South Africa has the largest and most developed economy in sub-Saharan Africa, and boasts well-regulated, sophisticated financial markets and banking systems supported by a progressive common law-based legal system. South Africa's banking and financial services sector was ranked in the top 10 in several key categories, including soundness of banks, regulation of securities exchanges and strength of auditing and reporting standards in the World Economic Forum's 2011/2012 Global Competitiveness Report.
Although the South African Reserve Bank (SARB) and the Financial Services Board (FSB) acting through industry-specific registrars regulate the banking system and non-banking services sector respectively, the regulatory landscape is set to be vastly revised as per a policy document released by the Minister of Finance in February 2011 in which the South African government's vision for the local financial sector is set out. The document places particular emphasis on the maintenance of financial stability, preventing financial crime, strengthening consumer protection and fostering a financial services space that is accessible and affordable. With a view to achieving these objectives, the document proposes the introduction of a twin-peaks model of financial regulation in terms of which the SARB will be responsible for all prudential regulation and supervision ' including the implementation and monitoring of financial legislation and regulations applicable to banks, securities firms and insurance companies to ensure that they are financially sound ' while the FSB will be responsible for market conduct regulation, including championing consumers' rights. This signals a move away from industry-specific regulation to broader, holistic oversight.
Banks Act 1990
Banks in South Africa are licensed in terms of and regulated by the Banks Act No. 94 of 1990. The Banks Act also affects the debt capital market, in that prohibits entities other than registered banks from accepting "deposits" from the general public. As a result of the broad definition of "deposit" in the Banks Act, which extends to cover the issuance of notes and debentures to the general public, the Commercial Paper Regulations to the Banks Act, dated December 14, 1994 and the Securitisation Regulations to the Banks Act, dated January 1, 2008 have been enacted to allow non-bank entities to issue commercial paper and implement securitisation structures.
Securities Services Act 2004
Securities exchanges, central securities depositories, clearing houses and their respective members are currently regulated by the Securities Services Act 2004 (SSA). In response to the global financial crisis and to clarify lingering uncertainties in the SSA, the legislature has drafted the Financial Markets Bill 2012, which is in its final stages. Although similar in many respects to the SSA, the bill seeks to clarify (although admittedly unsatisfactorily) the South African law approach to offering securities as collateral (which has long been a topic of debate), and in response to the call by the G20, provides for measures to regulate the OTC derivatives market (including centralising the clearing of "vanilla" derivatives) and credit default swaps.
The JSE Limited Listings Requirements and JSE Debt Listings Requirements
The JSE Limited (JSE), which ranks among the top 20 exchanges in the world by market capitalisation, is South Africa's only exchange following its merger with the erstwhile Bond Exchange in July 2009. The JSE rules and enforcement procedures are based on global best practice, while its automated trading, settlement, transfer and registration systems are on par with other leading stock exchanges. The JSE also features a futures exchange (SAFEX) and an interest-rate exchange on which corporate bonds, exchange traded funds, warrants, structured notes and similar instruments are listed and traded. With a view to formalising and streamlining the regulation of debt capital markets, the JSE replaced the previous bond exchange listing requirements with the comprehensive JSE Debt Listings Requirements on March 1, 2011, with which all issuers wishing to list debt securities must how comply.
The rules of the JSE allow foreign entities to list commercial paper through so-called inward listings if they, inter alia, comply with the JSE Debt Listings Requirements, dematerialise all scrip in the CSD, and appoint a settlement agent and local transfer secretary. The documentation used and the process followed to access the capital markets in South Africa is broadly similar to that of the euro markets and this makes it relatively easy for offshore parties to enter the South African market.
The Companies Act 2008
The Companies Act 2008, which completely replaced the Companies Act 1973 save for the provisions dealing with the winding up and liquidation of companies, took effect on May 1, 2011 and introduced certain sweeping changes to the South African company-law landscape. These important changes include the eradication of the outdated system of capital maintenance and introduction of a solvency and liquidity standard with which companies have to comply when inter alia granting financial assistance and making distributions to holders of securities, and the replacement of judicial management with a new business rescue regime for companies in financial distress.
Furthermore, because the Companies Act requires private companies to restrict the transferability of their securities while the Listings Requirements require securities to be freely transferable, a company or Issuer SPV wishing to offer securities to the public will now either have to be incorporated as a public company or convert from a private to a public company in terms of the Companies Act. The Companies Act also fleshes out the requirements with which prospectuses must comply, and imposes severe penalties (including the possibility of personal liability of the directors) for contravening these provisions.
Importantly, the two-year grace period contemplated in Schedule 5 to the Companies Act comes to an end on May 1, 2013, from which date any inconsistencies between a company's memorandum of incorporation, its rules and/or a shareholders agreement and the Companies Act, will be declared void.
Important legislative developments:
Financial Services Laws General Amendment Bill 2012
The twin-peaks model discussed above is expected to be ushered in through legislative reforms in 2013. The shift has however been instigated by the Financial Services Laws General Amendment Bill 2012, which has recently been tabled before Parliament. The Bill has been drafted to address gaps in legislation and offset existing systemic risks by aligning financial sector legislation with the Companies Act, giving the Minister of Finance emergency powers to deal with systemic risks to the financial system, and strengthening the SARB's powers to intervene in the event of a banking crisis.
