In principle, new bourse ‘will free BEE’
Trading Up | Exchange, with a less rigid ’principle-based’ listing gauge, will bring liquidity to equity ownership, says CEO
THE co-founder and CEO of ZAR X, South Africa’s second securities exchange company, Etienne Nel, says it will render superfluous the “once empowered always empowered” debate between the government and the private sector that is currently before the courts.
It will also create an investment and savings culture among those who, in spite of being beneficiaries of BEE, remain largely excluded from active participation in the economy.
Nel, 44, a stockbroker for 20 years, has been battling for more than a year to get a licence from the Financial Services Board to launch his exchange. The JSE has fought him all the way to protect its monopoly.
Last week the JSE won a bid to force the FSB to withdraw a conditional licence it had awarded to ZAR X, although Nel says this will not derail its plans to begin trading in the first week of October.
Although JSE CEO Nicky Newton-King has said it welcomes competition, this is not how Nel and his two co-founders see it.
After last week’s case, cofounder and director Geoff Cook denounced the JSE for a “pattern of delay, stonewalling and obstruction” that he said amounted to “bad faith” on the part of the JSE.
“I’m much more diplomatic than he is,” says Nel. “But things have happened behind the scenes that have pushed the boundaries of commerciality a bit.”
He won’t say what things.
Nel says the intention behind ZAR X is to provide a space for people to buy and sell BEE shares.
Companies that set up BEE structures to meet empowerment levels lose their empowerment status when BEE shareholders cash out at the end of a set term.
They want a “once empowered always empowered” court ruling, which the government is opposing.
“I asked: why can we not create a mechanism that creates liquidity for the black shareholder? You have the same corporate mechanism, but instead of having a cash-out date where this thing terminates, it’s like a normal share that runs in perpetuity as long as the company’s around,” says Nel.
Companies will be able to list whatever percentage of the company the BEE act requires on the restricted-market desk of ZAR X, allowing black shareholders to trade the shares in perpetuity.
This will give companies BEE in perpetuity. If the BEE act falls away, the BEE structure can be bought out or dissolved.
“If you need more BEE, up, say, from 20% to 25%, you have a rights offer and special purpose vehicle, invite new people to put money in so the whole vendor financing thing falls away and it becomes an economic transaction,” he says.
Instead of being passive recipients of BEE shares who dust off their share certificate after 10 years in order to cash out, the beneficiaries of BEE schemes will be able to trade the shares and become active participants in the market.
This “drives a different culture and mentality completely. People start asking questions about why the company does this or that with my money as a shareholder”, he says.
“Don’t for one second think that because people have never been part of the economy before they won’t ask very pointed and insightful questions about their shares.”
He says that by introducing a quicker, cheaper and easier alternative to the JSE, ZAR X will encourage entrepreneurship and the development of the small business sector.
Isn’t this what the JSE’s alternative exchange for small and medium-sized companies, AltX, already does?
“The problem with AltX is that it relies very heavily on the main board listing requirements,” says Nel. “AltX ended up not being quite what it was intended to be.”
Companies on ZAR X won’t have to comply with the “cumbersome” listing requirements that many companies listed on the JSE find so irksome.
But aren’t these requirements there to protect the investor, and won’t cutting them out compromise this protection?
“No,” says Nel. “From a ZAR X perspective, what is our single biggest risk? To have a listing fail. Something goes horribly wrong, directors run off with the money, whatever.
“So our listing requirements are compliant from a global best-practice perspective.”
The new exchange will use a principles-based rather than a rules-based approach, he says.
“So you have a conversation with the issuer of the shares around, for example, ‘Why can you not comply with the King code?’ ”
Most BEE special purpose vehicles are created to hold only one asset. He cites the example of Vodacom’s YeboYethu struc- ture, which owns a percentage of Vodacom South Africa shares.
“That’s all they do. The entire board consists of nonexecutives who don’t get paid and so on. So why should ZAR X insist on them having a remuneration committee, ethics committee, sustainability committee, as contemplated in King?”
So ZAR X will ignore the King codes on corporate governance?
“No. What we’re saying is the company needs to justify to us why they cannot comply. Then we’ll take a considered approach to that.”
The founder of a company may be the nonexecutive chairman but not independent. In terms of JSE rules he must be independent.
“We’re saying [to the company that wants to list]: ‘Hold on, justify to us why he does not have to be independent.’
“They say he’s a chartered accountant, the founder of the company, he’s been on the board and audit committee for however long and they want that continuity.
“OK, fine.” That would be good enough for ZAR X.
“But in a JSE environment they say the rule is the chair must be independent. So you replace a guy who knows what he’s talking about and put someone there who may be independent but doesn’t even have an accounting degree. But that’s OK because it’s the rules.“
A principles-based system is much tougher to circumvent than a rules-based one, he says.
“The problem with a rulesbased approach to listing is that the guys will always try to find a loophole. And then you have to write two new rules to plug that loophole, and so it goes on.”
ZAR X is not going to be “out there hunting for the next Facebook”, he says.
“The last thing we need is for word to get out that ZAR X is listing all these dodgy companies, stay away.
“We can’t afford that. And we’re acutely aware of that.”
The companies ZAR X brings to market will typically be those with solid records.
Not many companies have a more solid record than Senwes, 100 years old and the largest agribusiness in South Africa. It is currently trading over the counter but has become the first company to announce that it will migrate its shares to ZAR X on September 30.
The new Financial Markets Act requires all self-regulated trading platforms to apply for a licence to trade as an exchange, or migrate to a licensed exchange.
To apply for a licence is onerous, very costly and does not make business sense for most entities that, like Senwes, don’t feel listing on the main bourse is appropriate for them.
“That’s the sort of thing we’ll be targeting to bring to the investing public,” he says.
He’s in “very advanced discussions” with another three, and two are “teetering on the brink”. He hopes to have 10 by the end of the year.
Nel is a BCom investment management graduate from what was then Rand Afrikaans University. He has worked in securities for 20 years at Investec and BJM before co-found-
Things happening behind the scenes have pushed the boundaries of commerciality The last thing we need is for word to get out that ZAR X is listing dodgy companies, stay away
ing an over-the-counter platform called Equity Express in 2011.
“That piqued my interest. We managed to achieve a huge amount of success in a very short space of time.”
That’s where he pioneered the restricted-market concept for BEE shares.
“I realised there’s a huge need for another trading platform away from the JSE.”
In 2014 the FSB said those issuing shares in the over-thecounter space had to apply for an exchange licence. He worked in securities at Investec and BJM before co-founding ZAR X.
He expects its offering to expand rapidly next year once it is up and running.
“Then we’ll start offering a whole bunch of other stuff that we never considered.”
Maybe the JSE is right to be worried?
“Maybe they are,” he laughs.