Harpal Randhawa, founder of Global Emerging Markets (Gem), a US$3,4 billion alternative investment group that manages a diverse set of investment vehicles focused on emerging markets, appeared on the local corporate scene at an opportune time.
A well-accomplished player on the London market, he had showed up when RioZim, one of Zimbabwe’s enduring blue-chips, had fallen on hard times.
RioZim, an offshoot of Rio Tinto plc, was choking on unsustainably expensive US$60 million current debt.
Banks were on the company’s throats seeking either judicial management or outright liquidation.
Like a knight in shining armour, he was paraded as the man who would save RioZim.
Randhawa had met with the then RioZim chief executive Josh Sachikonye a couple of times and explored an investment deal.
On February 14 2012, RioZim executives received a pleasant Valentine’s gift, a term sheet detailing plans to raise US$6,6 million via a private placement between Raintree Investment Consortium and the mining group.
The consortium, representing Raintree Mining Private Ltd and Gem Management Ltd, would get 13 325 000 ordinary shares at the price of US0,50 cents per share.
The deal saw Gem acquire a 24% equity stake in the group.
The next day, another term sheet was agreed on between the parties. This time, it was for a US$45 million convertible debenture by RioZim Ltd to the Raintree Investment Consortium. Conditions for the issuance of debentures were that US$1 million could be drawn down by RioZim in multiples of US$1 million and be placed at the election of the investor.
“RioZim and the Raintree Investment Consortium, following consultation with the board, shall appoint the chief executive of RioZim for a period of 5 years from the date of successful conclusion of the EGM within 90 of the date of last signature of the term sheet and the Raintree Investment Consortium shall have the right for so long as it is a shareholder in RioZim, to nominate four directors to the RioZim Board,” the term sheet, seen by the Zimbabwe Independent, reads.
As a condition precedent, Raintree Investment Consortium would conduct a due diligence into the group to its satisfaction while RioZim was required to get shareholder and board approval for the transaction.
Each convertible debenture drawn or placed would mature in 60 months from the date of issue.
On paper, everything seemed to be going well.
At an Extraordinary General Meeting (EGM) to ratify the various transactions held on March 24, RioZim shareholders voted in favour of the deal.
As per the term sheet, Josh Sachikonye stepped down as chief executive and he was replaced by Ashton Ndlovu.
Richard Taite and Elisha Mushayakarara were also appointed to the board.
They joined James Back, the late corporate lawyer, Thami Mpofu, Simba Makoni, John Nixon, a former CE of the group, Albert Nhau, a respected businessman, on the board chaired by Tichaendepi Masaya, an esteemed corporate leader.
A few months later, Mordecai Mahlangu also joined the board as an Old Mutual appointee. Another director Kurai Matsheza also represented Old Mutual on the same board.
With banks closing in on RioZim and the ink on the term sheet barely dry, Randhawa found himself intervening in potentially litigious issues on behalf of the companywith banks threatening to call on their loans and bankrupt RioZim.
“This (the management fee) has to be understood in context,” a person who sat on the board who spoke on condition of anonymity said. “Management was not doing its job basically with regards to talking to banks. Harpal was doing that for them. They liked it because he basically told banks off over their money and they had little security as well. He told them to back off or he would liquidate RioZim. The prospect of losing big kept them at bay. Under normal circumstances, management should have been seized with the negotiations. But Ashton and company were happy Harpal was doing that for them.”
Having played the mergers and acquisitions game on both London and New York markets, negotiating reasonable terms with banks was a walk in the park. Immidiately , Randhawa saw a potential income line.
Although he stayed off the board, his fingerprints were all over.
Soon after assuming the role, Ndlovu, is said to have proposed a management fee for Randhawa in a board meeting, but it was shot down by independent directors on the board such as Taite, Nhau, Makoni, Mpofu and James Back.
Efforts to get a comment from Ndlovu yesterday proved fruitless as he insisted twice that he was driving. An sms sent to his mobile number had not been responded to at the time of going to press.
Makoni, a former board member, confirmed there had been discomfort over the management fee on the board.
