‘Damning’ high court judgment sets aside Mining Charter’s re-empowerment obligations

Written by Ciaran Ryan. Posted in Journalism

Court finds that the Mineral and Petroleum Resources Development Act does not empower the minister to make law. From Moneyweb.

The Minister of Mineral Resources and Energy, Gwede Mantashe. Image: GCIS
The Minister of Mineral Resources and Energy, Gwede Mantashe. Image: GCIS

A full bench of the Gauteng High Court this week ruled against the minister of Mineral and Energy Resources and in favour of the Minerals Council of SA, setting aside a number of key clauses within the Mining Charter III, including the re-empowerment clause which required mining rights holders to maintain black economic empowerment (BEE) ownership targets of 26% for pre-existing mining rights and 30% for new mining rights.

Also set aside were the charter’s procurement, supplier and enterprise development targets, and some of its penalty and enforcement provisions.

“The judgment vindicates my long-held view that the charter, in all its iterations, was nothing more than a socio-economic compact between government, labour and the mining industry,” says Peter Leon, global co-chair for Africa at law firm Herbert Smith Freehills. “The original charter, signed in October 2002, reflected exactly this principle. Regrettably the 2010 and 2018 versions purported to turn what was no more than a compact into a binding legislative instrument with all the associated regulatory uncertainty.

“Hopefully this carefully reasoned and strong judgment will give the DMRE cause to reflect on what has gone wrong in the last ten years and put the industry back on a much needed path of regulatory certainty and predictability.”

The case was originally brought in May 2020 by the Minerals Council against the minister and 13 other defendants, including a number of trade unions and community groups. The ruling says the question in dispute was whether the minister has the power in terms of Section 100(2) of the Mineral and Petroleum Resources Development Act (MPRDA) to make law in the form of subordinate legislation, and whether the charter constitutes law or policy.

The minister and other respondents argued that the minister did indeed have the power to make law through the charter, which would then impose binding obligations on mineral rights holders.

The Minerals Council disagreed, arguing that the charter is a formal policy document, and is only binding on holders of mining rights “to the extent that its terms have been lawfully incorporated by the minister into such mining rights.”

In response to the judgment, the Minerals Council South Africa says it welcomes the ruling that “the Mining Charter 2018 is a policy document, that the continuing consequences of previous black economic empowerment deals should be recognised and that the specific challenged provisions in the document should be removed.

“The Minerals Council and its members remain fully committed to the transformational objects of the Mineral and Petroleum Resources Development Act (MPRDA), but the objectives must create policy and regulatory certainty for long-term investment and inclusive growth in the sector.”

The minister had argued that the transformation objects of the MPRDA cannot be achieved unless the charter is binding subordinate legislation. The Gauteng High Court said the flaw in this argument is that it ignores the enforcement structure provided by the MPRDA.

The minister is able to enforce empowerment obligations through the issue of mining rights, which impose obligations on the rights holder in terms of the act, not the charter. Some of the enforcement tools available to the minister include the approval of a social and labour plan which, if violated, allow the minister to suspend or cancel the right.

The minister claimed he needed the power to make subordinate legislation in the form of the charter to advance the transformation of the mining sector – which, he said, it had failed to do despite previous charters. In support of this argument, he presented in-house studies to the court, though these were disputed by studies presented by the Minerals Council showing there had, indeed, been substantial transformation in the sector.

The minister also argued that incorporating charter provisions in mining rights would be ineffectual in achieving transformation because of the relatively short duration of mining rights.

The impact

Commenting on the judgment, Herbert Smith Freehills says the court once again confirmed the “once empowered, always empowered” principle.

This means that the Historically Disadvantaged South African (HDSA) ownership status of existing mining right holders who wish to renew or transfer their rights must automatically be recognised by the DMRE (Department of Mineral Resources and Energy).

“The judgment has a materially positive impact on the security of tenure of existing mining rights holders. As a result, existing mining right holders now know that if they previously satisfied the empowerment requirements imposed under any version of the charter, they will not be required to do so again,” says Herbert Smith Freehills.

In view of the fact that the court has determined the charter to be a policy document rather than a legally-binding instrument, mining right holders may, but are not legally obliged to, comply with the remaining requirements imposed under the charter.  This is subject to two qualifications:

  • Not all of the provisions of the charter were reviewed and set aside. For example, the clauses which concern employment equity, human resource development, mine community development, and housing and living conditions still form part of the charter. These clauses will not automatically impose obligations on the holders of existing mining rights, but may do so if such requirements are incorporated as specific terms or conditions of the mining right.
  • Second, the clauses which are set aside have now been removed from Mining Charter III. A significant example is the charter’s procurement, supplier and enterprise development requirements.

The judgment also set aside provisions in the 2018 Charter related to the Diamonds Act and Precious Metals Act to impose targets set out in the charter on licence holders under those acts.

Also removed from the charter by the judgment were provisions in the 2018 Charter related to mining companies not complying with ownership and mine community development requirement and thus being in breach of the MPRDA.

Under the previous version, this meant rights holders could potentially have their mining rights suspended or cancelled.

“The Minerals Council will continue to engage the DMRE on a constructive basis to create the necessary policy and regulatory certainty and to attract much greater investment into the exploration and mining sectors,” says the Minerals Council statement.

Cryptos take a dive as Evergrande teeters on the edge

Written by Ciaran Ryan. Posted in Journalism

All markets have been hit by debt troubles at the Chinese real estate company. From Moneyweb.

Most forms of commercial paper will be affected if Evergrande defaults on loan repayments that are due this week. Image: Bloomberg
Most forms of commercial paper will be affected if Evergrande defaults on loan repayments that are due this week. Image: Bloomberg

The troubles facing Chinese real estate company Evergrande lopped 2.5% off the Dow Jones Industrial Average and nearly 11% off Bitcoin (BTC), 15% off Solana (SOL) and 16% off Ethereum (ETH).

The question many are asking is what Evergrande has to do with cryptos to prompt this general sell-off?

The answer to that is there probably is a connection in the form of US stablecoin Tether (supposedly backed 1:1 by the US dollar).

