ENSafrica newsflash | 13 April 2017

Possible limitations on the enhanced B-BBEE recognition for EMEs and QSEs

by Sanjay Kassen and Parusha Desai Valodia

The South African Broad-Based Black Economic Empowerment (“B-BBEE”) Commission recently issued a non-binding practice guide regarding the enhanced recognition status for exempted micro-enterprises (“EMEs”) and qualifying small enterprises (“QSEs”) through the application of the modified flow-through principle. 

In terms of the current Codes of Good Practice (the “Codes”), which are promulgated under the Broad-Based Black Economic Empowerment Act, 2003, as amended (the “Act”), EMEs and QSEs benefit from the enhanced recognition status principle, in that a 51% black-owned EME or QSE will qualify as a level 2 contributor and a 100% black-owned EME or QSE will qualify as a level 1 contributor, provided that such EME or QSE has completed a sworn affidavit confirming its turnover and percentage of black ownership. The Codes set out a number of rules stipulating how entities are to measure their black ownership, including:

  • the flow-through principle: when measuring ownership of black people in an entity, only the rights of natural persons are relevant.  Where the rights of natural persons pass through a juristic entity or entities, then only the ownership rights of black persons in the juristic entity or entities are measurable; and 
  • the modified flow-through principle: where a company in a chain of ownership is more than 51% black owned and controlled, then once in that chain of ownership, despite the flow-through principle, that company can be treated as being 100% black owned and controlled.

In terms of the practice guide, the B-BBEE Commission is of the view that the measurement of black ownership in an EME or QSE must be calculated using the flow-through principle only (and not the modified flow-through principle) in order to benefit from the enhanced recognition status. 

Interestingly, the B-BBEE Commission acknowledges that the Codes, as currently drafted, do not provide for such limitations in claiming any enhanced recognitions status. However, and despite such acknowledgment, the B-BBEE Commission is of the view that that the effect of applying the modified flow-through principle to the enhanced recognition status undermines the objectives of the Act. 

While the practice guide is intended to be non-binding, it notes that any contrary advice would be regarded as a misrepresentation of an entity’s B-BBEE status, which is an offence in terms of section 13O(1)(a) of the Act. Accordingly, it would appear that the practice guide is more of a “ruling” than a guide, and is perhaps indicative of the manner in which the B-BBEE Commission will evaluate and investigate fronting practices in relation to EMEs and QSEs. This also brings into question the legal validity of such a “ruling”, as it purports to amend legislation. 

Furthermore, the B-BBEE status/level of an EME or QSE benefiting from the enhanced recognition status through the application of the modified flow-through principle may be adversely affected in terms of its next B-BBEE verification.

For more information, please contact:

 

 

Sanjay Kassen

corporate commercial | director
skassen@ENSafrica.com
cell: +27 82 561 1509

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Parusha Desai Valodia

corporate commercial | associate
pdvalodia@ENSafrica.com
cell: +27 82 560 4129

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No information provided herein may in any way be construed as legal advice from ENSafrica and/or any of its personnel. Professional advice must be sought from ENSafrica before any action is taken based on the information provided herein, and consent must be obtained from ENSafrica before the information provided herein is reproduced in any way. ENSafrica disclaims any responsibility for positions taken without due consultation and/or information reproduced without due consent, and no person shall have any claim of any nature whatsoever arising out of, or in connection with, the information provided herein against ENSafrica and/or any of its personnel. Any values, such as currency (and their indicators), and/or dates provided herein are indicative and for information purposes only, and ENSafrica does not warrant the correctness, completeness or accuracy of the information provided herein in any way.

 

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