Govt's., borrowing costs to rise
due to high inflation

With tomorrow's inflationary figures for this month  expected to show an increase over that of May due to the high cost of living, market sources expected the government's borrowing costs to rise at Wednesday's  Treasury bill (T bill) primary auction which is for the re-issue of Rs. 9,500 million worth of maturing T bills.

 The moving annual average rage rate of inflation as measured by the new Colombo Consumer Price Index (CCPIN) last month was 20.80%, up 1% over the previous month's figure of 19.80%.

 However, the moving annual average rate of inflation a measured by the old CCPI which the government discarded from last month, allegedly as it shows a higher rate of inflation that the present CCPIN, was 20% in April (the last time it was used after a span of over 50 years in service), as opposed to 18.7% shown by the new index.

Inflation, as measured by the point to point change in the old CCPI in April was 29.9%.

Meanwhile, T. bill yields, after briefly coming down last month on the perception that foreigners would invest in such maturities after its partial opening to such investors, have however since started to move up despite tinkering by the government to resist such increases.

One such tinkering was the suspension of the 91 day T bill auction for a period of three weeks, from the week ended May 30 to the week ended June 13, in order to induce the rates on the other two maturities, ie the 182 day and 364 day maturities to come down.

But this resulted in the weighted average yields (WAYs) of these two maturities to come down marginally by 24 and10 basis points (bp) to 18.06% and 18.40%, before moving up by a total of 11 and 13 bp in the next two auctions, to fetch WAYs of 18.17% and 18.53% respectively.

The government, through the Central Bank, after skipping three weekly primary auctions for the re-issue of 91 day maturities, however held one in the June 17 auction, which saw 91 day maturities climb up by 15 bp to 17.29%.

But last week the government did not have an auction for 91 day maturities, however this did not stop the rates for the other two maturities from climbing up (see separate story found elsewhere on this page).

 Dr. Yea Kim Leng, Group Chief Economist RAM Holdings Berhad, a Malaysian rating agency, told reporters in Colombo on Tuesday, that high inflation was caused by high government spending. He warned that the danger in running high budget and current account deficits is that there will be no cheap monies remaining for private sector investments.

Wednesday's T bill primary auction is for the re-issue of 91, 182 and 364 day maturities, comprising parcels of Rs. 1, 500 million; Rs. 3,000 million and Rs. 5,000 million respectively.

Meanwhile, the market which experienced an excess liquidity of Rs. 23 billion on Thursday due to the government receiving the proceeds of a US$ 150 million commercial loan, coupled with the proceeds of a maturing T bond of Rs. 10 billion, saw this liquidity reduced to a quarter, to under Rs. six billion, on Friday, due to the government's open market operations to swap up excess liquidity, while the rupee/US dollar parity at the end of last week was at the Rs. 107/67/70 levels.

Fowzie wins the day

A "strategy" that Petroleum Minister A.H.M. Fowzie had in mind allegedly compelled Lanka Indian Oil Company Ltd., (LIOC) to bring down the price of diesel so that it would be on par with Ceylon Petroleum Corporation's (CPC's) selling price.

 Fowzie told The Sunday Leader on Friday that though he told parliament on June 19 that he would take over LIOC's sheds, he had another strategy in hand, which had allegedly compelled LIOC to reduce its prices.

LIOC first brought down the price of a litre of diesel from its original selling price of Rs. 130 a litre to Rs. 120 from midnight on Tuesday and subsequently brought it down by a further Rs. 10 to Rs. 110 a litre, to be consonant with CPC's selling price, from midnight on Thursday.

Fowzie however refused to divulge what that strategy was.

LIOC Managing Director K. Ramakrishnan said that they reduced the selling price of diesel because the government wanted them to do it. As a result, as per Friday's international prices, they were making a Rs. 20 loss on a litre of diesel and Rs. 2.15 on petrol, he said. Both LIOC and CPC retail petrol at Rs. 157 a litre.

Ramakrishna said that the price of a barrel of diesel in the international market on Friday was US$ 137 and that of diesel, US$ 167.

LIOC is a subsidiary of Indian Oil Corporation, a government of India enterprise.

Meanwhile, Ramakrishnan was quoted on these pages, in The Sunday Leader issue of June 1, 2008, of having had said that a new tax on imported petrol had forced them to raise the price of diesel to Rs. 130, effective from May 28, 2008.

He said that the new tax on imported petrol is Rs. 24.50 a litre, it comes as Customs import duty. This tax continues.

LIOC depends 100% on imports to meet its petrol needs, whereas CPC, because it has its refinery in Sapugaskande, does not have to depend on petrol imports to meet its requirements, said Ramakrishnan.

This new increase would have had meant that the price of a litre of petrol would have had gone up by Rs. 24.50 from the current Rs. 157 to CPC's gain, he said. "We were making a loss on diesel, so we passed on this new tax also to diesel," he said.

Ramakrishnan on June 20 told The Sunday Leader that they have had appealed to the government to remove this petrol tax so that it would be possible for them to bring down diesel prices in line with CPC's selling price.

On Fowzie's threat of taking over LIOC fuel stations if they didn't bring down the price of diesel, Ramakrishnan said that he did not think that such a move would take place.

Former CPC Chairman Daham Wimalasena said that if the government takes over the sheds run by LIOC, they would not only have had to pay them compensation, but would also have had to be mindful of the political ramifications that such a move would cause.

Fowzie had further told parliament that after LIOC increased the price of a litre of diesel to Rs. 130, it had resulted in its diesel sales dropping to zero, while CPC's sales had increased.

