Hand Book for Issuers

Transcription

1 Hand Book for Issuers Version 2.0 October 2015

2 Document Information Copyright Notice Contents of this document are protected under South African copyright law. No part of this document may be copied, completely or partly, either electronically or manually, without the written consent of Strate Ltd. This document remains the sole property of Strate Ltd. Disclaimer Although this document is the result of extensive analysis and research, it is subject to changes which may emanate from the audience or any supporting or endorsing party. The revisions and editions will be recorded and indicated per the Version Numbers that are released. 2

3 Table of Contents Document Information... 2 Who is Strate... 4 Overview of settlement... 4 What does Strate do for Issuers?... 6 What is a Corporate Action... 7 What are the types of Corporate Actions... 7 What are the Basic Principles... 8 Who are the Role Players in a Corporate Actions... 8 What are the Important Points... 8 Current Corporate Actions Timeline... 9 Processing of Corporate Actions Payments through the South African Reserve Bank 9 The JSE s Move to T Shareholder Register Dematerialisation Duty of Care Rematerialisation The Shareholder Register Subregister and Sub-Subregister Nominees vs. Own Name and Beneficial Ownership Disclosure Legal Considerations Disclosure in terms of the Financial Markets Act Segregated Depository Accounts Introduction Legal Considerations Benefits of a Segregated Depository Account Glossary of Terms

4 Who is Strate Strate is South Africa s licensed Central Securities Depository and it provides the electronic settlement of equities, bonds and money markets. Up to trades are processed daily across the various markets and Strate currently settles transactions in excess of R130 billion daily. Overview of settlement At the point of settlement, the electronic records are updated via book-entry. Settlement via book entry is both secure and efficient. Rolling settlement refers to a settlement environment in which transactions (securities and funds) become due for settlement a set number of Business Days after trade. In South Africa, rolling settlement has been introduced on a T+5 basis for equities and T+3 for bonds (where T = Trade Date). As every day is a trading day, every day is also a settlement day. Contractual settlement is a market convention embodied in the Rules of the JSE which states that a Client has a contractual obligation to cause a JSE trade to settle on settlement day. The JSE, in its capacity as Settlement Authority, ensures that all On-market trades entered into by two JSE brokers settle five days after the trades are entered into. Investors obtain the assurance that their transactions will settle on the specified settlement day. The appropriate cash and Securities Accounts will be debited / credited on settlement day and the risk of delayed settlement and loss of earnings is vastly reduced. Strate is proud to be amongst the CSDs to have achieved true Simultaneous, Final, Irrevocable Delivery versus Payment (SFIDvP) in Central Bank funds. By synchronising securities transfer through Strate with cash payment through SAMOS, the South African market is able to provide local and international investors with SFIDvP. SAMOS provides for final and irrevocable payment settlement, while Strate provides the investor with settlement and finality of ownership transfer. Since Strate s equities netting engine was fully implemented on 6 November 2000, Strate has been in a position to offer both gross and nett settlement. The ability to offer both methods of settlement is an advantage to all market players, who invariably offer multiple investment products. The Strate system would be able to, and in some cases does already, settle all kinds of financial instruments; i.e. bonds, money market securities, derivatives and unit trusts. If Strate were to settle all financial instruments, investors would benefit from an efficient system in the settlement of all their investment transactions. The utilisation of Strate for the settlement of all 4

5 financial instruments would lead to significant economies of scale. Indeed, settling all financial instruments in the same environment would create consolidation, streamlining, cost savings and marketing opportunities for all effected industries. It would also increase market liquidity, eliminate operational risk and enhance market efficiency. 5

6 What does Strate do for Issuers? Strate facilitates all equities, bonds and money markets corporate actions/corporate events in the market on behalf of the issuer. In the case of equities, Strate is involved from when the announcement/declaration date is announced on SENS (Stock Exchange News Service) until payment date. Strate s system calculates the entitlements due, reconciles the holdings and electronically executes cash proceeds to the intermediaries within minutes. The security entitlements are available by beginning of day (BOD) on pay date to provide seamless continuous trading in the securities. Where there is complexity on an event that requires processing outside the normal market timelines, Strate is involved in the discussions and planning together with Sponsors, the JSE and Transfer Agents, prior to the announcement date. The benefits of Strate s corporate actions model cannot be underestimated, given the significant risk reduction and cost savings it brings. Issuers and investors benefit from a dramatically increased level of efficiency and cost effectiveness, as well as the elimination of market claims. 6

