On the 1st of May the Department of Trade and Industry issued an unexpected ‘clarification notice’ regarding broad-based empowerment and employee shared ownership schemes. According to these new clarifications, these schemes will no longer count towards individual share ownership on black economic empowerment scorecards. The effect of this new interpretation of the codes is the slashing of the BEE ratings of thousands of companies and removing the incentive for companies to involve employees in ownership beneficiary schemes.
What does this mean in practice?
- The notice substantially alters the ratings of companies that have placed a portion of ownership in the hands of employees or community organisations. Of the 25 points on the new scorecard that can potentially be earned for black ownership, broad-based and employee share ownership schemes can contribute a maximum of only three points. In practice this means that many companies are instantly going to drop as much as 20 points on their scorecards. For some companies this can mean a drop in at least three rating levels out of the eight.
- The new codes require that 80% of a company’s spend should be with BEE rated suppliers, a 10% higher requirement than before. Although the requirement has risen the points earned for compliance has dropped from 12 points to only five, greatly affecting the scores of some companies. This amendment goes further to require that 40% (previously 9%) of the total spend of the company should be with black-owned businesses in order to earn a further nine points on the scorecards.
- Previously, a company might be entirely white-owned but could achieve good BEE levels by complying with areas such as skills development, preferential procurement etc. Now that the categories have been condensed from seven to five it has also had an effect on the priority elements that needs to be complied with. One such priority element is a minimum of 10% black shareholding. If a company does not comply with the ownership element it is discounted one level.
- Exempt Micro Enterprises (EME) will benefit from the amendments. A company can be classified as an EME if their turnover is less than R10-milion an year (previously R5-million). These EME’s will also automatically gain a broad-based BEE level 4 status, even in the case of no black ownership.