Real People Directors Sanctioned Over Sh2.6bn Kenyan Bond Fraud

Three former directors of Real People Kenya have lost their final appeal against regulatory sanctions over the diversion of Sh2.63bn raised from Kenyan investors, closing a protracted enforcement battle that has tested the reach of the country’s capital markets watchdog.

In a ruling delivered on July 11, the Capital Markets Tribunal upheld in full penalties imposed in March 2021 by the Capital Markets Authority against Neil Grobbelaar, Arumugam Padachie and Bruce Schenk, all former executives linked to the South African parent of Real People Kenya Ltd.

The decision affirms fines and market bans tied to what regulators found to be the misapplication of bond proceeds that had been earmarked for lending to small and micro enterprises in Kenya.

Investors are estimated to have lost about Sh1.3bn after the company failed to meet its obligations at maturity.

The tribunal dismissed the appeal in its entirety, finding that the appellants were sufficiently involved in the disclosure failures and the diversion of proceeds to justify the sanctions imposed by the regulator’s ad hoc enforcement committee.

Bond proceeds routed offshore

The case centres on a Sh5bn medium term note programme approved in June 2015.

Real People Kenya raised Sh2.63bn in its inaugural tranche under an information memorandum that stated the funds would be used for onward lending to Kenyan small businesses.

According to findings cited by the tribunal, Sh2.13bn, or 82 per cent of the amount raised, was transferred out of Kenya between August 2015 and December 2016. The bulk of the funds, Sh2.02bn, was remitted to Real People (Pty) Ltd in South Africa. Additional transfers were made to related entities in Uganda and Tanzania.

The tribunal found that the redirection of funds was inconsistent with the stated purpose of the bond and occurred against a backdrop of deteriorating financial performance at the Kenyan subsidiary.

The company moved from a profit of Sh256.9mn in the year to March 2015 to a loss of Sh592.7mn by March 2017.

Regulators concluded that instead of supporting SME lending in Kenya, a significant portion of the proceeds was used to settle intercompany obligations within the wider group.

Individual accountability

Mr Grobbelaar, former group chief executive of Real People Investment Holdings Ltd and a non-executive director of the Kenyan unit, was fined Sh5mn and barred from serving as a director or key officer in any CMA-licensed entity until bondholders recover their principal and outstanding interest in full.

Mr Padachie, the former group chief financial officer, and Mr Schenk, an executive director, were each fined Sh2.5mn and subjected to similar bans.

In its determination, the tribunal held that the executives failed to exercise adequate oversight over the use of proceeds and, in the alternative, were involved in disclosures that were false, misleading or deceptive in light of how the funds were ultimately applied.

The tribunal also noted potential conflicts of interest arising from overlapping roles across the South African parent and the Kenyan subsidiary at the time decisions were taken to channel funds towards settling group liabilities.

From left-Real People Chief Executive Officer Daniel Ohonde, board member Nthenya Mule and Nairobi Securities Exchange chief executive officer Geoffrey Odundo during the bell ringing to mark the start of Real People bond trading at the Nairobi bourse on August 19, 2015.

Long-running dispute

The appeal was lodged in April 2021 after the CMA issued notices to show cause in 2020 and imposed sanctions through an ad hoc committee in March 2021.

The appellants challenged both the substance of the findings and aspects of procedure and jurisdiction.

The July ruling follows an earlier tribunal decision in June 2024 declining to halt disciplinary proceedings against five other former directors, including Norman Ambunya, Daniel Ohonde, Nthenya Mule, Charl Kocks and Yvonne Godo.

In total, nine former directors have faced enforcement action arising from the bond issue, with cumulative fines exceeding Sh25mn. The tribunal ordered that each party bear its own costs.

Signal to the market

The case represents one of the most sustained cross-border enforcement efforts undertaken by the Capital Markets Authority in recent years.

By conditioning the lifting of market bans on full repayment to investors, the regulator has linked individual rehabilitation directly to restitution.

The decision comes amid a broader push by Kenyan authorities to hold directors personally accountable for disclosure failures in public debt offerings.

In a separate matter, the CMA has sanctioned former executives of Chase Bank Kenya in connection with its Sh4.8bn bond programme, underscoring heightened scrutiny of governance and financial reporting standards.

For bondholders in Real People Kenya, the practical question remains whether the outstanding Sh1.3bn plus interest can be recovered.

While the tribunal’s ruling brings legal finality to the appeals process, enforcement across jurisdictions and the financial position of related entities will determine the prospects of restitution.

What is clear is that the tribunal has affirmed the regulator’s authority to pursue individual directors for breaches tied to capital markets disclosures and the use of investor funds.

For Kenya’s debt market, the judgment reinforces the principle that proceeds raised on the strength of an information memorandum must be applied strictly in accordance with its terms.