South African Reserve Bank Amendment Bill: South African Reserve Bank briefing
The South African Reserve Bank briefed the Committee on the South African Reserve Bank Amendment Bill. The SARB outlined the role of the Bank and of government, the shareholding provisions, the Constitutional and legislative provisions in regard to the Bank and the main features of the way in which it operated. The SARB noted that it was only one of nine Central Banks, worldwide, that allowed private shareholding, and compared its own situation to that of other banks, noting that none were driven by a profit motive, that shareholders were prevented from forming blocs and that voting rights were limited.
The structure and operations of the Central Bank in terms of control and management was explained, and the restrictions on shareholders were fully described. Each of those aimed to prevent shareholder control or undue influence. In the past, there had been instances, that were detailed, where shareholders attempted to circumvent the provisions of the Act and the general principles of restricting shareholder rights, and therefore it was necessary for the Bill to address those threats. It also aimed to expand the Board by one member, to allow for nomination of Directors by a broader base of the South African public and to broaden representation on the Board. The Bill also provided for the establishment of a Panel for the election of Directors, provided clear criteria both as to disqualification of directors and the criteria of “fit and proper”, clarified the powers and functions of the Board and provided for the possibility that the Governor and Deputy-Governors could be re-appointed to serve a term of less than five years.
Members of the Committee raised questions about the shareholding structure and the relationship between the Panel and the Board. They also asked for the reasons for distinctions being drawn in the appointment of directors, questioned the reasons for increasing the number of directors on the Board, why specific mention had been made of a “retired judge”, and questioned whether the revisions in this Bill were not cutting the powers of the board. A Member wondered why the Act could not be implemented retrospectively. Members noted that the Bill would be discussed in the House on 26 August.
South African Reserve Bank Amendment Bill [B10-2010]: South African Reserve Bank (SARB)
Dr Johann de Jager, General Counsel, South African Reserve Bank, introduced the South African Reserve Bank Amendment Bill [B10-2010] (the Bill) to the Committee. Dr de Jager briefly outlined the role of the South African Reserve Bank (SARB or the Bank). It was mandated to maintain the value of the currency in the interest of sustainable growth and development, to serve the public interest, to comply with international and national obligations and to adopt co-responsibility for a stable macro-economic environment of the country. The SARB’s responsibilities included currency, payment systems, bank regulation, financial markets, acting as banker to Government, managing country reserves, and managing exchange controls and monetary policy.
The complementary role of the Government was that it must establish a central bank, appoint Governors and independent Directors to the Bank and set policy goals. South Africa’s reserves were held in trust by the SARB, and government was the ultimate guarantor, and received 90% of the profits of the SARB.
Dr de Jager indicated that the SARB was not a private company. Although there were shareholders, they had limited rights, as set out in the South African Reserve Bank Act (the Act). Furthermore, there was limitation on the ownership of shares in the SARB, in order to prevent actions being taken by shareholders in concert with the intention of exerting undue influence. Shareholding in the SARB did not equate to ownership. There was also the widest possible limitation of representation on shareholding, whether this was individual or corporate, again to prevent blocs of opinion or influence.
Dr de Jager noted that the SARB was established in terms of Section 223 of the Constitution, read with the SARB Act. Section 224 required that it be able to act without fear, favour or prejudice, so it was independent within the Government, and held regular consultations with the Minister of Finance. He reiterated that it was not seen as a private company and was not governed by the Companies Act or Public Finance Management Act, being specifically exempt from the latter.
A 2004 survey conducted by the International Monetary Fund on 101 Central Banks had shown that only nine, including South Africa, had private shareholders. All these central banks were fundamentally different from an ordinary company, in that they were not driven by a profit motive and they now had a public interest motive. There had also generally been a re-alignment of rights of private shareholders in Central Banks. Public interest dictated that they could not own and control such institutions as they were public institutions. The more representative a Board of the Central Bank was of the wider community, the more likely that general support and acceptance of monetary policy would be. Independence was also one of the main features of all Central Banks, and the independence prevented them from being utilised by government for short-term purposes that were not for the benefit of the country. Shareholders were the custodians of the Central Bank and their main role was to safeguard the independence of the Central Bank.
The Bank’s structure was determined in terms of the Reserve Bank Act of 1989. Shareholders were only entitled to a maximum of 10 000 shares and he reiterated that not only were their votes limited, but the Act also provided that no votes could be exercised by a shareholder who was not ordinarily resident in the Republic of South Africa, irrespective of nationality. Another important provision was that the Act provided for a fixed return of 10% per annum. This confirmed the role of the SARB as one of public interest, rather than profit.
The greatest sphere of influence of shareholders lay in the fact that they could appoint Directors to the Board. This was their greatest sphere of influence on the Central bank. Shareholders were currently represented on the Board by four Directors who represented the sectors of commerce, finance, agriculture and industry.
Possible abuse by shareholders had in the past included the acquisition of shares above the legal limit through associates, with the intent to exercise undue influence. There were also offers of payment for votes in favour of appointment as a Director. Shareholders had demanded a share in the profits of the Bank, including adopting resolutions to try to give effect to this. There had been manipulation of the share price and a demand for a special Extraordinary General Meeting to further their profit agenda, thus disregarding the Provisions of the SARB Act. There had been allegations that the shareholder register was inaccurate. There were also some unsubstantiated allegations of fraud, corruption, bank bail-outs and other matters.
