The Unanswered Questions

About a couple of months ago, precisely on the 20th of December 2004 , an article concerning the Initial Public Offering (IPO) of Cal Merchant Bank Ghana Ltd was published on the the famous Ghanaian news website Ghanaweb.com. The article was meant to create awareness amongst the Ghanaian public of our need as a country to both respect and be vigilant of rules and regulations that govern financial transactions especially of the speculative nature. This article brought to the fore issues regarding compliance within the business community of Ghana and also the expected roles of all parties and stakeholders in the free and fair conduct of business.

In the article, the positives of a well regulated business environment were highlighted in the form of the creation of investor confidence, investment opportunities, job creation, currency stability, inflation control etc. that would eventually, likely, lead to economic growth of the proportions realistically needed for the achievement of the Ghana Vision 2020 target of middle-income status currently being proclaimed & sought by government.

This rejoinder has become necessary not because I am a rabble-rouser as some apologists may choose to think of me, but to serve as a reminder to Ghanaians especially, to be vigilant when it comes to parting with their hard-earned money in the name of a financial investment, especially in our capital markets. I have reason to believe that some players in the Ghanaian capital markets rely heavily on the relative ignorance of the average Ghanaian when it comes to issues regarding capital markets and how they work, to continuously make a windfall.

Background to the Case

In modern business, one method companies use to raise capital for expansion and enhancement of business operations is the floating of shares through an Initial Public Offering (IPO) on a stock exchange. Cal Merchant Bank Ghana Ltd (Cal Bank), quite a successful bank in Ghana since its inception about 10 years ago and with branches in Accra, Kumasi, Takoradi, etc, sought to finance their expansion & enhancement of business operations through such an IPO. In its case, it looked to enhance its service to customers with an obvious view to generate higher profits, which is normal in business.

Cal Bank therefore launched an Initial Public Offering (IPO) last year using Databank Brokerage Ltd as lead brokers and financial adviser whilst NTHC, EBG Brokers, Strategic African Securities, Merban Stockbrokers & a host of others were also contracted as other brokers. Cal Bank Ltd & SG-SSB Bank Ltd acted as receiving banks.

According to the law that governs the trading of securities in Ghana, the business of the IPO should be supervised and regulated by the Securities and Exchange Commission (SEC) of Ghana. In fact, it is only after Cal Bank has satisfied the rules that govern IPOs as set out in the Securities Industry Law (SIL) that the SEC can sanction an IPO.

Within this same law that governs the conduct of IPOs, Cal Bank must, in its application to the SEC and prospectus to the general public state how much money it wants to raise from the exercise. The rule also requires the bank to declare an upper limit for the amount it will like to retain in the case of an over-subscription as well as the purpose for the IPO.

In response to these questions, Cal bank stated 54 billion cedis as the amount of money it would like to raise through the IPO with an upper limit of 63 billion cedis should the offer become over-subscribed.

Owing to the seemingly general growing investor confidence in the GSE and Cal Bank in particular, at the close of the IPO on 1st October 2004, the amount raised stood at a staggering 240.45 billion cedis, 445.28% over and above the 54 billion cedis stated for the IPO. Since the rules governing the IPO would only allow the bank to keep 63 billion cedis, the bank was to refund the excess over this amount, representing the over-subscribed funds to those unfortunate investors whose bid for shares had been unsuccessful.

This refund process should have started immediately after the close of the IPO as Act 179 Section 284(4) of the Companies Code of Ghana (1963) states to the effect, that any refunds made 14 days after the close of the offer will attract a 5% interest penalty charge. Therefore Cal Bank would have to have refunded the excess above the 63 billion cedis to unsuccessful subscribers by close of business on 15th October 2004 in order to avoid the 5% interest penalty charge.

