THE JSE AND BLACK OWNERSHIP

Centuries of colonial domination in Africa, including South Africa, left countries either without their own bourses or stock exchanges still heavily weighted against black ownership

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Has the lack of economic and political will delayed the growth of black-owned companies on the JSE?

There are several factors, says politician and development economist, Professor Rabelani Dagada in a recent opinion piece; among them being post-independence governments preferring a socialist ideology that was against capitalist organisations and where growing financial markets were not significant. He adds that amongst some economic theorists, the slow growth in bourses on the continent is mainly due to a lack of economic and political will that has been destabilised by pessimism.

South Africa currently has an unstable economy, partly due to the global economic recession, exacerbated by political scandals and division and uncertainty in the ANC as the party is on the verge of electing a new president.

These factors have adversely affected economic growth in the country and this, in turn, has a negative effect on the Johannesburg Stock Exchange (JSE), not only for well-established companies but also for new listings, among them, black-owned and -managed companies.

How much do black investors own on the JSE?

Black ownership on the JSE has been a hotly debated topic for years. Way back in 2010, the JSE released its first report on the composition of companies owned on the JSE. At the time, the report stated that black South African investors owned 18% of the available share capital listed in the Top 100 companies.

The JSE calculations were done according to the Department of Trade and Industry’s (dti) code of good practice requirements on determining companies’ BEE ownership levels. It was a complicated calculation including all share capital, but excluding mandated investments including treasury shares and company operations outside South Africa. Cross-checks were done to eliminate duplicated capital on the JSE.

However, calculations done without using the dti regulatory codes showed that total black ownership in the Top 100 companies was at 8%. The JSE report also did not reflect black retailers or private black investors as race clarification is not necessary when opening a brokerage account.

The topic erupted again in 2013, after the JSE released a study by Alternative Prosperity that found that only 10% of black companies listed on the Top 100 companies are fully owned, while 13% is indirect black ownership through shareholdings and institutional funds.

But, according to the study, even these figures are debatable when it comes to full black ownership, as in some cases black ownership has occurred through the transference of shares in holdings through various BEE schemes.

When President Jacob Zuma stated in his State of the Nation Address (SONA) in 2017 that black-owned shareholdings on the JSE had jumped from 3% to 10%, the accuracy of the figures was hotly debated again in the media.

These (new) figures came after Zuma called for radical economic transformation when he claimed in his 2015 State of the Nation address that there was only 3% of black ownership on the JSE.

According to Africa Check (a fact-checking NGO) who fact-checked the authenticity of these figures, neither the 3% nor the 10% is accurate. Zuma attributed the dramatic rise in figures between 2015 and 2017 to the National Empowerment Fund (NEF), which was tasked by the government to facilitate economic equality and transformation in the country.

The NEF though, qualified their results by stating that the figures were that of black-owned companies when in fact, technically, the term used should have been “black-controlled and -managed.” A misuse of terminology that added to the conflicting statistics.

In 2015, after Zuma stated that black ownership in the Top 100 was 3%, the JSE released a contradictory report stating that “black South Africans hold at least 23% of the Top 100 companies on the JSE”. But Zuma’s figures were defended as being accurate because the NEF relied on the research from Who Owns Whom, as the organisation produces ‘original’ research on African business and economics.

The JSE then backtracked and released a statement agreeing with Zuma’s statistics, saying that it generally concurred that direct black South African investments listed on the JSE is 3%, but when the values of direct and indirect holdings were included in the Top 100 companies on the JSE, the figure is 23%.

This figure was the result of an analysis produced by Alternative Prosperity in 2013, however, at the time when the figures were released by the JSE, there was still 16% of the Top 100 companies to be analysed due to a “time-consuming process” that included going through thousands of records and cross-tabulating documents to obtain accurate figures about the racial profiles of investors. The JSE has since stopped publishing information on the breakdown of ownership on the Top 100 companies listed.

Fast forward to 2017 and the NEF’s Head of Marketing and Communications, Moemise Motsepe confirms that, as at May 2017, the percentage of black-controlled and -managed companies on the JSE is still at 3%, adding that “our main interest is to measure black ownership of the economy on the whole JSE and not to compare shareholdings in other categories, such as white or foreign-owned investments.”

So where did Zuma get the figure of 10% black ownership of the Top 100 companies on the JSE in his 2017 State of the Nation address? According to Africa Check, when they asked for proof of research from the NEF, they were sent the NEF’s submission to parliament’s standing committee on finance.

