Sri Lankan stocks tad weaker in thin trade

Dec 16 (Reuters) - Sri Lankan stocks fell for a fourth straight session on Tuesday, led by blue-chips such as John Keells Holdings as investors remained cautious ahead of the Jan. 8 presidential poll.

The main stock index ended 0.09 percent, or 6.70 points, lower at 7,223.56, its lowest close since Dec. 9.

"There was limited activity. Political worries are hindering market activity," a stockbroker said on condition of anonymity.

"Investors expect political stability after the election and until such time we may hardly see any big activity unless government funds boost the index."

Turnover stood at 543.7 million rupees ($4.15 million), according to stock exchange data, well below this year's daily average of 1.42 billion rupees.

Analysts and stockbrokers expect trading to be sluggish due to political uncertainty ahead of the presidential polls next month and the index to fall through December-end.

Foreign investors bought a net 57.4 million rupees worth of shares, extending their net buying so far this year to 22 billion rupees, exchange data showed.

Shares in Keells fell 0.79 percent to 250 rupees.

Nineteen candidates, including President Mahinda Rajapaksa and former health minister Mithripala Sirisena, the consensus candidate of a united opposition, submitted their nominations on Monday.

So far 11 loyalists from Rajapaksa's United People's Freedom Alliance, including Sirisena, have defected after he announced snap elections last month, while two opposition legislators have joined the ruling party.

Speculation over more defections also weighed on sentiment, analysts said. 

($1 = 131.0000 Sri Lankan rupees) 

(Reporting by Shihar Aneez; Editing by Sunil Nair)

Sri Lanka to launch a US$50mn private equity fund

Dec 16, 2014 (LBO) –Sri Lanka launched Emerald Sri Lanka Fund, a private equity fund, targeting a 50 million US dollar fund which will provide financing to small and medium enterprises in Sri Lanka that has strong growth potential, an official said.

The fund will be run NDB Zephyr Partners, a joint venture between by New York based Zephyr Management and Colombo base NDB Bank group.

The fund will invest in small and mid-sized businesses seeking growth.

“Without equity the companies cannot grow 20 to 30 percent,” Vajira Kulatilaka, Chief Executive of NDB Capital Holdings PLC said.

“If you are growing at 10 percent what will happen is that you will have go for internal cash generation and loans to but at a lower growth trajectory,”

“But if you want to grow at a higher trajectory you need an equity base. And that equity base is not here.”

“In Sri Lanka, unless you go for an IPO, there is no way for a company or a SME can get equity in this country,”

” So there is a gap and we are filling it.”

He was speaking at the launching ceremony held Colombo yesterday.

Pointing out an example of Face book, a social media network, Kulatilaka said that the company (Facebook ) had injected private equity several times before proceeding to an IPO.

Face Book grew from 0.5 million dollars in 2004 and went for a 16 billion dollars IPO in 2012.

“The first few investments were done by angle investors. Then it was venture capital. Lastly there was many stages of private equity placements before going to an IPO,” Kulatilaka said.

“This is what we should do in this county,”

“Before going to an IPO, we should have that several rounds of equity investments to make the company grow and then make the company public at the right time.”

The fund plans to make an investments in the range of two million US dollars to six million US dollars in equity and equity linked securities in small and medium sized enterprises in the island.

It is estimated 75 percent of all enterprises fall into the SME category in Sri Lanka and 45 percent of country’s employment represent by SME’s.

SME’s represent nearly 80 percent of 4700 Sri Lankan exporters.

Emerald Sri Lanka will make 10 to 12 investments for the next four year time period with 3 to 5 years exiting plan through IPO, buy back agreement or trade sale.

“We will not only provide equity but also add value to the company,” Kulatilaka said.

"We will add value by providing support and expertise on capital structures, financial reporting, business development, management development, corporate governance, strategy etc. to the portfolio companies."

The fund investors include IFC, a memberof the World Bank Group, DEG –Deutsche Investitions-und Entwicklungsgesellschaft mbH and FMO, the Netherlands Development Finance Company.

“The growth in Sri Lanka has been very strong and head count poverty is less than 7 percent and all the macroeconomic indicators heading in the right direction,” Adam Sack, IFC Country Manager for Sri Lanka and Maldives said.

“One of the missing ingredients for Sri Lanka is long term Capital particularly in small and medium sized enterprises.”

“How can you create income without long term risks?”

“And this gap, we are planning to fill though Emerald Sri Lanka.”

