Capital Markets Comparative Guide

1 Legal and regulatory framework

1.1 Which laws and regulations govern the capital markets in your jurisdiction?

Capital markets in South Africa are primarily regulated by the following laws and regulations:

• the Financial Markets Act (19/2012);
• the Financial Sector Regulation Act (9/2017);
• the Johannesburg Stock Exchange (JSE) Listing Requirements, which comprise:
• • the JSE Debt Listing Requirements; and
  • the JSE Equities Rules; and
• the JSE Derivative Rules, January 2005 (as amended).

In addition, the Companies Act (71/2008) outlines the rules for public offerings of company securities to the public.

The JSE is the largest of the South African securities exchanges and, unless otherwise stated, reference in this Q&A are made to the JSE Listings Requirements in respect of the various exchange rules.

1.2 Is your jurisdiction part of a supranational, transnational or multinational framework with relevance to capital markets? If yes, how does this work?

South Africa is a member of the Southern African Development Community (SADC). As a member of SADC, South Africa is a signatory to the SADC Protocol on Finance Investment. The purpose of the protocol is to foster economic development by creating an integrated system of capital markets, banks and credit institutions in respect of the SADC region.

South Africa's financial markets conduct regulator, the Financial Sector Conduct Authority (FSCA), is a member of the International Organization of Securities Commissions (IOSCO), which develops global standards for the conduct of capital markets regulators. In addition to local regulations, the JSE models its operation on the IOSCO principles.

1.3 Which bodies are responsible for regulating the capital markets in your jurisdiction? What powers do they have?

South African capital markets are regulated by:

• the market infrastructures, which includes:
• • JSE Limited;
  • the Cape Town Stock Exchange;
  • Integrated Exchange; and
  • A2X Markets;
• the FSCA; and
• the Prudential Authority.

Each of these bodies derives its powers from the respective empowering legislation applicable to it. Section 10 of the FMA sets out the functions and powers of licensed exchanges, which include, among others:

• the provision of infrastructure for the trading of securities listed on that exchange;
• the issuance of exchange rules;
• the supervision of compliance by authorised users; and
• enforcement of:
• • the exchange rules;
  • listing requirements; and
  • exchange directives.

Both the FSCA and the Prudential Authority, established as financial sector regulators, derive their powers from the Financial Sector Regulation Act. The Financial Sector Regulation Act sets out their functions and powers, which include the regulation and supervision of:

• the financial sector as a whole;
• the conduct of financial institutions; and
• market infrastructures.

Each has the power to impose administrative penalties for violations of financial sector laws and regulations.

1.4 How does enforcement work and what kinds of sanctions may be applied?

Section 10 of the FMA empowers a licensed exchange to:

• assume a regulatory and supervisory function;
• ensure compliance with the listing requirements, exchange rules and directives; and
• do all things necessary to ensure the proper operation of the exchange.

For instance, the JSE's powers in this regard are detailed in Paragraphs 1.21–1.28 of the JSE Listing Requirements, which state that in the event of contravention by an issuer/director/officer/depository, the JSE may:

• censure contravening parties individually or jointly by way of private censure;
• censure contravening parties individually or jointly by way of public censure;
• impose a fine not exceeding such amount as stipulated by the FMA;
• disqualify an applicant issuer's directors and officers from holding office for any period of time;
• convene an investigation into the conduct of an issuer, and potentially its directors and officer(s);
• order the disclosure of information from an issuer;
• suspend or remove the listing of any security;
• terminate the accreditation of an auditor, accountant or adviser; and
• issue any other penalty that is appropriate.

2 Capital markets infrastructure

2.1 What is the capital markets infrastructure in your jurisdiction (eg, trading venues, central counterparties, central securities depositaries (CSDs)?

The capital market infrastructures consists of:

• licensed securities exchanges (see question 2.2);
• authorised CSDs;
• licensed clearing houses; and
• a licensed trade repository.

2.2 What are the main exchanges and other trading venues in your jurisdiction? What are the key differences between those various trading venues?

South Africa has the following trading exchanges:

• the Johannesburg Stock Exchange (JSE);
• the Cape Town Stock Exchange (CTSE);
• Integrated Exchange; and
• A2X Markets.

There are various differences between the stock exchanges. The JSE, being the oldest and most established of the exchanges, is a full-service securities exchange. The CTSE:

• focuses on small and medium-sized businesses; and
• is fully licensed and regulated for both debt and equity instrument listings.

The JSE offers primary and secondary listings, while smaller exchanges such as the A2X Markets offer only secondary listings.

The minimum requirements for listing on the JSE include:

• subscribed capital of at least ZAR 50 million;
• no less than ZAR 25 million in respect of equity shares issues; and
• a reported profit minimum of ZAR 15 million before tax.

While the requirements are substantively similar on other exchanges, the thresholds are generally lower than those required by the JSE Listing Requirements.

