Board knew of fraud and looming bankruptcy but still issued bond


TNLM Writer

As the Imperial Bank storm rages, fresh questions are being raised in regard to how the bank’s directors allowed a Sh2 billion corporate bond to proceed even as it emerges they had been informed in good time by an internal whistle-blower that the bank was about to collapse. The issuance of the bond, which was eclipsed by its closure, lead to unprecedented losses for investors.

The Nairobi Law Monthly has established that the directors of the bank were made aware of the fraudulent activities taking place at the financial institution at least two weeks before the Central Bank of Kenya (CBK) placed it under receivership in October, 2015, the same day the bond was due to be listed at the Nairobi Securities Exchange(NSE). CBK appointed Kenya Deposit Insurance Corporation (KDIC) as receivers of Imperial Bank Limited owing to, amongst other reasons, financial impropriety and irregularities that exposed depositors, creditors and the banking sector to financial risk.

As set out in the bond’s information memorandum, duly approved by the board of directors and signed on their behalf by the Chairman, Alnashir Popat, and the late MD Janmohamed, the directors gave an undertaking that they would inform CMA of any changes in the bank status. The board of directors further gave undertaking that if at any time during the tenure of issue of the bond there was a significant change affecting the bond that would reasonably affect the investors, they would make it public too.

When the story broke out, the Capital Markets Authority, the agency charged with supervising, licensing and monitoring the stock exchange and the central depository and settlement system, said it would take action against the directors if it established they had kept information on the status of the bank secret.

“We are carrying out investigations, and if we establish that there were persons who were in possession of material information that negated their responsibility to disclose it to investors but failed to do so or notify the CMA for necessary interventionary action, then the Authority will take appropriate regulatory action in line with its mandate, which is to ensure fair and transparent capital markets in the country,” CMA Head of Communications Anthony Mwangi said at the time.

Mwangi said that the Authority approved the issue and listing of the Sh2 billion corporate bond in August last year on the basis of an Information Memorandum prepared by the bank’s directors and its professional advisers.

“In the particular case,” Mwangi said, “given the issuer of the Corporate Bond was a regulated Bank, the Authority also requested – and received – a no-objection from the CBK following its independent review of the offer documentation. In line with Regulation 13A of the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002, issuers are required to provide new information that becomes available between the offer opening and closing date and ensure its timely publication in order to allow investors to make informed decisions.”

In its consulting report, FTI Consulting revealed that the board of directors was informed in September that the Acting Managing Director and Deputy Managing Director had revealed to the board that the late Group MD Abdulmalik Janmohamed “had been responsible for fraudulent disbursements”.

Documents seen by the Nairobi Law Monthly show that this revelation was made before the allocation of the bond and the settlement date which was not until September 28, 2015. The results were announced to CMA on September 30 and the public announcement on October 2. The bond was due to be listed on 13 October 2015, the same date that the bank was placed under statutory management.

NSE Chief Executive Officer Geoffrey Odundo was also categorical that they were not aware of the goings on at Imperial Bank before the issuing of the bond but that when they did, they stopped the listing on NSE of their shares that would have led to commencement of trading.

According to the Corporate Bond Listing timelines, the approvals for the Sh2 billion bond offer were obtained from CMA on August 12, 2015, while the offer for the bond opened on August 24. The offer then closed on September 17 and five days later on September 22, the allocation was made and announced to investors.

An accountant at the collapsed bank who did not wish to named said: “It is true that the magnitude of the fraud was not clear at the time of issuing the bond, but the board had enough information to warrant deferment of the of the issue without creating market panic. If that had been done, it would have averted Sh2 billion worth of losses to the bond holders.”


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