Listing on the JSE presents challenges for newcomers

04 October 2017: The adoption of the King IV Code will have an immediate impact on companies planning to issue circulars on or after 1 October 2017 for the purposes of seeking a listing on the Johannesburg Stock Exchange (JSE).

Duncan Dollman

At the same time, potential investors can expect to see JSE-listed companies display much more transparency as the regime for King IV moves to comply and explain.

This is according to Duncan Dollman, Partner at Mazars, who adds that the JSE’s latest set of listing requirements will present some additional challenges for listed companies and applicant issuers seeking a listing on the Exchange.

According to Dollman, “the King IV code, which was adopted by the JSE, requires companies to disclose more information relating to their governance and their compliance with various requirements. Where companies do not comply with any regulation, they are also now required to publish their reasons for non-compliance. This means that investors and potential investors will be able to get much more disclosure from annual reports.

Structuring the board 

Dollman explains that in terms of good corporate governance practices, listed companies must have a properly constituted audit committee. “This committee needs to be comprised of a minimum of three members, and only consist of independent non-executive directors. Independence of directors is to be determined holistically and be in compliance with the Companies Act 2008 as well as King IV. A shareholder representative and non-executives participating in share incentive schemes for example will not qualify to be classified as independent directors.”

He adds that King IV also suggests that in order to provide an acceptable balance of power on the board the majority of the Board should be non-executives. “Typically a company having three executive directors namely a CEO, CFO and an operations director (COO), would therefore need a board of at least seven directors to satisfy the requirement for balance of power. Of the remaining four non-executive directors at least three would have to be independent.”

According to Dollman, recent changes to the JSE’s listing requirements require companies to have policies on promoting both race and gender diversity and are required to report to shareholders in the annual report on how the Board has considered and applied these policies. Currently white males still dominate the composition of Board of Directors of the majority of companies listed on the JSE. “Changes to the JSE’s listing requirements were introduced to encourage transformation and diversity within boards of directors,” he says.

“Also shareholders are now permitted a separate non-binding advisory vote at the AGM on the company’s remuneration report and the implementation report. If these policies are voted against by shareholders exercising 25% or more of the voting rights, then the issuer must invite dissenting voters to engage with the company and disclose the manner and timing of this engagement.”

Preparing pre-listing financial information 

“An applicant seeking a Main Board listing and issuing a prospectus or pre-listing statement will have to prepare a report of historical financial information, generally for three years up to the latest financial year before going to market,” Dollman says.

He adds that the report on the historical information must also include a general review of the business activities as well as earnings per share information, net asset values and segmental information, which might not previously have been compiled.

“Companies will be required to introduce the necessary systems and procedures for producing timeous financial reporting. The delays in preparing and auditing or reviewing this historical financial information must be built into the listing timetable. If the applicant seeking a listing is considering acquisitions or disposals of businesses as part of the listing process, pro forma financial information showing the effect of these transactions on the last reported period has to be presented. Property entities pre-listing statements are also required to include a forecast statement of comprehensive income, a valuation report and property portfolio information. The time and cost taken to prepare this information in the required format and framework must also be budgeted for.”

Cost of raising capital on the JSE 

Dollman notes that companies aiming to list on the JSE must build in a realistic expectation for the cost of raising capital and listing securities. “One of the aspects that businesses need to have is a very clear understanding of what they will need to spend in order to raise capital.”

He explains that a team of professionals comprising of skilled and experienced advisors needs to be appointed to facilitate a listing of securities.

“To give one example, Dis-Chem Pharmacies which listed in November 2016, in addition to the statutory sponsor and reporting accountants, added legal advisors, transaction sponsors, bookrunners and a stabilisation manager to its professional team. The company budgeted to spend, based on information contained in its pre-listing statement, around R345 000 for each R10million of capital raised. Premier Food and Fishing, which listed recently, expected to spend around R12.7 million in total to raise R525million, which amounted to R241,000 per R10m of capital raised,” he says.

“Mazars offers a range of JSE-related services including, developing listing strategies for smaller or acquisitive businesses, fairness opinions, reporting accountants work and prospectus reviews and has assisted many businesses in listing on the JSE,” Dollman says. 

“There are many potential challenges to be overcome in embarking on a listing strategy and applicants are encouraged to research and understand the process and requirements before attempting to engage with potential investors and other stakeholders,” Dollman concludes.

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