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Snapshot of South Africa’s Exchange Control Framework for Foreign Investors

09 September 2022 Dentons South Africa

Foreign investors should be aware of the South African exchange control framework before investing in any South African company.

The exchange control framework regulates the flow of capital across South African borders and is administered by the Financial Surveillance Department (“FSD”) of the South African Reserve Bank (“SARB”) and various “authorised dealers” (commercial banks authorised to deal in foreign exchange in South Africa).

The exchange control framework consists of the Currency and Exchanges Act, No. 9 of 1933, the Exchange Control Regulations, 1961 (“Regulations”) and the Currency and Exchanges Manual for Authorised Dealers (“Manual”) published by SARB. The Regulations restrict the free flow of capital in and out of South Africa and are generally applicable to South African residents. Non-residents are not directly subject to exchange control, and exchange control is enforced against them largely by way of enforcement against the South African resident who transacts with a non-resident. However, investments into South Africa must be reported to SARB (through any authorised dealer). South African subsidiaries and registered external companies (as South African residents) are thus subject to exchange control.

Authorised dealers act as agents of SARB and all correspondence to SARB on exchange control including exchange control applications are lodged with authorised dealers in South Africa, who administer the relevant processes and liaise with SARB where necessary. Authorised dealers are permitted to process certain transactions that are subject to exchange control without the need to approach SARB directly, where the transactions satisfy the requirements set out in the Manual.

Non-residents who invest in South African companies usually do so by way of acquiring equity in a South African company or making loans to a South African company.

It is important to note that non-resident shareholders in a South African company must obtain exchange control approval for the holding of shares in a South African company. This is a simple administrative procedure and usually entails the company applying to an authorised dealer to endorse the original share certificate as “non-resident” indicating that it is held by a non-resident. Endorsement is generally a mere formality and in practice it generally takes up to two or three weeks.

Endorsement of share certificates as “non-resident” is important because without it, dividends cannot be paid to non-resident shareholders, nor can the proceeds of the disposal of shares be repatriated to the non-resident shareholder’s jurisdiction. In addition, the endorsement must be effected within 30 days of acquiring the shares, failing which certain penalties may apply.

When endorsing share certificates, the authorised dealer must be satisfied that (i) the non-resident is the owner of the shares, (ii) the funds used to purchase the shares originated from outside of South Africa, and (iii) the purchase price was negotiated on an arm’s length basis and represents fair market value.

One of the principal objectives in controlling non-resident owned securities is to ensure that, since all income due to non-residents on their securities is freely transferable, non-residents do not purchase securities from residents other than through approved channels at a fair and market related price. It is also important to note that the exchange control rules do not only apply to securities registered in the name of a non-resident, but also to securities in the name of a resident acting as a nominee for a non-resident.

Turning now to loans to a South African company, it is important to note that South African residents are not permitted to incur borrowings from a non-resident unless exchange control approval has been obtained.

The application for approval must be submitted to the authorised dealer. The criteria for approval would typically include:

• the interest rate in respect of any foreign denominated loans may not exceed the base lending rate for the currency in question (as determined by commercial banks in the country of denomination) plus 3% or, in the case of shareholders’ loans, the base lending rate;
• the interest rate in respect of any Rand denominated loans may not exceed the base rate (being the prime rate) plus 5%, or the base rate in the case of shareholders’ loans; and
• no upfront payment of commitment fees, raising fees and/or any other administration fees must be payable by the borrower – the aforementioned fees may be paid from South Africa once the loan funds have been received and converted into Rand locally provided that such fees do not exceed 5% of the principal sum.

Without exchange control approval, it will not be possible to repatriate any capital or interest.

Any natural or juristic person who contravenes or fails to comply with the Regulations may be found guilty of an offence and will be liable upon conviction to a fine or to imprisonment (or a fine and imprisonment).

Credit to:

• Jesse Prinsloo, Associate
• Sebastian Petersen, Candidate Attorney

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