The Department of Trade and Industry provided an initial briefing on the proposed Corporate Law Amendment Bill to the Committee. The purpose of the Bill was explained and key pertinent issues elucidated. New provisions would be introduced into company and closed corporation regulations. The rationale behind the Bill was explained. Correct implementation of the Bill was crucial.
Members asked certain questions including the need for expert opinion at public hearings, the role of auditors within companies, Department capacity to implement the Bill, the envisaged impact of the electronic registration of companies, the vacancy rate within the Department, the distinction between public interest and limited interest companies, the dangers of equity finance by companies and the need to regulate auditors.
Documents handed out:
Department of Trade and Industry presentation
Mr F Sibanda (CD-Policy and Legislation) provided detail on the purpose of the Bill and key pertinent issues. The Bill intended to introduce certain provisions into company and closed corporation regimes. The Bill would introduce two types of companies namely "public interest" and "limited interest" companies. Reasons for the introduction of the Bill were elucidated. The Bill would achieve certain economic benefits. Detail was provided on how the Bill would be enforced.
Prof B Turok (ANC) advised Members not to rush the Bill and declared that the proposed legislation appeared simple on the surface but contained profound implications for the business community. He referred to a recent Financial Times article that exposed significant malpractice within a Japanese auditing firm. The Committee should conduct a proper investigation of all relevant aspects. Top experts should be invited to the public hearings. A recent conference on Black Economic Empowerment-related equity deal-making revealed substantial disquiet amongst leading financial leaders. The provision of non-auditing services by auditors created the potential for conflicts of interest. Many anomalies existed in the equity market.
The Chairperson stated that the Committee would not rush the deliberation process but realistic timeframes would have to be respected. Expert opinions would be garnered at the scheduled public hearings.
Ms F Mahomed (ANC) asked whether the Department had sufficient capacity to handle the additional workload that the proposed legislation would create. More detail was required on the proposed reporting bodies. The effectiveness of the electronic registration of companies was questioned.
Dr P Rabie (DA) sought an explanation on the distinction between public interest and limited interest companies.
Mr L Laubschangne (DA) stated that the Department’s 32% vacancy rate remained a worrying factor.
Mr Sibanda replied that the proposed electronic registration system would help to alleviate capacity shortfalls and facilitate enhanced efficiency. The Bill made provision for a budget for monitoring institutions to be established. The right skills would be sourced to fulfil the necessary functions.
Mr M Netshitenzhe (Director-Commercial Law and Policy) stated that the Bill provided a functional definition of the distinction between public interest and limited interest companies. The definition should be viewed as fluid. The Department was aware of the concerns raised by Prof Turok.
Mr M Lepaku (DTI-Policy and Legislation) declared that the basis of the distinction between public interest and limited interest companies was whether shares had been offered to the public. A public interest company required an audit committee whereas a limited interest company did not require such an arrangement.
Dr Rabie asked whether a company that delisted from the Stock Exchange would automatically become a limited interest company.
Mr Lepaku responded that the company articles would determine the nature of the company relative to the definition. The existence of public shares would determine the description of the company in question irrespective of a listing.
Mr Laubschangne asked whether the current distinction between "Pty Ltd" and "Ltd" would fall away as a result of new provisions. He suggested that the Bill could confuse the public with regard to the definition of companies.
Prof Turok declared that the issue of equity issuance by companies would be raised at the public hearings. The Department should formulate a sound response to satisfy enquiries.
The Chairperson noted the vacancies within the Department and proposed that such positions be filled to meet capacity demands. The Australian High Commissioner had recently indicated that vacancies created negative consequences for South Africa’s international standing. The Minister had to explain how the vacancy problem would be addressed in due course.
Mr Netshitenzhe asserted that the Bill intended to address controversial issues such as equity transfers and share manipulations. Two state institutions would be established to enforce provisions of the Bill. The Bill intended to complement provisions of the Auditor’s Profession Act. Recent international corporate scandals confirmed the need for the Bill. The Department would prepare well-informed responses in advance for the public hearings.
Mr Lepaku stated that the distinction between public interest and limited interest companies was important for financial reporting purposes only. The Bill would not confuse the general public and a public company would retain its characteristics.
Mr Netshitenzhe stated that the nature of the company would determine the stipulated reporting requirements.
Mr Laubschangne asked whether non-electronic material would also continue to be used in addition to electronic information. Transparency was required with regard to equity transfers. He asked why potential investors could not borrow money in the normal manner and why companies would have to provide the money themselves.
Mr Netshitenzhe stated that the current government approach to e-commerce was to gradually introduce such measures but continue to allow other forms of documentation to be utilised. An electronic signature could be used as evidence in court. The issuance of equity by a company to facilitate purchase of its shares could only occur when a company had established that liquidity would remain after transfer. The proposal would have to be argued at an Annual General Meeting and approved. Loans could not prejudice the company’s economic status. The Annual Report had to declare such transactions. The Minister would appoint Inspectors to investigate alleged transgressions if minority shareholders rights were prejudiced.
Prof Turok noted that the Department’s Director-General was aware of the pertinent issues and acknowledged the need for caution. Actual and potential distortions had to be debated at the public hearings. Equity dealmaking was a highly complex matter that could be manipulated in many ways. The dematerialisation of documents and share records had to be carefully considered as computer malfunctions could occur. Safeguard measures were needed to prevent system collapse.
Mr B Muthwa (Policy and Legislation) declared that transparency in equity transfers was of paramount importance. Legislation was designed to protect investors and creditor. A solvency liquidity test would be introduced after a company had agreed to issue capital to investors to facilitate share acquisition. Company assets had to be more than its liabilities. A company had to be able to repay debts at all times.
Mr Netshitenzhe stated that the Bill would provide for auditors to be rotated after five years to avoid potential conflicts of interest and familiarity with management.
Mr Lepaku stated that the creation of audit committees within companies would serve to ensure the independence of company auditors and avoid allegations of conflict of interest. Legislation would prevent auditors from fulfilling other services to companies such as tax advisors. The Bill specified certain services that could not be carried out by an auditor.
Ms Mahomed cautioned that a clear regulatory framework was needed to reduce irregular behaviour of auditors and address existing loopholes. A clear definition of prohibited activities for auditors was required. The Bill should explain the process if default occurred.
Prof Turok stated that the self-regulation of accountants and auditors had to cease and the Bill indicated a move in the right direction. Severe sanctions had to be imposed on violators to discourage further contraventions.
Mr Netshitenzhe concurred that self-regulation would be removed in the interests of investor protection. Sufficient sanctions would be imposed by relevant institutions to ensure adequate legislative compliance. The Bill would impose a R1 million penalty as a preliminary step.
The Chairperson stated that the legislation would be informed by expert opinions obtained at public hearings.
The meeting was adjourned.