Debt capital markets in South Africa: regulatory overview
A Q&A guide to debt capital markets law in South Africa.
The Q&A gives an overview of legislative restrictions on selling debt securities, market activity and deals, structuring a debt securities issue, main debt capital markets/exchanges, listing debt securities, continuing obligations, advisers and documents, debt prospectus/main offering document, timetables, tax, clearing and settlement, and reform.
To compare answers across multiple jurisdictions visit the Debt Capital Markets Country Q&A tool
This Q&A is part of the global guide to debt capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/debtcapitalmarkets-guide.
Legislative restrictions on selling debt securities
Main restrictions on offering and selling debt securities
The sale of debt securities falls within the ambit of the definition of "the business of a bank" under the Banks Act 1990. The Banks Act 1990 prohibits any person from carrying on the business of a bank other than a public company that is registered as a bank or a branch of a foreign bank authorised under the Banks Act 1990.
Therefore, to offer and issue debt securities, an applicant issuer must be registered as a bank, or authorised as a branch of a foreign bank under the Banks Act 1990 or must offer and issue debt securities in compliance with one of the available exemptions. The most relevant exemption for non-bank issuers is the exemption granted for the acceptance of money from the general public against the issue of commercial paper in accordance with the conditions set out in the Commercial Paper Regulations.
It is also possible to offer and issue debt securities in accordance with the conditions set out in the Securitisation Regulations (this will not be discussed here).
Subject to the exemptions (section 96, Companies Act 2008), if an offer of the debt securities constitutes an "offer to the public" within the meaning of section 95 of the Companies Act 2008, the applicant issuer must prepare and register a prospectus satisfying the requirements of the Companies Act 2008. These requirements are extensive and onerous.
An offshore offer and sale of debt securities by a South African resident or an offer and sale of debt securities by a non-resident in South Africa is subject to the prior approval of the Financial Surveillance Department (FSD) of the South African Reserve Bank under the Exchange Control Regulations 1961 promulgated under the Currency and Exchanges Act 1933 (Exchange Control Regulations). A non-resident must also comply with section H of the Currency and Exchanges Manual for Authorised Dealers (2016-07-29) titled "Inward Listings by Foreign Entities on the JSE Limited" (Inward Listings Directive). One of the applicable conditions is that instruments that offer South African investors exposure to offshore referenced assets in rand must be listed on the JSE Limited (JSE). These foreign referenced assets cannot be offered to South African investors on an over-the-counter basis.
The Financial Advisory and Intermediary Services Act 2002 (FAIS) prohibits any person other than a person licensed under the FAIS from:
Marketing debt securities.
Acting as an intermediary in offers and sales of debt securities..
Recommending or guiding (by any means or medium) on the purchase of investment of (among other) securities (listed or unlisted).
Market activity and deals
The below information is extracted from the June 2016 Quarterly Bulletin issued by the South African Reserve Bank.
The national government contributed to the bulk of the South African bond market with a nominal amount in issue of about ZAR1,615 billion at the end of May 2016. Private financial corporations were the second largest contributors with about ZAR423 billion, the bulk of which came from banks. Public non-financial corporations issued about ZAR245 billion as at the end of May 2016. The total outstanding nominal value of debt securities listed on the JSE Limited (JSE) reached about ZAR2.5 trillion at the end of May 2016, after net issued of about ZAR96 billion were recorded in the first five months of 2016.
Turnover in the secondary bond market reached record high levels in the first five months of 2016, bolstered by higher volumes traded. The all-time high daily average turnover of about ZAR132 billion in May 2016 contributed to raising the average daily value traded in the first five months to about ZAR120 billion, which was 26% more than in the corresponding period of 2015. Activity in the local bond market during the first quarter of 2016 was bolstered as volatility in the exchange rate and in bond yields induced repositioning by market participants. The All-Bond Index (ALBI) increased by 7% in the first five months of 2016, after recording a loss of 4% in 2015.
