The Sunday TimesBusiness

27th April 1997




The Mirror Magazine

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Seylan, Central Bank in court battle

In an unprecedented move a commercial bank has challenged a Central Bank decision and obtained a stay order against the suspension of the bank's primary dealership for an allegedly irregular transaction.

Early this month the Central Bank informed Seylan Bank that is was suspending its authority to act as a primary dealer as the Central Bank was not satisfied that the bank should be absolved from responsibility regarding the transaction which was said to have been carried out by a former employee. Seylan Bank then filed action in the Court of Appeal against the decision.

The bank in its plaint said that in October 1996, the Senior Manager (Treasury) had obtained approval from the General Manager of the Bank to grant Rs. 200 mn facility to Ceylinco Securities and Financial Services Ltd.

The officer had then recorded the transaction as a reverse re-purchase transaction pertaining to treasury bills.

Seylan Bank further pleaded that the officer had resigned from the bank and not reported for duty after 10th January, and later joined Pramuka Savings and Development Bank as its Financial Controller.

On 10th January, Central Bank officials had visited Seylan Bank to examine records relating to the transaction.

Seylan bank pleaded that it had reversed the entries relating to the transaction consequent on the visit though it was not legally obliged to do so.

On April 3 the Central Bank had requested Seylan Bank to explain why it should not be suspended from functioning as a primary dealer, for engaging in a reverse re-purchase transaction without having underlying treasury bills as required.

Seylan Bank in its reply said the sum of Rs. 200 mn. had been paid to Ceylinco Securities and Financial Services who on the same day had transferred the money to Ceylinco Seylan Developments Ltd.

The bank said this was the only instance in its history where Treasury Bills have not been called for in a reverse re-purchase transaction and the Senior Manager Treasury was apparently convinced that the transaction was completely legal. The officer had masterminded the transaction, the bank said.

The bank said it now had imposed strict controls.

"The position taken in your letter, that the responsibility for the transaction lies with a former employee of your Bank and that your Bank should be absolved of all responsibility is not acceptable," the Central Bank said in its reply.

CEB: shocking moves

The CEB has recommended a 10% tarrif hike and has requested that it be implemented early The Sunday Times Business learns.

The existing tariff blocks are also to be adjusted so that consumers would be liable to pay a standard amount for all units consumed, instead of a sliding rate.

The existing domestic rate blocks are 0-30 units at Rs. 1.20 per unit, 31-90 units at Rs. 2.40 per unit, 91-180 units at Rs. 4.50 per unit and above 180 units at Rs. 5.60 per unit. Consumers thus pay at a lower rate for the initial unit blocks and are only subject to pay higher charges for the additional units.

Under the new scheme, the consumer is subject to pay for all units consumed at the standard rate. For example the consumption of 35 units by a household would under the present tariff code, make the user liable to pay at Rs. 1.20 for first 30 units and at Rs. 2.40 for the remaining five units. Under the proposed tariff rate, all 35 units will have to be paid at Rs. 2.40 per unit.

This proposed adjustment to the consumption blocks and the 10% tariff hike if implemented would affect all consumer domestic and other users.

The general purpose, government/non-profitable organizations, hotels and industrial tariff bands would also be affected, thus increasing the CEB's billed revenue.

The total tariff hike thus is expected to be over 20% as the CEB in addition to the direct 10% increase hopes the re-adjusted unit consumption blocks would bring in at least 10% more revenue.

The decision to recommend a tariff hike was made by the CEB after a meeting on April 23. The proposal has been forwarded to the Power and Energy Minister who would present it to the Cabinet and then to the Parliament for approval.

Although the CEB recommends an immediate tariff hike, the official public announcement is not expected until after the Labour day, May 1st.

The tariff hike which has been in the offing for some time is mainly due to the fact that the CEB has been compelled to resort to emergency power generation methods (reported in our last week's issue) to avert extensive power cuts which have proven very costly.

The CEB officials expect the proposed tariff hike to be approved by Parliament and be brought into effect very soon.

Lanka makes grade

The interest rate of the recently issued sovereign floating note of the government was equal to the rate obtained by a BB or BB + rated issue, the Euromoney magazine said.

