Financial sector charter in conflict with new BEE codes

Financial sector charter in conflict with new BEE codes

By Soria Hay, executive director of Bravura Equity Services

The financial sector charter is in conflict with the final version of the first phase of the Department of Trade and Industry`s Codes of Good Practice, passed at the beginning of November 2005 and, according to Soria Hay, executive director of Bravura Equity Services, it will have to change to rectify the differences.

The major difference is that the charter only requires 10% black shareholding, with another 15% indirect black shareholding, whereas the codes require 25% direct black shareholding and do not acknowledge any indirect black shareholding, says Hay.

"The key problem with the charter is that finance minister Trevor Manuel signed it at the end of the negotiations process, which is why many financial sector participants assumed it would be promulgated."

Hay explains that after extensive lobbying by the financial services sector in last year, President Mbeki said companies that had already implemented BEE transactions would not have to restructure their deals. However, he did not say that these deals would be acknowledged as fully compliant and scored accordingly.

The message was one of tolerance but no commitment that transactions that had been concluded would be scored as fully compliant going forward. This will only happen if the charter is gazetted as a sector code, thereby giving it the legal status of a DTI code.

"The bar in terms of the DTI codes is very high and processes built in are onerous, so for any industry charter to be gazetted as a sector code, and thereby assume the same status as the DTI codes, will be extremely tough," she says.

"In my view the fact that Manuel signed the financial sector charter has been misinterpreted by hopeful sector participants. Any hope that it will be gazetted shortly and that it will then be equal to the codes is misplaced."

While the financial sector charter has proven to be useless legally, Hay acknowledges that practically it has been invaluable as it has started the difficult transformation process in the sector. "The quicker the banks start transforming, the easier it is for them to keep transforming up to the minimum target of 25% (in the new codes). At least now the banks are way ahead of the game whereas, had the charter not been negotiated, they would have had to start from scratch."

Banks will not have to restructure existing BEE transactions but will have to do additional transactions over a period of time to meet the 25% target, Hay explains. A lot of banks implemented transactions with companies that are 49% white held and 51% black held (as in the case of the Absa transaction) but, in terms of the DTI codes, they will now lose significant points. The "modified flow through" principle, which would have allowed companies to still score high points on the scorecard even if the BEE party which is investing is 49% white held, has now been seriously diluted.

She says that the problem with doing additional BEE transactions is that these deals are very costly. If communication around the codes had been more effective, different kinds of deals would have been entered into from the start. In retrospect, the two main problems were that government was negligent in not communicating its plans effectively to the business community and, secondly, on the side of business, there was a lack of critical assessment of what was going on.

Given all these issues it is Hay`s view that it is unlikely that the financial sector charter will be gazetted as a code. She anticipates that the process is likely to extend for another two to three years before finality is reached. Either the banks and other financial sector players will abandon their efforts to have the financial sector charter gazetted and decide to follow the codes, or they will comply with the codes to avoid going through the negotiation process again.

"The minus in all this is confusion that has been created and money that has been spent but the plus will be heightened business confidence in South Africa and accompanying business certainty," she concludes.

The reason why the government wanted uniform DTI codes was to dispel uncertainty surrounding BEE requirements, which was proving negative for outside investment.