www.lolc.com The Financial Highlights Diffeer nceer

For the year ended 31 March 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 LOLC 2011/12 REPORTS & ACCOUNTS

Group is... Performance Indicators (Rs. Mn) Profit before tax 290 402 572 709 998 1,183 1,247 2,841 8,282 10,327 Profit after tax 278 391 575 689 1,050 1,343 1,055 2,385 7,023 8,937 Total assets 7,038 8,987 10,706 16,227 24,484 32,994 46,287 75,371 111,813 145,288 LOLC 2011/12 New executions 3,189 4,740 5,591 10,064 13,340 14,320 14,906 21,963 47,392 58,233 REPORTS & ACCOUNTS Gross portfolio (rentals receivable) 6,867 8,517 10,112 14,806 23,057 29,282 44,824 47,351 70,077 98,941 Deposits from customers – 197 716 1,194 1,746 3,340 5,229 10,095 16,348 25,197 Outstanding borrowings 4,615 5,952 6,634 10,475 17,001 22,887 31,764 38,235 50,813 66,075 Non-performing portfolio 815 883 865 113 137 526 1,933 1,431 1,159 1,702 Return on equity (%) 17 21 27 26 31 30 19 26 37 39

Key Indicators (Rs. per share) Net asset value per share (adjusted) 3.60 3.92 4.92 6.10 7.96 10.78 12.65 16.63 27.35 40.59 Earnings per share (adjusted) 0.57 0.85 1.21 1.44 2.19 2.82 2.22 3.88 8.08 13.17

Canomp y Performance Indicators (Rs. Mn) Profit before tax 256 418 562 677 910 841 582 491 1,898 4,423 Profit after tax 256 418 562 664 987 1,059 505 327 1,523 4,301 Total assets 5,981 7,617 8,747 13,298 20,889 28,996 31,335 29,738 31,153 36,662 New executions 3,189 4,427 4,972 8,858 12,068 12,127 12,170 4,569 5,036 3,926 Gross portfolio (rentals receivable) 6,757 8,082 9,144 12,858 19,851 25,056 25,185 17,958 11,897 7,704 Outstanding borrowings 4,113 5,396 6,025 9,824 16,250 22,273 24,850 23,087 22,379 23,894 Non-performing portfolio 815 883 865 113 137 443 538 769 545 500

Key Indicators (Rs. per share) Dividends per share 0.33 0.19 0.23 0.30 0.15 0.23 0.28 – – – Market price per share 7.35 6.00 8.50 10.10 10.75 11.78 6.95 16.50 119.60 54.00 No. 100/1 Sri Jayewardenepura Mawatha, Net asset value per share 3.53 3.88 4.86 6.00 7.77 10.02 10.74 11.42 15.67 24.73 Rajagiriya,

Sri Lanka. (Times) Debt to equity ratio 2.45 2.93 2.61 3.45 4.40 4.66 4.87 4.25 3.00 2.03 Tel: +94 11 5880880 Interest cover 1.52 1.85 2.56 1.96 1.63 1.28 1.14 1.16 1.80 2.74 Fax: +94 11 2865612 / 2868648 Dividend cover 3.30 4.50 5.09 4.64 13.86 9.53 3.79 – – – Financial Highlights

For the year ended 31 March 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Group Performance Indicators (Rs. Mn) Profit before tax 290 402 572 709 998 1,183 1,247 2,841 8,282 10,327 Profit after tax 278 391 575 689 1,050 1,343 1,055 2,385 7,023 8,937 Total assets 7,038 8,987 10,706 16,227 24,484 32,994 46,287 75,371 111,813 145,288 New executions 3,189 4,740 5,591 10,064 13,340 14,320 14,906 21,963 47,392 58,233 Gross portfolio (rentals receivable) 6,867 8,517 10,112 14,806 23,057 29,282 44,824 47,351 70,077 98,941 Deposits from customers – 197 716 1,194 1,746 3,340 5,229 10,095 16,348 25,197 Outstanding borrowings 4,615 5,952 6,634 10,475 17,001 22,887 31,764 38,235 50,813 66,075 Non-performing portfolio 815 883 865 113 137 526 1,933 1,431 1,159 1,702 Return on equity (%) 17 21 27 26 31 30 19 26 37 39

Key Indicators (Rs. per share) Net asset value per share (adjusted) 3.60 3.92 4.92 6.10 7.96 10.78 12.65 16.63 27.35 40.59 Earnings per share (adjusted) 0.57 0.85 1.21 1.44 2.19 2.82 2.22 3.88 8.08 13.17

Company Performance Indicators (Rs. Mn) Profit before tax 256 418 562 677 910 841 582 491 1,898 4,423 Profit after tax 256 418 562 664 987 1,059 505 327 1,523 4,301 Total assets 5,981 7,617 8,747 13,298 20,889 28,996 31,335 29,738 31,153 36,662 New executions 3,189 4,427 4,972 8,858 12,068 12,127 12,170 4,569 5,036 3,926 Gross portfolio (rentals receivable) 6,757 8,082 9,144 12,858 19,851 25,056 25,185 17,958 11,897 7,704 Outstanding borrowings 4,113 5,396 6,025 9,824 16,250 22,273 24,850 23,087 22,379 23,894 Non-performing portfolio 815 883 865 113 137 443 538 769 545 500

Key Indicators (Rs. per share) Dividends per share 0.33 0.19 0.23 0.30 0.15 0.23 0.28 – – – Market price per share 7.35 6.00 8.50 10.10 10.75 11.78 6.95 16.50 119.60 54.00 Net asset value per share 3.53 3.88 4.86 6.00 7.77 10.02 10.74 11.42 15.67 24.73

(Times) Debt to equity ratio 2.45 2.93 2.61 3.45 4.40 4.66 4.87 4.25 3.00 2.03 Interest cover 1.52 1.85 2.56 1.96 1.63 1.28 1.14 1.16 1.80 2.74 Dividend cover 3.30 4.50 5.09 4.64 13.86 9.53 3.79 – – – 

About these Reports and Accounts

LOLC is a conglomerate with a unique difference. It has just taken on, the face of a parent, by becoming a Holding Company. of humble beginnings to a leasing company, it has grown to become the locally diversified financial conglomerate of today.

LOLC is simply unlike any other. Keeping with the difference of the Company, is the distinctive structure of these Reports and Accounts.

The Reports Section has been structured to substantiate the difference through narratives.

The Accounts Section features more than just the financial statements. It also carries accounts on areas such as governance, risk management and leadership.

In its entirety the Reports and Accounts is the story of a triumphant year foregone and the bright years ahead with full of promise and opportunity. REPORTS Chairperson’s Statement 04 Deputy Chairman’s Message 08 Group Managing Director/CEO’s Review 16 Business Review 24 Financial Review 56 The ORIX Connection 70 Global Funding Partners 72

ACCOUNTS Board of Directors 76 Corporate Management Team 84 Operational Management Team 90 Annual Report of the Board of Directors on the Affairs of the Company 94 Corporate Governance 102 Report of the Remuneration Committee 107 Report of the Nomination Committee 107 Report of the Integrated Risk Management Committee 108 Corporate Governance Committee Report 109 Audit Committee Report 110 Risk Management with a Vision 111 Directors’ Responsibility for Financial Reporting 117 Chief Executive Officer’s and Chief Financial Officer’s Responsibility Statement 118 Auditor’s Report 119 Financial Statements 120

ANNEXES Sustainability Report 208 Information on the Company’s Real Estate Portfolio and Listed Debentures 217 Ten Year Summary 218 Summarised Quarterly Statistics 220 Value Addition 221 Awards 223 Milestones 224 Group Companies/Directors 227 Share Information 231 Glossary 233 Notice of Meeting 235 Corporate Information 236

Form of Proxy Enclosed Financial Calendar Inner Back Cover REPORTS A Conglomerate Responsive to Market Needs

01.26

Chairperson’s Statement It gives me great pleasure to present the report and accounts of LOLC for a financial year in which the Group maintained steadfast growth in performance through our proactive business model. It is noteworthy that such growth was in the face of many challenges, including a mixed and unsettled world and domestic economic situation in which both positive and negative developments were seen.

The global economy The global economy remained fragile due to the slow growth of the US economy and the financial turmoil in the Eurozone. Large injections of liquidity by governments in developed economies, coupled with socio-political tensions in the Middle East and North Africa; caused oil prices to rise, increasing inflationary and fiscal pressures as well as driving volatility in the financial markets.

However, the growth in Asia has remained better, with China and India continuing to grow strongly despite cautious measures by the Chinese Government to rein in an economy in danger of overheating. The global economic downturn had an impact on the Sri Lankan economy as well due to our dependence on exports to developed countries. More than 50% of our exports are to USA and Europe, regions which were impacted in the year under review.

4 LOLC 2011/12 REPORTS & ACCOUNTS Chairperson’s Statement

Nevertheless, Sri Lanka, with its strong fundamentals in monetary policy, rebounded quickly. The Government took immediate action to buoy up the economy by liberalising the exchange rate policy and tightening both monetary and fiscal policy, thus bringing under control the deficit in reserves that developed during the second half of the year. The steady growth of worker foreign remittances was a positive factor to this effect.

The Group How did LOLC manage to weather these rough seas as an emerging conglomerate? Our strategy is simple. We anticipate economic trends, work to understand changing customer needs and, most importantly, stay responsive to the market.

An agile business model allows us to fine-tune our strategy by investing in growth sectors of the economy. In a relatively short time we have ventured into leisure, construction and renewable energy, whilst expanding our financial services portfolio further with insurance, stock-broking and factoring. This year, we continued the momentum by adding a commodity trading company and a leading hotel on the South Coast. LOLC Leisure is looking forward to being an active player in this sector, an identified key growth area of the Sri Lankan economy.

Our renewable energy portfolio will begin to earn returns in the upcoming months. All these strategic investments were possible because of the success of our core financial-services business, which generates more than 55% of our income.

We have identified ourselves as the largest non-bank financial institution in the country by growing and diversifying, often in unconventional ways, in response to changing market conditions. We were the pioneers in leasing to small and medium enterprises; SMEs are now the largest contributor by sector to the Sri Lankan economy. We remain the market leader in factoring, another LOLC innovation of particular significance to the SME community. We are also moving strongly into microfinance, a largely-untapped market in most regions, with a diverse product mix ranging from asset financing to group loans and now micro insurance - another first from the LOLC Group. The secret of our success remains our sensitivity and responsiveness to market needs.

LOLC 2011/12 REPORTS & ACCOUNTS 5 Chairperson’s Statement

The ORIX Connection ORIX Corporation, a Japan-based multinational, is LOLC’s single largest shareholder. Since inception, ORIX has always been a pillar of strength, offering support at every level from Board decision making to routine operations. Compliance and good governance are of primary importance to ORIX Corporation’s Japanese management, which explains why LOLC is the only financial institution in Sri Lanka to report according to the provisions of the US Sarbanes-Oxley Act.

It gives me special pleasure to record that LOLC won a Special ORIX Award for Excellent Performance this year out of a field of 100 overseas ORIX subsidiaries. This is, in fact, the second consecutive year that LOLC has received an accolade from ORIX.

Tributes LOLC was also recognised with another prestigious award, this time from the Open Compliance & Ethics Group (OCEG), an international think-tank that works to promote principled performance among organisations worldwide. OCEG named LOLC a winner of one of four 2012 GRC (Governance, Risk Management and Compliance) Achievement Awards, which honour companies that have shown exceptional quality and integrity in terms of governance, risk management and compliance.

Locally, we were named overall Runners-up at the National Business Excellence Awards 2011. This overall recognition was achieved in less than three years of first participation of LOLC in the competition.

Outlook In 2012 and possibly into 2013, trends indicate that global economic growth will remain subdued despite signs of improvement in the US economy. Indeed, continuing financial turmoil in the Eurozone may impact other countries leading to decline in our exports, diminished worker remittances and rises in commodity prices.

6 LOLC 2011/12 REPORTS & ACCOUNTS Chairperson’s Statement

Against this backdrop, domestic economic prospects for the year ahead still seem relatively positive so long as a prudent fiscal and monetary policy stance is maintained. Growth, which topped 8% for two consecutive years for the first time in history, is expected to slow down this year, though it will likely be higher than in Asia as a whole. Inflation is rising, but will probably remain in the single digits, though interest rates may spike in the short term.

Investment in infrastructure, especially from the private sector, together with increased focus on education, training and development and greater stability in the financial sector, particularly the stock market, will be elements essential to the maintenance of a positive business climate.

As for LOLC, we are eager to exploit the opportunities that arise from the aggressive development goals of the economy, especially in the regions and in sectors such as leisure, agriculture, construction and renewable energy. With our flexible business model, extensive footprint, diverse product mix covering the entire financial value chain and a dynamic workforce led by strong management, LOLC Group is very well poised to take advantage of these opportunities.

Acknowledgements I would like to conclude this Report by thanking the Board of Directors, our shareholders, our staff and management, as well as our funding partners and banks, for their significant contributions to our success. I thank all our stakeholders for their implicit trust and confidence in us. And as we move forward into the future, I would like to assure them that LOLC will continue its diligent efforts to deliver value to all stakeholders.

Rohini Nanayakkara Chairperson

LOLC 2011/12 REPORTS & ACCOUNTS 7 An Open Mind and a Flexible Agenda

02.07

Deputy Chairman’s Message The Chairperson, in her statement to stakeholders this year, describes how LOLC has evolved itself into a diversified conglomerate to explore opportunities arising from the Government-led efforts on resurgence and rebuilding the nation.

I thought of sharing more detail on how we adapted to this transformation.

As a long-established major player in the Sri Lankan business landscape, LOLC is no stranger to change. Although the main drivers of economic growth in the country have remained more or less the same in the last quarter- century or more, the political and social environment have seen constant and rapid, almost a revolutionary change. Economic policy, too, has undergone frequent revisions and adjustments, while the dramatic rollercoaster-ride taken by the world economy in recent years show just how much of a challenge it has been for us, to survive and thrive through these fluctuating times.

8 LOLC 2011/12 REPORTS & ACCOUNTS Deputy Chairman’s Message

Our policy on ‘change management’ has always been open-minded and holistic: we follow trends carefully, plan for the most likely outcomes, but remain prepared for the unexpected. The agility of our business model is an essential factor of our continued success. For us, the way to face the future is with an open mind and a flexible agenda. Starting out as a leasing company, we first transformed ourselves into a broad-spectrum financial-service provider, adding lines of business as opportunity dictated. Now we have gone further, investing in hotels and tourism, construction, agriculture and plantations, renewable energy, trading and manufacturing and several other growth sectors. Some of these were through mergers and acquisitions. For others we set up new entities ourselves or in collaboration with strategic partners. Whatever the details of engagement, we always bring to the table the same professionalism, flexibility of approach and a strong code of ethical practice.

Taking Care of the Core To move successfully from pure financial services to a diversified business portfolio, we started by nurturing the financial services business itself. Revenue and reputation earned in our core businesses are what enabled us to diversify in the first place. Even today, 55% of the Group’s income is derived from financial services. Starting out as a leasing company in the early days of the liberalised economy, we helped revolutionise the small- and medium-scale sector by financing assets for productive use that were thus self-financing for the customer. Having made our mark in this sector, we began adding financial services for which a growing economy fuelled demand. In 2011, we transformed ourselves into a holding company with controlling interest in six firms offering diversified financial services.

Briefly reviewing our investments in this sector, the two deposit-taking firms, Lanka ORIX Finance PLC and Commercial Leasing & Finance Ltd. have surpassed expectations especially in terms of portfolio growth and profitability, as has LOLC Micro Credit Ltd. which enjoys the advantage of competitive debt financing from our international funding partners. Each of these three companies has its own well-defined market base and service offering. Thus, among them, they effectively cover most of the microfinance and SME sectors.

LOLC 2011/12 REPORTS & ACCOUNTS 9 Deputy Chairman’s Message

We strongly believe that the LOLC Group has an important role to play in the future development of the microfinance sector. This is why we strengthened our focus on this sector in the year under review. This harmonises with the Government’s post-war development strategy, which is to concentrate on micro-enterprises and the lower end of the SME sector. Looking at the figures in this sector since the inception of our microfinancing arm in 2009, we see the very positive results of our efforts.

Helping Customers rise Up the Ladder Presence and access are the keys to success in these grassroots sectors. LOLC reaches out through its well positioned branch network of 183 comprising of main branches, mini branches, post office and LIOC centres and branches dedicated for gold products and Islamic financing. Our low cost but unique channel mechanism with Sri Lanka Post, offers the competitive edge not only in terms of reach but also enhancing service excellence to otherwise untapped micro clientele. Further, we have the liberty to select any post office for our operations out of 4,600 post/sub post offices across the island, thus ensuring our footprint is strategically positioned.

We are the largest microfinance entity in Sri Lanka in terms of geographic presence and portfolio size and the largest agriculture equipment provider through Brown & Company PLC. Microfinance comes in two varieties: asset-backed and income-backed. Our group loan model is somewhat different to the popular Grameen Bank model. We have a smaller group with a speedier and more effective step-up loan cycle. At present, 95% of our group loan portfolio graduate to individual borrowers. This opportunity not only empowers working women in the microfinance sector, but also facilitates their transition to an SME entrepreneur, alleviating poverty and uplifting the living standards of their families. In fact, our microfinance model has been a business case, whereby our associate PRASAC, the largest

10 LOLC 2011/12 REPORTS & ACCOUNTS Deputy Chairman’s Message

microfinance institution in Cambodia, has continuously transferred the know-how and best practices to their own business model. Another value addition that was included during the year was our micro insurance initiative. Through our insurance arm, LOLC Insurance Company Ltd. (LOIC), we were the first to offer a life insurance plan and a loan protection cover with our microfinance facilities.

Within the first year of its operations since April 2011, LOLC Insurance Company Ltd., with its captive business alone is already a significant player in the Insurance industry. In particular, as a catalyst to the micro insurance sector and its potential to grow in leaps and bounds, LOIC has a promising future in the insurance business.

LOLC Investments Ltd. is the Company that carries our strategic investments in different entities. Among other equity investments, Seylan Bank as well as Diriya Investments which holds a significant stake of Brown & Company PLC are noteworthy.

We have a bespoke product portfolio for the SME sector. In addition to the conventional leasing and loan products, we offer working capital solutions such as invoice discounting, cheque discounting and packing credit. As the pioneers of factoring, we challenge our own status-quo by adding innovative products. This year, we initiated ‘gold cheque’ discounting - a timely solution to SME borrowers to suit their financial needs in rough times by using their existing assets. And as our customers rise through the SME ranks, we are with them throughout, offering a diversified portfolio of financial services to their changing demands.

LOLC 2011/12 REPORTS & ACCOUNTS 11 Deputy Chairman’s Message

LOLC Securities Ltd. (LOSEC), is our newest subsidiary in the year under review. Although, we are not new to the stock broking business, LOSEC in less than 12 months of operations has become a leading stock broker to be included in the top 10 brokers based on annualised turnover.

In fact, with revolving credit, savings and fixed deposits, foreign currency deposits, leases, hire purchases, fleet management, diverse loan products, factoring and working capital, insurance, stock broking, Islamic financing, microfinancing, pawning and equity investments such as HDFC bank, our range of financial services is broader than ever. Small wonder, then, that we are the leading non-banking financial institution in Sri Lanka, and the leading microfinance, Islamic, agricultural and factoring operations of all such entities - in addition to having the largest fleet and the vehicle restoration centre in our possession.

Leveraging Our Strengths Our dominance in the financial sector is the result of leveraging our strengths in order to exploit opportunities as they arise. Sometimes these strengths are not the most obvious ones.

For example, as transparency and regulatory compliance have gained in importance in recent years, we have the advantage of a well-established corporate governance history behind us, thanks to our long-standing affiliation with ORIX Corporation, an international leasing-based financial group. Since ORIX is listed on both the Tokyo and New York stock exchanges, we have long been obliged to follow the reporting and compliance procedures and standards imposed by these entities as well.

Similarly, we have adopted and developed corporate social responsibility practices over the years thanks to our funding partners, many of whom are international development funds with specific goals relating to social equity, transparency,

12 LOLC 2011/12 REPORTS & ACCOUNTS Deputy Chairman’s Message

environment, etc. Working closely with our valued, long-term funding partners listed in page 72 have helped us develop as a responsible corporate citizen. Today, credit from these partners accounts half of our lending, while the rest is drawn from local commercial sources and our own depositors.

Needless to say, the guidance and assistance both financial and technical offered by ORIX and our long-standing funding partners have made us what we are today in terms of size, penetration and profile, and I take this opportunity to sincerely thank them for their confidence in us. We reciprocate their trust by continued financial stability led by sound profitability, attractive return on investment, swift portfolio growth and above all maintaining one of the best NPL ratios in the industry.

Into New Territory The decision to move beyond financial services was not taken lightly. Our main motive was a desire to align ourselves with the economic goals of the nation, since by doing so we are more likely to secure long-term operational viability and profitability. The prospect of developing a sustainable value chain by exploiting synergies between our various investments was another strong inducement.

For example, consider our investment in Brown’s Group. This 137-year-old company is heavily involved in complementary businesses. We are the largest micro financer and they are the largest agriculture equipment provider. Leveraging its automotive interests further, Brown’s manufactures vehicle batteries and radiators, the market leader in these product lines. Together with Browns we maintain a healthy portfolio of investments, ranging from banks to hotels, construction to forestry; plantation to agri inputs. In partnership with Browns, LOLC now owns the Confifi Group and its portfolio of hotel properties - Eden, Riverina and Club Palm Garden in addition to Tropical Villas, another hotel closely situated. We are actively looking for a strategic partner to what might be the largest resort complex in the country on completion of the proposed development.

LOLC 2011/12 REPORTS & ACCOUNTS 13 Deputy Chairman’s Message

We also acquired one of the most uniquely-positioned resorts in the Southern Coast - Dickwella Resort & Spa, in the year under review. Our investment in the leisure sector is long term, with a view to being one of the leading players in the nation’s most promising sector. Group investments in other areas follow a similar pattern.

The energy policy of the country indicated that by 2020, 100% of the country will be electrified with at least 20% of it generated via renewable energy sources. Hence our venture into renewable energy with a 75% stake in United Dendro Energy with its biomass power generating plants and plantation investments. Our decision to go with wood as an energy source was taken after a careful analysis of geographical potential and the probable future impacts of climate change.

In a similar way, our stake in associate company Sierra Construction was taken on the basis of the growing demand for large scale construction, their capability for major infrastructure projects. Through Sierra, we ventured into Agstar Fertilizer, a leading fertilizer and agri input producer. This too is a long-term investment aimed at establishing synergies with other Group companies and equity partners such as Browns. Our investment in Gal Oya Sugar, a public-private partnership with the Government of Sri Lanka, follows a similar rationale.

Confidence to Face A Changing Future Surviving and even thriving in turbulent times has given us confidence in our ability to withstand changes and challenges the future would hold. In fact, our strength is in identifying opportunities from these both in our core financial and non-financial areas of business. Overall, we will continue to drive performance in all our financial services businesses, looking at key indicators such as profitability, portfolio, NPLs and grassroots impact to steer us in the right direction. You will also see us changing our product mix gradually from concentrated leasing to a wider range of SME and micro based products to cater the changing needs of our prime customer base.

14 LOLC 2011/12 REPORTS & ACCOUNTS Deputy Chairman’s Message

As for our non-finance businesses, they already contribute 45% of Group income. We will place them at the centre of our strategic focus, keeping a keen eye out for synergies between them. We have already made our investment choices. Long-term opportunity and a sense of timing will continue to determine our investment strategy. Continuous restructuring, internal and external, will keep us agile and sensitive to economic and social currents.

Adapting to change is what we are good at. It is what makes us different!

Ishara Nanayakkara Deputy Chairman

LOLC 2011/12 REPORTS & ACCOUNTS 15 Foresight and Fast Footwork

01.51

Group Managing Director/CEO’s Review The year under review was an exceptional one for the Group. We achieved the unprecedented pre-tax profit of Rs. 10 Bn even as we transformed ourselves into a diversified business conglomerate through strategic expansion and investments. Our success was mainly due to what I call ‘Foresight and Fast Footwork’ - our often surprising ability to predict market and customer trends by leveraging our knowledge, experience and intuition, as well as the competitive advantage lent to us by our local and international investment and funding partners.

Financial services remain at the core of LOLC’s strategic business model. However, the irrepressible and dynamic nature of the Group has witnessed active diversification into strategic growth areas of national significance such as renewable energy, leisure, forestry and plantations, microfinance and other key sectors. By aligning its vision with that of the Government, the Group is on the fast track to pursue its ambition to build one of the strongest conglomerates in the country. The LOLC Group is confident of reaping the benefits of a resurgent economy poised to benefit from the ongoing ports, aviation and roads and expressway infrastructure development.

16 LOLC 2011/12 REPORTS & ACCOUNTS Group Managing Director/CEO’s Review

On the financial services side of the business, strong efforts by our marketing and recoveries teams further strengthened Group collections ratios, which significantly improved the quality of our loan portfolio. Lanka ORIX Finance PLC (LOFC), has taken over its parent company’s leasing and financial services business, including fixed deposits, enabling LOLC itself to function more effectively as a holding company. LOFC has successfully sustained its non-performing loans (NPL) ratio as among the lowest in the industry.

LOFC was listed in the Colombo Stock Exchange during the year under review. Further the LOLC Group’s subsidiary, Commercial Leasing, received Central Bank approval to operate as a Registered Finance Company, and to reflect its new status, the Company‘s name was changed to Commercial Leasing & Finance Ltd.

During the year, our microfinance subsidiary, LOLC Micro Credit Ltd., continued to thrive as its breadth and depth of grassroots penetration increased by leaps and bounds. The Company was successful in bringing invaluable financial services to this sector by expanding its branch network further. It was also instrumental in creating opportunities for rural employment through regular training sessions held at its vocational training school, which equips rural youth to meet the demands of their chosen vocation.

Our performance in 2011/12 was remarkable because it was such a challenging year in terms of competitive pressure. Here, our sustainable, low-cost business model enabled us to expand and diversify vertically and horizontally. Today, LOLC Group offers a full spectrum of non-bank financial products and services which makes it a one-stop shop for customers looking to benefit from our joint Group synergies.

LOLC 2011/12 REPORTS & ACCOUNTS 17 Group Managing Director/CEO’s Review

18 LOLC 2011/12 REPORTS & ACCOUNTS Group Managing Director/CEO’s Review

The Value of Partnership The year was marked by several innovative and lucrative partnership agreements. Lanka ORIX Finance (LOFC) joined hands with Valutrans Sp.A., a prominent international money transfer firm, in a strategic expansion of our remittance business that will enable Sri Lankan workers in Italy to remit funds home cost effectively and in real time, while receiving numerous attractive, value added benefits. Families receiving remittances can withdraw their money from LOFC’s 64 branches and savings centres as well as from Commercial Bank ATMs islandwide. These efforts by LOFC to promote remittances are timely in view of the fact that this is the first time that Sri Lanka has recorded over Rs. 1 Bn in worker remittances.

LOFC also entered into a landmark partnership with the International Fund for Agricultural Development (IFAD), in collaboration with the World Bank, in a programme to uplift the living standards of Sri Lanka’s rural poor by promoting financial inclusion among those who seek foreign employment. Finally, completing a series of partnerships designed to benefit remittance customers, the Company worked together with LOLC Micro Credit Ltd. to offer micro loans for income generating activities in order to reduce beneficiaries’ dependence on remittances over time and help them develop sustainable income resources.

LOLC 2011/12 REPORTS & ACCOUNTS 19 Group Managing Director/CEO’s Review

Innovation and Outreach The product and service innovations for which we are reputed played a key role in building and retaining business relationships. A new working capital product named Gold Cheque Financing was introduced to offer a feasible option for entrepreneurs who lack property or vehicles as collateral. We reintroduced our Shari’ah compliant children’s savings account, Al-Falaah Junior, with many added benefits. Our footprint grew to encompass a total of 183 locations, including 39 main branches as well as Post Office service centres, Islamic finance centres and factoring outlets, which include CLC, LOFC and LOMC branches as well. Locations in the North and East of the country now account for over 25% of this total. LOFC branches were opened in the Northern Province at Nelliady, Chunnakam and Chavakachcheri and in other parts of the country. Advanced Information and Communications Technology systems link nodes on the branch network enabled us to offer sophisticated services even to rural customers, while branch operations are backed by a round-the-clock customer service hotline. Aggressive marketing and promotions support the efforts of our branch staff to build relationships and business.

We Come First because Our People Do LOLC people are recruited for skill and competence, and trained extensively further to meet LOLC customer service standards. Our HR strategy blends training and development, rewards and promotion with leadership and management that promotes creativity and innovation among all employees. Our agility and flexibility is made possible entirely by our talented and dedicated people, and we freely acknowledge that the difference they make lies at the heart of our success.

20 LOLC 2011/12 REPORTS & ACCOUNTS Group Managing Director/CEO’s Review

Sustainability Embedded Our strategic focus has long been on investing in innovative and sustainable initiatives, making a visible difference to our stakeholders’ lives and promoting national development. Sustainability lies at the heart of our operations and to underscore the importance we attach to sustainable operations, LOLC is a signatory to the UN Global Compact and implements its charter in every aspect of its business.

LOLC headquarters has the largest solar power installation of any commercial building in the country - a 48kW plant that meets 15% of monthly energy requirements. Our vision of a green energy portfolio consisting of mini hydro, biomass and solid waste power generation is now becoming a reality through our investment in companies such as United Dendro Energy and Gal Oya Plantations.

Social value generation is embedded into the LOLC business model, which is based on financial empowerment for rural farmers, women and small entrepreneurs. We not only provide financial support for such entrepreneurs, but even help ensure value chain creation by providing strong market linkages for their products.

A further testament of our commitment to sustainability is LOLC Motors’ state-of-the-art automotive workshop that delivers such benefits as lower electricity and water usage, widespread use of natural lighting, solar power generation and rainwater harvesting.

The Group now manifests its direct social responsibility commitments through LOLC Care, which will be the conduit for all future CSR initiatives. Its current focus is on construction and equipping the Madiwela Special Education School and Home for Boys.

LOLC 2011/12 REPORTS & ACCOUNTS 21 Group Managing Director/CEO’s Review

Challenges Ahead We see a bright prospect ahead for the leisure industry, of which the recent uptick in tourist arrivals is merely the first glimmer. Large scale infrastructure developments and the commissioning of the Southern Expressway are generating opportunities, as the Government’s concentrated focus on tourism has begun paying dividends. Our strategic entry into the sector two years ago with the acquisition of four hotels on the south coast demonstrates the Group’s astute assessment of the sector’s future potential. We deepened our sectoral commitment further during the period under review by acquiring the Dickwella Resort & Spa, a stunningly located 77-room property in the deep south of the island. LOLC Leisure is already known as one of the largest leisure property owners in the country. The upgrading of our Club Palm Garden, Riverina and Tropical Villas properties in tandem with several other LOLC-owned properties along Sri Lanka’s ‘Golden Mile’ will witness the single largest beach resort block and complex in the country.

Outlook LOLC has created strong links between sectors vital for the country’s economic growth and its core businesses. By aligning its business interests with these sectors, LOLC has placed itself on a strong upward trajectory that will grow steeper as post-war growth and development begin to show returns.

22 LOLC 2011/12 REPORTS & ACCOUNTS Group Managing Director/CEO’s Review

Acknowledgements In conclusion, I would like to express my sincere gratitude to the Chairperson and Board of Directors for their wise counsel throughout the year. In a Company that moves with great agility, many vital decisions have to be taken swiftly and I am grateful for the support from the Board in this regard. I would like to commend the LOLC team and all Group companies for their responsive alignment with the vision of the Group. Operating in a competitive sector requires forbearance and a tactical mindset. I am confident that our team will continue to exhibit both qualities in equal measure through the coming months, thus creating a strong launching pad for future growth by building on the gains achieved during the year.

Kapila Jayawardena Group Managing Director/CEO

LOLC 2011/12 REPORTS & ACCOUNTS 23 We are Committed to the Grassroots Level

Business Review The year that just concluded was filled with both opportunities and challenges. Post-war economic resurgence gained significant momentum, opening up tremendous opportunities for entrepreneurs and financiers, especially in the North and East of the country where an immense reconstruction effort is underway. The LOLC Group was quick to take advantage of these opportunities, looking to expand through organic growth and strategic acquisitions while consolidating ourselves in the sectors we already inhabit. This expansionary phase is expected to continue for the short to medium term.

Less encouragingly, the ongoing global recession had its inevitable effect on Sri Lanka’s economic and business performance. Export-related businesses were particularly affected. The domestic economy also received shocks from currency devaluation and inflation. The effects of these developments on the financial services sector were mixed, though its effect on other sectors were generally negative.

Slower growth and high interest rates foreshadow a difficult year ahead. Some sectors of the economy, such as tourism, services and construction, are likely to do well. A stable political environment and clear economic policy focusing on agriculture and infrastructure will help drive growth in 2012. For the Group - as well as for its competitors - such a clear policy direction makes it possible to invest confidently in these sectors, taking advantage of various incentives and facilities offered by the Government.

Higher interest rates and lower liquidity will probably cause the volumes of non-performing advances to increase across the financial services industry in 2012, which would pressurise in limiting the growth in lending. The resulting credit demand will improve prospects for the various financial services businesses of the LOLC Group. In particular, credit demand in the SME/micro-enterprise sectors are likely to grow, to the benefit of our own SME and micro-enterprise operations. Our access to attractive lines of long-term credit for SME and micro-enterprise development from international bilateral and multilateral funding agencies gives us a very strong advantage in these sectors, one we shall leverage on increasingly in the months to come.

24 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

Strategic Direction Our long-term strategy is to pursue growth in sectors that complement our profile in financial services, where we continue to maintain our strength. However, the tactical means by which this strategy is implemented will vary in the short to medium term.

In financial services, the main sources of growth will be our channel network, where we will build business by offering attractive interest rates based on our sources of low cost funds and promote cross-selling by packaging products from different Group companies as integrated customer service solutions. Effective collections systems and further back-end integration through insurance, fleet management and vehicle repairs will also help drive growth in financial services.

Beyond this core sector, the Group will continue to consolidate investments already made in leisure, manufacturing and trading, agriculture and plantations, renewable energy and construction. In all these sectors, we will consolidate the positions we now hold through recently launched or acquired businesses, building long-term value and looking for steady growth.

In financial services as well as in other sectors, we will strive to be always within arm’s reach of potential customers at grassroots level, building infrastructure and honing our systems to achieve this.

Financial Services While the LOLC Group continues to evolve into a broad-based conglomerate, we will never lose our core commitment to financial services. It is on the success in this sector that our current expansion has been founded, and it is from this sector that much of the resources for future growth will be drawn. Accordingly, we paid increased attention to growth and integration in financial services throughout the year under review, with strategic investments in accessibility, service provision and backup, information technology and cross-selling. In particular, we strove to make our products and services evermore accessible to ordinary Sri Lankans all over the country.

LOLC 2011/12 REPORTS & ACCOUNTS 25 Business Review

Starting with a leased tractor from LOLC, this successful farmer A group microfinance customer in Chilaw harvesting her gotukola from Kurunegala has now bought his second tractor to grow his cultivation. agri business.

Growing her cane basket weaving business through a group loan Producing savoury snacks that are packed and sold in Balangoda by a scheme, Devika of Mathugama now employs eight others to help her. group microfinance-supported family business.

A seamstress from Divulapitiya who doubled her income through Rushika of Mathugama is now on her second cycle of the group group microfinance. microfinance scheme and is expanding her poultry business.

26 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

The purchase of a sewing machine through a group loan helps A microfinance-supported family business from Chilaw that Anushiya of Jaffna to supplement her income and support her family. manufactures and markets ekel brooms across the country.

A group loan member from Puttalam who runs her own batik business Nihal of Nikaweratiya has gradually built his curd production business that serves hotels as well as tourists. through group microfinance.

A group loan has helped Pushparohini to develop her vineyard that Group loan customer Pushpa manages a successful home-grown produces the distinct Jaffna grapes. mushroom business in Mathugama.

LOLC 2011/12 REPORTS & ACCOUNTS 27 Business Review

Microfinance Nowhere was our commitment to the grassroots more apparent than in the burgeoning field of microfinance. In a mere three years, LOLC Micro Credit Ltd. (LOMC) has become the leading microfinance solutions provider in Sri Lanka, with a loan portfolio of Rs. 12.26 Bn (up from Rs. 8.22 Bn in 2010/11) disbursed through a total of 100,981 loans, of which 74,821 were in the year under review. The active borrower base, 60% of which is female, increased by 55%. LOMC also has one of the lowest non-performing loan ratios in the country.

These operations were partly financed by facilities from five international funding partners, amounting to Rs. 2.57 Bn in total. Meanwhile, the Company’s pawning portfolio, acquired from the sister company Lanka ORIX Finance PLC (LOFC), grew by 46% to Rs. 1.73 Bn.

In the year under review, LOMC recorded a profit before and after tax of Rs. 818 Mn and Rs. 658 Mn respectively, compared with last year’s figures of Rs. 554 Mn and Rs. 415 Mn respectively.

Having aggressively expanded its network during the year, LOMC is now active in 23 districts through a total of 34 branches and 95 IsuruDiriya service centres. This strong rural presence also helps create employment opportunities for local youth: the Company’s 277 loan officers were all recruited from the local towns around the branch network and deployed in their respective hometowns. To support this initiative, a fully-equipped training and development centre for loan officers was also set up during the year. In addition, LOMC was proud to be able to provide training for officers of two overseas ORIX partners namely, Xac Leasing (Mongolia) and BRAC Bank (Bangladesh).

Plans for 2012 call for continued geographical expansion to serve borrowers who do not have access to mainstream financial institutions - in particular, those resident in the North and East where the Company continues to receive technical assistance for operational growth under a performance-based grant from the International Finance Corporation. LOMC now derives 16% of its portfolio from its six branches and 15 service centres in this formerly war-torn region.

28 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

Small and Medium Enterprise Finance An important aspect of the LOLC Group’s commitment to national development is its support for enterprise growth through incremental, need-based access to larger and more sophisticated financial resources. The first step on this ladder is microfinance, which is the purview of LOMC; here, at the deep grassroots, customers with no collateral resources guarantee each other’s loans. Once a customer has outgrown the resources of microfinance, the next step up is to small-and-medium-scale enterprise (SME) financing, the purview of LOFC.

More than 80% of Sri Lankan enterprises may be described as SMEs. Collectively, they contribute over 30% of GDP in terms of value addition. The sector makes considerable use of lease financing, and LOLC has played a valuable role in its development over the years. Our diverse SME portfolio includes customers engaged in agriculture, trading, services and transport; our exposure to these different sectors is continuously monitored in order to manage risk.

Our operations in this important sector saw substantial growth in the year under review, driven by favourable Government policy and a climate of economic confidence. Most of this growth was derived from motor vehicle financing, as duty concessions to certain groups made new vehicles more affordable. Overall, leases and loans in the SME category amounted Rs. 33 Bn compared with Rs. 20.8 Bn in 2010/11, an increase of 59%. Despite aggressive competitor action, LOLC retained its edge, largely because of our policy of assessing credit worthiness based on a customer’s cash flow rather than the collateral he or she can present.

In fact, our credit-assessment process provides a vital competitive advantage. We have developed the means to gather relevant information from SMEs which, in many instances, cannot produce formal records to justify their creditworthiness. Industry references and referrals from existing clients are an important part of this process.

Another advantage is our presence at grassroots level. We opened another 26 branches and other outlets during the year under review, bringing the operating total to 135.

LOLC 2011/12 REPORTS & ACCOUNTS 29 Business Review

Lease facilities on vehicle purchases, offered through collaborations with selected vehicle dealers, was a key element of our marketing strategy in 2011-12. These were promoted through media advertising, telemarketing and regional campaigns. We even entered into a bulk purchasing agreement with a leading commercial vehicle vendor in order to shorten the delivery period for vehicles purchased with LOFC lease facilities.

In the third quarter of the year, certain Government decisions - increases in interest rates, limits on credit growth by banks and financial institutions and the devaluation of the Rupee - caused a rise in vehicle prices and a consequent decline in the demand for lease facilities.

As a result of these policy reversals, Sri Lanka may expect slower growth going forward. Businesses will incur higher operating costs and margins will shrink. SMEs will be compelled to manage their costs more efficiently, and the LOLC Group will have to adopt a more conservative approach to credit assessment and the management of exposure.

Lanka ORIX Finance LOFC, a licensed finance company established in 2001, 90% of which is owned by LOLC, is the main deposit-taking subsidiary of the Group. The Company maintained its growth momentum in the year under review, with indicators such as deposits, available capital, credit growth, asset quality and profitability all showing impressive gains. However, a shortage of market liquidity from October 2011 (as discussed above) reduced the overall growth momentum of the deposit base. Deposits at the end of the year under review amounted to Rs. 25.1 Bn, growing by an impressive Rs. 7.7 Bn or 44% over the previous year. Foreign-currency deposits did especially well, growing 173% to reach Rs. 1.96 Bn at year’s end.

30 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

Deposit Analysis, F.Y. 2011/12

Category Deposits Contribution (Rs. Bn) (rounded %)

Fixed Deposits (short-term) 15.20 61 Fixed Deposits (long-term) 4.06 16 Savings Deposits 0.36 1 Foreign Currency Deposits 1.96 8 Al-Falaah Deposits 3.52 14 Total Deposits 25.10 100

Assets and Liabilities LOFC enjoyed a 58% increase in its asset base, which reached Rs. 38 Bn by year’s end. Most of this growth came from the accommodations portfolio, comprising finance leases, hire-purchases and other secured advances, which itself grew by 59% to Rs. 33 Bn. Secured loans were the second highest contributor to asset growth.

Deposits, LOFC’s major source of funding, amounted to 75% of total liabilities, having grown by 44% to Rs. 25 Bn - one of the largest deposit bases among licensed finance companies. Time deposits accounted for nearly 90% of the base. Foreign currency deposits showed a spectacular increase. Overall, sustained profitability strengthened the Company’s capital fund.

Capital & Profits Driven by higher profits and improved profit retention, the equity of LOFC grew by 35% to Rs. 4.8 Bn. Capital adequacy ratios remained above the statutory minimum. The core capital ratio (as a percentage of risk-weighted assets) stood at 14.4% at year’s end, in keeping with the industry average, while the ratio of capital to deposits was 19%.

LOLC 2011/12 REPORTS & ACCOUNTS 31 Business Review

A Substantial portion of LOLC Group profits under review was derived from the operations of LOFC in the Group’s core businesses of lending and deposit-taking. At the end of the financial year, LOFC had recorded profit before tax of Rs. 1.8 Bn, which represents 17% of Group profits and an increase of 20% over the previous financial year’s figure.

Other Lines of Business The contribution of remittances from Sri Lankans employed overseas was of salient importance in 2011/12. LOFC made a strong contribution to inward remittance growth, handling over US$ 5 Mn during the course of the year through agreements with exchange houses covering Europe and the Middle East. The Company also embarked on a financial literacy initiative for beneficiaries of such remittances, supported by a grant of US$ 245,000 from the Finance for Remittances (FFR) initiative of the International Fund for Agricultural Development (IFAD). The project, targeting 10,000 migrant worker families, covers financial goal setting, savings, and access to credit and insurance that will help broaden the Group’s rural customer base.

During the year, LOFC obtained the approval of the Central Bank of Sri Lanka to engage in the business of money changing, which is now included in its portfolio of services. LOFC is also in the process of implementing a campaign to promote this new line of business.

Risk Management Credit risk remained low, although non-performing accommodations rose by 5% to Rs. 336 Mn, mainly due to ‘seasoning’ of the portfolio following rapid expansion. Exposure to NPAs relative to total loans outstanding declined to 1.01%, a figure that compares very favourably with the industry average of 5.1%. With loan loss provision considered, the net NPA ratio was 0.73%, compared to an average of 1.9% for the non-bank financial sector. Provision coverage for NPAs was reduced to 29%.

32 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

A single-digit interest rate regime coupled with increased business volumes boosted earnings for most of the year. Net interest income grew by 123% to reach Rs. 3 Bn; as a percentage of total assets, it had reached 7.9% by 31 March 2012 compared to an average industry margin of 6.4% for the 12 month period ended December 2011.

Liquid assets amounted to Rs 2.95 Bn at the end of the review period, 12% higher than the minimum set by the Central Bank. Liquid assets in approved securities were maintained at 33% above the stipulated minimum.

Strong and sustained portfolio expansion, augmented by the transfer of LOLC’s finance-leasing franchise, boosted earnings. Profitability, too, continued to improve. The Company recorded a remarkable profit after tax figure of Rs. 1.2 Bn. The increase was mainly attributable to business growth derived from LOFC’s expanding network of branches.

Islandwide Presence The year under review saw the Company greatly improve its geographical presence and accessibility, opening 64 cash-collection centres (Isuru Diriya Centres) at post offices across the country as well as three savings centres and 13 fully-fledged branches. The number of outlets in the Northern and Eastern Provinces exceeded thrice over, growing from 8 to 25. Our commitment to financial inclusion was reflected in the operation of three Al-Falaah centres (see below) in the Eastern Province, where many Muslim Sri Lankans make their homes.

Commercial Leasing and Finance Ltd. (CLC) CLC played a key role in the financial services sector of the LOLC Group adding value in many fronts in terms of top line and bottom line contribution, island-wide reach, serving a multitude of customer segments, brand value etc.

CLC’s business model enabled the Company and the Group to reach the clients and markets that have been deprived of formal finance up to date, thus, developing the rural and newly-developing markets, especially those outside the Western Province.

LOLC 2011/12 REPORTS & ACCOUNTS 33 Business Review

The strategy paid rich dividends where the demand for formal credit was high and also backed by the high debt servicing appetite and capacity. This resulted in high business volumes as well as exceptional collection ratios.

The asset book of CLC grew by 23% during the year from Rs. 21 Bn to Rs. 26 Bn. The non-performing loan ratio was 2.8% as at 31 March 2012.

The Company recorded a very impressive profit before tax of Rs. 3.2 Bn for FY 2011/12 up from Rs. 741 Mn in the previous year.

In addition to financial performance, CLC also achieved few key milestones during the year. The highlights of which include receiving the licence to function as a finance company from the Central Bank of Sri Lanka (CBSL) and the opening of the 50th branch in the strategic township of Kilinochchi by the Governor of CBSL. With the receipt of finance company licence, the Company commenced its fixed deposits and savings operations in January 2012. Results to date indicate that it would be a key player due to high public confidence in the popular CLC brand name developed over the 24-year history of the Company.

CLC Key Indicators

For the year ended 31 March 2012 2011 Increase (Rs. Mn) (Rs. Mn) (%)

Interest Income 5,245 3,402 54 Profit Before Tax 3,182 741 329 Portfolio Balance 24,104 18,371 31 Factoring Portfolio 2,682 2,953 -9

34 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

Working Capital and Factoring Micro-enterprise and SMEs often struggle to find working capital to sustain ongoing operations and expansion plans. Larger businesses, too, often find themselves short of funds due to delayed payments from customers and other reasons. Factoring provides a solution for all these entrepreneurs. LOLC Factors Ltd. (LOFAC) was incorporated to take over the activities of the Working Capital Business Unit of LOLC. Having a separate firm to handle factoring supports the important shift in the new-business focus of the LOLC Group. For most of its 20-year history, factoring services were offered mainly to corporate customers in the Western Province. Although LOFAC's first steps into regional markets commenced some years ago, it was the end of the war and the Government’s declared commitment to rural and regional development that encouraged the Company to make a strong commitment in this sector. Leveraging the growing branch network of the LOLC Group, LOFAC provided a record number of new facilities to customers all over the country, successfully cross-selling other financial products through its sister company, LOFC, at the same time.

The year under review saw LOFAC’s working capital/factoring operation record its highest-ever performance in:

 Factoring funds in use

 Monthly turnover

 Profit per marketing employee

LOFAC also had the lowest expense margin amongst all business units within the Group. Thus, factoring became one of the highest-yielding Group operations, with the best net return among all our lines of business.

Other highlights of the year included the successful launch of a new product, which brought in many customers previously thought of as unbankable, by allowing them to offer gold as collateral against their borrowings.

LOLC 2011/12 REPORTS & ACCOUNTS 35 Business Review

Islamic Finance LOLC Group’s involvement in Islamic Finance began in response to growing popular demand for such services. In 2005, the Banking Act made provision for Islamic Finance, giving further recognition and creating more scope for all stakeholders in the industry to reap the benefits of Islamic finance. With the challenges faced initially, the scope and the need for a reputable Islamic Financier was immense to re-establish the confidence amongst the stakeholders and the public at large. Seizing the opportunity, the Group established its Islamic Business Division in 2007. This Division now functions as Al-Falaah, the Islamic Business Unit of Lanka ORIX Finance PLC.

The decision has been borne out by its results. Today, Al-Falaah is a prominent player in an industry where the formal and informal segments together is estimated to be worth over Rs. 100 Bn. However, more than 70% of Islamic financial needs are fulfilled by the informal sector and the conventional banking and finance sector. Al-Falaah is moving to tap this massive potential through the provision of relevant Shari’ah-compliant services at all levels from the grassroots upward. Currently, Al-Falaah offers fully-Shari’ah-compliant alternatives for term and savings deposits, trade finance, working capital and import-finance services. By broadening its product mix to include special savings accounts for senior citizens and minors, the unit plans to serve the entire Muslim community, and ultimately to become the premier provider of Islamic financial solutions in Sri Lanka.

In the year under review, Al-Falaah achieved its growth targets in deposits and assets. The mudharabah and wakalah portfolio grew by 22% year on year, from Rs. 2.9 Bn in 2011 to Rs. 3.6 Bn in 2012, while the assets portfolio comprising Ijarah, Murabaha, Diminishing Musharakah and Musawammah rose in value from Rs. 3.5 Bn to Rs. 4.7 Bn, an increase of 32%. Collection and NPL ratios also exceeded expectations, the net NPL ratio was maintained at 0.09%.

Due to the efficient and effective management of its assets book, the award winning Al-Falaah Business Unit of LOFC was able to distribute the highest profit distribution to its Mudharabah account holders. Hence, Al-Falaah was able to dispel the myth of low returns to Islamic Finance investors through this high profit returns which at times exceeded the conventional returns.

36 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

Overall, the Division’s pre-tax profit showed a twofold increase in the current year compared to last year’s figure of Rs. 92 Mn.

Operational highlights include the opening of the fifth Al-Falaah centre at Akkaraipattu in April 2012. Future plans include further broadening of Al-Falaah’s regional and demographic reach, with particular concentration on microfinance for agricultural and home-based enterprises, while continuing to serve the SME and corporate sectors; increasing the number of LOLC staff dedicated to Al-Falaah operations and ultimately the establishment of Al-Falaah as an independent corporate entity under the LOLC Group umbrella.

Al-Falaah is highly committed to run its business in accordance to Shari’ah principles and the Shari’ah Supervisory Board (SSB) guidelines. This includes quarterly Shari’ah audits, whetting of all transactions by the in-house Shari’ah advisory, continuous review of processes and procedures by the SSB etc. Al-Falaah intends to be a role model in the industry, whereby the entire industry will follow suit and ultimately all stakeholders will reap the benefits of Islamic Finance.

Fleet Management Our commitment to providing financial and enterprise support to Sri Lankans in corporate and other segments of the market across the country are further reflected in our fleet management operations which we have continued to strengthen over the years. Our three-pronged strategy is to:

 serve all segments of the market,

 offer attractive rentals on all types of vehicles, and

 be self-sufficient in funding asset purchases.

We entered the short-term rent-a-car market a few years ago, hiring out vehicles to walk-in clients as well as to corporates that rent vehicles for a specified term. The long-term rental portfolio also increased, while our fleet itself now numbers more than 1,500 vehicles and is still growing. Besides creating a steady, reliable cash flow, the long-term

LOLC 2011/12 REPORTS & ACCOUNTS 37 Business Review

rental business also realises additional profits from the eventual sale of assets in a market where import duty increases have raised prices for second-hand vehicles. We also finance the rental of heavy equipment used by the construction industry. Here our strategy involves disposing of the equipment at the end of its tenure.

Going forward, LOLC will consolidate its positions in the short- and long-term car rental market, continue to augment its vehicle fleet and introduce value additions such as fuel cards and tracking systems to enhance the efficiency of customers’ vehicle use. We will also maintain the most important and fundamental value addition to our rental business, namely our mechanical workshop.

LOLC Motors Activity in the year under review was dominated by the launch of our new subsidiary, Speed Italia, which commenced operations in September 2011. Speed Italia markets Fiat automobiles in Sri Lanka, commencing with an initial order of 70 cars to the Air Force. The launch generated considerable press publicity, which was supplemented by advertisements for Fiat cars. A radio promotion campaign was conducted in December and January, supported by more press advertising and local street promotions in Anuradhapura, Jaffna, Kurunegala and Nawalapitiya.

LOLC Insurance LOLC Insurance is a new entrant to a highly competitive industry with more than 20 players in which business volumes grew from Rs. 66.25* Bn in 2010 to an estimated Rs. 78.51 Bn in 2011. The market saw a substantial growth in General Insurance during the year under review predominantly driven by motor insurance due to a temporary reduction in vehicle import taxes that drove a boom in vehicle purchases. The industry is now in a period of regulatory transition, with existing composite insurance companies being required to segregate their life and general businesses in the next couple of years followed by mandatory listings in the stock exchange whilst rules on solvency and supervision are also being revised.

* As per IBSL press release on 5 June 2012.

38 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

LOLC Insurance obtained a composite insurance licence in 2010 and started writing business in mid-2011. Most of the year under review was spent in setting up the infrastructure to commence operational activities and opening its office in Colombo. The Company wrote Life Assurance Policies amounting to Gross Written Premium (GWP) of Rs. 51.4 Mn and General Insurance GWP of Rs. 364.7 Mn during the period under review and has successfully tied up with leading international reinsurers for underwriting capacity.

Going forward, LOLC Insurance will be establishing itself in the market as a major player in the industry with a full range of insurance products and services on offer for both Life and General.

LOLC Securities Commencing operations in July 2011, LOLC Securities marks the return of the Group to stock broking after a two-year hiatus. Leveraging a new operational model centered on investors’ portfolio management strategies, the Company has captured a significant share of market in a very short period of time. Although it began operating in a period when the market was declining and highly volatile, it ranked 11th out of 28 stock broking firms in terms of monthly turnover at the end of the financial year.

In addition to its Colombo Headquarters, LOLC Securities has branches in Galle and Kurunegala and has mobilised sufficient funds from regional and rural investors to make a positive contribution to its bottom line. The Company plans to open offices in Kandy and Jaffna in the near future.

Attracting foreign investors to the Sri Lankan equity market is another component of the Company’s strategy: it has already appointed agents in Malaysia and Dubai and is planning to widen its reach to include India and the United Kingdom in the near future.

LOLC 2011/12 REPORTS & ACCOUNTS 39 Business Review

Diversified Activities In a market economy, growth and development depend upon the availability of capital. Financial services providers thus become facilitators of growth.

This is a vital function as also an intermediary one. Purveyors of finance can have a powerful influence on the character and direction of development by choosing which sectors, ventures and entrepreneurs they finance. However, this influence is indirect, and in a reasonably open market for capital, an entrepreneur can usually find a source of funds with fewer strings attached, especially if he is willing to pay a premium for this.

In the climate of opportunity created by post-war economic revival and with a sense of mission arising from our commitment to the national agenda, the LOLC Group is no longer content to let its influence on development be wholly indirect. Behind our recent metamorphosis into a business conglomerate with interests in agriculture and plantations, renewable energy, leisure and construction is our determination to participate directly in the national effort.

The remaining pages of this Business Review cover our non-financial operations in 2011/12. From ethical tea production, to renewable energy that lowers the nation’s carbon footprint to essential infrastructure construction projects, they portray a Group engaged at the heart of Sri Lanka’s development effort and deeply committed to the future.

Leisure LOLC Group has identified the potential of tourism and has invested aggressively in leisure. The holdings through LOLC Leisure Ltd., include five existing resort hotels with a combined room inventory of 616.

40 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

LOLC Hotels: Room Analysis

Property Rooms Status

Eden Resort & Spa 158 Active Dickwella Resort & Spa 76 Active Riverina 192 Club Palm Garden 140 Being repositioned Tropical Villas 50 }

In the year under review, three properties were closed for repositioning. A fourth, Dickwella Resort & Spa, was acquired in December 2011. For most of the year, the only active hotel in the portfolio was Eden Resort & Spa, located at Beruwela on the Southwest coast of the island.

Eden Resort & Spa, Beruwela Eden is a well-established 158-room five star property with an excellent reputation among visitors, agents and tour operators. The hotel has enjoyed steady growth in turnover and profits over the past four years, while steadily reducing its debt-to-equity ratio, which stood at 0.04 at the end of the year under review.

Eden Resort & Spa: Turnover and Profitability

For the year ended 31 March 2012 2011 Increase (Rs.Mn) (Rs. Mn) (%)

Revenue 601.4 516.5 16 Profit before Tax 171.6 112.9 52 Profit after Tax 146.0 101.4 44

LOLC 2011/12 REPORTS & ACCOUNTS 41 Business Review

Eden was the focus of intensive marketing and promotional activity throughout the year that witnessed the hotel achieving its highest-ever profit before and after tax of Rs. 171.6 Mn and Rs. 146.0 Mn respectively. These demonstrate the capacity and ability of the Company to contribute to the Group.

Dickwella Resort & Spa, Dickwella Acquired in December 2011 at a price of Rs. 1,014 Mn, this luxury 76-room property is situated on a scenic promontory with the sea on three sides and an extraordinarily attractive beach frontage. Access has been greatly improved since the opening of the Southern Expressway and planned developments in the South of the country focused on Hambantota are expected to drive business in the medium term.

Dickwella Resort & Spa enjoyed a very good financial year, the first nine months of which were passed under its previous owners. Gross annual turnover was Rs. 188 Mn, an increase of Rs. 35 Mn over the figure for the previous year. The property has considerable potential and plans have been drawn up to expand room capacity to 150 over the next few years.

Marketing activities for the hotel since its acquisition included telesales and press advertising promoting a weekend getaway package.

Excel World Development Project The 6-acre Excel World site on Darley Road is ideally located to benefit from the urban renaissance and renewal taking place around the Beira Lake at the centre of Colombo. Formerly underutilised as a downmarket entertainment and leisure complex, it is now the focus of an ambitious development plan which includes entertainment, shopping, conferencing, supermarket, leisure etc.

42 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

Looking Forward LOLC Leisure is moving to occupy a strong position in the Sri Lankan tourism sector within the next medium to long term, by which time it will have approximately 1,000 plus rooms in its portfolio. Most of these will be in four or five-star hotels or exclusive boutique properties. Our existing properties, Eden Resort & Spa and Dickwella Resort & Spa, together with the properties under refurbishment and the Kosgoda and Nasuvanthivu-Passekudah development projects will position LOLC Leisure as a formidable force in the industry.

Agriculture and Plantations Maturata Plantations Ltd. and Pussellawa Plantations Ltd. are two of the largest tea producing companies in Sri Lanka.

Maturata Plantations Maturata Plantations operates 19 tea estates, of which significant acreage also accommodate the cultivation of rubber, coconut and spices. The Company posted a turnover of Rs. 1,981 Mn during the year under review, with tea accounting for 88% of the total, followed by rubber (10%), coconut and others. Plantations are labour intensive, and wages are reviewed every two years. The last review in 2011 saw a substantial 30% increase in wages based on the Collective Agreement between Regional Plantation Companies (RPC) represented by the Employers Federation and trade unions.

Maturata Plantations recorded a landmark yield of 1,232 kg rubber per hectare in 2011, the best performance among all RPCs. Further, the Company had the highest new planting of cinnamon for the year, reflecting a crop diversification strategy which includes the large scale planting of trees for timber on uncultivated lands.

In recognition of its worker-friendly and environmentally sound policies, the Company obtained Ethical Tea Partnership certification for eight tea factories during the year. Several awards were also won at events organised by the Tea Brokers, while Maturata Plantations won the Gold, Silver and Bronze awards at the Ceylon Specialty Tea Award Ceremony held in Moscow in September 2011.

LOLC 2011/12 REPORTS & ACCOUNTS 43 Business Review

Pussellawa Plantations The principal activities of the firm are the cultivation and processing of tea and rubber and the cultivation of timber. Its holdings comprise of ten tea plantations, including some historic estates originally established as coffee plantations in the 1840s, nine rubber estates and five estates planted in a mix of tea and rubber. The total area under cultivation is 9,165 ha.

The Company recorded a turnover of Rs. 3,546.7 Mn and a profit after tax of Rs. 483.6 Mn for the year. Timber tree stocks were valued at fair value. Gain on change in fair value of timber tree stocks in the reported profit is Rs. 25.9 Mn. The year’s results were achieved despite substantial drop in tea prices since April 2011 and rubber prices since October 2011, and also with a high wage increase granted in April 2011.

Capital expenditure during the year under review amounted to Rs. 533.8 Mn, of which Rs. 432.6 Mn was invested in re-planting and the maintenance of immature plantations. New plantings during the year consisted of 248 ha in rubber and 16 ha in tea. In all, immature plantings amounted to 2,003 ha in rubber and 137 ha in tea.

Sustainability is a vital element of the Company’s operating ethos, and sustainable programmes to protect the environment and improve the quality of life of workers continued to receive priority in the year under review. In 2011/12, Pussellawa Plantations continued, with its own funding, a worker-housing project originally financed by the Plantation Development Project (PDP), spending Rs. 13.5 Mn to re-roof 169 worker housing units, upgrade 22 staff housing units and implement seven water-supply schemes on its plantations. Additionally, the Company re-roofed a further 59 worker housing units and constructed 25 housing units and 25 toilets for estate workers with PDP funding.

