Retail chain Nakumatt lost Sh18 billion worth of stock in the year to December 2017, its managers say in a report that reveals the extent of fraudulent activity that brought the company to near collapse.
Peter Kahi, the court-appointed administrator, has hired experts to conduct a “special audit” into the significant discrepancy in Nakumatt’s books of accounts, which the retailer booked as an adjustment in its accounts for the year to December 2017.
Nakumatt’s former management has said the discrepancy was the result of massive “theft, pilferage, stock shrinkage and losses arising from stock obsolescence, a response Mr Kahi says is “unsatisfactory.”
The administrator, who insists initiatives to improve controls at Nakumatt started too late, is hopeful that the fresh stock audit will help the business secure a partial “tax write-off” from the Kenya Revenue Authority (KRA) and afford it headroom to map out a recovery path.
The Sh18 billion hole emerged in a comprehensive report Mr Kahi presented to the retailer’s creditors on Wednesday, outlining restructuring proposals he believes would keep the business afloat.
“The explanations are clearly unsatisfactory and raise more questions than answers, if we’re to claim this expenditure for tax purposes,” the administrator’s report says. “KRA will need a very clear and transparent response as to the make-up and nature of these losses.”
Mr Kahi says in his report that in the year to February 2017, Nakumatt made sales of Sh52.2 billion and a net loss of Sh3.2 billion, meaning that the missing stock amounted to a third of the year’s revenues.
Extent of fraud
Nakumatt’s unaccounted for stock is more than two times what Carrefour, the French retailer, reported in sales last year, demonstrating the severity of the loss.
Internal and external fraud — whose extent has never been revealed — has been a perennial challenge for Kenyan retailers.
The retailers, through their umbrella body Retail Trade Association of Kenya (Retrack), have previously claimed they lose goods worth Sh3.5 billion annually to shoplifters.
Nakumatt’s managing director, Atul Shah, in January acknowledged the existence of internal fraud even as he insisted that the main causes of the retailer’s woes were external. Nakumatt creditors rejected Mr Kahi’s report, arguing the explanation given was unconvincing.
“Was this stock purchased in 2017 or are these amounts from previous years? If from previous years, then audited financials have been incorrect,” one creditor noted.
“Based on these incorrect financials, a commercial paper was issued. This is fraudulent and suggests that controls were so weak that this (missing stock) could not picked up sooner.”
The administrator’s report paints a grim picture of Nakumatt’s financial health, noting that its total liabilities stand at Sh35.8 billion against Sh5.2 billion assets.
Top among the creditors are commercial banks such as DTB, which is owed Sh3.6 billion, KCB (Sh1.7 billion) and StanChart (Sh805.1 million).
Nakumatt also owes Bank of Africa (Sh328.4 million), United Bank of Africa (Sh126.2 million) and GT Bank (Sh104.8 million).
The retailer also owes Sh1.1 billion in private placement loans, and Sh4.8 billion in commercial papers. Trade creditors, many of whom have sued the retailer over the high debts, are owed Sh18.6 billion.
Mr Kahi, whose goal is to maintain the business as a going concern, has asked banks to accept a three-year moratorium on loan repayments, chargeable at interest rates lower than prevailing market rates.
He also wants creditors, commercial paper holders and private placement loan issuers to waive a quarter of the Sh25 billion they are claiming and convert the balance into equity.
The administrator has further proposed that Nakumatt hold an initial public offering (IPO) before March 2024, where creditors can trade their shares on a private platform.
Shares held by unsecured lenders, mostly suppliers, would be listed on the Nairobi Securities Exchange (NSE), helping “release cash to the creditors who sell their equity or hold the same for potential upside in subsequent years.”
Nakumatt posted a net loss of Sh23 billion in the 10 month to December 2017 from sales of Sh14.8 billion.
The administrator believes that if the restructuring is greenlighted by the creditors, the business will lift itself from the deep financial hole and return consecutive profits for the next 12 years.
However, Nakumatt’s recovery plan now hangs in the balance after the creditors rejected the proposals and failed to vote on the proposals during an acrimonious meeting on Wednesday.
“Of course in a crowd of more than 2,000 people all can’t agree to your views. We agreed to adjourn the meeting and call another once I address some procedural issues raised by the creditors,” Mr Kahi said, downplaying the fallout.