South African Reserve Bank Amendment Bill [B10-2010]: briefing by National Treasury

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Finance Standing Committee

10 May 2010
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The South African Reserve Bank briefed the two Committees on the South African Reserve Bank Amendment Bill. The briefing provided a historical background of the Central Bank’s development from the traditional model of company formation. Whilst shareholding in this model meant that shareholders were entitled to all the benefits and the profits of the company, the Central Bank’s role as a regulator of financial institutions meant that it had lost its competitive function in the market and now served a public interest and its shareholders had a fixed return.

South Africa was one of few countries surveyed by the International Monetary Fund (IMF) in 2004 that had a Central Bank with private shareholders and strict limitations imposed on profit allocation. This model of Central Bank was not driven by a profit motive and served the public interest which dictated that shareholders could not be in control of the institution.

The structure and operations of the Central Bank in terms of control and management was explained in terms of relevant provisions of the Reserve Bank Act. There were mechanisms built into the Act to prevent shareholders from accumulating voting rights that would enable them to influence or take over the Central Banks management and operation. These were limitations on shareholding providing for 10000 shares as a maximum for each shareholder.

The Amendment Bill had been necessitated by the actions of a small group of shareholders to circumvent the limitations on shareholding through the acquisition of shares by conglomerates of associates and family members. There had also been shareholders who time and again had made attempts to change their fixed allocation on the returns from their shareholding to something that permitted them a share of the Central Bank’s profits.

The Bill therefore aimed to stop the Bank’s shareholders from circumventing the Act’s limitation of a maximum of a 10000 shares per shareholder; to allow for nomination of Directors by a broader base of the South African public and to broaden representation on the Board; provide for the establishment of a panel for the election of Directors; define clear criteria when persons were disqualified from serving n the Board; provide for the confirmation of the Board nominees against “fit and proper” criteria; clarify the powers and functions of the Board; and to provide for the possibility of the Governor and Deputy Governors to be re-appointed to serve a term of less than 5 years.

Members from both Committees raised questions on, amongst other issues, shareholding by foreign investors; the reasons for the reduction of the Governor’s term of office; the exact way in which the actions of “activist shareholders” were a detriment to the operations of the Reserve Bank; requesting clarification of the allegations by some shareholders that they shares were under threat of expropriation and that the Reserve Bank would be nationalised; and whether the criterion of fit and proper persons to be appointed to the Board of the Reserve Bank took into account previously disadvantaged South Africans.

The Governor urged Parliament to deal with the amendment expeditiously to enable finalisation of the Bill before the Bank’s next Annual General Meeting in September 2010.


Meeting report

The Chairperson introduced the agenda for the meeting. The South African Reserve Bank Amendment Bill was an important matter that had generated a great amount of public interest and one that the Committee needed to deal with expeditiously. .

Presentation of the Reserve Bank Amendment Bill by National Treasury
Ms Rebecca Tee, Chief Director: Legal Services, National Treasury, introduced the team from National Treasury and the South African Reserve Bank.

Dr Johann De Jager gave a brief introduction of the historical groundwork leading to the formation of the modern banking system. Originally when the concept of a company had been developed there had been a traditional model of a company that had been followed. People took the assets of a company and handed them over to managers to be managed on their behalf. The traditional model of company formation had established the principle that the management of such institutions owed all their fiduciary duties to the company’s shareholders. The shareholders were entitled to all the benefits and all the profits of the institution. In the modern era this had been the model adopted by the Companies Act. When Banks had been established in South Africa they had been set up in the same fashion. It became necessary for the establishment of a Central Bank to regulate other banks and to spread liquidity and currency. It also became an agent for Banker and Government. The Central Bank later on became the conduit for monetary policy. The Central Bank therefore took on an advantageous monopolistic position and the rights of its shareholders had to be realigned accordingly as they would have been in a position of advantage compared to other institutions in the market. From that point onwards, the Central Bank had lost its competitive role in the market and became non-profitable. The Central Bank started to play a public interest role. Instead of sharing in the profits of the institution the Central Bank’s shareholders now had a fixed return.

