BEE code change shocks industry

BY CAROL PATON, 07 MAY 2015, 06:02

Business Day

THE Department of Trade and Industry sprung a surprise on business, issuing an unexpected "clarification notice" on Tuesday that broad-based empowerment and employee share ownership schemes will no longer count as much as individual share ownership on the black economic empowerment (BEE) scorecard.

The notice astounded lawyers and verification agencies and will substantially alter the ratings of companies that have placed a portion of their ownership in the hands of employees or community organisations.

The notice also set out to clarify a range of issues relating to the new codes of good practice, which were due to come into effect on May 1, and explain their staggered implementation.

Of the 25 points on the new scorecard that can be earned for black ownership, broad-based and employee share ownership schemes can contribute only a maximum of three points. They cannot count towards the voting rights of black people or the economic interest they hold in the company, which are the other elements on the scorecard.

Under the previous score-card, broad-based and employee ownership schemes were used in the general calculation of black ownership, provided they were manifested in voting rights and reflected genuine economic interests, such as dividend payments and the ability to trade shares. The change was not canvassed with stakeholders or verification agencies.

Keith Levenstein, CEO of empowerment verification agency Econoserve said it would affect hundreds if not thousands of broad-based schemes.

"It is going to instantly drop these companies on the scorecard by as much as 20 points and imply they do not meet the element of ownership," he said.

Empowerdex described the news as a "big shocker" and Mazar’s managing partner Tony Balshaw called it "devastating".

"A significant number of nonlisted multinationals and large-and medium-sized enterprises have done empowerment deals based on employee or broad ownership schemes. The effect on them could be to drop at least three ratings levels of the eight," said Mr Balshaw.

Chief director of the Department of Trade and Industry Takalani Tambani said the idea behind the change was to ensure that ownership by black individuals was given greater priority by the business community.

"The message is government views the ownership as important to transform the economy. For us to effectively do that, we want to see black people participating meaningfully in the core of the economy.

Passive shareholding will not be able to transform this economy. Passive shareholders are not the real drivers of the business," he said.

Mr Tambani also downplayed the effect the new measure would have on the scorecards of businesses, saying it was not a major change from the way broad-based ownership was measured in the past.

But Mr Balshaw said it had never been the interpretation of law firms advising on multibillion-rand empowerment deals that broad-based ownership was not real ownership.

Mr Levenstein said many companies had used broad-based schemes and trusts as empowerment fronts as the schemes did not allow members to trade their shares or result in financial benefits. If black people were unable to realise economic benefits then such schemes should not qualify for ownership points, he said.

But in creating a blanket exclusion the department had "thrown the baby out with the bathwater", he said.