Sri Lanka policy rates steady; inflation, credit growth benign

Mar 21,2014 (LBO) - Sri Lanka is holding a policy rate corridor at 6.5 to 8.0 percent, the Central Bank said amid benign credit growth and inflation. Credit to government had expanded by 68.3 billion rupees in January 2014 but the proceeds of a sovereign bond sold in January is expected to have reduced credit to the state in February.

Credit to private sector has grown 5.2 percent in the year to January 2014, from 7.5 percent in December 2013 mostly due to falling gold-backed loans and repayments of short-term advances by companies.

Credit to state owned enterprises have also contracted in January the Central Bank said. SOE credit surged in December. There had been concerns that higher thermal power generation amid a drought could worsen the finances of SOEs, which improved over the last year.

Lower credit growth reduces inflationary pressures and imports and the trade deficit contracts as deposits outpace loans in the banking system.

It also allows the Central Bank to rebuild foreign reserves lost during a balance of payments crisis triggered by credit bubbles.

The Central Bank said gross official foreign reserves rose to 8.0 billion US dollars in January 2013, which was equal to 5.3 months worth of imports.

Exports grew 23.2 percent in January 2013 from a year earlier while imports grew 7.9 percent allowing the trade deficit to contract to 756 million US dollars in the month, the Central Bank said.

Any increase in exports will increase imports by the same amount shortly after either through direct spending by the recipients of export proceeds (such as apparel factory workers) or when their savings in banks are loaned to others, except when credit is weak.

Trade deficits are caused by spending of proceeds of foreign exchange inflows outside merchandise exports such as worker remittances (exports of labour) and net government borrowings (exports of government debt).

Consumer prices were up 4.2 percent during the 12-months to February 2014, compared to 4.4 percent in January.

"Looking ahead, inflation is expected to remain at mid single digits throughout 2014," the Central Bank said in its March monetary policy review.

"Although the outlook for inflation remains encouraging from a demand perspective, the Central Bank will continue to closely monitor possible supply disruptions resulting from the drought conditions experienced in certain parts of the country."

Analysts say any so-called 'supply shock' from drought will only trigger a temporary rise in prices and not inflation, which is a monetary phenomenon, unless such supply shocks are accommodated by the Central Bank, through credit from the banking system.


In 2011 a drought which reduced hydro power generated was accommodated by the banking credit which eventually saw the rupee falling to 130 from 100 to the US dollar and a surge in inflation.

The rate setting 'monetary board' expected credit to private sector to "rebound from the second quarter of the year, supported by declining market lending rates, sufficient liquidity levels and increased demand for exports from the advanced economies."

The state statistics office said Sri Lanka's economy has grown 8.2 percent in the last quarter of 2013. 

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http://www.cbsl.gov.lk/pics_n_docs/latest_news/press_20140321e.pdf

CB to play marriage broker for banks and NBFIs

By Mario Andree

Ceylon FT: A senior official said, that the country's financial sector regulator, the Central Bank had decided to play the role of marriage broker for banks and non-bank financial institutions which fail to identify their partner for merger or acquisition.

Assistant Governor of Central Bank C. J. P Siriwardana said that adequate time was given for banks and non-bank financial institutions to identify partners for mergers and acquisitions, and if any institution fails to submit proposals by the deadline, the Central Bank would identify marriage proposals for them.

Addressing queries at a forum organized by the Institute of Chartered Accountants on Wednesday (19), Siriwardena said that the regulator...decided to reduce the number of banks and non-bank financial institutions through mergers.

According to him, banks and non-bank financial institutes have shown keen interest in consolidation efforts giving rise to several issues arising in the process.

The regulator, decided to reduce the number of banks and non-bank financial institutions after several recorded failures. According to the Central Bank master plan, the number of non-bank financial institutions would be reduced to 20 out of which three will specialize in micro finance, while five major banks would be created to hold more than Rs 1 trillion assets, with one bank as a major development bank and smaller banks which would hold more than Rs 100 billion in assets.

Central Bank categorized the 58 non-banking financial institutions (NBFIs) into three categories A, B and C in preparation for the consolidation; and 19 NBFIs fitted into category 'A' which was compliant with regulations, with a capital of more than Rs 1 billion and assets worth more than Rs 8 billion. The Central Bank Governor outlining the Master Plan on Consolidation of the Financial Sector said that 38 NBFIs were categorized as 'B' because they fell short of the requirements for category A, and one firm that was under court restraint, fell into category 'C'.
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CBSL envisages strong financial sector by consolidation – Suresh Perera

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.
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Sri Lanka stocks edge up on foreign buying

(Reuters) - Sri Lankan shares edged up in thin trade on Thursday led by blue-chips and on foreign buying, but an impending U.N. resolution on the country's human rights record later this month dented sentiment.

