Directors’ report

for the year ended 31 December 2010

The directors have pleasure in presenting their report which forms part of the audited annual financial statements of the Company and the Group for the year ended 31 December 2010.

Nature of business

MTN Group Limited (MTN Group or the Company), incorporated on 23 November 1994, carries on the business of investing in the communications industry through its subsidiary companies, joint ventures and associated companies. MTN Group is listed on the JSE Limited.

International Financial Reporting Standards (IFRS)

MTN Group’s financial statements were prepared in accordance with International Financial Reporting Standards.

Financial results

Full details of the financial results of MTN Group are set out on pages 106 to 231 of these annual financial statements and accompanying notes for the year ended 31 December 2010.

Year under review

The detailed reviews and the activities of MTN Group are contained in the chairman and Group president and CEO’s statements and the operational and financial review as set out on pages 16 to 73.

Subsidiary companies

Details of entities in which MTN Group has a direct or indirect interest are set out in Annexure 1 of the financial statements on pages 228.

All Group subsidiaries have a year end consistent with that of the MTN Group, with the exception of Irancell Telecommunication Services Company (Private Joint Stock) (MTN Irancell), which has a year end of 19 March, due to statutory requirements in Iran.

Distribution to shareholders

Final dividend

A final dividend of 349 cents per share (December 2009: 192 cents per share) amounting to R6 577 million (December 2009: R3 534 million) in respect of the financial year ended 31 December 2010 was declared on Wednesday, 8 March 2011, payable to shareholders registered on Friday, 25 March 2011.

Interim dividend

A maiden interim dividend of 151 cents per share amounting to R2 780 million in respect of the half-year period ended 30 June 2010 was declared on Wednesday, 18 August 2010, paid to shareholders registered on Friday, 10 September 2010.

The payments of future dividends will depend on the board’s ongoing assessment of MTN Group’s earnings, financial position, cash needs, future earnings prospects and other factors.

Shareholders on the South African register who dematerialised their ordinary shares receive payment of their dividends electronically, as provided for by STRATE. For those shareholders who have not yet dematerialised their shareholding in the Company in certificated form, the Company operates an electronic funds transmission service, whereby dividends may be electronically transferred to shareholders’ bank accounts. These shareholders are encouraged to mandate this method of payment for all future dividends, by approaching our share registrar, Computershare Investor Services (Proprietary) Limited, whose contact details are set out on page 254 of the notice of the annual general meeting.

Share capital

Authorised share capital

There was no change in the authorised share capital of the Company during the year under review. The authorised ordinary share capital of MTN Group is 2,5 billion shares of 0,01 cent each. The movements in the issued ordinary share capital during the period under review were reflected as follows:

During the year under review there was a net increase in the issued share capital due to the acquisition of shares by MTN Zakhele Limited in respect of the MTN BEE transaction and the subsequent issuing of shares under the Employee Share Ownership Plan (ESOP).

Options exercised and allotted

Shares issued to MTN Zakhele Limited in terms of the MTN BEE transaction

Shares issued in respect of the Employee Share Ownership Plan (ESOP)

Accordingly, at 31 December 2010, the issued share capital of the Company was R188 453 (December 2009: R184 053) comprising 1 884 510 117 (December 2009:
1 840 536 491) ordinary shares of 0,01 cent each. As at the date of this report, there were no treasury shares held by the Company.

Control of unissued share capital

The unissued ordinary shares are the subject of a general authority granted to the directors in terms of section 221 of the Companies Act, 1973 as amended (Act No 61 of 1973) (the Companies Act). As this general authority remains valid only until the next annual general meeting, which is to be held on 22 June 2011, members will be asked at that meeting to consider an ordinary resolution placing the said unissued ordinary shares, up to a maximum of 10% of the Company’s issued share capital, under the control of the directors until the next annual general meeting.

Further details of the authorised and issued shares as well as the share premium for the year ended 31 December 2010 are set out in note 18 to the Group annual financial statements.

MTN broad-based BEE transaction

Rationale for and principles of the MTN broad-based BEE transaction

BEE is integral to the ethos of MTN and MTN believes that broad-based BEE participation is important to its future success.

