The Johannesburg Stock Exchange (JSE) is the largest bourse in Africa. Its market cap of approximately ZAR20 trillion also means that it sits in the top 20 of the world’s largest stock exchanges. Despite that size and heft, it is under significant pressure.
In addition to increased competition from newer exchanges such as the Cape Town Stock Exchange and A2X Markets, it has a serious delisting problem. Over the last decade, over 100 companies have been delisted from the exchange. The number of companies listed today is also half what it was 30 years ago. That would not be a problem if there was a strong pipeline of companies waiting to list on the exchange, but there simply is not. In 2023, for example, just three new companies – Premier Foods, Copper360 and Primary Health Properties – came to market on the JSE.
It is worth pointing out that the delisting phenomenon is a global one. According to the World Bank, the number of listed domestic companies in Germany has declined by approximately 42% since 2000. Similarly, the UK has seen an approximate 32% decline over the same period in listed domestic companies. Even in the US, the world’s largest economy, the number of listed domestic companies has decreased by approximately 2 200.
In a bid to reverse this trend, the JSE is introducing amended regulations designed to make life easier for listed companies. More specifically, the proposed amendments aim to reduce the legal and administrative requirements for certain types of transactions. While these and other changes can not address all of the factors behind the many delisting’s we’ve seen in recent years, they may just make it more enticing for local companies to list when raising capital.
Understanding the delisting phenomenon
Before digging into what these amendments mean and whether they will have a positive impact, it is worth digging a bit deeper into some of the underlying factors behind the global delisting phenomenon.
High up on the list is the rise of private equity. Along with asset managers from other investment classes, many private equity firms target publicly listed companies to take them private. This not only gives the private equity firms greater control over companies than they would have as public shareholders but it also ensures that they can take a greater share of any returns those companies bring in.
As certain sectors mature, they also present opportunities for consolidation, which will see an increase in merger activity. Some of those merging parties will be delisted as a result. Macroeconomic factors also have a role to play, with some companies looking for alternative listings in stronger economies. The last of these is particularly pertinent for South Africa, which has struggled for growth for over a decade.
These are, of course, factors which stock exchanges have little to no control over. One thing they can influence, however, is issuer regulation. It is this area that the JSE hopes to address with the proposed amendments.
So, what is changing?
Currently, there are two tiers to the JSE: the Main Board and the Alt X. The JSE has proposed a split of the Main Board into two further segments: a Prime Segment and a General Segment. Under the proposed amendments, the Prime Segment would be the default position and listed companies would have to apply to the JSE for classification under the General Segment. The JSE will approve an application for inclusion in the General Segment provided the applicant issuer is not included in the FTSE/JSE All Share Index.
According to the JSE, the shift “aims to provide an effective and appropriate level of regulation depending on the size and liquidity of Main Board companies, whilst also maintaining investor confidence in our market”. Ultimately, it’s hoped that this change will make it easier for smaller listed companies to raise money and conduct other corporate actions.
Among the proposed amendments is an increase to the percentage ratios (such as gross assets, profits, or market capitalisation) for category 1 transactions (such as large acquisitions or deals) from 30% to 50% for companies in the General Segment. That should, in theory, decrease transaction costs for smaller companies in this segment.
The local bourse is additionally relaxing requirements around financial reporting for companies in the General Segment by doing away with interim or quarterly condensed financials. It is also removing the fairness requirement from certain transactions, certain types of repurchase transactions, share issuances and related party transactions.
Finally, a special resolution will not be required for (i) a general repurchase of securities, (ii) a general authority to issue shares for cash, provided it does not exceed 10% of the issuer’s issued share capital, and (iii) specific authority to repurchase securities from parties other than related parties, provided it does not exceed 20% of the issuer’s share capital.
Whatever form the final amendments may take, this proposed amendment to JSE’s intervention in this respect is welcome and will hopefully contribute towards maintaining South Africa’s position as one of the leading capital market destinations on the globe.
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