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Equity Corporate Actions

The way in which corporate actions are processed and disseminated by Strate has been highly commended by settlement authorities in several first world countries. The corporate actions mechanisms are integral to Strate's prime objective of drastically reducing settlement risk. Familiarity with the various aspects of such mechanisms is crucial for all market players. 

Announcements/Declaration Date

All company announcements relating to listed companies are published on SENS (Stock Exchange News Service). Once the message is received from SENS, or any other system that the JSE may use for this function, Strate creates the event in its system and distributes it to all the Central Securities Depository Participants (CSD Participants), which are then responsible for notifying all clients who hold the securities in question. 

Among the clients to  whom the message from the CSD Participant is dispatched are the brokers, fund managers, global custodians, etc. Brokers are responsible for informing their clients of corporate actions, such information being based on material received from their CSD Participants may choose to notify all their clients, irrespective of whether or not they hold the shares in question. All the pertinent information relative to the event becomes irrevocable on LDT - 5 (last day to trade minus five). A final message is dispatched by Strate as earlier indicated. 

The investor's CSD Participant or broker is responsible for advising the investor of all events that:

  • Affect his holdings;
  • Result in him receiving cash or shares; or 
  • For which he needs to instruct his agent as to what action should be taken for all optional events.

Final Date/Last Date to Trade - 5 

This is the date on which the event and its details become irrevocable -- that is, no further changes to any of the pertinent details can be made by the issuer. No dematerialisation/remateliasation orders are accepted by Strate between this date and Record Date. 

All demat/remat orders that are outstanding as at this date must be finalised before end of day (EOD) on last date to trade (LDT). The transfer secretaries/issuers prepare the payments or entitlements for those investors holding their shares in certificated form on this date after taking into account any unprocessed dematerialisation or rematerialisation orders. The certificated investors’ positions may not change from this date. 

In exceptional cases (withdrawal of an underwriter or any other circumstance that would make the event impossible to execute), the listings department of the JSE may sanction the cancellation of an event provided it takes place on or before RD. 

Last Date to Trade (LDT) 

This is the last date on which to trade in order to qualify for or participate in the event. All on-market trades done from LDT + 1 exclude entitlements. As at this date, the investor can ascertain what his projected holdings will be on RD and decide what election he needs to make. 

Any demat/remat orders received by LDT - 5 must be finalised by LDT. No further changes to the dematerialised holdings in the company can take place after this date. This enables the issuer or transfer secretary to pre-plan the position on which the entitlement will be based. Should any investor be prevented from transferring all or part of his certificated holdings during this period, and the transfer prevents the entitled holder from receiving the entitlement, the claim or payment must be arranged between the deliverer and the receiver. 

Such instances are rare, as normal off-market trades are obliged to be executed through Strate in dematerialised form. 

Ex-date/Last Date to Trade +1 (LDT + 1)

All on-market trades from this date exclude the right to receive entitlements. This date will normally be the first business date after LDT (LDT + 1). For investors (private and institutional) and fund managers, from LDT + 1, all concluded trades exclude the right to participate in the event. Share entitlements may be traded from this date. As the investor will be in a position to calculate his holdings on RD (record date), he is able to plan his election instructions for RD - 2. 

Last Date to Elect (LDE)

This is the date by which the CSD Participants must have received the election instructions from all their clients, including brokers, fund managers, global custodians, etc. At this stage, the CSD Participants reconcile the holdings on which the clients have elected with the projected holdings in their books for each client, aggregate these across all their clients linked to a specific CSA (central securities account), and provide Strate with their election instruction by CSA. 

The brokers would have undertaken the same process across all their clients to come up with their aggregated election per the CSA they maintain with their appointed CSD Participant. If any investor has not provided his broker or CSD Participant with his election instruction by this date, the CSD Participant or broker applies the default option, communicated in the notice of event, to the defaulter’s holdings as defined in the agreement that exists between them. For investors (private, institutional and foreign, including global custodians) and fund managers, this is the final date for providing the CSD Participant or broker with election instructions for those events that provide an option or call for an election that must be made by RD - 2. 

To facilitate this, the details of the event, such as dates and ratios or cash per share, are finalised two full weeks before RD. These details cannot thereafter be changed. Because on-market trades are settled on a rolling T + 3 basis, and the shares trade excluding entitlements from RD - 4, the position on which the entitlement will be based is effectively fixed and known by end of day on RD - 5. 

For brokers, this is the final date for receiving clients’ election instructions for those events calling for a response CSD Participants and Brokers apply the default option to those clients that have failed to furnish election instructions. To facilitate election on RD - 2, the details of the event, such as dates and ratios or cash per share, are finalised two full weeks before RD. 

