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How South African Firm’s 594 Million Investment Into Kenyan IT Company Turned Sour

A South African company, Enko Capital Management is reeling in the shocking revelation that it invested Ksh 594 million into a Kenyan IT firm that was not as big as it imagined. Enko pumped in $5 million into Software Technology Limited (STL) in a deal that was inked in October, 2018.

Enko was convinced by the rising revenues and assets of STL and even conducted financial due diligence before the colossal investment. Everything about STL was excellent as they had worked with giant firms such as Safaricom, KenGen, EACC and Equity Bank. According to the Standard, audited accounts for STL for the financial year ended June, 2018 showed it had accumulated Ksh 887.45 million in revenues and Ksh 194.84 million in net profit. However, a thorough scrutiny unraveled that STL’s actual revenues for the said year was Ksh 220.77 million while net profit plunged to Ksh 48.82 million.

STL is alleged to have inflated their numbers through nonexistent clients, suppliers with unknown addresses and nonexistent intellectual property (IP) assets on the balance sheet.

“We saw the numbers and believed them, we thought we were buying an elephant, it turned out to be a mouse,” Enko Senior Investment Officer Kuipa Tineyi told the Standard.

Before investing in STL, in September, 2017, Enko approached Grant Thornton Consulting Limited to conduct financial due diligence on STL accounts. Barely three months later, Grant Thornton came up with 89 page report indicating the main shareholders and the financial position of STL. The document depicted STL as a fast-rising firm with revenues that had taken an upward trajectory from Ksh 524.9 million to 655.04 million and 773.8 million in 2014, 2016 and 2017 respectively. However, Grant Thornton indicated that STL didn’t properly maintain the intellectual property register and the data to verify how much it had earned through the sale of its software was also not kept up.

In October 2018, Enko pumped in a whooping  $5 million injection, becoming the largest shareholder of STL. STL was incepted in 1991 by the late Jyoti Mukherjee who steered the company alongside her husband Sanjivan Mukherjee, their son Chaitanya ‘Chets’ Mukherjee and daughter Nivedita Mukherjee. Enko had a 20.14% stake with Jyoti and her husband owning 16.21% each while their son Chets had a 13.9% and their daughter had a 7.52%.

Enko hoped that through their new position they were going to help STL to grow tentacles in the East and South African region while also ensuring that the company succeeds in ‘necessary treatment’ of its intangible assets. A number of meetings were scheduled in February, May, September and November 2019.

STL’s finance director, Stephen Omwenga was required to issue draft financials and explanation of the company’s intangible assets before the first board meeting in 2019. However, he was unable to complete the tasks before the first board meeting after Enko joined. The matter raised eyebrows with Enko expressing dissatisfaction in Omwenga’s apparent shirking from responsibility.

Opening A Can of Worms

Enko recommended a substitution of auditors who were involved in STL’s accounts auditing. In May, 2019, Mazars Kenya were brought in as the new auditors, and this opened a can of worms. A scrutiny of the 2018/2019 financials revealed that there were non-existent customers and suppliers with no known addresses.

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With STL becoming the centre of this storm, it was also unraveled that the firm may have duped Enko in stating that they had resellers in Nigeria, Dubai and Middle East. Mazars asked that STL provides emails addresses for these resellers and it was then that it was established that such addresses had been created at the same time that the audit had began. Efforts to have a physical meeting with the resellers proved futile.

According to Mazars audit which was completed in late 2019, they were unable to verify existence of significant revenues, clients and suppliers’ expenses. The audit also cast doubts on the existence of STL’s IP assets which had been reflected on the balance sheet.

The death of Jyoti Mukherjee in January 2020 further complicated matters for Enko Limited but they were determined to get to the real image of STL. Enko piled more pressure on the finance director, Mr. Omwenga who eventually lifted the lid on the matter. The document he shared revealed that indeed STL had been inflating its revenues and expenses.

Meanwhile, Chaitanya Mukherjee who was the acting CEO told shareholders in a meeting held in March 2020 that the revenues for the year were likely to plummet to between Ksh 295 million and Ksh 355 million. For Enko Capital Management, this was the ultimate confirmation that there was something bizarre.

And in May 2020, Mr. Omwenga disclosed to Mazars that he had removed 27 ‘project accounts ‘ off the sheet of STL to reflect the true position of the company. According to the Standard, the so-called ‘project accounts’ were basically fictitious entries that served to disguise STL as a company with higher revenues vis-a-vis its actual financial position.

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