The main objectives of this Bill aimed to address these and other issues. Firstly the Bill aimed to stop shareholders of the Bank from circumventing the Act’s current limitation of a maximum of 10 000 shares per shareholder. Secondly, it would allow for the nomination of Directors by a broader base of the South African public and broaden representation on the Board. Thirdly, the Bill would provide for the establishment of a panel for the election of Directors, define clear criteria as to the disqualification of people from serving on the Board and provide for the confirmation of the Board nominees against ‘fit and proper’ criteria. Fourthly, the Bill would clarify the powers and functions of the Board, which would primarily be those of governance. The remaining powers and duties of the Bank would be vested in and exercised by the Governor and Deputy-Governors. Lastly, the Bill would provide for the possibility of the Governor and Deputy-Governors being re-appointed to serve a term of less than five years.
Dr de Jager then proceeded to present the Bill, clause by clause (see attached document). He explained the nature of the Board and emphasised that there was a distinction between governance and the day-to-day running of the Bank, and policy implementation. The Bill now provided that the SARB must have a Board of 15, rather than saying it should be managed by a Board of 14. The Bill entrenched the prevailing practice but did not rely on delegation and thus created original powers of the Executive of the SARB. The SARB Board was based on governance, not policy and management.
Dr de Jager also stressed that the use of a panel system would broaden the pool from which Directors were nominated and elected. The Panel should also ensure that fit and proper Directors were chosen who had the knowledge and expertise in these matters. The use of a panel enhances independence. However, he noted that Parliament would still have an oversight role.
Dr de Jager also explained in some detail the functions and powers of the Board and the conditions of office and tenure of directors.
Mr M Makhubela (COPE, Limpopo) asked why, with reference to Clause 2, there were now to be odd, rather than even numbers of Board Members.
Mr Chris Moraitis, Independent Legal Adviser, SARB noted that seven of the Board members were appointed by the President and the other seven by the shareholders. The size of the Board is increased with one director appointed by Minister to guard against domination by directors elected by shareholders (for example if the Chairperson (who had a casting vote) was not a Governor. This would emphasise the cohesion of the Board.
Mr Makhubela asked why there was specific mention of a retired judge.
Mr Moraitis replied that the appointment of a retired judge was intended to provide the right balance to the panel and make it more representative. This also complied with the requirements of “fit and proper”.
Mr B Mnguni (ANC, Free State) asked what the current shareholding structure was, and what was the position when a person wanted to buy shares.
Mr Moraitis said that it was important for there to be community representation and participation and for the community to express their views. Shareholders accepted the limitation of shareholding rights. Shareholders would not be allowed to increase their share and the voting would always be limited. He noted again that 90% of the profits of SARB went to government and 10% were distributed between the Bank and shareholders. A bloc of shareholders could also not be permitted, for coherent reasons.
Mr B Mashile (ANC, Mpumalanga) wanted to know about the relationship between the panel and the board.
Mr Moraitis noted that the Board did not oversee the panel. There were certain terms of reference and due process would be followed.
Mr T Harris (DA, Western Cape) commented that in his understanding the purpose of the Board was to provide a balance of power and to limit the power of individuals. Furthermore he stated that the current Governor of the Reserve Bank was quite capable. However, he felt that the revisions to Section 4 would cut the powers of the board. He thus asked what would happen if there was a “rogue” governor in charge of the Reserve Bank. He was also convinced that the Bill provided for the right balance of power. He called for a list of the powers of the Board.
Dr de Jager commented that the Board could not manage the institution’s day-to-day operations and that the Board must exercise governance rather than becoming involved in day-to-day activities. It was important to note that the Board would still be able to exercise all its current powers. The Act set out in detail what the SARB was allowed to do. Clauses 3 and 4 of this Bill codified the functions of the Board and the conditions of office of Directors of the Board.
Mr R Lees (DA, Kwazulu-Natal) asked why the Directors that were appointed were not subjected to the same process as other Directors. Furthermore, he asked why there was distinction between them. He commented that it was possible to appoint people with different agendas.
Mr S Montshitsi (ANC, Gauteng) asked a question regarding the seven “other” members of the Board, noting that it was specified that they must be drawn from different sectors: namely two Directors from Commerce and Finance, one Director from Agriculture, two Directors from Industry, one Director from Labour,and one director from Mining. He questioned how balanced that would be.
Mr B Mnguni (ANC) asked whether “fit and proper” individuals would really represent the interests of the community.
Dr de Jager responded that the board member policy was tested against all other Central Banks and that it was the norm in all emerging countries.
Mr Moraitis responded by saying that the board members elected must have knowledge of the sectors which represented the most important sectors in the country. He noted that it was incumbent on the Board to represent the whole country. The Central Bank was not elected by the electorate, nor was intended to represent the community. There was an obligation on the President to appoint eight directors. Every Director must also be fit and proper, even those appointed by the President.
He reminded Members that the main goal of the SARB, as set out in the Act, was to maintain the value of the currency and that the government followed an inflation targeting process in which the limit was set between three and six percent. It was important to hold individuals accountable. An unstable Central bank could bring problems to the system. He noted that sensitive information was also discussed by Board.
Mr Makhubela asked why the Act could not be implemented retrospectively.
Dr de Jager said that it was not the intention of this Bill to try to interfere with what had happened in the past. The Bill still permitted people to retain their shares but it was important to note the limitations and that the SARB could exercise control of the shares.
Mr Makhubela asked what the reason for dealing with the accumulated share.
Dr de Jager responded that propaganda had been spread by the market that shares belonged to shareholders. For example, in Belgium, shareholders wanted to share in the assets of the institution.
The Chairperson noted that further written and oral submissions might be necessary. The Bill would be discussed in the House on 26 August.
The meeting was adjourned.
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