The reason for my writing the previous article published on Ghanaweb on 20th December 2004 was mainly because up to 6 weeks after the close of the IPO on 1st October 2004, indications were that, payments were being made to unsuccessful subscribers, but conspicuously without the interest they had legally become entitled to. Unfortunately, utterances from key players involved in this seemingly bizarre financial transaction, Messrs Frank Adu (MD ? Cal Bank), Ken Ofori-Atta (CEO ? Databank) & Ashong-Katai (Director of Market Research & Development ? SEC) did not make matters any easier and thus required comment.

In the previous article, certain questions were raised & allegations somewhat made, which I thought would generate at least a reaction from Cal Bank, Databank and the SEC amongst others to clear the air. However, as I suspected, these parties, having been somewhat accused of collusion and fraud, have maintained a loud silence. This state of affairs though not surprising, has given rise to some schools of thought and questions, which I will now put forward for the consideration of all.

Cal Bank

? What did Mr. Frank Adu (MD ? Cal Bank), mean by ?hitches? that had prevented payments being made on time when he was asked about the delay? Surely it would help if he had been a bit more specific about that wouldn?t it? What I know as standard practice all over the world is that funds from an IPO are lodged in an escrow account and only credited to the company, in this case Cal Bank, after the IPO has been declared successful. Excess funds can then be immediately returned to unsuccessful share subscribers.

? Does the law in Act 179 Section 284(4) of the Companies? Code of Ghana (1963) make provision for these ?hitches??

? How come Cal Bank together with the lead sponsors, with all their supposed preparation and expertise on IPOs, not foresee these ?hitches? occurring in the event of refunds due to over-subscription and thus react appropriately, seeing that this could cost them an extra 5% interest penalty charges?

? From my knowledge of IPOs, I am aware that prudently, Cal Bank?s agreement with its brokers & receiving banks must include a clause that entreats these brokers & receiving banks to update it or its lead brokers and financial adviser regularly during the IPO on how much money is collected. How come Cal Bank then ends up with an over-subscribed amount to the tune of about 450%?

? Mr. Frank Adu, the MD at Cal Bank, when asked why the bank was not paying any interest on its late refunds replied that as far as he was concerned, the bank was operating within the law and would only pay this interest if the SEC asked them to do so. One wonders if he was totally unaware of the existence of Act 179 Section 284(4) of the Companies Code Ghana (1963) as a CEO of a leading Ghanaian bank?

? If indeed he was aware of Act 179 Section 284(4) of the Companies Code of Ghana (1963), then what other law was he claiming to be operating within? Could he kindly enlighten the general public on it?

? What assurance does the investing public have that the allotment of shares was done equitably in the light of this huge volume of over subscription? Can Cal Bank sincerely assure the public that the allotment was done on a first-come, first-serve basis with no underhand dealings judging from the irregularities we have all seen here?

? Does Mr. Frank Adu also know that his conduct goes a long way to potentially tarnish the corporate image of Cal Bank in particular and the Ghanaian capital market as a whole? Or, is it the case that in a relatively unsophisticated economy like what pertains in Ghana at the moment, issues of corporate responsibility are not a necessity?

Isn?t it time for Cal Bank to come up with some answers?

Databank

For years, this has been probably the leading brokerage firm in Ghana and a major player on the Ghana Stock Exchange (GSE). It has been behind most of the major IPOs since the inception of share-trading in Ghana. From the days of the Ashanti Goldfields Company (AGC) floatation through to those of SG-SSB Bank Ghana Ltd to the now controversial Cal Bank IPO, Databank has been on the scene playing a major role, which is commendable considering its humble beginnings. Databank as an outfit is led by Ken Ofori-Atta, the Colombia ? Yale educated Ghanaian financial technocrat.

Now, those who have watched Databank?s activities on the Ghanaian securities market carefully over the years will know that it is not a stranger to controversy. This brings to mind the likes of the Obotan Gardens investment scandal where billions of cedis of poor pensioners? cash was transferred from SSNIT to Databank under seemingly dubious circumstances in the name of a real estate/properties investment which turned out to be only existent in name.

