Heads in the sand over Gupta listing

The controversial Gupta family stands accused of inflating the share price of their mining company just before it began to trade on the JSE, but determining who is responsible for oversight is like looking for a Gupta in jail. Even Sasfin, the Gupta company’s corporate adviser and sponsor at the time of listing, has washed its hands of any accountability.

Leaked emails have shown that, just before the Guptas listed Oakbay Resources & Energy in November 2014, the family lent an associate $1-million to buy shares in the entity in what seems to have been an attempt to boost the price of the stock before it debuted at R10 a share, as was first reported by the Sunday Times.

Oakbay appears to have driven a bus through the regulatory processes, with no one now willing to carry the can.

The JSE and the Financial Services Board (FSB) have no oversight before a share is traded and Sasfin has claimed it was not party to any discussions between Oakbay and shareholders who acquired shares before listing.

Sasfin Capital told the Mail & Guardian this was because Oakbay listed by way of introduction and not as a public offering. In the case of a public offering, the sponsor can provide guidance to the company being listed about the pricing when capital is raised from the public.

“In this case, the corporate adviser normally forms a robust valuation exercise in order to guide the issuing company in the decision of the pricing of their offering in order to ensure a successful capital raise,” Sasfin said.

In the case of Oakbay, the company had exclusive say over the listing price.

Despite this, Sasfin said it did perform a reasonableness assessment of the estimated valuation at the time. “Our assessment was based on audited financial statements, representation made by the management of Oakbay and the competent persons valuation performed by Mineral Corporation.”

Asked for more detail about the reasonableness assessment, Sasfin responded: “Without having done a detailed valuation (which wasn’t required), it is difficult to comment with confidence on the reasonableness of the share price. That being said, a high-level assessment at the time – incorporating the audited financial statements, management representations and competent persons valuation by Mineral Corporation – suggested a fair basis for the share price.”

Sasfin said the auditors have no role to play in the pricing of a share, but Oakbay, in defending its market valuation in the past, has said the price was deemed fair value, because its auditors, KPMG, “have expressed an unmodified opinion thereon”, indicating fair value.

As yet, KPMG is the only Oakbay service provider to have faced any repercussions following the Gupta leaks.

Last week one client, Sygnia asset managers, dumped the auditor over concerns about the possible role it played in aiding the Gupta family in questionable business dealings with the state.

If the Oakbay listing price was inflated, it was not a victimless crime. The Industrial Development Corporation (IDC), a state-owned development financier, extended a loan to Oakbay and, later, R256-million in accrued interest on the loan was converted into equity in the company.

This was based on the listing price, although the IDC received its shares at a discounted price of R9. The IDC previously told the M&G it did not believe the price was overvalued at the time of listing.

The IDC said a technical valuation of the company was based on a combination of factors such as the Competent Persons Report, valuation, the mineral resources to mineral reserves and other assets, such as plant and equipment.

These, it said, determined the R10 a share listing price in terms of the independent review.

After losing its second sponsor, Oakbay recently delisted (the last price its share traded at was roughly R5.80), but the IDC has said it did not expect it would have to write off the debt entirely, noting that, in any public listed company, minority rights are protected by the JSE rules.

“However, now that Oakbay has delisted, the IDC is engaging with the company to explore all options to ensure that we are not prejudiced in any way due to delisting.”

Peter Redman, of the JSE’s market regulation division, said the exchange only has a record of trades after listing. And so he could not provide any further direction on the matter.

The FSB, the regulatory agency responsible for the non-banking financial services industry in South Africa, also said it did not oversee this. The FSB’s directorate of market abuse has a statutory mandate to investigate any allegations of possible market manipulation of listed securities in terms of the Financial Markets Act.

The FSB head of the directorate for market abuse, Solly Keetse, said, in terms of section 80 of the Act, market manipulation is defined as a trade-based activity. This means the FSB can only investigate allegations of manipulation when shares have begun trading on an exchange.

Oakbay did not respond to a request for comment.

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