As diesel was sold at a loss (Rs. 20 a litre), CPC's losses had also increased, the Minister told Parliament.

Edgar gives quit notice

Sampath Bank PLC Chairman Edgar Gunatunge (76) has given notice of his resignation from the Bank from September 30,2008.

He will be succeeded by Arthur Senanayake, its deputy chairman. "He had wanted to resign from the bank for the past 1« years, but the other Board members had previously prevailed upon him to not to take such a decision," informed sources said.

The Bank is seemingly going through a difficult period operating in a difficult economic environment, having earlier announced a rights issue in the proportion of 1:4 at an issue price of Rs. 100 a share, when its shares are trading at Rs. 97 a share currently, Rs. 3 less than its market price.

 There are four groupings which allegedly have an over 50% stake in the Bank cumulatively. Those are two groups led by business magnates Don Harold Stassen Jayawardena and Dhammika Perera respectively, the Chinkara Group-an offshore fund and the Bank's ESOP.

In the event the rights issue is not fully subscribed, the saving grace is that the balance may be offered to IFC, a World Bank affiliate which wants to take a 14.5% equity stake in Sampath at Rs. 117 a share (plus two board seats), while ShoreCap, a US based fund wants to subscribe to US$ 4.5 million worth of shares, also at Rs. 117 a share, they said.

Sampath currently has 68 million issued shares.

SLT-Maxis to introduce new products

Sri Lanka Telecom (SLT) has employed British Telecom (BT) as its consultants to help streamline its operations. It's learnt that there is overlapping of work in certain operations in SLT and this consultancy would help identify such duplications and come out with alternative solutions.

SLT Chairman Mrs. Leisha Chandrasena de Silva told reporters on Thursday  that they plan to introduce new products to the market with the assistance of their second biggest shareholder Global Telecommunications Holdings NV (GTH) which has a 44.9% stake in SLT.

GTH is also an associate company of Maxis, Malaysia's biggest mobile telecoms operator. GTH became a shareholder of SLT after it bought the 35.19% stake formerly owned by NTT Japan for Rs. 32.07 billion on April 1.

De Silva said that these products would be made known to the market in due course.

With regard to the appointment of a CEO to SLT and a shareholder agreement with GTH, she told The Sunday Leader that discussions in this regard were ongoing with GTH.GTH became a shareholder of SLT only two months ago, it's difficult to give a time frame by when these matters will be sorted out, said de Silva.

Asked whether these issues would be resolved at SLT's next board meeting due in July, she answered in the negative. The government is SLT's biggest shareholder, with a 49.5% stake in the company.

SLT has been running without a CEO after the Japanese exited from the company, with Ms. Pat Abayasekera, SLT's chief corporate officer, overlooking the works of a CEO since. Its last CEO was NTT nominee Shoji Takahashi, a privilege which NTT enjoyed, in having its own CEO to oversee SLT's operations after the Japanese bought a 35.19% stake in the company in 1997

Banks seek integrated risk management

The biggest need of the local banking industry is an IT driven integrated risk and compliance approach, a survey conducted by an IT company revealed.

Those included covering risks such as credit risk and operational risk.

The survey conducted by I-flex solutions, a company that provides IT solutions to the financial services industry, in February, had identified that among the challenges facing local banks in the IT sector were the standardization of processes, the availability of skilled manpower and the cost of implementation.

And the identified key drivers for an IT enabled environment among local banks: Better risk management and regulatory requirements.

Miss Saloni P. Ramakrishna, head-business development, Reveleus & Mantas, at I-flex, also told reporters on Wednesday, that the need to protect reputational risk among banks were at an all time high.

She said that banks, from being primarily concerned about shareholder value, were shifting towards stakeholder value. That included looking after the interest of its customers and staff.

Ramakrishna also said that banks, wherever they may be, are involved in the core functions of deposit taking and lending.

She further said that an IMF report released in November had said that the Sri Lankan financial system is resilient despite a challenging macro-economic environment.

The capital adequacy ratio of local banks at 12% was well above the Central Bank of Sri Lanka's (CBSL's) requirement of 10%, Ramakrishna said.

Non performing loans (NPLs) have been falling. Banks' loan portfolio in recent times have doubled, while NPLs were coming down. This was a positive development.

Ramakrishna said that Reveleus & Mantas were two software products that I-flex, an Oracle company, was offering to the local market.

Already its product Flex Cubes, a software solution for the financial services industry has been successfully sold to local banks.

Case for developing Islamic finance

By Suresh R.I. Perera*

The case for development of Islamic financing is not confined to facilitating devout followers of Quran a means of fulfilling their financing requirements without violating their religious fundamentals. The case extends to availing an opportunity to experience a leap frog development of the economy of the country itself. Many countries in the world are introducing regulatory changes and are providing tax incentives to Islamic financial instruments to develop as 'hubs' for Islamic financing to attract the liquid funds in the Middle East. Legislation in UK has provided relief from stamp duty to promote this mode of financing. In addition UK Finance Act of 2005 and Finance Act of 2006 have paved the way for fiscal certainty for structures used in Islamic financing. In the Asian region, Malaysia that is competing with Singapore to be the main centre for Islamic financing in Asia recently granted many tax incentives in the budget of 2007, including a 10 year tax holiday for profits derived from Islamic banking business conducted in international currencies, including transactions with Malaysian residents. The establishment of a conducive regulatory & a tax framework which would preserve the competitive edge of Islamic financial instruments, including Sukuk (cheque) would witness the attraction of high liquidity in the gulf countries into these Islamic instruments.

