Exchange Control – An investors nightmare?

Exchange Controls

Essentially, Exchange Controls are limitations and rules imposed by governments on currency transactions.

The intention is that these controls will create a way to stabilize economies by limiting and controlling how money flows in and out of a country, which left unchecked, would (this is the logic) detrimentally affect currency stability, and would create an unacceptable level of currency volatility.

How does exchange controls affect foreign investment

Unfortunately, while the intention to protect the currency may be good, the fall out is that Exchange Control regulations can be problematic for potential investors into South Africa, who may not be aware of them, or who underestimate the consequences of not having the correct approvals and structures in place, when investing.

If not dealt with at the time of investment, this can lead to a potential nightmare for the foreign investor down the line when wanting to disinvest, when wanting to repay loans or when wanting to reap the benefits of any investment upside, such as dividends.

If you are looking to invest into South Africa, for example,  by way of equity investment, or by way of lending money, you must consider the Exchange Control implications upfront and ensure that your proposed investment is properly structured and approved in terms of the applicable Exchange Control regulations.

What steps should an investor take?

When making an investment into South Africa it is crucial that you consider whether you need to obtain the approval of the South African Reserve Bank (SARB) through an Authorised Dealer. Approval is generally required for most movement of capital/funds in and out of South Africa. 

Whilst SARB has relaxed exchange controls over the last few years with the intention of decreasing the administrative burden for businesses, where foreign investors subscribe for shares in a South African company, it is a requirement for the share certificates to be endorsed ‘nonresident’ by an Authorised Dealer (generally one of the large commercial banks in South Africa). This allows for any dividends declared in such shares to be freely repatriated from South Africa. Where the foreign investor advances a loan to a South African company, it is necessary to obtain exchange control approval for the loan. Once approval has been obtained, any interest or capital repayments on the loan may be freely remitted from South Africa.

Without these approvals in place, it would be extremely difficult to repatriate any investment.

Author: Shelley Mackay-Davidson

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