The proposed “beneficial owner” disclosure and reporting requirements for listed companies could result in companies moving their primary listing from South Africa to other jurisdictions, the JSE has told the National Assembly’s Standing Committee on Finance (Scof).
On Tuesday, the JSE briefed the Scof on some of its concerns with the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill. The exchange’s submission focused on the proposed amendments to the Companies Act, particularly those that will affect listed companies.
The JSE supported the introduction of a central register of the beneficial owners of companies. However, the proposed amendments to the Companies Act were unworkable for publicly listed companies, said Anne Clayton, the JSE’s head of public policy and regulatory affairs.
Most companies listed on a South African exchange will not be able to comply with the proposed “beneficial owner” disclosure and reporting requirements.
The increasing regulatory burden on listed companies has contributed to the delistings from the JSE. The number of listed companies has declined from 529 in January 2002 to 311 in July 2022.
Onerous regulatory burdens disincentivise companies from raising capital or remaining listed on an exchange, which has a negative outcome for the growth and global attractiveness of South African markets, Clayton said.
The proposed amendments were not aligned to the transparency and disclosure practices in developed markets, and if implemented, could discourage companies from raising capital on a South African exchange.
“There was a need to find a pragmatic solution to some of the key challenges of the bill to enable compliance with the Financial Action Task Force’s Recommendations, while ensuring that the perhaps unforeseen and unintended consequences of the proposed amendments do not result in undue and impossible burdens being placed on companies listed on a South African exchange,” Clayton said.
Requirements are ‘unrealistic’
Many countries have implemented a beneficial ownership registry for reporting requirements for all registered or licensed companies. However, they exempt listed companies from having to report to a beneficial ownership registry where other mechanisms provide “adequately transparent” ownership information. These “other mechanisms” are aligned with what is already provided for in the Companies Act, Clayton said.
“That approach recognises that it is unrealistic and ineffective to require that listed companies obtain, maintain and disclose their shareholders’ beneficial ownership information, because listed companies have significantly more shareholders than unlisted companies and the share ownership of listed companies changes more frequently.”
The implementation of the amendments in their current form could result in listed companies moving their primary listing from South Africa to jurisdictions “with sensible, practical and effective disclosure requirements”.
Challenges to collecting beneficial ownership information
The fragmented nature of shareholder registers was an obstacle to compliance with the proposed amendments, Clayton said.
Most registered holders are nominees who act as the registered holder of the securities on behalf of the underlying beneficial interest holders. These nominees are typically operated by banks, stockbrokers and investment managers acting on behalf of their clients.
A beneficial interest holder is a natural or juristic person who enjoys the ultimate rights of ownership of the security registered in the name of the nominee. Importantly, this is different to a beneficial owner, or an ultimate beneficial owner, in the context of the FATF’s Recommendations (standards) or the Financial Intelligence Centre Act (Fica), which specifically means the natural persons who ultimately own or exercise ultimate effective control over a juristic person.
The number and geographic dispersion of the direct and indirect owners of shares in a listed company, the frequency at which the shareholding of a listed company changes, and the structure of the shareholder register preclude a listed company from being able to collect and report accurate and complete beneficial ownership information in respect of its shareholders.
Clayton said it was important to distinguish between the concepts of a “beneficial owner”, a “beneficial interest”, and “legal ownership and control”.
- The “beneficial owner” of a company was a natural person who “actually” owns the company or “really” exerts effective control over the company. But that person may not, and is often not, in a position of legal ownership and control.
- “Beneficial interest” refers to those persons (natural or juristic) who participate in any distributions in relation to the company’s securities, exercise rights that attach to the company’s securities, and can direct the disposition of the company’s securities. A beneficial owner enjoys economic benefits attached to the securities where the securities are registered in the name of another person (typically, a nominee).
- “Legal ownership and control” refer to the person (natural or juristic) who can exercise the majority of the voting rights associated with the securities of a company.
JSE’s recommendations
Clayton said the JSE’s recommendations included:
- Refining the definition of beneficial owner to provide clarity on its practical application, specifically removing the reference to Fica, because it is not suitable for the Companies Act.
- Providing for “a correct and appropriate” distinction between the concepts of “legal ownership” and “beneficial ownership” of a company.
- A provision that will empower the Minister of Finance, in consultation with the Financial Intelligence Centre, to exempt certain companies, including listed companies, from having to file a record of the natural persons who ultimately own or control the company.
- The JSE, for its part, has proposed amending its Listings Requirements to provide more transparency and accessibility to law enforcement and other authorities regarding the holders of a significant beneficial interest in a listed company
- Replacing the provision that requires a company to record beneficial ownership information in its security register with a provision that requires the establishment and maintenance of a separate register of beneficial ownership. The securities register was not an appropriate register to hold beneficial ownership information.