Record Date (RD)

This is the date on which the holdings upon which the event entitlement is based are ascertained. RD is currently three business days after LDT (one settlement cycle). All affected parties (CSD Participants, brokers and investors) are required to anticipate their holdings on RD by taking into account all unsettled trades concluded on or before LDT and which are due to settle on or before RD. This enables investors to provide their CSD Participant or broker with their election based on their anticipated holdings by the election deadline date (RD - 2). 

Once settlement has run on RD, Strate ensures that the holdings on which the CSD Participant has based its election agrees with the holdings in that CSD Participants CSAs. In the event of a discrepancy, or if for any reason Strate is unable to resolve the discrepancy with the CSD Participant, or the CSD Participant is not able to provide amended election instructions in time, the following action is taken:

  • If the CSD Participants election exceeds the holdings in the CSA and the election covers more than one option, the election in respect of the default option is be reduced by the amount of the excess.
  • If the discrepancy exceeds the amount elected for the default option, this amount is eliminated and the remaining discrepancy subtracted from the next option. If there are more than two options, Strate decides which to adjust and advises the CSD Participant accordingly.
  • If the CSD Participants election is less than the holdings in its CSA, the remaining holding is applied to the default option.

Strate also ensures that the aggregate of all the CSD Participants elections agree with the election made by Strate on the total dematerialised holdings, which would have been agreed with the books of the company or transfer secretary. Strate provides the issuer or transfer secretary with details of the number of shares and/or cash due to Strate on payment date (RD + 1) in respect of each CSA. 

This is based on the election instructions received per CSA from the CSD Participants. Shares or cash details are provided to the issuer or transfer secretary for all entitlements, even for mandatory events where no election is made. The issuer or transfer secretary would by this stage already have ascertained the reconciled holdings on which the election from Strate is expected. 

Strate advises the CSD Participants of the holdings in their CSAs immediately after settlement has been completed on RD. This will be the holdings on which their election has been based. The message will also contain the CSD Participants expected entitlements per CSA. This date used to be known as Last Date to Register (LDR) and is the key date that determines all other trigger dates relating to corporate actions. Investors are able to anticipate their holdings on LDR from close of trading on LDT - 5. 

Record Date + 1 (RD + 1)

Dematerialisation and rematerialisation orders re-commence for the security affected by the event from RD + 1, the date on which entitlements are normally paid. Investors can plan the use of any entitlements due to them, as they will be received on this date. If they sell their entitled shares on LDT + 1, the trade will settle on this date.

Payment Date (normally RD + 1)

The issuer or transfer secretary must ensure that the cash is received for distribution by Strate by no later than 10h00 on this date. The issuer or transfer secretary must ensure that the shares are available for distribution by BOD to enable settlement to take place. This is particularly important in those cases where the investor may have sold the entitlement. 

The listings department of the JSE assists with the recovery of any claims that may arise as a result of the late payment of cash or shares. Investors receive their cash and/or share entitlements on this date, which is also the first date for settlements of any trades concluded in the entitled shares on or after ex-date. CSD Participants receive their cash and/or share entitlements on RD + 1. They are required to distribute the cash and/or shares entitlements to their clients on this date. 

New Issues

New issues are handled on the basis of DVP/RVP (Delivery versus Payment/Receipt versus Payment). Orders are entered by the CSD Participant of the issuer or transfer secretary and matched by the opposite leg created by Strate on behalf of the respective CSD Participant. 

Investors make application for the number of shares for which they wish to subscribe through their CSD Participant, which records the application and submits an MT565 message to Strate with the investors' instructions. If an application form is received directly by the issuer or transfer secretary, it must be accompanied by a cheque in payment for the subscription cost and shares allocated to the applicant will be in certificated form. 

Strate submits the MT565s to the transfer secretary, which handles it in the same way as it would had it been received in paper form. Once the allocation of shares has been made, the CSD Participant of the issuer or transfer secretary raises a DVP order for the number of shares allocated and the cost, per the MT565 received from the CSD Participant. The relevant CSD Participant receives an MT548 from Strate advising it of the trade, labelled "matched ready for settlement". By submitting the MT 565, the CSD Participant adds its commitment to settlement of the deal on allocation up to the number and cost subscribed for. This is to ensure that all shares allocated are in fact taken up. The date of the trade (closing date + 3) and the settlement date (trade date + 5, at this stage) is included in the MT564 submitted by Strate. 

All investors' subscriptions must be made to their chosen CSD Participant or broker, who will make the necessary arrangements with them regarding the payment, which will no longer accompany the investor’s subscription. The allocated shares are distributed to the shareholders via a DVP by the issuer or its agent and an RVP by the investor’s CSD Participant. As the CSD Participant or broker guarantees the settlement of these orders, it is up to them to arrange the payment details with the investor. Offers to take up additional shares in an existing company follows the same process. The subscription cost remains the property of the investor until payment against delivery takes place and any income earned on this money is for the account of the investor and not the issuer. 