2.3 What kinds of securities does your jurisdiction provide for (eg, electronic securities)?

South Africa offers a wide range of securities, including:

• equity securities;
• exchange-traded funds;
• exchange-traded notes;
• debt securities;
• hybrid securities;
• asset-backed securities;
• derivatives;
• sponsored and unsponsored depository receipts;
• bonds; and
• structured products.

The rules of the various exchanges are not prescriptive in respect of whether securities should be materialised or dematerialised. The form of the security will be determined by the offering circular to be issued by the issuer. The general trend, however, is to move towards dematerialised securities.

2.4 Is it mandatory to deposit securities with a (local) CSD (eg, for listing)?

Sections 28 and 29 of the Financial Markets Act (FMA) requires an issuer of securities on an exchange to obtain approval and admission from a licensed CSD in terms of the applicable central securities depository rules and directives.

An issuer obtains admission from the applicable CSD. All trades in specialist securities will be settled through the CSD and each holder of securities must appoint a CSD or broker that will maintain an electronic record of ownership.

2.5 Are there rules in place governing crypto-assets and crypto-infrastructure (eg, crypto-exchanges, local crypto-money)?

Currently, crypto assets are not listed on any of the stock exchanges. However, with the move towards cryptocurrency regulation in South Africa, stock exchanges may, over time, offer these products. Presently, crypto assets are regulated in South Africa under the Financial Advisory and Intermediary Services Act (37/2002) and the Financial Intelligence Centre Act (38/2001), as well as AML legislation.

2.6 Are special rules in place for crowdfunding products?

Crowdfunding products are not explicitly regulated in South Africa. Depending on the area of application, crowdfunding may, per the Financial Sector Conduct Authority's circular dated 12 July 2016, be subject to existing legislation such as:

• the Banks Act;
• the Collective Investment Schemes Control Act; and
• the FMA.

2.7 What kinds of databases are available on instruments issued and traded in your jurisdiction, and how can they be accessed?

The websites of the various securities exchanges offer live tracking of the tickers for the securities listed on the exchanges. Other databases include:

• business news websites;
• television news and business channels; and
• daily business newspapers.

3 Trading and post-trading infrastructure

3.1 What kind of market infrastructure does your jurisdiction provide for?

The Financial Markets Act makes provision for the market infrastructures described in question 2.1.

3.2 What are the rules governing liquidity flows across execution venues (eg, use of systematic internalisers, trading obligations)?

The Johannesburg Stock Exchange (JSE) rules governing liquidity flows are contained in the JSE Clear Liquidity Policy. These include the requirement that JSE Clear – a company that performs the role of a central counterparty and clearing house for the JSE – maintain enough liquidity to:

• ensure the effective management of default risk;
• monitor liquidity; and
• perform liquidity stress testing for the purpose of testing the adequacy of the available liquid resources.

3.3 Are there rules on light and dark markets and how do these apply?

The JSE makes provision for dark markets through its JSE Dark Functionality offering. Dark Functionality facilitates:

• central order book cross trades;
• block trades;
• iceberg orders; and
• end-of-day volume auctions.

3.4 Are market participants subject to best execution requirements?

Yes – for instance, Paragraph 8.9 of the JSE Equities Rules requires members to adhere to the best execution rule when acting for a client in the purchase or sale of equity securities.

3.5 Does your jurisdiction apply a target market concept?

No.

3.6 How does securities settlement work in your jurisdiction?

Each stock exchange has policies for the settlement of trades. The Cape Town Stock Exchange has the ability to provide immediate settlement of equity trades. On the JSE, all transactions in equity securities are settled electronically (typically on a T+3 basis) through Strate. The Settlement Authority manages the settlement of transactions effected through the central order book of the JSE. The JSE Listings Requirements contain a comprehensive set of rules regarding the settlement of trades.

4 Listing and delisting of shares and bonds

4.1 What key requirements must be met to obtain a primary listing in your jurisdiction? What restrictions apply in this regard? Do any exemptions apply?

A company wishing to have its primary listing on the Johannesburg Stock Exchange (JSE) must fully comply with the JSE Listing Requirements. The requirements applicable to a primary listing include the following:

• The entity must be duly and properly incorporated.
• The directors and senior management must have appropriate expertise and experience for the governance and management of the business.
• The entity must have appointed:
• • an executive financial director;
  • a company secretary;
  • a chief executive officer; and
  • a chairman.
• There must be no director conflicts of interest.
• The company must have:
• • a subscribed capital of at least ZAR 50 million;
  • no less than ZAR 25 million in equity share issues; and
  • a reported minimum profit of ZAR 15 million before tax.

4.2 What key requirements must be met to obtain a secondary listing in your jurisdiction? What restrictions apply in this regard? Do any exemptions apply?

