Explainer: The fungibility suspension

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Tawanda Musarurwa

Last week, Treasury – through Exchange Control (Suspension of Fungibility of Certain Shares) Order 2020 – suspended the fungibility of Old Mutual Limited, PPC Limited and Seed Co International Limited shares for a period of 12 months.

What is fungibility?

“Fungibility” basically implies that two things are identical in specification; accordingly, individual units of the good or asset can be mutually substituted.

In view of this basic concept, the shares of Old Mutual Limited, PPC Limited and Seed Co International (which were suspended) can be said to be fungible in so far as all the three companies’ stock are listed on at least more than one stock exchange.

In this case Old Mutual’s stock trades on the Zimbabwe Stock Exchange (ZSE), the London Stock Exchange (LSE) in the United Kingdom and the Johannesburg Stock Exchange (JSE) in South Africa. PPC’s stock trades on the ZSE and the JSE, while Seed Co International’s stock trades on the ZSE and on the Botswana Stock Exchange (BSE).

Although the ZSE allows for both partial fungibility, and full fungibility, prior to the suspension, the three counters Old Mutual, PPC and Seed Co International were fully fungible, meaning that their shares could be sold or bought from one exchange into the other and vice versa. Partial fungibility, on the other hand, means that the shares can only move in one direction. The suspension means the local shares of Old Mutual Limited, PPC Limited and Seed Co International are no tradeable on foreign exchanges, at least for the next 12 months.

Was the suspension necessary?

Zimbabwe’s monetary and fiscals certainly think so. And there seems to be justification for such a move. Fungible shares in an inflationary environment such as Zimbabwe at the moment, can be bought on the ZSE and sold on foreign markets, which would be tantamount to illicit flows of local foreign currency.

Fungibility allows 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.

And the OMIR factor . . .

Although the Zimbabwe dollar, which was re-introduced in June 2019 as a culmination of a string of currency and monetary reforms, officially trades with other currencies on the official interbank market (current rate circa 18 to the US dollar), the Old Mutual Implied Rate (OMIR) has been having a significant, albeit negative, impact on parallel markets currency trades.  The OMIR is basically a comparison of the price of shares of Old Mutual Limited in London and Harare, and certain individuals and corporates have been exploiting it as a de facto currency rate determination platform. 

Is Old Mutual Limited to blame?

No. Although Old Mutual’s investment wing, Old Mutual Investment Group Zimbabwe, can also buy and sell Old Mutual Limited shares on behalf of clients, anyone from many other institutions, both local and foreign can participate in trading of Old Mutual Limited shares with market forces determining the final trading price. The Zimbabwe Stock Exchange is market driven and Old Mutual Limited has no say or influence on the prevailing share price.

What is the scope of the suspension?

According to the notice from Treasury, the order does not have any impact on the settlement of transactions in the stocks conducted prior to March 13, 2020 as long as they are effected by March 18, 2020.

Will the suspension remove the OMIR?

No. For as long as the share is listed on two or more platforms, the implied rate will always be there. The share price and in the process the OMIR will fluctuate depending on the investment appetite and views in its various markets. A day after suspension of fungibility Old Mutual Limited’s share price fell by 19,90 percent on the ZSE and 18,23 percent on the JSE. This meant the OMIR still went up to 61,37 from the previous day’s 60,77.