MTN has been guided primarily by the following principles in structuring the MTN BEE transaction:

• the vesting (through MTN Zakhele) of full voting and economic rights to the BEE participants from inception;
• achieving a sustainable and robust BEE transaction at a realistic economic cost (inclusive of any dilution) to shareholder;
• broadening MTN’s South African BEE ownership by structuring the MTN BEE transaction through an offer to the black public; and
• acting as far as possible within the letter and spirit of the broad-based black economic empowerment codes of practice and their requirements for the empowerment of South African businesses.

During the period under review, the Company launched an empowerment vehicle where members of the black public were invited to subscribe for ordinary shares in MTN Zakhele Limited (MTN Zakhele). In terms of the prospectus issued by MTN Zakhele on 30 August 2010, all black staff and black directors of MTN and its major subsidiaries and their associates were entitled to participate in the MTN Zakhele offer on precisely the same terms as members of the black public.

A total of 80 900 000 MTN Zakhele shares were offered to the members of the black public at R20 per share. Although there was an oversubscription of shares, MTN Zakhele Limited shares were allotted and issued to all successful applicants. No preference in any allocation was given to any employee or director of MTN or its subsidiaries, or their associates.

MTN Zakhele shares cannot be traded during the minimum investment period (ie the first three years). Restricted trading is allowed during the fourth to sixth years, where MTN Zakhele shares could be sold to eligible MTN Zakhele ordinary shareholders. All sales during the fourth to sixth years are subject to approval and verification by MTN or a designated committee. There are no special restrictions on the sale or encumbrance of MTN Zakhele shares after the empowerment period.

Details of participation in MTN Zakhele scheme by black MTN directors, directors of major subsidiaries and company secretary are set out below.

Employee Share Ownership Plan (ESOP)

MTN established the ESOP for the benefit of eligible employees (employees who are South African citizens or permanent residents and at job level 1 and 2 that do not participate in any other existing share scheme within MTN Group). The ESOP was effective from 1 December 2010. Eligible MTN ESOP employees were not required to contribute any equity to participate and will be entitled to full voting and dividend rights. Eligible MTN ESOP employees were granted an allocation of 400 MTN shares each not exceeding R50 000 per eligible MTN ESOP employee. With limited exceptions (eg death), participants in the ESOP are required to hold the MTN shares awarded to them under the ESOP for a period of at least five years.

The implementation of the ESOP was not conditional upon the implementation of the MTN BEE transaction and eligible MTN ESOP employees were issued the ESOP shares directly and not through MTN Zakhele.

New employee share incentive plans

During the period under review, MTN Group established two employee share incentive schemes, namely, MTN Group Limited Performance Share Plan 2010 and MTN Group Limited Share Appreciation Rights Scheme 2010. The shareholders of the Company approved these two schemes and their salient features at the annual general meeting held on 15 July 2010. No allocations had been made in terms of these two schemes as at 31 December 2010.

Acquisition of the Company’s own shares

At the last annual general meeting held on 15 July 2010, shareholders gave the Company or any of its subsidiaries a general approval in terms of sections 85 and 89 of the Companies Act, by way of special resolution, for the acquisition of its own shares. As this general approval remains valid only until the next annual general meeting, which is to be held on 22 June 2011, members will be asked at that meeting to consider a special resolution to renew this general approval until the next annual general meeting, subject to a maximum extension of 15 months. During the year under review there were no acquisition of the Company’s own shares.

Shareholders’ interest

Disclosure in accordance with section 140A (8) (a) of the Companies Act and paragraph 8.63 of the JSE Listings Requirements.

The following information was extracted from the Company’s share register as at 31 December 2010:

MTN Group Limited: Shareholder analysis tables
Register date: 31 December 2010
Issued share capital: 1 884 510 117

* National Empowerment Fund Stratequity Empowerment Investment and MTN Zakhele.
** Government Employee Pension Fund managed through various asset, investment and fund managers.

