Contents

• About Us 02 • Vision, Mission, Values 02 • Financial Highlights 03 • Chairman’s Review 04 • Chief Executive Officer’s Review 06 • Board of Directors 08 • Corporate Management 09 • Management Discussion and Analysis 11 • Risk Management 13 • Corporate Governance Report 23 • Annual Report of the Board of Directors on the Affairs of the Company 31 • Directors’ Statement on Internal Control 34 • Statement of Directors’ Responsibilities in Relation to Financial Statements 35 • Statement of Responsibility of the Chief Executive Officer and General Manager - Finance and Administration 36 • Board Audit Committee Report 37 • Board Integrated Risk Management Committee Report 39 • Board Remuneration Committee Report 40 • Board Related Party Transactions Review Committee Report 41

Financial Reports

• Independent Auditor’s Report 43 • Statement of Profit or Loss and Other Comprehensive Income 48 • Statement of Financial Position 49 • Statement of Changes in Equity 50 • Statement of Cash Flows 51 • Notes to the Financial Statements 52 • Ten Years at a Glance 108 • Share Information 110 • Glossary of Financial Terms 112 • Our Network 115 • Notice of Meeting 116 • Form of Proxy 119 • Corporate Information Inner Back Cover Swarnamahal Financial Services PLC is a Public Limited Liability Company incorporated in Sri Lanka on 14th January 2004, under the Companies Act No.17 of 1982, and re-registered on 16th September 2008 under the Companies Act No.7 of 2007. The Company is licensed by the Monetary Board of the Central Bank of Sri Lanka under the Finance Business Act No.42 of 2011 and listed on the Colombo Stock Exchange.

About Us To be one of the most trusted, innovative financial services provider in the country, understanding the pulse and financial needs of the people.

To create opportunities for everyone to uplift their living standards while ensuring superior long term value to our Vision stakeholders.

Customer Focus We provide personalized financial solutions for our Mision customers and always work towards to exceed their expectations. Service Excellence We are committed to achieve the service perfection with the highest standard of service quality. Continuous improvements and anticipation We are always doing the best today to create a better tomorrow for all our stakeholders. Value Direction All our efforts and courage are clearly in line with our direction. Ethics Our success is with ethics and not with our rights. Integrity We believe in fair dealings, honest and complete communication with our clients and aspire towards continuous improvement in our organization. Flexibility We are really persistent of our goals and flexible in our methods and approach. Teamwork We nurture individual talents to strengthen our teamwork to thrive on competition and challenges.

2 Annual Report 2018/19 Swarnamahal Financial Services PLC Financial Highlights

2019 2018 Rs. Rs. Financial Performance for the year (Rs. Mn) Gross Income 547 683 Net Profit / (Loss) before Tax (PBT) (29) (67) Income Tax Expense (1) 1 Net Profit / (Loss) after Tax (PAT) (28) (68)

Financial Position at the year end (Rs. Mn) Total Assets 1,665 2,559 Gold Loan Advances 999 1,071 Other loans and advances 88 489 Deposits 2,389 3,539 Shareholders’ Funds (1,161) (1,062)

Information for Ordinary Share (Rs.) Earnings / (Loss) (0.06 ) (0.14) Net Asset Value (2.32) (2.12)

Key Indicators Return on Average Shareholders’ Funds (%) (2.3) (6.6) Return on Average Assets (%) (1.3) (2.5) Cost to Income Ratio (%) 97.6 128.8

Capital Adequacy Ratios (as per CBSL regulations) Core Capital Ratio-Tier I (%) (185.2) (105.9) Total Risk weighted Capital Ratio -Tier I & II (%) (185.2) (105.9)

Statutory Ratios Shareholders’ Funds to Deposits (%) (48.6) (30.0) Liquid Assets Ratio (%) (2.7) 19.2

