By Rusiripala Tennakoon –
Rusiripala Tennakoon
Sunday Times BT reported about the engagement of a Local Audit Firm by the SEC to get to the bottom of MTD accounts. This action is pursued in the context of defaulting payments on the type B Debentures issued by this Company and several other irregularities committed there. Non submission of the Annual Reports for 2018/2019, Interim financials after 30th June 2019 and alleged sale of assets associated with siphoning out of Funds without proper internal controls. The Commission has decided to initiate action to conduct a Special Purpose Audit and obtain a report to consider any further action warranted.
The SEC has specifically ordered the MTD- Board of Directors, CEO, CFO and all management personnel to desist in any manner from destroying, concealing, altering, removing, amending or cause the destruction, concealment, alteration, amendment or removal of any information that is in the records or books maintained by the Company. SEC has already imposed a compounding fee of Rs.36.3 million on the MTD directors for breach of listing rules violating rule no.6 of the Act.
Several Commercial Banks have initiated action against MTD Walkers Group for the recovery of overdues running into Billions. Four Banks by their petitions claimed that MTD Walkers owed them money and was attempting to transfer shares in the name of third parties and obtained restraining orders from the Commercial High Courts preventing the Company from doing so. Peoples Bank, was among those contemplating legal action against this company.
Unlike the other Commercial Banks, the role of lending to this Company by the Peoples Bank was alleged to be tainted with apprehensive deals in a distrustful and fishy background due to the Executive Deputy Chairman of MTD Walkers PLC serving simultaneously as a member of the Board of Directors of the PB. Mr. Jehan Amaratunga has been a Director of the PB since 2010 and was designated as Country Head of MTD Walkers PLC, Sri Lanka, overseeing the operations of MTD Walkers and its subsidiaries when he was appointed as a Director of the PB. He resigned from the Bank Board on 18th October 2018, with retrospective effect from 31st August 2018?
At one stage the total borrowings of this Company from the PB exceeded Rs.10 Billion and it became a public issue discussed widely including the Parliament. The questionable nature arose due to Jehan Amaratunga holding several important positions in the Bank while serving as the Executive Deputy Chairman of the Company. When he was a Director of the Peoples Bank he has served as a member of;
Board integrated Risk management Committee from 2010
Board nomination committee from 2010
Chairman of the Board Audit Committee since 2010
Board IT committee
Board Investment banking Committee
Board Strategic plan review committee
Peoples bank had granted facilities amounting to about Rs 10 Billion from time to time during the period Amaratunga was holding these positions.
CSE categorized MTD Walkers PLC as a Company reflecting in the Watch List with effect from 2-7-2018. This was due to non-compliance of CSE rules as observed by them over a period of time.
But PB granted Rs.1 billion in March 2018, which has been transferred to NPL on 27th July 2018.
This has been approved when the position of the Company’s Financials were as follows;
Balance sheet of the Company for the year ending 31-3-2018 showed a negative cash flow of Rs.4.95 billion and an annual loss of Rs.2.8 Billion while its current account with the bank remained overdrawn to the extent of Rs.6.2 Billion. A debenture issue of Rs.3Billion was due to mature in September 2018.
Subsidiaries of the PB, Peoples Leasing and Peoples Merchant too have granted facilities to this group in addition to the bank
{this shows that the bank has failed or overlooked under some influence to apply correct assessment criteria}
Chairman of the bank Hemasiri Fernando, however, issuing a public statement announced that the bank has followed the procedures in accordance with the CBSL regulations in granting these loans.
It is relevant to consider some of the revelations made about the facilities extended to this Group of Companies at the (parliament) COPE inquiry held on 05-09-2019.
CML-MTD Construction Ltd facilities have been rescheduled 31 times
The total due from CML-MTD Construction Ltd is about Rs 7000 million
An amount of Rs. 3946 million from this Group has been transferred to NPL category
Of this amount Rs 3339 million (85%) has been granted with no tangible security
CEO of PB, Gunewardana who was summoned for the inquiry offered the following explanation to the COPE;
“One of the practices of banks is to grant loans looking at the cash flows. CML-MTD is an old company in Sri lanka listed in the Securities Exchange. Hence we presumed that the Company is run by a professional management as a corporate entity……… This company has honoured its obligations successfully previously for 10 to 15 years. We gave facilities in that background also taking into consideration the controls by SEC as a listed company………”
According to these statements both SEC and the CBSL are to be held responsible for the monitoring of the quality of lending to this Company.
