Fronting control not passive participation is aim…..

Department of Trade and Industry (DTI) has published a notice stating that it has tabled a Broad-Based Black Economic Empowerment Amendment Bill before Parliament, the eradication of “fronting” being perceived as one of the main objectives of the proposals.

In a statement released at the time, the amendments seek amongst other things to establish a B-BBEE commission “to deal with compliance” in respect of B-BBEE-related legislation and  strengthen compliance-related monitoring and evaluation and providing for offences and a maximum penalty.

On the issue of fronting, DTI have referred to in a number of documents issued by the department, although by now suggesting criminalization of the issue a clearer legal definition is going to have to be found, commentators have noted. DTI in the past has said that any process of black participation in business must result in an increase in the ownership and control of the economy by black persons.

The BEE  scorecard currently being used by business gives points for direct empowerment which focuses on black ownership of enterprises and assets through shares and other instruments that provide the holder thereof with voting rights and economic benefits, such as dividends or interest payments.

Control means, according to DTI in their BEE statements, the right or the ability to direct or otherwise control the majority of the votes attaching to the shareholder’s issued shares; to appoint or remove directors holding a majority of voting rights at meetings of the board of directors of that shareholder and the right to control the management of that shareholder.

DTI has been particularly vocal on the subject that passive ownership by black people is in itself not sufficient to bring about “transformation” or where investors have very little control over the direction of investment decisions made by fund managers. Such passive ownership of enterprises can also lead to a form of ‘fronting’ “and this needs to be guarded against”, says DTI.

Minister of trade and industry, Dr Rob Davies, has referred to this matter and further consequences of the new Bill in a number of DTI press statements recently and conferences he has addressed.

The Bill also contains more regulations to control B-BBEE verification agencies involving an independent regulatory board of auditors is also part of the minister’s proposals contained in the Bill and the provision or creation of incentive schemes to support black-owned business. The Bill is notable in that it follows the BEE scorecard principle of specifically defining a “black person” as Africa, Coloured or Indian.

A draft bill was published for comment and no doubt the portfolio committee on trade and industry will announce public hearings before the committee in the new parliamentary session of 2013. The Bill as tabled is available on the DTI website.