UNDERSTANDING BEE - SAIPA

1 UNDERSTANDING BEEAMENDED CODES TRAINING SESSIONOVERALL TABLE OF CONTENTS1. B-BBEE Amendment Act 46 of 2013 History; Key Changes; Key Definitions; Offences and Penalties2. Problem StatementObjectives in DTI s own wordsEconomic Impact of the ThresholdsObjectives-Envisaged modus operandi / whirl wind effect3. Key Priority QSE Recognition Levels + Qualification Overall Discounting Principle4. Elements Scorecards Key Issues Key Changes Key Formulae Key Calculations DocumentaryEvidence Checklists5. ScorecardNEW BEE ACT: empowerment AMENDMENT ACT 46 OF 2013 Material Amendments Aligningthe Act and the codes Introduction of a trumping clause Creating the B-BBEE Commission Specifying requirements re: monitoring, evaluation & reporting Introducing offences, penalties & prohibitions Introducing the concept of B-BBEE Verification Regulator& Verification Professionals Clarifying & extending Minister s power to make regulations (faster effection and implementation of fraud-busting measures)DefinitionsIntroduction of/amendment to the following definitions(must know) B-BBEE Initiative broad- based black economic empowerment black people (amendment incorporated from code) Commission fronting practice knowing , knowingly means: Having actual knowledge Was in a position where ought to have Known Investigated.

2 To know Taken other measures; to knowAligning the codes and the Act Minister may allow organs of state and public entities to set criteria forprocurement & other economic activities that exceed those set out in the codes; Every organ of state must take into account any relevant code of good practice in terms of this Act; An enterprise in a sector with an issued sector code may only be measuredfor B-BBEE compliancein line with that code; Enterprises required to report annually on B-BBEE compliance to sector councils and BEE CommissionOffences, penalties and prohibitions Knowingly providing false information to the Commission(see proposed definition of knowingly ) Misrepresenting the B-BBEE status of an enterprise Providing false information or misrepresenting information to a B-BBEE verification professionalin order to secure a particular B-BBEE status Providing false information or misrepresenting information relevant to assessing the B-BBEE status ofan enterprise, to any organ of state or public entity Engaging in a fronting practice (as defined in s1) Failing to report an offence by verification professionals, procurement officers or other officials of an organ of state or public entity) Subsection 1 Penalty (Knowingly committing an offence)

3 Maximum penalty 10 years imprisonment (and/or a fine), If the offender is not a natural person, maximum fineof10% of its annual turnover Subsection 2 Penalty (offence relating to the Commission, or for a failure to report): Maximum penalty is 1 year imprisonment (and/or a fine)REVISED CODES OBJECTIVESP roblem Statement Triple Socio- economic Challenge: Poverty Inequality Unemployment Triple Macro- economic Challenge Trade Deficit(Net importer; Insufficient Production) Insufficient economic growth High Budget DeficitObjectivesin DTI s own wordsoTo changeSA culture to be supportive ofentrepreneurship and diversification of value chainsoConcerted effort in linking B-BBBE with other governmenteconomic development strategiessuch as IPAP, CSDP, New Growth Path, etc. (the real economy)oFocus on Businesses and industries that result in significant job creation and addressing ofsocio- economic challengesoEmpowerment efforts should result in the promotion of a culture of venturing intonew territories, operational excellence andrisk takingoSymbiotic relationship between the public and the private sector and amongst private sector players, and large and small enterprises to unlock opportunitiesEconomic Impact of the ThresholdsSIZE OF THE COMPANYS urvivalists, Micro and Very SmallQSE (R 10 m to R 50 m)Large ( More than R 50m)87803234 11811871NO%BEE complianceNo complianceRelaxed complianceFull Compliance95 %3%2%SOURCE.

4 SARS2012 Above companies include only current active filers/ economically active companiestotalling 924 021 Up to 95% of all economically active companies exempted from B-BBEE compliance Companies that are expected to comply with the genericscorecard represent 2%of allactive fillers Softerlanding for 3%= QSE sObjectivesEnvisaged modus operandi / whirl wind effectObjectives:To eradicate:Poverty, Inequality, UnemploymentTrade DeficitGovernment Policy Documents:ASGI_SA, NIPF, IPAP, CSDP, NIPP/NDP?Favored StrategiesSupplier development, Localization,Entrepreneurship promotion Symbiotic relationshipsJob creationKey Means / Policy Emphasis:Good governance, economic growth, Operational excellence, Competitiveness, Development, Productivity & IndustrializationELEMENT SUMMARIESO verall Framework and related issues All organs of stateand public entities now measureable under the CodesoNo longer limited to schedule 2 &3 Introduction of Priority elements Generics Ownership(OC), Skills Development and (SD) & Enterprise & Supplier Development(SED)Discounting of BBBEE status by 2 levels.

