CB’s ‘rush to merge’ policies
View(s):Last year when a well-known finance company crashed, among its top directors was a man who had been convicted abroad and had changed his name and passport.
A Central Bank (CB) official, asked how the ‘convict’ was permitted to be a director under ‘fit and proper’ rules in the governance code, said “since he was appealing against the conviction, he is presumed innocent”.
So has the CB broken its own code? The CB says in governance provisions relating to appointment of directors of finance companies that directors are persons who have not been subjected to an investigation or inquiry involving fraud, deceit, dishonesty or other similar criminal activity; or have not been convicted by any court in Sri Lanka or abroad in respect of an offence involving fraud, deceit, dishonesty or similar criminal activity. There are more deterrents against rogue directors under these rules but the fact of the matter is that the CB approved a director who had been convicted abroad, in violation of its own law. This is just one case. Some banking officials say that because it is difficult nowadays to find ‘unscrupulously honest’ persons as directors (meaning everyone has done some wrong in his/her lifetime), the rules are bent a bit to accommodate ‘somewhat’ honest persons. What an argument!
Clearly this raises credibility issues pertaining to the ‘fit and proper’ criteria of directors in this sector.
It also raises fundamental issues relating to the current CB plan to consolidate the financial sector. While consolidation as a mechanism to strengthen institutions in preparation to ‘weather any storm’ or a financial crisis and also protect depositors and shareholders is a welcome move, the hurry to enforce the new plan has raised many eyebrows.
Last week, retired banker Ranjith Fernando raised the ‘hurry to merge’ issue and asked the question as to why ‘good’ companies are being forced to merge.
He told a seminar that the plan seems to protect four or five failed companies, in most cases where the directors have misused funds or mismanaged depositors’ funds, while ‘good’ finance companies are being penalized.
Opposition legislator Eran Wickramaratne raised the same issue in a newspaper interview and asked whether there was a motive behind this ‘rush to merge’
There are larger issues in the finance company sector that needs immediate attention than the rush to consolidate. In the ‘fit and proper’ rules, there are at least two CEOs of top financial institutions who figured in a Supreme Court inquiry which contraves ‘fit and proper’ rules pertaining to being investigated, while a former Merchant Bank Chairman was reprimanded by the Supreme Court for being dishonest.
There are scores of directors and senior officials who aren’t “fit and proper” to continue or be appointed but nevertheless it’s a merry-go-round. When Ross Maloney came forward as an investor to bail out the failed Central Investment & Finance Ltd his application was approved despite the fact that accounts at his Touchwood Group had at one time been questioned by the Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB). The latest: Maloney and his wife are absconding from a Securities and Exchange Commission probe after off-loading, crisis-hit Touchwood. Their whereabouts? Unknown!
The worst move by finance companies was investments in real estate, sometimes by directors in their own name using depositors’ funds. These investments were made with a longer-than-usual return period (over 5 years) while collecting deposits at short 1-2 year periods. Routine lending was also longer than the 1-2 year periods which meant that the companies had to have a steady inflow of deposits to return deposits that matured.
In some cases assets were nowhere near liabilities. One finance company’s borrowings is in the region of over Rs 4 billion as against equity of Rs. 80 million in contravention of the rule that borrowings should be just seven times the size of equity.
Under the plan in which ‘affected’ finance companies have to submit a confirmed proposal to merge by March 31, these institutions must have Rs. 1 billion in equity and Rs. 8 billion in assets by January 2016, a tall task for companies that have assets of less than half of that.
38 companies in what is called ‘category B’ must come up with plans by end March to merge or be acquired by 13 bigger and more successful institutions that belong to ‘category A’ or banks. The Business Times has consciously refrained from publishing the list, which it has, of companies listed for mergers to avert a possible run on deposits and another crisis.
Is there an agenda? Are the authorities trying to protect 4-5 failed companies whose directors have taken the money and run? Why the hurry to merge or the urge to merge? These are questions being persistently asked both in the financial sector and the public amidst the inability of the CB to rein in errant directors.
The desperate rush to find partners for affected finance companies is pushing some of them towards the precipice. In the rush some companies are most likely to prop up their balance sheet with ‘dubious’ partners and ‘slush’ funds, once again putting depositors at risk.