Why do so many companies opt to delist from JSE?
THE JSE INCREASED its regulatory and governance role of listed companies in response to usually publicised South African corporate scandals that have taken place over the past few years.
The JSE is an established stock market and Africa’s largest stock exchange by size, and also the largest number of active listings. However, the past decade has seen a decline in the listing of companies and an increase in the number of delistings.
African Oxygen (Afrox), which has been listed for 56 years, is set to leave the JSE after an agreement by Afrox to buy the shares of its subsidiary that it does not already own. The factual number of African companies looking to de-list from the JSE is not certain, however, there is an increasing number of them who have thought it necessary to get their stocks off what is Africa’s largest stock exchange.
The pressures of Covid-19, the aftermaths of the lockdowns, the contraction of the economy by 7.8 percent, the volatility of share prices, and the poor growth prospects afflicting the South African equity market are reasons revealed for seeking delisting.
Listed companies grumble that they suffered a significant drop in their share prices, resulting in company founders and shareholders currently being undervalued to see the current time as a moment to delist. In general terms, the stock market allows investors to purchase an equity interest in companies in the form of stock shares, enabling them to share in a listed company’s profits. For companies, the stock market offers capital for growth through the sale of stock shares without incurring debt.
The tough economic situation in SA is compelling listed companies to rethink their listing as the tax revenues for 2020/21 are expected to decline to R312 billion lower than projected in the 2020 Budget Review, the gross national debt will increase to 81.8 percent of gross domestic product (GDP) while interest payments on the debt will accelerate to 4.8 percent of GDP. Moreover, nose-diving household and business incomes are placing delisting on the corporate agenda when considering the expenditure of being listed.
More evidence of the challenging economic situation is the sharp spike in the 2.2 million job losses, large-scale business closures, and a near-complete halt in international goods trade. Only 14.1 million workers are employed in South Africa out of a population of 58.56 million (2019). To exacerbate matters, the JSE imposed huge fines and public censure on listed companies for failure to comply with the JSE listing requirements and the International Financial Reporting Standards (IFRS). In these cases, some of the major auditor firms in South Africa were responsible as external auditors, for example, Deloitte & Touché, Ernst & Young, KPMG, Mazars, and PwC to ensure compliance with listing requirements and IFRS.
Apart from the audit process of the external auditors, listed companies must also appoint the statutory audit and risk committees who meet collectively with auditors before recommending to the company board for approval of the annual audited financial statements.
Listed companies must also strengthen the internal audit process capacity as well as ensure the independence of the audit and risks committee to guide the chief financial officer and chief executive of management, which adds further costs for the company. In all these processes the audit and risks committee has a critical role play to support the board in ensuring financial reporting procedures and processes are established and effectively operating to prevent material financial.
It is no wonder that many listed companies are considering delisting.
While the JSE has good liquidity across the board the appetite for exposure to South Africa has dwindled causing companies to struggle to increase their market valuations. This has also pushed local companies to delist, amalgamate, unbundle and seek listings in other markets.
The critical question is who regulates the JSE, the Financial Sector Conduct Authority (FSCA), supervises the JSE in the commission of its regulatory duties. The FSCA has not focused on the decline in the listing of companies and an increase in the number of de-listings.
The JSE could face serious headwinds because the perceptions of a conflict of interest by the investment community because the JSE is both a regulator and a market operator.
Dr Dennis George is the founding director of African Quartz