European investigators visit troubled construction firm Spencon after shareholder war

The European Investment Bank (EIB) has opened investigations into possible fraud in its investments in Kenya through US-based private equity fund Emerging Capital Partners (ECP) and construction firm Spencon.

EIB’s anti-fraud investigators landed in Nairobi yesterday to look into alleged fraud and corruption relating to the bank’s investments in Kenya, according to private communication seen by the Business Daily.

“The Inspectorate General’s Fraud Investigations Division is currently looking into a complaint concerning ECP Africa and Spencon,” EIB said in a letter sent to Nairobi ahead of the visit.

EIB, which invested millions of shillings in Spencon, says the investigations have been launched as a result of a complaint concerning ECP and Spencon –whose directors are embroiled in a bitter ownership war.

Spencon, which is currently under the management of an administrator sunk into financial distress last year in the wake of alleged financial and ownership fraud that EIB says has exposed it to reputational and financial loss.

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ECP, the fund through which EIB invested in Kenya, spent billions of shillings to acquire a 98 per cent stake in Spencon shortly before the company got embroiled in an ownership brawl.

The ownership war started in earnest after Spencon’s founders accused ECP of fraudulently squeezing them out of the company, a claim the PE firm has dismissed as false even as it blames the founding shareholders of defrauding the construction company of millions of dollars.

EIB says its goal is to ensure any funds it has invested in any entity are used for the intended purposes and through processes that are free of fraud, corruption, collusion, coercion, obstruction, money laundering and terrorist financing.

“Any prohibited conduct that occurs is to be reported promptly and investigated thoroughly and fairly and wrongdoers sanctioned in accordance with applicable policies and procedures,” the bank’s anti-fraud policy says.

EIB can recall its capital in the event of a partner’s involvement in fraudulent activities besides applying sanctions that can be replicated by other multilateral development banks with which it co-operates on integrity issues.

The list of EIB’s partners includes the World Bank, African Development Bank, Asian Development Bank and Inter-American Development Bank.

EIB committed $45 million (Sh4.6 billion) to ECP’s Africa Fund II –the vehicle that provided loans to Spencon, which were later converted into equity. Other backers of ECP include UK’s sovereign wealth fund CDC Group.

ECP’s investment in Spencon has more recently been beset by intense competition from Chinese contractors and shareholder wars that have now left its founders, management and ECP executives as targets of the looming investigations.

Audit reports filed in court show that a former Spencon shareholder, Naveen Prakash Sharma, stole some Sh515 million from the construction firm while Kiran Saroop Sagaar, another former shareholder, is also accused of unspecified fraud that saw him lose his 3.1 per cent stake in the company to the other shareholders, including ECP.

Jitendra Chhotabhai Patel, a founder of Spencon, is also accused of taking a 41 per cent stake in the company’s subsidiary Spedec without paying for it.

Spedec, which was previously fully owned by Spencon, has a 41.5-acre land in Nairobi’s Kasarani valued at more than Sh500 million as its major asset.

Mr Patel, who is waging a global legal fight against ECP, has in return accused the PE firm and its appointees at Spencon of fraudulently acquiring a controlling stake in the firm.

ECP lent Spencon $15 million (Sh1.5 billion) between 2006 and 2007. The loan fell due in 2009 but the construction firm was unable to settle the debt, and requested that it be converted into equity.

ECP reckons that the request was meant to avoid a default that would have called in the founders’ personal guarantees to other creditors.

Terms of the settlement included a Put Option Agreement (POA) that committed the founders to buying out ECP at Sh2.3 billion if the fund failed to get alternative buyers of the 37.4 per equity it acquired in the original conversion.

ECP says its interest subsequently rose to 38.6 per cent after it appropriated Mr Sagaar’s shares as part of the pro-rata redistribution of shares.

The fund says it decided to exercise the POA in February 2013 after it failed to reach an agreement with the founders.

That set in motion a process that led to its acquisition of a combined 60.68 per cent stake from the other shareholders, raising its interest in Spencon to 98.08 per cent.

Mr Patel insists that the acquisition of the extra shares was illegal and is seeking $50 million (Sh5.1 billion) from ECP as compensation for what he claims to have lost with the entry of the American fund into Spencon, which is now under administration.

Mr Patel has also accused Spencon’s former management team led by Andrew Ross of paying $4 million in bribes in Uganda and siphoning assets worth hundreds of millions of shillings, including motor vehicles before exiting the company.