Islamic financing is the 'in thing' in the world of financial services.

 'Murabaha, Mudaraba, Ijara' are some of the 'buzz' words. The latest financial instrument to enter the Islamic financial services sector is 'Sukuk,' an Arabic term, - the plural of SAKK - the origin of the English word cheque. The list is not exhaustive. 'Musharaka, Istisina, Thawaruq, Salam' are some of the other buzz words.

The cross - cultural penetration of Islamic finance is manifesting it's impact in the developing Sri Lankan market too. Whilst customers for Islamic financial products are expanding to non-Islamic customers, there are many non- Islamic financial institutions venturing to offer these products that comply with Shari'ah principles.

 The Amending Act No.2 of 2005 introduced to the Banking Act of Sri Lanka permits banks to introduce banking products based on Islamic principles. Whilst amendments to relevant statutes would further the cause of development of Islamic financing, tax considerations would be the determinant for monetary benefits to be in parity with its conventional counterparts.

Interest vs. profit

The basic tenet of the Islamic value proposition is the prohibition of paying and receiving interest (riba), and a fundamental belief in the sharing of profit and risk in the conduct of business. The Quran Sura Al Baqara, verse 275 says that the creator allowed trade, but prohibited Riba, which is typically translated as interest

 While interest is a 'passive' income, profit is an earned income which is treated differently for tax purposes. Profit is considered an after tax item for the profit creator and a fully taxable item for the profit receiver. Herein lies one of the principle tax barriers for the smooth progression of the development of Islamic financial services sector.

The growth of the current tax systems in most of the countries over the last century has been to address issues of a conventional financial environment and the system naturally poses many issues for Islamic financial instruments.

The concept of interest is intrinsically embodied in tax statutes around the globe and international treaties between countries for avoidance of double taxation. Income Tax Statutes in countries that follow the 'source doctrine' such as Sri Lanka, recognises interest as a separate source of income and contains specific provisions for the tax deductibility thereof, and relieves such as lower rates or exemptions.

 Invariably income statutes also impose withholding tax burden on the person paying interest as a collection mechanism by deduction at source.

As interest is considered haram, Islamic financial products avoid payment or receipt of interest by adopting sharing of risks & rewards or cost plus profit mechanisms. As opposed to providing an interest bearing loans, the financier obtains the return by way of a share of profits for his equity finance which is intrinsically related to success of the venture. While Musharaka & Mudaraba are profit & loss sharing instruments, Murahaba is based on cost plus profit basis. Thus the critical tax issue that these instruments are exposed to is whether the profit element or the share of profits would be treated as interest for tax purposes.

Would the payments associated with these instruments qualify for tax deductions?

Battle between substance & form

The success and viability of Islamic financial instruments as an alternate mode of financing in a particular jurisdiction would depend on the adoption of the doctrine of substance over form by tax authorities. These instruments would flourish and appeal to the populace in a country in the same manner of its conventional counterpart where tax authorities are governed by economic reality and the substance of a particular transaction. In countries where the hands of the tax authorities are bound by the shackles of the legal form of the transactions, unless the tax systems are adapted for Islamic instruments by requisite amendments to tax statutes, the two competing product lines would experience inconsistent results-more often than not to the detriment of Islamic financial instruments. Whilst the Netherlands and Switzerland are examples of countries that analyse transactions by the substance and economic reality for tax purposes, UK tax authorities weigh heavily in favour of the legal form for ascertaining tax consequences. 

Murabaha (trade finance)

This is the alternative Islamic financial instrument available for a person who wishes to acquire an asset by obtaining a conventional interest bearing loan which is considered haram according to Shari'ah principles to the followers.

 This instrument is a means to fund a variety of acquisitions such as motor vehicles, computers, furniture, televisions, residential & commercial property, etc. The financier buys the asset identified by the customer, say at Rs. 1M and sells to him at a premium for 1.2M to be settled on deferred instalment basis or the total price to be paid at a specified future date. The profit of Rs.0.2M made by the financier corresponds to the interest earned under a conventional loan. At the time of the startof the arrangement the title passes from the financier to the customer.

The crucial issue that arises from a tax perspective with regard to the aforesaid Murabaha structure is whether the tax authorities would adhere to the doctrine of 'substance over form' to accept it as a financing arrangement for tax purposes or insist on the application of tax laws based on the strict legal form. Most of the countries that follow English legal tradition would find the mechanics of Murabaha falling within a statute akin to 'Sale of Goods Act'.

An interesting observation in this regard was made in a case decided by the District Court of Sri Lanka. The defence taken up by a company sought to be wound up, that the action was prescribed under the Prescription Ordinance, as the Murabaha structure was governed by rules pertaining to sale and delivery of goods was rejected in favour of it being a financing transaction. The relevant extract from the Order of the court in Case No. 92/ Co., where an application under the Companies Act was made by Amana Investments Ltd. to wind up Greenwood Growers (Pvt) Ltd. is reproduced below.

"It is stated in the Affidavit, filed on behalf of the company sought to be wound up, that since the relevant loan transaction is one of sale and delivery of goods, it has been prescribed in terms of the provisions of the prescription Ordinance. The petitioner has submitted that the said transaction was not one of sale and delivery of goods, but a transaction to provide a financial facility. Petitioners have further stated by their written submission that the loan amount claimed to be owned to them has been accepted as a loan payable by the company sought to be wound up in its final accounts according to the report of the provisional liquidators. The report of provisional liquidators confirms that the final accounts of the company sought to be wound up has been prepared as at 31.03.2001 and that it states the amount of the loan and the interest thereon as an amount payable therein. Therefore the company sought to be wound-up has admitted that the loan was payable as at 31.03.2001. It is evident ex facie that since it has to be treated as an acknowledged debt it would be governed by Section 12 of the Prescription Ordinance and that it is not governed by the provisions relating to sale and delivery of goods. Therefore it cannot be stated that the debt claimed by the petitioner has been prescribed."

