38 NBFIs under due diligence study by nine audit firms for mergers

By Shabiya Ali Ahlam

A panel of nine reputed audit firms are currently engaged in a due diligence exercise on 38 individual Non Bank Finance Institutions (NBFIs), whose merger or absorption proposals are expected by end of this month.

The Central Bank has requested the Panel of Auditors to conduct the due diligence and valuation of business of Category B NBFIs and all other consultants to work with these auditors.

These NBFIs are to be merged or absorbed by banks or Category A NBFIs. They could also explore mergers among themselves, so that they fulfil conditions of the Category A NBFIs.

Those classified under Category B are Licensed Finance Companies (LFCs) or Specialised Leasing Companies (SLCs) or Groups of LFCs and/or SLCs that do not fulfil one or more of the criteria of the Category A, which involves NBFIs with assets more than Rs. 8 billion, core capital of over Rs. 1 billion and have high degree of compliance with Directions issued by CBSL.

According to CB Assistant Governor C.J.P. Siriwardana, in the event that a Category B NBFI requires a capital infusion by the acquiring bank or Category A NBFI as per a plan that is approved by the Central Bank, a matching support to the acquiring entity, via the Deposit Insurance and Liquidity Support Fund, would be provided.

Out of the 38 Category B NBFIs, 19 are listed. Interestingly in 11 listed companies over 50% of the shares are held by one shareholder, and in 15 listed companies 50% of the shares are held by up to three shareholders whilst in 15 companies 75% of the shares are held by up to five shareholders. In all unlisted companies 75% of the shareholding is held by up to five shareholders.

Siriwardana said the Central Bank will expect independent and professional output from the Auditors whilst there will be a consistent scope and business valuation methods to be followed.

“These due diligence and business valuations will be carried out using acceptable standards and will provide price guidance to buyers and sellers,” he said at seminar on financial sector consolidation organised by Kenanga Investment Corporation Ltd.
The deadline for submission of the Plan of Action to CB is 31 March 2014, same as for NBFIs within a Group.

The majority of Category B NBFIs are expected to be absorbed by December 2014, while any remaining are expected to be completed by first half of 2015.
At present there are 58 NBFIs in total accounting for 7% of the financial sector. Of the total, 10 NBFIs account for 61.5% market share with assets worth Rs. 433 billion. To ensure financial sector stability, soundness and efficiency, the Central Bank is keen to have about 20 NBFIs of which around three will be specialising in microfinance.

http://www.ft.lk/2014/03/14/38-nbfis-under-due-diligence-study-by-nine-audit-firms-for-mergers/