7 What is a Corporate Action This is an action that is taken by an issuer or by another third party that affects the registered and beneficial owners of securities in terms of an entitlement. What are the types of Corporate Actions Typical events include: An economic event (i.e. a cash or Dividend in Specie); A non-economic event (i.e. a notice of meeting); and An outside event (i.e. a takeover). These events are classified into one or more of the following types: Mandatory (i.e. the shareholder has no choice as to whether they participate in the event. This includes cash dividends, schemes of arrangement and bonus issues); Mandatory with Choice (i.e. shareholders must give an instruction with their decision. The default, as prescribed by the issuer, will be applied where no instruction is received from the shareholder. This includes dividends with options, dividend reinvestments and spin-offs); and Voluntary (i.e. shareholders can elect and make their decision known by sending an instruction. Shareholders who take no action, remain unaffected by the event. This includes tender offers and exchange offers). 7

8 What are the Basic Principles In order for corporate actions to be processed successfully, there are specific criteria for issuers to abide by, such as: All details and salient dates of a corporate action must be known and irrevocable by finalisation date, which is Record date (RD) In the event that there are outstanding conditions, or that certain resolutions have not been passed by the majority of shareholders, the issuer will need to withdraw this event and announce new salient dates; and No dematerialisations or rematerialisations are allowed between Last day to trade (LDT) and RD, as this will have an impact on the final figure which will be used for the distribution. This is due to the settlement cycle of T+5, whereby orders executed on or after LDT + 1 will only settle within five business days. Who are the Role Players in a Corporate Actions Issuers Strate (CSD) JSE CSD Participants Sponsors and Transfer Secretary (Issuer Agent) What are the Important Points When preparing the salient information for a corporate action, it should be noted that: Currently, entitlements are calculated to five decimal places. This is in line with the JSE Listing Requirements and Strate s Corporate Action Directives; and The first announcement must be made at least 15 business days before RD (RD - 15) 8

9 Current Corporate Actions Timeline South Africa currently settles equities on a T+5 cycle (trade + five business days). The processing of equity corporate actions is aligned to this practice. The important dates in an equities corporate action are as follows and are depicted in the Diagram below: Declaration Date (DD) = Record Date (RD) - 15; Finalisation Date (FD) = RD - 10; Last Day to Trade (LDT) = RD - 5; First Day ex = RD - 4 (or LDT + 1); Election Date = 13:00; and Payment Date = RD + 1 Processing of Corporate Actions Payments through the South African Reserve Bank On 5 October 2015, Strate implemented a new solution to process corporate action payments via the South African Reserve Bank (SARB) In line with global best practice, Strate has been in discussions with the South African Reserve Bank (SARB) to improve the risk management of the funding for these events. Strate, in its role as the CSD for the South African securities markets, performs a critical role in overseeing the distribution of funds for corporate actions and events within the equities, bonds and money market environments. This involves the efficient processing of multiple corporate actions and events throughout the year. 9

10 In terms of the previous processing model, the funds due in respect of a particular event were paid by the relevant issuer into a Strate trust account that is used exclusively for this purpose. Once the funds had been received and cleared, Strate authorised its banker to distribute the funds to the various CSD Participants, who in turn pay the underlying shareholders reflected in their books. In terms of the new solution, payments will be processed via the South African Reserve Bank (SARB) into a designated account. This process will continue throughout the transition period. The benefits of the new model include: Improved cash flows through the elimination of unnecessary intermediate steps and any costs associated with this; Greater stability within the financial market. There is obviously no denying that the failure of a large commercial bank in South Africa would have far-reaching consequences across the financial sector, but the ability to insulate Strate and the surviving banks from as much of the disruption as possible would be of immense value; Efficiencies within the payment process. Once the funds have been released into the SARB s South African Multiple Option Settlement (SAMOS) system, there will no longer be timing differences in respect of the receipt of funds by each of the CSD Participants; and Better/improved liquidity management within the banking system. The inward transfer of the full proceeds from the issuer via its authorised banker will be the only transaction requiring liquidity or collateral management, while the outward distribution will be concluded in a matter of moments. The issuer is requested to provide their bank with a mandate in respect of equity corporate actions payments. Strate will assist Issuers with obtaining these mandates for their bankers to accept and act on instructions received from Strate. Issuers are requested to advise Strate of the following details: Bank Name Branch Branch Code Account Name Account Number 10