Would our tax authorities in Sri Lanka be sufficiently liberal to accept a fundamental principal of taxation-'substance should override form,' to allow the development of this mode of financing still in its infant stage?. To date the issue remains a controversial in Sri Lanka as the Tax Office has not clearly ruled on this.

  If the Tax Office opts to look at the form over the substance, some of the fiscal consequences of this alternate mode of financing would differ from an interest bearing loan; its conventional counter part. As the title transfers twice - initial purchase by the financier and then the onward sale to the customer -indirect tax implications could impact the profitability due to the existence of two tax points.

If buy-sell operations are not excluded under the VAT / GST statute in a particular jurisdiction and the statute imposes input tax recoverability, the cost to the ultimate consumer of a product provided under a Murabaha arrangement could be higher than a conventional loan. To eliminate this impediment, Singapore for instance has permitted the financial institution to claim GST attributable to the purchase in full, whilst exempting the mark-up on selling price.

The exclusion of wholesale or retail sale of goods from transactional VAT under Sec.3 of Value Added Tax Act No. 14 of 2002 may provide relief whilst denying the input tax claim to the financier, provided the transaction does not involve an importation, whilst exposing it to the turnover tax levied by the provincial councils in Sri Lanka. Though above would be the tax consequence if form takes precedence over substance, if Sri Lankan tax authorities accept the structure as a pure mode of financing, profit derived by a bank would be subject to a profit VAT at 20% only.

The liability of a bank carrying out a conventional loan transaction is restricted to the interest element for the purpose of 'Economic Service Charge' (ESC) levied under Act No. 13 of 2006. However a Murabaha arrangement exposes it on the total sales proceeds, if the ESC Act follows the form of the transaction,. ie. Rs.1.2M as opposed to the mere profit element of Rs.0.2M. If the entity does not have sufficient income tax payable to set off the incremental ESC, this would turn out to be a cause to deplete the competitive edge of Murabaha. On the other hand, in the battle between substance and form, substance emerging victorious, could wipe out the disadvantage.

Diminishing Musharaka

Whilst Shari'ah compliant alternate of the conventional housing finance could be carried out using Diminishing Musharaka, Murabaha or Ijara, where these arrangements involve two transfers of title, ie execution of two transfer deeds, where the financing entity is required to buy the asset and sell it to the customer, the liability to stamp duty twice becomes unavoidable as most of the countries levy stamp duty on transfer of immovable property. This impediment has been successfully removed in UK by providing specific relief from Stamp duty Land Tax. (SDLT).

A customer who wishes to buy a house for Rs.10M could deposit a sum of Rs.1M with the vendor and execute a diminishing ownership agreement with the bank, pursuant to which the bank pays the outstanding Rs.9M to the vendor to acquire the title.

Thus the ownership is split between bank & customer, 9/10th and 1/10th respectively. The customer has to pay the Rs. 9M on deferred payment basis to the bank without any interest. In addition to the diminishing ownership agreement, a lease agreement is executed between the bank and the customer for payment of a variable amount of rent for use of the bank's share of the house by the customer. Over a period of time as the share owned by the bank gradually decreases, the amount due under the lease agreement also declines. At the end of the period on the fulfilment of all the conditions and normally for an additional payment, the title passes to the customer under the diminishing ownership agreement.

 Diminishing Musharaka involves two distinct supplies for VAT purposes, namely a supply of a lease and the gradual supply of equitable interest.

The main tax issue that arises from the perspective of the eventual owner, where form reigns, is the tax deductibility of the rental and the withholding tax burden associated with it. Where the eventual owner utilizes the premises, for a business he may have a claim for deduction and the obligation to deduct withholding tax at the rate applicable for rent.

Any Islamic instrument for home financing to be competitive in the market would have to face the competitive edge a conventional housing loan enjoys due to specific relief provided for in Inland Revenue Act for tax deductibility of interest payment and qualifying payment relief for repayment of capital. As mentioned previously, the attitude of the tax officers towards the doctrine of 'substance over form' would play a major role in this regard in the absence of specific legislation.

Another tax issue that arises in Islamic structures such as Diminishing Musharaka is the tax exposure of the non resident financier. Where most of the countries are concerned, interest paid on a foreign loan is subject to withholding tax under domestic statutes and a ceiling on such rate stipulated in double tax treaties. Either a buy & sell transaction or a profit sharing venture is carried out in another country and the issue arises whether this activity would expose the foreign financier for creation a permanent establishment, which would oblige it to file income tax returns in that country.

 Tax reforms

Perhaps one of the major hurdles in adapting VAT statutes in individual countries that wish to provide relief to Islamic financing in European countries is the sixth directive and the European Union treaties. To avoid the double incidence of stamp duty on Islamic instruments specific relief from UK's Stamp Duty Land Tax was provided in 2003. The enactment of Finance Act of 2005 & 2006 in UK has paved the way for smooth operation of these instruments in the UK market.