The Finance Company PLC continues second phase of restructuring

CBSL Press Release

In keeping with the direction issued by the Monetary Board at its meeting held on 26th May 2014, the Central Bank has continued the implementation of the second phase of restructuring of The Finance Company PLC (TFC) in order to further stabilise the Company and move it to a profitable level, in terms of the provisions of the Finance Business Act No. 42 of 2011. Already, a new Board of Directors has been appointed and a new business model has been implemented by the TFC under which the company is expected to broad base and rationalize its business activities. At the same time, the Monetary Board has approved a long term concessionary loan facility from the Sri Lanka Deposit Insurance and Liquidity Support Fund in order to support the liquidity requirements of TFC as per the envisaged new business model.

In that context, an agreement pertaining to the liquidity support facility was signed on 15th December 2014 by Dr. S H A M Abeyratne, Chairman and Mr. Aruna Lekamge, Managing Director, of TFC, with the Central Bank of Sri Lanka. As a result, TFC is now expected to further consolidate its progress towards reaching a stable, sustainable and profitable level that would enable the company to attract new equity capital through a suitable future share issue.

The current Board of Directors of TFC are as follows:
Dr. S. H. A. M. Abeyratne Chairman
Mr. Sujeewa Rajapakse Deputy Chairman/ Non-Executive Independent Director
Mr. Aruna P Lekamge Managing Director
Mr. T B Ekanayake Executive Director
Mr. R D Abeywickrama Executive Director
Dr. Rohantha Athukorala Non-Executive Independent Director
Ms. Himalee Kularathna Non-Executive Independent Director

Insurers' Fundamentals firm in face of reforms - Fitch

Fitch Ratings Lanka says that the Sri Lankan insurers are likely to maintain their financial fundamentals, supported by moderate market growth and under-penetration. This is despite the many regulatory reforms, including the requirement that composite insurers separate their life and non-life businesses in early 2015, Fitch says in a new report published today.

Sri Lanka remains heavily under-penetrated by insurance with a total premium to GDP ratio of just 1.09%. Fitch does not expect any drastic increase in penetration of life insurance in the short to medium term as disposable income levels are still low. In addition, there is a lack of awareness and appreciation of the concept and benefits of insurance, and lack of confidence in the industry.

Most composite insurers are likely to split their life and non-life businesses in January 2015. Fitch expects the separation of the businesses to provide greater focus and transparency, and enhance policy holder protection. However, some insurers may face operational uncertainties as a result.

In 2014, the regulator tested the risk-based capital (RBC) regime and companies will report RBC ratios as well as solvency ratios to the regulator in 2015. The RBC regime is expected to replace current solvency regime by 2016.

The minimum capital requirement for each line of business - life and non-life - has been increased to Rs 500m (from Rs 100m) and insurers are expected to list in the Colombo Stock Exchange by 2016, subject to certain exemptions.

Many established insurers are striving to grow their profitable life businesses inorganically and some are considering divesting their non-life businesses, competition for which is intense. Fitch expects the more stringent regulation to promote market consolidation due to higher compliance and administrative costs. Consolidation would be a positive development, especially for insurers with low capital bases.

Fitch expects underwriting losses of many non-life entities to continue in the short to medium term, driven by price competition.

The smaller companies will strive to achieve critical mass, with each segment of business having to operate separately from early 2015. Fitch expects falling interest rates to affect the investment income of many insurers who are accustomed to higher returns that in the past counterbalanced poor underwriting performance in the non-life segment.

The sector outlook could be revised to negative if the split of composites leads to a significant decrease in capitalisation and solvency ratios. Any weakening in risk capital due to profit volatility or higher equity exposure in investments will be negative to issuer ratings. Sever e price competition in motor insurance, leading to weak technical results, and or significant reduction in investment income due to falling interest rates that result in sustained losses would be negative for the non-life industry.

Significant growth in real gross domestic product and disposable income that is conducive to deeper penetration will be positive for the industry.

The full report titled "'2015 Outlook: Sri Lankan Insurance Sector'" dated 15 December 2014, is available on Fitch's website at www.fitchratings.com.
www.dailynews.lk

Focus on transparency

Veteran chartered accountant, former company managing director and Public Rights Activist, Chandra Jayaratne, has written to the Director General of the Securities and Exchange Commission of Sri Lanka on the good governance and transparency associated with the Regulatory Reforms proposals covering the operation of Executive Share Option Schemes in Sri Lanka. In his letter, under the theme: Regulatory Reforms Proposal Re; Executive Share Option Schemes, Jayaratne said: "I write to submit good governance and transparency associated with Regulatory Reforms proposal covering the operation of Executive Share Option Schemes in Sri Lanka.

