The opportunities of relaxed exchange controls
Recent relaxations of exchange controls in South Africa have encouraged growing cross-border investments and facilitated freer participation in global financial markets and opportunities.
To understand the extent to which exchange controls in South Africa have been relaxed since their inception, it helps to look at their history, which can be broadly categorised into three phases:
- It all began in 1939 with the introduction of restrictions on the outflow of funds to non-sterling area countries. These were extended during 1961 to 1993 in response to the worsening internal political situation, the introduction of economic and financial sanctions against South Africa in the mid-eighties, and a moratorium on the repayment of South Africa's foreign debt.
- The 1961-1993 era was characterised by a comprehensive system of exchange controls embracing both current and capital account transactions over residents and non-residents.
- The third phase commenced in 1993 and spearheaded a period of gradual relaxation of exchange controls. Among the most notable ones was the removal of controls on non-residents, and the facility afforded to companies and private individuals to diversify their assets through investments abroad.
With democracy also came the liberalisation of exchange controls
Over the past twenty-two years, there has been ongoing "liberalisation" of exchange controls, to the degree that South African companies are afforded the opportunity to expand their activities outside of our borders. Cross-border investment can take the form of establishing branches and offices, as well as acquiring equity stakes in new or existing foreign enterprises. It is interesting to note that any proposed investment that falls outside the company's current line of business is not excluded from the dispensation.
The South African Reserve Bank and, more particularly, the Financial Surveillance Department (FinSurv), has been delegated authority by the Minister of Finance to administer the exchange control system in accordance within the policy guidelines provided. To further facilitate the day-to-day administration of exchange control, certain banks have been appointed as authorised dealers in foreign exchange.
This structure means that requests by companies to undertake cross-border investments and diversification must, in the first instance, be referred to the company's authorised dealer who is authorised by FinSurv to adjudicate on the application within a set of conditions laid down by FinSurv. The authorised dealer may approve requests within an overall limit of ZAR1 billion. A request that exceeds the ZAR1 billion limit is referred to FinSurv for adjudication.
Under the new liberalised dispensation, the opportunity exists for a company (whether listed or unlisted) to establish a South African holding company (HoldCo) for its African and offshore operations. The administrative procedures require that requests to establish a HoldCo are first referred to the company's authorised dealer to obtain the necessary approval. While the HoldCo will be subject to certain conditions, it is important to note that it will not be subject to any exchange control restrictions.
In addition to the two specific opportunities for companies described above, the liberalisation has also brought other benefits, such as enabling the financial markets to function more normally. These would include, among others, improved competition within the foreign exchange markets, less stringent forward cover requirements and very little effective control on current account transactions.
Under the liberalised exchange control regime, we have seen the establishment of a Bond Exchange and a South African Futures Exchange along with foreign ownership of stockbrokers, which enable South Africa's freer participation in global financial markets and opportunities.
The opportunity for private individuals to externalise up to ZAR10 million per calendar year currently satisfies demand of approximately 97% of all South African households.
There may be some critics who do not subscribe to the removal of exchange controls, but the evidence would suggest that the relaxations have created opportunities for greater cross-border interaction.
Although restrictions have been relaxed over the years, all foreign exchange transactions are still subject to comprehensive exchange control regulations and companies are well advised to seek expert advice on international commercial transactions.