By Hema Senanayake –
A billion rupee financial institution namely the Central Investment & Finance PLC (CIFL) is in grave crisis. Some respectable people in Sri Lanka now believe that senior professionals in the Central Bank of Sri Lanka (CBSL) make deals when Licensed Finance Companies like CIFL go bankrupt. The mechanism is that they allow devaluing the assets and then transfer such assets to business friends of their choice. Also they put their friends to be in charge of the troubled company and planning to extend financial assistance under the Liquidity Support Scheme which scheme is going to be established soon by the CBSL. If this is true this must be stopped right now; sale or transfer of assets must be stopped immediately until CIFL restructured fully. This action is necessary to safe-guard peoples’ deposit over Rs.2.6 billion and the money other investors put in CIFL. This is a company that has assets over Rs.3.6 billion.
CIFL is not liquid as at now, but this does not mean that there is no value in CIFL assets. I guess that there are no significant bad loans and bad investments but the company’s cash inflow is not sufficient to meet its daily obligations. But value of the assets might be intact. Protection of the value of assets as it is, if possible, is the necessary first condition that is required to save everybody’s interest. Therefore, the first thing that should be done by CBSL to protect depositors, creditors and investors, is to stop sale or transfer of assets at devalued prices until the company is restructured and become operational fully. If the assets are devalued and sell to friends of CBSL Officials nobody’s investment will be safe.
John Perkins wrote a book titled “A Confession Of An Economic Hit Man.” Still I do not believe or more accurately I can’t believe the story. What does the economic hit man do? He uses his professional skills to make extremely lucrative deals for his employer (or employing country) while putting the country which his services are obtained, at very disadvantageous position but such situation is hidden by using his professional terminologies.
However I never thought that there are “Financial Hit-men” in our own Central Bank, in Sri Lanka. What do they do? They use their professional skills to cut deals to make them and their buddies, rich when a Licensed Finance Company is in trouble. In their own words this is what they are going to do when a Licensed Finance Company approved by Central Bank goes into liquidity crisis. This will be applicable for CIFL now.
The department of communication of CBSL issued a press release after the collapse of CIFL. I wish to quote the entire communiqué bellow, because you need to understand the hidden objective of it.
“Press Release Issued By
Supervision of Non-Bank Financial Institutions Department 07 September 2013 – Central Bank introduces a Liquidity Support Scheme for Licensed Finance Companies.
With a view to sustaining financial system stability and enhancing public confidence in the financial system, the Central Bank of Sri Lanka (CBSL) has decided to implement a Liquidity Support Scheme (LSS) for any licensed finance company (LFC) that faces liquidity constraints, thereby enabling such LFC to revive and restructure its operations. The liquidity support would be provided via the LSS of the Sri Lanka Deposit Insurance Fund (SLDIF), and would be granted on a case by case basis, after an assessment of the liquidity position of the particular LFC, by the CBSL.
In tandem with the LSS, the CBSL may direct the existing shareholders of the LFC to infuse fresh capital, or invite a strategic investor to assume a strategic stake in the LFC through a new infusion of capital, or in certain instances, direct the depositors to convert a part of their deposit liabilities into ordinary shares.
In order to obtain facilities under the LSS, a LFC will be required to submit an acceptable business restructuring plan to the CBSL, and also meet the terms and conditions prescribed by the CBSL, which would include the restriction of transactions with related parties, curtailment of remuneration and incentive payments to the board of directors and key management personnel, reduction of administrative costs, furnishing of acceptable collateral, and submission of periodic reports on the progress of the implementation of the restructuring plan. The LSS will come into operation with immediate effect.
Sep. 07th.” (End of the press release).
According to the last paragraph of the press release anybody would think that CBSL is trying to do what is necessary to revive the company which is in trouble. CBSL is to offer liquidity support under the Liquidity Support Scheme (LSS). And also CBSL wants that those LSS funds not to be used to pay remuneration and incentives to the board of directors and key management personnel and must reduce the administrative cost. This is very good and professional.
Now, go to the second paragraph. When the CBSL offers liquidity support under LSS, CBSL might “direct the depositors to convert a part of their deposit liabilities into ordinary shares.” The CBSL may “direct the existing shareholders of the LFC to infuse fresh capital.” Also, CBSL might direct to “invite a strategic investor to assume a strategic stake in the LFC through a new infusion of capital.” Those directives seem honest and professional. But in regard to CIFL, those are the words of “Financial Hit Men.” Let me explain further.
