I would like to briefly address a couple of matters in this mailer:
- Fronting and Trusts
- CA Sector charter
Fronting and Trusts
On 23rd April 2019, there was an article in the Business Day by Carol Paton entitled “Broad-Based Trusts ‘not black ownership’”. In terms of this article, the B-BBEE Commission has written to a large number of companies notifying them that they need to “rectify their ownership structure and undergo re-verification of their BEE status or face investigation for fronting.” The reason given is that the Ownership transactions for Broad-Based Ownership Schemes “are not compliant with the law as the trusts are not genuine and effective black ownership”. The reason given is the requirement that the black beneficiaries of the trust become the unencumbered owners of the shares. Potential examples of companies needing to rectify their ownership structures include Kagiso Trust, the SACTWU Investment Trust, the Wiphold Investment Trust, Batho Batho Trust and the Royal Bafokeng Nation Trust.
There are several concerns with the matters raised in the article:
- The B-BBEE codes of Good Practice lay down specific requirements for a Broad-Based Ownership Scheme to qualify for Ownership recognition. There is no requirement that the shares must vest in the beneficiaries’ hands.
- All the trusts listed above are substantial trusts with values in excess of R25 million. Gazette 40898 was published on 09 June 2017 requiring all B-BBEE transactions greater than R25 million be registered with the B-BBEE Commission. Gazette 40898 requires all such transactions concluded on or after 24th October 2014 to be registered with the Commission within 30 days. I am assuming that these transactions were all registered as required and approved by the Commission. Does this mean that the transaction has now been “un-approved”?
- We are going back to the requirements of Gazette 38764 dated 05 May 2015 which stated amongst other matters that “Black participants in Broad-Based Ownership Schemes and Employee Share Ownership Programmes holding rights of Ownership in a Measured Entity must only score points under paragraph 2.2.3 under the Ownership scorecard.” This lasted all of 10 days before being repealed in Gazette 38799.
- The costs of unwinding such schemes and transferring unencumbered ownership to the beneficiaries will be significant.
- Is this retrospective legislation?
- This article states that Broad-Based Ownership Schemes are the schemes being targeted here. Many Employee Share Ownership schemes are also housed in Trusts. Are these the next target?
This is a case of legislation by press release. There is no way an article in the press can supercede gazetted law. If the BEE Commissioner wants to change the law as it currently stands, she must follow the correct procedures and issue proposed changes for 60-day comment.
CA Sector Code Draft
The Chartered Accountants Sector Code was repealed by the dti on 17 February 2016. All businesses covered by this code had to comply with the Generic Codes or Good Practice. The Draft Chartered Accountancy Profession Sector Code was issued for 60-day public comment on 26 April 2019 in Gazette 42417.
The following are covered by the draft code:
- Registered Auditors in public practice
- The South African Institute of Chartered Accountants (SAICA)
- The Office of the Auditor-General
- Training organisations other than in public practice. Care needs to be taken here as such organisations may be subject to other sector codes
- Members of SAICA and/or IRBA and
- Accredited Higher Education Institutions
The Draft Code classifies business as follows:
|EME||Less than R10 million||Any Ownership||Affidavit/CIPC Certificate|
|QSE||Between R10 and R50 Million||Greater than 51% Black Ownership||Affidavit/CIPC Certificate|
|Less than 51% Black Ownership||B-BBEE Certificate|
|Generic||Greater than R50 million||Any Ownership||B-BBEE Certificate|
|Start-up – First year following formation or incorporation||Immaterial||Any Ownership||Affidavit/CIPC Certificate|
|Tender value greater than R10 million||Any Ownership||QSE or Generic B-BBEE certificate|
Points are made up as follows:
|Element||Generic CoGP||CA||Generic CoGP||CA|
|Enterprise and Supplier Development||40||30||30||20|
A quick review of the draft codes shows the following differences between the Generic Codes of Good Practice and the draft CA Code for large companies:
- Points are awarded for Exercisable Voting Rights in the hands of black CAs, and Black Female CAs. This is in addition to the points for Voting Rights in the hands of black people and black women
- Points are awarded for Economic Interest to which of black CAs and Black Female CAs are entitled. This is in addition to the points for Economic Interest to which black people and black women are entitled
- There are no points for New Entrants and for Net Value. The priority element subminimum is based upon 40% of the 6 points available for Economic Interest of Black people and Black CAs
- Additional points are available for exceeding the Voting Rights targets
- A target of 4% of NPAT or 0.5% of turnover spent on bursary expenditure on Black employees or potential employees, including amounts spent with the Thuthuka Educational Upliftment Fund. There are up to 5 points available for such spend.