The operations which have been highlighted in the Audit Reports reveal a different story. Between 2015 and 2019 the lending process of the PB to MTD-Walkers has been made extraordinarily liberal with the Board and the Chairman of the Bank endorsing the recommendations of the Credit line officials. This is borne out by the fact that the facilities had to be soon transferred to NPL and were granted without tangible, (easily realizable) securities making it impossible for the bank to recover them when defaulted. Some of the strange and exceptional transactions will elaborate this position.
PB has invested a total of Rs 26.77 million worth in the shares of this company
Ironically while the Company liabilities towards the bank were so stretched PB decided to invest Rs 500 million in the debenture issue of this Company. This investment has been made when the Company balance sheet was showing a loss in the Company for 2015/16
{The Board Investment banking committee with Jehan Amaratunga has recommended this investment which is in default today.
Throughout the series of operations of this Company with the Bank, there has been a potential risk of abusing the requirements of related party transactions under regulatory provisions. It has to be ascertained independently whether there have been any violations in this regard.
CBSL in its Statutory Examinations has pointed out that Facilities granted to MTD Walkers PLC which have to be classified as NPL are continued as current facilities against the regulatory requirements (30-9-2018)
It is interesting to note that the Senior officials in the Corporate lending sections of the bank were fully aware of these shortcomings and violations of procedures. No one has been questioned or held responsible. Instead, when there was a public hue and cry about these issues, Chairman of the bank Hemasiri Fernando came forward to offer explanations in the form of public statements justifying and rationalizing the affairs on behalf of the Bank.
No audit or inquiry against this Company (MTD Walkers PLC) will be complete without including the involvements of the Peoples bank as a State institution in granting favors and unethical preferences to this Group while its executive deputy chairman serving in decision making positions in the Peoples Bank. Particularly, when the facilities so granted are today lying unpaid as non- performing with poor chances of recovery due to relaxed and wrongful lending practices adopted by the bank. It is to be noted that the SEC has been misled by the actions of the PB to continue the overdue loans without transferring them to the NPL category.
There is negligence on the part of the Bank Supervision Department of the CBSL due to their failure to observe the circumventions of the transparency standards of LKAS-24 for related party transactions and the required disclosures. They are also responsible to ensure the application of provisions under section 3.1(xii) dealing with conflicts of interest in case of transactions by Jehan Amaratunga for and on behalf of MTD Walkers PLC.
All these factors are highly relevant for the investigative audit initiated by the SEC. These lapses on the part of the Peoples Bank and CBSL has prevented the SEC from taking early action against this Group of Companies as required under the Act.
“Anto Jata Bahi Jata” Knots and complications both in- side and outside !
As the proposal by SEC in the current context is to appoint a hired local audit Firm for a Special Purpose Audit we wish to signal a caution in Public Interest. The current Chairman of the Board of Directors of the Peoples Bank is Mr Sujeewa Rajapakse. He is a professional Accountant who counts over 30 years of Audit experience and is the Managing partner of BDO partners Sri Lanka, a leading Audit Firm. He is serving as the Chairman of the Peoples Bank since December 2019. Whether it is in order for a Bank Chairman to continue as a Partner of an Accounting Audit Firm is a matter that has to be cleared by the CBSL under the eligibility critera for Fit & Proper persons according to the CBSL directions. We are however aware of an instance where Mr. Lal Nanayakkara, A partner of an Audit firm, resigned from that position after being appointed as the Chairman of PB.
But there is another worrying factor regarding the conflict of interest issue. BDO partners Sri Lanka , according to SEC records are the Auditors of MTD-Walkers PLC. All the disputed distortions, flaws and irregularities of MTD-Walkers have taken place while their accounts were Audited by BDO partners. Peoples bank has now instituted legal action against the Company. This is something the SEC will have to take into account in conducting their Special Purpose Audit of this Company, MTD-Walkers PLC.
While the SEC proceeds with its inquiry as contemplated, peoples bank will have to examine the records which were suppressed under the previous regime, to take necessary action against all misdeeds associated with this episode causing losses and damages to the reputation of the Bank. Mr Sujeewa Rajapakse as the current Chairman of the bank has to initiate this.