One cannot expect a government to enact tax legislation for a particular religion or a sector. The amendments to be introduced should refer to the type of transaction that fulfils the qualifying criteria, irrespective of the parties to the transaction and compliance or non-compliance with Shari'ah law. The Amending Act No. 2 of 2005 that amended the Principal Banking Act to facilitate Islamic banking perhaps contains a mode of drafting that fulfils this criteria. For example Murabaha has been couched as a permissible banking business in the Act by the use of the following words without reference to any religious practice.

 "The purchase of goods, to be sold immediately upon purchase to a buyer on deferred payment terms provided that the goods and their suppliers are specified by such buyer and the price at which such goods are sold to the buyer and the deferred payment terms are determined at the time the bank agrees with the buyer to purchase the said goods for sale to the buyer"[ item (z) in schedule (ii) and in item (oo) in schedule (iv) of the Banking Act]

This broad description enables any party including a non-Islamic person to reap the benefit of Murabaha. Tax law reforms to be introduced should also follow a similar path. An example of enacting tax legislation for facilitating Islamic financing without reference to 'buzz words' Murabaha, Musharaka, Mudaraba is found in UK's Finance Acts of 2005 & 2006. Tax consequences are spelt out simply with reference to the definitions of transactions as set out in these Acts.

*The writer is the Director Tax & Regulatory, KPMG Ford Rhodes Thornton & Co.

Another 1st. from Ceylinco

The first ever Retirement Condominium in Sri Lanka was launched by 'Ceylinco Housing Development Corporation (Pvt) Ltd.' (CHDC) recently, with the Chief Guest being Deputy Chairperson Ms. M. Sabaratnam.

'Golden Ray' retirement condominium is more than just another condominium, located at the heart of Colombo, it is designed with many special features and services that would allow you to relax and enjoy a tranquil lifestyle.

CHDC saw the need to create a new concept of 'Retirement Condominiums' having observed emerging social trends. It is estimated that by 2011, over  three million Sri Lankans would be above 60 years of age. In today's competitive environment more children are compelled to migrate for better prospects and higher studies, leaving their parents. Thus, there is an emerging segment of senior citizens living alone following independent life styles needing comfort and care.  Then there is the increasing segment of single persons looking for camaraderie, friendly neighbours but retaining their independence and privacy.

CHDC dedicates this Sri Lanka's first ever Retirement Condominium providing dignity, care and security at every level, giving thought to every need of such occupants.

Golden Ray consists of 30 apartments on six floors. Each apartment is designed with a living/dining Room, one or two bedrooms with attached bathroom, fully fitted pantry, maid's room and private balcony. The floor area is 700-800 sq.ft.Other features include a lobby area with a private area to entertain visitors, an infirmary, a gymnasium, parking facility, 24 hour security, a roof terrace and a recreation area.

In order to provide convenience to its in-mates, a 24 hour help desk under the supervision of a manager to co-ordinate services such as healthcare, food, transport/cab services, laundry, salon, financial and legal services is also provided.

CHDC also offers banking to grocery services. The Condominium is centrally located at Edward Lane,

Colombo.

Kotelawala sues Cabraal

Ceylinco Consolidated Chairman Lalith Kotelawala is suing Central Bank Governor Ajith Nivard Cabraal for Rs. one billion for allegedly promulgating the code on corporate governance for banks and exposure draft on corporate governance on registered finance companies (RFCs) which he claims is a move to victimize him.

Kotelawala is a founder of several banks and finance companies.

In a letter sent by his lawyer to Cabraal, Kotelawala alleges that in analyzing the mandatory code of governance for banks, it is apparent that the said code has been promulgated specifically to remove my (Kotelawala) client as Chairman and director of Seylan Bank PLC by preventing a person holding the post of director through the directives: "in the event the said person has held the post of director in a commercial bank for more than 9 years; in the event the said person is over 70 years of age and in the event the said person is a director of more than 20 other companies or entities.."

Kotelawala's lawyer in the letter of demand alleges that the said rules have been formulated, deliberately targeting my client, to make sure my client cannot function as Chairman and director of Seylan Bank which is a bank created and built up by the vision and guidance of my client, and in defiance of the confidence placed in my client by Seylan's shareholders, customers and other stakeholders.

I am instructed that the said code on corporate governance has been introduced as a direction under the Banking Act, in the background and in (alleged) ignorance of the provisions relating to corporate governance envisaged in the Companies Act No 7of 2007, The Banking Act No 30 of 1988 as amended and the Finance Companies Act No 78 of 1988 and in violation of a citizens right to engage in a lawful trade, without age, number of directorial positions held, being a barrier; which even the said acts passed by the Parliament of Sri Lanka has (allegedly) recognized, the letter says.

I am further instructed to state that even though the Central Bank of Sri Lanka (CBSL) made an amendment to the said code by a direction dated April 23, 2008, no significant changes have been made to the (alleged) draconian provisions of the original code of corporate governance published by CBSL in relation licensed commercial banks.

I am instructed to state that presently the legality of the said code has been challenged by my client, Seylan Bank PLC and other commercial banks, shareholders and employees in the Supreme Court and Court of Appeal of Sri Lanka. I am instructed to state that in spite of the aforesaid pending litigation and sentiments expressed on behalf of you as well as the CBSL to bring about a settlement between the parties to the said actions; you have initiated to implement an exposure draft code of corporate governance in relation to RFCs once again, with the (alleged) malicious intention and sinister motive of summarily removing my client from the position of Chairman and director of the "aforesaid" finance companies, as well.

I am instructed to state that out of the six RFCs presently within the Ceylinco Group of Companies, three finance companies were fallen finance companies, which were resurrected by my client at CBSL's request. I am further instructed to state that, in the aforesaid circumstances, my client is shocked and surprised to note that the reward for resurrecting the said fallen finance companies, is the (alleged) removal of my client who was directly responsible for such resurrection.