What about the ?infamous? Golden Development Holdings Company (GDHC) floatation which was also handled by Databank sometime ago? GDHC, a start up company with no track record was packaged to prospective investors as a company backed by none other than the Asantehene, Otumfuo Osei Tutu II with some prominent Ghanaian businessmen & entrepreneurs on the board. On the funny side, the GDHC IPO could perhaps walk straight into the Guinness Book of Records as one of the longest ever running IPOs in history as it spanned almost 2 years!!!

Months after the opening of the GDHC IPO however, its erratic nature came to the fore when even those who had bought shares in the company did not know what was happening to their investment. I entreat readers to look for an article by a certain Christopher Hunt (a GDHC shareholder) published on Ghanaweb.com sometime last year. People privy to this IPO even speak of a rift between Databank and people representing the Otumfuo & some of the directors of GDHC leading to Databank being side-lined at a point when a parallel account was opened in the US by one of the feuding parties of GDHC to facilitate the collection of monies from US based investors.

I stand to correction, but there is information that the Otumfuo Education Fund itself is invested in treasury bills through Databank Brokerage Ltd. We all know the good work that the Fund is supposed to be doing within the educational sector in Ghana today however, some of us think that judging from the source of these funds (mostly donations from Ghanaian individuals & businesses), is it not unethical to lend it back to the people of Ghana (via the treasury bill investments) so as to earn interest? One would have thought Databank would have been best to give advice to Manhyia on this, if indeed the facts I have stated are correct.

Many will ask why I have singled out Databank (from amongst all the other brokers involved with the Cal Bank IPO) for comment. Well, for the basic reason that, without due regard for the laws governing the IPO, Ken Ofori-Atta, Databank?s CEO, made headlines lambasting the SEC for refusing to ?bend? the law to allow Cal Bank to keep the proceeds of the over-subscribed IPO. As I stated in my previous article, I find this awful coming from an Ivy League educated Executive Chairman of Ghana?s premiere investment bank who is supposed to have enormous work-experience from Wall Street, New York itself at Salomon Smith Barney, (now a part of Citigroup) and Morgan Stanley, both investment banks that are household names in the biggest capital markets in the world. With the conduct of Databank I cannot resist asking the questions below.

? What kind of research did Databank conduct on the IPO that did not foresee this staggering level of over-subscription considering that the two previous IPO?s on the GSE had all been over subscribed?

? Why did Databank not advice Cal Bank to close or suspend the IPO since it was likely to have been aware at some point that it had exceeded the 63 billion cedi mark permissible by law in this particular case?

? Why had Databank not sought a change to the law long before this IPO opened, but rather chose to behave in such an arrogant & expedient manner after it noticed the over-subscription?

Ken Ofori-Atta is understandably a businessman first and foremost. However, one would expect that with his education and experience he would have returned to Ghana to help build a stronger financial sector to encourage greater investor-confidence (both local & foreign) thus helping to stabilise the economy & making the country prosperous, & in the long run, ensuring prosperity for himself too. But obviously, from the track record of Databank outlined above, it seems he came to take advantage of our relative ignorance when it comes to the business of securities-trading to ensure profit for himself and his firm.

The Securities and Exchange Commission

The Securities and Exchange Commission (SEC) is the representative of the government in the securities trading industry of Ghana. The SEC regulates, licences and ensures compliance with legislation in the trading of securities on any exchange in this country to ensure it is free and fair to all parties involved. In general its duty is to ensure confidence in the market and protect investors from abuse by other market participants.

In the case of the Cal Bank IPO, the bank supposedly satisfied the SEC Regulations (2003), Legislative Instrument (LI) 1728 and was thus given the go-ahead to proceed. At the close of the IPO, Databank & likely the other receiving banks and brokers listed above tried to get the SEC to approve of Cal Bank?s attempt to keep the excess funds realised due to the 450% over-subscription. In other words they wanted the SEC to ?bend? the law that governs IPOs in Ghana for their sake. I understand that in business, there must be room for negotiation; however, this must be done in accordance with all relevant legislation.

