Wilting rose: How Karuturi coughed up his flower empire

Some of the greenhouses in Naivasha based Karuturi flower farm which was put under receivership three years ago leaving over 3,000 workers jobless.

In the last week of June 2015, Nakuru County Commissioner received a rare complaint from a player in the flower industry.

It was not just strange but unprecedented.

County Commissioner Mohamed Birik was being asked to mediate between owners of Karuturi Limited, which used to be one of Kenya’s most successful flower company and its new receiver managers.

The complainant was a Mr Ian Small, the lead receiver manager of Karuturi Ltd.

Small had been appointed jointly with Kieran Day to run the firm after it was placed under receivership. They had run the company for over one year before this incident.

Small was escalating his complaint given that even police officers in their nearest Naivasha station were finding it difficult to mediate.

He reported that Mr Sai Ramakrishna Karuturi and Shireesh Jain, the company managers before it was put under receivership, along with other unknown persons allegedly invaded company property and broke office doors.

According to the police report, the team took away various assets including laptops, mobile phones and desktops.

"The matter was reported to the Officer Commanding Station (OCS) – Kongoni who intervened and the invaders were requested to surrender the assets they had stolen,” the police report reads in part.

The complaint was recorded in the occurrence book number 05/25/06/2015 at Kongoni police station.

But of immediate concern for Ian was a planned meeting where the former directors were to address employees of the flower company. This was urgent and needed immediate intervention.

"I have learnt that the two persons mentioned above intend to address our employees with the intention of inciting them in an effort to destabilise the operations of the farm. Such incitement is likely to result in demonstrations and breach of peace," he wrote.

This is the story of what was one of Kenya's most successful flower companies, which even courts can only delay its imminent crash. The fights came immediately Stanbic Bank placed the company under receivership.

The possibility of the owners losing a company they had painfully built was now becoming clearer. Jobs of 2,400 employees were now at risk. More than 10,000 other people who depended on the farm indirectly from businesses around the farm, the vendors all the way to exporters were also staring at losing that part of the business.

This will also not be the only problems that its owner, Sai Ramakrishna Karuturi is dealing with. In Kenya and Ethiopia, his flower empire has withered. Banks are after him. The taxman has stretched his arm, seeking his pound of flesh in tax arrears.

Findings of a forensic audit by Deloitte have summarised the story of Karuturi in all too familiar steps. You walk to a bank. Take a loan. Default. And you are forced to cough it up. You lose control. Run to the courts for refuge.

But it is a lot more complicated than that.

A court ordered Deloitte to conduct a forensic audit of the firm following revelations by the bank that the firm’s level of indebtedness had worsened after being placed under receivership.

The real owners of the firm would hear none of this.

Karuturi, the beginning

The flower firm is a Kenyan company that was operating a 134-hectare rose farming business in Naivasha. It is fully owned by Karuturi Global, an Indian company listed on the Bangalore stock exchange.   

The firm was originally set up and operated by a Dutch family who sold it to Karuturi Global in 2007.

It set its first debt trap in 2010 when it took a Sh227 million loan from CFC Stanbic Bank. Two years later, it went back to the lender in January 2013 where it took a dollar-denominated loan of $3.8 million which translates to about Sh380 million at the current exchange rates.

But by the end of the year, the operations of the firm were coming to a near standstill following incessant labour disputes. At this time, the firm was also struggling to make its debt repayments.

It was at this time that CFC Stanbic appointed Ian Small and Kieran Day as receiver managers from February 2014, who have now been replaced.

At this time, the firm owed about $4 million (Sh400 million) and another Sh2 million in local currency. Interests continued to accrue as well as additional expenses which pushed the debt to $6.2 million (Sh620 million) by the end of December 2016.

When Small and his team took over the business, a decision was taken to go back to trading in an effort to preserve the value of the firm and possibly make money to repay its debts.

The strategy was to normalise its operations after restarting its production and then sell it off as a going concern. But the owners of the firm would not let this go on without a fight.

They moved to court and applied for an injunction blocking the disposal of the firm. They got a temporary reprieve from the courts after their prayer for an injunction was granted. This injunction would leave the new receiver managers, who had to learn very fast on the job, how to run a flower firm.

Their nightmare was worse given that the firm was losing money every month it remained in operation and would not survive without choking up more debts. The firm incurred more expenses compared to revenues generated, resulting in an even bigger deficit position.

As at December 2016, the firm’s deficit position had risen to Sh940 million and was racing to hit the billion mark.

The fact that the equipment and crop were in a bad state of disrepair only made the situation worse. "The farm was not operational at the commencement of the receivership in February 2014. The biological assets were in a state of neglect, production and sales activity had come to a standstill,” a report by the joint receiver managers reads in part.