I am instructed to state that your actions and conduct in relation to the said corporate governance code with regard to licensed commercial banks (LCBs), and the exposure draft in relation to RFCs clearly demonstrates the manner in which you are (allegedly) acting maliciously towards my client.

In the aforesaid circumstances, I am instructed by my client that, in the event you persist with the implementation of any corporate governance codes in relation to LCBs and RFCs, in whatever manner that affect my client's position as chairman and director of the said companies above; my client has instructed me to initiate  legal action against you, to recover damages from you in favour of my client for loss of employment, loss of remuneration, loss of business opportunity, loss of retirement benefits and pain of mind.

I am instructed to state that the (alleged) malicious actions taken by you to date to remove my client from the post of chairman and director of the aforesaid companies has caused pain of mind towards my client. My client values the said pain of mind caused to my client, loss of business opportunity, loss of employment, loss of remuneration, loss retirement benefits and pain of mind due to your aforesaid action, at a sum of Rs. one billion

Under these circumstances, I am instructed to demand from you the said sum of Rs. one billion and the same is hereby demanded from you.  In the event of your failure to pay and settle the said sum within two weeks of the receipt of this letter, I am further instructed by my client to institute legal proceedings against you for the recovery of same with interest and cost of suit, the letter further said.

Virtual banking with HNB

The Virtual Branch of Hatton National Bank (HNB), 'located' within a computer has been designed to make it a bank branch that is virtually freely and easily available throughout the day and night through which a range of facilities are being afforded to its large customer base.

"We have seen a 100% growth in internet banking usage amongst our customers over the past year. The volume of transactions has increased enormously. This costs the bank as well as the customer so much less in terms of time and money in effecting transactions that would otherwise be done manually," said Asst. General Manager .P Sridharan. One certainly does not have to write a cheque to make a payment, it can be done via the Virtual Branch or the ATM. "It's that simple," he added.

These include obtaining information on accounts and unrealized effects; transferring funds from HNB accounts to third party HNB accounts up to a maximum of Rs.100,000; pay electricity, telephone, mobile phone and other utility bills; view credit card outstanding, available balance and statement details; settle HNB credit card bills online; view latest banking news; get information on exchange rates and deposit rates and access one's account 24 hours a day from anywhere in the world by logging on to www.hnb.net and clicking the Virtual Branch icon.

One can also click on the "Demo" icon displayed for a virtual demo. And all of this with absolute security as HNB uses 128-bit encryption via secure socket layer connectivity to ensure that an accountholder's data and account information are protected.

HNB, while focusing on enhancing and increasing its services to its customers via the Automated Teller Machine (ATM), Tele-banking facilities and kiosk machines in designated places like supermarkets, also has a unique feature, that of having ATMs spread in the north, south, east and west of the country. "Having researched locations patronized by clients frequently, HNB hopes to introduce more ATMs in the coming months, particularly in Colombo and the greater Colombo areas, taking into account facilities such as easy access and convenient parking, once again operative throughout the day and night," said .P.Sridharan.

HNB ATMs are also now VISA and MASTERCARD card enabled, making it that much easier for customers to make their transactions through their credit cards. The bank is now issuing proprietary cards known as "Cashline" which will be converted to a Visa Debit card shortly. HNB's Visa and Mastercard credit cards are accepted worldwide with millions of outlets at which customers could transact.

While the ATM network has expanded to over 200 outlets islandwide, HNB has 171 branches including those in the north and the east. Added facilities through the ATM include balance inquiries, requests for cheque books and credit card settlements, while other bill payments too will be introduced soon.

With such facilities available to its customers, HNB is focusing on finding more ways and means of making banking a pleasure to its wide and large customer base with the further intention of attracting new relationships so that they too can experience banking from a true "Partner in Progress."

Family offer

Dialog Telekom recently announced the launch of a Family Postpaid package, a unique package that allows customers to keep in touch with their family members for the lowest rates.

The introduction of the Family Package is based on the Company's ethos to make mobile communications accessible to all and more family friendly. With calls and SMS for just 50 cents, this package will be one of the most economical ways to keep in touch with family members.

The newly launched Family package includes several special features. The package allows for one primary connection and a maximum of four supplementary connections with all connections issued under primary connection holder. The Primary connection will consist of a Rs. 500 monthly rental and incoming free package with the supplementary connections having a Rs. 100 monthly rental giving all incoming free of charge. Each supplementary connection is subject to a minimum usage commitment of Rs.250 per month.

The Company also announced that as an introductory offer customers who register for three connections or more will be entitled to a special Vodafone Handset offer. Under this offer the Vodafone 225 will be available at Rs. 3,499 and Vodafone 720, 3G handset at Rs. 15,490.

$ 250,000 IFC loan to Dialog

IFC, a member of the World Bank Group, and Dialog Telekom PLC have joined forces to help strengthen the business skills of Dialog's retail distributors in Sri Lanka.

This will help them build a track record of creditworthiness by using the IFC SME Toolkit, an advisory product implemented in more than 25 countries worldwide.

IFC will provide $250,000 to support Dialog's Distributor-Retailer Community Network project which looks at strengthening the skills of the Company's retail and distributor network.

IFC Country Manager for Maldives and Sri Lanka Gilles Galludec said, "This innovative programme will help build capacities of small businesses in Sri Lanka and bring them into the formal banking sector, thus creating better linkages between SMEs and banks. IFC is keen to strengthen its partnership with Dialog and support the programme."