44 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

Environmental sustainability is an equally salient concern. In a region where soil erosion is a historical problem, the Company has planted over 54,000 timber trees on previously harvested and marginal tea lands and beside some hill-country roads. A programme has now been initiated to plant giant bamboos on stream banks and at other erosion-prone locations in the Pussellawa region in cooperation with the Mahaweli Authority of Sri Lanka.

In recognition of efforts like these the Company achieved Ethical Tea Partnership certification for its Hellbodde and Rothschild Estates during the course of the financial year.

Brown & Company In the course of its 137-year history, Brown & Company PLC has established a strong presence in key areas of the Sri Lankan economy, such as agriculture and plantations, tourism, transportation and construction. Originally, a trading and agency firm supplying the colonial plantation industry, it has evolved over time into a diversified trading and investment group enjoying leadership in a variety of markets, among them automotive batteries and radiators, tractors, marine engines, branded power tools and veterinary pharmaceuticals. This breadth and depth of involvement has bred a thorough understanding of Sri Lankan consumers and markets.

The equity and professional relations between Brown & Company and LOLC Group enable the latter to partake of Brown’s established strengths and forge important synergies that support LOLC in its mission to build its business and serve the nation from the grassroots up.

Browns builds on its inherent strengths as a trading and manufacturing entity while making strategic investments in emerging business areas through its investment arm, Browns Investments. The Browns Group represents a number of leading global brands in the Sri Lanka market, among them Ashok Leyland Marine, Continental Airlines, Exide, Eukanuba, FG Wilson, Massey-Ferguson/TAFE, Olympus, Pitney Bowes and Sharp.

LOLC 2011/12 REPORTS & ACCOUNTS 45 Business Review

Browns is itself a household name across the country. The Company is especially well-known to Sri Lanka’s farmers and commercial planters to whom it supplies a wide range of agricultural inputs: machinery such as 4- and 2-wheeled tractors and other farm implements, fertilizer, seeds and planting materials. The plantation investments of Browns are in a joint venture with Perpetual Holdings, under which are the Maturata and Pussellawa plantations. Exide and Lucas automotive batteries are by far the leaders in their field, while the Browns ‘BattMobile’ emergency replacement service has revolutionised the service paradigm in this market.

Browns also has significant presence in the leisure industry through the holdings of Browns Investments, which has a 30% stake in LOLC Leisure as well wholly owning a 150-room resort property, Samudra Beach Hotel, now under construction. Brown’s also has access to a significant portfolio of freehold and leasehold property, including Brown & Company’s former head office at Darley Road.

Aside from its leadership position in veterinary pharmaceuticals, the trading interests of Browns Group include pet foods, power tools, consumer electrical items, office automation equipment and consumer durables. However, the Group’s strategic focus going forward will be on construction, tourism, healthcare, plantations, trading and entertainment sectors of the Sri Lankan economy in which substantial growth is projected in the medium to long-term.

Gal Oya Gal Oya Plantations, run by LOLC and Brown & Company in a public-private partnership with the Sri Lanka Government, is a project which includes the revival and refurbishment of the sugar plantation and power plant. Refurbishment of the plant is almost complete and the factory is expected to commence operations in July. The project also includes a water purification plant with a capacity of 250,000 litres per hour which was successfully renovated and commissioned in January 2012. Excess purified water is sold to the National Water Supply and Drainage Board.

46 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

To fulfil the factory needs, 5,200 ha of landmass has been rejuvenated and brought under sugar cane cultivation Ethanol will be produced as a by-product, in addition to 2 MW of bagasse-derived power. This initiative possesses the capacity to provide direct employment for nearly 1,200 individuals and indirect employment for over 15,000 individuals and 5,500 farmer families, largely contributing towards the upliftment of their livelihoods with new revenue streams.

Renewable Energy In a society where energy security and environmental sustainability are increasingly urgent concerns, few investments make as much sense as renewable energy. LOLC Group’s commitment to this sector is in alignment with the national policy of increasing the share of renewables in the power sector‘s energy mix, which also supports sustainable development in order to build a better future for all Sri Lankans.

LOLC acquired a 75% stake in United Dendro Energy in 2010. The company currently has a 6 MW wood-fired power plant under construction at Dodangoda, in Kalutara, with a further 34 MW of planned capacity to come online over the next five years from new plants located at Hambantota and Puttalam, as well as from planned increases to generating capacity at Dodangoda. United Dendro also has 4,000 acres of land in the south of the country presently being planted with gliricidia, a fuelwood tree whose leaves can be used as cattle feed, adding to the sustainability of the venture. The company is working to secure an additional 40,000 acres of redundant or barren land for planting gliricidia, a venture that will provide direct employment for over a 1,000 rural Sri Lankans. Further, fuelwood resources will be secured through an outgrower programme that will provide economic support to as many as 66,000 more rural families. Outgrower registration is already underway in the relevant districts.

United Dendro is a ‘green energy’ initiative that will not only help reduce Sri Lanka’s dependence on imported fossil fuels but will also earn carbon credits which, when traded, make a positive contribution to the national balance of trade.

LOLC 2011/12 REPORTS & ACCOUNTS 47 Business Review

Construction Founded in 1981, Sierra Construction is today one of Sri Lanka’s most visible enterprises, its familiar logo adorning large-scale infrastructure construction projects in areas as diverse as water supply and sewerage, irrigation, power generation and distribution, piling, roads and large building sites, as well as the civil engineering and telecommunications projects which were its original area of interest. It is one of the few large Sri Lankan engineering firms to have established a presence outside the country, having undertaken projects in India, Maldives and Qatar. Sierra today employs over 4,000 people, either directly or indirectly, including more than 300 engineers. The company takes pride in its highly motivated and talented workforce, which it perceives as the driving force behind its success.

Now in its third decade of operations, Sierra has earned numerous awards and accolades as well as the more formal endorsement of ISO certification. In the year under review, the company began implementing a best-practice regime in corporate governance and risk management. Sierra remains focused on its vision of being the preferred infrastructure development partner in the region, identified by customers and partners as integral to their success.

Few of the major projects completed during the recent past:

 Colombo Town North Water Supply Project Package 1 & 2: Rs. 4,900 Mn  Dialog Broadband Stage 1: Rs. 2,400 Mn  Hambantota Water Supply Project: Rs. 1,200 Mn  Muttur Water Supply Project: Rs. 1,070 Mn  Kattankudi Hospital: Rs. 410 Mn  Sainthamaruthu Hospital Project: Rs. 213 Mn  NADA Building Battaramulla: Rs. 223 Mn

48 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

Few of the major projects currently in progress:

 Thannekumbura Road Project: Rs. 2,600 Mn  Kalu Ganga Water Supply Project: Rs. 2,300 Mn  Hambantota Convention Centre Stages 1, 2 and 3: Rs. 2,200 Mn  Muttur Treatment Plant (Turnkey Project): 1,560 Mn  SLT Unit Rate Project: Rs. 1,100 Mn  Dialog Broad Band Project Stage 2: Rs. 1,030 Mn  JICA Funded Road Projects - Central Province: Rs. 720 Mn  Sun & Fun Hotel Project: Rs. 310 Mn  William Gopallawa Mawatha: Rs. 449 Mn  Provincial Road Project - Jaffna: Rs. 324 Mn  Free Lanka Capital Tower - Borella: Rs. 625 Mn  Vidulakpaya Piling Project: Rs. 304 Mn

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A Sweep of the Sectors We Serve

Financial Services Renewable Energy  Lending  Hydro Power  Microfinance  Biomass Power  Savings and Deposits  Solar Power  Foreign Currency Deposits  Factoring/Working Capital Leisure  Islamic Finance Construction  SME & Development Finance

 Insurance Trading & Agencies  Stock Broking  Consumer Electronics  Fleet Management  Pharmaceuticals  Automobile Restoration and Service  Automotive Spares  Investments  Power Tools

Agriculture & Plantations  Agriculture Equipment  Tea Plantations  Rubber Plantations  Sugar Plantation  Fertilizer and Agri Products

50 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

Our Reach

Northern Province North-Western Province This region is predominantly agricultural in pursuit, thus the Sri Lanka’s third largest paddy producing region, the North- majority engage in farming and fishing or are professionals within Western Province has a highly-developed agricultural economy, the civil and business sectors. growing a variety of fruits and vegetables, flowering plants, spices and oil-seeds in addition to the traditional plantation crops such as coconut, rubber and rice. Its fertile land mass and varied climate make it ‘ideal ground’ for growing virtually any crop.

It is also home to vibrant industries such as fishing, prawn farming and rubber.

North-Central Province The largest of all the provinces, the North-Central Province is predominantly agro-based, with more than 65% of its residents dependent on basic agriculture and agro-based industries for their livelihood. Central Province The North-Central Province is fertile ground for any investor This is Sri Lanka’s world famous tea country; the home of whose interests lie in areas such as agriculture, agro-based authentic, fragrant, world renowned Ceylon tea. Its rich history, industries and livestock farming. scenic mountain beauty and contrastingly cool climate make it a continuing draw for tourists from all over the world.

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Sabaragamuwa Province Uva Province Sri Lanka’s fabulous gem mining terrain lies within this province. Within Uva’s boundaries flow some of Sri Lanka’s most It is one of the ‘jewels in Sri Lanka’s crown’ famed as Sri Lanka spectacular waterfalls such as Dunhinda, Diyaluma and Rawana. is for its rubies and sapphires, and is on every tourist’s itinerary. Along with the Udawalawe National Park and Galoya National Park it is no wonder tourism flourishes in this region. One of the world’s last remaining rain forests, the Sinharajah reserve, also lies within its boundaries.

Sabaragamuwa is a rich trove of opportunity for tourists and entrepreneurs alike.

Southern Province The bounty from this region is divided between land and sea as farming and fishing provide the main sources of income for the vast majority of people based here.

Substantial development has and is taking place in the region, with Sri Lanka’s new port the Manampitiya Mahinda Rajapaksa Port already operational whilst a new international airport is slated for opening later this year at Mattala.

Sri Lanka’s first super highway is also to be found in this Province. The 126 km long Southern Lanka Expressway is Sri Lanka’s first E Class highway which links the Sri Lankan capital, Colombo with Matara. The new highway has slashed travel time between Colombo and the South by over 50% to less than 1½ hours.

52 LOLC 2011/12 REPORTS & ACCOUNTS Business Review

Eastern Province Western Province Sri Lanka’s Eastern Province is witnessing rapid development This is the most densely populated province in the country. after being caught up in a 30-year war which ended in 2009. Within its environs lies Colombo, the nation’s administrative and Its people are an eclectic mix of ethnicity and religious persuasion, business ’capital’. with all communities and major religions being represented in abundance. It is an area with vast potential for investment and As Sri Lanka’s economic hub, all major local and international development, particularly in the leisure sector with vast stretches corporations have their presence in the city and so do major of pristine and unspoilt beach front. designer and high street retailers.

Almost all the premier educational institutions in the country are located here. Also, this province has the largest number of schools and colleges in the country.

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Group Structure

90% 80% 100% 100% 100% 100%

LOFC LOMC LOIL LOFAC LOIC LOSEC

22.05% 50% 10% 20% 10%

DIRIYA 10% AF

51% 13%

22.05% 10% 60% GPPL BCP SB SH SC

50% 10%

10% 30% BI

100% 50% 69%

EGH FLCH FP

76.39% 59%

71.24% M P

HPFL Business Review

AF - Agstar Fertilizer (Pvt) Ltd. BCP - Brown & Company PLC

100% 90% 100% 100% BI - Browns Investment PLC CIB - Commercial Insurance Brokers Ltd. CLC - Commercial Leasing & Finance Ltd. DIRIYA - Diriya Investments (Pvt) Ltd. LOMO CLC LOITS LOECO DRS - Dickwella Resorts (Pvt) Ltd. EH - Eden Hotel Lanka PLC EGH - Excel Global Holdings 70% 100% 40% 75% 18% FLCH - Free Lanka Capital Holdings PLC FP - Fernwood Porcelain GPPL - Gal Oya Plantations (Pvt) Ltd. HPFL - Hydro Power Free Lanka PLC LOECO - LOLC Eco Solutions Ltd. SIL CIB UDE PRASAC LOFAC - LOLC Factors Ltd. LOFC - Lanka ORIX Finance PLC LOIC - LOLC Insurance Company Ltd. LOIL - LOLC Investments Ltd. LOITS - Lanka ORIX Information Technology Services Ltd. RH LOLL - LOLC Leisure Ltd. LOMC - LOLC Micro Credit Ltd. LOMO - LOLC Motors Ltd. 25.5% 49% 29% LOSEC - LOLC Securities Ltd. M - Maturata Plantations Ltd. P - Pussellawa Plantations Ltd. 52.8% 24.39% PG - Palm Garden Hotel PLC LOLL PG PRASAC - PRASAC Micro Finance Ltd. RH - Riverina Hotels PLC 100% 100% 21.82% SB - Seylan Bank PLC SC - Sierra Constructions Company Ltd. SH - Sierra Holdings Company Ltd. SIL - Speed Italia (Pvt) Ltd. DRS TVH EH TVH - Tropical Villas (Pvt) Ltd. UDE - United Dendro Energy (Pvt) Ltd.

As at 31 March 2012 We are on a Roll

FINANCIAL REVIEW LOLC Group LOLC Group posted yet another year of healthy growth in profitability recording Rs. 10.3 Bn Profit Before Tax (PBT), a 25% year on year growth. The Profit After Tax (PAT) for the year was Rs. 8.9 Bn, a 27% increase over last year which was Rs. 7.0 Bn. The PAT was after providing for Rs. 1.4 Bn as taxes. LOLC Group’s superior performance comes amidst a challenging environment where its core business of financial services faced interest rate volatility, increased taxes on motor vehicles and lower liquidity in the financial markets. Despite these challenges, the financial services sector remained dominant in profit contribution, with 72% of the Profit Before Tax coming from this sector, which is the core business operation of the Group. LOLC Group’s gross revenue increased by 18% to reach Rs. 37.8 Bn from Rs. 32.1 Bn recorded in the previous year. LOLC’s double digit growth in revenue and profits have proven the dynamism, confidence and ability to build a highly successful and competitive business in diversified areas.

The earnings per share for the year was at Rs. 13.17, an increase of 63% over the previous year. Net assets attributable to equity holders too increased by 48% to Rs. 19.3 Bn. The total assets of the Group reached Rs. 145.3 Bn compared with Rs. 111.8 Bn recorded in the previous year, mainly due to increase in financial assets. The total net receivables of the financial service sector increased to Rs. 80.2 Bn, an increase of 37% over the previous financial year.

The focused strategies adopted by the Group had a positive impact as the Group‘s gross income increased to Rs. 37.8 Bn (2010/11 - Rs. 32.1 Bn) mainly due to increase in revenue from financial service sector and trading sector. Total revenue from financial service sector grew by 31% to Rs. 20.5 Bn (2010/11 - Rs. 15.7 Bn) primarily due to growth in business volumes achieved through the expansion of branches island-wide for the SME and micro lending businesses.

Revenue for the year includes gains made from investment activities. This includes capital gains of Rs. 3.7 Bn from the divestiture of 10% of two subsidiary companies. However, with the negative sentiments in the equity markets during the latter part of the financial year, valuation losses from shares for the Group was Rs. 1.5 Bn.

56 LOLC 2011/12 REPORTS & ACCOUNTS FINANCIAL REVIEW

Net interest cost increased to Rs. 8.5 Bn compared with previous year’s Rs. 6.4 Bn mainly due to higher level of borrowings during the year. Total interest-bearing loans and bank overdrafts increased to Rs. 66.1 Bn from Rs. 50.8 Bn due to the increase in the financial service sector lending portfolio. The total deposit base increased to Rs. 25.2 Bn from Rs. 16.3 Bn.

Direct expenses excluding interest cost reduced by 3% to Rs. 986 Mn mainly due to decrease in VAT on financial services (Rs. 422 Mn from Rs. 650 Mn). Direct expenses also includes claims and benefits paid on insurance contracts amounting to Rs. 51 Mn on accounts of LOLC Insurance Ltd.

The operating expenses, including provisioning for bad and doubtful debts, depreciation, staff cost and marketing expenses increased by 31% to Rs. 10.4 Bn. Staff-related cost increased by 67% to Rs. 3.3 Bn due to growth in number of staff and increase in related expenses. Provision for bad and doubtful debts for the year was Rs. 609 Mn. Additional specific provisions were made by each of the financial services companies, amounting to Rs. 487 Mn, over and above the regulatory provisioning requirement.

The Group strengthened its strategy by further investing into the leisure sector with the acquisition of the controlling interest in Dickwella Resorts (Pvt) Ltd. (Dickwella) and Excel Global Holdings Ltd. recording negative goodwill of Rs. 269 Mn and Rs. 2.6 Bn respectively arising from fair valuing the net assets. The Group’s holding in these companies are 99.9% in Dickwella and 100% in Excel Global Holdings Ltd.

The share of profit from Equity Accounted Investees amounting to Rs. 270 Mn was recognised mainly from PRASAC Microfinance Institution in Cambodia, Agstar Fertilizer (Pvt) Ltd. and Associated Battery Manufactures.

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Lanka Orix Leasing Company PLC (LOLC) While the LOLC Group continued its steady growth as a conglomerate, the Parent Company Lanka ORIX Leasing Company PLC (LOLC) continues its conversion into holding company from a leasing company, and acts as the catalyst in the investment activities of the Group.

Financial services activities, previously performed by LOLC are now carried out by its subsidiary companies Lanka ORIX Finance PLC (LOFC), LOLC Micro Credit Ltd. (LOMC) and Commercial Leasing & Finance Ltd. (CLC). These companies provide the solid base of profitability from financial services to the Group.

In line with LOLC’s strategy to move towards a holding company, no new lending business is booked in the Parent Company, LOLC’s portfolio of leases were transferred to LOFC resulting in a significant reduction in the lending portfolio which fell by 47% to Rs. 5.8 Bn from Rs. 11.0 Bn.

58 LOLC 2011/12 REPORTS & ACCOUNTS FINANCIAL REVIEW

Borrowings increased marginally from Rs. 22.4 Bn to Rs. 23.9 Bn, an increase of 7% over last year, mainly to facilitate investment and branch expansion within the financial services sector. Shareholders’ funds increased by 58% to Rs. 11.7 Bn from Rs 7.4 Bn through profits recorded during the period. As a result, LOLC’s gearing, Debt to Equity Ratio, decreased from 3.0 times to 2.0 times.

LOLC disposed 10% each of its fully-owned subsidiaries LOFC and CLC in compliance with the ruling issued by the Central Bank of Sri Lanka, requiring finance companies to be listed on the Colombo Stock Exchange. As a result, a net disposal gain of Rs. 4.1 Bn was recognised in the Income Statement. The year under review was a challenging year for equity market investments. LOLC recorded marked to market losses of Rs. 745 Mn.

Staff cost reduced to Rs. 268 Mn from Rs. 341 Mn as a result of the business operations getting shifted to the subsidiary companies. Consequently, the operating expenses of the Company reduced by 15% to Rs. 1.7 Bn leading to a profit after tax of Rs. 4.3 Bn after providing Rs. 122 Mn as income taxes.

Financial Services Sector The financial services sector, which is the core business of the Group, contributed 72% to the Group’s Profit Before Tax. The sector continued to grow with expanding demand for credit reinforced by the favourable economic and market conditions prevalent during the early part of the year. However, the lending operations slowed down during the latter part of the year synchronising the credit squeeze in the financial services industry as a result of the lower level of liquidity.

Despite the competitive market environment and challenging economic conditions prevalent in the latter part of the year, LOLC Group’s financial services sector completed another extremely successful year in terms of profitability, financial position and business expansion. Net portfolio (net receivables) grew by 37% to reach Rs. 80.2 Bn from Rs. 58.4 Bn. These levels of growth were achieved through the continuous funding made available from LOLC and its funding partners. The Group was successful in sourcing US$ 39.5 Mn as new funding, which were secured through

LOLC 2011/12 REPORTS & ACCOUNTS 59 FINANCIAL REVIEW

LOLC’s long standing relationships with several foreign multilateral and bilateral funding institutions, towards the expansion of the SME and Micro businesses.

The single largest shareholder in LOLC continues to be ORIX Corporation. Our Japanese founding partner remains a pillar of strength and continued with support, especially in respect of compliance and governance. LOLC is the only financial services company in Sri Lanka to report according to the provision of the Sarbanes-Oxley Act. In the year under review, LOLC received an ORIX Group award recognising its excellent performance among ORIX’s overseas subsidiaries. This is the second consecutive year in which we have won this prestigious award.

LOLC Group’s policy of zero exposure to foreign exchange risks paid well where the Group was not exposed to the devaluation effects of the Rupee. This policy was also mandated by the CBSL on all foreign borrowing of the LOLC Group.

Strategic expansion in the branch network to reach 185 locations island-wide provided the companies ease of access to the target customers in the SME and the Micro sectors. The finance business of the Group grew from strength to strength achieving a deposit base of Rs. 25.2 Bn, an increase of 54% over the previous year’s Rs. 16.3 Bn. This clearly demonstrates the confidence placed by the deposit holders in the stability of LOLC and the respective finance companies.

During the year, LOLC Group, being one of Sri Lanka’s premier financial solution providers, further expanded its service offerings. LOLC Securities Ltd., commenced operations during the year providing broking services at the Colombo Stock Exchange and made Rs. 21 Mn as PBT within the first few months of operations despite the low level of market activity. LOLC Insurance Ltd. expanded its operations offering a wide range of general and life insurance products to the market. The Company in its maiden year of operations made a loss of Rs. 66 Mn before tax as a result of the start-up costs and build-up of insurance reserves. LOLC Motors and Speed Italia complements the financial services business with the provision of state-of-the-art automobile restoration facility to the Group’s fleet operation and to its customers.

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Lanka ORIX Finance PLC (LOFC) LOFC continued to show robust performance during the year subsequent to being positioned as the flagship financial service provider of the Group. The Company underwent many structural changes following LOLC’s decision to become a holding company. Accordingly, LOLC transferred its entire leasing portfolio to LOFC during the year and also extended its full franchise of branches to LOFC. LOFC benefits from the already established infrastructure of LOLC and the branch network strategically covering all parts of the island. During the year, LOFC listed its shares in the Colombo Stock Exchange in line with the Ruling issued by the Central Bank of Sri Lanka to all registered finance companies to be listed.

LOFC concluded an extremely successful year recording an impressive profit after tax of Rs. 1.2 Bn Gross income from operations was Rs. 6.3 Bn, an increase of 37% over the previous year’s income of Rs. 4.6 Bn. Increase in interest income is mainly due to increase in the lending portfolio.

LOFC’s lending portfolio consisting of leases, hire purchases and loans, increased by 59% to Rs. 33 Bn. Growth in loan portfolio was achieved with no compromise on asset quality. LOFC’s net non-performing loan ratio was maintained at a superior level of 0.7% at the end of the year. The Company’s effective collection mechanism and tight credit supervision has resulted in LOFC being able to maintain asset quality at a higher level.

Provision for bad and doubtful debts for the year reduced to Rs. 21 Mn compared with the previous year’s charge of Rs. 156 Mn. Rs. 90 Mn was made as additional specific provisions towards bad and doubtful debts over and above the CBSL required levels.

The increase in the lending portfolio was well complemented by mobilising funding to facilitate the additional disbursements. LOFC’s main funding sources are fixed deposits, savings and bank borrowings. The deposit base of the Company consists of conventional, Islamic, foreign currency fixed and savings deposits. The total deposit base grew from Rs. 17.4 Bn to Rs. 25.0 Bn during the year. Foreign currency deposits grew by 173% to Rs. 1.96 Bn during the year

LOLC 2011/12 REPORTS & ACCOUNTS 61 FINANCIAL REVIEW

from Rs. 719 Mn in the previous year. Borrowings too increased to Rs. 5.9 Bn from Rs. 1.1 Bn during the year. The capital adequacy ratio of the Company was at a healthy 14.4% as at financial year end, well above the regulatory minimum requirement of 10%.

Net finance cost of the Company was Rs. 3.0 Bn, an increase of 69% over the previous year. The increase in borrowing cost is mainly due to the increase in customer deposits interest which increased with the growth of the deposit base as well as in line with the market movements.

The increased level of activity and network expansion led to an increase in operating expenses to Rs. 1.6 Bn, a 16% growth. The resultant Profit Before Tax for the year was Rs. 1.78 Bn and the Company reported a Profit After Tax of Rs. 1.24 Bn after providing for income tax of Rs. 534 Mn.

62 LOLC 2011/12 REPORTS & ACCOUNTS FINANCIAL REVIEW

LOLC Micro Credit Ltd. (LOMC) Completing three years of operation, LOMC has shown substantial progress in its business performance in terms of its outreach, portfolio expansion and profitability. Within a short span of three years LOMC today is considered one of the largest private sector microfinance institutions in Sri Lanka.

LOMC recorded an impressive Profit After Tax of Rs. 658 Mn, an increase of 59% over the previous financial year. The main contributor to the superior performance is the increase in lending portfolio which consists of leases, loans and pawning. Lending portfolio grew by 49% to reach Rs. 12.2 Bn from Rs. 8.2 Bn during the year. LOMC’s strategic focus, strategic presence, and professional approach towards microfinance has been the key factors contributing towards the outstanding performance.

LOMC was extremely successful in managing the net non-performing loan portfolio at a creditable level as the gross NPL ratio was maintained at 0.7% during the year reduced from 1.0% in the previous year. LOMC’s rigorous recovery efforts have been the key to success in managing NPL at a commendable level. The Company made further specific provisions of Rs. 302 Mn over and above the required levels minimum stipulated by the CBSL towards bad and doubtful debts.

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Whilst the lending portfolio grew 49% during the year, borrowings too increased by 24% to Rs. 9.7 Bn to finance the portfolio growth. LOMC has been extremely successful in raising funds through foreign bilateral and multilateral funding institutions which has enabled LOMC to raise long-term funds at very attractive terms. LOMC follows the Group’s zero foreign currency exposure policy on all these foreign funding by entering into currency swaps. Borrowing costs increased by 74% to Rs. 963 Mn from previous year with the increase in borrowings.

During the year, the Debt to Equity ratio improved to 4.0 times from 5.9 times in the previous year. Improvement in debt to equity ratio was due to LOMC’s retained earnings together with the increase in share capital by Rs. 426 Mn by the conversion of debentures held by its shareholders LOLC and FMO.

LOMC’s interest income grew by 73% to Rs. 2.8 Bn from Rs. 1.6 Bn in the previous year achieved by the growth in business volumes in leases and loans. Pawning business which was transferred from LOFC during the previous year contributed 11% to the overall interest income of the Company.

64 LOLC 2011/12 REPORTS & ACCOUNTS FINANCIAL REVIEW

Operating expenses increased to Rs. 1.3 Bn from Rs. 779 Mn during the year as a result of the rapid expansions of the business operations. The Company reported Profit Before Tax of Rs. 818 Mn for the year.

Commercial Leasing and Finance Ltd. (CLC) CLC concluded an extremely successful year with total income increasing to Rs. 7.4 Bn from Rs. 3.6 Bn and a PAT of Rs. 2.9 Bn. CLC achieved remarkable results through strategic expansion in the lending business and professional management of its asset portfolio.

The total assets increased from Rs. 21.4 Bn to Rs. 26.4 Bn, a 23% growth over the previous year due to the increase in lending portfolio consisting of Lease, HP, Loan and Factoring. The lending portfolio grew significantly by 31% to Rs. 24.1 Bn from Rs. 18.4 Bn compared to the previous year as a result of growing business volumes. Managing non-performing loans was of paramount importance and the Company’s strategy of effective collection and bad debt management paid off well, achieving an above industry average non-performing loan ratio. CLC’s gross NPL ratio

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was 2.8%. The Company’s provisions were at a strong level of Rs. 711 Mn with additional Rs. 96 Mn provisions being made on account of bad and doubtful debts, over and above the regulatory provisioning requirement.

During the year, total borrowings increased to Rs. 16.3 Bn from Rs. 15.4 Bn, as a result of growth in business volumes. However, Debt to Equity Ratio of the Company strengthened to 2.5 times from 4.2 times in 2010/11 as a result of enhancing equity position of the Company through operating results.

Interest income grew to Rs. 5.2 Bn for the year from Rs. 3.4 Bn, an increase of 54% with interest on Leases and HP contributing 67% to the total interest income of the Company. Income earned from the factoring business grew to Rs. 795 Mn, an increase of 73% year on year.

Increase in borrowings to fund the additional volume growth together with rising market interest rates have caused an increase in interest expenses for the year to Rs. 2.2 Bn, an increase of 66% over the previous year.

During the year, the Company disposed Diriya Investments to LOLC Investments, a subsidiary company of the Group, which resulted in a capital gain of Rs. 2 Bn to CLC.

Total operating expenses increased by 37% to Rs. 2.1 Bn supporting the branch expansion and increase in business volumes. The Company reported a Profit After Tax of Rs. 2.9 Bn after providing for income tax of Rs. 263 Mn.

During the year, the Company converted itself to a finance company subsequent to its successful application made to the CBSL. The Company was listed in the Colombo Stock Exchange in June 2012, keeping with the CBSL requirements for all finance companies to be listed.

66 LOLC 2011/12 REPORTS & ACCOUNTS FINANCIAL REVIEW

LOLC 2011/12 REPORTS & ACCOUNTS 67 FINANCIAL REVIEW

LOLC Insurance Ltd. (LOLC Insurance) LOLC Insurance Company Ltd. is a fully-owned subsidiary of LOLC. The Company commenced its insurance operations during the year providing Life and Non-Life insurance services.

During the year, LOLC Insurance recorded a gross written premium of Rs. 416 Mn which includes Rs. 365 Mn from non-life insurance and Rs. 51 Mn from life insurance respectively. This level of high income is achieved in the first year of operations as a result of LOLC Insurance’s presence through the Group’s existing branch network. An amount of Rs. 49 Mn was incurred as claims after deducting reinsurance receivable. LOLC Insurance on its first year of operation reported a loss of Rs. 66 Mn before tax.

Leisure LOLC Leisure Ltd. (LOLC Leisure), the holding company of the Group’s leisure sector, acquired 99.9% of Dickwella Resort (Pvt) Ltd. (Dickwella) in December for Rs. 1.1 Bn. Eden Resort & Spa PLC. (Eden) and Dickwella completed an exceptional year with an excellent contribution being made to LOLC Leisure‘s profits. Eden made Rs. 172 Mn as PBT, a 52% growth over last year and Dickwella made Rs. 71 Mn PBT for the year. The remaining three hotels of LOLC Leisure, Palm Garden PLC, Riverina Hotels PLC and Tropical Villas (Pvt) Ltd. were closed for business to undergo refurbishments which is now underway. All furniture and fittings were sold and the buildings have been considered for accelerated depreciation. Due to this, the losses reported from Palm Garden was Rs. 523 Mn, Riverina Rs. 577 Mn and Tropical Villas Rs. 100 Mn.

Trading The Group’s investment into the trading sector is through Brown & Company PLC and its subsidiaries which are primarily engaged in managing its trading business through leading consumer durable brands, motor accessories and industrial equipment.

Total contribution to the Group’s revenue from the trading sector increased by 27% to Rs. 13.1 Bn Cost of sales increased by 41% to Rs. 10.2 Bn. The Profit Before Tax was Rs. 651 Mn.

68 LOLC 2011/12 REPORTS & ACCOUNTS FINANCIAL REVIEW

Renewable Energy LOLC’s strategy of entering into the renewable energy sector is in line with its green initiatives and with this in mind the Group invested into United Dendro through LOLC Eco Solutions Ltd. two years ago. The Company is in the process of setting up the power plant and planting gliricidia, an essential raw material, to generate biomass power. The Group’s joint venture company, Hydro Power Free Lanka, is engaged in generating power through mini-hydros. Total revenue from the sector was Rs. 50 Mn and the loss from operating activities was Rs. 61 Mn with the operations still being at preliminary levels.

Plantations The Group’s investment in the plantation sector mainly consists of Maturata Plantations Ltd., Pussellawa Plantations Ltd., two joint venture companies and associate companies, Agstar Fertilizer PLC and Gal Oya Plantations Ltd.

The Group investment in Agstar Fertilizer PLC further increased to 33% from 20%, during the year. These investments were made through LOLC and Browns Investments.

Total revenue to the Group from the sector was Rs. 3 Bn. With the cost of sales of Rs. 1.3 Bn the Profit Before Tax from the sector was Rs. 222 Mn.

In conclusion LOLC Group concluded yet another successful year with strong top and bottom line growths. Financial services business remains the main profit contributor and will remain LOLC’s key focus going forward as well. LOLC as a conglomerate continues to consolidate its position in the selected growth sectors and is expected to derive steady performance in the coming years.

LOLC 2011/12 REPORTS & ACCOUNTS 69 We are Strengthened by the ORIX Connection

The ORIX Connection An important formative influence featuring in the history of the LOLC Group has been that of ORIX Corporation, a multinational conglomerate of Japanese origin specialising in lease finance, with investments in subsidiaries and partner companies across the world.

About ORIX ORIX Corporation was established in 1964 in Osaka as Orient Leasing Company, a venture in which three trading companies and five banks became capital partners. A pioneer in leasing, ORIX has remained on the leading edge of financial innovation since its inception. Its growth strategy, based on strategic and geographical expansion, exhibits a boldness and scope that sets it apart from other large Japanese financial services firms. In 1989, it changed its name to ORIX Corporation in order to reflect its increasingly international profile and mark a move beyond leasing into other financial services. ORIX Corporation is listed on the Tokyo and New York Stock Exchanges.

Today, ORIX enjoys a diversity of revenue streams from operating and financing leases, low margin business, auto and equipment leasing, insurance, corporate rehabilitation, loan servicing, real-estate and other specialised finance, investment and retail banking and value added services. It provides innovative, value added financial products and services to SMEs through a global network spanning 27 countries and regions worldwide. The Group is made up of 811 consolidated subsidiaries and 108 affiliates, with a total of 1,114 offices in Japan and another 270 locations in the United States, Asia, Oceania, Europe, the Middle East and Africa.

LOLC is regarded as one of the most successful ventures under the ORIX aegis, winning internal awards for ‘outstanding performance among ORIX companies’ and ‘excellent performance in the overseas operations category’ in the year under review.

Today, after more than 3 years since its establishment, we believe that LOLC is recognised as a unique company in the world of conglomerates. In view of the global emergence of huge financial services conglomerates and mega financial institutes, strong corporate governance systems are other important factors help which sustain growth in shareholder value. ORIX Corporation maintains a 30% stake in LOLC. Its involvement is further continued by its nominating two Directors to the LOLC Board. These nominees are senior, ORIX executives.

70 LOLC 2011/12 REPORTS & ACCOUNTS The ORIX Connection

The persistent development of new businesses and the pursuit of excellence is what we can expect LOLC to be maintaining in their management philosophy. We at ORIX have seen this at LOLC which keeps them one step ahead of the competition, by constantly seizing new business opportunities.

Notwithstanding a sluggish world economy, ORIX Corporation surpassed its targets for the financial year ended March 2011. The Group continued to focus on its dual management strategy and the realisation of stable operations and steady growth, through enhanced financial stability and comprehensive risk management.

Global ORIX Network

LOLC 2011/12 REPORTS & ACCOUNTS 71 We have Strong Relationships with Multiple Globally-Renowned Funding Partners global FUNDING PARTNERS

Institution Type of Facility Purpose of Funding Value Addition

Organisation of the Long-term US$ Loan SME sector financing and Petroleum Exporting development Countries Fund for International Development (OPEC)

The Netherlands Long-term US$ Loan/ SME and Microfinance sector Environmental policy; Development Finance Equity Tier I & II and financing and development Anti-Money Laundering Company (FMO) - debt capital for the policy Netherland microfinance company

French Development Long-term US$ Loan Tsunami-affected SME sector Environmental policy; Agency Group financing, SME sector financing Anti-Money Laundering (PROPARCO) - France and development policy

Deutsche Investitionsund Long-term US$ Loan SME sector financing and Environmental policy; Entwicklungsgesellschaft development Anti-Money Laundering mbH (DEG) - Germany policy, Liquidity risk management technology

Belgium Investment Long-term US$ Loan SME sector financing and Environmental policy; Organisation (BIO) - development Anti-Money Laundering Belgium policy

Overseas Private Risk Sharing Facility SME sector financing and Environmental policy; Investment Corporation with Citi Bank, Colombo development Anti-Money Laundering (OPIC) policy

United States Agency Portable Guarantee Microfinance sector development Environmental policy; for International Scheme in Eastern and Uva Provinces Anti-Money Laundering Development (USAID) - USA

Finish Development Long-term US$ Loan SME sector financing and Environmental policy; Finance Company development Anti-Money Laundering (FINNFUND) - Finland policy

72 LOLC 2011/12 REPORTS & ACCOUNTS global FUNDING PARTNERS

Institution Type of Facility Purpose of Funding Value Addition

European Investment Long-term Rupee/Euro Tsunami-affected SME sector Environmental policy; Bank (EIB) Refinancing Scheme development and support in tourism Anti-Money Laundering sector policy

The World Bank Long-term Refinancing Refinancing of rural sector Environmental policy; Rupee Loan renewable energy development Anti-Money Laundering policy

Japan Bank for Long-term Rupee Loan/ Environmental protection/ Environmental policy; International Refinancing Scheme mitigate & eliminate industrial Anti-Money Laundering Corporation (JBIC) - pollution and waste/energy policy Japan saving, recycling & resource recovery in industries

Asian Development Bank Long-term Rupee Loan/ SME sector financing and Environmental policy; (ADB) Refinancing Scheme development/Tea smallholders Anti-Money Laundering income improvement and policy development. Development of the plantation sector in enhancing profitability. Improve the living and working conditions of the workforce

Export Development Long-term US$ Loan SME Sector financing & Corporation (EDC) - Development with Canadian Canada imports

Nippon Export and Long-term US$ Loan SME sector financing and Investment Insurance development (NEXI) - Japan

ING Bank - Japan

Citi - Japan Citi Bank and ING Bank Tokyo being the lenders and Nexi as the guarantor

Deutsche Gesellschaft Technical assistance Development of Microfinance Promotion of für Technische for Microfinance Sectors Microfinance sector Zusammenarbeit (GTZ) - Germany

LOLC 2011/12 REPORTS & ACCOUNTS 73 global FUNDING PARTNERS

Institution Type of Facility Purpose of Funding Value Addition

Triple Jump - Long-term EURO Loan Microfinance sector development Netherlands

Triodos Bank - Long-term EURO Loan Microfinance sector development Netherlands

Symbiotics - Switzerland Long-term US $ Loan Microfinance sector development

ResponsAbility - Long-term US$ Loan Microfinance sector development Luxembourg

Minlam Microfinance Long-term US$ Loan Microfinance sector development Fund - New York

International Finance Technical Assistance Development of Institutional capacity Corporation Microfinance sector development

Blue Orchard - Long-term US$ Loan Microfinance sector development Switzerland

Developing World Long-term US$ Loan Microfinance sector development Markets - USA

Norwegian Microfinance Long-term US$ Loan Microfinance sector development Initiative (NMI) - Norway

Bank IM Bistum Essen Long-term US$ Loan Microfinance sector development e.G. - Germany

Treetops Capital (Gawa Long-term US$ Loan Microfinance sector development Microfinance Fund 1) - Luxembourg

74 LOLC 2011/12 REPORTS & ACCOUNTS Accounts Board of Directors

  

Mrs. R.L. Nanayakkara Mr. I.C. Nanayakkara Mr. W.D.K. Jayawardena Chairperson Deputy Chairman Group Managing Director/CEO

Mrs. K.U. Amarasinghe Mr. R.N. Asirwatham Mr. H. Ichida Executive Director Independent Director Non-Executive Director

76 LOLC 2011/12 REPORTS & ACCOUNTS Board of Directors

  

Deshamanya M.D.D. Pieris Mr. R.A. Fernando Mr. R.M. Nanayakkara Independent Director Independent Director Non-Executive Director

Mr. M. Kawano Miss C.S. Emmanuel Non-Executive Director Company Secretary

LOLC 2011/12 REPORTS & ACCOUNTS 77 Board of Directors

Mrs. R. L. Nanayakkara Mrs. Rohini Nanayakkara was appointed to the Board of Directors of the Company as an Independent Non-Executive Director in August 2004 and assumed duties as Chairperson of LOLC and its subsidiaries. She holds a second Class BA Honours Degree from the University of Peradeniya, Sri Lanka. She also holds a Diploma in French from the Chamber of Commerce, Brussels. She is a Fellow of the Institute of Management and the Institute of Bankers, Sri Lanka. She was also a Past President of the Sri Lanka Banks Association, Association of Professional Bankers, a member of the Commission of the University of Colombo, Sri Lanka and of the Task Force setup by the Government for tsunami reconstruction.

She was the first woman executive to join a Commercial Bank, namely Bank of Ceylon, with the rare distinction of becoming the first woman General Manager/CEO of a Bank in Sri Lanka and the Asian Region.

She was also Chairperson/Director of several financial institutions such as the National Development Bank, DFCC Bank, Merchant Bank of Sri Lanka and the First Capital Group of Companies. She has served as Director/General Manager/ CEO of one of the largest private banks namely, Seylan Bank PLC.

She is presently the President of United Nations Association of Sri Lanka and also the Chairperson of the Browns Group of Companies, NDB Venture Investments (Pvt) Ltd., Ayojana Fund (Pvt) Ltd. and Taprobane Investment Group of Companies. She is also a Director of Overseas Realty (Ceylon) PLC, Mireka Homes (Pvt) Ltd., Trans Asia Hotels PLC and Eastern Merchants PLC.

Mr. I.C. Nanayakkara Mr. Ishara Nanayakkara is an astute businessman who holds directorial positions in many corporates and conglomerates in Sri Lanka.

He ventured into the arena of financial services with the strategic investment in Lanka ORIX Leasing Company PLC and was appointed to the Board in 2002. Today, as Deputy Chairman of LOLC Group, he straddles a conglomerate that encompasses financial services, agriculture and plantation, leisure, renewable energy, construction, manufacturing and trading.

Mr. Nanayakkara has extensive exposure in both banking and non-banking financial services sector through his involvement in Lanka ORIX Finance PLC, Commercial Leasing & Finance Ltd., and Seylan Bank PLC.

His interest in Microfinance is evident through his recurrent contribution to PRASAC - the largest microfinance company in Cambodia and in his own initiative, LOLC Micro Credit Ltd. - the only regulated private sector microfinance institution with foreign equity in Sri Lanka.

78 LOLC 2011/12 REPORTS & ACCOUNTS Board of Directors

His passion for renewable energy is reflected through the green portfolio of the LOLC Group - comprising hydro power, solar power, agri waste and biomass - a promising source of alternate energy. The green investments of the LOLC Group companies are poised to offer their share to the environment.

Mr. Nanayakkara is also conversant in sustainable forestry and plantation through Group companies - Maturata, Pussellawa and Gal Oya Plantations. The addition of Agstar Fertilizers Ltd., a leading agri input provider in the country, has further enhanced the Group’s contribution to the agriculture and plantation sectors.

The participation in Sierra Constructions Pvt Ltd., one of the largest construction companies in the country is timely, considering the contribution of the construction sector to the post-war development.

Mr. Nanayakkara is focused on the immense opportunities presented by the leisure sector. With the recent acquisitions of some of the leading hotels in the Southern coast alongside key properties in the North and East, development plans are underway for the leisure subsidiaries of LOLC Group - Eden Hotel Lanka PLC, Riverina Hotel PLC, Palm Garden Hotels PLC, Tropical Villas (Pvt) Ltd. and Dickwella Resorts (Pvt) Ltd.

He is also involved at strategic level in Browns Group of Companies, a conglomerate with leading market position in trade, leisure, manufacturing, consumer appliances and agriculture equipment.

He holds a Diploma in Business Accounting from Australia.

Mr. Nanayakkara’s involvement in multifaceted business fields is a fine proof of his perpetual interest on the growth sectors of the Sri Lankan economy.

Mr. W.D.K. Jayawardena Mr. Kapila Jayawardena was appointed as the Group Managing Director/CEO of LOLC in June 2007. He holds an MBA in Financial Management; is an Associate of the Institute of Cost and Executive Accountants and was awarded Fellowship of the Institute of Bankers of Sri Lanka (IBSL) in 2006.

He has varied experience in the fields of Banking, Audit, Relationship Management, Corporate Finance, Corporate Banking, Investment Banking and Treasury Management. Mr. Jayawardena was appointed as the Chairman of the Sri Lanka Banks’ Association (SLBA) in 2003/04 and served as President of the American Chamber of Commerce in Sri Lanka in 2006/07. He served as a Director of Lanka Clear, National Institute of Business Management (NIBM) and The Institute of Bankers of Sri Lanka (IBSL).

LOLC 2011/12 REPORTS & ACCOUNTS 79 Board of Directors

Mr. Jayawardena was appointed to the Financial Sector Reforms Committee (FSRC) by the Prime Minister and was a member of the Finance Sector and Capital Markets Cluster of the National Council of Economic Development (NCED). He was a key member of the inaugural sovereign rating team and sovereign debt for Sri Lanka appointed by the Governor of the Central Bank. He was presented with the prestigious Combined Support Group Award by the US Navy for services rendered after the tsunami in 2005. The Government of Sri Lanka appointed him to the Board of the Sri Lanka Fulbright Commission in 2010.

Mr. Jayawardene was appointed to the Council of the National Chamber of Commerce of Sri Lanka on 27 January 2011.

Mr. Jayawardena has over 27 years experience in all areas of banking, out of which 9 years was in the capacity of CEO/ Country Head Citibank Sri Lanka and the Maldives. He was the first Sri Lankan to be appointed as a Senior Credit Officer (SCO) by Citibank in Sri Lanka. During his leadership, Citibank Sri Lanka was rated AAA by Fitch Ratings in Sri Lanka. Citibank Sri Lanka was the first foreign Bank to obtain an AAA rating.

Mr. Jayawardena is the Chairman of Lanka ORIX Finance PLC, LOLC Insurance Ltd., LOLC General Insurance Ltd., LOLC Life Insurance Ltd., LOLC Leisure Ltd., LOLC Motors Ltd., LOLC Securities Ltd., Speed Italia (Pvt) Ltd., United Dendro Energy (Pvt) Ltd., Palm Garden Hotels PLC, Riverina Hotel PLC, Tropical Villas (Pvt) Ltd., Eden Hotel Lanka PLC and Dickwella Resorts (Pvt) Ltd.

He is also on the Boards of LOLC Micro Credit Ltd. and Commercial Leasing & Finance Ltd., which are subsidiaries of the LOLC Group. Mr Jayawardena is also a Director of HDFC Bank.

Deshamanya M.D.D. Pieris Deshamanya Dharmasiri Pieris is a Graduate of the University of Ceylon (Peradeniya); Fellow of the Chartered Management Institute, UK and has been conferred the Degree of Doctor of Letters (Honoris Causa) by the University of Colombo and the title of Honorary Senior Fellow by the Postgraduate Institute of Medicine.

Deshamanya Pieris is an illustrious retired civil servant, who in the course of his distinguished career in the public service has held several important posts, including that of Secretary to the Prime Minister; Secretary, Ministry of Public Administration, Provincial Councils and Home Affairs; Secretary, Ministry of Agriculture, Food and Co-operatives; Secretary, Ministry of Education and Higher Education and Chairman and Director General of Broadcasting.

He has also acted on several occasions in addition to his duties, in the posts of Secretary to the Ministry of Defence and External Affairs and Secretary to the Ministry of Trade and Shipping.

80 LOLC 2011/12 REPORTS & ACCOUNTS Board of Directors

He has at various times been the Chairman of the National Institute of Education; Chairman - Board of Management of the Sri Lanka Institute of Development Administration and Chairman of the Agrarian Research and Training Institute.

He has also served on the Governing Councils or Boards of Management of several Universities and Postgraduate Institutes.

He has been a Director of the People’s Bank, the People’s Merchant Bank and a member of the Rural Credit Advisory Committee of the Central Bank.

He has served as a member of the National Salaries Commission and as a member of the Presidential Commission on Finance and Banking.

Within the LOLC Group, he has also served as Director on the Board of Lanka ORIX Finance PLC as well as some subsidiaries of the LOLC Group. He also serves on the Risk Management Committee, Audit Committee and the Remuneration Committee, whilst Chairing the Corporate Governance Committee and the Nomination Committee.

Currently, he also serves as Deputy Chairman - Mercantile Merchant Bank Ltd. and as a member of the Board of MMBL Logistics (Pvt) Ltd., MMBL Money Transfer (Pvt) Ltd., Mountain Hawk Express (Pvt) Ltd. and Pathfinder Holdings (Pvt) Ltd.

Deshamanya Pieris also serves on the Boards of a few Postgraduate Institutes of Universities and is the Chairman Pro-tem of the S.W.R.D. Bandaranaike National Memorial Foundation responsible for the management of the B.M.I.C.H./ B.C.I.S. Complex. He is also currently a member of the Board of the Sri Lanka Foundation Institute and the Senior Advisor to the Governing Board of the Regional Centre for Strategic Studies.

Mr. R.A. Fernando Mr. Ravi Fernando is a MBA from the University of Colombo and is a Fellow of the Chartered Institute of Marketing (UK). He holds a Diploma in International Management and completed the Advanced Management Programme at the INSEAD Business School in France. He is an Alumni of the University of Cambridge Programme for Sustainable Leadership having completed the Climate Leadership Programme in 2007 and the Postgraduate Certificate in Sustainable Business at Cambridge University in 2008 with Distinction. Currently, reading for a Master’s in Sustainable Leadership at Cambridge University at Wolfson College.

He is Operations Director - Malaysian Blue Ocean Strategy Institute since December 2011.

He was the United Nations Global Compact Focal Point for Sri Lanka. He is on the Board of Governors UNOPS - ARU and on the Boards of Environmental Foundation, Ceylon Asset Management Ltd.

LOLC 2011/12 REPORTS & ACCOUNTS 81 Board of Directors

His career with Multinationals - Unilever, Sterling Health International, SmithKline Beecham International and Reckitt Benckiser covered Africa, Middle East and Asia in CEO/Marketing Management positions. He was the founder CEO SLINTEC (Sri Lanka Institute of Nanotechnology) in 2008-2010.

In Academia, he was a faculty member of the INSEAD Advanced Management Programme from 2005-2010 and an Executive in Residence at the INSEAD Social Innovation Centre from September 2010. He is also a visiting faculty member at the Deusto Business School in Spain and the University of Colombo MBA Programmes. In September 2007, he won a ‘Global Strategy Leadership Award’ at the World Strategy Summit for his work on Ethical Branding for the Sri Lankan Apparel and Tea sectors. mr. R.M. Nanayakkara Mr. Rajah Nanayakkara is the Founder and Executive Chairman of Ishara Traders (Pvt) Ltd., a business which pioneered the import and sale of new and reconditioned motor vehicles. Thirty years later, this organisation remains an industry leader. He was also the Founder Chairman of the Motor Vehicle Importers’ Association of Sri Lanka, and continues to play a significant role.

Mr. Nanayakkara is also the Chairman of Ishara Plantations (Pvt) Ltd. an Award Winning Estate of Tea and Spices - and Chairman of Ishara Property Development, a company which has been involved in construction for the past 18 years.

Mrs. K.U. Amarasinghe Mrs. Kalsha Amarasinghe holds an Honours Degree in Economics. She serves on the Boards of many of the LOLC Group Companies including the Commercial Leasing Group.

Mr. R.N. Asirwatham Mr. Rajan Asirwatham is a Fellow of The Institute of Chartered Accountants of Sri Lanka.

He has gained experience as Chairman of the Financial Services Stability Committee at the Central Bank of Sri Lanka. He was a member of the Presidential Commission on Taxation appointed by His Excellency the President.

He joined the Board of Directors of the Company on 26 August 2009. He also served as a Director of Lanka ORIX Finance PLC, a subsidiary of the LOLC Group.

82 LOLC 2011/12 REPORTS & ACCOUNTS Board of Directors

Mr. H. Ichida Mr. Hideo Ichida joined ORIX in 1982. He became the General Manager of the Aircraft Group in the Investment Banking Headquarters in October 2004. After being appointed the Deputy Head of the Alternative Investment and Development Headquarters in July 2007, Mr. Ichida was promoted to Deputy Head of the Global Business and Alternative Investment Headquarters in January 2009.

In January 2010, he was made an Executive Officer and was appointed Head of Global Business and Alternative Investment Headquarters in January 2011. In February 2012, he was appointed the Head of Global Business Administrative Headquarters.

Mr. M. Kawano Mr. Masaaki Kawano joined ORIX in 1982. He became the Managing Director of ORIX Aviation Systems Ltd., a 100% subsidiary of ORIX, which specialises in aircraft leasing and management services, in August 2000. After being appointed the Senior Vice-President of Project Development and Investment Group of ORIX in August 2005, he became the Deputy Managing Director and Chief Financial Officer of ORIX Leasing Malaysia Berhad in September 2009.

In October 2011, he was made the Managing Director of International Business Group. In February 2012, he was appointed the Acting Head of Global Business and Investment Headquarters.

Miss C.S. Emmanuel Miss Chrishanthi Emmanuel is a Fellow of the Institute of Chartered Secretaries and Administrators - UK and a Fellow of the Institute of Chartered Corporate Secretaries (Sri Lanka). She is Company Secretary of several companies within the LOLC Group. She is also Secretary of the Leasing Association of Sri Lanka.

LOLC 2011/12 REPORTS & ACCOUNTS 83 Corporate Management Team

  

Brindley De Zylva Anura L. Dharmaprema Conrad Dias Managing Director/Chief Executive Officer - Corporate Executive Officer - Managing Director/Chief Executive Officer - Lanka ORIX Finance PLC Recoveries - LOLC Lanka ORIX Information Technologies Ltd., Chief Information Officer - LOLC Group Solomon Jesudason Jayantha Kelegama Chief Officer - Chief Credit Officer - Marketing Operations - LOLC LOLC Sunjeevani Kotakadeniya Chief Financial Officer - LOLC Group Rohan Perera Krishan Thilakaratne Group Treasurer Director/Chief Executive Officer - Commercial Leasing and Finance Ltd., Ravi Tissera Chief Executive Officer - Director/Chief Executive Officer - Islamic Business Unit and Valuation Unit LOLC Micro Credit Ltd.

84 LOLC 2011/12 REPORTS & ACCOUNTS Corporate Management Team

  

Dharini Fernando Kithsiri Gunawardena Gunendra Jayasena Chief Operating Officer - Chief Operating Officer - General Manager - LOLC Insurance Co. Ltd. LOLC, LOLC Ventures Ltd., Chief Legal Officer - Chief Administration Officer - Graham Lawrence LOLC Group LOLC Group

Chief Executive Officer - LOLC Factors Ltd., Jacqueline Lord Ashan Nissanka Chief Officer - Chief Human Resources Officer - Chief Officer - Metropolitan Branch Network - LOLC LOLC Group Branch Network - LOLC

Sharmini Wickremasekera Sriyan Gurusinghe Chief Risk Officer - Managing Director/Chief Executive Officer - LOLC Group LOLC Securities Ltd.

LOLC 2011/12 REPORTS & ACCOUNTS 85 Corporate Management Team

Brindley de Zylva Managing Director/Chief Executive Officer - Lanka ORIX Finance PLC

Joined in 2003. Counts over 28 years experience in the Non-Banking Financial Services Sector. Currently, serves the Industry as a Director of the Finance Houses Association of Sri Lanka, The Financial Ombudsman Sri Lanka (Guarantee) Ltd. and a Council Member of the Sri Lanka Institute of Credit Management.

Anura L. Dharmaprema Corporate Executive Officer - Recoveries - LOLC

Joined in 1998. Counts over 23 years of experience in Recoveries in the Financial Services Industry. Previously a Senior Collections Manager of a leading finance company. Anura has been appointed as a Director of LOLC Services Ltd.

Conrad Dias FCMA (UK), CGMA, MBCS (UK), MBA (University of Leicester) Managing Director/Chief Executive Officer - Lanka ORIX Information Technologies Ltd., Chief Information Officer - LOLC Group

Joined in 2006. Counts over 21 years of experience in Information Technology, Software Engineering, Project Management, Strategic and Investment Planning, Finance Management, Corporate Restructuring and Unit Trust& Fund Management. Possesses domain expertise in sectors such as Trading, Banking and Finance, Asset Management and Manufacturing.

Dharini Fernando Chartered Insurer, Associate of the Chartered Insurance Institute of London (ACII) Chief Operating Officer - LOLC Insurance Co. Ltd.

Joined in December 2010. Counts 19 years of experience in both General and Life Insurance. Has work experience with a number of leading multinational insurance companies in varying roles at senior management level. Wide exposure and experience in Managing Reinsurance, Property, General Accident and Casualty Lines of Business, Life Assurance and has been closely involved in the implementation of insurance systems in multinational companies.

Kithsiri Gunawardena Attorney-at-Law, Postgraduate Diploma in Marketing Management (PIM, Sri. J.) Chief Operating Officer - LOLC, Chief Legal Officer - LOLC Group

Joined in 2004. Counts over 22 years of experience as a Lawyer. Held a number of important positions in the State, including the office of State Counsel attached to the Attorney General’s Department, the Office of Director - Legal of the Securities and Exchange Commission of Sri Lanka and the Insurance Board of Sri Lanka and was involved in setting up the Consumer Affairs Authority as its first Director General. Kithsiri holds directorship in number of LOLC Group Companies.

86 LOLC 2011/12 REPORTS & ACCOUNTS Corporate Management Team

Gunendra Jayasena General Manager - LOLC Ventures Ltd., Chief Administration Officer - LOLC Group

Joined in 2007. Counts over 19 years of experience in Manufacturing, Human Resource Management, Administration, Renewable Energy and Plantation Management. Gunendra has been appointed as a Director in 3 subsidiaries within the LOLC Group.

Solomon Jesudason Chief Officer - Marketing Operations - LOLC

Joined in 1988. Counts over 24 years of experience in the Leasing Industry in Finance and Marketing Operations. Currently responsible for the Customer Servicing Operations, which includes Application Processing for Finance Leases, Hire Purchases, Loans, LC Facilities, Insurance, Savings, FD Operations, RMV Operations, Working Capital and Microfinance.

Jayantha Kelegama BA (Hons.) - University of Delhi Chief Credit Officer - LOLC

Joined in 2005. Counts over 17 years of experience in Leasing, Asset Financing, Credit Risk Management and Banking. Jayantha has been appointed as a Director of 4 subsidiaries within the LOLC Group.

Sunjeevani Kotakadeniya FCMA (UK), MBA (Col.) Chief Financial Officer - LOLC Group

Joined in 2005 and counts over 24 years of experience in Financial Management and General Management including Financial Accounting, Strategic Planning, Insurance, Fund Management and Administration, IT Management, Treasury Management, New Business Set-up, Process Re-engineering, Change Management, ERP Implementation and Project Management.

Graham Lawrence Chief Executive Officer - LOLC Factors Ltd., Chief Officer - Metropolitan Branch Network - LOLC

Joined in 1992. Counts over 24 years of experience in the Financial Services Sector. Began his career as a Banker and has evolved to general management having covered Marketing, Credit and Recovery of Diverse Financial Products, including Leasing and Factoring.

LOLC 2011/12 REPORTS & ACCOUNTS 87 Corporate Management Team

Jacqueline Lord Chief Human Resources Officer - LOLC Group

Joined in 2006. Counts 21 years of experience in HR in diverse business sectors entailing the development and execution of human resource strategies, HR business plans and budgeting, setting up of HR systems for new business ventures whilst engaging in the implementation of strategic initiatives including restructuring automation of HR processes, etc. External to the Human Resource field, she has gained expertise in the field of Administration/ Infrastructure Management.

Ashan Nissanka DipM CIM (UK), Practicing Marketer (SL), MSLIM, MBA Chief Officer - Branch Network - LOLC

Joined in 1998. Counts over 20 years of experience in Marketing, Credit, Branch Management, Channel Development/ Management and General Management in the Banking and Finance Sectors.

Rohan Perera MBA, Edith University of Perth, Australia Group Treasurer

Joined in 2007. Counts over 26 years of experience concentrated on Banking and Corporate Treasuries with expertise in Treasury Management including Strategic Risk Management and Cash Management. Competent in operational management with capacity in handling financing of high value projects. Starting his career as a Banker and particularly in its Treasuries; from thereon moved to Corporate Treasuries. Pioneered the concept of Corporate Treasuries in Sri Lanka. Involved in setting up of the Corporate Treasurers’ Association as its Founder President.

Krishan Thilakaratne AIB (SL) Director/Chief Executive Officer - Commercial Leasing & Finance Ltd., Chief Executive Officer - Islamic Business Unit of LOFC and Valuation Unit

Joined in 1995. Counts over 22 years of experience in Banking and Financial Institutions with expertise in Credit, Marketing, Factoring, Leasing and Channel Management. Conceptualised and introduced Islamic Finance to LOLC in 2007.

88 LOLC 2011/12 REPORTS & ACCOUNTS Corporate Management Team

Ravi Tissera Chartered Institute of Marketing - UK Director/Chief Executive Officer - LOLC Micro Credit Ltd.

Joined in 1993. Has gained experience in SME Banking, Leasing and Microfinance Sectors. Has 20 years experience in the field of Development Finance. A Development Finance Specialist. Instrumental in conceptualising and introducing microfinance to LOLC.

Sharmini Wickremasekera CISA, CRISC Chief Risk Officer - LOLC Group

Joined in 1983. Counts over 29 years of experience in Finance, Accounting, Credit, Internal Auditing, Information Systems, Auditing and Governance, Enterprise-wide Risk Management, Business Continuity Management and Business Process Re-engineering. Member and a Past President of ISACA Sri Lanka Chapter.

Sriyan Gurusinghe ICMQ (UK) Managing Director/Chief Executive Officer - LOLC Securities Ltd.

Joined in 2011. Counts over 19 years of experience in stock broking. Previously Director/General Manager at Ceylinco Stock Brokers for 14 years. Currently serves the industry as the President to Colombo Stock Brokers‘ Association.

