Refer to note 8.1 of the group financial statements for the applicable accounting policy.

Share-based payment transaction

The group unwound its broad-based black economic empowerment (BBBEE) transaction ‘MTN Zakhele’ during November 2016. As a consequence of the unwind of MTN Zakhele, the group concluded a new BBBEE transaction. The new BBBEE transaction was structured through a separate legal entity, MTN Zakhele Futhi (RF) Limited (hereafter referred to as MTN Zakhele Futhi). The transaction is designed to provide long-term, sustainable benefits to all BBBEE participants and will run for a period of eight years.

MTN Zakhele Futhi acquired 76 835 378 of the company’s shares at a price of R128,50 per share. The acquisition of 35 747 139 shares (and transaction costs of R36 million incurred by MTN Zakhele Futhi) was funded using equity raised from the allotment of MTN Zakhele Futhi shares totalling R1 651 million (including R557 million obtained from the group for the purchase of MTN Zakhele Futhi shares in terms of its underwrite option), reinvestment of R817 million from the existing MTN Zakhele shareholders and third-party preference share funding of R2 161 million. The acquisition of 15 367 075 shares was funded through a donation of R1 975 million received from the group. The company also issued 25 721 164 notional vendor finance shares (NVF shares) at par value to MTN Zakhele Futhi amounting to approximately R3 305 million.

The BBBEE transaction with MTN Zakhele Futhi has the substance of an option for accounting purposes. MTN Zakhele Futhi must repay the preference shares and NVF before the company’s shares held by it become unencumbered, while the company’s shares are the only security offered by MTN Zakhele Futhi for the debt funding obtained. Until the company’s shares held by MTN Zakhele Futhi become unencumbered, the ordinary shareholders of MTN Zakhele Futhi are exposed to the gains on the company’s shares, while their exposure to downside risk or risk of loss is limited to their equity contributions (i.e. the purchase price paid by them for the MTN Zakhele Futhi shares). Consequently, although legally issued, the company does not recognise its shares issued to MTN Zakhele Futhi and does not recognise the NVF as outstanding for accounting purposes. Equity contributions from external parties comprising cash received from new investors (including amounts funded from the preference shares) and the reinvestment by existing MTN Zakhele shareholders, are in substance a premium paid for the option to acquire the company’s shares in future. The resultant premium recognised by the company in the share-based payment reserve is R4 036 million. Securities transfer tax of R10 million was paid by MTN on the acquisition of shares from MTN Zakhele, which was recognised in the share-based payment reserve.

The transaction with MTN Zakhele Futhi’s shareholders is an equity-settled share-based payment transaction among group entities in terms of which the company will issue shares in future to MTN Zakhele Futhi’s shareholders in exchange for BBBEE benefits received by Mobile Telephone Networks Proprietary Limited (note 5).

During the 2017 year, an additional 24 388 294 MTN Zakhele Futhi shares were sold to external parties, that were previously acquired by the company in terms of the underwrite option during the allotment of MTN Zakhele Futhi shares in 2016. The shares were sold in four tranches on different grant dates for a total consideration of R487 million. The total increase in equity resulting from these share-based payment transactions amounted to R921 million of which R434 million (2016: R1 008 million) relates to the share-based payment expense capitalised as part of the investment in subsidiaries and R487 million relates to the option premium on the shares sold during the year.