THE Securities and Exchange Commission’s (SEC) temporary possession of Madison Asset Management Company (MAMCo) came as a result of its financial challenges, which emanated from exposure to companies that collapsed, LSA Group chairman Dr Lawrence Sikutwa has disclosed.
But MAMCo’s financial challenges, which led to SEC temporarily taking possession earlier this month, are being worked on as plans to inject liquidity amounting to around K70 million are progressing well.
Meanwhile, SEC chief executive officer Phillip Chitalu has urged SEC-licensed entities to comply with all directives to avoid any unnecessary disruptions to business operations.
On March 2, 2020, the SEC took temporary possession of MAMCo for a period of three months to re-assess the status and ability of the company to meet its obligations to its creditors.
According to a widely-circulated statement, the SEC stated that the temporal takeover of MAMCo was to enable the SEC ascertain the state of affairs at the asset management company and ensure compliance with the Securities Act.
Section 1 of the Securities Act empowers the SEC to take possession of a licensee, such as MAMCo, under prescribed circumstances, including where the licensee fails to comply with an order or directive of the Commission.
But in an interview in Lusaka, Dr Sikutwa explained that MAMCo had experienced financial challenges, which were mainly triggered by its exposure to financial services companies that collapsed last year.
“MAMCo, an entity regulated by the SEC, has experienced financial challenges emanating from, among other things, exposure to counter-parties that have since gone under, namely Focus Financial Services Limited and Pan African Building Society as well as a slump in property prices, which affected its large property portfolio,” Dr Sikutwa said.
He explained that MAMCo’s failure to comply with the SEC directive involved its Fixed Income Fund (FIF), which was not authorized to be sold on the local market.
“MAMCo had since 2008 been offering a product in the market called the Fixed Income Fund (FIF), which guaranteed a fixed return. Accordingly, the FIF was required to wind down to comply with the SEC directive. The result of the said directive was that all depositor liabilities under the FIF became due and payable. The process of unwinding the FIF has brought about challenges for MAMCo as it moves to meet investor obligations in a timely manner. This is because a substantial part of the Fund is invested in real estate whose values are subject to market perils, and in the current economic environment, cannot be realized in the short to medium-term,” Dr Sikutwa explained.
“In an effort to manage the situation, MAMCo approached the High Court of Zambia in August, 2019, and obtained an Order to Convene a Creditors Meeting of the FIF so that MAMCo and the investors in the FIF would explore the possibility of entering into a Scheme of Arrangement (SOA), which would result in all the investors eventually being paid. The process of arriving at an agreed Scheme of Arrangement with the investors has been ongoing, with the last meeting having been held on December 13, 2019. However, on March 2, 2020, the Regulator, through the powers vested in it, decided to take temporary possession of MAMCo for a period of three months to re-assess the status and ability of the company to meet its obligations to the creditors.”
He disclosed that Madison Financial Services (MFS), MAMCo’s parent company, has stepped in to raise financing to recapitalize the company.
“In order to assist MAMCo, MFS, as the parent company, has been in the local and international markets to raise capital to inject into MAMCo. In the alternative, MFS made a commitment to capitalize MAMCo to the extent of K70 million and has so far injected K10 million into the company with the balance to be injected as soon as possible. We hasten to add that the K70 million capital commitment is not a legal requirement, but a voluntary obligation to bridge the solvency gap arising from the capital adequacy shortfall on the assets of MAMCo. MFS is confident that the capital injection will result in MAMCo trading out of its current challenges,” Dr Sikutwa added.
He also stressed that MFS subsidiary companies were safe and well managed under the Group portfolio, allaying fears of a possible contagion effect.
“MFS would also like to state that all its other subsidiary companies are separate entities from MAMCo and are only related by virtue of having a common shareholder. The shareholding and governance structure in the Group ensures strict adherence to applicable laws, independence and sustainability of all subsidiaries as separate entities,” Dr Sikutwa explained.
“The performance of our other subsidiary companies has remained resilient and profitable. In particular, the insurance companies have an excellent claims payment record in the market. The profit making subsidiary companies have been assisting MAMCo to resolve its difficulties.”
He further assured MAMCo’s creditors that none of them would lose their investment following SEC’s seizure of MAMCo.
“As head of the Group, I take full responsibility to ensure that whilst there will be a delay in fully extinguishing the MAMCo liabilities, no single creditor will lose their investment,” said Dr Sikutwa.
Meanwihile, in a separate interview in Lusaka, Chitalu advised all SEC-licensed entities to comply with the regulator’s directives to avoid unnecessary disruptions to business operations.
“Our role is very straightforward; we tend to lean towards investor protection, and that’s our mandate given by law…So, if your space is to continue operating in the financial services sector, then, it’s imperative that one gets to comply with directives. Although we do not want to see business fortunes going down, our regulatory oversight role, especially if it goes to enforcement, may actually affect your business,” Chitalu said.
In December, 2018, the SEC issued a directive to capital market operators, such as MAMCo, prohibiting them from undertaking investment activities, which provided a guaranteed return.
According to Chitalu, the SEC’s focus was on MAMCo’s FIF, which was not authorized to be on the market.
“In December, 2018, the Commission became aware that there were products on the market that were being sold that were not necessarily authorized by the Commission. Now, because they were not authorized, that means the Commission may have not assessed the risks involved in such products. So, the Commission issued a directive, signed by myself, with the effect that there were products on the market that were not to be provided. So, all the fund managers were given this directive, so, that’s the genesis. One such entity was Madison [Asset Management Company]; and this product was being offered to the market and we did not authorize the product. That product, obviously, we had people who had invested in it, and they were exposed because it wasn’t being regulated by the Commission. So, we’ve specifically gone into Madison to try and understand the nature of how this product was offered and see how best the process of unwinding this product could be done,” explained Chitalu.
“Suffice to say, we had given capital market operators enough time to more or less self-liquidate; we had given two specific exit strategies: one of them was to ‘go back to your investors – ask them whether they would want to move into a regulated product or ‘go back to your investors, and if they did not agree to move into a regulated product, pay them their money.’ So, basically, that’s the nature of the directive. So, whoever has not complied with those two positions, then, obviously, regulatory oversight becomes necessary to get to see how best we can ensure that the market complied with the December, 2018, directive.”