Existing shareholders are already devastated and their investments amounting to over Rs.700 million are in doubt. At such a situation they might be thinking to sell off their shares at a much discounted price, I remember during my career one leading businessman sold a very big stake of ordinary shares of Rs.10/- each to a price of one rupee during a restructure process. May be not for such a discounted price, yet, obviously existing shareholders of CIFL might be thinking to sell off their stocks. So, CBSL wants to “direct existing shareholders to bring in new capital.” Will that happen? Never! It will never happen. So, what is the next option?
The next option is to “invite a strategic investor.” The idea seems professional. No investor will come and risk his/her money if he or she can’t make a profit through his or her investment. Investors want to make money and they do not do charity in investing in CIFL. CBSL wants that such a strategic investor to be the main shareholder of the company. CBSL says such a strategic investor must “assume a strategic stake.” This can be done at least in two ways. One method is to expand the authorized share capital of the company and facilitate the new investor to bring in new capital. According to the annual report of 2012 of CIFL, the value of the holding of existing shareholders amounts to over Rs. 700 million including profit reserves, as far as I remember. Perhaps, if the new investor wants to be the majority shareholder then he must bring in, at least over Rs.700 million, so that he will hold over 50% of total equity. If that amount of cash is brought in by the strategic investor then there won’t be any need of LSS funds from CBSL in order to liquid CIFL. Therefore this is not a possible scenario.
The second method is that the new investor buys the majority of existing shares at a much discounted price, in a worst case scenario; perhaps investor could purchase 50% of the existing shares at a price of Rs.100 million. This Rs.100 million will be paid to the sellers of shares and hence do not help to improve the liquidity situation. Also, CBSL says that it will direct “the depositors to convert a part of their deposit liabilities into ordinary shares.” (Pl. refer press release). By 31st March 2012, the deposit liabilities of CIFL amounted to Rs.2.6 billion. Current figures are not publicly available. Hence assume that 50% of those deposits mentioned in the annual report of 2012 are converted into ordinary shares, perhaps investor might be prefer to convert them into ordinary share with no voting rights. The immediate effect of such conversion is that CIFL is now not necessary to pay monthly interest for deposits of Rs.1.3 billion – And that improve the company’s liquidity situation by over Rs.150 million. Perhaps now the investor will bring in another Rs.100 million and CBSL will offer Rs.100 or 200 million under LSS. At the end the resultant effect of all those actions could be summarized as follows if creditors are not asked to convert part of their liabilities into ordinary shares. However this process is a possibility.
CIFL is made liquid. New investor is in control of CIFL, managing assets over Rs.3.6 billion by investing just Rs.200 million. Existing shareholders will lose around Rs.250 million in sales of stocks and depositors will virtually lose Rs.150 million of interest income annually, instead will hold shares that will not earn good return at least for a few years. Perhaps part of those shares would be purchased at a bargain price by the investor. Everybody is losing except the new so called investor. If this is not a work of “Financial Hit men”, then what it is?
CIFL cannot revive by bring in new investor without jeopardizing the interests of all investors, creditors and depositors. Writing to Colombo Telegraph on September 07, I pointed out as to what should be done to revive this company. I quote, “Whatever the case is the Managing Agent of CIFL has a daunting task. According to my thinking what is needed now is to reorient the nature of investment structure of CIFL. In other words, put the short term deposits in short-term investments while liquidating part of long term investments. In fact this is nothing new for the CIFL itself, they have been doing this before 5 or 6 years ago and they were doing well by that time. Rather than threatening the Board of Directors, CBSL must passively help the Managing Agent to revive CIFL for the best interest of depositors and the stability of the financial system.” (Quote ends).
I do think, a few harsh measures will require temporarily but those measures will ensure the safety of everybody’s investment but those are just details.
Just extending liquidity support will not solve this company’s problems. It needs to liquidate good part of long term investments and the proceeds must invest in much short term income generating businesses such as leasing, hire-purchases, loans and advances. This will ensure the continuing liquidity of CIFL. People’s Leasing, the managing agent appointed to CIFL by CBSL is capable of doing this. Let it do it with the assistance under LSS. People’s action might need to stop financial-hit-men before they hit hard. The travesty, it seems, is that those professionals who are bounded to protect people’s hard earned deposits have become hit-men themselves.