MLSS – Conflicts of interest, absence of due diligence and lack of transparency regarding shares purchased at a cost of $1.19 BILLION Dollars

Auditor General's Findings

Conflict of Interest – The audit of equity purchases revealed a conflict of interest, whereby NIF acquired listed shares, totalling $27 million in two companies, owned by the spouse of a senior officer employed in NIF’s Equity Management unit. In the first instance, NIF purchased 1.96 million shares on April 25, 2017, at $6.18 per share at a cost of $12.1 million. Prior to this transaction, NIF had also acquired shares in the same company, at prices ranging from $5.00 to $5.75, during the period April 21-24, 2017. In the other instance, NIF acquired 3.35 million shares at $4.45 per share ($14.9 million) on July 27, 2017; approximately three times the price paid ($1.50), one month earlier in the IPO on June 28, 2017. However, the requisite approval from the Minister with responsibility for Finance was not sought for the acquisition of the shares, in breach of the Investment Policy.

Further, NIF did not present any evidence that the conflict of interest was brought to the attention of the Chief Technical Director (CTD) and the Board by the senior officer, contrary to the Ministry of Finance approved Staff Order. The Staff Order stipulates that ‘that in order to address the potential for conflict of interest, officers should in all instances inform the appropriate authority of any such undertaking, seek clarification and get permission’

Absence of Due Diligence – NIF did not faithfully conduct due diligence in deciding on equity investments to properly inform investment decisions and financial exposure. Between February 2015 and September 2017, NIF purchased shares in eight companies at an approximate cost of $783 million. However, we found no evidence that the qualitative and quantitative assessments were done, as the investment proposals were not presented. NIF indicated “no formal full analysis was done” for these companies and “purchases were made on the basis of already being in our portfolio and their past performance.” Nonetheless, NIF should have conducted reviews in accordance with its Investment Policy.

Lack of Transparency and Accountability in significant share acquisitions – The Investment Policy established thresholds for the approval of investments by the National Insurance Advisory Board, the Minister with responsibility for Finance and the Cabinet, within an established threshold. However, NIF purchased shares in two companies on the JSE Junior Market, in excess of the approved limits and at a cost of $1.19 billion, without the review of the Investment Committee and the approval of the Board and Minister of Finance. The purchase of shares in 11 additional companies at a cost of $903.26 million and USD$340,200 was also undertaken without the review of the Investment Committee and the requisite approval of the Board. The transactions not only breached the investment policy guidelines regarding approval levels, but raises questions regarding transparency and accountability.

Over three trade days in April 2017, NIF purchased 103.8 million shares in a company for $522.4 million acquired through two brokerage firms from 34 shareholders. The total investment represented 0.56 per cent of NIF net asset value, and as such, the approval of the Minister of Finance was required to accord with the NIF Investment policy. Further, there was no evidence that the investment opportunity was reviewed by the Investment Committee and approved by the Board. We requested that NIF provide us with the due diligence report, which informed the investment decision to acquire the Company shares. Instead, NIF submitted an undated Technical Note that detailed industry and financial analyses based on audited financial information, as at March 2016, though the Company posted its unaudited Financial Statements for the Third Quarter ended December 31, 2016. There is no evidence that the Technical Note was reviewed by the Chief Technical Director. Our review of the Technical Note provided, revealed that no conclusion was arrived at regarding purchase of the Company shares and we saw no evidence that NIF, in deciding to acquire the shares, contemplated the stocks’ fundamental standing (such as an industry analysis) and technical position (such as the stock’s price-earnings multiple, PE). The Board Minutes did not reveal the source of the offer and the offer document was not presented for audit scrutiny, despite our requests.