In the above connection, I draw your kind attention to the newspaper report titled, 'Share option bonanza for JKH executive directors,' which appeared in the Sunday Island of 29 November 2014.

I submit that the Securities and Exchange Commission appoints a committee comprising multi disciplinary professionals and multi stakeholder representatives, to review and report as to whether;

1. Share option schemes of the type, structure, operation, and options as referred to in this news media report, in application as a part of executive compensation by listed companies operating In Sri Lanka, within the currently applicable company law, governance, market supervision, codes of conduct and enforcement framework, are appropriate and beneficial to and in the interest of all stakeholders in the longer term?

2. If such schemes are to be promoted in Sri Lanka, review whether the present laws, regulations, disclosure requirements, market supervision, codes of conduct and enforcement schemes are adequate to ensure the sustainable beneficial interests of all stakeholders?

3. Review whether such schemes can be abused by key executive option holders for their personal benefit and lead to market manipulations, conflicts of interests and promote undesirable related party/financial transactions?

4. If such schemes are to be retained in operation in Sri Lanka, in the interests of all stakeholders, review whether the relevant key executives and their related parties should be prevented from trading in their holdings of company shares for a specified period of at least two to three years before and after exercise of such options?

5. If such schemes are to be retained in operation in Sri Lanka, in the interests of all stakeholders, review whether new/revised good governance expectations led Codes of Best Practice and Codes of Ethical Conduct should be in place, with an effective compliance process, self declarations, independent monitoring schemes and transparency via independent financial media?

In the run up to this submission, I placed the above issues as a questionnaire and circulated it to 50 key market participants. There were 21 responses with the respondents expressing the under noted views in respect of each of the questions;

1. Question 1: 18 persons 'NO' and Three Persons 'YES'

2. Question 2:19 persons 'NO' and 1 person 'YES'

3. Question 3: 20 Persons 'YES'

4. Question 3: 20 Persons 'YES'

5. Question 3: 20 Persons 'YES'

I trust that this submission will receive your professional attention:

The letter has been copied to the Secretary, Ministry of Finance & Planning; Central Bank Governor, Registrar of Companies; Chairman, Securities & Exchange Commission of Sri Lanka; Chairman, Colombo Stock Exchange, Director General, Colombo Stock Exchange; Director General, Accounting & Auditing Standards Monitoring Board; President, Chartered Financial Analysts Association, President, Institute of Chartered Accountants of Sri Lanka and the chairman, Ceylon Chamber of Commerce and all editors of financial media.
www.ceylontoday.lk

Overdue Lanka Cement accounts arrive Results disappoint after damming 2011 Audit Report

By J. Kurukulasuriya

Ceylon Finance Today: Lanka Cement PLC simultaneously released its financial statements for the quarters ended 31 March and 30 June 2014, on Friday 12 December, showing that their cost of sales expenses for the six months of. operations rose 17% over the previous corresponding period and interest expense has gone from zero to 782,000 resulting in a net loss of Rs 2.5 million as against the comparable 2013 loss of Rs 517,000.

In the report and accounts for the year ended 31 December 2011, which is the most recent set of audited accounts released by the Lanka Cement Company, N. S. M. Samsudeen attorney-at-law Chairman/Managing director states, "I assumed duties as the chairman of Lanka Cement PLC in July 2012. We assure all share holders that the company will be uplifted into a profit generating enterprise in the near future". This was in spite of having incurred an operational loss for the year 2010 of Rs 39,338,269 and Rs 34,735,581 for the year 2011.

The auditor could not verify the existence or value of the company's property, plant and equipment at the time — it said—, "We were not received (sic) satisfactory documentary evidence in respect of following property, plant and equipment. Hence, we are unable to satisfy ourselves as to the existence, accuracy and value of the property, plant & equipment as at 31 December2011. Satisfactory evidence was not made available in respect of the deferred grant amounting Rs 94,785,639 and government grant amounting Rs 9,259,621".

Further criticizing the company the auditor said, — "We also draw attention that (sic) the adverse financial indicators of the company. The company incurred consecutive year net loss of Rs 34,560,582 during the year ended 31 December, 2011 and, there is an accumulated loss of Rs 1,785,491434 as of that date. The company's total liabilities exceeded its total assets by Rs 50,383,953 (Previous year Rs 15, 823, 372).These factors raise substantial doubt that the company will be able to continue as a going concern". In conclusion they said — "we do NOT express an opinion on the financial statements of the company."