In some Central Banks, governments had taken over the shareholding. A survey conducted by the International Monetary Fund (IMF) in 2004 had shown that South Africa was currently one of 9 out 101 Central Banks throughout the world that had been surveyed that had private shareholders. There was now a huge difference in that all these institutions now had strict limitations on profit allocation. These Central Banks were fundamentally different from an ordinary company, they were not driven by a profit motive and they now had a public interest motive. The rights of the shareholders of these institutions were not the same as the rights of the shareholders in ordinary profit-making companies. Public interest dictated that they could not own and control this institution as it was a public institution. The question then arose why shareholders were there at all. It was said that the more representative the Board of the Central Bank was of the wider community, the more likely that one could find support and acceptance of monetary policy. Another important reason had to do with ensuring the independence of the Central Bank. Independence was one of the cornerstones of the Central Bank. It had to operate independently because it could be utilised by government for short term purposes that were not for the benefit of the country. So the main role of shareholders was to safeguard the independence of the Central Bank and it was rightfully said that shareholders were the custodians of the Central Bank’s independence.

An explanation was provided as to the current structure and operations of the Central Bank in terms of how it was controlled and managed. The Bank’s structure was determined in terms of the Reserve Bank Act of 1989. The Act was very strict on shareholding to ensure that shareholders appreciated their role and did not attempt to benefit from their shareholding for their own sake. Shareholders were only entitled to a maximum of 10000 shares and their votes were limited. The Act also provided that no votes could be exercised by a shareholder who was not ordinarily resident in the Republic. Another important provision was that the Act provided for a fixed return of 10% per annum. The biggest power possessed by shareholders that made it possible for them to influence the Central Bank, was that they could appoint Directors to the Board. However, because government also had a stake in this institution, half of the Board was also appointed by government. Shareholders were currently represented on the Board by four Directors who represented Commerce, Finance, Agriculture and Industry. 

The presentation also focused on the problem that had necessitated the amendment of the Act. It turned out that some of the Reserve Bank’s shareholders did not understand their role.  Time and again in the past, there had been shareholders who had tried to change their allocation of the fixed return on their shares to something where they shared in the profits generated by the Central Bank. It had also been discovered that shareholders had accumulated lots of shares by making use of family members for instance, to circumvent the 10000 shares that they were limited to hold and to also exercise more than the 50 votes per shareholder that they would be entitled to have if they had 10000 shares. There were also persons who had been appointed to the Board, who did not understand that when they were appointed to the Board, they owed their duty to the institution and not to the shareholders who appointed them. Instead of doing what the Central Bank was supposed to do, such persons sat on the Board and tried to do what was best for the appointee shareholders. The Reserve Bank had therefore embarked on a process of amending the law resulting in the Bill before Parliament that was trying to address those issues.

The Bill therefore aimed to stop the Bank’s shareholders from circumventing the Act’s limitation of a maximum of a 10000 shares per shareholder; to allow for nomination of Directors by a broader base of the South African public and to broaden representation on the Board; provide for the establishment of a panel for the election of Directors; define clear criteria when persons were disqualified from serving n the Board; provide for the confirmation of the Board nominees against “fit and proper” criteria; clarify the powers and functions of the Board; and to provide for the possibility of the Governor and Deputy Governors to be re-appointed to serve a term of less than 5 years.

The Chairperson asked if members had any questions on this part of the presentation before they moved on to the next part.
           
Discussion
Mr Z Luyenge (ANC, Eastern Cape) asked for an actual copy of the Bill to be provided to Members. He asked for more information to be provided regarding the fixed term of the Board and for an explanation of the term ordinarily resident. Ordinarily resident referred to someone who resided in South Africa. It did not say that this person had to be a citizen of South Africa.

Mr N Koornhoff (COPE, Western Cape) noted that at present non-South Africans could buy shares and asked if this was being outlawed in the current Bill. If not, he asked why was this was not being done.