5 On non-compliance with threshold requirements for any above elements resultsOC-40% of Annual NET Value TargetSD-40% of the targetESD-40% of the target set out in , and of BBBEE status by 1 level on non-compliance with threshold requirements for OC and SD OR ESDoEligibility as QSEoThreshold changed from R5-R35m to R10m-R50millionoHave to comply with all elements of the scorecardDiscounting Principle Introduction of Priority Elements: Ownership (OC), Skills Development (SD) Enterprise & Supplier Development (ESD) Discounting of BBBEE status by 1 level if non-compliant On non-compliance with threshold requirementsfor any above elements:OC-40% of Annual NET Value pointsSD-40% of the pointsESD 40% of the target set out -Supplier -Enterprise & Supplier DevelopmentOWNERSHIPOWNERSHIP INDEXM easurement CategoriesOwnershipMeasurementcategories 1 GeneralMeasurementPrinciples2 Flowthrough& , ,ESOPSs,BroadBasedSchemesDiscounting ScorecardIndicatorDescriptionWeighting PointsCompliance Voting Rights in the Entity in the hands of black people425%+ 1 Voting Rights in the Entity in the hands of black women210% Interest in the Entity to which black people are entitled425% Interest in the Entity to which black women are entitled210% Interest of any of the following black natural people in the Measured black designated groups; 33% participants in Employee Share Ownership Programmes; people in Broad- based Ownership Schemes.

6 Participants in Entrants22% Realisation Value8 Refer to Annexure C25 Ownership Key Issues Increased the Weightingof the scorecard from 20 to 25 points Introduced discounting if threshold not met of 40% on Net Value annualtargets Ownership is one of the priority elements (If threshold not achieved entity will still score whatever actual points achieved BUT the overall score will be discounted) Consolidatedownership fulfilment and net valuepoints (previously separate points) May only choose either MFT or ExclusionPrinciple; not both Modified flow through may only be applied oncein the entire structure, and not once in every chain of ownership Enhanced the Private Equity provisions to help bolster black ownership and management thereof Enhanced the Equity Equivalent provisions To introduce more flexibility and align with National Imperatives Only South Africanbased regulated investments qualify as Mandated Investments Sale of assets Once empowered always empoweredif meeting criteria sale of separately identifiablerelated business.

7 Assets, business or equity Key Issues The element does not incorporate bonus points (previous bonus point areas, beingNew Entrants and Marginalised Participants have been elevated to actual point areas) New entrants threshold increased from R20 million to R50 million Discretionary family trustsare now is still no discretion permitted on Broad based schemes Broad- based Ownership Schemes Ministerial Technical Task Team set up to: Explore the appropriate balance between active and passive ownership. Table recommendations in that regard. Recommendations to be used to make further pronouncements or amendments to the ownership scorecardKey Indicators/ Assertions The Ownership Element deals with 7 major assertions ( the verification objectives): To determine whether the measured entity meets the criteria under the Ownership element of B-BBEE the Verification Professional shall: Obtain sufficient and appropriate evidence proving that the calculation of Net Valueis accurate and prepare a report detailing the method used in the findings.

8 Obtain sufficient and appropriate evidence proving that the Exercisable Voting Rights and economic Interest in respect of shares carrying preferred rightsare properly allocated and classified. Obtain sufficient and appropriate evidence proving that the calculation of Designated Group is not misstated by the Measured Entity. Obtain sufficient and appropriate evidence proving that ownership in the hands of black People in relation to complex structures, sale of assets and equity equivalents is dealt with appropriately. To establish proof as evidence that the measured entity meets the criteria under the Ownership element, the B-BBEE Verification Professional shall inter alia: Obtain sufficient and appropriate evidence to ensure transfer or issue of equity rights can be verifiedthrough appropriate legal and statutory documentation. Obtain sufficient and appropriate evidence to determine effect of any third party rightsthat may be attached to the equity instruments held by the black participant.

9 Determine the accuracyof the scorecard. For beneficiariesthat are listed as black trace the beneficiaries to sufficient and appropriate evidence that the natural people who are beneficiaries qualify as black People in terms of the ChecklistsOWNERSHIPI ssue/DocumentDetailsShareholding listsStructureShareholding Organogram / Effective ownership structureRegister& Share register-Measured and all intervening companiesCertificatesShare certificates-Measured and intervening entitiesShare CategoriesList and claim detailswith all special shareholders:Exclusions/ Participants Special InclusionsCross-cuttingCIPC Registration CertificateCK1/2 or CM1of all intervening companiesMemorandum of Incorporation / Articles and Memorandum of Association together with all resolutions effecting changes to these documentsShareholders Minutes/ Attendance RegistersMinutes of the last 2 shareholders meetings(Especially attendance registers)IDsCertified copies of individual black shareholder s IDs (Measured entity and all intervening companies)Shareholders Agreement/ MOIKey clauses covering all assertions to be verified ( transaction amount, special conditions, value, voting rights, cession, Transaction detailsShare purchase / sale / subscriptionagreementFlow-through ProofProof of ultimate full ownership by individual black ShareholdersEconomic InterestMOI / Shareholders Agreement.)

10 Key clauses on voting, special condition, condition precedent AFS, Loan Agreement condition, cession, Minutes/ Attendance register, vesting conditionsVoting RightsDocument ChecklistsOWNERSHIPI ssue/DocumentDetailsValuationValueCompan y valuation(Independent or company)FinancingFinancingagreement and summary; Written declaration by MELoan balanceProof of outstanding balance on any loan associated with purchase; sworn affidavit from black shareholders on the current ownership and acquisition debt status, Debt valuationNet ValueNet value report and proof of accuracy, publicly traded price proofSubstance vs form3 RDParty RightsService level agreements between company and black shareholder/sCessionCession agreementsPreference sharesProof of correct calculation of Voting Rights and economic InterestOtherOther key agreements to determine substance over formExclusions NB 40% limit calculation, Preference independent competent person reportOrgans of StatePFMA Schedule listing; founding Act.