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Two CSDs muddy capital markets

The capital markets in Zimbabwe have been muddied.

We are at a defining moment in history where certain issues need to be looked at more closely, interrogated and resolved to preserve the integrity, reputation and safeness of investments. The Securities and Exchange Commission of Zimbabwe (SECZ) ought to take decisive action to protect investors and minority shareholders of listed companies in order to restore confidence in the Zimbabwean capital markets.

Zimbabwean capital markets commenced central securities depository (CSD) operations in 2014 after Chengetedzai Depository Company Limited (CDC) won and implemented a tender floated by the SECZ.

This was then followed by the implementation of the automated trading system (ATS) by the Zimbabwe Stock Exchange (ZSE) in 2015. From my understanding, these two automation projects where a welcome development that brought efficiencies to the Zimbabwean capital market. A CSD provides securities/share accounts, central safekeeping services and asset services enabling securities to be transferred and settled electronically after trading on a stock exchange.

Simply put, investors hold a CSD account, which is similar to a bank account, into which they can deposit and withdraw their shares according to Section 76-80 of the Securities Act 24:25. Once shares are credited to an investors account, they can be traded and mortgaged upon instruction of the investor.

A stock exchange is a market in which securities/shares are bought and sold. It is also used by companies to raise money.

Investors in listed companies are issued with shares in exchange for cash payments. A share is a unit of ownership of a company which carries certain rights and obligations for the investor.

According to the IMF it recommends emerging economies to have one CSD, which is the reason why SECZ issued a tender for a CSD for the capital markets industry about 10 years ago. Because of the magnitude of the project, Cabinet resolved that Government would acquire majority shareholding in the only CSD at that time, CDC.

But the ZSE announced that it was licensed to operate a CSD in September 2021. Most captains of industry agree that Zimbabwe’s capital markets are too small for two CSDs and the rationale behind SECZ licensing another CSD is still not well explained though accepted by some players. To the best of my knowledge, CDC was implemented professionally and, in a manner where wide market consultations were done to formulate the best policies, procedures and rules that work in Zimbabwe.

CDC has received an international A- rating which basically means the service provided is in line with the international standards and 1st world countries. CDC enjoyed a monopoly over a long period but with the introduction of competition, the CSDs will need to offer a competitive value to ensure that they attract customers.

I feel CDC could have done more in providing investor education and assisting the market in coming up with solutions to economic problems that could be buttressed by its platforms. Investors open accounts with the CSD through an agent of the CSD referred to as a depository participant. Depository participants include stockbrokers, custodial service providers and transfer secretaries.

With the introduction of the ZSE CSD in a rather abrupt way, a series of unhealthy competitive practices were bound to happen.

Perhaps this is a result of the market being so small that getting CSD business in ordinary channels can be very difficult and time consuming. This is because the CSD has to open accounts for investors one at a time and take share deposits or transfers likewise.

It also appears that the ZSE rushed the implementation of a CSD without market engagement and formulation of robust business process flows. The ZSE operated with technical glitches almost every day last week as a result of the “migration” of companies to its CSD following a SECZ directive that once a listed company chooses to change a CSD, all issued shares of that company should be transferred to the new CSD.

A group of investors challenged the legality of the migrations in a matter that is currently in the High Court. These individuals share the same sentiments that most investors have, that issued shares belong to them. As such, when these shares have been deposited/credited to their accounts, it is only them that have the power to issue an instruction for them to be moved to another CSD.

The matter is before the courts so it’s a subject for another day when the honourable judges are done with the case.

We are beginning to see the ZSE operating like “gangsters” in the manner in which they have been conducting themselves regarding the ZSE CSD. When you follow the matter closely, you will see that ZSE was censured by the Competitive and Tariffs Commission (CTC) for engaging in restrictive practices in acquiring business for its CSD.

ZSE had no option but to withdraw certain restrictive incentives it had offered companies listed on the ZSE after CTC’s intervention. The ZSE is somewhat a regulator of listed companies and it is not far-fetched to assume that they have been using this position as a regulator to make veiled “carrot or stick” offers to listed companies.

Listed companies, out of fear of being harassed in the future by the regulator if they do not accept ZSE CSD’s proposition, have been somewhat coerced into accepting to move CSDs to the ZSE. If you look much closer at this issue, the listed companies that have chosen to move CSDs have been deceived by the ZSE into believing that directors of these companies have power over shares issued in their companies.

It is an elementary principle that once a company issues shares in exchange for cash from an investor, those shares are now the private property of the investor. As such, an investor can elect to keep their share certificate in their safe, frame it and hang it in their home or deposit the shares with a CSD of their choice.

Directors of the listed companies that have “moved” CSDs have failed to understand the difference between a share deposit and a share register. A transfer secretary is contracted by a company to maintain a share register, which is a record of the ownership of issued shares at any given time. However, it is not the business of the directors to dictate where investors keep their shares whether in physical or electronic form.

As I mentioned earlier, the introduction of another CSD was bound to lead to cut throat competition and unhealthy business practices.

CDC obviously had a first mover advantage and it could take many years for ZSE to open new accounts and build up deposits to the level of CDC. One would think that the ZSE would have a certain level of etiquette and decorum in ensuring the orderly function of capital markets. They have, however, resorted to unorthodox and illegal means to get this business.

An analysis of the ZSE’s last annual report show that it reported an operating loss for the first time in a long while. These moves by the ZSE have exposed the nature of the characters behind this initiative. They do not realise that they have shot themselves in the foot by trying to cut corners and taking the “easy way out” in generating business for their subsidiary. Any investor should be worried to keep their shares with the ZSE CSD if one day they can wake and decide to take them wherever they want without the investor’s consent.

Unless each individual investor opens an account and deposits or transfers shares to the ZSE CSD, whatever shares that are being kept and transacted on the ZSE CSD are questionable. Taking share registers of listed companies that want to “move” and using them as the basis of crediting investor accounts with shares and recognising them as legitimate deposits is outright fraud.

SECZ should not allow this to happen and should bring sanity to the capital markets. Given that there are now multiple CSDs licensed, even though we did not need them in Zimbabwe, a legal framework should be put in place that compels all capital market players to implement systems that enable multiple CSDs to operate and for CSDs to transact with each other, just like how an individual can make or receive bank transfers from their bank or other banks.

It seems that the market is ahead of the regulator and the regulator ought to pull up its socks and catch up. Being owners of private property in shares and with constitutional property rights, investors remain with the right and choice on where they decide to keep their shares whether in physical or electronic form.

Simply put, an investor should elect which CSD to keep their shares without hindrance or discrimination. It is time for SECZ to stop the ZSE from trying to legitimise fake shares that will result in serious problems in the future. At a time that Zimbabwe is pursuing vision 2030, such practices and actions undermine the mantra of Zimbabwe being open for business and the Government respecting property rights of investors.

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