Dr De Jager replied that copies of the Bill had been made and could be distributed to Members.  If a shareholder Director was appointed at an Annual General Meeting (AGM) the term of office would start from the following day after the AGM and would last till the third AGM after his/her appointment. This effectively meant that it would be 3 years and that was a fixed term. Non-citizenship was not a disqualification for the acquisition of shares or to be appointed as a Director. However it was required that one be resident in the Republic. A shareholder’s residence status also determined their right to vote. This was based on the principle that you would not want a person to exercise influence by voting if that person did not live in the society affected by the operation of the institution. One could have for example, a citizen of Belgium who lived in South Africa and would be able to vote and yet a South African citizen living in Belgium would not be allowed to vote.

Mr D Van Rooyen (ANC) asked whether share acquisition in the Central Bank was popularised amongst previously disadvantaged groups.

Mr Chris Moraitis, Independent Legal Adviser on behalf of South African Reserve Bank, replied that the sale of the shares at one rand a share made this an investment that was open to all and not just the wealthy. Share prices were moving upward and it was important to curb speculation by keeping share prices at a low level. The current price of R1 was determined in part by the dividends paid out to shareholders. It had never been intended that only people who afforded these shares acquired them. They wanted to stop the speculation involved in the trade of the Reserve Bank based on the inaccurate belief by some shareholders that they had an entitlement to share in the profits of the institution.

South Africa had always welcomed foreign direct investment. Non-residents and resident non-citizens had always been allowed to take shareholding in the Bank because the bank fully appreciated that foreign citizens were affected by the laws of South Africa and by the Central Bank itself if they were resident in South Africa. There was no wish on the Bank’s part to somehow prevent them from participating in that community spirit. All that they said was that such people could own shares in the institution but they would not be allowed to vote their shares if they were not resident in the Republic.

Mr D George (DA, Gauteng) commented that the Reserve Bank was not an ordinary company and undoubtedly there were shareholders that were acting in a way that brought their ability to govern the Central Bank into question. However there was also a view that this group of shareholders was actually making sure that there was good governance in the Bank and that they had been somehow demonised. He therefore sought clarity on exactly how these shareholders were not acting in the best interests of the bank.

Mr D Van Rooyen (ANC) asked what the current shareholder structure was like and how had the manipulation of the 10% shareholding affected the operation of the Reserve Bank?  This would help him to appreciate the magnitude of that particular problem. It would also be important for Members to be informed about what remedial action had been before the amendment of the Act and the steps that would be taken to correct the situation that had arisen as result of the breach of the limitations on shareholding.

Dr De Jager responded that the fixed 10% shareholding meant that shareholders paid 10% on a nominal value of a share. The nominal value was R1 and this meant that the shareholders paid 10c. If a shareholder had 10000 shares this would amount to R1000 a year in shareholding.

The Central Bank’s operations were there for the benefit of the people of South Africa. All its operations, therefore had to have this ultimate goal and it would not be too difficult to see when a person appointed to its Board acted for his/her own personal interests especially by trying to earn more returns on shareholding than was allowed in terms of the Act. If a person was appointed as Director to the Board and through his/her powers tried to see that the institution was either nationalised or that it paid bigger dividends of the profits made by the institution, that person would clearly not be acting in the best interests of the institution and the South African public. The Reserve Bank was aware that there had been a definite indication that there were people who were trying to nationalise this institution and benefit from South Africa’s national reserves. For example, Over the Counter Shares Transfer Facilities (OTCSTF) statistics provided by the Central Bank for the period January to March 2010 had revealed irregular trading patterns that indicated speculation when compared to the corresponding trading period of the previous year. Following media reports about nationalisation and expropriation, the number of transactions concluded had risen from 4 in the previous year to 37 in 2010. The number of shares traded over the period was 57600 in 2010 as opposed to 5000 in 2009. The spread in trading had been between R1 a share to R14 a share and this was a huge spread that was speculative as opposed to a spread in the past of about R1. The percentage of shares traded in this period was 2.88% of the total number of shares as opposed to 0.25% in the corresponding period. These statistics showed that there persons intending to buy shares at low price to later on make huge profits at a later stage.  This was shown by the prices that these persons were offering their shares for sale on the market clearly based on the principle that if this institution was nationalised or if shareholders were paid out on expropriation then for shares for which they had paid for not much more than R10, R13 or R14, they would want a massive return for them.