LOLC 2011/12 REPORTS & ACCOUNTS 89 Operational Management Team

  

Susaan Bandara Gayani de Silva Chrishanthi Emmanuel Head of Marcom - Head of SME Development Finance BU & CRM - Company Secretary LOLC Group LOLC

Mallika Abeykoon Deepamalie Abhayawardane Jude Anthony AGM - Finance Operations - AGM - Client Management - AGM - Branch Network - LOLC LOLC Factors/CLC Factors CLC

Saliya Dias Heshan Ferdinand Yanik Fernando AGM - Life (Technical and Operations) - AGM - General (Technical and Operations) - AGM - Eastern and Uva Regions - LOIC LOIC LOLC

90 LOLC 2011/12 REPORTS & ACCOUNTS Operational Management Team

  

Jithendra Gunatilake Chandana Jayanath Rohana Kumara DGM - Finance Operations - DGM - Recoveries - DGM - Micro Finance - LOLC LOLC LOMC

Rohana Chandrasiri Isaac Devshanker Jayantha Dharmapriya AGM - Branches - AGM - Metro Region - AGM - Legal - LOLC Securities LOLC LOLC

Enoka Jayampathy Nishanthi Kariyawasam Mehra Mendis AGM- Finance Corporate - AGM - Finance Corporate - AGM - Fleet Management - LOLC LOLC LOLC

LOLC 2011/12 REPORTS & ACCOUNTS 91 Operational Management Team

  

Manish Rodrigo Shantha Rodrigo Bahirathan Shanmugalingam AGM - Sales - AGM - Central Region - AGM - Finance Operations - LOLC Securities LOLC LOLC

Preethimali Soosaithasan Sujeewa Vidanapathirana Montini Warnakula AGM - Client Management - AGM - Sales (General Insurance) - AGM - Western II and North-Western Regions - LOLC Factors LOIC LOLC

Nihal Weerapana Roshani Weerasekara AGM - Legal and Recoveries - AGM - Marketing Savings and Deposits - CLC LOFC

92 LOLC 2011/12 REPORTS & ACCOUNTS Operational Management Team

LOLC Leisure Ltd.

  

Ajit Jayemanne Tilak S. Selviah Eksath Wijeratne Consultant/Director - Projects Consultant/General Manager - General Manager - LOLC Leisure LOLC Leisure Eden Resort & Spa

Mirza Borham Jayantha De Silva Cyril Fernando Manager - Head of Sales and Marketing Manager - Dickwella Resort & Spa Tropical Villas

United Dendro Energy (Pvt) Ltd.

Haresh Karunanayake Suresh Navaratnam Managing Director Deputy General Manager - Plantations

LOLC 2011/12 REPORTS & ACCOUNTS 93 Annual Report of the Board of Directors on the Affairs of the Company

The Directors take pleasure in presenting this report, together with the Audited Financial Statements and connected Reports for the year ended 31 March 2012.

Principal Activities As we explained in our Report last year, LOLC, having discussed the issue with the Central Bank of Sri Lanka, relinquished its leasing license to function primarily as the holding company of the LOLC Group. LOLC’s focus is now on identifying investment opportunities, monitoring and managing the performance of its investments, and provision of centralised shared services.

Financial services are mainly provided by our subsidiaries, and include conventional and Islamic products, (both lending and savings products) microfinance, factoring, pawning, margin trading financing, insurance and trading in equity and debt securities.

As a related diversification to these core financial products and services, the Group has a subsidiary providing information technology services and also a vehicle garage facility.

Diversifications into identified growth areas have resulted in investments in hotels and construction as well.

The Statements of the Chairperson, Deputy Chairman and Group Managing Director/CEO (found on pages 4, 8 and 16 respectively), read together with the Business Review and Financial Review found on pages 24 and 56 will provide a comprehensive review of performance for the year under review and plans for the future.

Directorate The Directors’ Profiles are given on pages 78 to 83. In terms of Article 88 (i) of the Articles of Association of the Company, Mr. R.A. Fernando retires by rotation and seeks re-election. The Board of Directors recommends his re-election. In terms of Article 95 of the Articles of Association of the Company, Mr. M. Kawano retires by rotation and seeks re-election. The Board of Directors recommends his re-election.

The Company has received notices from shareholders of their intention in terms of Section 210 of the Companies Act No. 07 of 2007 to propose the re-elections of Mrs. R.L. Nanayakkara, Deshamanya M.D.D. Pieris and Mr. R.M. Nanayakkara, all of whom are over 70 years of age. The Board of Directors recommends their re-election.

The aggregate remuneration paid to the Directors, is disclosed on page 149.

The other boards on which the Directors serve are listed on pages 96 to 101.

94 LOLC 2011/12 REPORTS & ACCOUNTS Annual Report of the Board of Directors on the Affairs of the Company

Auditors The Auditors, Ernst & Young retire and offer themselves for reappointment. The Board recommends that they be reappointed Auditors for the year 2012/13, at a fee to be decided upon by the Board. The fees paid to the Auditors are disclosed in the Notes to the Financial Statements on page 149.

As far as the Directors are aware, the Auditors do not have any other relationship with the Company or any of its subsidiaries nor do they have any interest in contracts with the Company or any of its subsidiaries.

The Auditors’ Report appears on page 119.

Going Concern The Directors believe that the Company is in a position to continue its operations in the foreseeable future. Accordingly, the Financial Statements are prepared on the basis that the Company is a going concern.

Compliance with Laws and Regulations The Company is compliant with the Listing Rules of the Colombo Stock Exchange and the Companies Act No. 07 of 2007.

Donations During the year under review, the Company made donations amounting to Rs. 1.77 Mn (2011 - Rs. 1.5 Mn). This included a donation of Rs. 1.7 Mn for flood relief in the North and the East.

Events Occurring after the Balance Sheet date Mr. R.N. Asirwatham stepped down as Director, citing a conflict of interest between the Company and an entity on which he serves as Trustee. The Board places on record its appreciation of Mr. Asirwatham’s contribution to the growth of the Company and the Group.

The last year has been a year of transition to the new structure and seen the listing of two subsidiaries. Consequently, LOLC is poised to usher its subsidiaries into a new phase, confident that each Group company will be able to achieve success and enhance shareholder wealth.

On behalf of the Board of Directors,

Rohini Nanayakkara Chairperson

Kapila Jayawardena Group Managing Director/CEO

LOLC 2011/12 REPORTS & ACCOUNTS 95 Directors’ Declarations

Name Other Directorships held

Mrs. R.L. Nanayakkara Chairperson: Lanka ORIX Leasing Company PLC Lanka ORIX Project Development Ltd. LOLC Micro Credit Ltd. Brown & Company PLC Browns Group Industries Ltd. Browns Group Motels Ltd. Browns Tours (Pvt) Ltd. B.G. Air Services (Pvt) Ltd. C.F.T Engineering Ltd. Engineering Services Ltd. The Hatton Transport and Agency Company Ltd. I.G Browns Rubber Industries Ltd. Masons Mixture Ltd. Mutugala Estates Ltd. Pathregalla Estates Ltd. Standard Finance (Pvt) Ltd. NDB Venture Investments (Pvt) Ltd. Ayojana Fund (Pvt) Ltd. Taprobane Fund Management Ltd. Taprobane Holdings Taprobane Investment (Pvt) Ltd. Taprobane Plantation Ltd. Hydro Power Free Lanka (Pvt) Ltd. AgriSil Holdings Ltd. Browns Termal Engineering (Pvt) Ltd. Browns Healthcare (Pvt) Ltd. Browns Real Estates (Pvt) Ltd. Browns Capital (Pvt) Ltd. Samudra Beach Resort (Pvt) Ltd. Taprobane Securities (Pvt) Ltd. Browns Industrial Park (Pvt) Ltd. ARC Capital (Pvt) Ltd.

Director: Sifang Lanka (Pvt) Ltd. Sifang Lanka Trading Ltd. Browns Battery (Pvt) Ltd. Browns Investments PLC

96 LOLC 2011/12 REPORTS & ACCOUNTS Directors’ Declarations

Name Other Directorships held

Walker & Greig (Pvt) Ltd. Trans Asia Hotels PLC Mireka Homes (Pvt) Ltd. Overseas Realty (Ceylon) Ltd. Taprobane Mutual Fund Ltd. Eastern Merchants PLC Amethyst Leisure Ltd. Paradise Resort Passikudha (Pvt) Ltd.

Mr. W.D.K. Jayawardena Chairman: LOLC Insurance Company Ltd. LOLC Motors Ltd. LOLC Securities Ltd. LOLC Leisure Ltd. United Dendro Energy (Pvt) Ltd. Lanka ORIX Finance PLC Eden Hotel PLC LOLC Life Insurance Ltd. LOLC General Insurance Ltd. Palm Garden Hotels PLC Riverina Hotel PLC Speed Italia (Pvt) Ltd.

Group Managing Director/CEO: Lanka ORIX Leasing Company PLC

Director: LOLC Micro Credit Ltd. Commercial Leasing & Finance Ltd. HDFC Bank Brown & Company PLC

Mr. I.C. Nanayakkara Chairman: Commercial Leasing & Finance Ltd.

Deputy Chairman: Lanka ORIX Leasing Company PLC Lanka ORIX Finance PLC

Director: PRASAC Micro Finance Institute Brown & Company PLC Diriya Investments (Pvt) Ltd.

LOLC 2011/12 REPORTS & ACCOUNTS 97 Directors’ Declarations

Name Other Directorships held

Seylan Bank PLC Sierra Constructions Ltd. Agstar Fertilizers (Pvt) Ltd. LOLC Micro Credit Ltd. AgriSil Holdings Ltd. Free Lanka Capital Holdings (Pvt) Ltd.

Mrs. K.U. Amarasinghe Director: Commercial Leasing & Finance Ltd. Lanka ORIX Finance PLC Lanka ORIX Leasing Company PLC Lanka ORIX Project Development Ltd. LOLC Insurance Company Ltd. LOLC Leisure Ltd. LOLC Micro Credit Ltd. LOLC Securities Ltd. United Dendro Energy (Pvt) Ltd. Eden Hotel Lanka PLC Riverina Hotels PLC Palm Garden Hotels PLC LOLC Life Insurance Ltd. LOLC General Insurance Ltd. Speed Italia (Pvt) Ltd. Brown & Company PLC

Mr. R.N. Asirwatham Director: Lanka ORIX Leasing Company PLC Aitken Spence & Company PLC Royal Ceramics PLC Vallibel One PLC CIC Holdings PLC Yarl Hotels (Pvt) Ltd. Rajawella Holdings Ltd. Aitken Spence Hotels PLC Browns Beach Hotel PLC Ceylon Tea Services PLC Renuka Hotels (Pvt) Ltd. Mercantile Merchant Bank Ltd. Dialtex Industries Ltd. Dankotuwa Porcelain PLC

98 LOLC 2011/12 REPORTS & ACCOUNTS Directors’ Declarations

Name Other Directorships held

Riverina Hotel PLC Eden Hotel Lanka PLC Ceylon Agro Industries Ltd. Lanka House Boats (Pvt) Ltd.

Mr. M.D.D. Pieris Director : Mercantile Merchant Bank Ltd. Lanka ORIX Leasing Company PLC Financial Systems International (Pvt) Ltd. Mercantile Financial Brokers Ltd. Mercsair Ltd. MMBL Logistics (Pvt) Ltd. MMBL Money Transfer (Pvt) Ltd. Mountain Hawk Express (Pvt) Ltd. Mountain Hawk (Pvt) Ltd. Pathfinder (Pvt) Ltd. Pathfinder Holdings (Pvt) Ltd. Sanasa Campus Company Ltd.

Mr. R.A. Fernando Director: Lanka ORIX Leasing Company PLC Malaysian Blue Ocean Strategy Institute

Board Member: Environmental Foundation Ceylon Asset Management Ltd.

Member of the Board of Governors: UNOP-ARU

Mr. R.M. Nanayakkara Chairman: Ishara Traders (Pvt) Ltd. Ishara Property Developers (Pvt) Ltd.

Director: Lanka ORIX Leasing Company PLC

Mr. H. Ichida Chairman: ORIX (China) Investment Company Ltd. ORIX Polska S.A. ORIX Australia Corporation Ltd.

Deputy Chairman: China Railway Leasing Company Ltd.

LOLC 2011/12 REPORTS & ACCOUNTS 99 Directors’ Declarations

Name Other Directorships held

Director: AIRASIA X SDN.BHD. DI Investment Partners Ltd. ETHOZ Group Ltd. IL&FS Securities Services Ltd. Infrastructure Leasing & Financial Services Ltd. Lanka ORIX Leasing Company PLC ORIX Asia Ltd. ORIX Auto Infrastructure Services Ltd. ORIX Auto Leasing Taiwan Corporation ORIX Aviation Systems Ltd. ORIX Capital Korea Corporation ORIX China Corporation ORIX Enterprise Corporation ORIX Leasing Malaysia Berhad ORIX METRO Leasing and Finance Corporation ORIX Private Equity Korea Corporation ORIX Rentec (Korea) Corporation ORIX Rentec (Tianjin) Corporation ORIX Taiwan Corporation Saudi ORIX Leasing Company Shanghai Jinheyuan Engineering Construction Company Ltd. Tune Hotels. Com. Ltd. BonifacioLandmark Realty and Dev’t. Corporation

Vice President: Island Reinsurance Corporation

Mr. M. Kawano Chairman: OMLF Servicer Corporation ORIX Glorious Stars (SPV-AMC), Inc.

Deputy Chairman: ORIX Polska S.A.

Director/Secretary: Alioth Shipping Corporation Marion Corporation

Director/Treasurer: Anson Steamship Inc. Bartlett Marine Corporation Belfry Ocean Inc.

100 LOLC 2011/12 REPORTS & ACCOUNTS Directors’ Declarations

Name Other Directorships held

Berlian Steamship Inc. Botany Shipping Ltd. Brave Point Shipping Corporation Canble Shipping Corporation Cherub Shipping Corporation Chilin Marine Corporation Equator Shipping Inc. Famous Steamship S.A. FANTASY SHIPPING S.A. Fractal Marine Corporation Future Shipping S.A. Great Concert Navigation Corporation Harper-Line Shipping Corporation Ichiki Navigation Inc. Lealty Marine Corporation Mascot Ocean Corporation Nabob Shipping Corporation New Roman Corporation New Wing Shipping S.A. Noel Shipping Corporation ORIX Fortune Inc. ORIX Treasure Inc. Osaka Steamship Inc. Panther Navigation Inc. Rabell Navigation Corporation Rejoice Trans S.A. Ringle Steamship Inc. Whale Line S.A. Younex Enterprises Corporation Zeeman Marine Corp.

Director: Indochina Capital Corporation Lanka ORIX Leasing Company PLC ORIX Australia Corporation Ltd. ORIX Hotels International Private Ltd. ORIX Leasing Singapore Ltd. ORIX Rentec (Singapore) Pte. Ltd. Semarak Capital Sdn. Bhd. Thai Incinerate Service Company Ltd. Thai ORIX Leasing Company Ltd.

LOLC 2011/12 REPORTS & ACCOUNTS 101 Corporate governance

LOLC has today developed from a pioneering leasing company to a financial services provider, from a single entity to the holding company of a diversified conglomerate. Each change has brought new challenges, including the need for new processes and controls to facilitate operations and enhance reporting.

LOLC has always endeavoured to instill the essence of good corporate governance throughout the Company and eventually the Group, so that transparency and disclosure, adherence to procedure and a recognition of the need for ethical and sustainable business practices are principles which flow right through the Company. The difference is that controls and processes are not seen as ends in themselves, but as means to facilitate good governance. Thus, procedures which are no longer viable in the changing business environment can be suitably amended. This attitude encourages a governance mindset, as procedures can be modified and complied with, while still ensuring governance and control, instead of creating an environment where adherence frustrates business while not meeting any governance purpose.

The Company is compliant with all requirements of the Listing Rules of the Colombo Stock Exchange.

The Board of Directors The Board comprised 10 Directors, of whom 7 were Non-Executive, including the Chairperson. This meets the recommended best practice of having a majority of Non-Executive Directors. Of the Non-Executive Directors, 3 were independent. The Directors were of varied disciplines (including finance, administration, and sustainable business) and their collective experience and expertise is of benefit to the Company, even more so now, as it expands its role to that of the holding company of a diversified conglomerate. The names of the Directors and their profiles are given on pages 78 to 83.

The roles of Chairperson and Chief Executive Officer are separate, also a recommended best practice. The Non-Executive Chairperson ensures that the Board receives the information needed for them to monitor performance and compliance, including where necessary independent professional advice. The Managing Director, who also functions as the Group CEO reports to the Board on all operational aspects.

102 LOLC 2011/12 REPORTS & ACCOUNTS Corporate governance

Mr. Ravi Fernando and Deshamanya Dharmasiri Pieris have both served as Directors of the Company for over 9 years. The Board is of the view that, despite this period of service, these Directors remain independent. Mr. Fernando’s multifaceted experience, spanning both local and multinational companies, enables him to contribute meaningfully to the diverse interests which now make up the LOLC Group. Mr. Pieris, who has many years of distinguished service in several areas of both Government and private commerce, brings to the Group unmatched expertise in administration, controls and procedures.

Board Meetings Board Meetings are held monthly, and Board Papers are sent out in advance, to enable a meaningful discussion at the Meeting. In selected instances, issues and/or documents are first studied by the relevant Board Subcommittees, which then make recommendations to the Board. All Directors can request the inclusion of Board meeting agenda items, or additional information.

Board Subcommittees The Board Subcommittees are listed on page 105 and the Reports of the subcommittees are found on pages 107 to 110.

Group structure As the Group began to expand, the Board reviewed the operations and a decision was taken to centralise support services. This ensured that procedures and controls were standardised across all Group companies. Thus Group companies could share lessons learnt and experiences, and immediately commence operations at a high level, rather than go through repetitive cycles of learning. The benefits of innovation and creativity are similarly shared. All Group companies can take advantage of economies of scale, irrespective of their individual sizes.

As with any other organism, the health of the whole is enhanced by the health of the individual unit. The frequent Management Meetings, chaired by the Group MD/CEO, ensure that issues between operational units and service units are discussed and resolved to the satisfaction of all. The quarterly IT Steering Committee Meetings, chaired by the Group Chairperson ensure that the many demands on the Group’s IT subsidiary are prioritised and their resources optimised. Issues raised at these Committee Meetings also facilitate risk identification and mitigation, streamlining of processes and management of costs.

LOLC 2011/12 REPORTS & ACCOUNTS 103 Corporate governance

Taking cognizance of this symbiosis, at the monthly Board Meetings the Group Managing Director/CEO makes a comprehensive presentation which covers the performance of the core financial services Group and not merely the Company. Similarly, significant events or decisions affecting these subsidiaries are reported on, discussed and noted. In this way, the entire group benefits from the deliberations of the Board of the holding company.

Internal Controls The Enterprise Risk Management (ERM) Division has been tasked with auditing the procedures and processes of all business and service units, including Information Technology. The connected review of controls benefits all Group companies. The ERM reports are discussed by the audit committees of the relevant companies, and certain reports are taken up at the holding company level, to ensure that corrective measures are replicated within every Group company.

The Board takes pride in the fact that the ERM practices were recognised by the Open Compliance and Ethics Group (OCEG), which selected LOLC as one of the 4 recipients of its GRC (Governance, Risk Management and Compliance) award, which was presented at its convention held in Washington DC, United Sates of America. This is the first time this award had been presented to an Asian company.

Relationship with stakeholders LOLC was begun to provide a service to the people of Sri Lanka - leasing enabled businessmen to prosper by providing access to resources, without the need for ownership of those resources. Each new financial product of the Group, from factoring to microfinancing to savings products for migrant workers overseas, has been developed with the mission of helping people reach their full potential, and enjoy the fruit of their labour.

The LOLC Group acknowledges the importance of every one of its stakeholders, be they customer or creditor, supplier or shareholder, employee or entrepreneur, regulator or financier. The Group was delighted to receive the ‘Excellent Performance in the Overseas Operations Category’ for the Financial Year 2011/12, awarded by ORIX Corporation. However, it also believes that the yearly improvement in profit, the increase in business volumes and the growth of the Group is an award by the stakeholders and a testimony to the strength and soundness of the Group.

104 LOLC 2011/12 REPORTS & ACCOUNTS Corporate governance

Composition of Board Subcommittees

Name Executive Audit Remuneration Nomination Corporate IT Steering Integrated Committee Committee Committee Committee Governance Committee Risk (Dissolved Committee Management w.e.f. 1 March Committee 2012)

Mrs. R.L. Nanayakkara    Chairperson

Mr. I.C. Nanayakkara    Deputy Chairman

Mr. W.D.K. Jayawardena    Group Managing Director/CEO

Mrs. K.U. Amarasinghe   Executive Director

Deshamanya M.D.D. Pieris       Independent Director

Mr. R.N. Asirwatham*      Independent Director

Mr. R.A. Fernando     Independent Director

Key Management Personnel Mrs. S. Wickremasekera   Chief Risk Officer

Mrs. S. Kotakadeniya   Chief Financial Officer

Mr. C. Dias   Chief Information Officer

Mr. R. Perera  Group Treasurer

Mr. J. Kelegama  Chief Credit Officer

* Resigned w.e.f. 10 May 2012

LOLC 2011/12 REPORTS & ACCOUNTS 105 Corporate governance

Attendance at Meetings

Board Executive Audit Remuneration Nomination Corporate Integrated IT Steering Meetings Committee Committee Committee Committee Governance Risk Committee • Committee Management Committee

No. of Meetings 12 02 13 01 00 05 04 03 Director Classification

Mrs. R.L. Nanayakkara* Non-Executive 12 2 12 N/A N/A 4 1 3

Mr. I.C. Nanayakkara Executive 9 1 2 1 0 N/A 0 N/A

Mr. W.D.K. Jayawardena Executive 10 1 11 N/A N/A 2 2 1

Mrs. K.U. Amarasinghe Executive 11 2 11 N/A N/A 2 3 3

Mr. R.N. Asirwatham** Independent 11 N/A 12 1 0 4 4 N/A

Deshamanya M.D.D. Pieris Independent 10 1 12 1 0 4 4 N/A

Mr. R.A. Fernando Independent 9 N/A 5 1 0 2 N/A N/A

Mr. R.M. Nanayakkara - Non-Executive 9 N/A N/A N/A N/A N/A N/A N/A by his alternate Mr. I.C. Nanayakkara

Mr. K. Okimoto - Non-Executive 9 N/A N/A N/A N/A N/A N/A N/A by his alternate Mr. T. Yamazaki

Mr. H. Ichida - Non-Executive 9 N/A N/A N/A N/A N/A N/A N/A by his alternate Mr. T. Yamazaki/ Mr. H. Umetani

* - Chairman of the Board ** - Chairman of the Committee • - The Executive Committee was dissolved with effect from 1 March 2012

106 LOLC 2011/12 REPORTS & ACCOUNTS Report of the Remuneration Committee

The Remuneration Committee comprises three Independent Directors.

The Committee met once in the year 2011/12. The Committee reviewed the practices and policies with regard to remuneration of employees, taking into consideration performance, employee expectations and employee retention. The Committee satisfied itself that the practices and policies are transparent and appropriate.

R.A. Fernando Chairman - Remuneration Committee

Report of the Nomination Committee

The Nomination Committee comprises three Independent Directors and the Executive Deputy Chairman.

Consequent to the decision to move from being a financial services provider to being the holding company of a diversified conglomerate, LOLC was no longer required to comply with the Directions of the Central Bank of Sri Lanka (CBSL) with regard to the number of Directors on the Board. The Board has its full complement of ten Directors, and there is therefore no vacancy on the Board. There is also no necessity to change the Board composition to comply with CBSL Directions.

The Committee has therefore worked closely with the Board to further refine the Directors‘ self-evaluations. The Committee, along with the rest of the Board, is satisfied that the Independent Directors remain independent, despite having served for over 9 years.

Deshamanya M.D.D. Pieris Chairman - Nomination Committee

LOLC 2011/12 REPORTS & ACCOUNTS 107 REPORT OF THE INTEGRATED RISK MANAGEMENT COMMITTEE (IRMC)

The IRMC is a requirement of the Central Bank of Sri Lanka. As the Company has relinquished its leasing license, this is no longer a requirement for LOLC. However, the Committee decided to continue to function, as identification and management of risk is a vital need in the dynamic environment in which the Company operates.

The Committee continued to meet quarterly. It comprised two Independent Directors, the Managing Director and Senior Managers overseeing areas identified as critical to risk management and mitigation. The Chairman and Executive Directors attend by invitation.

The identified risks were discussed, together with possible mitigation methods. The Committee’s composition ensures a cross functional contribution to the discussion, and facilitates a well-rounded and practical approach to managing risk.

R.N. Asirwatham Chairman - Integrated Risk Management Committee

108 LOLC 2011/12 REPORTS & ACCOUNTS Corporate Governance Committee Report

The Corporate Governance Committee comprises three Independent Directors and the Chairperson. There is no statutory requirement for this Committee, but it was established to support the Board in its wish to strengthen Corporate Governance for the benefit of all stakeholders.

The Committee reviewed the Board subcommittees and made recommendations, following which the Executive Committee (Ex Co) was dissolved. This was viewed as necessary, in view of the Company moving towards functioning more as a holding company and less as an operational company. In its place, committees were established to approve routine administration requirements or credit facilities respectively, with authority being delegated to the Group Managing Director/CEO to chair these committees.

The Committee also reviewed the independence of the Directors and made recommendations to the Board.

The Committee met four times during the year 2011/12.

Deshamanya M.D.D. Pieris Chairman - Corporate Governance Committee

LOLC 2011/12 REPORTS & ACCOUNTS 109 Audit Committee Report

The Audit Committee comprised three Independent Directors, and was chaired by a Director with qualifications and experience in accounting and auditing. The Committee met 11 times during the financial year 2011/12.

The Committee reviewed the interim financials and the Audited Financial Statements prior to their release to the Colombo Stock Exchange. The External Auditors were invited to these meetings. The Committee also reviewed reports submitted by the Enterprise Risk Management Division. These reports covered operational issues, processes and controls.

At the invitation of the Committee, the Chairman of the Company, the Managing Director and the Chief Financial Officer were present at meetings, together with the Chief Risk Officer, the Chief HR Officer and the Chief Information Officer.

The Committee had a detailed agenda which ensured that critical areas are reviewed annually, in addition to the ones mentioned above. There was also constant follow-up on issues raised at previous meetings, to ensure that decisions have been implemented and all necessary corrective/proactive action taken.

The Audit Committee was satisfied that the Auditors, Ernst & Young are independent. This determination is based on the following: a. Period of service - Ernst & Young were appointed Auditors, with shareholder approval, in June 2008. b. Fees and services - neither the fees paid nor the non-audit services rendered are of sufficient quantum to impair their independence.

Accordingly, the Audit Committee has recommended to the Board of Directors that Ernst & Young be reappointed as Auditors for the financial year ending 31 March 2013. The reappointment of the Audit Firm and the authorising of the Board to negotiate its fee will be subject to the approval of the shareholders at the Annual General Meeting to be held on 18 September 2012.

R.N. Asirwatham Chairman - Audit Committee

110 LOLC 2011/12 REPORTS & ACCOUNTS Risk Management with A Vision

With the vision of creating an organisational culture where protection, assurance, reliability, accountability, transparency and confidentiality are treasured and lasting values, LOLC considers all employees, including the Board of Directors, as risk managers within the scope of their respective functions.

LOLC defines risk as any circumstance or event that might hinder the achievement of stated corporate objectives. This definition helps all members of the LOLC team to focus on identifying material, minor or even isolated process level risks. It also allows us to identify potential issues at source, enabling us to formulate controls and strategies to align risk with our risk appetite.

The Risk Management Framework The LOLC risk management framework permits active synergies between risk management, compliance, internal audit and information systems audit functions under the umbrella of the Group Enterprise Risk Management (ERM) Division, ensuring that risk is a consideration with respect to all operational functions.

Action is guided by the Group risk management policy. Dedicated officers are appointed within the risk management function for each subsidiary in which the Parent Company has a material stake. These officers report to the Chief Risk Officer (CRO). The ERM process retains total independence from other business functions, with the CRO reporting to the Chairperson of the Board through the Integrated Risk Management Committees (IRMC) of every major Group company. These Committees are constituted from an appropriate mix of Independent Directors, Executive Directors and Management Personnel.

Each IRMC evaluates the identified risks that are relevant to it. Group level risks are escalated to the Parent Company IRMC and the Board. The process is simplified by adopting common risk policies across the Group, retaining uniformity and avoiding policy conflict. Risk information is held centrally at Group level, with reporting lines to Group ERM from each subsidiary. Additionally, every regulated subsidiary has its own appointed compliance officer for better focus on the diverse regulatory compliance requirements of each. The Group ERM Division enjoys unrestricted access and auditing rights over all major subsidiaries of the Group.

LOLC 2011/12 REPORTS & ACCOUNTS 111 Risk Management with a Vision

Despite our broad presence at grass roots level across Sri Lanka, support services of the Group are managed centrally. In order to capture vital risk information, reporting lines run to Group ERM from every business unit and branch. Tactical level operations are governed by well-defined policies and procedures, which once approved by the Board are owned and protected by Group ERM. Any changes to operating policy or procedures are reviewed for adequacy with respect to internal controls. Internal Audit reviews compliance and the currency of rules when a function is audited.

Accountability and a focus on supervisory functions are maintained by the annual issue, by the heads of each business unit, of certificates testifying compliance with internal controls, with all material exceptions reported. Internal audit also conducts an annual compliance test on key and material controls relating to financial reporting.

Propagating Awareness and Understanding of Risk All Group employees undergo training on risk management at induction, while training programmes on risks relating to specific functions are conducted periodically by Group ERM. Should internal audit report a lack of awareness or increased frequency of non-compliance in a certain function or business unit, Group ERM mandates awareness building and training sessions, which are conducted in collaboration with the respective unit and the Human Resources Division.

How We Identify Risk The inherent risk of risk management lies in not identifying a particular risk. LOLC Group practises a three-tier risk identification methodology to help minimise this danger. The three tiers consist of separate assessments by the risk owner, by stakeholders and finally an independent assessment by LOLC Group ERM. This process is augmented by a “whistle-blowers’ hotline” whose users enjoy full privacy and confidentiality.

Customers are often the first to detect irregular practices or process efficiency bottlenecks, and they are encouraged to report them to Group ERM using our customer feedback line. Information received is acted upon and followed up until resolution. This practice has greatly helped us in streamlining our processes and procedures, increasing both effectiveness and control.

Supplementing the operational monitoring mechanisms established by business and service units of the Group are compulsory reporting requirements on risk for each unit, as well as field audits by the Group’s Internal Auditors. Anti-money laundering precautions and ‘know your customer’ rules are embedded in all contract and transaction processes, with centralised monitoring by Group compliance officers.

112 LOLC 2011/12 REPORTS & ACCOUNTS Risk Management with a Vision

Defence-in-Depth LOLC takes a defence-in-depth approach in responding to risk. Within the policy and procedural framework, the first line of defence relies on the risk awareness, skills and knowledge of line staff with respect to their particular functions. The second line of defence is formed by management supervision, embedded information systems and application controls. Risk detection and response may also result from reviews conducted by the internal monitoring functions of each business unit as well as from periodic internal and IT audits. Finally, Group ERM has the mandate and capacity to conduct forensic audits and investigations, including the integrity of our IT platform, if the need arises.

Internal audit adopts a four-step follow-up process on action to mitigate risk. It consists of: 1. Confirmation by the risk owner that the weakness identified by internal audit has been rectified. 2. follow up review on the effectiveness of rectification by internal audit. 3. Control self-assessment by the risk owner, under the guidance of Group ERM. 4. follow-up by internal audit based on this self-assessment.

Capacity Building and Quality Management for ERM Staff ERM staff possess a diverse array of knowledge and skills covering the entire gamut of operations of the LOLC Group. They are kept updated through continuous training and education. A broad and comprehensive educational resource base, managed by Group ERM, is in frequent use by risk officers as well as Internal Auditors.

Reaching for Excellence In this uncertain world, the complete elimination of risk is impossible. However, we believe there is no limit to continuous improvement in effective risk management. All our risk management processes are continually reviewed and, wherever possible, improved. Internal quality management is strengthened by a rating system adopted to monitor the quality of assignments handled by department staff, and feedback received from supervisors‘ drives further improvement.

Risk Profile of LOLC This is a highlevel categorisation based on perceived risk. The table below assigns risk values based on a numerical scale:

Risk Rating Score

Very Low 1 Low 2 Medium 3 High 4 Very High 5

LOLC 2011/12 REPORTS & ACCOUNTS 113 Risk Management with a Vision

114 LOLC 2011/12 REPORTS & ACCOUNTS Risk Management with a Vision

LOLC 2011/12 REPORTS & ACCOUNTS 115 Risk Management with a Vision

Future Challenges The volatile global business environment, a variable macroeconomic outlook and the Group’s exposure to multiple industry sectors call for aggressive and effective risk mitigation strategies. This has necessitated changes in our risk management approach and the adjustment of mitigation mechanisms to meet various regulatory and business requirements. It has also created a need for robust automation to strengthen our processes.

Global Recognition LOLC Group’s institutionalisation of good governance, risk management and compliance practices was recognised in the year under review with a global achievement award from the Open Compliance and Ethics Group (OCEG), USA. LOLC is the first Asian business entity to receive this award.

In her congratulatory message to LOLC, Ms. Carole Switzer, President of OCEG observes: “I am writing to extend my personal congratulations to LOLC, as a recipient of the 2012 GRC Achievement Award from OCEG. The award recognises the great strides that companies, Government agencies and other organisations have made in improving and integrating their approaches to governance, risk management and compliance, to achieve principled performance”.

Although elated, we will not rest on our laurels. We are already moving to further improve and consolidate our internationally-acclaimed risk management practices.

116 LOLC 2011/12 REPORTS & ACCOUNTS Directors’ Responsibility for Financial Reporting

The Directors confirm that the Company’s Financial Statements for the year ended 31 March 2012, are prepared and presented in conformity with the requirements of the Sri Lanka Accounting Standards, the Regulations and Directions of the Central Bank of Sri Lanka, the Listing Rules of the Colombo Stock Exchange, the Finance Leasing Act No. 56 of 2000 and the Companies Act No. 07 of 2007. They believe that the Financial Statements present a true and fair view of the state of the affairs of the Company and of the Group as at the end of the financial year.

The Directors also accept responsibility for the integrity and accuracy of the Financial Statements presented and confirm that appropriate accounting policies have been selected and applied consistently and reasonable and prudent judgment has been exercised so as to accurately report transactions.

The Directors have taken reasonable steps to safeguard the assets of the Company, to prevent, deter and detect fraud, and to ensure the integrity, accuracy and safeguarding of operational and financial records.

The Directors confirm that to the best of their knowledge, all statutory payments due in respect of the Company and its subsidiaries as at the Balance Sheet date have been paid for, or where relevant, provided for.

The Directors believe that the Company is in a position to continue its operations in the foreseeable future. Accordingly, the Financial Statements are prepared on the basis that the Company is a going concern.

The External Auditors, Ernst & Young, were provided with the opportunity to make appropriate inspections of financial records, minutes and other documents to enable them to form an opinion of the Financial Statements. The Report of the Auditors is set out on page 119.

Kapila Jayawardena Group Managing Director/CEO

20 June 2012

LOLC 2011/12 REPORTS & ACCOUNTS 117 Chief Executive Officer’s and Chief Financial Officer’s Responsibility Statement

The Financial Statements are prepared in compliance with the Sri Lanka Accounting Standards issued by The Institute of Chartered Accountants of Sri Lanka and the requirements of the Companies Act No. 07 of 2007 and any other applicable statutes to the extent applicable to the Company. There are no departures from the prescribed accounting standards in their adoption. The accounting policies used in the preparation of the Financial Statements are appropriate and are consistently applied.

The Board of Directors and the management of your Company accept responsibility for the integrity and objectivity of these Financial Statements. The estimates and judgments relating to the Financial Statements were made on a prudent and reasonable basis, in order that the Financial Statements reflect in a true and fair manner, the form and substance of transactions and reasonably present the Company’s state of affairs. To ensure this, the Company has taken proper and sufficient care in installing a system of internal controls and accounting records, for safeguarding assets and for preventing and detecting frauds as well as other irregularities, which is reviewed, evaluated and updated on an ongoing basis. Our Internal Auditors have conducted periodic audits to provide reasonable assurance that the established policies and procedures of the Company were consistently followed. However, there are inherent limitations that should be recognised in weighing the assurances provided by any system of internal controls and accounting.

The Financial Statements were audited by Ernst & Young, Chartered Accountants, the Company’s External Auditors. The Audit Committee of your Company meets periodically with the Internal Auditors and the External Auditors to review the manner in which these Auditors are performing their responsibilities and to discuss auditing, internal control and financial reporting issues. To ensure complete independence, the External Auditors and the Internal Auditors have full and free access to the members of the Audit Committee to discuss any matter of substance.

It is also declared and confirmed that the Company has complied with and ensured compliance by the Auditor with the guidelines for the audit of listed companies where mandatory compliance is required. It is further confirmed that all the other guidelines have been complied with.

Kapila Jayawardena Group Managing Director/CEO

Sunjeevani Kotakadeniya Chief Financial Officer

LOLC Group 20 June 2012

118 LOLC 2011/12 REPORTS & ACCOUNTS Independent Auditor’s Report

EYRNST &OUNG Chartered Accountants 201 De Saram Place P. O. Box 101 Colombo 10 Sri Lanka Tel : (0) 11 2463500 Fax Gen : (0) 11 2697369 Tax : (0) 11 5578180 [email protected] HMAJ/RM/BV/DM TO THE SHAREHOLDERS OF LANKA ORIX LEASING COMPANY PLC Report on the Financial Statements We have audited the accompanying financial statements of Lanka ORIX Leasing Company PLC (“Company”) and the consolidated financial statements of the Company and its subsidiaries (“Group”) which comprise the balance sheets as at 31 March 2012, and the income statements, statements of changes in equity and cash flow statements for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Scope of Audit and Basis of Opinion Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit. We therefore believe that our audit provides a reasonable basis for our opinion.

Opinion In our opinion, so far as appears from our examination, the Company maintained proper accounting records for the year ended 31 March 2012 and the financial statements give a true and fair view of the Company’s state of affairs as at 31 March 2012 and its profit and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs as at 31 March 2012 and the profit and cash flows for the year then ended, in accordance with Sri Lanka Accounting Standards, of the Company and its subsidiaries dealt with thereby, so far as concerns the shareholders of the Company.

Report on Other Legal and Regulatory Requirements In our opinion, these financial statements also comply with the requirements of Sections 151(2) and 153(2) to 153(7) of the Companies Act No. 07 of 2007.

25 June 2012 Colombo.

LOLC 2011/12 REPORTS & ACCOUNTS 119 Balance Sheet

Group Company As at 31 March 2012 2011 2012 2011 Note (Rs.) (Rs.) (Rs.) (Rs.)

Assets Cash and cash equivalents 14.1 4,444,709,429 4,659,100,494 250,011,865 392,011,825 Short-term investments 15 158,676,105 196,698,996 31,676,105 53,754,799 Investment in term deposits 16 1,192,812,399 2,456,187,694 149,251,925 221,601,049 Other investment securities 17 13,559,263,441 14,456,096,680 3,519,958,963 3,564,192,696 Rentals receivable on lease assets, hire purchase and operating leases 18.4 40,140,654,684 28,936,756,777 27,884,646 1,712,647,297 Advances and other loans 19 39,947,438,011 28,713,568,515 5,616,432,725 8,554,924,885 Instalment sales 20 157,319,578 766,007,123 157,319,576 766,007,123 Premium receivables 21 239,616,479 – – – Inventories 22 3,226,719,371 1,599,184,190 – 1,750,000 Trade and other current assets 23 9,428,802,502 5,637,082,628 11,819,408,501 1,816,916,447 Prepaid lease rentals 24 243,943,630 305,535,859 – – Investment properties 25 4,345,970,500 439,649,668 412,500,000 247,500,000 Real estate stocks 16,449,276 16,261,676 – – Timber and rubber stocks 26 3,777,671,171 3,778,893,130 – – Mature and immature plantations 27 1,692,000,390 1,615,524,496 – – Investments in joint venture companies 28 – – 14,298,187 136,384,471 Investments in equity accounted investees 29 3,552,556,908 2,759,078,715 1,544,757,723 1,211,335,904 Investments in subsidiary companies 30 – – 9,978,045,185 8,944,162,094 Deferred tax assets 31.1 347,479,485 434,654,001 145,709,757 185,030,360 Goodwill on acquisition 32.1 421,627,920 331,713,877 – – Other intangible assets 32.2 223,117,992 239,531,119 47,677,489 61,011,327 Property, plant and equipment 33 18,170,909,670 14,472,006,950 2,947,114,811 3,283,496,368 Total assets 145,287,738,941 111,813,532,588 36,662,047,458 31,152,726,645

120 LOLC 2011/12 REPORTS & ACCOUNTS Balance Sheet

Group Company As at 31 March 2012 2011 2012 2011 Note (Rs.) (Rs.) (Rs.) (Rs.)

Liabilities and Equity Liabilities Bank overdrafts 14.2 4,014,222,740 4,029,204,315 1,603,899,113 2,094,424,623 Deposits from customers 34 25,196,686,539 16,348,135,523 – – Interest-bearing borrowings 35 62,060,524,584 46,784,293,787 22,290,356,355 20,284,843,757 Insurance provision - Life 36.1 47,570,657 – – – Insurance provision - General 36.2 320,324,550 – – – Provision for taxation 559,300,089 516,720,428 29,849,505 71,858,253 Trade and other payables 37 7,549,394,229 7,361,431,347 902,335,465 1,172,832,456 Deferred tax liabilities 31.3 1,196,442,542 872,361,434 – – Deferred income 38 328,277,459 288,877,431 – – Retirement benefit obligations 39 950,486,084 889,356,837 85,996,592 80,123,443 Total liabilities 102,223,229,473 77,090,381,102 24,912,437,030 23,704,082,532

Equity Stated capital 40 475,200,000 475,200,000 475,200,000 475,200,000 Reserves 41 2,210,863,862 1,747,745,668 1,078,243,031 1,096,102,808 Retained earnings 42 16,602,055,414 10,773,393,641 10,196,167,397 5,877,341,305 Equity attributable to equity holders of the Company 19,288,119,276 12,996,339,309 11,749,610,428 7,448,644,113 Minority interest 23,776,390,192 21,726,812,177 – – Total equity 43,064,509,468 34,723,151,486 11,749,610,428 7,448,644,113 Total liabilities and equity 145,287,738,941 111,813,532,588 36,662,047,458 31,152,726,645

The Notes on pages 126 to 206 are an integral part of these Financial Statements. Figures in brackets indicate deductions.

I certify that these Financial Statements have been prepared and presented in compliance with the requirements of the Companies Act, No. 07 of 2007.

S.S. Kotakadeniya Chief Financial Officer - LOLC Group

The Board of Directors is responsible for the preparation and presentation of these Financial Statements. Approved and signed for and on behalf of the Board;

Mrs. R.L. Nanayakkara W.D.K. Jayawardena Chairperson Group Managing Director/CEO

Rajagiriya (Greater Colombo) 20 June 2012

LOLC 2011/12 REPORTS & ACCOUNTS 121 Income Statement

Group Company For the year ended 31 March 2012 2011 2012 2011 Note (Rs.) (Rs.) (Rs.) (Rs.)

Gross Income 4 37,815,861,546 32,077,327,461 8,709,835,017 6,344,360,964

Revenue 4.1 17,136,314,250 14,288,491,997 – – Less: Cost of sales (11,805,638,691) (9,911,221,898) – – Gross profit 5,330,675,559 4,377,270,099 – –

Income 4.2 17,312,892,336 12,150,506,779 3,030,395,171 3,511,733,478 Other income/(expenses) 5 3,366,654,960 5,638,328,685 5,679,439,846 2,832,627,486 Net finance costs 6 (8,469,890,440) (6,420,587,888) (2,543,317,728) (2,384,015,349) Profit before operating expenses 17,540,332,415 15,745,517,675 6,166,517,289 3,960,345,615 Operating Expenses Direct expenses excluding finance costs 7 (985,721,033) (1,017,831,003) (198,478,582) (266,842,585) Provision for bad and doubtful debts (609,059,502) (546,455,858) (22,839,520) (100,485,684) Personnel costs 8 (3,312,149,808) (1,985,476,257) (267,636,548) (341,104,639) Depreciation and amortisation 10 (1,669,629,317) (1,110,354,747) (602,974,674) (685,174,234) Other operating expenses 9 (4,072,138,935) (3,239,924,434) (651,220,519) (673,974,788) Change in fair value of investment properties 25 251,224,000 (13,549,065) – 5,225,775 Results from operating activities 10 7,142,857,820 7,831,926,311 4,423,367,446 1,897,989,460

Gains on bargain purchase (Negative goodwill) 11 2,914,536,420 271,910,632 – – Share of profit of Equity Accounted Investees 29.3 269,958,673 178,522,137 – – Profit before income tax expense 10,327,352,913 8,282,359,080 4,423,367,446 1,897,989,460 Taxation 12.1 (1,390,275,815) (1,259,279,168) (122,401,131) (374,646,172) Profit for the year 8,937,077,098 7,023,079,912 4,300,966,315 1,523,343,288

Attributable to: Owners of the Company 6,259,864,500 3,840,227,908 4,300,966,315 1,523,343,288 Minority interest 2,677,212,598 3,182,852,004 – – 8,937,077,098 7,023,079,912 4,300,966,315 1,523,343,288

Earnings per share 13 13.17 8.08

The Notes on pages 126 to 206 are an integral part of these Financial Statements. Figures in brackets indicate deductions.

122 LOLC 2011/12 REPORTS & ACCOUNTS Statement of Changes in Equity

Group Equity Attributable to Owners of the Company Stated Revaluation Future Statutory Investment Retained Total Minority Total Capital Reserve Taxation Reserve Fund Earnings Interest Reserve For the year ended 31 March 2012 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Balance as at 31 March 2010 475,200,000 155,879,068 205,000,000 404,979,197 – 6,662,696,388 7,903,754,653 11,835,892,945 19,739,647,598 Profit for the year – – – – – 3,840,227,908 3,840,227,908 3,182,852,004 7,023,079,912 Dividends paid during the period – – – – – – – (564,719,966) (564,719,966) Dividends forfeited – – – – – 1,162,576 1,162,576 – 1,162,576 Revaluation of investments – 790,556,790 – – – – 790,556,790 2,799,654,728 3,590,211,518 Revaluation of property, plant and equipment – 546,889,277 – – – – 546,889,277 231,141,073 778,030,350 Deferred tax on revaluation – (4,937,305) – – – – (4,937,305) (22,200,340) (27,137,645) Realisation of investment revaluation – (735,975,206) – – – 735,975,206 – – – Transfers during the year – – – 327,954,925 57,398,922 (385,353,847) – – – Change in percentage holdings in subsidiary companies – – – – – (81,314,590) (81,314,590) (1,284,685,925) (1,366,000,515) Additions of minority through acquisition of subsidiaries – – – – – – – 1,703,110,991 1,703,110,991 Share issue of subsidiaries – – – – – – – 3,845,766,667 3,845,766,667 Balance as at 31 March 2011 475,200,000 752,412,624 205,000,000 732,934,122 57,398,922 10,773,393,641 12,996,339,309 21,726,812,177 34,723,151,486

Profit for the year – – – – – 6,259,864,500 6,259,864,500 2,677,212,598 8,937,077,098 Dividends – – – – – – – (408,757,492) (408,757,492) Share issue of subsidiaries – – – – – – – 250,000,000 250,000,000 Addition to minority through acquisition of subsidiaries (Note 30.5) – – – – – – – 270,647,926 270,647,926 Transfers during the year – – – 370,035,270 223,874,950 (593,910,220) – – – Revaluation of investments – (453,853,500) – – – – (453,853,500) (1,604,439,017) (2,058,292,517) Revaluation of property, plant and equipment – 245,266,828 – – – – 245,266,828 331,821,663 577,088,491 Deferred tax on revaluation – 8,057,821 – – – – 8,057,821 22,188,834 30,246,655 Change in percentage holdings in subsidiary companies and consolidation adjustments – 69,736,825 – – – 162,707,493 232,444,318 510,903,503 743,347,821 Balance as at 31 March 2012 475,200,000 621,620,598 205,000,000 1,102,969,392 281,273,872 16,602,055,414 19,288,119,276 23,776,390,192 43,064,509,468

Company Stated Revaluation Future Statutory Retained Total Capital Reserve Taxation Reserve Earnings Reserve For the year ended 31 March 2012 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Balance as at 31 March 2010 475,200,000 105,402,842 205,000,000 241,889,290 4,401,162,084 5,428,654,216 Profit for the year – – – – 1,523,343,288 1,523,343,288 Revaluation made – 495,484,033 – – – 495,484,033 Transfers during the year – – – 48,326,643 (48,326,643) – Dividends forfeited – – – – 1,162,576 1,162,576 Balance as at 31 March 2011 475,200,000 600,886,875 205,000,000 290,215,933 5,877,341,305 7,448,644,113

Balance as at 31 March 2011 475,200,000 600,886,875 205,000,000 290,215,933 5,877,341,305 7,448,644,113 Profit for the year – – – – 4,300,966,315 4,300,966,315 Transfers during the year – – – (17,859,777) 17,859,777 – Balance as at 31 March 2012 475,200,000 600,886,875 205,000,000 272,356,156 10,196,167,397 11,749,610,428

The Notes on pages 126 to 206 are an integral part of these Financial Statements.

Figures in brackets indicate deductions. LOLC 2011/12 REPORTS & ACCOUNTS 123 Cash Flow Statement

Group Company For the year ended 31 March 2012 2011 2012 2011 Note (Rs.) (Rs.) (Rs.) (Rs.)

Cash Flow from Operating Activities Profit before income tax expense 10,327,352,913 8,282,359,080 4,423,367,446 1,897,989,460 Adjustment for: (Gain)/loss on sale of property, plant and equipment 5.1 (155,164,954) 25,890,860 (137,863,165) 36,300,647 Depreciation and amortisation 10 1,669,629,317 1,110,354,747 602,974,674 685,174,234 Insurance provision 367,895,207 – – – Change in fair value of forward contracts 5.1 (211,713,264) – – – Provision for gratuity 39 131,332,229 215,070,845 10,648,775 13,197,616 Provision for bad and doubtful debts 609,059,502 546,455,858 22,839,520 100,485,684 Provision for fall/(increase) in value of investments 1,486,975,245 (1,035,134,489) 744,814,802 (718,294,170) Gain on sale of Treasury Bonds 5.1 (892,921) (550,983,898) (645,500) (272,172,043) Investment income (365,650,509) (688,965,710) (64,059,197) (52,882,917) Net finance costs 6 8,540,365,708 6,433,250,418 1,735,146,208 2,394,677,826 Interest income (474,505,533) (12,662,530) (8,098,989) (10,662,477) Change in fair value of investment properties 25 (251,224,000) 13,549,065 – (5,225,775) Amortisation of deferred income (10,066,408) (4,757,172) – – (Profit)/Loss on sale of quoted and non-quoted shares (611,854,853) (1,958,298,140) (180,983,216) (667,164,597) (Profit)/Loss on sale of subsidiaries, associates and quoted shares (3,370,422,110) – (4,075,235,698) – Gains on bargain purchases (Negative goodwill) 11 (2,914,536,420) (271,910,632) – – Share of profit of equity accounted investees 29 (269,958,673) (178,522,137) – – Impairment of investments – – 21,244,900 29,940,752 (Gain)/loss on timber valuation 26 27,384,221 (149,563,509) – – Operating profit before working capital changes 14,524,004,697 11,776,132,656 3,094,150,560 3,431,364,240

Working capital changes (Increase)/Decrease in trade and other receivables (3,452,315,004) 450,841,344 (7,865,111,656) 1,552,231,698 (Increase)/Decrease in inventories (1,425,839,410) (476,860,129) 1,750,000 7,664,705 Increase/(Decrease) in trade and other payables (422,965,616) 1,471,567,280 (294,931,245) 219,072,176 (Increase)/Decrease in real estate stocks (187,600) 6,668,623 – – (Increase)/Decrease in investment in leases, hire purchase and others (12,063,691,233) (11,500,763,582) 1,691,822,995 1,584,779,618 (Increase)/Decrease in factoring account receivable 250,733,824 (2,699,238,197) 2,736,752,654 (1,142,066,549) (Increase)/Decrease in investment in advances and other loans (10,565,181,951) (9,743,424,178) 812,938,035 873,978,759 Increase/(Decrease) in customer deposits 8,848,551,016 6,253,452,297 – – Increase/(Decrease) in premium receivables (239,616,479) – – – Cash generated from operations (4,546,507,756) (4,461,623,886) 177,371,343 6,527,024,647

Finance cost paid (8,540,365,708) (6,387,667,991) (1,710,711,954) (2,498,600,000) Income tax and economic service charge paid (946,633,741) (501,206,982) (51,513,040) (114,226,058) Defined benefit plan costs paid 39 (97,964,019) (109,855,568) (4,775,626) (2,880,483) Net cash from/(used in) operating activities (14,131,471,224) (11,460,354,427) (1,589,629,277) 3,911,318,106

124 LOLC 2011/12 REPORTS & ACCOUNTS Cash Flow Statement

Group Company For the year ended 31 March 2012 2011 2012 2011 Note (Rs.) (Rs.) (Rs.) (Rs.)

Cash Flow from Investing Activities Investment in subsidiary companies – – (1,055,127,991) (5,495,805,225) Acquisition of minority interests 30.6 (165,000,000) (1,366,000,515) – – Net cash and cash equivalents on acquisition of subsidiary 30.7 (2,228,943,946) (2,848,451,166) – – Investment in equity accounted investees (558,388,000) (2,206,647,702) (333,421,819) (756,202,639) Investment in joint venture – – 122,086,284 (36,384,471) Acquisition of property, plant and equipment (2,604,054,889) (2,886,588,358) (903,758,542) (1,647,861,464) Acquisition of intangible assets 32 (37,575,109) (69,197,493) (7,664,693) (14,371,445) Acquisition/(Disposal) of investment properties 25 6,861,090 – – – Net proceeds from short-term investments 38,022,891 (114,578,669) 22,078,694 (31,764,807) Proceeds from sale of subsidiaries and associates and shares 4,278,769,931 7,116,016,375 1,858,555,000 1,940,420,063 Net additions to investment securities (2,014,951,677) (27,293,000) (518,952,353) 870,858,081 Net investment in term deposits 1,340,124,563 383,882,448 72,349,124 952,271,234 Proceeds from the sale of property, plant and equipment 906,440,435 1,087,766,387 631,027,119 931,070,610 Interest received 474,505,533 12,662,530 8,098,989 10,662,477 Dividend received 364,488,860 713,099,630 37,372,416 45,573,201 Rent received 5.1 46,030,129 7,565,793 – – Additions of timber and rubber stocks 26 (26,162,262) (17,496,840) – – Additions of mature and immature plantations 27 (116,461,386) (199,931,644) – – Net cash flow from investing activities (296,293,837) (415,192,224) (67,357,772) (3,231,534,385)

Cash Flow from Financing Activities Net cash proceeds from short-term interest-bearing loans and borrowings 3,155,461,885 1,052,499,211 (2,018,523,147) (640,737,952) Principal repayment under finance lease liabilities (215,332,758) (466,324,628) 181,647,559 (110,691,251) Proceeds from long-term interest-bearing loans and borrowings 15,972,695,717 20,374,573,885 4,645,579,180 6,443,121,962 Repayments of long-term interest-bearing loans and borrowings (9,471,968,986) (10,851,810,070) (5,053,190,993) (7,142,904,087) Proceeds from issuance of debentures 4,889,287,500 – 4,250,000,000 – Proceeds from issuance of shares of subsidiaries 250,000,000 3,845,766,666 – – Dividend paid (398,606,871) (564,719,966) – – Receipt of Deferred income 46,819,084 19,801,663 – – Net cash generated from financing activities 14,228,355,571 13,409,786,761 2,005,512,599 (1,451,211,328)

Net increase/(decrease) in cash and cash equivalents during the year (199,409,490) 1,534,240,110 348,525,550 (771,427,607) Cash and cash equivalents at the beginning of the year 629,896,179 (904,343,931) (1,702,412,798) (930,985,191) Cash and cash equivalents at the end of the year 430,486,689 629,896,179 (1,353,887,248) (1,702,412,798)

Analysis of cash and cash equivalents at the end of the year Cash in hand and favourable bank balances 14.1 4,444,709,429 4,659,100,494 250,011,865 392,011,825 Unfavourable bank balances used for cash management purposes 14.2 (4,014,222,740) (4,029,204,315) (1,603,899,113) (2,094,424,623) 430,486,689 629,896,179 (1,353,887,248) (1,702,412,798)

The Notes on pages 126 to 206 are an integral part of these Financial Statements. Figures in brackets indicate deductions. LOLC 2011/12 REPORTS & ACCOUNTS 125 Notes to the Financial Statements

Note Page 1 Corporate Information 1. Corporate Information 126 1.1 General 2. Basis of Preparation 127 3. Significant Accounting Policies 129 Lanka ORIX Leasing Company PLC (‘the Company’) is a public quoted company 4. Gross Income 146 incorporated on 14 March 1980 and 5. Other Income/(Expenses) 147 domiciled in Sri Lanka. The address of the 6. Net Finance Costs 148 Company’s registered office is No. 110/1, 7. Direct Expenses Excluding Finance Costs 148 Sri Jayawardenapura Mawatha, Rajagiriya, 8. Personnel Costs 148 Sri Lanka and the principal place of 9. Other Operating Expenses 148 business is at the same place. 10. Results from Operating Activities 149 11. Gains on Bargain Purchases (Negative Goodwill) 149 Consolidated Financial Statements of the 12. Income Tax Expense 151 Company as at and for the year ended 31 13. Earnings Per Share 154 March 2012 comprises of the Company and 14. Cash and Cash Equivalents 154 its subsidiaries (together referred to as the 15. Short-Term Investments 154 ‘Group’ and individually as ‘Group entities’) 16. Investment in Term Deposits 155 and the Group’s interest in associates and 17. Investment Securities 155 jointly controlled entities. 18. Rentals Receivable on Lease Assets, Hire Purchases and Operating Leases 159 19. Advances and Other Loans 161 The Group is primarily involved in providing 20. Instalment Sales 162 diversified financial solutions for the 21. Premium Receivables 162 several customer segments. 22. Inventories 163 23. Trade and Other Current Assets 163 Ordinary shares of the Company are listed 24. Prepaid Lease Rentals 164 on the main board of the Colombo Stock 25. Investment Properties 166 Exchange (CSE). 26. Timber and Rubber Stocks 167 27. Mature and Immature Plantations 168 1.2 Principal Activities and 28. Investments in Joint Venture Companies 170 Nature of Operations 29. Investments in Equity Accounted Investees 171 The principal activities of the Company 30. Investments in Subsidiary Companies 174 comprised of leasing, hire purchase, loans, 31. Deferred Tax Assets and Liabilities 180 operating leases and investing activities. 32. Intangible Assets 182 33. Property, Plant and Equipment 184 However, with effect from 1 April 2011, the 34. Deposits from Customers 188 Company with the concurrence of the 35. Interest-Bearing Borrowings 188 Central Bank of Sri Lanka ceased to 36. Insurance Provision 192 operate as specialised leasing company 37. Trade and Other Payables 194 and lease portfolio has been transferred 38. Deferred Income 194 to Lanka ORIX Finance PLC which is a 39. Retirement Benefit Obligations 195 subsidiary of the Company and became a 40. Stated Capital 196 holding company. The Company continued 41. Reserves 196 the business of hire purchases and loans 42. Retained Earnings 197 and to manage the remaining book of 43. Commitments and Contingencies 198 business. 44. Events After the Balance Sheet Date 199 45. Assets Pledged 199 The Group’s principal activities range from 46. Related Party Disclosures 200 financial services, insurance, trading, 47. Segmental Information 206 leisure, plantation to power and energy.

126 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Descriptions of the nature of operations  General insurance reserve is stated at application of accounting policies and the and principal activities of the, jointly- fair value. reported amounts of assets, liabilities, controlled entities and associates are income and expenses. Actual results may  Life insurance contract liabilities are given in Notes 28.2 and 29.4 respectively in differ from these estimates. stated at fair value. these Financial Statements. Estimates and underlying assumptions 2.3 Functional and Presentation are based on historical experience and 1.3 Parent Entity and Ultimate Currency Parent Entity various other factors that are believed to The functional currency is the currency be reasonable under the circumstances, Lanka ORIX Leasing Company PLC is of the primary economic environment in the results which form the basis of making the holding company of the Group and which the entities of the Group operate. the judgments about the carrying amount therefore, it does not have an identifiable of assets and liabilities that are not readily immediate or Ultimate Parent of its own. The Financial Statements are presented apparent from other sources. in Sri Lankan Rupee (SLR), which is the 2 Basis of Preparation functional currency and the Group’s Estimates and underlying assumptions are presentation currency. All financial reviewed on an ongoing basis. Revisions to 2.1 Statement of Compliance information presented in Rupees has accounting estimates are recognised in the The Financial Statements of the been rounded to the nearest Rupee unless period in which the estimates are revised Company and the Group are prepared in stated otherwise. and in any future periods affected. accordance with Sri Lanka Accounting Standards (SLASs) laid down by The 2.4 Use of Estimates and Judgment Information about critical judgments in Institute of Chartered Accountants of The preparation of the Financial applying accounting policies that have the Sri Lanka (ICASL) and in compliance with Statements in conformity with SLASs most significant effect on the amounts the Companies Act No. 07 of 2007. requires management to make judgments, recognised in the Financial Statements are estimates and assumptions that affect the included in the following Notes to these The Financial Statements were authorised Financial Statements: for issue by the Directors on 20 June 2012.

