Nobody's buying ANC's Reserve Bank story
A few months ago, the South African Reserve Bank announced it was making 149 000 shares available to the public and I made a snap decision to buy some. Investment returns had little to do with it.
My thinking at the time was a combination of misguided patriotism – I could claim ownership of a little piece of my central bank – and ham-fisted journalistic strategising. If I were a shareholder, my logic went, I would have guaranteed access to the annual general meetings and a surefire way to doorstop bank officials, in the hope that there would be fewer journalists to compete with in this setting.
I have yet to receive my share certificate.
But pronouncements from the ANC’s policy conference on the nationalisation of the Reserve Bank throw a whole new light on my decision.
How the government would go about nationalising the entity could be more convoluted and costly than it may appear. A major point of contention would the price of the two million shares in issue, which are traded through an over-the-counter share transfer facility via the Reserve Bank.
The matter has been the subject of acrimony between the bank and some of its “activist shareholders”, notably German Michael Duerr (right). He told the Mail & Guardian this week that in the event the government wanted to expropriate the shares outright to nationalise the bank, his interests are protected by the bilateral investment treaty signed with Germany in 1997.
Although the treaty, designed to protect German investments in South Africa, has since been replaced by the Promotion and Protection of Investment Act, said Duerr, the protections in the treaty run until 2034.
This could potentially force the state into international arbitration – a long and expensive process. But if the state aims to pay out shareholders, there will probably be a tussle over how much it this will cost, according to experts.
ANC officials such as Enoch Godongwana have noted that the nationalisation proposal is essentially a symbolic one, because it would do almost nothing to change how the bank works and could represent an added cost to the fiscus.
Legally, when it comes to monetary policy, the bank’s mandate or how it regulates the banking system shareholders have no sway, said Reserve Bank governor Lesetja Kganyago.
Their rights are tightly limited by the South African Reserve Bank Act – for example, they may only vote for a minority of directors from a set of candidates approved by a panel chaired by the governor.
They receive a maximum of only 10c a share each year in dividends, and they are unable to change the bank’s constitution or take charge of its affairs by altering or deviating from the prescriptions of the South African Reserve Bank Act, he noted.
In my case, I bought 250 shares – amounting to a paltry R25 before dividends withholding tax of 15%.
There are no material advantages to having a privately owned Reserve Bank, said Kganyago. It simply represents an additional layer in the bank’s governance framework, which strengthens accountability and transparency, and complements the mechanism that sees the bank account to Parliament.
“There aren’t advantages in having a central bank that is wholly owned by government, either,” Kganyago said. “Whether the [Reserve Bank] has private shareholders or all the shares are owned by government, the primary mandate of the [bank]remains [the same].”
As a public policy institution it is “remote” from the traditional concept of a for profit company, he said.
On the question of nationalisation, Kganyago said that any potential purchase of all the shares by the government would require the introduction of new legislation, because the existing South African Reserve Bank Act does not have a mechanism to nationalise the entity.
Parliament and the legislation itself would have to provide a way to determine the shares’ value.
Little clarity has been given on key points of the ANC’s policy proposal – including whether the government would opt to pay shareholders rather than expropriate the shares. Kganyago declined to give further comment on this.
In the event of such a move, the real debate would be about what the value of the shares would amount to and under what conditions it would be nationalised, argued Jannie Rossouw, the head of the school of economic and business sciences at the University of the Witwatersrand.
Rossouw, who is a former employee of the Reserve Bank, also owns shares in the bank.
It would be difficult to ascertain the right price for the shares, he said.
Duerr has long believed that the shares trade far below their true value. His long-running battle with the bank on the subject is one of the reasons that it made 149 000 shares available to the public.
The decision came after the bank approached the high court to compel shareholders and their associates, including family members, who held more than 10 000 shares, which is not permitted by the Act, to sell them.
Duerr began amassing shares in 2006 and, along with other activist shareholders, became a thorn in the Reserve Bank’s side. The problem worsened to the extent that in 2010, the Act was amended to further limit the rights of shareholders.
The argument against Duerr is laid out in the Reserve Bank’s high court application. His growing influence over the years was designed, the bank held, to frustrate its workings to the point that the treasury would be forced to nationalise the shares for Duerr to achieve “an asset-based compensation payment for the expropriation”.
In an interview with the Business Times, Duerr noted that the only legal way to get rid of private shareholders was to liquidate the bank. Under a liquidation scenario, which is provided for under the Act, the bank’s reserves and any surplus assets are split between shareholders and the government – on a 40% to 60% basis.
Under this section of the Act, the value shareholders can extract is also capped at the average share price over the preceding 12 months.
But Duerr denied that nationalisation was ever his ultimate aim, because it would mean “total chaos for the country”. He said the bank’s shares should be returned to the JSE, similar to the Belgian model. The Belgian state holds 50% of its central bank and the remaining portion is traded on the Euronext stock exchange.
Duerr believes that as a starting point, the shares should be assessed on a net asset value basis – which would put the share price closer to R4 700 each. According to him, there are a range of other items – or hidden reserves – that can be used to further adjust the value of the shares.
He is reluctant to disclose exactly how he has determined the worth of his shares because he has paid for a costly expert evaluation to get there.
But, as Kganyago pointed out, shareholders can offer their shares for sale “at whatever price they deem fit, without disclosing the manner by means of which they arrived at a figure”. But an offer to sell has to be matched with a willing buyer.
The prevailing price is R10 a share. Nevertheless, included in some of the most recent standing sell offers recorded by banks is one for 10 000 shares at just over R7 900 each.
This contrasts vastly with a valuation assessment that advisory firm KPMG did for the bank in the high court application. It found that the share’s fair value was about R1.55.
It also went so far as to assess how shareholders might benefit in the unlikely event that the Reserve Bank was liquidated and whether there was a risk the bank’s reserves would be distributed. The report found that it was highly unlikely and that Parliament would prevent this from happening by fixing the share price, amending legislation or using any other means to prevent the bank’s assets and surplus reserves from being doled out to shareholders.
As far as the bank is concerned, in terms of the law shareholders have no rights to the reserves.
Duerr is baffled by KPMG’s finding, arguing that its assessment values the Reserve Bank at a mere R3.1‑million, or the price of two BMW 740-series cars.
Political analyst JP Landman said the government would probably have to pay out shareholders simply because in terms of the Constitution and the yet-to-be-passed Expropriation Bill, “just and equitable” compensation would have to be provided. “There will no doubt be someone who would push that point and insist on being paid the correct value,” said Landman.
He, too, is a Reserve Bank shareholder, but said this was not because of the share’s intrinsic value. “I became a shareholder many years ago partly out of curiosity and partly to receive their publications, which are a masterclass in economics,” he said.
If nationalising the bank would bring little change but would prove fraught and costly for the state, the proposal has stoked concerns in the market about the real reasons behind it.
“This is yet another attack on the Reserve Bank from different sides,” Rossouw said. It comes amid other perceived attacks such as the public protector’s recent bid to force a change in the bank’s mandate.
“That is far more worrying.”