According to information received by the directors, the following shareholders held shares in excess of 5% of the issued ordinary share capital of the Company:

Directorate and Company secretary

The composition and profiles of the board of directors of MTN Group are set out on pages 20 to 23.
Details of directors’ remuneration and shareholding are set below.
Details of board changes during the reporting period are set out on page 19 of the chairman’s statement.
The Company group secretary is SB Mtshali, whose business and postal addresses are set out below:

Business address
216 – 14th Avenue, Fairland
Gauteng, 2195

Postal address
Private Bag X9955
Cresta
2118

Directors

In accordance with the articles of association of the Company, one-third of the board is required to retire by rotation at each annual general meeting. Retiring directors are those who have been in office the longest since their last re-election and directors who have been appointed between annual general meetings.

The directors retiring by rotation in terms of the articles of association at the forthcoming annual general meeting and who are available for re-election are J van Rooyen, MJN Njeke AT Mikati, JHN Strydom and KP Kalyan. The profiles of the directors retiring by rotation and seeking re-election are set out on pages 235 to 237 of the notice of the annual general meeting.

During the year under review, NP Mageza, A Harper and MLD Marole were appointed to the existing board to fill vacancies and were subsequently re‑elected at the annual general meeting held on 15 July 2010. The other directors who were due for rotation, MC Ramaphosa, AF van Biljon, DDB Band were re-elected.

Interests of directors and officers

During the year under review, no contracts were entered into in which directors and officers of the Company had an interest which significantly affected the business of the Group. Black MTN directors had an indirect interest in MTN Group Limited securities through subscription for MTN Zakhele Limited, details of which are set below.

The directors had no interest in any third party or company responsible for managing any of the business activities of the Group.

The emoluments and perquisites of executive directors are determined by the Group nominations, remuneration, human resources and corporate governance committee (NRHR & CG committee) and approved by the board. No long-term service contracts exist between executive directors and the Company, with the exception of the contract of service between the Group president and CEO and the Company, of which the first contract had commenced on 1 July 2002 and terminated on 30 June 2007. The contract was subsequently renewed at the AGM held on 13 June 2007 until 30 June 2010.

The Group president and CEO did not renew his long-term contract of employment which ended on 30 June 2010. However, he agreed to continue in his current role until 31 March 2011. The Company has entered into a restraint of trade agreement with PF Nhleko which was ratified at the AGM on 15 July 2010. In terms of this agreement, the Company will pay PF Nhleko R33 million on 1 April 2011. The restraint is for a three-year period.

Reward and remuneration philosophy

The principles of MTN Group’s remuneration policy reflect the Group’s objectives of a sound governance process and long-term value creation for the Group’s shareholders. It is also designed to support key business strategies and create a strong, performance-orientated environment as well as attract, motivate and retain employees.

Performance management

The performance of MTN employees is enhanced through an effective performance management system at all levels of remuneration, whether through the fixed guaranteed package, or the various short-term and long-term incentive schemes.

As a multinational company, all applicable employees and executives within Group companies and operating units participate in the Group’s Integrated Performance Framework (IPF) by means of performance agreements, thereby ensuring that the entire Group is fully aligned in achieving the strategic objectives and goals as determined by the board. This process consists of two elements, namely: the individual performance section, which rewards individuals for achieving targets through the salary increase process; and the team performance section which rewards the team for achieving the strategically determined value drivers, coupled with the Company’s performance targets, and is rewarded through the performance bonus incentive scheme.

The MTN Group board of directors has delegated responsibility for remuneration policy to the NRHR & CG committee. The role of this committee, among others, is to establish the overall principles that determine the remuneration of the executive directors and senior management. The full details of the NRHR & CG committee’s role, constitution and attendance are outlined in the corporate governance report.

In setting remuneration policy, the NRHR & CG committee recognises the need to be competitive in an international market. The committee’s practice is to set remuneration levels which ensure that executive directors and senior management are fairly and responsibly rewarded for their contribution to the Group’s operating and financial performance. In addition, in order to promote a common interest with shareholders, performance-linked, share-based incentives are considered to be an important element of the executive incentive policy.

Executive directors and senior management

The remuneration of the executive directors and senior management currently consists of three main components to balance long- and short-term objectives: base salary; annual bonus plan with performance targets; and long-term incentives in the form of share-based incentive schemes. The last two are designed to encourage and reward superior performance, employee retention and to align the interests of the executive directors and senior management employees as closely as possible with the interests of shareholders. In addition to these main components, the executive directors and senior management also receive pensions, medical insurance, death/disability insurance and other benefits.

