MBSL says savings subsidiary sale will result in a profit of Rs. 325 m

The Merchant Bank of Sri Lanka (MBSL) in a filing to the Colombo Stock Exchange (CSE) has stated that The Daily FT articles of 14 and 15 May had carried misleading insinuations over the position with regard to the disposal of the shares of MBSL Savings Bank.

Chairman M.R. Shah’s filing to the CSE is as follows:

At the outset we wish to state for purpose of public knowledge that one of the core business activities of the MBSL is merchant banking including investment banking activities. 

Accordingly, in functioning as an investment bank, we invest in distressed business entities in order to provide required capital and management support and resurrect such entities with a view to disposing them in an appropriate manner, generating profits to the MBSL.

It was on that basis that the MBSL stepped into rehabilitate some of the Ceylinco Group of Companies, including the acquisition of Ceylinco Savings Bank. Similarly, the sick ABC Insurance Company was also acquired and was resurrected, thereby adding value.

As part of this process, 78% of the voting shares of Ceylinco Savings Bank have been acquired in April 2009, by investing Rs. 100 m at a price of Rs. 1 per share. The entity was renamed as MBSL Savings Bank in order to sustain public confidence.

Furthermore, an additional Rs. 150 m was infused to acquire 72% of the non-voting shares, making the total investment Rs. 250 m. With the unanimous decision of the Board, on 2 September 2010, 12.8 m of the voting shares were disposed of at a price of Rs. 3 in order to generate a profit of Rs. 25.6 m to MBSL.

Similarly the unanimous consensus of the Board was reached for the disposal of balance 68% voting shares at a price of Rs. 3 .7 5 per share and the entire 100,000,000 non-voting shares at a price of Rs. 2.35 per share being the best possible price negotiated by the committee appointed by the Board, based on the valuation obtained from PricewaterhouseCoopers for the purpose of the merger and the sale prices were far in excess of the valuation. This transaction will result in a profit of Rs. 325 m to MBSL.

MBSL Savings Bank continued to make losses despite efforts made by MBSL to rehabilitate the bank. Furthermore, if MBSL continued without considering the disposal at this stage, MBSL would have been required to invest Rs. 1.3 b to meet the capital adequacy requirements of MBSL Savings Bank, in accordance with the requirements of the Central Bank of Sri Lanka.

We wish to state that the bank has followed all relevant procedures in making this decision, at the Board level and communicated the decision to the parent company (Bank of Ceylon) and the regulator, (Central Bank of Sri Lanka) and obtained formal approval from the Bank Supervision Department and the Non Bank Supervision Division of the Central Bank of Sri Lanka, which is the direct regulator of MBSL.

Furthermore, for purpose of public knowledge, the details of this transaction were comprehensively informed to the Colombo Stock Exchange (CSE) as far back as October 2011.

In the above context the Board of Directors of the MBSL wish to expressly state that the proposed transaction has been considered with utmost transparency and in good faith to the benefit of the MBSL.

Editor’s Note: Though MBSL didn’t issue a clarification or denial directly to Daily FT, we stand by the issues raised by minority shareholders and industry analysts in our stories. The assertion by MBSL Chairman M.R. Shah that there was unanimous Board decision is nullified by the fact that the same Board also stipulated a higher price previously though later on a decision was made to sell at a lower price.