The main stock index ended up 0.04 percent, or 2.51 points, at 5,914.56.

Foreign investors were net buyers for the first time in five sessions, buying a net 52.1 million rupees worth of shares on Thursday. Net outflows stood at 4.1 billion rupees so far in 2014, and clocked 22.88 billion rupees in 2013.

The day's turnover was 263.3 million rupees ($2.02 million), well below a third of this year's daily average of about 907.4 million rupees.

Analysts said investor sentiment has been dented on concerns over the U.N. resolution, which could have an impact on the country's economy. Many potential buyers in risky assets are staying on the sidelines awaiting clear direction.

Shares in biggest listed lender Commercial Bank of Ceylon PLC gained 1.03 percent, while top conglomerate John Keells Holdings edged up 0.05 percent.

Earlier this month, Sri Lanka questioned the independence of the human rights office of the United Nations after the United States asked it to investigate violations by the Sri Lanka government related to the civil war.

A vote on the resolution is scheduled for the next week. 

($1 = 130.6000 Sri Lanka rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Sunil Nair)

Sri Lanka shares close flat

Mar 20, 2014 (LBO) - Sri Lanka's shares close slightly higher amid thin price increases in the index heavy stocks, brokers said.

The Colombo benchmark All Share Price Index closed 2.51 points higher at 5,914.56 up 0.04 percent. The S&P SL20 closed 6.69 points higher at 3,231.91, up 0.21 percent.

Turnover was 263.33 million rupees, down from 640.97 million rupees a day earlier with 93 stocks close positive against 97 negative.

Commercial Bank closed 1.20 rupees higher at 117.70 rupees with market transactions of 50.60 million rupees contributing to 19 percent of the daily turnover.

Foreign investors bought 105.47 million rupees worth shares while selling 53.33 million rupees of shares.

Union Bank closed 90 cents higher at 18.30 rupees and Blue Diamonds closed 30 cents higher at 3.50 rupees, attracting most number of trades during the day.

Indo Malay closed 150.00 rupees higher at 1,650.00 rupees and C T Holdings closed 5.40 rupees higher at 140.00 rupees.

Hatton National Bank closed 1.70 rupees lower at 156.20 rupees.

Bukit Darah closed 8.90 rupees higher at 560.00 rupees and Lion Brewery closed 9.00 rupees lower at 385.00 rupees.

Ceylon Cold Stores closed 5.70 rupees lower at 141.00 rupees and Nestle Lanka closed 2.90 rupees higher at 1,953.10 rupees.

Ceylon Tobacco Company closed 10 cents lower at 1,099.90 rupees and John Keells Holdings closed 10 cents higher at 218.10 rupees.

JKH’s W0022 warrants closed 1.10 rupees lower at 62.70 rupees and its W0023 warrants closed flat at 67.10 rupees.

Sri Lanka's Softlogic Retail rated 'BBB-' by RAM

Mar 20, 2014 (LBO) - Sri Lanka's Softlogic Retail (Pvt) Ltd, a consumer durables and apparel retailer has been given a 'BBB-' domestic rating by RAM Ratings Lanka.

" The ratings are upheld by the Company’s strong competitive position backed by its diversified target markets and a retail branding strategy which caters to the various niches of the local retailing industry," RAM said in a statement.

"The Company’s “Softlogic Max” branded showrooms cater to the high-end market segment, whilst the “Softlogic” branded showrooms cater to the countries mass market as a whole, even encompassing the rural populace of the country.

"Furthermore, SRL also remains as the market leader in the branded apparel market segment, and has grown exponentially in this segment over the past few years by introducing many international brands such as Mango, Nike, Giordano, DKNY, Levis, and Charles & Keith exclusively under its retail wing."

But RAM the rating was moderated by weak debt protection metrics and exposure to foreign vendor and supplier concentration risks.

The Group’s total borrowings most for expansion had more than doubled to 3.47 billion rupees in March 2012 from 1.66 billion in March 2011.

Its gearing ration increased to 3.57 times from (2.94 times excluding borrowings from related parties) from 1.95 times in 2011

By March 2013 gearing had marginally improved to 3.37 times and to 2.49 times by March 2014 financial year after a 398 million capital infusion.

The full statement is reproduced below:-

RAM Ratings Lanka assigns BBB-/P3 Corporate Credit Ratings to Softlogic Retail (Private) Limited

RAM Ratings Lanka has assigned respective long- and short-term corporate credit ratings of BBB- and P3 to Softlogic Retail (Private) Limited (“SRL” or “the Company”); the long-term ratings carry a stable outlook. SRL is an electronic and clothing retailer, which is involved in the import and distribution of home electrical appliances, office automation items, and apparels. The Company is also an authorised agent for a number of automobile brands in Sri Lanka. SRL and its subsidiaries are collectively referred to as the Group.

