To BEE or not to BEE? Grant Thornton says latest clarification from dti brings some relief

21 May 2015 Jenni Lawrence, Grant Thornton

But new affidavit requirements for B-BBEE status is “as clear as mud”.

A dti notice which was gazetted late in the afternoon on Friday 15 May, effectively withdrawing the amendment to B-BBEE employee and broad based share schemes in operation, has brought a sigh of relief from companies.

Jenni Lawrence, managing director of Verification Services at Grant Thornton says: “This notice was in effect a second clarification following the first clarification notice hurriedly issued on 5 May 2015, which contained the infamous clause ‘1d’ – an amendment which was unfortunately very poorly thought out.”

The new clause resulted in a huge reduction to the value of ownership points from employee ownership schemes, or broad-based ownership schemes, to a maximum of three points, for 3% participation. Previously, ownership in these schemes could earn a score of up to 12 points for voting rights and economic equity as well as points for "net value" and other bonus points.

Lawrence concedes that while the sentiment and intention of this change was undoubtedly aimed at tightening up a much abused ownership scoring opportunity, the dti had failed to follow proper process and effectively implemented this new legislation without providing for an obligatory commentary period from parties.

Clause 1d caused large and influential entities with these schemes in place (such as Sasol, MTN and Vodacom) to demand urgent and immediate clarity and reassurance from the dti that their successful schemes would not be affected by this shock change to the codes.

This in turn created an influx of media attention.

“The dti then issued a media statement on 8 May, confirming that this change would not be retrospective, and that a task team would be appointed, to ‘explore the appropriate balance between active (direct) and passive (broad-based schemes) ownership’,” said Lawrence.

Takalani Tambani, acting chief director of the dti’s BEE unit, indicated that ownership held through these vehicles was viewed by the department as “passive” and was not a real driver to businesses.

But Jenni Lawrence cautions that while the latest announcement has put people’s fears at bay, the dti is still likely to make some changes to the recognition of these schemes, based on the recommendations of the new task team, and rightly so.

“While employee benefit schemes have been around for many years and can serve to incentivise and motivate staff, in some cases these schemes have been corrupted, purely to meet the needs of BEE, without providing any benefits to employees whatsoever,” she continues. “Ownership which infers no real benefit to buy or sell shares, no ability to control business and in many cases, no benefit ever paid out, does not meet the intention of the codes of good practice.”

Lawrence hopes that the dti’s task team implements a regulation which includes more stringent requirements but that recognition for appropriate schemes continues.

“We applaud the dti’s decision to retract the announcement, in order to follow their own procedure and we are certain that this will result in a more balanced result.”

Affidavits replacing certificates is causing confusion

But Clause 1d is not the only issue which is causing confusion for businesses in terms of the new amended B-BBEE legislation.

“While the dti has indicated that certain sized companies need only obtain an affidavit confirming turnover and black ownership, to effectively replace a certificate, state-owned enterprises and private businesses have not yet aligned their policies to these new affidavits and to date, will not accept these,” says Lawrence

Verification agencies alike are also confused, lamenting that the dti’s gazetted verification manual itself is creating uncertainty regarding acceptance of the affidavits.

The current verification manual, in its definition of ‘admissible evidence’ states the following: ‘The reliability of evidence is influenced by its source and its nature and is dependent on the individual circumstances under which it is obtained.’ It also says that verification professionals need to exercise ‘professional scepticism’ in their task.

“With the manual’s definition in mind, it is extremely difficult to accept that an affidavit should be used as a valid basis on which to award a BEE score or a tender or purchasing decision, especially if you consider that under the Amended BEE Act of 2013, verification professionals and procurement professionals could be sent to jail based on the information in the affidavit, if it turned out to be false,” adds Lawrence.

The Amended BEE Act of 2013 states that professionals could be found guilty of fronting, if they “knowingly or reasonably ought to have—
(i) had actual knowledge;
(ii) investigated the matter to an extent that would have provided the person with actual knowledge; or
(iii) taken other measures which, if taken, would reasonably be expected to have provided the person with actual knowledge of the matter.”

The dti has since authorised the CIPC to issue these affidavits, but Lawrence adds that the CIPC will only issue these affidavits for newly registered companies, and it will not issue them for existing companies, nor renew the affidavits on an annual basis.

“Unfortunately the affidavit issue really is as ‘clear as mud’,” says Lawrence.

She concedes that while the nation patiently waits for the updated verification manual to be gazetted, she and her team will be relying on common sense and best practice, trusting that they are correctly interpreting and applying the new requirements in the areas where there is still uncertainty.

“There is no doubt that when new legislation is gazetted, there will always be a period of resistance. Certainly, to an extent we just need to get on with it, but we are looking to the dti for some direction and clarification, before we go much further,” Lawrence concludes.

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