New regulations tame bourse arbitrage window

THE 90-day disposal window of dual listed securities or shares bought by investors on the Zimbabwe Stock Exchange is a positive move as it tames arbitrage opportunities and externalisation of funds, economic analysts said yesterday.

The Reserve Bank of Zimbabwe (RBZ) has directed that with effect from Tuesday this week, any investor who shall purchase a dual share on the Zimbabwe Stock Exchange (ZSE) shall only be allowed to sell the shares on the local bourse or on an external exchange after a vesting period of 90 days from the date of initial purchase.

In separate interviews, economic analysts hailed the RBZ stance as a bold move towards curbing speculative tendencies and arbitrage opportunities on the stock market. Bulawayo-based economic analyst, Mr Morris Mpala, said:

“When talking about dual listing of shares on the ZSE, we are mostly looking at two counters; Old Mutual and PPC and these are both listed on the ZSE and JSE in South Africa. 

“What used to happen before the directive by the Central Bank, people could just buy Old Mutual shares on the ZSE and sell them on the JSE so it was a way of them moving funds from Zimbabwe to other countries wherever they deemed fit.”

The new policy further requires investors wishing to uplift dual listed shares from external bourses for purposes of selling the shares on the ZSE, to dispose of these after a period of 90 days from the date of registration on the ZSE. And for those investors who have already acquired dual listed shares on the ZSE and are desirous of disposing of such shares, RBZ said the exchange control division requires that such sales can only be allowed in instances where shares have been purchased on or before March 2019.

Mr Mpala said when people have an opportunity to move the funds it creates arbitrage and speculative tendencies as they would just come and buy the shares on the ZSE at a cheap price and move them to an external bourse to make money.

“At the same time, the challenge with these now, it also created demand for those shares and as the share prices rose, it also meant the implied rate going up so it was sort of e-guideline in terms of the forex market but that is an artificial thing because all those speculators were taking advantage of that,” he said. 

“Therefore, it was a proxy for the parallel market exchange rate as it informed the exchange rate in a way.

“Everyone else who wanted to find out where exactly the exchange rate was supposed to be in terms of the local currency and the US$, they used the Old Mutual Implied Rate (OMIR), as a result this inflated the rate to the RTGS dollar,” said Mr Mpala.

He said once demand goes up, the price of Old Mutual or PPC shares shoots up because the implied rate in terms of those two dual-listed counters also picks up and thus informing people in terms of the exchange rate.

“This puts pressure on the exchange rate of the RTGS dollar against the US$,” said Mr Mpala.

Another economic analyst, Mr Peter Mhaka, said the new regulations on the ZSE “will reduce speculation” and contain the trading activities in the two counters.

“It will also lower the exchange rate (OMIR) and thus also lowering the share price,” he said.

Critics on one hand argue that the 90-day window will frustrate trading on the ZSE and compromise its viability. Former Presidential Advisor, Ambassador Chris Mutsvangwa, recently blamed Old Mutual for allegedly causing parallel market financial distortions saying the exchange rate had inordinately risen due to the OMIR.

Amb Mutsvangwa had hinted that the OMIR was used on the ZSE to determine the exchange rate and Old Mutual could change it as they wished in determining the exchange rate.

When the ZSE was going through demutualisation in recent years, he said, Old Mutual requested from Government to be allowed to trade on the local bourse as well as the JSE and the London Stock Exchange and this was premised on the understanding that Zimbabwe needed capital inflows from those countries with excess capital.

However, he said, this has not attracted the excess capital into the country. 

— @okazunga.