Reserve Bank shakeup in property syndications

JOHANNESBURG - Sharemax has become the first company to fall foul of a Reserve Bank investigation into property syndication companies.

The Reserve Bank tasked its inspectors to look at a handful of unlisted property syndication companies and determine whether they were conducting the business of a bank, which is illegal without a banking licence.

During the investigation, two of the companies under review collapsed before the inspectors had a chance to form an opinion.

Early this year, after a lengthy legal argument, the Reserve Bank declared Sharemax's debenture structure to be a contravention of the Banks Act.

Sharemax agreed to revise its structure. Its latest prospectus offers shares to the public instead of the usual share-and-debenture mix.

Sharemax feels that as it is excluded from marketing debentures, and its competitors suffer no such restrictions, it is not competing on a level playing field.

Debentures allow property investment companies to offer higher yields, because the interest income is taxed in the hands of the investor. The tax rate depends on the investor's overall income. Shares pay dividends, which are taxed before they reach the investor.

Sharemax has issued a memo in which it notes that there are "various promoters who still sell their products to the public by means of a share and a linked loan account/debenture". It encourages "all financial advisers to report these product providers to the Reserve Bank and to avoid selling those products blindly".

But Deputy Registrar of Banks Michael Blackbeard denies that Sharemax has been singled out in any way. As the inspectors conclude their investigation of other syndicators similar action may be taken, notes Blackbeard.

The Reserve Bank shakeup in the property syndications sector is far from over. Both Sharemax and the Reserve Bank agree that the difference of opinions may end up going to court to get a declaratory order to rule on the correct interpretation of the Banks Act.

The Reserve Bank has yet to express an opinion on Sharemax's revised share-only investment structure. It also has to decide what to do about the products that have been sold in alleged contravention of the Act.

It is possible that Sharemax - and others - will be instructed to return money received from these "non-compliant" prospectuses.

Perhaps a more practical solution would be to convert the syndications to the new structure. Sharemax legal adviser Eckard le Roux tells Realestateweb that a conversion is possible and, while a good deal of red tape would be involved, it need not be an overly expensive process.

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