The JSE is examining trading in Capitec shares by two directors just days before the company issued a profit warning, "to determine whether there are any issues of regulatory concern".
But, JSE director of market regulation Shaun Davies told Moneyweb the transactions may not have impacted trading on the bourse as they were off-market transactions.
Davies' response prompted Shane Watkins, chief investment officer of All Weather Capital, to suggest the JSE is opening up a "pandora's box" of opportunity: "Are they suggesting you can use insider information as long as you're not trading on the stock exchange?"
Watkins said that as a listed company it doesn't matter whether the trading was on or off the market.
Sequence of events
According to a Sens announcement issued by Capitec on Monday, an entity controlled by Michiel le Roux completed a hedging transaction on May 28 involving 1.25 million of Le Roux' Capitec shares at a deemed value of R1.1 billion. Hours earlier it had issued a Sens announcement relating to a similar type of hedging transaction undertaken by a company linked to Chris Otto and involving 200 000 Capitec shares. Otto, who like Le Roux, is a long-serving member of the Capitec board, completed his transaction on May 27.
On May 29, hours before its annual general meeting, the board warned shareholders: "There is a reasonable degree of certainty that Capitec's headline earnings per share and earnings per share will decline by more than 20%, or more than 509c and 510c respectively."
On Tuesday Capitec's chief financial officer Andre du Plessis told Moneyweb that Le Roux had obtained clearance for the transaction on May 4, more than three weeks before the profit statement was issued.
Capitec released its annual results for the year ended February on April 14 and informed the market of what it knew about the expected impact of the pandemic at that stage, said Du Plessis. The board was given no further information between then and May 4 when Le Roux obtained clearance. It was well after May 4 that management became reasonably certain that a trading update was required, said Du Plessis. "The forecast that led to the trading update was shared with the board on May 22."
Du Plessis explained that Le Roux had signed the agreement on May 4 and the counterparty began to trade in small volumes. "They concluded the trades on May 28 upon which Michiel (Le Roux) was in a position to publish the required information relating to the transaction on Sens."
Du Plessis told Moneyweb that the circumstances around Otto's trading were similar.
However Watkins was not persuaded by Du Plessis' explanation, saying: "The authority given to an insider to trade doesn't hold in perpetuity, otherwise directors could merely get a blanket approval at the beginning of the year." He said that when the circumstances changed at Capitec – prompting the need for a profit warning – the approval should have been rescinded.
"Even if Capitec can demonstrate what it did was legal, it reflects poorly on the company," said Watkins.
This is the second time within three months that Le Roux' hedging strategy has made the headlines. In March Capitec issued a statement, without mentioning Le Roux, explaining why R49 billion had been wiped off the bank's market value in a matter of hours. "Banks that are counterparties to collar transactions are inclined to sell the underlying share when contracted limits are breached," said Capitec following a 39% tumble in the share price to just above R550.
Le Roux, who co-founded the bank in 2001, holds an indirect 13.3 million Capitec shares – making him the largest shareholder after PSG unbundles the bulk of its holding. A combined 3.75 million of his shares are tied up in collars, which were put in place in recent years to provide security for bank loans.
On Tuesday the share price closed 3.74% higher on the day at R903.83.
Brought to you by Moneyweb
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