NSB conspicuous by its silence on allegations over TFC buy

One week on, NSB has remained silent concerning the purchase of a 13% stake in The Finance Company Plc (TFC) at a hefty premium, prompting analysts to claim the savings giant was either ignoring or confirming controversies and allegations levelled by the UNP and the market.

This assertion is despite TFC on Wednesday issuing a statement defending NSB’s buy.

Analysts said that it was NSB’s prerogative to clarify or deny allegations levelled by UNP MP Dr. Harsha De Silva over the investment of Rs. 400 million to buy a 13% stake amounting to nearly eight million shares at Rs. 50 each, when the TFC stock was trading around Rs. 30.

NSB has only lamely described the investment as strategic, rather than responding to posers from the market and the Opposition.

“TFC as the company and its management must remain independent rather than making statements supportive of a new shareholder,” analysts told the Daily FT. “If the TFC is making a statement and in the process divulging various price-sensitive information, then such a move may have had the TFC Board sanction. In that context then the Board as well as the director who sold can run the risk of insider dealing,” analysts opined. Among major sellers last Friday were shareholder Director Dinal Wijemanne, who incidentally is also the CEO of Taprobane Securities, the broker picked by NSB for the purchase.

NSB...

The other seller was ABC Broadcasting Corporation CEO and business leader Rayynor Silva.

NSB’s buying into TFC stirred up a controversy due to multiple reasons. One is the alleged risk of public savings when NSB makes such investments into a company which has a negative net worth of Rs. 23 per share and is saddled with Rs. 9 billion retained losses.  

Though the Rs. 50 is being perceived as expensive, sellers said the 13% stake had been originally bought in September 29011 at Rs. 48 per share, suggesting that NSB paid only Rs. 2 extra.

However, others pointed out that when there were thousands of those who were stuck with shares unable to sell at lower prices after having bought last year at higher level, because of the “arranged deal,” sellers of TFC shares indeed were the most fortunate couple in the market.

On the day the deal went through, a few others who had relatively large blocks offered to sell, however the NSB broker had declined to buy. Analysts said it was important for NSB to collect quantities from the market rather than buying from a favoured few. Nevertheless, NSB did mop up 98.5% of the 7.982 million shares of TFC traded on Friday, whilst the major sellers accounted for 89% or 7.1 million shares comprising 2.9 million each (Dinal and Rayynor), 669,700 (Nandadeva Perera) and 667,700 (Yogendra Perera).

As reported in the Daily FT on Monday, other analysts speculated that NSB could be keen to increase its stake in TFC further and thereby support the latter in its revival and expansion. Market talk is that NSB could be eying a stake of 51% from the current 13%.

Following the initial purchase, NSB Chairman Prasad Kariyawasam and another nominee are expected to be invited to join the TFC Board. In a related development, TFC announced yesterday that Wijemanne, who sold his stake and resigned as a Director, has been subsequently appointed as an Alternate Director to Anura Fernando.

In a statement, the UNP’s MP and its Chief Spokesman on economic matters, Dr. Harsha De Silva said: “We note with serious concern the purchase of close to eight million shares of TFC by the NSB at 65 per cent above its current market price. What logic was employed to pay Rs. 49.75 for shares of this high risk and loss-making financial institution when it was last traded at the Colombo Stock Exchange for only Rs. 30 is more than a puzzle.”

“Perhaps one could argue that it is the business of the board and management of any institution to pay whatever price it feels is right for anything they purchase. But NSB is not, by any stretch of the imagination, just another institution. It is absolutely the only bank whose deposits are fully guaranteed by the Government of Sri Lanka as expressed explicitly in the statute governing the bank: NSB Act No. 30 of 1971,” the UNP MP said.

“This necessarily means that NSB must maintain a risk-averse investment profile and transactions like the one just concluded are not what it should be engaging in,” he added.

Dr. De Silva said that TFC had an accumulated loss of over Rs. 9,000 million as at end December 2011 and even if it had made a moderate profit for the financial year ending March 2012, which is not yet public knowledge, a premium of 65 per cent is by any standard extremely high.

“Therefore, in the interest of the depositor base of NSB as well as the public at large, it becomes imperative that authorities provide satisfactory answers to the questions on this transaction,” Dr. De Silva said in his statement.

