Coming on strong over the counter
There are many benefits to OTC share trading for companies needing capital which are not ready to look at a formal listing on the JSE, writes ZILLA EFRAT
Molope, which made its JSE debut this week, has highlighted the benefits of OTC trade. Backed by Johnnic chairman Cyril Ramaphosa, the company first raised R30-million in a private placement to reduce debt. After deciding to postpone its listing, it needed to find a place where its shares could trade.
As its share price rose from their first OTC trade of 50c in April to about 720c a month before its JSE listing, it was able to establish a value for which it could issue paper to fund acquisitions.
While various kinds of unlisted companies have traded OTC, two types appear to dominate: agricultural co-operatives which have corporatised, and many shareholders and venture capital-orientated companies which need to raise money to fund their growth.
Stockbrokers Huysamer Stals appear to have pioneered the more formalised OTC market when they started trading in the shares of Kolosus, which has since listed, and Clover, which should debut on the JSE's boards next year.
It also trades in Mercantile Bank shares and others are in the pipeline. Next on board was Standard Corporate Merchant Bank (SCMB), which began with co-operative OTK and is now involved with Bokomo/Sasko and SentraalWes Co-operative.
Since August 1995, SCMB has traded R121-million worth in OTC shares and in January, it will launch the Womens Investment Portfolio (Wiphold) into this market. A number more are set to follow.
Stockbrokers Lowenthal & Co led the way in trading Molope shares on the OTC market, moving 19.8-million shares worth over R60-million before its listing. They are, however, more focused towards venture capital companies, bringing to the likes of the Hamilton Airship Company International, which is building the world's largest commercial airship, to the OTC market.
Lowenthals also introduced Celtron and Moulded Medical Supplies to this market before their listings and will launch three newcomers next year, including African Resources Investment in April.
All players in the OTC market see it as a "stepping stone" or grooming procedure ahead of a JSE listing. None will take on companies which do not intend ultimately to find a home on the JSE's boards.
SCMB director Rob Shuter says: "Most companies go for a formal listing to raise capital. Other companies, however, do not need capital, but need to a place where their shares can be traded. For these, going the OTC route is far simpler than going through the rigmarole of listing on the JSE."
When it comes to the co-operatives, Shuter says trading OTC allows farmers to access the underlying value of their shares and has eliminated the need to wait for the end of the season for a cash payment and he sees it as " an ideal halfway station" to listing.
Huysamer Stals managing director Werner Stals says: "We will only trade the shares of a good solid company with a market capitalisation of well over R500-million. These type of companies need to trade OTC because of timing or because they are restructuring themselves. All would qualify for a JSE listing."
Stals expects the OTC market to continue grow. One thrust will be the rising appetite from private equity funds who are eager to get into good stocks early.
Lowenthal & Co senior executive Howard Lowenthal says: "The OTC market can be of use to a company which is putting a number of groups together and wants to wait until these are bedded down before coming to the market.
"There is a definite need to develop venture capital companies in SA. Investors who are more risk adverse can take a punt, but they must know while some may grow into huge companies, others will fail."
Lowenthal & Co senior executive Ron Lowenthal adds that his firm will spend much time and energy in bringing start up companies with good growth potential to the OTC market.
He says: "We would like to encourage other players into the market. The more participants there are, the more liquid it will become."
Indeed, the OTC market does not appear to have the liquidity of the JSE and a number of observers are concerned about its transparency, lack of regulation and exposure to abuse.
There are no specific laws to regulating the OTC market and, because many deals are done by a private placing, companies do not have to publish a prospectus. To buy OTC, one would phone one's broker, just like when buying any share, and put in the order. And, like listed shares, MST, VAT and brokerage applies and OTC share certificates are still issued by transfer secretaries. OTC trades, however, are not done through the JSE's JET system which means that prices are not openly displayed. But like any other share, the transaction is entered in the JSE's Broker Dealing Accounting system (BDA).
JSE president Rusell Loubser confirms that while there are no moves to regulate this market, all OTC transactions through the BDA system fall under the watchfull eye of the JSE's surveillance department.
He says: "We do not want to discourage OTC trading. It shows a company whether there is a market for its shares and whether it should list. It is educational and healthy as long as it is done by responsible people.
"We can, however, regulate our members and we do. No member can do anything to jeopardise another member or bring the market under disrepute. And, when trading in OTC, the normal rules of agency apply."