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Amended Financial Services Sector Series FS100: The general principles for measuring ownership – part 1

This article deals with the measurement of ownership principles as defined in Gazette No. 41287 dated 01 December 2017. Code Series FS100 is a lengthy document therefore this article is part 1 of a series related to this code series.

OBJECTIVES OF STATEMENT FS100

The objectives of this statement are to:

Specify the scorecard for measuring the Ownership element of B-BBEE for Banks, Long-term Insurers, Short-term Insurers and the Stock Exchanges and their members;
Specify the scorecard for measuring the Ownership element of B-BBEE for all other financial institutions;
Define the key measurement principles associated with the Ownership element of B-BBEE;
Specify the specific measurement principles applicable to various types of enterprises;
Specify the specific measurement principles applicable to various types of equity instruments; and
Specify the formula for measuring voting rights, economic interest, net value points, realisation points and bonus points.

THE OWNERSHIP SCORECARD

Table 1 represents the indicators and method for calculating a score for Ownership for local measured entities that are Banks, Long-term Insurers, Short-term Insurers, Stock Exchanges and members of Stock Exchanges.



If a measured entity wishes to claim ownership credits for indirect ownership it must provide a competent person’s report that has estimated the value of B-BBEE ownership held through indirect ownership.

Table 2 represents the indicators and method for calculating a score for ownership for measured entities that are exempted from ownership in terms of FS000, Statement 000 paragraph 2.11.



KEY MEASUREMENT PRINCIPLES

General principles

An enterprise receives points for participation by black people in its rights of ownership, using the ownership scorecard in paragraph 2a or 2b of this Amended FSC statement. Black people may hold their rights of ownership in a measured entity as direct participants or as participants through a form of business such as:

a. A Company as defined in the Companies Act of 2008 (as amended);
b. A close corporation;
c. A co-operative;
d. Any form of juristic person recognised in South African law;
e. A partnership or other association of natural persons;
f. A Broad-Based Ownership Scheme;
g. An Employee Ownership Programme; and
h. A Trust.

Any domestic or foreign measured entity may also receive points on the ownership scorecard , Table 1, (domestic entities and other multinationals) or Table 2 (only qualifying multinationals), via equity equivalent contributions.

Measured entities may also receive points on the ownership scorecard in paragraphs 2a or 2b through the sales of assets.

For local branches of foreign banks who commenced operation after 01/01/2011, the target in Table 2b is based on the value of the business as at the date at the end of the first financial year end.

Measured entities that are not Banks, Long-term Insurers, Short-term Insurers, Stock Exchanges or members of Stock Exchanges will be measured for Ownership as per the DTI Generic Scorecard and requirements as per the B-BBEE
Codes of Good Practice, gazetted on the 11th October 2013, Gazette no. 36928.

Sub-minimum Requirements

A measured entity is required to achieve a minimum of 40% of the net value points (i.e. 40% x 6 points = 2,4 points).

Non-compliance with this sub-minimum target, will result in the achieved B-BBEE status level being discounted.

The Flow-through Principle

As a general principle, when measuring the rights of ownership of any category of black people in a measured entity, 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.

An exception to this general principle exists with regard to recognition in the ownership scorecard for domestic measured entities via equity equivalents. This exception to the general principle is dealt with in further detail in future articles.

The method of applying the flow-through principle across one or more intervening juristic persons is as follows:

a. Multiply the percentage of the participants’ rights of ownership in the juristic persons through which those rights pass by the percentage of rights of ownership of each of those juristic persons successively to the measured entity; and
b. The result of this calculation represents the percentage of rights of ownership held by the participant.

The Modified Flow-through Principle

A Measured Entity applying this Modified Flow-Through Principle cannot benefit from the Exclusion Principle.

The modified flow-through principle applies to any B-BBEE owned or controlled company owned by the measured entity.

In calculating exercisable voting rights and economic interest, the following applies:

For existing BEE deals, where in the chain of ownership, black people have a flow-through level of participation in excess of 50%, then only once in that chain may such black participation be treated as if it were 100% black.

For BEE deals concluded after the date of gazetting of this amended Code, where in the chain of Ownership, Black people have a flow-through level of participation of at least 51%, and then only once in the entire ownership structure of the Measured Entity, such Black participation may be treated as if it were 100% Black.

The modified flow-through principle may only be applied in the calculation of the indicators in paragraphs 2.1.1 of Table 1, which sets out the voting rights of black people, and 2.2.1 of Table 1, which describes the economic interest of black people.

In all other instances, the flow-through principle applies.

The Exclusion of specified entities when determining ownership:

When determining ownership in a measured entity, ownership held directly by organs of state or public entities in the Republic of South Africa must be excluded. Exclusion of ownership held by the organs of state or public entities is to be effected before any other ownership discounting methods are applied.

B-BBEE Facilitator Status:

The Minister of Trade and Industry may, by notice in the Government Gazette, designate certain organs of state or public entities as B-BBEE facilitators. In calculating their ownership score, measured Entities must treat B-BBEE facilitators as having rights of ownership held:

a. 100% by black people;
b. 40% by black women;
c. 20% by black designated groups;
d. Without any acquisition debts; and
e. Without any third-party rights.

Mandated Investments

When determining ownership in a measured entity, rights of ownership of Mandated Investments may be excluded.

The maximum percentage of the ownership of any measured entity that may be so excluded is 40%.

Mandated Investments are those investments as defined in Schedule 1 of the CoGP published in Government Gazette No. 36928.

Entities that elect not to exclude mandated investments when entitled to do so may either treat all of that ownership as non-black or obtain a competent person’s report estimating the extent of black rights of ownership measurable in the measured entity and originating from that mandated investment.

A measured entity cannot selectively include or exclude mandated investments and an election to exclude one mandated investment is an election to exclude all mandated investments and vice versa.

Dilution due to regulatory requirements

Any dilution in the percentage of black ownership in a measured entity that occurs due to the entity having to increase its capital base as a direct result of new or existing regulatory requirements, will for the purposes of this Amended FSC not result in a dilution of the percentage black ownership claimed on the scorecard in paragraph 2 of Table 1.

A measured entity may exclude ownership arising in future as a direct result of any new regulatory requirements to increase the capital base of the measured entity.

This principle will not apply if the institution is required to raise additional capital due to it having written “bad business” – a term which is not defined in the Amended Sector Code.

Look out for future articles explaining more of the Ownership Principles.

Author CL Tonkin

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