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Information and Communication Technology (ICT) Sector – Ownership Element

1. Introduction and Applicability

  • 1.1 Sector Code Overview: The Amended ICT Sector Code provides a framework for measuring B-BBEE compliance specifically within the information and communication technology sector in South Africa. It aims to address the unique characteristics of this sector, including its rapid technological advancements, its importance to economic growth, and the need for digital inclusion.
  • 1.2 Scope of Application: The ICT Sector Code applies to a wide range of ICT-related activities, including:
    • Telecommunications services
    • Broadcasting services
    • Electronics manufacturing
    • Software development and IT services
    • Information technology
    • Other ICT-related activities (as defined in the Code)
  • 1.3 Legal Basis: Section 9(1) of the Broad-Based Black Economic Empowerment Act (No. 53 of 2003, as amended) and the Amended ICT Sector Code (Government Gazette No. 40407, 07 November 2016).
  • 1.4 Effective Date: 07 November 2016.
  • 1.5 Precedence: This Sector Code supersedes the Generic Codes for entities within its scope.

2. Ownership Scorecard and Thresholds

IndicatorWeightingTarget
Exercisable Voting Rights (Black People) 5 points 30%
Exercisable Voting Rights (Black Women) 2.5 points (+0.5) (15% of 30%)
Economic Interest (Black People) 5 points 30%
Economic Interest (Black Women) 2.5 points (+0.5) (15% of 30%)
Economic Interest (Black Designated Groups/Broad-based schemes/ESOPs) 4 points 10%
Net Value 9 points See Below
Subtotal 28
Bonus Points: Realisation of Net Value 2 points
Total 30 points Net Value Target: Based on a phased-in approach, linked to “years of recognition.” The target is expressed as a percentage of 30%.
  • 2.1 Ownership Scorecard: see table above
  • 2.2 Priority Element Status: Ownership is a priority element.
  • 2.3 Subminimum Requirements: 40% of the Net Value points (i.e., 40% of 9 points = 3.6 points).
  • 2.4 Entity Size Thresholds:
    • EME Threshold: Annual Total Revenue of R10 million or less. (Same as the Generic Codes).
    • QSE Threshold: Annual Total Revenue between R10 million and R50 million. (Same as the Generic Codes).
    • Generic Threshold: Annual Total Revenue above R50 million. (Same as the Generic Codes).
  • 2.5 Automatic Recognition for EMEs/QSEs:
    • The usual automatic levels apply (Level Four for EMEs, Level One/Two for 100%/51%+ Black-owned EMEs and QSEs).
    • Crucially: Are there any conditions or restrictions on this automatic recognition? No. The ICT Sector Code does not have a similar provision to the Construction Sector Code’s Clause 3.1.3 (restricting automatic recognition for BEPs).

3. Specific Ownership Requirements and Interpretations

  • 3.1 Unique Ownership Targets: The ICT Sector Code has a higher target for voting rights and economic interest (30%) compared to the Generic Codes (25% + 1 vote and 25%). The overall points allocation for ownership is also higher (28 points + 2 bonus points).
  • 3.2 Flow-Through and Modified Flow-Through: Standard Flow-Through and Modified Flow-Through Principles apply.
  • 3.3 Exclusion Principle: Standard Exclusion Principle applies.
  • 3.4 Treatment of Specific Entities: The ICT Sector Code provides specific recognition criteria for:
    • Broad-Based Ownership Schemes (BBOS): Must meet specific criteria.
    • Trusts: Must meet specific criteria.
    • ESOPs: Must meet specific criteria.
  • 3.5 Multinationals: No specific provisions beyond the Generic Codes. Equity Equivalents would likely apply as usual.
  • 3.6 Ownership by Qualified Professionals/Specific Roles:
    • Not a specific requirement.
    • Crucially: Are there any requirements for ownership to be held by individuals in specific roles (e.g., executive management, as in the Construction Sector Code for BEPs)? Are there penalties for not meeting these requirements? No.
  • 3.7 Sale of Assets: No specific deviations from the Generic Codes.
  • 3.8 Private Equity Funds: Ownership by B-BBEE compliant Private Equity Funds is possible under the ICT Sector Code, provided the fund meets the requirements outlined in the Generic Codes (Statement 100, paragraph 3.10). No specific provisions prevent or modify this.
  • 3.9 Other Unique Provisions:
    • Higher Targets: The 30% target for voting rights and economic interest is a significant difference from the Generic Codes.
    • Bonus Points: Bonus points available for achieving Net Value targets.

4. Areas of Uncertainty and Interpretation

  • 4.1 Ambiguities: As with the Generic Codes, valuation methodologies and the application of the Flow-Through Principle can be areas of interpretation. The specific rules for BBOS, Trusts, and ESOPs may also require careful interpretation.
  • 4.2 Industry Practice: Industry practice is developing, and engagement with the relevant industry bodies is important.
  • 4.3 Potential Disputes: Valuation disputes, challenges to the legitimacy of ownership structures, and interpretation of the specific rules for various entities.

5. Deal Process, Parties, and Costs

  • 5.1 Typical Deal Structures: Direct ownership, trusts, BBOS, ESOPs, and private equity investments.
  • 5.2 Key Parties Involved: ICT companies, Black investors, private equity funds, legal advisors, financial advisors, B-BBEE verification agencies.
  • 5.3 Deal Process Overview: Similar to the Generic Codes: due diligence, valuation, negotiation, legal documentation, and implementation.
  • 5.4 Cost Considerations: Similar to the Generic Codes: legal fees, valuation fees, advisory fees, B-BBEE verification fees, and the cost of the ownership transaction itself.

6. Gotchas and Best Practices

  • 6.1 Common Mistakes: Failing to meet the Net Value subminimum, inadequate documentation, fronting, not understanding the specific rules for various entities (BBOS, Trusts, ESOPs). (Pay particular attention to any specific requirements like those for BEPs in the Construction Code). Not applicable here.
  • 6.2 Fronting Risks: High risk.
  • 6.3 Best Practices: Thorough planning, expert advice, genuine commitment to transformation, careful structuring of ownership deals, ongoing monitoring of compliance.

7. Alternatives to Ownership
The other elements of the ICT Sector Scorecard include:

  • Management Control
  • Skills Development
  • Enterprise and Supplier Development
  • Socio-Economic Development

8. Conclusion

The ICT Sector Code builds upon the Generic Codes but introduces a significantly higher target for Black ownership (30% for voting rights and economic interest) and a higher overall points allocation. This reflects the importance of transformation in this rapidly evolving sector. Crucially, it does not impose restrictive ownership requirements based on professional registration and executive management roles, unlike the Construction Sector Code for BEPs.

Please contact us for a confidential discussion around your unique BEE ownership needs.

Chapter: Sector codes:
Chapter: Sector codes:
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