One of the KQ planes acquired before its financial performance took a nose-dive. PHOTO | FILE
Part of the Capital Markets Authority’s (CMA) core mandate is to promote investor education, awareness and interest in capital markets products and services.
This is intended to ensure that shareholders gain skills to hold board and management to account for the manner they execute power vested in them. In recent months, the performance of several listed companies has dominated media reports on the perception that they are either insolvent or struggling to maintain liquidity.
For a company to be declared insolvent, its total liabilities would have to exceed total assets. It is therefore necessary to distinguish between companies that are insolvent and those that are illiquid.
The CMA’s role in respect of listed companies involves detailed assessment of any proposed issuance of securities to the public.
Such an assessment seeks to establish the extent to which the offer meets eligibility requirements and more importantly, that the issuer has disclosed all relevant information to help investors understand the nature of the offer, the strategy of the entity and the risk factors that may impact the proposed strategy.
These disclosures in a company’s information memorandum or prospectus, before an issue, are intended for thorough interrogation by investors in order to facilitate an informed investment decision.
During the approval a prospective issuer’s financial wellbeing is evaluated and approvals are granted based on the levels of compliance and subject to adequacy of disclosures to investors.
Upon approval, the company’s board and management are charged with overseeing the operations and strategic delivery of the company in line with the disclosures and subject to an obligation to make public disclosures of material deviations from the disclosed outlook and projections as well as regular updates to and subject to approvals by shareholders during annual and extraordinary general meetings.
Further, the boards are charged with ensuring sound risk management is implemented for smooth business operations and that the risks faced are within their operational appetites.
In light of the ongoing reports on poor performance by firms and perceived threats of insolvency, with some quarters suggesting their suspension from listing, the CMA has been engaging several of them behind the scenes, to ensure that they have mechanisms in place to maximise shareholder value.
Below are the steps that the CMA has taken with regard to six firms.
Kenya Airways’ (KQ) financial problems were highlighted after the release of its 2014 audited accounts. Although the company’s liabilities substantially exceed its assets, the current situation does not emanate from issuance of an approved security but rather buildup of liabilities overtime against poor performance owing to failed strategy.
The company has been engaging the government for further financial support and the discussions remain inconclusive. The company continues to update the CMA on new developments.
Mumias Sugar Company’s woes were attributed to poor management and corruption amongst senior management. No approved security was issued as a precursor to the challenges and the CMA discouraged the structuring of a rights issue due to the depressed financial state and potential exposure to public investors until a clear assessment of the failings was sanctioned.
The CMA has commissioned an independent forensic audit whose outcome will be used to hold those responsible accountable.
The audit has, however, been delayed due to concerns over the quality of initial findings which have called for further work to be done by the consulting firm.
Although an initial government bailout was negotiated and first release made last year, significant additional capital continues to be needed to fund a turnaround.
The new management has been very supportive and continues to work closely with the CMA. This progress underpins the authority’s commitment to the proactive protection of investor interests.
TransCentury Limited’s (TCL) subsidiary incorporated in Mauritius issued a convertible bond of up to $75 million that is listed on a securities exchange in Mauritius.
The CMA was not involved in the bond approval since at the time, TCL was not a publicly listed company and the bond was not listed on the Nairobi Securities Exchange (NSE). However, as the parent company of the Mauritian subsidiary, TCL guaranteed the bond.
The bond was already in progress at the time TCL applied to the CMA for a listing by introduction in July 2011. As it stands, the bond was not converted into equity as expected because shareholders refused to be diluted further.
Due to this refusal there is perceived threat of a default by TCL as the bond is due for redemption on March 25 especially given that the market capitalisation of the company has decreased to under Sh1.7 billion which by far is lower than the outstanding principal.
The CMA has had several engagements with TCL management and board chairman and the firm is considering measures of arriving at a settlement since it has adequate assets to meet its obligations if given time.
Athi River Mining , although not insolvent, has experienced liquidity challenges which cast doubt as to whether it is able to meet its obligations on the privately arranged commercial paper programmes which are not subject to the authority’s approval.
In addition, the firm has been operating on large loans with some being foreign denominated. However, it has identified a strategic partner was expected to be on board by March to inject over Sh12 billion.
The management has engaged the CMA several times to provide updates on the progress with the investor as well as on bridge financing arrangements underway.
Uchumi Supermarkets once under receivership experienced liquidity problems in circumstances where senior management has been accused of creative accounting resulting in material misstatements in the financial reports in addition to dealing with the company in conflicted circumstances with intention to benefit.
The top management and a large percentage of the board was replaced and a forensic investigation undertaken following substantial pressure from the CMA.
A draft report was availed to the CMA to which we highlighted a number of areas in which further work would be necessary if it is to support effective civil, criminal or administrative action.
The CMA awaits a final report to inform actions where non-compliances and transgressions have been identified.
In the interim Uchumi decided to dispose of some assets to boost its liquidity with clearances relating to the process of ensuring shareholder understanding of the ongoing process being granted by the CMA.
Home Afrika is a listed growth enterprise market (GEM ) firm under first line supervisory oversight of the NSE.
It has experienced serious governance challenges as well as apparent business model failure impacting on its cash flows given its interests in real estate development.
A substantive managing director was appointed a few weeks ago and the CMA has engaged it to understand its road map to addressing the current problems.
The company attempted to issue a bond in 2014 but was unable to raise the minimum funds for successful issuance.
However the company raised part of the funds through arranged bank syndicated loans. It therefore does not hold any issued security approved by the CMA.
Mr Muthaura is the acting chief executive of the CMA.
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