Uncertainty descends as Pula Steel sale grinds to a halt

Pauline Dikuelo | Friday May 17, 2019 13:08

 

Pula Steel was built at a cost of P130 million in 2015 and entered liquidation in October 2017 having operated in fits and starts due to financial and technical challenges, including shortage of its raw materials. Creditors, owed about P100 million, were left in the lurch following the plant’s closure.

An auction to hand the plant to new investors was finalised on January 31, but despite extensions, the winning bidder has reportedly gone to ground without making good on commitments.

Mmegi is informed that while naturally, the auctioneers would open discussions with the two other losing bidders, a complaint lodged by one of the hopefuls with the Master of the High Court is complicating matters. The complainants are the Verma family, founders of Pula Steel who at the time of closure held 22% equity in the business.

“We have consulted the Master of High Court with regard to the way forward and have given her our proposals, which were developed with the consultants who are the auctioneers,” Pula Steel liquidator, John Hinchliffe told Mmegi yesterday.

“The Master has said she wants to consult with someone senior and thus far we have not received feedback on our proposal for the way forward.”

Insiders close to the latest developments say the Verma family could yet bounce back at Pula Steel as the complexities of losing a winning bidder gives the losing bidders more leverage in negotiations.

“The Vermas bid could now be the winning bid. In any case, it’s always difficult to approach the second best bidder because they now have the power to push the money down. “It’s quite possible the Vermas could win the eventual battle.”

Meanwhile, Pula Steel’s founding family, the Vermas, are ramping up pressure on the process.  The Vermas, through former Pula Steel’s director, Deepak, filed a complaint with the Master of the High Court against Hinchliffe saying the liquidation process was shrouded in irregularities including the tender opening, which they claim they were excluded from.

“We received a letter saying our bid was unsuccessful with no reasons given, which should not happen,” Deepak told Mmegi.

“We also asked who the successful bidder was and that information has not been given.” The Vermas are reportedly also preparing a legal challenge, which could stretch back to historical issues that occasioned Pula Steel’s collapse.

“I have already given this matter to my lawyers and they will render an opinion.

“My lawyers will also look at how we have been maligned in this whole process and accused of mismanaging Pula Steel which has affected our reputation,” Verma said.

The Vermas, who have been rallying other creditors to demand answers from the Pula Steel liquidator, have publicly accused Citizen Entrepreneurial Development Agency (CEDA), a five percent shareholder and major lender to Pula Steel, of concocting a scheme to collapse the company and re-sell it to a preferred investor.

The family, which is in the process of establishing a similar plant in Zimbabwe, has argued that a key ministerial directive that would have secured scrap metal for Pula Steel was not enforced, while CEDA withheld funding even as the Selebi-Phikwe plant fell to its knees.

The Vermas have also raised suspicions that CEDA could be indirectly behind the last remaining bid in the race for Pula Steel.

This week, however, the family’s claims came up against a damning report by local advisory firm, Grant Thornton, which pointed the blame back at the Vermas, citing mismanagement as the straw that broke the camel’s back.

With the Vermas in charge, with two directors on the board including the CEO, Grant Thornton investigators found shambolic accounts and record keeping in 2016, the year prior to closure. “Pula Steel’s financial records were unreliable, with no internal controls systems for key business cycles like payroll, fixed assets, petty cash, procurements payable, sales receivables and bank operations.

“Pula Steel was found to have a very shallow customer base, as only three South African companies accounted for 87% of its revenue.

“Pula Steel had no contracts in place to guard against penal clauses arising from non-delivery.  “Pula Steel’s billets were being sold at giveaway prices in South Africa and paid no consideration to internal costs of production.  “Pula Steel was selling its billets at up to 35% lower than the price of billets per tonne in South Africa at the time,” a summary of the report handed to Mmegi reads.

As at December 2016, Pula Steel owed BURS over P500, 000 after deducting PAYE from employees but ultimately failing to pay the taxman. The company also failed to submit annual and VAT returns in that year.

“Of particular interest to Grant Thornton was the relationship between the Vermas and an Indian company called People Map Consultants, which was engaged to recruit expatriate employees for Pula Steel,” reads the summary.

“The company had billed Pula Steel P12 million for services rendered over 25 months.  “However, details on this transaction were sketchy.  “Investigators found that People Map Consultants signed a Memorandum of Understanding with Pula Steel for the supply of manpower resources running into millions of Pula in July 2014, three weeks after the company was incorporated.

“The MoU neither identified charge out rates applicable to the employees contracted nor the grades, core responsibilities and number of employees seconded.”

Mmegi is informed that as the company’s troubles intensified and it operated in fits and starts, it issued a capital call for P28 million in late 2016.

CEDA responded but demanded that the entire board resign and that the parastatal appoint its own representatives as primary signatories to the Pula Steel account.

All shareholders were also asked to contribute to the capital call. The initiative eventually failed and by October, the firm was officially in liquidation with about 100 workers losing their jobs.