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Allan Gray’s can of worms

8 March 2017

Social and governance considerations surrounding Net-1 UEPS and its subsidiary CPS, which distributes social grant payments in South Africa.

This opinion piece was first published on Moneyweb on 8 March 2017.

Over the past few weeks, the Department of Social Development, its minister Bathabile Dlamini, and the South African Social Security Agency (Sassa) have been the focus of attention over the social grants debacle. With almost 17 million of South Africa’s poorest citizens potentially affected if a solution is not put in place by April 1, this focus is warranted. However, thus far the focus has been almost exclusively on Dlamini, Sassa and the department. While their handling of the matter is unquestionably shocking, the private sector players in this fiasco – Cash Paymaster Services (CPS) and its parent company Net1 UEPS, and Net1’s CEO Serge Belamant – should not escape scrutiny. And nor should investors into Net1, which is listed on Nasdaq and the JSE, especially those that claim to be committed to responsible investment.

Despite the concerning developments around Sassa and CPS, Net1’s major shareholder Allan Gray has indicated that its engagement with the company over the contract has been minimal. This is surprising, as many commentators have alluded to corruption as one of the possible reasons that Dlamini, the department and Sassa have seemingly failed to take any action to comply with the 2014 Constitutional Court judgement in which they were ordered to put in place a new grants distribution system.

The delays have left CPS in an extremely powerful position in the negotiations around an emergency contract. As a result, some business media has recommended that investors look to profit from the “Sassa noise”. However, if there is any indication that corruption has played a role in the department or Sassa’s behaviour, then it is incumbent on investors to ask questions about CPS’s role, or at the very least to scrutinise the company’s governance and risk management processes in this regard.

Belamant is correct to say that neither Net1 nor CPS have ever been found guilty of any crime, but there are red flags from a social and corporate governance perspective that should not be ignored.

Firstly, while the US Securities and Exchange Commission (SEC) decided in June 2015 not to recommend an enforcement action over the 2012 Sassa contract, Net1’s 2016 Annual Report notes that the US Department of Justice’s investigation into possible violations of the Foreign Corrupt Practices Act is ongoing.

Secondly, while much is made of the ConCourt’s 2014 ruling that Sassa’s conduct was the sole cause for the CPS contract being set aside, this does not exonerate CPS. The ConCourt found that Sassa failed to objectively confirm the Black Economic Empowerment (BEE) credentials claimed by CPS and, as an amaBhungane investigation has shown, these BEE credentials appear to amount to “fronting”, and provided a key piece of the puzzle in understanding the relationship between CPS and Dlamini. There have been several other allegations of corruption.

Thirdly, in terms of corporate governance, Net1 falls short in a number of areas. For example, the fact that Belamant is both CEO and Chairman of Net1, and that there is no lead independent director, is contrary to corporate governance best practice, and violates the JSE’s listing requirements that Net1, which has its primary listing at Nasdaq, is required to comply with. Similarly, Herman Kotze’s combined role as CFO, secretary and treasurer is also contrary to corporate governance principles that stipulate that the company secretary should not be a director. The independence of Net1’s three non-executive directors can also be questioned as they have all served since 2005. In light of the discovery that Mr Belamant was the “unfortunate victim of a scam” relating to his supposed honorary doctorate, you would imagine that investors would want a truly independent board in place. However, Allan Gray voted in favour of the re-election of all five directors at Net1’s November 2016 AGM.

Finally, there are questions over Net1/CPS’s behaviour in terms of its management of social grants payments. Human rights organisation The Black Sash has alleged that other Net1 subsidiaries have used confidential information given to CPS to sell mobile phone airtime and financial products such as funeral insurance and loans. The department has, in fact, turned to court to end illegal deductions being made against grant recipients. While cross-selling of financial products to grant recipients might benefit Net1 shareholders, there are serious questions around these practices in terms of sustainability, not to mention morality, as they will lead to even greater indebtedness and exacerbate inequality.

In South Africa, many asset managers, including Allan Gray, have committed to implementing Responsible and Sustainable Investment (SRI) practices through initiatives such as the Code for Responsible Investing in South Africa (CRISA) and the Principles for Responsible Investment (PRI). These commitments include incorporating sustainability factors into their investment decisions and demonstrating responsible ownership practices. As with other recent examples such as African Bank and Lonmin, it appears that Net1 will become yet another case study of asset manager failure to fulfil these commitments.


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