Annual Report 2018/19 Swarnamahal Financial Services PLC 3 Chairman’s Review

Dear Shareholders, further as the growth in import Specialized Leasing Companies (SLCs) It gives me a great pleasure to expenditure outpaced the rise in sector moderated during the first eight welcome all of you to the 14th Annual earnings from exports, although months of 2018 in an environment General Meeting of Swarnamahal earnings from services exports, of high interest rates, low economic Financial Services PLC and to present including tourism, and workers’ growth and natural calamities. The you the Audited Financial Statements remittances helped cushion the asset base of the sector slowed and the Annual Report for the external current account deficit to down with low credit growth, the financial year 2018/19. some extent. Amidst the widened reduction in the investment portfolio trade and current account deficits, due to a substantial sale of assets by which was partly due to the increased a distressed LFC and the decline in SRI LANKAN ECONOMY expenditure of fuel imports and available liquid assets. Capital and Sri Lanka’s economy grew at a imports of motor vehicles and gold, liquidity levels of the LFC and SLC moderate pace of 3.6 percent in the the balance of payments (BOP) sector were well above the minimum first half of 2018, following relatively also experienced pressure from the regulatory requirement. However, low growth of 3.3 per cent recorded emerging market selloff caused by asset quality declined during the first during the year 2017. Agricultural tightening global financial conditions eight months of the year reflecting the activities continued their rebound and the strengthening of the US impact of flood, nationwide drought in the first half of 2018 supported dollar. These developments resulted and slow economic growth. Necessary by favourable weather conditions in a sharp depreciation of the Sri action has been taken by the Central that prevailed during this period. Lankan rupee, and the Central Bank Bank to initiate key prudential The growth in industrial activities intervened in the market at times to measures with a view to reviving slowed, mainly due to the subdued prevent disorderly adjustment of the companies with weak financial performance in the construction and exchange rate while allowing demand positions and to safeguard depositors mining and quarrying subsectors. The and supply conditions to determine its and to ensure the long term stability expansion in services activities was direction. of the financial sector. broad-based, driven mainly by the growth of financial services, wholesale The economy gathered steam COMPANY REVIEW and retail trade and other personal gradually responding to the services activities. Meanwhile, an measures taken to facilitate domestic It was another challenging year for increase in the unemployment rate production, merchandise and services the finance industry in Sri Lanka, was observed during the first half of exports, as well as domestic and your company’s operations were also 2018. foreign investment. At the macro level, hampered due to significant obstacles the maintenance of low and stable faced in recent past that resulted Sri Lanka’s external sector experienced inflation under the envisaged Flexible constrains in financial performance a setback in the second and the third Inflation Targeting (FIT) framework, of the company. Nevertheless, our quarters of 2018, with moderate the competitive exchange rate, and stakeholders are pleased to notify foreign exchange inflows amidst the continuation of the government’s your company was able to secure increased import expenditure and fiscal consolidation efforts are much better position in the business higher capital outflows. Higher expected to ensure macroeconomic with improved financial performance than expected growth in import stability in the medium term. during the financial year under review. expenditure outpaced the increase in export earnings, resulting in a The financial performance during the INDUSTRY ANALYSIS considerable widening of the trade year under review was constrained deficit during the first eight months The performance of the Licensed significantly by notable external of 2018. The trade deficit widened Finance Companies (LFCs) and factors including the intervention

4 Annual Report 2018/19 Swarnamahal Financial Services PLC by the Central Bank of Sri Lanka of Sri Lanka and the Colombo Stock with effect from 02nd January 2018 Exchange. with the imposition of a severe regulatory actions not limited to ACKNOWLEDGEMENT deposit restriction which has severely It is important to note that these limited our ability to grow our asset breakthrough could not have been portfolios during the year under possible if the strong proactive role review. Nevertheless, such constrains is not taken by the Central Bank were encountered following the of Sri Lanka in helping to resurrect unfortunate series of events, resulting the much-needed harmony among the Company’s inability to comply the stakeholders of the Company. I with the Core Capital requirement express my heartfelt gratitude and despite the fact that thirty percent appreciation to the Governor, the of the deposit liability was paid out Director & staff of the Department of its own funds as permitted by the of the Supervision of Non-Banking Central Bank of Sri Lanka, in terms Financial Institutions and the of regulatory provisions. Further, it Management Panel appointed by was also the fact that the trading of the Central Bank of Sri Lanka for the securities of company was halted their continued support and prudent by the Colombo Stock Exchange due guidance to resurrect the Company. to non-availability of Independent Non- Executive Directors for the Board Further, my sincere appreciation goes and Board Sub committees of the to the fellow members of the Board Company. of Directors, the Chief Executive Officer and the senior management, The Management must be all other staff, all our depositors and commended for their unwavering other stakeholders of the company support and determination in for their exceptional commitment weathering this difficult period and extended to resurrect the Company. ultimately secure a much better I remain confident that Swarnamahal financial position for the year under Financial Services PLC will grow review. Having accepted the varied strength to strength as it is in the difficulties that were to follow over way to encompass strategic changes the past few years, significant efforts in near future and I look forward have already been instigated towards to rely on your continued support bring in a new investor, in consultation and commitment in fulfilling the with the Central Bank of Sri Lanka, to aspirations of all our stakeholders infuse fresh capital into the company during ensuing years. to meet the core capital requirement in terms of the direction issued by the Central Bank of Sri Lanka, appoint new Independent Non- Executive Directors for the Board and Board Sub- J.H. Edirisinghe Committees in terms of the regulatory Chairman requirements of the Central Bank 28th June 2019

