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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » New rules to curb shady deals by finance companies

New rules to curb shady deals by finance companies

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sriranga

sriranga
Co-Admin
By Namini Wijedasa

The Central Bank of Sri Lanka (CBSL) has issued regulations to prevent, among other things, registered finance companies from writing off loans or leases granted to their own directors or relatives of directors. Five new directions have been made on the back of stinging criticism over the CBSL’s failure to prevent yet another finance company — Central Investments and Finance Ltd (CIFL) — from falling into distress.

Industry sources welcomed the move, while remarking that the regulator was in the midst of several other moves to improve the health of the non-banking finance sector. They stressed, however, that it was essential to ensure the new directives, as well as a plethora of existing ones, were not observed in the breach.

“It is partly because existing regulations were not followed that some registered finance companies are in distress,” one source said, requesting anonymity. “Implementation is the key.”

The Finance Companies (Writing Off Of Accommodations) Direction decrees that registered finance companies must secure permission from the head of the Department for Supervision of Non-Bank Financial institutions before writing off “accommodations” granted to specified persons.

Broadly speaking, the word “accommodation” refers to advances, with loans and leases being the most popular forms. The new directive also prohibits finance companies from writing off advances granted to any undertaking in which any of its directors has an interest; any of its subsidiaries or associates; corporate or unincorporated companies where directors of the finance company hold directorships, shares or other investments; and any person who is an employee, consultant or advisor of the finance company.

This regulation comes amidst revelations in CBSL’s own documents that the directors of CIFL had been involved in many internal financial transactions with the company; and that some of these dealings –such as the deposits and loans of a leading lawyer who was a director of CIFL, and his wife — were not included in forms containing disclosure of the company’s transactions with its directors.

The results of a CBSL on-site inquiry into CIFL’s finances (dated July 2011) state that the company even failed to report to the regulator the amounts due to it from related companies and from staff loans. It also provided no details of other unsecured loans and advances.

Among the regulations made by the Central Bank is the Finance Companies (Corporate Governance Amendment) Direction. It states that a director of a finance company shall not hold office as a director or any other equivalent position in more than 20 companies, societies, bodies or corporates including associate companies or subsidiaries of the finance company.

Another section of this regulation binds the board of each finance company to confirm in each annual report that the institution’s financial statements for external purposes “has been done in accordance with relevant accounting principles and regulatory requirements”.

The earlier direction did not include the words “for external purposes”. A recurrent complaint in CBSL reports on CIFL was that information relevant to the regulator’s investigation was not made available.
http://www.sundaytimes.lk/131020/news/new-rules-to-curb-shady-deals-by-finance-companies-66460.html

http://sharemarket-srilanka.blogspot.co.uk/

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Not just finance companies

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