Ideas & Debate

When liability for directors extends beyond our borders

board

PART 1

It seems 2015 was a good year for the Kenyan subsidiary of South African microfinance lender Real People. Mid-2015 Real People Kenya Limited (RPK) came to the Kenyan capital markets to raise the first of what were to be three tranches of a Sh5 billion medium term fixed rate note.

The note was listed on the Nairobi Securities Exchange (NSE) having received approval from the Capital Markets Authority (CMA) and issued in the first weeks of August that year.

In order to receive the CMA approval for listing, RPK had submitted an Information Memorandum that stated that the purpose for the funds would be to raise capital for onward lending to its primary customers who were small to medium business enterprises.

RPK raised Sh1.6 billion out of the targeted Sh2 billion for the first tranche. But Press reports in this newspaper had started to pick up trouble in RPK’s parent’s backyard. Real People Investment Holdings (RPIH), the South African parent company, was listed on the Johannesburg Stock Exchange.

Funding risks

However, Global Credit Rating agency for the second time rated RPIH as “negative” based on a low quality loan book and funding risks associated with the lack of investor appetite, reported the Business Daily on July 6, 2015.

Waxing lyrical about the strong potential of the Kenyan subsidiary in light of the upcoming medium term note, the same Press report quoted the chief executive of RPK, Daniel Ohonde, saying “the negative outlook does not amount to a change in outlook and will not, in our opinion, affect the uptake of the Real People Kenya bond.

Real People is a separate legal and operating entity and is sufficiently well capitalised to operate on a standalone basis.”

Well, someone in Johannesburg was laughing in South African Rand at the “separate legal and operating entity…sufficiently well capitalised blah blah” part.

No sooner had the investor funds from the bond checked into the RPK’s Nairobi bank accounts than instructions were sent to sweep the funds to Johannesburg to pay off an intercompany loan owed to the parent RPIH, according to a CMA investigation.

Now, remember that the funds were being raised ostensibly to permit more lending to happen in Kenya and money to be made from interest received in the lucrative (others might say, sometimes usurious) microfinance sector and the benefits shared via interest repayments to the bondholders.

The board of directors of RPK, who literally have to sign an information memorandum with their own blood as they are promising potential investors that everything stated therein is the truth, the whole truth and nothing but the truth, had a fiduciary responsibility to ensure that the promises made on the document were fulfilled. What were those promises explicitly?

Ratings downgraded

Firstly, that the funds would be used for what RPK said they would use them for. Secondly, that investors would be repaid from the successful application of those funds.

Well, fast forward to April 2017 when, for the third time, the same Global Credit Ratings (GCR) agency further downgraded the ratings assigned for RPK’s parent company RPIH. In a report published in this newspaper on April 13, 2017, the agency gave a negative outlook, saying: “This negative rating action primarily reflects a reduction in the servicer’s financial strength assessment following GCR’s recent downgrade of Real People’s issuer rating to CCC from BB+.

This is due to significant deteriorating in the trading results of Real People up to December 31, 2016 and the resultant strong possibility that the group will breach its Capital Adequacy Ratio debt covenant in the near term, and/or fail to meet existing debt obligations.”

So this is happening two years after the Kenyan subsidiary RPK has raised the bond, sent out the money to its parent to repay an intercompany loan, which repayment quite likely was desperately needed to shore up rapidly deteriorating balance sheet ratios that had been flagged by auditors before.

So, was there a scheme that had been hatched by the South African parent on how subsidiaries could be used to draw funds back into the South African home base?

Next week, I will touch on how the CMA was having none of that cross-border nonsense and undertook a stern regulatory action that demonstrated its reach for directors physically situated beyond Kenya’s geographical borders while setting a good corporate governance precedent.

PART 2

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