Tag Archives: corporate governance

Uchumi Rights Issue: CMA Acts – Part I

Yesterday the Capital Markets Authority (CMA) meted out punishment, following the Uchumi Supermarkets (USL) rights Issues.

Back in 2014. Uchumi’s rights issue to raise Kshs 895 million ($10 million) by offering shareholders 3 shares for every 8 held at Kshs 9 per share, with the funds to be used for expansion in East Africa and refurbishment of stores.

(Excerpts from) The CMA statement reads:

  • 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.

Also that

  • 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.

And

  • 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.

Other recent actions by the CMA have targeted directors of Imperial Bank and CMC Group.

Reading the Tea Leaves at Chase Bank: Part I

24 hours in the life of a bank:

  • In the April 6, 2016 Standard newspaper, Chase Bank republished their FY 2015 accounts, but with some fine print added.
  • Mid-day: At a press conference, the Central Bank of Kenya (CBK) governor said he would not comment on rumors about any bank.
  • In the afternoon, Chase Bank announced the Chairman and Group Managing Director would step down from the board. This first appeared in a blog, then in an official tweet, from the Bank.
  • In the April 7 newspapers, Chase Bank had an advertisement about the board changes..but
  • On the same morning of April 7, 2016, the bank didn’t open. Customers instead found a notice from the CBK placing Chase Bank in receivership for a year.

So What happened? The bank was in the midst of celebrating their 20 year anniversary – dubbed #Chaseat20 , but all that changed in 24 hours. Throughout the day, there was an active discussion online, on what the changes at the bank meant. And offline, it seems people acted and, went to the bank and withdrew cash in droves.

FY 2015

The bank accounts published last month last week, and and again in the April 6 newspapers, are the same, but there were a few differences:

  1. No auditor was mentioned last week, but in the new notice, there was a mention that Deloitte had qualified the Chase Bank accounts. What does ‘qualified mean? Investopedia notes that this may mean the financial statements are materially misstated due to misstatement in one particular account balance, class of transaction or disclosure that does not have pervasive effect on the financial statements. or that the auditor is unable to obtain audit evidence regarding particular account balance, class of transaction or disclosure that does not have pervasive effect on the financial statements.
  2. While there was no difference in major items likes assets (Kshs 142 billion), deposit, loans, and profits (Kshs -1.1 billion) in both the newspapers, there were a changes in one item; Insider lending which was Kshs 5.2 billion last week, was now Kshs 13 billion in the Standard this week.  It’s doubtful that insider lending went up by Kshs 9 billion in a week, but it’s more likely that the money had been borrowed by directors/shareholders/associate firms before,  and that the auditors just discovered that the borrowers were related to directors of the bank.  (A material matter which may have led to the board changes?)
  3. There was no change in provisions and non performing loans. While the amounts jumped from by a staggering amount, between 2014 and 2015, with non-performing loans going from Kshs 3 billion to Kshs 11 billion and provisions  from Kshs 757 million to Kshs 2.1 billion, this has been the norm with (it seems) a stricter regime at the Central Bank of Kenya, requiring  banks to be stricter on provisions in 2015, compared to 2014.

Social Media

While twitter usage may be considered small, Whatapp is very active. There are messages I saw,  and, I can imagine,  many more that  I didn’t see, on WhatsApp, but it’s clear that social media had an impact on the run at the bank.

Bank Runs:

A bank run can happen, any time, to any bank. Banks only keep only so much money at their branches for everyday use. If they have a panic, and they only have Kshs 10 million or Kshs 100 million at the bank, and 1,000 customers all come to the bank to send instructions, or to withdraw all their cash, then even the strongest bank will have no recourse. Chase Bank was a darling of big investors, and SME’s funds, and you can imagine how the panic withdrawals exhausted the banks reserves.

Note:  I’m a Chase Bank customer.