Critical Accounting Estimate/Judgment Disclosure Reference 2.2 Basis of Measurement Note Page

The Consolidated Financial Statements Timber stocks 3.7.1/26 134/168 have been prepared on the historical cost Investment properties 3.16.2/25.4 136/167 basis and applied consistently with no Revaluation of lands & buildings 3.17.1.2.2 137 adjustments being made for inflationary factors affecting the Financial Statements, Goodwill on acquisition 3.1.12 131 except for the following material items in Insurance provision - Life 3.41.4.6 144 the Balance Sheet: Insurance provision - General 3.41.3.8 144 Unearned premium reserve 3.41.3.3 143  The liability for defined benefit obligations is recognised as the present Deferred acquisition cost 3.41.3.6 143 value of the defined benefit obligation. Gross outstanding claims 3.41.4.4 144 Retirement benefit obligation 3.25.2 139  Land and buildings are recognised at Deferred tax assets & liabilities 3.3.2 131 the revalued amounts. Loan loss provision 3.6.4 133  Leasehold rights to bear land are stated Leasehold right to bare land 3.42.5 145 at fair value. Impairment of non-financial assets 3.18 138  Investment properties are recognised Useful lives of property, plant and equipment 3.17.1.5 137 at fair value. Useful lives of intangible assets 3.15.5 136

 Investment securities are measured at Consolidation of PRASAC Micro Finance Institution Ltd. 29.5 173 quoted market price. Consolidation of Diriya Investments Ltd. 30.2.1 176 Consolidation of Browns Investments PLC 30.2.2 176  Timber stocks are measured at fair value less cost at point of sale.

LOLC 2011/12 REPORTS & ACCOUNTS 127 Notes to the Financial Statements

2.5 Comparative Information International Financial Reporting Standard presentation of owner’s transactions with with effect from financial period beginning the equity. This standard also requires Previous period figures and Notes have on or after 1 January 2012. Accordingly all preparation of three Balance Sheets if been restated and reclassified wherever the existing Sri Lanka Accounting Standards the entity has made an accounting policy necessary to conform to the current year’s (SLAS) have been prefixed as Sri Lanka change or an accounting error under presentation. Financial Reporting Standards (SLFRS). LKAS 8 or reclassification of item. This These Standards (SLFRS) have not been Standard in general has similar effect on 2.6 Materiality and Aggregation applied in preparing current year Financial every entity within the Group. Each material class of similar items is Statements as they were not effective for the presented separately in the Financial period ended 31 March 2012. Standards on Financial Statements. Items of dissimilar nature or Instruments function are presented separately unless The Company and the Group will prepare 2.10.3 LKAS 39 - Recognition and they are immaterial. the Financial Statements beginning Measurement of Financial Instruments after 1 April 2012 based on the New LKAS 39 provides the guidance for 2.7 Offsetting Sri Lanka Accounting Standards (SLFRS) definition, Recognition, Measurement, Assets and liabilities, and income and which include LKAS, SLFRS and other Impairment and Derecognition for expenses, are not offset unless required or interpretation issued by International Financial Instruments. LKAS 39 requires permitted by SLASs. Accounting Standard Board. The Company the all financial instruments be measured and the Group is currently analysing the at fair value at its initial recognition. financial effects due to New Accounting 2.8 Going Concern Subsequent to the initial recognition, the Standards. The following is the summary The Board of Directors is satisfied that measurement will be based on the financial based on financial assessment on possible the Company has adequate resources to instrument classification. Financial assets changes due to application of SLFRS (This continue its operations in the foreseeable will be classified into fair value through assessment is subjected to audit by the future and going-concern basis has been profit & loss, loans and receivables, Held Auditors of the Company and the Group): adopted in preparing these Financial to maturity investments and available Statements. for sale and financial liabilities will be 2.10.1 SLFRS 1 - First Time Adoption of Sri Lanka Accounting Standards classified into fair value through profit 2.9 Directors’ Responsibility for & loss and other financial liabilities. SLFRS 1 is applicable only when the entity the Financial Statements Depending on the classification, the prepares its Financial Statement base on subsequent measurement will be changed The Board of Directors is responsible for SLFRS for the first time. Accordingly this where financial assets and liabilities the preparation and fair presentation of Standard requires an entity to illustrate the carried at fair value through profit and loss these Financial Statements in accordance transition date adjustments to Financial are valued through Income Statement and with Sri Lanka Accounting Standards and Statements by a way of reconciliation and available for sale instruments fair valued as per the provisions of the Companies explanation notes at the transition date in through other comprehensive income. Act No. 07 of 2007. This responsibility order to comply with SLFRS. Furthermore, Loans and receivables, held to maturity includes: designing, implementing and this Standard provides certain accounting instruments and other liabilities will be maintaining internal controls relevant to options which will then be selected and measured at amortised cost. the preparation and fair presentation of applied by the management consistently. Financial Statements that are free from This standard in general has similar effect Except for financial assets at fair value material misstatement, whether due to on every entity within the Group. fraud or error; selecting and applying through profit and loss, other financial assets are subjected to impairment appropriate accounting policies; and 2.10.2 LKAS 1 - Presentation of Financial making accounting estimates that are Statements assessment. Accordingly, an entity shall assess at the end of each reporting period reasonable in the circumstances. LKAS 1 provides the Financial Statement whether there is any objective evidence preparation and presentation guidelines that a financial asset or group of asset 2.10 New Accounting Standards in accordance with SLFRS. This standard is impaired. If any such impairment Issued but not Effective as at requires presentation of components of evidence exists, impairment test will be Balance Sheet Date Other Comprehensive Income which will performed to determine any amount of any then be part of Comprehensive Income for The Institute of Chartered Accountants impairment loss. of Sri Lanka has decided to converge the year. The Standard further requires Sri Lanka Accounting Standard (SLAS) with

128 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

2.10.4 LKAS 32 - Presentation of Financial The Group presents the segmental significant components within the same Instruments information based on sector results and class of asset evaluated for depreciation This standard provides the principles will change the current classification of separately. for presenting financial instruments as segments based on the requirement of this standard. liabilities or equity and for offsetting 3 sIGnificant Accounting financial assets and liabilities. Policies 2.10.8 SLFRS 4 - Insurance Contacts 2.10.5 SLFRS 7 - Financial Instruments An entity applies this standard to insurance The accounting policies set out below have Disclosure contracts (including reinsurance contracts) been applied consistently to all periods This standard requires the entity to provide that it issues and reinsurance contracts presented in these Consolidated Financial detail disclosure on the significance of that it holds and financial instruments that Statements, and have been applied the financial instruments and nature and are issued with discretionary participation consistently by Group entities. the risk of risks arising from financial feature. instruments and how those risks are 3.1 Basis of Consolidation managed by the entity. Currently, these The entity requires to carry out an 3.1.1 Subsidiaries assessment at the end of each reporting disclosures are being evaluated with Subsidiaries are entities controlled by the period whether the recognised insurance various financial models in order to meet Company. Control exists when the Company liabilities are adequate, using current the requirement of the standards. has the power, directly or indirectly, to estimates of future cash flows under govern the financial and operational policies its insurance contracts. Furthermore, Financial instrument standards will have of an entity so as to obtain benefits from its this standard requires carrying out an a significant impact on financial service activities. In assessing control, potential impairment test on the reinsurance sector as most of items within financials voting rights that presently are exercisable receivables and insurance liabilities to be are govern through this Standard. Other or convertible are taken into account. sectors will have considerable impact presented without offsetting them against related insurance assets. These changes depending on the type of financial The Financial Statements of subsidiaries will have an impact on the Insurance instrument they hold. are included in the Consolidated Financial Company. Statements from the date that control 2.10.6 SLFRS 3 - Business Combinations commences until the date that control 2.10.9 LKAS 41 - Biological Assets SLFRS 3 requires an entity to evaluate ceases. Acquisition of subsidiaries is on the new definition of ‘business’ in LKAS 41 prescribes the accounting accounted for using the purchase method order to ensure that an entity acquiring treatment for biological assets. Biological of accounting. only a business will prepare consolidated assets are to be measured at fair value less financials than simply acquiring a set cost to sell. The change in fair value of the The accounting policies of subsidiaries of assets. This standard further entails biological asset will be directly recognised have been changed when necessary to the recognition and measurement of the in Income Statement. Agricultural produce align them with the policies adopted by identifiable assets acquired and liabilities harvested from the biological asset the Group. If a member of the Group assumed and any non-controlling interest. considered as inventories and will be uses accounting policies other than those Gains and losses which result in changes measured by applying LKAS 2 - Inventories adopted in the Consolidated Financial in subsidiary without losing control are from the Point of Harvest. Statements for like transactions and events to be accounted with in the equity. These in similar circumstances, appropriate standards will have significant impact on 2.10.10 LKAS 16 - Property, Plant and adjustments are made to its Financial Equipment the consolidated financials of the Group. Statements in preparing the Consolidated LKAS 16 requires property, plant and Financial Statements. 2.10.7 SLFRS 8 - Operating Segments equipment measured at cost at the initial SLFRS 8 requires an entity to present recognition. Initial cost of the asset also 3.1.2 Minority Interests the segmental results in line with the includes the initial estimation of site Minority interests is the equity in a information that is reviewed by the restoration cost such as environmental subsidiary not attributable, directly or Chief Operating Decision Maker (CODM) cost and similar cost, which will be indirectly, to the Parent are presented in the to allocate resources and assess depreciated over useful life of the asset. Consolidated Balance Sheet within equity, performance of the segment. separately from the equity attributable to This standard also requires depreciation of equity holders of the Parent (Company). assets over their useful lives considering

LOLC 2011/12 REPORTS & ACCOUNTS 129 Notes to the Financial Statements

3.1.3 Acquisition of Minority Interests Associates are accounted for using the 3.1.8 Reporting Date Subsequent to the acquisition of control, equity method (equity accounted investees) All the Group’s subsidiaries, associate any further acquisition of net assets from and are initially recognised at cost. The companies and joint venture companies minority interest is accounted for as cost of the investment includes transaction have a common financial year end which transactions with owners in their capacity costs. The Group’s investment in associate ends on 31 March other than Commercial as owners. includes goodwill identified on acquisition, Insurance Brokers, LOLC Insurance net of any accumulated impairment losses. Company Ltd. and Prasac Micro Finance Any difference between the amount by Company whose financial year ends on which the minority interests is adjusted The Consolidated Financial Statements 31 December. and the fair value of the consideration include the Group’s share of the income and paid or received shall be recognised expenses and equity movements of equity The difference between the reporting date directly in equity and attributed to the accounted investees, after adjustments to of the above companies and that of the owners of the Parent. align the accounting policies with those of Parent does not exceed three months. the Group, from the date that significant 3.1.4 Loss of Control influence commences until the date that 3.1.9 Transactions Eliminated on significant influence ceases. Consolidation The Parent can lose control of a subsidiary with or without a change in absolute or Intra-group balances and transactions, When the Group’s share of losses exceeds relative ownership levels. Upon the loss including income, expenses and dividends, its interest in an equity accounted investee, of control, the Group derecognises the are eliminated in full. Profits and losses the carrying amount of that interest assets and liabilities of the subsidiary, resulting from intra-group transactions (including any long-term investments) is any minority interests and the other that are recognised in assets, such as reduced to nil and the recognition of further components of equity related to the inventory and fixed assets, are eliminated losses is discontinued except to the extent subsidiary. Any surplus or deficit arising in full. that the Group has an obligation or has on the loss of control is recognised in the made payments on behalf of the investee. Income Statement. Unrealised gains arising from transactions Associate companies of the Group which with equity accounted investees are have been accounted for under the equity If the Group retains any interest in the eliminated against the investment to method of accounting are disclosed under previous subsidiary, then such interest the extent of the Group’s interest in the Note 29.2 to these Financial Statements. is measured at fair value at the date that investee. control is lost. Subsequently it is accounted 3.1.7 Jointly-Controlled Entities for as an equity-accounted investee or as 3.1.10 Business Combinations other financial asset depending on the Joint ventures are those entities over All business combinations have been level of influence retained. whose activities the Group has joint control, accounted for by applying the purchase established by contractual agreement and method in accordance with Sri Lanka 3.1.5 Adjustments that do not Result in a requiring unanimous consent for strategic Accounting Standard 25 (Revised 2004) - Loss of Control financial and operating decisions. ‘Business Combinations’. Applying this Adjustments to minority interests arising method involves the entity that obtains from transactions that do not involve Jointly-controlled entities are accounted for control of the other entity to recognise the the loss of control are based on the using proportionate consolidation method, fair value of assets acquired and liabilities proportionate amount of the net assets of from the date that joint control commences and contingent liabilities assumed, including the subsidiary. until the date that joint control ceases. those not previously recognised. The Group combines its share of the joint The resultant gain/loss are accounted in ventures’ individual income and expenses, 3.1.11 Cost of Acquisition assets and liabilities and cash flows on a the Income Statement. The cost of an acquisition is measured as line-by-line basis with similar items in the the fair value of the assets given, equity Group’s Financial Statements. 3.1.6 Associates - Equity Accounted instruments issued and liabilities incurred Investees or assumed at the date of exchange, plus Jointly-controlled entities of the Group Associates are those entities in which the costs directly attributable to the acquisition. Group has significant influence, but not which have been accounted for under the control, over the financial and operating proportionate consolidation method of activities. accounting are disclosed in Note 28.1 to these Financial Statements.

130 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

3.1.12 Goodwill on Acquisition 3.2 Foreign Currency 3.3.1 Current Tax Goodwill represents the excess of the cost 3.2.1 Foreign Currency Transactions Current tax is the expected tax payable or receivable on the taxable income or of any acquisition of a subsidiary or an Transactions in foreign currencies are loss for the year, using tax rates enacted associate over the Group’s interest in the translated to the functional currency or substantively enacted at the reporting net fair value of the identifiable assets, (Sri Lankan Rupees) of the Group at date, and any adjustment to tax payable liabilities and contingent liabilities acquired. exchange rates at the dates of the in respect of previous years. Current tax transactions. Goodwill is initially recognised at cost. payable also includes any tax liability arising from the tax on dividend income. The Company will test the goodwill for Monetary assets and liabilities impairment annually and assess for any denominated in foreign currencies at The provision for income tax is based on indication of impairment to ensure that the reporting date are retranslated to the elements of income and expenditure as its carrying amount does not exceed the the functional currency at the exchange reported in the Financial Statements and recoverable amount. If an impairment loss rate at that date. The foreign currency computed in accordance with the provisions is identified, it is recognised immediately gain or loss on monetary items is the of the Inland Revenue Act No. 10 of 2006 and to the Income Statement. For the purpose difference between amortised cost in the subsequent amendments thereto. of impairment testing, goodwill acquired functional currency at the beginning of in a business combination is, from the the year, adjusted for effective interest Current tax assets and liabilities for the acquisition date, allocated to groups of and payments during the year, and cash-generating units that are expected current and prior periods are measured at the amortised cost in foreign currency the amount expected to be recovered from to benefit from the synergies of the translated at the exchange rate at the end combination. or paid to the Commissioner General of of the year. Inland Revenue. The impairment loss is allocated first to Non-monetary assets and liabilities 3.3.2 Deferred Tax reduce the carrying amount of any goodwill denominated in foreign currencies that are Deferred tax is recognised in respect allocated to the unit and then to the other measured at fair value are retranslated to of temporary differences between the assets pro-rata to the carrying amount the functional currency at the exchange carrying amounts of assets and liabilities of each asset in the unit. Where goodwill rate at the date that the fair value was for financial reporting purposes and the forms part of a cash-generating unit and determined. Non-monetary items in a amounts used for taxation purposes. part of the operation within that unit is foreign currency that are measured in Deferred tax is not recognised for: disposed of, the goodwill associated with terms of historical cost are translated  Temporary differences on the initial the operation disposed of is included in using the exchange rate at the date of the recognition of assets or liabilities in the carrying amount of the operation when transaction. determining the gain or loss on disposal of a transaction that is not a business combination and that affects neither the operation. Foreign currency differences arising on accounting nor taxable profit or loss; retranslation are recognised in Income Carrying amount of the goodwill arising Statement.  Temporary differences related to on acquisition of subsidiaries and joint investments in subsidiaries and jointly- ventures is presented as an intangible and 3.2.2 Forward Exchange Contracts controlled entities to the extent that it the goodwill on an acquisition of an equity is probable that they will not reverse in Forward exchange contracts are valued accounted investment is included in the the foreseeable future; and at the forward market rates ruling on the carrying value of the investment. date of the Balance Sheet. The resultant  Taxable temporary differences arising gain or loss in fair value is recognised in the on the initial recognition of goodwill; 3.1.13 Gain on Bargain Purchase (Negative Goodwill) Income Statement.  Taxable temporary differences arising on subsidiaries, associates or joint If the Group’s interest, in the net fair value ventures who have not distributed their of the identifiable assets, liabilities and 3.3 Tax Expense entire profits to the parent or investor. contingent liabilities exceeds the cost of Tax expense comprises of current, deferred the acquisition of the entity, the Group tax and other statutory taxes. Income tax Deferred tax is measured at the tax rates expense is recognised in Income Statement will reassess the measurement of the that are expected to be applied to temporary except to the extent that it relates to items acquiree’s identifiable assets and liabilities differences when they reverse, based on the recognised directly in the statement changes and the measurement of the cost and laws that have been enacted or substantively in equity. recognise the difference immediately in enacted by the reporting date. the Consolidated Income Statement.

LOLC 2011/12 REPORTS & ACCOUNTS 131 Notes to the Financial Statements

Deferred tax assets and liabilities are offset Where a company is entitled to claim 3.3.7 Sales Taxes (Value Added Tax and if there is a legally enforceable right to offset the total value or any part of expenditure Turnover Tax) current tax liabilities and assets, and they made during the tax holiday period, as Revenues, expenses and assets are relate to income taxes levied by the same deductions for tax purposes after the tax recognised net of the amount of sales tax tax authority on the same taxable entity, or holiday period, such an entity will treat such except for the following: on different tax entities, but they intend to amount of expenditure as part of the tax  Sales tax incurred on a purchase of a settle current tax liabilities and assets on base throughout the tax holiday period for assets or services is not recoverable a net basis or their tax assets and liabilities the purpose of recognising deferred tax. from the taxation authority, in which will be realised simultaneously. case the sales tax is recognised as 3.3.3 Withholding Tax on Dividends part of the cost of acquisition of the A deferred tax asset is recognised for Dividend distributed out of taxable profit asset or as part of the expense item as unused tax losses, tax credits and deductible of the local companies attracts a 10% applicable; and temporary differences, to the extent that it is deduction at source and is not available  Receivables and payables that are probable that future taxable profits will be for set off against the tax liability of the stated with the amount of sales tax available against which they can be utilised. Company. Withholding tax that arises from included. Deferred tax assets are reviewed at each the distribution of dividends by the Company reporting date and are reduced to the extent is recognised at the same time as the liability The net amount of sales tax recoverable that it is no longer probable that the related to pay the related dividend is recognised. tax benefit will be realised. from, or payable to, the taxation authority 3.3.4 Economic Service Charge (ESC) is included as part of other receivables or Deferred tax assets and liabilities are not other payables in the Balance Sheet. As per the provisions of Economic Service discounted. Charge Act No. 13 of 2006 amendments 3.4 Borrowing Costs thereto, ESC is payable on the liable The net increase in the carrying amount turnover at specified rates. ESC is Borrowing costs that are directly attributable of deferred tax liability net of deferred tax deductible from the income tax liability. to the acquisition, construction or production asset is recognised as deferred tax asset Any unclaimed amount can be carried of qualifying assets that take a substantial is recognised as deferred tax expense and forward and set off against the income tax period of time to get ready for its intended conversely any net decrease is recognised payable in the five subsequent years as per use or sale, are capitalised as part of the as reversal to deferred tax expense, in the the relevant provision in the Act. assets. Income Statement. 3.3.5 Nation Building Tax (NBT) Borrowing costs that are not directly 3.3.2.1 Application of Deferred Taxation to attributable to the acquisition, construction Group Companies Enjoying a Tax Holiday As per the provisions of the Nation Building or production of a qualifying asset are Period Tax Act No. 09 of 2009 and the subsequent recognised in profit or loss using the amendments thereto, Nation Building Tax As per the requirements of Sri Lanka effective interest method. Accounting Standard (SLAS) 14 - Income should be payable at the rate of 2% with effect Taxes (Revised 2005) and the Ruling issued from 1 January 2011 on the liable turnover as per the relevant provisions of the Act. Assets and Bases of their by The Institute of Chartered Accountants of Valuation Sri Lanka (ICASL), a group company enjoying An asset is a resource controlled by a tax exemption period shall only recognise 3.3.6 Value Added Tax on Financial Services (VAT on FS) the entity as a result of past events and deferred tax in their Financial Statements from which future economic benefits are for temporary differences, where reversals VAT on financial services is calculated in expected to flow to the entity. of such differences extend beyond the tax accordance with the amended Value Added exemption period. Tax (VAT) Act No. 07 of 2003 and subsequent amendments thereto. The base for the 3.5 Cash and Cash Equivalents Deferred Tax shall not be considered nor computation of VAT on financial services Cash and cash equivalents comprise of provided for assets/liabilities for which tax is the accounting profit before income tax cash in hand and cash at banks and other impacts and reversals take place within adjusted for the economic depreciation and highly liquid financial assets which are the tax exemption period. There will be no emoluments of employees. VAT on financial held for the purpose of meeting short- tax implications that take place after the services is computed on the prescribed rate term cash commitments with original expiration of the tax exemption period for of 12%. maturities of less than three months which such assets. are subject to insignificant risk of changes in their fair value.

132 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Bank overdrafts that are repayable on  Fifty per cent (50%) of all Balance receivable on Terminated Contract demand and form an integral part of the accommodations (net of unearned for Lease, Hire Purchase, Advances Group cash management are included as a income) which are in arrears for a period and Loans. of 12 to 18 months. component of cash and cash equivalents for  One hundred percent (100%) of the purpose of the Statement of Cash Flows.  One hundred per cent (100%) of all proceeds receivables. accommodations (net of unearned 3.6 Loans, Advances and Rental income) which are in arrears for a period Additional specific provisions are made Receivables of 18 months and more. upon management review on the 3.6.1 Rentals Receivable on Finance performance of the lease, hire purchase Leases and Hire Purchases  One hundred per cent (100%) of all and loan portfolios. accommodations where instalments Rentals receivable on leased and hire are not paid on a monthly basis, purchase assets are accounted for as Lanka ORIX Finance PLC and Commercial whenever the Company has realised finance leases, hire purchases and Leasing and Finance Ltd. that instalments will not be paid on the reflected in the Balance Sheet at balance Lanka ORIX Finance PLC and Commercial due dates. cost recoverable after eliminating Leasing and Finance Ltd. provide for bad unearned income and deducting prepaid and doubtful debts based on the Direction LOLC Micro Credit Ltd. rentals, rental collections and provision for No. 3 of 2006 of the Finance Business Act bad and doubtful debts. LOLC Micro Credit Ltd. computes No. 42 of 2011. provisioning for bad and doubtful debts  Fifty per cent (50%) on all lease, hire 3.6.2 Rental Receivable on Operating according to the Central Bank Direction purchase and loan receivables (net of Leases No. 02 of 2006 of the Finance Leasing Act unearned income) which are in arrears Leases where the Group as the lessor No. 56 of 2000. for a period of 6 to 12 months. effectively retains substantially all the risk The provisions for doubtful debts are  One hundred per cent (100%) on all and rewards incidental to the ownership arrived at using the following bases: lease, hire purchase and loan receivables are classified as operating leases. Lease, hire purchase and loan receivables; (net of unearned income) which are in Lease rentals from operating leases are arrears for a period of 12 months and recognised as income on a straight-line  Fifty percent (50%) on all more with additional specific provisions. basis over the lease term. accommodations (net of unearned income) which are in arrears for a Additional specific provisions are 3.6.3 Advances and Other Loans to period of 6 to 12 months. made upon management review on the Customers  One hundred percent (100%) on all performance of the lease, hire purchases Advances and other loans to customers accommodations (net of unearned and loan portfolios. comprised of revolving loans, loans income) which are in arrears for a with fixed instalments, factoring and period of 12 months and more, with The value of the following items held as pawning advances. additional specific provisions. collateral for a particular advance has been deducted in arriving the above provisions: Revolving loans to customers are reflected In addition to the above provision, LOLC  Vehicles that have been repossessed in the Balance Sheet at amounts disbursed Micro Credit Ltd. provide specific provision by Lanka ORIX Finance PLC, eighty less repayments and provision for doubtful for bad and doubtful debts using the percent (80%) of the valuation obtained debts. Loans to customers with fixed following bases for non-asset back loan during the preceding 6 months from a instalments are stated in the Balance receivables of the Company: professional valuer. Sheet net of possible loan losses and net  Fifty percent (50%) on all receivables of interest, which is not accrued to revenue.  Land and buildings, the full value, in (net of unearned income) which are in case of a primary mortgage, such value arrears for a period of 3 to 6 months. 3.6.4 Provision for Doubtful Debts shall not exceed the value decided by a qualified professional valuer at the time The specific provisions for doubtful debts  One hundred percent (100%) on all of providing the accommodation. are arrived at using the following bases: receivables (net of unearned income) which are in arrears for a period of Lanka ORIX Leasing Company PLC Balance receivable on Terminated 6 months and more, with additional Contracts for Lease, Hire Purchase  Twenty per cent (20%) of all specific provisions. accommodations which are in arrears Advances and Loans one hundred per cent for a period of 6 to 12 months. (100%) of proceeds receivables are made as provision for bad debts.

LOLC 2011/12 REPORTS & ACCOUNTS 133 Notes to the Financial Statements

3.6.5 Acquired Properties on Settlement The Group provides 100% of the amount 3.7.1 Timber Stocks and Rubber of Accommodation over pawning advance as pawning The accounting policies adopted for timber Acquired properties represent properties provision immediately after the due date. plantations which is a consumable biological acquired in full or partial settlement of loans asset, is stated at fair value less estimated and advances are accounted for the carrying 3.7 Inventories point-of-sale costs. Point-of-sale cost amount of the accommodation granted. Inventories are measured at the lower of includes all costs that would be necessary cost and net realisable value. to sell the assets including cost necessary The Group reviews these properties at to get the assets to the market. each reporting date or more frequently for The cost of inventories is based on the the changes in value. first-in first-out principle, and includes The plantation companies have engaged expenditure incurred in acquiring the an Independent Chartered Valuation 3.6.6 Factoring Receivables inventories, production or conversion costs Surveyor, Mr. K.T.D. Tissera in determining Factoring receivables of the Group have and other costs incurred in bringing them the fair value of timber stocks and rubber been stated net of specific provisions to their existing location and condition. as at the Balance Sheet date. The valuer based on company provisioning policy. has valued the timber stocks and rubber Any amount uncollectable is written-off In the case of manufactured inventories per tree valuation basis by using available against profits. and work-in-progress, cost includes an log and tree prices in city centres less appropriate share of production overheads point-of-sale costs. The specific provisions for doubtful debts based on normal operating capacity. Net are arrived at using the following bases: realisable value is the estimated selling 3.7.2 Real Estate Stocks  If one hundred per cent (100%) of the price in the ordinary course of business, Real estate stocks of the Group represent sales ledger is disputed, and no further less the estimated costs of completion and the purchase value of properties acquired transactions have taken place for a selling expenses. for resale. Carrying value of the real period of 6 months, 50% of the current estate stocks as at the Balance Sheet date account balance is provided for, from For the manufacturing stocks, provision for represents the purchase value of properties the last date of dispute. slow moving inventories is made when the and any subsequent expenditure incurred  When this period reaches 12 months holding period exceeds 365 days, and the on development of such properties. 100% is provided for. sale of the inventories is no longer probable.

However, if the total of settlements The cost incurred in bringing inventories received within the said 3 months is less to its present location and condition is than 25% of the overdue current account accounted using the following cost formula: balance, 50% of such current account Type of Inventory Method of Valuation balance is provided in 6 months and the 100% provided after 12 months as in the Input Materials Weighted average cost formula. case of such accounts. Growing Crop - Nurseries At the cost of direct materials, direct labour and Further, the total portfolio is reviewed appropriate proportion of directly attributable overheads quarterly to capture any accounts that are less provision for over grown plants. not falling under the above criteria but Harvested Crop Produce stocks manufactured up to the Balance Sheet are considered as ‘non-performing’. date and sold since then, until the time of preparation Such accounts are considered for provisioning on a case-by-case basis, of the Financial Statements are valued at since realised under specific provisioning. price. The balance produce stocks are valued at estimated selling prices. The prices are net of all attributed expenses 3.6.7 Pawning Advances relating to the public auction. The Group provides pawning facilities with Spares and Consumables Weighted average cost basis. different maturities which are less than one year. The amounts receivables from Finished Goods and First-In First-Out (FIFO) basis. pawning are included in the advances and work-in-progress other loans at the amounts expect to be recovered.

134 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

3.8 Short-Term Investments 3.11.2 Securities Purchased under Resale 3.15 Intangible Assets Agreements (Reverse Repos) Short-term investment comprises of call 3.15.1 Basis of Recognition These are advances collateralised by deposits and interest earning demand An intangible asset is recognised if it is purchase of Government Treasury Bills deposits with banks. Call deposits and probable that future economic benefits and Treasury Bonds from the banks, deposits with banks are stated at the that are attributable to the assets will flow subject to an agreement to resell them amounts to be realised. to the entity and the cost of the assets can at a predetermined price. Such securities be measured reliably. 3.9 Investments in Term Deposits remain on the Balance Sheet of the Group and the asset is recorded in respect of the 3.15.2 Basis of Measurement Term deposits are stated at principal consideration paid. amount plus interest accrued on a time Intangible assets acquired separately proportionate basis. The difference between the purchase and are measured as initial recognition the sale price represents interest income at cost. Following initial recognition 3.10 Investment Securities and is recognised in the Income Statement intangible assets are carried at cost less any accumulated amortisation and any 3.10.1 Investment in Quoted Shares - over the period of the resale agreement accumulated impairment losses. The Trading Purposes based on a pattern reflecting an effective rate of return. useful life of intangible assets is assessed These investments that are acquired or to be either finite or indefinite. Intangible incurred principally for the purpose of assets with finite useful life are amortised selling or holding as part of a portfolio that 3.12 Investment in Non-Quoted Shares over the useful economic life and assessed is managed for short-term profit. for impairment whenever there is an These are securities which are acquired indication that the intangible asset may Investments in quoted shares are stated and held for yield or capital growth in be impaired. The amortisation period and at their respective market values on an the medium/long term with the positive the method for an intangible asset with aggregate portfolio basis. The difference intent and ability to hold. Such securities a finite useful life is reviewed at least at between cost and the market value is are recorded at cost. Changes in market each financial year end. Intangible assets charged to the Income Statement. values of these securities are not taken with indefinite useful lives are tested for into account, unless there is considered impairment annually either individually or 3.10.2 Investment in Long-Term to be a diminution in value which is other at the cash-generating unit level. Marketable Securities than temporary. The long-term marketable securities of 3.15.3 Subsequent Expenditure the Group are stated at the market value 3.13 Trade Receivables Subsequent expenditure on intangible as at the Balance Sheet date. The excess Trade and other receivables are stated at assets is capitalised only when it increases on revaluation is credited to Revaluation of the amounts they are estimated to realise, the future economic benefits embodied Investments in the Statement of Changes net of provisions for bad and doubtful in these assets. All other expenditure is in Equity. receivables. A provision for doubtful expensed when incurred. debts is made where as there is objective 3.11 Investment in Government evidence that the Company will not be able 3.15.4 Derecognition Securities to recover all amounts due according to the Intangible assets are derecognised on original terms of receivables. Bad debts 3.11.1 Investment in Government disposal or when no future economic Treasury Bills and Treasury Bonds are written-off when identified. benefits are expected from its use. The Investments in Treasury Bills and Treasury gain or loss arising from derecognition Bonds are initially recorded at its cost and 3.14 Other Receivables of intangible assets are measured as interest is accrued up to the period end. The Other receivable balances are stated difference between the net disposal premium/discount arising from Treasury at estimated amounts receivable after proceeds and the carrying amount of Bonds are systematically amortised in the providing for doubtful receivables. the asset. Income Statement throughout the period up to maturity.

LOLC 2011/12 REPORTS & ACCOUNTS 135 Notes to the Financial Statements

3.15.5 Amortisation 3.16.3 Derecognition 3.16.5 Determining Fair Value Amortisation is recognised in the Income Investment properties are derecognised External and independent valuers, having Statement on a straight-line basis over the when either they have been disposed appropriate recognised professional estimated useful lives of intangible assets, of or when the investment property is qualifications and recent experience in the other than goodwill, from the date that permanently withdrawn from use and location and category of property being they are available for use. no future economic benefit is expected valued, values the investment property from its disposal. Any gains or losses portfolio every 3 years. In financial The estimated useful life of each intangible on the retirement or disposal of an periods within that period the fair value is asset is as follows: investment property are recognised in the determined by the Board of Directors. Income Statement in the year of retirement Computer Software 5 years or disposal. The fair values are based on market values, Brand Name 10 years being the estimated amount for which a Customer Base 5 years 3.16.4 Subsequent Transfers to/from property could be exchanged on the date of License and Fees 20 years Investment Property the valuation between a willing buyer and a Transfers are made to investment property willing seller in an arm’s length transaction Amortisation methods, useful lives and when, and only when, there is a change after proper marketing wherein the parties residual values are reviewed at each in use, evidenced by the end of owner had each acted knowledgeably. reporting date and adjusted if appropriate. occupation, commencement of an operating lease to another party or completion of 3.17 Property, Plant and 3.16 Investment Properties construction or development. Equipment 3.16.1 Basis of Recognition 3.17.1 Freehold Property, Plant and An investment property is property held Transfers are made from investment Equipment either to earn rental income or for capital property when, and only when, there is a 3.17.1.1 Basis of Recognition change in use, evidenced by commencement appreciation or for both, but not for sale in Property, plant and equipment are of owner occupation or commencement of the ordinary course of business, use in the recognised if it is probable that future development with a view to sell. production or supply of goods or services economic benefits associated with the or for administrative purposes. asset will flow to the Group and cost of the For a transfer from investment property asset can be reliably measured. 3.16.2 Basis of Measurement to owner occupied property or inventories, the deemed cost of property for subsequent Fair Value Model 3.17.1.2 Basis of Measurement accounting is its fair value at the date of Investment properties are initially change in use. If the property occupied Items of property, plant and equipment recognised at cost. Subsequent to initial by the Company as an owner occupied are measured at cost/revaluation less recognition, the investment properties are property becomes an investment property, accumulated depreciation/impairment stated at fair values, which reflect market the Company, accounts for such property losses. conditions at the Balance Sheet date. Gains in accordance with the policy stated under or losses arising from changes in fair value property, plant and equipment up to the Cost includes expenditure that is directly are included in the Income Statement in date of change in use. attributable to the acquisition of the asset. the year in which they arise. The cost of self-constructed assets includes For a transfer from inventories to the cost of materials and direct labour, any Where Group companies occupy a investment property, any difference other costs directly attributable to bringing significant portion of the investment between the fair value of the property at that the assets to a working condition for their property of a subsidiary, such investment date and its previous carrying amount is intended use, the costs of dismantling and properties are treated as property, plant recognised in the Income Statement. When removing the items and restoring the site and equipment in the Consolidated the Company completes the construction on which they are located, and capitalised Financial Statements, and accounted for or development of a self-constructed borrowing costs. as per SLAS 18 (Revised) - ‘Property, Plant investment property, any difference and Equipment’. between the fair value of the property at Purchased software that is integral to the that date and its previous carrying amount functionality of the related equipment is is recognised in the Income Statement. capitalised as part of that equipment.

136 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

When parts of an item of property, plant economic benefits embodied within the Depreciation methods, useful life values and equipment have different useful lives, part will flow to the Group and its cost can are assessed at the reporting date. The they are accounted for as separate items of be measured reliably. The carrying amount estimated useful lives for the current year property, plant and equipment. of the replaced part is derecognised. are as follows: The costs of the day-to-day servicing Building 40-50 years 3.17.1.2.1 Cost Model of property, plant and equipment are Plant and Machinery 8-13 years The Group applies the cost model to all recognised in profit or loss as incurred. property, plant and equipment, except Motor Vehicles 4-5 years freehold land and buildings; which 3.17.1.4 Reclassification to Investment Water Sanitation 20 years records at cost of purchase together Property Security Fencing 3 years with any incidental expenses thereon When the use of a property changes from Penstock Pipes 20 years less any accumulated depreciation and owner-occupied to investment property, Biological Assets 10 years accumulated impairment losses. the property is remeasured to fair value Tools 20 years and reclassified as investment property. Roads and Bridges 50 years 3.17.1.2.2 Revaluation Model Any gain arising on remeasurement is Furniture and Fittings 5-10 years The Group revalues its land and buildings recognised in profit or loss to the extent Office Equipment 4-5 years which are measured at its fair value that it reverses a previous impairment loss at the date of revaluation less any on the specific property, with any remaining Computer Equipment 5-8 years subsequent accumulated depreciation gain recognised and presented in the Swimming Pool 10 years and accumulated impairment losses. revaluation reserve in equity. Any loss is Cutlery, Crockery Revaluations are made with sufficient recognised immediately in profit or loss. and Glassware 5 years regularity to ensure that the carrying Linen 3 years amount does not differ materially from 3.17.1.5 Depreciation that which would be determined using fair Depreciation is based on the cost of an 3.17.1.6 Derecognition value at the Balance Sheet date. asset less its residual value. Significant An item of property, plant and equipment components of individual assets are is derecognised upon disposal or when On revaluation of lands and buildings, assessed and if a component has a useful no future economic benefits are expected any increase in the revaluation amount life that is different from the remainder of from its use or disposal. is credited to the revaluation reserve that asset, that component is depreciated in shareholder’s equity unless it off separately. The gain or loss on disposal of an item sets a previous decrease in value of the of property, plant and equipment is same asset that was recognised in the Depreciation is recognised in profit or loss determined by comparing the proceeds Income Statement. A decrease in value on a straight-line basis over the estimated from disposal with the carrying amount of is recognised in the Income Statement useful life of each component of an item the property, plant and equipment, and is where it exceeds the increase previously of property, plant and equipment. Leased recognised net within other income/other recognised in the revaluation reserve. assets are depreciated over the shorter of expenses in the Income Statement. When Upon disposal, any related revaluation the lease term and their useful lives unless revalued assets are sold, the amounts reserve is transferred from the revaluation it is reasonably certain that the Group will included in the revaluation surplus reserve reserve to retained earnings and is not obtain ownership by the end of the lease are transferred to retained earnings. taken into account in arriving at the gain or term. Lands are not depreciated. loss on disposal. 3.17.1.7 Operating Lease Assets Depreciation of an asset begins when it is Operating lease assets are motor vehicles 3.17.1.3 Subsequent Costs available for use and ceases at the earlier and equipment shown under property, The cost of replacing part of an item of the date that the asset is classified as plant and equipment in the Balance Sheet of property, plant and equipment is held for sale and the date that the asset is at cost less accumulated depreciation. recognised in the carrying amount of derecognised. the item if it is probable that the future

LOLC 2011/12 REPORTS & ACCOUNTS 137 Notes to the Financial Statements

Motor vehicles are depreciated net of cost then to reduce the carrying amounts of the Deposits to be insured include time and and the estimated residual value over other assets in the CGU (group of CGUs) on savings deposit liabilities and exclude the the effective useful life. Residual value is a pro rata basis. following: the estimated net amount the Company  Deposit liabilities to member would currently obtain from disposal of the Impairment losses recognised in prior institutions. assets at the end of useful life. periods are assessed at each reporting  Deposit liabilities to Government of date for any indications that the loss Sri Lanka. 3.17.2 Leasehold Property, Plant and has decreased or no longer exists. An Equipment (Assets Acquired on Finance impairment loss is reversed if there has  Deposit liabilities to shareholders, Leases) Directors, key management personnel been a change in the estimates used to and other related parties as defined Leases in terms of which the Group determine the recoverable amount. An in Finance Companies Act Direction assumes substantially obtained all the impairment loss is reversed only to the No. 03 of 2008 on Corporate Governance risks and rewards of ownership are extent that the asset’s carrying amount does of Registered Finance Companies. classified as finance leases. Assets not exceed the carrying amount that would acquired by way of a finance lease are have been determined, net of depreciation,  Deposit liabilities held as collateral against any accommodation granted. stated at an amount equal to the lower if no impairment loss had been recognised. of their fair value and the present value  Deposit liabilities falling within the of minimum lease payments at the Liabilities and Provisions meaning of dormant deposits in terms inception less accumulated depreciation. of the Finance Companies Act, funds of Liabilities are recognised in the Balance which have been transferred to Central Sheet when there is a present obligation as 3.17.3 Capital Work-in-Progress Bank of Sri Lanka. a result of a past event, the settlement of Capital work-in-progress is stated at cost. which is expected to result in an outflow of Registered Finance Companies are These are expenses of a capital nature resources embodying economic benefits. required to pay a premium of 0.15% on directly incurred in the construction of Obligations payable at the demand of the eligible deposit liabilities as at end of the buildings. creditor within one year of the Balance month to be payable within a period of 15 Sheet date are treated as current liabilities. days from the end of the respective month. 3.18 Impairment of Liabilities payable after one year from the Non-Financial Assets Balance Sheet date are treated as non- 3.20 Grants and Subsidies The carrying amounts of the Company’s current liabilities. Grants related to property, plant and non-financial assets are reviewed at each equipment are initially deferred and reporting date to determine whether 3.19 Deposits from Customers allocated to Income Statement on a there is any indication of impairment. Deposits include savings deposits and systematic basis over the useful life of the If any such indication exists, then the term deposits. They are brought to account related property, plant and equipment. assets’ recoverable amount is estimated. at the gross value of the outstanding Grants related to assets, including non- An impairment loss is recognised if the balance. Interest for the period is charged monetary grants at fair value, are deferred carrying amount of an asset or its related to the Income Statement. in the Balance Sheet and credited to the Cash-Generating Unit (CGU) exceeds its Income Statement over the useful life of estimated recoverable amount. 3.19.1 Deposit Insurance Scheme the related asset as given below: In terms of the Finance Companies The Company’s corporate assets do not No. of Rate Direction No. 2 of 2010 ‘Insurance of Deposit Years % generate separate cash inflows and are Liabilities’ issued on 27 September 2010, utilised by more than one CGU. Corporate all Registered Finance Companies are Buildings 40 2.5 assets are allocated to CGUs on a reasonable required to insure their deposit liabilities in Plant and Machinery 13 1/3 7.5 and consistent basis and tested for the Deposit Insurance Scheme operated by Equipment 08 12.5 impairment as part of the testing of the CGU the Monetary Board in terms of Sri Lanka to which the corporate asset is allocated. Roads 50 2.0 Deposit Insurance. Vehicles 05 20.0 Impairment losses are recognised in profit Scheme Regulations No. 1 of 2010 issued or loss. Impairment losses recognised Relevant assets are presented separately under Sections 32A to 32E of the Monetary in respect of CGUs are allocated first to in the Financial Statements without setting Law Act with effect from 1 October 2010. reduce the carrying amount of any goodwill off against the relevant grants. allocated to the CGU (group of CGUs), and

138 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Grants related to income are recognised subject to an agreement to repurchase 3.25.2 Defined Benefit Plans in the Income Statement in the period in them at a predetermined price. Such A defined benefit plan is a post- which they are receivable. securities remain on the Balance Sheet of employment benefit plan other than a the Company and the liability is recorded defined contribution plan. The Company’s 3.21 Finance Leases in respect of the consideration received. net obligation in respect of defined benefit The difference between the sale and Property and equipment on finance leases, pension plans is calculated by estimating the purchase price represents interest which effectively transfer to the Group the amount of future benefit that expense, which is recognised in the Income substantially the entire risk and rewards employees have earned in return for their Statement evenly over the period of the incidental to ownership of the leased service in the current and prior periods; repurchased agreement. items, are disclosed as finance leases at that benefit is discounted to determine their cash price and depreciated over the its present value. Any unrecognised past period the Group is expected to benefit 3.23 Interest-Bearing Borrowings service costs are deducted. from the use of the leased assets. Borrowings include borrowings from financial institutions. They are brought The calculation is performed every three The corresponding principal amount to account at the gross value of the years by a qualified actuary using the payable to the lessor is shown as a liability. outstanding balance. Projected Unit Credit Method. For the Lease payments are apportioned between purpose of determining the charge for any the finance charges and reduction of the 3.24 Debentures period before the next regular actuarial valuation falls due, an approximate lease liability so as to achieve a constant These represent the funds borrowed by the estimate provided by the qualified actuary rate of interest on the outstanding balance Group for long-term funding requirements. is used. of the liability. The interest payable over These are recorded in the Balance Sheet at the period of the lease is transferred to an amounts expected to be payable. interest in suspense account. The interest When the benefits of a plan are improved, the portion of the increased benefit related element of the rental obligations pertaining 3.25 Employee Benefits to each financial year is charged to the to past service by employees is recognised Income Statement over the period of lease. 3.25.1 Defined Contribution Plans in profit or loss on a straight-line basis A Defined Contribution Plan is a post- over the average period until the benefits 3.21.1 Lease Payments employment benefit plan under which become vested. To the extent that the Payments made under operating leases an entity pays fixed contributions into benefits vest immediately, the expense is are recognised in profit or loss on a a separate entity and will have no legal recognised immediately in profit or loss. straight-line basis over the term of the or constructive obligation to pay further The Company recognises all actuarial lease. Lease incentives received are amounts. Obligations for contributions to gains and losses arising from the defined recognised as an integral part of the total defined contribution plans are recognised benefit plan and all expenses related lease expense, over the term of the lease. as an employee benefit expense in the Income Statement in the periods during to defined benefit plans in personnel Minimum lease payments made under which services are rendered by employees. expenses in profit or loss. finance leases are apportioned between This retirement benefit obligation is not the finance expense and the reduction 3.25.1.1 Employees’ Provident Fund (EPF), externally funded. of the outstanding liability. The finance Ceylon Plantation Provident Society (CPPS) and Estate Staff Provident Society (ESPS) expense is allocated to each period during 3.25.3 Short-Term Employee Benefits the lease term so as to produce a constant The Group and employees contribute 12% periodic rate of interest on the remaining and 8% respectively on the salary of each Short-term employee benefit obligations balance of the liability. employee to the abovementioned funds. are measured on an undiscounted basis and are expensed as the related service 3.22 Securities Sold under 3.25.1.2 Employees’ Trust Fund (ETF) is provided. A liability is recognised for the Repurchase Agreements The Company/Group contribute 3% of the amount expected to be paid under short- salary of each employee to the Employees’ term cash bonus if the Company has a These are borrowings collateralised by Trust Fund. present legal or constructive obligation sale of Treasury Bills and Treasury Bonds to pay this amount as a result of past held by the Company to the counterparty service provided by the employee, and the from whom the Company borrowed, obligation can be estimated reliably.

LOLC 2011/12 REPORTS & ACCOUNTS 139 Notes to the Financial Statements

3.26 Swap Instruments The following are the main components of the revenue: Group in its ordinary course of business enter into transactions such as currency Finance & Leasing Earned Income on Leases, Hire Purchases, Factoring, swaps and foreign exchange contracts and Margin Trading, Loans and Advances uses derivative instruments to manage Insurance Gross Written Premium exposure to currency risks. In order to Trading & Related Services Sale of Consumer, Agricultural, Motor Vehicles and account for such transactions, the Group Industrial Items and Providing Related Services. applies hedging accounting principles Leisure Accommodation Sales, Service Charges, Food and based on best accounting practices. Beverages, Income and Outlet Sales Plantation Sale of Perennial Crops Currency swaps are recognised as Off- IT Services IT Service Fee Balance Sheet Assets or Liabilities. The Group’s commitment for the contracted Stock Brokering Brokerage Fees period is converted to Sri Lankan Rupees Power Generation Sale of Electrical Energy, Sale of Solar System based on the exchange rate agreed. Revenue is income that arises in the course reliably, there is no continuing management of ordinary activities of an enterprise. Other 3.27 Accounts Payables and involvement with the goods, and the amount income such as interest on Treasury Bills, Accrued Expenses of revenue can be measured reliably. Bonds and Debentures, gain on disposal Trade and other payables are stated at cost. of property, plant and equipment, rental If it is probable that discounts will be income, dividend income, royalty income, granted and the amount can be measured 3.28 Provisions foreign exchange gain, franchise fees, reliably, then the discount is recognised Provisions are made for all obligations gain on disposal of investments securities, as a reduction of revenue as the sales are existing as at the Balance Sheet date gain on marked to market valuation of recognised. The timing of the transfer of when it is probable that such an obligation investments, etc., also included in the risks and rewards varies depending on the will result in an outflow of resources and gross income. individual terms of the sales agreement. a reliable estimate can be made of the quantum of the outflow. All contingent 3.29.1 Revenue Recognition 3.29.1.2 Rendering of Services liabilities are disclosed as a note to the Revenue is recognised to the extent that Revenue from services rendered is Financial Statements unless the outflow it is probable that the economic benefits recognised in profit or loss in proportion to of resources is remote. Contingent assets will flow to the Group, and the revenue and the stage of completion of the transaction are disclosed, where inflow of economic associated costs incurred or to be incurred at the reporting date. The stage of benefit is probable. can be reliably measured. Revenue is completion is assessed by reference to measured at the fair value of the surveys of work performed. Income Statement consideration received or receivable, net of 3.29 Gross Income trade discounts and value added taxes, net 3.29.1.3 Earned Income on Leases, Hire of sales within the Group. Gross income comprises of revenue, Purchases, Loans and Advances income and other income other than The Group follows the financing method 3.29.1.1 Goods Sold those relating to contributions from of accounting for its income. The excess equity participants. Revenue from the sale of goods in the of aggregated contract receivable over course of ordinary activities is measured at the cost of the assets constitutes the total the fair value of the consideration received unearned income at the commencement of or receivable, net of returns, trade discounts a contract. and volume rebates. Revenue is recognised when persuasive evidence exists, usually in The unearned income is recognised the form of an executed sales agreement, over the term of the facility commencing that the significant risks and rewards of on the month on which the facility is ownership have been transferred to the executed in proportion to the declining customer, recovery of the consideration receivable balance, so as to produce a is probable, the associated costs and constant periodic rate of return on the net possible return of goods can be estimated investment outstanding.

140 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Non-performing loans are those facilities 3.29.1.5 Revenue from Accommodation 3.29.2.1 Rental Income Sales and Services Charge where the rentals are overdue for 6 months Rental income from investment property is and over. Income accrued is suspended Revenue from accommodation sales is recognised in profit or loss on a straight- from the date a facility is classified as non- recognised for the rooms occupied on a line basis over the term of the lease. Lease performing and credited to the ‘Earned daily basis, together with outlet sales and incentives granted are recognised as an Income in Suspense’ in compliance with other income from hotel operations. integral part of the total rental income, Direction No. 05 of 2005 of the Finance over the term of the lease. Rental income Leasing Act No. 56 of 2000 and Direction 90% of service charge collected from from subleased property is recognised as No. 15 of 1991 of the Finance Companies guests is distributed among the employees, other income. Act No. 78 of 1988. Thereafter, such income retaining 10% of such service charge is recognised on cash basis. collected for recovery of breakages of 3.29.2.2 Amortisation of Government cutlery, crockery, glassware and stainless Grants Received Profit or loss on contracts terminated, steel items. Any balance amount of the An unconditional Government grant collections on contracts written-off, retention after recovery of actual breakages related to a biological asset is recognised interest on overdue rentals, interest is redistributed among employees at the in the Income Statement as other income on revolving loans, interest earned on end of each financial year. when the grant becomes receivable. property sale and buy back agreements, interest income on pawn broking are 3.29.1.6 IT Service Fee Other Government grants are recognised accounted for on cash basis. IT services fee is accounted for on an initially as deferred income at fair value when accrual basis. there is reasonable assurance that they will 3.29.1.4 Factoring be received and the Group will comply with Revenue is derived from two sources, 3.29.1.7 Turnover from Sale of Solar the conditions associated with the grant and Funding and providing Sales Ledger Systems and Sale of Electricity are then recognised in the Income Statement Related Services. The above revenue components are as other income on a systematic basis over accounted on an accrual basis. the useful life of the asset. Funding - Discount income relating to factoring transactions is recognised at 3.29.1.8 Income from Government Grants that compensate the Group for the end of a given accounting month. Securities expenses incurred are recognised in the In computing this discount, a fixed rate Discounts/premiums on Treasury Bills/ Income Statement as other income on a agreed upon at the commencement of the Bonds are amortised over the period to systematic basis in the same periods in factoring agreement is applied on the daily reflect a constant periodic rate of return. which the expenses are recognised. balance in the Client’s Current Account. The coupon interest on Treasury Bonds is recognised on an accrual basis. 3.30 Expenses Recognition Sales Ledger-Related Services - A service Expenses are recognised in the Income charge is levied as stipulated in the 3.29.2 Other Income Statement on the basis of a direct Factoring Agreement. Rent income, non-operational interest association between the cost incurred and income, royalty income and franchise fees the earning of specific items of income. All Income is accounted for on an accrual are accounted for on accrual basis. expenditure incurred in the running of the basis and deemed earned on disbursement business and in maintaining the property, of advances for invoices factored, Dividend income is recognised when the plant and equipment in a state of efficiency except where the account is classified as right to receive payment is established. has been charged to income in arriving at non-performing. the profit for the year. Gain on disposal of property, plant and Income is suspended on the basis of, if equipment and other non-current assets, For the presentation of the Income 100% of the sales ledger is disputed and including investments held by the Group Statement the Directors are of the opinion there are no transactions for a period of have been accounted for in the Income that the nature of the expenses method 3 months from the last date of dispute. Statement, after deducting from the net present fairly the element of the Company’s sales proceeds on disposal of the carrying performance, and hence such presentation amount of such assets. method is adopted.

LOLC 2011/12 REPORTS & ACCOUNTS 141 Notes to the Financial Statements

Preliminary and pre-operational the weighted average number of ordinary is based on the assessment of the risk expenditure is recognised in the Income shares outstanding, for the effects of all and pricing model of the Company and Statement. dilutive potential ordinary shares. is comparable with what is applied to transactions between the Company and its Repairs and renewals are charged to the EQUITY unrelated customers. Income Statement in the year in which the 3.34 Stated Capital expenditure is incurred. 3.37.2 Transactions with Key Management Stated capital in relation to the Company Personnel means the total of all amounts received 3.31 Finance Income and According to Sri Lanka Accounting by the Company or due and payable to the Finance Costs Standard 30 (Revised 2005) - ‘Related Company in respect of the issue of shares Party Disclosures’, key management Finance income comprises interest income and in respect of calls on shares. on funds invested, dividend income, gains personnel, are those having authority and responsibility for planning, directing on the disposal of financial assets, fair Incremental costs directly attributable to and controlling the activities of the entity. value gains on financial assets. Interest the issue of ordinary shares are recognised Accordingly, the Board of Directors income is recognised as it accrues in profit as a deduction from equity, net of any tax (including Executive and Non-Executive or loss, using the effective interest method. effects. Dividend income is recognised in profit or Directors), personnel hold designation of Divisional General Manager and above loss on the date that the Group’s right to 3.35 Movement of Reserves receive payment is established, which in positions and their immediate family the case of quoted securities is normally Movement of reserves is disclosed in the members have been classified as Key the ex-dividend date. Statements of Changes in Equity. Management Personnel of the Company.

Finance costs comprise interest expense 3.36 Cash Flow Statement The immediate family member is defined as spouse or dependent. Dependent is on borrowings and impairment losses The Cash Flow Statement has been defined as anyone who depends on the recognised on financial assets (other than prepared using the ‘Indirect Method’ of respective Director for more than 50% of trade receivables), are recognised in the preparing Cash Flows in accordance with his/her financial needs. Income Statement. the Sri Lanka Accounting Standard 09 - ‘Cash Flow Statements’. Cash and cash 3.32 The Group Profits are Stated equivalents comprise short term, highly- 3.38 Segmental Reporting After- liquid investments that are readily Segment is a distinguishable component of convertible to known amounts of cash the Group that is engaged either in providing  Providing for all bad and doubtful debts and depreciation of property, plant and and are subject to an insignificant risk of products or services (business segment), equipment. changes in value. or in providing products or services within a particular economic environment  Charging all expenses incurred in the Cash and cash equivalents comprise of (geographical segment), which is subject day-to-day operations of the business cash in hand and cash at banks and other to risks and rewards that are different from and in maintaining the property, plant highly-liquid financial assets which are those of other segments. and equipment in a state of efficiency. held for the purpose of meeting short- term cash commitments with original In accordance with the Sri Lanka 3.33 Earnings Per Share maturities of less than three months which Accounting Standard 28 - ‘Segment The Company presents basic and diluted are subject to insignificant risk of changes Reporting’, segmental information is earnings per share data for its ordinary in their fair value. presented in respect of the Group. The shares. Basic earnings per share is segment comprises of Financial Services, calculated by dividing the profit or loss 3.37 Related Party Disclosures Insurance, Trading, Leisure, Plantation, attributable to ordinary shareholders of 3.37.1 Transactions with Related Parties Power and Energy and others are the Company by the weighted average described in Note 47. The Company carries out transactions in number of ordinary shares outstanding the ordinary course of its business with during the year. Diluted earnings per share Segment results, assets and liabilities parties who are defined as related parties in is determined by adjusting the profit or loss include items directly attributable to a Sri Lanka Accounting Standard 30 (Revised attributable to ordinary shareholders and segment as well as those that can be 2005) - ‘Related Party Disclosures’. The allocated on a reasonable basis. Segment Pricing applicable to such transactions capital expenditure is the total cost

142 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

incurred during the period to acquire A reinsurance asset is impaired if there is 3.41.3.4 Unexpired Risks segment assets that are expected to be objective evidence, as a result of an event Provision is made where appropriate used for more than one period. that occurred after the initial recognition for the estimated amount required over of the reinsurance asset, that the Company and above unearned premium to meet Expenses that cannot be directly identified may not receive all amounts due to it future claims and related expenses on the to a particular segment are allocated on under the terms of the contract, and the business in force as at 31 December. bases decided by the management and event has a reliably measurable impact on applied consistently throughout the year. the amount that the Company will receive 3.41.3.5 Unexpired Risk Reserve from the reinsurer. Reinsurance assets are The calculation of premium liability requires derecognised when the contractual rights 3.39 Events After the Balance a comparison between the Company’s are extinguished or expire or the contract Sheet Date held unearned premium reserve less DAC is transferred to another party. All material Post-Balance Sheet events provision with actuarial estimate of the have been considered and where unexpired risk for the total general insurance 3.41.2 Premium Receivables appropriate adjustments or disclosures business. The resulting premium liability is have been made in the respective Notes to Collectability of premiums and other the higher of these two. In estimating the the Financial Statements. debts are reviewed on an on-going basis. unexpired risk liability, assumptions are Policies issued on debt basis and that made on the expected ultimate loss ratio 3.40 Commitments and are known to be uncollectible are for each class of business and management Contingencies cancelled and the respective gross written expenses incurred whilst these policies premium is reversed. A provision for All discernible risks are accounted for remain exposed for claims. doubtful debts is raised when some doubt in determining the amount of all known as to collection exists. liabilities. Contingent liabilities are 3.41.3.6 Deferred Acquisition Costs (DAC) possible obligations whose existence will Deferred acquisition expenses represent 3.41.3 General Insurance Business be confirmed only by uncertain future commission and franchise fees which 3.41.3.1 Gross Written Premium events or present obligations where vary with and are directly related to the the transfer of economic benefit is not Premium is accounted as and when production of business. Commission probable or cannot be reliably measured. cash is received and in the same period expenses are deferred and charged over Contingent liabilities are not recognised in as the policy liabilities are created. For the period in which the related premiums the Balance Sheet but are disclosed unless single premium contracts, premiums are are earned, on 1/365 basis. they are remote. recorded as income when received with any excess profit deferred and recognised 3.41.3.7 Claims ACCOUNTING POLICIES SPECIFIC TO as income in a constant relationship to the Claims incurred include provisions for SPECIFIC INDUSTRY SECTORS insurance in force, for annuities and the the estimated cost of claims and related amount of expected benefit payments. 3.41 Insurance Sector handling expenses in respect of incidents up to 31 December. Claims outstanding 3.41.1 Reinsurance Receivable 3.41.3.2 Reinsurance Premium are assessed by reviewing the individual The Group cedes insurance risk in the Reinsurance premium expense is accrued claim files and estimating changes in normal course of business. Reinsurance on active policies on a monthly basis. the ultimate cost of settling claims. The assets represent balances due from provision in respect of claims Incurred But reinsurance companies. Recoverable 3.41.3.3 Unearned Premium Reserve Not Reported (IBNR) is actuarially valued amounts are estimated in a manner Unearned premium is the portion of to ensure a more realistic estimation of the consistent with the outstanding claims gross written premium and reinsurance future liability based on past experience provision and are in accordance with premium written in the current year in and trends. Actuarial valuations are the reinsurance contract. Reinsurance respect of risk related to subsequent performed on an annual basis. Whilst the is recorded gross in the Balance Sheet periods. Unearned premium is calculated Directors consider that the provision for unless a right to offset exists. If a on the 1/365 basis in accordance with the claims-related reinsurance recoveries are reinsurance asset is impaired, the Rules made by the Insurance Board of fairly stated on the basis of information Company reduces the carrying amount Sri Lanka under the Regulation of currently available, the ultimate liability accordingly and recognises a loss in the Insurance Industry Act No. 43 of 2000. will vary as a result of subsequent Statement of Income. information and events. This may result in adjustments to the amounts provided.