The ratings are upheld by the Company’s strong competitive position backed by its diversified target markets and a retail branding strategy which caters to the various niches of the local retailing industry. SRL has devised a retail branding operation, which caters to the various niches of the local retailing industry.

The Company’s “Softlogic Max” branded showrooms cater to the high-end market segment, whilst the “Softlogic” branded showrooms cater to the countries mass market as a whole, even encompassing the rural populace of the country. Furthermore, SRL also remains as the market leader in the branded apparel market segment, and has grown exponentially in this segment over the past few years by introducing many international brands such as Mango, Nike, Giordano, DKNY, Levis, and Charles & Keith exclusively under its retail wing.

The ratings are also upheld by the robust improvements in the Company’s financial performance in recent times. SRL’s revenue has charted an uptrend in the recent years, demonstrating a compounded annual growth rate (CAGR) of 60.52% from FY Mar 2009 to FY Mar 2013. The Group’s growth was recorded at 10.55% in FY Mar 2013, from the higher growth levels of FY Mar 2012 and FY Mar 2011 on the back of adverse economic and market conditions encountered by the entire retail industry.

Nevertheless, SRL’s revenue continued to grow in Q3 FY Mar 2014, increasing by 23.52% y-o-y (Annualised) on the back of an increase in demand for consumer electronics and branded apparels in the country. The Group’s operating profit before depreciation, interest and tax (OPBDIT) margin, which declined to 8.97% in FY Mar 2013 from 9.48% in FY Mar 2012, also rebounded marginally in Q3 FY Mar 2014, increasing to 9.01% amidst a rise in demand for consumer electronics and branded apparels on the back of an improved economic and financial climate. However, the Group’s bottom-line growth remained fairly stagnant on the back of higher finance costs coupled with fixed costs pertaining to the opening of new outlets.

Furthermore, the outlook for the retail sector of Sri Lanka is also expected to progress, driven by improved market balances, favourable economic conditions and an increase in the overall consumer spending levels.

The preceding positives are, however, moderated by the Company’s weak debt protection metrics coupled with SRL’s exposure to foreign exchange and supplier/ vendor concentration risks. The Group’s total borrowings, which were largely raised for expansion purposes, more than doubled to LKR 3.47 billion in FY Mar 2012 from LKR 1.66 billion in FY Mar 2011.

Consequently, SRL’s gearing ratio increased to 3.57 times (2.94 times excluding borrowings due to related parties) in FY Mar 2012 from 1.95 times (1.64 times excluding borrowings due to related parties) in FY Mar 2011. Nonetheless, SRL gearing levels showed marginal improvement in FY Mar 2013, improving to 3.37 times (2.75 times excluding borrowings due to related parties) and improved further to 2.49 times (2.02 times excluding borrowings due to related parties) in Q3 FY Mar 2014 on the back of equity inflows amounting to LKR 398 million through a capital infusion in 2QFY 2014.

We also note that a bulk of SRL’s borrowings consist of working capital loans related to hire purchases. Thus, SRL’s gearing ratio excluding working capital loans related to hire purchases was at 1.31 times as at end- FY Mar 2013 and 0.82 times as at end- FY Dec 2013. Furthermore, SRL’s FFO debt coverage ratio continued to remain weak at 0.22 times in FY Mar 2013 (0.47 times excluding borrowings related to working capital loans related to hire purchases), regardless of the Company’s improved performance, due to the Group’s existing debt levels.

We also note that SRL has short-term borrowings consists of loans due to related parties amounting to LKR 1.00 billion as at end-3Q FY Mar 2014 (LKR64.80 million as at end- FY Mar 2013). Our ratings hinge upon the capitalization of LKR400million worth of related company loans on or before end-1Q FY Mar 2015 (June 2014), which is expected to further improve the Company’s gearing levels. RAM Ratings Lanka notes that the non-capitalization of this related company loan will trigger a negative rating action on the company.

More time needing Touchwood objects but petitioner proceeds with winding up

The much awaited Touchwood winding-up case was called in the Commercial High Court yesterday before High Court Judge Amendra Senevirathna, on 19 March 2014 for the inquiry of the Winding-up where the appearances and the legal representations of the parties were as before.

Counsel for the petitioner Avindra Rodrigo, proceeded with the inquiry of the winding-up amidst many objections by the counsel for the company Harsha Amarasekera P.C.

The company had delayed the inquiry on various grounds, promising a settlement from the time the matter was first heard in Court and it was apparent that the company attempted to postpone the inquiry, when the matter was taken up in Court yesterday. Inquiry will resume on 24 March 2014 on which date the company will be given the opportunity to make their submissions.