11 Frequently Asked Question 1. Does the issuer and their Settling Bank require an Agreement/Mandate to enable settlement of Equity Corporate Actions via Central Bank Funds? Yes, an agreement needs to be signed between the issuer and their appointed bankers to enable the processing of payments via central bank funds. 2. How does the Agreement/Mandate work? Is the issuer giving Strate the blanket authority to debit their bank account? No, the issuer is not providing Strate with any authority to debit their bank account. The Agreement/Mandate is signed between the issuer and their appointed bankers, and the issuer will need to provide their bank with an authority to debit their account with the precise amount due. This amount will be reconciled with the payment letter obligation received from Strate for each separate corporate action event. Strate (Pty) Ltd will send a Society for Worldwide Interbank Financial Telecommunication (SWIFT) notification to the issuer s bank quoting the corporate event ID, the amount to be debited and the issuer s bank account details. The SWIFT notification sent by Strate to the issuer s settling bank is automated (i.e. Straight-Through-Processing (STP)). There is no manual intervention by Strate. Furthermore, Strate is a member of the Payment Association of South Africa (PASA). PASA being the payment management body recognised by the South African Reserve Bank (SARB) in terms of the National Payment System Act No. 78 of 1998 (NPS Act), to organise, manage and regulate the participation of the members in the payment system. Strate is licensed as a Payment Clearing House (PCH) system operator. A system operator is defined in the NPS Act as a person authorised by the payment system management body, which is PASA, to provide clearing processing services on behalf of two or more system participants or a clearing house. Strate has been duly authorised by the equity, bond and money market PCH s to perform this function in terms of equity, bond and money market cash settlement obligations. Strate is therefore regulated by PASA, which has defined rules and guidelines to ensure that its members and other stakeholders meet the requirements of the NPS Act. Besides being a member of PASA, Strate is further governed by the legal framework covered by the PCH 11

12 agreements. Hence, being a member of PASA and having the PCH agreements in place controls and regulates the manner in which Strate operates within this model. 3. If the issuer utilises the same bank with different bank accounts for each corporate event, how far in advance must the issuer notify Strate of the bank account details? In such instances, it is preferable for the issuer to advise Strate of the relative account details as soon as the salient dates are announced, or two weeks before the Last Day to Trade to qualify for the event. It is the issuer s responsibility to advise Strate of any changes to their bank account details. Failure to advise Strate of such changes could result in a delayed payment or the non-payment on the payment date of the corporate event. A Service Level Agreement (SLA) will be required between Strate and the issuer, should this approach be selected. 4. How will bonds be handled? The processing of bonds for capital events and redemptions remains unchanged for now. However, the same Central Bank Funds Model is intended to be applied to bonds. The timeline for bonds will be advised once it has been finalised, but it will only be introduced after the equities model has been implemented. 5. Would Strate be able to access the issuer s bank account and debit the issuer s account for other purposes, e.g. outstanding fees? No, Strate will never send a notification to the issuer s settling bank to debit their bank account for any purpose other than for a valid corporate event. Strate is a member of PASA and is licensed as a PCH system operator. Strate is therefore regulated by PASA, which has defined rules and guidelines to ensure that its members and other stakeholders meet the requirements of the NPS Act. One of the main responsibilities of PASA is to support the SARB in its role as the overseer of the payment system by ensuring compliance by its members and, where necessary, imposing penalties and sanctions. Strate is further governed by the legal framework covered by the PCH agreements. Being a member of PASA and having the PCH agreements in place thus controls and regulates the manner in which Strate operates within this model. 6. Will there be any impact/additional costs to the issuers with respect to fees? 12

