Denel board on VR Laser Asia and suspension of its executives

Meeting report

The Chairperson stated the agenda of the day was to interact with Denel board members to address certain matters which had been the subject of speculation in the media for some time.

The Denel Board Chairperson, Mr Daniel Mantsha introduced the board members present and proceeded to give a breakdown of the operational structure of the Denel company.

Denel’s Acting Chief Financial Officer, Mr Odwa Mhlwana, made the presentation on behalf of Denel. He said that Denel has been a focus of intense media reporting in recent weeks. The main topics being the formation of a joint venture to establish Denel Asia with VR Laser Asia and the suspension of employees. As part of the strategy to create a financially self-sustainable defence business, Denel is expanding into the export market. This is particularly important in order to fulfil its role of supporting the Department of Defence especially during phases when there are limited contracts from its partners.

In the 2015/16 financial year, export sales accounted for 52% of total turnover. This 52% was largely from the Middle East, Asia Pacific, Europe and South America. The Middle East remains the biggest and most important market. Denel has seen remarkable growth in its Asian Pacific market and it remains a very important market. To achieve such global penetration, markets require not merely transactional supplies but transfer of know-how through joint venture models. The strategic partners were selected through due diligence and these partnerships have yielded very positive results for Denel. One such partnership is the Tawazun partnership in the UAE which has produced over R52 million sales and orders worth over R2 billion through the marketing strategies of Denel. The process of selecting strategic partners is largely driven by market intelligence and trust relations already existing and this process is not a procurement process. Players which met Denel’s value systems and criteria are selected. For the Tawazun partnership in the UAE, no public adverts were placed. With the Denel Asia joint venture, four partners were approached because of the geographical spread and the best partner was selected.

On the ownership of VR Laser South Africa, Mr Mhlwana stated that contrary to media reports, Mr Rajesh Gupta owns only 25.1% equity shares which make him a minority shareholder. The majority of the shares are owned by Mr Salin Essa who owns Elgasove (Pty) Ltd. Aerohaven Trading (Pty) Ltd owned by Ms Ragauan owns 10% shares. He debunked media reports which stated that VR Laser is getting R10 billion from the Badger Vehicle Project. The total amount which will accrue to VR Laser from that project is R400 million. According to Mr Mhlwana, VR Laser is the cheapest and technically strongest partner available for that project.

VR Laser Asia was incorporated on 20 June 2014 as a private company in Hong Kong. This business is strongly related to VR Laser South Africa and this is one of the reasons for going into partnership with it. VR Laser Asia will be funding the operations and business development activities of the joint venture. This is a key agreement in the joint venture. Similar to how the Tawazun joint venture is structured, Denel will provide its product technology through a manufacturing licence. The rationale for the joint venture with VR Laser Asia is because the Asian market especially India is the fastest growing defence market in the world. Denel had been out of the Indian market for over 10 years due to a black-listing and this was lifted in 2015 following a thorough investigation that cleared Denel of any wrong-doing up until the black-listing, Denel had spent in excess of R500m on business development activities in India. VR Laser Asia as a potential partner has offered to contribute R100m to support business development activities and operations of the joint venture, to provide market and industry knowledge and steel cutting and fabrication intellectual property (I)P.

On the legality of the partnership with VR Laser Asia, Mr Mhlwana said permission was requested by Mr Riaz Saloojee, the previous CEO of Denel, during the first meeting of the current board and authorisation was given to him to pursue the formation of Denel Asia and to find a strategic partner. On 29 October 2015, a pre-notification submission was submitted to both the National Treasury and Department of Public Enterprises. On 23 November 2015, the Department of Public Enterprises approved the pre-notification with certain conditions attached. On 11 December all conditions mentioned by Department of Public Enterprises were met and a formal application submitted to both the Department and National Treasury. Denel insisted that it had a right to read National Treasury’s failure to respond to notifications of intent as tacit approval for the deal.

Mr Mantsha said “If you do not receive any response from the shareholder department you may deem that the approval has been granted after the expiry of 30 days”. Those 30 days expired on the 12 January 2016. We did not establish Denel Asia on 13 January. We established Denel Asia on the 29 January, at that date, it is important to note, we still had not heard anything, neither from the shareholder department nor from National Treasury. On 5 February, a letter was received by Denel from National Treasury asking for more information but by then Denel Asia had already been incorporated. Despite the misunderstandings, Denel executives are still engaging with National Treasury through Department of Public Enterprises to clarify Denel’s legal compliance in establishing Denel Asia.

Mr Mantsha talked about the suspension of the former Group CEO, Group CFO and Group Company Secretary who were suspended with effect from 23 September 2015. The cause of the suspension was a result of the LSSA transaction which compromised the liquidity of Denel. They borrowed from two financial institutions and played them against each other, ignoring the instructions of the shareholder. They renegotiated the terms of the funds borrowed without the approval of the Denel Board. R455 million was borrowed from Nedbank with an agreement that the loan would be repaid within a five year period but these executives ignored the shareholder and renegotiated this loan to be paid back within six months placing Denel in a precarious financial position, compromising the liquidity of Denel. Denel is proceeding with disciplinary action against two of the officials, of which the proceedings had already commenced. The Denel Board has decided not to recommend to the Minister the renewal of the former CEO’s contract of employment which was to expire on 31 January 2017.

