NBK takeover: unmasking the scandal

Why is a listed bank that belongs to the workers of Kenya (48%), small shareholders (30%) and government (22%) being taken over at a tenth of its value and without paying a cent of cash by a bank that largely belongs to private shareholders in an unprocedural way that runs foul regulations, laws and common sense?


To be clear, the National Bank of Kenya (NBK) transaction is an unsolicited hostile takeover of a listed bank that has majority ownership by the public; 60,000 individual investors, National Social Security Fund (NSSF) contributors and Government of Kenya (GoK) by another listed bank that is majority owned by private individuals. 

The takeover of NBK by Kenya Commercial Bank (KCB) is being surrounded by an orchestra of facilitating regulators and approvals in Annual General Meetings to give it an aura of transparency. But it is anything but transparent. It is an irregular and illegal action as shown below. 

The groundwork for this was laid over a number of years. And both the financial basis of the transaction and involvement of KCB have helped shield this fraudulent transaction from the scrutiny it deserves. The Ordinary shareholders in NBK are 48%, belonging to workers through NSSF and 30% that belongs to the general public also referred to as small shareholders. The bank also has non-convertible and non-redeemable preference shareholders who have no ownership rights under company law and CMA rules whatsoever, and are simply a glorified debt item on balance sheet. 

Why is a listed bank that belongs to the workers of Kenya (48%), small shareholders (30%) and government (22%) being taken over at a tenth of its value and without paying a cent of cash by a bank that largely belongs to private shareholders in an unprocedural way that runs foul of following regulations, laws and common sense?

Privatization Act 

The Board of NBK cannot decide to sell the 22% of GoK shareholding. And, disposal of any GoK investment has to be in accordance with the Privatization Act and done in transparent way, including obtaining fair market value. In the case in question, it is being done at the offer price of KCB, a privately owned entity, at below market value and without due process as elaborated in the Privatization Act. Central Bank of Kenya (CBK), National Treasury and Capital Markets Authority (CMA) are acting beyond their mandate and outside the law. Public Procurements and Disposal Act and related procedures including a request for proposal (RFP) and open tender system must be conducted in an open and transparent way. This is mandatory to sell even an old piece of broken office furniture that belongs to GoK. How is 22% of GoK Shares in NBK being transferred by the Board of NBK? 

The CBK Governor comes on record before the Parliamentary Finance Committee and says there is no other option for NBK but to be sold to KCB despite saying the problem is bad management since 2016 that wiped its capital. He doesn’t say what other options were considered (none apparently). He doesn’t say if the issue is lack of capital in NBK, or why capital injection is not the simple and obvious solution. The Governor doesn’t also say why he is identifying takeover by KCB as the only viable solution to NBK problems and why he is involved! He is apparently unaware that he is making a decision that is not within his legal remit and mandate to make per the Central Bank Act and its regulatory authority. NBK is not under KCB statutory management so why is he even involved in the resolution of whatever problem it has beyond enforcing the prudential guidelines? 

Paul Muthaura, CMA Chairman.


It is not clear if the Competition Authority has considered in depth the impact of this takeover, which will create a large banking entity and will result in limiting the choice of consumers and compromise the employment of the workers in these entities. 

The Central Bank of Kenya is acting outside its remit of regulation. It is venturing into babysitting a takeover transaction of a listed bank by another listed bank. The CBK Governor is actively promoting and identifying KCB as the right entity to take over NBK. What gives the CBK this authority? The CBK is failing to appreciate that KCB is already the biggest bank in Kenya and this transaction will only create a “too big to fail” banking entity. The CBK is ignoring the adverse impact this transaction will have on consumer choice and access to financial services by creating a large bureaucracy and single entity. The CBK is actively involving itself in the running of two banks and their investment decisions to the detriment of the competing banks. 

Equity bank was at some point interested in buying NBK and even made a bid to at the Privatization Commission. Why was that transaction stopped? The CMA by waving through this suspicious transaction is breaking most of its regulations and procedures including failing to perform necessary safeguards of investing public interest in listed entities and protecting minority shareholders. The CMA failed to follow the Mergers, Acquisition and Takeover Regulations of CMA Act and related due diligence procedures before approval is granted for takeover of a listed entity, failing to review the proposed takeover transaction against the safeguards for the protection of investors in listed entities on NSE and protecting minority interests in listed companies.

There is no question raised on the obvious undervaluation of NBK in this transaction. CMA has failed to review and question the valuation adopted in the proposed takeover. They should question why the depressed share price of NBK is used as the basis for selling the entity rather than the alternative valuations of using NBK’s discounted earnings potential or use of net-book value valuations options. CMA failed to scrutinize a key transaction feature of the conversion of preference shares into ordinary shares before the transaction moves to takeover stage. In fact CMA appears to deliberately turn a blind eye to this action, which should receive CMA approval before the transaction should proceed. 

The reason the CMA is covering up this aspect of the transaction is because it knows it did not approve the preference shares on NBK’s balance sheet when they were set up; preference shares are NOT convertible or redeemable and this illegal conversion enables the CMA to not apply the 10% minority shareholders rule that protects the small shareholders from boardroom negotiated compulsory takeover decisions by the majority shareholders. 

This is what protected the Unga shareholders in that failed forcible takeover. By converting non-convertible preference shares, CMA enabled an illegal takeover and dispensed with this protection for the economic rights of minority shareholders in NBK. Also, CMA is failing to trigger the rules put in place for protection of minority investors by applying the rule of receiving the consent of all shareholders that hold more than 10% threshold of shareholding before their shares can be compulsorily acquired. In fact CMA is attempting to cover its tracks by allowing the conversion of the preference shares to ordinary shares as above to defeat this very rule. 

