SOUTH AFRICA: NEW OWNERSHIP RULES FOR TELECOMS OPERATORS AND BROADCASTERS

By Livia Dyer Wednesday, April 14, 2021
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On 31 March 2021, South Africa’s communications regulator, the Independent Communications Authority of South Africa (ICASA), published the long-awaited Regulations in respect of the Limitations of Control and Equity Ownership by Historically Disadvantaged Groups and the Application of the ICT Sector Code.

ICASA had published draft regulations for comment in February 2020 and conducted a regulatory impact assessment for affected licence holders earlier in 2021.

The new Regulations impose new rules on licensed providers of communications networks and services, including fixed and mobile network operators, internet service providers, broadcasters, satellite providers and others. Different rules apply to individual licensees and class licensees.

The new Regulations are aimed at increasing diversity and facilitating transformation in the communications sector.

Communications companies are measured for broad-based Black economic empowerment (BBBEE) purposes in terms of the ICT Sector Code published by the Minister of Trade, Industry & Competition under the Broad-Based Black Economic Empowerment Act, 2003 (BBBEE Act).

ICASA also has the power to make its own rules on equity ownership in terms of its empowering legislation, the Independent Communications Authority of South Africa Act, 2000. ICASA has exercised this power by making the Regulations.

The new requirements imposed by the Regulations mean that communications companies cannot focus only on improving their BBBEE status levels. They will now be required to comply with strict empowerment requirements on an ongoing basis, failing which they will be in breach of their licences.

Ownership by persons from historically disadvantaged groups (HDPs) and Black people will also be calculated differently from how ownership by Black people is calculated under the ICT Sector Code.

Summary of requirements

Individual licensees (i.e. larger network operators and providers) have to comply with the following rules:

  • 30% ownership by persons from HDPs;
  • 30% ownership by Black people as defined under the BBBEE Act (suspended until ICASA brings this requirement into effect); and
  • Achieve level 4 BBBEE status (assessed under the ICT Sector Code).

Large Individual licensees (with annual revenues above ZAR 50 million) have to meet these requirements in full, except for the requirement on ownership by Black people, within 36 months (i.e. by 31 March 2024).

The requirements ramp up over the three-year transitional period and licensees have to achieve progressive compliance each year. For example, by 31 March 2022, large individual licensees must be at least level 6 BBBEE contributors, and by 31 March 2023 they must be level 5.

30% HDP ownership and ownership by Black people only needs to be achieved by the end of the transitional period. Individual licensees that are small, micro and medium enterprises (with annual revenues below ZAR 50 million) have to achieve full compliance within 48 months, and need to improve their BBBEE contributor status progressively over the four-year period.

New class licensees (smaller, municipal networks and service providers) have to achieve level 4 BBBEE status (assessed under the ICT Sector Code). They have to comply with this requirement within 48 months (i.e. by 31 March 2025). Existing class licensees will only have to comply with the requirement as and when their licences are renewed, transferred or amended.

Class licensees also have to achieve progressive compliance with this requirement: level 7 by 31 March 2022, level 6 by 31 March 2023, level 5 by 31 March 2024, and level 4 by 31 March 2025.

How is ownership calculated?

When communications companies measure their levels of ownership by Black people for BBBEE purposes when their BBBEE scores are assessed, they are able to use various deeming principles in the ICT Sector Code.

These include the modified flow-through principle, the sale of assets principle, the private equity fund principle, the BBBEE facilitator principle, the exclusion principle, the mandated investor principle, and the continuing consequences principle.

All these deeming principles allow measured entities to recognise a higher percentage Black ownership on their BBBEE certificates than their direct Black ownership.

The new rules introduced by ICASA appear to indicate, consistent with ICASA’s recent practice, that ownership by HDPs and Black people can be calculated on a flow-through basis only.

Although the new Regulations do not expressly say that the other principles from the BBBEE Codes cannot be used, they repeatedly indicate that ownership by HDPs and Black people must be calculated on the basis of the flow-through principle and make no mention of any of the other principles other than the BBBEE facilitator principle.

In short, where ICASA requires 30% ownership by HDPs, 30% of the ownership interests in the licensee must be held directly by HDPs, not taking into account any of the deeming principles other than the BBBEE facilitator principle.

The new Regulations provide that any equity held by a shareholder that is a designated BBBEE facilitator in terms of the BBBEE Codes, will be recognised as being held by Black people. The Public Investment Corporation (when it holds shares on behalf of the Isibaya Fund), the National Empowerment Fund, MISTRA (the Mapungubwe Institute for Strategic Reflection) and others currently have BBBEE facilitator status. The Government in its capacity as shareholder of Telkom was designated as a BBBEE facilitator in 2019 but this was set aside by the High Court in 2020.

What happens where there is a change of control of a licensee?

In 2016 the High Court interpreted the Electronic Communications Act, 2005 (ECA) as requiring individual licensees to have 30% ownership by HDPs as a prerequisite for ICASA to approve a transfer of control of an individual licence i.e. where an investor acquires a control interest in an individual licence-holder entity.

The implication of the approach taken by the High Court is that an individual licensee must also demonstrate that it complies with the 30% HDP ownership requirement if it applies to ICASA to renew, amend or transfer its licence.

The new Regulations do not change this position. If someone acquires a control interest in an individual licensee (or if an individual licence is renewed, amended or transferred), the individual licensee must be 30% owned by HDPs in order for ICASA to grant approval. This requirement applies already (and has applied since 2016) and is not impacted by the transitional period that has been given for licensees to comply with the new empowerment rules.

The draft Regulations that were published for comment in 2020 suggested that the change of control approval requirement would be triggered where an investor crossed a 20% shareholding brightline, directly or indirectly. This would have meant that the acquisition of a non-controlling stake in an individual licensee would have required ICASA’s prior approval. This proposal has been dropped.

ICASA has instead published a memorandum setting out its views on what control means and when someone will be regarded as having acquired control of a licensee, thus triggering the approval requirements. 

ICASA has indicated that control under the ECA should, in its view, be understood similarly to how control is understood from a competition perspective. As such, for example, the acquisition of majority control or of a minority interest with negative control rights, or the ability to appoint or veto the appointment of the majority of the board members, in an individual licensee, will be a transfer of control that will trigger the approval requirements.

Notification and filing requirements

Licensees will have to provide proof of compliance to ICASA each year, including a BBBEE certificate.

Under the BBBEE Codes, licensees that are 51% Black-owned qualifying small enterprises (QSEs) or that are exempted micro-enterprises (EMEs) are only required to depose to an affidavit or obtain a certificate from the Companies and Intellectual Property Commission (CIPC) certifying their BBBEE status.

ICASA has indicated that smaller licensees that are 51% Black-owned QSEs (with annual revenues below ZAR 50 million) or EMEs can also submit their affidavits or certificates to ICASA to prove compliance.

ICASA will also monitor changes to licensees’ BBBEE shareholding, even where they comply with the 30% HDP ownership requirement.

Individual licensees will have to notify ICASA where shareholding changes over a period of 24 months directly or indirectly decrease the number of shares held by HDPs or Black people by more than 5% or the rights attaching to shares held by HDPs/Black people are diluted. Approval for these types of changes is not required.

Penalties

Individual licensees that contravene the ownership requirements will be liable to pay a fine of between ZAR 5 million or 10% of annual turnover from licensed services, whichever is the greater.

The Regulations do not stipulate the sanction that may be imposed on class licensees.

The Regulations can be accessed here.