Is Kenya Seed Company Being Sold Illegally?

A JOINT REPORT
THE EASTAFRICAN

THE STATE-Controlled Kenya Seed Company has been secretly selling shares for the past five months to "selected" investors through a heavily discounted private placement. 

The issue of 4 million new shares in the company to "invited applicants only" was scheduled to close this Friday. The share price is Ksh40 (50 US cents) and the issue, if concluded, will raise Ksh160 million ($2 million).

But following queries by The EastAfrican last week, the investment secretary at the Treasury, Mrs Esther Koimett, said on Friday that the government had advised Kenya Seed Company to "restructure the private offer into a rights issue" involving only existing shareholders.

"The issues you raise are legitimate. We believe this proposal has been modified into a rights issue," she said.

A prospectus signed by the company's directors stated that "applications from ordinary members of the public will not be accepted." It said only the company's existing shareholders, directors, employees, seed suppliers, sub-agents and stockists who had been "specifically invited to subscribe" were eligible.

The directors argued that there was no need to make the offer public because it involved the issuing of shares to named individuals and companies who had an existing business connection with the company. 

Mrs Koimett told The EastAfrican: "If they fail to raise adequate capital through the rights issue, they should issue shares to the public through a public offer, giving all Kenyans an opportunity to buy shares."

Under the government's divestiture programme, private placement of shares in parastatals is illegal. However, government shares can be offloaded to existing shareholders through pre-emptive rights.

KSC's private placement does not fall in this category nor that of a rights issue since new investors were to be brought on board. 

Kenya Seed managing director Mr Nathaniel Tum was not available to comment on why the company was flouting government policy on divestiture, the criteria used to select potential investors and whether the treasury's advice had been heeded.

"The management is in the process of preparing an article that will answer most of the questions you have posed," the company's human resources and public relations manager, Mr Allan Rutto, said. 

The government order on the rights issue puts at stake money from investors who had already accepted the offer including a top political family, which had reportedly snapped up 1.25 million of the new shares. The company has the option of refunding the money or treating it as debt in consultation with the applicants.

Although the prospectus says existing shareholders were to be allotted a fifth of the new shares, the calculation was that the government would not participate in the share issue.

The government owns 53 per cent of the shares through the heavily plundered Agricultural Development Corporation (ADC). The Kenya Farmers Association (KFA), which holds a 15 per cent stake in Kenya Seed Company, is also in a financial straitjacket and is not expected to take up any new shares. 

If all the pieces fall into place, the government's interest will drop to 38.5 per cent while that of KFA will dwindle to 10.8 per cent. Individuals, on the other hand, will attain a 50.6 per cent share holding in the company, giving them total control if they act in concert. With majority ownership, the cabal can then push to acquire the remaining government shares through the exercise of pre-emptive rights.

Although Kenya Seed has experienced some turbulence since the liberalisation of the seed market, the shares were still very attractively priced, being sold at Ksh40 each (US cents 50) compared with a face value of Ksh52 (US cents 65), a 23 per cent discount.

Also attractive to investors are Kenya Seed's industrial, agricultural and commercial properties in Nairobi, Rift Valley and Western Kenya, which were valued at Ksh1.8 billion ($23 million) by December 2000. However, the company had a debt of Ksh600 million ($7.5 million).

The debt consists of overdraft facilities with the Kenya Commercial Bank ($2.1 million), Barclays Bank of Kenya ($3 million) and medium term loans ($2.4 million)

The company's financials show that turnover doubled from Ksh1.2 billion ($15 million) to Ksh2.4 billion ($30 million) over the past five years. Profit before tax grew from Ksh42 million ($525,000) to Ksh106 million ($1.3 million) over the same period, while net assets fell from Ksh723 million ($9 million) to Ksh669 million ($8.4 million) over the past three years.

Proceeds from the sale were to go towards defraying part of the company's Ksh288 million ($3.6 million) expansion programme.

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