In terms of the shareholding spread, private shareholding was at 78.1%, Banks at 3.1% and other at 18.1%. The spread was also given in terms of resident compared to non-resident shareholders. 82% of shares were owned by persons resident in the Republic whilst the remainder was in the hands of non-residents. Looking at some of the conglomerates of shareholding that were there, family and associates held close to 9%. While this appeared to be a small figure, in an ordinary company, if one had 10% of the issued shares of a company they could pass a special resolution. The percentage of the shares held of the total non-resident shareholding that were held by family and associate shareholders was a huge figure of 57.5%.

Mr M Swart (DA, Western Cape) asked if the definitions proposed by the Bill were sufficient to cover the actions of the shareholders in trying to circumvent the limitations on shareholding imposed by the Reserve Bank Act.

Ms Z Dubazana (ANC, KwaZulu-Natal) asked what the Reserve Bank had resolved to do after it had realised that its control measures with respect to shareholding had failed. Was there a proposed tool or control measure to ensure that the abuse of power by shareholders would be stopped?

Dr De Jager addressed the issue about what had been done in the Companies Act and the Banks Act to address the circumvention of the limitations on shareholding. The Banks Act had controls on shareholding including the definition of “associate” to try and identify links between shareholders for the purposes of circumventing requirements of the Act. However, there were limitations to the ambit of the Act because wording alone was insufficient to cover all different scenarios. It would therefore remain possible that people would always be capable of devising ways to circumvent the Act despite concerted efforts by legislation to prevent that from happening. They could only act after discovering what was being done by people and not proactively. What they did was that they calculated shares based on the definition of “associate” to make sure that no unfair voting rights were obtained from conglomerate shareholding. For example, a husband and a wife qualified as “associates” and their shareholding would be calculated by adding up all their shares so that they added up to 10000 shares. The husband would not be able to buy 10000 shares in his name and another 10000 shares in his wife’s name. They would only be able to buy up to a maximum of 10000 shares and they would only be able to exercise a maximum of 50 votes. They were not going to legislate retrospectively. However there would be an in-between measure that would allow persons that had more than 10000 shares, if they disclosed that fact. It would be possible for the Central Bank to exercise control over that by limiting them to 50 votes. If one sold off any of the shares they would not be able to buy up to the level that they previously held, if that had been above the 10000 share limit. This had been introduced in the OTCSTF system in the past but there had been no legal backing of the type sought through the amendment Bill.

Mr Moraitis added that what they were dealing with was a situation where a very small number of shareholders were accumulating a disproportionate number of shares. There had been press campaigns that had been propagated by these people where they had indicated that they held 5% of the shares in the bank and that members of their families together with associates held another 5%. The moment that kind of a situation prevailed it created a position where a few people had a disproportionate amount of power within an institution that was public in its nature. It had to be borne in mind that this was an institution that did not pay dividends and was a society based investment. There was no real incentive unless those people wanted to attend AGMs and to vote for the election of Directors. The moment you had a bloc of shares controlled by persons who could have other motives this heightened the danger of those persons exerting undue influence to achieve their ultimate goals. Therefore, although the 10% shareholding appeared to be very small, in reality it could be a significant shareholding if there was shareholder apathy.  The original intention had been to have a wide spread of shareholding to include community participation to ensure better governance of the institution. While much had been made of the fact that the “shareholder activists” as they called themselves were in it for reasons of good corporate governance, the OTCSTF statistics had demonstrated very clearly that this was not true. They were in it for the purpose of trying to make the Central Bank’s life as difficult as possible so that their shareholding would be expropriated. This had nothing to do with nationalisation; the term “nationalisation” was a misnomer. It was expropriation of shares with an ulterior motive. The Reserve Bank did not hide behind the lack of good corporate governance. However unsubstantiated and unfounded allegations were being thrown around regarding corporate governance for an ulterior motive.