Analysts say BB+indicated that Sri Lanka has almost made it to the investment grade securities. The Central Bank has said that it will go for a rating for Sri Lanka late this year.

"Debt rated by Standard and Poor (S&P) as 'BB' or below is regarded as having predominantly speculative characteristics," an analyst said. "It indicates less near term vulnerability to default than other speculative issues."

The '+' modifier indicated higher standing within the category.

According to the rating system of S & P best issues are rated AAA followed by AA, A, and BBB, after which comes BB.

At a premium of 150 basis points above, the London Interbank Offered rate (Libor) the deal achieved a good price', Eurmoney said.

The magazine said Swiss and South East Asian Investors took 25 per cent each of the US 50 mn issue, 20 per cent went to the Gulf and UK, while German and Dutch investors each took 10 per cent.

It was estimated that 25 per cent went to bank and 20 per cent went to emerging market bond funds and pension funds.

Manuel Carralet Head of debt syndication at ING Barings, which jointly managed the issue with Citibank told Euromoney that ING itself had bought into the issue.

The magazine speculated that there was friction among the syndicate which managed the issue.

Citibank had initially won the mandate for the issue, which the magazine said had surprised bankers.

"They've not been very active in the Indian subcontinent at all," the magazine quoted one banker as saying. "So they had to go out and find a bookrunner that had some experience of Sri Lanka.

Citibank had approached ING Barings and ANZ Grindlays, expecting one to turn the offer down.

When they both accepted Citibank had made ING Baring joint lead manager and ANZ co-lead manager.

"ANZ which must have wanted the mandate themselves given their 100 year presence in Sri Lanka, were put out at their demotion, the magazine said quoting an observer. The observer told the magazine that ANZ was ready to walk out of the deal halfway through until the Central Bank intervened and persuaded them to stay.

The issue gave an opportunity for the government to concentrate attention more on the resilience of the economy than on the conflict with Tigers, Euromoney said.

Market Focus

By Analyst

Review period 17/4-23/4/97

With the bull run in the CSM, the ASPI edged its way to the 750 & above levels, with foreign investors flushed with funds from gains made in other markets.

It was noted that most buying orders were of a market order variety, which augurs well for the upward momentum of the market. Retails/local institutional investors concentrating on small value shares, all round price gains, were witnessed. For the three weeks of April, more than Rs. 700m inflows were witnessed mostly from Hong Kong and Singapore. It is expected that more foreign portfolio investments would be made in more speculative counters, which have yet to move up significantly.

This proves the theory that for the CSE to sustain the momentum upward, more foreign participation is vital, as only then local investors would also invest with confidence. Sustained growth in volume and turnover would attract more foreigners to invest in the CSM.

It is expected that quarterly reports would be above analysis expectation, but the impending power cuts would be a negative factor to the bullishness of the market.

The risk of bomb attacks in Colombo could adversely affect the tourism industry, which would be detrimental to stocks quoted in this sector.

More privatizations of large scale government entities such as AirLanka, Telecom etc. would see a massive infusion of capital to the CSE, which would significantly increase the market capitalization of the market.

Public Enterprises Act No. 29 of 1996, which had been made effective from November 12th last year in respect of take over of six companies which had earlier been privatized, would come up for debate in Parliament on 23.4.97.

Corporate outlook:

Richard Pieris: growth in excess of 20% expected. Hayleys: growth in export sector expected. NDB: Strong return expected as the economy recovers. JKH: Growth in export sector as well as investments in food and beverages sector should perform well.

Speculative investments:

Ceylinco Securities Rs. 7.50-10; MBSL Rs. 25 +/-2; Seylan Bank Rs. 26 +/-3; Ceylinco Insurance Rs. 25 +/-2; The Finance Rs. 29 +/-5; Blue Diamonds Rs. 12 +/-2; Lambretta Rs. 10 +/-2; Kelani Tyres Rs. 10 +/-2.

The above speculative investments are recommended on the basis of very high volume of shares traded over the last three weeks.

Continue to Business page 2 - Return of power crisis * New model of measuring cridit risks * MIND YOUR BUSINESS

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