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BSE further revises equity brokerage commission

Following the successful demutualisation of Botswana Stock Exchange to a company held by shares BSEL limited has been introducing a number of changes within its stock trading operations , of which many automatically comes with a demutualised stock market.

 In April 2016 while still a mutual organization under the Ministry of Finance the BSE amended the equity brokerage commission to introduce a floor of 0.60 percent. However, the introduction of the floor has experienced several challenges since inception, receiving backlash from asset managers also viewed as impediment to potential investors, especially foreign asset managers.         

Now that BSE is a demutualised institution on transition to becoming a globally competitive stock trading platform that attracts universal multinational fortune 500 companies and international investors  further review on the equity brokerage commission has been ongoing.  After several consultations with asset managers BSE reiterates that the 2016 revised brokerage commission that is currently in effect has challenges and limitations that impedes smooth running of an evolving demutualised stock market.

A statement released by BSE this week said introducing the floor effectively raised the cost of trading and presented an opportunity for brokers to undercut one another in a bid to win trades. “It also has the potential to result in low trading activity in dual listed stocks as asset managers circumvent the BSE to trade the stocks in stock exchange where brokerage is comparatively lower.” reiterated BSE.

The stock market also said concerns underscored with the current brokerage commission are that benchmarking exercise which was undertaken to review the brokerage commission relied on information provided by an interested party, a broker, and the exercise could not have provided an independent and objective analysis for the BSE to make a well informed decision. In addition BSE observed that the information presented by the broker was not complete and comprehensive.

 “From that end, the benchmarking exercise selected higher ends ceilings of the brokerage commissions to give an impression that brokerage commission in Botswana is very low compared to the chosen markets to support the introduction of the floor,” BSE statement said.
Since the brokerage commission was revised effective April 2016 BSE trading turnover levels declined in 2016 and 2017, and still remained very low in 2018 compared to corresponding periods prior implementation of the floor.

 Further analysis indicated that if the impact of the trades in New African Properties (NAP) which accounted for 18.0 percent and 18.4 percent of turnover in 2016 and 2017 respectively is removed, trading levels for 2016 and 2017 would have lagged those for 2013, 2014 and 2015. On the back of reduced trading levels, particularly in 2018, it is generally believed that this is attributable to the introduction of the floor. Stakeholders have since expressed to the Exchange that the floor could be revised or removed with expectations of revival in trading activity.

“In part, their concerns are attributed to the pressure that the brokers are experiencing on their revenues as a result of subdued trading activity,” says BSEL. The Exchange further lamented that the introduction of the floor came with negative skewness to overall turnover distributions increased the variance and the deviation of daily average turnover and reduced the stability of turnover. A brief overview of BSE trading figures indicates that conventionally, high value trades attract lower commission compared to low value trades.

Historically, asset managers have been paying brokerage averaging 0.36 percent on the basis of the size of the trades.  It therefore could have been expected that introducing a floor that elevated the fees almost twice on average and by as much as six times what was paid for high value trades would result in a reduced propensity to trade in order to minimize the transaction costs incurred by the funds.  In bookovers, where the effort to facilitate the trades is correspondingly lower, asset managers have paid an average rate of 0.30 percent.

 An introduction of the floor of 0.60 percent effectively doubles the rate and doubling the rate would have been expected to curtail trading. To further support the review and possible scrapping out of the floor BSE say in a liberal market and a free market economy, fees have to be driven by competition on the basis of the quality of service and effort and have to be commensurate with the level of services provided.

 “In our case, the brokerage commission was not justified by any improvement in value added services, such as increased coverage of stocks or increased cost of execution that warrants passing the costs to the end investors. Therefore, this was mechanically engineered and this is against the order of free market economy,” lamented BSE. In most markets, brokerage commission is on a sliding scale. The scales are such that brokerage declines as the value of the transaction increases.

In a few markets, brokerage is negotiable within certain 3 ranges and in some market it is flat. Further, we have noted that the BSE’s ceiling of 1.85 percent is one of the highest in comparative markets.  Currently BSE is engaging stakeholders including the Public for ideas and views exchanges towards the possible removal of the floor.The Exchanges says in the interest of promoting the ideals of a liberal market, stimulating competitiveness and trading activity it recommends the removal of the floor of 0.60 percent such that brokerage is negotiable up to 1.85 percent as was the case prior to April 2016.

 “We base this on the fact that asset managers are capable of paying any fees and brokers are free to charge any fees, so without imposing mechanisms in the form of the floor, it is ideal to allow the broker and the asset manager to negotiate any rate,”  indicated the statement.
According to BSE the removal of the floor would positively impact overall transaction costs of the funds and stimulate trading activity also taking into account that increased trading activity directly contributes to more income for brokers.  

