FSCA cancels the stock exchange license of ZAR X

Published Feb 13, 2023


The Financial Sector Conduct Authority (FSCA) announced on Monday that, with the concurrence of the Prudential Authority and the South African Reserve Bank, had cancelled ZARX’s stock exchange license in terms of the Financial Markets Act, 2012, with immediate effect.

The cancellation of ZAR X’s license follows its prolonged non-compliance with the Act and read with FMA Regulations, which relate to the liquidity and capital adequacy requirements of an exchange. The license was suspended effective 20 August 2021.

The Act requires licensed stock exchanges to have capital on their balance sheet that is equivalent to at least six months of their operating expenses – funds that would help them withstand unexpected future events. According to the FSCA, ZAR X had not been able to meet this capital adequacy requirement since its suspension, necessitating the cancellation of its license.

At the time of suspension, The Public Investment Corporation (PIC), which is a 24,14% shareholder in ZAR X on behalf of the Government Employees Pension Fund, was lambasted for blocking a significant equity transaction with a foreign-based investor to acquire a controlling interest in the exchange. The exchange said in a public statement that it “has been stalled due to an inability by ZAR X’s largest shareholder, the PIC, to grant formal approval of the transaction due to protracted internal issues and governance processes.”

The investment is help under the GEPFs unlisted developmental investment mandate in 1997 under the name Isibaya Fund.

The statement further stated that “the transaction would be concluded by 20 August 2021, which would have pre-empted the need for the suspension”, laying the blame squarely on the PIC.

The public asset manager replied by stating that the PIC subjects investment proposals, including reinvestment proposals, to a thorough investment process for the benefit of clients on whose behalf it invests. “Whilst it is not in PIC’s character to publicly debate its relationship dynamics with investee companies, it is necessary to state that the PIC has demonstrated its support for ZAR X and has gone the extra mile to ensure that it succeeds,” it added.

ZAR X CEO Etienne Nel said that he decision by the FSCA to cancel ZAR X exchange license, following a period of suspension whilst understandably disappointing, is a significant set-back to advancing financial inclusion and to addressing the significant structural short-comings present in SA capital markets that impact on small and medium sized companies

ZAR X said in a media statement that: prior to the suspension of its licence on 24 June 2021, ZAR X had secured and completed a significant funding transaction in December 2020 with an offshore consortium that would have ensured ZAR X continued compliance with the capital adequacy requirements and enabled ZAR X to launch a number of innovative new listings and product initiatives. Unfortunately, the transaction was not timeously approved by the PIC, which resulted in the investor withdrawing its offer.

“Post the suspension of the license in August 2021, ZAR X has engaged with numerous potential investors. The timing of the cancellation of the licence could not be more unfortunate. Following protracted discussion and due diligence, we were recently informed by the prospective investor that they will be submitting a formal binding offer to invest the requisite capital during the course of this week.”

Personal Finance is still waiting for a response from the PIC on the latest development.

Previously, the PIC stated that it had participated in the ZAR X two previous rights issues after its initial investment as a show of confidence in the ZAR X platform. “The PIC has continued to engage with the company on its turnaround strategy, including cost containment measures which took a protracted period of time to be implemented. Whilst the PIC’s support for ZAR X has remained unwavering, it has had to do so on a risk-adjusted basis for the benefit of the clients on whose behalf it invests.”

The FSCA stated in their press release that the cancellation decision was not taken lightly. However, the decision follows a prolonged remedial process which was initiated to assist ZAR X to become compliant to the regulatory framework. The remedial process failed to yield positive results.

The four other licensed securities exchanges, including the JSE, A2X Markets and the Cape Town Stock Exchange, remain operational within the South African financial markets, the regulator said.

ZAR X was the only exchange that reflected shareholding at beneficial holding level as required by the Financial Action Task Force (FATF). That would need to change now as listed companies look for new hosts and shareholding is transferred into nominee accounts, which is the status quo in South Africa.

“Operationally, ZAR X facilitated the trading and real time settlement of transactions conducted through the exchange without a single failure. A unique feature of ZAR X exchange model is that investor assets are never at risk as investors hold their assets directly in their own name. The model therefore poses very little risk to investors and the market,” Nel concluded.