Take up of Shares/NPLs in Respect of a Rights Issue

 A typical rights issue is handled as three different events:

  • Rights issue – the event that has the NPLs as the entitlement on the mother share. From a processing point of view, it replicates that of a capitalisation issue.
  • Rights closure – the event that removes or wipes out the NPLs after the closing of the take-up. From a processing point of view, it replicates a liquidation without payout.
  • Rights take-up – the event that handles those who wish to take up the rights to receive the new shares. These instructions are conveyed to Strate by the CSD Participants via an MT565

The take up of rights is handled on a DVP/RVP basis. The investor’s instructions are given to his chosen CSD Participant or broker. As with new issues, payment is only made on receipt of the distributed shares.

Application to Take up Additional Shares in a Rights Issue (Excess Rights Take-up) 

This follows the same process as new issues and is always handled as a different event from the rights issue and take up of NPLs. The event normally starts after the take-up of rights has been completed. The event closely resembles the process for a new issue, where any investor holding these shares is entitled to apply for the take-up. 

Election

The election process on optional events takes place as follows: Strate instructs the transfer secretary to pay the entitlements as calculated by Strate in terms of the election instructions received from each CSD Participant, per CSA. The CSD Participants elect on their holdings per CSA with Strate in terms of the election instructions received from each of their clients (brokers will be one of these clients in the records of the CSD Participant). 

The CSD Participants election is the aggregate of each individual client’s election instruction. The brokers, fund managers or global custodians elect on their holdings per CSA with the CSD Participant in terms of the instructions received from each of their own clients. Their election is also the aggregate of all their clients' election instructions. Owing to rounding, the number of shares received by Strate, the CSD Participants, brokers, fund managers, global custodians or any other entity may not tally with the number they require to satisfy the individual entitlements of each of their clients. Such shares have to be purchased or sold by Strate, the CSD Participant, broker or relevant entity in order to increase or decrease their holdings in their CSA to bring the figure into line with the aggregate of all their clients’ accounts in their books. 

In the case of cash, the shortfall relating to payments to clients is made good by the entity that was short. Any surpluses are used to offset the cost of acquiring additional shares or the payment of additional cash. To achieve this, it may in certain cases be necessary to sell the surplus shares that could have been received. The investor can accurately calculate his expected entitlement as all investors, irrespective of the size of their holdings, are treated in the same way. 

Fractions of Shares Resulting from the Calculation of Entitlements

Fractions of shares are no longer paid out in cash but are rounded up or down based on the standard rounding convention (less than 0,5 round down, and 0,5 and greater round up). This rule was introduced to ensure a smooth distribution of entitlements and to remove the risks and costs associated with the distribution of large numbers of small amounts that result from the payment in cash of the fractions of one share. In some cases an investor may not receive a cash payment, as in the past. However, this should be offset by the likelihood that the investor receives an additional share as a result of the rounding.

Claims in Respect of Entitlements on Open Trades as at RD

LDT ensures that claims of this nature no longer arise. Strate, in conjunction with the Settlement Authority, manages any adjustments to or payments of entitlements to clients that may be affected by the action taken by the Settlement Authority in rectifying a failed trade. 

The problems associated with the allocation or payment of entitlements by the seller to the buyer arising from trades outstanding on RD was the single largest cause of dissatisfaction and frustration experienced by investors in the SA equities market. These problems have now been eliminated, since the private investor always knows exactly whether or not his trade qualifies for participation in the fruits of the event. Institutional investors always know if their trades qualify. The costs and administrative burden associated with the monitoring and control of entitlements outstanding on unsettled trades on RD has been eliminated. 

Further, the service delivered to clients of CSD Participants and brokers has improved, while for fund managers the costs and administrative burden associated with the monitoring and control of entitlements outstanding on unsettled trades on RD has been eliminated. Additionally, all funds receive all their entitlements on due date. The change has reduced the number of queries received by issuers from dissatisfied members who have not received their entitlements due on unsettled trades on RD. The elimination of the need to claim makes investment in South African equities significantly more attractive. 

Proxy Voting

Proxy voting is based on the information provided to the transfer secretary/issuer by the CSD Participants. The CSD Participant or broker provides any investor wishing to attend and vote at the meeting with the necessary authorising documentation. Strate provides the transfer secretary/issuer with the holdings per CSD Participant per CSA together with the total number of dematerialised shares in issue. CSD Participant and brokers may only vote in terms of clients’ instructions, which are retained and controlled in the same way as for settlement instructions. 

The Foreign Listed Companies are as Follows:

  • Anglo American PLC
  • BHP Billiton PLC
  • Bicc Cafca LTD
  • Brait SA
  • Conafex Societe Anonyme
  • Dimention Data Holdings PLC
  • Halogen Holdings Societe Anonyme
  • Investec PLC
  • Liberty International PLC
  • London Finance and Investment Group PLC
  • Lonmin PLC
  • Lonrho Africa PLC
  • Monteagle Societe Anonyme
  • Old Mutual PLC
  • Hwange Colliery Company Limited