Sunday, May 6, 2012

CSE’s first "settlement failure’’ due to non-payment

The controversial stock exchange transaction through which the National Savings Bank (NSB) on April 27 acquired 13 percent of The Finance Company PLC (TFC) is still hanging fire without conclusion, well informed sources said yesterday.

 Settlement of the deal had not been made when markets closed on Friday although Taprobane Securities who were brokers for both the big buyers and sellers had completed all docum.entation, these sources said.

However participants were hopeful that the whole issue will be sorted out by Tuesday although there was a newspaper report on Saturday that the president had stopped the deal.

There was no confirmation on whether this was actually so or whether, in fact, it is possible to do so when such a transaction had been concluded.

But the problem has been compounded by what brokers called the country’s first ``settlement failure’’ with the CSE unable to pay a number of brokers what they were owed due to the non-receipt of Rs. 400 million due from NSB on the TFC transaction.

The funds had been released to Taprobane Securities, brokers for both the big buyers and sellers, by the custodial bank following the green light given by the CSE in the belief than the NSB was making the transfer. But the non-receipt has created a major problem.

``This is going to undermine confidence in our market,’’ a well informed source said. ``While the amount is not big, the fact that it happened is a cause for worry.’’

Brokers said there was one previous instance where there was a one day payment delay on a big transaction that had made some waves.

When a deal is struck over shares held by a custodial bank, the buyer and seller must confirm to the bank that the transaction has taken place by the day after the trade or by T + 1 in stock exchange parlance with `T’ standing for the transaction date with one day added.

NSB acts as its own custodial bank and whether it had made the in-house confirmation to itself was not clear.

While at least one broker said that money over TFC transactions on that day had not been paid, another broker confirmed that ``we have been paid.’’

Analysts said that the NSB appeared to be having a strategy of entering the finance company business and acquiring a stake in TFC, the oldest established finance company in business today with a 65-strong branch network and an extensive land bank and real estate assets may have been seen as an opportunity.

The bank was looking for board seats and some resignations from the TFC board was seen as paving the way for at least two NSB directors and possibly three becoming directors.

``Nominations had in fact been made although there was no stock exchange filing indicating appointment,’’ one well informed source said.

Asked how NSB could have increased its stake or taken control of TFC and analyst said that it could have been done through a rights issue or via some kind of debt instrument. If a rights issue was floated, given the weakness of the TFC balance sheet at present and its inability to pay dividends for some time, much of it would have been unsubscribed and an investor like NSB with financial muscle could have mopped up such allotments.

``It could also have been structured by a debt instrument,’’ he said.

At least two of the big sellers, Dinal Wijemanne and Rayynor Silva paid a substantial premium to market to acquire there shares from high net worth investor, Dr. T. Senthilverl, several months ago at a price of Rs. 48 per share.

The sale price of Rs. 50 barely gave them a return on their holding cost, analysts noted.

Senthilverl remains the biggest individual shareholder of TFC with 11.79% according to its latest published financial. He holds a further 6.74% through another account and 2.15% under his own name in an unpledged account. The EPF is the third largest shareholder with 8.43% behind Ceylinco Investments (11.04%). The Ceybank Unit Trust holds 5.19% and Mr. Lalith Kotelawela is No. 16 in the Top Twenty with 0.87%.

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