It coul also harm foreign investment. This is according to the Security Industry Alliance, an umbrella body for private security service organisations.
The Private Security Industry Regulation Amendment Bill proposes that South African citizens must own at least 51% of all private security firms operating in the country.
It also grants the minister of police power to determine the different percentages of ownership across different categories of security services.
These include anything from guarding services to the supply, manufacture and installation of security equipment, surveillance and cash-in-transit services.
The Bill was tabled in Parliament earlier this month and is due to be processed by the parliamentary portfolio committee on police.
The move could negatively affect a large portion of the industry, according to Steve Conradie, chief executive of the Security Industry Alliance.
There are five large companies involved in guarding services that are foreign owned, including ADT, which is a division of multinational Tyco, and G4S, which is listed on the London Stock Exchange.
There are also a large number of international players in the electronics side of the industry, such as Siemens and Sony, which could be affected, as well as other companies such as ADI Global Distribution.
"This has not been very well thought through," said Conradie. "It is targeting a significant investment into South Africa."
The majority of the sector is already black-owned, he said, and all the major operators have already conducted black economic empowerment transactions.
The industry is the biggest supplier of entry-level jobs in the labour market and the Bill will threaten employment, he argued.
According to the police ministry, the sector has about 10 000 active private security companies, which government regulates through the Private Security Industry Regulatory Authority. The regulator has more than 1.9-million security officers on its database, of which more than 400000 are active security officers.
The authority is funded by the private sector through deductions from employees' wages. A positive aspect of the Bill, Conradie said, is that the regulator is likely to become state-funded, which will ease the burden on workers in the industry.
But it is not clear why the state is seeking such stringent ownership requirements. The memorandum to the Bill states that it seeks to address "the increased threat to national security posed by the participation of foreign nationals in the industry".
The Democratic Alliance has already rejected the Bill outright, saying that restrictions on ownership would "discourage investment in the sector, jeopardising jobs as well as people's safety".
"The claims by government that the ownership of these security companies poses a threat to national security are not adequately backed up by concrete evidence," the party's spokesperson on police, Dianne Kohler Barnard, said recently.
"It is not just private citizens and businesses that depend on private security companies. More and more government departments, state entities and even state security agencies and the police themselves use private security firms," she said.
The police minister's spokesperson, Zweli Mnisi, said a number of challenges had prompted a review of the legislation.
"The private security industry is growing at a fast pace and we must also align our regulation strategies to deliver effective regulation.
"In addition, the prevalence of unaccounted-for firearms and ammunition in the hands of some of these mushrooming private security companies is a worrying situation."
The Bill proposes a separate register of firearms for the private security service sector.
There is a need for greater co-operation between private security firms and the police. Another challenge, Mnisi said, is ensuring that criminal elements are not able to "infiltrate the private security industry [and] thus compromise the safety of the republic".