Four major Sri Lankan banks collectively stand to lose Rs.50 million as a result of being forced to write-off their equity investment if the Securities and Exchange Commission were to cancel the licence of the suspended Lanka Rating Agency, market sources told Ceylon FT yesterday.
This situation arises against a backdrop where global rating agencies are leaving specific regional presence due to weak or small markets were it is impractical to continue to provide such services such as happened in Indonesia where the Indian rating agency ICRA left the country recently.
While 65% of the shares of Lanka Rating Agency is held by Chairman and CEO led ICON, the aforementioned backs and financial institutes hold the remaining 35%.
The financial institutions exposed to Lanka Rating Agency are Commercial Bank, Sampath Bank, Hatton National Bank and National Development Bank. Of these, two banks have each invested Rs 14 million in Lanka Rating Agency and the other two, 7 million each. Additionally, the boutique investment bank Capital Alliance Group also stand to lose Rs 7 million of their investment in the same agency.
These five entities collectively represent 35% of the shares of Lanka Rating Agency with each entity owning between 5% and 10%.
Meanwhile, market sources said that the representative of India's second largest rating agency CARE is in discussion with Lanka Rating Agency for a possible takeover bid. Their representative also came and met with the regulators market sources said.
"What we found is that the previous Governor of the Central Bank Nivard Cabraal forced the aforementioned banks to invest in this agency despite some of the directors of these financial institutes refusing to do so" said a senior government official.
He also went on to say that Lanka Rating Agency was set up as a competitor to the worldwide Fitch Rating Agency since they felt that the Fitch Rating was very stringent and rigorous and had downgraded Sri Lanka's country rating during the war.
However, the Chairman of Lanka Rating Agency Preethi Jayawardena denied these accusations saying: "Our aim was to develop a local rating agency. We recently hired two well experienced international rating experts to strengthen our analysts' team but, it is most unfortunate that the prevailing situation has arisen and that is why we have decided to sell to a foreign party" he said. However, government sources pointed out that Lanka Rating Agency hired the experts due to the insistence of the regulators and not on their own initiative.
Lanka Rating Agency had more than 140 clients most of whom were finance companies. It is risky therefore, to trust their ratings since they do not have the required expertise to do so, the aforementioned government official further elaborated.
Courtesy:Ceylon Financial Times 10 July 2015