The rise and fall of The Finance Co. - Part 2 | Sunday Observer

The rise and fall of The Finance Co. - Part 2

4 October, 2020
A protest by TFC depositors.  Pic: Rukmal Gamage
A protest by TFC depositors. Pic: Rukmal Gamage

(Continued from last week)

At the time a depositor placed his or her deposit they were not informed by TFC that their monies would be secured by the Sri Lanka Deposit Insurance and Liquidity Support Scheme and none of the depositors would have had any idea how the scheme worked. TFC had an obligation and duty to inform the depositors at the time of placing their deposits details of the Insurance Deposit Scheme.

This information would have been important to the depositors in the context set at out in 2.5 of the gazette issued by the Monetary Board on September 28, 2010 where it is stated that the scheme will initially outline a mechanism to protect small depositors from failure of financial institutions, thereby promoting the stability of institutions by maintaining small depositors’ confidence. If the intention of the Monetary Board was to protect small time depositors, why did TFC obtain deposits from big time depositors who now account for 61% of the deposits totaling over Rs.16 billion?

Chairman Monetary Board Ajith Nivard Cabraal in terms of the Monetary Law Act issued notices to the Central Bank of Sri Lanka on November 20, 2010 setting out regulations for the operation of The Sri Lanka Deposit Insurance Scheme.

In terms of Section 5 of the Monetary Law Act, CBSL was authorised primarily for two objectives, (a) economic and price stability and (b) finance stability. If one considers maintaining the financial stability of TFC since it was taken over by CBSL in 2009, the obvious inference that could be drawn is total disaster by none other than the so called Directors who probably had academic qualifications to be appointed as Directors but lacked professional qualifications to meet the challenges they were appointed to sustain the stability of TFC. It is no secret that some of the Directors mismanaged TFC in the interests of some of them.

Section 2.5 of the gazette notification states:

“The Deposit Insurance Scheme” will be implemented in the interest of the overall financial stability of the country and it will initially outline a mechanism to protect small depositors from failure of financial institutions thereby promoting the stability of financial institutions by maintaining small depositors’ confidence.

Does this clause infer that only small time depositors would be insured? At the time a depositor places his deposit was the depositor apprised of the Insurance Scheme? Was the large depositors told that this insurance scheme is only for small time depositors? It does not appear that TFC has advised small time depositors or big time depositors of the scheme.

The Monetary Board Regulation states it intends to protect small time depositors but does not specify the value of a small time deposit. There is a lot of ambiguity in 2.5 of the Monetary Board Regulation which depositors would construe as the Monetary Board will take care of small time depositors and not guarantee the deposits of big time depositors.

Big depositors

Based on regulation 2.5 of the Gazette it would appear it would not be relevant to ask questions or seek answers as the CBSL has taken steps to protect small depositors.Under the recently concluded agreement the CBSL agreed to pay a sum limited to Rs. 600,000 per deposit which in real terms solved the problems of the small depositors.

The question that remains to be answered is how it plans to settle the 61% big time depositors who, based on the predicament they are now confronted with, would have thought twice before placing their deposit in view of the Monetary Boards regulation to protect small depositors initially.

The depositors became aware of the financial crisis at TFC and to protect the rights of the depositors an organisation was set up an organization to protect TFC depositors. This organisation held several discussions with TFC and CBSL officials. Several proposals were submitted to TFC during these discussions by the organisation to protect depositors and the TFC Union.

Some of the proposal that were suggested by the Organisation were as follows:

To invite an investor (one or more) with the capacity to invest an amount equivalent to the deposits with TFC in which event the investor would be entitled to secure all assets and liabilities of TFC.

If a credible investor could be secured the credibility of TFC could have been restored and confidence instilled in TFC depositors and TFC shares would have got a boost in the stock market.

The following was suggested as obligations of the investor.

To secure and guarantee the deposits of the depositors

Payment of interest to the depositors

Investors would have the right and freedom to appoint its own personnel as directors of the company

In the event there is more than one investor, the majority shareholder would be entitled to the shares based on its investment

Among the principal proposals that were submitted, the primary objective of the proposal was to ensure by reviving TFC the credibility of TFC would b restored and more importantly a large number of jobs would have been saved.

However, officials of TFC and CBSL always adopted a negative view of the proposals that were submitted by TFC’s Union and also the Independent Organisation to protect the rights of TFC depositors.

The depositors in their representations to President Gotabaya Rajapaksa in the event of the failure of TFC Directors to agree to the proposals submitted to appoint a Presidential Commission of Inquiry in the face of financial frauds and financial irregularities that have transpired since CBSL took over the administration of TFC.

By letter dated August 21, 2020 Governor of the Central Bank of Sri Lanka, Prof. W.D. Lakshman addressed to the organization to protect TFC depositors states that since the financial status of the company had deteriorated as a result of the failure of a number of financial institutions within the Ceylinco Group, the CBSL made all efforts to revive the company through different strategies which had failed and the continuity of the status of the company was detrimental to the interest of the depositors and other stakeholders of the company.

Inefficiency

Even though CBSL had intervened into the affairs of TFC by appointing Board of Directors / Management Panel to safeguard the interests of depositors, creditors and other stakeholders, it is important to note that maintaining proper business conduct and restructuring the company are among utmost responsibilities of the Board of Directors and key management of the persons of the company.

It is very clear that what happened to TFC was due to the inefficiency of the Directors appointed by CBSL.

The Governor by the same letter states that it is also the responsibility of the depositors to be aware of the nature of financial institutions in which they deposit money. By this statement does the Governor imply that TFC was not a credit worthy company?

The CBSL as the financial regulator of all financial institutions in Sri Lanka should advise Sri Lankans of the companies that are prone to financial crisis and that deposits made with such companies cannot be guaranteed by the CBSL. It is sad and unfair by the depositors for the CBSL to make such a statement after a crisis has occurred at TFC. There is no point shutting the door once the horse has bolted.

During a discussion with the Prime Minister, Cabraal had stated that it was not the policy of the government to close down companies like TFC and had indicated that a proposal to revive TFC will be presented before January 30, 2020.

CBSL is now talking of settling the balance of the depositors by liquidating the assets. However, the CBSL does not seem to have concrete plans or any idea as to how it intends to solve the problems of TFC. Depositors believe that given the bad management, mismanagement and fraudulent acts committed by the Directors they have no answers because they did not formulate any plans.

The problem of TFC commenced in 2009 and the administrators of CBSL including the Finance Minister at the time did not make any comment regarding the situation at TFC and allowed the Directors appointed by CBSL to TFC to have their merry way.

This scheme of paying Rs.600,000 to each of the depositors too has not been formulated by the CBSL as there seems to be a lot of problems in obtaining the Rs.600,000 agreed by the CBSL.

Finally, the depositors are of the opinion that there are many unanswered questions to be clarified and answered by the Directors who were responsible for the collapse of TFC. The depositors are confident under a responsible government this unfortunate episode of TFC will be brought to an end.

More details regarding this unfortunate episode confronted by the depositors emanating from the acts perpetrated by the Directors appointed by the CBSL since 2009 will be highlighted separately.

Written on behalf of the People’s Forum to Protect Financial Stability in Sri Lanka

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