How mystery changes to a R350m VBS loan cost the PIC millions

Three changes, which were not approved, were made at the 11th hour to the conditions attached to the R350m loan facility by the Public Investment Corporation (PIC) to the now defunct VBS Mutual Bank, the commission of inquiry heard on Tuesday. 

The changes appear to have been instituted by two former members of the VBS board, who have since been debarred from the financial services sector. 

The PIC, which invests around R2trn, mostly on behalf of government employees was VBS's  second-largest shareholder with a 25.2% stake through its client the Government Employees Pension Fund (GEPF). 

The GEPF has a legacy shareholding in the Venda based bank when it absorbed the pension fund of the Venda Bantustan government in 1996. 

VBS is bankrupt and was liquidated in November, after being placed under curatorship by the South African Reserve Bank (SARB) in March 2018.

Advocate Jerry Motau's forensic report ‘The Great Bank Heist’ found that the R350m loan facility from the PIC to VBS was used to plug the cash hole at the bank.

The Motau report revealed almost R2bn was looted from VBS and payments were made to several politically connected individuals.

Civil and criminal cases will be lengthy and are unlikely to recover the full amount that was taken. 

The commission of inquiry, headed up by Justice Lex Mpati is investigating investment decisions taken by the asset manager.

Loan changes  

Associate principal of impact investing at the PIC, Brendah Mdluli told the commission of inquiry that the R350m loan extended to VBS in 2015 was a revolving credit facility, which allowed the bank to borrow or drawdown further, after having repaid the capital. 

Mdluli testified that the application for the loan was first introduced to her in 2014 by Paul Magula who was then the associate principal for unlisted debt within the PIC’s Isibaya fund, and a director on the board of VBS.  

He was later transferred to the Risk Division and she continued to correspond about the loan conditions with a PIC legal representative, Ernest Nesane, who was also a member of the VBS board, on behalf of the asset manager. 

Both Magula and Nesane are banned from working in the financial services sector after they were found to be unfit and improper by the Financial Sector Conduct Authority (FSCA) for their role as VBS board members, the commission heard earlier in March. 

Mdluli explained to the commission that the original loan facility agreement was changed on an electronic copy in April 2015 and she had printed out the original document sent earlier that month. The original document did not contain two controversial clauses. It was also the version she commented on. 

The two clauses were added to the final agreement and she only became aware of the changes “at a very later stage” when VBS was placed under curatorship in March 2018. 

This allowed the R350m loan to be “subordinated” against other borrow creditors, which ranked the PIC debt below other claims by VBS lenders.

Another condition which was changed gave VBS the green light to convert the R350m loan into equity or shares in the bank, at the discretion of the bank.

The original agreement also allowed for R200m to be loaned initially and R150m would be made available later in line with performance.

This condition was withdrawn in the final document. 

Unlikely to recover funds 

To date, VBS had used R324.8m of the revolving credit facility, according to the PIC’s operations and investment support manager Sello Nkoane. The asset manager is unlikely to recover this money, given the changes to the original loan agreement. 

Mdluli told the commission that the PIC’s legal department would be best placed to answer why the agreement was changed at the 11th hour. 

Assistant commissioner Gil Marcus asked if the PIC has a system in place to monitor changes to draft agreements as there had been several similar cases to the VBS loan agreement and there should be “some review” of this. 

Mdluli responded that the person sending the original document is responsible for monitoring the amendments and comments prior to final approval. 

In the case of the VBS loan agreement, this was Nesane.

The PIC board in December said that it would pursue criminal charges against Nesane and Magula for failing to report suspicious transactions at VBS.     

The inquiry is ongoing.

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