Investing, according to the late American economist Paul Samuelson, should be more like watching paint dry or watching grass grow.
Mr Samuelson advised those seeking excitement to take $800 (Sh95,000) and go to Las Vegas - a major resort city, popular for gambling, shopping, fine dining and nightlife.
So, when Cyrille Nkontchou and Ralph Gilchrist, the founders and partners of Enko Africa Private Equity Fund (EAPEF) wanted to invest, they did not go to Las Vegas. They came to Kenya.
Software Technologies Ltd (STL), a Kenyan proprietary software solutions provider and IT training company founded by Jyoti Mukherjee, now deceased, caught their attention.
Mr Nkontchou and Mr Gilchrist had over 38 years of combined experience in African private equity and capital markets at the time of leading Enko to buy a 20.14 per cent stake in STL at $5 million (Sh594 million) in October 2018.
The duo had led and advised on over $500 million (Sh59 billion) of investments in Africa.
But even the experienced sometimes get it wrong and STL is to them a mistake that must be rectified or Sh594 million will be lost. This is after stumbling on what they believe looks, sounds and feels like fraud.
Enko has invited sleuths from the Directorate of Criminal Investigations (DCI) to unravel what has become a mystery of a company whose revenues and net profit shrank by 75 per cent during a second scrutiny of its books.
Started in 1991 and ran for long as a successful family business, STL now adds to the many of Kenya’s family-owned businesses that have not seen the best of times after selling out a stake.
Tineyi Kuipa, the senior investment officer at Enko Capital Management that runs EAPEF, regrets that they put more effort in conducting due diligence on the STL business than on the company's owners.
“The most crucial due diligence you can ever do when you want to enter into business as an investor is not necessarily on the company but on the character and history of the people you want to do business with,” said Mr Kuipa in an exclusive interview with Financial Standard.
“That is what we didn’t do. Our problem is that we didn’t do due diligence on them as well as we should have. We were so focused on the company itself.”
Financial Standard has combed through a series of documents, including internal email exchanges, from banks and shareholders and due diligence reports to capture Enko’s push to recover Sh594 million from STL.
With the founder and CEO Mukherjee having died in January 2020 and finance director Stephen Omwenga released from work, Enko now has the Mukherjee family to face.
Sanjivan Mukherjee (Jyoti’s husband) and their children Chaitanya Mukherjee and Nivedita Mukherjee are all shareholders and directors in STL. Chaitanya, known in the boardroom as Chets, is now the acting CEO.
For Enko, it was a short but painful adventure - that of investing Sh594 million in a company in October 2018 and learning within months that the books of accounts were not as they seemed.
This was uncovered after the STL board, after push from Enko, hired Mazars Kenya as its new auditors to replace Ernst & Young.
A series of meetings between Enko and STL has only served to fuel tensions between the two parties that were supposed to become business partners and take the previous family business across the continent.
Enko on April 22, 2020 wrote to the Mukherjees demanding a refund of $3.433 million (Sh408.3 million) within 10 business days since the revised accounts had shown that STL was a substantially smaller business than thought.
In the letter, Enko said it had overpaid for the STL shares at an implied price of $237 (Sh28,180) per primary share and $213 (Sh25,3000) for each secondary share.
Primary shares are new stock issued by a company to new or existing investors while secondary shares are those that have already been issued.
Enko told the Mukherjees that it should have paid $827,556 (Sh98.4 million) for the STL shares instead of Sh594 million had the Kenyan firm not used fictitious statements to inflate value.
“The company has maintained fake customer contracts to support the practice of inflating revenue over the past few years, resulting in a previously reported 2017/2018 revenue of $8.7 million (Sh1 billion) per the management accounts whereas per the revised management accounts revenue is $1.8 million (Sh214 million),” wrote Enko.
Based on the revised accounts, Enko cautioned STL that there was also a likelihood of additional tax liabilities to Kenya Revenue Authority (KRA) in the wake of restatement of accounts.
“This is related to the potential write-off of inflated intellectual property assets, the reversal of inflated tax amortisation on these assets for which deductions against taxable profits were falsely claimed,” said Enko.
But the Mukherjees, in May 2020, through Kiptinness & Odhiambo Associates, wrote to Enko expressing their reservations with regard to how the amount was arrived at.
Without admitting the validity of the claim, the Mukherjees said the share purchase agreement had capped the maximum penalty for breaching the agreement at Sh50 million.
They offered to add Enko a 10 per cent stake to settle the matter.
“Our clients (Mukherjees) propose a surrender of an additional 10 per cent of their shareholding to Enko in full and final compensation of the alleged claimed amount,” wrote the law firm.
The equity fund declined the offer.
This would trigger several meetings, which saw the Mukherjees sign a non-binding agreement to convert Enko’s equity in STL into a company loan, to be repaid by the Mukherjees.