“As I recall, the management contract was brought to the board by the remuneration committee.Yes, there was discomfort among some directors about aspects of the contract relating to imprecise functions and deliverables, especially vis-a-vis the executive team; reporting and accountability lines, the contract’s duration and the amount of fees payable,” Makoni told the Independent this week. “It is inappropriate to assign specific views or positions to individual directors.”
Owing to strong resistance from independent directors the proposal was shelved for a brief period. Ndlovu had proposed a 1,5% of turnover for Randhawa.
A person who also served on the board, who spoke on condition of anonymity, corroborated Makoni’s account.
“The directors were critical of that proposal. Many felt that it amounted to preferential treatment of the same class of shareholders. Others said this amounted to profit taking. They said if shareholders wanted profits, then they should wait for dividends,” a person who sat on the board said. “We had a good team of independent directors then.”
But the management fee issue was refusing to go away.
“Randhawa was careful to keep away from directors. Everything he said was through his proxies — Elisha, Taite and Ndlovu,” a person who sat on the board said. “Ndlovu said this must be a small token of appreciation for the good work Randhawa was doing behind the scenes with banks.”
Randhawa has not taken a board position at RioZim or Murowa.
Eventually, the board reluctantly signed the management contract on 1 July 2012.
Two years later, the board was faced with a dilemma; They could not assess the RioZim management given the conflicting roles between executives and Gem RioZim.
According to a person on the board who spoke to the Independent on condition of anonymity this week, the board took a decision to review the management contract.
“They was no simple way of assessing how management was doing when you have Gem. Then there was talk to get rid of the arrangement,” a person who served on the RioZim board said.
Around the same time, the management fee issue was taking centre stage, another issue had also arisen on the board.
Minutes of a meeting of the board committee on investment held at 1 Kenilworth Road, Highlands, Harare, the group’s head office, onThursday 11 September 2014 at 10:30 hours to discuss a proposed capital raising exercise that would see US$10 million being invested into the restart of Cam & Motor gold project show there was friction over the US$45 million debentures promised by Gem.
“Before going into the agenda the preliminary point was raised that in considering the option of fund raising in terms of the proposed capital raise to be underwritten by Gem Riozim Investments Limited the Committee was obliged to take note of the following documents:signed Term Sheet dated 15th February 2012 regarding the raising of US$45 000 000 through the issue of convertible debentures by RioZim Limited to the Raintree Investment Consortium,” the minutes seen by the Independent say.
“It was noted that in 2012 the majority shareholder, Gem RioZim Investments Ltd then represented by Raintree Investment Consortium, had agreed to financially assist RioZim Limited through the issue of convertible debentures.
“However, at the time Gem was concerned about the indigenous status of RioZim Ltd. In the absence of clarity on the status of the company Gem was reluctant to invest in the company in the form of equity through the issue of convertible debentures when it could purchase shares in the company on the stock market. Accordingly, the Term Sheet was not implemented.”
According to the minutes, it was recommended that management and the board revisit the issue of the debentures given that the company was underfunded.
Mahlangu, a respected corporate lawyer, is said to have called on the US$45 million debentures as provided for the calling of US$1 million debentures.
People close to the development said Randhawa at first cited indigenisation fears as the reason he could not provide the financing he had promised. Indigenisation laws compel foreigners to dispose of controlling equity stakes to indigenous Zimbabweans.
“He said between Gem and Old Mutual, they would break indigenisation rules and could not invest beyond the 24% he held,” a person who was on the board said on condition of anonymity.
Minutes of the board committee on investment confirm that indigenisation was indeed a key reason Gem used to avoid fulfilling their end of the bargain as per the term sheet.
“It was noted that whilst the issue of RioZim Ltd’s indigenisation status was yet to be finalised, it was now proposed that a letter be submitted to the Minister of Indigenisation seeking a special dispensation for Gem in the event that the indigenisation threshold was exceeded. The seeking of such an exemption had never been put before the committee or the board and was in clear conflict and lacked consistency with the explanation proffered for failure to avail the convertible debentures funds as per the 15th February 2012, Term Sheet,” minutes of the board committee meeting ead.
