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[Opinion] Take the FSB at its word: start a BEE stock exchange by Phakamisa Ndzamela

June 29, 2014

MORE than R23bn of market value on over-the-counter (OTC) platforms belongs to black shareholders, and these sizeable assets run the risk of being untradeable.

This follows a draft directive from the Financial Services Board (FSB), which gives companies operating OTC platforms until the end of next month to apply for a stock exchange licence or cease trading. The idea is to protect investors. A licensed exchange has measures to combat price manipulation, insider trading and other market ills.

Although the directive threatens to suffocate the black economic empowerment (BEE) market, it is also an opportunity for black entrepreneurs to come together and create a multibillion-rand black-owned, licensed exchange, where BEE shares and many other non-BEE shares can trade. Many people have been complaining about the level of transformation and share ownership at the JSE. Well, here is an opportunity for a black-owned exchange.

The BEE shares being traded on the OTC platforms include Eyomhlaba and Hlumisa, which are aligned to African Bank Investments; Phuthuma Nathi 1 and Phuthuma Nathi 2, aligned to MultiChoice; Thembeka Capital, linked to the PSG Group; Sasol Inzalo, related to Sasol; Ukhamba Holdings, the BEE arm of logistics company Imperial; Welkom Yizani, the Media 24 BEE scheme; and YeboYethu, the BEE partner of Vodacom; and MTN Zakhele, aligned to MTN. They have a combined market value of more than R23bn.

The FSB notes in its directive that the Financial Markets Act of 2012 makes it an offence to operate an exchange without being licensed to do so. An exchange is defined as “a person who constitutes, maintains and provides an infrastructure for bringing together buyers and sellers of securities, for matching bids and offers for securities of multiple buyers and sellers; and whereby a matched bid and offer for securities constitutes a transaction”.

The basic instinct is to blame the captains of industry who oversee these OTC stocks and accuse them of failing to ensure that these shares are traded legally and that BEE investors are protected. It is easy to blame captains of industry for failing to put in place measures aimed at protecting this newly accumulated black wealth.

However, these trading platforms or “exchanges” have been trading for some time without licences. The question that many have asked is: why would the FSB issue a directive only now, after all these years?

I think this is the wrong question. Driving without a licence simply cannot be tolerated and it can’t be correct to question why an illegal activity is being scrutinised only now. The point is that operating an exchange is illegal, whether or not it has been questioned in the past.

In its defence, the FSB argues that “it continuously evaluates its regulatory scope in line with changing market conditions”. It was in the course of such an evaluation that the FSB saw fit to issue this draft directive. In the recent past, the FSB has seen a substantial increase in the activity of companies trading their own shares. In the light of this and in the course of the evaluation of its regulatory scope, the FSB approached senior counsel, who confirmed its view that this activity does fall within the definition of an “exchange”.

But my view is that SA is a developmental state and any directive should consider its developmental imperatives and its population. The OTC market in SA is, in essence, predominantly a market for black shareholders. On the Equity Express platform, out of the 12 companies that allow for the trading of their shares, nine are held only by black shareholders. MTN Zakhele does not use Equity Express.

These BEE platforms have been instrumental in the financial inclusion of the previously disadvantaged. Thanks to the BEE OTC platforms, many people who did not know about trading shares now understand it.

The risk of doing away with these BEE platforms or so-called exchanges is that it could create anticompetitive behaviour and a monopoly, in which the JSE is the only exchange in SA.

What is to be done?

Black business leaders from all of the 10 BEE platforms should be coming together and finding ways of owning a licensed black-owned exchange. To drive the developmental and transformative agenda in SA, an exchange where BEE shares are traded must be maintained.

According to the FSB, the fixed licence application fees are R450,000. For 10 BEE counters, this would eat R4.5m of black shareholder’s money. If all the black business leaders came together and housed these 10 BEE companies in one black-owned exchange, the costs would be lower. It would be far cheaper to implement surveillance systems and other exchange tools if all the BEE vehicles came together.

• Ndzamela is finance editor at Business Times.

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From → BBBEE, Opinion

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