- There are additional scorecard indicators for learnerships:
- The number of Black people completing their learnerships and who have passed the Qualify Exam as % of Black people completing their learnership. There is a target of 80% and 5 points are available
- The number of black people without a Certificate in Theory of Accounting at the start of their learnership but have successfully completed their learnership. There is a target of 50% and 3 points are available
- There are additional bonus points available for absorption of African and Coloured people on completion of their learnerships
Enterprise and Supplier Development
The points on the Procurement scorecard are lower than the Generic CoGP.
|51% Black Owned||9||6|
|30% Black Women Owned||4||2|
There are 2 parts to Supplier Development
|Supplier Development contribution||5||1% of NPAT or 0.125% of Turnover|
|Contributions to Historically disadvantaged Universities to assist with the development of Black CA||5||1% of NPAT or 0.125% of Turnover|
The bonus points for job creation as a result of Enterprise and Supplier development activities and for Graduation from Enterprise Development beneficiary to Supplier Development beneficiary have been removed. They are replaced by Contributions to Black Owned Professional service firms through subcontracting audits or joint audits in the listed company sector. The target is 1% of NPAT or 0.125% of Turnover, and 2 points are available.
Qualifying Small Enterprise
The following table shows the differences between the Generic Codes of Good Practice and the draft CA Code for QSE companies:
|OWNERSHIP||Weighting Points – CoGP||Compliance Target – CoGP||Weighting Points – CA||Compliance Target – CA|
|In black hands||5||25%||9||32.5%|
|In black Female hands||2||10%||4||13%|
|In black hands||5||25%||8||32.5%|
|In black Female hands||2||10%||4||13%|
|New Entrants or designated groups||3||2%||0|
|Total Points Scored||25||25|
|MANAGEMENT & CONTROL||Weighting Points – CoGP||Compliance Target – CoGP||Weighting Points – CA||Compliance Target – CA|
|Black representation at Top Management||5||50%||5||50%|
|Black woman representation as Top-Management||2||25%||2||25%|
|Black employees in management||6||60%||6||60%|
|Black female employees in management||2||30%||2||30%|
|Total Points Scored||15||15|
|SKILLS DEVELOPMENT||Weighting Points – CoGP||Compliance Target – CoGP||Weighting Points – CA||Compliance Target – CA|
|Skills development expenditure in respect of all black people as a % of leviable amount||15||3%||15||3%|
|Skills development expenditure in respect of all black female people as a % of leviable amount||7||1%||7||1%|
|Skills development expenditure in respect of all disabled black people as a % of leviable amount||3||0.15%||3||0.15%|
|Bursary Expenditure on Current & potential Black Employees||5||4% of NPAT or 0.5% of Turnover|
|Black people participating in B, D & D learnerships as a % of total Employees||5||2.5%|
|Bonus points for Number of black people absorbed by the entity and industry at the end of the learning programme||5||100%||5||100|
|Total Points Scored||25||35|
|ENTERPRISE AND SUPPLIER DEVELOPMENT||Weighting Points – CoGP||Compliance Target – CoGP||Weighting Points – CA||Compliance Target – CA|
|B-BBEE Procurement Spend from all Empowering Suppliers as % of Measured Spend||15||60%||7||60%|
|Spend from 51% Black Owned Suppliers||5||15%||3||15%|
|Enterprise Development Contributions as % of NPAT||5||1%||5||1% of NPAT or 0.125% of turnover|
|Supplier Development Contributions as % of NPAT OR Annual Contributions to Historically Disadvantaged Universities||5||1%||5||1% of NPAT or 0.125% of turnover|
|Bonus Points: BBBEE Spend from Designated Group Suppliers >=51% Black Owned||1||1%||1||1%|
|Bonus Points: Graduation to Supplier Development from Enterprise Development||1||1|
|Bonus Points: Creating one or more Jobs via Supplier or Enterprise Development||1||1|
|Total Supplier & Enterprise Development Points Scored||30||20|
|SOCIO-ECONOMIC DEVELOPMENT||Weighting Points – CoGP||Compliance Target – CoGP||Weighting Points – CA||Compliance Target – CA|
|Socio-Economic Development as % of NPAT||5||1%||5||1% of NPAT or 0.125% of turnover|
|Total Points Scored||5||5|
If you need any B-BBEE consulting, please do not hesitate to contact Richard Ryding on 083 440 2130 or firstname.lastname@example.org.