Tough JSE rules a necessary evil
Days after Steinhoff revealed a R100bn-plus hole in its accounts in December 2017, exchange operator JSE Ltd was among those in the crosshairs of investors whose equity was all but wiped out.
Where was the JSE, which prides itself on a reputation of rectitude and reliability in emerging markets, when a group of executives at Steinhoff came up with a complex scheme in which intercompany deals were fraudulently recorded as external income to overstate assets and profits?
A few months later, companies such as EOH, Tongaat Hulett and Resilient Reit, hogged the headlines for dodgy governance and bookkeeping practices, inflaming the pain for the exchange still smarting from SA’s biggest corporate scandal in which R200bn in shareholder money vanished.
It became a no-brainer that the JSE would tighten its listing requirements, but has the exchange operator gone too far? Piet Mouton, CEO of Stellenbosch-based investment heavyweight PSG Group says compliance regulations are becoming intrusive, prompting companies to consider going private and putting off those seeking to launch initial public offerings.
To an extent, one could say the reason for an increasing number of companies, especially small ones, delisting in the past few years is down to the onerous JSE listing rules contained in an almost 500-page document. Add the almost 200-page Companies Act, the 84-page Financial Markets Act, and another 120 pages (at least) of the King IV Code, and it’s easy to sympathise with growing frustrations that being publicly traded is not worth the cost of hiring the armies of compliance officers required. Citing the costly administrative burden and lack of investor interest, Anchor Capital, a smallcap fund asset manager, became one of the 20-odd companies to leave the JSE in 2020.
To be fair, some of the companies that left, such as Pioneer Foods, went private because of takeover deals. Still, the number of companies on the JSE, which dates back to the 1880s, has halved over the last 20 years to about 300 with implications for the JSE itself and the wider investment community.
A shrinking universe from which pension funds, compelled by law to invest a big portion of their clients’ money in domestic stocks, means there is less to choose from to prudently guard against risk. That said, it is not as black and white as lobbying the JSE to lower its listing standards to allow any company to come to market. For a start, a vast majority of small companies that leave the bourse tend to be overlooked, undervalued and discounted because their shares are tightly held by founders, making it difficult for investors, big and small alike, to easily get in and out.
Furthermore, the increasing popularity of cheaper exchange traded funds (ETFs), which tend to be benchmarked on large-cap companies, have undermined the logic of researching and scrutinising little-known small companies to work out if they will be the next Capitec or Cartrack. So, lowering standards will not make small caps appealing to liquidity-hungry institutional investors or retail investors in the age of ETFs.
What’s more, investors could have been burnt three years ago when Sugamatha Technologies, a technically insolvent company depicting itself as the Amazon of Africa, came close to coming to the market had it met the JSE’s strict disclosure rules.
It may also be reassuring to investors that listed companies consistently score higher than their privately held counterparts on transparency issues such as anticorruption measures, governance and reporting, according to the 2020 Transparency in Corporate Reporting document by Corruption Watch and Londonbased, global think-tank the Overseas Development Institute.
While we sympathise with executives’ frustrations over burdensome disclosure regulations, it would be much more damaging to investors to lower the listing standards and allow just about anything to come to the market.
THE NUMBER OF COMPANIES ON THE JSE HAS HALVED OVER THE LAST 20 YEARS