Following exchange-reported net sales of local bonds by non-residents in the last two quarters 2015, non-residents' appetite for local bonds improved noticeably in the first quarter of 2016, as evidenced by net purchases of ZAR15 billion. The return to riskier emerging-market bonds was buoyed by, among other things, the US Federal Reserve's decision to slow the pace of raising interest rates and the appreciation in the exchange value of the rand. This contributed to cumulative net purchases of local bonds to the amount of ZAR13 billion in the five months to May 2016.
Market for exchange-traded derivatives
Derivatives turnover on the JSE, January to May 2016, is summarised as follows:
Equity: 2,625 billion in value with a change of 15% over one year.
Warrants: ZAR0.3 billion with a change of 10% over one year.
Commodity: ZAR428 billion with a change of 71% over one year.
Interest rate: ZAR480 billion with a change of 35% over one year.
Currency: ZAR279 billion with a change of 40% over one year.
Most significant deal over the past year
In April 2016, the Government of South Africa, after an absence of one and a half years, re-entered the international capital markets and issued a US$1.25 billion ten-year bond with a coupon rate of 4.875%.
Structuring a debt securities issue
The debt capital markets do not currently distinguish between retail and professional investors, and different structures do not exist for issues to the public (retail issues) and issues to professional investors (wholesale issues).
If the offer is an "offer to the public" within the meaning of the Companies Act 2008, the applicant issuer must prepare and register a prospectus satisfying the requirements of the Companies Act 2008. There are certain exemptions as to what constitutes an "offer to the public" (section 96, Companies Act 2008).
The trust structure is not commonly used for issues of debt securities, as a trust is not the most tax efficient way of structuring these types of transactions. However, there are circumstances where the trust structure has been used. For example, the sukuk bond issued by the government in September 2014 used the trust structure.
A corporate special purpose vehicle (SPV) is more commonly used for issues of asset-backed securities, high yield debt securities and other types of secured debt securities. This SPV structure is not generally used for issues of unsecured debt securities.
Main debt capital markets/exchanges
Main debt markets/exchanges
The JSE Limited (JSE) is currently the only licensed exchange for the listing of debt securities. Debt securities are generally listed on a separate sub-market of the JSE called the Interest Rate Market. Subject to compliance with both the Debt Listings Requirements and the listings requirements relating to the Main Board (where applicable), an applicant issuer can list its debt securities on the Main Board of the JSE.
Derivative-type instruments are listed on the Derivatives Market of the JSE.
The JSE Limited (JSE) is licensed and regulated under the Financial Markets Act 2012. The Financial Services Board oversees and supervises the JSE in its performance of its regulatory duties.
The key legislation governing debt securities are as follows:
Banks Act 1990.
Commercial Paper Regulations.
Companies Act 2008.
Currency and Exchanges Act 1933 (the Exchange Control Regulations).
Section H of the Currency and Exchanges for Authorised Dealers (2016-07-29) titled "Inward Listings by Foreign Entities on the JSE Limited" (Inward Listings Directive).
Financial Markets Act 2012.
Financial Advisory and Intermediary Services Act 2002 (FAIS).
Listing debt securities
The listings requirements for bonds and notes issued under a programme are set out in the Debt Listings Requirements of the JSE Limited (JSE). The Debt Listings Requirements provide for the minimum disclosure that investors and their professional advisers would reasonably require for the purpose of making an informed assessment of the nature and state of an applicant issuer's business.
Applicant issuers engaged in specialised industries (for example, banking, insurance, mining and oil and gas) or issuing specialist securities (for example, securitisation) may be required by the JSE to provide additional information.
The JSE has an overriding discretion in all instances to approve or refuse an application for listing or registration of a programme by an applicant issuer on the grounds that the approval or refusal is in the interest of the investing public.
The Debt Listings Requirements also require that debt securities must be freely transferable, fully paid up and issued in compliance with the laws of the issuer's country of incorporation and the issuer's constitutive documents (this obligation includes ensuring that the requisite corporate and regulatory authorisations have been obtained).
