Independent directors blew whistle on Entrust
Independent directors at beleaguered Entrust Securities PLC (Entrust), a primary dealer in the money markets, had blown the whistle last year when they had got wind of Entrust’s financial woes through an internal grapevine, well-informed sources said. On October 29, 2015 the three independent directors Dr. Nalin Jayasuriya, Kishan Nanayakkara and Manohara Thilakawardena had discovered through ‘inside information’ that there was a liquidity issue at Entrust. An independent director immediately called the company Chairman Isira Dassanayake in a bid to verify this, but couldn’t reach him, a source close to the three independent directors told the Business Times.
“Then he had contacted Entrust Group Managing Director Chanuka Ratwatte and asked whether there’s a liquidity issue at Entrust. He had said there is some cash missing in the securities side, but that it’s not a fraud,” he said. Mr. Ratwatte, in a letter to the Sunday Times, last week says he was not Chairman and Managing Director of the group but was designated Group Vice Chairman and in a non-executive position. A day later (October 30) the three independent directors wrote to the Central Bank (CB) seeking an urgent meeting with the regulator. According to the source, the rest of the (executive) directors weren’t aware that the three independent directors had written to the CB.
Special board meeting
On October 31, the independent directors requested a special board meeting from the company secretary with the rest of the Entrust board – Mr. Dassanayake, Mr. Ratwatte, Romesha Senerath (CEO and Director) and S. Jeyavarman, which she (company secretary), had set up. “When independent directors had confronted the other directors (Mr. Jeyavarman hadn’t attended this meeting or other connected board meetings) and questioned them about the missing Rs. 6 billion saying that they’re surprised and shocked to learn that money is missing from Entrust, ‘they (executive directors) kept saying’ that part of this exposure was ‘inherited’ (during the time when Entrust was Ceylinco Sriram),” the source said.
The three independent directors had admonished them and advised them to seek a meeting with the CB in order to discuss this matter. They agreed, but they hadn’t followed up. When pressed as to how money can be moved out without securities assigned, they (executive directors) had explained that there’s a system flaw in the CDS (CB’s Central Depository System) which permits them to assign securities to (other) customers without the investors’ or the CB’s knowledge. “They insisted that other primary dealers also do this, which dismayed the independent directors,” the source said. The independent directors had requested for a full-time CEO, but that wasn’t taken seriously by the chairman. The top management however agreed to a request to hire a full-time auditor but that never happened.
Ratwatte resigns
Mr. Ratwatte had tendered his resignation at the special board meeting on the October 31 meeting saying that if he remains on this board, it’ll become a political fiasco and despite the three independent directors’ protests, Mr. Dassanayake had accepted it. In the meantime, the CB, 10 days later on November 9, granted the Entrust board a meeting, according to a CB official. CB Governor – Arjuna Mahendran, Superintendent of Public Debt CB – T.H.B. Saratchandra, Assistant Governor – K.D. Ranasinghe and Additional Superintendent of Public Debt – U.L. Muthugala were present at this meeting. There Mr. Mahendran confronted Mr. Dassanayake and Ms. Senerath about Entrust’s large exposure.
Again, the same story on the company inheriting the Rs. 6 billion exposure was told, the CB official recalled. “Then Mr. Mahendran had asked what had happened to the balance cash (Rs. 3.1 billion was accounted for, out of the Rs. 6 billion, but the balance Rs. 2.1 billion wasn’t) and the two directors had said that it was interest, rollover, etc of which the governor and the others weren’t satisfied.” At the meeting with CB, it was revealed that CB had asked the Entrust board to meet (three weeks earlier) in September, which the independent directors were unaware of. “This was hidden to the independent directors,” the source said. The CB then requested the board to submit an action plan which they agreed to do.
Forensic audit
Two days later (November 11) a special board meeting at Entrust was convened. The independent directors wanted to appoint a ‘forensic audit’ amongst other measures such as obtain a conclusive list of Entrust’s assets, focusing a strategy to curtail operations, plan to cut staff and a restructuring plan to be submitted to the CB and this was communicated to the CB on November 16. Subsequently auditor KPMG was asked by the company to carry out a special audit. The independent directors on November 22 wrote to the CSE making a disclosure with regards to the fiasco at Entrust. Meanwhile Mr. Jeyavarman had sent his resignation which the board didn’t accept. The three independent directors had protested at his resignation.