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Another DTI B-BBEE Unit oops – EconoBEE Newsletter – 12 August 2014


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Another DTI B-BBEE Unit oops

The dti are the gatekeepers of BEE and transformation, but it often looks like they are intent on sabotaging the whole process.

There are hundreds of issues that have been raised since the codes were first issued in 2007, and the dti has been conspicuous by its failure to issue more than a handful of notices or clarifications. They often delegate any problem to SANAS or IRBA who delegates the issue to the verification agency or auditor. There is no accountability. 

It’s no small wonder that BEE has become a free-for-all. Businesses and agencies are doing whatever they want, or whatever they think is correct – whether it is in line with the codes or not. The dti does not, or cannot give any guidance. There is no investigation of specific issues, and sadly limited understanding of the complexities of business and BEE. They refuse to investigate or take action against fronting. Usually they delegate the problem to the as yet un-appointed BEE Commissioner, not caring that it will take another 2 years to appoint the BEE Commissioner and get the office up and running.

The dti make promises “the 2nd phase of the codes including QSE and sector codes will be issued early in 2014”, “the QSE and sector codes will be issued in July 2014”, “the QSE and Sector codes will be issued in the third quarter of 2014”. Little do they even know that most of the sector councils are as dysfunctional as they are, and most sector codes will not be gazetted by May 2015. In the interests of the country, it is finally time for a wake-up, or get-out call to the dti.

Every now and then the dti does issue a clarification (1, 2 and 3). The problem is the clarification is more than likely to lend itself to more confusion, or they simply get it wrong.

A case in point:
With regard to Ownership the codes allow companies to earn points by selling shares to “Black New Entrant”. We see a new entrant as someone who is new to the field of purchasing shares and investing – a person who is not a high wealth individual.

The 2007 codes give the following definition:

“Means black participants who hold rights of ownership in a measured entity and who, before holding the equity instrument in the measured entity, have not held equity instruments in any other entity which has a total value of more than R20 000 000.00 (R20-million), measured using a standard valuation method;”

The 2013 Amended Codes use the following definition:

“Means Black participants who hold rights of ownership in a Measured Entity and who, before holding the Equity Instrument in the Measured Entity, have not held equity instruments in other Entities which has a total value of more than R50,000,000, measured using a standard valuation method;”
Note how the new definition only changes the threshold from R20m to R50m. This definition was always problematical. The phrase “have not held equity instruments in any other entity which has a total value of more than R20 000 000.00 (R20-million),” could be read to mean that the value of the entity should not exceed R20m, or the value of equity instruments in the hands of the participant should not exceed R20m.

Most commentators saw this as an area where the dti should give a clearer explanation. We believed that the codes were referring to a person who has not held equity worth, IN TOTAL, more than R20m. We saw this as excluding a wealthy black businessman and the codes wanting to include as a new entrant only people who were not independently wealthy, with an investment value of more than R20m. It could even have been perceived as excluding an entity that itself had a value of more than R20m. Obviously it was not clear, though most verification agencies were following this interpretation of a person with less than R20m worth of shares because it seemed to make the most sense. Participants in employee and broad-based ownership schemes were always seen as a new entrant because they were generally low wealth individuals.

When the Amended Codes were issued, the dti did not take the opportunity of expanding on this – it simply changed the R20m threshold to R50m, but leaving the same problematical definition.

Eventually on 25th April 2014, the chief director of the B-BBEE unit at the dti issued the following statement of clarification referring to the 2007 codes:

A “Black New Entrant” is a black participant who holds rights of ownership in a Measured Entity and who, before holding the Equity Instrument in the Measured Entity, has not held
equity instruments in any other entity that has a total value of less than R20 000 000 at the time the deal was entered into, measured using a standard valuation method. In the case of a Broad-Based Ownership Scheme, the beneficiaries of the scheme being natural people are considered as opposed to the scheme as a whole.

Let’s read that again: a new entrant is someone who has not held equity in any other equity that has a total value of LESS THAN R20 000 000 at the time the deal was entered into. Is the dti truly saying that a person who has never done a deal in his life is NOT a new entrant, but one who has done deals of say R2billion is indeed a new entrant? Is the chief director trying to exclude employees in ownership schemes from being new entrants and trying to extend a benefit to the existing fatcats? 

We think that the clarification should have said “more than”. This still does not help us with the rest of the problematic definition in which case the clarification would still have been useless.

Who knows what the dti was thinking? Maybe their whole aim was to add the phrase “at the time”, while messing up the rest of the definition. Maybe they wanted to give a clarification that if a participant purchased shares in 2007 and at the time he had not held shares worth more than R20m, but has subsequently become more successful he would be regarded as a new entrant? However they said “not held…value less than R20m”, so he is a new entrant only if he is not really a new entrant.

This is ludicrous! It took the dti 7 years to issue a simple clarification that is obviously wrong. Can we trust any clarification or anything else that comes out of the unit? Why did they not fix this in the Amended Codes? 

In any event this is not a clarification. The chief director cannot simply change words. It should be an explanation, in line with the codes, not a brand new definition. How does a company actually become compliant if the dti can arbitrarily change the rules?

If this was the only error, we would recognise it as human error. It happens all the time – usually through inaction of the dti. On numerous occasions the minister has had to issue a corrected gazette. How embarrassing to the minister, government and the transformation process that it is being ruined by the very department tasked with implementing it. There are many other errors in the 2007 codes that were perpetuated in the 2013 Amended Codes. Each error leads to a different interpretation. It’s almost as if the dti wants us to get it wrong, but more likely they don’t know better!

We no longer trust any clarification that the dti issues. We suggest that they be ignored, and we only react to official notices, as long as the minister does not make the same mistakes. In the following weeks we will highlight many other issues that the dti should have sorted out.

Finally, please note that the deadline for the Amended codes, the as yet unissued sector codes, the unissued QSE codes is now just over 8 months away. Within 8 months the minister must issue as a draft the sector codes, the QSE codes (which has been promised since the 2012 draft codes), obtain public input and participation. Thereafter the final codes must be issued, together with the revised verification manual, the revised IRBA SASAE and SANAS must re-accredit verification agencies or give them an extension of scope. If this unlikely event does occur then you will be verified on your businesses’ activities during this financial year when there are no suitable codes to guide you. Moreover, the dti does not even know what a new entrant is.

We call upon the minister to replace the entire BEE unit. Alternatively we call upon the President to replace the minister!

We know that most agencies, auditors, attorneys, consultants, accountants – even the sector councils and regulators themselves are hugely frustrated with trying to deal with the dti. They are too scared to speak out. We have to do it for all of us.

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EconoBEE Newsletter
 12 August 2014

In this issue

  • Another DTI B-BBEE Unit oops

In other news

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