For a non-bank issuer to rely on the exemption contained in the Commercial Paper Regulations (see Question 1), the issuer must be a listed company or have a net asset value of at least ZAR100 million for at least 18 months prior to any issue of commercial paper, as certified by its auditor and reflected in its audited financial statements, unless the instruments are:
Listed on a recognised financial exchange.
Endorsed by a bank.
Issued for a period of longer than five years.
Issued by a central government as defined in the Regulations relating to Banks published under section 90 of the Banks Act 1990.
Backed by an explicit central government guarantee.
Minimum size requirements
The Debt Listings Requirements do not prescribe any minimum size requirements. See above, Main requirements for the requirement set out in the Commercial Paper Regulations regarding the net asset value of an applicant issuer that is not a listed company (subject to the exemptions stated above).
Trading record and accounts
An applicant issuer must submit its audited financial statements to the JSE, which must be prepared in accordance with International Financial Reporting Standards (IFRS) and relate to the issuer's three most recent financial years, with the most recent being in respect of a period that ended less than 18 months before the date of the placing document. This financial information can be included in full or incorporated by reference in the placing document of the debt securities. If more than nine months have passed since the issuer's financial year end, the issuer must also submit interim financial statements prepared in accordance with IAS34. The JSE can, under certain circumstances, accept less than three years' financial statements.
The Debt Listings Requirements do not specify a minimum denomination for debt securities. The Commercial Paper Regulations require that commercial paper is issued and transferred in a minimum denomination of ZAR1 million.
The Debt Listings Requirements of the JSE Limited (JSE) set out additional requirements for asset backed securities and high yield debt securities. Specialist securities include:
Exchange traded notes.
Exchange traded funds.
Asset backed securities.
Specialist securities are further regulated by numerous and fairly onerous requirements (section 19, JSE Listings Requirements). Convertible debt securities must also comply with the applicable provisions of the board of the JSE (such as the Main Board) on which those securities are to be listed following conversion.
Continuing obligations: debt securities
During the period its debt securities remain listed on the JSE Limited (JSE), the issuer must:
Maintain the appointment of a debt sponsor.
Make its audited financial statement for its three most recent financial years and those of any guarantor of its debt securities available for inspection at its registered office, in Johannesburg, along with the following documentation:
the current listing document;
any supplementary documents to the listing document; and
any pricing supplements with respect to outstanding debt securities.
Make the current listing document, and any supplementary documents published since the listing document was approved, available on the JSE website. These documents, together with the issuer's annual financial statements, must also be published on the issuer's website.
Submit its audited financial statements and, where required by the JSE, those of any guarantor of its debt securities to the JSE and publish them on the Stock Exchange News Service (SENS) within six months of the end of each financial year.
If the issuer prepares interim financial statements, publish and submit these to the JSE within three months of the end of the period to which they relate.
Update its listing document within six months after its financial year end in the event that any of the information it contains becomes outdated in a material way. An update of a listing document is not required if the financial statements are incorporated in the listing document by reference.
If a rating has been assigned to any of its debt securities or to the issuer:
disclose the rating either in its listing document or pricing supplements; and
notify the JSE and publish a SENS announcement within 48 hours of obtaining the rating or notification of any change to the rating.
Notify the JSE of the occurrence of an event of default within one business day of its occurrence (as defined in the terms and conditions of the relevant debt security).
Immediately release an announcement on SENS if it has failed to make a distribution to holders of debt securities. The announcement must contain details of the nature and extent of this failure and of suggested remedial steps.
Notify the JSE if there has been a material change to the financial position or affairs of the issuer and submit detailed supplementary information specifying the nature and extent of such material change to the JSE.
Publish a SENS announcement on:
all information material to the financial or trading position of the issuer to enable investors to make an informed investment decision; and
where the issuer is listed on another licensed or recognised exchange, all announcements released through that licensed or recognised exchange.
The continuing obligations apply to every issuer with securities listed on the JSE Limited (JSE), including foreign companies. Where a foreign company is unable to comply with the continuing obligations and the Debt Listings Requirements of the JSE, it must consult with the JSE for a discretionary ruling.
