EMPOWERMENT TRANSACTIONS: Editorials: October 2019 / January 2020

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Goalposts
moved

Minister Ebrahim Patel wants a rethink of B-BBEE.
He can start with a rethink of its commissioner.

Wrapped into the legislation for Broad-Based Black Economic Empowerment is the Financial Sector Code. Shudder at the prospect were any of its institutional signatories, which deal with pension funds, met with treatment similar to that recently targeted at blue-chip MTN.

A display of regulatory over-reach is the B-BBEE commission’s recommendations that follow its investigation into MTN’s R9,9bn Zakhele-Futhi scheme. Until the commission pronounced, Zakhele-Futhi was considered one of the best on offer.

The commission reckons the scheme doesn’t comply with objectives of the B-BBEE Act on the basis of various restrictions such as involvement in decision-making at the top level of the MTN group. These restrictions on members of the scheme, it contends, are at odds with ownership requirements set out in the codes of good practice. MTN is accused of fronting, potentially a criminal offence.

In an interview with Business Day earlier this year, MTN was one amongst dozens of companies to which B-BBEE commissioner Zodwa Ntuli referred. She said that the commission had written to “a large number of entities to inform them that their ownership structures constituted fronting”.

The findings have sent chills through an increasingly confused business community. Apparently in line with an official brochure that first emerged in April, the findings encapsulate the commission’s current interpretation of the codes.

Essentially, according to the brochure (which has no legal authority), in order to qualify under the Act the beneficiaries of a scheme must not only beclearly identifiable but must also be able to exercise voting rights. They must receive the same economic benefits, such as ordinary dividends, as all other shareholders.

 

These dividends would have to be additional to the prefs made available for funding of the MTN shares purchased at a discounted price. Further, in a move that finds no support under the Companies Act, the scheme beneficiaries must also be allowed to appoint a director to the MTN board.

Then too the B-BBEE commissioner wants not only the lifting of individual ownership restrictions but also a public apology from MTN and disciplinary action against employees who’d “defied” the commission’s initial advice. For senior executives, insult is added to injury by the requirement for specialised training and development of a compliance programme.

MTN has extensive experience in dealing with Africa’s most volatile regimes. Yet, just in case it didn’t appreciate the seriousness of it all in SA, the commission reminded one of the country’s largest employers that it “may” refer MTN and its directors to the police for criminal prosecution.

Six weeks later and there’s still no sign of a public apology. What will the commission do about that?

And what about the number of other entities which, according to Ntuli, are being investigated? Why the corporate silence? Has the prospect of criminal charges created a certain mind-numbing terror? Possibly thousands of transactions could be subject to investigation.

It’s suggested by a BEE consultant that the commission has everybody running scared: “Companies naturally shy away from confrontation with the authorities.” But the sooner the commission’s interpretation of the codes and Act are challenged in court, as with the mining charter, the sooner there will be clarity.

Ntuli . . . example made of MTN

The way matters stand, the commission’s actions look to be a declaration of war against many companies that have done their best to comply with the letter and spirit of the legislation. More than this, the actions potentially represent an assault on such established structures as Kagiso Trust, the Sactwu Investment Trust, the Batho Batho Trust and even the Cyril Ramaphosa Foundation.

Amongst the numerous allegedly suspect companies, there could well have been a certain amount of system gaming. While the commission goes about its investigations, it would be helpful for it to attempt a cost-benefit analysis of the codes’ implementation.

Since introduction in 2007, adherence has been made infinitely more complex by regulatory creep. Tougher regulations, compiled by bureaucrats who’ve never had to turn a profit but have a sharp eye for political plaudits, invite an upturn in gaming.

Ultimately, more loopholes will be sought and costs of verification will increase. Empowerment initiatives become riddled with rent-seeking opportunities while the goodwill and good benefits become distorted.