13 Apart from the annual increases in fees, Strate will not be changing their fees structure for the processing of Equity Corporate Actions via Central Bank funds. Strate continues to facilitate the payment process to ensure that dematerialised beneficial holders of securities are paid on payment date 7. With the new process, what are the risks associated with processing via The South African Multiple Option Settlement (SAMOS) system? The introduction of processing via SAMOS essentially reduces risk. In addition, once the funds have been released into the SAMOS system, there will no longer be any timing differences in respect of the receipt of funds by each of the CSD Participants. The primary benefit of this model is the improved liquidity and risk management within the banking system. 8. Who is taking over the risk from Strate? The existing risk has been effectively mitigated due to the cash flowing through the SAMOS system, which provides an efficient and safe settlement system. 9. Who will be responsible for Dividends Withholding Tax for dematerialised clients? The process relating to the withholding, reporting, and the payment of Dividends Withholding Tax to the South African Revenue Service remains unchanged. Regulated Intermediaries remain responsible in terms of section 64H of the Income Tax Act, No 58 of What are the benefits of this model? The benefits include: Improved cash flows through the elimination of unnecessary intermediate steps and any costs associated with this; Greater stability within the financial market. There is obviously no denying that the failure of a large commercial bank in South Africa would have far-reaching consequences across the financial sector, but the ability to insulate Strate and the surviving banks from as much of the disruption as possible would be of immense value; Efficiencies within the payment process. Once the funds have been released into the SARB s SAMOS system, there will no longer be any timing differences in respect of the receipt of funds by each of the CSD Participants; and Better/improved liquidity or collateral management within the banking system. The inward transfer of the full proceeds from the issuer via its authorised banker will be the only transaction requiring any banking liquidity or collateral management, while the outward distribution will be concluded in a matter of moments. 13

14 11. Can issuers make corporate action payments directly to the central bank instead of having a debit order in place with their settling bank? Only those South African Banks that are members of PASA can process payments through their treasury department. Unfortunately issuers are not members of PASA and cannot make payments directly through to the central bank. 12. Given that the issuer signs an Agreement/Mandate with their settling bank, how will the issuer know that the corporate action funds are going into the correct settling bank s CBPL account? For internal authorisation processes, the issuer would require the account number that will be credited with the funds for risk mitigation purposes. Consequently, the agreement/mandate between the issuer and their settling bank should contain both the account number to be debited (the issuer s account), as well as the account number to be credited (the settling bank s SAMOS CBPL account number). Where this is required for authorisation purposes, the issuer should obtain the relative account number from their corporate bankers. 13. How will Strate ensure the secure storage of the issuers banking details in the relevant systems? The issuers banking details will be stored in Strate s core equity system. All entries into the system are validated using the four eye principle to ensure that details are captured correctly and maintaining the accuracy and integrity of the data. Furthermore, where such master file data is required to be changed or edited, authorisation must be granted before data may be changed or edited. A management report is automatically generated whenever master file data is changed. This report provides an audit trail of the relative change, the person(s) making such change and the senior official that authorised/reviewed the change. 14. Do issuers have the option of utilising Strate to help facilitate the corporate action payment for the certificated portion of the share register by utilising the current central bank model? Issuers can use Strate to facilitate the corporate action payment. In need issuers can contact Gregory Naicker (gregoryn@strate.co.za) or Nita David (nitad@strate.co.za) to avail of this option. 14

15 15. Will the bank require the issuer to provide a board resolution as part of the Agreement/Mandate? This would depend on each individual bank s requirements. 16. If the issuer is a foreign incorporated company and does not have a South African bank account, how can the corporate action payment be processed? The issuer can either: 1. Open a bank account in South Africa, or 2. Contact their Issuer Agent/Transfer Secretary and determine if they would be willing to offer this service on the back of the certificated segment of the share register. Strate would like to thank the issuers, banks, SARB and all other parties involved for making this milestone for the South African markets a huge success. Issuers are, encouraged to approach the Strate relationship team to explore the benefits that this new solution offers them. Watch Settling of Corporate Action through South African Reserve Bank video Relationship team contacts Carol Otto +27 (0) carolo@strate.co.za Thembeka Khumalo +27(0) thembekak@strate.co.za 15