Dr Njoroge, CBK Governor

First stage of the transaction 

For a start, the conversion of the preference shares to ordinary shares is illegal and fraudulent because the conversion of preference shares changes fundamentally the ownership of NBK. Past this irregular conversion; NSSF ownership share is diluted from 48% to 26%; NSSF Board by agreeing to this is sacrificing its ownership without any financial consideration and at the expense of the contributors of the fund thereby absconding their legal obligation and fiduciary responsibility; General public shareholding is diluted from 30% to 4%. This, apart from robbing them of their rightful ownership also facilitates for their shareholding to be compulsorily acquired without their agreement. This is because the Mergers and Takeovers rules of CMA don’t allow compulsory acquisition of shareholding above 10%. The rules say their consent must be obtained if they hold above 10% so this action is double jeopardizing the rights and ownership of the general public .The CMA instead of protecting the investing public is helping to hoodwink them into being robbed by scaremongering to the effect that they will lose an opportunity if they don’t agree to this fraudulent transaction; GoK shareholding increases from 22% to 70%. This may look like GoK is winning in this transaction but the second stage of the takeover shows that it is just smoke and mirror tricks and indeed the GoK shareholding is being privatized to KCB shareholders at below market value and almost at free rate and outside the transparent process of Privatization Act.

Second stage of transaction

The entire NBK shares, post conversion, are sold at market capitalization rate of NBK shares at the deliberately depressed Sh4/share that has been achieved through the creation of fake crisis in the NBK management in 2016. That set the stage for creating a situation where KCB was dressed as a savior when in actual fact it is a Trojan horse to grab NBK for free. The valuation of NBK should be at either Net-Book Value or Discounted NPV of the Potential Profits from the good book (the NPL is fully secured and already fully provided for so has only upside to bottom line in the future through recoveries). Instead,the purchaser has been allowed to decide to value NBK using the wrong method of current depressed Market Cap. This was facilitated by multiple actors and regulators. 

CBK Governor declared NBK is capital deficient and no one is willing to invest in it and therefore there are no options for it other than to sell it to KCB. This is not the place of CBK to decide how to remedy a capital deficit, as that is the sole responsibility of its shareholders. The solution is simply capital injection and not throwing away the value of NBK. 

Remember NBK had a right issue approved by shareholders in Dec 2013, which was illegally and without any lawful authority scuttled by CMA in 2014. They refused the capital injection to proceed despite NSSF committing to fully underwrite the entire rights issue. 

CMA is the second regulator to turn a blind eye to its oversight obligations of mergers and takeover. The CMA knows full well that the preference shares in NBK are not redeemable or convertible and that its conversion at par value as done will dilute the majority shareholders of NSSF and general public investors. They have allowed this distortion of the ownership of the bank and absconded from their duty to protect the investors in a listed entity by allowing this conversion. 

It has also not challenged the wrong valuation that robs the general public of its investment in NBK and allowed its handover to KCB for a song. It has further allowed a total disregard of the merger and takeover regulation in this transaction and waved through a clear fraudulent transaction. KCB is largely a privately held listed bank. It is not a GoK owner entity at all contrary to the misperception of the general public. And certainly it is not taking over NBK to save it because that is not the interest of KCB shareholders as a profit-motivated entity. It is simply being used as a Trojan horse to take the assets of NBK at a low price. 

We know KCB is not state owned so the question is who really owns KCB? 

Even if we believe the false narrative that NBK was mis-managed, isn’t the solution to replace the Board of NBK and senior management rather than hand the bank over for almost free in a paper transaction that reduces the owners of NBK to holding a 1/10th of the real value of their assets? 

And if you have wrongly bought into the thin capitalization of NBK argument, you should know the solution to that was injection of capital by the shareholders of NBK which they approved in the 2014 AGM but it was blocked illegally by the CMA in 2014, apparently to facilitate this scam! There was absolutely no reason given by CMA to refuse the shareholders to inject capital back in 2014. Now we know the game plan was always to starve NBK of capital, hound out the transformative management that was pursuing strategic transformation on false accusations and then go for the kill through a process orchestrated through regulators and boards to deliver NBK on a silver platter to unknown parties under  the misguidance of CBK and CMA cover, which have manufactured misinformed consent of the public and minority investors in NBK through false crisis and fear mongering that NBK would collapse with depositors money. 

This is false because it is the responsibility of the shareholders of NBK to inject capital and put in place competent management, as these are the only reasons the CBK Governor gave to justify this transaction. And remember NBK had a rights issue back in 2014, which CMA refused to approve apparently what we now know as antecedent to facilitate this illegal takeover. The takeover is a paper transaction and no cash payment is being made. This shows the CBK argument that NBK will be capitalized through this process to be nonsense. Cash is required for meaningful core capital that would support the growth of NBK. The Central Bank is actively pushing for the takeover. Why? 

That is not the role of the banking regulator and in fact the CBK has no authority to interfere in the investment decisions of legal entities and is therefore acting outside the scope of the Central Bank Act. The justification the governor offers to this transaction is that NBK is capital deficient. But this doesn’t mean the regulator has any legal authority to push a particular route to resolve this matter much less to promote this transaction of selling it below fair value. That issue is for the shareholders of NBK to resolve in line with their responsibilities and not for the regulator to use as an excuse to sell the bank at below its true fair value. 

NBK had applied for a rights issue of Sh13 billion to be injected in 2013. All the NBK shareholders approved this capitalization plan. But the CMA refused to approve the capitalization prospect without any reason. Why did the CMA and Treasury both conspire to frustrate this plan despite the NSSF agreeing to underwrite the entire rights issue? Why is the CMA allowing the rights of the investing public and shareholders of NBK to obtain fair value for their investments and facilitating a transaction that is being conducted outside the requirements of CMA’s own Mergers, Acquisitions and Takeover regulations? 

Sign Up