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Amended Financial Services Sector Series FS100: The general principles for measuring ownership – part 2

his article continues the discussion of 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 2 of a series related to this code series. Please read part 1 before continuing with part 2.

The article deals with the recognition of ownership after the sale or loss of shares by black participants.

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 recognition of ownership after the sale or loss of shares by black participants:

A measured entity is allowed to recognise a portion of black ownership after a black participant has exited through the sale or loss of shares. The details of the requirements will be set out in a Guidance Note. The portion recognisable where such sale or loss occurs is as follows:

In the event of a dilution in the percentage of black ownership in a measured entity, as a result of black participants electing to sell their shares and realise the net value attributable to those shares when they have become eligible for sale or transfer, the net value percentage created for black participants at the date of exit can be carried forward in terms of paragraph 2, Table 2a above, subject to the following conditions:

a. The black participant has held those shares for a minimum period of three (3) years;
b. The net value must have been created for the benefit of black people; and
c. Transformation has taken place within the measured enterprise using the comparable B-BBEE recognition level from the period of entry of black participants to their exit.

A measured entity subject to code FS600 (banks and life offices) can top up the shortfall in its ownership points through the provision of Black Business Growth Funding, as an equity equivalent that becomes available on exit of empowerment partners. Such financing can be provided at an individual company level or as a collaborative effort with other industry players. Equity Equivalence per statement FS103 may be applied over and above the mechanisms applied in this paragraph. Where a measured entity elects this top-up through the Black Business Growth Fund, the 5% maximum Equity Equivalent contribution stated in Code Series FS103 will not apply, i.e. a measured entity may do an equity equivalent over the 5% limit.

The extent of the equity equivalent will be determined using the following criteria:

a. Target net value created for black people by the measured entity as at the date of exit, less actual net value created for black people by the entity at the date of exit. The difference between these two figures can form the basis for the measured entity’s contribution to the equity equivalent.

Further to the above, the measured entities not subject to code FS600 i.e. entities other than banks and life offices, can top up the shortfall in its ownership points after a black participant has exited through the sale of shares through enterprise development contributions over and above the targets contained in code FS400, or by way of an equivalent value to support black students studying at post-school education and training institutions in South Africa. Where a measured entity elects this top-up equity equivalent contribution, the 5% maximum Equity Equivalent contribution stated in paragraph 2.6 of FS103 will not apply, i.e. a measured entity may do an equity equivalent over the 5% limit.

The extent of the equity equivalent will be determined using the criteria listed above.

In the event of a dilution in the percentage of black ownership in a measured entity as a result of all other sales of shares except the sale of shares described above, a portion of the percentage may be recognisable subject to the following criteria:

a. The black participant has held those shares for a minimum period of three years;
b. Net value based on the time-based graduation factor in Annexe 100 (C) must have been created for black people, i.e. a portion of the debt acquired to purchase the equity must have been repaid, or the selling price of the shares must be higher than the purchase price; and
c. Transformation has taken place within the entity using the comparable B-BBEE recognition level from the period of entry of black participants to their exit.

The formula for calculating continued recognition for sales of shares in circumstances as contemplated in paragraph 3.9.3 is contained in paragraph 5 of Annexe 100 (C) of this Code Statement. Black participation arising from continued recognition of black ownership cannot contribute more than 40% of the score on the ownership scorecard.

In the case of a loss of shares by a black investor, the following additional rules apply:

A written tripartite agreement between the measured entity, the black participant and a lender must record the loan or security arrangement, unless the measured entity is the lender; and the period during which the continued recognition points are allocated or recognisable will not exceed the period over which the shares were held.

The ownership points (which deals with the loss of shares, unless that loss of shares is outside the control of the measured entity) that are attributable to the entity, will be calculated by multiplying the following elements:

a. The value created for black participants as a percentage of the value of the measured entity at the date of the loss of shares as a percentage of the entity’s value; and
b. The ownership points attributable to the measured entity on the date of sale or loss.

The formula for measuring the percentage of continued recognition is as follows:

                    A = B x C X D

Where:

A is the continued recognition after the loss of shares
B is the percentage ownership for each of the indicators in the ownership scorecard held immediately prior to the loss
C is the net value as per formula “Loss 1” below
D is most recent B-BBEE recognition level of the measured entity (not more than one year old and based on all elements excluding ownership).

Formula: Loss 1:

                    A = (B – C) / D

Where:

A is the deemed net value
B is the value of the lost shares as at the date of loss
C is the carrying value of any debt in relation to the lost shares as at the date of loss
D is value of the measured entity as at the date of loss

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

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