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Dematerialisation and STRATE
Mercantile Custody Services is the only South African custodian to have an in-house relationship with the country's largest Transfer Secretary. One of the benefits is an on-site Satellite Office which facilitates the immobilisation of paper out of the vaults in preparation for STRATE (Share Transactions Totally Electronic)
Mercantile Registrars is currently Transfer Secretary (TS) to approximately 75% of the companies listed on the JSE.
Mercantile Registrars has approximately four million open Documents of Title (certificates and cm41's) in the marketplace on behalf of Issuers. When counters are dematerialised under STRATE every piece of paper has to be physically verified and cancelled by the TS. The logistics of this exercise are daunting given the timescale proposed by STRATE of nine months (March 2001 to December 2001).
In anticipation of this problem Mercantile launched two initiatives more than a year ago with the objective of taking paper out of the market before formal demat starts. The concept was enabled by the necessary changes to the Safe Custody of Securities Act and the Sanlam listing where 95% of shareholders received a share statement of their immobilised holding and not a share certificate.
A vertical immobilisation programme called STAR (Share Transfer and Replacement) was developed to cater for Issuers and their private shareholders. A horizontal programme called BENT (Broker/Bank Electronic Nominee Trading) was launched for the professional investment market.
STAR is a formal corporate action which immobilises (same TS process as for dematerialisation but pre-STRATE) all shareholdings into an electronic entry on the Issuer share register. Certificates are essentially placed in a 'print queue' and only generated to settle a trade. The shareholder receives a share statement like a bank statement, as they will under STRATE, which reflects their holding. This statement is significantly less expensive to produce and mail then a certificate and is not negotiable therefore reducing the risk of new tainted scrip. The shareholder will receive a statement each time a holding changes as a result of a trade or corporate action. The statement itself is an inexpensive communication which the Issuer can use to educate the shareholder about the electronic settlement environment. The shareholder trades normally through their broker and a certificate is produced by Mercantile when required to settle a trade. As the register has already been immobilised, formal dematerialisation amounts to an electronic transfer into STRATE which would be a literal non-event for the shareholder already conditioned for electronic settlement.
BENT is facility which enables nominee companies to immobilise their holdings across all registers and draw off paper, in the correct denominations, as and when required for settlement. This reduces cost and risk to the professional market and enables them to audit their holdings pre-STRATE.
Although these initiatives were launched more than a year ago the industry has been tiptoeing around the concept and very little immobilisation has actually taken place. Corporate Actions are still being effected which generate new paper. Although the TS generates revenue from the creation of paper and again when the paper is dematerialised there is an obligation to highlight this avoidable cost to it's Issuer client base. Immobilisation not only has significant immediate and future cost benefits to Issuers it also solves a very real industry problem ahead of the electronic settlement environment.
Mercantile Custody Service's use of BENT gives in a significant service advantage over the rest of the market in preparation for STRATE.
Figures drawn from the Mercantile Registrars shareholder base of more than 2m show that although private shareholders make up over 96% of the number of shareholders they represent only 4.5% of the market capitalisation. By contrast, the professional market, which makes up 1.3% of the number of shareholders holds more than two thirds of the JSE market capitalisation. The study also shows that more than 70% of shareholders hold portfolios of less than two counters.
These figures show the potential for increased private share ownership directly in shares listed on the JSE.
There is currently a mis-conception amongst private shareholders that the introduction of STRATE (Share Transactions Totally Electronic) forces them to register in a nominee and consequently lose their registered shareholder status. This is entirely incorrect. Recent amendments to the Companies Act specifically protects the right of the shareholder to be reflected as the registered shareholder in the Issuer register under STRATE . This status is termed 'Own Name' registered shareholder in the electronic settlement environment. This status ensures that the shareholder retains a direct relationship with the Issuer for purposes of communication and investor relations. 'Own Name' registration also retains the shareholder exemption, in terms of the Companies Act, for the costs of transfer and corporate actions as well as new costs under STRATE such as Share Statements.
The Mercantile CSDP standard offering is 'Own Name' registration ensuring shareholders keep their registered holder status under STRATE. If shareholders wish to avoid the process of submitting individual shares for dematerialisation as required by STRATE, they can request a custodian such as Mercantile Custody Services to assume immediate responsibility for their entire portfolio. Trades will be settled on behalf of the shareholder for shares both in the electronic and paper environments until STRATE is fully implemented. The relevant counters will be lodged with the CSDP nominee as required for dematerialisation under STRATE but ensure the shareholder is registered as 'Own Name'.
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