By RISHAR SALEEM
Ceylon FT
Central Bank of Sri Lanka (CBSL) recently decreed the consolidation of financial institutions in Sri Lanka. CBSL has given a time frame to all the financial institutions to comply with their decree. This has created a stir among the financial institutions which are in operation in Sri Lanka and this has become a 'talking point' among the business circles. It shows some of these companies are keen and prepared for the consolidation but some are not. To get a clear independent view on this Ceylon FT spoke to an expert in finance and Taxation. A tax attorney at KPMG Suresh Perera gives his view on this particularly on the amalgamation process.An excerpt of the interview is given below.
Q: Can you give an overview of the Scheme by the Central Bank of Sri Lanka (CBSL) for the amalgamation of the finance companies?
A: CBSL wants to have a strong and dynamic financial sector and because of that it is proposing a scheme where finance companies combine together and make giant companies. Currently there are 58 finance companies operating in Sri Lanka and at the end of the scheme CBSL envisages the number to reduce up to 20 finance companies.
The proposed scheme identifies three categories of finance institutions. The Category A finance companies meets three criteria. Companies which have more than Rs 8 billion of assets, more than Rs1billion of core capital and who have higher degree of compliance with the directives of CBSL are categorized as Category A finance companies. Those companies which could not meet one or more of these criteria fall into Category B finance companies. The non-bank finance companies where business is at a standstill fall into the category C and there is only one such company in this category. There are 19 of Category A NBFIs and 38 of Category B NBFIs.
The proposition of this scheme is to increase the core capital of the Category B non banking financial institutions (NBFI) to Rs 1 billion. CBSL provides a deadline for these companies to abide by. They should fulfil this requirement by 1 of January 2016. This amount of core capital should be further increased to Rs 1.8 bn by 1 of January 2018.
There are further deadlines of compliance that has been laid down by the CBSL. Prior to carrying out all these required actions, the NBFIs should furnish CBSL with reports containing their Action Plans.
When increasing their core capital the NBFIs can either merge within their own groups or can merge or amalgamate with another Category B bank or a Category A NBFI. If it opts to merge within the group it should be completed by 30 June 2014 and the Action Plan should be submitted by 31 of March 2014. If it opts for the second option of merging with an external party, the majority of the NBFIs will be expected to be merged or absorbed by December 2014 and the remaining to be completed by the first half of 2015. The Action Plan to be carried out by such NBFIs should be submitted by 31 May 2014.
As you can see CBSL has laid down strict deadlines for this scheme and the NBFIs should act fast and comply with these requirements.
On the other hand, due diligence processes has already been commenced in these NBFIs. Major audit firms in Sri Lanka are helping out in carrying these due diligence reports which should be then submitted to CBSL.
Q: How will this merging will take place?
A: There are two methods to amalgamate companies. One is by a simple merger. This is a clear cut version of an 'amalgamation' where two separate entities combine into one single entity. The second method is where one entity acquires ownership of another company and then later on amalgamates into a new company. Such an amalgamation need not be within the same group.
One might think that when carrying out the second option in the present context, simply an acquisition would be sufficient. This would be less costly and time consuming than carrying out a subsequent amalgamation of the two entities. But, with that it creates a wholly-owned subsidiary of the company. The aim of CBSL is not to create subsidiaries but to have individual firms acting with financial stability.
Q: What is the legal procedure of amalgamating two companies?
A: The Companies Act of 2007 identifies two forms of amalgamation – the long form and the short form. The long form is where two unrelated companies combine to form a separate new entity. The short form is where a fully-owned subsidiary is amalgamating with its parent company to create a new entity.
In the earlier company law, such amalgamation needed the Court's approval. However, the current Act has taken away this provision. So the procedure has been more simplified. Those companies which opt for the long form amalgamation need to create an amalgamation proposal which terms out the particulars of the intended amalgamation. This amalgamation proposal needs to be approved by a Board resolution and then should be noticed to the public.
For short form amalgamation to take place a mere Board resolution would suffice. This is another difference between the short form and long form amalgamation processes.
Q: Most finance companies are listed. How would the process of amalgamation be on these companies?
A: This is an example of the short form amalgamation that the Companies Act provides for. Firstly one company acquires the shares of the other. This may be carried out under a shareholder agreement. With this, a fully-owned subsidiary is created. And then following the separate procedure for the short form amalgamation, such merger can be carried out. CBSL favours this method of amalgamation.
Q: What is the effect of the amalgamation on the companies?
A: Amalgamation is not a scheme of transferring business from one company to another. It is a continuation of business. The Companies Act says that once two companies are combined, the amalgamated company succeeds to all the property, rights, powers, and privileges of each of the amalgamating companies.
