Abstract
M.Comm.
Stock Exchange as an instrument for the financing of South African industry.
The Johannesburg Stock Exchange, like all stock exchanges in the world, has as
main functions, firstly, the raising of capital for industry and secondly, the provision
of a market for the trading of financial paper. As such, the Johannesburg Stock
Exchange is of vital relevance for the national economy. It has implications for the
formation and flow of capital and therefore the functioning of savings and investment
industry of the country. The channelling of savings into industry, green field projects,
the provision of housing, education and health care, as well as the development of
the infrastructure, are all affected by the workings of the Johannesburg Stock
Exchange.
The Johannesburg Stock Exchange is the largest stock exchange on the African
continent, having a market capitalisation of R919 803 million in 1994. This, however,
does not mean that the Stock Exchange performs its function as an instrument for
the financing of South African industry effectively. The Stock Exchange is known for
its high level of illiquidity with only six percent of the shares listed on it being traded
on an annual basis. The shares that are traded regularly are restricted to the 30 - 50
prime shares which are held mainly by the large institutional investors and the
mining houses.
A study of the owners of shares listed on the Stock Exchange shows a large
concentration of control and ownership in the hands of only three institutions,
namely, the Anglo-American group of companies and the two large insurance
companies Old Mutual and Sanlam. Research has shown that as many as 65
percent of the shares on the Johannesburg Stock Exchange are owned by only 1
200 shareholders and that there are not more than 750 000 South Africans who are
shareholders, representing less than four percent of the South African population.
Participation in the activities of the Johannesburg Stock Exchange by the small
investor has declined continuously over the last two to three decades. The decline in
small investor presence in the market deprives the Development Capital Market and
the Venture Capital Market of financing.
New capital raised on the Stock Exchange amounts to an average of around R12
billion per year. The funds raised are mainly attributed to the selling of the paper of
gilt-edged companies. The so-called second rated companies, which comprise 80
percent of the market, do not enjoy the share turnover rates that the gilt-edged
companies do. The shares of the second raters comprise less than 10 percent of the
turnover on the market. The shares of the second raters are not only traded in
relatively small volumes but they are also traded rather sporadically.
This poor performance of the Stock Exchange as a primary capital market compel
the smaller companies to seek financing elsewhere. Such financing is almost always
more expensive than equity financing. The high costs involved in obtaining a listing
on the Stock Exchange is another factor that may encourage smaller businesses to
obtain their financing from financial institutions rather then from the Stock Exchange.
South Africa has now entered a new phase of socio-economic development on
account of the revised political dispensation and becoming a full member of the
international community once again. These changes have once again placed South
Africa on the world map as a venue for investment. The Johannesburg Stock
Exchange could play a very important role in this respect. It will, however, have to
become a more active market.
The financing of South Africa's industry cannot rely mainly on foreign investment, it
must generate more domestic financial support. The Johannesburg Stock Exchange
is an ideal institution to perform such a function. The Stock Exchange will, however,
have to create a more liquid market by increasing turnover to a level more in line
with those of stock exchanges elsewhere in the world. Such an achievement will add
significantly to the pool of funds available for the financing of the South African
industry.