The final version of the first phase of the codes of good practice for black economic empowerment (BEE) address a few contentious issues, but leave many questions unanswered.
The codes clarify concerns around the measurement of bonus points, the issue of whether pension funds’ indirect equity holdings count as empowerment, and the so-called flow-through principle.
The codes were launched by Minister of Trade and Industry Mandisi Mpahlwa in December last year.
Three codes have so far been published, with seven still to come. Among the many issues not yet addressed is the treatment of foreign-owned companies.
These codes will not be gazetted until all are published — because each has equal importance in a balanced scorecard. And though the Department of Trade and Industry is already working on the other codes — they will not be published until next year.
“This means that, though the uncertainty may be relieved, companies and sectors may still not feel comfortable proceeding with transactions and charters until the full picture is finally available,” says Reg Rumney, Businessmap executive director of information and research services.
The codes also impact on the many other industry charters under development, with more than 20 in the pipeline, says Mpho Nkeli, an executive director at Alexander Forbes Risk Services responsible for BEE and transformation.
Nkeli advises companies in these sectors to conserve their energies in trying to translate and implement BEE, “which is what the codes are intended to achieve”.
The codes also herald a new process by which charters must be gazetted.
The codes move BEE into the realm of legal compliance. It remains a “soft” law with no penalties for non-compliance, but Rumney says it has already been seen that non- compliance is simply not an option.
“It now takes form as an onerous compliance issue for all companies. For a start, it will cost time and effort simply to understand the codes, but I don’t see any of them doing anything but complying.”
It also signals the end of the much-criticised practice of prominent black businesspeople representing unnamed members of “broad-based” groups in empowerment deals.
In future, broad-based schemes will have to comply with certain criteria before the transactions in which they are involved will be recognised.
For instance, in terms of the new codes, members of such schemes must be entitled to participate in the appointment of the trustees of the scheme. They must also be entitled to participate in the management of the schemes to the same extent afforded to shareholders in a private company.
The codes clear up a number of other controversial aspects. Rumney says one concession is that pension funds’ investments will count towards the 25% target for black ownership of companies’ equity, though public-sector institutions such as the Public Investment Corporation (PIC) will not.
PIC, the state’s pension fund manager, manages nearly R400-billion in assets and holds stakes in many JSE-listed firms.
The new codes relax the flow-through principle. Previously, the government had inferred that where a 50% black-owned company bought 50% of a white-owned company, its effective black ownership would be only 25%. This would have repercussions in the case where a 50% black-owned holding company owns 50% of a BEE company which in turn acquired a 26% stake in a white business. Previously, the final purchase would only be considered a 13% stake and therefore not qualify as black empowered. This would reduce the appetite for such deals.
Now, when a company is 51% majority black-owned, a 50% acquisition in a white company will be deemed to be 50% rather than 25%.
“This creates a recognition that not all BEE companies can be 100% black-owned, and also allows other parties to invest in BEE companies without diluting their status — provided it remains majority black-owned.”
The codes also provide relief for BEE companies that heavily leverage their stakes. In the earlier draft, eight of the possible 20 points on the ownership scorecard were withheld until the debt was repaid and the equity passed. Now, seven points will accrue gradually as repayments are made.
The codes retain a great deal of focus on ownership, though it only accounts for 20% of scorecard points.
Many believe these other components of broad-based empowerment are only unlocked in the presence of a BEE equity deal.