The JSE is set for its biggest shake-up in a generation to rein in the flight of small-cap companies. Africa’s largest bourse has halved in size over the past two decades, which has curtailed trading volumes and shrunk options for savers.
The exchange on Thursday said plans were afoot to split the JSE’s main board into two segments, catering to the different needs of large corporations and their smaller peers.
If the blueprint is implemented as envisaged, the main board will be segmented into prime and general, with the latter housing smaller companies.
The move, according to the bourse operator, aimed at reducing regulatory moves and costs associated with listing on the JSE, which earns some of its income from publicly traded companies.
The dwindling pool of listings also matters for savers, as pension funds are faced with a constricted selection, which challenges their ability to diversify and prudently guard against risk. From a macroeconomic perspective, an exchange that struggles to maintain or entice new entrants narrows avenues for businesses to secure funding for growth.
Some of the benefits that will accrue to smaller issuers listed on the general segment will be the flexibility to raise capital. This will be done by the introduction of a general authority to issue shares for cash without shareholders’ approval. This will be subject to a prescribed limit and pricing limitations.
Another reform will see groups listed on the general segment required to prepare an annual report within four months instead of the current requirement of three months.
The JSE also plans to remove fairness opinions for related-party transactions/corporate actions, with more emphasis being placed on shareholders’ approval.
The exchange’s director of issuer regulation, Andre Visser, said the proposed reforms provided relief for smaller companies from the perspective of regulation, cost and resources.
“The market segmentation project is set to redefine the regulatory landscape for smaller listed companies on the main board. By introducing segmentation, we are proposing measures that will support the ease of raising capital and undertaking corporate actions by smaller companies while maintaining investor confidence through disclosure and appropriate safeguards,” Visser said.
“As Africa’s largest stock exchange, it is crucial for us to take all necessary measures to encourage inbound investment and boost confidence among local and international investors ... this restructured environment will likely attract more investment and retain current listings, enhancing the overall health of our capital market.”
The reform blueprint is subject to authorisation by the Financial Sector Conduct Authority.
The mooted reforms are an indication that one of the JSE’s last reforms in the past 20 years, the launch of the alternative exchange, AltX, for small and mid-sized listings in 2003 fell short in retaining and attracting new listings.
Losing streak
When De Beers delisted from the JSE in June 2001, the move was regarded as a blow to SA’s equity market, but not all that big as it remained an unlisted subsidiary of Anglo American, which remains listed on the bourse.
When De Beers went private, the JSE was still the platform on which more than 600 companies traded their shares.
Now the JSE, which traces its roots to the discovery of gold in Gauteng in the 1880s, is home to fewer than 300 listed companies. It has endured a seven-year losing streak with, on average, 25 companies a year delisting from the exchange in the period.
Andrew Bahlmann, CEO of Deal Leaders International, said the move to segment the main board was a smart and long overdue strategy.
“They have to look at ways to make the listing mechanism attractive again. The deterioration in the number of new listings has been a red flag for quite some time,” Bahlmann said.
“Operating in the private capital market, there is more than enough liquidity available without the onerous ‘red tape’ and compliance requirements of the JSE.”
His optimism was shared by small-cap analyst Anthony Clark, the founder of Smalltalkdaily Research, who said the red tape and high costs of remaining listed on the JSE had decimated small companies.
“The splitting of the board into two distinct areas is a wise move. The small-caps sector has been diminishing rapidly. When I joined the market back in the ‘90s, we had 800 listed companies. As we stand now we have about 285 listed groups,” Clark said.
“I think part of the problem with the JSE is the onerous regulations and requirements put on small companies. The cost of being listed to deal with all the regulatory and financial requirements is too excessive for many companies. So they decide to delist or not list at all.”
It is not only small companies that have been delisting from the bourse, with some of the exchange’s erstwhile darlings having also exited, mainly due to corporate actions.
These include Pioneer Foods, Mediclinic, Distell, Massmart, PSG Group, Clover, Royal Bafokeng Platinum and Liberty.
The JSE has simultaneously embarked on a plan to rewrite its listing requirements and cut the red tape that has made it unattractive for local and offshore companies.
Simplification
The exchange in September said it would embark on a “simplification project” over the next 18 months with the aim of using understandable language in its listing requirements in the hope of attracting more companies.
JSE Ltd, the listed company that operates the exchange, said in March it aimed to grow its non-trading revenue by double digits in the years ahead as the volume of shares being traded on the local bourse dwindled, posing a liquidity challenge for investors
The exchange will roll out several new products to augment its non-trading business, which now accounts for 36.8% of revenue, up from 29% in 2019.
Rowan Goeller, from Chronux Research, said: “There are a number of small caps who must wonder about the value of a listing given the costs and regulatory requirements, so reducing this burden will be welcome.”
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