Tether is the fourth-largest crypto with a market cap of $68 billion, and part of its backing is rumoured by be commercial paper issued by Evergrande – notwithstanding Tether’s assertions to the contrary.

Many expected to take a hit

Even if Tether does not have any direct investment in Evergrande, most forms of commercial paper will take a hit should Evergrande default on loan repayments which fall due this week.

Evergrande is a major Chinese property development company that may default on more than $300 billion in debts, likely sparking a broader financial calamity in China and across the globe due to the number of companies, banks and debt issuers with exposure to the company.

Read:Wall Street’s message on EvergrandeEvergrande tumbles further after S&P says default is likely

SA shares slide, as default risks haunt Evergrande

Tether is used as a surrogate for the US dollar and as a way for traders to park profits from crypto investing, without having to leave the crypto eco-sphere.

According to Coindesk, bitcoin’s share of crypto assets under management has fallen from 81% in January to 67% this week.

Solana’s price was hit by the general crypto sell-off and a 20-hour network outage, though this did not stop investors piling in as the crypto retreated from its recent high of $210 to around $141.

Revix says while Evergrande may be driving the global correction in asset prices, this isn’t deterring pro traders from buying the dip.

El Salvador buys the dip

Among those buying the dip over the last week was El Salvador, which announced that it had acquired another 150 BTC at below $46 000, bringing the country’s total BTC holdings to 700. El Salvador recently announced that it would accept BTC as legal tender. That got the Bitcoin crowd excited, but S&P Global warned that it would make the Central American government’s efforts to raise a $1 billion loan from the Internal Monetary Fund more problematic.

Salvadoran President Nayib Bukele tweeted: “They can never beat you if you buy the dips.” Then added: “Presidential advice.” This was clearly not intended as financial advice for the masses.

Market sell-off a sign of broader risk aversion

The crypto sell-off, prompted by a break below the S&P 500 Index 50-day moving average support, may signal a deeper downside break for risk assets, with Morgan Stanley warning of potential for a 20%+ correction for bitcoin.

The Federal Reserve’s Open Markets Committee is expected to announce the tapering of its monetary stimulus in the next two months, but should it decide to push this out to 2022, risk assets may recover their recent losses, according to Morgan Stanley.

While bitcoin has been equated to digital gold, its price behaviour more closely resembles that of other risk assets.

Read: Evergrande meltdown ensnares stocks with very little China links

FSCA’s warning on Binance is the latest salvo against crypto operators

Written by Ciaran Ryan. Posted in Journalism

Binance, the world’s largest crypto exchange, has come under regulatory scrutiny in several countries. From Moneyweb.

The company says the notice was ‘perhaps a precautionary move’ and more of ‘a warning that crypto is not regulated’. Image: Darrin Zammit Lupi/Reuters
The company says the notice was ‘perhaps a precautionary move’ and more of ‘a warning that crypto is not regulated’. Image: Darrin Zammit Lupi/Reuters

Earlier this month the Financial Sector Conduct Authority (FSCA) warned the public to be cautious in dealing with Binance, the world’s largest crypto exchange.

This follows similar warnings in the UK, Japan and Canada.

Read: UK financial regulator bars crypto exchange Binance markets

Head of enforcement at the FSCA, Brandon Topham, says Binance has engaged with the FSCA with a view to addressing the concerns raised by the regulator, though the warning still stands.

“Our concern is that Binance is offering products to South Africans for which you need a licence from the FSCA, and here we are talking about financial products such as derivatives rather than cryptos – which are unregulated.”

The notice says the FSCA received information that Binance Group, situated in Seychelles (which Binance disputes*) has a Telegram group that South Africans can join to gain access to the crypto exchange.

Read: FSCA suspends ZAR X’s exchange licence

“The FSCA would like [to] caution that in addition to this entity not being authorised to provide any financial services or business, crypto-related investments are currently not regulated by the FSCA or any other body in South Africa. As a result, if something goes wrong, you’re unlikely to get your money back and will have no recourse against anyone,” says the FSCA notice.

The regulator says Binance is not authorised to give financial advice or intermediary services in SA in terms of the Financial Advisory and Intermediary Services (Fais) Act.

Read:FSCA issues and withdraws warning on Ovex crypto exchange

FSCA apologises to Ovex, says company does not require a financial services licence

Binance grew from nothing to the world’s largest crypto exchange in four years, generating daily volumes of around $2 billion. The exchange was established in 2017 by Chaopeng Zhang, a Chinese-Canadian coder also known as CZ, who previously worked at the Tokyo Stock Exchange and Bloomberg. He also spent time as an employee of McDonald’s. According to Forbes, his net worth is around $1.9 billion, virtually all of this in the form of cryptocurrencies.

Binance timed its entry to the market in 2017 to coincide with a huge upswing in crypto adoption.

While initially limiting its offering to cryptos, it later diversified into trading forex pairs and a range of derivatives, and this is what appears to have brought it unwanted attention from regulators.

It recently announced that it would discontinue certain services in Singapore after falling under regulatory scrutiny there.

Binance says it is working with regulators across the globe to ensure it remains compliant.

Brenton Naicker, business development manager for Binance Africa, says the company has been in contact with the regulator, and the notice issued by it was perhaps a precautionary move and “was more a warning that crypto is not regulated – with specific reference to us.” The reasons for the FSCA warning were explained to customers, and has not had a negative impact on the business.

In response to the FSCA warning, Binance issued the following statement:

“We are aware of the notice published by the South Africa FSCA on September 3. At the outset, we would like to take this opportunity to clarify that Binance.com does not provide financial advice or render any intermediary services. We have clearly set this out in our terms of use, which can be found here at: https://www.binance.com/en/terms.

As the FSCA stated in its notice, cryptocurrency-related activities are currently not regulated by it or any other body in South Africa. In order to bridge the gap and to uphold our commitment to protecting our users, Binance.com has set stringent and industry-first standards. For example, Binance.com has recently implemented the Intermediate Verification requirement for all users which supports Binance’s Know Your Customer (KYC) and Anti-Money Laundering (AML) efforts. In addition, to ensure that our users are as protected as possible, since 2018, Binance.com has implemented a Secure Asset Fund for Users (SAFU) where we allocate 10% of all trading fees received into it to offer protection to our users and their funds in extreme cases.

