Investors query the quality of advice in share, bond issues

An investor monitors trade at the Nairobi Securities Exchange (NSE). PHOTO | FILE 

By DAVID HERBLING, hdavid@ke.nationmedia.com

In Summary

• The advisors have particularly come under intense scrutiny after Jamii Bora Bank said last month that the Uchumi's rights issue information memorandum was a “work of fiction.”
• Faida Investment Bank, which served as the lead transaction advisor and sponsoring stockbroker, topped the list of consultants for the ill-fated Sh895 million cash call.
• Queries of a possible conflict of interest have arisen around the transaction after it emerged that Bob Karina, the chairman of Faida Investment Bank, was and remains a shareholder in Jamii Bora Bank and also sat in the board of the NSE where Uchumi is listed.

Consultants who steered Uchumi Supermarket’s 2014 rights issue have come under intense scrutiny following revelations that the cash call was based on deeply flawed information, which has left investors counting heavy losses.

The advisors have particularly come under intense scrutiny after Jamii Bora Bank – which eclipsed the Treasury to become Uchumi’s single largest shareholder after taking part in the cash call – said last month that the rights issue information memorandum was a “work of fiction.”

The tier III lender invested Sh500 million in Uchumi through an affiliate firm, Goodwill Ltd, a decision that increased its stake in the retailer to 15.8 per cent compared to the government’s 14.67 per cent.

Faida Investment Bank, which served as the lead transaction advisor and sponsoring stockbroker, topped the list of consultants for the ill-fated Sh895 million Uchumi rights issue.

Audit firm EY was the reporting accountant while law firm Hamilton Harrison & Mathews were the legal advisors.

More recently, queries of a possible conflict of interest have arisen around the transaction after it emerged that Bob Karina, the founder and chairman of Faida Investment Bank, was and remains a shareholder in Jamii Bora Bank and also sat in the board of the Nairobi Securities Exchange (NSE) where Uchumi is listed.

Uchumi had styled the cash call as a capital raising venture meant to clear supplier debts, bankroll regional expansion, fund new branches in Kenya, and refurbish existing stores.

The retailer’s directors at the time of the offer were Khadija Mire (chairman), Trade PS Ibrahim Mohamed, Mbatha Mbithi (ICDC), James Murigu, Bartholomew Ragalo and managing director Jonathan Ciano.

What followed thereafter was, however, a series of events that saw Uchumi plunge into the red, exit Uganda and Tanzania, grapple with additional supplier debts, fire Mr Ciano and close five outlets in Kenya.

Jamii Bora Bank CEO Sam Kimani, who lifted the lid on the Uchumi rights issue, said he could not comment on the matter in light of an ongoing investigation by the Capital Markets Authority (CMA).

“The information memorandum was a work of fiction. It did not reflect what we found there,” Mr Kimani told Jamii Bora shareholders last month.

“We feel cheated because unlike a private company where you do due diligence, with a listed company you depend on the information memorandum provided,” he said even as it emerged that he and Mr Karina, who prepared the information memorandum, are shareholders in Asterisk Holdings, a company through which they own Jamii Bora Bank.

READ: Jamii Bora says Sh500m Uchumi buyout was a con

The outcry over a toxic Uchumi rights issue is the latest in a series of other doubtful capital raising plans at the Nairobi bourse including the Sh2 billion Imperial Bank bond and Chase Bank’s Sh4.8 billion medium-term note, which were sold to investors just weeks before their collapse.

Imperial Bank was unexpectedly placed under receivership on October 13, 2015; the same day it was to list a corporate bond on the NSE.

Regulators were forced to suspend trading of Chase Bank’s bond after the mid-sized lender collapsed on April 7, 2016 owing to liquidity and corporate governance challenges.

The Uchumi rights issue was approved by the CMA, which raked in Sh2.36 million in fees – placing some responsibility on its doorsteps.

CMA boss Paul Muthaura did not respond to questions as to whether the regulator intends to probe the Uchumi cash call and enquire into the conduct of the advisors over their role in the transmission of false information to investors.

READ: Imperial owners issued dodgy Sh2bn bond: CMA

Faida Investment Bank defended the accuracy of the Uchumi rights issue prospectus, insisting it had acted on the basis of information provided by the company “that was validated as true and factual as at the point of production.”

“All financials in the information memorandum were audited, reviewed and signed off by the Reporting Accountants. There is nothing inaccurate in the information memorandum,” said David Mataen, director of corporate finance at Faida, who was in charge of the offer.

“We therefore take no responsibility for any outcome resulting from decisions made from reading the information memorandum,” said Mr Mataen.

On Mr Karina’s cross-ownership in Jamii Bora Bank and Faida, the investment bank said the Uchumi rights issue was offered publicly. “The extent of its participation is an internal matter within Jamii Bora,” Faida said.

Mr Karina is the chairman of Asterisk Holdings Ltd, an investment vehicle that owns a 20 per cent stake and is the single largest owner of Jamii Bora Bank.

The list of Jamii Bora Bank shareholders through Asterisk Holdings includes the family of the late Njenga Karume, Supreme Court judge Njoki Ndung’u, Sam Kimani (the bank’s CEO), Timothy Kabiru (the bank’s chief commercial officer), and former Foreign Affairs PS Thuita Mwangi.

Faida Investment Bank earned Sh2.7 million in fees as lead transaction adviser and a further Sh2 million in its role as sponsoring broker.

EY - who pocketed Sh4.36 million in professional fees – declined to comment on its handling of Uchumi rights issue, citing client disclosure rules.

“Due to client confidentiality, we are unfortunately unable to comment on the matter,” said Joseph Cheboror, assurance partner at EY.

Hamilton Harrison & Mathews made Sh7.5 million for offering legal services in the Uchumi rights issue. 

The law firm issued a qualified opinion saying it could not verify Uchumi’s ownership of two plots of land in Kasarani, Nairobi, technically referred to as LR No. 5875/2 and LR No 23393.