The report says that the company had also lost its business license and did not have a number of certifications that would enable it to sell its products in international markets.

Electricity supply to the farm operations had also been disconnected due to arrears, medical facilities on site at the farm had become in-operational, and irrigation, plumbing and electrical equipment on the farm had fallen into disrepair.

More debt

It did not stop borrowing. The firm would take up other loans and overdraft facilities making its debt position irredeemable.

The bank provided an overdraft facility of a further Sh600 million to help with the payment of critical expenses of the company, including distress creditors and employees dues in an effort to preserve the value of the assets, at least in the short term. These facilities also attracted interests. By the end of 2016, they had attracted Sh200 million in interest.

In addition to interest and penalties as well as the loans before receivership, the firm was now owing Stanbic Sh1.5 billion.

It is not only Stanbic that the firm owed by the end of 2016. Other creditors had also slapped the firm with demand notices bringing the total debt to about $32 million or Sh3.2 billion.

The firm was also incurring other expenses to continue running. Among them receiver fees, security expenses, electricity, salaries, casual wages, water, sanitary and exhaust services. Between January to July last year, these costs were adding another cost of nearly Sh100 million.

After taking over the company, the new receivers could not survive without taking more debt. They again requested fresh funding from CFC Stanbic in order to support the envisaged trading operation.

These taking of additional loans into receivership would later form one of the grounds for litigation.

But the receivers did what they thought they needed to try and keep the business running as a going concern. The plan was to eventually put the assets of the company on sale after breathing life into it.

But this dream was cut short in July 2014 after a court injunction barred the receiver managers from selling any assets of the company. This forced them to continue running the company as they waited for the completion of the court battle.

In 2015, Ian Small, the lead receiver manager who was running the Karuturi operations relocated to the Netherlands. As a result, CFC Stanbic appointed a new set of managers led by Muniu Thoithi and Kuria Muchiru of PwC.

They took over on October 21, 2015. The injunction stopping sale of the firm’s assets remained in force.  

Points of friction

During the receivership period, owners and employers did not agree with some of the decisions that were taken by the caretaker managers.

Besides the new debts, they disputed some of the flower production numbers as reported by the receivers. Union officials went ahead to present parallel production records that suggested that the management were underreporting.

For instance, union data suggested that the production of stems as at December 31, 2015, was 463 million. However, the receiver managers reported 403 million stems, a difference of 60 million flower stems.

When forensic auditors from Deloitte went to ascertain these claims, they reported that their interviews with Karuturi employees showed that production figures were verbally communicated by employees working in the grading halls to union officials.

"The number of stems produced would be communicated to Mr Samson Ounda, the union branch chief shop steward, who would then record the information on a piece of paper which he would submit to the union offices for compilation,” the report says. The union officials maintained these records to ensure that bonus payments to their members were accurate and fair.

Deloitte observed that the union did not have a formal mandate or capacity to maintain parallel production records as alleged by the Karuturi directors. There were other inconsistencies given that the records showed production of stems on days when employees were on strike. This raised doubt on the reliability of the union data.

To support their case that receivers were under-reporting, directors of the firm had engaged PKF to conduct an audit on the production process and financial statements of Karuturi when it was under receivership. However, PKF used approximations in their analysis making their report also unreliable.

"We noted that the PKF report used production numbers as presented in a document captioned ‘the approximate flower receipt’ from greenhouse forms," the report notes.

"These forms contained an approximation of flowers harvested from the greenhouses before grading and therefore the records could not be relied upon in the determination of flowers produced and sold to the market,” the report adds.

In dismissing the PKF report, the forensic auditors also noted that PKF made various unverifiable assumptions by using extrapolated production numbers. Instead of using actual numbers, PKF used estimates and this would end up costing the credibility of their work and weakening their case.

The other matter in contention is the transfer pricing question.

The appointed receiver managers (Ian Small) established a private company Twiga BV in the Netherlands in October 2014. The firm was said to provide administrative support to Karuturi. The firm was to help Karuturi sell flowers in the Netherlands. Its support functions included selection of vendors, invoicing and general administrative functions.

A year later, shares of Twiga BV were transferred from Ian Small to Karuturi under the directorship of Mr Muniu Thoithi, the new receiver-manager.

But Deloitte ruled out the existence of transfer pricing between the two firms.

"After assessing the nature of the relationship between KLIR (Karuturi Limited in Liquidation) and Twiga BV, we noted that the issue of transfer pricing does not arise. KLIR did not sell flowers to Twiga BV,” the report notes.

Forensic auditors say Twiga only facilitated the sale of flowers on behalf of Karuturi and remitted its revenues from the sale of flowers back to Karuturi.

This is the report that the court will rely on to make a final determination on the bank’s application to be allowed to wind up the firm and sell off its assets. If granted, this will be the end of the firm.

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