Furthermore, Binance.com is committed to taking a collaborative approach in working with regulators and law enforcement globally, and in particular, Binance.com is continuously collaborating with the FIC (Financial Intelligence Centre), the major regulator of financial crimes in South Africa. Binance.com is registered with the FIC as a voluntary self-disclosure institution. As a member of this programme, Binance complies with the FIC Act obligations relating to establishing and verifying of clients’ identities, record keeping and reporting suspicious or unusual transactions in terms of section 29 of the FIC Act.

In the course of 2021 to date, Binance.com has collaborated with the FIC on over 462 cases, and in turn, we understand that the FIC collaborates with the FSCA for further investigations when necessary. We have reached out to the FSCA for more clarification on their statement and look forward to working with them and addressing any concerns they may have.

In terms of social media outreach, we have an official Binance South Africa Telegram community which promotes blockchain education and community announcements.

*It is not intended, nor does it provide any financial advice. This community is moderated by staff, admins and Binance ‘angels’. For completeness, we would also clarify that we do not have an associated entity named Binance Group in Seychelles.”

Komape family wins court battle seven years after their son drowned in a pit toilet

Written by Ciaran Ryan. Posted in Journalism

State must provide court with reports every six months with details of steps taken to eradicate pit toilets. From GroundUp.

James and Rosina Komape and their eldest daughter, Lydia, sit in the Limpopo High Court in November 2017. Archive photo: Ciaran Ryan
  • In 2014 five-year-old Michael Komape drowned in a pit toilet at his school outside Polokwane.
  • Earlier judgments ordered the Limpopo education department to eradicate pit toilets at schools.
  • But after the department provided a plan that would take over a decade to implement, the Komape family went back to court.
  • The Limpopo High Court handed down a judgment on Friday in favour of the family, compelling the state to provide a list of all schools with pit toilets within 90 days along with plans to eradicate them.
  • The state is to provide the court with reports every six months on progress towards eliminating pit toilets.

The Limpopo High Court handed down judgment in favour of the Komape family on Friday, with an order compelling the provincial administration to provide, within 90 days, a detailed list of all schools in the province with pit toilets along with plans to eradicate these.

The defendants in the case — the Limpopo Department of Education (LDOE) and the Department of Basic Education (DBE) — have also been ordered to show how the funds for this programme will be sourced, and to explain what interim measures will be implemented “to address schools’ urgent sanitation needs and immediate safety risks pending the delivery of permanent sanitation measures”.

Michael Komape was five years old when he drowned in a pit toilet at Mahlodumela Primacy School in Chebeng Village, outside Polokwane, on 20 January 2014. The case has attracted international notoriety, and thrown a spotlight on the LDOE and the use of pit toilets in some 1,500 schools across the province.

Read the judgment

Public sector law firm SECTION27, which provided legal support to the Komape family, welcomed Judge Gerrit Muller’s judgment.

“The judgment is a vindication of the rights of learners in Limpopo to safe and dignified sanitation. It follows a six-year legal battle to ensure that the Limpopo Department of Education and the Department of Basic Education eradicates pit toilets in that province,” says SECTION27 in a statement.

The case was first heard in the Limpopo High Court in 2017. The Komape family initially lost its claim for damages in the Limpopo court, but this was overturned in the Supreme Court of Appeal in 2019 when the family was awarded R1.4 million.

The second part of the 2017 case dealt with the family’s request for a structural order directing the DBE and LDOE to supply each school in Limpopo with safe and dignified toilets. In 2018, the Limpopo High Court ordered the state to conduct a comprehensive audit of sanitation needs – detailing the names and locations of all schools with pit toilets in the province – and provide a comprehensive plan for the installation of new toilets. Since the structural order, the LDOE and DBE have filed two affidavits with the court – on 31 August 2018 and 12 May 2020.

The LDOE and DBE proposed replacing pit toilets at 1,498 schools in the province over a period of 14 years, which the Limpopo High Court found was unduly long.

SECTION27 returned to the High Court on 6 August 2021 seeking an order declaring that the LDOE and DBE’s plans were unconstitutional and in breach of the structural order. It asked the court to direct the Member of the Executive Council in the Limpopo Department of Education to remedy the shortcomings of the plan to ensure that it is constitutionally compliant. It also asked the court to supervise the updated plan and its implementation.

In reaching his decision, the judge relied on a judgment in another case, Government of the Republic of SA and Others v Grootboom and Others, which dealt with access to adequate housing and was tasked with finding a way to achieve the progressive realisation of that right, including whether public money could be better spent in the pursuit of these rights.

While SECTION27 argued for the creation of a special task team to implement the structural order, the court said such a step was not warranted at the moment. “The defendants must be given the opportunity [to] put up a revised plan which meets the test of reasonableness,” reads the judgment. While financial constraints are a fact of life, “adequate financial provision should be put in place to address the plight of the learners in schools with pit toilets.”

The state is to provide the court with reports every six months with details of steps taken to implement the revised plan.

“We are delighted that the court has recognised the urgent need to eradicate pit toilets in our schools and directed the DBE and LDOE to fulfill the constitutional rights of learners to safe and dignified sanitation,” said Faranaaz Veriava, head of the education rights programme at SECTION27.

The order requires the state to provide a detailed inventory of schools’ sanitation needs, including a list of pit toilets across schools in the province, and how the province intends to implement the revised sanitation plan. The state is also required to provide revised deadlines for the eradication of pit toilets, along with detailed budgets.

When 10 cryptos (or 20) are better than one

Written by Ciaran Ryan. Posted in Journalism

Smaller cryptos like Ethereum, Cardano and Solana are outpacing the granddaddy of them all, Bitcoin. From Moneyweb.

