Companies Amendment Bill: hearings

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Trade and Industry

12 August 2004
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Meeting Summary

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Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
13 August 2004
COMPANIES AMENDMENT BILL: HEARINGS

Chairperson:

Mr B Martins

Relevant documents

Banking Council Powerpoint submission
STRATE Powerpoint submission
Life Officers Association submission
Banking Council's replies to questions of committee members on 11/8

SUMMARY

 

The Committee heard presentations by the Banking Council and the Share Transaction Totally Electronic (STRATE). Concerns raised by members regarding fraudulent trading of shares were addressed. The two organisations reassured members that there were tight controls regarding these transactions

MINUTES
Banking Council submission

Mr K Daly, a consultant representing the Banking Council, began his presentation by saying that he would be addressing some questions which the members had raised in their previous meeting. He also referred to some negative press which had appeared regarding the bill.

The Chair asked for some clarity regarding the negative press reports.

Mr Daly said that he had not seen the report himself, but he was aware that there had been a report in Business Day on the previous day.

Prof Turok (ANC) said that there had been reports in Business Day and in the Business Report supplement of the Cape Times. He felt that the reports had reflected the reservations of the Committee quite well.

Mr Daly continued his presentation and said that he had summarised the questions of the Committee in three which he would try to address. These questions and the responses can be seen in the Powerpoint presentation attached.

Discussion
Prof Turok (ANC) said that he found the presentation very reassuring. He had a concern though about people, especially elderly people, who perhaps inherit shares and had never dealt with them. They would then go to a broker to manage the shares on their behalf. The management contract does not require that the broker report back to the owner. The broker might sell the shares without the knowledge of the owner. He felt that the law should take this scenario into account where the owner makes the claim. The intermediary should therefore be held responsible for this position since the loss was by an innocent party. Should there be a direct link between the owner and the buyer, a claim should be made on the operator namely STRATE or the off exchange person. He asked for clarity about the off exchange trade of shares.

Mr Daly replied that when STRATE came into being, there was a deficiency in the law to protect the consumer or investor. Since 1998 there had a been a change in the legislation to protect investors. The Financial Advisory and Intermediary Services Act was passed to protect the consumer or investor involved in a case as outlined by Professor Turok. If there is a breach of mandate, there is a definite case. If the action however was within the mandate the obligation would be on the agent to do a risk profile on the shareholder to determine the level of sophistication of the shareholder and to offer services in accordance with their needs. He felt that this law protected the investor adequately in these kind of situations.

Dr Vermaas, from STRATE, added that in terms of section 91A of the Companies Act, the Central Securities Depository Participant (CSDP) was required to send a statement regularly to shareholders about the amount of shares that was kept by them.

Mr Daly said that there was therefore a responsibility on the owner to regularly check what was in his/her account. He explained further that it was still possible to trade shares off the exchange. STRATE however was the electronic register for all transactions and the CSDP had to inform them of transactions even if it happened off the exchange.

Dr Vermaas added that according to section 91A, there was still a place for paper certificates. In this scenario, the broker warrants the correctness of the share certificates. In the electronic environment, a similar warranty was applicable. The warranty and indemnity could therefore be traced back to the broker should a wrong instruction be given. In the electronic environment only the registered CSDPs were allowed to do these transactions

Dr Nkem-Abonta (DA) said that he had had the same concern that a broker might get away should he deal fraudulently. Thus he was reassured by the responses to Professor Turok's question. He asked, though, what penalties there were for the broker.

Ms van E Vuuren, from STRATE, replied that this was legislated in the Public Exchanges Control Act and the Financial Markets Control Act. These acts control the exchanges that then regulate the brokers. The exchange then had the right to remove licences from brokers who had acted illegally. The JSE had removed some licences form brokers in the past.

Prof Turok asked if the punishment was still on the broker, should the transaction be off exchange.

Ms van Vuuren replied that the Financial Advisory and Intermediary Services Act would then come into effect because this regulates off exchange transactions. The Financial Services Board was the body that investors had to approach in these cases.

The Chair said that the essence was that all individuals had to be empowered with the information at hand. He suggested that perhaps the Portfolio Committee should be responsible for this. It was important that there was transparency. Mr Daly said that this was a very good idea.

Prof Turok suggested that perhaps some adjustment should be made to the clause to inform readers of other legislation connected to it.

Share Transaction Totally Electronic (STRATE) submission
Ms E van Vuuren, legal counsel for the JSE, began the presentation by giving a brief background to the links between the JSE and STRATE and why the legislation was important. She said that the JSE owned 41% of STRATE while 59% was owned by the major banks. STRATE was responsible for the settlement of all trading that took place on the JSE. Before 1999 all shares were on paper certificates which left the process open to fraud. Prior to 1998, South Africa's settlement risk ranking was very low. Since 1998 however there had not been one fault trade. This rate was even better that the USA and the UK. This was because of the introduction of STRATE.

Dr Vermaas addressed the Committee on the workings of STRATE (see presentation). She added that all Central Securities Depository Participants had to come through STRATE and that STRATE issues the rules and directives to CSDPs.

Discussion
Prof Turok (ANC) commented that the presentation was satisfactory and very reassuring. He had two concerns though. Certain companies were issuing shares to their workers and many of them had no skills to manage this. The onus therefore still rested with the owner even though many of them were not able to manage the shares. He wanted to know what safeguards there were for such individuals. He was also concerned that off exchange transactions still took place. In these cases the broker should still be held liable for any fraudulent transactions.

Dr Vermaas replied that STRATE required that there had to be a mandate for the participant and the client. The mandate had been strengthened by making the minimum requirements tighter. If this was not carried out, the CSDP membership would be terminated. She reassured members that this process was supervised. The listing requirements of the JSE states that all trade on the exchange had to be settled in STRATE. The 5% that had not been dematerialised still had to be traded through the JSE and settled by STRATE.

Mr Rasmeni (ANC) said that he was satisfied with the tight controls but was concerned about illiterate people. He asked how clear the statements were for these people to understand.

Dr Vermaas said that investors had the option of putting the shares in the name of a nominee. The nominee could then do things on their behalf. She was unable to say whether the statements were easy to read. They did however comply with the regulations of the Companies Act.

Dr Nkem-Abonta (DA) said that he understood the concern raised by Mr Rasmeni since the trend was to encourage wide ownership. He felt that legislation however could not handle this. The department should rather address this. He suggested that a unit be set up to advise people once they receive shares.

The meeting was adjourned.

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