Financial Times

On Seylan Merchant Bank and financial crisis

Right of Reply

With reference to last week’s report in The Sunday Times FT headlined 'Seylan Merchant Bank facing major financial crisis owing to mismanagement', SMB Deputy Chairman Rohan Senanayake has sent the following letter where he says sections of the article are untrue and clarified other points.

The letter says the report, quoting unnamed sources ‘makes a series of very serious and potential damaging allegations against this company. Many of these allegations are not substantiated with specific examples. While in the rare instances where purported examples are provided, they are factually incorrect’.

We are publishing relevant portions of the letter which has extracts of articles, responses from the company and our response.

Factually incorrect statements:
"Seylan Merchant Bank (SMB) has fallen into an abyss of mismanagement, corruption, unethical practices and financial misappropriation"
SMB - This is a completely false statement.

Our response: We received reliable information with regard to certain financial dealings of SMB and relevant authorities are conducting investigations based on complaints.
Also according to resolution number 77 presented and passed at the 2006 SMB AGM, the SMB Chairman stated that the company should endeavour to recruit a fully qualified Accountant as the Bank functioned without a qualified Accountant till 2006.

"Other sources revealed that Investigations will be carried out not only by the Central Bank but also by Inland Revenue, Labour Department and the CID as the SMB group has been allegedly violating laws in mishandling of public funds".

- SMB Group has not been informed by the Central Bank, Inland Revenue Labour Department or by the CID that any investigations are to be carried out. We have, subsequent to publication of the article, confirmed with the Central Bank that there is no investigation of the nature alleged.
The reports have tried to maliciously bring the two institutions namely SMB and SML into disrepute with speculative statements to mislead the public.
Our response – Officials from the Central Bank, Inland Revenue and the CID have confirmed that they are conducting investigations.
Tax and CID officials say there is no requirement to inform involved parties of an investigation.

"Depositors are in a quandary as withdrawals have been restricted. Some influential persons have withdrawn their monies "Through the backdoor" while small… depositors have to obtain the approval of the General Manager even to withdraw small amounts. Several depositors told the Sunday Times FT"
-- Premature withdrawals are restricted as in all financial institutions and even the Central Bank of Sri Lanka has been informed by us about restrictions on premature withdrawals. No influential persons have withdrawn their monies through the backdoor as alleged and no approval is sought from the General Manager to withdraw even small amounts.

Our response -- We have received complaints from depositors and investors with regard to the company’s handling of repayment of their deposits and investments and some of them have made complaints to relevant authorities (CID and Central Bank) and investigations are in progress.

"With SMB saddled with many non performing loans (Most of which are inter company transactions) and low profitability, all sales and marketing has been assigned to SML the sources said."
- SMB's non performing loan portfolio does not have majority of internal company transactions as alleged.

"The President of the Inter Company Employees Union Wasantha Samarasinghe told the Sunday Times FT that SMB collected over Rs. 2.4 billion from depositors but it was not invested in profitable ventures"
- The above mentioned Employees Union is not a trade union of the SMB. SMB only has a welfare union. SMB's investments are in leasing and loans and in subsidiaries which are profitable.
Our response -- This trade union has branches in several companies of the Ceylinco group and the President of the union said this, at a recent press conference held in Colombo. SMB has not denied the statement about the Rs 2.4 billion collected from depositors.

"The total investment in this loss making subsidiary may exceed Rs. 500 million. SML is a licensed finance company but it is also facing a financial crisis due to mismanagement"
--- SMB has not invested Rs. 50 million in Ceylinco Automobiles. The actual investment is less than Rs. 50 million and the larger part of this is commercial lending in the normal course of business.
SML is not experiencing any financial crisis and this could be verified by speaking to any senior official of the Central Bank of Sri Lanka. This statement too is malicious and has been made with the intention of harming the relationship between SML and the People's Leasing Company which recently signed a non disclosure agreement with SML.

Our response – Agreed, the investment was Rs 48 million rupees and we erred on the amount. This is an inter-company transaction.
Central Bank officials have been entertaining many complaints from the public over issues in many Ceylinco Group companies, a lot to do with inter company transactions. It is mostly finance companies in the Ceylinco Group that have sought the stimulus package offered by the Central Bank and very few, other independent companies. Furthermore if SML has no problems why is it seeking a deal with People’s Leasing at this point of time?

"Shareholders alleged that Seylan Merchant Bank Plc has failed to hold its annual general meeting (one year) for the years 2007/2008 and to file its annual returns – a direct violation of the Companies Act No. 7 of 2007".

---SMB's financial year is not 2007/2008 since it is a 31st December company. Hence, SMB's AGM for 2007 was held on 30th June 2008 at Raja Bojun Restaurant, Colombo 03.
Our response – we stand corrected on the holding of the AGM.

"SMB has sent interim reports for the quarter ended 30th June 2008 and 30th September 2008 to shareholders stating that KPMG Ford Rhodes Thornton and Company are the auditors of the bank despite the fact that these interim reports have not been audited"
-- Audits are done annually and no company carries out interim audits.

Our response -- SMB has sent interim reports for the quarter ended 30th June 2008 and 30th September 2008 to shareholders without stating that the above figures are subject to audit. However under the Colombo Stock Exchange Listing Rules Section 8.3, it has to be stated that ‘the report is subject to audit’.

"The company has failed to amend its Articles of Association"
--- There is no requirement under the new Companies Act to do so.
Our response – The section in the article refers to the use of non-voting and voting shares in the Interim Report for the quarter ended 30th June 2008.
According to the Registrar of Companies, the Articles of Association should be amended according to Section 50-60 of the Companies Act if a company continues to use voting and non-voting shares. He said there is no par value under existing regulations.

Solvency test issue and non payment of dividend

- Since the solvency test was not performed, a dividend was not paid. This was addressed at the AGM held on 30th June 2008.
Our response – no issue with this.

"However he noted that according to Section 220(1). If the net assets of the company are less than half of its stated capital, the board shall within 20 working days, call an extraordinary general meeting of shareholders of the company, which has not been done of far"
- The company has detected this and has already taken steps in compliance under this section.
Our response – no issue with this.

Business Editor’s note:
The Sunday Times FT repeatedly tried to contact the Deputy Chairman of the SMB for more than a week to seek his views on the current situation of the company but he was not available for comment.
His secretary Chamila Ramanayake said that the deputy chairman is busy conducting meetings with depositors and investors and holding important discussions and cannot be disturbed.
The newspaper made at least 30 calls from two reporters and left messages with their contact numbers but there was no response.

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