Broad-based schemes

Still making the news is the clarification issued by the dti on 5th May 2015, and its subsequent retraction on 15th May 2015.

 

The intention of the clarification was to clamp down on dodgy or as the minister calls them “mischievous” broad-based schemes – not to close them all.
We all know that there are many schemes where the beneficiaries do not have economic interest, but traditionally the companies were verified (incorrectly) as having a broad-based or employee ownership scheme.

We know of companies where the employee “owns” shares, but can never sell them, where he loses this shares when he leaves, is dismissed or dies. That is not an ownership scheme and falls foul of the codes.

We know of broad-based schemes where participants are broadly defined “black women”, but no black woman has ever seen one cent. We know of schemes where beneficiaries do receive dividends, but lose their beneficiary status after a year, or at the discretion of the trustees and any opportunity of any capital appreciation of the shares. The company then chooses to pay no dividends, or sufficient dividends to keep their beneficiaries quiet. This is obviously not in line with the substance of the codes (key principle 2.1).

However it is seen by some as a loophole in the codes. The fault lies with dti/SANAS/IRBA for not even knowing or checking up these sham schemes until recently, with the verification industry for turning a blind eye to the codes, and many (not me) in the consulting and legal industry who thought they had found a loophole in the codes.

If any broad-based or employee ownership scheme is properly constituted, follows the rules, including the substance of the codes, it will be ok. If it does not it may end up being rejected, as it should. This is what the minister is trying to do. His first notice was so wrong it had to be retracted. In a month or two we’ll see notices or a clarification or instructions to the verification industry that do make sense.

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