Year of `Scandals’ Spurs South African Bourse to Plan New Rules

JOHANNESBURG (Capital Markets in Africa) – Johannesburg’s stock exchange said it’s proposing tighter listing rules after South African financial markets were “shaken by a range of corporate scandals, rumors and innuendo” over the past year.

The bourse published a consultation paper Wednesday, saying recent events showed a need for it to review its responsibilities and strengthen aspects of regulation. Recommendations range from boosting racial and gender diversity on boards, to doubling the notice period before new stocks start trading. It proposes greater disclosure when directors use shares as collateral and supports plans for information on short-selling transactions to be made public.

The exchange said incidents “have led to questions about how certain alleged activities were able to happen, apparently undetected, whether regulators such as the JSE could have taken action to prevent certain activities and whether those events have highlighted any regulatory provisions that might need to change.” Its comments come nine months after the near-collapse of retailer Steinhoff International Holdings NV, which lost more than 90 percent of its value when it was engulfed in an accounting scandal in December.

“The speed and the unexpectedness of the Steinhoff event obviously caught everybody off guard and I would say that that was the point of ignition,” Nicky Newton-King, chief executive officer of exchange operator JSE Ltd., said in an interview. “People started to raise questions that they had not raised before. But when it comes to the proposals, the theme here is disclosure.”

In December, EOH Holdings Ltd. said forced stock sales due to margin calls involving two directors caused a 35 percent plunge in its share price. In January, regulators said they were studying sharp drops in stocks including Aspen Pharmacare Holdings Ltd. and Resilient REIT Ltd. amid speculation they were about to be the subject of a negative report by short seller Viceroy Research.

Two months later, the financial services watchdog said it was probing trading in shares including Capitec Bank Holdings Ltd., EOH and Mr Price Group Ltd.

“We as regulators learn, we learn from mistakes and loopholes people make,” John Burke, director of issuer regulation at the JSE, told reporters Wednesday. The JSE said it’s seeking comment on the proposals and that these can be submitted to Burke until Oct. 22. Here are some of the exchange’s recommendations and comments:

Stronger Listing Regulations

• The current subscribed capital amount of 500 million rand ($34 million) may need to be increased and issuers may need to have this in place before raising funds through a JSE listing
• To expand the proportion of shares in listed companies in the hands of general investors, the classification of “public shareholders” could be tightened to exclude anyone closely affiliated with directors and management
• The JSE is considering doubling the notice period before new listings start trading to 10 days from five to give “time for the listing to be analyzed and absorbed by the market”
• Requiring the board of listing applicants to make a positive statement that applicants are in good standing with all applicable laws
• The JSE is considering requiring audit committees and company secretaries to undergo training on their responsibilities under the Companies Act and listing requirements
• The exchange is considering introducing a shareholders’ vote on corporate governance, where if a report is voted down by more than 25 percent shareholders, the JSE would require “engagement” by companies, as is already the case with remuneration reports
• After cases where share prices came under pressure from directors using stock as collateral without the market’s knowledge, the JSE is considering requiring an announcement when such arrangements are made

Secondary Listings

• The JSE is considering being more selective on the jurisdictions it accepts for secondary listings, creating a pre-approved list of foreign exchanges with which it is “comfortable”
• It’s also considering tighter controls on which exchanges it accepts when companies move their primary listings away from the JSE, accepting only those with equivalent regulations
• The ability to have a primary listing elsewhere when the JSE accounts for more than 50 percent of the volume and value of stocks traded may be removed

Diversity

• The JSE is considering requiring that boards have a mandatory policy on diversity and that they publish performance against that on an annual basis; a diversity of views and oversight “becomes critical when a company has dominant and charismatic directors”

Short Selling

• While short selling plays an important role in price formation, the JSE supports the Financial Sector Conduct Authority’s proposal to require public disclosure of information on short sales; the exchange will comment on the proposals once they are released.