A Kenyan entrepreneur, who founded troubled construction firm Spencon, has sued a US private equity fund for $50 million (Sh5.1 billion) he claims to have lost when the fund fraudulently acquired a 60.68 per cent stake in the company.
Jitendra Chhotabhai Patel filed the suit in the US Court of the District of Columbia seeking discovery — a process that would compel Emerging Capital Partners (ECP) to provide him with information he wants to use in suits against the fund in multiple jurisdictions, including the UK and East Africa.
“I am seeking documents and testimony from ECP regarding the following subjects, all of which are related and relevant to the allegations that ECP Africa has caused great damage to Spencon as a result of its illegal ownership and management,” Mr Patel says in the court documents.
Information sought includes Spencon’s expenses and contracts since the fund forcefully took over its operations.
Mr Patel accuses ECP principals of deceit and use of threats, including an attempt to force him into a partnership in a subsidiary with the infamous Mombasa-based Akasha family, in order to drop the cases he has filed against the fund in Mauritius and Uganda.
ECP is a $2 billion (Sh206 billion) fund backed by development finance institutions such as CDC Group and European Investment Bank (EIB). Its investments in Kenya include telecommunications and entertainment firm Wananchi Group Holdings and Java House.
Mr Patel told the court that ECP had by 2007 invested a total of $15 million (Sh1.5 billion) in Spencon through debt instruments that were converted into ordinary shares in 2009, giving the fund a 37.4 per cent stake in the company.
The investment was made in Spencon International, a firm registered in Mauritius as a holding company for several subsidiaries operating in Kenya, Uganda, Tanzania and other African markets.
Through a mix of complex transactions, which Mr Patel describes as fraudulent, the fund raised its stake in the company to 98.08 per cent as it squeezed out Mr Patel and other shareholders.
The businessman claims that since taking control of Spencon, ECP has run down the firm through asset stripping, mismanagement and corruption.
Mr Patel says he founded Spencon in 1979 with Naveen Prakash Sharma, and gradually grew the company which has undertaken more than 200 major road, bridge and water projects in Kenya, Uganda, Tanzania, Zambia, Malawi and Mozambique.
Other investors, including Rishi Limited and Kiran Saroop Sagaar, later came on board.
In 2005, the shareholders decided to boost its capital base and strengthen its corporate governance, leading to the investment by the private equity fund.
When ECP converted the loan into shares, it took a 37.4 per cent stake and diluted the founding shareholders by a similar margin. Mr Patel, for instance, ended up with a 23.15 per cent stake through his investment vehicle Barnwell Limited.
The PE firm also acquired rights to appoint half of Spencon’s board of directors at this point. The shareholders also entered into several pacts with ECP that would later cause the fallout and threaten the company’s future.
Buy back shares
Specon founders then signed a Put Option Agreement (POA) requiring them to buy back ECP’s shares at a price equaling the conversion price of about $1 (Sh103) for each of the 17.3 million shares plus a premium of eight per cent compounded annually.
They also pledged their shares to ECP to secure the commitment to buy out the fund at an aggregate price of $26.2 million (ShSh2.7 billion). Mr Sagaar, who at the time held a 3.1 per cent stake in Spencon, was the only one who did not pledge his shares.
As part of the series of agreements, however, he transferred his shares to other shareholders on a pro rata basis. This, for instance, raised the interest of ECP and Mr Patel to 38.63 per cent and 23.9 per cent respectively.
In 2011, ECP approached Dubai-based Delma Emirates Group to buy 100 per cent of Spencon though it did not fully own the construction company.
“With reference to your trailing mail, I do confirm that we were offered 100 per cent stake in M/s Spencon… And correspondingly we had declined for a complete takeover,” an official of Delma wrote in an April 4, 2013 email to a section of Spencon’s founders who had written to the multinational seeking clarification of the matter.
By this time, the battle for control of Spencon had been raging for about a year, with ECP enlisting the help of Mr Sharma who, according to audit reports filed in court, had over the years stolen some $5 million (Sh515 million) from the company.
On August 16, 2013, ECP used blank share transfer forms that had been signed by the founders to transfer to itself all the shares. After the takeover, the fund moved to break away from the founders, including Mr Patel whose son Pragnesh Patel owned a 49 per cent stake in property developer Spedec with Spencon as the owner of the remaining shares.
While moving to sell Spencon’s interest in Spedec, chief executive Andrew Ross (appointed by ECP) told the Patels that he would sell the stake to the Akasha family unless they stopped their litigation in an apparent threat.
Before the shareholder wars brought it to its knees, Spencon was one of the largest local construction firms with more than three decades of experience building roads, bridges and water infrastructure.
This performance saw international investors like the International Finance Corporation (IFC) and the United States’ Overseas Private Investment Corporation (OPIC) queue to lend it billions of shillings between 2010 and 2012.
KCB Group lent Spencon Kenya more than Sh2 billion during the good times but risks losing its latest loan of Sh871.2 million after the construction firm was placed under administration last month following a steady deterioration in its operations and finances.