LOLC 2011/12 REPORTS & ACCOUNTS 143 Notes to the Financial Statements

Such adjustments are reflected in the 3.41.4.2 Reinsurance Premium is the starting point and in addition to Financial Statements for that period. The Reinsurance premium expense is accrued that a liability may be held on account of methods used, and the estimates made, on active policies on a monthly basis. future cash flows shortfalls. This second are reviewed regularly. Reinsurance recoveries are credited to component is calculated exactly as per the match the relevant gross claims. sterling reserve above. 3.41.3.8 Valuation of Insurance Provision - General Insurance Reserve for 3.41.4.3 Benefits, Losses and Expenses 3.41.4.6 Valuation of Insurance Provision - outstanding claims including IBNR Life Insurance Contract Liabilities Expenses related to the acquisition and The Group started writing Non-Life In the last nine months of operation ending maintenance of long-term insurance Business in year 2011, the Company has on 31 December 2011, the Group has business. Claims by death or maturity are started with Writing Motor Business and sold three products viz. Divisaviya, Isuru charged against revenue on notification was only class of business till 31.12.2011. Sahana and Credit Life Group. All three are of death or on expiry of the term. Claims single premium term insurance products. payable includes direct cost of settlement. The Directors determine the long-term As per IBSL’s guidelines, the method of Interim payments and surrenders are insurance business provisions for the valuation is Net Premium method. As per accounted for at the time of settlement. Company on the recommendation of the IBSL’s requirements, the discounting rate Actuary, following his annual investigation used is 5% p.a.; this being the first year 3.41.4.4 Actuarial Valuation for Long- of the life insurance business. The actuarial Term Insurance Provision of operations of the Company. A mortality valuation takes into account all liabilities table used is A (67-70) ultimate table. The Directors determine the long-term including contingent liabilities and is insurance business provisions for the based on assumptions recommended by A contingency reserve has been set aside Company on the recommendation of the the Reporting Actuary. to make provision for other risks like Actuary, following his annual investigation Catastrophe, IBNR. of the life insurance business. The actuarial Market ratios were considered arriving at valuation takes into account all liabilities IBNR figures. Actuary has used an average Reinsurance has been ignored for including contingent liabilities and is delay method modified suitably looking computation of solvency margin as a based on assumptions recommended by at Company’s new business policy and conservative basis. the Reporting Actuary. delay pattern observed. IBNR calculated is around 7% of Net Earned Premiums, 3.41.4.5 Life insurance Contract Liabilities 3.42 Plantation Sector and is on conservative side for a start- 3.42.1 Immature and Mature Plantations up company. Actuary believes that over Life insurance liabilities are recognised a period of couple of more years actuary when the contracts are entered into and The total cost of land preparation, will be able to use some statistical method premiums are charged. These liabilities rehabilitation, new planting, re-planting, as data may be sufficient at that time and are calculated via the net premium method crop diversification, inter-planting and Company also may have ventured in to for protection products, the unit fund plus fertilizing incurred between the time of other classes of business. Sterling reserve method for unit-linked planting and harvesting (When the planted products and a modified gross premium area attains maturity) are classified as 3.41.4 Life Insurance Business method for conventional products. For immature plantations. 3.41.4.1 Gross Written Premium the net premium method the liability is calculated as the discounted value of the These immature plantations are shown Premium is accounted as and when future benefits that are directly related to at direct costs plus attributed overheads, cash is received and in the same period the contract, less the discounted value of including interest attributable to long- as the policy liabilities are created. For the theoretical premiums that would be term loans used for financing immature single premium contracts, premiums are required to meet those future benefits plantations. Attributable overheads recorded as income when received with based on the valuation assumptions. For incurred on the plantation are apportioned any excess profit deferred and recognised the sterling reserve method all contract- based on the labour days spent on as income in a constant relationship to the related cash flows are projected using best respective replanting & new planting and insurance in force, for annuities and the estimate assumptions (but with valuation capitalised on the immature areas. The amount of expected benefit payments. claim rates) and additional liabilities are remaining non-attributable overhead is set up in the event that contracts are not expensed in the accounting period in which self-financing. For the modified gross it is incurred. premium method the investment account

144 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

The expenditure incurred on perennial These costs have been capitalised and The difference between depreciation crop (Tea/Rubber/Coconut) fields, which amortised over the remaining lease period. based on the revalued carrying amount come into bearing during the year, of the asset and depreciation based on has been transferred to mature plantations 3.42.4 Infilling Costs the asset’s original cost is transferred and depreciated over their useful The land development costs incurred in to retained earnings over the remaining life period. the form of infilling have been capitalised leasehold period. to the relevant mature field where infilling The cost of replanting and new planting results in an increase in the economic life 3.42.7 Prepaid Lease Rentals/Leasehold Properties are classified as immature plantations up of the relevant field beyond its previously to the time of harvesting the crop. assessed standard of performance, in Prepaid lease rentals paid to acquire land accordance with Sri Lanka Accounting use rights are amortised over the lease Further, the general charges incurred on Standard - 32 and depreciated over the term in accordance with the pattern of the plantation are apportioned based on the useful life at rates applicable to mature benefits provided. Leasehold properties labour days spent on respective replanting plantation. Infilling costs are not capitalised are tested for impairment annually and and new planting and capitalised in the and charged to the Income Statement in are written down where applicable. immature areas. The remaining portion the year in which they are incurred. The impairment loss, if any, is recognised of the general charges is expensed in the in the Income Statement. accounting period in which it is incurred. 3.42.5 Leasehold Rights to Bare Land of JEDB/SLSPC Estate Assets and 3.42.8 Amortisation Immovable (JEDB/SLSPC) Estates Assets The cost of areas coming in to bearing is The leasehold rights of assets taken over on Finance Lease transferred to mature plantations at the from JEDP/SLSPC are amortised in equal end of the financial year. Leasehold Rights to bare land of JEDB/ amounts over the lower of lease period and SLSPC estate assets and immovable economic useful life. Mature plantations are depreciated over (JEDB/SLSPC) estates assets on finance their useful lives or unexpired lease lease obtained on a long-term basis, are Depreciation rates used for the purpose period, whichever is less. No depreciation stated at the recorded carrying values as at are as follows: is provided for immature plantations. the effective date of Sri Lanka Accounting No. of Rate Standard No. 19 - Leases, in line with Years % The estimated useful lives for the current Ruling of the Urgent Issues Task Force of and comparative years are as follows: The Institute of Chartered Accountants Bare Land 53 1.89 Tea 30-33 1/3 years of Sri Lanka. Such carrying amounts are Improvement to Lands 30 3.33 amortised over the remaining lease term Rubber 20 years Mature Plantations 30 3.33 or useful life of such asset whichever is Coconut 50 years Buildings 25 4.00 shorter. Cardamom/Cinnamon 15 years Machinery 15 6.67 3.42.6 Amortisation of Revaluation Surplus Crop Diversification 30 3.33 3.42.2 Restoration Costs Water and Sanitation 20 5.00 In compliance with the Sri Lanka Expenditure incurred on repairs or Accounting Standards Application Other Vested Assets 30 3.33 maintenance of property, plant and Guidance Abstract No. 11 of The Institute Permanent Land equipment in order to restore or maintain of Chartered Accountants of Sri Lanka Development 53 1.89 the future economic benefits expected (ICASL), the valuation of the leasehold from originally assessed standard of rights to bare lands was carried out performance is recognised as an expense by a professionally-qualified valuer, when incurred. Mr. Arthur Perera as at 31 December 2005. The excess of valuation over the 3.42.3 Permanent Land Development carrying amount has been treated as the Costs revaluation surplus and transferred to Permanent land development costs component of equity. are those costs incurred making major infrastructure development and building new access roads on leasehold lands.

LOLC 2011/12 REPORTS & ACCOUNTS 145 Notes to the Financial Statements

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

4 Gross Income Revenue (Note 4.1) 17,136,314,250 14,288,491,997 – – Income (Note 4.2) 17,312,892,336 12,150,506,779 3,030,395,171 3,511,733,478 Other income (Note 5) 3,366,654,960 5,638,328,685 5,679,439,846 2,832,627,486 Total 37,815,861,546 32,077,327,461 8,709,835,017 6,344,360,964

4.1 Revenue Gross revenue 17,142,719,653 14,293,506,364 – – Less - Turnover taxes (6,405,403) (5,014,367) – – 17,136,314,250 14,288,491,997 – –

4.2 Income Leasing interest income 4,631,845,792 2,390,289,528 124,162,528 306,098,603 Hire purchases interest income 2,667,096,069 2,871,899,544 30,670,520 159,734,570 Advances and other loans interest income 5,937,530,409 3,498,669,764 1,811,590,218 1,075,960,268 Earned premium on insurance contracts 115,792,303 – – – Deferred instalment income 175,110,871 305,062,781 175,047,562 305,062,781 Operating lease and hire rental income 466,975,064 830,643,280 450,391,739 796,510,089 Overdue interest income 680,350,751 469,431,023 200,883,981 182,361,902 Debt factoring income 1,449,833,742 927,509,275 40,494,675 466,622,290 Insurance commission income 9,115,757 12,176,354 9,115,757 12,176,354 Securities trading and others 16,565,680 – – – Recoveries from contracts written-off 57,951,740 35,563,032 47,424,974 35,563,032 Transfer fees and profit on termination 488,679,285 157,773,656 133,009,158 157,773,656 Arrangement/documentation fee and other 172,198,489 191,637,547 7,604,059 13,869,934 Other operational income 443,846,384 459,850,995 – – Total 17,312,892,336 12,150,506,779 3,030,395,171 3,511,733,478

146 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

5 other Income/(Expenses) 5.1 Other Income Rental income 46,030,129 7,565,793 – – Gain/(loss) on sale of property, plant and equipment 155,164,954 (25,890,860) 137,863,165 (36,300,647) Profit on sale of vehicles 6,169,351 4,525,772 – – Dividends income 319,620,380 688,965,710 64,059,197 52,882,917 Interest received from deposits and Government Securities 337,100,961 1,118,583,225 2,543,759 542,932,458 Debenture interest income – – 59,752,485 84,093,924 Royalty income – – – 6,939,260 Foreign exchange gain/(loss) (144,783,960) 6,621,810 9,100,389 16,613,708 Change in fair value of forward contracts 211,713,264 – – – Gain on sale of Treasury Bonds 892,921 550,983,898 – 272,172,043 Gain on sale of factoring portfolio – – 828,726,215 – Reversal of provision for fall in value of investments and others 2,900,266 – – – Appreciation in market value of quoted investments 57,952 1,035,134,489 – 718,294,170 Profit on sale of quoted and non-quoted shares 3,982,276,963 1,958,298,140 4,256,218,914 667,164,597 Franchise fees 114,302,575 85,938,933 114,302,575 85,938,933 Amortisation of capital grants (Note 38.1) 8,448,663 4,690,079 – – Gain/(loss) on change in fair value of timber stocks (Note 26) (27,384,221) 149,563,509 – – Insurance policy fees 7,362,300 – – – Treasury management fees – – 370.722,994 309,639,937 Restructuring and arrangement fees – – 400,000,000 1,304,169 Other expenses (Note 5.2) (1,520,620,853) – (744,814,802) – Sundry income/(expenses) (132,596,685) 53,348,187 180,964,955 110,952,016 Total 3,366,654,960 5,638,328,685 5,679,439,846 2,832,627,486

5.2 Other Expenses Fall in market value of quoted and non-quoted shares 1,487,033,197 – 744,814,802 – Other expenses 33,587,656 – – – Total 1,520,620,853 – 744,814,802 –

5.3 Credit for Withholding Tax on Government Securities on Secondary Market Transactions Section 137 of the Inland Revenue Act No. 10 of 2006 provides that a Company which derives interest income from the secondary market transactions in Government Securities be entitled to a notional tax credit (being one-ninth of the net Interest income) provided such interest income forms part of the statutory income of the Company for that year of assessment.

Accordingly, net income earned from secondary market transactions in Government Securities for the year resulting notional tax credit amounted to Rs. 35,215,851/- (2010/11 - Rs. 124,051,297/-) for the Group and Rs. 254,376/- (2010/11 - Rs. 54,293,245/-) for the Company.

LOLC 2011/12 REPORTS & ACCOUNTS 147 Notes to the Financial Statements

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

6 net Finance Costs Overdraft and other short-term borrowings 3,231,227,974 2,451,333,422 1,640,408,117 1,501,235,594 Long-term borrowings 2,244,192,748 1,992,447,827 604,542,500 665,183,830 Finance lease interest 60,713,974 72,970,366 32,353,914 31,818,620 Debenture interest 240,229,163 16,874,771 147,105,733 – Charges on SWAPS 341,758,864 368,313,171 127,006,453 196,439,782 Interest on customer deposits 2,422,242,985 1,531,310,861 – – 8,540,365,708 6,433,250,418 2,551,416,717 2,394,677,826 (-) Interest income on foreign currency deposits (70,475,268) (12,662,530) (8,098,989) (10,662,477) 8,469,890,440 6,420,587,888 2,543,317,728 2,384,015,349

7 dIrect Expenses Excluding Finance Costs Value Added Tax (VAT) on leases/general expenses and VAT on financial services 421,770,942 649,831,089 103,402,864 138,015,591 Business Turnover Tax (BTT), NBT, debits tax and others 447,593,932 367,999,914 95,075,718 128,826,994 Reinsurance premium 14,879,871 – – – Insurance benefits, losses and expenses 50,800,006 – – – Increase in long-term insurance fund 47,570,658 – – – Other direct expenses 3,105,624 – – – 985,721,033 1,017,831,003 198,478,582 266,842,585

8 personnel Costs Salaries, wages and other benefits 2,863,579,414 1,628,153,494 216,250,006 275,430,731 Contribution to EPF/CCPS/ESPS 267,851,630 116,616,930 34,488,141 44,513,768 Contribution to ETF 49,386,535 25,634,988 6,249,626 7,962,524 Retirement benefit cost (Note 39.1) 131,332,229 215,070,845 10,648,775 13,197,616 3,312,149,808 1,985,476,257 267,636,548 341,104,639

9 other Operating Expenses Administration cost 1,491,884,362 1,251,494,624 349,204,457 373,759,295 Operating and marketing cost 2,529,530,968 1,783,020,530 215,495,451 257,872,764 Specific provisions reversals (141,272,121) (470,061,799) (67,297,667) (366,274,425) Specific bad debts written-off 114,404,712 587,712,100 78,860,103 378,676,402 Other provisions 77,591,014 87,758,979 74,958,175 29,940,752 4,072,138,935 3,239,924,434 651,220,519 673,974,788

148 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

10 results from Operating Activities

Results from operating activities are stated after charging all expenses including the following:

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Directors’ Remuneration 53,883,448 40,282,878 46,064,635 38,387,878

Auditors’ fees and expenses: Remuneration for - Audit-related services 17,426,584 15,295,529 2,450,000 2,113,104 Non-audit-related services 2,003,379 2,763,361 1,567,793 561,680 Legal expenses 54,134,452 56,621,901 12,458,792 24,126,801 Professional fees 68,417,029 39,062,853 23,072,295 19,479,318 Advertising-related expenses 439,914,228 329,515,219 51,891,974 41,275,084 Donations 8,328,546 4,604,103 1,766,670 1,478,614

Depreciation and Amortisation Depreciation of property, plant and equipment (Note 33) 1,514,063,360 977,143,735 581,976,145 666,912,764 Amortisation of prepaid lease rentals (Note 24) 61,592,229 46,101,307 – – Amortisation of intangible assets (Notes 32.3/32.4) 53,988,236 51,298,219 20,998,529 18,261,470 Depreciation of mature plantations (Note 27) 39,985,492 35,811,486 – – 1,669,629,317 1,110,354,747 602,974,674 685,174,234

11 Gains on Bargain Purchases (Negative Goodwill) Group For the year ended 31 March 2012 2011 (Rs.) (Rs.)

On acquisition of subsidiaries (Note 11.1) 2,914,536,420 271,910,632 2,914,536,420 271,910,632

11.1 The gains on bargain purchases (negative goodwill) is attributable for the following entities acquired during the period:

Group For the year ended 31 March 2012 2011 (Rs.) (Rs.)

Excel Global Holdings (Pvt) Ltd. (Group) (Note 11.2) 2,604,554,950 – Confifi Hotels Group – 271,910,632 Taprobane Capital Ltd. (Group) 41,469,110 – Dickwella Resort Ltd. 268,512,360 – 2,914,536,420 271,910,632

LOLC 2011/12 REPORTS & ACCOUNTS 149 Notes to the Financial Statements

11.2 Browns Investments PLC (the Group) acquired 100% shareholding of Excel Global Holdings (Pvt) Ltd., on 22 July 2011. Upon this acquisition the Group gained controlling interest of Millennium Development (Pvt) Ltd. (MDL), which is a wholly-owned subsidiary of Excel Global Holdings (Pvt) Ltd. The cost of the acquisition was Rs. 887 Mn. MDL has leasehold rights to a block of land at T.B. Jayah Mawatha to the extent of 897 Perches, presently known as ‘Excel World’. The lease is for a further period of 32 years with a provision for extension for another 40 years, subject to conditions therein.

As per SLAS 25 (14), all business combinations shall apply the purchase method of accounting and SLAS 25 (16) (c) requires to allocate (at the acquisition date), the cost of the business combination to the assets acquired and liabilities and contingent liabilities assumed.

Further, SLAS 25 (36), requires the acquirer to allocate the cost of the business combination by recognising the acquiree’s identifiable assets and identifiable and contingent liabilities that satisfy recognition criteria provided in SLAS 25 (37) at their fair value at the date of the acquisition. Therefore, all identifiable intangible asset acquired in a business combination are recognised separately from goodwill and are measured initially at fair value at acquisition date.

As such, the fair value of this intangible asset has been incorporated in the Financial Statements for the period in computing the goodwill on acquisition and the resultant gain (negative goodwill) of Rs 2,604.5 Mn is reflected in the Group Income Statement for the period ended 31 March 2012.

For the purpose of ascertaining the fair value of leasehold interest, valuation of the said leasehold interest of the property has been obtained from two Chartered Valuers. Mr. P.W. Senaratne, Chartered Valuer has valued the leasehold interest at Rs. 5,102 Mn for a period of 72 years and at Rs. 4,320 Mn for a period of 32 years. Mr. K.T.D. Tissera, Chartered Valuer has valued the leasehold interest at Rs. 4,500 Mn for 72 years and at Rs. 3,500 Mn for 32 years. The Group has incorporated the lower valuation as given by Mr. Tissera as a matter of prudence. MDL intends to develop this property as a mixed development over the next few years. It is planned that this development be in line with the terms of the lease agreement between MDL and the Lessor namely, the Incorporate Trustees of the Church of England in Ceylon. Specifically the development will be in line with the sixth schedule of the lease agreement and the approved development plan. All licenses granted to tenants would be for activities which are in keeping with the tenants of the church.

On 1 October 2011, Taprobane Plantations Ltd., an associate company of the Group took over business activities of the Excel World formerly operated by MDL. As a result, the property was categorised as an investment property as provided for by the Sri Lanka Accounting Standards and consequently, the intangible assets was classified as an investment property and the Company uses the fair value model, in terms of SLAS 40 (35). This investment property was revalued as at 31 March 2012, resulting in a sum of Rs. 250 Mn being credited to the Income Statement.

150 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

12 Income Tax Expense

The Company is liable for tax at the rate of 28% on its taxable income in accordance with the Inland Revenue Act No. 10 of 2006, and subsequent amendments made thereto. Provision has been made in the Financial Statements accordingly. The rest of the Group companies are taxable under the prevailing applicable rates.

12.1 Major components of income tax expense are as follows:

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Current tax expense (Note 12.3) 989,109,419 803,875,954 83,080,528 128,892,387 Deferred tax expense (Note 31.5) 401,166,396 455,403,214 39,320,603 245,753,785 Income tax expense reported in the income statement 1,390,275,815 1,259,279,168 122,401,131 374,646,172

12.2 Numerical reconciliation of accounting profits to income tax expense-

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Profit before income tax expense 10,327,352,913 8,282,359,080 4,423,367,446 1,897,989,460 (+) Disallowable expenses 20,175,375,117 9,862,533,960 2,368,730,498 2,831,528,090 (-) Allowable expenses (16,267,032,567) (8,484,982,755) (1,651,372,515) (2,662,748,657) (-) Tax exempt income (11,791,133,094) (7,268,155,911) (5,314,570,485) (1,758,139,868) (-) Allowable tax credits (25,535,741) (121,780,651) – – (+/-) Tax losses incurred/utilised (Note 12.6) 480,222,806 (261,059,971) 173,845,055 (108,020,159) (+/-) Other adjustments 366,914,588 230,865,135 – – Taxable income 3,266,164,023 2,239,778,887 – 200,608,866 Income tax @ 28% 787,624,853 – – – 12% 26,634,100 – – – 10% 38,632,620 – – – 35% – 692,984,749 – 70,213,104 15% – 38,973,369 – – Total tax expenses 852,891,573 731,958,118 – 70,213,104 Average statutory income tax rate (%) 26.11 32.68 28.00 35.00

12.3 Current Tax Expense Tax expense 852,891,573 731,958,118 – 70,213,104 (+) SRL @ 1.5% – 10,979,372 – 1,053,196 Under provision in respect of previous years 134,823,285 60,938,464 83,080,528 57,626,087 Tax on intercompany dividends 925,299 – – – Deemed dividend tax paid 469,262 – – – 989,109,419 803,875,954 83,080,528 128,892,387

LOLC 2011/12 REPORTS & ACCOUNTS 151 Notes to the Financial Statements

12.4 Effective Tax Rate Group Company For the year ended 31 March 2012 2011 2012 2011 (%) (%) (%) (%)

13.46 15.20 2.77 19.74

12.5 A reconciliation of effective tax rate is as follows:

For the year ended 31 March 2012 2011 (Rs.) (%) (Rs.) (%)

Group Accounting profit before income tax 10,327,352,913 8,282,359,080 Income tax expense at the average statutory income tax rate 2,696,775,854 26.11 2,706,668,949 32.68 Disallowable expenses 5,669,550,745 54.90 3,678,472,170 44.41 Allowable expenses (4,247,801,058) (41.13) (2,772,886,220) (33.48) Tax exempt income (3,079,011,948) (29.81) (2,375,228,088) (28.68) Allowable tax credits (6,668,134) (0.06) (39,797,829) (0.48) Tax losses incurred/utilised 125,400,311 1.21 (85,314,209) (1.03) Other adjustments 95,812,200 0.93 75,446,559 0.91 SRL @ 1.5% – – 10,979,372 0.13 Under/(over) provision in respect of previous years 134,823,285 1.31 60,938,464 0.74 Tax on intercompany dividends 925,299 0.01 – – Deemed dividend tax paid 469,262 0.00 – – Income tax expense 1,390,275,815 13.46 1,259,279,168 15.20

Company Accounting profit before income tax 4,423,367,446 1,897,989,460 Income tax expense at the average statutory income tax rate 1,238,542,885 28.00 664,296,311 35.00 Disallowable expenses 702,565,142.44 15.88 1,236,788,617 65.16 Allowable expenses (462,384,304) (10.45) (931,962,030) (49.10) Tax exempt income (1,488,079,736) (33.64) (615,348,954) (32.42) Tax losses incurred/utilised 48,676,615 1.10 (37,807,056) (1.99) SRL @ 1.5% – – 1,053,197 0.06 Under/(over) provision in respect of previous years 83,080,528 1.88 57,626,087 3.04 Income tax expense 122,401,131 2.77 374,646,172 19.74

152 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

12.6 Tax Losses

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Losses brought forward 3,269,759,515 3,530,819,486 1,206,745,573 1,314,765,732 Acquisition of subsidiaries 35,982,578 – – – Adjustments for brought forward tax losses (217,440,225) – (217,440,225) – Losses incurred 873,940,619 130,242,273 173,845,055 – Losses utilised (393,717,813) (391,302,244) – (108,020,159) Losses carried forward 3,568,524,674 3,269,759,515 1,163,150,403 1,206,745,573

12.7 Tax Exemptions,Concessions or Holidays that have been granted to the Group of Companies Maturata Plantations Ltd. and Pussellawa Plantations Ltd. ‘Specified Profit’ from agricultural undertaking under Section 16 of Inland Revenue Act are exempted for a five year period reckoned from the year of assessment 2006/07.

LOLC Leisure Sector Companies All leisure sector companies are taxed at the rate of 12%.

United Dendro Energy (Pvt) Ltd. As per the agreement entered with the Board of Investments (BOI) Sri Lanka, the Company’s business profits are tax exempted for first 5 years of operations and the next two years is taxed under a concessionary rate of 10% and thereafter income tax will be payable at the rate of 20%.

During the 2011/12 financial period, the following companies were taxed at the rate of 10% since their turnover is less than Rs. 300 Mn. 1. Browns Group Industries (Pvt) Ltd. 2. Standard Finance (Pvt) Ltd. 3. LOLC Services Ltd. 4. LOLC Leisure Ltd. 5. Dickwella Resort Ltd. 6. LOLC Securities Ltd.

LOLC 2011/12 REPORTS & ACCOUNTS 153 Notes to the Financial Statements

13 eArnings Per Share 13.1 Basic Earnings Per Share The calculation of basic earnings per share for the year is based on the profit attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding calculated as follows:

Group For the year ended 31 March 2012 2011

Profit attributable to ordinary shareholders (Rs.) 6,259,864,501 3,840,227,908 Weighted average numbers of ordinary shares (Note 13.1.1) 475,200,000 475,200,000 Basic earnings per share (Rs.) 13.17 8.08

13.1.1 Weighted Average Number of Ordinary Shares Total as at beginning of the period 475,200,000 47,520,000 Effect on subdivision of 1:10 (Note 13.1.2) – 427,680,000 Total as at end of the period 475,200,000 475,200,000

13.1.2 Subdivision of Shares In the financial period of 2010/11, each existing fully-paid ordinary share of the Company was subdivided into ten (10) ordinary shares in order to facilitate further market liquidity. Consequent to this subdivision, the number of ordinary shares in issue increased from 47,520,000 to 475,200,000.

13.2 Diluted Earnings Per Share There were no potential dilutive ordinary shares outstanding at any time during the year or previous year. Therefore, not presented.

14 Cash and Cash Equivalents 14.1 Cash in Hand and Favourable Bank Balances Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Cash in hand 97,357,439 25,029,013 2,604,500 1,349,500 Balances at banks 4,347,351,990 4,634,071,481 247,407,365 390,662,325 4,444,709,429 4,659,100,494 250,011,865 392,011,825

14.2 Unfavourable Bank Balances used for Cash Management Purposes Bank overdrafts (4,014,222,740) (4,029,204,315) (1,603,899,113) (2,094,424,623) Net cash and cash equivalents 430,486,689 629,896,179 (1,353,887,248) (1,702,412,798)

15 sHort-term Investments

1. Unit trusts 127,000,000 – – – 2. Investments in foreign currency deposits 31,676,105 196,698,996 31,676,105 53,754,799 158,676,105 196,698,996 31,676,105 53,754,799

154 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

16 Investment in Term Deposits

Investments in fixed deposits 1,192,812,399 2,456,187,694 149,251,925 221,601,049 1,192,812,399 2,456,187,694 149,251,925 221,601,049

17 Investment Securities

Investment in debentures 32,523,522 28,000,299 377,931,522 714,400,299 Investment in preference shares – 21,111,110 – – Investment in mudharabah deposit – – – 35,000,000 Investment in commercial papers 891,822,087 940,984,552 – – Investment in reverse repurchase agreements 1,050,540,584 2,411,486,792 – – Investment in Treasury Bills 144,657,267 – – – Investment in Treasury Bonds 883,637,257 34,532,933 18,655,578 – Quoted ordinary shares (Note 17.1 ) 10,286,555,682 10,730,084,505 3,123,371,863 2,788,580,298 Non-quoted ordinary shares (Note 17.2) 262,167,696 289,896,489 – 26,212,099 Investments in capital savings 7,359,346 – – – 13,559,263,441 14,456,096,680 3,519,958,963 3,564,192,696

17.1 Quoted Ordinary Shares

Group

As at 31 March 2012 2011 No. of Cost Market Value No. of Cost Market Value Shares (Rs.) (Rs.) Shares (Rs.) (Rs.)

Amaya Leisure PLC 1,000 132,467 76,000 1,000 132,467 120,100 Abans Electricals PLC 50,000 13,133,972 7,900,000 – – – Acme Printing & Packaging PLC 575,000 13,373,266 11,212,500 – – – Asia Capital PLC 40 – 1,500 40 – 3,512 Browns Beach Hotel PLC 412,113 2,712,543 6,119,810 326,622 4,403,226 6,957,048 Cargo Boat Development Company PLC 300 9,801 25,440 300 9,801 43,950 Central Finance PLC 2,583 707,840 442,468 – – – Ceylon Guardian Investment Trust PLC 19,063 – 4,422,617 3,360 1,239,840 1,241,520 Ceylon Insurance PLC 1,000 553,706 845,000 1,000 553,706 730,000 Ceylon & Foreign Trade PLC – – – 100,600 957,144 814,860 Chemanex PLC 486,905 71,667,488 49,329,208 279,100 46,690,313 37,231,940 Colombo Dockyard PLC 4,110 85,997 945,300 4,110 85,997 1,048,461 Commercial Bank of Ceylon PLC 160,450 16,224,704 16,045,000 151,000 38,478,182 40,135,800 DFCC Bank PLC 19 – 2,140 3,196 3,215 549,073 Dialog Telekom PLC 46,991,400 546,194,121 333,638,940 46,990,600 546,189,177 493,401,300 Distilleries Company of Sri Lanka PLC 43,138 5,370,708 6,575,895 65,938 12,039,602 11,868,840

LOLC 2011/12 REPORTS & ACCOUNTS 155 Notes to the Financial Statements

Group

As at 31 March 2012 2011 No. of Cost Market Value No. of Cost Market Value Shares (Rs.) (Rs.) Shares (Rs.) (Rs.)

Environment Resources Investments PLC 18,616 36,708 36,708 18,616 36,708 1,439,017 Expo Lanka PLC 1,000,000 18,000,000 6,200,000 – – – Grain Elevators PLC – – – 104,200 12,732,485 17,516,020 Hayleys PLC 2,745,024 1,083,315,244 988,244,640 2,043,624 809,747,338 800,715,429 Hatton National Bank PLC 22,186,274 773,036,366 3,394,499,922 13,213,030 338,499,277 5,046,653,078 HDFC Bank PLC 9,707,740 451,700,459 664,009,416 946,174 423,025,112 1,065,297,308 Hemas Holdings PLC 2,008,200 91,074,827 52,815,660 2,022,200 94,938,529 93,021,200 Hapugastenna Plantation PLC 100 1,000 4,050 100 1,000 7,400 John Keells Holdings PLC 205 26,000 42,230 205 26,000 58,548 John Keells Hotels PLC 131,573 378,930 2,249,899 131,573 378,930 2,263,056 Janashakthi Insurance PLC – – – 627,600 10,077,502 10,355,400 Lake House Printers and Publishers PLC 121,000 21,052,762 14,253,800 – – – Lanka IOC PLC 27,800 750,600 750,600 27,800 750,600 489,280 Lanka Ashok Leyland PLC 100 293,248 206,970 – – – The Lanka Hospitals Corporation PLC – – – 300 14,560 13,440 The Finance Company PLC 1,250,000 50,000,000 37,500,000 1,250,000 50,000,000 46,250,000 The Lion Brewery (Ceylon) PLC 2,462,400 508,040,042 491,248,800 2,165,800 439,198,032 433,160,000 Laugfs Gas PLC 945,500 52,127,825 24,393,900 1,013,500 56,022,672 44,999,400 Laugfs Gas PLC (Non-Voting) – – – 120,800 5,114,744 4,191,760 Malwatta Valley Plantation PLC 500 11,412 11,412 – – – Merchant Bank of Sri Lanka PLC 66,000 3,687,847 1,953,600 66,000 3,687,847 3,049,200 Nation Lanka PLC 181,327 919,907 1,831,403 1,000 916,035 11,100 Nations Trust Bank PLC 116,100 10,272,531 6,617,700 116,100 10,272,531 8,858,430 Overseas Reality Ceylon PLC 113,680 1,664,891 1,523,312 113,680 1,664,891 1,705,200 Panasian Power PLC 4,000,000 20,881,458 10,400,000 – – – PC House PLC 300,000 6,461,589 2,460,000 – – – People's Merchant Bank – – – 7,380,179 196,315,602 184,504,475 Pelwatte Sugar Industries PLC – – – 104,600 4,230,861 3,336,740 Parquet Ceylon PLC 72,800 2,367,087 1,092,000 758,300 16,592,038 16,000,130 Radient Gem International 31,365 2,280,052 2,261,417 – – – Raigam Wayamba Salterns PLC 52,400 131,000 162,440 26,200 65,500 117,900 Richard Pieris and Company PLC 1,600,400 23,864,268 12,003,000 1,943,200 28,280,299 26,427,520 Serendib Hotels PLC 30,000 879,744 744,000 – – – Seylan Bank PLC (Voting) 48,653,939 3,251,388,277 3,026,609,083 24,833,998 2,183,311,137 1,867,516,650 Seylan Bank PLC (Non-Voting) 33,274,622 1,057,666,658 964,964,038 7,424,300 179,264,362 291,774,990 Seirra Cables PLC 29,964,100 186,434,420 107,152,384 30,550,900 205,190,543 164,974,860 Sinhaputha Finance PLC 86,100 9,916,622 7,654,290 – – – Swisstek (Ceylon) PLC 758,300 16,592,039 11,374,500 – – – Textured Jersey PLC 1,744,700 26,301,353 12,387,370 – – – Vallible Finance PLC 33,900 497,200 1,315,320 24,860 248,600 1,230,570 Veyangoda Textiles Mills PLC 10,300 262,060 – 10,300 262,060 – 8,342,481,039 10,286,555,682 5,721,648,465 10,730,084,505

156 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Company

As at 31 March 2012 2011 No. of Cost Market Value No. of Cost Market Value Shares (Rs.) (Rs.) Shares (Rs.) (Rs.)

Asia Capital PLC 40 – 1,500 40 – 3,512 Abans Electricals PLC 50,000 13,133,972 7,900,000 – – – Acme Printing & Packaging PLC 575,000 13,373,266 11,212,500 – – – Browns Beach Hotel PLC – – – 34,500 802,391 734,850 Central Finance PLC 2,583 707,840 442,468 – – – Ceylon & Foreign Trade PLC – – – 100,600 957,144 814,860 Ceylon Grain Elevators PLC – – – 104,200 12,732,485 17,516,020 Chemanex PLC 303,605 40,961,213 30,815,908 95,800 15,984,038 12,779,720 Distilleries Company of Sri Lanka PLC 29,000 3,529,088 4,205,000 – – – Hayleys PLC 2,423,124 952,052,418 872,324,640 2,015,024 798,468,514 769,940,671 HDFC Bank PLC 9,707,740 451,700,459 664,009,416 946,174 423,025,112 1,065,297,307 Hemas Holdings PLC 85,100 4,043,441 2,238,130 250,000 11,846,880 11,500,000 Lake House Printers and Publishers PLC 121,000 21,052,762 14,253,800 – – – Laugfs Gas PLC 945,500 52,127,825 24,393,900 1,013,500 56,022,672 44,999,400 Laugfs Gas PLC (Non-Voting) – – – 120,800 5,114,744 4,191,760 Panasian Power PLC 4,000,000 20,881,458 10,400,000 – – – Parquet Ceylon PLC – – – 758,300 16,592,038 16,000,130 PC House PLC 300,000 6,461,589 2,460,000 – – – Pelwatte Sugar Industries PLC – – – 104,600 4,230,861 3,336,740 People's Merchant Bank PLC – – – 7,380,179 196,315,602 184,504,475 Radient Gem International PLC 31,365 2,280,052 2,261,415 – – – Seylan Bank PLC (Voting) 88 1,650 5,888 66 – 4,963 Seylan Bank PLC (Non-Voting) 33,274,622 1,057,666,658 964,964,038 5,594,700 111,538,365 219,871,710 Seirra Cables PLC 139,900 707,341 461,670 726,700 3,674,226 3,924,180 Serendib Hotels PLC 30,000 879,744 744,000 – – – Sinhaputhra Finance PLC 86,100 9,916,622 7,654,290 – – – Swisstek (Ceylon) PLC 758,300 16,592,039 11,374,500 – – – The Lion Brewery Ceylon PLC 2,462,400 508,040,042 491,248,800 2,165,800 439,198,032 433,160,000 Veyangoda Textiles Mills PLC 10,300 262,060 – 10,300 262,060 – 3,176,371,532 3,123,371,863 2,096,765,164 2,788,580,298

LOLC 2011/12 REPORTS & ACCOUNTS 157 Notes to the Financial Statements

17.2 Non-Quoted Ordinary Shares

Group

As at 31 March 2012 2011 No. of Cost No. of Cost Shares (Rs.) Shares (Rs.)

Badulla Transport and Agency Company (Pvt) Ltd. – – 10,000 100,000 Asia Lanka Ltd. 52,000,000 130,650,000 – – Browns Capital (Pvt) Ltd. – – 5,000,000 50,000,000 Browns Healthcare (Pvt) Ltd. – – 17,500,000 175,000,000 Browns Hotels Ltd. – – 11,000 110,000 Ceylon Marine & Travel Services (Pvt) Ltd. – – 9,450 73,700 Ceylon Studios Ltd. 500 5,000 500 5,000 Confifi Finance Ltd. 39,100 391,000 39,100 391,000 CT Land Property Ltd. 11,550 1,122,660 – – Credit Information Bureau 100 203,900 100 203,899 Equity Investments Lanka Ltd. – – 17,250 172,500 Expo Lanka Holdings Ltd. 36,750 367,500 1,000,000 18,000,000 Export International Ltd. 7,500 75,000 7,500 75,000 Hotel Hantana Ltd. 190,000 190,000 – – Indo-Lanka Steel Ltd. 200,000 6,000,000 200,000 6,000,000 Lanka Glass Manufacturing Ltd. 3,000,000 3,000,000 3,000,000 3,000,000 Magpek Exports Ltd. 250,000 1,000,000 250,000 1,000,000 Malwaththavelley Plantation Ltd. – – 500 11,412 Motor Marvels (Pvt) Ltd. – – 480,000 4,800,000 Polycoat Resins Ltd. – – 400,000 4,000,000 Rainforest Ecology (Pvt) Ltd. – – 17,000 470,000 Taprobane Capital (Pvt) Ltd. – – 4,840,000 48,400,000 Taprobane Holding (Pvt) Ltd. 16,766,667 100,600,002 – – Vallibel One Ltd. – – 1,568,000 39,287,099 Rain Forest Eco Lodge Ltd. 3,283,688 28,752,634 – – Total 272,357,696 351,099,610

Less: Provision for fall in value Balance as at the beginning of the period 61,203,121 10,000,000 Provision/(Reversal) made during the year (51,013,121) 51,203,121 Balance as at the end of the period 10,190,000 61,203,121 Carrying amount at the end of the year 262,167,696 289,896,489

158 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Company

As at 31 March 2012 2011 No. of Cost No. of Cost Shares (Rs.) Shares (Rs.)

Indo-Lanka Steel Ltd. 200,000 6,000,000 200,000 6,000,000 Lanka Glass Manufacturing Ltd. 3,000,000 3,000,000 3,000,000 3,000,000 Magpek Exports Ltd. 250,000 1,000,000 250,000 1,000,000 Vallibel One Ltd. – – 1,045,000 26,212,099 Total 10,000,000 36,212,099

Less: Provision for fall in value Balance as at the beginning of the period 10,000,000 10,000,000 Provision/(Reversal) made during the year – – Balance as at the end of the period 10,000,000 10,000,000 Carrying amount at the end of the year – 26,212,099

18 rentals Receivable on Lease Assets, Hire Purchases and Operating Leases

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

18.1 Rentals Receivable on Leased Assets Receivable from one to five years Rentals receivable 27,977,608,739 14,254,566,569 – 1,184,517,921 Unearned income (5,823,094,901) (3,057,716,858) – (247,133,822) Provision for doubtful debts (200,744,029) (51,826,440) – (5,257,883) Deposits received from lessees (4,191,687,939) (1,347,539,014) – (22,591,880) 17,762,081,870 9,797,484,257 – 909,534,336

Receivables within one year Rentals receivable 17,371,427,532 8,085,804,215 – 624,087,409 Unearned income (5,469,544,617) (2,675,893,458) – (125,568,210) Provision for doubtful debts (205,145,445) (73,640,308) – (7,917,220) 11,696,737,470 5,336,270,449 – 490,601,979

Overdue rentals receivable Rentals receivable 590,142,710 370,542,420 – 70,592,215 Earned income in suspense (51,306,771) (38,367,805) – (7,220,079) Provision for doubtful debts (89,981,899) (101,617,893) – (40,860,232) 448,854,040 230,556,722 – 22,511,904

Total Rentals receivable 45,939,178,981 22,710,913,204 – 1,879,197,545 Unearned income (11,292,639,518) (5,733,610,316) – (372,702,032) Earned income in suspense (51,306,771) (38,367,805) – (7,220,079) Provision for doubtful debts (495,871,373) (227,084,641) – (54,035,335) Deposits received from lessees (4,191,687,939) (1,347,539,014) – (22,591,880) Balance as at 31 March 29,907,673,380 15,364,311,428 – 1,422,648,219

LOLC 2011/12 REPORTS & ACCOUNTS 159 Notes to the Financial Statements

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

18.2 Rentals Receivable on Hire Purchase Receivable from one to five years Rentals receivable 7,020,558,206 11,608,365,475 10,474,594 55,504,784 Unearned income (1,234,642,382) (2,624,754,988) (402,284) (4,794,696) Provision for doubtful debts (78,775,717) (227,364,643) – (1,136,163) 5,707,140,107 8,756,245,844 10,072,310 49,573,925

Receivables within one year Rentals receivable 6,028,298,715 6,686,782,003 34,027,184 265,897,704 Unearned income (1,603,764,315) (1,965,442,823) 4,031,153 (38,908,315) Provision for doubtful debts (171,905,699) (163,828,792) (170,746) (6,662,845) 4,252,628,701 4,557,510,388 29,825,285 220,326,544

Overdue rental receivable Rentals receivable 431,984,939 401,370,647 21,907,874 45,081,233 Earned income in suspense (69,656,024) (50,283,736) (1,447,528) (4,872,911) Provision for doubtful debts (72,587,025) (99,505,517) (15,943,897) (24,950,547) 289,741,890 251,581,394 4,516,449 15,257,775

Total hire purchase receivables Rentals receivable 13,480,841,860 18,696,518,125 66,409,652 366,483,721 Unearned income (2,838,406,697) (4,590,197,811) (4,433,437) (43,703,011) Earned income in suspense (69,656,024) (50,283,736) (1,447,528) (4,872,911) Provision for doubtful debts (323,268,441) (490,698,952) (16,114,643) (32,749,555) Balance as at 31 March 10,249,510,698 13,565,337,626 44,414,044 285,158,244

18.3 Rentals Receivable on Operating Leases Rentals receivable 1,128,588,081 1,792,154,119 1,128,588,081 1,789,887,230 Unearned income (1,103,393,975) (1,732,672,533) (1,103,393,975) (1,732,672,533) Earned income in suspense (41,723,505) (46,820,238) (41,723,505) (46,820,238) Provision for doubtful debts – (5,553,625) – (5,553,625) Balance as at 31 March (16,529,399) 7,107,723 (16,529,399) 4,840,834

18.4 Total Rentals Receivable on Leased Assets, Hire Purchases and Operating Leases Rentals receivable 60,548,608,922 43,199,585,448 1,194,997,733 4,035,568,496 Unearned income (15,234,440,190) (12,056,480,660) (1,107,827,412) (2,149,077,576) Earned income in suspense (162,686,300) (135,471,779) (43,171,033) (58,913,228) Provision for doubtful debts (Note 18.5) (819,139,809) (723,337,218) (16,114,642) (92,338,515) Deposits received from lessees (4,191,687,939) (1,347,539,014) – (22,591,880) Balance as at 31 March 40,140,654,684 28,936,756,777 27,884,646 1,712,647,297

160 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

18.5 Provision for Doubtful Debts Balance as at 01 April 723,337,218 590,334,116 92,338,515 240,450,879 Provisions made during the year - Charged against profits 221,515,129 446,403,174 (7,060,344) 85,137,556 - Written-off during the year (125,712,538) (313,400,072) (69,163,529) (233,249,920) Balance as at 31 March 819,139,809 723,337,218 16,114,642 92,338,515

19 Advances and Other Loans Rentals receivable on loans to customers 22,275,917,510 17,169,553,043 1,844,117,146 2,865,068,852 Capital outstanding of revolving loans 14,955,013,592 8,058,785,745 3,892,574,785 3,018,555,387 Factoring receivable (Note 19.1) 5,168,221,621 5,690,466,719 – 2,736,752,654 Pawning advances 1,825,622,013 1,180,641,246 – – Transferred from investment property and other accounts receivable – 281,430,476 – 281,430,476 Overdue loan instalments 915,659,187 922,778,917 527,906,819 551,600,070 Earned income in suspense (251,842,196) (288,571,469) (178,216,399) (186,161,615) Unearned loan income (4,625,657,796) (4,076,225,062) (393,610,556) (623,782,755) Provision for doubtful debts (Note 19.2) (315,495,920) (225,291,100) (76,339,070) (88,538,184) 39,947,438,011 28,713,568,515 5,616,432,725 8,554,924,885

19.1 Factoring Receivable Factoring receivable 5,573,720,413 5,824,454,237 2,736,752,654 2,811,441,884 Transferred to subsidiaries – – (2,736,752,654) – Provision for doubtful debts (Note 19.1.1) (405,498,792) (133,987,518) – (74,689,230) Balance as at 31 March 5,168,221,621 5,690,466,719 – 2,736,752,654

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

19.1.1 Provision for Doubtful Debts - Factoring Balance as at 01 April 133,987,518 123,445,560 74,689,230 104,384,093 Transferred to subsidiary – – (74,689,230) – Provisions made during the year 271,511,274 10,541,958 – (29,694,863) Balance as at 31 March 405,498,792 133,987,518 – 74,689,230

19.2 Provision for Doubtful Debts Balance as at 01 April 225,291,100 291,963,558 88,538,184 159,428,465 Provisions made during the year - Charged against profits 145,767,823 34,924,378 5,434,685 7,069,333 - Written-off during the year (55,563,003) (101,596,836) (17,633,799) (77,959,614) Balance as at 31 March 315,495,920 225,291,100 76,339,070 88,538,184

LOLC 2011/12 REPORTS & ACCOUNTS 161 Notes to the Financial Statements

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

20 Instalment Sales Rentals receivable on loans to customers 234,047,556 1,116,097,136 234,047,556 1,116,097,136 Overdue loan instalments 11,404,148 28,976,211 11,404,147 28,976,211 Earned income in suspense (212,659) (3,383,217) (212,659) (3,383,217) Unearned loan income (85,265,457) (350,963,351) (85,265,457) (350,963,351) Provision for doubtful debts (Note 20.1) (2,654,010) (24,719,656) (2,654,011) (24,719,656) 157,319,578 766,007,123 157,319,576 766,007,123

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

20.1 Provision for Doubtful Debts Balance as at 01 April 24,719,656 44,193,705 24,719,656 44,193,705 Provisions made during the year - Charged against profits (7,945,667) 35,590,842 (7,945,666) 35,590,842 - Written-off during the year (14,119,979) (55,064,891) (14,119,979) (55,064,891) Balance as at 31 March 2,654,010 24,719,656 2,654,011 24,719,656

21 premium Receivables

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Insurance premium receivables 239,616,479 – – – Less: provision for bad debts – – – – 239,616,479 – – –

162 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

22 Inventories Raw materials 403,756,480 288,407,849 – – Work-in-progress 44,411,571 31,229,424 – – Finished goods and trading stocks 2,308,770,751 849,468,207 – – Input materials 31,842,133 37,633,004 – – Growing crop nurseries 15,975,922 11,303,473 – – Harvested crop - Tea 220,771,854 271,525,801 – – - Rubber 25,499,507 45,953,245 – – - Coconut 210,245 1,016,977 – – Consumables, maintenance and spares 114,463,543 62,528,994 – – Vehicle stocks 115,476,239 74,018,262 – 1,750,000 Goods in transit 60,517,290 41,738,684 – – Others 32,229,618 – – – 3,373,925,153 1,714,823,920 – 1,750,000 Less: Provision for slow moving stocks (147,205,782) (115,639,730) – – 3,226,719,371 1,599,184,190 – 1,750,000

23 trade and Other Current Assets

Trade receivables 4,017,097,060 1,286,381,347 – – Amount due from related parties (Note 46.3.1) 705,865,685 101,586,568 10,595,364,318 1,138,017,228 Unamortised finance charges 107,957,618 166,570,895 107,957,618 143,887,712 Tax recoverable (Note 23.1) 1,286,482,652 792,457,486 35,775,218 74,557,824 Loans given to employees (Note 23.2) 267,597,639 194,576,581 144,455,064 124,798,837 Other accounts receivables 3,043,801,848 3,095,509,751 935,856,285 335,654,846 9,428,802,502 5,637,082,628 11,819,408,501 1,816,916,447

23.1 Tax Recoverable

Value Added Tax (VAT) recoverable 1,079,166,924 530,665,710 – – Advanced Corporate Tax (ACT) recoverable 505,972 651,516 – – Withholding Tax (WHT) recoverable 89,396,610 67,671,688 – – Economic Service Charge (ESC) recoverable 117,413,146 193,468,572 35,775,218 74,557,824 1,286,482,652 792,457,486 35,775,218 74,557,824

LOLC 2011/12 REPORTS & ACCOUNTS 163 Notes to the Financial Statements

23.2 Loans given to Employees

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Balance at 01 April 194,576,581 109,215,678 124,798,837 72,295,067 Acquisition of subsidiaries 698,751 – – – Granted during the period 154,695,401 152,294,084 73,482,621 94,870,176 Recovered during the period (82,373,094) (66,933,181) (53,826,394) (42,366,406) 267,597,639 194,576,581 144,455,064 124,798,837

24 prepaid Lease RentalS

Vested Improvements to Vested Mature Immature Land Buildings Machinery Permanent Crop Roads and Other Vested Total Unimproved Lands Lands Plantations Plantations Plantations Development Water Sanitation Diversification Bridges Assets (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Group Cost/Valuation Balance as at 01 April 2011 444,435 3,421,963 2,228,759 298,153,564 123,531 250,390 41,121,598 19,299,170 8,191,521 4,518,883 638,317 107,498,818 485,890,949 Additions – – – – – – – – – – – – – Balance as at 31 March 2012 444,435 3,421,963 2,228,759 298,153,564 123,531 250,390 41,121,598 19,299,170 8,191,521 4,518,883 638,317 107,498,818 485,890,949

Accumulated Amortisation Balance as at 01 April 2011 262,369 2,130,252 1,640,466 124,290,570 – 88,686 30,877,250 8,751,361 7,890,706 2,827,604 394,176 1,201,650 180,355,090 Charge for the year 14,815 114,417 52,236 56,564,644 – – 1,644,864 2,180,000 250,417 150,630 19,554 600,652 61,592,229 Balance as at 31 March 2012 277,184 2,244,669 1,692,702 180,855,214 – 88,686 32,522,114 10,931,361 8,141,123 2,978,234 413,730 1,802,302 241,947,319

Carrying Amount As at 31 March 2012 167,251 1,177,294 536,057 117,298,350 123,531 161,704 8,599,484 8,367,809 50,398 1,540,649 224,587 105,696,516 243,943,630 As at 31 March 2011 182,066 1,291,711 588,293 173,862,994 123,531 161,704 10,244,348 10,547,809 300,815 1,691,279 244,141 106,297,168 305,535,859

24.1 Maturata Plantations Ltd. and Pussellawa Plantations Ltd. Lease agreements of all JEDB/SLSPC estates handed over to the Group’s joint ventures namely, Maturata Plantations Ltd. and Pussellawa Plantations Ltd. have been executed to date. All of these leases are retrospective to 15 June 1992, the date of formation of these companies. The leasehold rights to the bare land on all of these estates have been taken into the books of the above companies on 15 June 1992, immediately after formation of these companies, in terms of the ruling obtained from the Urgent Issue Task Force (UITF) of The Institute of Chartered Accountants of Sri Lanka. For this purpose, the Board of the Company’s joint ventures decided at their meetings that leased bare land would be revalued at the value established for this land by Valuation Specialist Dr. Wickramasinghe just prior to the formation of these companies.

The leasehold right to bare land of JEDB/SLSPC estates is being amortised by equal amounts over a 53 year period and the unexpired period of the lease as at the Balance Sheet date is 34 years.

Since the fair value of revalued assets differs materially from its carrying amount, the Board of Directors of the Group’s joint venture (namely, Maturata Plantations Ltd.), on 20 December 2005 has decided a further revaluation to be carried out as at 31 December 2005. The net amounts have been restated to the new valuation carried out by an independent and qualified valuer, Mr. K. Arthur Perera. The value of bare land which was not subjected to a land survey has been based on the current freehold bare land value which varies from district to district and estate to estate, depending on demand. The freehold values have been converted into leasehold value depending on the balance period of the lease. The revised UITF Ruling does not permit further revaluation of leasehold land. Maturata Plantations Ltd. has complied with this UITF Ruling.

164 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

23.2 Loans given to Employees

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Balance at 01 April 194,576,581 109,215,678 124,798,837 72,295,067 Acquisition of subsidiaries 698,751 – – – Granted during the period 154,695,401 152,294,084 73,482,621 94,870,176 Recovered during the period (82,373,094) (66,933,181) (53,826,394) (42,366,406) 267,597,639 194,576,581 144,455,064 124,798,837

24 prepaid Lease RentalS

Vested Improvements to Vested Mature Immature Land Buildings Machinery Permanent Crop Roads and Other Vested Total Unimproved Lands Lands Plantations Plantations Plantations Development Water Sanitation Diversification Bridges Assets (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Group Cost/Valuation Balance as at 01 April 2011 444,435 3,421,963 2,228,759 298,153,564 123,531 250,390 41,121,598 19,299,170 8,191,521 4,518,883 638,317 107,498,818 485,890,949 Additions – – – – – – – – – – – – – Balance as at 31 March 2012 444,435 3,421,963 2,228,759 298,153,564 123,531 250,390 41,121,598 19,299,170 8,191,521 4,518,883 638,317 107,498,818 485,890,949

Accumulated Amortisation Balance as at 01 April 2011 262,369 2,130,252 1,640,466 124,290,570 – 88,686 30,877,250 8,751,361 7,890,706 2,827,604 394,176 1,201,650 180,355,090 Charge for the year 14,815 114,417 52,236 56,564,644 – – 1,644,864 2,180,000 250,417 150,630 19,554 600,652 61,592,229 Balance as at 31 March 2012 277,184 2,244,669 1,692,702 180,855,214 – 88,686 32,522,114 10,931,361 8,141,123 2,978,234 413,730 1,802,302 241,947,319

Carrying Amount As at 31 March 2012 167,251 1,177,294 536,057 117,298,350 123,531 161,704 8,599,484 8,367,809 50,398 1,540,649 224,587 105,696,516 243,943,630 As at 31 March 2011 182,066 1,291,711 588,293 173,862,994 123,531 161,704 10,244,348 10,547,809 300,815 1,691,279 244,141 106,297,168 305,535,859

LOLC 2011/12 REPORTS & ACCOUNTS 165 Notes to the Financial Statements

25 Investment Properties

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Balance at the beginning of the year 439,649,668 451,743,865 247,500,000 242,274,225 On acquisition of subsidiaries 3,252,409,369 – – – Additions – – – – Disposals (6,861,090) – – – Transfers (to)/from property, plant and equipment (Note 25.1) 409,548,553 1,454,868 165,000,000 – Change in fair value during the year 251,224,000 (13,549,065) – 5,225,775 Balance at the end of the year 4,345,970,500 439,649,668 412,500,000 247,500,000

Investment property comprises of a number of commercial properties that are leased/rented out to third parties. Each of these leases/rents contains an initial lease period of one year and 32 years for the excel world property. Subsequent renewals are negotiated with the lessee and on average renewal periods are three to five years for the excel world property it is 40 years.

25.1 Transfers from Owner-Occupied Properties During the financial year Rs. 165,000,000/- worth of property of the Company and Rs. 409,548,553/- worth of properties of the Group have been transferred from property, plant and equipment (Note 33: Property, Plant and Equipment) to investment property, since the property was no longer used by the Group and as such it was decided that these buildings be leased to third parties.

25.2 Details of Investment Properties

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Owned properties classified as investments properties 595,970,500 439,649,668 412,500,000 247,500,000 Properties held under operating lease classified as investment properties 3,750,000,000 – – – 4,345,970,500 439,649,668 412,500,000 247,500,000

25.3 Relevant Income and Expenditure Relating to Investment Properties

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Rent income earned 37,215,883 891,993 – – Maintenance expenses 28,005 – – –

166 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

25.4 The fair value of investment properties were determined by independent valuers who hold recognised and relevant professional qualifications and have recent experience in the location and category of the investments properties. The method of valuation used is on recent sales prices of comparative properties.

Significant assumptions used in determining the fair value: 1. The property is prime and most suitable for high rise development. 2. Located in a prime commercial area. 3. Discounting factor used for the valuation - 5.5%. 4. Period considered - 32 years.

26 tIMBer and Rubber Stocks

Group For the year ended 31 March 2012 2011 (Rs.) (Rs.)

Balance as at 01 April 3,778,893,130 3,614,748,311 Transfer from immature plantations – (2,915,530) Additions from new planting 26,162,262 17,496,840 Harvested during the period – – Gain/(Loss) from valuation (27,384,221) 149,563,509 Balance as at 31 March 3,777,671,171 3,778,893,130

The carrying value of timber as at the year end has been computed as follows: Group As at 31 March 2012 2011 (Rs.) (Rs.)

Valuation of timber 3,718,948,204 3,721,410,982 Cost of timber plants below three years of age 58,722,967 57,482,148 3,777,671,171 3,778,893,130

The timber stocks of the Group were valued by Mr. K.T.D. Tissera, an independent Chartered Valuation Surveyor on a tree basis. Based on the Valuation Report dated 05 April 2012, the timber trees were valued as at 31 March 2012. The direct cost attributable to new planting has been added to the timber stocks.

Timber trees namely Eucalyptus Torariyana, Albezzia, Graveelia, Eucalyptus Grandis, Astonia, Pinus, Toona, Mahogany, Teak, Jak, Turpentine, Rubber, Nadun, Mango, Pellen, Hora, Domba, Lunumidella, Wal Del and Mara on the plantations have been taken into consideration in this valuation of timber trees.

LOLC 2011/12 REPORTS & ACCOUNTS 167 Notes to the Financial Statements

In valuing the timber plantations, undermentioned factors have been taken into consideration. i. The present age of the tree. ii. Maturity of the trees are based on variety (species) of the tree. iii. Annual marginal increase in growth in the timber content according to species and present size of the tree. iv. The number of years to harvest in case of trees are matured for harvesting (harvesting programmes) v. Timber content of harvestable trees. vi. The timber content of immature trees at an estimated future harvestable date. vii. The current price of species of the timber per cubic foot at the relevant date.

The fair value is determined as being the net present value of expected future cash flows using a discounted rate of 12%. Significant assumption used in the valuation of timber stocks are as follows: i. Future cash flows are determined by references to current timber prices without considering the inflationary effect. ii. The ongoing cost of growing the trees which are deducted in determining the net cash flows are constant in real terms. iii. Timber trees that have not come up to a harvestable size are valued working out the period that would take for those trees to grow up to a harvestable size. iv. The present value of the tree is worked out based on the projected size and the estimated number of years it would take to reach that size. This is worked out on the basis of an annual marginal increase of timber content which normally ranges from 0.55 to 1.5 cm per year for trees of diameter girth over 10 cm. v. Trees have been valued as per the current timber prices in the domestic market based on the price list of the State Timber Corporation and price of timber trees sold by estate and price of logs and sawn timber of popular timber traders in Sri Lanka. vi. The value of each matured species of timber is worked out on the price of a cubic of timber in the market, the species and the available cubic content of timber in the tree. vii. Due consideration has been given for cost of felling, transport, sawing and cost of sale including obtaining approval for felling.

