The 2018 budget speech delivered by the Minister of Finance on 21 February 2018 ushered in further relaxations to exchange control, which found its beginnings in South Africa as far back as 1939 when the country was a member of the now defunct British Sterling Area.
Gradual relaxations to exchange control commenced in 1993 and the February announcements, dealt with in more detail below, impact primarily the cross-border activities of South African companies and institutional investors.
The foreign direct investment dispensation available to companies immediately prior to the announcements in the 2018 budget was based on a minimum requirement to obtain at least 10 percent of the foreign target entity's voting rights and/or shareholding.
In addition, an approved foreign direct investment under the aforementioned dispensation permitted the target entity to invest back into the Common Monetary Area (Lesotho, Namibia, Swaziland and South Africa), including the provision of loans, provided the equity investment in the target entity did not exceed 20 percent and met the minimum requirement of 10 percent. These transactions are defined for exchange control purposes as "loop" structures.
The requirement for a South African company to hold a minimum of 10 percent of a foreign target's voting rights and/or equity has been abolished as a further step to enable the government to manage capital flows and encourage investment. The abolition of the minimum requirement has necessitated a distinction between foreign direct investments and foreign portfolio investments and the introduction of the following new limits:
Foreign direct investments
Permissible "loop" structures
The percentage whereby South African companies, as well as tax resident private equity funds, are permitted to acquire equity and/or voting rights in a foreign target entity that may invest back into the Common Monetary Area is increased from 20 percent to 40 percent.
"Loop" structures in excess of this percentage will require the prior approval of the Financial Surveillance Department of the South African Reserve Bank.
Less than 10% equity or voting rights
Investments in which the investor owns less than 10 percent of the voting rights in the foreign target entity is now defined as a category of international investment, which covers investment in equity and debt securities.
The current limits for foreign portfolio investments by qualifying institutional investors have been increased by an additional five percent, which includes the African allowance.
The five percent increase also applies to the limit for institutional investors to invest in approved inward listed instruments on the JSE.
South African holding companies
The limits for South African Holding Companies in respect of foreign investments are increased for listed companies from ZAR2 billion to ZAR3 billion and for unlisted companies from ZAR1 billion to ZAR2 billion.