PIC & GEPF on Steinhoff; Transformation of the Financial Sector: Nedlac; Over-the Counter Derivative Transactions: NT briefing

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Finance Standing Committee

03 December 2019
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

The Public Investment Corporation (PIC) briefed the Standing Committee on a mediation process between the Steinhoff Group and its creditors, including the PIC.  It reported that Steinhoff had made a proposal involving funds from a third party known as “The White Knight”. The terms of this proposal remained strictly confidential. This process was fragile and complex. If it did not succeed, the PIC would resume legal action against Steinhoff. The PIC had received confirmation from law enforcement agencies that they were investigating those implicated in the Steinhoff matter.

The Government Employee Pension Fund indicated that it has put corrective measures in place including requiring that the PIC should consult it first before making any investment of R2 billion or more.

Committee members expressed frustration that efforts to recover funds were taking so long. In addition, they expressed unhappiness at Steinhoff’s refusal to release an audit report from PriceWaterCoopers on the company’s decline and suggested that they could use its powers of subpoena to obtain it.

The Committee also received a briefing from the National Economic Development and Labour Council (Nedlac) on transformation in the financial sector. They heard that there had been limited monitoring of the agreements reached at a 2002 summit on ensuring access to basic financial services and the development of sustainable institutions to serve poor communities. There were no consequences for failure to implement agreements. The Committee was briefed on steps taken to prepare for a second summit on financial sector transformation which was to have been held last year, but which was postponed. The committee called on Nedlac to report back to it on when the summit would be convened.

The Committee received a final briefing form the National Treasury on standards to be set for over-the-counter derivatives transactions. This would be done in terms of subordinate legislation under the Financial Sector Regulation Act of 2017 and would set margin requirements in order to reduce risk for counterparties to such trades.  Members agreed to consider the presentation and review the matter in the new year.

Meeting report

The Chairperson commented that efforts to recover money invested in the Steinhoff Group were moving at a slow pace. The PIC would have to convince Parliament that it was serious about getting back pensioners’ funds. He invited the PIC delegation to make its presentation.
 
Briefing by Public Investment Corporation (PIC)
Dr Reuel Khoza, Chairperson, PIC board, gave an assurance that there was no sluggishness on the part of the PIC in pursuing money owed to pensioners, widows and orphans.
 
Ms Lindiwe Dlamini, Acting Head: Legal Services, PIC, said legal action against Steinhoff in the Amsterdam courts had been suspended for a mediation process which started on 4 July 2019 and initially ran for three days. It was held under strict confidentiality between participating investors and their respective representatives.
 
There were three key groups of creditors and claimants:
 
-Bondholders who had the strongest position because their rights were senior and they could “pull the plug” and place Steinhoff in bankruptcy for all the loans on which it had defaulted;
 
-“Vendor claims” of those who purchased or exchanged Steinhoff stock as part of the many mergers and acquisitions transactions the former CEO, Marcus Jooste, engaged in recent years, and who now had the right to unwind those transactions on account of fraud;
 
-Other shareholders, including the PIC group, who brought claims for prospectus liability, or delict, and secondary market securities fraud.
 
During the mediation, Steinhoff made a proposal to the participating investors and shareholders involving funds from a third party known as “The White Knight”. The terms of this proposal remained strictly confidential.
 
Ms Dlamini said that, while Steinhoff had made efforts to reach a settlement, it should be noted that this process was fragile. The sheer size of the number of parties involved and the fact that it involved jurisdictions in South Africa, the Netherlands and Germany made the process very complex and time- consuming.
 
The key to finding a solution was Steinhoff would sell certain assets. Such a structured settlement required an additional stock issue, which would require shareholder approval, as well as approval of the Dutch Court of a mandatory haircut or “cram down” of outstanding creditors’ claims.
 
Ms Dlamini said the PIC had received confirmation from law enforcement agencies that they were investigating those implicated in the Steinhoff matter. The PIC is assisting with criminal investigations currently underway.
 
The PIC had contemplated further steps it could take against those implicated. The Financial Services Conduct Authority had fined Steinhoff R1.5 billion for misrepresenting its finances to the market. The PIC understood that Steinhoff will only need to pay R53 million of the fine. The PIC was in the process of instituting legal proceedings against the directors implicated in financial irregularities.
 
Discussion
Ms M Mabiletsa (ANC) said she was not encouraged by the statement that mediation with Steinhoff was ongoing. The committee needed timeframes so that it could follow up on the progress being made in recovering money.
 
Ms M Mohlala (EFF) commented that the wrongdoing at Steinhoff took place over a period of years. Was there no way to detect it earlier? How were investment proposals evaluated?
 
Ms P Abraham (ANC) said she appreciated what had been done so far. However, a crime had been committed. What progress was being made in bringing them to account and who were they? She too asked for timeframes.
 