27 Mature and Immature Plantations

Land Immature Plantations Mature Plantations Total Development Cost Tea Rubber Coconut Mixed Crops Total Tea Rubber Coconut Mixed Crops Total (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Group Cost/Valuation Balance as at 01 April 2011 29,329,032 196,337,518 708,468,954 3,414,304 2,917,192 911,137,968 502,985,256 413,770,601 10,134,526 1,504,072 928,394,455 1,868,861,455 Additions 912,042 67,474,655 43,644,066 206,422 4,224,201 115,549,344 – – – – – 116,461,386 Transfers – (96,636,672) (65,720,191) (359,484) (245,873) (162,962,220) 96,636,672 65,720,191 359,484 245,873 162,962,220 – Balance as at 31 March 2012 30,241,074 167,175,501 686,392,829 3,261,242 6,895,520 863,725,092 599,621,928 479,490,792 10,494,010 1,749,945 1,091,356,675 1,985,322,841

Accumulated Depreciation Balance as at 01 April 2011 1,839,632 – – – – – 118,018,715 131,387,228 1,779,978 311,406 251,497,327 253,336,959 Charge for the year 563,078 – – – – – 16,537,573 22,228,035 611,291 45,515 39,422,414 39,985,492 Balance as at 31 March 2012 2,402,710 – – – – – 134,556,288 153,615,263 2,391,269 356,921 290,919,741 293,322,451

Carrying Amount As at 31 March 2012 27,838,364 167,175,501 686,392,829 3,261,242 6,895,520 863,725,092 465,065,640 325,875,529 8,102,741 1,393,024 800,436,934 1,692,000,390 As at 31 March 2011 27,489,400 196,337,518 708,468,954 3,414,304 2,917,192 911,137,968 384,966,541 282,383,373 8,354,548 1,192,666 676,897,128 1,615,524,496

168 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

27 Mature and Immature Plantations

Land Immature Plantations Mature Plantations Total Development Cost Tea Rubber Coconut Mixed Crops Total Tea Rubber Coconut Mixed Crops Total (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Group Cost/Valuation Balance as at 01 April 2011 29,329,032 196,337,518 708,468,954 3,414,304 2,917,192 911,137,968 502,985,256 413,770,601 10,134,526 1,504,072 928,394,455 1,868,861,455 Additions 912,042 67,474,655 43,644,066 206,422 4,224,201 115,549,344 – – – – – 116,461,386 Transfers – (96,636,672) (65,720,191) (359,484) (245,873) (162,962,220) 96,636,672 65,720,191 359,484 245,873 162,962,220 – Balance as at 31 March 2012 30,241,074 167,175,501 686,392,829 3,261,242 6,895,520 863,725,092 599,621,928 479,490,792 10,494,010 1,749,945 1,091,356,675 1,985,322,841

Accumulated Depreciation Balance as at 01 April 2011 1,839,632 – – – – – 118,018,715 131,387,228 1,779,978 311,406 251,497,327 253,336,959 Charge for the year 563,078 – – – – – 16,537,573 22,228,035 611,291 45,515 39,422,414 39,985,492 Balance as at 31 March 2012 2,402,710 – – – – – 134,556,288 153,615,263 2,391,269 356,921 290,919,741 293,322,451

Carrying Amount As at 31 March 2012 27,838,364 167,175,501 686,392,829 3,261,242 6,895,520 863,725,092 465,065,640 325,875,529 8,102,741 1,393,024 800,436,934 1,692,000,390 As at 31 March 2011 27,489,400 196,337,518 708,468,954 3,414,304 2,917,192 911,137,968 384,966,541 282,383,373 8,354,548 1,192,666 676,897,128 1,615,524,496

LOLC 2011/12 REPORTS & ACCOUNTS 169 Notes to the Financial Statements

28 Investments in Joint Venture Companies

No. of Shares Cost Principal Activity As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.)

Company Hydro Power Free Lanka PLC 976,700 2,485,400 14,298,187 36,384,471 Hydro Power Free Lanka Capital Holding PLC – 21,276,596 – 100,000,000 Investing Activities Total 14,298,187 136,384,471

28.1 The following companies have been accounted for as joint ventures of the Group: Maturata Plantation Ltd. (MPL) Hydro Power Free Lanka 2 (Pvt) Ltd. (HPFL 2) Free Lanka Plantation Company (FLPC) Hydro Power Free Lanka 3 (Pvt) Ltd. (HPFL 3) Free Lanka Capital Holding PLC (FLCHP) Free Lanka Power 1 (Pvt) Ltd. (FLP 1) Free Lanka Power Holding (Pvt) Ltd. (FLPHL) Free Lanka Power 2 (Pvt) Ltd. (FLP 2) Pussellawa Estates Ltd. (PEL) Free Lanka Power 3 (Pvt) Ltd. (FLP 3) Free Lanka Capital Properties (Pvt) Ltd. (FLCPL) The Tea Leaf Resort Holding (Pvt) Ltd. (TLRL) Melfort Green Tea (Pvt) Ltd. (MFGTL) Free Lanka Capital (Pvt) Ltd. (FLCL) Free Lanka Management Company (FLMC) Free Lanka Estate Bungalows (Pvt) Ltd. (FLEBL) Hydro Power Free Lanka PLC (HPFLP) Agrisil Holdings Ltd. (AGL)

28.2 The summarised financial information of joint ventures for the year ended 31 March 2012 not adjusted for the percentage of ownership held by the Group:

Entity Principal Activities Total Assets Total Liabilities Equity Income Expenses Profit/(Loss) for the period (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

MPL Plantations 4,684,865,114 2,450,753,425 2,234,111,690 1,977,557,360 2,333,542,734 (355,985,374) FLPC Plantation management 956,929,581 28,359,418 928,570,164 – 22,600,677 (22,600,677) FLCHP Investing in ventures 2,841,922,000 120,045,000 2,721,877,000 192,882,000 40,636,520 152,245,480 FLPHL Investing in ventures 115,590,477 98,380 115,492,097 16,771,946 202,671 16,569,275 PEL Plantations 9,837,064,877 2,105,674,307 7,731,390,570 3,806,882,907 3,323,329,705 483,553,202 FLCPL Real estate business 346,724,008 7,213,506 339,510,502 – 4,848,685 (4,848,685) MFGTL Manufacturing green tea 43,469,003 10,305,544 33,163,459 120,280,234 110,916,218 9,364,016 FLMC Investing in ventures 821,781,758 20,420,419 801,361,339 246,297,885 30,898,560 215,399,325 HPFLP Power generation 845,670,559 55,626,709 790,043,851 77,093,449 71,575,116 5,518,333 HPFL 2 Hydro power generation 96,827,648 87,877,794 8,949,854 1,183,426 784,088 399,338 HPFL 3 Hydro power generation 99,214,793 90,086,278 9,128,515 1,058,525 686,034 372,491 FLP 1 Hydro power generation 13,538,858 4,133,873 9,404,985 – 285,951 (285,951) FLP 2 Hydro power generation 10,111,529 519,729 9,591,800 – 218,662 (218,662) FLP 3 Hydro power generation 10,400,024 975,776 9,424,248 – 294,224 (294,224) TLRL Leisure 7,764,070 7,316,673 447,397 13,913 3,150,785 (3,136,872) FLCL Investing in ventures 748,600,000 664,717,000 83,883,000 – 1,482,000 (1,482,000) FLEBL Leisure 1,000,000 78,898 921,102 – 78,898 (78,898) AGL Non-operational 33,600,000 1,276,160 32,323,840 – – – 21,515,074,299 5,655,478,889 15,859,595,413 6,440,021,645 5,945,531,528 494,490,117

170 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

29 Investments in Equity Accounted Investees

Holding No. of Shares Cost As at 31 March 2012 2011 2012 2011 2012 2011 (%) (%) (Rs.) (Rs.)

29.1 Company PRASAC Micro Finance Institution Ltd. (PRASAC) 18.00 18.00 138,626 138,626 106,691,120 108,977,301 Gal Oya Plantation Ltd. (GPL) 23.00 23.00 24,788,235 24,788,235 247,882,353 247,882,353 Sierra Construction (Pvt) Ltd. (SCPL) 10.00 10.00 12,490,250 12,490,250 600,000,000 600,000,000 Sierra Holdings (Pvt) Ltd. (SHL) 10.00 10.00 4,496,492 4,496,492 200,000,000 200,000,000 Agstar Fertilizer PLC (AFPL) 20.00 10.00 60,213,500 1,825,000 390,184,250 54,476,250 Total 1,544,757,723 1,211,335,904

Group Holding No. of Shares Value As at 31 March 2012 2011 2012 2011 2012 2011 (%) (%) (Rs.) (Rs.)

29.2 Group Unquoted investments Commercial Insurance Brokers (Pvt) Ltd. (CIB) Investor Commercial Leasing and Finance Ltd. 40 40 240,000 240,000 800,000 800,000 40 40 240,000 240,000 800,000 800,000

PRASAC Micro Finance Institution Ltd. (PRASAC) (Note 29.5) Investor Lanka Orix Leasing Company PLC 18 18 138,626 138,626 106,691,120 108,977,301 18 18 138,626 138,626 106,691,120 108,977,301

Associated Battery Manufacturers (Cey.) Ltd. (ABM) Investor Standard Finance (Pvt) Ltd. 39 39 2,439,355 2,439,355 24,393,550 24,393,550 39 39 2,439,355 2,439,355 24,393,550 24,393,550

Gal Oya Plantations Ltd. (GPL) Investor Lanka ORIX Leasing Company PLC 23 23 24,788,235 24,788,235 247,882,353 247,882,353 Brown & Company PLC 23 23 22,309,412 22,309,412 248,997,882 248,997,882 46 46 47,097,647 47,097,647 496,880,235 496,880,235

Sierra Construction (Pvt) Ltd. (SCPL) - Group Investor Lanka ORIX Leasing Company PLC 10 10 12,490,250 12,490,250 600,000,000 600,000,000 Browns Investments PLC 10 10 12,490,253 12,490,253 600,903,926 600,903,926 20 20 24,980,503 24,980,503 1,200,903,926 1,200,903,926

Sierra Holdings (Pvt) Ltd. (SHL) - Group Investor Lanka ORIX Leasing Company PLC 10 10 4,496,492 4,496,492 200,000,000 200,000,000 Browns Investments PLC 10 10 4,496,492 4,496,492 199,911,042 199,911,042 20 20 8,992,984 8,992,984 399,911,042 399,911,042

LOLC 2011/12 REPORTS & ACCOUNTS 171 Notes to the Financial Statements

Group Holding No. of Shares Value As at 31 March 2012 2011 2012 2011 2012 2011 (%) (%) (Rs.) (Rs.)

Agstar Fertilizer PLC (AFPL) - Group Investor Lanka ORIX Leasing Company PLC 20 10 60,213,500 1,825,000 390,184,250 54,476,250 Browns Investments PLC 13 10 39,000,000 1,825,000 273,133,750 54,476,250 Ajax Engineers (Pvt) Ltd. 0.4 – 1,250,000 – 10,000,000 – 33 20 100,463,500 3,650,000 673,318,000 108,952,500

Virginia International Ltd. (VIL) Investor Browns Investments PLC 45 – 800,000 – 4,000,000 – 45 – 800,000 – 4,000,000 –

Taprobane Plantation Ltd. (TPL) Investor Browns Investments PLC 45 – 22,500 – 22,500 – 45 – 22,500 – 22,500 – Total cost to the Group 2,906,920,373 2,340,818,554

29.3 Equity Value of Investment in Equity Accounted Investees

As at 31 March 2012 Equity Value of Acquisition Share of Dividend Equity Value of Investments as at during Profits/(Loss) Received Investments as at Entity 01 April 2011 the Year Net of Tax 31 March 2012 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Group CIB 52,968,268 – 7,327,454 (960,000) 59,335,722 PRASAC 354,757,078 – 173,591,815 – 528,348,893 ABM 191,116,503 – 51,232,553 (43,908,480) 198,440,576 GPL 444,298,650 – (90,402,548) – 353,896,102 SCPL 1,202,386,298 – (5,413,718) – 1,196,972,580 SHL 394,237,951 – 36,842,253 – 431,080,204 AFPLC 119,313,967 564,365,500 92,420,517 – 776,099,984 VIL – 4,000,000 – – 4,000,000 TPL – 22,500 4,360,347 – 4,382,847 Total 2,759,078,715 568,388,000 269,958,673 (44,868,480) 3,552,556,908

172 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

As at 31 March 2011 Equity Value of Acquisition Share of Dividend Reclassifications/ Equity Value of Investments as at during Profits/(Loss) Received Transfers/ Investments as at Entity 01 April 2010 the Year Net of Tax Disposals 31 March 2011 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Group CIB 50,809,436 – 3,118,832 (960,000) – 52,968,268 PRASAC 255,729,271 – 99,027,807 – – 354,757,078 IGBRIL 7,259,080 – (1,377,610) – (5,881,470) – ABM 169,451,572 – 44,838,911 (23,173,920) – 191,116,563 BDIPL 32,325,750 – 9,821,917 – (42,147,667) – Seylan 2,519,821,732 – 69,503,118 – (2,589,324,850) – GPL – 496,880,235 (52,581,586) – – 444,298,649 SCPL – 1,200,903,925 1,482,372 – – 1,202,386,297 SHL – 399,910,984 (5,673,091) – – 394,237,893 AFPLC – 108,952,500 10,361,467 – – 119,313,967 Total 3,035,396,841 2,206,647,644 178,522,137 (24,133,920) (2,637,353,987) 2,759,078,715

29.4 The Summarised Financial Information of Equity Accounted Investees for the year ended 31 March 2012 not adjusted for the percentage of ownership held by the Group:

Component Principal Activities Total Assets Total Liabilities Equity Income Expenses Profit/(Loss) for the Period (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

CIB Insurance Broking 217,843,129 69,503,825 148,339,304 159,944,670 (141,626,036) 18,318,634 PRASAC Micro Finance 71,763,708,621 55,799,673,191 15,964,035,430 3,585,016,280 (2,607,916,302) 977,099,978 ABM Manufacturing 1,010,198,380 494,768,159 515,430,221 1,852,075,920 (1,719,004,355) 133,071,565 GPL Plantations 1,424,930,228 1,291,754,130 133,176,098 24,434,576 (229,429,015) (204,994,439) SCPL Construction 10,739,422,760 7,580,596,579 3,158,826,181 5,196,364,982 (5,186,445,274) 9,919,708 SHL Investing 17,111,557,862 11,371,413,299 5,740,144,563 9,561,825,613 (9,186,279,900) 375,545,713 AGFL Fertilizer manufacturing 4,180,206,491 2,313,221,754 1,866,984,737 1,805,149,111 (1,518,678,618) 286,470,493 VIL Non-operational – – – – – – TPL Plantations 20,862,143 11,335,151 9,526,992 78,966,603 (69,276,945) 9,689,658 106,468,729,614 78,932,266,088 27,536,463,526 22,263,777,755 (20,658,656,445) 1,605,121,310

The Directors’ valuation of investments in equity accounted investees has been done on net assets basis except for the investment in Agstar Fertilizer PLC, for which the market value is considered. Based on this valuation, no adjustments were required for the carrying amounts. Agstar Fertilizer PLC is listed in the Colombo Stock Exchange (CSE). Based on its closing price of Rs. 10.20 at the reporting date, the fair value of the Group’s investment is Rs. 1,024,727,700/-.

29.5 PRASAC Micro Finance Institution Ltd. The Group has less than 20% ownership (18%) over the voting rights. However, the Group is considered to have significant influence over the entity due to the fact that it has Board representation and is providing microfinance-related business services and expertise on a regular basis.

The financial year end of PRASAC is 31 December and the Financial Statements for the year ended 31 December 2011 has been considered for equity accounting purposes.

LOLC 2011/12 REPORTS & ACCOUNTS 173 Notes to the Financial Statements

30 Investments in Subsidiary Companies

2012 2011 Principal Activity No. of Shares Holding Cost No. of Shares Holding Cost (%) (Rs.) (%) (Rs.)

30.1 Company Lanka ORIX Finance PLC (LOFC) Finance business 2,520,000,000 90.00 1,800,000,000 200,000,000 100.00 2,000,000,000 LOLC Investments Ltd. (LOIV) Investing 6,000,000 100.00 445,000,000 6,000,000 100.00 445,000,000 Lanka Orix Project Development Ltd. (LOPD) Non-operating entity 5,200,000 100.00 52,000,000 5,200,000 100.00 52,000,000 Sundaya Lanka (Pvt) Ltd. Assembling and distribution of solar systems 624,490 51.00 6,244,900 624,490 51.00 6,244,900 Commercial Leasing and Leasing hire purchasing, Finance Ltd. (CLC) factoring and finance business 5,739,940,053 90.00 2,398,473,025 27,729,179 100.00 2,664,970,028 LOLC Micro Credit Ltd. (LOMC) Agro and microfinancing 52,800,000 80.00 801,117,000 40,000,000 80.00 460,125,000 Commercial Factors Ltd. Non-operating entity 1 100.00 10 1 100.00 10 LOLC Eco Solutions (Pvt) Ltd. Power generation 2,500,000 100.00 25,000,000 2,500,000 100.00 25,000,000 Brown & Company PLC Trading and manufacturing 3,382,800 4.77 532,474,080 4,519,200 6.40 711,350,616 Gal Oya Holdings Ltd. Management company- sugar plantation 1,000,000 50.00 10,000,000 1,000,000 50.00 10,000,000 LOLC Motors Ltd. (LOMO) Motor repair 15,000,000 100.00 150,000,000 15,000,000 100.00 150,000,000 LOLC Insurance Company Ltd. Insurance 39,000,000 100.00 390,000,000 20,000,000 100.00 200,000,000 Lanka ORIX Information Software design development Technology Services Ltd. and distribution 1,700,000 100.00 17,000,000 1,500,000 100.00 15,000,000 Orient Academy Ltd. Consultancy, training and educational services, providing services and skilled personnel and technical support 1,500,000 100.00 15,000,000 1,500,000 100.00 – Browns Investments PLC Holding company 14,344,100 0.79 65,496,030 – – – LOLC Leisure Ltd. Holding company 944,416,200 70.00 2,767,485,000 112,430,500 70.00 1,980,471,500 LOLC Land Holdings Ltd. Real estates 13,300,000 100.00 133,000,000 13,300,000 100.00 133,000,000 LOLC Reality Ltd. Real estates 1 100.00 10 1 100.00 10 LOLC Property Holdings Ltd. Real estates 1 100.00 10 1 100.00 10 LOLC Securities Ltd. Stock Broking 10,000,000 100.00 100,000,000 5,000,000 100.00 50,000,000 LOLC Securities Ltd. - Redeemable Shares Stock Broking 2,500,000 100.00 250,000,000 – – – LOLC Asset Holdings Ltd. Real estates 1 100.00 10 1 100.00 10 LOLC Estates Ltd. Real estates 1 100.00 10 1 100.00 10 LOLC Services Ltd. Real estates 10,300,000 100.00 103,000,000 10,300,000 100.00 103,000,000 Provision of Impairment (Note 30.1.1) (83,244,900) (62,000,000) Total 9,978,045,185 8,944,162,094

2012 2011 (Rs.) (Rs.)

30.1.1 Provision of Impairment Lanka Orix Project Development Ltd. 52,000,000 52,000,000 Gal Oya Holdings Ltd. 10,000,000 10,000,000 Sundaya Lanka (Pvt) Ltd. 6,244,900 – Orient Academy Ltd. 15,000,000 – 83,244,900 62,000,000

174 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

30.2 Group

2012 2011 No. of Shares Control Holding No. of Shares Control Holding (%) (%)

Ajax Engineers (Pvt) Ltd. 239,694 51.00 – – B G Air Services (Pvt) Ltd. 50,000 100.00 50,000 100.00 Brown & Company PLC 39,788,976 56.14 39,788,976 56.15 Browns Battery (Pvt ) Ltd. 10,000 100.00 10,000 100.00 Browns Group Industries (Pvt) Ltd. 2,800,000 100.00 2,800,000 100.00 Browns Group Motels Ltd. 399,859 75.97 399,859 75.97 Browns Health Care (Pvt) Ltd. 17,500,000 87.50 – – Browns Industrial Park Ltd. 15,405,137 100.00 15,405,137 100.00 Browns Investments PLC 773,373,900 42.73 730,000,000 40.33 Browns Motor (Pvt) Ltd. 5,000,000 100.00 5,000,000 100.00 Browns Thermal Engineering (Pvt) Ltd. 824,997 55.00 824,997 55.00 Browns Tours (Pvt) Ltd. 2,030,000 99.99 2,030,000 99.99 Central Services Ltd. 802 100.00 802 100.00 CFT Engineering Ltd. 3,450 95.04 3,450 95.04 Commercial Factors Ltd. 1 100.00 1 100.00 Commercial Leasing & Finance Ltd. 5,739,939,225 90.00 27,729,179 100.00 Dikwella Resort (Pvt) Ltd. 481,665 100.00 – – Diriya Investments (Pvt) Ltd. 108,053,352 50.00 108,053,352 50.00 Eden Resort & Spa PLC 24,398,472 46.21 24,398,472 46.21 Engineering Services (Pvt) Ltd. 147,502 100.00 147,502 100.00 Excel Global Holding Ltd. 53,448,329 100.00 – – Fernwood Corporate Services Ltd. 10,204 100.00 – – Fernwood Lanka Ltd. 800,000 100.00 – – Gal Oya Holdings Ltd. 2,000,000 100.00 2,000,000 100.00 I.G. Browns Rubber Industries (Pvt) Ltd. 420,000 93.34 420,000 93.34 Klevernberg (Pvt) Ltd. 11,856,000 76.00 3,120,000 60.00 Lanka Decals (Pvt) Ltd. 14,000,000 100.00 – – Lanka Orix Finance PLC 2,520,000,000 90.00 200,000,000 100.00 Lanka ORIX Information Technology Services Ltd. 1,500,000 100.00 1,500,000 100.00 LOLC Micro Credit Ltd. 52,800,000 80.00 40,000,000 80.00 Lanka Orix Project Developers (LOPD) 5,200,000 100.00 5,200,000 100.00 LOLC Asset Holdings Ltd. 1 100.00 1 100.00 LOLC Eco Solutions (Pvt) Ltd. 2,500,000 100.00 2,500,000 100.00 LOLC Estates Ltd. 1 100.00 1 100.00 LOLC Insurance Company Ltd. 39,000,000 100.00 20,000,000 100.00 LOLC Factors Ltd. 1 100.00 1 100.00 LOLC Investments Ltd. 6,000,000 100.00 6,000,000 100.00 LOLC Land Holdings Ltd. 1 100.00 1 100.00 LOLC Leisure Ltd. 1,349,166,000 100.00 160,615,000 100.00

LOLC 2011/12 REPORTS & ACCOUNTS 175 Notes to the Financial Statements

2012 2011 No. of Shares Control Holding No. of Shares Control Holding (%) (%)

LOLC Motors Ltd. 15,000,000 100.00 15,000,000 100.00 LOLC Property Investments Ltd. 1 100.00 1 100.00 LOLC Realty Ltd. 1 100.00 1 100.00 LOLC Securities Ltd. 10,000,000 100.00 5,000,000 100.00 LOLC Services Ltd. 10,300,000 100.00 10,300,000 100.00 Masons Mixture Ltd. 4,289,849 99.66 4,289,849 99.66 Millennium Development Ltd. 44,390,823 100.00 – – Mutugalla Estates (Pvt) Ltd. 960 80.00 960 80.00 Orient Academy Ltd. 1,500,000 100.00 1,500,000 100.00 Palm Garden Hotels PLC 5,914,169 79.18 5,914,169 79.18 Pathregalla Estates (Pvt) Ltd. 3,831 91.22 3,831 91.22 Riverina Hotel PLC 10,566,107 70.29 10,566,107 70.29 Royal Fernwood Porcelain Ltd. 316,440,611 76.68 – – Sifang Lanka (Pvt) Ltd. 2,050,000 100.00 2,050,000 100.00 Sifang Lanka Trading (Pvt) Ltd. 3,000,002 100.00 3,000,002 100.00 Snowcem Products Lanka (Pvt) Ltd. 400,000 100.00 400,000 100.00 Southern Cleaners Ltd. 201,267 100.00 201,267 100.00 Speed Italia Ltd. 100,000 100.00 – – Standard Finance (Pvt) Ltd. 2,700,000 100.00 2,700,000 100.00 Sumudra Beach Resorts (Pvt) Ltd. 1,000,000 100.00 – – Sundaya Lanka (Pvt) Ltd. 624,490 51.00 624,490 51.00 Taprobane Capital (Pvt) Ltd. 18,200,002 100.00 – – Taprobane Fund Management Company 15,725,000 62.90 15,725,000 62.90 The Hatton Transport & Agency Company (Pvt) Ltd. 112,000 100.00 112,000 98.34 Tropical Villas (Pvt) Ltd. 10,344,300 100.00 6,206,580 60.00 United Dendro Energy (Pvt ) Ltd. 1,000 75.00 1,000 75.00 Walker & Greig (Pvt ) Ltd. 1 100.00 1 100.00

30.2.1 Diriya Investments (Pvt) Ltd. Lanka ORIX Investments Ltd. (LOIV) which is a fully-owned subsidiary of LOLC holds 50% of the shares of the aforesaid Company while the rest of the shares are held by a single shareholder. For the purpose of consolidation, Diriya is considered as a subsidiary since LOLC through LOIV exercises control over the operating and financial policies of Diriya, with the concurrence of the other shareholder.

30.2.2 Browns Investments PLC LOLC directly and through its subsidiaries, including Brown & Company PLC, holds a total of 43% in Browns Investments PLC (BI). Though the percentage held directly and indirectly by LOLC is less than 50%, BI is considered as a subsidiary as a result of an agreement between Taprobane Holdings Ltd. (which holds 26% in BI) and Brown & Company PLC, allowing the latter to exercise voting rights on behalf of the Taprobane Holdings Ltd. The existence of this agreement gives a total voting right of 69% and thus it is considered as a subsidiary of the LOLC Group.

176 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

30.3 Acquisition of Subsidiaries and Minority Interests During the reporting period, the Group has obtained the control of the following entities:

Acquiree % of Control Holding Acquired Acquisition Date Principal Activities

Taprobane Capital Ltd. 100 January 2012 Investment activities Royal Fernwood Porcelain Ltd. 76 January 2012 Porcelain production Fernwood Lanka (Pvt) Ltd. 100 January 2012 Porcelain production Lanka Decals (Pvt) Ltd. 100 January 2012 Porcelain production Fernwood Corporate Services Ltd. 100 January 2012 Porcelain production Samudra Beach Resorts (Pvt) Ltd. 100 April 2011 Hotel services Ajax Engineers (Pvt) Ltd. 51 February 2012 Steel manufacturing Excel Global Holding (Pvt) Ltd. 100 July 2011 Investment activities Millennium Developments (Pvt) Ltd. 100 July 2011 Operating recreational park and renting Excel Restaurants (Pvt) Ltd. 100 February 2012 Operating restaurants Dickwella Resort (Pvt) Ltd. 100 December 2011 Hotelier Speed Italia Ltd. 100 April 2011 FIAT linea vehicle sale

Taking control of the above entities will enable the Group to further expand its diversification and meet the strategic business objectives set by the Management. These acquisitions are expected to provide the Group with an increase share of returns on the investments.

In the post acquisition period, the acquired entities contributed, revenue of Rs. 735,086,511/- and operating profits of Rs. 244,455,357/- to the Group results.

The following summarises the major classes of consideration transferred, and the recognised amounts of assets acquired and liabilities assumed at the acquisition date: 30.4 Consideration Transferred Group For the year ended 31 March 2012 (Rs.)

Cash and cash equivalents paid 2,195,011,478 2,195,011,478

LOLC 2011/12 REPORTS & ACCOUNTS 177 Notes to the Financial Statements

30.5 Goodwill on Acquisition/Gain on a Bargain Purchase Goodwill on Acquisition/Gain on a Bargain Purchase is recognised as a result of the acquisitions as follows:

Group For the year ended 31 March Note 2012 (Rs.)

Total Consideration paid 30.4 2,195,011,478 (-) Total Identifiable net assets (stated at fair value) 30.8 5,290,281,781 Minority interest acquired (270,647,926) Parent’s share of net assets acquired (5,019,633,855) Total resulted goodwill/(Negative goodwill) (2,824,622,377)

Goodwill on acquisition (Note 30.5.1) 32.1 89,914,043 Gains on bargain purchases (Negative goodwill) 11.1 (2,914,536,420) (2,824,622,377)

30.5.1 The goodwill is mainly attributable to the established business position, and the synergies expected to be achieved from integrating the acquired companies into the Group’s existing business.

30.6 Acquisition of Minority Interests During the current financial period, the Group acquired additional interest of the following controlled entities:

Company Increase in Holding Decrease in Minority Interest Additional Investment Made %

Tropical Villas (Pvt) Ltd. 40 180,227,608 165,000,000

30.7 Net Cash used in Acquisition

Group For the year ended 31 March Note 2012 (Rs.)

Purchase consideration paid 30.4 2,195,011,478 (-) Cash and cash equivalents acquired 30.8 Positive cash balances 17,931,395 Bank overdrafts (51,863,863) 33,932,468 (2,228,943,946)

178 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

30.8 Identifiable Assets Acquired and Liabilities Assumed

Subsidiary Fair Value Total Total Adjustments (Rs.) (Rs.) (Rs.)

Assets Cash and cash equivalents 17,931,395 – 17,931,395 Investment in term deposits 76,749,268 – 76,749,268 Other investment securities 20,735,072 – 20,735,072 Advances and other loans 60,000,000 – 60,000,000 Inventories 201,695,771 – 201,695,771 Trade and other current assets 426,628,027 – 426,628,026 Leasehold right – 3,252,409,369 3,252,409,369 Investments in associate companies 10,000,000 – 10,000,000 Property, plant and equipment 1,100,396,231 1,378,400,809 2,478,797,040 Total assets 1,914,135,764 4,630,810,178 6,544,945,941

Liabilities and Equity Liabilities Bank overdrafts 51,863,863 – 51,863,863 Interest-bearing borrowings 573,583,508 – 573,583,508 Provision for taxation 103,983 – 103,983 Trade and other payables 600,777,877 – 600,777,877 Deferred income 1,323,676 – 1,323,676 Retirement benefit obligations 27,011,254 – 27,011,254 Total liabilities 1,254,664,161 – 1,254,664,161

Equity Stated capital 1,347,328,418 – 1,347,328,418 Reserves 619,164,681 4,630,810,178 5,249,974,859 Retained earnings (1,307,021,496) – (1,307,021,496) Equity attributable to equity holders of the Company 1,299,921,313 4,630,810,178 5,290,281,781 Total liabilities and equity 2,554,585,474 4,630,810,178 6,544,945,942

LOLC 2011/12 REPORTS & ACCOUNTS 179 Notes to the Financial Statements

31 deferred Tax Assets and Liabilities 31.1 Recognised Deferred Tax Assets Deferred tax assets are attributable to the originations of following temporary differences:

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Property, plant and equipment (419,457,475) (683,946,985) (335,343,033) (626,046,299) Investment properties (1,224,000) (280,000) – – Lease receivables (387,210,523) – (387,210,523) – Unutilised tax losses 1,930,262,894 1,526,320,581 1,163,150,402 1,206,745,572 Employee benefits 162,989,416 128,570,403 85,996,592 80,123,443 General provisions 34,604,368 (994,137) – – Operating lease assets unamortised VAT (6,201,443) – (6,201,443) – Net deductible temporary difference 1,313,763,237 969,669,862 520,391,995 660,822,716

Total recognised deferred tax assets 347,479,485 434,654,001 145,709,757 185,030,360

31.2 Movement in Recognised Deferred Tax Assets

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Balance as at the beginning of the period 434,654 ,001 774,243,504 185,030,360 430,784,145 Originations/reversal to the Income Statement (127,939,243) (192,382,879) (39,320,603) (159,596,955) Directly charged to the equity (Note 31.9) 2,367,008 (28,560) – – Recognition of previously unrecognised deferred tax (Note 31.7) 40,121,001 – – – Impact due to rate change (Note 31.8) – (147,178,064) – (86,156,830) Other adjustments (1,723,282) – – – Balance as at the end of the period 347,479,485 434,654,001 145,709,757 185,030,360

31.3 Recognised Deferred Tax Liabilities Deferred tax liabilities are attributable to the originations of following temporary differences:

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Property, plant and equipment 1,700,141,471 1,873,268,133 – – Revaluation of properties 753,293,434 399,210,122 – – Lease recievables 3,904,518,239 2,429,831,009 – – Unutilised tax losses (1,048,155,795) (674,155,280) – – Employee benefits (54,928,893) (45,194,289) – – Forward exchange contracts assets 211,713,264 – – – Net taxable temporary difference 5,466,581,720 3,982,959,695 – –

Total recognised deferred tax liabilities 1,196,442,542 872,361,434 – –

180 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

31.4 Movement in Recognised Deferred Tax Liabilities

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Balance as at the beginning of the period 872,361,434 442,464,503 – – Originations/reversal to the Income Statement 313,348,154 235,282,287 – – Directly charged to the equity (Note 31.9) (27,879,647) 27,166,205 – – Impact due to rate change (Note 31.8) – (135,441,952) – – Other adjustments 38,612,601 302,890,391 – – Balance as at the end of the period 1,196,442,542 872,361,434 – –

31.5 Deferred Tax Expense

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Deferred Tax Assets (Note 31.2) Originations/reversal during the period 127,939,243 192,382,879 39,320,603 159,596,955 Recognition of previously unrecognised deferred tax (Note 31.7) (40,121,001) – – – Impact due to rate change – 147,178,064 – 86,156,830

Deferred Tax Liabilities (Note 31.4) Originations/reversal during the period 313,348,154 235,282,287 – – Impact due to rate change – (135,441,952) – – 401,166,396 455,403,214 39,320,603 245,753,785

31.6 Unrecognised Deferred Tax Assets for Deferred Taxation Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which the Group can utilise the benefits therefrom.

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Deductible temporary differences 1,041,465 781,432 – – Unutilised tax losses 590,105,985 1,069,283,654 – – 591,147,450 1,070,065,086 – –

LOLC 2011/12 REPORTS & ACCOUNTS 181 Notes to the Financial Statements

31.7 Previously Unrecognised Tax Losses In 2011/12, the following companies have recognised deferred tax assets on previously unrecognised tax losses as management considered it is probable that future taxable profits would be available against which they can be utilised.

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Klevenberg (Pvt) Ltd. 84,398,075 – – – LOLC Motors Ltd. 98,392,711 – – – LOLC Insurance Company Ltd. 58,891,215 – – – 241,682,001 – – –

31.8 Impact Due to Corporate Income Tax Rate Change - 2010/11 Financial Period The corporate income tax rate has been changed to 28%, 12% and 10% from 35% and 15% commencing from year of assessment 2011/12 as per the Budget Proposals for 2011 announced by the Finance Minister, enacted in 2011. Accordingly, in the year of 2010/11 deferred tax asset and liability have been computed based on the revised rates and Rs. 11,736,112/- of the Group and Rs. 86,156,829/- of the Company have been reversed to Income Statement and Statement of Changes in Equity respectively.

31.9 Deferred Tax Charged/Credited Directly to Equity According to Sri Lanka Accounting Standard No. 14 (Revised 2005) - ‘Income Taxes’, deferred tax shall be charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or in a different period. Accordingly, the deferred tax liability arising on revaluation of property, plant and equipment of Rs. 30,246,655/- (2010/11 - Rs. 27,137,645/- charged) of the Group was credited directly to revaluation reserve in the Statement of Changes in Equity in 2011/12.

32 Intangible Assets 32.1 Goodwill on Acquisition

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Balance at the beginning of the period 331,713,877 151,415,234 – – Acquisition during the period 89,914,043 180,298,643 – – 421,627,920 331,713,877 – –

During the period goodwill acquired mainly resulted from acquisition of Speed Italia Ltd. (Rs. 59,000,000/-), Excel Restaurant (Pvt) Ltd. (Rs. 20,524,340/-) and Ajex Engineers (Pvt) Ltd. (Rs. 10,389,703/-).

Goodwill as at the Balance Sheet date has been tested for impairment and found no impairment for the carrying value.

182 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

32.2 Other Intangible Assets

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Computer software 89,877,232 114,687,349 47,677,489 61,011,327 Licence and fees 27,759,815 – – – Brand value 75,827,956 85,306,451 – – Customer base 29,652,989 39,537,319 – – Total 223,117,992 239,531,119 47,677,489 61,011,327

32.3 Other Intangible Assets - Group

Computer Software Licence and Fees Brand Value Customer Base Total (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Cost/Valuation Balance as at 1 April 2011 196,973,582 – 94,784,946 49,421,649 341,180,177 Additions during the year 9,209,310 28,365,799 – – 37,575,109 Balance as at 31 March 2012 206,182,892 28,365,799 94,784,946 49,421,649 378,755,286

Accumulated Amortisation Balance as at 1 April 2011 82,286,233 – 9,478,495 9,884,330 101,649,058 Amortisation during the year 34,019,427 605,984 9,478,495 9,884,330 53,988,236 Balance as at 31 March 2012 116,305,660 605,984 18,956,990 19,768,660 155,637,294

Carrying Amount As at 31 March 2012 89,877,232 27,759,815 75,827,956 29,652,989 223,117,992 As at 31 March 2011 114,687,349 – 85,306,451 39,537,319 239,531,119

32.4 Other Intangible Assets - Company Computer Software

For the year ended 31 March 2012 2011 (Rs.) (Rs.)

Cost/Valuation Balance as at 01 April 113,467,128 99,095,682 Additions during the year 7,664,691 14,371,446 Balance as at 31 March 121,131,819 113,467,128

Amortisation Balance as at 01 April 52,455,801 34,194,331 Amortisation during the year 20,998,529 18,261,470 Balance as at 31 March 73,454,330 52,455,801 Carrying amount as at 31 March 47,677,489 61,011,327

LOLC 2011/12 REPORTS & ACCOUNTS 183 Notes to the Financial Statements

33 property, Plant and Equipment

Lands Freehold Buildings Leasehold Freehold Motor Leasehold Motor Furniture & Office Equipment Computers Freehold Plant & Leasehold Assets for Other Capital Work-in- Total Buildings Vehicles Vehicles Fittings Machinery Machinery Operating Leases Tangible Assets Progress (CWIP) (Note 33.1) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Group Cost/Valuation Balance as at 1 April 2011 6,980,701,474 4,101,962,350 681,873,765 1,508,616,385 419,313,275 810,321,921 538,141,397 306,813,915 696,468,478 49,598,874 1,136,009,576 652,406,285 49,005,457 17,931,233,152 Additions 1,004,300,761 91,563,873 188,596,308 658,169,342 57,572,245 135,611,892 88,500,852 120,171,050 290,496,747 31,726,800 5,508,855 23,050,675 281,289,420 2,976,558,820 Revaluations 629,566,825 (18,106,762) (29,664,315) – – – – – – – – – – 581,795,748 Disposals (132,648,583) (64,310,982) – (222,331,395) (333,902,877) (192,075,126) (87,108,731) (8,003,594) (368,217,433) (2,574,769) (395,931,641) (75,073,027) (591,402) (1,882,769,560) Transfers (36,742,785) 34,493,935 27,788,110 10,196,668 (10,196,668) 6,600,615 1,670,500 – 12,765,990 (19,765,990) – – (79,360,407) (52,550,032) Acquisition of subsidiaries & joint ventures 1,224,223,100 1,132,625,961 – 26,518,676 15,942,027 65,066,865 46,941,109 2,161,193 1,242,228,099 – – 7,213,220 760,619 3,763,680,869 Transfer to investment properties (57,802,500) (478,400,850) – – – – – – – – – – – (536,203,350) Balance as at 31 March 2012 9,611,598,292 4,799,827,525 868,593,868 1,981,169,676 148,728,002 825,526,167 588,145,127 421,142,564 1,873,741,881 58,984,915 745,586,790 607,597,153 251,103,687 22,781,745,647

Accumulated Depreciation Balance as at 1 April 2011 191,932,534 63,797,520 583,668,522 250,779,567 574,523,374 260,055,904 190,165,418 601,818,759 19,349,200 505,790,691 217,344,713 3,459,226,202 Charge for the year 627,323,153 19,393,196 376,070,067 34,306,216 79,396,510 51,956,308 36,739,022 75,940,504 5,097,631 187,184,865 20,655,888 1,514,063,360 Revaluations (4,707,259) – – – – – – – – – – (4,707,259) Depreciation on disposals (983,678) – (131,191,751) (210,205,878) (147,221,207) (77,859,165) (2,416,502) (264,564,836) (1,662,872) (278,569,090) (67,327,465) (1,182,002,444) Depreciation on transfers (836) – 27,266,752 (27,266,752) 10,947 (10,111) – 5,206,627 (7,248,294) – – (2,041,667) Acquisition of subsidiaries & joint ventures 177,741,073 – 10,950,126 1,985,508 33,619,856 35,388,404 1,644,556 688,324,356 – – 3,298,703 952,952,582 Transfer to Investment Properties (126,654,797) – – – – – – – – – – (126,654,797) Balance as at 31 March 2012 864,650,190 83,190,716 866,763,716 49,598,661 540,329,480 269,531,340 226,132,494 1,106,725,410 15,535,665 414,406,466 173,971,839 4,610,835,977

Carrying Amount As at 31 March 2012 9,611,598,292 3,935,177,335 785,403,152 1,114,405,960 99,129,341 285,196,687 318,613,787 195,010,070 767,016,471 43,449,250 331,180,324 433,625,314 251,103,687 18,170,909,670 As at 31 March 2011 6,980,701,474 3,910,029,816 618,076,245 (164,355,247) 559,542,354 235,798,547 278,085,493 116,648,497 94,649,719 30,249,674 630,218,885 435,061,572 49,005,457 14,472,006,950

Footnotes 1. Property, plant and equipment included fully-depreciated assets having a gross amount of Rs. 761,343,795 /- as at 31 March 2012 (2011 - Rs. 964,098,243/-).

2. The capitalised borrowing costs related to the acquisition of Property, plant and equipment during the year is Rs. 9,266,764/- (2010/11 - Rs. 279,734,804/-).

3. The fair value of the revalued properties were determined by independent valuers who hold recognised and relevant professional qualification and have recent experience in the location and category of the revalued properties.

4. Change in Estimates During the year the Group conducted an operational efficiency review at its leisure sector properties which resulted in changes in the expected useful lives of certain items of properties. Certain buildings, which management previously intended to operate in longer term are now expected to remain in service for 3 years from 01 April 2011. As a result, the expected useful lives of these buildings decreased and their estimated depreciation values were accelerated in order to reflect the change in estimate of useful lives. The effect of these changes on depreciation expense, recognised in Income Statement in current and future years is as follows:

For the year ended 31 March 2012 2013 2014 Later (Rs.) (Rs.) (Rs.) (Rs.)

Increase in depreciation expense 553,893,294 553,893,294 553,893,294 –

184 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

33 property, Plant and Equipment

Lands Freehold Buildings Leasehold Freehold Motor Leasehold Motor Furniture & Office Equipment Computers Freehold Plant & Leasehold Assets for Other Capital Work-in- Total Buildings Vehicles Vehicles Fittings Machinery Machinery Operating Leases Tangible Assets Progress (CWIP) (Note 33.1) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Group Cost/Valuation Balance as at 1 April 2011 6,980,701,474 4,101,962,350 681,873,765 1,508,616,385 419,313,275 810,321,921 538,141,397 306,813,915 696,468,478 49,598,874 1,136,009,576 652,406,285 49,005,457 17,931,233,152 Additions 1,004,300,761 91,563,873 188,596,308 658,169,342 57,572,245 135,611,892 88,500,852 120,171,050 290,496,747 31,726,800 5,508,855 23,050,675 281,289,420 2,976,558,820 Revaluations 629,566,825 (18,106,762) (29,664,315) – – – – – – – – – – 581,795,748 Disposals (132,648,583) (64,310,982) – (222,331,395) (333,902,877) (192,075,126) (87,108,731) (8,003,594) (368,217,433) (2,574,769) (395,931,641) (75,073,027) (591,402) (1,882,769,560) Transfers (36,742,785) 34,493,935 27,788,110 10,196,668 (10,196,668) 6,600,615 1,670,500 – 12,765,990 (19,765,990) – – (79,360,407) (52,550,032) Acquisition of subsidiaries & joint ventures 1,224,223,100 1,132,625,961 – 26,518,676 15,942,027 65,066,865 46,941,109 2,161,193 1,242,228,099 – – 7,213,220 760,619 3,763,680,869 Transfer to investment properties (57,802,500) (478,400,850) – – – – – – – – – – – (536,203,350) Balance as at 31 March 2012 9,611,598,292 4,799,827,525 868,593,868 1,981,169,676 148,728,002 825,526,167 588,145,127 421,142,564 1,873,741,881 58,984,915 745,586,790 607,597,153 251,103,687 22,781,745,647

Accumulated Depreciation Balance as at 1 April 2011 191,932,534 63,797,520 583,668,522 250,779,567 574,523,374 260,055,904 190,165,418 601,818,759 19,349,200 505,790,691 217,344,713 3,459,226,202 Charge for the year 627,323,153 19,393,196 376,070,067 34,306,216 79,396,510 51,956,308 36,739,022 75,940,504 5,097,631 187,184,865 20,655,888 1,514,063,360 Revaluations (4,707,259) – – – – – – – – – – (4,707,259) Depreciation on disposals (983,678) – (131,191,751) (210,205,878) (147,221,207) (77,859,165) (2,416,502) (264,564,836) (1,662,872) (278,569,090) (67,327,465) (1,182,002,444) Depreciation on transfers (836) – 27,266,752 (27,266,752) 10,947 (10,111) – 5,206,627 (7,248,294) – – (2,041,667) Acquisition of subsidiaries & joint ventures 177,741,073 – 10,950,126 1,985,508 33,619,856 35,388,404 1,644,556 688,324,356 – – 3,298,703 952,952,582 Transfer to Investment Properties (126,654,797) – – – – – – – – – – (126,654,797) Balance as at 31 March 2012 864,650,190 83,190,716 866,763,716 49,598,661 540,329,480 269,531,340 226,132,494 1,106,725,410 15,535,665 414,406,466 173,971,839 4,610,835,977

Carrying Amount As at 31 March 2012 9,611,598,292 3,935,177,335 785,403,152 1,114,405,960 99,129,341 285,196,687 318,613,787 195,010,070 767,016,471 43,449,250 331,180,324 433,625,314 251,103,687 18,170,909,670 As at 31 March 2011 6,980,701,474 3,910,029,816 618,076,245 (164,355,247) 559,542,354 235,798,547 278,085,493 116,648,497 94,649,719 30,249,674 630,218,885 435,061,572 49,005,457 14,472,006,950

LOLC 2011/12 REPORTS & ACCOUNTS 185 Notes to the Financial Statements

Lands Freehold Freehold Leasehold Furniture & Office Equipment Computers Assets for Capital Work-in- Total Buildings Motor Vehicles Motor Vehicles Fittings Operating Leases Progress (CWIP) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Company Cost/Valuation Balance as at 1 April 2011 1,185,649,236 322,904,866 1,119,622,132 368,737,044 211,017,099 231,373,336 186,430,587 1,025,739,473 – 4,651,473,773 Additions 203,937,803 30,431,681 510,470,831 22,481,602 21,146,222 42,986,275 68,247,952 31,176 4,025,000 903,758,542 Revaluations – – – – – – – – – – Disposals (132,648,583) (27,350,417) (200,475,927) (332,510,377) (18,921,526) (42,734,141) (7,924,094) (362,964,348) – (1,125,529,413) Transfers (36,742,785) 34,493,935 (18,151,506) 18,151,506 2,196,350 52,500 – – – – Transfer to investment properties (57,802,500) (107,197,500) – – – – – – – (165,000,000) Balance as at 31 March 2012 1,162,393,171 253,282,565 1,411,465,530 76,859,775 215,438,145 231,677,970 246,754,445 662,806,301 4,025,000 4,264,702,902

Accumulated Depreciation Balance as at 1 April 2011 794,384 345,360,067 213,609,029 129,347,860 138,578,675 112,137,425 428,149,965 1,367,977,405 Charge for the year 5,369,244 303,355,505 19,430,234 34,768,749 24,240,011 16,060,951 178,751,451 581,976,145 Depreciation on disposals – (113,086,186) (209,416,794) (17,273,018) (39,090,970) (2,361,293) (251,137,198) (632,365,459) Depreciation on transfers (836) (991,886) 991,886 – 836 – – – Balance as at 31 March 2012 6,162,792 534,637,500 24,614,355 146,843,591 123,728,552 125,837,083 355,764,218 1,317,588,091

Carrying Amount As at 31 March 2012 1,162,393,171 247,119,773 876,828,030 52,245,420 68,594,554 107,949,418 120,917,362 307,042,083 4,025,000 2,947,114,811 As at 31 March 2011 1,185,649,236 322,110,482 774,262,065 155,128,015 81,669,239 92,794,661 74,293,162 597,589,508 – 3,283,496,368

Footnotes 1. Property, plant and equipment included fully-depreciated assets having a gross amount of Rs. 246,526,432/- as at 31 March 2012 (2011 - Rs. 239,258,715/-).

2. The carrying amount of land and buildings of the Company, if carried at cost less accumulated depreciation would amount to Rs. 669,162,516/- as at 31 March 2012 (31 March 2011 - Rs. 755,878,090/-).

186 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Lands Freehold Freehold Leasehold Furniture & Office Equipment Computers Assets for Capital Work-in- Total Buildings Motor Vehicles Motor Vehicles Fittings Operating Leases Progress (CWIP) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Company Cost/Valuation Balance as at 1 April 2011 1,185,649,236 322,904,866 1,119,622,132 368,737,044 211,017,099 231,373,336 186,430,587 1,025,739,473 – 4,651,473,773 Additions 203,937,803 30,431,681 510,470,831 22,481,602 21,146,222 42,986,275 68,247,952 31,176 4,025,000 903,758,542 Revaluations – – – – – – – – – – Disposals (132,648,583) (27,350,417) (200,475,927) (332,510,377) (18,921,526) (42,734,141) (7,924,094) (362,964,348) – (1,125,529,413) Transfers (36,742,785) 34,493,935 (18,151,506) 18,151,506 2,196,350 52,500 – – – – Transfer to investment properties (57,802,500) (107,197,500) – – – – – – – (165,000,000) Balance as at 31 March 2012 1,162,393,171 253,282,565 1,411,465,530 76,859,775 215,438,145 231,677,970 246,754,445 662,806,301 4,025,000 4,264,702,902

Accumulated Depreciation Balance as at 1 April 2011 794,384 345,360,067 213,609,029 129,347,860 138,578,675 112,137,425 428,149,965 1,367,977,405 Charge for the year 5,369,244 303,355,505 19,430,234 34,768,749 24,240,011 16,060,951 178,751,451 581,976,145 Depreciation on disposals – (113,086,186) (209,416,794) (17,273,018) (39,090,970) (2,361,293) (251,137,198) (632,365,459) Depreciation on transfers (836) (991,886) 991,886 – 836 – – – Balance as at 31 March 2012 6,162,792 534,637,500 24,614,355 146,843,591 123,728,552 125,837,083 355,764,218 1,317,588,091

Carrying Amount As at 31 March 2012 1,162,393,171 247,119,773 876,828,030 52,245,420 68,594,554 107,949,418 120,917,362 307,042,083 4,025,000 2,947,114,811 As at 31 March 2011 1,185,649,236 322,110,482 774,262,065 155,128,015 81,669,239 92,794,661 74,293,162 597,589,508 – 3,283,496,368

LOLC 2011/12 REPORTS & ACCOUNTS 187 Notes to the Financial Statements

33.1 Other Tangible Assets - Group

Water Sanitation Biological Roads & Penstock Security Fences Cutlery, Crockery Linen & Swimming Pool Bare Lands Others Total & Others Assets Bridges Pipe Line & Glassware Furnishing (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Group Cost/Valuation Balance as at 01 April 2011 22,532,507 82,434 68,790,945 76,000,000 1,380,500 27,864,613 74,641,874 9,911,812 342,390,848 28,810,752 652,406,285 Additions 298,057 – 1,692,393 656,075 7,120,265 2,071,203 9,334,487 1,792,715 – 85,480 23,050,675 Disposals (1,387,589) – – – (1,952,334) (13,005,371) (40,035,040) – – (18,692,693) (75,073,027) Acquisition of subsidiaries & joint ventures – – – – – – 3,274,242 – – 3,938,978 7,213,220 Balance as at 31 March 2012 21,442,975 82,434 70,483,338 76,656,075 6,548,431 16,930,445 47,215,563 11,704,527 342,390,848 14,142,517 607,597,153

Accumulated Depreciation Balance as at 01 April 2011 11,158,050 82,434 3,205,740 3,800,000 1,342,128 24,616,901 62,334,876 7,673,627 80,326,299 22,804,658 217,344,713 Charge for the year 1,402,676 – 1,531,581 3,810,935 221,504 1,083,964 2,538,748 609,062 7,664,185 1,793,233 20,655,888 Depreciation on disposals (1,387,589) – – – (173,809) (12,022,369) (36,369,619) (16,674) – (17,357,405) (67,327,465) Acquisition of subsidiaries & joint ventures – – – – – – 3,124,744 – – 173,959 3,298,703 Balance as at 31 March 2012 11,173,137 82,434 4,737,321 7,610,935 1,389,823 13,678,496 31,628,749 8,266,015 87,990,484 7,414,445 173,971,839

Carrying Amount As at 31 March 2012 10,269,838 – 65,746,017 69,045,140 5,158,608 3,251,949 15,586,814 3,438,512 254,400,364 6,728,072 433,625,314 As at 31 March 2011 11,374,457 – 65,585,205 72,200,000 38,372 3,247,712 12,306,998 2,238,185 262,064,549 6,006,094 435,061,572

34 deposits from Customers

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Deposits maturing within one year 20,780,338,469 12,590,283,288 – – Deposits maturing after one year 4,416,348,070 3,757,852,235 – – Total 25,196,686,539 16,348,135,523 – –

35 Interest-Bearing Borrowings

Commercial papers & Promissory Notes 3,995,912,204 3,063,700,795 3,676,738,942 2,025,012,091 Short-term loans and others 17,108,560,573 14,574,822,384 4,056,000,000 7,726,250,000 Debentures 5,054,887,500 165,600,000 4,250,000,000 – Finance lease liabilities (Note 35.1) 535,729,355 369,696,813 363,666,764 182,019,206 Long-term borrowings (Note 35.2) 35,365,434,952 28,610,473,795 9,943,950,649 10,351,562,460 62,060,524,584 46,784,293,787 22,290,356,355 20,284,843,757

188 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

33.1 Other Tangible Assets - Group

Water Sanitation Biological Roads & Penstock Security Fences Cutlery, Crockery Linen & Swimming Pool Bare Lands Others Total & Others Assets Bridges Pipe Line & Glassware Furnishing (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Group Cost/Valuation Balance as at 01 April 2011 22,532,507 82,434 68,790,945 76,000,000 1,380,500 27,864,613 74,641,874 9,911,812 342,390,848 28,810,752 652,406,285 Additions 298,057 – 1,692,393 656,075 7,120,265 2,071,203 9,334,487 1,792,715 – 85,480 23,050,675 Disposals (1,387,589) – – – (1,952,334) (13,005,371) (40,035,040) – – (18,692,693) (75,073,027) Acquisition of subsidiaries & joint ventures – – – – – – 3,274,242 – – 3,938,978 7,213,220 Balance as at 31 March 2012 21,442,975 82,434 70,483,338 76,656,075 6,548,431 16,930,445 47,215,563 11,704,527 342,390,848 14,142,517 607,597,153

Accumulated Depreciation Balance as at 01 April 2011 11,158,050 82,434 3,205,740 3,800,000 1,342,128 24,616,901 62,334,876 7,673,627 80,326,299 22,804,658 217,344,713 Charge for the year 1,402,676 – 1,531,581 3,810,935 221,504 1,083,964 2,538,748 609,062 7,664,185 1,793,233 20,655,888 Depreciation on disposals (1,387,589) – – – (173,809) (12,022,369) (36,369,619) (16,674) – (17,357,405) (67,327,465) Acquisition of subsidiaries & joint ventures – – – – – – 3,124,744 – – 173,959 3,298,703 Balance as at 31 March 2012 11,173,137 82,434 4,737,321 7,610,935 1,389,823 13,678,496 31,628,749 8,266,015 87,990,484 7,414,445 173,971,839

Carrying Amount As at 31 March 2012 10,269,838 – 65,746,017 69,045,140 5,158,608 3,251,949 15,586,814 3,438,512 254,400,364 6,728,072 433,625,314 As at 31 March 2011 11,374,457 – 65,585,205 72,200,000 38,372 3,247,712 12,306,998 2,238,185 262,064,549 6,006,094 435,061,572

34 deposits from Customers

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Deposits maturing within one year 20,780,338,469 12,590,283,288 – – Deposits maturing after one year 4,416,348,070 3,757,852,235 – – Total 25,196,686,539 16,348,135,523 – –

35 Interest-Bearing Borrowings

Commercial papers & Promissory Notes 3,995,912,204 3,063,700,795 3,676,738,942 2,025,012,091 Short-term loans and others 17,108,560,573 14,574,822,384 4,056,000,000 7,726,250,000 Debentures 5,054,887,500 165,600,000 4,250,000,000 – Finance lease liabilities (Note 35.1) 535,729,355 369,696,813 363,666,764 182,019,206 Long-term borrowings (Note 35.2) 35,365,434,952 28,610,473,795 9,943,950,649 10,351,562,460 62,060,524,584 46,784,293,787 22,290,356,355 20,284,843,757

LOLC 2011/12 REPORTS & ACCOUNTS 189 Notes to the Financial Statements

35.1 Finance Lease Liabilities

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Net liability to lessor of JEDB/SLSPC estates (Note 35.1.2) 152,390,073 154,578,922 – – Other lease liabilities 383,339,282 215,117,891 363,666,764 182,019,206 Total lease liabilities (Note 35.1.1) 535,729,355 369,696,813 363,666,764 182,019,206

35.1.1 Gross lease rentals payable as at 1 April 542,941,585 633,876,495 215,329,321 333,646,526 On acquisition of subsidiaries & joint ventures 8,861,369 – – – Leases obtained during the year 405,005,772 529,050,726 414,663,360 115,141,675 Lease rentals paid during the year (188,080,791) (619,985,636) (162,983,893) (233,458,880) Gross lease rentals payable as at 31 March 768,727,935 542,941,585 467,008,788 215,329,321 Less: Interest in suspense (232,998,580) (173,244,772) (103,342,024) (33,310,115) Net lease liability 535,729,355 369,696,813 363,666,764 182,019,206

Repayable within one year Gross lease rentals payable 188,386,159 158,434,292 109,311,565 126,448,109 Less: Interest in suspense (71,269,784) (27,251,967) (39,140,818) (16,009,250) Net lease liability 117,116,375 131,182,325 70,170,747 110,438,859

Repayable after one year before five years Gross lease rentals payable 344,158,820 139,952,337 357,697,223 88,881,212 Less: Interest in suspense (66,468,283) (45,425,651) (64,201,206) (17,300,865) Net lease liability 277,690,537 94,526,686 293,496,017 71,580,347

Repayable after five years Gross lease rentals payable 236,182,956 244,554,956 – – Less: Interest in suspense (95,260,513) (100,567,154) – – Net lease liability 140,922,443 143,987,802 – – Total 535,729,355 369,696,813 363,666,764 182,019,206

190 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

35.1.2 Net Liability to Lessor of JEDB/SLSPC Estates

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Gross Liability Balance as at 1 April 286,414,956 294,805,885 – – Repayments (8,372,000) (8,390,929) – – Balance as at 31 March 278,042,956 286,414,956 – – Finance costs allocated to future years (125,652,883) (131,836,034) – – Net liability 152,390,073 154,578,922 – –

Payable within one Year Gross liability 8,372,000 8,372,000 – – Finance costs allocated to future years (6,113,920) (6,188,612) – – Net liability transferred to current liabilities. 2,258,080 2,183,388 – –

Payable within two to five Years Gross liability 33,488,000 33,488,000 – – Finance costs allocated to future years (24,278,451) (25,080,269) – – Net liability 9,209,549 8,407,731 – –

Payable after five years Gross liability 236,182,956 244,554,956 – – Finance costs allocated to future years (95,260,513) (100,567,154) – – Net liability 140,922,443 143,987,802 – –

Pussellawa Plantations Ltd. and Maturata Plantations Ltd. The lease rentals have been amended, with effect from 15 June 1996 to a substantially higher amount than the previous nominal lease rental of Rs. 500/- per estate per annum.

The basic rental payable under the revised basis is Rs. 13,607,000/- per annum and this amount is to be inflated annually by the Gross Domestic Production (GDP) Deflator and is in the form contingent lease rental. Consequently, contingent lease rentals charged for the current year in the Income Statement amounts to Rs. 23,006,972/- ( 2010/11 - Rs. 44,638,885/-).

This lease agreement was further amended on 15 June 2002, freezing annual lease rental at Rs. 17,940,189/- for a period of six years commencing from 15 June 2002. Hence, the GDP Deflator adjustment has been frozen at Rs. 4,333,189/- per annum until 15 June 2008.

Lease rental has been revised by the Ministry of Finance after the relief period of 2002-2008. The rental has been computed in accordance with Amendment of Leases - (Agreement No. 1560).

Future liability on annual lease payment of Rs. 13,607,000/- would continue until year 2045. The Net Present Value of this liability at 4% discounting rate (as recommended by UITF) would result in a liability of Rs. 152,390,073/- (2010/11 - Rs. 154,578,922/-).

The Net Present Value of Rs. 152,390,073/- is presented by gross liability of Rs. 278,042,956/- and interest in suspense of Rs. 125,652,883 /-.

The Charge to the Income Statement during the current period is Rs. 6,183,150/-.

LOLC 2011/12 REPORTS & ACCOUNTS 191 Notes to the Financial Statements

35.2 Long-Term Borrowings

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Balance as at 1 April 28,610,473,795 18,016,249,980 10,351,562,460 11,051,344,585 On acquisition of subsidiaries & joint ventures 254,234,426 1,071,460,000 – – Received during the year 15,972,695,717 20,374,573,885 2,900,000,000 6,443,121,963 Repaid during the year (9,471,968,986) (10,851,810,070) (3,307,611,811) (7,142,904,088) Balance as at 31 March 35,365,434,952 28,610,473,795 9,943,950,649 10,351,562,460

Long-term borrowings - current 11,674,511,306 5,737,421,018 3,533,838,752 3,563,534,904 Long-term borrowings - non-current 23,690,923,646 22,873,052,777 6,410,111,897 6,788,027,556 Total 35,365,434,952 28,610,473,795 9,943,950,649 10,351,562,460

Analysis of Non-Current Portion of Long-Term Borrowings Repayable within 3 years 17,385,755,657 17,109,761,985 5,558,515,372 5,648,166,932 Repayable after 3 years 6,305,167,989 5,763,290,792 851,596,525 1,139,860,624 Total 23,690,923,646 22,873,052,777 6,410,111,897 6,788,027,556

36 Insurance Provision

Group As at 31 March 2012 2011 (Rs.) (Rs.)