“Gem’s failure to invest monies in 2012 was premised on concerns about the indigenous status of the company, yet it was now willing to invest monies in the company, by way of underwriting a rights issue.The chairman Mustafa (Sachak) pointed out that the letter was clearly envisaging a post-transaction scenario in the event of minority shareholders not following their rights. He queried as to why the issue was being raised at this point when the capital raise was close to finalisation.It was pointed out that an explanation was being sought as to why Gem was now willing to exceed the indigenisation threshold when it was not prepared to do so in 2012 under the convertible debenture arrangement. A waiver could have been sought then as was being sought now.”
Sachak was appointed by Gem RioZim to the board.
Whilst Randhawa employed delaying tactics with regards to the US$45 million debenture, the RioZim share price was suffering.
At dollarisation, the share price had reached a peak of US$4,20 in June 2009 with a market cap of US$125 million.
When the parties signed a term sheet, the share price was trading at US50 cents. On Wednesday RioZim share price was US17cents.
Another person said Mahlangu and Nhaupressed Randhawa to meet his end of the bargain.
“Randhawa attacked Mahlangu over the debentures affair and said he was presiding over a failing medical aid and that he had failed in life. While Gem had been given extravagant preferential rights such as to appoint four directors, including the CE and chairman and two other directors, he had not provided a cent to the company,” another person who sat on the board of RioZim told the Independent.
“Nhau also called him demanding closure to the debentures issue as per the term sheet but he was berated as well. Harpal can be very abusive. He has not paid a cent for the debentures.”
Before that Randhawa was very charming, another person on the board recalls.
“I remember he took us to this glitzy party when he had just come in. It was a royal affair. He can be very charming,” the person recalls. “The whole board was taken by that.”
After the clash with Mahlangu, the gloves were off.
“Anyone who clashed with him was attacked mercilessly and told that they had achieved nothing. The then chairman (now late) Mushayakarara was being hand held by Randhawa. Behind his back, he claimed he had given his son a job,” the person said.
Irked by what he viewed as incessant interference from independent directors, Randhawa set out to have control of the board. He could have four directors on the board as provided for by the term sheet.
Minutes of an adhoc board meeting to amend the articles of association on January 22 2014, further illustrates the extent Randhawa and Gem wanted to control the board.
The board resolved that the amendment of articles of association would be done at an AGM later in the year.
“Discussion ensued on the setting of a maximum number of directors. It was agreed that this was not necessary. The board wished to retain flexibility as to the appropriate number of directors and would be guided by what was cost-effective and manageable. Also in the selection of appointees, the board would need to consider the individual’s skills so that he/she made a meaningful contribution. The need to be gender sensitive was recognised, “ the minutes of the board read.
“Whilst acknowledging that the current quorum for board meetings was too low, there was diversity of opinion on the quorum required for board meetings. Mr (Saleem) Beebeejaun expressed the view that any quorum should include representation by a specified number of Gem nominees. The chairman (Mushayakarara) rejected the proposal on the basis that as chairman it was his duty to protect all shareholders and in particular key shareholders.”
According to the minutes, it was agreed to set the quorum for board meetings at attendance by 50% of board members.
“Mr Beebeejaun insisted that the said composition should provide for representation by Gem as majority shareholder.
He maintained that it was not unusual to safeguard a majority shareholder’s interests in this way,” the minutes added.
“The majority of the board disagreed. It was argued that in an organisation with a history of poor corporate governance no one shareholder should be viewed as having a preference over another. In a recent press report on 27 November 2013 RioZim was ranked amongst the worst companies for corporate governance. The criteria used for this assessment was being investigated. In the interim it was necessary to build shareholder confidence. The contribution of Gem was acknowledged and appreciated. It was noted that the board worked through its committees and in this regard it was felt that Gem was adequately represented on these committees.”
Randhawa is said to have started raising “expenses” for the “work” he was doing. “He raised expenses to the company,” a person on the board said.
But signs that Randhawa’s conduct left a lot to be desired were evident from day one. He had set up an office right next to the chief executive’s within a few days of acquiring equity in RioZim.
This was not in line with international best practice.
Both independent directors and executive members of board started leaving.
First to go in 2012 was an executive director, Markham, a respected metallurgist. He is said to have gone into retirement.
Others were frustrated.
