MBSL explores three perspectives of managing businesses

By Shabiya Ali Ahlam

The Merchant Bank of Sri Lanka PLC (MBSL) brought together a panel of top industry professionals at an all-inclusive seminar based on the theme ‘Three Perspectives of Managing Businesses’.

While key officials and staff of the finance and banking sector involved in capital markets were present at the colloquium, the expert resource people conducting the sessions included National Chamber of Commerce President/Employers’ Federation of Ceylon Chairman and former MBSL MD Sunil G. Wijesinha, MBSL Deputy General Corporate Advisory and Capital Markets A.M.A. Cader and MBSL Manager Portfolio/Investment Hemendra Wijekoon.

While welcoming the audience, MBSL Chairman M.R. Shah stated that the MBSL thought it was best to organise the seminar as it would help companies that deal with capital markets to gear up, adjust and effectively react to the ever-changing industry.

Companies going public have become more of a trend after the 30-year war and Shah opined that: “Going public is a criterion through which you could really establish an organisation in the best interest of its future stability.”

Nevertheless, the leapfrogging step calls for restructuring the entire system as it is a key area which emphasises on reorganising legal ownership, operations and strategic processes for profitability to be specified.

While restructuring is noted to be a tedious task that should be pertinently assessed and executed, the audience was able to gain fine insights on the restructuring process from Wijesinha who has had triumphant experience in bringing to success organisations such as Dankotuwa and MBSL during times of distress.

While Cader facilitated the session on developing sustainable capital market products for the success of organisations, Wijekoon shed light on the types of investments options prevailing in Sri Lankan markets and its effective management to yield profitable returns.

Effective investment management

This session was facilitated by MBSL Manager Portfolio/Investment Hemendra Wijekoon. Although managing investments is a broad concept and is derived based on the principles of risk and returns, investments vary from equity and debt related investments and it is a well-known fact that timing of investments will decide on the returns.

It is common for rumours to become sell signals in capital markets and according to Wijekoon, 80% of the investors are mere followers. Outlining the character of investors, he noted that most of them are known to have short term memories, show herd behaviour and are unwilling to adjust their own decisions.

Core areas of effective investment management should be taken into account before investing, investment objectives should be well defined by considering the investors financial position, risk tolerance, liquidity status, absolute income level and time horizon. Effective investment strategies should be formulated by choosing to go defensive, balanced or aggressive with the investment.

The investment should be well monitored by measuring the investment option against a market index. On accessing the core areas, an investment service provider needs to be selected, one that can best handle the funds. The types of services providers include brokers, investment advisors and investment managers, and all three are regulated by the Securities and Exchange Commission (SEC).

To select the best service provider for one’s investment, Wijekoon adviced the audience to first define the services required. If assistance is necessary with buying and selling investment products, a broker is the best choice, whereas if ongoing management and oversight on products is needed, then the better option is to have an investment manager. Wijekoon concluded the session by stating: “When following the process of effective investment management, the risks of entering and remaining in the venture would be better managed.”

Business restructuring in good and bad times

The second session was facilitated by National Chamber of Commerce President/Employers’ Federation of Ceylon Chairman and former MBSL MD Sunil G. Wijesinha.

A simple mistake in the identification of a problem or the poor formulation of a solution could lead to the negative impact on a company when restructuring is in process. When company performance slows down, realigning the strategies to suit current situations and future prospects is recognised as a key factor to succeed.

To best understand issues revolving around restructuring, Wijesinha used the scenario of MBSL itself when it had to undergo tremendous changes in order to sustain itself. Being the man behind successfully restructuring the bank, Wijesinha stressed on the fact that the case study was based solely on his perception and analysis.

Touching on the background of MBSL, he noted that it was a merchant bank and not a commercial bank, a subsidiary of Bank of Ceylon (BOC), and was a listed company on the stock exchange with 8,000 shareholders at the time.

Rapid expansion activities by MBSL during 1989-1995 included a stock brokering, money and finance company being acquired, a joint venture set up in Nepal, the establishment of an investment subsidiary and plantation management, three outstation branches successfully opened and rapid expansion of the investment portfolio.

Soon after the high speed growth, the profile of MBSL faced a serious issue when it incurred a Rs. 1.1 billion loss in 1997.

Questions bombarded at the management due to the fall included if the expansion too fast, if systems were in place to manage risk, if the reward scheme was inappropriate, if the workforce was skilled enough to handle the larger operation, and if warning signs by auditors were ignored.

Soon after the crisis, in 1998 MBSL experienced huge decline in morale, unions were up in arms, business was in hysteria, and the poor external image, flight of good staff and the initial restructuring and tightening of administration caused further problems. To rectify the loss, MBSL went through a three phase restructuring process.

Phase one: The bank sought to bring back its financial stability by replacing short term high cost funds with long term debentures. The entire quoted portfolio was sold at a loss – subsidiaries, investments and the Nepalese operation were sold off. Few borrowings were settled, legal activities were strengthened and attention was paid to recoveries.

MBSL underwent a 360 degree corporate culture change where its mission, vision and core values were redefined. Better internal and external communication was established with better participation and involvement. To redesign new systems and procedures, new procedure manuals and employee handbooks were brought in along with the ISO 9000 certification being obtained which pushed through better management practices.

5S was implemented and all formats and procedures were standardised. An interactive website with a lease calculator and online applications for leasing and employment was constructed while intranet was also made available. A new cost culture and provisioning policy was introduced and team spirit was highly emphasised upon and encouraged.

With a newly formulated marketing plan for leasing, which included the execution of comprehensive marketing research, through which issues such as language barriers and the bank being more up-market was highlighted by the clientele. To make processes friendly, trilingual applications and customer feedback forms were introduced.