Annual Report 2018/19 Swarnamahal Financial Services PLC 5 Chief Executive Officer’s Review

It gives me a great pleasure to present the business operations without their stands to infuse fresh capital into it to you the Annual Report for the year immense commitment, trust and strengthen the core capital, for which, ended 31st March 2019. confidence placed on us. the negotiations are now going on to finalize a proposal with a potential I would like to note, during the year Financial Performance investor in consultation with the under review, your company has Central Bank of Sri Lanka to infuse indicated an improved financial Despite the Challenges faced during fresh capital, change the ownership performance compared to the prior the recent past, your company was and appoint new directors into SFS in year. In January 2018, the certain able to record an interest income terms of the regulatory requirements, business operations of the company of Rs.539mn for the year 2018/19, hence it is expected that SFS would were delimited by the Central Bank compared to Rs.665mn reported be able to recommence the normal of Sri Lanka while directing to infuse during the year 2017/18. The business operations, during next few fresh capital into the Company, interest expense of the company months. We are confident that we to strengthen the Core Capital of was decreased by Rs.171mn to Rs. will be able to regain the brand image the Company. Further, a Panel of 297mn, during the year under review, and the normal business operations in Management was appointed to compared to Rs. 468 Mn reported near future along the proposed capital manage the affairs of the company, during the year 2017/18, resulted due infusion. by the Central Bank of Sri Lanka, with to reduction of deposit base along a view to safeguard the interests of with the repayment of 30% of the Appreciations the depositors and other creditors of principal amount of deposit liabilities the company and to ensure safety and and the delimitation of the interest I take the opportunity to express my soundness of the financial system. rate on fixed deposits by the Central sincere appreciation to the Chairman and the Board of Directors for their Our staff members at all levels had Bank of Sri Lanka. The total operating unstinted support and their guidance made sacrifices to do their best for expenses was also decreased by provided in strategic decision making the Company amidst the challenges Rs.8mn to Rs.267mn compared process. I also wish to express my faced in recent past. During the period to Rs.275mn reported during the appreciation to the Governor of under review, all branches/pawning financial year 2017/18. the Central Bank of Sri Lanka, the centers had engaged in carrying Director- Department of Supervision out most cost effective promotional Future Outlook of Non-Bank Financial Institutions campaigns to sustain the business Our main strengths are committed of the Central Bank of Sri Lanka and among the adverse challenges. It is and outmost dedicated staff who the Panel of Management appointed vital to note that we were able to are customer friendly and loyal to by the Central Bank of Sri Lanka improve our internal cash in flows the Company and also our Branch for their professional guidance and through collections and repay 30% Network with a trusted and loyal the assistance. I further extend my of the principal amount of deposit customer base. Your Company’s appreciation to our External Auditors, liabilities to the depositors to meet Brand name stands to command with M/S KPMG Chartered Accountants, their requirements to an extent that a track record in service excellence for the meticulous professionalism we were able through internal cash and a vast pool of confidence as one they have brought into the matter of inflows. Further, our loyal depositors of the most trusted financial service Auditing. had made many scarifications and providers in the financial services SFS would not be able to sustain in industry. Further, your company now My appreciation also extends to the

6 Annual Report 2018/19 Swarnamahal Financial Services PLC senior management team and all staff members of our company for their untiring commitment and the dedication which were instrumental in driving the company towards to the right direction despite the challenges faced during recent past. I would also like to thank to our shareholders, customers and all other stakeholders for their loyalty, continuous patronage and the trust that they have placed on us

George Samantha Chief Executive Officer 28th June 2019

Annual Report 2018/19 Swarnamahal Financial Services PLC 7 Board of Directors

Mr. J. H. Edirisinghe Mrs. A. D. Edirisinghe Chairman Executive Director

The Deputy Chairman of EAP Group of The Director of EAP Group of Companies. He counts over 34 years Companies. She counts over 29 of extensive experience in the fields years of experience in the fields of of Finance, Gold, Jewellery, Electronic Management and Finance. Media and Management.