Crypto volatility can be somewhat softened by investing in a crypto portfolio. Image: Bloomberg
Crypto volatility can be somewhat softened by investing in a crypto portfolio. Image: Bloomberg

Bitcoin is being outpaced by smaller crypto assets slugging it out for dominance of a new blockchain-dominated financial architecture known as decentralised finance (DeFi).

Bitcoin (BTC) might have grown by a compound average rate of 200% for the last decade, but that’s beginning to pale alongside the super-charged growth of smaller cryptos like Ethereum (ETH), Cardano (ADA), Solana (SOL) and Polkadot (DOT), all of which are contenders for dominance of the DeFi space.

ADA is up 2 456% over 12 months, ETH 895%, and SOL is up 40-fold.

ETH remains the king of DeFi for the time being, but the technology behind Solana and Cardano could unsettle this. You can already use your cryptos as collateral to lend, borrow and earn interest, but a host of new financial services and business processes, from insurance to company audits, will soon be widely available on these blockchains.

Read: Why cryptos should be a part of your financial plan

The big criticism of BTC is that it is a speculative asset, a form of digital gold, with no real business behind it. That’s not true of Ethereum and other coins battling it out for control of the emerging financial architecture called DeFi.

Read:Is bitcoin the new gold?

Crypto is no goldGold is good but Bitcoin better for $7.5bn hedge fund

Picking winners in the crypto space is never easy, but one proven way to capture some of growth in the up-and-comers is through bundled investments such as that offered by Revix, BitFund, EC10 and Blue Token.

All of these offer diversification and exposure to some of the more exciting stories in the crypto space.

These are the crypto equivalent of unit trusts in the stock market, and they all differ in how the constituents are selected and in capping the weighting placed on the constituents.

In most cases, this prevents bitcoin (which accounts for more than 50% of the crypto market cap) exercising too much dominance in the fund.

As the results below demonstrate, all these funds outperformed a direct investment in BTC over the last 12 months.


Revix’s Top 10 Bundle spreads your investment across the top 10 cryptos as measured by market cap, with a 10% weighting in each. The bundle is reweighted monthly so that the underlying cryptos maintain their 10% weighting.

Revix’s Top 10 Bundle is showing a 642% gain over 12 months, against 306% for a direct investment in Bitcoin. The Top 10 Bundle’s performance was boosted by giving 10% weightings to smaller, faster-growing coins like SOL and ADA, and placing a cap on the slower-growing BTC.

Source: Revix


EC10 spreads your investment across the top 10 cryptos measured by market cap, which means BTC makes up about 54% and ETH 25% of the portfolio.

The chart below (measured in rands) shows that an investment in EC10 would have generated a return of more than 300% over 12 months, against 256% for a Bitcoin-only investment.

Source: EC10

Blue Token

Blue Token is a digital token with 14 underlying constituents, comprising the 14 largest crypto assets (with no one crypto exceeding 25% of the total). The two largest crypto assets, BTC and ETH, account for 50% of the token’s value, with the remaining 12 crypto assets making up the remaining 50%. The minimum weighting is 2.5% for any constituent.

Blue Token achieved a return of 556% over the 12 months to September 1, powered by some strong gains by ETH, Cardano and Solana.

Blue Token is controlled by Digital Horizon, with the technology provided by Stratum.

Blue Token 12-month returns

Source: Bluetoken.io


BitFund has a Balanced 10 and a Capped 20 portfolio – made up of the top 10 and 20 coins as measured by market cap. The Balanced 10 fund has roughly 60% exposure to BTC and 22% to ETH. The Capped 20 portfolio caps exposure to any single coin to 15%. Both funds are rebalanced weekly to maintain market cap weightings.

Says BitFund co-founder Josh Miltz: “When holding a portfolio whose constituents depend on market cap, it is important to devise a strategy that outlines when cryptos enter and exit your portfolio. For example, if you are holding the top 10 cryptos, and a new crypto enters the top 10, at what point do you sell out of one to buy the other?

“There are various things to consider here. For one, if you were to trade every time the top 10 constituents change, you could end up trading multiple times per week or even per day in a volatile market.

“In this scenario your returns can be severely affected by trading costs,” says Miltz.

“On the other hand, if you only trade once every month or less, you risk missing out on further gains that a new constituent might make if it continues on its trajectory that brought it into the top 10 in the first place. You also risk holding on to an asset for too long that might have dropped out of the top 10 due to its own downwards trajectory.”

BitFund rebalances weekly, which is frequent enough to tap into the natural performance of the market, but infrequently enough to avoid pushing trading costs up too high, says Miltz.

After fees of 2.4% a year, both portfolios significantly outperformed BTC. Over the past year, BTC has returned roughly 240%. Over the same period, the Balanced 10 performance was 315% and the Capped 20 performance was 419%. In a market where the altcoins have been performing very strongly, it is clear that the early exposure to smaller coins in the top 20 portfolio has led to greater performance.

The outperformance of smaller coins might be a feature of bull markets, but what about bear markets?

During declining markets, BTC has shown itself less volatile than smaller coins. Those funds holding fewer, but more well established cryptos, seem to hold their value better.

Bitcoin vs Capped 20 portfolio

Source: BitFund

Bitcoin vs Balanced 10 Fund

Source: BitFund

The bottom line: you cannot escape the volatility of cryptos, but you can soften it somewhat by investing in a crypto portfolio. Apart from diversification, an investment in these funds gives you exposure to some truly extraordinary crypto assets like ADA and SOL.

Will the FSCA’s R50m fine on Viceroy have a chilling effect on research?

Written by Ciaran Ryan. Posted in Journalism

Yes, says Viceroy – and that makes it less likely that the next Steinhoff will be picked up ahead of time. From Moneyweb.

The obvious intention of the law is to prevent market manipulation under cover of research, but subjectivity is an issue. Image: Shutterstock
The obvious intention of the law is to prevent market manipulation under cover of research, but subjectivity is an issue. Image: Shutterstock

Analysts and research teams focused on South African stocks will no doubt be revisiting many of their recommendations – buy or sell – in light of the Financial Sector Conduct Authority’s (FSCA) imposition of a R50 million fine on Viceroy Research last week for a series of 2018 reports on Capitec that were deemed to be false or misleading.

