Archive for the 'Black Economic Empowerment' Category

South Africa’s securities exchange war goes to court

Court is the next battleground in a contest to transform the securities exchange landscape in South Africa. Newly licensed exchange 4AX, which is not yet operational, has launched a High Court application to set aside both the decisions of the FSB regulator and its Appeals Board to give a licence to new exchange ZAR X, according to Moneyweb .

Last September the Registrar of South Africa’s Financial Services Board (FSB) awarded licences to ZARX (Pty) Ltd (ZAR X) and 4 Africa Exchange (Pty) Ltd (4AX) (see our story here). The JSE and 4AX appealed against ZAR X’s licence, but in February 2017 the FSB Appeals Board dismissed the appeal, saying that ZARX and the FSB had complied fully with the Financial Markets Act 2012 (FMA), and awarding full costs to both ZARX and the FSB (see another Moneyweb article). ZAR X settled its first trade in February 2017, delayed from an initial September launch date. Its first listing was agribusiness Senwes. 4AX is not yet trading.

In February Donna Nemer, JSE Director of Capital Markets, said the JSE will fully respect and abide by the decision: “We are still very committed to the market and the participants in this market, and will cooperate fully in the debate on how we should be evolving going forward,” she said. “We will continue the work we are doing with the regulator and all the market participants, including the new exchanges, to maintain the high quality capital markets for which South Africa is really well known.” The JSE is not joining the new court case which 4AX has launched in the South Gauteng High Court to set aside both the decisions of the FSB Registrar and the FSB Appeals Board.

Also in waiting is exchange A2X, which has a licence application with the FSB. For more background on 4AX see our story.

Why another exchange?
The new bourse ZAR X has 3 listed securities and 9 authorized market participants or brokers, according to its website. It says a number of listings are in the pipeline.
According to Geoff Cook, cofounder and director of ZAR X, writing in Business Day newspaper this month: “Nowhere is radical change more desperately needed in SA than in the capital markets. The model that has dominated for more than 60 years is stagnant, with no broadening of the capital markets. It is also hopelessly skewed against the private investor.”
Volumes had grown of trading over the counter (OTC) in shares in black economic empowerment schemes for big companies such as MTN, Vodacom, Multichoice, Sasol and Imperial. Other OTC schemes were being operated as restricted shareholder platforms such as large agricultural cooperatives Senwes, TWK and KWV, while a few other companies sought liquidity at low cost for a limited spread of shareholders.

Geoff Cook, ZAR X Head Markets and Regulations (credit ZAR X)

ZAR X co-founder and CEO Etienne Nel created a platform called Equity Express for the OTC market. In July 2014 the FSB issued Board Notice #68 which effectively compels the OTC equity trading market to alter methodology and operate through a licensed exchange in terms of the FMA.
ZAR X works with a pre-funded model, so that cash is prepaid (deposited into the system before a trade) and a seller’s shareholding is pre-cleared before concluding a transaction. This means a huge reduction in settlement risk. Securities are held in a segregated depository account at a central securities depository (CSD), as required by the FMA, with a CSD participant facilitating clearing. The trade settles on t+0 or real time.
According to Cook: “Only severe disruption will return the financial markets to any sense of reality and social relevance. That disruption has arrived. Brokers can now execute a R1,000 order profitably through a world-leading T+0 prefunded execution model that does not require settlement risk capital, in which trading and administration applications are provided at minimal cost and where live data is free to all. Safe custody fees are zero and fees are only paid on conclusion of a transaction.
“The equity market is too concentrated and the debt market remains inaccessible and opaque. Despite there being nearly 1,300 collective investment schemes as well as many broker-managed discretionary portfolios, allocations are nearly all aligned to a limited number of old economy securities. Passive investment products such as index trackers simply compound the concentration.”
Cook says that regulation and the funding imbalance towards collective investment schemes means innovative small and medium and medium-sized companies will struggle to raise capital from asset managers. They need direct access to retail investors or bespoke asset managers who can invest smaller amounts. Asset managers are restricted by the size of their portfolios to investing in securities with large market capitalization.
He says the new exchange will mean that listings of companies with market capitalization of around R200m will become more common.
Cook claims that on average less than 0.5% of daily market volume on the JSE is retail-driven with less than 300,000 active retail clients, across all brokers, loaded within the JSE’s broker deal accounting (BDA) system. He says 30% of trading volume comes from brokers who collocated or moved their trading systems physically closer to the JSE trading engine in order to profit by millisecond time advantages. According to its website: “No high frequency trading, derivatives or short selling will be allowed. ZAR X has deliberately structured fees in such a manner that we wish to encourage investing rather than trading and, in so doing, promote savings.”
“Nearly all equity listings om the JSE are now done by way of private placement, which requires a minimum investment of R100,000 per subscriber. Offers to the public are rare as brokers in the conventional system cannot facilitate smaller retail client transactions profitably. With high costs and insufficient order flow brokers focus on providing discretionary managed portfolios, which attract higher fees but have higher financial entry requirements.
“The ‘uninvested’ retail investor is therefore totally excluded from directly participating in the capital market. Their only access is indirectly via a collective investment scheme that, if they did, would further perpetuate the shrinking of our capital market.
“The concentration of order flows to fewer institutional brokers is detrimental to efficient and transparent market pricing. With thin net margins, institutional brokers use their balance sheets to secure revenue flow by engaging in principal trading, high-frequency trading (HFT), and facilitation trading, including dark pools.”

