MTN Zakhele was granted temporary exemption by the Financial Services Board before starting its platform in November last year. The FSB gave MTN Zakhele permission to operate using a call centre and an online OTC trading system. MTN Zakhele has over 100,000 shareholders and caters to an active BEE share trading environment. This temporary status is up for review, and Zakhele needs to resubmit its application to the FSB in order to continue trading. However, it seems that the FSB has changed its strategy with regards to the platform. Alec Hogg was joined by Sydney Mhlari, MTN Zakhele’s spokesperson to discuss the future of MTN Zakhele and what the potential outcome of the FSB’s next move is. – LF
ALEC HOGG: Welcome back to Power Lunch. Business is all about certainty. It’s about making investments when you know where you investment is going to be delivering to you in the long-term. Sydney, I’m sure this whole change in strategy from the FSB must be giving you guys grey hairs.
SYDNEY MHLARHI: Certainly, it’s kept us busy over the past few weeks, preparing the application to reapply for our exemption. However, the FSB did warn us at the time that we applied for exemption in October and we were granted the exemption that they are relooking at the regulatory regime surrounding OTC platforms. Therefore, even at the time, our exemption contained provisions that (1) it was on an interim basis and (2) was temporary until they finalised the regulatory regime. The regime has subsequently been finalised in early July after a round of comments. Upon finalisation, our first reading of the directive was that we are allowed – since we already have an exemption to continue operating, which was indeed the case – and a fortnight later we received a letter stating when the current exemption will expire, and we need to reapply for a new exemption under the new regime.
ALEC HOGG: So when does it expire?
SYDNEY MHLARHI: At the end of August – at the end of this month.
ALEC HOGG: So you have to reapply.
SYDNEY MHLARHI: We have to reapply.
ALEC HOGG: For a permanent exemption?
SYDNEY MHLARHI: We’re still going through that process, but for an exemption that will enable us to continue operating as we’ve been operating, at least until the end of the current empowerment scheme.
GUGULETHU MFUPHI: Would that be in 2016 – end of 2016?
SYDNEY MHLARHI: The end of 2016 – November.
GUGULETHU MFUPHI: In your statement, you say that you’re very confident that you will get this exemption done before the end of this month. How can you be certain, when the FSB almost seems to change its mind so often?
SYDNEY MHLARHI: We are in the process of finalising the application. In the next few days, that application will be delivered to the FSB, applying for the new exemption. In the interim, what we intend to do while the FSB are looking at our application – we don’t control or even know how quickly they’ll respond to us -, but shortly after the application is in, we’ll probably enter into correspondence for clarification, etcetera. We intend asking the FSB as part of the application, to extend from 31st of August until we get an answer from them.
ALEC HOGG: I spoke to Nicky Newton-King from the JSE last night, and she said that there is a rule about exchanges. It’s in the law. Her view is that we don’t think – and I’m just reading from it to make sure I don’t make a mistake here – ‘we don’t think that it’s legally possible for an exemption to be granted’. Therefore, even if you’re going to apply for one, according to the JSE, which is the only exchange at the moment; they don’t think it’s legally possible for that to happen. I sense in there, that there could be some kind of a legal challenge coming. Are you ready for that?
SYDNEY MHLARHI: Well, that will be for both the FSB, the legal, and ourselves to look into that. however, the directive makes it clear and in fact, the Act makes it clear as well, that exemptions can be granted at the discretion of the Registrar, so we are applying in terms of that particular/specific section of the Financial Markets Act for this exemption.
ALEC HOGG: That’s interesting because Nicky herself, is a lawyer, so I guess she would know a little about the legal side. Just going back to that whole point that Gugu was making about the changing minds, etcetera. Is there now, any way that you would apply for an exchange license?
SYDNEY MHLARHI: That’s a categorical ‘no’. Having looked at the extensive exchange requirements, we do not think it’s something that’s feasible. Things may change, but at this stage, that’s not the case. In fact, that is one of the questions in the application that the FSB asks of any applicant when you’re applying – whether you intend to apply for an exchange – and for us, we’ll be answering that question with a categorical ‘no’.
GUGULETHU MFUPHI: Are there increased costs with the new reapplication of this exemption?
SYDNEY MHLARHI: Obviously, there are increased costs to mobilise the team.
GUGULETHU MFUPHI: How much?
SYDNEY MHLARHI: Including the various advice to input on that application… Those are not substantial costs – incremental costs – but your typical consulting fees for the time that it would take to prepare.
ALEC HOGG: I just want to get this right. You have more than 100,000 participants.
SYDNEY MHLARHI: One-hundred-and-nine-thousand shareholders.
ALEC HOGG: In the MTN Zakhele scheme. You apply for an exemption, which the JSE says legally, they can’t give you. You think that legally, you can. If you’re wrong…if they cannot give you an exemption, you’re not applying for an exchange license. What happens to those shareholders who want to trade? Do they simply not trade anymore?
SYDNEY MHLARHI: Well, the transfers of shares can still happen. All that means is that the platform is not available as a vehicle through which shareholder A can sell to shareholder B. It makes it a lot more difficult for the shareholders who want to sell, to find willing buyers outside of a formalised environment, which is what the trading platform does. That can still happen but clearly, you have an illiquid instrument in your hands, which you may sell at whatever price you agree to on a ballot or basis, but the platform is taken away.
GUGULETHU MFUPHI: So from an infrastructure perspective, you’d only be using the call centre.
SYDNEY MHLARHI: No. If the platform is no longer there, you can no longer facilitate effectively as a middleman, which is what the company is doing – the anonymous buying and selling of the shares between the shareholders.
ALEC HOGG: And what has the platform cost you to build, to date? What has the investment been?
SYDNEY MHLARHI: The establishment cost for the actual development platform itself… The platform is in effect, owned by the various service providers. The biggest cost is the monthly lease/rental expenses to rent the platform. It runs into over R10m on an annual basis, to operate the platform.
ALEC HOGG: Operating costs. The other investments would therefore be significant as well. Wow Sydney, good luck. It sounds like you need it in this one.
SYDNEY MHLARHI: Thank you very much.
GUGULETHU MFUPHI: Thank you so much to MTN Zakhele’s Spokesperson, Sydney Mhlarhi.