“This  will avoid situations where brokers are undercutting one another to cannibalise trades , also this will minimize situations where asset managers could potentially seek rebates for the trades they avail to the brokers with lesser broker effort,” observes BSE. The review and possible removal of the 0.6 percent floor is viewed by BSE as a great opportunity to attract more foreign asset managers who currently view the BSE as expensive.

The latest FTSE classification published in September 2018, the BSE is rated as having relatively unreasonable and uncompetitive transaction costs and BSE says this rating was a result of the introduction of the floor. In paper titled, “What attracts international investors to emerging markets?” the World Federation of Exchanges (WFE) found that reducing trading fees is associated with an increase in foreign trading activity. BSE says revision and possible removal of this charges would make the BSE more competitive relative to other markets.

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Pula smiles at COVID-19 vaccine

25th November 2020
COVID-19 vaccine

A squeaky and glittering metaphoric smile was the look reflected from the Pula against the greenback this week and money market researchers lean this on optimism following Monday’s announcement of another Covid-19 vaccine which is said to have boosted emerging market economies.

With other emerging market currencies, the Pula too reacted to optimism and fanfare on the new Covid-19 vaccine against the weakening US dollar which has been losing its shine since the uncertainty laden US elections.

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Choppies high on JSE rollercoaster volatility

25th November 2020
CHOPPIES

After bouncing back into the Johannesburg Stock Exchange (JSE) last week Friday, following a year of being in the freezer, the Choppies stock started this week with much fluidity.

Choppies was suspended in both the Botswana Stock Exchange and its secondary listing at the JSE for failure to publish financial results. Choppies suspension on Botswana Stock Exchange was lifted on 27 July 2020. On Friday last week, when suspension was being lifted, Choppies explained that this came into fruition “following extensive engagement with the JSE.”

Choppies stock, prior to suspension, hit a mammoth decline in value of more than 60 percent, especially in September 2018. Waking from a 24 month freezer, last week the Choppies share price was at R0.64 and the stock did not make any movement.

However, Monday was the day when Choppies stock moved vibrantly, albeit volatile. Choppies’ value was on a high volatile mood on Monday, reaching highs of 200 percent. At noon, the same Monday, the Choppies share had reached R1.05. Before taking an uphill movement, Choppies stock slightly slipped by 2 cents. But the Choppies share rode up high and by lunch time the stock had reached the day’s summit of R2.00 and that was at 13:30 when investors were buying the stock for lunch.

The same eventful Monday saw gloom on the faces of Choppies rivals, when Choppies gained by 220.31 percent around lunch time its rivals in the JSE Food & Drug Retailers sector were licking wounds. Spar lost 2.94 percent, Pick Pay fell by 2.43 percent, Shoprite 7.52 percent and Dis-Chem 1.98 percent. The only gainer was Clicks by a paltry 0.51 percent.

In an interview with BusinessPost, Choppies sponsors at the JSE PSG Capital Managing Director Johan Holtzhausen explained that the retailer’s stock was in high demand after a long suspension. He said when a company list or a suspension is lifted the market needs to find itself on the pricing of the share.

“Initially when the suspension was lifted there were more buyers than sellers. As far as we could see this created a shortage of shares so to speak and resulted in the price at which the shares traded going to R1.20 and eventually R2.05 before finding its level around R0.80 sent from a JSE perspective.

This is marked dynamics and reflect that there are investors that are positive about the stock in the long run. This is a snapshot over a short period and one requires a longer period to draw further conclusions,” said Holtzhausen in an interview talking about the Choppies stock.

On Monday this week where the Choppies value grew by 200 percent, the stock took a turn looking down, closing the day at R0.87 from a high of R2.00. According to local stockbroker Motswedi Securities on Monday while there was no movement by Choppies in the local stock exchange as the retailer appeared on the board as 141,000 shares traded at P0.60 each.

However in Choppies’ secondary listing the stock price rallied to over 200 percent during intraday trading on Monday before losing steam and declining to around R0.87 share.

Before press yesterday Choppies opened the market with the stock starting the day at R0.80 then went flat for few hours before taking a slide downward, dropping 5 cents in 30 minutes. Choppies then went flat at R0.75 for 50 minutes yesterday before going up at 10:20 am where it nearly recovered the open day price of 80 cents, but was shy of 1 cent. From 79 cents the price went flat until noon.

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Foschini-Jet merger, a class and rivalry conundrum dissection

25th November 2020
Foschini

Competition and Consumer Authority (CCA) has revealed that in its assessment of the Jet take over by Foschini, there were considerations on possible market rivalry and a clash in targeted classes.