In addition to complying with the general conditions for listing, the issuer must confirm that:

• it has a primary listing on another exchange which is a member of the World Federation of Exchanges; or
• it has a subscribed capital of at least ZAR 50 million.

In relation to the first point above, the issuer will need to confirm that the primary listing is at least on an equivalent exchange to that for which application is being made on the JSE. Accordingly, the JSE will not grant a secondary listing to an applicant issuer that has a primary listing on a junior/secondary market of an exchange. The secondary issuer must not have traded in its securities on the JSE in respect of which a secondary listing is sought of more than 50% of both the total volume and value traded in those securities on all markets in which it is listed over 12 months. The applicant issuer must further confirm that it fully complies with all the requirements of the exchange on which it has its primary listing.

4.3 What are the most common listing structures? What are the advantages and disadvantages of these different types of structures? What other factors should companies consider when deciding on a listing structure?

There are several listing structures that a company must consider when listing. For example, the JSE provides companies with options for:

• listing on the Main Board;
• raising capital on the AltX board;
• dual listing; and
• fast-track listings.

Each of these structures has a comprehensive list of requirements that a company must comply with.

When deciding on a listing structure, prospective issuer should consider factors such as:

• investor base;
• costs;
• time limits; and
• market capitalisation.

4.4 How does the listing of bonds differ from the listing of shares?

There are two separate sets of requirements for the listing of bonds and the listing of shares:

• The listing of shares is governed by the JSE Equities Listing Requirements; and
• The listing of bonds is governed by the JSE Debt Listing Requirements.

The listing of shares is subject to more rigorous regulatory oversight as compared to bonds. The listing of shares is also more complex and involves a prospectus or other detailed pre-listing circular, as well as more comprehensive disclosures.

4.5 What advisers are typically involved in the listing process? What claims (if any) can be brought against advisers with regard to their role in the listing process? Is there any way to mitigate such liability?

Typically, an issuer will:

• approach corporate, legal, financial and accounting advisers; and
• appoint a sponsor, which will be responsible for advising the entity on the application of the JSE Listing Requirements, director obligations and responsibilities including acting as liaison between the JSE and the entity.

Claims can be brought against advisers under the common law of delict if they are negligent in the performance of their duties. Mandates with advisers can exclude certain forms of liability within the ambit of the JSE Listing Requirements.

Further, advisers are not generally liable for losses suffered by subscribers that rely on the contents of a pre-listing statement. They are, however, liable in respect of any untrue statement purportedly made by a person acting as an expert unless the expert:

• withdrew consent to have his or her name published in the prospectus, in writing, before the prospectus was filed for registration;
• became aware of the untrue statement, withdrew the consent in writing and gave reasonable public notice of the withdrawal and the reason for such withdrawal, at any time between the filing of the prospectus for registration and any allotment; or
• was competent to make the statement and had reasonable grounds to believe that the statement was true.

4.6 What other factors should companies consider when deciding on a listing strategy?

Other factors to be considered include:

• the costs;
• the regulatory environment;
• market conditions;
• the target investor base;
• the capital requirements;
• the timing of the listing; and
• tax considerations.

4.7 What are the typical reasons for voluntary delisting? What are the grounds for compulsory delisting? What is the process for delisting?

Typical reasons for voluntary delisting include the following:

• Listing and regulatory requirements may be onerous; and
• The costs involved are extremely high.

Limited free float and inability to raise new capital also constitute reasons for delisting.

The most common ground for compulsory delisting is failure to meet the listing requirements, particularly in relation to:

• the timely publication of audited financial statements; or
• the publication of incorrect information.

Insolvency is also grounds for compulsory delisting.

A company that intends to delist must prepare a circular, which must be submitted to the JSE for pre-approval, informing shareholders of the intention to delist. It may also require an independent fair and reasonable opinion to confirm that the delisting offer price is appropriate. The circular is then published on the Stock Exchange News Services and posted to shareholders, which are then given an opportunity to vote on the proposed delisting (generally requiring a 75% majority vote). Once approved by shareholders, the company will apply to the JSE for delisting.

4.8 What tax considerations should be borne in mind from the issuer's perspective?

Considerations to be mindful of from a tax perspective include:

• securities transfer tax; and
• potential withholding tax in the case of foreign shareholders.

5 Prospectus rules and marketing

5.1 What kinds of instruments are subject to prospectus requirements?

Sections 99, 100 and 101 of the Companies Act regulate offers to the public.

Section 99(2) states that:

2. A person must not make an initial public offering unless that offer is accompanied by a registered prospectus.
3. Except with respect to securities that are the subject of a company's initial public offering, a person must not make a-
   
   1. primary offer to the public of any-
      
      1. listed securities of a company, otherwise than in accordance with the requirements of the relevant exchange; or
      2. unlisted securities of a company, unless the offer is accompanied by a registered prospectus that satisfies the requirements of section 100; or
   2. secondary offer to the public of any securities of a company, unless the offer satisfies the requirements of section 101.

