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 Post subject: Plundering the nation by finance companies
 Post Posted: Sat Jul 08, 2006 4:23 am 
Plundering the nation
The Central Bank fails to recover billions from 13 default finance companies

Well documented evidence indicates that the CB has failed to recover the refinance facilities provided to 13 default finance companies during the period 1988 to 1994. While the total advances made to these companies amounted to Rs. 2.7 billion, the total outstanding balance as at December 31, 2004 amounts to Rs. 7.3 billion.

By Wilson Gnanadass
@ The nation / 02 July 2006


The performance of the Central Bank of Sri Lanka (CBSL) in supervising finance companies and banks and issuing licenses to run commercial firms has come under scrutiny, after the bank failed to recover millions of rupees from 13 default finance companies.

Well documented evidence indicates that the CB has failed to recover the refinance facilities provided to 13 default finance companies during the period 1988 to 1994. While the total advances made to these companies amounted to Rs. 2.7 billion, the total outstanding balance as at December 31, 2004 amounts to Rs. 7.3 billion.

The Committee on Public Enterprises (COPE) in its latest report on the Central Bank submitted to parliament has in fact outlined details of Mercantile Credit Limited (MCL), one of the 13 default finance companies, as the amount advanced to this company by the CB alone amounts to Rs. 1.7 billion (63% of the total advances made) and the amount outstanding amounts to Rs. 4.7 billion (64% of the total outstanding) as at December 31, 2004.

To date, the Central Bank has not recovered from MCL, the staggering Rs. 4.7 billion. MCL was incorporated as a limited liability company on July 4, 1956 and converted into a public quoted company on January 23, 1957 and was registered on November 27, 1980 as a finance company under the Control of Finance Companies Act No. 27 of 1979. It was registered under the new Finance Companies Act No. 78 of 1988 and issued a license to carry on finance business with effect from November 6, 1990.

The COPE in its damning report says since November 1990, MCL had experienced severe liquidity problems and had further requested refinancing from the government.

The Central Bank had in turn has granted direct loan facilities amounting to Rs. 1,742 million to MCL from 1991 to 2000.

While the MCL was facing a series of financial crises during this period, it had also painted a healthy financial structure, violating several accounting principles. And Coopers and Lybrand Associates (C&L), who were appointed by the CB on January 1, 1991 to carry out an audit investigation on MCL, had also indicated in its report that MCL’s track record was unhealthy. The Nation is in possession of the C&L report.
Despite the detailed report of C&L being available in July 1991, the Central Bank had not taken any action to look into the performance of MCL, but instead gone ahead with granting more loans.

The COPE report says that even though the finance companies were prohibited through Gazette Extraordinary No. 198/9 of June 24, 1982 from granting loans and advances to subsidiary companies, the CBSL has failed to prevent granting such loans and advances to related companies.
According to the findings of the COPE, the MCL, while obtaining loans from the Central Bank, has in turn financed its subsidiary companies, thereby severely violating financial regulations.

MCL forms PML

The MCL, has also formed another company, namely Premier Management Limited (PML) and appointed the directors of the MCL into its board of directors. They were A.S. Illangakoon, (in whose name 9,994 shares were registered and was holding them in trust for Allied Investments Limited (AIL)), Nihal Jayawardene, Chairman of MCL (was a director of 19 of the 21 subsidiary companies of PML), Mrs. Neeliya Perera, (daughter of N.U.Jayawardene who was also the President of MCL and was a director of 13 subsidiary companies of PML), Milinda Moragoda (son of Mrs. Neeliya Perera, was a director of 13 subsidiary companies of PML).

The new appointments of Nihal Jayawardene, Mrs. Neeliya Perera and Milinda Moragoda also made them directors of both PML and MCL.
Therefore the COPE concluded that the subsidiary companies were funded by MCL, through the loans obtained from the Central Bank.

The total issued share capital of the 21 subsidiaries as at March 31, 1989 was 29, 152,000 according to the COPE report.

Loans and advances granted by MCL direct to these companies as at March 31, 1990 amounted to Rs. 124 million, while loans and advances granted by MCL through PML amounted to Rs. 33 million.

The registered office of PML is also the same as that of MCL. The 25 subsidiaries of PML are also registered at that address. The above is a clear indication of the serious failure on the part of the Central Bank to allow MCL, which controls 25 subsidiaries through PML to transfer funds as loans and advances.

