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WHO OWNS THE JSE?

What does the Johannesburg Stock Exchange (JSE) data tell us about our transformation journey in South Africa’s listed markets, especially with regard to BEE ownership? It’s important for policymakers and investors to appreciate the arcane intricacies of measuring black ownership.

The Johannesburg Stock Exchange (JSE) is in essence a global platform that operates in the context of the global market. It thus enables companies operating from virtually anywhere in the world, to list and trade capital between investors domiciled in almost any jurisdiction. Think AB InBev, British American Tobacco, Naspers, SABMiller, Anglo American etc. All of these extremely large-cap stocks by South African market standards do most of their business in value terms outside of SA, more often than not employ most of their staff outside SA, and are logically also predominantly owned by foreigners.

Despite the above facts, aggregate transformation statistics across the market are often cited by policymakers and others as indicative of the levels of transformation across the South African economy. In figures quoted last year by the National Empowerment Fund, and endorsed by the Presidency, it was claimed that 3% of the JSE is in black hands. This study did not take into account various categories of black participation in the exchange, most notably black membership of pension funds, often referred to as indirect ownership or ownership through mandated investment schemes.

In studies published by the JSE, based on research performed by Alternative Prosperity, the following aggregate statistics were revealed, using the JSE Top 100 and the Shareholder Weighted (SWIX) Indices as a basis:

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The above statistics, however, only reveal a very small part of the story that policymakers and investors should take note of.

The first aspect worth considering is the significant foreign portfolio investment on the exchange. According to our research, foreigners own approximately 40% of the market when SWIX is used as a basis. Alternatively, they own in excess of 60% of the market when the foreign registers of duallisted multinationals are taken into account.

This is an entirely logical outcome of the fact that many foreign companies have chosen to list on the JSE to take advantage of our well-regulated, transparent and relatively liquid market. In addition, many South African companies have significantly diversified their operations outside South Africa post 1994.

This expansion, it could be argued, has largely been funded by foreign shareholders. Stated differently, South Africans only own 40% to 60% of the market, dependent on which basis is used for the analysis. This dynamic is in all likelihood very different in the unlisted part of the economy.

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The second dynamic that should be taken note of is that pension funds are the predominant South African owners of listed equity. In aggregate, institutional investors, who invest on behalf of the “man in the street” (principally members of employer-sponsored pension funds, life insurance policyholders and unitholders of unit trusts), own around 39% of the SWIX.

Individuals, private investment companies and the like own a very small percentage of the market in aggregate, other than in the minority of instances where the founders of the business still hold a substantial equity stake.

The various BEE consortia are by far the largest category of private/direct owners. However, the extent to which individual black shareholders can influence the activities of companies through these structures, varies between consortia.

It is thus imperative that policymakers actively monitor the aggregate extent to which previously disadvantaged individuals are participating in pension funds and the like, as this arguably represents the only reliable market statistic that can be used as a proxy for the transformation of asset ownership within the economically active population as a whole.

The third important dynamic, with respect to policymakers and investors, is the potential effect of significant BEE exits from listed companies (principally miners and financials), post the publication of the above research. Some of these companies are being actively lobbied to do replacement transactions. Others may require replacement transactions for commercial or licensing reasons. Some of these companies (financials) will be required to increase levels of “below-the-line” empowerment in the form of equity-equivalent financing. In our view, investors should actively engage with affected investee companies on a proactive basis – vis-à-vis their respective takes on “where to from here” regarding BEE ownership. As if to complicate matters further for investors, the mining, fuel and construction sectors currently face an uncertain future, vis-à-vis broad-based black economic empowerment (B-BBEE) regulations pertinent to their sectors.

Finally, it should also be noted that the above statistics merely represent averages across the market. Within the average, there are many listed entities that significantly exceed regulatory BEE targets, as well as many that fall far short. Most companies publish BEE statistics in the public domain. Some, curiously, don’t. Active investors should, in our view, be engaging with listed entities in the portfolios – to encourage transparency and comprehensive disclosure of B-BBEE credentials, and with a view towards interrogating the reputational, legal and commercial risks that companies with inadequate B-BBEE credentials may be subject to. In this context, it should also be borne in mind that regulators are increasingly scrutinising listed companies operating in all sectors, BEE credentials, and will shortly be compelling listed entities to report transformation credentials to the office of the BEE Commissioner.

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AUTHOR

Trevor Chandler
Chairman of Alternative Prosperity

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