5.2 What are the key exemptions from the prospectus requirements and what kinds of selling restrictions might apply?

Section 101 of the Companies Act provides an exemption for securities in respect of which an exchange has granted permission to deal.

5.3 What key information must be included in a prospectus? What other requirements and restrictions apply with regard to the content of the prospectus?

A prospectus must contain all the information required to allow a potential investor to assess:

• the risk factors, assets and liabilities, financial position, profits and losses, cash flow and prospects of the listing entity;
• the securities being offered; and
• the rights attaching to such securities.

Copies of any material agreements and/or memorandum giving full particulars of unwritten agreements will also need to be attached to the prospectus.

Just as with any other pre-listing statement, a prospectus must include the following:

• a responsibility statement;
• a clear explanation of the subject matter;
• if voting or any other action by security holders is required:
• • all necessary information to allow security holders to make properly informed decisions; and
  • a heading drawing their attention to the importance of the document and advising them to consult with independent advisers should they be in doubt on what action to take;
• any other official languages in which the prospectus is available; and
• clear guidance in respect of any event requiring action by certificated and dematerialised shareholders, including the following:
• • wherever reference is made to shareholders or members of a company, the procedures for certificated, dematerialised own name and dematerialised shareholders must be separately detailed;
  • the surrender of share certificates will apply only to certificated shareholders and the surrender forms must state this;
  • in the case of dematerialised shareholders, the CSD or broker will automatically action the surrender of ownership title in accordance with the corporate action or after having received an election instruction;
  • election forms apply only to certificated shareholders and must state this accordingly. The document concerned must state that dematerialised shareholders' elections should be provided to their appointed CSD or broker in the form stipulated in the custody agreement entered into between the shareholder and the CSD or broker;
  • the form of proxy included in the circular should state that it is for completion by certificated shareholders and own name dematerialised shareholders only. The circular must state that dematerialised shareholders must inform their CSD or broker of their intention to attend any general meeting in order for such CSD or broker to be able to issue them with the necessary authorisation to enable them to attend such meeting; or alternatively, should they not wish to attend the meeting, they should provide their CSDP or broker with their voting instruction;
  • the salient dates should include all dates in the declaration data and finalisation information. The definitions for these dates should be included in the "Definitions" section of the document; and
  • if new securities are to be issued, shareholders or members should have the right to receive such new securities in certificated or dematerialised form.

5.4 What is the process for preparation, approval, filing and publication of the prospectus? How long does each step take?

Before a prospectus is issued, shareholder approval is required. The following statement should appear on the first page of the prospectus:

The issuer's sponsor, and thereafter the Johannesburg Stock Exchange (JSE), must approve the prospectus. The prospectus must be submitted to the JSE before formal approval is granted. Thereafter, no later than 48 hours before listing, the final prospectus and supporting documents must be submitted to the JSE. Finally, the prospectus will be published on the Stock Exchange News Services.

5.5 What are the rules governing prospectus summaries/key information documents (KIDs) in your jurisdiction?

The JSE Listings Requirements make provision for summary circulars. They state that an issuer may dispatch a summary circular with respect to any corporate action provided that it has an operational website. The summary circular must:

• be approved by the JSE before publication;
• state where the full circular can be viewed or accessed; and
• contain a statement, on the front page, that the document is a summary of the full circular.

Further provision is made for short-form press announcements. These must also contain:

• a warning that the statement is a summary and does not include full details; and
• a statement noting that the full prospectus is available on the issuer's website.

5.6 Who is liable for the content of a prospectus/KID in your jurisdiction? On what grounds can such claims be brought? Is there any way to mitigate such liability?

If an untrue statement is included in a prospectus/KID which causes a person to suffer losses as a result thereof, general director liability will apply under the Companies Act. In addition, the following persons can be held liable:

• a person who becomes a director between the issuing of the prospectus and the holding of the first general shareholders' meeting at which directors are elected or appointed;
• a person who consented to be named in the prospectus as a director or who agreed to become a director either immediately or after an interval of time;
• a promoter of the company; or
• a person who:
• • authorised the issue of the prospectus or is regarded as having authorised the issue of that prospectus; or
  • made that offer to the public.

Such a person will not be liable if:

• he or she believed the statement to be true at the time;
• the statement purports to have been made by an expert or is contained in what purports to be an export report;
• an untrue statement purporting to be made by an official person or contained in what purports to be a copy of or extract from a public official document appeared to be a correct and a fair representation of the statement or copy of or extract from the document;
• that person consented to become a director of the company, but subsequently withdrew consent before the issue of the prospectus and the prospectus was issued without that person's consent;
• the prospectus was issued without the knowledge or consent of that person and, on becoming aware of its issue, that person gave reasonable public notice that it was issued without his or her knowledge or consent; or
• after the issue of the prospectus and before allotment or acceptance thereunder, that person, on becoming aware of any untrue statement, withdrew any consent to the prospectus and gave reasonable public notice of the withdrawal and the reason therefor.

