Financial Times

Harry J still eyeing DFCC?
The recent change in the composition of the DFCC Bank directorate has again triggered speculation that tycoon Harry Jayawardena is making renewed efforts to take control of the bank.

This came after the unopposed election of S. B. Hewage, a former deputy chairman and finance director of Readywear Industries Ltd., the fifth largest shareholder in DFCC, to the bank's board of directors at its annual general meeting.

"There's speculation surrounding DFCC's ownership structure - whether Harry Jayawardena and related parties are looking to increase their stakes," said a stock broker. "Some believe he already has control." Some analysts believe the tycoon's next stop will be the Hayleys conglomerate. He already controls Aitken Spence.

Part of the speculation centred on the appointment of Hewage to DFCC's board with Readyware believed to be supporting Harry Jayawardena. Hewage replaced DFCC's former chief executive officer Maxi Prelis who did not stand for re-election to avoid a contest. Speculation has it that Jayawardena is trying to take indirect control of the bank, operating through proxies.

He already has significant stakes in DFCC through companies he controls or has influence in. Hatton National Bank, in which Jayawardena is a director, is the third largest shareholder of DFCC, owning 12.34 percent, followed by Jayawardena's Sri Lanka Insurance Corporation (SLIC) with an 11.41 percent stake.

Jayawardena also controls another 6.54 percent stake in DFCC held by his firm, Distilleries Company of Sri Lanka. He is reportedly trying to indirectly control DFCC through his own shareholdings and those of friendly shareholders such as Readywear Industries which has a 8.74 percent stake in DFCC.

Stock market analysts said that the tycoon is being careful not to violate statutory limits on bank shareholdings. In addition, DFCC Bank has refused to register 3.4 million shares or an almost six percent stake bought by a foreign investor last September.

"There's speculation that Harry Jayawardena has invested in DFCC through a firm located in a tax haven," said a market analyst. DFCC said in its annual report that it had not registered these shares because it was unable to identify its true beneficial owners. This was done to ensure that DFCC Bank does not become a party to the violation of any statutory obligations.

The Central Bank has limits on cross-holdings among banks to prevent any single shareholder gaining undue influence over such lending institutions. The reserve Bank of India last week tightened similar restrictions on bank cross-holdings by extending existing restrictions to all forms of capital funds. (See story on page ...)

DFCC Bank said that information requested on the beneficial ownership had not been provided to the satisfaction of the board of directors. Both the purchaser and the bank have made submissions to the Securities and Exchange Commission. Some analysts said DFCC's attraction was its access to cheap foreign funds acquired as a one-time DFI (development finance institution) and on some of which the government has guaranteed the foreign exchange risk. DFCC, along with NDB, has access to low cost long-term funds. These are foreign credit lines where the banks can borrow at subsidised interest rates and lend at commercial or near market rates and make easy profits.

"Also, a lot of the foreign aid the government gets is usually disbursed through development banks like DFCC," the analyst said. Others discounted the attraction of concessionary funding saying these were old lines of credit and that their importance was overrated. "The biggest attraction is DFCC's 29.8 percent stake in Commercial Bank and what DFCC would do with that."

"With DFCC venturing into commercial banking through its new subsidiary DFCC Vardhana Bank there is the possibility that DFCC's stake in Commercial Bank may be up for sale."

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