Black Economic Empowerment (BEE) share schemes are various initiatives undertaken and typically facilitated by companies to introduce BEE shareholders to their shareholder base.
Broadly speaking, there are public and restricted BEE schemes. In a public scheme, qualifying individuals are invited to invest in the structure. By contrast, an example of a restricted scheme is an individual participating in an employees’ share scheme at their company.
Riaz Gardee, Principal at MMI Holdings, says BEE schemes are aimed at empowering previously disadvantaged individuals (PDIs).
“The company typically raises debt, issues shares at a discount and raises capital from PDIs to purchase equity. This block of shares is then owned by BEE shareholders and qualifies for points in terms of government’s BEE scorecard and other BEE legislation,” he explains.
WHAT IMPACT HAVE BEE SHARE SCHEMES MADE?
There are many arguments for and against the effectiveness of BEE share schemes as a means of creating wealth for PDIs and diversifying corporate ownership, says Samke Ngwenya. One viewpoint is that they’ve have had the positive impact of increasing black ownership in parent companies to a level that couldn’t have been achieved without the funding and discounts afforded by BEE schemes.
“Sadly, not all share schemes have created shareholder value for the BEE investors, usually when the value of the BEE share is equal to or lower than the debt portion of the share,” says Ngwenya.
“This also happens when the BEE share price upon maturation of the scheme is lower than the purchase price. The success and effectiveness of a share scheme depend not only on the parent company’s performance, but also on the investors’ ability to maintain their shareholding long-term.”
INVESTING IN BEE SHARE SCHEMES
What should you know?
A potential investor should clearly understand their investment objectives and risk appetite, as these will dictate when they should invest and how much, says Gardee. “Understanding the company and markets in general is a good starting point.”
BEE schemes are open only to PDIs who are classified as black per the BEE Act.
When should you invest?
Investors have limited ability to enter and exit BEE share schemes because of the liquidity constraints inherent in them. Ngwenya says the best time to invest therefore depends largely on the investor’s financial position and their ability to make the most profitable decision at the time of maturation.
How much should you buy?
The returns on BEE schemes are share price-linked and are quoted as the percentage growth or loss in the value of your shareholding. The size of the monetary return is therefore directly proportionate to the number of shares held. A good return on a BEE scheme isn’t driven by the quantity of shares acquired, but rather by how well the parent company share performs, as well as by how quickly the scheme debt is repaid.
How should you finance your investment?
Ngwenya says the general rule of thumb is not incurring debt to invest in equities, unless you’re a highly sophisticated investor with a reputable track record. It’s crucial to consider all the risks carefully before investing in a BEE scheme.
When can you sell?
The purchased BEE shares are subject to a lock-in period during which they can’t be sold. Thereafter, there’s usually a period in which investors can sell their shares, but only to other qualifying BEE investors, in order to maintain the BEE shareholding achieved by the scheme. Upon maturation of the scheme, investors have the option to sell their shares for cash, or surrender their BEE shares and use the net proceeds to acquire shares in the parent company. The proceeds to the BEE investors are always net of the debt balance in the scheme.