|DTI Interpretations Catches President in Lie|
DTI’s interpretations has caused the President to be caught out in a lie. In his answers to the SONA debate, the President stated that only 3% of the JSE was owned by black people. The JSE then released its own study showing that black people own 23% of the top 100 companies on the JSE.
Although they are not comparing apples with apples – all of JSE compared to top 100 JSE companies and 3% compared to 23% just cannot be.
President JSE Black Ownership Debate
The President is probably basing his figures on a “gut feel“ that ownership is low – and he is not entirely wrong, but that is not good enough. On the other hand the JSE figure includes 10% of black ownership via broad-based schemes. The JSE uses the dti’s own interpretations of ownership. For some reason the dti recognises broad-based schemes as having ownership even if the beneficiaries never see any more than the odd dividend declared by the company. The dti does not require black beneficiaries to receive any capital gains on shares they hold, because they never hold the shares, even indirectly, or via “units” in the trust holding the shares.
The whole point of purchasing shares on the JSE is the expectation that share prices go up and that dividends are paid. Participants in many broad-based schemes never see this – because the dti condones how the schemes are supposed to be operated and approves of verification agencies recognising ownership in this way.
We have come across many schemes where the sole trustee of a trust holding a broad-based scheme was a director of the company. Shares were indeed transferred by the company to the trust. The beneficiaries of the trust were defined as very broad with a fast changing beneficiary base such as “young black girls” or “Matriculants”. Exactly who they really were was not made clear in the trust. In the case of the matriculants once they passed they ceased being defined as a matriculant, and therefore as a beneficiary. If there was a capital gain, via an increased share price, they were not able to participate. Any capital gain does accrue to the trust which usually has a way to pass the shares back to the company if necessary. It sounds like these schemes are not so much ownership as a participation in some proceeds received from a company – social economic development and not “true” ownership.
However in each instance the verification agency awarded the company BEE points and regarded them as black owned.
Many companies never pay dividends or pay minimal dividends. Profits are ploughed back to grow the business, or are taken as management fees. Despite this, if a broad-based scheme participant has the “right” to receive 25% of any dividends, even if none are declared, the dti’s codes award the company full ownership points and the company is deemed to be “25% black owned“. The dti even allows the trustees to hold back some or all dividends for future distribution.
Maybe the President took this into account when he made his speech, because he believed Ownership should include all benefits and not just dividends. According to the dti’s interpretation the President should have recognised the companies as having black ownership.
In our opinion the BEE codes do not fully support the above ownership discussion, but are sufficiently unclear to allow the firms who create trusts and broad-based schemes to justify their position. This is fully condoned by verification agencies and auditors, and the regulators IRBA and SANAS. Dti is fully aware that this happens – maybe they should tell the President.
The BEE codes define a key principle of ownership as:
“As a general principle, when measuring the rights of ownership of any category of black people in a Measured Enterprise, only rights held by natural persons are relevant. If the rights of ownership of black people pass through a juristic person, then the rights of ownership of black people in that juristic person are measurable. This principle applies across every tier of ownership in a multi-tiered chain of ownership until that chain ends with a black person holding rights of ownership.”
In the case of broad-based schemes, the above is ignored by the dti.
In addition ownership is defined as shareholders having both voting rights and economic interest. The BEE codes define economic interest as:
“Means a claim against an entity representing a return on ownership of the entity similar in nature to a dividend right, measured using the flow through and, where applicable, the modified through principles;”
Note how it does not include capital appreciation allowing this difference in interpretation.
The JSE’s own methodology is also questionable. It takes into account black ownership of “mandated investments” – shares held by unit trusts, pension funds and life policies. It also does not look at debts owing on any shares owned by black people.
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25 February 2015
In this issue
- DTI Interpretations Catches President in Lie
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