Rowan Callaghan
The Johannesburg Stock Exchange (JSE) is eagerly awaiting the launch of its first electronic share settlement system on July 30 this year. It is hoping that Share Transactions Totally Electronic (Strate) will help repair the damage caused by a notoriously inefficient settlement system and boost investor confidence.
Although paper share certificates should remain in operation for the two years of the system’s full implementation, paper shares seem to be heading the way of the long- playing record.
Until now, the JSE has been using a paper- based system with share certificates and transfer deeds as proof of ownership. Investors will still buy and sell shares through the JSE, but payment and transfer of shares will be conducted through Strate.
According to Monica Singer, GM of Strate, the volume of share transactions handled by the JSE has increased dramatically since the advent of Johannesburg Electronic Training, making the paper-based settlement system cumbersome and risky. She says that paper share certificates can be stolen, misplaced or forged. With the current system, large amounts of trades that should have been settled within seven days often take months.
“At the moment South Africa is bottom of the settlement log and this will actually propel us nearer the top. We desperately need it because the securities industry is losing a lot of money because of the inefficiencies of the paper-based system,” says Bruce Allen, Strate project manager at HSBC Simpson McKie.
However, in order to move over to the electronic system, shareholders will first have to dematerialise their share certificates (or scrip). This simply means that they will have to change from paper certificates to electronic records of ownership (much like when you deposit your salary into the bank for an electronic record of your deposit). At the end of every month, you will receive a statement of your investment.
If they wish to dematerialise their certificates shareholders will have to take their share certificate to a central securities depository participant (CSDP) or to their stockbroker.
A CSDP is an agent who is electronically connected to the Central Securities Depository (CSD), the central computer system. It records ownership of all shares held electronically by the CSD.
Stockholders can still sell and buy shares through their broker but the shares and cash will both be transferred electronically (within five working days after trade).
Once the company the shareholder have invested in announces dematerialisation, you are given six weeks to dematerialise. If you present your shares within that time, the company will bear the cost of dematerialisation. After that you may still bring the shares for dematerialisation, but you will have to bear the cost.
“Investors can still hold on to the share certificate if they want to, but if they want to sell in the future, they will have to pay for the cost of dematerialisation,” Singer stresses. Her advice is to dematerialise as soon as possible. Once the system goes live, a schedule will be published showing which shares will be dematerialised each month.
While most people are confident that Strate will result in a dramatic increase in investor confidence, its introduction could cause problems. A key concern at the moment is who should be liable for fraudulent or stolen share certificates (tainted scrip) that are presented for dematerialisation.
Absa, Nedbank, First National Bank and Standard Bank are all concerned that high amounts of tainted scrip will be presented to them for dematerialisation.
According to Michael Fergusson, director of Investec Securities, brokers or individuals who submit tainted scrip to the settlement system are currently liable for those shares. The shares and any outstanding dividends are immediately replaced by the stockbroker, who in turn can claim from the originator of the scrip or from his insurance.
The banks are concerned that they will be held liable for tainted or stolen shares. They feel that it would be too costly to try claiming the amounts from the originator of the scrip.
Fergusson is confident that the amount of tainted scrip will not cause as much of a problem as the banks predict.
“Most people who stop receiving dividends start asking why they aren’t receiving their dividends straight away,” he says.
This means that they are more likely to pick up on a problem with their shares within a few months.
With the new system there is also a time limitation, as companies have to be introduced gradually.
“You have a Rolls Royce of a system that you can’t use immediately,” Singer says.
According to Singer, the Swiss system, which Strate will use, is also being used in India and has extremely sophisticated encryption devices, making it virtually hacker proof. The network – Swift – is used by all the major banks in the world to transfer money and send messages.
Tata Consultancy Services, the company that developed the system for the Swiss, is installing the R80-million system.
Strate will start with two companies in July and will not add any further companies until March 2000. From then on it is planned to move the illiquid companies (those whose stocks are bought or sold in small volumes) quite fast and to move the liquid companies after August 2000.
By the first quarter of 2001, the JSE is hoping to have moved all the listed companies into a Strate environment.
If it is a success, the chances are that other financial instruments could also be moved to electronic settlement in Strate.
The JSE has warned investors about crooks posing as Strate members, who are collecting share certificates. They realise that with Strate this is their last opportunity to con people out of their certificates.
Strate is not a bank or a stockbroker and will not collect shares. People should make sure they use a reputable bank or stockbroker when dematerialising. The ideal is to use your bank or broker.
Standard Bank, Absa, Nedbank, Mercantile Bank and First National Bank are among those able to arrange dematerialisation.