Big changes to JSE listing requirements

The JSE has taken another step forward in its plan to simplify listing requirements, which aims to attract more companies to the stock exchange.

The JSE has been under a lot of pressure as an increasing number of companies delist in search of more affordable and less regulated financing options.

Chief Investment Officer at PSG Wealth, Adriaan Pask, said the number of listed companies dropped drastically from 850 in the 1990s to less than 300 in 2024.

“This decline is attributed to several factors such as significant costs associated with compliance, reporting, legal and administrative requirements,” Pask explained.

Overregulation and unfavourable market conditions have made the JSE less appealing to businesses, many of which now choose to dual-list overseas or not list on the JSE at all.

The JSE is aware of these challenges and is actively working on initiatives to attract investors and simplify the listing process, Pask said.

As a part of this initiative, the JSE announced last year that the Financial Sector Conduct Authority had approved amendments to the JSE Listings Requirements regarding financial reporting disclosures, among other things.

Recently, the JSE announced the sixth phase of its Simplification Project, in which it proposes an entirely rewritten Section 13 on Property Entities.

Bowmans’ Senior Associate Mili Soni explained that phase six aims to shuffle and simplify the existing Sections of the JSE Requirements. 

“Pursuant to public consultation, the JSE now proposes an entirely rewritten Section 13 on Property Entities,” Soni said.

Eighteen definitions have been removed as part of this amendment because they are obvious, irrelevant, redundant, or have already been explained. 

Certain definitions have also been amended, Soni said. Some examples include: 

• Asset managers cannot make decisions for the issuer, as this is the responsibility of the board
• ‘Property’ and ‘property entity’ are to be defined more generically to support the listing of infrastructure real estate investment trusts (REITs)
• ‘Rental revenue’ is to consolidate several other definitions

Several requirements regarding financial information are also being updated. 

The rule requiring companies to make a forecast and get a special accountant’s approval for adjustments is seen as unnecessary. It will be scrapped if a company is already showing past financial information following the specific rules of Section 8.

As a result, it is also no longer necessary to have a special reporting accountant’s report on a forecast. “The application of currently applicable auditing standards is high enough and sufficient,” Soni explained. 

Where business acquisitions are concerned, companies will not need an audit opinion for the full financial accounts anymore, as it is onerous and unnecessary.

The special reporting accountant’s approval is enough to ensure that the financial information about the company being purchased is accurate.

The valuation report requirement will be removed for new listings and transactions.

It will now only be necessary for new listings or category 1 transactions where the property does not have 12 months’ rental revenues in terms of arms-length lease agreements, with less than 10% vacancy level. 

“Undeveloped property and owner-occupied properties will still trigger a valuation report requirement,” Soni said. 

No separate summary report will be required, even if a valuation is required. 

“Information previously contained in this will be largely included in the property-specific information disclosures, and a new obligation is being introduced for the board to confirm legal title for a new listing,” she said.

“Due to International Financial Reporting Standards (IFRS) advances, financial reporting will no longer require valuation reports on a rolling three-year basis.”

“The definition of ‘substantial property assets’ is to be amended so that the threshold triggering a valuation report for a non-property entity is to be changed from 25% to 50%. This is also to be limited to an asset test.”

She explained that the JSE’s process for appointing independent valuers will be changed to a clear and detailed criterion for independence. 

The threshold for Category 2 property transactions will increase from 5% to 10%.

In addition, the rules surrounding REITs are also being adjusted. 

The complicated rules for calculating the 60% debt-to-equity ratio are being simplified since they do not achieve their purpose and present practical challenges. The 60% limit itself will stay the same, but compliance will be made easier. 

Previously, companies had to wait 24 months before re-applying for REIT status, but amendments have been proposed to shorten the waiting period and provide incentives for good leavers.

“A risk-based approach is proposed for tenant information disclosures on the property portfolio as opposed to the JSE defined ‘A’, ‘B’ and ‘C’ categories,” Soni said. 

The JSE is looking to change the rules for company announcements. Companies won’t have to repeat the same information about their existing partners in every circular. They will only need to disclose new partnerships or any changes in existing ones.

A new rule is being added that requires companies to give out at least 75% of their profits in cash.

“Transitional requirements for property entities are no longer relevant and are to be removed,” the stock exchange said.

The JSE is eliminating a separate explanation – guidance letter – about fairness opinions for property companies. Instead, they’ll add those details to the main rules so they apply to all issuers, not just property entities.

It will read as follows: “A valuation report can be used for the purposes of a small-related party transaction instead of a fairness opinion provided the subject of the transaction is the property, and the consideration is cash.”

Soni added that “several other provisions have been reworded without changing the applicable principles in substance”.

“The JSE invites comments by close of business on Monday, 15 July 2024.”