Questions are raised as to why the Central Bank failed to take control over the operations of PML and its subsidiaries even after receiving the investigation report of the Coopers and Lybrand Associates (C&L).

Distortion

The MCL according to the findings of C&L, has also distorted its financial positions for its own mileage.

It is reported that the retained profit and debtors as at March 31 1990 are overstated at least by Rs. 108 million through premature and unjustified recognition of lease purchase and hire purchase income.

The company had further estimated the provision for bad and doubtful debts as at March 31, 1990 as Rs. 285 million. The net worth of the company has also been reduced from Rs. 273 million to a negative figure of Rs. 124 million as at March 31, 1990. The company had also falsely reported that the net accumulated losses of subsidiaries of MCL amounting to Rs. 149 million were funded by MCL advances.

It is also reported that MCL has tied up Rs. 182 million in PML and its subsidiaries. “If the accounts of PML and its subsidiaries are consolidated with the group accounts of MCL and its subsidiaries, the consolidated share capital and reserves would have come down by approximately Rs. 150 million,” the COPE report says.

It is also reported that losses of related companies are more than what is reported in the audited accounts.

Through PML, the MCL directors have been controlling 25 companies and have been exercising significant influence over their operations and affairs.

The MCL had been investing and advancing monies to those companies for the sustenance of these companies and this in turn had been viewed as the contributory factors for the heavy liquidity problems faced by MCL.
Another distortion by the MCL is the declaration of dividends at a modest rate of 25% on the ordinary share capital during the year ended March 31, 1990, while in reality there was a financial loss heading towards virtual bankruptcy.

The MCL is also charged for not submitting the final accounts or even draft final accounts after 1999/2000 for approval from the Monetary Board of the Central Bank.

The Central Bank has recovered to date only Rs. 121. 4 million against the advances made amounting to Rs. 1.7 billion. Not even seven percent of the advances made have been recovered.

Further, only a sum of Rs. 13 million has been recovered from the monies that have been extended to the subsidiaries by the MCL.

Besides, the MCL it is reported also owes substantial sums of monies to two state banks namely Peoples Bank and Bank of Ceylon. The debtor’s list of the Bank has reflected the same directors of the MCL.

Shockingly, the Central Bank has gone to the extent of issuing licenses to operate commercial banks to the very directorate of MCL, violating the criteria set out for the issuance of banking licenses.

According to the COPE, a report license has been issued to Sampath Bank in 1989, while the directorate of the Bank has been N.U.Jayawardene (Chairman), Nihal Jayawardene (deputy chairman) and Milinda Moragoda (director). The three directors had been removed by the then shareholders of the Sampath Bank due to reasons of mismanagement in 1991.

License has also been granted to run the National Enterprise Bank in 1994 and the directors had been N. U.Jayawardene (chairman) and Nihal Jayawardene (director). The bank was subsequently reconstituted in 1999 and obtained a license under the name of National Mercantile Bank Ltd, with Milinda Moragoda as Chairman and Nihal Jayawardene as Deputy Chairman.

Fined

Meanwhile the Controller of Exchange has also imposed a fine of Rs. 985,300,768.87 on N.U.Jayawardene and Milinda Moragoda on January 9, 1992 for violating provisions of the Exchange Control Act, in respect of purchases and repatriation of foreign currency.

In 1990, the Mercantile Merchant Bank Ltd, was refused permission by the Exchange Control Department (ECD) to deal in the repatriation of foreign currency as the bank was not a commercial bank.

However despite the refusal, Jayawardene had signed a Memorandum of Understanding with the Sampath Bank Ltd, of which bank he was also the chairman, to over come this hurdle in August 1990.

CB’s failure

To the utter dismay of the public, the COPE has further reported that even though the Finance Companies Act, No. 78 of 1998, prohibited the companies to engage in financial business without obtaining a license from the Central Bank, there are in fact, approximately 30 such finance companies operating in Sri Lanka by violating that legal provision.

Be that as it may, the Central Bank’s failure to carry out proper supervision on finance companies has led to many hardships to the ordinary depositors in the country.

Early detection and timely monitoring could have prevented the collapse of some of the finance companies and the banks. Besides, prompt action taken to recover the outstanding amounts from financial companies also would have helped the bank’s coffer.

However, sadly, officials responsible to look into these lapses have also failed to take prompt action.


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