Mr G Hill-Lewis (DA) said the PIC’s statement on its financial exposure in the Steinhoff matter as of February 2019, listed a loss of R5.23 billion under the current status quo. However, given large unrealised losses reflected in the PIC statement, it appeared that actual losses could total R28 billion if the full loan was written off. He suggested that the PIC had under reported its current loss, because Steinhoff shares had halved in value since the loss was calculated in February. 
 
Mr Hill-Lewis questioned the granting of a R9.35 billion loan to the Lancaster Group to buy an equity stake in Steinhoff. Did the PIC have a claim against Lancaster? He noted the intention to have Steinhoff directors declared delinquent. Which ones?
 
The Chairperson asked what the PIC meant when it said the process to reach a settlement with Steinhoff was fragile and complex. South Africa was part of a global governance system and should be working with counterparts in other countries on the Steinhoff matter.
 
In response to the calls for timeframes, Mr Vuyani Hako, Acting CEO, PIC, said the mediation process was not open-ended. If a settlement was not reached by the end of December, then the full legal process against Steinhoff would recommence.
 
Mr Hako said the PIC did have mechanisms to monitor the performance of loans. However, this monitoring relied on the opinions expressed by the auditors of the companies that received loans. In the Steinhoff case, the PIC was not letting the company’s auditors off the hook.
 
On the mediation process, Ms Dlamini said the PIC had received an offer from Steinhoff the previous week. It was applying its mind to the offer and would report back on it. If the offer was not palatable to the underlying shareholders, the legal process would be reactivated. She assured the Chairperson that the PIC was engaging internationally with Steinhoff stakeholders.
 
She gave an additional assurance that there would be consequences for those guilty of wrongdoing. The PIC had provided all the relevant information to law enforcement agencies and regulators. Papers for delinquency proceedings against Steinhoff directors were being finalised. However, the PIC required access to the PwC report on its investigation at Steinhoff. Steinhoff had refused to release it, and the PIC was now taking legal action to compel release of the report. 
 
Mr Horatius Maluleka, Acting Executive Head for Listed Assets, PIC, responded to questions about the Lancaster loan. He said the PIC had been approached by Mr Jayendra Naidoo and the Steinhoff Group to do an empowerment deal. The PIC owned 50% of the shares in Lancaster, Mr Naidoo owned 25% and the other 25% was owned by a non-profit company which was involved in empowerment initiatives. The loss on the Lancaster transaction had now gone up to R6.2 billion.
 
Ms Dlamini said the Lancaster loans were currently not in default so no action was being taken against Mr Naidoo.
 
Mr Hill Lewis suggested that the Lancaster Loan would have meant that the PIC was overweight in its exposure to Steinhoff. If the Lancaster loan was not in default, how was it being serviced? He asked for more details on the non-profit company involved in the Lancaster deal. 
 
Ms Mohlala asked who took the investment decisions at the PIC. Were decisions made by individuals subject to oversight?  
 
Ms Abraham commented that those who were accountable for the Steinhoff decisions were not in front of the Committee.
 
Ms Botsang Morobe, Associate Principal Private Equity, said there were two Lanacaster transactions; the first was a loan by the PIC to Lancaster to buy shares in Steinhoff. When the Steinhoff share price began to “tank,” the PIC did a second transaction to enhance its security. This involved Lanacaster obtaining a loan from Citibank and buying Pepkor shares. The dividend on these shares helped service the loan helped service the loan.
 
Mr Hill-Lewis asked whether the transactions had been approved by the Government Employees Pension Fund (GEPF).
 
Ms Morobe said at the time they had fallen below the threshold at which stakeholder approval was required. The threshold had since been lowered.
 
The Chairperson commented that Steinhoff was “playing hide and seek.” Parliament needed to see the PwC report and suggested that it could use its powers of subpoena to obtain it.
 
He invited representatives of the GEPF who had accompanied the PIC delegation to address the Committee.
 
Ms Fikile Mbhokota, Investment Manager, GEPF, explained that they had no separate presentation and had relied on the PIC, as their asset manager, to make the presentation on Steinhoff.

Mr Hill-Lewis asked what action the GEPF had taken on the governance failures at the PIC.

Mr G Skosana (ANC) said that the GEPF, as the client of the PIC, should have led the presentation. 
 

Ms Mbhokota said they had now set a limit of R2 billion above which approval had to be obtained for investments. The PIC had to report to the GEPF on a quarterly basis and there were other regular interactions.
 
Briefing by Nedlac
In inviting Nedlac to make their presentation, the Chairperson noted that they had failed to attend a meeting the previous week to which they had been invited. He asked for an explanation.
 
Mr Thembinkosi Mkalipi, Acting Head, Nedlac, apologised for this. He explained that he had assumed this position only on October 5. Due to misdirected email, he found out about the meeting at very short notice and would not have been able to make a meaningful presentation.
 
