The Board of the Capital Markets Authority (CMA) has taken enforcement action against the former Uchumi Supermarkets Ltd (USL) Chief Executive and Finance Manager, former USL directors and the rights issues transaction advisor for regulatory breaches following an inquiry undertaken by CMA in line with its mandate of investor protection. These enforcement actions are effective from November 17, 2016.
The regulatory breaches of the former directors and the two USL officers were identified in respect of the period of 2012 – 2015 and involved making changes to the Information Memorandum (IM) after CMA approval; failing to make proper disclosure of material information to inform investor decision making; misapplication of Rights Issue (RI) proceeds; mis-statement of financial statements in 2014; weaknesses in board oversight of the branch expansion programme; inadequate conflict of interest management; and inadequate disclosure of asset sale and leaseback arrangements. The breaches of the transaction advisor revolve around not ensuring changes made to an approved IM were submitted to CMA for further approval.
The published USL Rights issue IM was established not to have been updated with the material developments at USL necessary to give investors the full picture of the impact of the funds raised through the rights issue. These omissions related to branch expansion activity commenced changes in business strategy, drawing down of undisclosed loans from financial institutions and engagement in asset sale & leaseback arrangements to raise additional funds.
Out of the Ksh895 million right issue proceeds received by USL in January 2015 it was established that a small portion was used to pay the rights issue expenses but the balance was transferred to the trading account from where payments were being made to settle outstanding suppliers’ debts as opposed to funding branch expansion. The co-mingling of the rights issue proceeds with the general trading funds further made it difficult for USL Board to track the actual application of the rights issue proceeds. The ultimate application of the specific RI proceeds remains the subject of further investigations.
The inquiry also revealed unapproved changes to the IM for the rights issue including increasing expenses from Ksh75 million to Ksh80.5 million, and the changes to the purpose of the rights issue proceeds.
With respect to the financial statements for the period ended June 30, 2014, that were used to support the Right Issue, it was established that a Ksh350 million asset sale and lease back transaction was recognized, while the agreement for the same was signed and funds received in September 2014 . As a result of this recognition, USL’s profits as at June 30, 2014 were enhanced by Ksh19.97 million arising from the gain on sale of the assets. Further, the USL liabilities were understated to the tune of approximately Kshs.1 billion. The Board subsequently reversed this treatment in the audited accounts in 2015, stating that this recognition had been premature.
In addition, land was inappropriately reported as an investment property in the financial statement despite there being caveats prohibiting sale and various ongoing court cases affecting its ownership. The nature of these encumbrances were further not disclosed in the financial statements nor factored in the valuations of the property thereby positively affecting the perception of profitability of USL.
The inquiry further established that in some instances the USL branch expansion program was undertaken without regard to the Board’s fiduciary duty of care due to the absence of a proper risk management framework being in place. It was also established that in two instances, USL pre-financed landlords in addition to making payment of respective commitment fees, but nevertheless the branches were never opened or funds recovered.
Timely public disclosure of the sale of assets worth Ksh500 million through an asset sale and leaseback transaction was not made within 24 hours after the event, as required of such material information in line with the continuous listing obligations. Further investigations are however proceeding into the sale of assets worth Ksh1.1 billion, which the USL Board denied approving, despite the supermarkets chain receiving Ksh613 million as proceeds from the asset sale and leaseback transaction.
On findings of conflicts of interest, the former CEO was established not to have disclosed his conflict of interest involving USL business partners.
As a consequence of the inquiry and subsequent due process hearings held by the Board to provide an opportunity to be heard to all parties, the Board resolved to:
- Disqualify the former USL Chairman, Ms Khadija Mire, from holding office as a director and/or key officer of a public listed company and/or issuer, licensee or any approved institution of CMA for a period of two years. Secondly the CMA board has disgorged Ms. Mire’s board allowances of Ksh1.77 million net of tax deemed to have been earned from USL for the financial years 2014 and 2015. Ms. Mire was also directed to attend Corporate Governance Training to be eligible for appointment as a director in a listed company in future.
- Disqualify the former USL Chief Executive Officer, Dr Jonathan Ciano, from holding office as a director and/or key officer of a public listed company and/or issuer, licensee or any CMA-approved institution for five years. Secondly, the Authority’s board imposed a financial penalty on Dr. Ciano of Kshs5 million; and also disgorged from him Kshs13.5 million being deemed profits obtained due to non-disclosure of the conflict of interest to the USL Board.
- Disqualify the former USL Finance Manager, Mr Chadwick Okumu, from holding office as a Chief Financial Officer, director and/or key officer of a public listed company and/or issuer, licensee or any approved institution of the Authority for a period of two years.
- Lodge a complaint for the commencement of disciplinary proceedings by the Institute of Certified Public Accountants of Kenya (ICPAK) in the professional conduct of Dr. Ciano and Mr. Okumu as Certified Public Accountants.
- Disqualify the former USL director, Mr James Murigu, from holding office as a director and/or key officer of a public listed company and/or issuer, licensee or any approved institution of CMA for one year and also disgorged Ksh660,000 board allowances from Mr Murigu net of tax deemed to have been earned from USL for the financial years 2014 and 2015.
- Disgorge board allowances from the former USL director, Mr Bartholomew Ragalo, of Kshs 855,000 net of tax deemed to have been earned and paid to him by USL for the financial years 2014 and 2015. Secondly, the board has issued a regulatory caution to Mr Ragalo to ensure that his future engagement as a director and/or a key officer in a public listed company being a director and/or key officer of a public listed company or issuer of securities to the public, licensee is in compliance with the Corporate Governance Code. Finally, Mr. Ragalo has been directed to attend Corporate Governance Training to be eligible for appointment as a director in a listed company in future.
Imposed a restriction on Faida Investment Bank from carrying out transaction advisory services for a period of six months together with a regulatory caution to ensure its role as a lead transaction adviser in future is conducted in full compliance with the requirements of a regulatory framework.
The hearings for two former directors remain pending while the external auditors, EY, have obtained a court order to bar the due process proceedings which is being contested by the Authority.
BACKROUND INFORMATION ON THE CAPITAL MARKETS AUTHORITY
The Capital Markets Authority (CMA) was set up in 1989 as a statutory agency under the Capital Markets Act Cap 485A. It is charged with the prime responsibility of both regulating and developing an orderly, fair and efficient capital markets in Kenya with the view to promoting market integrity and investor confidence.
The regulatory functions of the Authority as provided by the Act and the regulations include; Licensing and supervising all the capital market intermediaries; Ensuring compliance with the legal and regulatory framework by all market participants; Regulating public offers of securities, such as equities and bonds & the issuance of other capital market products such as collective investment schemes; Promoting market development through research on new products and services; Reviewing the legal framework to respond to market dynamics; Promoting investor education and public awareness; and Protecting investors’ interest. For more information, please contact: Antony Mwangi, Head of Corporate Communications on firstname.lastname@example.org