Thursday, October 21, 2010

Another Regulatory Mess From the DTI

The Securities Regulation Panel has become a thoroughly dysfunctional white elephant. It actually does have a seriously important series of duties to discharge, most of which are concerned with Mergers and Acquisitions (read takeovers).

The term of office of the SRP’s panel members expired on August 16 – a little more than two months ago. No replacements have been named or appointed by Trade & Industry Minister Rob Davies. Why not? Because he was waiting for the new Companies Act to go live this month. It hasn’t because so many issues have been raised around the Act that substantial amendments had to be drafted. That’s what happens when you toss the work on a really critical matter like this to external lawyers. It’s water under the bridge now but the question remains: why use Canadian lawyers when this country has many eminently qualified men and women who could have done a better job? 

Meanwhile, back at the SRP ranch a mess has been created. Back in April this year South African Coal Mine Holdings was the subject of takeover bids from three companies. SA Coal’s board said at the time that it wouldn’t recommend JSW’s offer which was priced at 25 cents compared with an offer by Cyril Ramaphosa’s Shanduka Coal which had bid 28 cents per share. 

Now a SENS announcement reveals that JSW is going to proceed with an offer to shareholders of 30 cents a share – “…subject to the approval of the SRP.” But I don’t see how the SRP can give its approval in the absence of its properly constituted Panel – unless the intention is to get the SRP executive to give it the nod subject to the Panel’s agreement when it is subsequently reconstituted. 

JSW has given an undertaking that, if the SRP later rules that the offer price should have been pitched higher, it will pay the difference between the 30 cents and whatever the SRP reckons to be equitable. I have to presume that Shanduka will have something pretty sharp to say about all this – when the SRP is finally cobbled together again.

That’s all very well, but it’s easy to see what a muddle and mess has been made of this – and all because bright sparks somewhere in government decided SA’s own lawyers couldn’t be trusted. The ramifications have spread rapidly – the affair has had the effect of worrying international investors. Not only do they have to contend with the rants of Julius (the mouth) Malema with his threats to nationalise the mining industry but they now see an inability on the part of regulatory authorities to arrive at quick and reasonable decisions. 


Holding back the tide

What is a Tobin Tax? It was first proposed by James Tobin, a Nobel Laureate economist back in 1972 and it was intended to place a penalty on short-term financial round tripping between currencies. As expressed later by the representative of an NGO, its intention was “…to throw some sand in the wheels of speculative flows.” That wasn’t Tobin’s own interpretation. He told Der Spiegel in 2001 that: “The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations.”

Of course what has raised the Tobin Tax here is the manner in which the rand has galloped down the strengthening straight. It is headed, believes economist Chris Hart, for R6.50 = $1. Let me add that Hart was, to my knowledge, one of the very few economists, if not the only one, to call the rand in that way and to that extent. 

A strong rand has a range of benefits and disadvantages. It makes it effectively cheaper to buy imports and that helps to keep inflation on the deck. But it also means that exporters earn fewer rand unless they push up the price of their products in dollars – which could make them uncompetitive in a tough market. I have always personally thought an important job of any government is to defend the currency – and successive South African governments haven’t discharged that duty with much good effect. 

In South Africa’s case the conventional wisdom is that the flow of foreign money into the country represents investors seeking better interest rate yields than those available in the industrialised “hard” currency countries. This holds that, once rates in those countries improve, the ‘hot’ money will immediately be withdrawn and that will send the rand into another of its favourite spiral dives. There is a counter-argument to this which was touched on the other day by National Treasury director-general Lesetja Kganyago when he put the idea that not all the money flowing into the country was necessarily ‘hot’ (meaning speculative) and that at least some of it was for long-term investment purposes. If that’s the case – and I hope it is – it implies that, when interest rates abroad turn, the flood of money out of South Africa may not be as substantial as many fear.

The issue, though and for the purpose of this column, is does the Tobin Tax work? As Brait economist Colen Garrow noted in Business Report (August 26), Indonesia and Brazil were able to scare off speculators without deterring investors and those countries applied variations of the Tobin Tax idea. But the problem that attends a tax of that kind is that it must be administratively easy and it must work swiftly. These are not attributes for which this country is exactly famous. 

I doubt a Tobin Tax will be introduced here – though it is certainly interesting to note Reserve Bank Governor Gill Marcus’s latest comment when she told investors in Cape Town that South Africa “…needed to consider special support measures for affected industries.” (Reuters) “These are extraordinary times which call for extraordinary measures,” she said. 

A last comment. Writing about Tobin in 2009, London School of Economics Professor Willem Buiter said: “Tobin was a genius…but the Tobin tax was probably his one daft idea.” (Financial Times) 

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