Shareholding restrictions for finance companies needed – governance specialist says
View(s):Even though lending to majority shareholders was the primary cause of finance companies collapsing, the practice of restricting shareholdings had not been put in place, as was the case with banks, says good governance specialist Nihal Sri Ameresekere in a February 6 letter to Central Bank Governor Ajith Nivard Cabraal.
“One cannot understand why the maximum percentage of share capital to be held by a body corporate and/or individual of a finance company has not been restricted yet, as in the case of banks, as provided for in Section 12 (1) (n) of the Act. It had been disclosed in the COPE Report of June 2005, that the primary cause for the failure of finance companies had been uncontrolled / unsecured / imprudent / lending to businesses of the majority owners. This is a truism and reality even today. Should a finance company be a ‘window’ for collecting funds to finance one’s own business, particulars of which are not made known to the depositing public?” the letter said.
Mr. Ameresekera said “The COPE Report of June 2005 had extensively dealt with the Mercantile Credit Case – Vide COPE Report of June 2005; Mercantile Credit which had been operating under the Control of Finance Companies Act No. 27 of 1979 had been issued a renewed License under Finance Companies Act No. 78 of 1988 in November 1990… At the very same time, it had had liquidity problems, and had requested financing from the Central Bank in November 1990 itself! Monies amounting to Rs. 1,750 million appear to have been advanced prior to vesting in February 1992 Mercantile Credit with the Monetary Board, whereas such advances as per the Statute could have been made only to a company already vested”.
Further, he also commented; “Questionably, such cognizable advances of public monies had been with the net worth of this company misleadingly reported as Rs. 273 million, whereas the corrected net worth had been negative at Rs. 124 million (with Rs. 647 million dues in legal actions), and only just over Rs. 100 million had been recovered on these advances of Rs. 1,750 million, resulting in a debt of Rs. 4.7 million as at 31 December 2004 (now Rs. 13,000 million!)… Furthermore, intriguingly two Banking Licenses had been subsequently given to the same Directors!”
The letter also highlighted the difficulty of properly vetting candidates for board directorship, stating; “Section 21 (1) (e) (i) of the Act, reiterated by Annex 1 to the Directions, Rules, Notices and Guidelines published by the Central Bank, disqualifies a person from being a director of a finance company, if any investigation and/or inquiry is pending against such person, which is no doubt a salutory provision. To enforce such provision one would have to check with several relevant bodies conducting inquires or investigations, particularly with the recent reports of a spate of inquires disclosed to have been initiated by the SEC!”