Saturday, February 24, 2018

First Citizens IPO: a contrary view

 There has been widespread negative comment since the news that an employee, Philip Rahaman, was able to buy a significant block of shares (659,588) in the First Citizens Initial Public Offering (IPO). The subsequent sale of the shares to Mr Rahaman’s relatives, or organisations owned by them, raised deeper questions on the role of the bank’s board. There have been two casualties to date: Mr Rahaman, whose employment contract with the bank has been terminated, and the managing director of the brokerage firm associated with the transaction, Subhas Ramkhelawan, who resigned as chairman of the Stock Exchange and as an independent senator. 

Several newspaper columnists and shareholder activists have publicly called for the resignation of the board. I disagree. In my opinion, the board has done all that was required and has met all of its obligations and duties. I hold no shares in the bank. Neither I, nor any organisation controlled by me, has been paid to write this article, nor is there any arrangement, verbal or otherwise, to do so now or in the future.

My “contrary view” is based on the facts as I know them and on investigations I have made.

First, this was a sale of shares owned by the Corporation Sole (the Minister of Finance) not the bank. The allocation policy came from the minister, not the board. Fifteen per cent of the issue (7.3 million shares) was allocated to staff. Employees were allowed to buy up to 5,000 shares at a 10 per cent discount. Any shares above that limit were awarded at the full price and no cap was placed on the maximum amount of shares that could be bought by any one employee. These decisions were not within the purview of the board. Therefore, the board cannot be accountable for the loophole through which Mr Rahaman passed. A total of 1,073 employees bought 3.7 million shares and the unallocated portion in the employee bucket was re-allocated to individuals. 

Second, the board’s responsibility for the sale is clearly stated in the directors’ report on page 90 of the prospectus. The report applies only to the financial statements, the projections, contingent liabilities and material statements and is supported by the opinion of other professionals as required by law. It does not extend to the allocation mechanism or subsequent share dealings. Further, oversight over the process was given to the IPO Steering Committee. The committee was led by a senior member of the bank’s management team, and consisted of Ministry of Finance representatives and professional advisers appointed by the ministry. The committee reported to the ministry, not the board. 

Third, it is immaterial when the board found about the size of Mr Rahaman’s shareholding. There was no rule that prohibited Mr Rahaman from acquiring that quantum of shares. The only requirement after having made such a discovery would have been to ask management to ensure that Mr Rahaman complied with all the internal control disclosures and declarations with regard to his source of funds. As I understand it that certification was provided by Bourse Securities as the transaction was done by that firm. It is noteworthy that the ministry has delayed all planned IPOs. 

Fourth, non-executive directors are governed by one key principle, NIFO — nose in, fingers out. Directors have an oversight role and make policy decisions. Management executes and notifies the board of variations which are unusual in principle, or outside the policy guidelines. The board could only have known of Mr Rahaman’s share sale when informed by the management of the bank. The board, especially the non-executive directors, can only do their job if executive managers do their job. Mr Rahaman sold his shares on January 14. The sale of shares was discovered by the non-executive directors in March and only as a result of queries raised by third parties. 

Even if this is the first time there are shareholders other than the corporation sole, there ought to be a policy in place by which the corporate secretary reports changes in the share register quarterly. This is a clear failure of process. But the board made, or caused to be made, all the necessary actions when that omission was brought to their attention. It is noteworthy that the board terminated Mr Rahaman’s contract because of a “loss of confidence”. This phraseology has legal significance and indicates that there were more questions than there were answers. But the board made a decision.  

The Minister of Finance commissioned a forensic examination into the transaction. I understand that the board has not seen the report and is unaware of its contents. 

Financial systems require transparency and certainty of process to engender stability and confidence. It is important that the Securities and Exchange Commission (SEC), the regulator, be given time to do its job and its findings be adopted as part of the improvement to our institutional landscape. Where there are failures, the SEC must effect the necessary actions on the basis of the evidence. The country suffers from a lack of process and evidence-based decisions. Calls for the resignation of the board are at best premature and will have a negative impact on finding good candidates to serve on state boards in the future.

Even if the public is calling for blood, it would be wrong to fire the board because we wish to attribute to the board the “foresight” that can only come with hindsight. 

  * Mariano Browne is a 

management consultant and a former government minister