The Chairperson said Parliament should be taken very seriously and invited Nedlac to proceed. 
 
Ms Nobuntu Sibisi, Head: Programme Operations, Nedlac, said a Financial Sector Summit was convened in 2002. In 2016, Nedlac saw a need to convene a second summit and established a task team. The team did research into the progress made on agreements reached at the 2002 summit. The findings were presented at the Financial Sector Transformation Workshop held in April, 2018.
 
Agreements at the 2002 summit were on ensuring access to basic financial services and the development of sustainable institutions to serve poor communities.  There should be new enabling legislation for second and third tier deposit taking financial institutions and there should be efforts to support financial cooperatives and micro credit providers, with appropriate regulation on usurious practices. There were also agreements on the regulations of credit bureaus and ending unfair discrimination against people with HIV and AIDS.
 
Ms Sibisi said lessons from the 2002 summit were that there was limited monitoring of the agreements and that there were no consequences for lack of implementation.
 
Nedlac convened a workshop in April, 2018 to prepare for a second summit on financial sector transformation later that year. However, the summit was not convened because of two other summits that were taking place. Instead, it was agreed that the workshop’s report and declaration would be signed off by the Nedlac Executive Committee and submitted to the relevant ministers, Parliament’s Standing Committee on Finance and other stakeholders. Recommendations which were not agreed to at the workshop were discussed by Nedlac’s four working committees.
 
The process resulted in the social partners agreeing to:
 
●      Monitor the implementation of financial education, ensure funding for new entrants in the financial sector and eradicate anti-competitive conduct;
 
●      Play a role in ensuring that ownership and management of large financial institutions reflected the demographics of the country;
 
●      Review empowerment financing targets to give more weight to funding black SMMEs, and rural and township entrepreneurs;
 
●      Review procurement laws in order to achieve transformation targets;
 
●      Identify the hurdles to licensing the Postbank to become a state owned bank providing affordable banking services;
 
●      Review the mandates of development finance institutions to achieve national imperatives such as job creation;
 
●      Review the powers of the Nedlac Council to ensure punitive action for non-compliance with Financial Sector Codes.
 
Ms Sibisi said it was imperative that agreements reached at Nedlac were implemented to ensure transformation of the financial sector.
 
Discussion
Ms Abraham commented that Nedlac had huge responsibilities, but had weaknesses in its management. She asked how many managers were in acting instead of permanent capacity.
In spite of the summit, many issues remained unresolved. She raised the issue of credit bureaus which prevented people from obtaining credit. She asked what Nedlac was doing to eliminate discrimination by banks.
 
Mr G Skosana (ANC) asked how far transformation in the financial sector had progressed since Nedlac came into existence.
 
Ms Mohlala said empowerment charters had not achieved their objectives. Parliament should adopt a resolution that all businesses in South Africa should have 50% black ownership and that women were well represented. Nedlac should ensure that this transformation happened. The National Credit Act needed to be reviewed.  There were cases where house insurance was bundled together with mortgage repayments. When a house was repossessed because of non-payment on the mortgage, the insurance contributions were not refunded. There should be state owned banks to ensure access to finance and to fund agriculture and housing.
 
Mr Mkalipi said Nedlac decisions were taken by the social partners. Implementation of commitments made by them was a challenge which should be dealt with at the next summit.  There was a discussion in Nedlac about when the summit should take place. Candidates for the post of Nedlac Director were being interviewed. A permanent Chief Financial Officer would be in place by January 2020.
 
The Chairperson said Parliament had adopted a report from the Standing Committee on Finance in 2017 in which it was stated that a summit should be held. He asked Nedlac to report back to Parliament on when this would happen.
 
Briefing by National Treasury
Mr Roy Havemann, Chief Director for Financial Markets and Stability, said the Financial Sector Regulation Act of 2017 stipulated that subordinate legislation involving rules and standards should be placed before Parliament. Subordinate legislation was highly technical and of great volume. Parliament did not have to approve it, although it could raise issues and hold public hearings on them if it desired. 

Mr Havemann explained that the subordinate legislation presented to the Committee would set margin requirements for over-the-counter trade in derivatives. It would create a "safety net" by requiring parties to a trade to exchange collateral in order to reduce losses in the event of a default.  

Adv Frank Jenkins, Senior Legal Advisor, Parliament’s Constitutional and Legal Services Office, agreed. He said committee members could study the legislation and call for further engagement on it if they felt this was necessary. Otherwise, the Committee could simply take note of it.
 
Mr Havemann said National Treasury would be happy to wait until the following year while members considered the matter.
 
The Chairperson ruled that the matter should be deferred until the new year when the Committee would require a full briefing.
 
The meeting was adjourned. 

 

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