Chairperson and hon members of the House, for the past two years, the Department of Trade and Industry has been reviewing the regulatory framework of companies. This culminated in the publication of the Corporate Law Reform Policy in 2005.
Following the policy, the drafting of a new Company's Bill has been underway. In the interim, however, we identified certain pertinent issues that needed urgent attention, hence the proposed Corporate Laws Amendment Bill which is before us today. Consultations on the Bill at both departmental and parliamentary level were held and concluded, and when I say parliamentary level, I mean the portfolio committee.
This Bill is based on the tenets of corporate governance relating to financial reporting, winning investor confidence and instilling a culture of accountability by the board of directors. Thus the Bill is aimed at, amongst other things, firstly, providing for differential financial reporting by widely held companies and limited interest companies. Secondly, it provides for the legal enforcement of financial reporting standards. Thirdly, it allows companies to give financial assistance for the purchasing of their own shares. Fourthly, it requires the establishment of audit committees for widely held companies. Fifthly, it enhances auditor independence and, lastly, it facilitates electronic registration at the Companies and Intellectual Property Registration Office.
With respect to financial reporting, the Bill requires that certain companies called widely held companies should be subjected to high standards of financial reporting as prescribed through the International Financial Reporting Standards Committee. Flowing from our commitment to lightening the regulatory burden on small businesses, however, limited interest companies, on the other hand, will be subjected to less onerous reporting requirements.
This House will be aware that in terms of the current Act, there is no legal backing for accounting standards. This shortcoming was highlighted in the findings of the Nel Commission of Inquiry into the Fall of Masterbond as one of the deficiencies in statutory measures designed to protect investors. There was a lack of disclosure and uniformity in applying accounting standards because of different interpretations.
In this regard, the Bill proposes the establishment of a Financial Reporting Standards Council and a Financial Reporting Investigation Panel to establish financial reporting standards and monitor compliance therewith respectively.
The DTI has found it necessary that section 38 of the Company's Act should be amended. Section 38 completely prohibits a company from granting financial assistance to persons for purposes of purchasing their own shares. The rationale is that the assets of the company should always be maintained if the company is to stay in business. This provision has unintended consequences because it stands in the way of lawful transactions, including those relating to the Broad-based Black Economic Empowerment Act.
In order to remedy this situation, the Bill proposes that a company may offer financial assistance for the purchase of its own shares, provided certain conditions are met, namely, the liquidity and insolvency test. This means that as long as the company can prove that immediately after the transaction it can settle its debts as they fall due and that the assets of the company are more than its liabilities, the transaction should be approved. In addition, such a transaction shall be subject to the passing of a special resolution requiring approval by 75% of its shareholders. This way, both creditors and shareholders are protected while legitimate transactions are not unnecessarily prohibited. This is good for the vibrancy of our economy.
On auditor independence and credibility, it is a requirement that auditors should not perform non-audit functions such as giving tax advice and management consultancy during their tenure as auditors of a company. This provision is meant to avoid a situation where an auditor audits his or her own work. The Independent Regulatory Board for Auditors, established in terms of the Auditing Profession Act, will establish such rules of ethics dealing with non-audit functions. The Auditing Profession Act in this way complements the Corporate Laws Amendment Bill.
The Bill further proposes that auditors should be rotated after a period of five years. The rationale for rotating an auditor is that there should be no intimate relationship between an auditor and the management of a company.
Finally, you will recall that the Electronic Communications and Transactions Act of 2002 provides that electronic commerce will be allowed in South Africa at the commencement of that Act, including electronic registration and electronic signatures. The provisions of the Bill in this regard are to effect the provisions of the Electronic Communications and Transactions Act.
In conclusion, it is my belief that the proposals made in this Bill regarding financial reporting standards and auditor independence will promote good corporate governance and win the confidence of both investors and shareholders. In this process, growth will be stimulated with possible job creation opportunities in the marketplace.
Government is mindful of the role of small businesses, hence the effort to exempt them from onerous regulatory requirements in the Bill. Members, this is in line with the broad objectives of the government. I therefore urge you to please support the amendments. Thank you, Chair.
Debate concluded.
I shall now put the question. The question is that the Bill be agreed to, subject to the proposed amendments. In accordance with Rule 63, I shall first allow political parties to make their declarations of vote if they so wish.
We shall now proceed to the voting on the question. Those in favour, say ``Aye''; those against, say ``No''. [Interjections.] I think the ``ayes'' have it. I therefore declare the Bill agreed to in accordance with section 75 of the Constitution.
Bill, subject to proposed amendments, agreed to in accordance with section 75 of the Constitution.