*By Riaz Gardee
The recent FSB directives requiring trading platforms to apply for exchange licences have caused disarray amongst the over-the-counter BEE market. Trading volumes have plunged up to 30% since the FSB directive and Thembeka Capital has even ceased all trade since 31st July. BEE shareholders in these OTC counters have reason to panic as the outcome of this new FSB directive could significantly impact on liquidity and thus the pricing of their shares.
FSB Directive
The FSB has categorically stated that their intention is not to prohibit OTC trading but rather they seek to enforce existing laws which regulate ‘exchanges’ and protect investors. The crux of the issue is thus the definition of an exchange and how that differs from an IT platform. The FSB issued directives in May and July indicating that all these trading platforms now meet the definition of an exchange and thus should either apply for a license, an exemption or cease trading. All previous exemptions, as provided to MTN Zakhele, would thus be revoked and they would have to re-apply.
In the past the platform providers have either been operating with an exemption from the FSB or have not required an exchange licence as they were considered to be merely providing an IT platform for participants. The FSB has not commented as to what triggered the sudden change in their approach but the recent proliferation of these schemes may have played a role. The unanticipated change has caused enormous concern as markets and investors hate uncertainty.
BEE Schemes Overview
The three main avenues for trading platforms are in-house, out-sourced or the JSE. The following table sets out the salient feature of these BEE Schemes:
Most of these companies hold a single block of shares in a JSE listed entity, or its subsidiary, and have been purposely structured as such to comply with BEE objectives and guidelines. To impose the onerous regulations of a fully-fledged exchange and costs associated therewith on each of these individual platforms would ensure their demise. This was probably the reason that exemptions were issued in the past. Furthermore moving all of these companies to the JSE would significantly increase costs and accessibility for the end user. The vast majority of these shareholders do not have stockbrokers who would in any event not prefer large volume small trades. Furthermore the onus of ascertaining the BEE status of investors would fall on the broker or the JSE, both who are not currently geared up for this task for almost 800 000 investors.
Current Status
All the counters can currently be traded, pending the outcome of their licence application, except Thembeka Capital who has elected to cease trading.
The BEE OTC market was probably not the focus when drafting the 2012 Financial Markets Act pertaining to stock exchange rules and requirements. The type and nature of these schemes require specific rules or exemptions to meet the objectives of shareholder protection whilst at the same time ensuring a transparent trading environment. If the avenues to trade are no longer available the very objectives of the FSB could backfire with trades taking place off-market increasing the risks to small BEE investors. The FSB seems like the man whose only tool is the hammer and thus sees all problems as a nail.
It is essential that the rules for these uniquely South African instruments are clearly defined or re-defined as soon as possible, including any relevant exemptions, so that trading can continue at previous levels. The ball is in the FSB’s court and almost 800 000 investors are holding their breath.
* Riaz Gardee is a Chartered accountant who specialised in mergers & acquisitions and corporate advisory for a number of years. In recent years he has been working on expansion and development of businesses in sub-Saharan Africa.Â