Life Insurance (Note 36.1) 47,570,657 – General Insurance (Note 36.2) 320,324,550 – Total 367,895,207 –

36.1 Life Insurance Provision

Life fund net assets ( 36.1.1) 47,570,657 – Transfer to shareholders – – Insurance provision - Long-term (Post-transfer) – – 47,570,657 –

36.1.1 Life Fund Net Assets

Gross written premium 51,426,839 – Reinsurance premium (1,108,626) – Net written premium 50,318,213 – Net claims and benefits (553,652) – Operating and administrative expenses (6,188,020) – Excess from operations 43,576,541 – Investment income and other income 3,994,116 – Income tax expenses – – Life fund net assets - B/F – – Insurance provision - Long-term (Pre-transfer) 47,570,657 –

192 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

36.1.2 During the last nine months of operation ending on 31 December 2011, the LOLC Insurance Company Ltd. has sold three single premium term life products viz., Divisaviya, Isuru Sahana and Credit Life Group. All these are single premium term insurance products. As per IBSL’s guidelines, the method of valuation is Net Premium method, using the discounting rate of 5% p.a.; this being the first year of operations of the Company. Mortality table used is A (67-70) ultimate table.

Reinsurance has been ignored for computation of solvency margin on a conservative basis. The insurance provision has been established in accordance with the “Solvency Margin (Long-term Insurance) Rules 2002” made by the IBSL, under Section 105 read with Section 26 of the Regulation of Insurance Industry Act No. 43 of 2000.

The valuation of the Insurance Provision - long-term insurance business as at 31 December 2011 was made by the Actuary Mr. M.G. Diwan of Messrs K.A. Pandit (Consultant & Actuaries). According to the results of the valuation, provision of LKR 33,703,503/- (2010 - Not Applicable) is adequate to cover the liabilities pertaining to the long-term insurance business.

The Board of Directors decided not to transfer any amount from the long-term insurance fund to the shareholders’ fund.

36.2 General Insurance Provision

Group As at 31 March 2012 2011 (Rs.) (Rs.)

36.2.1 Unearned Premium Gross premium 300,369,624 – Reinsurance premium – – Net premium 300,369,624 – Deferred acquisition expenses (5,735,518) – Total unearned premium 294,634,106 –

36.2.2 Gross Claims Reserve Claims outstanding 22,103,444 – Claims incurred but not reported (IBNR/IBNER) 3,587,000 – Total gross claims reserve 25,690,444 – Total general insurance provision 320,324,550 –

36.2.3 Reconciliation Between Insurance Provision and Technical Reserve Insurance provision 320,324,550 – Reinsurance on claims reserves – – Technical reserve 320,324,550 –

36.2.4 LOLC Insurance Company Ltd. started writing Non-Life motor business in year 2011, the only class of business underwritten till 31 December 2011. A contingency reserve has been set aside to make provision for risks like Catastrophe, IBNR. Market ratios were considered arriving at IBNR figures. Actuary has used an average delay method modified suitably looking at Company’s new business policy and delay pattern observed. IBNR calculated is around 7% of Net Earned Premiums, and is on conservative basis for a start-up company. Actuary believes that over a couple of years, the actuary will be able to use some statistical method as data may be sufficient at that time and the Company also may have ventured into other classes of business. The valuation was done by Actuary Messrs K.A. Pandit - Consultant & Actuaries, 2nd Floor, Churchgate House, Veer Nariman Road, Fort, Mumbai.

LOLC 2011/12 REPORTS & ACCOUNTS 193 Notes to the Financial Statements

37 trade and Other Payables

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Accounts payable 5,552,748,705 4,691,541,819 728,688,402 789,588,904 Creditors for leased equipment 938,563,331 2,152,267,791 16,226,126 18,599,730 Amount due to related companies (Note 46.3.2) 297,338,524 4,500,000 5,090,362 250,884,814 Other payable 362,339,477 228,551,605 – – VAT payable 122,905,161 41,175,053 67,546,123 947,162 Other tax payable 223,806,155 213,587,928 82,014,909 110,094,472 Insurance premium payable 30,231,784 18,496,680 – – Unclaimed dividends 21,461,092 11,310,471 2,769,543 2,717,374 7,549,394,229 7,361,431,347 902,335,465 1,172,832,456

38 deferred Income

Capital grants (Note 38.1) 291,610,752 284,756,521 – – Operating lease receivables - PHDT (Note 38.2) 3,584,175 4,120,910 – – Sponsorships 2,166,667 – – – Deferred income in respect of transfer of shares (Note 38.3) 30,915,865 – – – 328,277,459 288,877,431 – –

38.1 Capital Grants

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Balance as at the beginning of the period 372,585,642 352,783,979 – – Capital grants received 15,302,894 19,801,663 – – Balance as at the end of the period 387,888,536 372,585,642 – –

Amortisation Balance as at the beginning of the period 87,829,121 83,139,042 – – Amortised during the period 8,448,663 4,690,079 – – Balance as at the end of the period 96,277,784 87,829,121 – – Unamortised capital grants as at 31 March 291,610,752 284,756,521 – –

The above capital grants represents the following: 1. Funds received from the Plantation Housing and Human Development Trust (PHDT), MTIP, MPI for the development of workers welfare facilities and improvements to institutional facilities. 2. Funds received from the Tea Board for the construction of the CTC Tea Factory at Delta Estate. 3. Funds received from the Plantation Reform Project for the development of Forestry Plantations. 4. Subsidies received from the Rubber Controller Department for Rubber Replanting.

The amounts spent is capitalised under the relevant classification of property, plant and equipment. The corresponding grant component is reflected under deferred income and is being amortised over the useful life span of the related asset.

194 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

38.2 Operating Lease Receivables - PHDT

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Balance as at the beginning of the period 4,120,910 4,188,003 – – Amortised during the period (536,735) (67,093) – – Balance as at the end of the period 3,584,175 4,120,910 – –

38.3 Deferred Income in Respect of Transfer of Shares - Maturata Plantations PLC

Balance as at the beginning of the Period – – – – Prepayments received 31,996,875 – – – Amortised during the period (1,081,010) – – – Balance as at the end of the period 30,915,865 – – –

This represents the value of 6,399,375 number of ordinary shares of Rain Forest Eco Lodge (Pvt) Ltd. received by Maturata Plantations Ltd. at Rs. 10/- each in lieu of releasing the leasehold rights of 488 Hectares in Enselwatte, Deniyaya for Eco Tourism Project. The value of ordinary shares are deferred and amortised over the unexpired balance lease period.

39 retirement Benefit Obligations

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Movement in the Present Value of the Defined Benefit Obligations Balance as at the beginning of the period 889,356,837 759,559,844 80,123,443 65,638,616 Acquisition of subsidiaries & joint ventures 27,761,037 24,581,716 – 4,167,694 Benefits paid by the plan (97,964,019) (109,855,568) (4,775,626) (2,880,483) Expenditure recognised in the Income Statement (Note 39.1) 131,332,229 215,070,845 10,648,775 13,197,616 Balance as at the end of the period 950,486,084 889,356,837 85,996,592 80,123,443

39.1 Expense Recognised in the Income Statement

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Current service costs 96,379,684 177,015,763 7,429,063 6,398,398 Interest costs 21,255,801 20,565,888 8,026,320 7,737,491 Curtailment gain – – – 60,206 Actuarial gain/(loss) 13,696,744 17,489,194 – (998,479) Transfer of expenses – – (4,806,608) – 131,332,229 215,070,845 10,648,775 13,197,616

LOLC 2011/12 REPORTS & ACCOUNTS 195 Notes to the Financial Statements

Actuarial Assumptions Principal actuarial assumptions at the reporting date (expressed as weighted averages).

For the year ended 31 March 2012 2011

Discount rate (%) 10 - 11 9 - 12.35 Future salary increases (%) 5 - 10 8 - 10.75 Staff turnover factor (%) 5 - 10 5 - 10 Retirement age (Yrs.) 55 - 60 55 - 60

40 stated Capital

Group Company As at 31 March 2012 2011 2012 2011

Issued and fully-paid (Note 40.1) (Rs.) 475,200,000 475,200,000 475,200,000 475,200,000 No. of shares (Note 40.2) 475,200,000 475,200,000 475,200,000 475,200,000

All shares rank equally with regard to the Company’s residual assets. The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company.

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

40.1 Movement in Stated Capital Balance at the beginning of the period 475,200,000 475,200,000 475,200,000 475,200,000 Movement during the period – – – – Balance at the end of the period 475,200,000 475,200,000 475,200,000 475,200,000

40.2 Movement in No. of Shares Balance at the beginning of the period 475,200,000 47,520,000 475,200,000 47,520,000 Sub-division of shares (Note 13.1.2) – 427,680,000 – 427,680,000 Balance at the end of the period 475,200,000 475,200,000 475,200,000 475,200,000

41 Reserves

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Revaluation reserve (Note 41.1) 621,620,598 752,412,624 600,886,875 600,886,875 Future taxation reserve (Note 41.2) 205,000,000 205,000,000 205,000,000 205,000,000 Statutory reserve (Note 41.3) 1,102,969,392 732,934,122 272,356,156 290,215,933 Investment fund reserve (Note 41.4) 281,273,872 57,398,922 – – Total 2,210,863,862 1,747,745,668 1,078,243,031 1,096,102,808

196 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

41.1 Revaluation Reserve The revaluation reserve relates to the revaluation surplus of property, plant and equipment and long-term investments. Once the respective revalued items have been disposed, the relevant portion of revaluation surplus is transferred to retained earnings.

41.2 Future Taxation Reserve This reserve was created in order to accommodate the unexpected future tax liabilities arisen and pay off the tax consequences thereon.

41.3 Statutory Reserve The reserve fund of the Company and subsidiaries (Namely LOLC Micro Credit Ltd.) involved in leasing business was created according to the Direction No. 05 of 2006 issued by the Central Bank of Sri Lanka under the Section 34 of the Finance Leasing Act No. 56 of 2000 which requires the Companies to transfer 5% of their annual profits to this reserve until the sum equals to share capital of those Companies.

The statutory reserves of Lanka Orix Finance PLC and Commercial Leasing and Finance Ltd. were created in accordance with the Finance Companies (Capital Funds) Direction No. 01 of 2003 issued under the Finance Business Act No. 42 of 2011 (which supersedes the Finance Companies Act No. 78 of 1988) which requires the Company to transfer 20% of its annual profit to this reserve.

41.4 Investment Fund Reserve All companies supplying financial services are liable to pay VAT on financial services as per Section 25 A-G of the Value Added Tax Act No. 14 of 2002 and are required to deposit the respective sums in an Investment Fund Account established by the respective company as per the Central Bank Guidelines under the cover of letter No. 02/17/800/0014/01 dated 29 April 2011. Each company is required to deposit an amount equal to 8% of the value addition (profits) computed for financial VAT purposes on the same date of each month that VAT on financial services is paid and the 5% of the income tax liability on quarter tax payment. This requirement is effective from 1 January 2011.

42 retained Earnings

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Balance brought forward 10,773,393,641 6,662,696,388 5,877,341,305 4,401,162,084 Transferred to retained earnings – 735,975,206 17,859,777 – Transfers to statutory reserves (593,910,220) (385,353,847) – (48,326,643) Net profit for the year 6,259,864,500 3,840,227,908 4,300,966,315 1,523,343,288 Dividend forfeited – 1,162,576 – 1,162,576 Changes in Group holdings 162,707,493 (81,314,590) – – Balance at the end of the year 16,602,055,414 10,773,393,641 10,196,167,397 5,877,341,305

The carrying amount of the retained earnings represents the undistributed earnings held by the Group and the Company. This could be used to absorb future losses and dividend declaration.

LOLC 2011/12 REPORTS & ACCOUNTS 197 Notes to the Financial Statements

43 Commitments and Contingencies

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

43.1 Contingent Liabilities Guarantees issued to banks and other institutions 1,151,229,151 1,538,987,284 102,317,924 1,500,000,000 Corporate guarantees given to foreign funding agencies to grant loans to microfinance clients 598,533,616 598,547,038 598,533,616 598,547,038 Corporate guarantees given to subsidiary companies to obtain loans 3,767,375,000 – 3,767,375,000 – Stumpage payables (Note 43.1.1) 50,800,000 – – – Balance at the end of the year 5,567,937,767 2,137,534,322 4,468,226,540 2,098,547,038

43.1.1 Stumpage Payables - Pussellawa Plantations Ltd. Forest Department has imposed Rs. 50,800,000/- as the stumpage payable to the Government by Pussellawa Plantations Ltd. for harvesting of Forest Department’s Pinus Trees at Delta Estate by the Timber Lake Company. However, the Company has requested Forest Department to reconsider the sumpage calculation, as the said fee is more than the market value of the timber and is not keeping in line with the Supreme Court Judgement. Therefore, the amount of liability and the date of liability are uncertain and will depend on the response of the Forest Department.

43.2 Commitments

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Forward exchange contracts (Note 43.2.1) 18,808,409,121 12,147,143,462 4,279,980,162 5,615,638,725 Capital commitments (Note 43.2.2) 4,640,914,200 133,456,600 – 73,456,600 Letter of credits opened 195,166,239 94,724,861 195,166,239 46,205,504 Facility limits not utilised 1,677,621,760 1,531,604,468 949,885,653 1,194,934,635 Balance at the end of the year 25,322,111,320 13,906,929,391 5,425,032,054 6,930,235,464

43.2.1 On the commitment for forward exchange contracts, the Group will receive US$ 10,785,906, Euro 27,027,168, GBP 1,345,000, AUD 1,965,000 and the Company will receive US$ 17,915,786 and Euro 13,030,000 on the conversion.

43.2.2 Capital Commitments The Group of Companies entered to following capital commitments as at the Balance Sheet date.

United Dendro Energy (Pvt) Ltd. According to the agreement entered with the Board of Investments (BOI) in Sri Lanka, the Company is committed to invest US$ 6,560,000 or its equivalent in Sri Lankan Rupees in 6 MW biomass power plant at Dodangoda.

Samudra Beach Resorts (Pvt) Ltd. Samudra Beach Resorts (Pvt) Ltd. has entered into an agreement for a contract with Sierra Civil Engineering (Pvt) Ltd. as Designing and Building Contractor to construct a 4-Star Hotel at Kosgoda. The total cost is estimated to be Rs. 1,720,000,000/-.

198 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Free Lanka Capital Properties (Pvt) Ltd. (FLCPL) FLCPL has entered into an agreement for a lump sum contract with Sierra Civil Engineering (Pvt) Ltd. as Designing and Building Contractor to construct a multi storied office complex at new assessment No. 19, Dudley Senanayake Mawatha, Colombo 08. The total cost of this project excluding the cost of land which is already acquired for Rs. 181,674,000/- and taxes, is estimated to be Rs. 625,000,000/-.

For the purpose of the aforementioned project FLCPL has entered into an agreement with Board of Investment on 8 March 2012 to obtain financial benefits/concessions under the agreement. Accordingly, FLCPL is required to invest in Fixed Assets not less than US$ 7,000,000 or its equivalent in Sri Lankan Rupees.

Tea Leaf Resort Holdings (Pvt) Ltd. (TLRHL) TLRHL has entered into an agreement with Sierra Construction (Pvt) Ltd. for Rs. 850,000,000/- for the construction of two boutique- style hotels.

Hydro Power Free Lanka 2 (Pvt) Ltd. The Company has entered into various contracts to construct Mini Hydro Power Projects at Thebuwana, Keragala Estate and Kuruwita amount to Rs. 656,600,000/-.

44 events After the Balance Sheet Date

Commercial Leasing and Finance Ltd. Subsequent to Balance Sheet date, the Company was floated in Colombo Stock Exchange’s (CSE) Diri Savi Board.

45 Assets Pledged

Nature of Assets Nature of Liability Group Company 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Foreign currency term deposits Interest-bearing loans and borrowings 177,326,195 2,862,886,491 177,326,195 245,366,725 Government Treasury Secured against the REPO instrument Bonds borrowings 20,000,000 – 20,000,000 – Lease, hire purchase and loans receivable Interest-bearing loans and borrowings 30,007,350,918 21,192,989,226 7,459,596,482 8,597,310,764 Marketable shares and Term loan/bank drafts/short- loans and buildings term loan/field and processing developments 4,355,710,634 3,761,387,771 3,587,746,035 – Leasehold right Bank overdrafts/term loans/ investments in field development 1,109,426,398 646,803,409 – – Leasehold property and vehicles Finance lease 474,506,586 205,078,015 52,245,420 155,128,015

Stock and book debts Term loan 913,391,947 940,000,000 – –

37,057,712,678 29,609,144,912 11,296,914,132 8,997,805,504

LOLC 2011/12 REPORTS & ACCOUNTS 199 Notes to the Financial Statements

46 related Party Disclosures 46.1 Transactions with Key Management Personnel According to Sri Lanka Accounting Standard 30 (Revised 2005) ‘Related Party Disclosures’, Key Management Personnel, are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly, the Board of Directors (including Executive and Non-Executive Directors), personnel hold designation of Divisional General Manager and above positions and their immediate family member have been classified as Key Management Personnel of the Company.

The immediate family member is defined as spouse or dependent. Dependent is defined as anyone who depends on the respective Director for more than 50% of his/her financial needs.

Key Management Personnel Compensation

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

46.1.1 Short-term employment benefits 300,199,959 213,821,556 222,780,559 174,867,936 Includes - Fees 53,883,448 40,282,878 46,064,635 38,387,878 - Emoluments 23,535,952 41,093,178 24,699,818 19,396,918 Other short-term benefits 222,780,559 132,445,500 152,016,106 117,083,140 300,199,959 213,821,556 222,780,559 174,867,936

46.1.2 Long-term employment benefits There are no long-term employment benefits paid to the Key Management Personnel during the year.

46.1.3 Other Transactions with Key Management Personnel

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

Advances granted during the period 2,900,000 550,000 – – Balance outstanding 2,426,998 1,216,866 – – Operating lease facilities granted 20,324,508 6,111,876 20,324,508 6,111,876 Rentals paid (2,455,832) (691,528) (2,455,832) (691,528) Balance rentals outstanding – 5,420,348 – 5,420,348 Deposits held 526,243,122 516,251,281 – – Interest paid/charged 56,767,230 35,749,864 – – Interest payable 9,143,809 13,483,774 – – Land and building purchases – 110,000,000 – 110,000,000

200 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

46.2 Transactions with Related Parties The Company carries out transactions in the ordinary course of its business with parties who are defined as related parties in Sri Lanka Accounting Standard 30 ‘Related Party Disclosures ‘(Revised 2005)’. The Pricing applicable to such transactions are based on the assessment of the risk and pricing model of the Company and is comparable with what is applied to transactions between the Company and its unrelated Customers.

46.2.1 Group Group’s uneliminated portion of transaction entered with joint ventures and associates; Group For the year ended 31 March 2012 2011 (Rs.) (Rs.)

Joint Ventures Loans, advances and promissory notes obtained 693,671,718 110,976,404 Interest paid 26,650,339 20,664,903 Repayment of finance leases and loans obtained 152,567,213 43,207,178 Rent and management fee received 2,770,956 167,876,000 Vehicle hire Income 900,000 240,000 Trading transactions – – - Sales 914,801 183,500 - Purchases 44,660,447 61,800,625 Purchase of land – 80,000,000 Term and savings deposits and commercial papers 1,354,868,525 137,500,000 Deposits interest income 68,353,555 1,977,740 Dividend income 55,090,046 40,569,000 Expenses incurred on behalf of the Company 12,708,311 22,352,500 Other operating expenses 31,570,258 26,545,500

Associates Insurance commission received 6,617,341 6,109,928 Term deposits – 498,815,217 Trading transactions - Sales 2,081,256,307 2,161,016,433 - Purchases 94,735,127 132,841,202 Interest paid 180,114,031 125,630,589 Fund transfers 150,000,001 78,233,663 Loans granted – 761,800,000 Repayment of loans and finance leases obtained 95,093,289 15,564,299 Expenses shared 1,124,523 1,115,741

LOLC 2011/12 REPORTS & ACCOUNTS 201 Notes to the Financial Statements

46.2.2 Company Transactions with Subsidiaries, Associates and Joint Ventures

Company For the year ended 31 March 2012 2011 (Rs.) (Rs.)

Subsidiaries Fund transfers in 62,855,971,628 31,306,783,120 Fund transfers out 59,181,931,637 34,213,911,311 Expenses shared 5,034,082,411 1,317,147,190 Asset hire income 96,884,565 35,624,049 Debenture interest received 59,752,485 83,579,449 Treasury management fee 370,101,349 300,378,935 Transfer of finance portfolio 1,216,014,768 – Interest received on fund transfer 816,270,507 119,933,399 Sale of investments 3,114,151,432 – Transfer of loans 2,100,579,120 – Shared services 111,707,515 – Transfer of factoring portfolio 3,663,568,509 – Reversal of interest-Browns Investments 7,303,638 – Transfer of subsidiary investments 75,251,732 – Loan transfer 550,579,120 – Purchase of assets 259,999,000 252,468,877 Part of consideration of the deed of transfer bearing 10,000,000 – Restructuring and arrangement fees 400,000,000 – Rentals paid 4,800,000 – Assets transferred 270,832 – Rendering of services received – 94,434,997 Royalty received – 6,415,960 Investment in subsidiary companies 4,357,453,642 3,987,220,040 Treasury Bond transfer – 2,575,252,804 Investment in commercial papers 260,796,050 – Loans granted – 822,668,356 Loan transfer to subsidiary – 820,968,356 Repayment of finance leases and loans obtained – 148,151 Associates Fund transfers in 78,233,663 Repayments of finance leases and loans obtained 93,841,527 15,564,299 Loans granted – 761,800,000 Interest received 76,345,098 99,752,718 Expenses shared – 1,115,471 Investment in commercial papers 584,942,144 – Joint Ventures Loans granted 5,250,000 9,219,808 Repayments of finance leases and loans obtained 57,378,815 37,681,632 Interest received 19,510,107 22,755,017 Purchase of commodities – 159,250 Investment in commercial papers 605,169,486 – Purchase of land – 160,000,000

Balance Outstanding on facilities granted to related parties as at 31 March: Subsidiaries Finance leases and loans granted 87,460,819 1,551,849 Associates Finance leases and loans granted 955,838,622 796,235,701 Joint Ventures Finance leases and loans granted 118,870,714 135,388,809

202 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

46.2.3 Transactions with Other Related Parties

Group Company For the year ended 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

46.2.3.1 Ishara Traders (Pvt) Ltd. Loans Obtained Balance as at the beginning of the year 3,858,854,772 1,539,090,987 – 764,708,631 Loan obtained 8,745,691,811 4,300,579,120 2,550,579,120 1,000,000,000 Loan settlements 6,254,016,370 (1,980,815,335) (2,550,579,120) (1,764,708,631) Balance at the end of the year 6,350,530,213 3,858,854,772 – –

Interest paid 1,023,862,538 422,825,591 101,885,179 104,051,420

Lease vehicles and fixed assets purchased 8,500,000 388,375,000 8,500,000 330,050,000

46.2.3.2 Sathya Capital (Pvt) Ltd. Loans Obtained Balance as at the beginning of the year – – – – Loans obtained during the year 610,000,000 – 610,000,000 – Loan settled during the year (610,000,000) – (610,000,000) – Balance at the end of the year – – – –

Interest paid 17,195,459 17,195,459

Sales proceeds from disposal of 126,029,117 CLC Shares 630,145,585 – – –

Loans Granted Balance as at the beginning of the year – – – – Loans granted during the year 633,296,313 – – – Loan recovered during the year – – – – Balance at the end of the year 633,296,313 – – –

Interest accrued 13,446,703 – – –

46.2.3.3 Saakya Capital (Pvt) Ltd. Debentures Issued 3,000,000,000 – 3,000,000,000 – Interest paid 37,873,507 – 37,873,507 –

Sales proceeds from disposal of 140,000,000 CLC Shares 700,000,000 – – –

Loans granted during the period 703,500,000 – – – Interest accrued 14,937,329 – – –

LOLC 2011/12 REPORTS & ACCOUNTS 203 Notes to the Financial Statements

46.3 Related Party Balances

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

46.3.1 Amounts due from Related Parties Lanka Orix Finance PLC – – 792,773,199 644,562,624 Lanka ORIX Information Technology Services Ltd. – – 24,621,697 26,519,579 Sundaya Lanka (Pvt) Ltd. – – 657,388 4,157,388 Commercial Leasing & Finance Ltd. – – 1,315,393,739 278,993,550 LOLC Micro Credit Ltd. – – 977,767,712 145,657,483 LOLC Insurance Company Ltd. – – 73,228,777 4,509,229 LOLC Investments Ltd. – – 438,153,063 – Browns & Company PLC – – – 7,303,638 United Dendro Energy (Pvt) Ltd. – – 84,935,534 16,304,234 LOLC Securities Ltd. – – 113,440,548 9,514,000 Eden Hotels Lanka PLC – – 234,090 295,503 LOLC Factors Ltd. – – 5,971,710,109 200,000 LOLC Motors Ltd. – – 405,437,356 – Speed Italia Ltd. – – 47,940,459 – Lanka Orix Project Development Ltd. – – 13,623,891 – Lanka Orix Securities Ltd. – – 70,812,304 – Diriya Investments Ltd. – – 198,534 – LOLC Land Holding Ltd. – – 57,600 – LOLC Realty Ltd. – – 160,028,990 – LOLC Leisure Ltd. – – 5,013,096 – Orient Academy Ltd. – – 60,251,732 – Dickwella Resort Ltd. – – 75,022,856 – Riverina Hotels PLC – – 24,041,728 – Agstra Fertilizer PLC 12,600,000 – – – Associated Battery Manufacturers (Ceylon) Ltd. 8,150 930,651 – – Galoya Plantations Ltd. 290,077,825 – 1,115,471 – Sierra Construction (Pvt) Ltd. 95,324 – – – Free Lanka Trading Liquor (Pvt) Ltd. 3,238,720 77,149 – – Browns Properties (Pvt) Ltd. – 250,000 – – LOLC Property Holding Ltd. – – 12,766,590 – Lanka Orix Insurance Brokers Ltd. 13,478 – 13,478 – Taprobane Holding Ltd. 133,095,305 – – – Lexinton Holding Ltd. 266,736,883 100,328,768 – – (-) Provision for impairment – – (73,875,623) – 705,865,685 101,586,568 10,595,364,318 1,138,017,228

204 LOLC 2011/12 REPORTS & ACCOUNTS Notes to the Financial Statements

Group Company As at 31 March 2012 2011 2012 2011 (Rs.) (Rs.) (Rs.) (Rs.)

46.3.2 Amount due to Related Parties LOLC Motor Ltd. – – – 30,268,302 LOLC Investments Ltd. – – – 41,160,377 Lanka ORIX Insurance Brokers Ltd. – – – 106,934 Lanka Eco Solutions Ltd. – – 4,819,500 4,875,000 LOLC Leisure Ltd. – – – 160,506,311 LOLC Securities Ltd. – – – 13,963,840 Commercial Factors Ltd. 10 – 10 10 LOLC Land Holdings Ltd. – – – 4,000 LOLC Reality Ltd. – – – 10 LOLC Property Investment Ltd. – – – 10 LOLC Asset Holding Ltd. – – 10 10 LOLC Estate Ltd. – – 10 10 Tropical Villas Ltd. – – 150,000 – Palm Garden Hotels PLC – – 120,832 – Associated Battery Manufacturers (Ceylon) Ltd. 72,491,530 – – – Galoya Plantations Ltd. 50,826,038 – – – Confifi Management Services Ltd. 306,779 – – – Free Lanka Trading (Private) Ltd. 1,152,909 – – – Taprobane Planations Ltd. 7,198,258 4,500,000 – – Perpetual Holdings Ltd. 165,363,000 – – – 297,338,524 4,500,000 5,090,362 250,884,814

LOLC 2011/12 REPORTS & ACCOUNTS 205 Notes to the Financial Statements

47 segmental Information

Financial Insurance Trading Leisure Plantation Power & Other Total Services Energy

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

2011/12 Total revenue 20,480,870,689 134,787,359 13,148,085,020 750,290,163 2,976,831,409 49,535,456 275,461,450 37,815,861,546 Net interest cost (7,713,457,336) – (478,145,442) (8,477,046) (91,090,424) (13,636,341) (165,083,851) (8,469,890,440) Cost of sales – – (10,163,668,119) (162,838,667) (1,333,158,010) (6,093,736) (139,880,159) (11,805,638,691) Profit before operating activities 12,767,413,353 134,787,359 2,506,271,459 578,974,450 1,552,582,975 29,805,379 (29,502,560) 17,540,332,415 Operating expenses (5,375,220,468) (200,393,839) (1,855,309,626) (1,113,239,112) (1,330,138,174) (91,229,106) (431,944,269) (10,397,474,594) Results from operating activities 7,392,192,885 (65,606,480) 650,961,833 (534,264,662) 222,444,801 (61,423,727) (461,446,829) 7,142,857,821 Share of profit from associate companies – – – – – – 269,958,673 269,958,673 Negative goodwill – – – 2,873,067,310 – – 41,469,110 2,914,536,420 Profit before taxation 7,392,192,885 (65,606,480) 650,961,833 2,338,802,648 222,444,801 (61,423,727) (150,019,046) 10,327,352,914

2010/11 Total revenue 15,677,183,431 9,701,446 10,318,536,846 1,358,691,213 4,912,776,578 73,854,557 (273,416,610) 32,077,327,461 Net interest cost (5,823,928,960) – (304,426,822) (130,358,841) (169,514,494) (3,293,388) (10,934,617) (6,420,587,888) Cost of sales – – (7,198,147,586) (256,438,947) (2,337,254,470) – (119,380,895) (9,911,221,898) Profit before operating expenses 9,853,254,471 9,701,446 2,815,962,438 971,893,425 2,406,007,614 70,561,169 (381,862,888) 15,745,517,675 Operating expenses (4,657,474,878) (4,455,481) (1,708,384,073) (752,915,943) (446,326,281) (50,355,730) (293,678,978) (7,913,591,364) Results from operating expenses 5,195,779,593 5,245,965 1,107,578,365 218,977,482 1,959,681,333 20,205,439 (675,541,866) 7,831,926,311 Share of profit of associate companies – – – – – – 178,522,137 178,522,137 Negative goodwill – – – – – – 271,910,632 271,910,632 Profit before taxation 5,195,779,593 5,245,965 1,107,578,365 218,977,482 1,959,681,333 20,205,439 (225,109,632) 8,282,359,080

2011/12 Capital expenditure 1,882,094,489 – 464,384,687 143,751,890 96,120,103 138,784,274 915,899,750 3,641,035,194 Depreciation and amortisation 652,892,067 – 126,774,353 625,513,618 170,615,014 24,803,821 69,030,442 1,669,629,316 Provision for bad and doubtful debts 605,145,016 – 476,957 362,795 – 3,074,736 – 609,059,504 Adjustment for change in value of marketable securities 757,562,662 – 235,900,944 3,273,431 – – 490,296,160 1,487,033,197 Retirement benefit obligation 18,160,358 3,601,432 29,905,313 7,282,587 69,385,508 302,351 2,694,680 131,332,229

2010/11 Capital expenditure 1,767,717,265 – 269,417,068 34,400,859 1,133,127,908 24,119,445 13,611,769 3,242,394,314 Depreciation and amortisation 753,926,528 – 60,079,759 108,914,695 90,787,100 13,657,810 47,177,369 1,074,543,261 Provision for bad and doubtful debts 533,393,901 – 1,501,357 6,468,920 – – 5,091,680 546,455,858 Adjustment for change in value of marketable securities (15,263,865) – 1,714,800 – – – – (13,549,065) Retirement benefit obligation 23,472,136 – 25,992,923 8,237,071 154,366,723 468,443 2,533,549 215,070,845

As at 31 March 2012 Total Assets 104,024,922,002 757,044,299 17,638,008,145 9,771,052,782 8,920,167,914 570,650,336 3,605,893,463 145,287,738,941 Total Liabilities 84,746,992,887 411,879,491 9,081,934,500 1,355,828,942 3,558,015,520 1,087,189,336 1,981,388,795 102,223,229,471

As at 31 March 2011 Total Assets 78,489,561,275 209,393,289 13,397,616,846 4,853,881,167 12,605,687,760 472,059,008 1,785,333,243 111,813,532,588 Total Liabilities 69,022,320,065 1,518,084 2,975,533,954 1,642,877,487 2,124,630,709 85,664,045 1,237,836,758 77,090,381,102

206 LOLC 2011/12 REPORTS & ACCOUNTS ANNEXES Sustainability Report

Introduction A commitment to serve the national development agenda implicitly demands a commitment to the principles of sustainability. When you are building for the future with your right hand, you do not break down and despoil what you already have with your left. Instead, you work to sustain and preserve.

Our insistence on triple bottom line reporting reflects our ultimate goal as a growing conglomerate: to deliver profit to our shareholders by investing in and supporting economic and national development, particularly in sectors where development policy seeks to promote and support growth. We are building for the long-term, serving both our stakeholders and the nation. By ensuring that we measure and seek to control the impacts of our activities and investments on society and the environment just as we seek to maximise our economic impact and returns, this reporting approach helps us achieve our strategic goals.

Making A Promise to the World LOLC is a member of the UN Global Compact (UNGC), a group of responsible bodies and businesses that have embraced a charter on sustainability in practice. This charter, known as the UNGC principles, holds members of the Compact to specific commitments in terms of human rights, labour rights, environmental protection and action against corruption.

Principles of the UN Global Compact Human Rights 1. Businesses should support and respect the protection of internationally-proclaimed human rights. 2. Businesses should make sure that they are not complicit in human rights abuses.

Labour 3. Businesses should uphold freedom of association and effective recognition of the right to collective bargaining. 4. Businesses should uphold the elimination of all forms of forced and compulsory labour. 5. Businesses should uphold the effective abolition of child labour. 6. Businesses should uphold the elimination of discrimination in respect of employment and occupation.

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Environment 7. Businesses are asked to support a precautionary approach to environmental challenges. 8. Businesses are asked to undertake initiatives to promote greater environmental responsibility. 9. Businesses are asked to encourage the development and diffusion of environmentally-friendly technologies.

Against Corruption

10. Businesses should work against corruption in all its forms, including extortion and bribery.

How LOLC Group Upholds the UNGC Principles Human Rights All Group companies and divisions adhere to the best principles and practices of human rights. This is of particular importance in the plantation sector, where historical conditions have resulted in a particular sensitivity to human rights issues. On the Group’s Maturata and Pussellawa plantations, continuing improvements to worker housing and sanitation facilities, community medical care access and education for the children of estate families reflect our concern for human rights within a broader programme of community development, which goes beyond mere rights to the extension of public services and benefits. Regular community meetings are followed up by management group review to ensure that the human rights regime on our plantations is exemplary and free from abuses of any kind.

Labour As a conglomerate, LOLC employs a large and varied workforce employed in a diversity of working environments. Across the Group, our employees enjoy freedom of association and a voice in management deliberations affecting their careers, pay or working conditions. On our plantations, workers’ committees and collective agreements determine wages, grievance handling and more. Gender equity, another area of historical concern, is maintained, with female staff appointed on our estates to oversee women’s issues.

LOLC is an equal opportunity employer, without bias, concerning recruitment, pay and benefits, training and development opportunities or promotion. Women, for example, serve and have served in the highest positions at LOLC and its subsidiaries. We simply recruit individuals with the best qualifications, skills, experience and mindset, irrespective of sex, race or religion.

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Our employment policy prohibits the hiring of anyone under 18 years of age. We shun child labour and will brook no relaxation of this policy. We also insist that all employees undertake to abide by our policy against sexual harassment.

The LOLC Group does not approve of or condone forced or compulsory labour.

In all these matters, we are governed by the law of the land and the terms of employment agreed with our employees.

Human Resources The brilliant performance and relentless contribution by our team of young, competent and dynamic employees deployed across the country in different business sectors has been the key success factor towards positioning LOLC as a leading and reputed Group in the country today. With the support and encouragement of a robust leadership that always works alongside their teams, the Group’s workforce has ensured sustainable growth year on year.

The financial year 2011/12 posed several challenges in the management and development of the Group’s employees especially with LOLC’s penetration and startup operations in diverse industries including Hospitality, Motor Engineering, Plantation, Stock Broking and Insurance. The Group’s HR policies were aligned to cater to the different business segments and relevant employment practices in each industry, while adhering to the core HR principles and policies of the Group. This created the need to re-model the HR architecture to cater to a diverse group of employees combined with several HR requirements of both the Group’s Financial and Non-Financial sectors by identifying different trends, necessities and interventions within the Sri Lankan context. The business requirements challenged the team of HR practitioners within the Group to review the core processes and operations of HR, innovate and acquire the needed knowledge of managing people of different industries. The reorganisation has enabled us to give equal and adequate focus to both sectors while reaping the economies of scale through the strengthening of a HR-shared services platform within the LOLC Group.

Our financial services sector expanded its footprint with 31 new branches and service centres. It has created a closer affinity with our customers and enables our regional teams to build a robust client relationship and to serve and be recognised in the community. The belief in and sustenance of an inclusive culture within LOLC has been key to delivering exceptional service to our clientele and key to our organisational well-being.

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Growth enabled us to create more opportunities for our existing employees to take up new challenges in newly opened branches, with enormous possibility for career development. The increasing network of LOLC mini branches paved way to develop potential leaders in the regions where employees were appointed as Officers-In-Charge of the newly- opened centres. Growth has brought greater employee mobility within the Group through promotions, transfers, lateral career moves, etc. which has generated improved employee morale and minimised stagnation in positions for several years. These opportunities provided to a total of 3,699 employees within the Group a high performance and rewarding working climate, paving the way for us to be a preferred employer in the financial services sector. The employee retention rate of 82% within the Group testifies to this fact.

The financial services sector saw a growth of 24% with a total of 449 new employees joining the Group. A retention rate of 86% was achieved in this sector for the financial year with a 90% + rate being maintained at leadership levels. A total of 92% have been trained in the financial services sector with an investment of around Rs. 18.5 Mn with a greater part of overseas programmes being sponsored by funding agencies, etc. The training programmes were designed and selected not only to enhance the knowledge of the employees but also to enhance their capabilities in relationship building, negotiation skills, etc., and develop identified individuals to be future leaders who could take up the responsibility of spearheading the business operations of the Group.

LOLC’s Flagship HR Programme ’From Student To Professional’ (FSTP) initiated in the last financial year created great enthusiasm among young school leavers with career ambitions to become leading professionals in the financial sector. The programme exceeded their expectations. The benefits of the programme has resulted in providing on the job training opportunities for 51 trainees out of whom 16 have already been absorbed to the permanent cadre of the Group. The programme has benefited us immensely by having readily available, trained and adaptable personnel to be deployed for job openings within the Group.

With the strategic acquisition of Dickwella Resorts & Spa, around 80 employees were absorbed to the non-financial sector making the total staff cadre as of end March, 856. The retention rate was 72% which is impressive considering Hotel Riverina, Tropical Villa and Club Palm Garden being closed for refurbishment.

The team ‘Spirit’ dedicated in stimulating the spirit among LOLC employees through numerous recreation initiatives over and above their routine job scope played a vital role in bringing all the employees of the sectors of the Group together.

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Inculcating the values in the hearts of employees, spirit started off the year with a Blood Donation Campaign which had an overwhelming response, focused towards our employees helping the community. Events such as ‘Peduru Party’ and a Six-a-side Cricket Tournament were organised to bring employees together from all regions/sectors to showcase their talents. The annual event such as the Pirith Ceremony, LOLC Dinner Dance and the Kiddies Christmas Party were also organised by the active cross functional team.

The LOLC Basketball team was awarded the Champions Trophy in the Mercantile Basketball Tournament, while the Badminton team maintained their consistent form in the Championships and became the Runners-up.

The Environment Preserving Sri Lanka’s environmental wealth is a vital element in our policy. It supports, for example, our investment in tourism, which is critically dependent on the natural beauty and biodiversity of our island. In a different but not dissimilar way, our interests in renewable energy not only preserve the environment but support the social goal of universal electrification and literally power national development. In this way, we can often broker a concurrence between the interests of our customers and shareholders and the interests of the environment.

Our plantations are run using best-in-class agricultural practices in which sustainability is an important consideration. Many estates rely at least partly on their own hydropower and dendropower resources, and undertake numerous reforestation and ecology-friendly waste-management programmes.

Group companies conserve vital resources and recycle wherever possible. LOLC Motors harvests rainwater, recycles waste water using a microbiological system and prevents the leakage of refrigerant from its air conditioning systems into the environment. The Company’s ‘Green Motor Service Facility’ maximises the use of natural lighting. Meanwhile, LOLC Micro Credit is taking measures to wean customers off two-stroke vehicles whose emissions reduce air quality. At its head office in Colombo, LOLC possesses the largest environmentally responsible installation of any commercial building in this country in the form of a rooftop solar array that generates 15% of daily power requirements - a full 48 kW.

Our green investment policy has seen our interests in the renewable-energy sector intensify in recent years. Hydro Power Free Lanka, a Group company, is already generating 3.2 MW from its mini-hydro plants, while 7 MW more, now in various stages of development, will add another 20 MW within the next 5 years at an initial investment of approximately US$ 30 Mn. These projects are registered to earn carbon credits from the United Nations Framework Convention on Climate Change (UNFCCC). Several estates of the Maturata and Pussellawa Groups have substituted wood for fossil

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fuels for tea drying, with the estates’ own forestry projects supplying the fuel. LOLC Eco Solutions, another subsidiary, has several biomass-fuelled and hydropower plants and is moving forward with its assessment of potential wind-power investments.

In addition, our strategic investment in United Dendro Energy (UDE) is showing results as its 6 MW wood-fired power plant takes shape at Kalutara and its forestry and agricultural programmes and outgrower registrations come on-stream. The Kalutara plant will be ready for operation by the end of 2013. UDE’s operations will generate thousands of jobs in the rural sector. Both its power generation and plantation operations will earn UNFCC carbon credits while reducing the Group’s carbon footprint.

Gal Oya Plantations, operated by LOLC and Brown & Company is a public-private partnership with the Government of Sri Lanka. The company is just completing a project which includes the revival and refurbishment of the sugar plantation and power plant, with the factory scheduled to commence operations in July. The project also included the renovation of the water purification plant, with excess purified water being sold to the National Water Supply and Drainage Board. The 5,200 ha sugar cane plantation will also support the production of ethanol as a by-product whilst generating 2 MW of bagasse based clean energy. Benefits to the local community include direct employment for nearly 1,200 persons, and indirect employment for over 15,000 persons and 5,500 farmer families, thus contributing towards income generation and improved quality of life.

More broadly, LOLC promotes initiatives such as internal paper recycling and the use of energy-saving light bulbs while limiting the use of air conditioning, computers and lighting. It is also replacing its fleet of conventional vehicles with new hybrid motors.

Besides these measures of its own, LOLC also encourages its customers to be more green. Our credit appraisal process requires the production of an environmental assessment report, with local environmental authority clearance where applicable. Further along the process, our staff evaluate and report on these businesses with regard to their environmental friendliness.

The Group’s Code of Conduct demands compliance with rules on sustainability and environmental friendliness with regard to the development of new products and services.

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The Fight Against Corruption LOLC has in place a comprehensive policy and regulatory framework to pre-empt and guard against any form of corruption. The Group’s anti-money laundering policy commits us to specific, comprehensive precautions to help prevent the systems and processes of the Group being used for money laundering or the financing of unlawful activities. Safeguards include customer identification routines and due diligence processes. We maintain an inclusive, supportive and confidential whistle-blower procedure that frees every employee to make material reports to Internal Audit and Enterprise Risk Management without risk or fear. LOLC is in compliance with the legislation of the Government of Sri Lanka in relation to the Convention on Suppression of Terrorist Financing Act No. 25 of 2005, the Financial Transactions Reporting Act No. 6 of 2006, the Prevention of Money Laundering Act No. 5 of 2006, and all relevant Acts and Regulations of the Government.

The Group also maintains transparency in all communications with stakeholders including its Annual Report, announcements made through the Colombo Stock Exchange, press releases and its website.

LOLC Care: Strategic CSR LOLC Care was created to plan, develop and carry out the corporate social responsibility initiatives of the Group. Launched in 2009, this operation was created to prioritise diverse CSR initiatives ranging from workshops in financial management for migrant workers to community awareness programmes on Dengue prevention. Today, the LOLC Care Committee, in which Board and management across different business units and divisions are represented, approves and supervises LOLC and Group level CSR.

Since its inception, LOLC Care has collaborated with the National Council for Child & Youth Welfare in the renovation and maintenance of Madiwela Special Education School & Home for Boys, a facility for differently-abled boys and men. In the first phase, the facility was expanded to accommodate six more residents; the second, will consist of a new building to house and educate fifty orphaned boys, which will be completed during September 2012. With the active participation of LOLC staff, customers and other well-wishers, LOLC Care continues to support the Madiwela School & Home, organise cultural and religious activities for its pupils and help with the supply of educational and vocational training inputs and facilities. Proceeds from the LOLC Care Fund, in which LOLC matches every Rupee donated by others or raised through merchandising, etc., are used to finance these activities.

214 LOLC 2011/12 REPORTS & ACCOUNTS Sustainability Report

CSR Initiatives by Other Group Companies Gal Oya Plantations: Supporting Rural Community Life On its 7,659 ha of plantation land, Gal Oya Plantations is a central element in the lives of the more than 6,000 rural farming families to whom land has been allocated for cultivation. The Company strives to be of benefit to this community by helping raise living standards and underwriting community welfare. Its CSR activities include infrastructure development and maintenance, healthcare programmes, support for education and for farmers’ representative organisations, and numerous contributions to community social, cultural and religious life.

Specific recent examples include blood donation campaigns, a health camp, the construction of a children’s park, water supply and playground maintenance projects for local schools, and the supply of water to certain Buddhist temples in the area. In addition, the Company maintains 90 km of roads and 140 km or irrigation canals on its property.

LOLC Micro Credit Ltd. LOLC Micro Credit has its own strategic CSR project, the Isuru Diriya Sisu Upahara Grade 5 Scholarship Awards programme. Instituted in 2010, the programme helps deserving pupils prepare for the national Grade 5 Scholarship Examination. The beneficiaries are gifted children from rural locations around the country, whose parents have few resources to spend on their education.

Beneficiaries attend preparatory classes, which are held at various locations across the country, and high achievers at the scholarship exam are felicitated at a ceremony in Colombo. In 2011/12, 230 students nationwide who attended the course received scholarships, as well as savings passbooks with a Rs. 1,000/- initial deposit from Lanka Orix Finance.

The Isuru Diriya Sisu Upahara programme forms the central pillar of LOMC’s CSR strategy. In addition, the Company’s unique ‘credit plus’ approach to microfinance also helps realise its vision for sustainable development. Finally, LOMC branches carry out various at-need CSR initiatives of their own, based mainly on educational, entrepreneurial and other socially relevant themes.

Lanka Orix Finance In addition to supporting LOMC’s Isuru Diriya Sisu Upahara programme by distributing children’s savings accounts as prizes (see above), LOFC has also co-operated with the Sarvodaya organisation in a programme to enhance the financial literacy of Sri Lankan migrant workers in Europe and their family members at home. 20 such workshops were conducted in different parts of the country in the year under review, reaching out to over 500 beneficiaries.

LOLC 2011/12 REPORTS & ACCOUNTS 215 Sustainability Report

Going ahead, this initiative will be continued on a larger scale in a partnership with the International Fund for Agricultural Development that aims to reach 10,400 people in rural areas all over the country, including the North and East. The project has the support and co-operation of the Ministry of Foreign Affairs and the Sri Lanka Bureau of Foreign Employment.

In addition to these strategic CSR initiatives, LOFC branches also carry out their own CSR projects, often initiated and partly funded by employees. Noteworthy projects in 2011/12 included the renovation and resupply of a struggling pre-school in Mullaitivu attended by 45 toddlers from internally-displaced families in the area (a project funded entirely by voluntary contributions from employees of LOFC’s Horana branch); blood donation campaigns at Hatton branch and LOFC’s head office in Colombo; support activities to benefit a school for differently-abled children (organised by Kurunegala branch staff in memory of a deceased colleague) and the donation of necessary equipment and consumables to local schools and hospitals by the Badulla, Kurunegala, Nawalapitiya and Ratnapura branches.

LOLC Leisure A broad range of CSR activities were undertaken by businesses within the LOLC leisure portfolio. Eden Resort & Spa celebrated World Tourism Day in September with an educational programme for pupils of a nearby school, Moragalla Junior School. Other CSR activities undertaken by this division included the cleaning and maintaining of a hospital ward at Aluthgama, blood donations, school and library book donations, a Christmas treat for orphans, a dansala to celebrate Poson festival and alms donations to Buddhist monks.

216 LOLC 2011/12 REPORTS & ACCOUNTS Information on the Company’s real estate portfolio and Listed debentures

Details of Freehold Land & Building of Company

Address Land Extent Building Cost Accumulated Last Valuation Carrying Amount Extent Land Building Depreciation Land Building 2012 2011 A-R-P Sq. Ft. (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

1. No. 100/1, Sri Jayawardenapura Mawatha, Rajagiriya 1A-0R-04.86P 51,800 27,500,000 32,500,000 3,740,345 27,500,000 32,500,000 681,259,655 684,989,780 2. No. 100 A, Sri Jayawardenapura Mawatha, Rajagiriya 0A-2R-20.00P 106,992,500 – – 106,992,500 – 245,000,000 245,000,000

3. No. 25/7, Wimalawatta Road, Mirihana, Nugegoda 0A-0R-33.40P 11,000,000 – – 11,000,000 – 20,000,000 20,000,000 4. No. 103, Sri Jayawardenapura Mawatha, Rajagiriya 0A-1R-12.50P 166,399,000 – – 166,399,000 – 166,399,000 166,399,000 5. No. 28A, Badulla Road, Nuwara Eliya 0A-0R-21.03P 5,426 56,974,000 57,425,000 2,127,872 56,974,000 – 112,271,128 113,706,754 6. No. 52/40, Stanly Road, Jaffna 0A-0R-37.31P 64,630,000 – – 64,630,000 – 64,630,000 64,630,000 7. No. 241 A, Maithreepala Senanayake Mawatha, Anuradhapua 0A-0R-13.01P 18,129,736 – – 18,807,102 – 18,129,736 18,129,736 8. No. 240, Moragahayata, Colombo Road, Ratnapura 0A-0R-15.80P 7,920 20,919,000 8,400,000 294,575 20,919,000 – 29,024,425 29,234,425 9. No. 156, Kolonnawa Road, Gothatuwa 1A-1R-33.71P – – – – – – 164,992,658

Land and building purchased during the year 10. No. 1163/A, Cotta Road, Rajagiriya 0A-0R-08.70P 7,810 34,546,435 38,252,565 – – – 72,799,000 – Total 507,090,671 136,577,565 6,162,792 473,221,602 32,500,000 1,409,512,944 1,507,082,353

Investment properties of the Company

Address Land Extent Building Cost Accumulated Last Valuation Carrying Amount Extent Land Building Depreciation Land Building 2012 2011 A-R-P Sq. Ft. (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

1. No. 305/5, Rajagiriya Road, Nawala 0A-3R-19.14P – 236,500,000 – – 236,500,000 – 236,500,000 236,500,000 2. No. 246/56, Kandy Road, Eldeniya, Kadawatha 0A-0R-23.37P 1,640 11,000,000 – – 11,000,000 – 11,000,000 11,000,000 3. No. 156, Kolonnawa Road, Gothatuwa 1A-1R-33.71P 69,121 57,802,500 107,197,500 – 57,802,500 107,197,500 165,000,000 – Total 305,302,500 107,197,500 – 305,302,500 107,197,500 412,500,000 247,500,000

Company’s Listed Debentures During the financial year, the Company issued debentures amounting to Rs. 1.25 Bn (4 years tenure of Rs. 610 Mn at 11.7%, Rs. 500 Mn at 12% and 5 years tenure of Rs. 140 Mn at 11.9%) which are listed in the Colombo Stock Exchange (CSE). The details related to them are as follows: 1. Interest rate of comparable Government Security - Buying and selling prices of Treasury Bonds at the auction held on 30 March 2012

Buying Price Buying Yield (%) Selling Price Selling Yield (%)

4 Year bond 87.17 11.80 87.64 11.65 5 Year bond 86.43 11.80 86.92 11.65

2. Debt/equity ratio 2.03 3. Interest cover ratio 2.74 4. Quick asset ratio 1.47 5. Market prices and yield during the year (ex interest) Market Price Market Yeild (%)

Highest price 610 Mn bond 11.70 Lowest price } Not traded during the financial year 500 Mn bond 12.00 Last traded price 140 Mn bond 11.90

6. Current ratings applicable to the entity - BBB+(lka) - Fitch, [SL]A - (Stable) - ICRA

LOLC 2011/12 REPORTS & ACCOUNTS 217 Ten Year Summary

For the year ended 31 March 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (Rs. ‘000)

Group Operating Results Revenue – – – – – – 3,495,607 3,571,367 14,288,492 17,136,314 Cost of sales – – – – – – (2,993,076) (2,869,272) (9,911,222) (11,805,639) Income 1,284,498 1,695,600 1,930,019 2,586,502 3,950,751 5,934,772 9,843,454 9,941,904 12,150,507 17,312,892 Other income/(expenses) 37,548 78,323 121,410 55,571 207,675 313,376 282,660 1,388,560 5,638,329 3,366,655 Interest costs (537,538) (552,770) (617,597) (895,570) (1,787,751) (3,403,965) (6,441,182) (6,178,137) (6,420,588) (8,469,890) Profit before operating expenses 784,508 1,221,153 1,433,832 1,746,503 2,370,675 2,844,183 4,187,463 5,854,422 15,745,518 17,540,332 Other operating expenses (494,562) (814,162) (855,600) (1,037,153) (1,372,936) (1,880,700) (3,080,622) (4,386,721) (7,913,592) (10,397,475) Results from operating activities 289,946 406,991 578,232 709,350 997,739 963,483 1,106,841 1,467,701 7,831,926 7,142,858 Negative goodwill – (4,550) (6,429) – – 131,293 – 1,423,837 271,911 2,914,536 Profit/(loss) on disposal of subsidiaries and associates – – – – – – – (167,088) – – Share of profit of associate companies – – – – – 88,277 140,458 116,337 178,522 269,959 Profit before tax 289,946 402,441 571,803 709,350 997,739 1,183,053 1,247,299 2,840,787 8,282,359 10,327,353 Income tax expense (11,833) (11,832) 3,553 (20,762) 52,443 160,443 (192,122) (455,382) (1,259,279) (1,390,276) Net profit after tax 278,113 390,609 575,356 688,588 1,050,182 1,343,496 1,055,177 2,385,405 7,023,080 8,937,077

As at 31 March Assets Net lending portfolio 4,668,719 5,853,064 7,173,915 11,123,245 16,103,706 21,434,958 32,697,993 35,084,686 58,416,332 80,245,412 Total assets 7,038,427 8,986,749 10,706,443 16,226,692 24,483,950 32,994,258 46,287,066 75,371,319 111,813,533 145,287,739

Liabilities Total liabilities 5,272,820 7,063,271 8,342,029 13,295,525 20,659,031 27,816,389 40,195,588 55,631,672 77,090,381 102,223,229

Shareholders’ Funds Share capital 237,600 475,200 475,200 475,200 475,200 475,200 475,200 475,200 475,200 475,200 Reserves 1,471,054 1,386,382 1,863,134 2,424,847 3,309,657 4,649,019 5,536,270 7,428,554 12,521,139 18,812,919 Minority interest 56,953 61,896 26,080 31,120 40,062 53,650 80,008 11,553,927 21,726,812 23,776,390 Shareholders’ funds 1,765,607 1,923,478 2,364,414 2,931,167 3,824,919 5,177,869 6,091,478 19,457,681 34,723,151 43,064,509

Investor Ratios Return on assets (%) 4 5 6 5 5 5 3 4 8 7 Return on equity (%) 17 21 27 26 31 30 19 26 37 39

Other Information No. of branches 9 12 12 16 18 22 26 48 73 80 No. of LIOC/mini branches – – – – – 10 14 13 22 25 No. of service centres – – – – – 11 36 72 87 No. of subsidiary companies 5 6 7 8 8 9 9 41 48 66 No. of associate companies – – – – – 2 2 7 7 9 No. of joint ventures – – – – – 1 1 15 18 18

218 LOLC 2011/12 REPORTS & ACCOUNTS Ten Year Summary

For the year ended 31 March 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (Rs. ‘000)

Company Operating Results Gross income 1,130,880 1,401,776 1,566,952 1,908,291 3,034,110 4,960,979 6,626,308 4,722,479 3,511,733 3,030,395 Other income/(expenses) 32,679 97,806 145,294 93,449 291,840 261,254 71,445 1,022,138 2,832,627 5,679,440 Interest costs (492,557) (493,338) (532,298) (703,399) (1,442,881) (2,972,057) (4,205,474) (3,090,912) (2,384,015) (2,543,318) Profit before operating expenses 671,002 1,006,244 1,179,948 1,298,341 1,883,069 2,250,176 2,492,279 2,653,705 3,960,346 6,166,517 Other operating expenses (415,469) (588,339) (617,719) (621,628) (972,865) (1,408,840) (1,910,159) (2,162,578) (2,062,356) (1,743,150) Results from operating 562,229 activities 255,533 417,905 676,713 910,204 841,336 582,120 491,127 1,897,989 4,423,367 Profit before tax 255,533 417,905 562,229 676,713 910,204 841,336 582,120 491,127 1,897,989 4,423,367 Income tax expense – – – (12,701) 76,390 217,901 (76,532) (164,187) (374,646) (122,401) Net profit after tax 255,533 417,905 562,229 664,012 986,594 1,059,237 505,588 326,940 1,523,343 4,300,966

As at 31 March Assets Total assets 5,980,825 7,616,680 8,746,741 13,297,988 20,888,694 28,996,068 31,335,180 29,737,969 31,152,727 36,662,047

Liabilities Total liabilities 4,302,665 5,772,331 6,438,611 10,447,735 17,194,407 24,233,931 26,233,467 24,309,315 23,704,083 24,912,437

Shareholders’ Funds Share capital and reserves Share capital 237,600 475,200 475,200 475,200 475,200 475,200 475,200 475,200 475,200 475,200 Reserves 1,440,560 1,369,149 1,832,930 2,375,053 3,219,087 4,286,937 4,626,513 4,953,454 6,973,444 11,274,410 Shareholders’ funds 1,678,160 1,844,349 2,308,130 2,850,253 3,694,287 4,762,137 5,101,713 5,428,654 7,448,644 11,749,610

Investor Ratios Bonus issues – – – – – – – – – – Gross dividends 77,220 92,664 110,009 142,560 71,280 106,920 133,056 – – –

Total assets to shareholders’ funds (times) 4 4 4 5 6 6 6 5 4 3 Return on assets (%) 4 6 7 6 6 4 2 1 5 12 Return on equity (%) 16 24 27 26 30 25 10 6 24 32

Other Information No. of employees 201 259 269 346 414 521 664 787 848 948

LOLC 2011/12 REPORTS & ACCOUNTS 219 Summarised Quarterly Statistics

2011/12 2010/11

Company Income Statements (Rs.’000) For the 3 months ended 30-June 30-September 31-December 31-March 30-June 30-September 31-December 31-March

Gross Income 578,697 648,946 532,095 1,270,657 965,505 842,464 805,030 898,734 Other income/(expenses) 1,816,869 1,243,815 387,257 2,231,498 711,751 635,358 321,124 1,164,394 Interest costs (450,990) (350,712) (429,848) (1,311,767) (505,958) (578,932) (632,349) (666,776) Profit before operating expenses 1,944,576 1,542,049 489,504 2,190,388 1,171,298 898,890 493,805 1,396,352 Other operating expenses (521,438) (425,869) (372,000) (423,844) (545,791) (577,463) (431,882) (507,220) Results from operating activities 1,423,138 1,116,180 117,504 1,766,544 625,507 321,427 61,923 889,132 Income tax expense (60,000) – (92,659) 30,258 (40,800) (40,800) (56,269) (236,777) Net profit after tax 1,363,138 1,116,180 24,845 1,796,802 584,707 280,627 5,654 652,355

Balance Sheets (Rs.’000) As at 30-June 30-September 31-December 31-March 30-June 30-September 31-December 31-March

Assets 32,942,908 36,540,451 38,009,542 36,662,047 28,744,921 35,001,430 34,901,357 31,152,727 Liabilities 24,131,126 26,612,488 28,056,734 24,912,437 22,731,560 28,707,441 28,601,714 23,704,083 Net assets 8,811,782 9,927,963 9,952,808 11,749,610 6,013,361 6,293,989 6,299,643 7,448,644 Share capital and reserves 8,811,782 9,927,963 9,952,808 11,749,610 6,013,361 6,293,989 6,299,643 7,448,644 Share capital 475,200 475,200 475,200 475,200 475,200 475,200 475,200 475,200 Reserves 8,336,582 9,452,763 9,477,608 11,274,410 5,538,161 5,818,789 5,824,443 6,973,444

Group Income Statements (Rs.’000) For the 3 months ended 30-June 30-September 31-December 31-March 30-June 30-September 31-December 31-March

Revenue 3,615,680 4,350,519 4,166,625 5,003,490 2,961,378 4,336,940 5,292,002 1,698,172 Cost of sales (2,821,385) (3,348,592) (2,820,054) (2,815,607) (2,256,469) (2,790,898) (3,486,344) (1,377,511) Income 3,699,562 4,259,072 5,128,071 4,226,187 2,849,441 2,873,526 3,034,545 3,185,788 Other income/(expenses) 1,798,646 446,735 (274,972) 1,396,246 95,049 2,681,963 1,444,327 1,624,197 Interest costs (1,807,944) (1,915,591) (2,435,548) (2,310,809) (1,276,163) (1,812,108) (1,807,290) (1,525,027) Profit before operating expenses 4,484,559 3,792,143 3,764,122 5,499,508 2,373,236 5,289,423 4,477,240 3,605,619 Other operating expenses (2,421,068) (2,077,706) (2,200,905) (3,697,795) (1,279,525) (1,893,936) (1,903,687) (2,836,443) Results from operating activities 2,063,491 1,714,437 1,563,217 1,801,713 1,093,711 3,395,487 2,573,553 769,176 Negative goodwill – 2,821,334 93,201 – – – – 271,910 Share of profit of associate companies 46,854 136,840 121,408 (35,143) 57,276 (17,340) 31,461 107,125 Profit before tax 2,110,345 4,672,611 1,777,826 1,766,570 1,150,987 3,378,147 2,605,014 1,148,211 Income tax expense (307,162) (446,517) (642,385) 5,788 (295,211) (379,164) (442,166) (142,738) Net profit after tax 1,803,183 4,226,094 1,135,441 1,772,358 855,776 2,998,983 2,162,848 1,005,473

Balance Sheets (Rs.’000) As at 30-June 30-September 31-December 31-March 30-June 30-September 31-December 31-March

Assets 123,773,551 137,063,264 147,738,333 145,287,739 81,534,628 98,418,312 107,951,923 111,813,532 Liabilities 86,375,820 95,076,946 104,490,883 102,223,229 59,816,837 73,313,020 80,706,001 77,090,381 Net assets 37,397,731 41,986,318 43,247,450 43,064,509 21,717,791 25,105,292 27,245,922 34,723,151 Share capital, reserves and minority interest 37,397,731 41,986,318 43,247,450 43,064,509 21,717,791 25,105,292 27,245,922 34,723,151 Share capital 475,200 475,200 475,200 475,200 475,200 475,200 475,200 475,200 Reserves 14,304,875 16,258,967 17,172,678 18,812,919 8,174,413 10,103,889 10,838,695 12,521,139 Minority interest 22,617,656 25,252,151 25,599,572 23,776,390 13,068,178 14,526,203 15,932,027 21,726,812

220 LOLC 2011/12 REPORTS & ACCOUNTS Value Addition

2011/12 2010/11 (Rs.) (%) (Rs.) (%)

Group Value Added Income 22,643,567,895 16,527,776,878 Other income 3,366,654,960 5,638,328,685 Cost of borrowings and services (14,494,645,412) (11,784,804,106) Provisions 609,059,502 546,455,858 Goodwill on consolidation 2,914,536,420 271,910,632 Share of profits of associate companies 269,958,673 178,522,137 Value added tax 1,153,663,591 755,680,247 16,462,795,629 12,133,870,331

Distribution of Value Added To Employees 3,312,149,808 20 1,985,476,257 16 Remuneration and other benefits 3,312,149,808 1,985,476,257

To Government 2,543,939,406 15 2,014,959,415 17 Indirect taxes 1,153,663,591 755,680,247 Direct taxes 1,390,275,815 1,259,279,168

To Providers of Capital 3,271,122,818 20 3,568,205,851 30 Dividends to shareholders – – Minority interest 2,677,212,598 3,182,852,004 Reserves 593,910,220 385,353,847

To Expansion and Growth 7,335,583,597 45 4,565,228,008 37 Retained profits 5,665,954,281 3,454,874,061 Depreciation and amortisation 1,669,629,316 1,110,354,747 16,462,795,629 100 12,133,870,331 100

LOLC 2011/12 REPORTS & ACCOUNTS 221 Value Addition

2011/12 2010/11 (Rs.) (%) (Rs.) (%)

Company Value Added Income 3,030,395,171 3,511,733,478 Other income 5,679,439,845 2,832,627,486 Cost of borrowings and services (3,438,695,867) (3,520,578,315) Provisions 22,839,520 100,485,684 Value added tax 342,495,984 433,689,641 5,636,474,653 3,357,957,974

Distribution of Value Added To Employees 267,636,548 5 341,104,639 10 Remuneration and other benefits 267,636,548 341,104,639

To Government 464,897,114 8 808,335,813 24 Indirect taxes 342,495,984 433,689,641 Direct taxes 122,401,130 374,646,172

To Providers of Capital – 48,326,643 2 Dividends to shareholders – – Reserves – 48,326,643

To Expansion and Growth 4,903,940,991 87 2,160,190,879 64 Retained profits 4,300,966,318 1,475,016,645 Depreciation and amortisation 602,974,673 685,174,234 5,636,474,653 100 3,357,957,974 100

222 LOLC 2011/12 REPORTS & ACCOUNTS Awards

n LOLC was awarded the Most Outstanding Financial Performer 2010/11 in the global ORIX network, by the ORIX Corporation of Japan. n LOLC won a global Achievement Award from the Open Compliance and Ethics Group (OCEG), USA for good governance, risk management and compliance practices. LOLC is the first Asian business entity to receive this award. n LOLC Annual Report 2010/11 won Gold at the ARC Awards 2011 and won the Grand Prize in its category. n LOLC Annual Report 2010/11 won Gold at the League of American Communications Professionals (LACP) Vision Awards 2010 in the ‘Conglomerates and Holding Companies’ category. n LOLC Annual Report 2010/11 wins the ADFIAP Awards 2012 for ‘Best Annual Report’ in the Special Awards category. n 2010 Annual Report of Al-Falaah - the Islamic Business Unit of LOFC, won Bronze at the League of American Communications Professionals (LACP) Vision Awards 2011. n LOLC becomes the Overall Silver Winner; Winner for Best ‘Capacity Builder’; First Runner-up for ‘Extra Large Sector’ and Runners- up for ‘Diversified Group of Companies’ and ‘Excellence in Business and Financial Performance’ at the National Business Excellence Awards 2010/11. n Eden Resort & Spa of LOLC Leisure Ltd. was awarded Runners-up in the ‘Hospitality’ category at the National Business Excellence Awards 2010/11. n Eden Resort & Spa won an overall 36 medals at the 14th Culinary Art 2011 organised by the Chefs Guild of Sri Lanka and was also placed 7th in the overall ranking amongst 211 hotels and other catering establishments in Sri Lanka. n LOLC was awarded one of Business Today’s Top 20 Corporates of Sri Lanka 2011. n LOLC was placed among the Top 20 Most Respected Entities in Sri Lanka 2010/11.

