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SUBMISSIONS TO THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY ON THE COMPANIES AMENDMENT BILL

SUBMISSIONS TO THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY ON THE COMPANIES AMENDMENT BILL. 1 December 2010. Presenters: Ismail Momoniat - Deputy Director General: Tax and Financial Sector Policy, National Treasury Keith Engel- Chief Director: Legal Tax Design, National Treasury

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SUBMISSIONS TO THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY ON THE COMPANIES AMENDMENT BILL

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  1. SUBMISSIONS TO THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY ON THE COMPANIES AMENDMENT BILL 1 December 2010 Presenters: Ismail Momoniat - Deputy Director General: Tax and Financial Sector Policy, National Treasury Keith Engel- Chief Director: Legal Tax Design, National Treasury Jeannine Bednar-Giyose- Director: Fiscal and Intergovernmental Legislation, National Treasury

  2. INTRODUCTION • National Treasury welcomes the process and opportunity to present on submission • Strongly support the Companies Act, 2008 to modernise co Law in SA • Extensive positive engagements between NT & dti regarding Act and Bill • Like taxation law, company law is always complex, given that it impacts on ALL companies in SA • Important issues of public interest • Impact not just on companies, but also on tax revenue and all financial regulators (SARB inc Bank Supervision, Fin Services Board) and JSE • Significant time and resources by regulators and SARS on new Act • Ongoing process, likely that issues will be identified in future

  3. INTRODUCTION- CONTINUED • SARS and financial regulators have approached National Treasury on various issues identified in the Act, prior to its coming into operation • dti presentation last week noted agreements with NT on certain amendments, not all of which are formally incorporated in the Bill as tabled • National Treasury wishes to inform Portfolio Committee regarding the context, content and rationale for proposed amendments • SARS, Financial Services Board, SARB and IRBA will also make presentations themselves on issues they have raised with dti and NT

  4. Tax Revenue and Tax Legislation • Tax acts are money bills, and 2008 Companies Act cannot and does not intend to amend tax laws, but the Act may impact on tax laws • Changes in 2008 Companies Act can set off triggers that create tax events, or require tax legislation to render such events non-taxable • Example of forced conversion from par value to nominal value • Mergers and acquisitions • Auditing changes, tax assessments reliant on audited statements • Implications of business rescue

  5. Regulating Financial Sector • Financial institutions like banks are REGULATED, and can pose SYSTEMIC RISKS • 2008 global financial crisis • SIFIs (systemically important fin institutions) and MORAL HAZARD • Regulatory standards on fin institutions are therefore more demanding than for ordinary companies • G20 and international co-ordination to impose higher standards since Company Act legislated in 2008 • Basel II now becoming Basel III with higher capital and liquidity requirements for banks, plus further global SIFI requirements • Solvency II for Insurance, IOSCO for securities

  6. Regulating Financial Sector.CONTINUED • Greater financial market and prudential regulation in accordance with these international standards will be implemented • National Treasury also intends to set more stringent standards for market conduct and consumer protection • A review of all financial sector legislation has commenced in 2008- some details to be announced shortly • JSE listed companies also set tougher standards than that required for ordinary companies • Higher standards set in financial sector legislation and by financial regulators must be preserved

  7. Role of Financial Regulators and Standard Setters • Many financial regulators and standard setters • SARB (Banking Supervision, National Payments System, Exchange Control) • Financial Services Board (insurance, securities, capital markets, pensions) • IRBA and setting of accounting standards • Treasury releasing paper to strengthen power and functioning of regulators • International effors focused on • Treat posed by SIFIs • Bankruptcy provisions for banks and financial institutions • Power of regulators must be strengthened, and not weakened in any way

  8. Co-ordination between Regulators • A major weakness in our current system, is the lack of regulation between the plethora of regulators • Many financial regulators and standard setters (SARB, FSB, SARS), reporting to different Ministries (NCR, Cipro, Financial Standards Reporting Council) • Credit (BSD, NCR) • Accounting Standards (IRBA, ASB, FSB, Financial Reporting Standards Council) • Need for coordination and information sharing between the financial regulators and standard setters • The Minister of Finance announced in the MTBPS the establishment of a Council of Regulators

  9. Conversion of Par Value to Non-Par Value Shares • Section 35(2) and Item 6 of Schedule 5 of the Act • Tax implications from forced conversion of par value to non-par value shares • Tax trigger for capital gains as a tax event • Great concern for widespread impact companies • Par value changes have achieved objective, not sure why we need forced conversion • Lack of necessity to require a forced conversion of shares. • Agreement between dti and NT on amendments to ensure that the undesirable tax consequences arising from a forced conversion of par value to non-par value shares would be effectively dealt with.