Credit must go to the SEC for refusing to cater for this capriciousness on the part of Databank and any others that might have been involved. However, the SEC?s conduct further down the line gives cause for concern. What surprised observers was that, although the SEC had held firm against attempts by Cal Bank, Databank & Co. to keep the excess proceeds from the IPO, its response to the contravention of Act 179 Section 284(4) was rather puzzling.

After it had become evident that Cal Bank was refunding to unsuccessful subscribers to its IPO, but without the 5% interest charge they had become entitled to by law, Mr. Ashong-Katai (SEC Director-Market Research & Development), made a statement to the press and thus the general public, indicating the SEC?s satisfaction with the conduct of Cal Bank & Co. as ?efforts? were being made to refund the proceeds of the over-subscription. This statement when contrasted with Act 179 Section 284(4) of the Companies Code of Ghana (1963) was to the effect that, although unsuccessful subscribers were not getting the 5% interest payment legally due them, the SEC saw nothing wrong with it!!!

? Why did the SEC turn a blind eye to the contravention of Act 179 Section 284(4) of the Companies Code of Ghana (1963)?

? What sanctions, if any has the SEC imposed on the various parties thus far?

? Why has the SEC not enforced Act 179 Section 284(4) compelling Cal Bank to pay unsuccessful subscribers their monies with the 5% interest as yet?

? Will the SEC please come clear on what Mr. Ashong-Katai meant by ?efforts? being made at refunds by Cal Bank which the SEC found satisfactory irrespective of the law?

? Is the SEC telling us today that over-subscribed funds in an IPO can be returned to clients minus the 5% interest charge subject to a suitable arrangement having been made?

? What provision has been made by the SEC to forestall further occurrences of this unfortunate incident?

? Are there any plans underway to amend our laws to cater for similar transactions in the future?

The Bank of Ghana

The financial system in Ghana in conformity obviously, with international standards has at its head, the central bank, in this case, the Bank of Ghana. From all indications, the Bank of Ghana has supreme oversight of all transactions conducted within the Ghanaian financial system. An IPO of the kind conducted by Cal Bank is obviously significant enough not to have escaped the attentions of the Bank of Ghana.

? One wonders why, with the obvious ineptitude of the SEC, the Bank of Ghana has been seemingly silent on the issue especially when it involves such a large level of over-subscription (450%) & amount of money?

? Can the Bank of Ghana kindly enlighten the general public on whether it has no jurisdiction in this area?

Government of Ghana

We are all aware of the huge investment the government of Ghana has put into trying to create investor-interest, both local and foreign in the national economy. Since the days of J.J. Rawlings and now J.A. Kuffuor, observers will testify to the billions of cedis (poor taxpayers? money) expended on trips abroad in the name of investment. However, this would all yield nothing positive if the trend of poor business regulation continues and indeed will only add to the already enormous waste of national resource coupled with humongous debt that has crippled development in all faces of the economy leaving the overwhelming majority of Ghanaians in a state of hopelessness and abject poverty.

In my opinion and with reason, these trips are merely expensive sightseeing events embarked upon by government and their cronies. The poor nurses, doctors, teachers, cocoa farmers & indeed any poor soul who is ?unfortunate? enough to fall into the tax net then pick up this expense.

The Government of Ghana, being the authority mandated by the people and the 4th Republican Constitution to run the affairs-of-state has its appointed agent, the SEC to regulate securities-trading in the country?s financial markets. From the look of things however, the SEC has failed woefully in ensuring a free & fair playing field in the case of the Cal Bank IPO. One however wonders about the government?s silence in view of the BOG?s silence that risks causing investor suspicion.

? Is the government not aware of the flagrant abuse of our country?s investment laws and the open exploitation of the already poor Ghanaian leading to this rather unfortunate incident?

