The Audit Committee Report published in the recent annual report of The Finance Company PLC (TFC) for the year ended March 31, 2012 highlights a series of lapses on the part of the loss making financial company, including the failure to comply with a plethora of laws and Central Bank directives, a fact the Central Bank failed to mention when it issued a statement earlier this year claiming that TFC was a sound financial institution when the fiasco came to light over National Savings Banks (NSB) purchasing its shares at an inflated price.
UNP Economic Spokesman Dr. Harsha De Silva MP said the NSB-TFC deal exposed the extent to which crony capitalism was entrenched in the country.
TFC has been flouting laws under the Finance Business Act but the government has allowed EPF funds to be invested in the company as well and the Central Bank was caught napping when the NSB fiasco broke out.
The following comments are taken from the Audit Committee Report:
"The Company’s accumulated losses including the loss incurred during the year (2011/12) under review is Rs.9,830,838,440/- as at 31st March 2012 and the net assets shows a negative balance of Rs.3,864,726,548/- as at that date; also there is a shortfall of quick assets required to settle the deposit liabilities falling due for payment in 2012/2013, as set forth in note 50 to these financial statements. These matters raise doubt in the Company’s ability to continue as a going concern.
"Although the Company has applied fair value modle of accounting for Investment properties, the investment properties at a cost of Rs.1,456,305,522/- which are valued at Rs.1,123,045,000/- as at 31st March 2012, reflect an impairment loss of Rs.333,260,522/- but not provided for in these financial statements.
"Direct confirmations which indicates acceptance of liabilities by third parties were not received in respect of the related company receivables for Rs.886,277,927/- as at 31st March 2012.
"The additional deferred tax asset of Rs. 2.18 bn. for the year ended 31st March 2012 (Rs. 2.13 bn. as at 31stt March 2011) has not been recognized since it is not expected that no taxable profits will be available immediately to utilize such deductible temporary differences other than Rs.191,225,285/- recognized as at 31st March 2012.
"The Company has been unable to comply with the directions issued by the Central Bank of Sri Lanka under the Finance Business Act No. 42 of 2011 as disclosed in note 49 to these financial statements.
"The Company has not prepared consolidated financial statements of the subsidiaries and associate companies as disclosed in note 30.2 to these financial statements.
"In the absence of records pertaining to assets and liabilities held by TFC Homes Limited and TFC Property Fund Company Limited the accuracy of assets and liabilities acquired from the two companies can not be established," the report said.
The Audit Committee goes on to highlight the Central Bank directives that TFC had failed to comply with:
"Direction No. 01 of 2003
a). Every finance company shall maintain capital funds which shall not at anytime be less than ten (10%) percent of the total deposit liability. The company’s capital funds to total deposit liability as at 31st March 2012 was negative 18.53%.
b). A sum equal to not less than 50% of the profit should be transferred to the Reserve Fund where the capital funds are less than 10% of the deposit liability. As the Company has incurred a net loss of Rs. 353,399,712/-, no transfer has been made during the year under review, which is more fully described in Note 38 to the financial statement.
Direction No. 02 of 2006
Every finance company is required to maintain its capital at a level not less than 10 percent of its risk weighted assets with core capital constituting not less than 5% of its risk weighted asset. The reference ratios of the Company were negative 30.81%and negative 30.92% respectively as at 31st March 2012.
Direction No. 1 of 2009
a). Every finance company shall maintain a minimum holding of liquid assets equal to 10% of the time deposit and certificate of deposit and 15% of the Savings deposit whereas the liquid assets of the Company as at 31st March 2012, was Rs. 338,944,859/- against the requirement of Rs. 2,161,765,199/-.
b). Every finance company shall maintain assets in the form of Sri Lanka Government Treasury Bills, Sri Lanka Government Securities and Central Bank of Sri Lanka Securities equivalent to seven and half (7.5%) percent of the average of its month end total deposit liabilities of the twelve months of the preceding financial year, but actual was Rs. Nil against the requirement of Rs. 1,563,821,459/-.
Direction No 3 of 2009
During the restructuring period a beneficiary finance company shall, recover at least 50% dues from related parties, which has not been complied with by the Company.
Direction No. 1 of 2011
Every finance company should continue to maintain an unimpaired core capital at a level not less than Rs. 200 million until end December 2012. The minimum core capital as at year end was Rs. 3,864,726,548/- negative.
Central Bank Direction No: 24/02/005/0021/003
Absorbing investor liabilities of The Finance Property Fund Company Limited (TFPF) and TFC Homes (Pvt) Ltd (TFCH) to The Finance Company PLC (TFC) One of the conditions stipulated by the Monetary Board of the Central Bank of Sri Lanka with regard to the above absorption is that the recovering of 75 percent of the total emoluments received by each director of TFPF and TFCH from inception to date (8th September 2009) to TFC as a means of meeting the deficiency in assets to meet liabilities transferred to TFC, which condition has not been complied by the Directors."
Addressing the media yesterday, Economic Spokesman for the UNP Dr. Harsha De Silva MP said the NSB-TFC fiasco exposed how crony capitalism was practiced in this country.
"It is true that the deal was nullified by the President, but this was because of the pressure that was created by politicians, unions and the media. When I exposed the fiasco last April, the government branded me an economic hitman. The Central Bank went as far as to issue a statement that TFC was a sound financial institution, when it was even breaking the laws in the country. To-date those responsible for the deal have to been held accountable and no action instituted against the culprits. Such misdeeds are taking place with impunity in this country and the country is destroying economic good governance and democracy," he said.
"I have nothing against TFC, but the National Savings Bank is a precious public asset. How did it ever come to the stage where public money was being thrown into a company like TFC? Didn’t NSB do its homework before investing? And how did the Central Bank claim TFC was a sound financial institutions when it clearly wasn’t? This is a clear example of crony capitalism in this country," Dr. De Silva said.
He also went on to charge that the recent appointments at the Securities and Exchange Commission were ‘disgusting’.
"We are in a situation where the mafia is now in control. True the stock exchange is booming, but for how long can it be manipulated?"
As at March 31, 2012, the Employees’ Provident Fund was the fourth largest shareholder of TFC with a stake of 7.44 percent. Bank of Ceylon and People’s Bank too had stakes in the troubled finance company.