Last week I started off the story of how Real People Kenya (RPK) came to the Kenyan capital markets in August 2015 to ostensibly raise capital for on lending to SME clients amounting to Kes 5 billion in a medium term note (or bond). The bond, listed on the Nairobi Securities Exchange was to be raised in three tranches and the first tranche targeting Kes 2 billion, managed to raise Kes 1.6 billion. RPK is a subsidiary of Real People Investment Holdings Ltd (RPIH), a South African company listed on the Johannesburg Stock Exchange.

Kenyan investors, hungry for risk diversification from the usual government bonds and thin pickings on the corporate bond front, invested Kes 1.6 billion in the bond. On 31^st March 2021, Kenya’s Capital Markets Authority (CMA) issued a press statement declaring it had taken enforcement action against former board members of RPK as well as current and former board members of RPIH in South Africa for their role in the misapplication of the Kes 1.6 billion bond proceeds.

It turns out that as soon as the Kes 1.6 billion was raised from unsuspecting investors  for use in the Kenyan SME lending market, the funds were instead put on the by-pass to glory and dispatched to the parent in South Africa to repay an intercompany loan. It is important to note that investors of the bond made their decision on the basis of the Information Memorandum prepared by the company and signed off by the directors of the company, noting that CMA regulations require that they undertake personal responsibility for the statements and information contained therein. The use of the funds is a key point of information to enable investors determine the capacity of the borrower to generate the funds both to repay the principle and the interest of the borrowed funds.

According to the CMA press release, RPK immediately started experiencing financial distress once the subordinate capital was sucked out of its balance sheet and was unable to meet its bond obligations. The company was forced to ask investors to extend the dates for redemption of the notes beyond the initial maturity dates. Upon investigation, the CMA found evidence that even before application, approval and issue of the bond had been given, there had been a plan between RPK in Kenya and its parent RPIH in South Africa to remit the proceeds to Johannesburg in settlement of the intercompany loan.

Long story short: CMA woke up and said not on our watch buddies! The regulator issued Notice To Show Cause letters and the scythe cut across directors and senior management of both the Kenyan subsidiary as well as the South African parent up to and including an alternate director of one of the South African board members. Out of the twelve directors who received the notices, seven appeared before a CMA Ad Hoc Committee while five filed a case at the Capital Markets Tribunal. The Ad Hoc Committee determined that there was lack of effective oversight on the part of the RPK board on the application of the MTN proceeds particularly in view of the fact that the June 2015 Information Memorandum for the bond  had clearly stated their use for lending in Kenya.

So what did the Committee conclude? Four out of the seven who appeared were fined various amounts personally and all were disqualified from being a director or key personnel of any issuer, licensed or approved person in the Kenyan capital market. The disqualification will only be lifted once the bond holders recover their money in full together with the accrued interest. No enforcement action was taken against the remaining three out of the seven. It is noteworthy that the steepest individual fine of Kes 5 million was levied against the RPK board chairman at the material time and the chief executive officer of the parent RPIH in South Africa. The group chief finance officer of the parent RPIH and the gentleman who sat as an alternate director on the board of RPK to the group chief executive of the parent RPIH were both fined Kes 2.5 million each. Both of the latter recipients of the penalties were board members of the parent company RPIH.

 

This ruling was an excellent addition to the corporate governance jurisprudence emerging in Kenya. The CMA essentially found that even if a director of an issuer was not physically present in Kenya (and in this case, even a director of a parent company not situated in the Kenyan jurisdiction and his alternate) they still had a duty of care responsibility to the purchasers of securities they issued in the Kenyan jurisdiction as well as a responsibility not to act negligently in their oversight of the securities issued by the company they oversee whether directly, as the subsidiary or indirectly, as the parent. Most importantly, 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 pecuniary and disqualification penalties accruing in the case of breach of fiduciary duty.

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