Subject to the suspension provisions of the Financial Markets Act 2012 and if it is in the public interest, the JSE Limited (JSE) can suspend the listing of debt securities or the registration of a programme memorandum on failure by an issuer to comply with the Debt Listings Requirements of the JSE. The JSE can also censure the issuer (publicly or privately) or impose a fine (not exceeding the amount stipulated by the Financial Markets Act 2012) or any other penalty that is appropriate in the circumstances.
Advisers and documents: debt securities issue
An applicant issuer wishing to issue debt securities that are to be listed on the JSE Limited (JSE) must appoint a debt sponsor approved by the JSE, in accordance with the Debt Listings Requirements of the JSE. The debt sponsor's main responsibilities include:
Advising the issuer on the application of the Debt Listings Requirements and the directors of the issuer on the nature of their responsibilities and obligations as directors of a listed company.
Using all reasonable endeavours to ensure that the issuer complies with the Debt Listings Requirements.
Submitting the listing documentation to the JSE.
Acting as intermediary between the JSE and the issuer.
Arranger and dealers
An applicant issuer typically appoints an arranger and dealers or managers under a programme agreement (or subscription agreement, as applicable) for various reasons, including:
Advising the issuer on the size and terms of the offer of debt securities.
Co-ordinating the timing and pricing of the offer.
Advising on the market conditions and potential demand for the debt securities.
An applicant issuer typically appoints the following agents under an agency agreement to assist it with the issuance and service of debt securities:
The transfer agent, who is mainly responsible for maintaining registers and issuing certificates (if any) evidencing the debt securities.
The paying agent or settlement agent, who is responsible for managing the transfer of funds between the issuer and investors.
The calculation agent, who is responsible for calculating (among other things) interest and redemption amounts payable on the debt securities.
The Commercial Paper Regulations require that the auditors of the issuer issue a certificate (for each issuance of debt securities) confirming that each issuance of debt securities complies in all respects with the Commercial Paper Regulations.
It is also market practice for the arranger or dealers or managers to request that the auditor of the issuer confirm in writing to them that there has been no material adverse change in the financial position of the issuer between the date of its last audited financial statements and the date of issuance of the relevant debt securities.
The legal adviser's main responsibilities include:
Advising on compliance with the Debt Listings Requirements.
Assisting with the drafting of the listing documentation to ensure all legal requirements are complied with.
If there is an underwriting or a placing, drafting the necessary agreements.
In conjunction with the debt sponsor, procuring the approval of the placing documents by the JSE and Strate Proprietary Limited (the central securities depository).
The main documents that an applicant issuer must submit relating to the issuing and listing of debt securities include:
The placing document, which typically takes the form of a programme memorandum and pricing supplement (base prospectus and final terms equivalent, respectively) where the securities are issued under a programme from time-to-time, or an offering circular where the debt securities are issued on a stand-alone basis.
Related programme documents, such as the:
agency agreement; and
auditor's material adverse change confirmation.
The auditor's confirmation of compliance with the Commercial Paper Regulations.
Debt prospectus/main offering document
A placing document is always required for the listing of debt securities on the JSE Limited (JSE). The placing document must comply with the Debt Listings Requirements of the JSE and must be submitted to the JSE for approval before the issue of any debt securities.
Where the offer constitutes an "offer to the public" under Chapter 4 of the Companies Act 2008, the placing document must comply with the prospectus requirements set out in the Companies Act 2008. These requirements are extensive and onerous. The prospectus must also be filed and registered with the Companies and Intellectual Property Commission. Whether the relevant securities offer is an offer to the public within the meaning of the Companies Act 2008 is a question of fact. An offer of debt securities is often structured to fall within one of the exemptions (section 96, Companies Act 2008), and it is rare that a placing document must be registered as a prospectus under the Companies Act 2008.