Among the claims made by Viceroy was that Capitec was understating its uncollectible loan book to the extent of about R10 billion, and was ‘curing’ this by issuing new loans to delinquent borrowers. This was denied by Capitec and the South African Reserve Bank, which rushed to its defence.

Read:FSCA hits Viceroy with R50m penalty for false, misleading statements on Capitec

Viceroy Research is a ‘hit squad,’ Kganyago says

The Viceroy reports caused a 23% drop in Capitec’s share price (from which it has more than recovered).

There has been some concern among analysts as to whether this fine, particularly the size of it, might have a chilling effect on research going forward.

Perhaps the more important question is: can two analysts look at the same data and come to entirely different conclusions?

Consider the case of Marvin Rothman, who predicted (correctly) that Donald Trump’s Taj Mahal casino in New Jersey would fail. Rothman was fired after his boss received a letter from Trump with a demand to apologise or argue it in court.

Or the case of Investec analyst Anthony Geard who called on former Tongaat CEO Peter Staude to resign because of the company’s ‘appalling’ financial results.

Investec issued an apology for causing any embarrassment to Staude, “with whom we have a long and fruitful relationship …” Tongaat was later found to have fudged its financial statements and Staude eventually did take the advice offered by Geard.


Or consider the dozens of analysts issuing glowing recommendations on Steinhoff, weeks before it imploded in a fireball of financial fraud.

Ironically, Viceroy got this call right. The web of intricate transactions underlying the business, when aggregated, spelt trouble to the analysts at Viceroy.

There were a few analysts and fund managers in SA that were uncomfortable with Steinhoff, among them Adrian Saville, then at Cannon Asset Managers, who sold out of the stock on the grounds that it could not easily be understood, and this at a time when Steinhoff shares were on a rampage.


Short sellers are regarded with suspicion by CEOs, because of the potential to hurt the value of company stock (and their own net worth).

Liberty founder Donald Gordon was known to rail against scrip lending when it was used to support short sales. “But the truth of the matter is that Liberty was losing direction and deserved to be downrated,” says one fund manager.

Read: ‘Shorting’ in SA

“We definitely need more interrogative research that causes us to challenge our assumptions. If we had more of this kind of research, perhaps we would have been alerted to trouble at African Bank earlier than was the case,” says Geoff Blount, investment director at TIP One fund.

“No one complains when analysts put out a strong buy signal, but you can certainly expect complaints when you put out a sell recommendation. There is a fine line here, where you don’t want to be seen to manipulate the market, at the same time you want robust research that does not necessarily go along with the consensus,” he adds.

Viceroy Research says it is appealing the FSCA fine which “seeks to shut down critical analysis of SA companies.”

The US-based research firm says it met with and provided its working papers to the FSCA, which appear to have been ignored.

Announcing the fine last week, the FSCA was at pains to emphasise that the penalty was not intended to discourage research recommending a sell on SA stocks, only that the recommendation must be based on information that is not false, misleading and deceptive. And if research is based on misleading information, it must be corrected.

Viceroy replies that the FSCA’s findings are predicated on Viceroy not publishing ‘full and frank corrections’ to its analysis, even after Capitec’s open response to its questions. In other words, it continues to stand behind the research, which the FSCA found had benefitted a financial partner who had taken a short position in Capitec shares.

Market abuse

Section 81 of the Financial Markets Act deals with market abuse, and makes it clear that once the author of a report is made aware that it contains statements that are false, misleading or deceptive, a full and frank correction must be issued without delay.

Says Peter Major, director of mining at Mergence Corporate Solutions: “We all know how hedge funds work. They pump up a stock as much as possible, any way they can, before they short the hell out of it. And they do vice versa when they want to buy it.”

Viceroy’s response to the FSCA suggests it does not feel the need to issue a full and frank correction.

The obvious intention of the law is to prevent market manipulation under cover of research. But there may be times when two analysts presented with the same facts come to entirely different views of a company.

There is an element of self-censorship infused in much of the research issued on SA stocks, and has been for decades. If you want access to management, you had probably better remain within the consensus parameters.

As one fund manager told Moneyweb, when presented with a contrarian view by an analyst, one has to test the assumptions underpinning that view. And while the consensus view is safe, this too needs to be challenged. “It keeps us on our toes,” he says.

High profile fund managers are often publicly bullish on shares they already hold in their portfolio, and are brazenly talking up their books while quietly selling into a rising market. Is that not market manipulation?

Whistleblower aspect

What about research based on whistleblower testimony that is not yet in the public domain? SA is rife with cases of whistleblowers being silenced with threats of legal action, notwithstanding the supposed armour of the Protected Disclosures Act.

Media outlets are often the last refuge for those with a dangerous story to tell. Whistleblower testimony may be wildly at odds with the official version, and may be wrong in aspects, but that should not prevent it from being tested, scrutinised and ventilated.

The penalties for launching SLAPP (strategic lawsuit against public participation) suits that are intended to intimidate and silence critics should be far more threatening than they are, and many countries now have some form of anti-SLAPP suit legislation in place. SA has yet to go down this road, and perhaps it should.

It remains to be seen whether Viceroy prevails in its appeal of the R50 million fine. Large fines issued by the FSCA against Steinhoff and Tongaat were later reduced – Steinhoff from R1.5 billion to R53 million, and Tongaat from R118 million to R20 million.

This was to spare shareholders having to take more pain than that already suffered. In October 2020, the FSCA hit former Steinhoff CEO Markus Jooste with a fine of R161 million for insider trading, after he notified three friends by SMS to sell their shares.

The broader question is what impact this will have on research going forward. That remains to be seen.

Mpumalanga residents head to court to halt 20-hours-a-day power cuts

Written by Ciaran Ryan. Posted in Journalism

Daily outages threaten businesses and the health of residents. From Moneyweb.

