Several cases of corporate malfeasance and poor governance over the past few years, which have dented the JSE’s credibility as a regulator and South Africa as an investment destination, have led to proposed major changes to both equity and debt listing requirements.
The JSE recently published the draft debt (bonds) listing requirements for public comment and a consultation paper on proposed changes to equity listing requirements. Both are expected to create more transparency and bolster the corporate governance of private and public companies.
Bonds have traditionally trailed the equity market when it comes to transparency, the disclosures of directors and the regulation of debt issuers.
The JSE director of issuer regulation, John Burke, said that, when the JSE first acquired the debt market in 2007, there were attempts to align it with the equity requirements but there was significant push-back from some stakeholders.
“Banks, originators, issuers kept on saying to us, ‘you are equity market specialists, you don’t know what is going on with the debt market and therefore these requirements cannot be the same’,” Burke said. “At that time, we actually took some of the requirements off the table.”
But since then they have had engagements with investors who told them that some of the issues in the debt market could be aligned with the equity market.
Concerns about bond market regulation have come to the fore mainly because of the significant corporate governance failing of the state-owned entities (SOEs), such as Eskom and Transnet, that issue debt.
Most notable in the draft bond requirements is that bond issuers will have to make an announcement when there is a change to the board of directors or company secretary, and brief CVs of the directors must be published. The issuer will also have to outline the nomination and assessment process that was undertaken to ensure directors are suitable for the post.
Directors who are considered “domestic prominent influential persons” must be disclosed and all transactions that are made with them will also have to be made public. This refers to people who hold senior political posts and heads of organisations that do business with the state, or those who are either related to or associated with such people.
The JSE also wants to provide clarity on the consequences for noncompliance by publishing annual financial statements and interim statements for issuers.
“It looks to us, at first glance, that the JSE has apparently turned in a positive direction towards improving bond market standards,” said Andrew Canter, the chief investment officer of Futuregrowth.
In 2016, Futuregrowth temporarily suspended loans to SOEs that were plagued by reports of poor governance.
Canter said one of the most significant changes was the introduction of an investor representative, who would be appointed by the bond issuer and tasked with looking after the interests of investors. The agent would be a single contact point with whom investors could raise issues and assert their rights when problems emerged.
With the breakdown of governance in the public and private sector bond market, holders and investors realised they had no real protection, said Canter.
“They weren’t able to get together and call a meeting or to jointly appoint attorneys. There was no voting mechanism, so you could not do anything. You were holding these bonds in which other people would sign your fate and you as a professional investor or producer had no rights or powers,” he said.
The equity market has also had its own share of scandals, which has prompted the JSE to tighten up on some its regulations to have better oversight of primary and secondary listings. In its consultation paper released on September 19, the JSE acknowledges it has been “shaken by a range of corporate scandals, rumours and innuendo” over the past year that prompted it to review its responsibilities.
One of the biggest shocks to the JSE in December last year was the revelation that Steinhoff had been cooking its books, which wiped 90% off the share price of the German-listed company.
In the same month, EOH’s share price also dropped significantly when two of its directors were forced by the banks to sell off their shares when the company’s share price started declining. The directors had used their shares as collateral to secure loans.
In response to these issues, the JSE has proposed more stringent oversight regulations of secondary listings. Steinhoff’s primary listing was on the Frankfurt Stock Exchange. The JSE wants to be more selective about the jurisdictions it accepts for secondary listings.
Directors and senior managers might have to announce to the JSE and in their annual reports when they use their shares as security in financial commitments.
“In order to provide the market with certainty as to approved secondary listing regimes, the intention would be for the JSE to create a pre-approved list of foreign exchanges with regulatory regimes with which the JSE is comfortable,” it says in the consultation paper.
Similar to the nonbinding advisory vote on remuneration policies, the JSE wants to introduce a mandatory nonbinding advisory vote on a company’s corporate governance reports that will ensure that, if 25% or more of shareholders vote against it, the company will have to with engage them. It is also considering a nonbinding advisory vote on board diversity.
The JSE is proposing to increase the minimum capital amount before a company can list. Currently, it is R500-million, which has stayed the same since 2007. It also wants to increase the notice period of an upcoming listing from five to 10 business days to allow time for the listing to be “analysed and absorbed by the market before trading commences”.
These changes can be attributed to Independent Media executive Iqbal Survé’s unsuccessful attempts to list a technically insolvent company, Sagarmatha Technologies, allegedly to unlock a R4-billion investment commitment made by the Public Investment Corporation.
Independent corporate finance specialist Melanie de Nysschen said that, although the proposed changes were laudable because they encouraged sound corporate governance and would protect investors, they would only be effective if all the market stakeholders co-operated.
“Any positive outcome from the changes proposed by the JSE will rely heavily not only on every participant having a clear understanding of its role in the ecosystem but also being relentlessly committed to executing on, and being accountable for, its role in the system,” she said.
“Whilst a failure in governance may appear to be a once-off, even isolated, event, it really is the culmination of a number of actions and/or inactions over a period of time, plotting together to create an enabling environment for the failure to realise. In such an environment, all participants are tainted by the stench that follows.”
Whether the rules would be enough to prevent the Steinhoffs and Sagarmathas, De Nysschen said a key concern was whether there were quantifiable consequences for noncompliance.
“The market is dependent on the JSE’s regulatory body, the Financial Services Conduct Authority (FSCA), to take appropriate legal action where any breaches have been identified by the JSE and notified to the FSCA,” she said. “The FSCA is yet to show real teeth as a deterrent for transgressors partaking in undesirable behaviour.”
Burke said the intention of the new proposals was also to provide investors with regular updates on the progress of market abuse investigations and on the number of JSE reported incidents of possible market abuse to the FSCA.
Tebogo Tshwane is an Adamela Trust business reporter at the Mail & Guardian