Unprecedented reversal of trade in the offing with sellers agreeable to buy back
Analysts opine Bourse in Catch 22 situation as stakeholders mixed over the approach to the cancellation and authorities not holding those responsible accountable so far
Confirming worst fears as exclusively speculated by the Daily FT on Tuesday in an article titled ‘Reverse and be doomed,’ the ill-fated NSB-TFC deal is now awaiting cancellation following the fallout as well as backtracking by involved parties amidst pressure from the Finance Ministry and criticism from the Opposition and market stakeholders.
As most stakeholders didn’t want a reversal since a stock market deal once done is final but urged for a subsequent sale by the buyer or a buy back by the sellers keeping the integrity of the market intact, there has been criticism over the manner in which the problem was fixed.
NSB, which agreed to buy a 13% stake in TFC for Rs. 390 million from a consortium of sellers which included directors and related party on the broking side, yesterday published a paid advertisement explaining reasons for firstly buying and for later not paying. This was termed “highly unprofessional” and akin to taking one step forward and two steps backwards.
Whilst deploring the deal, there had been consensus within the market that NSB should have paid for the original transaction and later resold even if it meant to the very sellers of the first round. Thereafter, if the Government wished, it could have separately dealt with those responsible at NSB being State-owned for the ill-fated deal.
Another view was that the Finance Ministry should have requested the regulators SEC and CSE to advice on how to proceed instead of suspending payment from the NSB side and ordering the savings giant to back off from the deal. The SEC can also take action if capital market participants have acted in a questionable manner in the deal.
This, analysts said, would have saved the sanctity and credibility of the Colombo Bourse.
The bizarre approach by the Government, akin to the cure being worse than the disease, comes when the President Mahinda Rajapaksa administration still remains under attack for its contentious Expropriation or Revival Bill.
Even the vociferous UNP MP and its Chief Spokesman on Economic Matters Dr. Harsha De Silva on Wednesday at a press conference stopped short of calling for a cancellation or reversal. He as well as senior business leader Rienzie T. Wijetilleke – an ex-banker and Chairman of the CSE – had called for action against those responsible for the deal on both sides. See separate story in today’s edition.
NSB on 27 April following Board approval the previous day went ahead with the decision to buy around eight million TFC shares at Rs. 50 each (which was Rs. 20 above the prevailing market price) from a consortium of sellers including TFC Directors Dinal Wijemanne and Anura Fernando as well as electronic media industry fame Rayynor Silva. The deal was proposed by Wijemanne, who is also the CEO of Taprobane Securities, the broker for the buyer and majority of sellers.
Apart from these three, there were at least another 11 who sold shares to NSB in a total of 7.986 million for Rs. 391.
Up to the time of the purchase and soon after, NSB had maintained it was a strategic investment based on future upside following anticipated synergies between NSB and TFC, the oldest and largest finance company. Though the strike price was above market and perceived expensive, given the Rs. 23 negative net asset value per share along with Rs. 9 billion in retained losses, the understanding between buyer and seller was the maximum of Rs. 50 per share was worth. This had been put in writing by NSB.
Since NSB’s Act restraints direct diversification, the basis was an initial 10 to 15% stake along with three Board seats will help savings giant to steer TFC to its fuller potential apart from infusing fresh capital. NSB was trying to maximise synergies via a finance company like Bank of Ceylon and People’s Bank having multiple subsidiaries carrying out other financial services. Though unconventional, even the TFC Chairman and CEO welcomed the NSB’s decision.
Despite the NSB Board approving the deal after being in possession of all relevant and supporting information, its statement yesterday after two weeks of the transaction that the choice of TFC isn’t good enough is self-contradictory. NSB’s backtracking is following President Rajapaksa and Finance Ministry intervention on the deal as well as apparent differences of opinion within the Board as it appears now.
Treasury Chief Dr. P.B. Jayasundera told the Daily FT early this week that the NSB Board hadn’t followed the correct procedure and had sought a report from its nominee on the Board whilst suspending payment. The basis was that the Treasury is accountable to Parliament.
Analysts said whilst those behind the scenes of the ill-fated deal as well as board members must be held accountable if they have failed in their responsibilities, NSB as a custodial bank also had the responsibility and freedom to reject the trade within the T+1 window or even within T+3. Its failure and non-payment is a violation of the rules of the Colombo Stock Exchange. Another fallout of this fiasco is the settlement bank, Sampath, paying the sellers without confirming the buyer had credited funds and thereby being Rs. 390 million overdrawn within the Central Depositors System of the CSE.
After being silent since 27 April, in its statement yesterday, the NSB said the following:
“The offer from TFC initially came to NSB to subscribe for their voting shares in January 2011. The bank carried out a detailed analysis on the TFC and was willing to purchase the voting shares up to approximately 8.33%. However, since the share issue had been oversubscribed, we were not in a position to proceed.
“Similarly, the bank received an invitation from a stock broker to purchase voting shares in March 2012. Since the bank had already carried out a detailed analysis in January 2011, the Board Sub Committee on Corporate Lending and Equity Investment decided to relook at the investment from a strategic initiative point of view with further analysis. Having done a further analysis, a favourable consideration was given to purchase voting shares of TFC, amounting to 10%-15%.
“However, since the Board was of the view that benefits of this investment are not as strong enough to proceed with, a decision was taken not to make the payment, due on this transaction.
“The above decision was conveyed to the Secretary to the Treasury Dr. P. B. Jayasundera at the meeting held on 8 May 2012 with the entire Board of Directors of NSB. Other relevant parties too have been informed of this development, accordingly. The Secretary advised the Board that the Bank should not move out from its core activity and advised to promote NSB as a premier savings bank without exposing its risk profile to maintain public confidence.
“As a socially conscious and a responsible State-owned financial institution, we wish to give a strong pledge to the general public that we would continue to uphold all traditions of our bank and as done in the past, continue our quest in having the depositors’ and other stakeholders’ total interest foremost in our minds in the future as well as the leader in developing you and the country.”
The Ceylon Chamber of Commerce, the only private sector body to formally react, on Wednesday expressed concern over the NSB-TFC deal.
In its statement, it said: “The chamber believes that ensuring integrity and transparency are vital to maintain investor confidence in the Colombo Stock Exchange (CSE) for the capital market to remain robust.
“Whilst appreciating the timely intervention by the officials in recognising the possible governance issues in the transaction and for initiating measures to conduct an inquiry, the CCC urges policy makers and regulators to ensure that the outcome of the inquiries results in identifying any violations and that action be taken against any wrongdoers.
“The Ceylon Chamber strongly believes that there should be collective efforts to ensure transparency and governance in order to enhance investor confidence in the capital markets.”
FT