The Merchant Bank of Sri Lanka PLC (MBSL) is seeking to infuse Rs.540 million zero cost capital into the company through a one for two rights issue priced at Rs.12 per share for 45 million new ordinary shares to be issued.

MBSL has told shareholders that its largest shareholder, the Bank of Ceylon with 76% of the company, had indicated that it would subscribe to its entire entitlement subject to the approval of the Finance Minister.

The company said that in the event the rights issue is under-subscribed, MBSL will utilize whatever funds raised to settle short-term liabilities including nearly Rs.1.2 billion worth of commercial paper carrying an interest rate of 20.73%.

"The main purpose of the rights issue is to settle part of the short term borrowings and to expand the lending portfolio of the company. Accordingly 75% of the proceeds will be utilized to settle part of the short term borrowings and the balance 25% will be utilized to increase the company’s leasing and hire purchase portfolio to maximize on opportunities in the emerging economy," shareholders have been told in a circular.

"The company intends to utilize total proceeds from this rights issue within six months from the date of allotment of shares for the above purposes."

MBSL stressed that shareholders will benefit from this rights issue as substantial interest cost can be saved by settling part of the high cost short-term borrowings and the additional income generated from the investments in the lending portfolio.

This year MBSL acquired 100% ownership of MBSL Insurance Company Limited (previously ABC Insurance Limited) and 78% of MBSL Savings Bank Limited (previously Ceylinco Savings Bank Limited).

MBSL has also been engaged in restructuring of several troubled financial institutions of the Ceylinco group including The Finance Company PLC, on a mandate received from the Central Bank of Sri Lanka with the view of stabilizing the banking and financial sector of this country.

In September this year, the MBSL share traded at a high of Rs.30.50 and a low of Rs.19.50 and was last traded in September at Rs.27.75. In August the share traded between Rs.16.25 and Rs.19.50 and closed at Rs.19.25 while in July it traded between Rs.15 and Rs.18.50 and closed at Rs.17.50.

In the six months ended June 30, 2009, the bank posted a profit of Rs.66.8 million on an income of Rs.521.5 million while in the previous year it had an after-tax profit of Rs.205.1 million on an income of over Rs.1 billion and the year before it posted a profit of Rs.238.5 million on an income of Rs.872.6 million. In the year ended December 31, 2006 earned Rs.209.5 million on an income of Rs.704.4 million.

MBSL has a stated capital of nearly Rs.1.1 billion, a reserve fund of Rs.45.7 million and retained earnings of Rs.543.8 million in its books.

Total assets were running at Rs.4.9 billion and total current liabilities at nearly Rs.3.3 billion as at June 30, 2009.

MBSL has summoned an extraordinary general meeting on November 19 for purpose of considering a resolution to float the rights issue.