Pula Steel “deal”- who benefited the most?

Tuesday, 19 March 2019
Pula Steel “deal”- who benefited the most?

Contrary to Verma’s assertions, evidence adduced in court leading to the company being placed under judicial management and final liquidation of Pula Steel indicates that the Verma family was the greatest beneficiary of the deal.

Court records submitted during the application for judicial management shows that CEDA was approached by Pula Steel partners comprising of Wealth Generation owned by Brian Mosenene and Mpho Balopi ; and the Verma Family represented by Verma senior and the spouse. CEDA then injected funds as they believed that it was a good business proposition and especially being in Selibe Phikwe, but before any production could start, BCL developed interest in being part of the project.

CEDA was not aware at all material times that one of the Verma’s was in partnership with the spouse of the BCL General Manager at that time in an unrelated  business nor was it privy to the discussions that led BCL to develop interest in Pula Steel. BCL paid for their consideration in Pula Steel and as per the Shareholders Agreement they were given a controlling stake whilst Phase 1 implementation was underway. Pula Steel under the management of Verma senior as CEO proceeded to procure equipment for Phase 2 with funds that were supposed to complete Phase 1 of the project. This led to a shortfall in funds to complete Phase 1 hence the capital call that resulted.

CEDA questioned the wisdom of allowing such a cardinal transgression in planning and subsequently CEDA declined to take part in the Capital Call and ended up being diluted. CEDA at the time stated to Pula Steel that its decision not to participate was based on the unjustified change in scope without CEDA’s consent and without a proper business case.  Whilst BCL did deposit their portion of the capital call, the Vermas indicated that they had paid a creditor a certain amount and therefore wanted it to be treated as their contribution, whilst the event took place prior to the capital call but could not produce paper trail to that effect.  Disagreements ensued that fuelled the mistrust within the shareholders because it was an expectation that such funds be deposited in an account and be recorded as such.

Hot debate
Besides non-compliance with the agreed capital call governance, funds were being raised for a different purpose than paying the referred creditors of which the resultant effect was that there will be a shortfall on the targeted capital being raised. This was hotly debated and contested, and other shareholders were adamant that the Vermas had not paid as agreed. However, over time as this was being debated, BCL being the majority shareholder decided to recognise the Vermas’ contribution and capital call process was closed and funds released for the company’s use.

Money then finished off very quickly as it came and still the business was not operating optimally. Pula Steel then made another capital call. This time around BCL made it clear that they will not participate because they were in liquidation. Besides BCL, other shareholders proceeded to consider the capital call. Following its internal processes, CEDA reverted and indicated that its exceptional participation woud be based on certain conditions being met which were stipulated in a term sheet.

The conditions that CEDA put in were that a Management Services firm be engaged to ensure that policies and procedures are embedded in the organisation for good corporate governance. CEDA needed to know as to what transpired from a company that required an initial P40m to a company that had already gobbled up more than P120m within a short space of time.

Since CEDA insisted on the Management Services Firm, Grant Thornton was engaged to undertake the assignment. Their results are contained in the report presented to the High Court. It showed that Pula Steel did not adhere to the basic principles of financial management, had poor record keeping, unpaid PAYE obligations to BURS, proper good governance, an improper pricing strategy, over reliance on a narrow customer base in South Africa and exacerbated by questionable related party dealings that were undeclared.

Hence CEDA insisted on the Vermas stepping down from the management team based on the results of the audit that showed that they were not running the company properly, poor financial management discipline, governance lapses, related party transactions and obligations that had no clear contracts. Creditors were not being paid yet money had been contributed by shareholders to among others deal with such matters. There was also employees dissatisfaction and in some cases those who questioned the Vermas were dismissed, an example being Jacob Motlhale who was the finance manager.

CEDA clear
Records seen by Botswana Guardian indicate that CEDA made it clear that its funding must give the Agency control of up to 49 percent so as to put things in order. CEDA required that it has control over three key positions being the CEO, Finance Manager and Production /Technical Manager. Another condition was that CEDA become a signatory in Pula Steel bank account, contributions from shareholders should be deposited in an escrow account at Armstrong Attorneys. 

This was to prevent an earlier scenario where the Vermas had decided to not deposit their contribution in a company account and instead insisted that they paid creditors. Other conditions were that CEDA takes security of Pula Steel plant and land against the funding; that all Pula Steel Directors including the Vermas resign from their positions and new Directors be appointed. This would have given the Vermas only one position.

Further the term sheet was made in March 2017. There was a set date for contributions to have been made but the Vermas and Wealth Generation did not meet the deadline. Only CEDA met the deadline of the capital call and had placed its contribution with the attorneys, and the deadline was extended for other shareholders. Subsequently numerous meetings ensued where the Vermas suddenly objected CEDA conditions and made it clear that they do not want to resign from the company and that they wanted more shares. It was discussed that if they wanted more shares, then they must put in more funds, something that they could not do.

Seeing that there was no progress, CEDA applied for judicial management which was agreed to by all the shareholders including the Vermas. From March to August, nothing could move as the Vermas allegedly changed goalposts time and again citing that CEDA conditions are not fair to them. During this period, the Judicial Manager was in charge of the company but could not do much to resuscitate the business without funding. CEDA did not move an inch on its conditions, citing that Pula Steel is in distress because of the bad management by the Vermas and therefore it cannot ignore such a factor in releasing its funding.  CEDA made it clear at court that its contribution of about P28m is available provided Pula Steel meets its conditions, which were objected to by the Vermas as they wanted control of the company.

The creditors including Pula Steel staff and other shareholders supported the new CEDA deal except for the Vermas. CEDA chief executive Thabo Thamane strongly stood his ground before the Master of High Court during one of the creditors’ meeting held on June 26th 2017. Thamane stated that CEDA could inject capital only if its terms were complied with to avoid money going down the drain. Indications are that had CEDA put in the P28m without clear conditions, the exposure in Pula Steel by the government owned entity would be substantial.

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