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The Modified Flow Through Principle is an integral part of the Broad-Based Black Economic Empowerment codes. The code permits a company to enhance (double) its ownership percentage, by incorporating a new company and holding the BEE shares in that vehicle. Importantly, the existing (non-BEE) vendors would then hold 49% of the shares in the new company.
Under the current framework for Broad-Based Black Economic Empowerment, entities that have a total annual revenue of less than R10 million, called Exempted Micro Enterprises (EME), automatically qualify for:
Level 1 if the company is 100% black owned
Level 2 if the company is 51% black owned
Level 4 if there is no black ownership
A second category exists for companies that have a turnover of less than R50 million – called Qualifying Small Enterprises (QSE). A QSE automatically qualifies for
Level 1 if the company is 100% black owned
Level 2 if the company is 51% black owned
Using the Modified Flow Through Principle, companies can effectively double up their ownership score.
Provided that new entity is 50.1% black owned, the entire entity is seen as being black owned. In short, this means that the existing shareholders can own the 49.9% with the result that the 50.1% shareholding equates to 25%. Put simply, this enables companies to seriously their ownership score under the BEE codes.
The Modified Flow Through Principle also impacts all other companies (other than EME & QSEs), save that the principle only applies to voting and equity, being the highest scoring of the categories relating to ownership.