It alleged that the husband of the Chief Justice of Sri Lanka, Pradeep Kariyawasam, who continues to enjoy power and position as the Chairman of the NSB among several other plum postings offered by the Rajapaksa Government, was a glaring example of conflict of interest.

“Hennayake Bandara, its General Manager, must justify to the public under what circumstance almost Rs. 400 million of depositor money guaranteed by the Government was spent on this high risk transaction and why they paid 65 per cent more than the current market price,” UNP MP said.

He said that that the Central Bank of Sri Lanka-controlled Employees Provident Fund owns a considerable share of the post-Kotalawela The Finance Company and counts several high profile investors of the calibre of Rayynor Silva, brother of MP Duminda Silva, as its largest shareholders.

“A number of colourful personalities including Anura Fernando whose name has been linked to the now-abandoned Central Bank investigation on the Gold Quest pyramid scam and a former Director of Capital Reach Leasing, a company in which Ajith Nivard Cabraal had a significant interest, also sit on its board,” alleged the statement by UNP MP.

“In a country where its citizens are denied the right to information and where governance principles are jackbooted with impunity by people of power, it becomes critically important that we as the main Opposition not only raise these issues in public interest, but media and civil society pressure the authorities for satisfactory answers not only to protect democracy but also the economic freedom and wealth of the people,” the statement added.

TFC Chairman Preethi Jayawardena in a statement (see Daily FT of Wednesday) described NSB’s investment as being completely value driven and an investment in the future of both corporate entities.

The contention that the price paid for each share of TFC was premium and did not validate the company’s share value was roundly rejected by Jayawardena, who said: “The value of the share of TFC previously did not reflect the company’s performance or potential.”

He also said “the investment by NSB was on the future of TFC.”

“The share price for a TFC share was highly undervalued owing to market conditions within the country and external factors such as economic factors on a global scale. Therefore, it can be safely said that the share price did not reflect the true worth of the company,” he said.

The Chairman said that the transaction should not be viewed as a one-off dealing. “This is a partnership for both entities. This was not a share bought over the counter and I am sure NSB would have done its homework before consideration. The benefits that would be reaped by the deal would augur well to all stakeholders of both companies and would provide horizontal integration to both companies in their future endeavours.”

TFC Chief Executive Office Kamal Yatawara said that the buy by NSB would enhance value to both companies to serve their stakeholders and the public at large. “NSB is a specialised banking institution and this in essence is a strategic partnership. NSB will be able to integrate horizontally and move into sectors that it could not previously due to limitations in place. It will open up new avenues for both entities and is clearly a win-win situation for both companies.”

Speaking on the transaction further, Yatawara said that since TFC had been the market leader in the real estate industry, the partnership with NSB would cement its dominance and provide relief to its clientele.

“A majority of citizens in the present day market buy land on loans and this partnership will only add value to them, giving them the direct opportunity to take out loans with less hassle and adding value to what we bring as a company to the desk. TFC has witnessed an unprecedented increase of 350% bringing in Rs. 2.7 billion in real estate-related transactions in comparison to last year and the partnership will further cement our surge,” he said.

Yatawara pointed out that the transaction would have occurred after thorough and careful analysis of the future potential of the company together with its corporate practice. The infrastructure possessed by TFC was also a major contributing factor for the investment. “TFC has the largest and widest network in our specified business and therefore it proved to be crucial in the decision,” he said.

He went on to state that the investment by NSB was one that was long-awaited. “NSB in fact wanted to buy shares worth Rs. 200 million during the initial share issue, but circumstances were such that when the cheque was received when the issue was closed. They always had an intention to pursue a profitable venture with us,” he said.

Yatawara said that the investment would prove to be fruitful in the near future. “As a company, despite doing one of the best turnarounds in the country’s recent corporate history, we know that we could achieve much higher goals. The investment would facilitate this drive to the future and cement our place once again as the most respected and profitable company in the country in our specified business.”

TFC also said when the new management took over TFC was in great financial difficulties. From a Rs. 1.7 billon loss-making venture, the company has witnessed a significant turnaround, making Rs. 15 million in profit during the last three quarters.