16 The JSE s Move to T+3 South Africa will be following a global trend to reduce its settlement cycle for equities to align with global best practice. It will reduce from the current five business days after the trade date (T+5) to three business days after the trade date (T+3). Accordingly, corporate actions will be processed in a shorter period. South Africa s financial markets have been preparing for the move to the shorter T+3 settlement cycles and are currently working on the project, which is expected to be implemented during the course of The impact to corporate actions will be that the last day to trade (LDT) will change from record date (RD) - 5 to RD - 3. The new timeline is depicted below: 16

17 Shareholder Register Dematerialisation Dematerialisation is the exchange of Securities (physical certificates and certified deeds) for an electronic record of ownership of Securities. The Financial Markets Act No 19 of 2012 (FMA), Regulations 33 and 34 deal with dematerialisation of certificated Securities (that is, conversion of certificated Securities into uncertificated Securities). In short, to dematerialise physical certificates, an investor or through his authorised agent approaches either a Participant directly, or via a broker, to effect the process. The Participant communicates electronically with the Transfer Secretary concerned via the CSD, while simultaneously surrendering the physical share certificate/s. The Transfer Secretary confirms that the share certificate is valid, cancels the original certificate and deletes the certificated record on the Register of Members. The Transfer Secretary immediately advises the CSD of the successful dematerialisation order the ISIN number and quantity of Securities. The CSD credits the Participants account in the CSD and the Participant credits the Clients account in the electronic Sub register. Once the Securities are dematerialised and reflected as an electronic entry, such record will be administered and maintained by a Participant or CSD in an uncertificated Securities register which forms part of the company s Securities register. Duty of Care It is accepted that the process of dematerialisation is vital in the control and detection of tainted Securities. As stated above, in order to dematerialise Securities, the investor will hand his share certificates to his chosen Participant or via his broker to the Participant of the broker s choice. The investor warrants the genuineness of the share certificate. This deposit of the share certificate does not result in any cancellation of the certificate and the holding still appears in the certificated Register of Members. At this point, both the broker and the Participant carry out a level of verification before certificates are lodged with the Transfer Secretary who undertakes the dematerialisation thereof. Both the broker and the Participant have a duty to physically validate the certificate and are entitled to reject any certificate which, to an ordinary person, appears to have been tampered with. 17

18 Rematerialisation Section 54 of the Companies Act deals with rematerialisation of uncertificated Securities (that is, conversion of uncertificated Securities into certificated Securities). Shareholders are permitted to rematerialise their Securities and obtain share certificates. Once approached by the investor or his agent, the Participant will advise the CSD who will in turn advise the Transfer Secretary concerned of the investor s requirements for a share certificate. The Participant will flag the shareholding entry in its electronic records and ask the Transfer Secretary to issue a share certificate. The CSD, on advice of the Participant and subsequent confirmation by the Transfer Secretary, will debit the Participant s account in the CSD and the Transfer Secretary will include the shareholder s name in the Register of Members and release the paper certificate to the Participant. This process has several drawbacks:- fees are charged for the reissue of a certificate in order to discourage investors from reverting to a paper environment; the reissue of paper certificate can take up to 10 days to process; the share certificate is not good for delivery i.e. it cannot be used to trade on an Exchange; and rematerialisation reintroduces the risk of tainted Securities into the market 18