If a prospectus contains the name of a person as a director of the company, or as having agreed to become a director of that company, and that person has not consented to becoming a director or has withdrawn consent before the issue of the prospectus, and has not authorised or consented to the issue of the prospectus, the following persons are liable to indemnify any person incorrectly named as a director against any damage, cost or expense arising as a result of that person having been so named in the prospectus:

• the directors of the company, except any without whose knowledge or consent the prospectus was issued; and
• any other person who issued or authorised the issue of the prospectus.

Any person who is liable for damages as explained above and who satisfied such liability may recover payments made from any other person who, if sued separately, would have been liable to make the same payment.

In addition, an expert may be liable for untrue statements made by him or her and contained in the prospectus, unless he or she:

• withdrew consent to have his or her name included in the prospectus before the prospectus was filed for registration;
• became aware of the untrue statement and gave public notice withdrawing the statement and provided reasons for such; or
• was competent to make the statement and had reasonable grounds to believe it to be true at the time of the allotment or acceptance of the offer.

6 Financial services (marketing and distribution)

6.1 What kinds of services in financial instruments are subject to authorisation requirements? Is proprietary trading allowed per se?

Proprietary trading is allowed in South Africa and is subject to compliance with the rules of the particular stock exchange.

6.2 Do special authorisation requirements apply to members of trading venues and/or issuers?

No answer submitted for this question.

6.3 How are financial instruments typically marketed in your jurisdiction? Are there special rules for initial public offerings?

A prospective issuer offering a security on a stock exchange will market the instruments through an announcement detailing the placement. The announcement must be accompanied by a registered prospectus, which provides details of the placement to potential investors. Section 99 of the Companies Act sets out the requirements in respect of initial public offerings.

6.4 Is book building commonly used in your jurisdiction? If so, what does this process typically involve and do the regulatory requirements apply to book building? What are the advantages and disadvantages of book building?

Book-building is commonly used by issuers in South African markets. It provides issuers with the benefit of wider market participation and issuers usually get a higher price through book-building. Book-building does, however, pose the risk of higher costs associated with:

• the building process;
• market volatility; and
• potential price manipulation.

Book-building must be conducted in compliance with the financial markets regulatory framework.

6.5 What requirements and restrictions apply with regard to price stabilisation in your jurisdiction?

The rules of each securities exchange provide for price stabilisation. For example:

• Paragraph 5.31 of the Cape Town Stock Exchange Listings Requirements provides for price stabilisation; and
• Paragraph 5.99 of the Johannesburg Stock Exchange Listings Requirements sets out the circumstances in which price stabilisation may be applied through an overallotment, with or without a greenshoe, aimed at achieving and maintaining price stability and sustainable markets.

7 Derivatives

7.1 What trading and clearing obligations apply to derivatives?

Section 7 of the Johannesburg Stock Exchange (JSE) Derivatives Rules:

• regulates the trading of derivatives on the JSE; and
• contains a detailed list of trading rules to be adhered to by participants in the derivatives market.

Section 8.9 states:

• the reporting requirements that must be fulfilled before JSE Clear may clear a trade; and
• the circumstances in which it may refuse to accept a trade for clearing.

7.2 Do mandatory risk mitigation techniques (eg, provision of collateral) apply?

A clearing member must pay an additional margin to the JSE's default fund, as determined by the JSE from time to time, as collateral for the due performance of its obligations as set out in the JSE Derivatives Rules.

7.3 Is a mandatory reporting system for derivatives transactions in place?

Section 10 of the JSE Derivatives Rules requires clearing members to:

• maintain all trading and position records; and
• provide reporting to clients on a monthly basis.

All records of trades are reported to the JSE, including all off-book trades executed after 17:30.

7.4 What are the commonly used framework agreements in your jurisdictions for non-cleared and cleared derivatives?

JSE Clear is the clearing house for all transactions in respect of listed derivative transactions concluded on the JSE's markets. It is empowered, in terms of the Financial Markets Act, to take all steps necessary and appropriate to clear transactions and manage risk in the JSE derivatives market.

8 Corporate governance/continuing obligations

8.1 What corporate governance requirements apply to listed companies?

Listed companies must comply with:

• Paragraph 3.84 of the Johannesburg Stock Exchange (JSE) Listings Requirements in respect of general corporate governance; and
• Paragraph 8.63 in relation to compliance with the King IV Code on Corporate Governance. In terms of Paragraph 8.63, an issuer is required to disclose in its annual financial statements, in respect of the King Code:
• • the implementation of the code through the application of the code's disclosure and application regime; and
  • steps taken to comply with the remuneration policy requirements.