According to a merger decision notice seen by this publication this week, high considerations were made to ensure that Foschini’s takeover of Jet is not anyhow an elimination of rivalry or competition or if the two entities; the targeted and the acquiring enterprise serves the same class of customers or offer the same products, to elude the anti-trust issues or a stretch of monopoly.

The two entities are South African retailers whose services stretched to Botswana shores.  Last month local anti-trust body, CCA, received an acquisition proposal from South African clothing retailer, Foschini, stating their intentions to take-over Jet.

South African government’s Business Rescue Practitioners earlier this year after finding out that Jet’s mother company, Edcon, is falling apart, made a decision that Foschini can buy Jet for R480 million. This means that Foschini will add Jet to its portfolio of 30 retail brands that trade in clothing, footwear, jewellery, sportswear, homeware, cell phones, and technology products from value to upper market segments throughout more than 4085 outlets in 32 countries on five continents.

However the main headache for the CCA decision which was released this week, is distinguishing the targeted and the acquiring entity businesses and services.

When doing a ‘Competitive Analysis and Public Interest’ assessment, CCA is said to have discovered that Foschini is classified as a “standard retailer” which targets middle-to-upper income consumers and it competes with stores such as; Truworths and Woolworths. The targeted entity, Jet, is on the lower league when compared to its acquirer, it serves customers of lower classes and is regarded as a discount/value retailer targeting lower income consumers or a mass market. This makes Jet to be in direct competition with Ackermans, Pepkor, Cash Bazaar and Mr Price.

“Therefore, a narrower view of the market is that Foschini through its stores trading in Botswana is not a close competitor to Jet. Additionally, there exist other major rivals who will continue to exercise competitive constraints on the merged enterprise post-merger,” concluded CCA this month.

The anti-trust body continued to explain that in terms of the Acquisition of a Dominant Position, the analysis shows that the acquisition of the target business by Foschini Botswana will result in an insignificant combined market share in the relevant market.

This made CCA reach to a conclusion that there is no case of an acquisition of a dominant position in the market under consideration or any other market on the account of the proposed transaction.

What supports the merger according to CCA is that it is in compliance with regards to ‘Public Interest Considerations’ because the findings of the assessment revealed that the transaction is as a result of the need for a Business Rescue by the target enterprise. This is so because in the event that the proposed transaction fails, it will translate into the loss of the employment positions at the target business.

“On that note the Authority (CCA) found it necessary to ensure that the proposed merger does not result in any retrenchments or redundancies. In light of this, the assessment revealed the critical need to protect the employees of the merged entity from possible merger specific retrenchments/ redundancies,” said CCA.

Before making a determination that the recently proposed transaction is not likely to result in the prevention or substantial lessening of competition or endanger the continuity of the services offered in the relevant market, CCA said it then moved into a concern for public interest which is a protection enshrined in the Competition Act of 2018.

CCA’s concern was mostly loss of livelihood or employment by 126 Batswana workers at Jet stores, stating that possible retrenchments or redundancies may arise as a result of implementation of the proposed merger.

Much to the desire of trade union or labour movements in Botswana and across Southern Africa where the Jet stores are stemmed-who also raised concerns about the retail’s workers job security- CCA subjects Foschini to keep the target entity 126 workers.

“There shall be no merger specific retrenchments or redundancies that may affect the employees of the merged enterprises. For clarity, merger specific retrenchments or redundancies do not include (the list is not exhaustive): i. voluntary retrenchment and/or voluntary separation arrangements; ii. Voluntary early retirement packages; iii. Unreasonable refusals to be redeployed; iv. Resignations or retirements in the ordinary course of business; v. retrenchments lawfully effected for operational requirements unrelated to the Merger; and vi. Terminations in the ordinary course of business, including but not limited to, dismissals as a result of misconduct or poor performance,” said CCA.

CCA also orders that Foschini informs it about all the details of 126 Jet employees within thirty (30) days of the merger approval date. CCA should also know information of when Foschini is implementing the merger, within 30 days of the approval date.

Other conditions include Foschini sharing a copy of the conditions of approval to all employees of the Jet or their respective representatives within ten (10) days of the approval date.

“Should vacancies arise in the target, the merged enterprise shall consider previous employment at one of the non-transferring Jet stores to be a positive factor to be taken into account in the consideration of offering potential employment,” said CCA.

According to CCA, in cases of any job losses, for the Authority to assess whether the retrenchments or redundancies are merger specific, at least three months before (to the extent that this deadline can be practically achieved and in terms of the prevailing and legally required employment practices) any retrenchments or redundancies are to take place, inform the Authority of:  i. The intended retrenchments; ii. The reasons for the retrenchments; iii. The number and categories of employees affected; iv. The expected date of the retrenchments.

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