The municipality has a long history of service delivery dereliction. Image: Govan Mbeki Municipality's Facebook page
The municipality has a long history of service delivery dereliction. Image: Govan Mbeki Municipality’s Facebook page

A residents association in the farming town of Bethal in Mpumalanga has dragged the local Govan Mbeki Municipality (GMM) and Eskom to court, claiming that power cuts of up to 20 hours a day are threatening the livelihoods and health of residents.

This is not the first time residents have taken a local municipality to court for service delivery failure, but what is unique about this case is that the applicant – the Bethal & eMzinoni Community for Services Association – is asking the court for a “structural interdict” that would force the municipality to settle its roughly R1.18 billion debt to Eskom and subject itself to court supervision to prevent or limit further power cuts.

Read: Deputy finance minister welcomes ruling opening way for intervention in municipalities

The other respondents in the case are the Gert Sibande Municipality (under which GMM falls), the municipal managers at GMM and Gert Sibande Municipality, and the provincial and national ministers for Co-operative Governance and Traditional Affairs.

The case was heard earlier this month in the Mpumalanga High Court.

Extent of collapse

Deposing for the residents’ association, Bethal businessman and resident Yusuf Carrim lays out the extent of the municipality’s financial and operational collapse: power outages of between four and 20 hours a day commenced in December 2019, and have increased in frequency and duration since March 2020.

The affected areas are the towns of Bethal, eMzinoni and Milan Park, all of which fall under GMM.

The association is asking the court to force the municipal respondents and Eskom to come to a repayment agreement for the roughly R1.18 billion owed to the electricity utility, and “to comply with their respective constitutional and statutory duties and to forthwith render the uninterrupted basic service of electricity to all those living and working within the Greater Bethal area who are willing and able to pay for it”.

The residents association was formed in June 2020 to address residents’ concerns over lack of service delivery by the municipality. It has more than 100 members and some 7 000 supporters drawn from all segments of the local communities.

After exhausting all possible remedies with the local municipality, the association raised more than R300 000 to take the matter to court.

Power supply isn’t the only issue

It’s not just daily power cuts that have outraged local residents. GMM has a long history of service delivery dereliction, from water cuts to unrepaired roads and broken garbage trucks.

Read: Is this the future of small town South Africa?

Local entrepreneurs have stepped in to provide the services the municipality is supposed to, from collection of rubbish to water supply.

The situation became so dire that the province was forced to step in with a recovery plan in 2019, though it is clear, says Carrim, that this had little material impact on the provision of basic services in GMM.

Eskom agreement

In 2019, the municipality and Eskom had agreed on what is known as a Notified Maximum Demand (NMD) system, whereby Eskom would implement “partial rotational load shedding” in the areas of Bethal, eMzinoni, Kinross and Evander.

Eskom is entitled to reduce or terminate the supply of electricity where a municipality contravenes payment conditions previously agreed, or fails to honour or to enter into an agreement for the supply of electricity under the Electricity Regulation Act.

The daily power outages are imposed on local businesses and residents without warning, and are unpredictable in timing and duration.

This is quite separate from national load shedding by Eskom which takes place at prescribed times.

Residents who can afford it have purchased generators to ensure they have sufficient power supply for the preparation of food, bathing and, for businesses, essential services such as wifi and power for computers.

Read: Eskom gets tough with errant municipalities, grabs cash and land

Carrim’s affidavit spells out how the power outages impact life for local residents:

  • The local high school is unable to function properly and cannot afford a generator to keep its computers running during power outages;
  • There are 68 residents in a frail care home that need uninterrupted power for lights, heating and electronic medical equipment;
  • A local grocery store had to shut down for a period due to damage to equipment caused by power outages; and
  • Other businesses likewise report damage to equipment caused by sudden power cuts, which in one case cost R75 000 to repair.

“Our argument is that the residents are dutifully paying their electricity bills to the municipality, but the municipality is not paying Eskom, so the power cuts that are imposed by Eskom prejudice law-abiding residents,” says Waseem Gani, attorney with MacRobert Attorneys, who is representing the association.

“This cannot be allowed to continue and we want to court to issue a structural interdict which will force the municipality to reach a settlement with Eskom over the arrears owed, and supervise the adherence to that settlement.

Acting municipal manager disputes residents’ claims

In response, Elizabeth Tshabalala, acting municipal manager at GMM, denies the residents association’s reasons for the power cuts, and says the municipality disputes the amount allegedly owed to Eskom, and that the matter was referred to arbitration.

She also denies the power interruptions at Bethal are as a result of the historic debt to Eskom, and argues that the decision to implement load shedding is a temporary measure until such time as the arbitration with Eskom is complete.

Some of Tshabalala’s affidavit is unintelligible – for example: “The First Respondent (GMM) hold meetings quality with the member of the communities)” – so one wonders how the judge will make sense of this.

The response from the Gert Sibande Municipality also appears to contain some basic errors, such as getting the name of the municipal manager wrong.

Its affidavit is signed by a CA Habini, described as an adult male, when the municipal manager’s name is CA Habile.

“It is of serious concern that the deponent would sign, and … the respondents deliver, an affidavit in which the apparent municipal manager has his surname given completely incorrectly, and his position within [the municipality] has not been described,” deposes Carrim.

Judgment in the case has been reserved.

A case to watch

Residents of other municipalities subject to similar power outages will be watching this case with interest with a view to potentially launching cases of their own.

“The allegations of [Bethal] residents, if true, represent a shocking case of indifference by GMM officials to the plight of residents who dutifully continue to pay their municipal dues,” says Tim Tyrrell, project manager at the Organisation Undoing Tax Abuse (Outa).

“It is appalling that there appear to be no consequences for officials who have clearly failed in their duty to deliver basic and constitutionally-mandated services.”

Read:Astral secures high court order against government in service delivery battle

Dysfunctional municipality chokes Astral

Out of my cold, dead Kung-fu hands

Written by Ciaran Ryan. Posted in Journalism

Beware governments that disarm. First published in DearSA.

In what is possibly the worst timing imaginable, the Firearms Control Amendment Bill was opened for comment just as looters racked up R50-R200 billion in damage and stolen property (it would be safe to assume the actual cost will tend towards the upper limit of this range).

