Police probe Orient Bank takeover

 

 

 

Bank PHB of Nigeria in September 2009 bought 4,000,000 shares in Orient Bank worth sh126.4b, but only stamp duty of 1% (sh1.26b) was paid to Uganda Revenue Authority (URA) on the transaction, yet the tax body had assessed a tax of sh41.3b.

 

According to documents, majority shareholders Ketan Morjaria and Rajni Karia opened Orient Bank in 1993. Karia transferred 2,050,000 shares worth $32,390,000 (sh64.78b), while Morjaria transferred 1,950,000 shares worth $30,810,000 (sh61.62b) and the exchange rate applied was sh2,000.

 

Karia has since passed on. When URA assessed sh41.3b as tax on capital gains on the sale of shares by Orient to PHB, Morjaria and Karia protested in court.

 

Through A.F Mpanga advocates, the shareholders objected to the assessment and sought an interim order on November 8, 2010, seeking to restrain URA from enforcing payment of the assessed amount.

 

According to documents seen by New Vision, the petitioners’ ground of objection to the sh41b tax was that the transaction was isolated and not part of an overall scheme to enhance or further the business of the shareholders.

 

They argued that the share sale was done in compliance with the Bank of Uganda directive to reduce the related person’s shareholding in Orient Bank to a maximum of 49% of the nominal value of the bank’s shares. B

 

ut URA disagreed, arguing that if this was to disregard the gains for tax purposes, then the tax body would have to determine the extent to which proceeds from the sale were re-invested in assets of a similar kind (shares) within one year of disposal, if any.

 

URA in a report on the transaction added that the existence of a gain in the sale of the shares was not in contest and that a profit was made in the sale of shares and the intention and motivation to make the profit was illustrated.

 

“Although the payment represents a one-off capital receipt, in substance it was a payment received by shareholders in the course of furthering their banking business, and the gain ought to be received as income received in the course of an adventure in the nature of trade…the proceeds are properly assessable as business income because it was beneficially derived to expand or enhance a profit making structure,” URA stated.

 

However, URA later conceded that sale of shares in a private limited liability company did not attract capital gains tax under the then legal provisions. The matter was settled and a consent judgement was entered between the two parties putting the matter to rest.

 

 

However, Police has since picked interest in the transaction. In a letter dated July 11, 2014, the Special Investigations Division (SID) commandant, Charles Kataratambi, wrote to Orient Bank’s chief executive officer asking him to provide information valuable and pertinent to their investigation.

 

“The SID is carrying out investigations surrounding allegations of fraud during the process of takeover by PHB Nigeria Bank. This is, therefore, to request your presence at the SID to provide information valuable and pertinent to the investigation. Bring along persons and documents relevant to the acquisition of 80% shareholding by PHB Nigeria Bank,” Kataratambi wrote.

 

Bernard Robinson Magulu, is Orient Bank’s executive director, while Julius Kakeeto is the acting managing director.

 

When Police summoned the Orient Bank chief executive officer for interrogation over the alleged fraudulent transaction, the matter was referred to the bank lawyers, Sebalu and Lule Advocates and Legal consultants.

 

Bank lawyers respond Nicholas Ecimu of Sebalu and Lule Advocates on July 30, 2014, responded to the Police summons.

 

“As you may appreciate, the current CEO wasn’t in the employment of the bank when Bank PHB PLC of Nigeria bought into Orient Bank Limited, so he is not fully conversant with what took place at the time, least still the process that related to the sale of shares by the shareholders individually and not the bank itself,” Ecimu contended.

 

“The bank has been visited on this account by people claiming to be from the Police, CMI (Chieftaincy of Military Intelligence), URA and even the media. This as you can imagine is very disruptive and in some cases boarded (sic) on blackmail,” he stated.

 

Ecimu confirmed that they paid the stamp duty to URA through Diamond Trust Bank, and that the tax body was not investigating Orient Bank over non-payment of the same.  

 

 

According to a whistleblower, four URA officials were involved in the negotiations and have been named in a report sent to the Police’s Special Investigations Division (SID) in Kireka for investigation.

 

The whistleblower in a June 2014 letter to Police alleged that four URA officials were paid $70,000 (sh183.4m) to compromise the case.

 

However, David Mpanga of A.F Mpanga Advocates, who represented shareholders Morjaria and Karia in the share sale transaction, said his clients never paid any bribe and that they cleared the 1% stamp duty on sale of shares as required by law.

 

“That was the only applicable tax as of April 27, 2009 before the capital gains tax came into force on July 1, 2010. Capital gains tax was before the law not payable by an individual in the sale of shares in a private limited liability company. Instead, my clients lost money when they chose to go for the consent judgment where each party had to pay its costs and the fluctuating exchange rate.”

 

Mpanga added that they also successfully challenged URA’s claim that the tax had been assessed as an adventure in nature of trade, arguing that the sale of shares in a bank business was not a one-off business to pay that tax.

 

Mpanga stated that Morjaria and Karia paid 30% of the assessed amount after they applied to the High Court for an injunction stopping URA from recovering the money.

 

“The High Court (Commercial Division) Judge Christopher Madrama granted the injunction on grounds that we pay the 30% (sh12.3b) of the sh41.3b. After we entered the consent judgment, my clients got back the 30%, but even that money was paid in three instalments because URA said there were cash flow constraints,” Mpanga explained. 

 

URA responds  

 

When contacted on the bribery allegations, Ali Ssekatawa, the assistant commissioner litigation said;

 

“We take particular exception to the allegation of bribery and we shall take legal proceedings against the purported author (whistleblower), including but not limited to libel, defamation and extortion.

 

Commenting on the share sale transaction, Ssekatawa said; “the transfer of the said shares were not subject to capital gains under the laws of Uganda as they stood at the time in 2009.

 

“The URA conducted legal due diligence on the matter including consulting independent international tax experts and retired Judges and found that the law as it stood could not tax the transaction, which was sale of shares by private individuals.”

 

He added that subsequently, Parliament after acknowledging that such transactions were not covered by the law as it stood in 2009, passed a new law in 2010 covering such transfers.

 

He, however, did not explain why URA had earlier made a sh41.3b assessment on the transaction.