Performance bonuses for executive directors are linked to the operational and financial value drivers pertaining to business performance against budget for individual operations and the Group as a whole. These value drivers are determined by the board every year in respect of the next financial year. Each executive director’s performance bonus is conditional upon achievement of their specific value drivers and key performance indicators which are structured to retain a balance between the performance of entities for which they are directly responsible, and that of the Group. In order to align incentive awards with the performance to which they relate, bonuses reflected are for amounts accrued in respect of each year and not the amounts paid in that year. The bonuses are determined by the NRHR & CG committee and are approved by the board.

The base salary of executive directors is subject to annual review and is set with reference to external market benchmarks, taking individual performance into consideration. Executive directors do not receive payment of director’s fees or committee fees in respect of meetings attended.

MTN Group recognises the benefits that the involvement of executive directors as non-executive director’s of other companies (under certain conditions) convey to the individuals and the Company. However, each executive director is normally permitted to accept only one outside appointment, and the earned director’s fees are ceded to MTN Group.

Remuneration of non-executive directors

MTN Group’s non-executive directors receive an annual retainer and meeting attendance fees. They do not participate in any type of share incentive scheme or receive pension-related benefits.

The board is proposing fee increases of 9,1% for local non-executive directors and a 4,1% increase for international non-executive directors for the retainer and attendance of board meetings. A 7,1% increase is proposed for the retainer and attendance of committee meetings. It is important to ensure that the remuneration of non-executive directors remains competitive in order to enable the Company to retain and attract persons of the required calibre who can make meaningful contributions. Given its global footprint and growth rate and having regard to the appropriate capabilities, skills and experience required, the Group president and CEO, in consultation with the Group executive: human resources and Group financial director conducted a review of the remuneration paid to non-executive directors, based on data provided by independent remuneration specialists and benchmarked against comparable entities. The NRHR & CG committee debated and considered the revised remuneration proposal at length and after reaching consensus, recommended the revised remuneration proposal to the board, which sanctioned the proposal for recommendation to shareholders at the annual general meeting to be held on 22 June 2011. The proposed new fee structure is outlined in the notice of the sixteenth annual general meeting and will be applicable with effect from 1 January 2011.

The fees received by executive and non-executive directors during 2010 are reflected in the following table:

Directors’ emoluments and related payments

For the year ended 31 December 2010

In terms of the share appreciation rights scheme and share rights plan, the executive directors made the following pre-tax gains:

* Includes medical aid and unemployment insurance fund.

*Fees that have been paid in euro have been converted to rand.
† Fees are paid to M1 Limited.
#Retainer and attendance fees include fees for board and committees.

Director’s emoluments and related payments

For the year ended 31 December 2009

The increase in PF Nhleko’s bonus is due to the 2010 amount being calculated using a 200% hyperbonus multiple, whereas 2009 bonus amount was based on 100% multiple as he did not qualify for the higher multiple.

In terms of the share appreciation rights scheme and share rights plan, an executive director made the following pre-tax gains:

The MTN Group share options, share appreciation rights and share rights schemes

The Company operates share options, share appreciation rights and share rights schemes (jointly referred to as the schemes) and eligible employees including executive directors, are able to participate in accordance with the schemes’ rules. The schemes are designed to retain and recognise the contributions of executive directors and eligible staff and to provide additional incentives to contribute to the Company’s continued growth.

In terms of the Company’s share option scheme, the total number of shares which may be allocated for the purposes of the scheme shall not exceed 5% of the total issued ordinary share capital of the Company, being 94 225 505 shares.

The following information is provided in accordance with the schemes:

The vesting periods under the schemes are as follows: 20%, 20%, 30% and 30% on the anniversary of the second, third, fourth and fifth years respectively, after the grant date. The strike price is determined as the closing market price for MTN Group Limited shares on the day prior to the date of allocation.

If the options or appreciation rights remain unexercised after a period of 10 years from the date of grant, they lapse. Furthermore, rights are forfeited if the employee leaves the Group before they vest.

Share options

Details of the share options allocated and reversed are as follows:

The market weighted average share price on the dates that share options were exercised during the year was R116,33.

