The management of internet company Naspers has come out swinging following the publication on Wednesday of a JSE proposal that it treat Naspers Ltd and Prosus NV as one entity for capping purposes in the FTSE/JSE Capped Indices.

This decision by the JSE is “inappropriate and suboptimal,” and goes against a decision that the JSE made in July, Naspers says in a statement. This is likely to create the perception that indexation and policy certainty is not guaranteed in South Africa.

This could, in turn, have a negative impact on how international investors view South Africa and the JSE as an investment destination and could materially negatively affect foreign direct investment in South Africa, the company adds.

The background is the decision announced by Naspers management in March 2019, that it would unbundle the group’s internet assets outside SA into an entity that would be listed in Amsterdam, with a secondary inward listing on the JSE.

The intention was to unlock value for shareholders and reduce the weighting of Naspers on the JSE Top 40, which was disproportionate to its peers. Naspers held consultations with the JSE over the period to decide on the best way to execute the secondary, inward listing of Prosus on the JSE, so that everyone was kept happy.

As a result, the JSE advised in July that Prosus and Naspers would be treated as separate companies for indexation purposes.

The table below shows the current weightings and proposed weightings:

The result was that both Naspers and Prosus were included in the JSE’s Top 40 list, which meant that the unbundling had not achieved the desired effect of reducing Naspers’s outsized influence on the JSE. To add insult to injury, Sappi was bumped out of the Top 40 in the process.

Investors have complained and the JSE has had a change of heart. This, says Naspers, is despite the fact that there is no new material information that warrants a review.

“The correct decision has already been made, implemented and acted upon by investors,” Naspers says.

The company argues that Naspers and Prosus are unique and separate companies with distinct characteristics from a public investor standpoint – this, it says, is evident from the first two months of trading since the listing of Prosus on September 11, 2019.

The JSE does not dispute the above, but argues that since the unbundling and inward listing of Prosus, market participants have raised concerns about the combined weight of Naspers and Prosus in the FTSE/JSE Capped indices, specifically the Capped SWIX All Share index, which is the de facto benchmark for local equity funds.

The reason for applying capping in indices is to reduce single stock exposure.

The JSE acknowledges that Naspers and Prosus are two separate companies, that the capping is applied separately and their combined index weight is thus in excess of the capping level of 10%.

But it adds that both companies draw a significant portion of their value from an underlying holding in TenCent, and some index users believe that this should be considered when capping their index weights.

The JSE says this suggestion is simply a proposal to be considered by investors.

The objective is to formulate a system of rules that would help to define when two entities should be considered as one for capping purposes.

“There needs to be an unambiguous rule that the market can clearly understand, interpret and predict, both for current constituents and future cross-holdings,” it says.

Unfortunately, there is no global precedent in terms of capping methodology whereby two separate listed instruments are capped as a single entity, so any implementation of such a rule in the South African context can’t be aligned with global practice.

However, the JSE believes treating the companies as one would alleviate the single large exposure risk to TenCent. BM