# Regulatory Compliance Category > BEE and Employment Equity Forum >  Diluted BEE codes start next year

## Dave A

Johannesburg - South Africa's empowerment codes, which are meant to drive economic transformation, will become binding early next year, three years after the government started drafting them.

The codes, which were approved by the cabinet a week ago, are a compromise between what hardline black business activists such as Peter Vundla, the chair of the President's Black Business Working Group, were pushing for and what white-owned and foreign businesses were happy to accept.

Jerry Vilakazi, the chief executive of Business Unity SA, said the codes would go a long way in creating certainty regarding what was expected of the business community in implementing black economic empowerment (BEE). "Business needs a stable and predictable environment to thrive and grow."

Jimmy Manyi, the president of the Black Management Forum, said the organisation was encouraged that the department of trade and industry had come up with a document that had managed to address a number of competing viewpoints, especially through the codes' increased emphasis on the promotion of black managers and skills development.

Key compromises include the fact that, subject to certain conditions, pension funds can be scored for empowerment or left out of any calculations of equity ownership. 

This in effect means that companies have to sell fewer shares to black people to meet their black ownership requirements.

The exclusion principle in the codes allows for ownership by certain entities to be excluded from calculation of ownership up to a maximum of 40 percent of the measured entity. The entities that can be omitted include government entities, non-profit companies and mandated investments such as pension funds, medical schemes and insurance funds.

Another compromise is that if a company does an empowerment deal and the black shareholders subsequently sell their shares, the company will still be able to score up to 40 percent of the maximum ownership points for black ownership.

The codes say black shareholders must have their equity stake for at least three years before exiting any entity. Polo Radebe, the trade and industry department's chief director of empowerment, said companies would have to demonstrate that there was net value created in the hands of black people.

On the contentious issue of private equity funds, the codes say the measured enterprise may treat any of its ownership arising from private equity funds as black-owned and -controlled provided that more than 50 percent of exercisable voting rights are in the hands of black people; that more than 50 percent of profit accrues to black people; and that the private equity fund manager is a black-owned company.

Enoch Godongwana, the principal officer of the financial services charter, said the codes managed to strike a delicate balance for black shareholders and the companies they invested in.

"On private equity funds, this is an issue the financial sector has been struggling with and we welcome clarity and certainty. We also welcome the fact that the financial charter is one of those charters that will be gazetted under section 9" of the Broad-based Black Economic Empowerment Act next year," Godongwana said. 

Foreign-owned companies do not have to sell shares in their South African operations as long as they exceed the other empowerment criteria, including procurement from black business, affirmative action and skills development.

The finalisation of the codes will bring certainty to business as it is now clear how empowerment efforts will be ranked. It will also enable verification agencies to be established. It will become possible to compare companies' empowerment shareholdings.

The codes have relaxed the empowerment requirements for small businesses. Businesses with turnover of less than R5 million are exempt. Those with turnover between R5 million and R35 million can choose four of the seven elements of the scorecard. Manyi said this was a worry because it could be abused. Black-owned businesses could be marginalised as they had to compete with similar white businesses without full credit being given for their empowerment status. 

Golden Malinga, the secretary-general of the National African Federated Chamber of Commerce and Industry, said: "We are confident that most black-owned businesses will reap good results as a number of loopholes have been tightened."

Ajay Lalu, a partner in consultancy Bravura Economic Empowerment, said the codes were still too complex.

*Generic empowerment scorecard*

For a locally owned firm to score as a level 1 empowered company, it will need more than 25 percent black ownership, 50 percent management and 80 percent staff. It will have to spend 3 percent of payroll on training. Seventy percent of procurement must be with empowered firms. Three percent of profit will be spent on enterprise development and 1 percent will go to social investment.


Ownership
20 points

Management control
10 points

Employment equity
15 points

Skills development
15 points

Preferential procurement
20 points

Enterprise development
15 points

Socioeconomic development 
5 points

Total: 100 points

from Business Report here

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## duncan drennan

It is all sounding good, but I would like to see it in black and white...hoping the DTI will put the codes up soon.

Personally happy about the R5m exempt limit, but you can't be lax, it shouldn't take too long to get to R5m turnover.

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## Dave A

> ... but you can't be lax, it shouldn't take too long to get to R5m turnover.


I like your thinking  :Batman:  

I think the main area to keep an eye on for exempt enterprises are the incentives that are put in place for big business in areas such as enterprise development and possibly narrow based bonus points on procurement. This could still have an effect, although we won't know 'till we get hold of those final codes. Even then, it might take a bit of unravelling to work out where those wrinkles might lie.

Hopefully the DTI will get them up on their website soon. I'm also keeping an eye on the gov info site to see if they get gazetted today.

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## Ronny_Kuipers

I  am in the proccess of getting BEE listed as a micro enterprise and have been umm and ahhing about the limit of 5m the problem being that once you exceed the 5m you are no longer BEE as a micro enterprise and i am definately going to be doing a lot more than that in a year or 2 time. So at the end of the day is it worth it for 2 years

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## Dave A

The trick might be to factor it in to your medium term plans.

I'm hoping over a fairly short period of time we're going to be able to develop an understanding here of essentially 5 scenarios:
Implications for Exempt Enterprises (EE) - I suspect there will be some, but hopefully nothing too seriousImplications for Qualifying Small Enterprises (QSEs) - turnover R5 to R35 millionImplications of the full codes - turnover in excess of R35 millionTransition implications for moving from EE to QSETransition implications for moving from QSE to full compliance
From there we can discuss optimising strategies for each of these scenarios. And I agree, sometimes the optimal approach might well be not to grow!

/And I just had to teach my spell checker a whole new set of acronyms  :Roll Eyes (Sarcastic):

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