B-BBEE: Can one use modified flow-through to get automatic recognition?
- Jendi Moore
- Nov 1, 2014
- 2 min read
The modified flow-through principle is something of a conundrum. It flies in the face of a principle emphasised repeatedly in the B-BBEE legislation, namely that benefits must actually accrue to black people to the stated proportions and that they must accordingly not benefit just on paper. But then along comes an artificial deeming provision that effectively allows a measured entity to get away with treating something that is only 51% black as 100% black. No wonder that it has many B-BBEE consultants and verification agencies nervous and leaves them hesitant to recommend or allow its use. But it is unequivocally and almost unrestrictedly part of the Codes and it is accordingly entirely lawful to make use of it. But what about the new deeming provisions in the Codes that allow EME’s and QSE’s that are 51% black-owned to qualify for automatic Level 2 recognition? Can one use the modified flow-through principle to make use of this significant advantage?
As with many provisions in the B-BBEE legislation, which is appallingly drafted, there is no clear answer. This question is simply not addressed explicitly in the Codes. However, when one has a closer look at the wording of the Codes, a compelling argument is to be made that it would be permissible to make use of modified flow-through in these situations. This is because the automatic recognition provisions make use of the words “51% black-owned”, which is actually a specifically defined concept in the Codes. The definition is as follows:
“51% Black owned means an Entity in which:
a) Black people hold at least 51% of the exercisable voting rights as determined under Code series 100;
b) Black people hold at least 51% of economic interest as determined under Code series 100; and
c) has earned all the points for Net Value under statement 100.”
The references to Code series 100 when determining the voting rights and economic interest is significant, as Code series 100 allows the use of the modified flow-through principle. Even more telling is the fact that modified flow-through only applies to the voting rights and economic interest of black people sub-categories of the Ownership scorecard as per Code series 100, which means that modified flow-through and the automatic recognition provisions are an exact fit for each other.
At this early stage of the new automatic recognition provision it would of course be impossible to state with any authority that one can definitely apply the modified flow-through principle. However, it would seem that such application could definitely be justified from a legal interpretation point of view. It remains to be seen whether the DTI and verification agencies will follow such a logical approach.
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