Stokvels – South Africa’s $3.8bn savings pool
Cook claims there is huge potential for retail investors to buy securities: “Stokvels, whose members are active savers and investors, have more than 2m members. The Zion Christian Church has about 4-million contributing members. The potential size of the ’uninvested’ retail market is unknown, but I would suggest it is in excess of R700bn. The market system has ignored it.”
ZAR X also hopes to work with other exchanges “particularly in Africa”.
Stokvels are a big part of life in South Africa, with estimated 810,000 stokvels and 11.5m members, with a stokvel economy worth R49bn ($3.8bn), according to the National Stokvel Association of South Africa. There is even a comedy show called Stokvel on DSTV’s Zambezi Magic.

Stokvel comedy, Zambezi Magic DSTV.

Brainworks fund links indigenization and private equity in Zimbabwe

Zimbabwean private equity firm Brainworks Capital Management has reportedly launched a $20 million fund targeting Zimbabwe’s agriculture, financial services, mining and telecommunications sectors, according to a report on
The Herald newspaper says Brainworks Capital was established earlier in 2011 and will enable Zimbabweans to own stakes in a wide range of companies as required by indigenization laws. Brainworks is offering 400 milion ordinary shares at US$0.05 each to pension funds and local and foreign institutional investors.
According to the Herald, Brainworks is targeting an internal rate of return of 30% on its investments and looks for equity stakes of at least 25% and representation on the board of its investee companies. It aims to hold investments for 3-5 years. It was founded by investment banker George Manyere, who used to work with the International Finance Corporation, and chartered accountant Mr Walter Kambwanji who used to work with HSBC. They have a combined 12.9% shareholding in Ecobank Zimbabwe, formerly Premier Banking Corporation. Mr Manyere is the managing partner and Chief Investment Officer and Mr Kambwanji is a partner and Chief Finance Officer.
The fund has reportedly arranged $6.8 million in bank financing. It aims to invest the biggest part of its funding in gold mining. In January Cape Range Ltd (, listed on the Australian Securities Exchange, announced that its subsidiary Cape Range Zimbabwe (Private) Ltd has entered an option agreement with Brainworks subsidiary Brainworks Capital Mining (Private Ltd), in which Brainworks would offer $2.4 mn for 30% of the company and become indigenization shareholder. Cape Range comments: “This transaction is seen as an extremely positive move forward for the Company to operate in Zimbabwe, as Cape Range endeavours to comply with the Zimbabwean Indigenisation and Economic Empowerment Act.” However, the option expired on 31 January.
Another subsidiary, Brainworks Capital Financial Services, assumed effective ownership of the 12.9% shareholding in Ecobank Zimbabwe and it can boost its stake to 30% in line with indigenisation approval conditions that were set when Ecobank invested in Premier.
Non-executive directors are: Mr Richard Muirimi (chairman), Vulindlela Ndlovu, Alwayn Scholtz (Scholtz Attorneys in South Africa), Swiss-based Cornel Vermaak and German Dirk Harbecke.

Zimbabwe Minister “blocks” Duration gold miner’s Toronto SE listing

According to media reports, Zimbabwe’s Indigenization Minister Saviour Kasukuwere is declining to give permission for leading gold miner Duration Gold ( to raise US$7 mn by listing on the Toronto Stock Exchange (
According to a report in businessdigest of the Zimbabwe Independent newspaper, the minister wants an empowerment plan detailing how Duration will empower black Zimbabweans in line with the Government’s 2010 economic empowerment regulations under which foreigners must sell controlling shareholdings to black Zimbabweans.
He also apparently believes the money could be raised locally on the Zimbabwe Stock Exchange.
The minister confirmed that Duration had written for permission to list but told the newspaper “I cannot comment on anything”.
The company is an investment by Clarity Capital (, a US-based fund founded in 1996 by Allan Dolan, that claims on its website: “Clarity has the capital and in-house expertise to create and grow successful businesses. We don’t just invest in promising ventures, we incubate and operate them.
“Clarity specialises in the minerals, life sciences, energy and creative industries sectors. Our entrepreneurial team of over 25 technical and commercial experts, from scientists, engineers and geologists to accountants, lawyers and financiers, are passionate about building value. Our goal is to deliver returns of 5 to 10 times our invested capital over a 3- to 5-year period.”
A fellow company, Whetstone Minerals, is listed on the TSX. According to the news report, Duration intended to retain 30% of the capital raised outside Zimbabwe for head office expenses. The newspaper does not report any comment or confirmation from the company.
Duration’s website describes it as “a Zimbabwe focused, private, emerging gold producer and explorer. The Company, majority owned by Clarity Capital and its employees, currently has a global resource base of 4.2 million oz of gold. Formed in 2006, Duration partnered with two long standing Zimbabwean mining families, the Muirs and the Thompsons, and now owns 5 core assets with historic production of 4.6 million oz. Each core asset has the potential to produce over 1 million ounces of gold. Duration is licensed to market and sell its gold on the open market. It sells gold at international spot prices and receives freely transferable foreign currency in return. The company is cash flow positive and generates a healthy EBITDA from its current operations.
Duration’s objective is to develop its existing asset base into a 350,000 oz per year producer, based on 5 bankable feasibility studies targeted for completion by 2014. Acquisition of additional producing and advanced stage assets will also bolster the company’s annual production.”
Zimbabwe’s economic regulations gazetted in March 2010 gives the Minister authority to approve and disapprove deals involving foreign equity participation. He previously sought to block the sale of Barclays Bank subsidiary, Custodial Financial Service, on grounds that the bank did not comply with indigenisation and economic empowerment regulations. This deal was part of the sale by Barclays Bank plc of its African custody businesses to Standard Chartered Bank.