This would be evident at the August 2012 AGM. Although Masaya and Back were eligible for re-election, they opted not to stand for re-election.
The term sheet empowered Gem to appoint the chairman and chief executive. the late Back, a respected corporate lawyer who had come on the board on secondment from RioTinto plc, is said to have felt let down by management.
“He had been assured by management that the company’s problems were not as severe,” a person close to Back said.
“And he was discovering that the situation management had understated the severity of the situation.”
The controversial management contract was signed a month before the AGM.
Mahlangu, an Old Mutual appointee and, Nhau, Nixon, Makoni and Matsheza stayed on. Among independent directors, Randhawa’s conduct, constant berating, and failure to meet his end of the bargain in terms of raising capital, was causing frustration.
Nhau was also not having the time of his life on the board. Clashes with Randhawa had become the order of the day, people close to him said.
The following year, Makoni, Mpofu and Taite resigned from the board with effect from December 4.
Mustafa Sachak and Lovemore Chihota were appointed to the board.
The 2013 resignation would not be the last ones.
On 30 November 2014 John Nixon retired from the board. He had been on the board 25 years.
Mushayakarara also resigned and subsequently passed on in February 2015.
Ndlovu, then chief executive and non-executive directors, Nhau and Mahlangu tendered their resignations from the board.
Perhaps to underscore the frustration, while Ndlovu, Nhau and Mahlangu were eligible for re-election at the 2014 AGM, they opted not to stand.
In November 2014, Gem appointed Noah Matimba as chief execitive and Caleb Dengu and Iqba Meer Sharmaas non-executive directors. At this stage he had five directors — Chihota, Beebeejaun, Dengu, Sachak, Sharma and Matimba on the board.
Only Matsheza is not a Gem nominee. The current board remains in place.
The development has raised questions over the independence of the board.
Also conflict of interest concerns have been raised on the part of some of the RioZim directors. Randhawa’s plot to crush dissent on the board seemed to have worked.
Reference is made to explosive minutes of a board meeting held on August 21 2014 (Min No. 88/2014) over related party transactions.
According to the minutes of the a meeting of the board committee held at 1 Kenilworth on Thursday 11 September 2014 at 10:30 hours, sharp differences emerged over related party transactions.
“At the board meeting held on 21st August 2014 the issue of related party transactions was considered in some depth and the need for transparency emphasised. The committee was now being requested to endorse a proposal to violate ZSE Rules and recommend this to the board. In terms of ZSE Listing Requirements Rule 5.42: ‘any underwriting commission paid to a shareholder should not be above the current market rate payable to independent underwriters’,” the minutes read.
This was after Gem attempted to charge 5% (US$500 000) as the underwriting fee of the transaction.
Gem eventually charged an underwriting fee of 3%.
“Enquiries have revealed that the going rate for an arm’s length transaction is 2% yet the company was required to pay Gem as underwriter a commission of 5% of the total subscription value of the rights offer shares on the basis that there was no one willing to underwrite at 2%. It was submitted that a proposal should then be put out to the market as to whether there was anyone willing to underwrite up to 5%,” the minutes read.
“The chairman was of the view that essentially this was a commercial issue which must be negotiated between the parties. He proposed returning to the agenda but this proposal was rejected on the basis that all other matters were routine and standard: the salient issues raised needed to be addressed first.”
A former member of the board said Sharin Omarshah, the company’s general counsel and legal secretary at the time queried aspects of the US$10 million rights issue.
Battle lines were drawn again.
Mahlangu is said to have clashed with Randhawa over his plans to get RioZim to include Gem’s US$2,877 million it was owed in management fees as part of the US$10 million to be raised from shareholders for the restart of Cam and Motor. Nhau is also said to have spoken to Randhawa about the need to come to the party with the US$45 million as these would extinguish fires as was agreed.
Nhau, Mahlangu and Mushayakarara felt that this amounted preferential treatment of shareholders.
“Basically, the issue was that Gem was being treated like a preferential creditor. It just wasn’t right,” a person close to the deliberations said.
Mahlangu resigned before the scheme to convert debt-to-equity was implemented without shareholders nod and knowledge.
l To be continued next week.