Additional compliance regulations might hurt SMEs

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FIFI PETERS: Business lobby group Business Unity South Africa [Busa] has expressed its concern about the potential ramifications of the draft Companies Amendment Bill for 2023 if it is pushed through in the current form. The group is inspired, as it were, about some of the constructive changes that have been made in the bill, but there are several areas of legitimate concern that they have outlined.

I am joined by Lunga Maloyi, who’s the economic policy director of Busa. Lunga, thanks so much for your time. Just exactly what is it about this bill that concerns you?

LUNGA MALOYI: Well firstly, as we welcome and acknowledge the intention of the draft bill in terms of strengthening governance, but also in enhancing investor confidence, we also welcome the intention to enhance the regulatory framework for business by promoting both transparency and accountability.

However, we do have a number of misgivings about the bill in its current form because it has given rise to legitimate concerns and alarm, specifically around the possible impact that it has on some businesses.

As we note, small businesses are a vital component of our economy [and] we are concerned that it places an extra burden or administrative burden which might inadvertently obviously place additional compliance requirements and costs on SMEs [small and medium-sized enterprises], and that would obviously potentially impede their competitiveness and growth.

FIFI PETERS: Sure.

LUNGA MALOYI: We are also very concerned that there’s various areas of complexity and ambiguity.

And then some provisions of the bill itself leave significant room for interpretation or misinterpretation, which in itself may result in legal challenges down the line.

Of particular concern for us, obviously, is the increased regulatory oversight. We perceive it to be excessively intrusive and interfering with the affairs of business. It might in the long run dilute the value created by voluntary corporate governance practices.

FIFI PETERS: Maybe let’s get into the specifics, just so that we can better understand the concerns that you have. You’re talking about additional compliance requirements on SMEs and the fact that those will ultimately cost them more. Compliance is a good thing; making sure that you tick the boxes is a good thing. It is good for governance; it is good for transparency purposes. So what additional compliance requirements do you think could perhaps prejudice small business in this current form?

LUNGA MALOYI: We all know that small businesses are impacted by red tape and bureaucracy as a whole, and I think one of the key things that stands out in the bill is that the bill itself proposes the amendment of Sections 26 and 33 of the [Companies] Act, such that there’s a requirement now for private companies not only to produce annual financial statements, but also that the information contained therein will now become public information.

As we know, most of our small and medium enterprises don’t actually have the financial capital to be able to produce audited annual financial statements on an annual basis.

That is just but one part of the bill that we think would be problematic and would then incur extra costs and [place] an extra administrative burden on small businesses.

FIFI PETERS: So you compare [them] to bigger companies, those essentially that are listed on the JSE – the financial statements that they publish to let their shareholders know exactly what is going on in the company, what assets are being bought, and where money is being spent? I do understand these are public entities that are accountable to their shareholders, and they’ve got the money to do so.

But what that also does is that it increases the level of governance and accountability of organisations knowing that you have to essentially lay bare what is happening internally in the company. So if you are saying that this might be difficult for small businesses, it might be costly for them, what do you reckon would be a better solution then to ensure that perhaps the governance and the accountability standards that this bill is trying to inject are still upheld?

LUNGA MALOYI: I think that’s a different question altogether. We all know the capabilities of some of the much larger entities or enterprises in terms of adhering to this governance framework that’s entailed within the bill itself.

But I think what’s really the bone of contention here involves some of the amendments that are included – for instance in Section 26(1). Now some of the proposals and amendments there will enable members of the public to access complete annual financial statements of these private entities over a certain period of time.

And that information itself, which is contained in the annual financial statements, as you rightly put, may then be made available to companies, competitors, their suppliers – and may have a negative consequence in terms of that particular company’s commercial operations.

In holding group structures, for instance, the financial information of subsidiaries may be consolidated into the financials of a listed entity.

This may provide, in some cases, ready access to what we perceive to be price-sensitive information and may result in some way in the probative act of sharing of price-sensitive information.

Now, what we are recommending is that private companies that are part of a listed company which, for instance, already publishes its own financial statements, should be exempted from the proposal made under Section 26 of the bill.

Alternatively, what we envision is that Section 26 should be further clarified such that the right of access to that kind of information, for instance, should be limited on the grounds of, one, reasonableness, but also, two, appropriateness, and should not now exclude access to the annual financial statements.

FIFI PETERS: Okay. So you are not happy with most or some parts of the bill. I’d like to know what next steps – particularly in addressing those parts of the bill – you are concerned about. What happens now?

LUNGA MALOYI: I think what we have done is we have engaged in the legislative process.

We have put in a written business position and submission to parliament. We’ve also made all oral representation to parliament.

We are still keen, as a business organisation, on partaking in the process of refining the legislation, because we believe that as it stands currently it would not be conducive to business.

And so we are open to ongoing engagement with our government counterparts, and we stand ready to do such and add value to the process of ensuring that the bill does reach its intended consequence.

FIFI PETERS: Okay. Lunga, thanks so much for that, sir. We’ll continue to follow the story very closely, particularly the outcomes of the ongoing engagements that you are having with the key stakeholders.

Lunga Maloyi is the economic policy director at Business Unity South Africa.