The IFC SME Toolkit leverages the latest information and communication technologies to help SMEs learn and implement sustainable business management practices. It offers free business management information and training on accounting and finance, business planning, human resources, marketing and sales, operations, and information technology. It also offers a wide range of resources to help users start, finance, formalize, and grow their businesses.

This follows an IFC investment in September 2007 to help the company expand its network and build new telecoms infrastructure. That $100 million financing package included long-term debt and equity.

IFC and Dialog have also signed an agreement for the IFC SME Toolkit, an online resource designed to serve the needs of small and medium enterprises in developing frontier markets. A version of the toolkit is being customized to meet Dialog's needs and will be available in Sinhala and Tamil. This effort is also helping to further strengthen the distributor-retailer community network itself.

Dialog Telekom Director and Chief Executive Dr. Hans Wijayasuriya said, "At Dialog Telekom we have always been committed to fostering entrepreneurship in Sri Lanka, specially in the SME sectors. We feel that our own retailers and distributors play a vital role in our Company, achieving the goals of its triple bottom-line, and our distributor retailer community network seeks to provide our retailers and distributors with the necessary tools to achieve their goals. By assisting in the design and implementation of this innovative project, IFC has demonstrated its understanding of Dialog's business needs and showcased its expertise in ensuring the well-being of the small and medium enterpreneurs that drive Dialog's distribution network."

Gold trading

Seylan Bank, the "Bank with a Heart" known for its innovative financial solutions has once again come up with a unique Gold Investment and Trading Account aptly   named "Ceylinco Seylan Gold Heart.".

As per its founder Chairman/Managing Director Dr. Lalith Kotelawala's vision, Seylan has developed a unique investment product which would add value to its clientele.

This account can be set up by any Sri Lankan over 18 years of age by opening a Gold Cash Account and a Gold Account in any Seylan Branch.

Thereafter, he/she may invest and trade in Gold.  There is no compulsion to retain physical gold.  The quantum of gold purchased by an individual less the quantum  sold, would reflect as the balance in the account.

Seylan would quote the buying and selling rate on a daily basis and also be the counterparty to buy back the gold in the Gold Account sold by any individual maintaining such accounts.

Apart from Seylan, The Finance PLC, Seylan Merchant Bank PLC, Ceylinco Investment and Realty, Ceylinco Finance PLC, Finance and Guarantee Company Pvt. Ltd., Ceylinco Savings Bank, Ceylinco Leasing Company and Multi Finance Ltd. would act as agents to the public to buy and sell gold.

The minimum transaction amount for Gold investment and trading would be 5 grams and in multiples of 0.10grams thereafter, based on the funds available in the Gold Cash Account.

The 5,10,20 and 50 gram bars are of 99.99 fine pure 24 Karat gold and Ten Tola bars are of 99.90 fine pure 24 Karat gold.

Customers may even withdraw physical gold from this account with prior notice given three days ahead for a nominal fee which would depend on the type and number of Gold bars withdrawn.

If an individual is inclined to buy physical gold, gold bars are available in denominations of 5 grams, 10 grams, 20 grams and  50 grams, Ten Tola  Bars of 3.746 ounces (116.6 grams)  and in  multiples of each denomination from the gold outlet situated at Seylan Bank's First City Office, Colombo .

Customers may also sell the gold in their account back to the bank at the bank's prevailing buying price and enjoy capital gains, depending on market conditions.

Historically, gold has been used by communities as a traditional store of value and over the centuries the metal's value had kept increasing steadily despite new sources and modern mining methods having increased the supply considerably.

For parents who plan for their children's weddings in the future, the balance available in the Gold Account would be a great boon.  The advantage is that the account holder does not have to worry about security in holding gold. This makes safety lockers and safes obsolete, for this purpose.

As such, as physical gold is not in one's possession, the need for insurance cover also does not arise. Whilst one makes a good long term investment for one's future, or accumulates capital gain due to fluctuating gold prices, it is the peace of mind in knowing that even physical gold, if needed, may be easily withdrawn, that is comforting to a gold account holder. 

Wealth Managers who wish to have a portfolio of investments, would have  an opportunity of  investing in another investment instrument on behalf of their clients. In this period of high inflation and increasing costs all around, the Gold Trading Account may give an opportunity for a real rate of return, to the investors' advantage.

Public comments urged

Central Bank of Sri Lanka (CBSL) has issued an exposure draft on corporate governance for registered finance companies (RFCs). The intent in issuing the exposure draft is to obtain comments, views and suggestions from all stakeholders of RFCs in relation to the governance of RFCs.

As the public has deposited funds with RFCs, they have a strong incentive to ensure that such companies are operated in an efficient, secure and sustainable manner. CBSL therefore urges the public, shareholders, managers and directors of RFCs and other interested parties to provide comments, views and suggestions on the exposure draft.

The final date for receiving comments, views and suggestions is August 15,.2008. A revised draft will be made available after considering the comments, views and suggestions.

News LINE

Ideal CIMA brand

The incumbent CIMA Sri Lanka (SL) President is the true ambassador of the CIMA brand, a former CIMA president said.

Dian Gomes, speaking at a dinner to fete Mrs. Gowri Shanker Somasunderam, the new CIMA president, on Wednesday said that Somasunderam was the ideal brand for CIMA SL.

Somasunderam in her speech said that she would strive for excellence in professionalism during her tenure of office.

She further said that Richard Ebell, another former CIMA president, was her great role model.