Discussion
Ms D Rantho (ANC) was concerned about the hearing being conducted for the former CFO. She asked for explanations on why the CFO was first fired before a hearing was conducted. She believed the CFO and every other executive who was fired should have been given a fair chance to defend themselves. Referring to the PFMA, she was of the view that Denel should have had a mutual understanding with National Treasury before going ahead with the joint venture partnership with VR Laser. She asked what the Denel Board would do if, after their engagement with National Treasury, it was found that they had flouted laid down procedures. What was the cost of reneging on their agreements with their partners if Treasury does not approve the deal? Talking about the companies that make up the VR Laser South Africa, she asked if there were any illegal agreements between the companies and Denel.

Ms N Mazzone (DA) stated that the suspension of the former CEO had cost South Africa R3.4 million because he was paid out the full sum of his term which was supposed to end in January 2017. Commenting on the suspension of the executives, she insisted that a fair hearing was not conducted before their dismissal since the Minister herself had said she was not consulted before the action was taken. It was worrying for Denel to insist that proper consultation was done before the actions were taken. Ms Mazzone was surprised that the former CEO renegotiated the repayment terms of the loan from five years to five months. She felt there was something that was not being said by Denel. Also on the suspension of the former CEO, she noted the new joint venture was formed right after that was done. She insisted it was illegal irrespective of how Denel interpreted the PFMA. She based her judgement on comments made by Finance Minister Gordhan. She concluded the Minister could not be lying. The previous Denel Board wrote to the Committee absolving itself from the formation of the new joint venture since the present Board had said it was the idea of the former Board to form Denel Asia. She therefore demanded answers to questions on the formation of Denel Asia, the suspension of the executives and asked if there were any direct links between any members of the Board and the Guptas.

Mr N Singh (IFP) was of the opinion that there was time constraints for Denel to sufficiently respond to the matters being raised against Denel and suggested that all the major players involved be invited and a proper engagement carried out. He therefore proposed a further intense engagement with all the other parties involved.

Dr Z Luyenge (ANC) agreed with Mr Singh that all the parties mentioned by Denel be invited to give everyone a fair hearing so that the facts can be presented as they are. He stated that most issues surrounding Denel were a result of media reporting, He agreed that for credible information to be given, a further date be given for better engagement. He noted that due credit must be given to Denel in areas where it had done credibly well.

Mr M Tseli (ANC) suggested that there be an interaction with the Minister so as to get firsthand information because he believes the Minister cannot be lying. He noted that it is important not to rubbish all the good things Denel had done because of the current issues surrounding its new joint venture partnerships. He asked the Board about the blacklisting of Denel previously and wanted information on the reasons why this blacklisting was done. He referred to the partnership of Denel with its partners especially in the UAE as he wanted a better explanation on this. He commented on the suspension of the executives without a fair hearing. He asked for further explanation on that issue.

The Chairperson agreed that it was important to agree on a date to invite all the other parties involved to deal with the issues raised.

Ms Rantho, referring to Section 54(3), said that Denel could have asked for legal opinion before going ahead with its new joint venture plan because of the nature of the deal.

Mr Mantsha responded that it is untrue that the executives were dismissed without a disciplinary hearing. The first hearing was called for in January this year but was postponed at the request of the employees due to the unavailability of their legal representatives. At the resumed hearing, all parties agreed to a mediation process and a mediator was appointed. All the parties involved represented themselves before the mediator. During the mediation process, the parties explored the possibility of averting further damage to the reputation of the company and further cost to the company. The mediation process could not be completed and the parties resorted to continue to use their legal representatives. It was during this process that the former CEO proposed certain settlement terms and those proposals made sense to Denel so they were accepted. On the reason there was a recommendation not to renew the former CEO’s contract, he said that at the first meeting of the Board, there was a request for the renewal of the contract of the former CEO but the Board was not in a position to accept or reject that proposal. The reason he gave for the request was that he wanted to know on time if his contract would be renewed or not so he could go look for new employment somewhere else. The CFO was not dismissed; rather, he is going through a disciplinary process now. The same applies to the Company Secretary. The reason the hearing has not been concluded was because of the mediation process that took place.

Replying to Ms Mazzone, Mr Mantsha insisted that indeed the former CEO and CFO changed the liquidity of the loans from a five year term to six months without the approval of the shareholder. He refused to comment on the issues surrounding the letter written by the former Denel Board. He stated that the current Board has never blamed the former Board for any decisions taken. The current Board indeed gave approval to the former CEO to source partners for the formation of Denel Asia. He refused to comment on whether the Ministers are lying or not but he insisted that Denel went through the legal route of getting approval for the formation of Denel Asia. He stated that Denel has all the documents to prove its cause. On the interpretation of the PFMA, he stated that Denel has its own interpretation of that Act just as Committee members may have their own interpretation. He therefore told the Committee that a differing opinion on interpretation does not translate to a violation of the Act and that Denel has not violated any existing law. On the export market, he stated that Denel is not investing any money in Denel Asia, rather its partner is prepared to provide the funds and Denel Asia is fully ready to comply with the national legislation of South Africa. A law firm was contracted to do a due diligence report on its proposed partners and all the recommendations from that report were fully complied with. Denel is not involved in any illegal activities and it is very vigilant to ensure that its marketing team and joint venture partner is not involved in any corrupt practices.

The Chairperson stated that another meeting would be arranged for a better engagement on all the issues raised.

The meeting was adjourned.