Ann Crotty

It was unacceptable for JSE-listed companies to choose to adhere to its listing requirements on the basis of a cost-benefit analysis, the Financial Services Board (FSB) said last week.

A decision handed down on Thursday by the FSB’s appeal board, which related to an appeal of the JSE’s decision to fine Cenmag directors for contravening the listing requirements, stated that the Cenmag directors “made a ‘cost-benefit’ analysis of the situation and decided that the cost of compliance with the corporate governance requirements outweighs the benefit of such compliance” and therefore did not comply.

On Friday JSE chief executive Nicky Newton-King told Business Report that the costs of being listed related to the setting of certain standards, which were necessary in order to protect the public’s money.

She said that the JSE made no apology for demanding these standards but noted that as a regulator it was important to constantly re-assess the balance between the cost of the listing requirements and the benefit to investors. Newton-King noted that “small cap stocks” on the AltX board such as Cenmag faced less onerous requirements than companies listed on the main board.

In 2010 the JSE censured Cenmag and imposed a fine of R1 million on each of the directors for contravening section 3.84 of the listing requirements.

Specifically, Cenmag’s board of directors had no audit committee, the offices of chairman and chief executive were not separate, the company had no full-time finance director, the chief executive served as chairman as well as finance director and company secretary.

In addition, no independent directors served on the board and the board had no remuneration committee.

Subsequently, in 2010, Cenmag became a cash shell when its operating assets, which were involved in engineering, were restructured.

The Cenmag listing was later renamed Capricorn Investment Holdings and last week was again renamed, Mine Restoration Investments. Mine Restoration Investment is un-connected with the case that was appealed to the FSB.

The appeal by the Cenmag directors, Victor Farkas, Justin Farkas and Casper le Roux, was against the fine imposed by the JSE for their contravention of the listing requirements.

The FSB upheld the fines and noted that the consequences of the sort of “cost-benefit” analysis approach adopted by Cenmag would be “lawlessness”.

“Laws exist because society needs to lay down basic rules of conduct to which all members of society must submit; no matter how inconvenient or expensive they are,” the FSB said.

It added that the corporate governance principles attached to the requirements were critical. “They are not overly technical; they are viewed by the JSE as of the utmost importance to ensure the integrity of the listings process; the quality of issuers listing on the exchange; as well as the quality of financial disclosure made by issuers. The listing requirements – particularly the corporate governance requirements – safeguard the financial integrity of listed companies.

“These matters are essential to a well-operating market in listed securities.”

In response to the directors’ argument that the shareholders suffered no prejudice because only 14 percent of Cenmag’s shares were traded, the FSB said that it was all the more important for minority shareholders to be protected when a company was closely held.

“The size of the directors’ majority shareholding makes it so much easier to abuse that position.”

John Burke, the head of listings at the JSE, said on Friday that the bourse operator was happy with the ruling, which emphasised the fact that if companies received money from the public they had to comply with requirements designed to protect the public.

Although the three appellants were no longer directors of the listed entity, the JSE would strive to secure payment of the fines.

A ruling by the FSB had the same authority as a ruling by the high court.

Business Report was unable to reach the directors for comment.