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A little movement

06 October 2004 Angelo Coppola

In his 2004 budget speech, the Minister of Finance announced that measures will be implemented during the course of 2004 to enable foreign firms to list and, accordingly, raise debt and equity finance on the South African capital markets.

The specialist team at Werksmans reports that the South African Reserve Bank (SARB) released Exchange Control Circular No D441 on 20 September 2004 (the circular).

The circular states that foreign companies will now be permitted to list on either the JSE or the Bond Exchange of South Africa (BESA).

Pursuant to the circular, South African individuals and institutional investors will now be able to invest in the securities of foreign companies which are listed on either the JSE or BESA.

However, they may do so only by making use of their existing foreign investment allowances. Existing foreign investment allowances are R750 000 for individuals and 15% to 20% of total retail assets for institutional investors (depending on the type of institutional investor).

Thus this exchange control policy reform will not result in any relaxation of existing exchange control limits on South African individuals and institutional investors, save that institutional investors may now, pursuant to the circular, invest an additional 5% of their total retail assets in African “inward” listed securities (ie 15% plus 5%).

A company will be regarded as “African” if it is either domiciled in Africa or its activities are geographically located in Africa; or if it is domiciled outside Africa but the majority of its activities are geographically located in Africa.

The circular encourages the JSE to develop an index that includes only “African” companies, as well as an index that includes only South African companies to cater for investors with a “South Africa only” mandate.

Any foreign entity wishing to list on the JSE or BESA will still require the prior approval of the Exchange Control Department of the SARB (Excon).

Similarly, any authorised dealer in foreign exchange wishing to facilitate any such listing will also require Excon approval and must comply with specific exchange control reporting requirements prior to such approval being granted.

In addition, foreign companies that list on the JSE or BESA will be permitted to use shares or other securities as “acquisition currency”.

South African institutional and individual shareholders will be given 12 months to realign their portfolios should they, as a result of acquiring same, be in excess of their exchange control exposure limits.

South African corporate shareholders will also be given 12 months to dispose of such shares.

However, should there be benefits (presumably economic benefits) to the continued financial involvement of a South African corporate in the business or assets acquired and the alignment of interests in the extraction of maximum value from the merged group, Excon may, on application, allow the corporate to retain such shares.

Should any foreign company embark on an “inward” listing and implement a rights offer, South African institutional, individual and corporate investors will be allowed to exercise their rights in terms of the rights offer and will have 12 months to realign their portfolios if they are in excess of their exchange control foreign exposure limits.

Although the JSE has finalised its proposed rules relating to “inward” listings with Excon, BESA is still in the process of doing so. Once BESA has satisfied Excon of its full compliance with reporting systems and other related matters, a further circular will be issued by the SARB. Until such time, “inward” listings of bond instruments on BESA cannot occur.

Accordingly, subject to compliance with the JSE’s Listings Requirements and the circular, foreign companies may begin the process of listing on the JSE.

Such listings must involve only non-derivative equity instruments. The process for a foreign company listing on the JSE will be substantially the same as for a South African company.
However, “inward” listed companies must open an escrow account with the JSE for the purpose of receiving and recording any capital raised.

Such capital raising must be done in terms of a prospectus and the capital must be deployed as soon as possible, but by not later than one month after being raised and recorded in the escrow account.

Failure to deploy the capital within one month after being raised will result in such capital being required to be transferred to a similar escrow account to ensure compliance with Excon’s reporting requirements.

Full reasons must be given to the JSE and Excon as to why the capital cannot be deployed within one month after being raised.

Furthermore, the relevant company must advise the JSE and Excon as to when they expect to deploy the capital raised.

The benefits of “inward” listings include, inter alia, attracting foreign direct investment into the domestic economy, growth in market capitalisation and liquidity of South Africa’s capital markets, supporting the NEPAD initiative and supporting exchange control objectives of enhancing foreign investment diversification through domestic channels.

Some fund managers have expressed reservations as to whether many foreign companies would be interested in securing an “inward” listing in view of the restrictions placed on investments by South African investors.

Nevertheless, an “inward” listing may well be beneficial to companies with operations in South Africa as it will allow such companies to raise money in South Africa for their South African operations – this may be particularly attractive to many of the mining companies with operations in South Africa but with listings on, say, the London Stock Exchange or the Australian Stock Exchange.

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