New BEE codes will hit equity dodgers

COMPANIES that have less than a 10% black shareholding will be punished harshly by the new black economic empowerment (BEE) codes of good practice, owing to strong lobbying by black business formations.

Although the government’s express purpose in reformulating the codes was to move away from shareholder transactions, which have distorted BEE policies, strong lobbying to make the ownership element compulsory held sway.

In terms of the codes, announced this week by Trade and Industry Minister Rob Davies, but not yet published in the Government Gazette, large companies that do not score a minimum of 40% of the points in the ownership category will be penalised by being automatically downgraded by two levels. Smaller entities, that are not exempt, would drop one level. To score full marks for ownership, a company would need a minimum of 25% black ownership; to score 40% it would therefore need a 10% black shareholding.

Department of Trade and Industry director-general Lionel October said while it had been the government’s intention to put special emphasis on only two categories on the scorecard — the contribution made to the creation of new enterprises and suppliers, and skills development — pressure from stake- holders had resulted in a compromise that also made ownership a priority category.

Webber Wentzel partner Safiyya Patel said that on the old scorecard, companies were able to achieve relatively high BEE ratings without having done an equity transaction.

“A company could get a considerably good rating — of between one and four — without achieving a minimum level of black ownership. Some companies did transactions but their black ownership level is below 10%. This is where companies are going to be hit,” said Ms Patel.

Many companies, particularly foreign ones, had opted to make up points by scoring well on the other elements of the card, she said.

“This will now refocus everybody’s mind,” Ms Patel said.

Black Business Council CEO Xolani Qubeka said black business had engaged with the department continuously for many months over the codes and other issues.

“Our view is that ownership and control are both very important. Ownership is important in order to encourage new entrants. If you don’t do that, then you are saying everything must stay the same,” he said.

Mr Qubeka said black business also strongly supported the other measures introduced in the codes, designed to counterbalance the emphasis previously placed on “passive shareholder transactions”.

This refers to another new compulsory element — the category of enterprise and supplier development, which also carries the most weight in the new scorecard.

Companies will also have to be proactively involved and score well in this area or face automatic downgrades of two levels.

In the past, a company was able to score points for enterprise development by assisting an external company. Now, points will only be scored for developing and incubating suppliers in the supply chain.

It is this measure that the government hopes will move BEE policies decisively away from the emphasis on shareholding to the creation of genuine black enterprises.