On the balance sheet, Lanka Cement has an issued capital of Rs 1,735 million, with accumulated losses of Rs 2.3 billion. It has a PB ST loan of Rs 7.5 million. The share capital consists of 173,510,748 ordinary shares.

By comparison with its competitor, Ceylon FT recently reported on the accounts of Tokyo Cement, which has a stated capital of Rs 2,890 million, with reserves of Rs 6,700 million. It had a six month profit of Rs 1,179 million for the six months to 30 September.

A new board of five Lanka Cement directors took office on 26 July 2012. They were — Noor Salim Mohamed Samsudeen, Jayasuriya Kuranage Nishan Chaminda Perera, Chintaka Jeevantha Wijesekera, Tiramadura Manik Arjuna Jayasinghe, and Lal Wijesekera Abeynayake.

Lanka Cement operates a concrete yard at KKS to supply concrete blocks and paving blocks for housing projects and road works. "My vision for the company is to install a grinding/Packing plant at KKS and cater to the Rehabilitation, Resettlement Programme started by the government in the Northern Province", the chairman said at the time.
The company's total equity went from Rs 32 million in 2007 to Rs minus 51 million (negative equity) on 31 December 2011, the date of the last audited accounts. The audit was carried out by Udayasiri Kariyawasam & Company Chartered Accountants.

There were 4,605 shareholders.

Lanka Cement's major shareholder and the controlling company is Ceylon Cement Corporation 62%, and the Secretary General to the Treasury holds 12%. The People's Bank has six per cent with over 10 million shares, and Ceylon Petroleum Corp five million shares. Among individual shareholders, Thirugnanasambandar Senthilverl has 158,200 shares and E. Thavagnanesooriyam 4,787,814 shares.

The public holds 25% of the shares in the company, none of the directors hold shares.
www.ceylontoday.lk

CSE announces constituent changes to S&P Sri Lanka 20 Index

Colombo Stock Exchange (CSE) yesterday announced the changes in S&P Sri Lanka 20 index constituents made by S&P Dow Jones Indices at the 2014 annual index rebalance.

Effective from the December 22, 2014 (after the market close of December 19, 2014), Asian Hotels & Properties PLC (CSE Ticker: AHPL, Bloomberg Ticker: AHPL SL), C T Holdings PLC(CSE Ticker: CTHR, Bloomberg Ticker: CTHR SL) and Hayleys PLC(CSE Ticker: HAYL, Bloomberg Ticker: HAYL SL)will be removed from the S&P Sri Lanka 20 index as they no longer qualify for index inclusion.

Replacements will be Access Engineering PLC (CSE Ticker: AEL, Bloomberg Ticker: AEL SL), People’s Leasing & Finance PLC (CSE Ticker: PLC, Bloomberg Ticker: PLC SL) and Sri Lanka Telecom PLC (CSE Ticker: SLT, Bloomberg Ticker: SLTL SL).

The index includes the largest 20 stocks, by total market capitalisation, listed on the CSE that meet minimum size, liquidity and financial viability thresholds. The constituents are weighted by float-adjusted market capitalisation, subject to a single stock cap of 15%, which is employed to reduce single stock concentration.

The S&P Sri Lanka 20 has been designed in accordance with international practices and standards. All stocks are classified according to the Global Industry Classification Standard (GICS), which was co-developed by S&P Dow Jones Indices and MCSI and is widely used by market participants throughout the world.

CSE Chief Executive Officer Rajeeva Bandaranaike said: “The S & P Sri Lanka 20 index has gained wide acceptance by all stakeholders and enhanced the visibility of the Colombo Stock Exchange. This index is particularly designed to create index tracking funds; such as index funds and Exchange Traded Funds (ETFs). The S&P Sri Lanka 20 index is a more realistic measure as it uses a public float adjusted market capitalisation, to measure the size of the company; in line with global standards. I am confident that the S&P Sri Lanka 20 will further enhance the visibility of the CSE amongst the global investor community and will be a tool to create more tradable products.”

To be eligible for inclusion, a stock must have a minimum float-adjusted market capitalisation of Rs. 500 million, a six-month average daily value traded of Rs. 1 million, have been traded at least 10 days of each month for the three months prior to the rebalancing reference date, and have positive net income over the 12 months prior to the rebalancing reference date.

For information, including the complete methodology, please visit www.spindices.com.
www.ft.lk