Paragraph 3.84 of the JSE Listings Requirements sets out the specific corporate governance practices that listed companies must follow and report on annually from a compliance perspective. These include:

• a policy evidencing a balance of power at board level;
• the appointment of a chairman and chief executive, who must not be the same person;
• the appointment of remuneration, audit and social and ethics committees, in compliance with the Companies Act;
• the appointment of a financial director;
• the appointment of a company secretary;
• submission to the JSE of the CV of each director;
• confirmation of each director's capacity as either an executive, non-executive or independent director;
• execution, and confirmation to shareholders thereof, in respect of the responsibilities of the audit committee, as required by the Companies Act;
• a policy on the promotion of gender diversity at board level;
• a policy on the promotion of racial diversity at board level; and
• a remuneration policy recording the measures that the board of directors commits to take in the event that either the remuneration policy, the implementation report or both are voted against by 25% or more of the votes exercised.

Listed companies must also comply with the corporate governance provisions of the Companies Act, insofar as they relate to public companies and listed securities.

8.2 Is there a mandatory or voluntary corporate governance index? If so, what does it contain?

Notwithstanding the specific governance practices required in question 8.1, the application of King Code practices is generally voluntary.

8.3 What reporting obligations apply to listed companies? Do these vary if the issuer is a foreign company or between trading venues/segments?

The reporting obligations for listed entities are generally the same regardless of whether an issuer is a South African company or a foreign entity. A foreign entity must ensure that:

• it obtains exchange control approval from the South African Reserve Bank; and
• information and materials submitted to the JSE to disclose in the South African market are in English.

8.4 What other continuing obligations apply to listed companies?

Paragraph 19.20 of the JSE Listings Requirements sets out the continuing obligations of listed companies. These broadly encompass:

• corporate governance;
• shareholder engagement;
• market disclosures; and
• financial reporting.

8.5 What are the consequences of breach of any of these obligations?

The Financial Markets Act (FMA) sets out the powers of a stock exchange in respect of an issuer that has not complied with the required standards, including suspension and removal of a security or issuer.

Sections 10(2)(m) and 11(1)(g)(v) of the FMA empower the JSE to:

• "do all other things that are necessary for, or incidental or conducive to the proper operation of an exchange and that are not inconsistent with this Act"; and
• "impose any penalty that is appropriate in the circumstances".

Each stock exchange has its own rules based on the powers set out in Sections 10 and 11 of the FMA.

8.6 Do mandatory auditing rules apply and is there a special review/enforcement process?

It is mandatory for a company listed on any stock exchange to appoint an auditor and an audit committee, as required by Section 89 of the Companies Act. Each stock exchange includes, in its set of listing requirements, provisions giving effect to this obligation. Paragraph 3.84 of the JSE Listing Requirements, for example, contains a comprehensive set of audit requirements. Section 30(2) of the Companies Act also requires public companies to have published audited financial statements on an annual basis.

9 Inside information and market manipulation

9.1 What qualifies as inside information?

Section 77 of the Financial Markets Act (FMA) defines 'inside information' as:

The FMA defines an 'insider' as:

9.2 What prohibitions apply to inside information? Is there a legitimate behaviour exemption?

The following acts are prohibited in terms of Section 78 of the FMA and anyone who engages in such conduct will be guilty of the offence of insider trading:

• A person who is aware that he or she has inside information deals, directly or indirectly, for himself or herself or another person, or causes another person to deal, in the securities to which the inside information relates or is likely to affect;
• A person deals for an insider, directly or indirectly or through an agent, on the basis of information possessed by the insider, in the knowledge that such person is an insider; or
• An insider knows that he or she has inside information and discloses the inside information to another person.

Section 78 of the FMA contains a number of legitimate behaviour exemptions if, on a balance of probabilities, an insider:

• is an authorised user, acting on a client's instructions, without knowledge that the client is an insider;
• became an insider only after giving the instruction to deal to an authorised user and the instruction was not after he or she became an insider;
• discloses inside information because it was necessary to do so for the purpose of the proper performance of the functions of his or her employment, office or profession; or
• was executing a transaction in respect of which:
• • all parties to the transaction had the same inside information;
  • trading was only between parties with inside information; and
  • the aim was not to secure a benefit from exposure to movement in the price of the security.

9.3 What are the rules on mandatory disclosure of inside information?

Each exchange has rules governing the disclosure of inside information in the appropriate circumstances. For example, the Johannesburg Stock Exchange (JSE) Listings Requirements contain various sections which make provision for the disclosure of price-sensitive information. Paragraph 3.9 states that:

In terms of Paragraph 3.4, an issuer must also issue a trading statement as soon as a reasonable degree of certainty exists that the financial results for the period to be reported upon next will differ by at least 20% from the forecast previously provided.

