Investing Through Chamas and the Best Operational Vehicle

INVESTING THROUGH CHAMAS AND THE BEST OPERATIONAL VEHICLE

In Kenya, Chamas or investment clubs has become one of the most famous form of saving and investment amongst friends, and it involve a group of friends contributing agreed amounts of money, mostly on periodic basis, for investment purpose.

Majority of Chamas operate on good will basis and without formal agreement between the members, business plan or legal registration.  As a result , many members have lost their investment through such risky ventures, and due to lack of written agreement, they cannot enjoy any legal remedies.  Connected to this, as investment vehicles, many Chamas are faced with myriad problems including lack of clear investment goals and objectives, default amongst members in paying the agreed contributions, dishonest officials,  lack of investments skills and inadequate capital base.

I have also observed that many Chamas mix their social and investment objectives, and some may have same leadership for the two.  Undoubtedly, such motley create confusion amongst members and  is a great contributor to lack of seriousness amongst some of the members since they know that in the event of default their  friends' will treat them with leniency.  It is therefore imperative for business venture to be separated from the social interest of members like weddings ceremonies. Where members of a Chama intend to have  social component, separate  should be elected and separate bank accounts operated for such activities.

Registration of Chamas as Companies

Chamas should be registered as private limited companies. For this purpose, members should engage a  qualified lawyer to assist them in the registration process and other legal matters

Under the Companies Act, a private company should have 2-50 members  (Chamas with more than  this number can register as co-operative society). Members in a company have limited liability and in the event of liquidation, the members can only lose money invested in the company; and not individual private property.  The reason for this is that a company has a separate legal personality which is different from that of its members or directors, and can therefore own property , or sue or be sued,  in its own name.

The day-to-day affairs of the company are under the control of its directors whereas the shareholders/ members are only supposed to attend general meetings where they mix certain decisions like approval of books of accounts, remuneration of directors and appoint of directors and company's auditors.

By law, a private company can be registered with at least one director, although it is preferably to have at least 2 directors.  The articles of the association of a company will usually prescribe the  minimum and maximum numbers of directors.

After registration, the company should hold a meeting during which the first directors of the company are appointed or confirmed.  If this is not done, the subscribers would be deemed to be the first directors of the company.  After this, the directors should open a bank account where they will be signatories. When this has been done, the directors can roll out the investment plan for the company in consultation with the members.

Ways of Raising Capital

A private company limited by shares must be registered with a certain share authorised capital, which is divided into shares of a certain nominal value.  For instance, a company can be registered with a registered capital of KShs. 100,000 divided into 1,000 shares of KShs. 100 each.

The authorised share capital with which the company is intended to registered is determined with its investment plan or requirement. Share capital can also be increased from time to time by members passing a special resolution and thereafter registering the increase with the registrar of companies.

The directors of an investment company of a Chama should raise capital by allotting shares to members. Members should be allotted shares of a certain value, which can be paid for in one instalment or over a certain duration through calls by directors.  The amount of capital that is paid for can be used for the intended investment. 

When the share capital has been exhausted and members have paid for all the shares allotted to them, the members should be issued with share certificate for their shares.  The share certificate issued to a member will constitute prima facie evidence of the investment made by such member in the company.  A mechanism should also be established to allow a member to sell part or all of his shares to other members.

Initially, members can agree to raise capital up to a certain threshold. Other than real estate which is the commonest form of investment for Chamas, it is prudent for a certain portion of the capital to be invested into profitable ventures which can generate regular income for the company. Such income can be used to fund day-to-day operations of the company, and the surplus ploughed back into investment ventures in order to augment the additional capital raised by members through allotment of shares and payment thereof in agreed instalments/calls.

An investment company can also raise capital for investment by borrowing from a financial institution or bank, or its rich shareholder or member.

Shareholders' Agreement in Chamas

In order to better regulate the internal affairs of their company, the members of the company should have suitable shareholders'  agreement signed and executed by all members. Such an agreement should, inter alia,  cover the following matters; the manner of making investment decisions;  the number of directors, their appointment, tenure in office, replacement and decision making powers, the types of meetings of members, their decision making power and frequency; the transfer of shares between members or in the event of withdrawal or death of a member;  the forfeiture of unpaid for shares; mode of raising capital for investment; the reserved matters that require unanimous decision of all members like sale of assets; call by directors; dividend policy; disputes resolution mechanism; and mechanism of admitting new members/shareholders.

The shareholders' agreement can also prescribed the penalty to be paid by members who do not pay for calls on shares allotted to them  within the agreed time frames. In the event of persistent default, the shareholders' agreement can also provided that a shareholder will be deemed to have sold his shares, which can be sold by the board of directors to the existing shareholders and the defaulting members refunded his contribution less a certain default penalty.

A shareholder agreement should also prescribed the manner in which a company will raise additional capital for its investment.  As stated before, a company can raise capital by borrowing from a  financial institution or bank , or a rich member  (i.e., shareholder loan). For bank loans, the shareholders' agreement should make it clear that such loan will be guaranteed by all members and  proportionate to their shareholding in the company. this is despite the fact that the bank may only require such loan to be secured only by personal directors' guarantee.  In case of a shareholder loan, the agreement should also provide that in the event of default by other members and the company, such loan can be converted into shares which will be issued to the loanee shareholder.

Chama Investment

Generally, the investment plan of the investment company should be prepared by the directors and approved by the shareholders during the annual general meeting. After this, the directors should be left alone to implement the approved business plan and come up with the ways of raising the necessary investment capital.  As explained above, the directors can do this by increasing the share capital of the company, and then allotting shares to members proportionate to their shareholding, and then requiring the members to pay  for shares allotted to them either by one instalment or by making periodical and agreed instalments payment (calls on shares).   Where a loan is taken out by the company to funds investment  by the company, this can be repaid by the instalment payments by members.

Use of Professionals

It is highly recommended for Members and officials of investments clubs to always insist on using qualified professionals including the company auditor, lawyer and company secretary.  All transactions and payments thereof must also be done in consultation with the company lawyer. Such a culture, among other things, will ensure that the interests of the members are properly safeguarded and that directors are properly advised before making critical investments decisions.

 As the saying goes, 'cheap is also expensive'; it is always prudent to use professionals

Summary

Members of a  Chama should  set solid foundation by their Chama by registering it as a private company and thereafter agree on clear rules of engagement by signing a shareholders' agreement. Thereafter, the Chama should agree on their vision, make a business plan, and actualize their collective dream.  Once they have created enough wealth for their members, they can convert it into a public company and  invite the members of the public to subscribed for shares, or even list in the Nairobi Securities Exchange, as TranCentury did in the recent past.

If you require detailed advice on who you can set up a company for your Chama or craft a suitable shareholders' agreement, please do not hesitate to contact the writer through mainacy@gmail.com

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