The security was to be the same shares that the Mukherjees pledged back to Enko. But Enko was not comfortable.
“Even though we were to hold the security of 70 or 74 per cent in the company, the company was now worth much less than we thought it was. So even 100 per cent stake would not cover our money,” says Mr Kuipa.
Enko pushed for more security, including the Mukherjees’ multi-million-shilling properties in Muthaiga. The Mukherjees pulled out of the agreement.
STL had an overdraft of $1 million (Sh118 million) with the Bank of Baroda at the time Enko purchased a stake.
The security of this loan was the Mukherjees’ property in Muthaiga but this was swapped with the $1 million cash collateral belonging to STL and derived from the investment made by Enko.
Enko says the change in security was effected by the Mukherjees without the board’s approval.
Minutes of a virtual board meeting held on April 27, 2020 show that STL had three signatories - Jyoti, her husband and son.
This worried Enko, especially after the revelation that the company had overstated its size.
Mr Tineyi suggested an introduction of an additional signatory since STL “needs controls, checks, and balances.” This was accepted.
The minutes of the meeting further reveal that Sh200,000 was being spent weekly as petty cash, an amount that now looked too high for a company whose size had shrunk by about 75 per cent after the Mazars audit.
For Enko, it became a race against time to close every governance lapse in STL and save their investment from further losses.
The STL board met on June 16, 2022 to consider the removal of Chets as the de facto acting CEO and operations director.
The motion to accept his resignation letter and terminate his employment with STL with immediate effect was passed with four of the seven STL directors voting in favour.
The three that voted against Chets’ removal were Chets himself, his father Sanjiv and his sister Nivedita, also known as Niva in the boardroom.
The board then appointed Riley Falcon firm as a security provider to restrict Chets’ access to the STL premises, software and IT hardware including email addresses and any other STL materials.
STL Chief Finance Officer Atanas Mwangi, who replaced Mr Omwenga after the alleged fraud was uncovered, was tasked to communicate to all STL banking partners—KCB, Transnational Bank and Bank of Baroda— that Chets was no longer a signatory to the bank accounts.
This did not go down well with the Mukherjees who then asked the company secretary to convene a special general meeting on June 28, 2022 and reverse the removal of Chets, and also rescind the earlier decision to have STL undergo a forensic audit.
“That the resolution passed at a meeting of the company’s board of directors on 7th February 2022/9th May 2022 to the effect that the company undergoes a forensic audit, be and is hereby rescinded,” read the first agenda of the meeting.
The meeting also reversed the April 30, 2020 board of directors’ resolution that all STL payments must be pre-approved by select nominated directors or their nominees.
In addition, the meeting authorised the immediate settlement of Sh21.49 million terminal benefits and dues owing to the late Jyoti’s estate.
The Mukherjees also used the same meeting to communicate that they would use the Sh21.49 million to purchase STL stock from willing existing shareholders.
Enko protested the move, terming the meeting illegal since the requisite notice period was not given and that the agenda had not first been discussed by the board.
According to Mr Tineyi, returning Chets to STL was “aimed at allowing the Mukherjees to have a free reign in continuing to pillage the company” and also to cover up fraud.
The company secretary then sent an email with the subject ‘Software Technologies Ltd Notice of Trespass,’ threatening to sue Riley Falcon for trespass if its guards remained at STL offices and continued to restrict Chets’ access.
This proved key in giving Chets a continued say in the movement of money in STL, including diverting tax payments to other accounts.
For instance, on November 3, 2021, Mr Mwangi wrote to Chets asking why a Sh1.78 million cheque payable to KRA was re-directed to a firm called Tavel General Supplies and marked as payment for supply of assorted goods paid.
“Last month's payment was also re-directed to Ogola Okello. A straightforward audit query, why are these cheques re-directed to other beneficiaries and how does this relate to tax payments?” posed Mr Mwangi in an email copied to Sanjiv.
The redirected cheque to Tavel was paid on November 3, 2021 from KCB Parklands Branch while that to Ogola was paid via Village Market branch on October 8, 2021.
Mr Mwangi had on September 15, 2021 written to Mr Kuipa and copied Chets, seeking his approval for payment of Sh1.78 million as income tax monthly instalment and Sh920,000 as monthly value added tax (VAT).
Mr Kuipa approved the payment. He also approved another one made by Mr Mwangi on October 18, 2021, spread as Sh1.78 million income tax and Sh850,000 VAT.
As Enko invites DCI sleuths to delve into the complex web of events, the private equity fund believes its relationship with STL cannot be mended.
“The relationship has broken down. For us, it is now a point of principle to ensure that justice is done. We are pursuing both a criminal and civil case with DCI,” says Mr Kuipa.