Cape Town Stock Exchange and its impact on the listing of BEE Schemes

Miscellaneous

The Cape Town Stock Exchange (CTSE) was originally launched as 4AX in 2016, and subsequently relaunched as CTSE in October 2021 and is one of only two exchanges in the country with a licence to list both equity and debt

Its head office is in Cape Town but they have presence in Johannesburg, and work with businesses all over the African continent.  CTSE adopted modern, scalable technology to reduce the cost and increase the efficiencies for companies  issuing equity and debt. It is a completely digital exchange with a cloud based platform offering simple, transparent and secure listing and trading.

Importantly, the CTSE has its own in-house registry (run off its own registry technology), reducing cost and cutting through red tape.

All CTSE group entities are 58.38% black owned, qualifying as exempted Micro Enterprises and are Level 2 B-BBEE Contributors with 125% B-BBEE procurement recognition.

Importantly, the CTSE has its own in-house registry (run off its own registry technology), reducing cost and cutting through red tape.

All CTSE group entities are 58.38% black owned, qualifying as exempted Micro Enterprises and are Level 2 B-BBEE Contributors with 125% B-BBEE procurement recognition.

When compared to the Johannesburg Stock Exchange (JSE), listing on CTSE offers specific benefits –

  • There are no minimum share trading fees, enabling shareholders to trade lower share volumes and    values and offering an appropriate exchange for retail investors;
  • due to its simplified listing and governance requirements and in-house registry, regulatory costs are much lower; 
  • the cloud-based in-house registry allow for the exact implementation of specific share trading restrictions;
  • as share prices are quoted in a public market and freely tradable, it offers enhanced tradability and liquidity;
  • a Client Protection Fund was introduced for the protection of brokers and their   clients in their dealings with CTSE.
 

As a licensed exchange for both equity and debt, CTSE offers issuers the opportunity to be closer to the head offices of several institutional investors and pension funds. 

Equity is accommodated through general listings, new ventures, discretionary investment companies (i.e. PE funds), non-discretionary investment vehicles (such as BEE schemes) and international issuers. CTSE offers investor diversification through bonds issuances, offering companies benefit from having the distant relationship between issuer and bondholder as opposed to the traditional bank funding relationships. Generally, the bond market offers bondholders a measure of legal protection relative to equity investors. Further, CTSE has amended its Debt Listing Requirements and established the Default Protection Fund for the protection of investors. Investors may utilize the Default Protection Fund to institute a claim against an issuer resulting from any issuer default.

Debt listing options include preferential share issues, bonds and notes, debentures, commercial paper as well as fixed and/or floating rate instruments. The CTSE debt market provides an efficient platform relative to the incumbent JSE debt market, which has been criticised for lacking sufficient investor protection. The CTSE Debt Listing Requirements have been drafted using the ASISA guidelines offering increased transparency and promoting fairness. CTSE provides an efficient platform to issue debt at a significantly lower cost when compared to the JSE. 

When considering the impact of the CTSE structures and digital platform (and in-house registry) on existing BEE schemes within listed entities, we firstly need to consider certain common characteristics within such schemes in South Africa – 

  • schemes are contractual in nature, with a defined lock-in period (committing BEE shareholders to the scheme for the stipulated period) and funded through a combination of traditional funding (be it bank funding, preference share funding, bond market issuances and/or broader financial institution facilities) and vendor funding. Typically, these funding facilities are serviced through the relevant dividends distributed relative to the equity earned by the BEE structures within such schemes. The funding is secured, including share encumbrance through a cession of the shares, a dividend waterfall ensuring preferential payment to financiers and possibly also shareholder guarantees (or personal sureties);
  • The combination of the contractual lock-in period and the need to fully repay funding through dividend flows (and the security held by financiers over the shares), contribute to very limited liquidity in the hands of the BEE shareholders under such schemes. Listed companies executing such schemes, seek maximum comfort and empowerment certainty of empowerment through the contractual lock-in periods, as unmitigated transfer or sale of BEE shareholders’ shares might lead to a dilution of the company’s empowerment credentials.

This inevitably results, from a liquidity perspective, in rather typical BEE scheme structures that severely curtail the ability of BEE shareholders to exit or trade on any upside in the company’s valuation or, alternatively, to leverage themselves on the basis of such company’s financial performance.

We therefore see limited interim liquidity mechanisms on the basis that final unwinding of the structure will only be allowed post the contractually stipulated lock-in periods –

 
  • Trade sales that could be enforced within an agreed period after the close of the BEE scheme but prior to the final lock-in period, whereby the BEE shareholders will have a limited right to sell their shares in the BEE scheme to any other party with at least the same HDSA status;
  • Further community or employee empowerment providing that, should the company explore any transaction designed to further empower any communities or employees prior to the final lock-in period, the BEE shareholders shall be entitled to sell their shares to enable such transaction;
  • Staggered vesting providing that where the company’s share price increases by more than a pre-agreed percentage, the BEE shareholders shall be entitled to sell their shares back to the company at a pre-agreed discount, but usually limited to the equivalent amount of any outstanding funding and limited to the requirement that the company remains sufficiently empowered from a regulatory perspective; and
  • The possibility of a public offering where the BEE shareholders (usually through the BEE HoldCo in the particular BEE scheme) may list on a registered exchange that restricts trading to HDSA shareholders.
 

Based on PWC’s latest valuation survey report, BEE shareholding with a lock in period of 5-10 years will on average have a discounted value of +/- 30% which can be unlocked (or partly unlocked) if these shareholders are able to trade on a listed trading platform;

Based on PWC’s latest valuation survey report, BEE shareholding with a lock in period of 5-10 years will on average have a discounted value of +/- 30% which can be unlocked (or partly unlocked) if these shareholders are able to trade on a listed trading platform;

Allowing for the BEE shareholders under a BEE scheme to separately list on CTSE would offer the following benefits – 

  • BEE shareholders will have the ability to trade their shares freely   with other BEE parties with the same HDSA status to unlock value;
  • Qualifying BEE investors are verified for their HDSE status by   the CTSE upon their onboarding;
  • Qualifying employees can also trade in these shares if they meet the right criteria;
  • Trading can be limited to specific    eligibility criteria determined by the board;
  • Furthermore, by way of comparison with JSE requirements, and in accordance with section 4.32 of the JSE listing requirements, an applicant issuer seeking a listing of its BEE securities on the BEE Segment must adhere to a stringent list of requirements which has  a cost associated with it, i.e., trading in the BEE securities must be restricted to a BEE compliant person pursuant to the use   of (i) a BEE contract or (ii) a BEE verification agent, which must satisfy certain criteria; the issuer needs to inform the JSE whether trading in its BEE securities will be executed via the   use of a BEE contract or a BEE verification agent and the issuer must provide the JSE with the details of the BEE verification agent and inform the JSE of any change in the BEE verification agent.
 

By virtue of the CTSE having its own registry, the costs pertaining to the above mentioned JSE requirements (and generally the administrative burden for investors) are saved as all investors (whether institutional or retail) trading on the exchange will already be verified regarding their BEE status.

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