Section 96 of the Companies Act 2008 sets out types of offers that are not offers to the public. The most commonly relied on exemptions include:
An offer to persons that deal with securities in the ordinary course of business, banks, mutual funds, financial institutions and financial services providers and wholly owned subsidiaries of banks, mutual funds, financial institutions and financial services providers.
An offer where the total contemplated acquisition cost of the securities for any single addressee acting as principal is equal to or greater than ZAR1 million.
The principal aim of the Debt Listings Requirements of the JSE Limited (JSE) is to ensure that an applicant issuer wishing to list its securities on the JSE provides investors and their professional advisers with the minimum disclosure reasonably required to make an informed assessment of the nature and state of the issuer and its business. The particular requirements for a placing document depend on the nature and circumstances of the particular debt securities. The principle disclosure requirements for a placing document under the Debt Listings Requirements include:
The financial information relating to the issuer (and any guarantor guaranteeing the debt securities). The prescribed financial information must be prepared in accordance with International Financial Reporting Standards (IFRS).
Full disclosure of the issuer's operations, financial resources and requirements, and the risks associated with its business and market place, so that an investor can assess the issuer's ability to service and redeem the debt securities.
A description of the issuer's management team and confirmation that the issuer adheres to King III – The King Code of Governance Principles and the King Report on Governance.
All relevant information relating to the particular nature of the issuer and the debt securities.
A description of the material risk factors relating to the issuer and the particular debt securities.
Although the placing document is largely drafted by the advisers of the applicant issuer, the directors of the applicant issuer accept full responsibility for the accuracy of its content and must provide for a responsibility statement in the placing document. The debt sponsor may be liable if it has not complied with its responsibility to ensure that the issuer complies with the Debt Listings Requirements of the JSE Limited.
Timetable: debt securities issue
The timetable for a typical debt offering depends on the method and structure of securities to be listed on the JSE Limited (JSE). The issuing and listing of debt securities typically takes between six to ten weeks.
The JSE follows a three-stage approval process, which takes up about three weeks to complete. The stages are as follows:
Informal comment (five days): the JSE undertakes to provide informal comment on the placing document within five business days of the first submission by the applicant issuer (through its debt sponsor) of the placing document and an annotated Debt Listings Requirements checklist.
Informal approval (three days): following submission of a revised placing document and checklist incorporating or responding to the JSE's informal comment, the JSE undertakes to revert with further comments or if no further comment, grant its informal approval within three business days.
Conditional formal approval (two days): the placing document is then submitted for conditional formal approval to the "Formal Committee" of the JSE. The Formal Committee undertakes to revert within two business days with comments or formal approval.
Tax: debt securities issue
Securities transfer tax
No securities transfer tax is payable on the issue or transfer of debt securities under the Securities Transfer Tax Act 2007, because a debt security does not fall within the definition of "security" as used for the purposes of the Securities Transfer Tax Act 2007.
Under the Income Tax Act 1962, a "resident" for South African tax purposes is subject to income tax on their worldwide income. Therefore, holders of debt securities that are "residents" of South Africa are generally liable to pay income tax, subject to available deductions, allowances and exemptions, on any interest earned under the debt securities. Non-residents of South Africa are subject to income tax on all income derived from a South African source (subject to domestic exemptions or relief under an applicable double taxation treaty).
Capital gains tax
The issue and listing of debt securities does not attract any capital gains tax. However, any capital gain or loss on the disposal of debt securities by a resident for South African tax purposes is subject to capital gains tax. Any discount or premium on acquisition that has already been treated as interest for income tax purposes, under the Income Tax Act 1962, will not be taken into account when determining any capital gain or loss. To the extent that a loss on disposal has previously been included in taxable income (as interest), it can be deducted from the taxable income of the holder when it is incurred and will not give rise to a capital loss.
Capital gains tax is not levied on debt securities disposed of by a person that is not a resident of South Africa, unless the debt securities disposed of are attributable to a permanent establishment of that person in South Africa.
