The domino effect upon the Ceylinco Group following the Golden Key crash is becoming more and more apparent by the day. Various arrangements are now falling into place with the Central Bank, which is the chief regulatory authority for the financial services sector, taking steps which, hopefully, will prevent a further slide. Wisdom after the event is as easy as popping cashew nuts into one’s mouth as the Sinhala saying has it, and there is a surfeit of nodding heads and ``I told you so’’ punditry on display today. But that is cold comfort to those investors who were lured to make risky deposits by the high interest rates that were on offer. For some of them such interest was retirement income; for others they provided what they believed was a fat return, safe haven for black money. Whatever the reason, people made risky and not-so-risky investments in different finance companies and other deposit takers and the failure of one has had a ripple effect on the entire sector. The good and the bad are all suffering to varying degrees.
On Friday, Merchant Bank of Sri Lanka PLC (MBSL), a listed subsidiary of the Bank of Ceylon on which the responsibility for running Seylan Bank PLC has been reposed, announced that it had with Central Bank clearance accepted an assignment to provide consultancy services to The Finance and Guarantee Company Ltd., another troubled member of the Ceylinco Group, ``to restore public confidence and to resolve current liquidity problems.’’ MBSL also said it was in preliminary discussions with the Central Bank to undertake the management of the affairs of Ceylinco Savings Bank and to rehabilitate that bank with a view to a long-term relationship. Those whose memories are not too short may remember that not so many years ago, MBSL itself was in trouble having badly over-extended itself. Thanks largely to prudent management that was set in place after the departure, with handsome compensation, of a CEO on whom much of the blame for what happened was laid, was able to successfully complete a long haul to viability and even become, as it is now, the physician treating other troubled companies! MBSL, of course, had the massive advantage that its parent was the country’s biggest commercial bank with the ability to bankroll the rehabilitation.
Other developments include Seylan Merchant Bank PLC, a listed entity, beginning talks of divesting the controlling shares of its subsidiary, Seylan Merchant Leasing PLC, also a quoted company, to People’s Leasing Company Ltd., a major player in the leasing industry which is a subsidiary of the People’s Bank. The price it can fetch will no doubt be influenced by the current downturn in leasing resulting from depressed vehicle sales market.. No deal has been finalized yet, but analysts note that the Ceylinco/Seylan Group is looking at raising cash to meet obligations arising from the Golden Key collapse and downsizing by divestment is part of the strategy. The Central Bank has announced that suitable managing agents are being sought for two unlisted members of the Ceylinco Group, Ceylinco Investment and Realty Ltd. and Asian Finance Ltd., while certain key executives at The Finance Company PLC, the first finance company to be established in the country by Senator Justin Kotelawela, Mr. Lalith Kotelawela’s father, have been identified to undertake overall management responsibility. All this implies that the regulator lacks confidence in the ability of some of these companies to properly manage their affairs in the face of the daunting challenges the group faces and would prefer to entrust that responsibility to external entities. Also there is recognition, as demonstrated in the instance of The Finance as well as the Seylan Bank, that there is senior management capability within the various group companies that can be harnessed to prudently mind the shops until stability is restored.
The Central Bank has also appointed an eminent four-member expert group comprising respected professional and business personalities to advise and assist the implementation of the government’s eight point stimulus package. We are glad about the initial composition of this group and hope that it will not be made unwieldy with too many additions as time goes on. It is evident that Ceylinco’s problems were largely the result of over-extension with the group comprising of as many as 400 companies. We do not think that Mr. Lalith Kotelawela set out to deliberately swindle depositors. Rather, a group of companies that had done very well out of real estate at a point of time got into the habit of shifting money from one company to another depending on where the need lay, without a real consciousness that this was depositors’ money rather than their own that was being moved with little or no focus on how repayments would be made. The group got badly hurt when the property bubble burst and Golden Key, especially, seemed to have for too long borrowed from Peter to pay Paul.
Regulatory failures too have occurred. It is now known that the Central Bank had ``examined’’ Golden Key long before its problems surfaced but has obviously done nothing further on the basis that it was not a registered deposit taker. The volume of the deposits held against the credit card spends they secured plus the magnitude of interest outgoings (as well as the high rates of interest) on these deposits should have been obvious tell-tale signs that should have been acted upon long before the crash. But all that is water under the bridge. The failure caused runs on the Seylan Bank, thankfully arrested now, and other related group companies. Those that are registered can now regain liquidity by selling their land stocks at 67% of their market value under the government’s package. These will be distress sales and once holding costs are factored, are very likely to result in losses. But those are hard facts of life that the companies and their owners must live with.
The lessons for investors too are many. Way above market interest rates are too good to be true. The mere fact that interest cheques come regularly does not mean the capital is safe as the Peter and Paul game may be very much in play. Aggressive deposit seeking by any company, inducement to staff for bringing in business and the past record of a business group and its owners are all matters that must be factored before hard earned money is lent on trust to anybody. A company called Energen to produce solar power in Rajasthan was found to be either/or a huge white elephant/massive fiddle. That company was an offshoot of Blue Diamonds of the Ceylinco Group and there was a lot of finger pointing at the time that bubble burst. Many things have been done and more measures will follow to tidy up the mess. Whether the Rs. 26 to 30 billion needed according to reports to settle Golden Key depositors can be raised remains to be seen. Meanwhile those who had money in that company or other troubled deposit takers will have to exercise what the Central Bank has called ``a certain degree of patience.’’ It may well be longer than they think.