The first move to deal with the BAI group was made by the Bank of Mauritius in early April this year, notably with the revocation of the licence of its commercial bank, the Bramer Bank. This was followed up by the decision by the Financial Services Commission (FSC), the regulator of non-bank financial services, to place the British American Insurance, the insurance arm of the group, under conservatorship.
A series of breakdowns since April 2015
Since then, the many companies of the group have been falling apart in succession. Some of the group’s companies are changing hands. Others like Iframac, the motorcar dealing arm, have simply been dismembered. Its healthcare company, the Apollo Bramwell, is on the lookout of a new administrator. One set of special administrators appointed by the FSC to deal with the assets of the group had to leave precipitously; another one has been appointed.
Contradictory statements have been made from time to time about the financial condition of the group. At one time, it was stated that the State would not need to inject public money to sort out matters, i.e., that there would be sufficient funds harvested from the realization of the assets as not to require any financing gaps to be bridged with public funds. The latest, coming from the special administrators, speaks about a gap of resources in the several billions of rupees. This implies that taxpayers would effectively have to pay up the difference. Which is which, one doesn’t know.
In whichever case, it should be clear that the manner in with which the group’s assets are being sold off will make a difference between what they would have fetched in the ordinary course of business and what their quick sales (as it is now the case) would bring. The amount of loss of value due to this action will then add up to funds, if any, that would have been actually siphoned off when the group was on and running.
Prudent regulatory principles
A financial group is prone to abuse when it is centrally controlled by certain dominant shareholders/directors. Such a set-up is inclined to advance publicly-raised funds – not always objectively and on tough commercial terms — to grant facilities to in-house related parties. This is why financial regulators keep under harder scrutiny such financial groups and, least of all, go as far as to give them banking licences.
The observed fast pace of the historical expansion of the BAI group was giving an indication that a too liberal use might have been made of this unwarranted business-finance link. Realizing this, it has been reported that the FSC moved on to curtail related party transactions and thus to manage a possible catastrophe in the making with the required discipline, calm and poise that regulators should be possessed of.
This was a considered approach to solving problems that had already crept in and, obviously, a much better approach than crashing the group all at once, with the consequent loss of value of assets, on suspicions of abuses having taken place. Putting back the pieces together through clever financial re-engineering – when this is still doable – is the best way to give serenity to a country’s financial sector, aware of the fact that this sector is a critical pillar of the economy and does not take abrupt disruptions kindly. This approach has been and still is the preferred mode the world over.
Limits of tolerance
It would appear that, despite having put the group on notice on account of certain discrepancies in the state of finances of certain of its entities at one time, the auditors, KPMG, finally formed the opinion that they did not have sufficient grounds to qualify the accounts – which would have had extremely damaging consequences both for the group and the country’s financial system. They would have formed the opinion that the “substance” audited entity had not been affected. When coming to this conclusion, they would have to abide by limits of tolerance laid down by internationally laid-down professional auditing standards. In addition, they might also have drawn comfort from the fact that regulators had taken corrective actions which were on course and would remedy temporary over-runs.
The latest in this matter is the escalation of certain of the BAI group problems to the external auditor, KPMG. Notwithstanding the fact that the Financial Reporting Council (FRC) is the public body in charge of audit firms operating in Mauritius, the FSC has come out with a Communiqué on 16th September 2015 to state that, over and above what the FRC is looking into concerning KPMG’s audit of BAI Mauritius and certain of its related entities, the FSC “has (also) called upon KPMG Mauritius to submit explanations with regard to its professional and statutory obligations as auditors of BAI Co (Mtius) Ltd and any of its related entities”.
To all evidence, the FSC appears to be coming a bit late, having regularly been in receipt of those audited financial reports in past years and not having questioned the auditors at the relevant time. Besides, also having had the power by law to conduct its own onsite investigations of any anomalies of group companies falling under its supervisory oversight, that might have drawn its adverse attention at the material time.
Inconclusiveness and disarray
As all these events show, the matter is dragging out, leave aside the loss of value of assets due to the resolution approach adopted and the lost opportunity to straighten out matters relating to the group less damagingly when it was, for all practical purposes, a going concern. We are increasingly going into a direction of inconclusiveness and disarray. A lot of uncertainty has been created for the financial sector which is known to give the best results when it is not beset by such persistent uncertainty.
Now that the country has reached such a station, there was a need to halt the seemingly unending serializing of the story and thus extending the distress already produced. That might have been addressed by a Commission of Inquiry, chaired by a judge and a couple of truly independent assessors having the financial skills that it requires to establish facts. Did the government have sufficient evidence at the very start to proceed with the group the way it did? Was the BAI a foregone case of a financial disaster waiting to happen? Or, was it recoverable as a financial business had an alternative lawful resolution procedure been pursued instead? What needs to be done to forestall recurrence of such events and avoid situations requiring taxpayers to foot the bills from rash actions and decisions taken?
Hopefully, such a course of action will throw much light on the reality of things and free the economic space of Mauritius soon enough to indulge in business rather than in what increasingly looks like an unending blame game.
- Published in print edition on 25 September 2015