Tuesday, May 8, 2012

Sanctity of CSE hinges on NSB

■Experts and analysts insist savings giant as a custodial bank must pay up and resolve internal issues separately without compromising integrity stability and confidence of market

 ■Popular settlement banker Sampath with Rs. 390 m overdrawn from CDS following payment on TFC deal stalls operations on Friday, causing chaos for brokers and clients of other deals; CSE expects backlog to be cleared today

The sanctity and credibility of the Colombo Stock Exchange (CSE) today hinges on the National Savings Bank (NSB) with analysts fearing failure to honour its recent purchase of The Finance Company Plc (TFC) shares can dealt the biggest blow to capital markets.


As exclusively reported by the Daily FT last week, the bizarre turn of events following the purchase of a 13% stake in TFC for Rs. 390 million by NSB have sent shockwaves across the entire financial services industry.

 Analysts said irrespective of whether the purchase of TFC stake is ill advised or not, foolish or otherwise, the sanctity of the trade cannot be compromised, hence NSB must honour the transaction by paying and resolve its own issues separately than risking the stability and confidence of the capital market.

 The background to the unprecedented crisis situation facing the Colombo Bourse is that NSB, despite its status of a custodial bank, had 1) failed to reject the buy order if NSB had some doubts about the transaction within the permitted T+1 window or even thereafter and 2) thus far it has failed to settle the due arising out of the transaction.

 Adding insult to injury, the settlement bank to the transaction Sampath Bank had “jumped the gun” and settled the sellers without ensuring remittance of funds from the buyer.

 With regard to Sampath Bank’s predicament analysts said that usually there is zero doubt of a Custodial bank (which is part of the capital market payment system hence it is an inter-participant settlement) not honouring the commitments hence it (Sampath Bank) had gone ahead with the payment for sellers.

 After having realised NSB hadn’t remitted funds, as of Friday, Sampath Bank has overdrawn Rs. 390 million from the Central Depository System (CDS). The latter development triggered a further crisis on Friday with Sampath Bank shutting down its settlement system with broking community on commitments due for T+3 on Friday.

 The Daily FT learns that Sampath Bank had maintained the position that it needs to clear the funds before making fresh settlement on T+3 commitments of Friday. Sampath, given its excellent services and rates, is the settlement bank for at least 15 brokers. At least two brokers had around Rs. 60 million worth of settlement falling on Friday.

 The affected brokers and their clients were furious on Friday despite assurances by regulators that the matter will be resolved.

 It is learnt that following legal advice obtained, Sampath Bank will be emphatically told by the CSE that it needs to clear the backlog today irrespective of Rs. 390 million overdrawn problem arising out of the TFC transaction/payment though brokers’ fears remain.  Brokers and investors who were affected by Sampath’s action had nothing to do with TFC fiasco.

 Be that as it may, NSB as well as Sampath Bank coupled with the current crisis unless resolved would threaten defaming the Colombo Bourse as being unreliable for both local and foreign investors.

 On 27 April NSB purchase 13% stake in TFC from a consortium involving Director and shareholder Dinal Wijemanne, high net worth investor Rayynor Silva (2.9 million shares each), Nandadeva Perera (669,700 shares) and Yogendra Perera (667,700 shares) as well as another TFC Director Anura Fernando (50,000), for Rs. 390 million.

 There were 15 sellers in total for NSB, however the five named sellers accounted for 89% of the TFC shares traded on Friday, whilst NSB picked up the balance shares from the market. Devi Holdings, an existing shareholder, was the sole buyer of TFC apart from NSB collecting 115,000 shares.

 It appears that following the purchase, NSB hadn’t rejected the buy order within T+1 or T+3 windows. On 3 May (the T+3 due date), even as late as 11 a.m. NSB officials had indicated they were waiting for clearance of payment over the purchase.

 However, after the 12 noon deadline for settlement had elapsed, NSB officials had inquired from the CSE whether the buy order could be cancelled. By this time, Sampath Bank had effected the settlement to the sellers of TFC shares, either oblivious or not whether the funds from NSB had come in or not.

 For the settlement system a saving grace was Taprobane Securities (CEO of which is Dinal Wijemanne, a director/shareholder of TFC) was the buying broker as well as for the majority of sellers with only three other brokers figuring in trades of TFC. If there had been widespread broker involvement, the fiasco over the settlement issue would have been far more damaging.

source - www.ft.lk

No comments: