The JSE is set to make its contribution to the RDP by introducing a new Main Board market, writes Jacques Magliolo
Finally, the Johannesburg Stock Exchange is to show that it has the courage to launch itself into a world of black business and empowerment. For the JSE this was a previously unthinkable notion, but president Roy Andersen is adamant that the introduction of a new Main Board market, to be called the Reconstruction and Development Programme (RDP) sector, can play an important role in promoting the exchange as accessible to the man-in-the-street.
Andersen says: “Within the next three weeks we will be able to disclose full details of listing requirements for the new sector.” This division will probably form part of the Industrial sector and will differ from other Main Board companies only in listing requirements.
Present criteria for a Main Board listing are severe and restrictive and include:
* Companies must have a subscribed capital of R2-million in not less than 1-million shares in issue;
* A three-year profit history with a pre-tax profit level of at least R1-million;
* The public must hold 30 percent of the first million shares issued and the number of public shareholders must amount to at least 300; and
* The issue price must be at least 100 cents.
In contrast, companies that will list on the RDP sector will not have to provide the exchange with a profit history and the R2-million subscribed capital may also fall away. The latter is, however, not finalised.
While somewhat stunned by this disclosure, analysts admit that with a total market capitalisation of over R700-million, the JSE has substantial influence in South Africa and “can certainly persuade institutions to invest in such companies”.
Andersen explains that the aim of this RDP sector is to provide investors and institutions with a vehicle to raise capital “to be lent to emerging black entrepreneurs or groups involved in the reconstruction of South Africa”.
Sceptics ask the obvious: “If requirements are minimal, what makes Andersen think that institutions will invest in such a market, given the failure of the Venture Capital Market (VCM) and the dismal performance of the Development Capital Market?”
In his reply Andersen says that the listing requirements may be different, but not without restrictions. A company wishing to list will have to set out its investment criteria, show how they intend to invest and perform in particular sectors of the economy and set out risks associated with proposed projects.
“The participants will have to demonstrate that their company will clearly contribute to reconstruction and be an advantage to promoting black entrepreneurship,” says Andersen.
In addition, it is expected that the JSE will place a limit on how much money will be required by the company and also a restriction on the degree to which management will control the underlying entity. Essentially, if Old Mutual listed, say, a company called Mutual Reconstruction on the RDP, Old Mutual directors would be limited in the running of the new company.
Another safeguard for investors will be the implementation of a full prospectus, which is the normal pre-listing document. RDP companies will also be required to submit normal six monthly accounting statements to the JSE and all shareholders.
In all respects the companies will be treated the same and directors of such companies will be required to answer shareholder and media questions.
Another expected change to be introduced by the JSE listing department relates to the VCM. Andersen says that at present JSE listing criteria do not generally make it easy for individuals to raise capital. The total lack of interest in the VCM has made this existing infrastructure available for change.
The JSE has not released details on what these changes will be, but market experts believe that a new RDP and VCM should raise “a great deal of interest in the market as a whole,” says a dealer. He believes that the success will be “similar to that achieved by the UK’s Unlisted Securities Market (USM)”. In this market, the UK exchange permitted companies to list on the exchange, but to retain private status.
The USM was formed in 1980 and by mid-1986 over 460 companies had been floated, totalling more than R5,5-million. The advantages which this market provided for the public could certainly be echoed in a South African RDP, “if the JSE is serious about black empowerment and can overcome the old boys club mentality,” says a corporate finance expert.
Analysts seem to agree that such a market could provide a number of benefits to both the listing company and to the exchange itself. Firstly, companies would benefit in being able to obtain capital from the public instead of the laborious mechanism of asking individuals for funds, growth by acquisition becomes possible — organic growth is restricted in our present environment — and the company status is enhanced, enabling easier access to bank loans.
Secondly, the JSE could benefit through increased trade and thus improve liquidity. Other advantages for the exchange include a saving on advertising costs in floating an RDP type company and greater flexibility is obtained in determining what companies become listed.
While the idea of such a sector seems ideal, numerous pessimists say that in reality such a market is unlikely to take off in South Africa. Disadvantages, they say, are vast. How does the exchange place a price on a company which has no profit history and when a price is finally determined, that price is not conclusive proof that it realistically represents the company’s net assets.
These experts believe that prices would be influenced by the holding company’s status and not necessarily related to the operating company’s performance.
Like the USM companies, RDP companies will probably not be permitted to be trustee securities, thus preventing a number of potential investors from purchasing these shares.
The true success of the RDP will not depend on whether private companies will be interested in listing, but in Roy Andersen’s ability to persuade his fellow JSE board members to start such a sector. If he can do this, there is a real chance of the JSE taking on its true role in South Africa; that of providing a fair market for all businessmen to start and expand viable businesses without enduring restrictive and prohibitive interest rates.