Last week I started the story of how Real People Kenya (RPK) entered the Kenyan capital markets in August 2015 apparently to raise capital to loan SME clients amounting to 5 billion shillings in a medium-term note (or a bond). The bond, listed on the Nairobi Securities Exchange (NSE) was to be raised in three installments and the first for 2 billion shillings succeeded in raising 1.6 billion shillings.
RPK is a subsidiary of Real People Investment Holdings Ltd (RPIH), a South African company listed on the Johannesburg Stock Exchange.
Kenyan investors, eager for risk diversification from the usual government bonds and slim picks on the corporate bond front, invested 1.6 billion shillings in the bond. On March 31, 2021, Kenya’s Capital Markets Authority (CMA) issued a press release stating that it had taken enforcement action against former RPK board members as well as current and former members of the board of directors. administration of RPIH in South Africa for their role in the misapplication of the Sh1.6 billion bond products.
It turns out that as soon as the 1.6 billion shillings was raised for use in the Kenyan SME loan market, the funds were instead put on the Glory bypass and sent to the parent company in South Africa. South to repay a business-to-business loan.
It is important to note that the bond investors made their decision based on the information memorandum prepared by the company and signed by the directors of the company, noting that CMA regulations require that they take personal responsibility. statements and information contained in the bridle.
The use of funds is a key point of information for investors to determine the borrower’s ability to generate the funds to both repay principal and interest on borrowed funds.
According to CMA’s press release, RPK immediately began to experience financial difficulties once the subordinated capital was sucked from its balance sheet and was unable to meet its bond obligations. The company was forced to ask investors to extend the repayment dates of the notes beyond the original maturity dates.
Upon investigation, the CMA found evidence that even before the application, approval and issuance of the bond, there had been a plan between RPK in Kenya and its parent company in South Africa to hand over the proceeds. in Johannesburg in settlement of the intercompany loan.
Long story short: the CMA woke up and said not to look at us buddies!
The regulator issued notice of show cause letters and the fake passed through the directors and senior management of the Kenyan subsidiary as well as the South African parent company up to and including an alternate director of one of the members of the South African board of directors.
Of the 12 directors who received the notices, seven appeared before an ad hoc CMA committee while five filed a complaint with the Capital Markets Tribunal. The ad hoc committee determined that there was a lack of effective oversight by RPK’s board of directors over the application of the MTN product, particularly in view of the fact that the June 2015 information memorandum for the bond had clearly indicated their use for loans in Kenya. .
So what did the Committee conclude? Four of the seven who appeared were personally fined various amounts and all were disqualified as directors or key personnel of any issuer, person authorized or approved in the Kenyan capital market. The disqualification will not be lifted until the bondholders have recovered all of their money plus interest. No enforcement action was taken against the other three out of the seven.
It should be noted that the highest individual fine of 5 million shillings was imposed on the chairman of the board of RPK at the material time and the CEO of the parent company in South Africa.
The chief financial officer of the RPIH group and the gentleman who served as an alternate director on the board of RPK to the general manager of the parent company group were both fined 2.5 million shillings each. . These last two recipients of the sanctions were members of the board of directors of the parent company RPIH.
This decision was a great addition to the emerging corporate governance jurisprudence in Kenya.
The CMA essentially found that even though a director of an issuer was not physically present in Kenya (and in this case even a director of a parent company not located in Kenyan jurisdiction and his deputy), he still had a duty of care to buyers of securities they have issued in Kenyan jurisdiction; and a responsibility not to act negligently in their oversight of securities issued by the company they oversee as the parent company.
It is a clear reminder to directors of listed companies that they are held to a very high standard by the regulator with equally high financial penalties and exclusion for breach of fiduciary duty.
E-mail: [email protected] Twitter: @carolmusyoka