She also said that as CIMA president, her focus would be on student development and assisting the public sector to be enterprise driven. Somasunderam further said that she would not compromise the CIMA motto, "Honesty, Accuracy and Justice," during her tenure of office.

"Power must be retained with care than with flair," she said.

Rs. 2.9 bn., subscribed by captive funds

Central Bank (CB) rejected bids for the re-issue of Rs. 2,893 million worth of maturing Treasury Bills (T Bills) at Wednesday's auction, inferring that captive funds would have been directed to invest in the same.

This auction was for the re-issue of a total number of Rs. 8,500 million maturing T bills of which Rs. 5,607 million worth of bids were accepted from the market. The auction saw the weighted average yields (WAYs) of 182 day T bills rising by six basis points (bp) to 18.17% and 364 day bills by eight bp to 18.53%. There were no 91 day T bills up for re-issue at this auction.

Market sources said that with inflation raging at over 30%, it was not surprising that interest rates were on an upward momentum. Our sister paper The Morning Leader in its Wednesday's issue predicted that yields would move up at this auction.

No request for Board Seat

No formal request has been made to the Hayleys Group to nominate Dhammika Perera, the company's largest shareholder to its directorate, informed sources said.

Perera and companies controlled by him, after recent acquisitions, has a 14.7% stake in the Hayleys Group.

They are followed by the D.S.Jayasundera Trust with 11.6%.

The Board's nomination committee is headed by the company's chairman N.G. (Tanky) Wickramaratne. There is no regular timetable for this committee to either meet, or to take up such matters, they said.

Hayleys Board meets four times a year, coinciding with the release of their quarterly reports.

The next Board meeting is due in August.

Penetration can grow upto 70%

"Smart Freedom" is the newest product that SLT's wholly owned mobile telecoms operator, SLT Mobitel (SLTM), introduced to the market on Thursday.

The product assists "Mobitel to Mobitel" users to take and receive calls, send and receive SMS messages and pictures for Rs. 50 a day or for

Rs. 270 a week.

SLTM CEO Suren J. Amarasekera told reporters that this value added product would benefit its existing customers.

He said that the mobile telecoms market which has about a 45% penetration currently, has room to grow to 70%.

SLTM in the first quarter ended March 31, 2008 in the current financial year saw its topline grow by 70% year on year (YoY), while its bottomline grew by 1,025% YoY to over Rs. 500 million.However, the company's penetration in the North East (NE) is low. "We cannot cope with the demand emanating from the East," Amarasekera said.

The company will have had invested US$ 300 million by the year end, by having a total of 2,000 base stations in place by that time. "We are also introducing the very latest in technology to the market," he said.

Leadership, key commodity

Leadership is the most important commodity in business, an Indian academic said.

Professor B. Mahadevan of the Indian Institute of Management, Bangalore, speaking at a CIMA function on Wednesday said that Leadership is that which drives companies to success and sustainability.

Foreign borrowings

Government's foreign borrowings help release domestic funds for private sector investment.

Dr. Yeah Kim Leng, Group Chief Economist RAM Holdings, a Malaysian rating agency, said this in response to a query made by this reporter on Tuesday, as to how he views government's foreign borrowings, made in order to settle maturing foreign debt. Leng alleged that the government's US$ 500 million bond borrowing made last year did just that.

Hitting $ 1 bn.

A ministerial sub-committee has been appointed to facilitate the business process outsourcing (BPO) industry to reach a revenue target of US$ one billion by 2010.

Outgoing CIMA Sri Lanka President Aruna Fernando speaking at a function in Colombo on Wednesday said that the BPO industry globally was expected to grow to US$ 100 billion by 2010, with India taking 70% of that share.

Rs. 496 mn., sale

Singer Sri Lanka PLC has accepted the mandatory offer made by Lanka Orix Leasing Company PLC to sell the 30% stake held in Commercial Leasing Co., PLC for Rs. 495.8 million. This is Rs. 408.9 million above its net book value in the company accounts.

Algae, alternate to jet fuel

Air France-KLM entered an agreement with Dutch technology company. AlgaeLink for a pilot project to develop alternative fuel for the aviation industry. AlgaeLink produces algae on a large scale in controlled photo-bioreactors and in greenhouses and processes it into algae oil which can be used in jet engines alone or in a mix with conventional jet fuel. AlgaeLink expects to start delivering algae-derived oil to KLM by year end. (Washington Aviation Summary)

ABS awards to Hyundai

American Bureau of Shipping (ABS) has awarded three ships in the Hyundai Merchant Marine (HMM) fleet with what is believed to be the first class notation specific to parametric roll issued to industry. The optional class notation was issued against criteria contained in the ABS Guide For The Assessment Of Parametric Roll Resonance In The Design Of Container Carriers which provides design and analysis measures to determine if a particular vessel is vulnerable to parametric roll and the potential magnitude of the roll motions.It was the first class criteria addressing the subject that is firmly based on ship motion analysis supported by extensive simulations. (Marine Talk)

Inflows swell reserves

Total reserves, at US$. 4,771.8 million as at end April 2008 were sufficient to finance 4.6 months of imports. This is also a 5.8% increase over the end December 2007 figure. Meanwhile, gross official reserves at US$ 3,383.8 million as at end April 2008 was sufficient to finance 3.3 months imports. This was also a 10.5% growth over its end December 2007 figure. Reserves growth in part, was buttressed by increased foreign inflows, which recorded a net foreign inflow figure of US$ 1,673 million in the first quarter, a 24.4% year on year increase. Source: Central Bank