Regulations to the Banks Act
In January 2008, the SARB made clear its intention to implement the new global Basel III regulatory standard in accordance with the prescribed timeframes. The Minister of Finance has initiated the phasing in of the liquid-asset and capital adequacy requirements set out in Basel III, and has released draft regulations (the latest dated August 17, 2012) which facilitate the implementation of the accord and replace regulations adopted on December 15, 2011 in terms of which the Basel 2.5 framework was implemented. It is envisaged that the new regulations will take effect on January 1, 2013.
After concern on the part of South African banks that they would not meet the liquid-asset criteria set out in Basel III due to the conventional local practice of using long-term financing as collateral, the SARB has undertaken, in the form of Guidance Note 5/2012 published on May 10, 2012 (the guidance note), to make a committed liquidity facility available to assist banks in meeting the liquidity coverage ratio prescribed in Basel III.
The SARB will provide such a facility for an amount up to 40 percent of a bank's net cash outflows under stressed scenarios, meaning that the facility may serve as a substitute for Level 2 assets. The SARB will provide the facility against the furnishment of acceptable collateral, which may comprise (i) marketable debt securities with a minimum credit rating of A- on a domestic rating scale (equivalent to BBB- on an international scale) by an eligible external credit rating institution, (ii) equities listed on the JSE's main exchange and included in the Top 40 Index, or (iii) notes of self-securitised pools of high-quality loans, which are ring-fenced in an appropriate structure and that carry a minimum rating of A- on a domestic rating scale.
Credit Rating Services Bill 2011
The legislature is also in the process of adopting the Credit Rating Services Bill 2012, which gives effect to the G20 recommendations on the regulation and registration of credit rating agencies. The CRS Bill requires any person or entity that performs data and information analysis, approvals, issues or reviews credit ratings in South Africa, publishes a credit rating in South Africa, or issues credit ratings that are published in South Africa to register as a credit rating agency.
South African tax law has undergone several significant changes of late. In addition to amendments to the Income Tax Act, 1962 concerning interest withholding taxes, the Tax Administration Act 2011 enacted on July 4, 2012 has overhauled the entire tax administration system by consolidating the administrative elements relating to tax into a single piece of legislation. The TAA streamlines the tax collection process, and affords the South African Revenue Services greater powers to protect the interests of the fiscus. Taxpayers are now also permitted to use a single account for administering tax, which makes it easier to allocate tax credits across tax categories and allows taxpayers to reconcile and track the movements of their tax account.
With effect from April 1, 2012, Secondary Tax on Companies, a tax imposed on companies at a rate of 10 percent of the dividend declared, has been replaced with dividends tax imposed on shareholders at a rate of 15 percent. Dividends tax is a withholding tax, meaning that the tax will be withheld and paid on behalf of the shareholder receiving the dividend to SARS by the company paying the dividend. DT will constitute a tax credit for foreign shareholders in that shareholder's jurisdiction. Although non-residents are generally exempt from tax in South Africa on South African sourced interest, with effect from January 1, 2013, a withholding tax of 15 percent will be levied on interest received by or accrued to a non-resident that is not controlled by a South African resident. Tax withheld will generally constitute a tax credit for such a non-resident in its respective jurisdiction. Furthermore, certain types of interest, including interest received by a non-resident in respect of a listed debt instrument, are exempt from this withholding tax.
The fiscus has also indicated in the 2012 Budget Speech that the inclusion of financial derivatives in the base of Securities Transfer Tax, which is a single tax in respect of any transfer of listed or unlisted securities, is being considered. The basis upon which such tax will be calculated for derivatives is presently unclear. The fiscus also highlighted a proposal to abolish the current exemption for brokers from securities transfer tax (levied at 0.25 percent), meaning that transactions for the broker's benefit may be taxed in the future, albeit at a lower rate.
Exchange control in South Africa is regulated by the SARB's Financial Surveillance Department. The FSD applies a system of exchange control designed to prevent the unauthorised transfer of currency abroad and to ensure the repatriation into the South African banking system of currency acquired by South African residents. Policymakers have embarked on a process of exchange control liberalisation over the years to encourage foreign direct investments such that non-resident investors may, subject to certain administrative requirements, freely invest in South Africa and repatriate the returns.
Residents over the age of 18 are permitted to transfer up to ZAR4 million abroad per year for investment purposes, subject to certain conditions. The FSB has recently announced that residents may use their further ZAR1 million single discretionary allowance for investment purposes without having to obtain a tax clearance certificate. Investments made by companies that do not exceed ZAR500 million per applicant company per year are no longer subject to approval from the FSD.
Recent legislative and market developments in South Africa are born out of South Africa's continuing efforts to facilitate and encourage investment and trade in accordance with international best practice. An awareness of these developments and an understanding of the relevant legislation should help to facilitate a broader range of transactions in an environment that enjoys clear regulation underpinned by legal certainty.
Previously published by Thomson Reuters Acceulus on November 20, 2012.
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