Investors Cheated into buying Kenya's Safaricom shares in IPO

Additional Reporting from The Financial Standard edited by Branded.

It is emerging that many local and international investors were cheated into buying shares in the recently concluded East Africa's largest ever Initial Public offering (Safaricom IPO). The company recently issued a revised Safaricom prospectus raising eyebrows as it borders on reneging on a sworn affidavit that's binding. This comes in the wake of yet another negative issue that the Kenyan regulators failed to clarify regarding a certain briefcase and shadowy firm, Mobitelea that owns 5% of the company Safaricom. The new developments paints a rather negative image that seems to suggest "Deep rooted corruption and underhand dealings only concerned with offloading some 10 Billion shares into the market to raise Ksh 50 billion" without regard to the public. It appears that investments into the company by the public may not be safe after all given the attitude displayed by the regulators. Investors are being taken on a rough ride.

As the curtain falls on Safaricom initial public offering (IPO), there has emerged some glaring regulatory weakness that put to test the credibility of the Capital Markets Authority (CMA).

Market information filtering through indicates that the sponsors of Kenya’s jewel, the Government, had quietly sneaked into the market another prospectus without caring to inform thousands of investors that it has withdrawn the earlier prospectus.

And to make matters worse, the new document that details all about the giant mobile operator, contains new information, distinctly different from the one that was approved by regulatory authorities for its Initial Public Offer (IPO). Though the CMA officials disclosed to the Financial Standard that the changes were minor and a formality that was meant to meet international accounting standards practices, sceptics, however, contend that the action was in contravention of the law and puts further dents into claims the process was above board.

It has also emerged that the CMA had approved the initial prospectus dated March 14, which was presented to investors despite the fact that the financial statements contained therein were neither approved by Safaricom’s directors nor the independent auditors, PriceWaterhouseCoopers (PWC).

Also buried within the deck of the revised document’s financial reports may be a kernel of truth about the understandable rush by both the players in the industry and the Government to bring the IPO to the market regardless of whether their action contravened the same laws strive to uphold.

Interestingly, there seems to be a conspiracy of silence within the capital markets, with players, including the Nairobi Stock Exchange (NSE), either keeping quiet or ignoring the issue altogether.

The anomalies have, however, been corrected in the revised prospectus, dated March 28, 2008. The revised document contains the PWC seal of approval and the signatures of Mr Nicholas Nganga and Ms Nancy Macharia, directors who approved the financial statements on behalf of Safaricom.

"The interim financial statements on pages 163 to 185 were approved for issue by the board of directors on March 4, 2008 and signed on its behalf by…" reads a statement on page 165 of the revised prospectus.

The second prospectus contains what experts refer to as "material information changes" or alterations to the original information given, which they insist must get CMA approval before being released to the public.

The wording used in the initial prospectus also varies with those used to introduce financial statements contained in the revised document. While the initial document refers to "financial statements of Safaricom Ltd, the revised version calls it "the condensed interim financial statements."

The rush to bring the IPO to the market has raised several claims, including unproven claims that the Government could have been rushing to finish the IPO within a set deadline for reasons not known to the public.

The anomaly and its potential to poke further holes into the transparency of the Safaricom offer are great. Observers say it might also portray the issue in a decidedly different light.

But the CMA maintains that approval of the initial prospectus was clean and that no laws were broken regardless of the fact that a revised prospectus was issued. It’s also not clear whether it went through the normal vetting process as required by accounting rules.

"All the information was verified by the reporting accountants — Deloitte and Touche —, and forwarded to PWC, which is the independent auditor," says a highly placed source from the CMA who did not want to be named.

Under these circumstances, the external auditor’s brief includes examining whether the financial statements are in conformity to International Financial Reporting Standards (IFRS).

According to this source, the reporting accountants (Deloitte and Touche) verified that PWC complied with the IFRS, then presented a draft financial report, which was used in the initial prospectus.

"If you look at both documents, you’ll realise that the figures have not been altered. The information is about the same and we (the CMA) issued a public notice notifying the public of the addendum (additional information) through the press," he says.

The officer adds that the CMA directed the issuer (Safaricom) to issue notices of addendum equal in number to the number of prospectuses in circulation. FS could not verify whether there was any compliance to the requirement because both the investors and experts contacted said they were not aware.

A highly placed source within the brokerage fraternity, however, says that the initial document did not comply with International Financial Reporting Standards because it lacked what he calls footnotes or notes to the accounts.

"This too has been corrected in the revised document. I believe a lot of material information was overlooked in the initial prospectus and the second one was produced to correct the anomaly," says the broker.

"Availing a different prospectus other than the original one is like reneging on a sworn affidavit and adding extra information to an agreement that is already binding. It is like reversing some understandings the company had with potential investors," he says.

Any company offering shares to the public in Kenya is required by law to issue a prospectus. The prospectus contains information that investors need to know in order to make informed investment decision about the issuer (in this case Safaricom) and its shares. It also gives an indication of the company’s area of business, the key investment risks, how the funds raised would be used, its operating track record and business prospects.

Risks that must be disclosed often include lack of business operating history, past problems with the company or members of its management and adverse economic conditions in the industry in which the company is operating. Others details include competitive disadvantages, the regulatory structure and dangers in the event of non-compliance, lack of assurance that there will be a market and dependence upon key personnel.

The company must also describe in the prospectus its business, properties and competition. It also needs to include certified financial statements audited by an independent certified public accountant.

Despite the differences in material information in the financial statements in the two prospectuses, a number of details have remained intact.

For example, information on principal players, including lead transaction advisor Dyer and Blair and the fact that it bid just 0.05 cents for the job, is still intact. The dreaded word Mobitelea still appears with the rider that it owns five per cent of Safaricom through (12.5 per cent shares in Vodafone (K) Limited’s 40 per cent stake. It is mentioned as a risk factor in the context of a Public Accounts Committees report.

Although the CMA headed by Ms Stella Kilonzo as the acting CEO has insisted that the information is in the public domain, most of the investors we talked to, including industry insiders seemed unaware of the revised prospectus.

The CMA has so far played its role of policing the country’s capital markets with, to a great extent, some level of sluggishness. Two stockbrokers – Francis Thuo and Partners and Nyaga Stockbrokers collapsed under its watch, amid allegations of illegal trading in investors’ shares.

The reluctance by the country’s premier regulatory authority to strictly enforce the regulations in the capital markets has been cited severally with different players calling a review of the laws governing the capital markets.

For example, the CMA, on behalf of the investing public, ought to have questioned a number of things, key among them why PWC did not authenticate the initial prospectus and why the mobile company’s directors did not sign the document.

Our source pointed to a number of other issues he thought should have been dealt with before the proposed listing. He says that Safaricom could have presented an incomplete prospectus in order to comply with CMA, while the later did not do its job well. In order to comply with the requirements of the CMA, the Government, who are the issue sponsors, submitted the initial prospectus. "It’s an abdication of responsibility for the CMA to turn a blind eye on what is clearly a blatant breach of the rules. It cannot abdicate its supervisory role to any arm of the Government," he says.

He says all these demonstrate the extent of CMA’s slackness and the need for "regulatory authorities to take their responsibilities with "utmost seriousness."

But despite the emerging fears, one positive development from this unlawful practice is the fact that if addressed, the anomalies will act as deterrence for such practices in any future IPOs.

As Safaricom prepares to release the final list of how the allocations were done, the company will also seek to put behind it the last few months of persistent questions about the great rush to take the IPO to the market and hopefully, answer the questions.