LOLC 2011/12 REPORTS & ACCOUNTS 223 Milestones

1992 2003 2006 n Launched its first subsidiary, LOFAC n Received the first US Dollar long-term n Negotiated the long-term US Dollar loan from OPEC Fund Loan from DEG 1995 n The first to win the Leasing Category n Negotiated the long-term US Dollar n First branch office opened in Kandy ‘Award for Excellence in Annual Loan from OPEC Fund n Negotiated the first long-term Rupee Reports and Accounts’ conducted n Branch office opened in Wattala loan from FMO by The Institute of Chartered Accountants of Sri Lanka n The first Regional Expansion to 1996 Cambodia through 18% holding of n Negotiated the third tranche of long- PRASAC n The first to extend Dollar denominated term Rupee loan from FMO leases to BOI companies n First to introduce a branded product n Branch offices opened in Nuwara Eliya ‘Guardian’ range from an insurance and Kiribathgoda 1997 broker, through LOIB n The first to introduce export factoring 2004 n Won the Leasing Category ‘Award through LOFAC n Entered into stock broking through for Excellence in Annual Reports n Branch office opened in Matara LOSEC and Accounts’ conducted by The Institute of Chartered Accountants of 1998 n Launched LOITS, the Information Sri Lanka for 2005/06 Technology arm Branch offices opened in Badulla and Ratnapura n The first to win the ‘Non-Banking 2007 Sector Award’ at the South Asian n Branch offices opened in Chilaw and 1999 Federation of Accountants (SAFA) for Mahiyangana Best Presented Accounts Competition n LOFAC enters into strategic alliance n Ranked among the Top 50 Brands by with Dunn and Bradstreet n Branch office opened in Gampaha Super Brands n Branch office opened in n Launched the New Strategic Plan for Anuradhapura 2005 the Company and its Subsidiaries n Launched its insurance subsidiary, n The first Leasing Company to be LOIB ranked among the Top 10 Brands by n Opened the first Hospital Savings Sting Consultants Brand Power Index Centre in Oasis 2000 n Launched LOPD, the project n Opened the first Student Savings n Negotiated the second tranche of development subsidiary Centre at Royal College - long-term Rupee loan from FMO Polonnaruwa n LOLC cricket team emerged n Branch office opened in Kochchikade Mercantile ‘C’ Division Champions n LOFC operations expanded to Wattala, Kegalle, Mahiyangana, Mount Lavinia 2001 n Negotiated the second tranche of and Chilaw n Launched its finance subsidiary, LOFC long-term US Dollar Loan from OPEC Fund n LOPD received Cabinet subcommittee n Branch offices opened in Kurunegala approval for the project on Off-Shore and Kalutara n Negotiated the fourth tranche of Sand Mining, Washing, Sieving and long-term Rupee loan from FMO Grading to supply construction and 2002 n Negotiated the long-term US Dollar related industries n The first leasing company to be Loan from Praparco n Signed up with LIOC to establish LOLC recognised as a Participating sub-branches at LIOC filling stations Financial Institution for the Indian n Branch offices opened in Kegalle, Line of Credit Embilipitiya and Polonnaruwa n LIOC Centres opened in Morawaka n Branch office opened in Galle and Trincomalee

224 LOLC 2011/12 REPORTS & ACCOUNTS Milestones

n Set up the Islamic BU with an in- 2009 n Lanka ORIX Finance Company Ltd. house Shari’ah Supervisory Board n Opened 40 Service Centres in Post started to transact in international financial markets via SWIFT n Dairy farmer loans, cultivation loans, Offices around the country consequent business set up loans and skills to the agreement with Sri Lanka Post, n Received a US$ 5.0 Mn guarantee enable loans were introduced to offer products of LOLC Micro Credit facility from USAID Ltd. to the rural community n Partnered with GTZ for capacity building n Invested in United Dendro Energy (Pvt) of the microfinance staff, setting-up low n Opened branches in Jaffna, Ampara, Ltd. through LOLC Eco Solutions Ltd. cost branch network and development Batticaloa, Vavuniya and Trincomalee, of a micro banking system thereby making our services available 2010 to the Northern and Eastern Regions n Opened 29 Service Centres in Post of the country 2008 Offices around the country n Launched a lottery for customers with n Opened the first dedicated Shari’ah n Opened branches in Avissawella, a house as the prize finance branches in Kathankudi, Pettah, Moneragala, Trincomalee, Oddamavadi and Kalmunai. n Launched Western Union Money Matugama, Homagama, Nawalapitiya, Transfer services at LOLC branches n Selected as the Winner of the Kohuwala, Hatton, Ambalangoda and Specialised Banking and Finance Elpitiya n Entered into a joint venture agreement Category at the National Business with Agri Tec for manufacture of n Acquisition of Confifi Hotel Holdings Excellence Awards precipitated silica and allied products PLC, Riverina Hotels PLC and Tropical using rice husk ash n Received BOI status for Lanka ORIX Villas (Pvt) Ltd. Information Technology Services Ltd. n LIOC Centres opened in n National Business Excellence Awards (LOITS - the IT arm) Pilimathalawa, Seeduwa, Aluthgama, 2010 - conducted by the National Kadawatha, Ambalangoda, n IT arm, Lanka ORIX Information Chamber of Commerce, Sri Lanka - Debarawewa, Beliatta and Talawakelle Technology Services Ltd. earns ‘ISO/ Gold Award for ‘Diversified Group of IEC 27001:2005’ certification for Companies Sector’, Silver Award for n Won Bronze Award at Effie Awards its enterprise data and software Best ‘Capacity Builder’ and Bronze 2008, in the Financial Services/ development functions Award for ‘Extra Large Sector’. LOLC Products Category Leisure Ltd. was awarded Silver for n Ranked amongst the Top 20 Brands in n Spin-off of Microfinance Business ‘Hospitality’ for Eden Resorts & Spa. Sri Lanka by Brand Finance Lanka Unit as LOLC Micro Credit Ltd. (LOMC) n IT arm - Lanka ORIX Information together with FMO n Won Best Annual Report Award and Technology Services Ltd. (LOITS) a Merit Award for Best Website from n LOLC Micro Credit Ltd. was appointed earns re-certification for its ADFIAP (Association of Development as the only representative from the conformance with the ISO/ Finance Institutions in Asia and the private sector to the Microfinance IEC 27001:2005, covering ‘The Pacific) Steering Committee appointed by the Management of Information Security Department of Development Finance n Won the Silver Award at the for Providing IT Services at Enterprise attached to Ministry of Finance and Sri Lankan HR Awards 2010 organised Data Centre’ Planning by the Association of HR Professionals n LOITS was the only winner in Sri Lanka together with the Hewitt n Won the International Assets and the Category of Programme and Associates, India Liability Management competition Application Security at the ISACA held by FMO and DEG n LOLC Micro Credit Ltd. (LOMC) Security Awards last year received a total of $ 14 Mn from n Joined with Sri Lanka Post to open n Investments made in Sierra Holdings, Symbiotics and Three Triodos Funds up Isuru Diriya Centres at Post Offices Sierra Constructions and Agstar to expand Microfinance Operations in and Sub-Post Offices Fertilizers Sri Lanka n Received a long-term loan from Symbiotics

LOLC 2011/12 REPORTS & ACCOUNTS 225 Milestones

n Received a long-term loan from n LOLC obtained the consent of the n Eden Resort & Spa of LOLC Leisure Triple Jump Central Bank of Sri Lanka (CBSL) to Ltd. was awarded Runners-up in the relinquish its leasing license from ‘Hospitality’ category at the National n Received a long-term loan from April 2011 and LOLC consolidated its Business Excellence Awards 2010/11 Minlam position as a Holding Company n Received a long-term loan from n Eden Resort & Spa won an overall 36 n LOFC obtained CBSL approval to Praparco medals at the 14th Culinary Art 2011 list on the CSE and was renamed as n Received a long-term loan from organised by the Chefs Guild of Lanka ORIX Finance PLC Triodos Sri Lanka and was also placed 7th n LOLC Leisure acquires 100% in the overall ranking amongst n Most Outstanding Financial Performer ownership of Dickwella Resort & Spa 211 hotels and other catering 2010/11 in the Global ORIX Network establishments in Sri Lanka n LOFC became one of the largest n Top 20 Most Valuable Stocks in the deposit base holders in the Registered n Eden Resort & Spa received the ISO Colombo Bourse Finance Company sector 9001:2008+HACCP certificate for an additional period of 3 years, effective 2011 n LOLC was awarded the Most from January 2012 Outstanding Financial Performer n Excellent Performance in the 2010/11 in the global ORIX network, Overseas Operations Category for FY n LOLC was ranked among Business by the ORIX Corporation of Japan 2012 in the Global ORIX Network Today’s Top 20 Corporates of Sri Lanka 2011 n LOLC Annual Report 2010/11 won Gold n LOLC won the Achievement Award for at the ARC Awards 2011 and won the Governance, Risk Management and n LOLC’s Brand was listed among the Grand Prize in its category Compliance (GRC) for 2012 from the Most Valuable Brands of 2011 by Brand Finance Lanka Open Compliance and Ethics Group n LOLC Annual Report 2010/11 won (OCEG), USA Gold at the League of American n LOLC was ranked among LMD’s Top Communications Professionals n First Money Exchange Outlet opened 50 Listed Companies of Sri Lanka (LACP) Vision Awards 2010 in in Matara the ‘Conglomerates and Holding n LOLC became the Top 20 Most n Launch of eZ pay services Companies’ category Valuable Stocks/Companies in the Colombo Bourse 2011 n LOLC Micro Credit (LOMC) became n LOLC Annual Report 2010/11 wins the the largest agriculture implement ADFIAP Awards 2012 for ‘Best Annual n LOLC was placed among the Top 20 financier in Sri Lanka with an excess Report’ in the Special Awards category Most Respected Entities in Sri Lanka of over 100,000 customer base 2010/11 n 2010 Annual Report of Al-Falaah - the n Commencement of operations of Islamic Business Unit of LOFC, won n During the FY, a total of 36 service LOLC Insurance Co. Ltd. Bronze at the League of American points were opened across the island. Communications Professionals n Formation of LOLC Securities Ltd. (LACP) Vision Awards 2011 n Formation of LOLC Motors and n LOLC becomes the Overall Silver authorised distributors for FIAT in Winner; Winner for Best ‘Capacity Sri Lanka Builder’; First Runner-up for ‘Extra n The LOLC team won the Mercantile Large Sector’ and Runners-up for Basketball Championship in their ‘Diversified Group of Companies’ and respective division ‘Excellence in Business & Financial Performance’ at the National n The LOLC Badminton team were placed Business Excellence Awards 2010/11 second at the Mercantile Badminton Team Championships for 2011.

226 LOLC 2011/12 REPORTS & ACCOUNTS Group Companies/Directors

Agrisil Holdings Ltd. Brown & Company PLC Browns Motors (Pvt) Ltd. Diriya Investments (Pvt) Ltd. Mrs. R.L. Nanayakkara Mrs. R.L. Nanayakkara Mrs. R.L. Nanayakkara Mr. I.C. Nanayakkara Mr. I.C. Nanayakkara Mr. A.L. Devasurendra Mrs. I. Nanayakkara Mr. A.L. Devasurendra Mr. N.K.S.M.C. Mendis Mr. N.M. Prakash Mrs. R.N.A. Nanayakkara Mr. G.R. Wellen Mr. S.V. Somasunderam (Mr. I.C. Nanayakkara is Alternate Dickwella Resorts (Pvt) Ltd. Director to Mrs. N. Nanayakkara) Mr. W. Verbrugghe Mr. I.C. Nanayakkara Mr. W.D.K. Jayawardena Mrs. K.U. Amarasinghe Mr. H.P.J. De Silva Browns Tours (Pvt) Ltd. Associated Battery Mrs. R.L. Nanayakkara Manufacturers Ceylon Ltd. Browns Thermal Engineering Browns Industrial Park Ltd. Mr. N.M. Prakash Mr. A.L. Devasurendra (Pvt) Ltd. Mrs. R.L. Nanayakkara Mr. S.V. Somasunderam Mr. N.M. Prakash Mrs. R.L. Nanayakkara Mr. N.M. Prakash Mr. R.B. Seneviratne Mr. S.V. Somasundaram Mr. S.V. Somasunderam Mr. S.V. Somasunderam Mrs. R.N.A. Nanayakkara Mr. P. K. Kataky Mr. N.M. Prakash (Mr. I.C. Nanayakkara is Alternate Mr. W.M.N.C. Fernando Mr. W. Wong Mr. D. Fernando Director to Mrs. N. Nanayakkara) Mr. A.K. Mukherjee Mr. A.K.D. Munidasa Mr. P. Weerasinghe Eden Hotel Lanka PLC Mr. K. Ganeshan Mr. W.M.N.C. Fernando Mr. W.D.K. Jayawardena Mr. S. Amab Central Services (Pvt) Ltd. Mrs. K.U. Amarasinghe Browns Group Industries Mr. K.A.K.P. Gunawardena Mr. D.S.K. Amarasekera (Pvt) Ltd. Agsta Fertilizers Mr. D.S.K. Amarasekera Mr. J.M. Swaminathan Mrs. R.L. Nanayakkara Mr. N.G.R. Karunaratne Mrs. J. Lord Prof. M.T. A. Furkhan Mr. N.M. Prakash Mr. D.N.N. Lokuge Mr. S. Furkhan Mr. S.V. Somasunderam Mr. W.A.P. Perera C F T Engineering Ltd. Mr. R.N. Asirwatham Mr. A.P. Weerasekera Mrs. R.N.A. Nanayakkara Mrs. R.L. Nanayakkara (Resigned on 29.05.2012) (Mr. I.C. Nanayakkara is Mr. I.C. Nanayakkara Alternate Director to Mr. N.M. Prakash Engineering Services (Pvt) Ltd. Mr. D.S.K. Amarasekera Mrs. N. Nanayakkara) Mr. S.V. Somasunderam Mrs. R.L. Nanayakkara Mr. P.R. Saldin Mr. W.M.N.C. Fernando Mrs. R.N.A. Nanayakkara (Mr. I.C. Nanayakkara is Alternate Mr. N.M. Prakash Mr. H.P.J. De Silva Director to Mrs. N. Nanayakkara) Browns Group Motels Ltd. Mr. S.V. Somasunderam Mr. A.G. Weerasinghe Mrs. R.L. Nanayakkara Mrs. R.N.A. Nanayakkara Commercial Factors Ltd. (Mr. I.C. Nanayakkara is Alternate Ajax Engineers (Pvt) Ltd. Mr. N.M. Prakash Mr. K.A.K.P. Gunawardena Director to Mrs. N. Nanayakkara Mr. S. Karunaratne Mr. S.V. Somasunderam Mr. D.M.D.K. Thilakaratne Mr. R.T. Devasurendra Mr. J. Sheriff Mrs. R.N.A. Nanayakkara (Mr. A.L. Devasurendra is (Mr. I.C. Nanayakkara is Alternate Alternate Director to Mr. A.P. Weerasekera Director to Mrs. N. Nanayakkara) Commercial Insurance Mr. R.T. Devasurendra) Mr. D.S.K. Amarasekera Brokers Ltd. (CIB) Mr. R.P. Sugathadasa Browns Healthcare (Pvt) Ltd. Mr. B.R.L. Fernando Excel Global Holdings (Pvt) Ltd. Mr. P.R. Saldin Mrs. R.L. Nanayakkara Mr. M.P. Jayawardena Mr. N.M. Prakash Mr. N.M. Prakash Mr. N.M. Prakash Mr. D.M.D.K. Thilakaratne Mr. D.S.K. Amarasekera Mr. K.S. Narangoda Mr. R.A.M. Seneviratne Mr. P.R. Saldin B G Air Services (Pvt) Ltd. Mr. S.V. Somasunderam Mr. W.M.R.S. Dias Mr. C. Francis Mrs. R.L. Nanayakkara Mr. N.M. Prakash Browns Investments PLC Commercial Leasing & Excel Restaurants (Pvt) Ltd. Finance Ltd. (CLC) Mr. S.V. Somasunderam Mrs. R.L. Nanayakkara Mr. T. Selliah Mrs. R.L. Nanayakkara Mr. N.M. Prakash Mr. K. Shenoy Mrs. R.N.A. Nanayakkara (Resigned on 31.12.2011) (Mr. I.C. Nanayakkara is Alternate Mr. R.P. Sugathadasa Director to Mrs. N. Nanayakkara) Mr. I.C. Nanayakkara Mr. P.R. Saldin Mr. P. Weerasinghe Mr. W.D.K. Jayawardena Mr. D.S.K. Amarasekera Mrs. K.U. Amarasinghe Mr. N. Fernando Dr. H. Cabral Mr. S. Furkhan Mr. D.M.D.K. Thilakaratne Mr. A.G. Weerasinghe Mr. P.D.J. Fernando

LOLC 2011/12 REPORTS & ACCOUNTS 227 Group Companies/Directors

Fernwood Lanka (Pvt) Ltd. Free Lanka Management Free Lanka Power Holdings Hydro Power Free Lanka 2 Mr. J. Peiris Company (Pvt) Ltd. (Pvt) Ltd. (Pvt) Ltd. Mr. K.C. Wijesuriya Mr. K. Aloysius Mr. K. Aloysius Mr. K. Aloysius Mr. N.M. Prakash Mr. J.M.S. De Mel Mr. G.A. Aloysius Mr. G.A. Aloysius Mr. A. Sugathadasa Mr. D.S.K. Amarasekera Mr. G.J. Aloysius Mr. U.K. Devasurendra Mr. P.R. Saldin Mr. C.J. Chaytor Mr. J.M.S. De Mel Mr. G.J. Alosius Mr. H. Ramasamy Mr. D.S.K. Amarasekera Mr. J.M.S. De Mel (Alternate Director to Mr. U.K. Devasurendra Mr. D.S.K. Amarasekera Fernwood Corporate Services Ltd. Mr. A.J. Chaytor) Dr. L.J.A. Peiris Mr. G.A. Aloysius Mrs. F.J. Peiris Free Lanka Estates Bungalows Hydro Power Free Lanka 3 Mr. G.J. Aloysius (Pvt) Ltd. (Pvt) Ltd. Mr. A.J. Chaytor Mr. G.J. Aloysius Mr. K. Aloysius Free Lanka Capital Holdings PLC Mr. G.D. Seaton Mr. D.S.K. Amarasekera Mr. G.A. Aloysius Mr. K. Aloysius Mr. P.R. Saldin Mr. G.J. Aloysius Mr. G.A. Aloysius Free Lanka Plantation Company Mr. J.M.S. De Mel Mr. U.K. Devasurendra Mr. J.M.S. De Mel Mr. K. Aloysius Mr. J.M.S. De Mel Mr. I.C. Nananyakkara Mr. G.A. Aloysius Galoya Holdings (Pvt) Ltd. Mr. D.S.K. Amarasekera Mr. N.M. Prakash Mr. G.J. Aloysius Mr. N.M. Prakash Mr. P.R. Saldin Mr. J.M.S. De Mel Mr. W.G.L. Dharmakeerthi I G Browns Rubber Industries Mr. G.J. Aloysius Mr. D.S K. Amarasekera Mr. N.T.K.A. Adikarama (Pvt) Ltd. Mr. D.C. Wimalasena Mr. P.R. Saldin Mrs. R.L. Nanayakkara Mr. A.I. Fernando Free Lanka Power 1 (Pvt) Ltd. Mr. R.M.G.K.B. Ratnayake Mr. N.M. Prakash Mr. D.S.K. Amarasekera Mr. K. Aloysius Mrs. M.A. Nandani Mr. G.A. Aloysius Klevenberg (Pvt) Ltd. Free Lanka Capital (Pvt) Ltd. Mr. M. Balasubramaniam Mr. G.J. Aloysius Galoya Plantations (Pvt) Ltd. Mr. K. Aloysius Mr. P. Balasubramaniam Mr. U.K. Devasurendra Mr. N.T.K.A. Adikarama Mr. G.A. Aloysius Mr. N.M. Prakash Mr. J.M.S. De Mel Mr. P.R. Saldin Mr. J.M.S. De Mel Mr. S.V. Somasunderam Mr. D.S.K. Amarasekera Mr. W.G.L. Dharmakeerthi Mr. R.P. Sugathadasa Mrs. R.N.A. Nanayakkara Mrs. M.A. Nandani Mr. P.R. Saldin Free Lanka Power 2 (Pvt) Ltd. (Mr. I.C. Nanayakkara is Alternate Mr. S.G. Senarathna Director to Mrs. N. Nanayakkara) Mr. N.M. Prakash Mr. K. Aloysius Mr. G.K.A.K. Perera Mr. R.T. Devasurendra Mr. D.S.K. Amarasekera Mr. G.A. Aloysius Mr. G.W. Wijesinghe (Mr. A.L. Devasurendra is Mr. G.J. Aloysius Mr. G.J. Aloysius Alternate Director to Mr. R.A.S.K. De Alwis Mr. R.T. Devasurendra) Mr. U.K. Devasurendra Mr. T.P.G.N. De Alwis Mr. C. Ediriwickrema Free Lanka Capital Properties Mr. J.M.S. De Mel (Pvt) Ltd. Mr. D.S.K. Amarasekera Mr. G.A. Aloysius Hydro Power Free Lanka Lanka ORIX Finance PLC (Pvt) Ltd. Mr. J.M.S. De Mel Mrs. R.L. Nanayakkara Free Lanka Power 3 (Pvt) Ltd. Mr. K. Aloysius (Resigned on 31.12.2011) Mr. D.S.K. Amarasekera Mr. K. Aloysius Mr. G.J. Aloysius Mr. I.C. Nanayakkara Mr. N.M. Prakash Mr. G.A. Aloysius Mr. G.A. Aloysius Mr. W.D.K. Jayawardena Mr. P.R. Saldin Mr. G.J. Aloysius Mr. J.M.S. De Mel Mrs. K.U. Amarasinghe Mr. U.K. Devasurendra Mr. D.S.K. Amarasekera Mr. R.N. Asirwatham Mr. J.M.S. De Mel Mr. U.K. Devasurendra (Resigned on 30.06.2012) Mr. D.S.K. Amarasekera Mrs. R.L. Nanayakkara Mr. B.C.G. De Zylva Mr. N.M. Prakash Dr .H. Cabral Mr. A.U. Weerasinha Mrs. D.P. Pieris Mr. R.M.S. Fernando Mr. T. Senthilveri

228 LOLC 2011/12 REPORTS & ACCOUNTS Group Companies/Directors

Lanka ORIX Information LOLC Estates Ltd. LOLC Services Ltd. Millennium Development Technology Services Ltd. Mr. K.A.K.P. Gunawardena Mr. A.L. Dharmaprema (Pvt) Ltd. Mr. F.K.C.P.N. Dias Mrs. J. Lord Mrs. J. Lord Mr. F. Chokatte Mr. K.A.K.P. Gunawardena Mr. N.M. Prakash LOLC Factors Ltd. LOLC Technologies Ltd. Mr. P.R. Saldin Lanka ORIX Project Development Mr. K.A.K.P. Gunawardena Mr. F.K.C.P.N. Dias Mr. D.S.K. Amarasekera Ltd. Mr. J.B.W. Kelegama Mr. K.A.K.P. Gunawardena Mrs. R.L. Nanayakkara Mr. F.G.A. Lawrence Mr. J.B.W. Kelegama Orient Academy Ltd. Mrs. K.U. Amarasinghe Mr. F.K.C.P.N. Dias Mr. K.A.K.P. Gunawardena LOLC Insurance Company Ltd. Masons Mixture Ltd. Mr. K.A.K.P. Gunawardena Mr. W.D.K. Jayawardena Mrs. R.L. Nanayakkara Lanka Decals (Pvt) Ltd. Mrs. K.U. Amarasinghe Mr. N.M. Prakash Orient Global Technologies Ltd. Mr. J. Peiris Mr. J.M. Swaminathan Mr. S.V. Somasunderam Mr. F.K.C.P.N. Dias Mr. N.M. Prakash Mrs. R.N.A. Nanayakkara Mr. K.A.K.P. Gunawardena Mr. P.R. Prakash LOLC Investments Ltd. (Mr. I.C. Nanayakkara is Alternate Mr. J.B.W. Kelegama Mr. P.R. Saldin Director to Mrs. N. Nanayakkara) Mr. K.A.K.P. Gunawardena Mrs. A. Sugathadasa Mr. R.T. Devasurendra Palm Garden Hotels PLC Mr. J.B.W. Kelegama (Mr. A.L. Devasurendra is Mr. P.D.G. Jayasena Alternate Director to Mr. W.D.K. Jayawardena LOLC Leisure Ltd. Mr. R.T. Devasurendra) Mrs. K.U. Amarasinghe Mr. W.D.K. Jayawardena LOLC Land Holdings Ltd. Mr. D.S.K. Amarasekera Mrs. K.U. Amarasinghe Maturata Plantations Ltd. Mr. K.A.K.P. Gunawardena Mr. J.M. Swaminathan Mr. K. Aloysius Mrs. J. Lord LOLC Life Insurance Ltd. Mr. G.A. Alosius Pathregalla Estates (Pvt) Ltd. Mr. W.D.K. Jayawardena LOLC Micro Credit Ltd. Mr. G.J. Aloysius Mrs. R.L. Nanayakkara Mrs. K.U. Amarasinghe Mrs. R.L. Nanayakkara Mr. J.M.S. De Mel Mr. S.V. Somasunderam Mr. I.C. Nanayakkara Mr. D.S.K. Amarasekera Mr. D.A.B. Dassanayake LOLC General Insurance Ltd. Mr. W.D.K. Jayawardena Mr. L.G.D. Premachandra Mrs. R.N.A. Nanayakkara Mr. W.D.K. Jayawardena (Mr. I.C. Nanayakkara is Alternate Mrs. K.U. Amarasinghe Mrs. K.U. Amarasinghe Melfort Green Tea Director to Mrs. N. Nanayakkara) Mr. R.D. Tissera Mr. K. Aloysius LOLC Property Investments Ltd. Drs. P. Kooi Pussellawa Plantations Ltd. Mr. G.A. Alosius Mr. K.A.K.P. Gunawardena Mr. J.M.S. De Mel LOLC Micro Finance Fund Ltd. Mr. H.D.A.D. Perera Mrs. J. Lord Mr. G.A. Aloysius Mr. L.T.D. Peiris Mr. K.A.K.P. Gunawardena Mr. G.D. Seaton Mrs. R.V. Perera LOLC Realty Ltd. Mr. R.D. Tissera Mr. G.J. Aloysius Mr. J.M.S. De Mel Mr. K.A.K.P. Gunawardena Mr. K. Aloysius LOLC Motors Ltd. Mrs. J. Lord Mr. M.P.D.U.K. Mapa Pathirana Mr. W.D.K. Jayawardena Mutugala Estates (Pvt) Ltd. Mrs. R.L. Nanayakkara LOLC Asset Holdings Ltd. Mrs. K.U. Amarasinghe PRASAC MFI Mr. K.A.K.P. Gunawardena Mr. R.T. Devasurendra Mr. K.A.K.P. Gunawardena (Mr. A.L. Devasurendra is Mr. S.A.V. Harpe Mrs. J. Lord Alternate Director to Mr. R. Fernando LOLC Securities Ltd. Mr. R.T. Devasurendra) Mr. H. Halbertsma Mr. W.D.K. Jayawardena Mr. S.V. Somasunderam LOLC Eco Solutions Ltd. Mr. I.C. Nanayakkara Mrs. K.U. Amarasinghe Mrs. R.N.A. Nanayakkara Mr. K.A.K.P. Gunawardena Mr. O.S. Oeun Mr. S. Gurusinghe (Mr. I.C. Nanayakkara is Alternate Mr. P.D.G. Jayasena Director to Mrs. N. Nanayakkara) Mr. P. Touch

LOLC 2011/12 REPORTS & ACCOUNTS 229 Group Companies/Directors

Riverina Hotels PLC Sierra Holdings (Pvt) Ltd. Standard Finance (Pvt) Ltd. Tea Leaf Resort Mr. W.D.K. Jayawardena Mr. D.N.N. Lokuge Mrs. R.L. Nanayakkara Mr. W.A.P. Perera Mrs. K.U. Amarasinghe Mr. W.A.P. Perera Mr. N.M. Prakash Mr. G.A. Aloysius Mr. D.S.K. Amarasekera Mr. F.A.W. Irugalbandara Mr. S.V. Somasunderam Mr. D.S. Panditha Mr. J.M. Swaminathan Mr. E.A.D.T.B. Perera Mrs. R.N.A. Nanayakkara Mr. D.S.K. Amarasekera Mr. R.N. Asirwatham Mr. D.S.K. Amarasekera (Mr. I.C. Nanayakkara is Alternate Mr. J.M.S. De Mel Director to Mrs. N. Nanayakkara) (Resigned on 29.05.2012) Ms. K.A. Suraweera Mr. N.M. Prakash Mr. R.T. Devasurendra (Alternate Director to (Mr. A.L. Devasurendra is Mr. G.J. Aloysius Mr. E.A.D.T.B. Perera) Royal Fernwood Porcelain Ltd. Alternate Director to Mr. R.T. Devasurendra) Mr. J. Peiris The Hatton Transport and Sifang Lanka (Pvt) Ltd. Mr. A.L. Devasurendra Agency Company (Pvt) Ltd. Mrs. R.L. Nanayakkara Sundaya Lanka (Pvt) Ltd. Mr. N.M. Prakash Mrs. R.L. Nanayakkara Mr. N.M. Prakash Mr. M.R. Adema Mr. P.R. Saldin Mr. N.M. Prakash Mr. S.V. Somasunderam Mr. R.D. Tissera Mrs. A. Sugathadasa Mr. S.V. Somasunderam Mrs. R.N.A. Nanayakkara Mr. T.S.R. Visweswaran Mrs. R.N.A. Nanayakkara (Mr. I.C. Nanayakkara is Alternate Mr. K.A.K.P. Gunawardena (Mr. I.C. Nanayakkara is Alternate Samudra Beach Resorts Director to Mrs. N. Nanayakkara) (Pvt) Ltd. Mr. J.B.W. Kelegama Director to Mrs. N. Nanayakkara) Mr. C. Ediriwickrema Mrs. R.L. Nanayakkara Mr. Z. Haifeng Tropical Villas (Pvt) Ltd. Mr. N.M. Prakash Speed Italia (Pvt) Ltd. Mr. H. Yilin Mr. W.D.K. Jayawardena Mr. D.S.K. Amarasekera Mr. W.D.K. Jayawardena Mrs. K.U. Amarasinghe Mrs. K.U. Amarasinghe Mr. P.R. Saldin Sifang Lanka Trading (Pvt) Ltd. Mr. K.A.K.P. Gunawardena Mr. D.S.K. Amarasekera Mr. R.P. Sugathadasa Mrs. R.L. Nanayakkara Mr. N.M. Prakash United Dendro Energy (Pvt) Ltd. Sierra Constructions (Pvt) Ltd. Taprobane Capital (Pvt) Ltd. Mr. S.V. Somasunderam Mr. W.D.K. Jayawardena Mr. F.A.W. Irugalbandara Mr. N.M. Prakash Mrs. R.N.A. Nanayakkara Mrs. K.U. Amarasinghe Mr. D.N.N. Lokuge (Mr. I.C. Nanayakkara is Alternate Mr. D.S.K. Amarasekera Mr. D.T. Karunanayake Mr. W.A.P. Perera Director to Mrs. N. Nanayakkara) Mr. P.R. Saldin Mr. H. Karunanayake Mr. E.A.D.T.B. Perera Mr. C. Ediriwickrema Mr. K.A.K.P. Gunawardena Mr. J.H.P. Ratnayake Taprobane Plantations Ltd. Snowcem Products Lanka Mr. D.A.B. Dassanayake Mr. P.D.G. Jayasena Mr. E.M.M. Boyagoda (Pvt) Ltd. Mr. I.C. Nanayakkara Mr. R.P. Sugathadasa Mr. N.M. Prakash Walker & Greig (Pvt) Ltd. Mr. A.L. Devasurendra Mr. R.R. Anthony Mr. S.V. Somasunderam Mrs. R.L. Nanayakkara Ms. A.C.P. Irugalbandara Mrs. R.N.A. Nanayakkara (Alternate Director to Taprobane Fund Management Mr. N.M. Prakash (Mr. I.C. Nanayakkara is Alternate Company Ltd. Mr. F.A.W. Irugalbandara) Director to Mrs. N. Nanayakkara) Mr. S.V. Somasunderam Mr. A.L. Devasurendra Ms. K.A. Suraweera Mr. C. Ediriwickrema Mrs. R.N.A. Nanayakkara (Alternate Director to Mr. E.A.D.T.B. Mrs. R.L. Nanayakkara (Mr. I.C. Nanayakkara is Alternate Perera) Director to Mrs. N. Nanayakkara) Southern Cleaners (Pvt) Ltd. Mr. S. Somasundaram Mr. K.A.K.P. Gunawardena Mrs. J. Lord Mr. D.S.K. Amarasekera

230 LOLC 2011/12 REPORTS & ACCOUNTS Share Information

1. Shareholding 1.1 Shareholding as at 31 March 2012

Range No. of No. of % of Shareholders Shares Shares

1 - 1,000 2,767 1,236,693 0.26 1,001 - 10,000 1,295 4,861,277 1.02 10,001 - 100,000 386 12,051,712 2.53 100,001 - 1,000,000 59 15,165,212 3.20 Over 1,000,000 Shares 15 441,885,106 92.99 4,522 475,200,000 100.00

Categories of Shareholders Local Individuals 4,158 286,400,987 60.27 Local Institutions 301 45,230,566 9.52 Foreign Individuals 57 651,580 0.14 Foreign Institutions 6 142,916,867 30.07 4,522 475,200,000 100.00

1.2 Directors’ Shareholding as at 31 March 2012

(Rs.) (%)

Mr. R.A. Fernando 12,600 0.003 Mr. M.D.D. Pieris – – Mr. I.C. Nanayakkara (also Alternate to Mr. R.M. Nanayakkara) 59,895,500 12.60 Mrs. K.U. Amarasinghe 52,432,000 11.03 Mrs. R.L. Nanayakkara – – Mr. R.M. Nanayakkara 141,433,220 29.76 Mr. W.D.K. Jayawardena – – Mr. H. Ichida – – Mr. R.N. Asirwatham 5,000 0.00 Mr. M. Kawano – – Mr. T. Yamazaki (Alternate to Mr. M. Kawano and Mr. H. Ichida) – –

1.3 Highest, Lowest and Closing Share Prices as at 31 March 2012

As at 31.03.2012 As at 31.03.2011 (Rs.) (Rs.)

Highest during the year 128.00 1,600.00 Lowest during the year 49.00 114.00 As at end of the year 54.00 119.60

LOLC 2011/12 REPORTS & ACCOUNTS 231 Share Information

Major Shareholders of the Company as at 31 March 2012

2012 No. of % of Issued Name of Shareholder Shares Capital

1. ORIX Corporation 142,560,000 30.00 2. Mr. R.M. Nanayakkara 141,433,220 29.76 3. Mr. I.C. Nanayakkara 59,895,500 12.60 4. Mrs. K.U. Amarasinghe 52,432,000 11.03 5. Employees’ Provident Fund 14,810,236 3.11 6. Sri Lanka Insurance Corporation Ltd. - Life Fund 10,762,560 2.26 7. Mrs. I. Nanayakkara 5,215,020 1.09 8. Employees’ Trust Fund Board 3,749,950 0.78 9. Mr. G.G. Ponnambalam 2,089,920 0.44 10. HSBC/Charitha Prasanna De Silva 2,000,000 0.42 11. HSBC/Romesh Charitha De Silva 1,800,000 0.37 12. Bank of Ceylon - No. 2 Account 1,546,000 0.32 13. Mr. M. Radhakrishnan 1,500,000 0.31 14. Bank of Ceylon - No. 1 Account 1,083,900 0.22 15. Swastika Mills Ltd. 1,006,800 0.21 16. DPMC Assetline Holdings (Pvt) Ltd. No. 1 Account 866,900 0.18 17. Mrs. S.N. Fernando 818,440 0.17 18. Ms. F.A.J.A. Cader 759,000 0.16 19. HSBC/Chandana Lal De Silva 722,000 0.15 20. Mr. S. Nadesan 660,000 0.13 445,711,446 93.79 Others 29,488,554 6.20 Total 475,200,000 100.00

Public Holding The percentage of shares held by the public is 15.498%.

232 LOLC 2011/12 REPORTS & ACCOUNTS Glossary

Terms Earned Premium Interest Cost The proportion of net written premium The sum of monies accrued and payable to A recognised for accounting purposes as the sources of borrowed working capital. Accrual Basis income in a given period. Recognising the effects of transactions and Interest in Suspense events when they occur, without waiting Interest income of non-performing portfolio; F for receipt or payment of cash or cash these interests are accrued but not equivalent. Fair Value considered as part of income. Fair value is the amount for which an asset Amortisation could be exchanged or a liability settled Investment Property Amortisation is the systematic allocation between knowledgeable, willing parties in an Investment property is property (land or of the depreciable amount of an intangible arm’s length transaction. a building - or part of a building - or both) asset over its useful life. held (by the owner or by the lessee under a Finance Lease finance lease) to earn rentals or for capital Associate A lease that transfers substantially all the appreciation or both, rather than for use in An associate is an entity, including an risks and rewards incidental to ownership of the production or supply of goods or services unincorporated entity such as a partnership, the asset to the lessee. Title may or may not or for administrative purposes; or sale in the over which the investor has significant eventually be transferred. ordinary course of business. influence and that is neither a subsidiary nor a joint venture. G J Goodwill Joint Venture C Any excess of the cost of the acquisition over A joint venture is a contractual arrangement Cash Basis the acquirer’s interest in the fair value of the whereby two or more parties undertake Recognising the effects of transactions and identifiable assets and liabilities acquired as an economic activity which is subject to events when receipt or payment of cash or at the date of the exchange transaction and joint control. cash equivalent occurs. is recognised as an asset. L Cash Equivalents Gross Dividend Short-term highly liquid investments that are The proportion of profit distributed to Lease readily convertible to known amounts of cash shareholders inclusive of tax withheld. A lease is an agreement whereby the lessor and which are subject to an insignificant risk conveys to the lessee in return for a payment in change in value. Gross Portfolio or series of payments the right to use an Total rental instalment receivable of the asset for an agreed period of time. Consolidated Financial Statements advances granted to customers under Financial Statements of a Group presented leasing, hire purchase, instalment sales and as those of a single company. loan facilities. M Minority Interest Corporate Governance H Part of the net results of operations and The process by which corporate entities of net assets of a subsidiary attributable are governed. It covers the way in which Hire Purchase to interests who are not owned, directly power is exercised over the management A hire purchase is a contract between hirer or indirectly through subsidiaries, by the and direction of entity, the supervision of and financier where the hirer takes on hire Parent. executive actions and accountability to a particular article from the financier, with owners and others. the option to purchase the article at the conclusion of the agreed rental payments. N D Negative Goodwill I Any excess, as at the date of the exchange Depreciation transaction, of the acquirer’s interest in Depreciation is the allocation of the Insurance Provisions the fair values of the identifiable assets depreciable amount of an asset over its Amounts set aside on the basis of actuarial and liabilities acquired over the cost of the estimated useful life. Depreciation for the calculations to meet obligations to acquisition and is treated as income in the accounting period is charged to profit or loss policyholders. period it arises. for the period either directly or indirectly. Intangible Asset Net Portfolio An intangible asset is an identifiable non- Total rental instalment receivable excluding E monetary asset without physical substance interest of the advances granted to Executions held for use in the production or supply of customers under leasing, hire purchase, Advances granted to customers under goods or services, for rental to others, or for instalment sales and loan facilities. leasing, hire purchase, instalment sales and administrative purposes. loan facilities.

LOLC 2011/12 REPORTS & ACCOUNTS 233 Glossary

Non-Performing Portfolio Stated Capital Dividend Per Share (DPS) Facilities granted to customers who are in All amounts received by the Company or due Value of the dividend proposed and paid default for more than six months. and payable to the Company - (a) in respect out to ordinary shareholders divided by the of the issue of shares, (b) in respect of calls number of ordinary shares in issue. Share on shares. of current year’s dividend distributable to an O ordinary share in issue. Operating Lease Subsidiary Company An operating lease is a lease other than a Subsidiary is a company that is controlled finance lease. (power to govern the financial and operating E policies of an enterprise so as to obtain Earnings Per Share (EPS) benefits from its activities) by another Profit attributable to ordinary shareholders P company known as the Parent. divided by the weighted average number of Provision ordinary shares outstanding during the year. Substance Over Form Amounts set aside against possible losses Share of current year’s earnings attributable The consideration that the accounting on net receivable of facilities granted to to an ordinary share in issue. treatment and the presentation in Financial customers, as a result of them becoming Statements of transactions and the events partly or wholly uncollectible. should be governed by their substance and I financial reality and not merely by legal form. Interest Cover R Earnings before interest and tax divided by Reinsurance U interest charges. Ability to cover or service An arrangement whereby Insurers interest charges of the debtholders. Unearned Premium transferring portions of risk portfolios to other Premiums received by an insurer outside parties (Reinsurers) in order to reduce part the current accounting period (unearned or all of the liability assumed by the insurer M premium). Such premiums are not treated as under a policy or policies of insurance. Market Capitalisation income until they become earned during the Number of ordinary shares in issue period to which they relate. Related Parties multiplied by market value of a share. Total Parties are considered to be related if one market value of all ordinary shares in issue. party has the ability to control the other V party or exercise significant influence over the other party in making financial or Value Addition N Value of wealth created by providing leasing operating decisions. Net Asset Value Per Ordinary Share and other related services considering the Ordinary shareholders’ funds divided by the cost of providing such services. Related Party Transactions number of ordinary shares in issue. Book A transfer of resources or obligations value of an ordinary share. between related parties, regardless of Ratios whether a price is charged. Method of computation and indicates Non-Performing Facilities Ratio Total gross non-performing portfolio divided Residual Value C by total gross portfolio. Percentage of total The estimated amount that is currently gross non-performing portfolio against the Cost to Income Ratio realisable from disposal of the asset, after total gross portfolio. deducting estimated costs of disposal, if Operating expenses excluding provision for the asset was already of the age and in the bad and doubtful debts as a percentage of condition expected at the end of its useful life. total operating income, net of interest cost. P Efficiency of cost management in generating Price Earning Ratio (PER Ratio) Revenue Reserve income. Market price of a share divided by Earnings Reserves set aside for future distribution and Per Share (EPS). Number of years that would reinvestment. D be taken to recoup shareholders’ capital outlay in the form of earnings. Debt to Equity (Gearing) Ratio S Total debts divided by equity. The extent to Segmental Analysis which debt contributes to fund total assets, R Analysis of information by segments of compared to the contribution from equity. Return On Assets (ROA) an enterprise, specifically the different Net profits expressed as a percentage of industries and the different geographical Dividend Cover average total assets. Overall effectiveness areas in which it operates. Profit attributable to ordinary shareholders divided by gross dividends of ordinary shares. in generating profits with available assets; earning power of invested total capital. Shareholders’ Funds (Equity) Number of times dividend is covered by Total of issued and fully-paid ordinary share current year’s distributable profits. Return On Equity (ROE) capital and reserves. Net profit, less preference share dividends if any, expressed as a percentage of average ordinary shareholders’ funds. Earning power on shareholders’ book value of investment (equity).

234 LOLC 2011/12 REPORTS & ACCOUNTS Notice of Meeting

NOTICE IS HEREBY GIVEN THAT THE THIRTY THIRD ANNUAL GENERAL MEETING of the Notes: Company will be held on Tuesday, 18 September 2012 at 10.30 a.m. at the LOLC Auditorium, 1. A member entitled to attend and vote at for the following purposes: the Meeting is entitled to appoint a Proxy to attend and vote instead of him/her. A Proxy 1. To receive and consider the Report of the Directors and Statement of Accounts for the need not be a member of the Company. year ended 31 March 2012 with the Report of the Auditors thereon. 2. The completed Form of Proxy should be deposited at the Registered Office of the 2. To re-elect as a Director, Mr. R.A. Fernando who retires by rotation in terms of Article Company, No. 100/1, Sri Jayewardenepura 88 (i) of the Articles of Association of the Company. Mawatha, Rajagiriya, not later than 10.30 a.m. on Sunday, 16 September 2012. 3. To re-elect as a Director Mr. M. Kawano who retires by rotation in terms of Article 95 of 3. A Form of Proxy accompanies this Notice. the Articles of Association of the Company. 4. Special Notice was received by the Company 4. To re-elect as a Director Mrs. R.L. Nanayakkara, who retires in terms of Sections from a shareholder of the Company giving 210/211 of the Companies Act No. 7 of 2007. Special Notice has been received from a Notice of intention to move the following Resolution at the above Annual General shareholder of the intention to pass a resolution which is set out below in relation to her Meeting: re-election (see Note 4). “Resolved that Mrs. R.L. Nanayakkara who is 76 years be and is hereby re-elected 5. To re-elect as a Director Mr. R.M. Nanayakkara, who retires in terms of Sections a Director of the Company and it is further 210/211 of the Companies Act No. 7 of 2007. Special Notice has been received from a specifically declared that the age limit of shareholder of the intention to pass a resolution which is set out below in relation to his 70 years referred to in Section 210 of the re-election (see Note 5). Companies Act No. 7 of 2007 shall not apply to the said Director, Mrs. R.L. Nanayakkara.”

6. To re-elect as a Director Deshamanya M.D.D. Pieris, who retires in terms of Sections 5. Special Notice was received by the Company 210/211 of the Companies Act No. 7 of 2007. Special Notice has been received from a from a shareholder of the Company giving shareholder of the intention to pass a resolution which is set out below in relation to his Notice of intention to move the following Resolution at the above Annual General re-election (see Note 6). Meeting: 7. To reappoint as Auditors Messrs Ernst and Young, Chartered Accountants at a “Resolved that Mr. R.M. Nanayakkara who is 72 years be and is hereby re-elected remuneration to be fixed by the Directors. a Director of the Company and it is further specifically declared that the age limit 8. To authorise the Directors to make donations. of 70 years referred to in Section 210 of the Companies Act No. 7 of 2007 By Order of the Board, shall not apply to the said Director, Mr. R.M. Nanayakkara.”

6. Special Notice was received by the Company from a shareholder of the Company giving Notice of intention to move the following Resolution at the above Annual General Chrishanthi Emmanuel Meeting: Secretary “Resolved that Deshamanya M.D.D. Pieris who will be 75 years be and is hereby 20 August 2012 re-elected a Director of the Company and it is further specifically declared that the age limit Rajagiriya (Greater Colombo) of 70 years referred to in Section 210 of the Companies Act No. 07 of 2007 shall not apply to the said Director, Deshamanya M.D.D. Pieris.”

LOLC 2011/12 REPORTS & ACCOUNTS 235 Corporate Information

Name of the Company Rajah Mahinda Nanayakkara - Lanka ORIX Leasing Company PLC Non-Executive Director Hideo Ichida - Country of Incorporation Non-Executive Director Sri Lanka Masaaki Kawano - Non-Executive Director (Appointed 28 September 2011) Date of Incorporation Kazunori Okimoto - 14 March 1980 Non-Executive Director (Resigned 28 September 2011) Legal Form Takuma Yamazaki - A quoted public company with limited Non-Executive Director liability. (Alternate to Mr. H. Ichida and Mr. M. Kawano)

Company Registration No. Company Secretary PQ 70 Chrishanthi S. Emmanuel, FCIS, FCCS

Stock Exchange Listing Auditors The ordinary shares of the Company are Ernst & Young listed on the Colombo Stock Exchange of Chartered Accountants Sri Lanka. Lawyers Registered Office Julius & Creasy No. 100/1, Sri Jayewardenepura Mawatha, Nithya Partners Rajagiriya, Sri Lanka Registrars Head Office P.W. Corporate Secretarial (Pvt) Ltd. No. 100/1, Sri Jayewardenepura Mawatha, No. 3/17, Kynsey Road, Colombo 8. Rajagiriya, Sri Lanka Tel: 011-5880880 Principal Activities Fax: 011-2865606 (Gen.) Monitoring performance of investments in Website: www.lolc.com associate and subsidiary companies and performing support services. Directors Rohini Lettitia Nanayakkara - Bankers Non-Executive Chairperson Bank of Ceylon, People’s Bank, Ishara Chinthaka Nanayakkara - Standard Chartered Bank, Citibank N.A., Executive Deputy Chairman Hatton National Bank PLC, Hongkong & (Also alternate to Mr. R.M. Nanayakkara) Shanghai Banking Corporation, Waduthantri Dharshan Kapila Jayawardena - National Savings Bank, Deutsche Bank AG, Group Managing Director/CEO Nations Trust Bank PLC, DFCC Vardhana Kalsha Upeka Amarasinghe - Bank PLC, Commercial Bank of Ceylon PLC, Executive Director NDB Bank PLC, Public Bank of Berhad, Deshamanya Minuwanpitiyage Dharmasiri Sampath Bank PLC, Seylan Bank PLC, Dayananda Pieris - Pan Asia Banking Corporation PLC, Independent Director Union Bank PLC, ICICI Bank, MCB Bank, Ravindra Ajith Fernando - Independent Director State Bank of India, Indian Overseas Bank, Indian Bank Rajanayagam Nalliah Asirwatham - Independent Director (Resigned 10 May 2012)

236 LOLC 2011/12 REPORTS & ACCOUNTS Lanka ORIX Leasing Company PLC Form of Proxy

I/We ...... ………...... of

...... being a member/members of the Company hereby appoint ...... of

...... whom failing

Mrs. R.L. Nanayakkara of Colombo or failing her Mr. I.C. Nanayakkara of Colombo or failing him Mr. W.D.K. Jayawardena of Colombo or failing him Deshamanya M.D.D. Pieris of Colombo or failing him Mr. R.M. Nanayakkara of Colombo or failing him Mrs. K.U. Amarasinghe of Colombo or failing her Mr. R.A. Fernando of Colombo as my/our proxy to represent me/us and vote on my/our behalf at the Annual General Meeting of the Company to be held on 18 September 2012 and at any adjournment thereof and at every poll which may be taken in consequence of the aforesaid Meeting.

For Against

1. To receive and consider the Report of the Directors and Statement of Accounts for the year ended 31 March 2012 with the Report of the Auditors thereon.

2. To re-elect as a Director, Mr. R.A. Fernando who retires by rotation in terms of Article 88 (i) of the Articles of Association of the Company.

3. To re-elect as a Director, Mr. M. Kawano who retires by rotation in terms of Article 95 of the Articles of Association of the Company.

4. To re-elect as a Director, Mrs. R.L. Nanayakkara, who retires in terms of Section 210/211 of the Companies Act No. 7 of 2007.

5. To re-elect as a Director Mr. R.M. Nanayakkara, who retires in terms of Section 210/211 of the Companies Act No. 7 of 2007.

6. To re-elect as a Director Deshamanya M.D.D. Pieris, who retires in terms of Section 210/211 of the Companies Act No. 7 of 2007.

7. To reappoint as Auditors Messrs Ernst and Young, Chartered Accountants at a remuneration to be fixed by the Directors.

8. To authorise the Directors to make donations.

Dated this ……….………………….. day of ……………………, Two Thousand and Twelve.

...... Signature of Shareholder Notes: 1. A Proxy need not be a member of the Company. 2. Instructions as to completion appear on the reverse hereof.

LOLC 2011/12 REPORTS & ACCOUNTS 237 Form of Proxy

Instructions as to Completion 1. Please return the completed Form of Proxy after filling in legibly your full name and address, signing on the space provided and filling in the date of signature.

2. The completed Form of Proxy should be deposited at the Registered Office of the Company, No. 100/1, Sri Jayewardenepura Mawatha, Rajagiriya not less than 48 hours before the time appointed for the holding of the Meeting.

238 LOLC 2011/12 REPORTS & ACCOUNTS

Financial Calendar 2011/12

1st Quarter Results 2011/12 released on 15 August 2011 2nd Quarter Results 2011/12 released on 15 November 2011 3rd Quarter Results 2011/12 released on 15 February 2012 4th Quarter Results 2011/12 released on 31 May 2012 Annual Report for 2011/12 released on 24 August 2012 33rd Annual General Meeting on 18 September 2012

Proposed Financial Calendar 2012/13

1st Quarter Results 2012/13 will be released on 15 August 2012 2nd Quarter Results 2012/13 will be released on 15 November 2012 3rd Quarter Results 2012/13 will be released on 15 February 2013 Annual Report for 2012/13 will be released on June 2013 34th Annual General Meeting in June 2013

This Annual Report is Carbon Neutral

This Lanka ORIX Leasing Company PLC Annual Report has been produced by Smart Media The Annual Report Company whose greenhouse gas emissions resulting from the writing, designing, photography, production, project management, usage of paper and other raw materials, printing and transportation are offset using verified carbon offsets. www.lolc.com The Financial Highlights Diffeer nceer

For the year ended 31 March 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 LOLC 2011/12 REPORTS & ACCOUNTS

Group is... Performance Indicators (Rs. Mn) Profit before tax 290 402 572 709 998 1,183 1,247 2,841 8,282 10,327 Profit after tax 278 391 575 689 1,050 1,343 1,055 2,385 7,023 8,937 Total assets 7,038 8,987 10,706 16,227 24,484 32,994 46,287 75,371 111,813 145,288 LOLC 2011/12 New executions 3,189 4,740 5,591 10,064 13,340 14,320 14,906 21,963 47,392 58,233 REPORTS & ACCOUNTS Gross portfolio (rentals receivable) 6,867 8,517 10,112 14,806 23,057 29,282 44,824 47,351 70,077 98,941 Deposits from customers – 197 716 1,194 1,746 3,340 5,229 10,095 16,348 25,197 Outstanding borrowings 4,615 5,952 6,634 10,475 17,001 22,887 31,764 38,235 50,813 66,075 Non-performing portfolio 815 883 865 113 137 526 1,933 1,431 1,159 1,702 Return on equity (%) 17 21 27 26 31 30 19 26 37 39

Key Indicators (Rs. per share) Net asset value per share (adjusted) 3.60 3.92 4.92 6.10 7.96 10.78 12.65 16.63 27.35 40.59 Earnings per share (adjusted) 0.57 0.85 1.21 1.44 2.19 2.82 2.22 3.88 8.08 13.17

Company Performance Indicators (Rs. Mn) Profit before tax 256 418 562 677 910 841 582 491 1,898 4,423 Profit after tax 256 418 562 664 987 1,059 505 327 1,523 4,301 Total assets 5,981 7,617 8,747 13,298 20,889 28,996 31,335 29,738 31,153 36,662 New executions 3,189 4,427 4,972 8,858 12,068 12,127 12,170 4,569 5,036 3,926 Gross portfolio (rentals receivable) 6,757 8,082 9,144 12,858 19,851 25,056 25,185 17,958 11,897 7,704 Outstanding borrowings 4,113 5,396 6,025 9,824 16,250 22,273 24,850 23,087 22,379 23,894 Non-performing portfolio 815 883 865 113 137 443 538 769 545 500

Key Indicators (Rs. per share) Dividends per share 0.33 0.19 0.23 0.30 0.15 0.23 0.28 – – – Market price per share 7.35 6.00 8.50 10.10 10.75 11.78 6.95 16.50 119.60 54.00 No. 100/1 Sri Jayewardenepura Mawatha, Net asset value per share 3.53 3.88 4.86 6.00 7.77 10.02 10.74 11.42 15.67 24.73 Rajagiriya,

Sri Lanka. (Times) Debt to equity ratio 2.45 2.93 2.61 3.45 4.40 4.66 4.87 4.25 3.00 2.03 Tel: +94 11 5880880 Interest cover 1.52 1.85 2.56 1.96 1.63 1.28 1.14 1.16 1.80 2.74 Fax: +94 11 2865612 / 2868648 Dividend cover 3.30 4.50 5.09 4.64 13.86 9.53 3.79 – – –