18 November 2012

Ethiopia: Complaint Over Audit Report Keeps Zemen in Dispute

Two shareholders of Zemen Bank have complained to the management and board of directors about the inclusion of 100 million Br in paid up capital, that was declared void by a court of law in the Bank's 2011/12 audit report, and the consequent entry of a nine million Br as special provision in the Bank's profit and loss account, which was taken out of shareholders' profits.

The management and board of the Bank were in discussion with these shareholders since Thursday this past week.

The final draft of the audit report, expected to be made public on November 24, 2012, was recently handed over to the board of Zemen Bank for final approval and to shareholders who had requested access to it.

Two of these shareholders, however, complained that the audit report could not be presented at the shareholders' meeting in its current state.

The issue ties back to Zemen's second extraordinary meeting held on September 17, 2011, which among other things approved of increasing the bank's capital from 149.6 million Br to 450 millionBr.

In addition, the meeting had also decided to award a little over nine million Birr to Ermyas Amelga and Tekle Alemeneh, former board chairman and founding CEO of the Bank respectively, for their contributions as promoter and advisor during the formation of the bank; and also hand over five percent of the share value to shareholders who had made one time full payment when buying shares.

These three decisions had led two shareholders Mesfin Shiferaw and Meseret Degefa, to file a complaint with the National Bank in October and latter on a suit at the Federal First Instance Court, Lideta Fifth BPR Bench, in December 2011. They also sent a warning to Zemen not to implement the decision.

The decisions taken to award Ermyas and Tekle and hand over five per cent of share value to selected shareholders should have been decided at the first founding shareholders meeting when the bank was established, the plaintiffs complained. They also argued that the decision to raise capital should have the unanimous vote of shareholders instead of majority vote.

The NBE accepted two of the shareholder' complaints, rejecting decisions to award selected shareholders. It did not comment on the decision to raise paid up capital by 300 million Br, however.

The court however went one step ahead and also struck down the decision to raise paid up capital.

Before the decision was made however the bank had floated shares worth 100 million Br to contribute towards increasing the current paid up capital. These were sold out within hours, according to sources.

Following the court's decision Zemen has appealed the decision to the Federal High court, which the later agreed to hear the case.

As the case was still in dispute, the auditor's report had included the 100 million Br raised in the balance sheet, and kept a special provision of nine million Br for it in the expense entry.

"The provision has eaten up 10.4pc of the profit after tax which currently stands at 86.37 million Br" Abdulmena Mohammed Hamza, accounts manager atLondonbased Portobello group, stated, after looking at the audit report.

Shareholders who had managed to access the request, however, complained that since the decision made by the first instance court is not reversed yet, the bank has to strike out the additional paid up capital and also let go of the money tied up as a provision to the bank.

Experts however seem to agree with the audit report saying the move to keep a provision is valid.

Keeping a provision without due reason is not allowed, according to Abdulmena. Litigation, however, is a valid reason for setting aside provisions, along with doubtful loans, warranties, environmental damages, he added.

The provision can be taken out from the profit after tax or legal reserve but has to be approved by the board or shareholders depending on the article of association.

Shareholders will meet to approve of the auditor's report next Saturday.

A lecturer of law at Civil Service University also stated that since the case has not yet been finished, Zemen can still register the 100 million Br as paid up capital,

The board of directors at Zemen has agreed to discuss the issue with the complaining parties, tomorrow.

"We hope to come to an amicable solution," Tamiru Wondemagehu, member of the board told Fortune.

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