With the FSB clampdown on unregistered exchanges, what will happen to MTN Zakhele shareholders?

The unfolding story around the unregistered, over-the-counter share exchanges that are being used to trade shares in broad-based black economic empowerment schemes like MTN’s Zakhele is fascinating and instructive. When Zakhele was conceived, shareholders were promised that after a certain period, they would be permitted to trade their Zakhele shares with other black persons – the idea was that MTN would keep its black shareholders but the people who took a punt on Zakhele could still make some money. To handle this trade, MTN got permission from the FSB to set up an OTC share trading system, that would verify that all buyers and sellers were black and facilitate trading. But now, after we’ve seen a proliferation of similar schemes and OTC trading systems, the FSB is having cold feet. It wants to clamp down on unlicensed share exchanges, and make sure that all share trading happens through monitored, regulated platforms like the JSE. This places MTN in an awkward position. The JSE isn’t set up to vet the race of share traders, and MTN can neither allow a trading free-for-all (and risk losing black shareholders) nor take away shareholders’ ability to trade their shares. All eyes are on the leadership of these companies to see what they’ll do. – FD 

GUGULETHU MFUPHI:  Welcome back to Power Lunch. Broad-based black economic empowerment scheme MTN Zakhele has about 117 000 registered shareholders. Sydney Mhlarhi is the MTN Zakhele spokesperson. He joins us now for an update on the trading platform. Sydney, thank you for joining us. When it comes to the OTC platform, something that Alec and I had focused on is no doubt, the FSB probe. Has MTN Zakhele secured that or is it still in the process?

SYDNEY MHLARHI: Well, at the beginning of the scheme when it was launched for trading, applied trading commenced and MTN Zakhele approached the FSB with a view of obtaining an exemption from the current legislation, from certain provisions of complying with Stock Exchange requirements. The FSB duly granted the exemption, although it is of a temporary nature, to MTN Zakhele to continue operating. Currently, the regime is that MTN Zakhele is operating under special exemption granted by the FSB, to continue with its operation.

ALEC HOGG: When does it expire?

SYDNEY MHLARHI: It can be withdrawn at any time. There is no period.

ALEC HOGG: So are you going to apply for a license?

SYDNEY MHLARHI: Obviously, the current directive that has been issued will have an effect on MTN Zakhele of either applying for a full Stock Exchange license like the JSE here, ceasing operations, or coming up with an alternative to that.

ALEC HOGG: No, you can’t cease operations. Don’t even say that.

GUGULETHU MFUPHI:  Do you know how many shareholders are counting on you?

ALEC HOGG: You think the AMCU strike was a problem. Wait. Obviously, you’ve sat down and you’ve thought about this because there were a lot of false starts and we were very critical about you guys to begin with, but you proved to everybody that you can do it. Now you have the exchange working well, you have people who are trading – 117 0000 shareholders… What do you say to them about their future ability to trade the stock?

SYDNEY MHLARHI: Alec, we’re still hopeful that some type of arrangement will be arrived at between the various companies that are operating on these types of platforms, together with the FSB – the regulatory regime, which regulates them – but not to the same extent as a fully-fledged Stock Exchange.

GUGULETHU MFUPHI:  Something else that’s of concern to me is that the likes of PSG have already started reacting to this. They have OTC trading platforms for some of their subsidiaries, but they’re already making a move onto the main board. Is that something you may be considering?

SYDNEY MHLARHI: The directors are evaluating all options at the moment, including the possibility of a move to the JSE’s B-board, so all options are open. In due course, appropriate communication will be made to the shareholders after the FSB has given clarity on which way it is going.

ALEC HOGG: But that will be difficult, if you move to the JSE because anybody can then buy the shares if it’s listed on the Johannesburg Stock Exchange.

SYDNEY MHLARHI: One of the difficulties of these schemes is that each one of them is unique in terms of the restrictions that are embedded in the scheme. You can only trade with fellow black shareholders – that’s pretty much the only restriction – beyond the obvious encumbrances…that these shareholders cannot encumber their shares or raise loans against these shares. That’s restricted. The register needs to be monitored to ensure that these shares remain in black hands at all times.

ALEC HOGG: Sydney, what about mergers of yourselves, Equity Express, the PSG platforms, and the various OTC platforms that are around there, into an organisation that could perhaps have the scale to make a Stock Exchange and maybe even compete with the JSE?

SYDNEY MHLARHI: It’s a possibility. No approaches have been made to us at MTN Zakhele by any of the other Stock Exchanges, but it’s definitely a possibility. To what extent that’s feasible in coming up with an exchange that will have exactly the same stringent requirements as the JSE, but on a much smaller scale because it only has 15 counters, or not more than 20 counters – I’m not sure how feasible that is.

ALEC HOGG: Has the FSB been listening to you, to the difficulties you have, and the specific requirements? You said when you started this discussion that you’d like to have less onerous conditions than the JSE, for obvious reasons. Are they being receptive to this or are they playing hardball?

SYDNEY MHLARHI: Over the past few months the FSB have been receptive. A directive came up in December, – which we were quite pleased about – coming up with a regime that would regulate (let’s call them ‘Stock Exchange Lites’). The latest directive was a distinct departure from where there would be no room for discretion, exemption, or for them to exercise their discretion as they are allowed by the Act. We’re still waiting for feedback. We put formal comments to the FSB, following their request and we’re still waiting for the outcome of those comments, which were given to the FSB; not only by MTN     Zakhele, but all the other platforms, services providers, or companies operating these exchanges as well.

GUGULETHU MFUPHI:  And in the interim – the communication from yourselves to your shareholders?

SYDNEY MHLARHI: It’s exactly what I’m communicating here: behind the scenes, directors are evaluating what their options are and coming up with ‘what if’ scenarios. For example, if it goes this way, what are their options, including listing on the JSE B-board?

GUGULETHU MFUPHI:  Well, that was Sydney Mhlarhi, MTN Zakhele’s spokesperson. Thank you for joining us today.