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Amended Financial Services Sector Series FS100: The general principles for measuring ownership – part 4

This 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 4 of a series (of 4 articles) related to this code series. Please read parts 1 to 3 before continuing with part 4.

The article deals with TRUSTS, BROAD-BASED OWNERSHIP SCHEMES AND EMPLOYEE OWNERSHIP SCHEMES, MEASUREMENT OF VOTING RIGHTS, MEASUREMENT OF ECONOMIC INTEREST AND NET VALUE.

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.

  1. RULES FOR TRUSTS

1.1 The qualification criteria for the recognition of trusts are as follows:

1.1.1 The trust deed must define the beneficiaries and the proportion of their entitlement to receive distributions;
1.1.2 A written record of the names of the beneficiaries or the use of a defined class of natural person satisfies the requirement for identification;
1.1.3 A written record of fixed percentages of entitlement or the use of a formula for calculating entitlement satisfies the need for defining proportion of benefit;
1.1.4 The trustees must have no discretion on the above-mentioned terms; and
1.1.5 On winding-up or termination of the trust, all accumulated Economic Interest must be transferred to the beneficiaries or to an entity representing the interest of the participants or class of beneficiaries.

  1. RULES FOR FAMILY TRUSTS

2.1 The qualification criteria for the recognition of Family Trusts are as follows:
2.1.1 The trust deed must define the beneficiaries and the proportion of their entitlement to receive distributions;
2.1.2 A written record of the names of the beneficiaries or the use of a defined class of natural persons satisfies the requirement of defining beneficiaries;
2.1.3 A use of a formula for calculating entitlement satisfies the need for defining proportion of benefit;
2.1.4 Only the trustees must have discretion on the above-mentioned terms; and
2.1.5 On winding-up or termination of the trust, all accumulated Economic Interest must be transferred to the beneficiaries or to an entity representing the interest of the participants or class of beneficiaries.

  1. ADDITIONAL CRITERIA APPLICABLE TO TRUSTS

3.1 For a measured entity to obtain the maximum points on its ownership scorecard from shareholding by a trust, the measured entity must be in possession of a certificate issued by a competent person to the effect;
3.2 That the trust was created for a legitimate commercial reason, which must be fully disclosed; and
3.3 That the terms of the trust do not directly or indirectly seek to circumvent the provisions of the Amended FSC and the Act.

  1. ADDITIONAL CRITERIA APPLICABLE TO BROAD-BASED OWNERSHIP SCHEMES AND EMPLOYEE OWNERSHIP SCHEMES:

4.1 For a measured entity to obtain the maximum points on its ownership scorecard, the following additional requirements must be met by a Broad-Based Scheme or Employee Share Ownership Scheme:
4.1.1 A track-record of operating as a Broad-Based Ownership Scheme or ESOP, or in the absence of such a track-record demonstrable evidence of full operational capacity to operate as a Broad-Based Ownership Scheme or ESOP; and
4.1.2 Operational capacity must be evidenced by suitably qualified and experienced staff in sufficient number, experienced professional advisors, operating premises and all other necessary requirements for operating a business.

ANNEXE FS100 (C)

MEASUREMENT OF VOTING RIGHTS

The calculation of the ownership indicators provided for in paragraphs 2.1 and 2.2 is as follows:

A = B/C x D

Where:

A is the score achieved for the measured entity for the measured ownership indicator.
B is the percentage of exercisable voting rights held by black participants in a measured entity as a percentage of all voting rights of that entity.

Where equity equivalents are utilised, the equity equivalents shall be deemed to hold voting rights that rank equally with ordinary shareholder voting rights and 50% of the deemed voting rights shall be deemed to be in favour of black women.

C is the percentage compliance target for exercisable voting rights for the applicable measured ownership indicator.
D is the weighting points allocated to the applicable measured ownership indicator.

If an enterprise gains a score in the formula above that is more than the weighting points, that enterprise will only receive the weighting points.

MEASUREMENT OF ECONOMIC INTEREST

The calculation of the ownership indicators provided for in the Ownership Scorecard is as follows:

A = B/C x D

Where:

A is the recognisable percentage of a black participant’s claim to economic interest in the measured entity.
B is the percentage of economic interest, which participants who fall within the category of black people in that measured entity hold to all economic interest which all participants of that measured entity hold.

Where equity equivalents are utilised the equity equivalents shall be deemed to hold economic interest that rank equally with ordinary shareholder economic interest and 50% of the deemed economic interest shall be deemed to be in favour of black women and 50% shall be deemed to be in favour of designated groups.

C is the percentage compliance target for economic interest for the applicable measured ownership indicator.
D is the weighting points allocated to the applicable measured ownership indicator.

If an enterprise gains a score in the formula above that is more than the weighting points, that enterprise will only receive the weighting points.

CALCULATION OF DEEMED NET VALUE

In calculating the ‘Deemed Net Value’ referred to below, the following formula applies:

A = (B – C)/D

Where:

A is the Deemed Net Value
B is the value of the Equity Instruments relevant to the calculation, determined on the measurement date
C is the carrying value of any acquisition debts of the relevant Black participants on the measurement date
D is the value of the measurable Portion (Value of South African Operations) of the measured entity on the measurement date

NET VALUE

The “Net Value” points are the lower result of Formula A and Formula B as follows:

Formula A

A = B x (1/(25% x C)) x 3

Where:

A is the score of the Net Value in the Ownership Scorecard
B is the Deemed Net Value for all black participants in the measured entity determined using the formula CALCULATION OF DEEMED NET VALUE above
C is the time-based graduation factor of the economic Interest compliance target outlined below:

a. 10% for the first year after the current equity interest date.
b. 20% for the second year after the current equity interest date.
c. 40% from the first day of the third year after the current equity interest date to the last day of the fourth year after the current equity interest date.
d. 60% from the first day of the fifth year after the current equity interest date to the last day of the sixth year after the current equity interest date.
e. 80% from the first day of the seventh year after the current equity interest date to the last day of the eighth year after the current equity interest date.
f. 100% from the first day of the ninth year after the current equity interest date to the last day of the tenth year after the current equity interest date.

Formula B

A = B/C x 3

Where:

A is the score of the Net Value in the Ownership Scorecard
B is the percentage economic Interest in the measured entity of black participants
C is the target for the ownership indicator of the Net Value in the Ownership Scorecard

If a measured entity gains a score in BROAD-BASED OWNERSHIP AND EMPLOYEE OWNERSHIP SCHEMES, paragraph 4.1 of the Code, that is more than the weighting points in the Net Value in the Ownership Scorecard, paragraph 2.3 of the Code, that entity will only receive the weighting points.

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