The Treasury and the Reserve Bank withdrew a circular liberalising exchange control measures for JSE-listed companies when it was realised that the changes might have the unintended consequence of enabling pension funds to take all their assets offshore, the Reserve Bank revealed on Friday.
The measures, among those announced by finance minister Tito Mboweni in his October medium term budget speech, were intended to create a neutral situation for JSE-listed companies with foreign assets between raising debt and raising equity capital on the bourse.
But they would also have made it possible for pension funds to invest all their assets in an exchange traded fund with 100% foreign underlying assets - bypassing the current prudential rules that allow them to invest a maximum of 30% of their assets offshore.
Reserve Bank deputy governor Kuben Naidoo said at a media roundtable on Friday that the objective had been to create neutrality between debt and equity instruments and the way they were treated.
This is in contrast to the current situation where the shares of a company like AB InBev, which has a secondary listing on the JSE, count as domestic, so pension funds can invest in those without using their offshore allowance, but a debt instrument issued by the company on the JSE doesn't count as domestic. However, exchange traded funds are also classified as debt instruments, and some of these ETFs are linked to underlying assets which are entirely foreign.
"Our intention was to allow SA pension funds to invest in the debt or equity of SA or foreign companies listed on the JSE in a neutral way. But an unintended consequence is it could have allowed pension funds effectively to externalise their entire funds," Naidoo said. "We want pension funds to keep most of their assets here because their liabilities (to pensioners) are here."
Naidoo said the new measures had been withdrawn "until we have figured out how we can fix them". The Treasury and the Reserve Bank would consult with the industry and hoped to present a revised version by the time of the February budget.
Mboweni said in his budget speech that the steps would make cross-border business easier and support SA's growth as an investment and financial hub for Africa. The Treasury said in an explanatory note that the changes to inward listing instruments would classify all debt, derivatives and exchange traded instruments that are traded and settled in rands on SA exchanges as domestic.
The proposed changes to the inward listing regulations were among several that would have continued the process of gradually liberalising exchange controls that the government has pursued since the 1990s.
They would also have helped to boost the role of the JSE and SA's financial markets. The JSE has shrunk to just 345 listed companies amidst the weak economic growth of recent years, and of those 109 are dual-listed. The bourse is now heavily dominated by international players such as Prosus/Naspers, British American Tobacco and AB InBev.
JSE CEO Leila Fourie told a webinar this week that the top 40 JSE-listed companies now derive more than 70% of their income from offshore sources, and account for 87% of the market capitalisation of the JSE.
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