Paragraph 3.63 lists the procedure for disclosure of information by the issuer via its sponsor.

The JSE Insider Trading Booklet contains a comprehensive guide detailing the responsibilities of issuers, sponsors, directors and officers in respect of insider trading.

9.4 Are there special provisions on the operation of insider lists and Chinese walls?

Yes. For example:

• Paragraph 7 of the Cape Town Stock Exchange's Conflicts of Interest Policy contains a set of rules for Chinese walls in circumstances intended to insulate one group of staff from information that gives rise to a particular conflict; and
• Paragraph 19 of the JSE Listing Requirements, read with the JSE Listings Requirements Guidance Letters, makes special provision for Chinese walls in respect of index calculators that act for an organisation or fund issuing an instrument from which it is not independent. In such cases:
• • the business responsible for calculating the index must operate separately from the issuer of the instrument; and
  • this must be evidenced by clear Chinese walls.

9.5 Do special rules apply to personal transactions?

The prohibitions and sanctions on insider trading apply whether a person is:

• trading for a client/third party; or
• executing personal transactions.

9.6 What kinds of activities may amount to market manipulation?

In addition to insider trading, Chapter X of the FMA lists the following activities as market abuse:

• participating in any the following activities, which a person knows or ought have known would create or would likely have the effect of creating a false or deceptive appearance of the demand or price of a security:
• • placing an order to buy or sell a security listed on a market which involves no change in the beneficial ownership of that security;
  • placing an order to buy or sell a security listed on a market in the knowledge that an opposite order or orders at substantially the same price had been or would be entered by or for the same or different persons;
  • placing orders to buy a security listed on a market at successively higher prices or orders to sell a security listed on a market at successively lower prices;
  • placing an order to buy or sell any security for inclusion in any auction during an auction call period and cancelling such order immediately prior to the auction matching;
  • creating a market corner; or
  • maintaining an artificial price for a security on a regulated market; or
• making or publishing false, misleading or deceptive statements, promises or forecasts in respect of:
• • securities traded on a regulated market; or
  • the past or future performance of a company.

9.7 What are the consequences of breach of these requirements and restrictions, both for issuers and for their directors and officers?

Anyone who breaches the provisions of the FMA relating to insider trading is liable to pay an administrative sanction not exceeding:

• the profit made or loss avoided through such dealing;
• an amount of up to ZAR 1 million, plus three times the amount referred to in the first point above;
• interest;
• the costs of the suit, including investigation costs; and
• the commission or consideration received (in case of the disclosure of insider information to another person).

In relation to any offence contemplated in Chapter X of the FMA, a court may order the attachment of assets or evidence to prevent its:

• concealment;
• removal;
• dissipation; or
• destruction.

Directors and officers may also be held liable criminally, in terms of Section 77 of the Companies Act. Sanctions include:

• personal liability for losses resulting from their actions; and
• disqualification as a director.

10 Short selling

10.1 What kinds of restrictions apply to short selling?

Short-selling on the Johannesburg Stock Exchange (JSE) is regulated by the JSE Equities Rules. The short-selling of shares that an investor does not own and has not borrowed – known as 'naked shorting' – is prohibited in terms of the JSE Equities Rules.

Rule 10.50.2.2.4 of the JSE Equities Rules states that a member may enter an order on the JSE equities trading system only if, in respect of a sell order, "a satisfactory borrowing arrangement is in place which will provide for the securities being available for settlement on settlement date".

A 'member' is defined in the JSE Equities Rules as "an equities member, which is a category of authorised user admitted to membership of the JSE under these rules".

10.2 Is a mandatory disclosure requirement in place regarding short selling?

There are currently no requirements for the reporting and disclosure of short sales on the trading platforms of stock exchanges. On 31 March 2023, the Financial Sector Conduct Authority published the draft Conduct Standard, aimed at regulating short selling, for public comment. If adopted, the Conduct Standard will require exchanges to publish aggregate short-sale transactional data per security for each trading day.

10.3 Is it permitted to write research reports while holding short positions?

There is no prohibition on publishing research reports while holding a short position. However, publication of information in relation to any securities must not contravene the provisions of the Financial Markets Act (FMA) relating to market abuse. Section 81 of the FMA prohibits, in respect of securities traded on a regulated market, the making or publication of any statement or forecast which a person knows or ought reasonably to have known to be false, misleading or deceptive. This prohibition is particularly relevant to short-selling, where unscrupulous market participants may attempt to spread misleading information to affect the price of the shorted instrument.

11 Sustainability

11.1 Is the term 'sustainability' defined in your jurisdiction and, if so, how? Does it cover environmental as well as social objectives? How is compliance with sustainability assessed (eg, quantitatively or qualitatively)? Are there certain minimum requirements?