We know this bill is a complete non-starter. Of the many thousands of comments collected by Dear South Africa, more than 99% are opposed to this bill. That’s probably a record for any campaign run by Dear SA, says campaign project leader, Rob Hutchinson.

South Africans are by now well aware of how close the country came to the abyss that many warned would never happen. It was a reality check for millions of people grown listless and numb to structural corruption. The thinking goes like this: if the guys at the top are able to loot without consequence, why not the rest of us?

As many have pointed out, it was an internal ANC battle that played out in the shopping malls and streets of Kwazulu-Natal and Gauteng, and it was armed citizens that saved the country.

Or, expressed more accurately, it was armed citizens of every colour and ethnicity – white, black, Indian and coloured – that did the job the police and army were unable to do. 

One of them was Nick Howarth, a former riot policeman and author of War in Peace: The Truth About the East Rand Riot Unit (a riveting read for those who imagine these terrifying days are behind us), who hastily convened a civilian militia to protect Umdloti, north of Durban, from mob attack.

“There were a few of us that had police or military training, but most had not,” says Howarth. “But the fact that we had set up road blocks and were armed was a definite deterrent. We know from intelligence we received from nearby townships that Umhloti and La Mercy were targeted for looting until the looters heard that there were armed civilians manning the entrances to the suburbs.”

There are also reports of gun dealers selling unlicensed firearms out of bakkies during the riots.

What does Howarth think of the Firearms Control Amendment Bill, and in particular its proposed restriction on access to firearms for purposes of self-defence?

“It’s dead in the water,” he says. “I would love to live in a country where guns were not needed, but South Africa is not that country – not now, at least. I’m keeping my gun.”

Here are some of the key proposed changes in the Bill:

  • No firearm licences for self-defence purposes (which looks like a Constitutional non-starter, unless the police Secretariate can convince the courts that it has miraculously rendered the country free of violence);
  • Limits on the number of firearm licences for occasional hunters and sports shooters;
  • No more private collection of firearms and ammunition;
  • New obligations to be imposed on gun access for the private security industry (which is reckoned to employ 1-1.5 million people in SA);
  • Ballistic sampling of firearms in possession of the private security industry;
  • Reduction in the amount of ammunition a licenced firearm owner may possess;
  • Create a Central Firearm Register under the police, and other administrative functions.

Speaking to the Centre for Risk Analysis, Martin Hood of law firm MJ Hood and Associates noted some serious problems with the current wording of the bill which, unless removed or changed, will face serious legal headwinds from gun advocates.

The security industry will have restricted access to firearms, limits will be placed on the number of firearms per person, access to firearms will be age-restricted, access to ammunition will be reduced for licenced gun owners.

Perhaps most disturbing about the draft Bill is that there was no consultation with civil society, nor any evidence of a proper economic impact assessment. The Ministry of Police claimed the bill was drafted based on research which has not been made available to the public, and there is no serious discussion about the impact this Bill will have on the security industry, nor the 900 licensed shooting ranges and 700 training centres, which Hood says will likely cease to exist if this Bill becomes law.

The Central Firearms Registry does not function, and previous amnesties were botched, resulting in thousands of guns that were handed in being sold to criminals.

It remains to be seen who commissioned the research that prompted this Bill, though there are bodies dedicated to reducing gun ownership, such as Gun Free SA, which says gun violence in SA has reached epidemic proportions. It welcomed the Draft Firearms Control Amendment Bill, and in particular:

“The alignment of the Firearms Control Act with global norms which do not recognise self-defence as a reason for gun ownership, as well as SA’s legal obligations

“The reliance on evidence that reducing access to firearms reduces gun violence

“The sharpening of provisions in the Act to facilitate its enforcement.

“All of us living in SA are grappling with ways to protect ourselves, our family, friends, colleagues and wider community from violent crime. The best way to do this is to use available evidence to make the most informed decision. The available evidence shows that reducing access to firearms helps make our homes, communities and country safer,” says Gun Free SA.

It cites the following table in support of its campaign to eliminate self-defence as a reason for gun ownership.

Gun Free SA then presents the following stats in making out its case for reducing gun ownership: Police annual reports consistently show that the majority of guns that are reported as lost or stolen were lost by or stolen from civilians. Of the 8,680 guns reported stolen or lost in 2019/20 (an average of 24 a day) 8,007 (92% or 22 a day) were owned by civilians and 673 were police owned.

South African research undertaken in two Johannesburg police precincts shows you are four times more likely to have your gun stolen from you than to use it in self-defence when being attacked.

For those a tad suspicious of Gun Free SA’s funders and motives, there is this somewhat dated article from Paratus, which points out some links to George Soros’s Open Society Foundation. Maybe harmless, but only if you think George Soros is a benign influence on the world, which is certainly open to question.

Gun advocates have a strong suspicion where the Police Ministry got its research, and they want to pull it apart, thread by thread. As we have seen in the US, gun control is hugely politicised, and you can pick whatever research you want to buttress your case.

Gun control advocates are playing the long game, so those who want to keep their guns had better brace themselves for what’s coming. In fact, they had better get organised, along with researchers to match the dodgy research that is pumped out by gun control advocates. Here’s just one example of how gun control research can so easily get twisted to fit a political cause.

Gun Free SA does not appear to have much popular support in SA, and the research it cites may just as well be an argument for more weapons training rather than handing over your guns. The DearSA stats around the campaign suggests the most contentious parts of the Firearms Control Amendment Bill are stillborn. But don’t imagine the government will rest on this one. It is always healthy to suspect the worst when governments are intent on restricting responsible gun ownership.

FSCA hits Viceroy with R50m penalty for false, misleading statements on Capitec

Written by Ciaran Ryan. Posted in Journalism

Its January 2018 report caused Capitec’s share price to drop 23%. From Moneyweb.

Image: Moneyweb

The Financial Sector Conduct Authority (FSCA) has slapped a R50-million administrative penalty on Viceroy Research and three partners – Aiden Lau, Fraser John Perring and Gabriel Bernarde – for publishing “false, misleading or deceptive” statements about Capitec Bank in 2018 that caused its share price to drop by 23%.

