12 December 2012

Zimbabwe: ZSE Suspensions Increase As Dollarisation Bites

The multi-currency regime which replaced the use of the local currency has served as a double edged sword.

On one hand the use of hard currencies effectively dealt with hyperinflation and an uncertain exchange rate whilst on the other hand it led to liquidity challenges. For companies listed on the Zimbabwe Stock Exchange (ZSE), the impact of the multi-currency regime mirrors its effects on the economy.

Some companies like Delta and Econet have benefited from the use of the hard currencies by being able to invest in state of the art technology and thus enhancing their capacities. Other companies like Red Star and CAPS have found the going tough and have had to throw in the towel. The Industrial Index on the ZSE comprises 75 counters of which 66 are actively traded and nine are suspended. Seven of the nine suspended counters were suspended between 2010 and 2012 (the multicurrency ear) with five suspensions having occurred in 2012 alone.

The most recent company to be suspended from trading on the bourse was Cairns Limited whose management applied for judicial management. The food processor had come under pressure from creditors and lenders over mounting debts and borrowings. The company is one of the many that failed to recapitalise post 2008 and as such faced challenges from obsolete equipment that made its products to be less competitive against imported substitutes. The company also borrowed to fund working capital but the borrowings proved to be too expensive and of a shorter duration than its working capital cycle.

In all the cases where a counter is suspended, minority shareholders suffer the most by being unable to transact on their shares. The question to be asked is whether shareholders can be protected against such occurrences in the future? The ZSE Listing Requirements provide various guidelines on how listed companies must provide price sensitive information to the public. Profit warning statements and cautionary statements are some of the ways investors are expected to be informed on how certain companies are performing. Further, the regulations require suspended companies to update shareholders on a quarterly basis the state affairs of the suspended company and any action proposed to have the suspension lifted. The requirement to have regular updates on progress towards removal of suspensions has largely not been complied with.

The Listing Requirements state that, "If a listing is suspended and the affected issuer fails to take adequate action to enable the ZSE to reinstate the listing within a reasonable period of time, the ZSE may terminate the listing". What constitutes "reasonable time" is subject to debate but Barbican and TZI have been suspended since 2004 and have not given any indication of when they will resume trading. Red Star and Steelnet were suspended in 2010 and 2011 respectively and 'significant; changes have taken place in these two entities that put their going concern status under doubt.

One way in which the regulators can ensure that 'healthy' companies remain listed on the ZSE is to enforce minimum capital requirements. The banking sector has such requirements to ensure that banks do not fold easily and thereby jeopardise depositor's interests. The regulators should also safeguard the interests of investors by ensuring that listed companies merit the listing. Currently the minimum capital requirements are at the discretion of the ZSE Listings Committee, although the listing requirements document show a minimum equity capital of ZW$500 million is required before a company can list on the ZSE. There is need to set new minimum capital requirements in line with the developments in the country to ensure that shareholders and management become more proactive in ensuring an organisation's success.

A survey of the minimum capital requirements for regional exchanges revealed that the Johannesburg Stock Exchange (JSE) in South Africa has a reasonable minimum of ZAR25 million (about US$3 million). Zambia has the least minimum capital requirements of ZMK250 million (about US$50 000) whilst the Mauritian Stock Exchange requires MUR20 million (about US$0,7 million). International markets like the New York Stock Exchange require minimum equity capital of US$100 million. The great difference between the NYSE requirement and the JSE requirements indicates the extent to which African markets needs to grow to catch up with the developed world. A minimum capital requirement of US$1 million for the local bourse would appear a logical figure although the actual figure should be ascertained in a context that balances between attracting new listings and ensuring market depth.

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