? Does the government not have any idea of, or indeed concern for how much damage this whole debacle could be doing to its investment drive both at home & abroad?

Unsuccessful IPO Subscribers

Too often in our dear country and under democratic rule, a lot of us have remained ignorant of our rights as enshrined under the constitution and by law. This has mainly been due to a lack of education (in some circumstances deliberately) coupled with the nature of life we live, trying to survive and make a living in this harsh and unfavourable global economy as it affects Ghana. In a nutshell, to make something of a normal life in this part of the world takes up so much of our thoughts and time that we hardly have time to think or do anything else. This situation causes a general lackadaisical attitude amongst us especially when it comes to gaining knowledge on what our rights and privileges should be under the laws of our land.

The judicial system in Ghana is internationally well known for its ?legendary snail pace? leading to a poor record of law enforcement in the country and the general public?s lack of confidence in it. But all this notwithstanding, I am tempted to ask the general public & indeed the complaining unsuccessful subscribers some questions.

? Have any of these subscribers thought about taking legal action against the perpetrators of this dastardly act in order to recover the 5% interest they all seem to have become legally entitled to?

? If so then why the delay?

? Is it because of concerns with cost?

? Does the law not make provision for plaintiff(s) to recover all costs from the defendant(s) in such cases should a legal action be ruled in the plaintiff(s)? favour?

I will ask all disgruntled unsuccessful subscribers to give a serious thought to legal advice and subsequent legal action against the perpetrators of this seemingly fraudulent act. Better still, unsuccessful subscribers should consider a class action, as it will amongst other things reduce the cost per head of pursuing legal action.

In my opinion, such conduct as has been exhibited by Cal Bank, Databank & the SEC amongst possible others, can only be deterred in the future if investors are aware of their rights and willing to institute legal action against anyone who attempts to take advantage of their perceived ignorance and vulnerability. Otherwise, organisations and institutions will continue to take advantage of the ignorance of the general public, with the attitude that after all this is Ghana.

Conclusion

It is time Ghanaians wake up to the realisation that, it is in our interest to abide by the laws that we ourselves put in place to govern the conduct of business in our country and it is only when we show respect for these laws that they become beneficial to us and aid our quest for positive development in our society. Otherwise why do we not simply scrap them all and live by the law of the jungle?

We are at the moment a country seeking to achieve middle-income status as per the Ghana Vision 2020 document. With no respect for the laws that govern business coupled with weak & lackadaisical regulation as has been exhibited in this case, we are either marking time or retrogressing in the long run.

Ghana?s economy cannot grow at the required rate to achieve the vision outlined in the Ghana Vision 2020 document if it only depends on gold, cocoa & timber. Information technology, agricultural, transport, education & research as well as financial services sectors of the economy amongst others will all have to play a huge role in achieving the overall growth target set out in the various development policies i.e. GPRS, HIPC, etc. Unfortunately efficiency in the economy is dependent on law and its enforcement. These are areas where Ghana over the years, even under democracy has been very weak. One reason for this can obviously be seen through the ineffectiveness of state agencies like the SEC and of course others tasked with the responsibility of enforcing our laws.

If I know my fellow Ghanaians well enough, living in our ?dream world? of Ghana, we may think we have a hundred years to go before we get to the year 2020, but indeed we have only 15 years. We need to realise that, the goals set in the Vision 2020 document, compared to our economic growth rate at the moment are virtually incompatible thus making the middle-income status we seek unachievable.

But alas, it?s still not too late. However, we must wake up to the fact that, from now on, every year we lose due to under-achievement will send the Vision 2020 dream further and further into the abyss.

This may sound harsh to many fellow Ghanaians, but to take the tiny chance we seem to however have at this moment, we will need to re-invent what seems to have become synonymous with the Ghanaian character, and by that I mean, our tendency to be satisfied with mediocrity.

A word to the wise???.???