There is no single definition of the term 'sustainability' in South African law. However, the term is considered in the Johannesburg Stock Exchange's (JSE) Sustainability Disclosure Guidance, which describes 'sustainability' as follows:

It is also defined in the King Code as a set of voluntary principles and leading practices, as the ultimate long-term goal of sustainable development. 'Sustainable development' is development that meets the needs of the present without compromising the ability of future generations to meet their needs.

11.2 Are there special rules in place in your jurisdiction on the identification, management and disclosure of sustainability issues?

There is no defined binding framework for the identification, management and disclosure of sustainability issues. The JSE Sustainability Disclosure Guidance does, however, contain a set of sustainability guidelines.

The JSE Sustainability Disclosure Guidance aims to:

• promote greater understanding among issuers of the sustainability reporting landscape;
• drive sustainable value creation; and
• support the convergence of global reporting standards.

11.3 Do applicable sustainability rules distinguish between sustainability risks (ie, financial risks resulting from sustainability issues) and the actual impact of corporate actions on, for example, the environment?

The JSE Sustainability Disclosure Guidance provides an assessment of material climate-related impacts and risks. These include financial risks that could:

• affect an entity's operational and financial wellbeing; and
• impact on the environment in general.

11.4 Does your jurisdiction provide for a special green bond regime?

Yes, the JSE offers green bonds. The JSE Debt Listings Requirements define 'sustainability instruments' as "any instrument that finances one or more green, sustainable and social projects and confirmed by an independent sustainability advisor the sustainability status pursuant to the sustainability standards".

The applicable sustainability standards include Green Bond Principles, Social Bonds Principles and Sustainability Bond Principles, as governed by the International Capital Markets Association.

11.5 Are there restrictions on the sale or distribution of instruments not considered sustainable?

There are currently no such restrictions.

11.6 Is it necessary to comply with certain minimum standards (eg, on human rights) to qualify as a 'green' issuer?

The JSE offers various instruments aimed at sustainability, including:

• green bonds;
• sustainability bonds; and
• sustainability-linked bonds.

Each type has minimum requirements, as prescribed by the JSE Debt Listing Requirements. An issuer must therefore comply with those requirements before the instrument can qualify and be listed as such in a particular sustainability-based category.

11.7 How will sustainability rules affect the capital markets in your jurisdiction?

With the increasing scrutiny on sustainable conduct of companies from regulators and investors, capital market participants will need to develop policies aimed at improving their compliance with internationally accepted sustainability standards. While guideline documents such as the JSE Sustainability Disclosure Guidance seek to offer guidance, many investors are increasingly conscious of sustainability goals and require the same of the companies they invest in.

12 Product bans

12.1 What products are currently banned from sale or marketing to (certain kinds of) investors in your jurisdiction?

The Johannesburg Stock Exchange (JSE) has no specific list of products that are banned or restricted from being marketed to certain investors. However, in terms of other laws – such as the restrictions on trading of arms and harmful substances – such products are indirectly restricted from being listed on South African securities exchanges.

12.2 What is the process for imposing product bans and which regulators are in charge of this?

Section 12 of the Financial Markets Act (FMA) empowers an exchange to remove or suspend a listing in the event of non-compliance with:

• the relevant Listings Requirements and/or exchange rules; or
• the FMA.

Paragraphs 1.10 and 1.12 of the Johannesburg Stock Exchange (JSE) Listings Requirements empower the JSE either to suspend or order the removal of listed securities of an issuer due to non-compliance with the JSE Listing Requirements. The Cape Town Stock Exchange (CTSE) has similar provisions, as referenced in Paragraph 3 of the CTSE Listing Requirements.

13 Trends and predictions

13.1 How would you describe the current capital markets landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The South African capital markets landscape is a competitive, well-regulated environment. The legislation and rules of the respective exchanges create a rigorous market in which investors can have confidence. The establishment of new exchanges presents prospective issuers with options regarding where to offer their securities. The Johannesburg Stock Exchange (JSE) continues to implement various policies such as the JSE's Sustainability Disclosure Guidance, aimed at ensuring compliance with global standards. These are likely to be incorporated into future amendments in capital markets legislation.

14 Tips and traps

14.1 What are your top tips for the smooth conclusion of offerings in your jurisdiction and what potential sticking points would you highlight?

Any entity that seeks to offer securities on a South African securities exchange should, as a starting point, ensure that it is compliant with the legislation regulating capital markets. To this end, it is important that a prospective issuer retain legal counsel to advise on compliance. When selecting an exchange to offer securities to list on, prospective issuers should consider factors such as:

• costs;
• market capitalisation; and
• the Listings Requirements and rules applicable to that particular securities exchange.

Continued compliance is a key factor that entities should always be mindful of, as non-compliance may have major financial, reputational and legal consequences.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.