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Revised B-BBEE Codes have serious implications for business

14th October 2013

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On 11 October 2013, the revised Broad-based Black Economic Empowerment (B-BBEE) Codes of Good Practice were released by the Minister of Trade and Industry. The codes signal major changes for the B-BBEE environment in South Africa, making compliance easier for some companies, and more difficult for others.

The codes are effective immediately, although entities may elect to use the previous regulations for a period of one year.

“The revised codes reduce the number of elements from seven to five, with three of these elevated to priority element status,” says Roger Latchman, chief executive officer of the B-BBEE compliance consultants, VeriFi BEE Compliance. “The new priority elements include ownership, skills development, and enterprise and supplier development. All entities will need to comply with all five elements, although qualifying small enterprises (QSEs) only have to comply with ownership and any one of the other two priority elements. The priority elements require that a 40% minimum of the targets be achieved, failing which, entities will suffer a one-level drop in their B-BBEE compliance scorecard.”

Some other major changes to the codes include:

  • Threshold levels:
  • exempt micro enterprises (EMEs) now include entities up to an annual revenue of
  • R10 million; and
  • QSEs now include entities that have annual revenue of more than R10 million, but less than R50 million.
  • EMEs with 100% black ownership qualify for a level 1 rating; and those with greater than 51% black ownership a level 2 rating.
  • QSEs with 100% black ownership qualify for an ‘enhanced B-BBEE recognition’ level 1 rating, and those with more than 51% black ownership a level 2 rating.
  • The points required to achieve B-BBEE recognition levels have been drastically increased. For example, to achieve a level 4 contributor status, an entity now needs to achieve a minimum of 80 points, whereas previously this was achievable with 65 points.
  • Qualifying points have increased from 30 to 40 for a level 8 rating.
  • Targets for executive management have increased from 40% to 60%.
  • Targets for junior management have increased from 80% to to 88%.
  • The previous formula-driven Adjusted Recognition for Gender no longer applies. Specific targets for black people and black females have now been included.
  • Training expenditure can include spend on the training of unemployed individuals.
  • Learnerships are now focused on the absorption of employees and unemployed black people into the formal economy.
  • Targets are to be weighted on the equitable representation of the different race sub-groups, in accordance with the Employment Equity Act.
  • Allowable imports can only be excluded if an enterprise and supplier development plan is developed.
  • The target for procurement has increased from 70% to 80% BEE expenditure, and the points have been reduced from 12 to five.
  • Procurement from empowering suppliers that are more than 50% black-owned will now attract nine points with an increase in the target to 40% of expenditure.
  • Additional criteria includes 2% spend from entities that are more than 50% owned by military veterans for two points.
  • Under the enterprise and supplier development element, an empowering supplier needs to meet extremely challenging criteria.

“In essence, the revised codes will require many entities to reconsider their B-BBEE strategy, ensuring that they meet the requirements necessary to achieve a sustainable compliance level,” says Latchman. “It is essential that entities begin their planning processes early, otherwise they may fall flat when they undergo their verification process.”

It is also important to consider whether previously concluded empowerment deals need to be restructured or refinanced, as the revised codes are applicable retrospectively to existing B-BBEE deals.

Latchman urges companies reliant on their B-BBEE scorecard to reassess their current ownership structure by assessing the following criteria:

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  • Do black females have sufficient voting rights and/or economic interest?
  • Do institutional shareholders qualify for B-BBEE facilitator status?
  • Can institutional shareholder shares be considered as a mandated investment?
  • Can ownership after sale/loss by black participants be recognised?
  • Is there private equity fund shareholding? Does it meet the criteria to be considered as if the ownership were held by black people?
  • Has the impact of shareholding by Section 21 companies or companies limited by guarantee been considered?
  • What is the impact of options and share warrants? Was a valuation done using a standard valuation method?
  • Are there preference shares? Are there loans attached to these?
  • Has a minimum of 40% of the annual net value targets been achieved as per Annexure 10 (E), paragraph 4? This may require a valuation of the company.
  • Does the broad-based share ownership plan meet the criteria contained in Annexure 100 (B)?
  • Does the employee share ownership plan meet the criteria contained in Annexure 100 (C)?
  • Does the trust or family trust meet the criteria?

Roger Latchman, CEO, VeriFi BEE Compliance

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