The counsel for the company requested Court to grant two more days to settle the petitioner and the intervening creditors, to which counsel for the petitioner and other counsel representing the intervening creditors objected, stating that it was yet another delaying tactic. As no payments were made by the company since the institution of action the petitioner and intervening creditors seemed adamant to proceed with the inquiry for the winding-up.

The petitioner filed action in the Commercial High Court Colombo, to wind-up Touchwood Investments PLC on 26 July 2013 as the company had failed to pay monies due to him. The company objected to the Winding-up Petition filed in court and stated that the company will settle all the investors of the Agarwood plantation in Thailand in accordance with a proposed payment plan.

The company proposed a settlement scheme to settle the petitioner in full in two installments, 50% of the payment by 14th January 2014 and 2nd installment of the remaining 50% by 14th March 2014. The company also admitted debt of seven other intervening creditors, and proposed a settlement plan to pay them in three instalments of 25% by 14 January 2014, 25% by 14 March 2014 and the remainder by 14 June 2014. The company failed to adhere to the terms of settlement they proposed, and no payments were made by 14 January 2014. The creditors who were deceived by the previous management of the company had a glimpse a hope of recovering their dues in the light of the proposed settlement plan presented by the new management, but soon realised that even though the management had changed hands not much has change. They were yet again left with only disappointment and regret.

On 27 January 2014 when the case was called in the Commercial High Court, counsel representing the company Harsha Amarasekara PC stated that the CEO of the Company, L.W. Kiwlegedara will issue cheques to the petitioner and seven other intervening creditors in settlement of the 1st instalment that was due on 14 January 2014. The cheques dated 27 February 2014 were issued from the personal bank account of the CEO and were presented to the creditors in open Court. Later when the case was called on 25 February 2014 the company requested the creditors to bank the cheques on 3 March 2014. The petitioner and the creditors accepted the said cheques even though they were post-dated cheques issued from the account of the CEO of the company and presented the cheques on 3 March 2014 as requested. The petitioner and the creditors have exhibited a great degree of tolerance towards the company by complying with numerous requests and by providing further time and opportunities for the company to settle their dues.

However, when the cheques presented in open Court were returned, the petitioner and the intervening creditors had no other recourse but to proceed with the winding-up. Numerous assurances given by the company in open Court were treated with no regard disrespecting the entire Court system and the legal proceedings of Court.

Avindra Rodrigo stated in his submissions that the petition for the winding-up had been made in compliance with the provisions of the Companies Act 7/2007 and the company had not at any instance disputed the monies owed to the petitioner. The company had given numerous assurances to the petitioner that his dues will be settled in a timely manner. Five cheques issued to the petitioner by the company before instituting legal action too had been returned as the said cheques were issued from a closed account. The Board of Directors of the company is said to have been changing frequently exhibiting the instability of the company. The counsel further stated that it is established beyond doubt that the company has no money to pay the investors as it had adopted a ‘Ponzi’ scheme where old investors are paid with the money invested by new investors, and the company is now faced with a liquidity crisis as there are no new investors.

Counsel further stated that directives issued by the SEC imposing a restriction on the management and alienation of the assets of the company will prevent the company from alienating its assets, however, as there is no official, such as a liquidator to take over or monitor the management of the company these directives may be of no effect in practice. It was further stated that a company which has failed to settle the petitioner and seven creditors as per the settlement plan is deemed unable to pay the admitted debts of 257 other creditors of the company and that alone reveals the insolvent state of the company. Counsel further submitted that the company has not only failed to pay its investors but also the salaries of its employees for the past few months and that the company now has no registered office.

Counsel further emphasised the urgency of concluding this matter as further delay would only increase the improbability of recovering the investors’ dues. Counsel further drew an analogy to other similar incidents of the recent past where public quoted companies collapsed leaving the investors with no hope of recovering their dues.

Several counsel appearing for the intervening creditors supported the submissions made on behalf of the petitioner and made submissions in support of the winding-up. They also drew Courts’ attention to the fact that investors of other companies using the brand name Touchwood such as Touchwood Ltd., in Thailand and Touchwood Forestry Company Ltd. in Hong Kong, may resort to other courses of action to recover their dues.

Several questions in relation to the accuracy and reliability of the information contained in the Annual Report of 2013 of the company were raised by a counsel for an intervening creditor.

Inquiry will be resumed on 24 March 2014 on which date the company will be given the opportunity to make their submissions.

Counsel Avindra Rodrigo instructed by Messrs. FJ&G De Saram appeared for the Petitioner while Harsha Amarasekara instructed by Messrs. Paul Rathnayake Associates appeared for Touchwood Investments PLC.
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