  10. Conversion of Par Value to Non-Par Value Shares.CONTINUED • Proposed Amendment: “Section 35(2) of the principal Act is hereby amended, by the substitution of the following subsection: (2) A share does not have a nominal or par value, subject to item 6(1)  of Schedule 5: provided that any loss of nominal or par value of pre-existing shares at the effective date shall not vary any other rights of the shareholders immediately prior to the conversion. Schedule 5 of the Act is hereby amended, by the deletion of item 6(2) and (3).”

  11. Financial Markets (JSE) • The 2008 Companies Act gives the right to hold either certificated or uncertificated securities in the listed and unlisted environments. • Strong reasons on both systemic and consumer protection grounds, that in the listed environment that we should have full dematerialization. • A move towards full dematerialization is currently prohibited under the current wording of section 49 of the Act • An issue for National Treasury is where there are higher standards, or more stringent standards (ie. JSE), can  such standards take precedence over other Acts? • One possible approach is to amend for specific legislation (the coming Financial Markets Bill, which will replace the Securities Services Act), to deal with dematerialisation

  12. Conflict of Laws Provision: Section 5(4) of the Act • Concern over overlapping provisions of the Companies Act, given dedicated laws on the supervision of financial institutions by the Financial Services Board and the Registrar of Banks. • Agreement between NT and dti on inclusion of the Municipal Finance Management Act, 2003 (Act No. 56 of 2003), National Payment Systems Act, 1998 (Act No. 78 of 1998) (“the NPS Act”), within the list in section 5(4). • Other financial legislation also requires serious consideration, particularly where practical conflicts have been identified with the application of the Act, which may have negative impacts for the effective regulation of the financial sector in particular, or the economy as a whole.

  13. Section 136(2) of the Act and Section 8 of the NPS Act • A conflict that has been highlighted by the South African Reserve Bank between section 136(2) of the Act and section 8 of the NPS Act must urgently been addressed, through the listing of the NPS Act in section 5(4)(b) of the Act, as legislation that would take precedence over provisions of the Act, in the event of any conflict. • It has been agreed by the dti that the NPS Act should be included amongst the legislation listed in section 5(4)(b) of the Act.

  14. Auditing and Independent Review Requirements- Section 30 of the Act and Clause 19 of the Bill • Wording should be included at the beginning of the new subsection (2A) that is included in clause 19(d) of the Bill slightly, to make it explicit that if the regulations issued in terms of section 30(7) require a company to be audited or undergo an independent review, then the exemption for a company having a single shareholder who is also a director of a company, would not apply.  • The dti indicated to the National Treasury that it was amenable to considering such a minor clarification in the wording of clause 19(d) of the Bill. • Importance of the Regulation making process to finalise regulations relating to auditing and independent review requirements.

  15. Business Rescue- Section 133(1) of the Act • Section 133(1) of the Act would negatively impact upon the rights of regulators to conduct regulatory proceedings in terms of their legislation once business rescue proceedings have commenced. • The dti, in engagements with the National Treasury, indicated that this implication of section 133(1), was not the intention of the provision. The dti agreed that it will develop appropriate amendments to section 133(1), so as to address this issue. • Section 133(1) of the Act must be amended to make it clear that business rescue would not prevent regulators from initiating or continuing regulatory actions in terms of their legislation. • Financial sector may need stronger provisions – domino effect requires “State of Emergency” approach of for eg curators

  16. Section 133(1) of the Act.CONTINUED • In order to address this issue, the following amendments are proposed:  • The definition of “regulatory authority” could be amended slightly to provide as follows: “regulatory authority” means an entity established in terms of national or provincial legislation responsible for regulating an industry, or sector of an industry, and includes the South African Revenue Service and the Financial Intelligence Centre; • And section 133 could be amended as follows, by the insertion of a new subsection (1A): “(1A) Subsection (1) does not apply to the exercise of any power or function, or the taking of any action by a regulatory authority.”

  17. Section 133(1) of the Act.CONTINUED • Alternatively, a single amendment to include a new subsection (1A) could be effected, which could read as follows: “(1A) Subsection (1) does not apply to the exercise of any power or function, or the taking of any action by an organ of state designated in national legislation to supervise, regulate or enforce legislation.” • It is also proposed that potentially the relevant regulator could be included with the definition of an “affected party” in section 128 of the Act, which would provide regulators with certain rights to apply to court in terms of section 130 of the Act to set aside business rescue proceedings. • It is very important that appropriate amendments in this regard be included in the Bill.

  18. CONCLUSION • National Treasury thanks the Portfolio Committee on Trade and Industry for the opportunity to make submissions • Nature of Bill raises many issues • NT Financial Regulators (SARS, IRBA, FSB) raising issues identified • New issues will arise in the future, similar to tax laws, which have to be amended every year • Companies will take steps to find loopholes in the legislation • NT will work closely with the dti and the Committee for any necessary technical assistance and amendments

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