RioZim share scandal: Corporate incest

This article is a continuation from last week where the Zimbabwe Independent business editor Chris Muronzi probes the acquisition of RioZim Ltd by Global Emerging Markets (Gem) founder Harpal Randhawa (pictured) at no cost while diluting other shareholders’ stake in the mining giant. Randhawa’s plot to crush dissent on the board seemed to have worked, writes Muronzi

According to minutes of a meeting of the board committee on investment held at 1 Kenilworth, Highlands, Harare on September 11 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 (Zimbabwe Stock Exchange) 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 for the transaction.

Gem eventually charged an underwriting fee of 3% of US$10 million.

“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 drawn

Mordecai Mahlangu, an Old Mutual appointee to the board, is said to have clashed with Randhawa over his plans to get RioZim to include Gem’s US$2,877 million owed in management fees as part of the US$10 million to be raised from shareholders for the restart of Cam & Motor Mine. Albert 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 and Mahlangu and the then chairman (now late) Elisha Mushayakarara felt that this amounted to 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 with shareholders’ nod.

As anticipated, the rights issue circular camouflaged the US$2,887 million owed to Gem RioZim as money for “refinancing of funds already expended and general purposes” in the rights issue breakdown.

This amounted to misleading the market on the part of the board.

Unbeknown to other shareholders, US$3 million of theUS$10 million would be used to pay Gem.

A US$700 000 loan was also included. The Lovemore Chihota-led board withheld the fact that US$2,887 million would be paid to Gem.

Essentially, shareholders had been led down the garden path. But Mahlangu would not have any of it, the story goes.

He is said to have objected to the arrangement on the grounds the rights issue must be for a specific capital project and could not pay his management fees of another shareholder.

“They clashed on that big time,” a person on the board said.

Mahlangu, according to sources, fought bravely for the rights of other shareholders with regards to Gem’s plans to collect US$3 million in management fees.

“He was let down by his principal, Old Mutual, whose interests on the board he was representing,” a person close to the developments said.

According to the source, Old Mutual viewed RioZim as a cast away and immaterial asset in its mining portfolio. At a market cap of US$125 million in June 2009, Old Mutual’s investment was worth US$28 million.

Now it is worth US$4,4 million at this week’s price of 17 US cents.

“In the context of Old Mutual’s equities portfolio, the RioZim investment was very small. And they were not worried by the developments,” a source said. “So they just let Randhawa have his way.”

This allowed Gem to increase its shareholding in RioZim to 44%.

After Randhawa acquired 50% of Sengwa Colliery and 78% of Murowa Diamonds, he now controls RioZim’s world-class assets.

Essentially, Gem has stripped RioZim off its valuable assets.

Questions sent to Old Mutual corporate communications consultant Tendai Mutseyekwa three weeks ago had not been responded to at the time of going to print. Old Mutual CE Jonas Mushosho had promised to respond to enquiries through Mutseyekwa.

“All media enquiries have to be dealt with by corporate communications. Talk to them,” Mushosho said. However, another Old Mutual appointee, Kurai Matsheza remains on the board.

When reached for comment on the management fees and his clashes with Randhawa, Mahlangu refused to comment citing confidentiality.

“I am bound by confidentiality and cannot respond to any of your queries,” Mahlangu said last week.

Almost eight directors have left the group since 2012 when Gem invested in RioZim.

With Mahlangu and Nhau gone, who were seen as the conscience of the board, dissent seemed to have left with them.

In the hunt to replace company secretary Regis Taruvinga, who had stepped down, another voice of dissent would be born.

Taruvinga’s replacement, Omarshah, would become the centre of Randhawa’s attacks. Her crime — legal advice over the Murowa diamond acquisition.

In her minutes of the September 11 board committee meeting, she was against some violations of law and “violate ZSE rules and recommend this to the board”.

Omarshah is said to have alerted Randhawa of the existence of a 2004 shareholders agreement and the steps to take given that RioZim was a listed company.

She had recommended an extraordinary general meeting (EGM) where Gem would not be allowed to vote on the transaction and issuance of cautionary statements, among other requirements.

In line with ZSE guidelines governing related party transactions, RioZim should have issued a cautionary statement and given notice of an EGM and convene the meeting to okay the sell to a related party.

RioZim shareholders had pre-emptive rights for the RioTinto Plc 78% equity stake and rights to tag along to their 22% equity stake in Murowa at the same terms as Rio Tinto as provided for by the shareholder’s agreement of 2004 and the first right of refusal on RioTinto’s 78% stake.

Some of the things she proposed was to follow listing rules dealing with related party transactions and adherring to disclosure rules.

Under the listing rules, Gem was an interested party in the acquisition of Murowa, an associate company and various disclosures needed to made in line with international best practice and ZSE rules.

“What she was proposing was in line with international best practice. Basically, she asked Randhawa’s to declare to the public that he was a related party to the transaction and that all requirements of the ZSE had to be met. But Randhawa didn’t like that.”

Gem and its beneficial shareholder, Randhawa, who are classified as material shareholders under the ZSE guidelines, should have declared their interest.

Omarshah is said to have instructed Randhawa to seek another legal opinion.

“Another legal opinion from a respected law firm was sought and it concurred with her recommendations. At that stage, she was targeted and she stepped down,” a source close to the developments said.

The Independent tracked Omarshah to her current employer, but she would not be drawn to comment on the issue of the legal opinion and her relationship with her former boss.

She refused to comment citing confidentiality.

“I have given my side of the story to National Economic Conduct Inspectorate and I can’t comment on that.”

