Troubled finance companies make headway
Sinhaputhra’s investor willing to buy remaining shares
The Finance Company floats second EOI
Two of the finance companies which came under strict regulatory actions of the Central Bank of Sri Lanka (CBSL) last year have made some progress in accordance with the conditions placed on them by the CBSL.
The companies Sinhaputhra Finance PLC and The Finance Company (TFC) were in danger of losing their licenses in September 2018 due to their noncompliance with provisions of the Finance Act. As a final opportunity, Sinhaputhra was provided a limited time period to attract a potential investor while TFC was given time to implement a proposed capital augmentation plan.
On Friday (3), Sinhaputhra released an offer document announcing a mandatory offer by Singhe Capital Investment (Pvt.) Ltd. (SCIL) to acquire all remaining ordinary shares of Sinhaputhra.
This offer came following SCIL’s acquisition of 31,675,870 ordinary voting shares representing 50.31% of the voting rights of Sinhaputhra at a price of Rs. 9.50 per share amounting to a total consideration of Rs. 300.92 million on 5 December.
Through this deal, SCIL offers to acquire from the shareholders all the offer shares at a price of Rs. 9.50. The number of the remaining ordinary voting shares which are subjected to this offer as of Friday (3) were 31,283,060, amounting to Rs. 297.1 million, which is 49.69% of the issued Sinhaputhra shares. Nevertheless, the total maximum cash requirement of SCIL to fulfill the obligations under the offer would amount to Rs. 107.8 million.
However, according to a Colombo Stock Exchange (CSE) disclosure made by Sinhaputhra on 9 December, several shareholders holding a total of 19,926,702 ordinary voting shares representing 31.65% have given undertakings to SCIL that they will not accept the offer.
SCIL is a limited liability company incorporated in Sri Lanka on 27 July 2019 under the Companies Act No. 7 of 2007. Harith Ruwan Ranasinghe is the Chairman of SCIL.
Meanwhile, TFC, which was given time to submit a capital augmentation plan, has called for Expressions of Interest (EOI) on 2 January. This is the second EOI by TFC, following the failure of the first to attract a suitable investor. Therefore, this will be the final chance given to the TFC to call for an EOI by the CBSL. According to TFC, prospective investors should comply with a minimum equity investment of Rs. 25 billion, either individually or jointly.
At the eighth and final Monetary Policy Review press conference in late December, CBSL Deputy Governor H.A. Karunaratne said that it expects a better response to the second EOI as the economic and political environment has improved. He added that the environment was not conducive when the first EOI was floated in October, therefore failing to find a potential investor.
On 2 September last year, the CBSL had issued a notice of license cancellation to Sinhaputhra due to its critical financial condition and continuous noncompliance with the regulatory requirements imposed by it.
Even though the CBSL issued a license cancellation notice, Sinhaputhra was still given the opportunity to tender its objections to the notice of cancellation of the license within the time period stipulated in the Finance Business Act (FBA), giving reasons as to why the license issued to them should not be cancelled. Accordingly, Sinhaputhra submitted its objections to the Monetary Board along with a capital augmentation proposal.
The Finance Company
The CBSL announced that it has issued a notice of cancellation of the license issued to TFC in a letter dated 23 October.
The notice has been given due to the “continuous violation” of the Finance Business Act Directions, including minimum core capital, capital adequacy, and liquid assets requirements as well as “the critical financial condition of TFC” due to negative capital, a poor liquidity position, continuous losses, significantly deteriorated asset quality, and poor governance practices.
This notice follows several regulatory measures taken with effect from 15 February 2019. The CBSL issued a notice saying that TFC was severely impacted by the failure of a number of financial institutions within the group in 2008 and since then, the financial status of the company deteriorated gradually and was with severe liquidity issues which need to be addressed immediately.
In May 2019, the Monetary Board extended the regulatory actions taken on TFC for three months with effect from 15 May. Issuing a statement, the CBSL said that this step was taken under the provisions of the FBA, and assured that the interest due on deposits was to be paid continuously.
On 15 September 2019, the CBSL said that the TFC had not found a suitable investor to revive the company and it was now vital to find an acceptable investor to bring in equity capital to TFC within an agreed time frame in order to avoid further deterioration of the financial condition of the company.
Therefore, in October, the Monetary Board instructed TFC to call for EOI from potential investors with immediate effect, and to request such investors to submit their business restructuring proposals to revive TFC.