The battle to control the pace and direction of the privatisation of the National Bank of Kenya — the third largest bank in the country — has taken a new twist with revelations that its board and management had planned to open a new front by taking the issue before the annual general meeting scheduled for June.

The EastAfrican has learnt that the Privatisation Commission — which is the ultimate authority on issues to do with privatisation — has written to the bank to remove from the agenda of the meeting a resolution that touches on the planned sale of the bank.

“What you are trying to do is fraudulent as it would be morally wrong for the shareholders of one category of shares to meet and change the rights and privileges of another category of shareholders,” writes the chief executive of the Commission, Solomon Kitungu.

Apparently, NBK wants the AGM to strip the preference shareholder of the bank of equal rights with ordinary shareholders in the sharing of dividends and bonuses. NBK also wants the AGM to create bonus shares to be distributed among ordinary shareholders.

Forestall decision by Cabinet

By forcing a shareholders’ resolution, NBK boss Reuben Marambii’s management was attempting to forestall a public policy decision by Kenya’s Cabinet on how this privatisation should be handled.

In spite of being a listed company, NBK has survived over the past decade on massive investment of taxpayer funds — in addition to shareholder loans, the Treasury agreed to pay over $300 million in bad debts incurred mostly through politically motivated lending.

Currently, NBK has both preference and ordinary shareholders on its balance sheetm with the government owning 79 per cent of preference shares and the National Social Security Fund holding 21 per cent.The two categories of shares rank in equal rights when it comes to distribution of dividends.

The preference shares also pay the government an interest of between six and 10 per cent whenever dividends are declared, meaning that the Treasury not only gets the first take, but in total it is entitled to 85 per cent of all profits distributed by NBK. However, holders of preference shares can not vote at an Annual General Meeting.

NSSF, which owns 48 per cent of the shares and the public which owns 29 per cent are only entitled to 15 per cent of the profits. As NBK is being prepared for privatisation, untangling the rights owned by these two classes of shares has become the flashpoint of a heated battle between the Privatisation Commission and NSSF.NBK’s management has chimed in with its own proposals.

Were the AGM to approve the proposal, the the government - whose sharholding stake in the bank is restricted to ownership of preference shares would be the biggest loser.

Which is why the Privatisation Commission is now demanding that that the proposals be expunged from the agenda of the AGM.

He argued that what NBK was trying to do through the AGM amounted to seeking to do a massive transfer of value from one class of shareholders to the shareholders who don’t vote at the AGM.

Under a privatisation formula crafted with the advise of professional services firm PriceWaterhouseCoopers, the Privatisation Commission has proposed that the two categories of shasres be converted at a rate of 1:1.

This would dilute equity holders, and the government will own 70 per cent of NBK for a short while before selling 51 per cent to a strategic investor. NSSF will be forced to cut down its exposure to NBK by nearly a half of its current stake after these deals.

Moral hazard

If PWC’s recommendation — modelled on a similar basis as the American and UK bank rescue packages a year ago — it would send the strongest signal yet to public shareholders and management of listed firms of the moral hazard involved in running a company poorly, and expect a taxpayer bailout.

NSSF has opposed the formula on the grounds that if a dividend of Ksh1 billion ($13 million) was declared today, 85 per cent of the dividend would accrue to the preference shareholders.

This would make NBK unattractive to strategic investors because the current rights enjoyed by the Government are tantamount to the most effective Poison Pill against a hostile takeover.

On the face of it, the disagreements are of a technical nature, but underlying the technical disputes is a ferocius battle to control and decide who eventually owns the bank. Company management is usually opposed to takeovers because of the risk of losing their jobs.

NSFF has resisted the 1:1 conversion formula on the grounds that it would dilute the fund’s investment in the bank.
NBK’s management have also come up with its own proposal with managing director Reuben Marambii suggesting that the pari passu arrangement be done away with and holders of preference shares be paid at the 10 per cent rate pegged at the rate which holders of government bonds are being paid. This proposal would create two parallel markets for the preference and ordinary shares.

In February, NBK’s company secretary, Lee Kamweti, wrote yet another a letter to Kitungu proposing several other options of converting the shares.

It would appear that in the process the Privatisation Commission is beginning to feel that NBK was ganging up with the NSSF to defeat the conversion formular proposed by PWC.

In his letter, Kitungu took exception to the assertion by Kamweti in his letter that the NSSF would continue to fight against PWC’s proposal. He said charged that Kamweti appeared either encouraging or precipitating resistance to the conversion in a bid to derail the privatisation process.

‘We need no spokesman’

“We do not think that Mr Kamweti needs to be the spokesman for the NSSF as NSSF can independently address the pertinent issues at the fund,” he said.

In the mix of it all is the Equity Bank factor: NBK’s management have written letters to the PIC complaining that the CEO of Equity Bank Mr James Mwangi had made statements suggesting that Equity Bank was about to purchasing NBK, complaining that the statements were prejudicial to the standing of a listed company such the NBK.

How the saga will play out in the coming months remains to be seen. But what is clear is that the mergers and acqusition scene in Kenya is about to witness the most significant acquisition in the banking sector in years.