Reg Rumney’s column “BEE codes could stymie deals” (April 8) makes startling and unsubstantiated suggestions about the draft Code of Good Practice on Black Economic Empowerment (BEE) equity participation that cannot go unchallenged.
Rumney contends that Code 100 “takes a stand against the financial instruments that make BEE deals possible”. Eight points out of 100 towards the total BEE scorecard are awarded only to the extent that these financial instruments are fully settled and black ownership is established.
This does not imply that deals dependent on financing arrangements are “penalised”, but that full recognition rests on attaining full, unencumbered and unrestricted ownership by the black equity participants.
This differs from the approach of previous charters — but that does not make it questionable. Indeed, postponing full recognition until a transaction reaches maturity is a more transparent and objective form of assessment.
The postponement of full recognition will affect all financed BEE acquisitions in the same way — thereby ensuring a continuously level playing field.
It is a gross exaggeration to suggest that such a principle “could stymie deals”.
One of the Department of Trade and Industry’s most significant changes in the final draft is a provision for timelines for the eight points. Similar arrangements are being considered in other codes.
Rumney’s contention that “preference shares or other instruments that transfer ownership over time are banned” is nonsense.
Code 100 merely seeks to treat preference-share schemes, as a means of financing acquisitions, as loans. This would serve to remove them from equity measurement — a principle that would benefit black shareholders who need to secure finance from white-owned financial institutions.
Any other form of preference share is treated in an identical manner to an ordinary share and is thus recognised as ordinary equity. It stands to reason that, once redeemed, the preference share becomes irrelevant and the ompany will qualify for the full allocation of points for ownership based upon the actual shareholding.
The same principle applies to any other conceivable “instruments that transfers ownership over time”, although it may be useful if Rumney could provide examples of such instruments in respect of which this principle does not apply.
More troubling is Rumney’s contention that “locking in black participants through an exit penalty” is banned.
Code 100 allows “any lawful arrangement whereby a member agrees, in writing, to a limitation upon their right to alienate any portion of the equity interest owned by them for a fixed period of time”.
What the code does not recognise as entitling a company to full recognition, is a lock-in provision whereby the black shareholder is required to pay a financial penalty on premature exit. In the BEE context, exit penalties appear more akin to indenture than sustainable partnerships.
For Rumney, Code 100 implies that “the established company must guarantee the success of the deal”. The department merely envisages established companies playing an active role in ensuring that BEE deals work. Why should it be embarrassed about this?
Rumney is at his most mischievous in suggesting that “the only way of guaranteeing success of a BEE deal is to give shares away” and that Code 100 implements a regime that “is the equivalent of expropriation”.
There is nothing in Code 100 to suggest that wholesale donation of shares is required or endorsed — indeed, the department generally opposes such arrangements.
The department’s primary expectation is that BEE transactions should be based on sound economic principles and that discounts offered should obviously make good economic sense.
All the government’s BEE initiatives have been structured on a “willing seller, willing buyer” basis, and every effort has been made to ensure that sectoral transformation charters avoid the expropriation.
Foreign investors are already extremely sensitive to any suggestion of “expropriation”, and one wonders whether Rumney gave full consideration to the possible impact of his statement.
At the heart of Code 100 is the principle that BEE deals must demonstrate sustainability and maturity before they receive the government’s stamp of approval. Rumney appears to confuse a fixation with high “marks” for BEE with the process of encouraging and promoting effective black participation in the economy.
As Trade and Industry Minister Mandisi Mphahlwa said recently: “Nobody is expecting all companies to become 100% compliant immediately. BEE is a process, the end state of which is full compliance.”
The department has structured Code 100 to permit significant scoring opportunity based solely on the form of a transaction, holding over only 8% of the total scorecard for recognition over a period of time. In response to public submissions, the period will be specified as 10 to 15 years in the next draft.
Three centuries of racial inequity in South Africa can hardly be expected to be undone in a year, and the expectation that all ownership points should become available immediately on concluding a transaction should be considered in that context.
Rumney’s article reflects a wave of BEE performance anxiety on the part of established business. This is misplaced. The draft codes seek to place all businesses on a level playing field and measure not only deal value, but broad-based compliance and sustainability.
Philisiwe Buthelezi is Chief Director for BEE at the Department of Trade and Industry