19 The Shareholder Register Strate introduced much higher levels of efficiency, transparency and accuracy in the Securities industry, especially in respect of the daily update and accuracy of the register of all owners of dematerialised Securities. Section 50 of the Companies Act states that a record of uncertificated Securities must be administered and maintained by the Participant or CSD, and it forms part of the company s Securities register. A Subregister maintained by a Participant therefore, is part of the company s Securities register. Subregister and Sub-Subregister The accounts maintained by the Participants (the Subregisters) form part of the main register of the Issuer known as the Securities register. With the introduction of Strate and the dematerialisation of Securities under the 1973 Companies Act, the Register of Members maintained by the Company or the Transfer Secretary acting as the Issuer s agent was broadened to include not only a register of owners of paper share certificates, but also included the register of all owners of dematerialised Securities. This remains almost the same under the 2008 Companies Act, with the uncertificated Securities register held and maintained by either a Participant or CSD forming part of the company s Securities register. The Subregisters are deemed to form part of the company s Securities register and therefore Participant Nominees or those Clients of the Participants appearing in the Subregister are regarded as being the registered shareholder of the relevant company. In this way, entries in these accounts maintained by the Participants are equivalent to entries on the company s Securities register. This means that where applicable depositors (Clients) are regarded as registered shareholders of the company and do not lose their direct rights against the company by dematerialising their Securities. In other words, the Securities register of a company/issuer comprises the principle certificated register and the electronic Subregister maintained by the Participants. The Subregister will reflect registered ownership and not Beneficial Ownership as these Securities are generally held in the name of the Client or a Nominee. Where Securities are held in the name of a Nominee, the Nominee s name, and not the Client s name will be recorded in the Subregister. (Nominees are explained later in this chapter.) Details of the balances of uncertificated Securities dematerialised in the CSD systems, as recorded by the Transfer Secretary, are transmitted daily by the Issuers agent to Strate for reconciliation purposes. This means that the total register of shareholders and total share capital will consist of 19

20 share capital in paper form and share capital dematerialised in Strate. The records in Strate are deemed to be SACROSANCT. Because the Participants, and not the company, maintain and administer the Subregisters, the Participants are also responsible for ensuring the correctness of transfers of the uncertificated Securities effected by them. The Participant has a duty to balance their records with the holdings at Strate daily. A Participant may open one or more Central Securities Accounts at Strate to record the Securities dematerialised on behalf of their underlying Clients. Certificate vs Uncertificated Register ISSUERS Certificated Uncertificated Transfer Secretary Strate Registers Company Share register a b c d. Dematerialised Control Account Participant A Participant B Sub - Registers Participant C Mr A Mrs B Mrs Y EFA cc ABC Trust XYZ ltd

21 Nominees vs. Own Name and Beneficial Ownership Disclosure In the Strate environment the investor does not have to rely on the Issuers choice of Transfer Secretary and is empowered to make his/her own decisions and to choose a service provider most suitable to his/her needs. Depending on the level of services required, the investor can choose from a number of brokers and several Participants offering such services. Amendments to the 1973 Companies Act were specifically included to ensure that investors currently enjoying certain services courtesy of the Issuer, should, if they wish, continue to receive exactly the same benefit in the Strate environment. This led to the provision of own name services which can simply be defined as a shareholder whose name, appears in the Subregister of a Participant. The cost of providing these services is to be borne by the Issuer. This will appeal more specifically to investors that do not trade with any regularity. While this service is provided at no cost to the investor, the investor will have to bear the costs of moving any Securities to be sold over to his/her broker when deciding to sell any Securities. Investors choosing to register in their own name are opting to have a direct relationship with the Issuer. Own name Clients appear on the Subregister maintained by a Participant. Alternatively, investors Securities are held under the Nominee of their broker or Participant. These investors will not be treated as legal or registered shareholder, but will only appear as Beneficial Owners on the Sub-Subregister maintained by a broker or Participant Nominee. Legal Considerations Section 56 of the Companies Act 71 of 2008 ( the Act ) requires the disclosure of beneficial interest in Securities It allows a Nominee to hold Securities for the beneficial interest of another person. In respect of the Securities of a public company registered in the name of a Nominee, such Nominee must disclose the identity of the beneficial holder, the number and classes of Securities held and the extent of each beneficial interest. Information must be disclosed to the company, in writing, within 5 Business Days after the end of every month during which a change in Beneficial Ownership occurs. A company may by written notice, require a Nominee to, within 10 business days, confirm or deny Beneficial Ownership, disclose the identity of a beneficial holder, or provide particulars of the extent of beneficial interest during the past 3 years. In respect of the Securities of a public company, a person is regarded to have a beneficial interest in the Security of a company if that person Has Securities held in a nomine officii capacity (e.g. executor, trustee, etc) by another person, 21

