The share price of dually listed entity, Old Mutual Limited, fell by 19,91 percent on the Zimbabwe Stock Exchange yesterday in the wake of Government’s decision to suspend the share’s fungibility status for the next 12 months to March 12, 2021. In its Exchange Control (Suspension of Fungibility of Certain Shares) Order 2020, Government ordered for the suspension of fungibility of Old Mutual Limited, PPC Limited and SeedCo International Limited shares. Fungible shares are those that are listed or can be traded on two or more stock exchanges with investors being able to buy from one and sale on another.
While the ZSE has three such shares, Old Mutual has been the most prominent one that has allowed shares to move to and from the local bourse to the Johannesburg Stock Exchange and to the London Stock Exchange. Fungibility also allowed investors to compare prices across different exchanges and exploit arbitrage opportunities.
If the share price is higher here in Zimbabwe (ZSE), investors could buy on the JSE and sell on the ZSE or vice versa, something which has been happening as millions of shares moved to the Zimbabwe register as investors, individuals, and institutions could get more by bringing Old Mutual shares to the local bourse, than sending foreign currency through banking channels.
Likewise, individuals and institutions struggling to access hard cash or repatriate it outside the country would also buy shares on the ZSE for onward sale on the JSE or LSE giving them access to hard cash.
Some individuals were using this method to repatriate money outside the country to pay for goods and services including school fees.
With the prevailing foreign currency shortages having taken long to be resolved, a lot more individuals and institutions chose this route to repatriate funds outside the country to the extent that they will pay a premium to get their shares.
This increased demand meant Old Mutual’s share price on the ZSE could trade at a much higher premium to share prices prevailing on the JSE and LSE.
To some market watchers this was a reflection on the local currency. It meant an implied rate of the local currency popularly known as the Old Mutual Implied Rate (OMIR).
Those with foreign currency, US dollars in particular, used it to demand more local dollars for their hard cash resulting in the local dollar tracking the OMIR on both the official and parallel market.
On Friday the OMIR stood at 60,77 implying that one needs $60,77 for every US$1.
This is against Friday’s interbank rate of 18,39 or $18,39 for every US$1.
While fungibility of shares can help improve liquidity in the economy, to the extent that in 2016, the Reserve Bank of Zimbabwe increased the threshold of fungibility status from 40 percent to 49 percent, authorities believed the OMIR was doing harm to the exchange rate. Mid last year, as part of local currency support measures, a vesting period of 90 days was imposed on disposal of dual listed securities or shares purchased by investors on the Zimbabwe Stock Exchange (ZSE). The vesting or waiting period was meant to limit activity in fungible shares by forcing investors to hold securities throughout the vesting period.
However, this did not stop demand for Old Mutual shares, which apart from its fungibility status, is a good company which regularly pays a dividend. Its asset base and performance has been solid over the years and investors see it as a perfect hedge against inflation.
There has also been abuse according to sources at the Ministry of Finance and Economic Development. Last week the Securities and Exchange Commission had reportedly started investigations amid suspicion that the 90 vesting period was being manipulated.
These investigations were on all shares traded since June 2019, according to a stockbroker who requested anonymity.
But on Sunday, Government moved to suspend fungibility of the shares with a senior Government official in the Ministry of Finance saying abuse of the facility was “part of the indiscipline that forced us to take this drastic action.”
Some market watchers believe the suspension will see the share price of Old Mutual coming off as it did yesterday when it came off by 19,90percent.
The implied rate, however, still closed firmer at 61,37 after Old Mutual Limited traded 18,23 percent lower on the JSE.–herald.clo.zw