Johannesburg - Questions have been raised over the R500 million settlement between Regiments Capital’s majority shareholders Niven Pillay, Litha Nyhonyha and Transnet.
The settlement relates to the Transnet Second Defined Benefit Fund (TSDB Fund). The rushed nature of the settlement has been slammed, and questions raised.
It is believed that Pillay and Nyhonya agreed to sign the settlement when TSDBF started asking questions regarding 'bond churning' transactions entered into between the fund and Regiments Securities on the instruction of Regiments Fund Managers during December 2015, March 2016 and April 2016.
Bond churning is generally found when a broker makes excessive trades in stocks or bonds. The excessive trading generates commissions for the broker but provides very little benefits to the investor.
The settlement followed a court battle involving Regiments and 10 other defendants who maintained that everything was above board concerning the fund management.
According to sources close to the debacle, Transnet never lost money through the transactions of interest rate swaps that were carried out by Regiments and the initial claim of R230 million was not supposed to have been lodged.
In 2015, Regiments Fund Managers were appointed as the fund manager for a portion of the funds of the TSDB Fund, sources said.
From the onset, Transnet did not make a loss and both parties were happy with how things were progressing.
Documents seen by the Sunday Independent corroborate this claim, which further indicates that Regiments had made it known at the time of signing the initial agreement, that it was involved in a wider range of investment management, corporate finance and securities issuing, trading and research.
The company also added that it may make use of the services of any of Regiments associates.
"Regiments' Associates shall be entitled to retain any fees, profits or other consideration arising from such dealings or from the use or provision of such services as though Regiments was not acting as such agent or fiduciary," clause 16 of the agreement stated.
Despite the agreement in place, things took a turn at the height of reports of State Capture by the Gupta family.
Despite having raked in millions in profits, the TSDB Fund lodged a court challenge demanding close to R230m.
“In 2017 the TSDBF instituted a civil claim for just over R230m against The Regiments Defendants and others, and the claims essentially stemmed from certain interest rate swap transactions transacted at the instruction and behest of Regiments fund managers as between the TSDB Fund and Transnet State-owned Company (SOC),” said a source speaking on condition of anonymity.
“These interest rate swap transactions were traded in December 2015, March 2016 and April 2016 in a series of separate transactions. Regiments fund managers in the execution of the interest rate swap transactions facilitated the payment of advisory fees agreed to between Transnet SOC and its advisors (Regiments Capital) amounting to a total quantum of around R229m over the series of transactions,” the source said.
Transnet’s acting group chief executive, Mohammed Mahomedy, told the Zondo Commission in May 2019 that the terms of loans worth about R23-billion were changed.
The loans were changed from linked interest rate to high fixed interest rates. He said the company lost significant amounts of money due to the decision to convert the loan from linked interest rates to fixed. The biggest benefactors of the deal are believed to be Regiments and Nedbank.
"For the Nedbank transactions, Transnet has paid additional interest of R785.3 million. For the pension fund transactions, Transnet has paid additional interest of R696.6 million," Mahomedy told the Zondo Commission.
Regiments was paid R227 million for facilitating the interest rate swaps.
"One has to draw the inference that it was done to benefit an entity like Regiments, specifically, with the significant amount of money that then flowed to Regiments," Mahomedy said.
That payment to Regiments was challenged in court.
In court papers responding to the court challenge, Regiments in its defence, stated that the interest rate swaps were transacted by Regiments Fund managers in the best interests of the TSDB Fund.
They said that they acted in accordance with best market practices and acted in accordance with the fund mandate as agreed between the fund manager and TSDBF.
The transactions had the benefit of reducing significant risk that the fund would have been exposed to and that the fund made a significant profit from trading the interest rate swap transactions.
“It would, therefore, seem that the interest rate swap transactions were legitimately transacted, the fees facilitated and paid were legitimate and therefore that the claims of the TSDB Fund were, therefore, misplaced,” said the source.
The R230m claim was modified in mid-2019 with the TSDB Fund claiming an additional R349m for certain 'bond churning' transactions entered into between the fund and Regiments Securities on the instruction of Regiments Fund Managers during December 2015, March 2016 and April 2016.
The sources said they found the additional money being claimed perplexing and they were surprised to hear that the Regiments Defendants, Pillay and Nyhonyha, who are the directors of Regiments, never provided an explanation to the 'bond churning' transactions and instead opted to settle it immediately.
The sources said the move indicated that the pair had something to hide, hence the hurried settlement.
“It is important to note that all transactions entered into by TSDB Fund in respect of the funds administered by Regiments Fund Managers, would have been at the express instruction of Regiments Fund Managers, and in particular with the express instruction, knowledge and consent of the CEO of Regiments Fund Managers (Niven Pillay),” said another source.
In September 2019, the regiments defendants entered into a settlement agreement with TSDB Fund for an amount of just over R600m. The deal was discounted from R825m.
In its court challenge, Transnet questioned the appointment of Regiments to manage the fund, claiming the process was corrupt.
Before the introduction of claims relating to the 'bond churning' transactions, the Regiments defendants were adamant that the swap transactions were above board, in the best interests of the fund and in accordance with the signed fund management agreement.
“Once the 'bond churning' transactions were introduced as part of the TSDB Fund claims, there seemed to be no adequate explanation forthcoming from the Regiments defendants. In response, the Regiments defendants seem to have then entered into a settlement agreement with TSDB Fund with undue haste to avoid having to face the scrutiny that would necessarily follow regarding the reasoning for the transactions related to the 'bond churning' claims,” said the source.
Questions have arisen regarding the settlement with the sources indicating that the agreement settles all civil claims between TSDB Fund and the Regiments defendants, paving the way for their assets to be returned.
“The question that remains relates to the possible criminal charges that may stem from the 'bond churning' transactions. Have the Regiments defendants agreed to some sort of a deal regarding this matter and to avoid possible prosecution?
“These 'bond churning' transactions could only have been entered under the instruction and knowledge of the CEO of Regiments Fund Managers which is Niven Pillay,” said the source.
Pillay declined to comment when contacted regarding the agreement.
“I’m not allowed to speak to the media, sorry,” he said.
The settlement will see Regiments selling its Capitec shares to TSDBF in a bid to settle the matter, but the bank is challenging the move.
Capitec in 2007 issued shares to Regiments Capital’s Coral as part of an effort to redress discrimination that occurred during apartheid.
The agreement was concluded on the basis that Capitec’s consent is needed to sell the shares, and has to be transferred to other black investors, the bank said in a statement in September.
The bank said, "Transnet now wants Capitec to pay the price for Transnet’s mistakes."
The bank in its challenge was standing side by side with Eric Wood, former director of Regiments who left the company to start Trillian with Gupta Lieutenant Salim Essa.
In court papers, Wood said his former colleagues were using the company's money to save themselves and alienating him to deal with the repercussions alone.
He declined to comment on the matter. The High Court in Johannesburg last week ruled against Capitec and said it must allow Regiments Capital which owns Coral to sell the shares so that it can be able to pay the settlement.
Judge Bashier Vally in his ruling said the bank had two days from the judgment to give consent to Coral to sell its 810 230 Capitec shares.
The bank is, however, challenging the ruling.
Capitec’s head of communications, Charl Nel, said: "Capitec has now considered the judgment by Judge Vally, J. Capitec has filed an application for leave to appeal. That application is pending before the court. A further statement will be made once the application for leave to appeal has been decided."