22 Is married in community of property to the holder of a beneficial interest, Is the parent of a minor who holds a beneficial interest, Acts in agreement with the beneficial holder, Is the holding or parent company of the beneficial holder, Controls the majority of the voting rights of the beneficial holder, or Is the controlling shareholder of beneficial holder A regulated company, that is, public company, a state-owned company and certain private companies must establish a register of disclosures. It must also publish in its annual financial statements (if required to audit), a list of persons holding beneficial interest equal to or in excess of 5% of a total number of securities of that class together with the extent of the beneficial interest. It is thus clear that Nominees, the largest of which are run by South Africa s big banks and brokers, must disclose the information as required. Strate provides a Beneficial Download service (the BND) in which information from the legal ownership records and this Beneficial Ownership information are put together and provided to the issuers and/or their agents on a weekly basis. 22

23 Disclosure in terms of the Financial Markets Act In terms of Section 35(2)(l) of the FMA: The CSD must make Rules which provide for (i) the duty of persons for whom securities accounts or central securities accounts are kept to disclose to a participant or central securities depository, as the case may be, and the duty of a participant to disclose to a central securities depository, information about a beneficial, limited or other interest in securities deposited with the participant or central securities depository, as the case may be; and (ii) the manner, form and frequency of such disclosure; In terms of section 1 of the FMA Securities is defined as:- (a) listed and unlisted (i) shares, depository receipts and other equivalent equities in public companies, other than shares in a share block company as defined in the Share Blocks Control Act, 1980 (Act No. 59 of 1980); (ii) debentures, and bonds issued by public companies, public state-owned enterprises, the South African Reserve Bank and the Government of the Republic of South Africa; (iii) derivative instruments; (iv) notes; (v) participatory interests in a collective investment scheme as defined in the Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002), and units or any other form of participation in a foreign collective investment scheme approved by the Registrar of Collective Investment Schemes in terms of section 65 of that Act; and (vi) instruments based on an index; (b) units or any other form of participation in a collective investment scheme licensed or registered in a country other than the Republic; (c) the securities contemplated in paragraphs (a)(i) to (vi) and (b) that are listed on an external exchange; (d) an instrument similar to one or more of the securities contemplated in paragraphs (a) to (c) prescribed by the registrar to be a security for the purposes of this Act; (e) rights in the securities referred to in paragraphs (a) to (d), but excludes 23

24 (i) money market securities, except for the purposes of Chapter IV; or if prescribed by the registrar as contemplated in paragraph (d); (ii) the share capital of the South African Reserve Bank referred to in section 21 of the South African Reserve Bank Act, 1989 (Act No. 90 of 1989); and (iii) any security contemplated in paragraph (a) prescribed by the registrar; In terms of Strate Directive SA.8, Strate mandates the current layout for Disclosure of Beneficial Ownership Equities and Bonds. 24

25 Segregated Depository Accounts Introduction The inter-dependence of the world s financial markets took centre stage with the failure of Lehman Brothers. As the significance of this event has rippled through the financial world, many financial institutions and Investors are calling for higher levels of transparency, increased regulation and improved protection of their Securities. Increasingly the co-mingling of Securities and legal certainty of title has come into question where Client s Securities are placed under the management and custody of a Custodian. In an effort to address these trends, the South African market, under the guidance of the Central Securities Depository (CSD), Strate Ltd, and the local Custodians, has created the concept of Segregated Depository Accounts (SDAs). The South African market operates nominee securities account structures for equities and fixed income securities. Currently Investors Securities are held in Custodians nominee accounts at the CSD. The SDA account allows Investors to open an account directly at the CSD level while maintaining all their existing relationships and services with their Custodian. Not only are Investors securities held in a separate account but they also benefit from increased protection in the event of an Insolvency Proceeding being instituted against one of the Custodians. 25