Gem has since failed to honour the US$45 million term sheet on convertible debentures which would have been non-dilutive to other shareholders. Other RioZim shareholders have been diluted at 15 US cents, a quarter of the price when he took over and without putting in a single cent.

Corporate incest

When the rights issue was mooted, RioZim Foundation, the third largest shareholder in RioZim with an 11,25% stake in the business, okayed the rights offer. This was notwithstanding the fact that RioZim Foundation did not have funds to follow its own rights when called upon in a rights issue.

As a result, RioZim Foundation now holds only 4,92% of the group’s issued share capital or six million shares from 11%. The shares were naturally acquired by Gem as the underwriter.

Chihota, an appointee of Randhawa, is also RioZim Foundation chairman while Noah Matimba, the current CE of RioZim, who was again appointed by the businessman, is the current deputy chairman, according to the company’s website.

Questions of the independence of the two directors have been raised and if this did not amount to corporate incest.

All unsubscribed for shares were snapped up by Gem, who were the underwriters of the transaction.

Only 67% followed their rights, leaving Gem to pick up the balance.

Gem RioZim increased its shareholding from a 25% stake to 45%. Randhawa did not pay a cent for 10% of his stake.

Others such as CM Brand, V Hungwe, E Makonese and HJ Malaba, L Mhlanga and P Mutekedza are trustees.

In light of this fact, Chihota and Matimba could have reneged on their fiduciary duties as directors of RioZim Foundation when they allowed the rights issue to go ahead when they knew the full impact of the dilution.

“This was a breach of their fiduciary duties. They didn’t act in the best interest of the foundation. How does the foundation back a rights issue it has no money to finance? It’s just curious. What is worrying is if it can be proven that they could have acted to ensure that Gem got more shares in the company in unsubscribed for shares, then this becomes a worse scandal,” a source said.

The corporate incest does not end there. Chihota and Matimba are also directors of Murowa Diamonds.

More worringly, Chihota and Matimba have a prior working relationship. Chihota was until recently chairman Aurex Holdings (Pvt) Ltd, a jewellery manufacturer while Matimba was hired as the MD of Aurex. Matimba then joined RioZim in 2014 as CE. His appointment coincided with the elevation of Chihota to chairman of RioZim. Prior to his appointment in November 2014, Chihota was a non-executive director of RioZim.

All bark and no bite

While the ZSE has clear listing rules on related party transactions, it has not been strict in their application.
This, market players say, could set a precedence for would-be offenders as they view the exchange as a toothless bulldog.

The Securities Exchange Commission of Zimbabwe (SECZ), the regulator of the ZSE, also does not have the legal spine to act and impose harsh penalties to offenders. Although SECZ has been on the forefront of promoting shareholder rights, even big institutional investors such as Old Mutual and the National Social Security Authority (Nssa) have not exercised their rights as they should have.

Old Mutual held 22,8% prior to the rights issue. While the financial conglomerate followed its rights in the capital raise, it was indifferent on the implications the rights issue on ther shareholders.

Nssa has of late been pressing for its rights in companies it is invested in. Last year, Nssa appealed to SECZ to intervene after the fund’s former management decided to follow part of its rights in ZimRe Holdings Ltd (ZHL).

Sadly, SECZ did not take action when it became apparent that shareholders were not given adequate information on ZHL deal in line with listing requirements, which say companies must make full disclosures.

Robber Barons

Market players say the ZSE is slowly descending into an ungoverned market open to manipulation akin to the days of Robber Barons.

Robber Baron was a term applied to unscrupulous American businessman in the 19th Century who engaged in unethical and monopolistic practices, wielded widespread political influence and amassed enormous wealth
The US stock market was unregulated at the time and prone to manipulating by unscrupulous traders. Some notable robber barons such as Jay Gould were ruthless at using techniques such as cornering a stock, drive prices up and ruining speculators who were short on the stock, betting the price would go down.
ZSE-related party rules are designed to prevent transactions such as the RioZim and Murowa one where a controlling shareholder using his insider position obtains access to information which is lucrative and keep for themselves.
Gem found itself in a position to negotiate with RioTinto over the disposal of Murowa and Sengwa because of pre-emptive rights which belonged to all shareholders of RioZim owing to the 2004 shareholders’ agreement.

Where is the ZSE?

Essentially, the minority shareholders of RioZim have lost the chance to make good on their capital or an opportunity to benefit from what would have been a significant capital gain had the 78% of Murowa been rightly bought by RioZim.

Experts say the ZSE itself lost what could have become a much bigger listing on the exchange. A diversified RioZim Group with Murowa, the gold interests and 100% control of Sengwa would have rivalled Delta Beverages as the largest listing on the local bourse.

RioZim management has issued various prospective statements lauding Murowa’s outlook in 2016 and beyond. The company has also gone to town and plans to develop a power station with Eskom or the Dangote Group.

Minorities say all this could have benefitted all RioZim shareholders. Only Gem has profited from the sale of Murowa and 50% of Sengwa.

“What they forget to add to their excitement is how it would have been an infinitely better deal if RioZim actually owned 100% Murowa and 100% of Sengwa,” a concerned shareholder said this wek. “Then every shareholder would have benefitted from the risk they took in investing their savings in RioZim on the ZSE. As things currently stand, someone will make a lot money selling Murowa’s gem diamonds in Europe and Sengwa’s coal fuel to the power station — that person will not be RioZim.”

A year after the sale of Murowa, the ZSE has not fully investigated the transaction.

“The ZSE rules with regards to dealing with related parties as well as the issuing of cautionary statements when dealing with material information were not complied with — what is there to investigate?” a shareholder said.