The FSCA says Viceroy Research and its partners had contravened Section 81 of the Financial Markets Act, which makes it an offence to publish false or misleading statements about securities and which the author “ought reasonably to know” is false, misleading or deceptive. The act also makes it an offence to omit material facts about securities that could lead to making false or misleading conclusions about securities.

Once made aware of false or misleading statements in the course of research, the author must, without delay, publish a correction.

FSCA Commissioner Unathi Kamlana told journalists on Wednesday that Viceroy Research was alerted to the fact that its research on Capitec Bank was based on false or misleading assumptions, yet it failed to issue a correction when this was brought to its attention.

“They sought to benefit from this by an arrangement with a client who had taken a short position in Capitec shares. They did this while destroying value in Capitec shares for others or dissuading others from purchasing these shares,” he said.

The graph below shows the drop in the bank’s share price in early 2018.

The FSCA did not name the partner who had taken a short position in Capitec shares.

The regulator says some of the factors determining the size of the fine were the need to deter this type of conduct in the future, the seriousness of the contravention, the losses suffered by Capitec shareholders (while Viceroy and its partner benefitted financially), and the impact the report had on SA’s financial system.

“This penalty is particularly significant because it shows just how far the Financial Markets Act (FMA) reaches,” says Kamlana. “Although the Viceroy Research Partnership, and its partners, are not financial institutions, and are domiciled in a different jurisdiction, their comments about South African-listed securities make them subject to the stipulations of the act. The penalty also makes it clear that breaching our financial sector laws has serious consequences”.

In a series of reports published in 2018, Viceroy alleged that Capitec’s balance sheet, income and solvency numbers were not reliable, and that it was underrepresenting losses “to pretend that uncollectable loans are collectable and still accruing income.” It alleged that at least R10 billion of loans fell into this uncollectable category. This was disputed by Capitec, with the SA Reserve Bank coming to its defence.

In response to the penalty, Viceroy tweeted: “Viceroy are challenging FSCA’s minimum effort investigation & fine imposed on us. We have cooperated with the @FSCA_ZA with their enquiries & have maintained open dialogue. Contrary to their assertion, we believe this fine seeks to shut down critical analysis of SA companies.”

The FSCA said it also investigated possible insider trading in Capitec securities during the period of the Viceroy publications but cleared it of any wrongdoing in this regard.

When questioned as to whether this penalty could discourage short selling of securities, the FSCA’s head of enforcement, Brandon Topham, said the objective was not to discourage short selling, but to prevent the publication of false information, and to protect market participants and investors. Kamlana said a more effective way of dealing with situations like this was through discourse rather than administrative action. However, Viceroy had been given adequate opportunity to correct its erroneous research and had not done so.

Topham hit back at Viceroy’s claim of a “minimum investigation” investigation by the FSCA, saying it took more than two years – including extensive dealings with the Securities and Exchange Commission (SEC) of the US to compel a representative of the Viceroy Research partnership to be questioned under oath – to bring the investigation to its conclusion.

Some of the specific findings of false and misleading statements include:

  • Viceroy’s claim that Capitec had to write off more than 42% of the gross collectible principal debt due to it in the 2017 financial year, which the FSCA found not to be true;
  • The FSCA also rejected Viceroy’s claim that Capitec had a “pervasive practice” of rescheduling delinquent loans by issuing new loans to clients;
  • That FSCA says Viceroy made errors in calculation to arrive at the conclusion that Capitec’s loan book was irreconcilable to the tune of R3 billion;’
  • The regulator also rejected the Viceroy claim that Capitec was guilt of reckless lending and would lose a court case, triggering a class action lawsuit (the basis of this claim being the erroneous assumption that a lawsuit was imminent and would centre around a multi-loan product that was prohibited – which was not the case);
  • That the imagined lawsuit would result in Capitec having to pay back R12.7 billion to current and former clients;
  • The incorrect claim that the Capitec board was made up largely of several executives from both PSG and Steinhoff;
  • That Capitec would require impairments and write-offs of more than R11 billion due to its “impossibly low arrears.”

When asked whether the FSCA would act against analysts who punted shares that later tanked, Kamlana said the regulator is bound to act in terms of the FMA, particularly where false, misleading and deceptive information is published.

Viceroy replies:

To be abundantly clear: the FSCA’s findings and list of grievances are entirely predicated on Viceroy not publishing “full and frank corrections” to our analysis after Capitec’s open response to our report. The grievances were not based on an investigation into Viceroy’s claims, but into Viceroy itself, from the onset.

Viceroy met with, provided working papers, and provided detailed responses, line-by-line, to the FSCA, which has been apparently ignored. We believe the purpose of the investigation, therefore, is purely to make an utilitarian example of critics who dare publish insightful contrarian analysis into South African companies. We say utilitarian, because the FSCA’s grievances in our reports have been duplicated and published by dozens of other journalists and financial analysts alike. We will not be the scapegoat.

Based on the investigation conducted, the FCSA avoided placing Capitec under any scrutiny. When reading the FSCA report presented to the Tribunal, you would be left wondering if the Capitec were a Grade A Credit reference agency, rather than the most expensive deposit-taking institution in the world whose loan book is almost exclusively unsecured loans to financially vulnerable demographics.

We were investigated by the SEC who did not recommend any enforcement and closed the case – this is the “outcome” of our discussions with the SEC and FSCA, which the FSCA has refused to comment on to the press. The FCSA has set about attacking a thesis that has been backed up by many including the media in South Africa. The level of prejudice the FSCA has used to protect a South African institution is appalling.

The FSCA has proceeded to insult the public further by claiming “We’re going to hold you liable for saying things, even on your personal blog. If that personal blog is on the public domain and those statements are negligent, we are going to come and hold you accountable”. If this were actually the case, we would like to know how many fines have been issued to Steinhoff analysts who had jockeyed the company’s share price for years in the midst of obvious fraud.

Viceroy Research was not notified of the (FSCA) Tribunal date or time, merely its findings. We have informed the FCSA that we are appealing this.