The new B-BBEE regulations in South Africa demand greater transparency and scrutiny of transactions. Key changes include criminalizing fronting practices, establishing the B-BBEE Commission to oversee compliance, and requiring registration of major B-BBEE transactions and compliance reports from listed companies. The regulations aim to eliminate unintended consequences of B-BBEE like fronting that undermine its objectives, increase transparency of transactions, and enable the B-BBEE Commission to identify non-compliance and promote transformation.
new B-BBEE regulations demand greater transparency and scrutiny
1. 1
new B-BBEE regulations demand greater transparency and scrutiny
Over the past year, the broad-based black economic empowerment (“B-BBEE”) landscape in South Africa
has been completely overhauled and has become more stringent. Among the most significant changes are
the:
criminalisation of fronting practices
establishment of the B-BBEE Commission
promulgation of the new B-BBEE Regulations (the “Regulations”), which came into force on 6 June
2016
criminalisation of fronting
A fronting practice is defined in the Broad-Based Black Economic Empowerment Act, 2003, as amended
(the “B-BBEE Act”), as a transaction, arrangement or other act or conduct that directly or indirectly
undermines or frustrates the achievement of the objectives of the B-BBEE Act and/or the Codes of Good
Practice (the “Codes”).
A person found guilty of a fronting practice could face a fine and/or a prison sentence of up to 10 years. If
the guilty party is a juristic person, such as a company, it could face a fine of up to 10% of its annual
turnover. In addition, such an enterprise may not contract or transact any business with any state body or
public entity for 10 years. It must also be entered into the register of tender defaulters, which the National
Treasury may maintain for that purpose. Lastly, an enterprise involved in a fronting practice could suffer
significant reputational harm.
establishment of the B-BBEE Commission
Zodwa Ntuli has been appointed by the Department of Trade and Industry (“DTI”) as the first acting B-BBEE
Commissioner. The B-BBEE Commission’s primary tasks are to:
oversee, supervise and promote adherence with the B-BBEE Act in the interests of the public
investigate any matter concerning B-BBEE, including summoning people to appear before it, to
answer questions and to produce any relevant document
maintain a registry of major B-BBEE transactions
The B-BBEE Commission has made several observations about fronting practices, including that “fronting
undermines transformation and is unacceptable”. No doubt, acting Commissioner Ntuli’s primary focus is to
eradicate fronting practices and put in place safeguards to prevent these occurring in future, to enable true
economic transformation.
registration of major B-BBEE transactions
2. 2
Parties to a major B-BBEE transaction now have 15 days from the date of conclusion (not implementation)
of the transaction to register it with the B-BBEE Commission by completing and submitting a prescribed form
(together with the underlying documents of the transaction). In terms of the Regulations, a transaction would
constitute a major B-BBEE transaction if it falls above a certain threshold, which is yet to be determined and
published by the Minister of Trade and Industry.
Upon submission of the prescribed form and other related documents, the B-BBEE Commission must, within
10 days, issue a certificate of registration, provided the requirements for registration have been
met. Unfortunately, the Regulations do not clearly stipulate what these are.
The B-BBEE Commission is entitled to assess the adherence of a major B-BBEE transaction with the B-
BBEE Act and advise the parties of any concerns it may have about the registered transaction within 90
days of its registration. If the B-BBEE Commission has identified any concerns, the parties must take such
steps as may be required to remedy the transaction within a reasonable period. Failure to do so may lead
the B-BBEE Commission to initiate an investigation in terms of the B-BBEE Act. Unfortunately, it is not clear
from the Regulations as to what constitutes a “reasonable period” and this will have to be determined on a
case-by-case basis. However, it would be in the interests of the parties to the transaction to ensure that they
cease, as soon as possible, to perpetuate a B-BBEE transaction that the B-BBEE Commission believes
could be contrary to the B-BBEE Act.
The Regulations further recommend that parties to a major B-BBEE transaction take steps to seek
appropriate advice prior to concluding the transaction, including through the advisory services of the B-BBEE
Commission.
Importantly, the obligation to now register a major B-BBEE transaction does not in any way prohibit or
prevent the parties from implementing the transaction. The risk is that the B-BBEE Commission may require
the unwinding or restructuring of a transaction that has been implemented if there is non-compliance with the
B-BBEE Act, which is likely to result in severe timing and cost implications. To circumvent the risk of
“unscrambling” a transaction (particularly a complex one), it would need to be assessed (on a case-by-case
basis) whether it is prudent to delay implementing the transaction until the B-BBEE Commission has not
raised any concerns following the 90-day review period. It is also highly recommended that all parties to a
major B-BBEE transaction seek appropriate advice from their advisors in order to satisfy the requirements of
the Regulations.
reporting duties
The Regulations, read with the Act, also place a mandatory obligation on all companies listed on the
Johannesburg Stock Exchange (“JSE”) and government entities to submit a compliance report to the B-
BBEE Commission annually. The report must detail the state of compliance with the B-BBEE elements as
set out in the Codes, and how each element contributes to the outcome of the scorecard in terms of the
Codes.
3. 3
A JSE-listed company is obliged to submit its compliance report to the B-BBEE Commission within 90 days
of the end of its financial year, or within 30 days of the approval of its audited financial statements and
annual report, where the annual compliance report is included in its annual report. Government entities must
submit their reports within 30 days of the approval of their audited financial statements and annual reports.
Upon receipt of a compliance report, the B-BBEE Commission must, within 90 days thereof, assess the
compliance report, describe the state of compliance with the B-BBEE Act and highlight any areas of
improvement.
If the B-BBEE Commission is of the view that the reporting entity is not compliant with the B-BBEE Act, it
must notify the reporting entity accordingly and provide it with 30 days to remedy the non-compliance.
Should the reporting entity fail to remedy the non-compliance within 30 days, the B-BBEE Commission must
reject the compliance report. The remedial period of 30 days appears to be very short, and we suspect that
many entities will seek a longer remedial period. In this regard, the Regulations provide for certain
condonations.
The consequences of a so-called “rejected compliance report” are not clear from the Regulations. However,
the intention and objectives of the new B-BBEE regime make it clear that one of the major consequences of
a rejected compliance report is that the B-BBEE Commission may initiate an investigation.
It is important to note that a similar obligation is placed on measured entities operating in particular sectors
for which a sector code has been gazetted.
formal complaint procedure
In terms of the Regulations and the B-BBEE Act, either the B-BBEE Commission or a third party is permitted
to initiate an investigation into any measured entity. The B-BBEE Commission is further empowered to:
institute proceedings in any court to restrain any breach of the B-BBEE Act, including a fronting
practice
obtain appropriate remedial relief
refer a matter to the National Prosecuting Authority or the appropriate division of the South African
Police Service
B-BBEE has not really achieved what was originally intended. One of the most unfortunate consequences
has been the emergence of different types of fronting practices, which appear to have become the norm.
Accordingly, regulators of
B-BBEE, such as the B-BBEE Commission, are determined to regularly scrutinise
B-BBEE transactions and monitor the compliance of measured entities with applicable B-BBEE legislation.
Stakeholders are hopeful that the registration of major B-BBEE transactions and the reporting duties placed
on certain measured entities will provide a certain degree of transparency and enable the B-BBEE
Commission to identify and remedy the unintended consequences of B-BBEE.
4. 4
For more information, please contact:
Sanjay Kassen
corporate commercial | director
skassen@ENSafrica.com
+27 82 561 1509
Parusha Desai Valodia
corporate commercial | associate
pdvalodia@ENSafrica.com
+27 82 560 4129