Shareholders furious over lack of disclosure, sale plan of MBSL’s savings subsidiary

Minority shareholders and analysts are fuming over MBSL’s failure of proper disclosure, including providing no justification for the sale of its controlling stake in its savings bank subsidiary.

Sequel to Daily FT’s expose yesterday, investors said that MBSL in its 2010 Annual Report didn’t even give a hint that it was contemplating a sale of MBSL Savings Bank, but boldly gave assurance that it was being turned around including a return to profitability.  

In that context, analysts expressed concern that the only disclosure on MBSL Savings was in October last year, merely stating that the Board had accepted an offer made by a consortium to purchase a 68% stake in the subsidiary subject to Central Bank approval.

"In that disclosure, MBSL didn’t give a reason for the sale and what the benefits were, if at all, nor why the offer was accepted and whether it was a solicited proposal or not," minority shareholders told the Daily FT.

Though 72% owned by Bank of Ceylon, MBSL has a public float of 28% with around 11,500 shareholders including 8,518 in the category of owning 1-1,000 shares and 2,500 holding between 1,001 and 10,000 shares as at end 2010.

The Daily FT yesterday in its front page article titled ‘MBSL selling savings bank for a song’ highlighted that MBSL has accepted a Rs. 562 million worth offer by a consortium led by Navara Capital, when there had been a higher offer as well as price-specific recommendation from the Board. Analysts also questioned the rationale for the sale and the price given the fact that a Specialised Bank licence is of premium value and it is not doom and gloom for the savings banking industry.

The Navara-led consortium offer was Rs. 3.75 per voting share and Rs. 2.35 per non-voting share, whilst MBSL holds 87.18 million voting shares and 100 million non-voting shares in MBSL Savings Bank. The Board had preferred Rs. 5 per voting and Rs. 3 for non-voting.

The market stakeholders are also furious over the planned sale because the 2010 Annual Report of MBSL the Board had assured shareholders that “it is appropriate to adopt the going concern assumption (for MBSL Savings Bank) in preparation of the financial statements for the year ended 31 December 2010”.

The relevant paragraph was: “During the year 2010, the Bank successfully completed a rights issue of 121,685,328 ordinary non-voting shares to the value of LKR. 182,527,992, and the required level of capital adequacy as per CBSL guideline has been met as of 31 December 2010. The Bank has budgeted to offer a fresh issue of LKR. 600 Million ordinary shares and list the Bank on the Colombo Stock Exchange by 31 December 2011 in order to comply with the CBSL guidelines. The above budget has been approved by the Board of Directors and the capital infusion will allow the Bank to overcome the serious loss of capital in May 2011. Also, the Bank has sought approval from the CBSL to convert the 12 extension offices to fully-fledged branches. That will allow the Bank to explore many opportunities and enhance business volumes, which will eventually increase the profitability of the Bank. Considering the above, the directors are of the view that it is appropriate to adopt the going concern assumption in preparation of the financial statements for the year ended 31 December 2010.”

Furthermore in the CEO’s Review, MBSL said: “Even though MBSL Savings Bank failed to contribute positively to the bottom line of the group, they managed to perform to its budgetary expectations. This indicates that MBSL Savings Bank is energetically progressing and is expected to break even in the year 2011.”

As reported in the Daily FT, analysts opined that MBSL or its parent could address the capital inadequacy issue by extending fresh funding, thereby retaining the prized and high potential entity, which is the only private savings bank. If MBSL wishes to divest, then it should be more transparent and invite open and competitive bidding.

MBSL Savings Bank made a Rs. 40 million profit in 2009 after suffering a loss of Rs. 372 million in the previous year. In 2010, it had made a loss whilst last year it is estimated to have either made a loss of broke even. MBSL’s 2011 Annual Report is due soon though its bottom line too dipped by 29% to Rs. 346.5 million.