This means that the rights of one company vests in the new amalgamated company and also its liabilities. Say if there is a debt recovery action in one of the amalgamating companies that action will continue to the newly amalgamated company irrespective of the transition. This shows that the law provides for the continuation of the rights, liabilities and privileges of the existing companies.
www.ceylontoday.lk
Ceylon FT
Central Bank of Sri Lanka (CBSL) recently decreed the consolidation of financial institutions in Sri Lanka. CBSL has given a time frame to all the financial institutions to comply with their decree. This has created a stir among the financial institutions which are in operation in Sri Lanka and this has become a 'talking point' among the business circles. It shows some of these companies are keen and prepared for the consolidation but some are not. To get a clear independent view on this Ceylon FT spoke to an expert in finance and Taxation. A tax attorney at KPMG Suresh Perera gives his view on this particularly on the amalgamation process.An excerpt of the interview is given below.
Q: Can you give an overview of the Scheme by the Central Bank of Sri Lanka (CBSL) for the amalgamation of the finance companies?
A: CBSL wants to have a strong and dynamic financial sector and because of that it is proposing a scheme where finance companies combine together and make giant companies. Currently there are 58 finance companies operating in Sri Lanka and at the end of the scheme CBSL envisages the number to reduce up to 20 finance companies.
The proposed scheme identifies three categories of finance institutions. The Category A finance companies meets three criteria. Companies which have more than Rs 8 billion of assets, more than Rs1billion of core capital and who have higher degree of compliance with the directives of CBSL are categorized as Category A finance companies. Those companies which could not meet one or more of these criteria fall into Category B finance companies. The non-bank finance companies where business is at a standstill fall into the category C and there is only one such company in this category. There are 19 of Category A NBFIs and 38 of Category B NBFIs.
The proposition of this scheme is to increase the core capital of the Category B non banking financial institutions (NBFI) to Rs 1 billion. CBSL provides a deadline for these companies to abide by. They should fulfil this requirement by 1 of January 2016. This amount of core capital should be further increased to Rs 1.8 bn by 1 of January 2018.
There are further deadlines of compliance that has been laid down by the CBSL. Prior to carrying out all these required actions, the NBFIs should furnish CBSL with reports containing their Action Plans.
When increasing their core capital the NBFIs can either merge within their own groups or can merge or amalgamate with another Category B bank or a Category A NBFI. If it opts to merge within the group it should be completed by 30 June 2014 and the Action Plan should be submitted by 31 of March 2014. If it opts for the second option of merging with an external party, the majority of the NBFIs will be expected to be merged or absorbed by December 2014 and the remaining to be completed by the first half of 2015. The Action Plan to be carried out by such NBFIs should be submitted by 31 May 2014.
As you can see CBSL has laid down strict deadlines for this scheme and the NBFIs should act fast and comply with these requirements.
On the other hand, due diligence processes has already been commenced in these NBFIs. Major audit firms in Sri Lanka are helping out in carrying these due diligence reports which should be then submitted to CBSL.
Q: How will this merging will take place?
A: There are two methods to amalgamate companies. One is by a simple merger. This is a clear cut version of an 'amalgamation' where two separate entities combine into one single entity. The second method is where one entity acquires ownership of another company and then later on amalgamates into a new company. Such an amalgamation need not be within the same group.
One might think that when carrying out the second option in the present context, simply an acquisition would be sufficient. This would be less costly and time consuming than carrying out a subsequent amalgamation of the two entities. But, with that it creates a wholly-owned subsidiary of the company. The aim of CBSL is not to create subsidiaries but to have individual firms acting with financial stability.
Q: What is the legal procedure of amalgamating two companies?
A: The Companies Act of 2007 identifies two forms of amalgamation – the long form and the short form. The long form is where two unrelated companies combine to form a separate new entity. The short form is where a fully-owned subsidiary is amalgamating with its parent company to create a new entity.
In the earlier company law, such amalgamation needed the Court's approval. However, the current Act has taken away this provision. So the procedure has been more simplified. Those companies which opt for the long form amalgamation need to create an amalgamation proposal which terms out the particulars of the intended amalgamation. This amalgamation proposal needs to be approved by a Board resolution and then should be noticed to the public.
For short form amalgamation to take place a mere Board resolution would suffice. This is another difference between the short form and long form amalgamation processes.
Q: Most finance companies are listed. How would the process of amalgamation be on these companies?
A: This is an example of the short form amalgamation that the Companies Act provides for. Firstly one company acquires the shares of the other. This may be carried out under a shareholder agreement. With this, a fully-owned subsidiary is created. And then following the separate procedure for the short form amalgamation, such merger can be carried out. CBSL favours this method of amalgamation.
Q: What is the effect of the amalgamation on the companies?
A: Amalgamation is not a scheme of transferring business from one company to another. It is a continuation of business. The Companies Act says that once two companies are combined, the amalgamated company succeeds to all the property, rights, powers, and privileges of each of the amalgamating companies.
This means that the rights of one company vests in the new amalgamated company and also its liabilities. Say if there is a debt recovery action in one of the amalgamating companies that action will continue to the newly amalgamated company irrespective of the transition. This shows that the law provides for the continuation of the rights, liabilities and privileges of the existing companies.
www.ceylontoday.lk
No comments:
Post a Comment