The leasing logo was redesigned with the leasing terminology captured in Sinhalese and MBSL was the pioneer to establish this stand. The bank also was the first to introduce 24 hour lease processing and with the new incorporation, the leasing disbursement recorded a 50% increase. Enhancing the business, leasing was differentiated and work was done on the basis of optimising limited funds and not increasing market share. MBSL was made to be recognised as a brand while a new logo was introduced and lots of PR activity was conducted.

The MBSL Mid Cap Index was introduced and vigorous CSR activities were performed. Overhead reductions were taking place where three months notice for resignation was suspended for some time, bonuses and salary increments were not extended to executives and all replacement staff was on contract basis.

MBSL’s new strategic plan aimed at a lean, efficient and technology driven organisation and the bank is known to have one of the highest PC densities in the financial services sector and a highly IT driven system.

Phase two: The second phase which took place in 1999 started off with the settling of Rs. 1.7 billion debenture from BOC and debentures worth of Rs. 800 million was converted to preference shares. In consultation with the relevant authorities, unilateral withdrawal of benefits granted by the collective agreement to the trade union was made effective.

Many protests took place but the union never took the matter to the labour courts as they understood the situation the bank was in. Eventually, through proper provisioning, the balance sheet cleared and the business was deliberately slowed down for some time to accumulate funds to settle the debentures.

Phase three: The capital reduction that took place was to effectively erase the accumulated loss and at the same time, reduce the number of shares. However, the accumulated loss of Rs. 1,453,808 in the balance sheet as at 31 December 2003 created difficulties and had to be wiped out.

MBSL, with ordinary share capital worth Rs. 500 million, preference share capital Rs. 800 million and share premium worth Rs. 770 million, exercised a methodology to reduce all shares by cancelling seven for every 13 held, to cancel Rs. 753 million out of the Rs. 770 million appearing in the share premium account and to convert all the reduced preference shares into ordinary shares.

Wijesinha acknowledged that had MBSL not carried out the capital reduction, the distribution of profits would have resulted in the first Rs. 96 million going to holders of preference shares and the remainder, if any, going to ordinary shareholders.

The results of the activity caused the share price to be Rs. 9.25 in December 2004 before the capital reduction and after a few months on executing it, the price went up to Rs. 30, ensuring a shareholder a value enhancement of Rs. 1,380 for a price that would have been Rs. 925, a 49% increase. Despite the offering, shareholders were unhappy as they didn’t understand but nevertheless they realised the benefit.

At the end of it, to the surprise of many, MBSL survived and is now known to be very profitable. In 2005, six years after the crisis, MBSL paid its first dividend. Wijesinha, who was the MD for MBSL at the time of restructuring, said: “We have had many anxious moments and went from one crisis to another without losing heart but with even more determination.”

Benefits of listing

This session was facilitated General Corporate Advisory and Capital Markets A.M.A. Cader.

Developing a sustainable capital market product is a success for any organisation and this can involve from a basic share to a convertible debt issue or even a complex hybrid structure. The recent budget proposals for capital markets provide dual benefits of no withholding tax and interest income, enabling higher yield returns for investors.

Focusing on raising capital, Cader explained that the listing of debt securities allows access to public funds, cost debt capital and exemption of withholding tax and interest income from investments made on or after 1 January 2013 in corporate debt securities listed in Colombo Stock Exchange (CSE).

Benefits for capital market development from Budget 2013 allow foreign borrowings without the Exchange Control Department’s approval, enabling corporate entities to borrow up to US$ 10 million per annum over next three years and licensed commercial banks to borrow up to US$ 50 million per annum for three years.

Listing of debt securities can be facilitated by an Offer for Subscription – an invitation to the public by or on behalf of an entity to subscribe for its debt securities; Offer for Sale of Debt Securities – an invitation to the public by or on behalf of debt securities to purchase debt securities; and Introduction – allocating debt security six months prior to the listing application.

For debt securities to be eligible to be listed on the main board, the application should provide a guarantee for the repayment of capital and interest from a licensed bank with an ‘A’ rating or equivalent with the SEC, whereas the debt security should have an investment grade rating from a rating agency listed with the SEC.

For debt securities to be eligible on the Diri Savi Board, the applicant’s entry should have been in business for a minimum of three years, immediately preceding the date of application, and should obtain a rating for securities to be listed from a SEC rated agency. For debt securities to be listed, general requirements to be fulfilled are that the debt securities have to be fully paid, freely transferable and issued only for cash.

Venturing into hybrid financial products, an unpopular concept in Sri Lanka, a hybrid financial instrument is an investment that blends characteristics of both equity and debt markets. The most common form of hybrid market is the convertible debentures, preferred stocks and equity default SWAPs.

This type of security is an issuance of debt that can be converted to a company’s common stock at any given time. Advantages of having a hybrid product are that if the corporation share price goes down, the option will not be exercised and investors would still receive interest payments on their bonds.

Getting a company listed on the Colombo Stock Exchange has many benefits. Access to funds by issuing shares to the public, access to low cost capital and reduced dependence on bank borrowing are just a few of them. It also enhances the company’s corporate image which would help improve the normal business, give superior brand perception, and boost employee morale and prospects for joint venture, mergers and franchising would open up.

In addition to this, a three half tax holiday for new listings are open to those listed between April 2012 and December 2013 if a minimum of 20% public holding is maintained. The liquidity of the company would be smooth and expansion through subsidiaries will be enabled.

The growth prospects of a listed company are higher than a privately held company therefore the wealth of owners would increase due to high market price and most importantly, listed company shares have strong collateral for borrowing.