Merchant Bank of Sri Lanka transferred to Watch List due to undercapitalized insurance subsidiary

The Colombo Stock Exchange (CSE) has transferred the securities of the Merchant Bank of Sri Lanka and Finance PLC (MBSL) to the Watch List with effect from July 17, 2018 due to the issues pertaining to its undercapitalized insurance subsidiary, MBSL Insurance Company Ltd. (MBSLI).

The audited financial statements of MBSL for the FY17 contains and emphasizes matters ongoing concerns pertaining to MBSLI, as the parent had made an impairment provision of 95.9 percent of the investment in subsidiary. 

According to a CSE filing, MBSL has already taken proactive remedial action to revive MBSLI and is currently in the process of facilitating a capital infusion of Rs.700 million by way of a private placement of shares with a strategic investor. 

MBSLI has called for Expressions of Interests (EOIs) from investors to invest in a significant minority stake in the company, subsequent to which two final bidding offers were received and evaluated. MBSL said it is working towards receiving the requisite approvals from the line ministry, Insurance Regulatory Commission of Sri Lanka and MBSL’s parent Bank of Ceylon (BOC) in this regard.

“MBSL and MBSLI intend to enter into an investment agreement with selected strategic investor no sooner the said approvals are received,” the filing said.
Simultaneously, MBSL said it intends to invest Rs.500 million in MBSLI to meet balance regulatory capital requirement of MBSLI subject to necessary approvals and thereby facilitate the restoration of MBSLI, which is currently suspended.

MBSL said it has already received the principle approval of the Central Bank and the BOC for the proposed capital infusion subject to conditions.  

In the event the matters giving rise to the emphasis of matter ongoing concern are not resolved within a period of 15 months from the date of transferring the securities of MBSL to the Watch List, the trading of Securities of MBSL shall be suspended.

In the event the trading suspension continues for the period in excess of 12 months, the securities of MBSL will be delisted by the CSE in terms of Rule 10.3(a) of Listing Rules. 

According to the MBSL FY17 annual report, the operations of MBSLI have been temporarily halted due to inadequate capital. MBSL has little over 84 percent stake in MBSLI.

MSBLI made an after-tax loss of Rs.53.6 million in FY17, narrowing its losses from Rs.231.2 million a year ago. As at December 31, 2017, the company had a total asset base of Rs.1.35 billion.