26 Legal Considerations The Companies Act, 2008 (effective 1 May 2011) enables Strate to revise its CSD Rules to allow legal record of ownership to be recorded at the CSD. By allowing Clients SDAs to be opened directly in the books of the CSD, Investors will be granted full legal ownership rights upon credit of their accounts, providing legal certainty to Investors in the current intermediated Securities environment. While Clients Securities held in CSD Participants nominee accounts will not fall in the intermediary s estate in the event of an Insolvency Proceeding (see specifically section 36(2)(a) of the FMA), the proposed SDAs guarantee full legal ownership and direct access at CSD level. Benefits of a Segregated Depository Account SDAs offer numerous benefits to Clients and Investors, including: The option of opening a direct SDA at the CSD as opposed to remaining in a Sub-register holding chain in the name of a CSD Participant Nominee; Clients/Investors who select the option, through their CSD Participant, to open an SDA directly with the CSD, have the legal security and protection of their Securities in the case of an Insolvency Proceeding against their CSD Participant, thereby reducing both operational and systemic risks; In the event of an Insolvency Proceeding, this product is designed to reduce market, price and operational risk by avoiding a situation where the Securities may otherwise have been trapped in the books of the failed Participant, while the Insolvency Administrator endeavors to identify their ownership and return the Securities to the rightful owner; The SDA functionality significantly enhances the portability of Clients holdings, allowing them to engage with an alternate service provider at short notice thereby ensuring that if there was an Insolvency Proceeding instigated against their Participant, their account would not be frozen by the Insolvency Administrator and the Client could continue trading in that account in a relatively seamless manner; and The ability to appoint a Primary and Secondary Participant where, in the event of Insolvency Proceedings being instituted against the Primary Participant, the custody and administration of the Client s Securities can be switched to their appointed Secondary Participant almost immediately. This has the effect of significantly reducing the risks associated with time delays and other operational impacts while having to move a portfolio from one Participant to another. 26

27 The following principles apply to all SDAs: The SDA is opened in the records of the CSD by the Primary Participant; The Client / Investor may pre-appoint a Secondary Participant and details of the appointment are provided to the CSD via the Primary Participant as well as by the Secondary Participant; The Primary and Secondary Participants are responsible for entering into or amending a Safe Custody Agreement / Client Mandate with the Client / Investor; and Where applicable, the SDA account holder must ensure that all standing instructions in place with their Primary Participant, are communicated and switched to the Secondary Participant in the event of an Insolvency Proceeding being instituted against the Primary Participant. Glossary of Terms Central Securities Depository (CSD) Strate (Pty) Ltd (Strate), registration number 1998/022242/07, registered as a Central Securities Depository in terms of the Financial Markets Act (FMA) No. 19 of The CSD operates the electronic settlement system for transactions which take place on the JSE and off-market trades. Central Securities Depository Participant An entity that is approved to hold securities in custody and that administers the securities, or an interest in securities, which has been accepted by a Central Securities Depository as a Participant in that Central Securities Depository. Declaration Date (DD) The date on which the Corporate Action and the declaration data (including any conditions precedent to which the corporate action is subject) are announced. Election Date (ED) The date by which the Participants must have received the election instructions from all their clients, including brokers, fund managers, global custodians, etc. Finalisation Date (FD) This date is RD First Day Ex The date from which any transactions in that security excludes the right to receive entitlements relating to the relevant corporate action. Ex-date is equal to LDT

28 Issuer Juristic person, wherever incorporated or established, including any undertaking, association of persons or entities and any trust or similar device, wherever established, that issues securities. Issuer Agent Any person who has been appointed by an issuer to act as its agent in the performance of certain functions; (e.g. a Transfer Secretary). JSE JSE Ltd, registration number 2005/022939/06. The stock exchange in South Africa where shares are bought and sold. Last Day to Trade (LDT) The last date that anyone can trade on-market in order to qualify or participate in a corporate action. Payment Date (PD) The date on which corporate action entitlements are paid. Ratio The basis for a security entitlement. Record Date (RD) The date on which the holdings upon which the corporate action entitlement is based, are ascertained. RD is equal to LDT + 5. SENS Stock Exchange News Service. Settlement The completion of a transaction, whereby securities and corresponding funds are delivered and received, into the appropriate accounts of clients. Sponsor 28

29 Sponsor assists applicant issuers with applications for listing and advises Company Secretaries on compliance with the JSE Listing Requirements. They must be recorded on the JSE s Register of Sponsors. Types of Dividends Dividend Any amount transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company. Dividend In Specie This is a distribution of shares in other companies. Foreign Dividend Any amount that is paid or payable by a foreign company in respect of a share in that foreign company. Scrip Dividend This is dividends or interest paid in the form of scrip. Bonus /Capitalisation Issue A fresh issue of new shares and no movement of cash. Unbundling An event where an Issuer distributes in specie to the registered owners (for the benefit of beneficial owners where applicable). 29