Mr M Makhubela (COPE, Limpopo) asked why the Bill’s proposal for the re-appointment of the Governor and the Deputy Governor had reduced the term of office to 3 years from 5 years.

Mr De Jager responded that this allowed flexibility as in terms of the current law the Governor’s term could not be revised if there was a need to do so.

Ms Dubazana asked if the criteria of “fit and proper” persons took into account previously disadvantaged groups.

Mr Moraitis responded that there was nothing in the criteria of “fit and proper” that discriminated against previously disadvantaged groups. It was not correct to say that fit and proper excluded people who were previously disadvantaged. A panel would determine who was suitable to sit on the Board.

Mr T Harris (DA, Western Cape) commented that although a distinction had been made between governance and operations in the presentation, he was interested in what influence the Board could have over monetary policy and all the day to day operations of the bank.

Mr De Jager responded that creating monetary policy was one of the original powers possessed by an Executive in an institution.  Shareholders had nothing to do with monetary policy. There was no way that shareholders could be allowed to exercise any influence on monetary policy.

The Chairperson asked if they had a way of knowing how many shareholders they had in terms of their nationality and other demographic information.

Mr De Jager responder that access to the register of shareholders was restricted to shareholders only and they could therefore not have access to it


Presentation of the Amendments Clause by clause
Mr De Jager presented the Amendment Bill, clause by clause as shown in the accompanying document.

Discussion
Mr George commented that while he agreed that this Act was not an Act of Expropriation, there were however some shareholders who had expressed the sentiment that this was an assault on property rights and would be challenging the Bill in an international court. He therefore requested further clarity on the question on the shareholder attack on property rights. He asked if the Reserve Bank was anticipating any constitutionality challenges

Mr Moraitis was confident that the Bill did not violate any bi-lateral trade agreements between Germany and South Africa after consultation with senior counsel.

Mr R Lees (DA) bemoaned the fact that there appeared to be no definition of a “fit and proper person” to sit on the Board and who would define this concept. Secondly, the make up of the panel that would make nominations of who would sit on the Board was going to be appointed by the Governor. The Governor could do a good job in one instance but at another time could then do a very poor job. This opened up the issue to a large degree of controversy in the future.

He was lost as to the great deal of concern raised given that these shareholder Directors had a very limited role to play in the operations of the Bank. By and large, it was the Governor who was responsible for running the bank and setting monetary policies.

Mr Harris commented that this amendment created a huge edifice of structures above the Board. In his opinion, however, the real nub of the matter was that the Board’s roles and functions were massively restricted. 

He requested an explanation why the conditions had been weakened from representing a sector to having knowledge of a sector. Whilst he understood mining as having an important historical role in the SA economy, its contribution to the Gross Domestic Product (GDP) was shrinking. In the past it would have made sense to have mining represented on the Board but to include currently was questionable.

The new section 4 restricted the Board to the minutiae of the governance of the bank. They had no say over anything that the bank did. He commented that the Board had no say over things that mattered and asked if there would be a review of the Central Bank by the Minister of Finance.

Mr Moraitis responded that it was incorrect to say that the Governor appointed the panel. She received nominations and exercised a functional role. It was also simplistic to suggest that the Board had no real authority and pointed out that there were other considerations such as conflict of interest that necessitated restrictions on what the Board could do.

Ms Gill Marcus, Governor of the Reserve Bank of South Africa, addressed the Committee in closing. She appealed that the Bill be expedited through Parliament to enable its implementation prior to the Reserve Bank Annual General Meeting in September 2010.

The meeting was adjourned.










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