Subject to certain exemptions, the Income Tax Act 1962 imposes withholding tax at a rate of 15% on interest paid by any person to, or for the benefit of, a foreign person. The foreign person is responsible for the tax, but it must be withheld by the person making the interest payment to, or for the benefit of, the foreign person. A foreign person can obtain limited relief from withholding tax under a double taxation treaty. The exemptions relevant to withholding tax fall into three broad groups relating to the payer, the instrument and the foreign person. The following exemptions are most commonly relied on in relation to interest paid on debt securities paid by a South African resident for income tax purposes to a foreign person:
The interest is paid by a bank registered in South Africa under the Banks Act 1990.
The interest is paid in connection with any debt instrument listed on a recognised exchange (which includes the JSE Limited).
The foreign person to whom interest is paid is a natural person who was physically present in South Africa for a period exceeding 183 days in aggregate during the 12-month period preceding the date on which the interest is paid, or the debt claim in respect of which that interest is paid is effectively connected with a permanent establishment of that foreign person in South Africa, if that foreign person is registered as a taxpayer in South Africa.
Value added tax (VAT)
No VAT is payable on the issue or transfer of debt securities. However, commissions, fees or similar charges raised for the facilitation, issue, allotment, drawing, acceptance, endorsement or transfer of ownership of debt securities are subject to VAT at the standard rate (currently 14%), except where the recipient is a non-resident.
Clearing and settlement of debt securities
Listed debt securities in South Africa must be:
Issued in rand.
Held in dematerialised (uncertificated) form.
Cleared and settled through Strate Proprietary Limited, the only accredited clearing and settlement house in South Africa.
Unlisted debt can also be settled through Strate Proprietary Limited.
Persons accepted by Strate Limited as participants under the relevant legislation are responsible for the settlement of scrip and payment transfers through Strate Limited, the Interest Rate Market (or such other board of the JSE Limited on which the debt securities are listed) and the South African Reserve Bank. Strate Limited has accepted and supervises seven participants for debt securities. These participants are currently:
Citibank NA (South Africa branch).
FirstRand Bank Limited.
The Standard Bank of South Africa Limited.
Standard Chartered Bank (Johannesburg branch).
Societe Generale (Johannesburg branch).
South African Reserve Bank.
Euroclear Bank SA/NV, as operator of the Euroclear System and Clearstream Banking (société anonyme) (Clearstream) can hold debt securities through their central securities depository participant. Euroclear System and Clearstream settle offshore transfers through their nominated participant.
All debt securities held in Strate Proprietary are registered in the name of the Central Depository Nominee. Any payment of an amount for debt securities held in Strate Limited are made to the Central Depository Nominee, as the registered holder of the securities, which in turn transfers that amount via participants to the holders of the beneficial interests in those debt securities. Title to beneficial interests held by clients of the participants passes by electronic book entry in the securities accounts maintained by the participants for their clients. Beneficial interests can be exchanged for debt securities represented by individual definitive certificates in certain circumstances.
Description. The official website of, and maintained by, the JSE Limited, the only licensed exchange in South Africa for the listing of debt securities. This site includes copies of all programmes registered on one of the boards of the JSE and all pricing supplements relating to debt securities listed on the JSE.
Financial Services Board
Description. The official website of the Financial Services Board, the body responsible for the regulation and supervision of securities exchanges, central securities depositories, clearing houses, central counterparties and trade repositories of South African capital markets. It includes links to applicable legislation and rules.
Description. The official website of Strate Proprietary Limited, South Africa's Central Securities Depository, responsible for the electronic settlement of securities transactions concluded on the JSE Limited. It includes links to applicable legislation and rules.
Lionel Shawe, Partner
Allen & Overy (South Africa) LLP
Professional qualifications. South Africa, Attorney; South Africa, Notary
Areas of practice. Mining financing; aircraft financing; acquisition and leveraged financing; structured financing; property financing; preference share funding; securitisation; capital markets; debt restructuring.
Non-professional qualifications. LLM (specialising in Tax), University of South Africa; LLB, University of Witwatersrand; B.Com (specialising in Finance and Law), University of Witwatersrand.