News
Hingurana sugar consortium takes billions worth of loans at soaring interest rates from its own affiliates
A national audit has unveiled serious irregularities at the Hingurana sugar factory, which is run jointly by the Government and private entities Brown & Company PLC and Lanka ORIX Leasing Company PLC (LOLC), with billions worth of loans being taken at soaring interest rates from associated companies of LOLC.
The factory was set up in the 1960s and privatised in 1993 before being re-acquired by the State in 1997. Plans were floated in 2006 to restructure it as a public-private partnership. While the relevant shareholder agreement was signed in 2009–and the first share issuance was in the following year—the Brown and LOLC-led consortium ran Hingurana Sugar Industries Ltd (HISL) from 2006 onwards through two companies named Gal Oya Plantation (Pvt) Ltd (GOPL) and Gal Oya Holdings (Pvt) Ltd (GOHL), which handled the management.
After 2009, the Government retained a 51 percent shareholding while 49 percent went to the private sector together with Browns and LOLC.
Most damaging are the National Audit Office (NAO) findings that the GOPL’s operations were repeatedly funded through loans obtained from LOLC subsidiaries “under abnormal terms and comparatively higher interest rates”. Some were taken on compound interest, resulting in high finance costs.
Company statements show that GOPL had borrowings of more than Rs 13.7bn from April 2009 to March 2020. Of this, Rs 11.3bn was from LOLC, Brown and associate companies of LOLC. This is 82.8 percent of total borrowings.
These include LOLC PLC (which has a 26 percent shareholding in Brown); Brown & Co PLC; LOLC Factors Ltd (of which LOLC has a 100 percent shareholding); Commercial Leasing and Finance (Pvt) Ltd (of which LOLC has a 90 percent shareholding); Saakya Capital (Pvt) Ltd (the third-largest shareholding company of LOLC); LOLC Finance (Pvt) Ltd; Commercial Trust Technologies (Pvt) Ltd (registered to the address of Ishara Traders which shares directors with LOLC); and Seylan Bank PLC (of which Brown holds 10 percent and LOLC holds 13 percent). The stakes are as reported in the NAO report.
GOPL also borrowed from Satya Capital (Pvt) Ltd (which, in 2020, was the fourth-largest shareholder of LOLC) and Danya Capital (Pvt) Ltd (a directress of LOLC serves on the board of this company). Just over Rs 2.36bn was from the Bank of Ceylon, People’s Bank, and HNB.
Loans from other financial institutions had annual interest rates of four to 15 percent at the time of borrowing, the NAO records. But loans from associate companies were “at comparatively very high interest rates, in the range of 18 percent to 28 percent”. At least Rs 5bn of these was at annual interest rates of between 20 to 26.5 percent while Rs 6.3bn was at between seven and 10 percent.
On certain occasions, it had been agreed with LOLC-affiliated companies that the interest rate will be hiked to more than 48 percent a year (four percent a month) if the relevant repayments were delayed. “Accordingly, loans had been obtained from associate companies by superseding the terms of loans and interest rates of formal credit market,” the NAO held.
In one instance, loans to the value of Rs 674.7mn were obtained between April 2010 and March 2020 from LOLC and Brown. While more than Rs 94.1mn had been repaid, more than Rs 1.78bn had been accounted as interest on the total loan.
According to GOPL’s financial statements, loan interest expenses increased by 978 percent from the fiscal year 2009-10 up to the fiscal year 2019-20. Separately, administrative costs during the same period went up from Rs 57mn to Rs 609mn, a hike of 968 percent. But finance costs alone amounted to Rs 8bn between 2009 and 2020. This was 67 percent of company expenses.
Between 2009 and 2020–when there was a finance cost of over Rs 7.9bn–the amount related to LOLC, two Brown companies and associated entities of LOLC was over Rs 7.6bn (and just Rs 364mn was related to other financial institutions).
The NAO said it could not confirm that Directors on the Board that represented the Government “had made a sufficient and effective mediation” to protect its rights and benefits, particularly in the manner in which loans were continuously obtained under “abnormal” conditions. The General Treasury’s Public Enterprises Department “had not carried out effective supervision or regulation in this connection”.
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