Foreign capital: Laws and regulations that apply to cross-border transactions

With its political and economic stability, competitive labour market and diverse industries, South Africa remains an attractive investment destination for offshore investors. The South African government is generally welcoming of foreign direct investment (FDI). It is one of the strategic goals of the Department of Trade and Industry (DTI), through its Trade and Investment South Africa agency, to increase the quality and quantum of FDI. As part of the DTI’s mission to provide an environment that is conducive to investment, financial incentives are offered to qualifying companies undertaking particular economic activities. Some of these incentives are available to qualifying foreign investors. Currently, there is no set FDI framework against which FDI transactions are assessed – rather FDI is assessed under exchange control regulations, corporate and anti-trust controls and industry specific regulations.

EXCHANGE CONTROLS: Since 1994, South Africa’s exchange controls have been gradually relaxed. However, there remains some exchange controls which apply both to South African residents and cross-border transactions. Generally, there are no restrictions on inflows and outflows of foreign capital under cross-border transactions but, depending on the transaction, exchange control approvals may be required. Examples of FDI transactions that are subject to exchange control approvals are foreign loans into South Africa and the raising of domestic capital by listing of equity and debt instruments on the South African market.

In applying exchange controls, consideration is given to factors such as whether the transaction is being undertaken at a commercially fair and reasonable price, what the long-term benefits of the transaction are likely to be and whether there are any corporate or economic risks associated with the transaction.

COMPETITION: Under the anti-trust laws, mergers having an effect in South Africa that exceed a certain threshold value require the approval of the Competition Commission or Competition Tribunal. One of the factors taken into account in assessing a proposed merger is whether it can be justified on public interest grounds. Transactions are also required to comply with the applicable provisions of the Companies Act of 2008 and, in certain instances, the Takeover Regulations. These provisions seek, inter alia, to ensure the integrity of the market and fair treatment of shareholders.

DEVELOPMENTS: On February 23, 2011, the Treasury, being cognisant of the fact that the lack of a uniform framework to assess FDI is undesirable, released a discussion document, entitled “[a] review framework for cross-border direct investment in South Africa”. This proposed framework, which is expected to come into force within the next 12-18 months, will contain a statement of principles that will apply to cross-border investment to provide certainty to foreign investors and transparent mechanisms to intervene in transactions where required by public interest considerations.

The broad objectives as set out in the framework include the balancing of the benefits and risks of cross-border investments, facilitating the growth of South African companies and supporting the stability of the financial system, while, at the same time, encouraging FDI, ensuring policy certainty for investors and providing a clear statement of public interest objectives against which FDI can be assessed. The proposed framework would replace the exchange control regulations that are currently used to assess FDI, although the other controls highlighted above would continue to apply. The manner in which cross-border transactions will be assessed under the framework has not yet been finalised, although it is proposed that acquisitions above a certain threshold should be subject to review. Transactions falling below the threshold could be subject to a notification process, to enable monitoring and policy evaluation. It is also intended that the framework will be consistent with South Africa’s existing international commitments and applicable bilateral agreements.

OBG would like to thank Edward Nathan Sonnenbergs for their contribution to THE REPORT South Africa 2012.