The over the counter (OTC) trading environment has had an uncertain time of things lately. With the Financial Services Board (FSB) leaving the trading platforms, that mostly cater to BEE shares, in the proverbial lurch. The FSB is looking to have the status of the OTC platform changed to that of an exchange, which would institute a bevy of regulatory costs, in a trading environment that has otherwise sought to be low-cost. Unpacking the uncertainty of the situation, the impact it has had, and what is expected to happen is Riaz Gardee, BEE Analyst from Gardee Wealth. – LF
GUGULETHU MFUPHI: Thank you so much, Alec. Well, taking a look at the legal dilemma in over-the-counter market for BEE share schemes, they’ve cause a lot of jitters amongst shareholders last week. Riaz Gardee from Gardee Wealth is a BEE Analyst and a Chartered Accountant, an independent analyst to unpack this for us further. Something else that has been causing jitters Riaz, is when you made your way into the office and we were waiting for you here in the studio, was this earth tremor that apparently, is being felt throughout Johannesburg and even as far as Durban.
RIAZ GARDEE: Yes, I thought the tremor had to do with these BEE shares now and the OTC platform, but it seems to be wider than that.
GUGULETHU MFUPHI: In that case then the FSB would be in a lot more trouble.
RIAZ GARDEE: I think so.
GUGULETHU MFUPHI: Exactly, but let’s unpack this because it is something that is concerning for a lot of BEE investors and the platform managers themselves. One thing that really scares me is that Thembeka Capital has already ceased share trades on its platform, given the uncertainty with regard to regulation.
RIAZ GARDEE: Yes, as you know Gugu, markets like certainty. Everybody wants a clear set of rules and they all want to know what they need to follow. I think what’s happened in recent times with the FSB defining an exchange and saying, ‘these platforms fall in line with an exchange’ has made a lot of people very cautious. Thembeka is an example, and they have decided to stop trading. The crux of the matter basically, is the FSB has defined an exchange and said they now fall within the rules of an exchange versus being a platform. I think that’s the essence, in terms of where the dilemma is.
GUGULETHU MFUPHI: What’s interesting is that when you speak to the owners of the different platforms, the likes of Equity Express or Singular Systems, as well as the one that handles MTN’s Zakhele platform; at the moment, they are still quiet because they are in negotiations with the FSB. However, for companies such as Thembeka Capital, as well as Zeda who had some of their assets on the OTC platform – they’ve just decided, ‘we’re not going to go through that schlep; shutdown and halt the OTC operations’. For BEE platforms, the likes of MTN Zakhele and Vodacom YeboYethu – is that an option or is the JSE maybe, the next best thing for them to go for?
RIAZ GARDEE: I think the reason they considered that initially, probably, when they did their listing – and the costs would probably be favourable for them to have their own platform – and they probably looked at that exercise as well, at the time. If you think about it, there are basically three ways that these OTC platforms can trade and that’s in source, like Equity Express or the JSE. What’s happened is that the FSB is saying ‘we’re not against OTC trading, as such. What we are saying is we want to regulate the exchange’. The problem is that in the past, MTN etcetera have been given exemptions for trading the Zakhele platform and now it seems like the rules are being enforced in a different way.
GUGULETHU MFUPHI: Maybe we need to be slightly more critical of the FSB because the timing does seem unusual. They allowed Equity Express to go ahead when they launched for Phuthuma Nathi as well as Abil, and now, all of a sudden, with the flurry of BEE platforms available on the OTC market, the timing leaves one guessing.
RIAZ GARDEE: Even more so, I think, like I said, they gave an exemption to MTN so on that basis, the other people could possibly have an exemption as well. The market wants clear rules and I think the FSB… It seems as though they are taking the approach of ‘the man who has a hammer and every problem looks like a nail’. You know, they’re not tailoring the problem and giving a solution to what’s required.
GUGULETHU MFUPHI: Our investors are the people who unfortunately, may be on the winning or the losing end but nonetheless, they are left in confusion here and I understand that close to 850.000 of them might be impacted.
RIAZ GARDEE: Yes, there are about 850.000 direct investors and the intention of the FSB may be good. Their intention is to provide investor protection, transparent markets, and not insider trading. However, if these trading platforms go underground and the OTC is not allowed, exactly the opposite will happen because they you would need to find your own counter-party. You’d need to agree on the price. You’d need to do the entire transaction on your own, on a one-to-one basis. By removing these platforms, it will just backfire and it will just create the opposite of the intention, of what the FSB is trying to do.
GUGULETHU MFUPHI: Now we know when it comes to BEE shares, there’s a lack of liquidity and a lack of knowledge among the novice investors. Whose responsibility is it then, to notify investors of these challenges in the industry: the Platform Regulators or the companies behind it, themselves?
RIAZ GARDEE: Yes, that’s been a dilemma all along because the Platform Regulators want to be independent and they don’t want to be seen as giving advice on company specifics. The companies as such, again, they don’t want to give them advice in terms of what they should do but they would like to provide information on the company as such. I think the different role-players are providing different sets of information, but the individual investor has to then digest that, and take all of that information onboard.
GUGULETHU MFUPHI: Now, no doubt, as you’ve mentioned the FSB here, no doubt, using that hammer to solve all the many problems that are seen as nails, when you compare S.A.’s OTC market, compared to our global counterparts, are there key differences there?
RIAZ GARDEE: I think, broadly speaking, the OTC market is exactly that. You know, it’s an over-the-counter trading platform, which has less onerous regulations for that very reason. A different number of people, different users, different sophistication, and different companies as such, so I think the different products gravitate to different markets and, in essence, you would put your listed equity or your product in a market that suits the users of that market, and that’s exactly what’s happening. It has probably caught everyone off guard in a sense that this market has grown so fast, with all of these BEE shares coming only onto the market recently, with the locking periods changing, so all of this is very new. The regulations that have been in place have been geared more towards the JSE type of companies, whereas 100’s of companies… You can imagine the costs of trying to run your own exchange, just to satisfy a few of your investors.
GUGULETHU MFUPHI: Riaz, I’m going to steal minute here, just to close off with, if you could advise the FSB; what would you whisper in their ear now?
RIAZ GARDEE: Yes, well I think they need to quickly put down what the rules are, so everybody knows what the playing field is and I think there must be time limits because markets don’t like uncertainty and they can’t wait for an indefinite period. I am sure they are doing that behind the scenes but I think they need to come out and say ‘by this date, these will be the rules’ or ‘these will be the exemptions’ and everybody knows where they stand.
GUGULETHU MFUPHI: Exactly, Riaz, thank you so much for your time today. It was good to have you with us. That was Riaz Gardee. He’s a Financial Analyst who looks at BEE shares.