The options outstanding at the end of the period under review have a weighted average remaining contractual life of three years (December 2009: four years). During the year ended 31 December 2010, no options were granted. The fair values as reflected on page 182 under note 22 of the financial statements were calculated using the stochastic model. The inputs into the model are reflected below:

Expected volatility was determined by calculating the historical volatility of the Company’s share price over the previous six years. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.The expected dividend yield was determined based on historical data.

Options exercised during the year yielded the following proceeds, after transaction costs:

*Amount less than R1 million.

The balances of share options are reflected below:

MTN Group share appreciation rights scheme and share rights scheme (the rights schemes)

The share appreciation rights scheme was implemented on 31 May 2006, and superseded the share option scheme.

On 26 August 2008, the board approved the share rights scheme, which superseded the share appreciation rights scheme. Both the rights schemes operate under the same provisions with the exception that the share rights scheme was extended to allow participation by junior managers.

Share rights under the rights schemes are granted to eligible employees by the relevant employer subsidiary company. Exercised rights are equity settled whereby the relevant MTN Group subsidiary purchases the required MTN shares in the open market.

The following is a summary of the outstanding share appreciation rights as at 31 December 2010 for the share appreciation rights scheme 2006:

The following is a summary of the outstanding share rights as at 31 December 2010 for the share rights scheme 2008:

A valuation has been prepared using the stochastic model to determine the fair value of share appreciation rights and the expense to be recognised during the year.

The inputs into the stochastic model were as follows:

Expected volatility was determined by calculating the historical volatility of MTN Group share price over the previous six years. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The expected dividend yield was determined based on historical data.

The nominations, remunerations, human resources and corporate governance committee periodically assesses the effectiveness of the Company’s long-term incentive scheme, to ensure alignment with shareholder requirements and international best practice.

Equity compensation benefits for executive directors, the company secretary and directors of major subsidiaries

Participation in the MTN Group Limited share schemes for the year ended 31 December 2010.

Equity compensation benefits in respect of share options for executive directors and directors of major subsidiaries

Directors’ shareholdings and dealings

The interests of the directors and major subsidiaries directors in the ordinary shares of the Company were as follows:

# Major subsidiary director.
** Company secretary

Total share dealings transactions concluded by directors, major subsidiaries directors and the company secretary during the financial year under review including options and transactions on MTN ordinary shares.

** Transactions on MTN ordinary shares.

* Shares exercised under the share options scheme.
** Transactions on MTN ordinary shares

Directors’ interests in MTN Group held through acquisition of shares in MTN Zakhele Limited

The following persons, being directors of MTN Group Limited and its major subsidiaries and the MTN company secretary were allocated the following number of MTN Zakhele shares which has a shareholding in MTN Group Limited shares.

Material resolutions

During the year there were no material resolutions from subsidiary companies.

Mergers and acquisitions

Details of the MTN Group’s acquisitions and disposals are presented on pages 196 to 198 of the annual financial statements.

Events after the reporting date

No material events have occurred between the date of these financial statements, and the date of approval the knowledge of which would affect the users of these statements to make proper evaluations and decisions.

Property, plant and equipment

There were no changes in the nature of property, plant and equipment nor in the policy regarding their use during the financial year under review.

American depository receipt facility

A sponsored American depository receipt facility has been established. This ADR facility is sponsored by the Bank of New York and details of the administrators are reflected under the administration page 251.

Borrowing powers

In terms of the articles of association of the Company, the borrowing powers of the Company are unlimited. However all borrowings by the MTN Group are subject to limitations expressed in the treasury policy. The details of borrowings appear in note 20 of the annual financial statements.

Going concern

The directors have reviewed the MTN Group’s budget and cash flow forecast for the year to 31 December 2011. On the basis of this review, and in the light of the current financial position and existing borrowing facilities, the directors are satisfied that the MTN Group has access to adequate resources to continue in operational existence for the foreseeable future and is a going concern and have continued to adopt the going-concern basis in preparing the financial statements.

Auditors

PricewaterhouseCoopers Inc. and SizweNtsaluba vsp will continue in office as joint auditors in accordance with section 270 of the Companies Act. The audit committee reviewed the independence of the auditors during the period under review and declared itself satisfied that the auditors were independent of the Company.