In its submission, the research only looked at a “sample analysis of the top 17 financial services companies by market capitalisation as listed on the JSE” as at 31 December 2016, and not the Top 100, as Zuma had stated. There was also no reference to 10% black ownership on the JSE. According to the NEF, the research submitted showed an achievement of 6% by the financial services sector against the direct equity target of 10%.”

Determining companies’ BEE ownership levels on the JSE

Trevor Chandler, from Trevor Chandler and Associates that oversaw the research conducted by Alternative Prosperity, says that BEE share deals are usually done through a South African asset at a subsidiary level and not at a group level, which makes it a lengthy process to work out what percentage in a company are BEE deals.

“The easiest way to determine BEE ownership levels is to look at the big BEE deals on the JSE listed share register and assume the shares are held by black (includes coloured and Indian) people. Then you have to put the percentage of a company that are BEE deals and the number of shares assumed to be black-owned in BEE deals to clearly determine black participation on the JSE,” he says.

In September 2017, the National Treasury released a research report on the ownership of JSE-listed companies stating in its introduction that, “The structure of ownership of South African companies reflects several important aspects of the South African economy, linking to policy priorities on transformation and inclusive growth, macroeconomic and financial stability, and competition, adding that listed companies are typically expected to have diverse ownership—characterised by a large number of relatively small shareholdings—although many will also have one or more strategic shareholders with a significant influence in the company.

The report looks at four areas of ownership including BEE ownership, stating that one of the main objectives of BEE is to increase black ownership of South African companies in line with the transformation agenda to substantially expand participation in the economy by previously disadvantaged communities. Ownership is one of five elements of the generic B-BBEE scorecard for companies doing business in South Africa and is an important feature of the sector-specific codes.

Most companies listed on the JSE are in line with the BEE approach and have set up structures within their companies to transfer share ownership to black beneficiaries. A study of the value generated by BEE transactions in 2015, done by Intellidex identified that 83 out of the Top 100 JSE-listed companies were on BEE schemes. (The Value of BEE Deals, Intellidex Research Report, June 2015)

According to the Intellidex report, the value of BEE deals includes schemes introducing new strategic investors in the company, schemes for company employees and schemes targeted at community groups. In the case of community groups, some ownership schemes have transferred shares in the listed company itself, while other companies have established ownership schemes in their subsidiaries or at the level of specific operations.

Eventually, these schemes should, with the help of sustainable financing, contribute to the creation of new wealth held by previously disadvantaged South Africans.

Measuring black ownership this way, reports Intellidex, is consistent with the B-BBEE Codes, which allow ownership points on the scorecard to be achieved through sale-of-asset transactions, as well as ownership stakes in the listed entity itself.

According to the report, to focus narrowly on the ownership of shares of listed entities would, therefore, disregard the extent to which black ownership has been facilitated through various forms of BEE schemes. For this reason, BEE transactions at the subsidiary level can be counted towards ownership under the B-BBEE Codes—and are also included by Alternative Prosperity in their estimates of black ownership.” Current B-BBEE Codes have allowed for the recognition of black ownership after the sale or loss of shares by black participants. The use of the principle of “once empowered, always empowered” has been the subject of debate in the development of amendments to the Codes.

Although many of South Africa’s main financial institutions have made progress towards achieving black ownership, they have not yet fully reached the targets set out in the Financial Sector Code (2012). On a weighted average basis, the 15 major companies covered in this analysis have realised a score of 15.3 out of the 17 points (including bonus points) available for ownership on the B-BBEE scorecard.

Where transformation is seriously lagging is in management control and employment equity areas where major financial companies are visibly struggling to reach transformation goals.

The largest single shareholder on the JSE listing is the Government Employees Pension Fund, which has 11% of the top 25 listed companies, but black shareholders with more than 5% listed stakes still only account for 1% of listed ownership.

Changing the mindset of black investment on the bourse

While stock exchanges in Africa have been slow to rise, the JSE is the exception but the concern, says Prof. Dagada, is that there are still too few black investors trading in stocks.

“The mindset of many black investors is still locked in traditional savings practices as they are suspicious of capitalist institutions. As a result, it is the new elite who replaced the colonialist rulers who are the major retail investors in domestic stock exchanges, through a post-colonial wealth redistribution strategy,” explains Dagada.

The outcry and subsequent investigations into the low percentage of black investors on the JSE illuminate the fact that formal investments are largely confined to an exclusive market that has marginalised the mainly rural population from partaking in modern investment practices, especially the stock market.

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