Mr. A. S. Edirisinghe Mr. N. P. Edirisinghe Executive Director Executive Director

The Director of EAP Group of The Director of EAP Group of Companies. He is a Finalist of the Companies. He has an expert Chartered Institute of Management knowledge in Gold and other precious Accountants (UK) and a Member of metals and stones and counts over 29 the Film Association. He counts over years of extensive experience in the 29 years of experience in the fields fields of Gold, Information Technology, of Film Industry, Gold, Information Finance and Management. Technology and Finance.

Mr. S. M. Ganegoda Non-Executive Director

He is the Chief Executive Officer of ETI Finance Limited and was the Director/Chief Executive Officer of the Company from January 2009 to September 2013. He counts over 19 years of experience in the fields of Finance and Audit and holds the Business Management Degree from the University of Kelaniya. He is an Associate Member of the Institute of Chartered Accountants of Sri Lanka and Institute of Certified Management Accountants of Sri Lanka.

8 Annual Report 2018/19 Swarnamahal Financial Services PLC Corporate Management

Mr. George Samantha Mrs. Subhani Edirisinghe Mr. H. A. C. S. Kumara Chief Executive Officer Chief Manager - Deposit Mobilization Senior Manager - Branch Operations

He counts over 15 years of She counts over 18 years of He counts over 12 years of experience in the fields of Banking experience in the field of deposit experience in the field of and Finance and holds the B.Sc mobilization. She holds the B.Sc Non-Banking Financial Sector. Marketing Management (Special) Business Administration (Marketing Hons. Degree, from the University Special) Degree from the University of Sri Jayewardenepura. He is a of Sri Jayewardenepura. Member of the Chartered Institute of Marketing (MCIM) and Sri Lanka Institute of Marketing (MSLIM).

Mr. Wishva Mr. Sisira Munasinghe Wickramaarachchi Chief Manager - Credit General Manager – Finance and Administration He counts over 24 years of experience in the field of Banking He counts over 17 years of and Finance including three years experience in finance and business of service in the Gulf Region . He management in diversified fields is an experienced retail banker ranging from mass communication, with expertise in Credit, Branch manufacturing, BPO to more Operations, Credit Administration specialized in banking and finance and Recoveries. He started his and holds Fellow membership banking career at Seylan Bank in of The Chartered Institute of 1991. In 2015. he joined ETI Finance Management Accountants (UK) Limited, as an Assistant Manager with over 11 years of post- Credit and subsequently promoted qualifying experience. He holds a as Manager Credit Administration. BSc (Economics and Management) He holds a Diploma in Management, degree from University of London from the Open University of Sri (London School of Economics). Post Lanka. Graduate Diploma in Business and Finance Management from The Institute of Chartered Accountants (Sri Lanka) with a merit award and a MBA from Harriot Watt University (Edinburgh Business School) in Scotland. He has also completed a Certificate in Taxation conducted by Association of Accounting Technicians of Sri Lanka and Diploma in Treasury and Risk Management from the Institute of Bankers of Sri Lanka and Diploma in Taxation from the Sri Lanka Institute of Taxation.

Annual Report 2018/19 Swarnamahal Financial Services PLC 9 Corporate Management contd.

Mrs. Nirmala Maduwanthi Mr. Ruwantha Sampath Manager - Finance Manager - Operation

She counts over 14 years of He counts over 17 years of experience in the fields of Auditing experience in the fields of Auditing, and Finance and holds the Higher Finance and Branch Operations. He National Diploma in Accountancy is a member of the AAT Sri Lanka (HNDA), from the Sri Lanka (MAAT) and successfully completed Institute of Advanced Technological the intermediate level of institute of Education and she is reading for chartered Accountants of Sri Lanka. corporate level of Institute of Chartered Accountants of Sri Lanka.

Mr. Prasanga Wijenayake Mr. Lasika Sampath Manager - Recovery Manager – Gold Loan

He counts over 18 years of He counts over 12 years of experience in recoveries in the field experience in the field of NonBank of Non-Bank Financial Sector. Financial Sector.

10 Annual Report 2018/19 Swarnamahal Financial Services PLC Management Discussion and Analysis

REVIEW OF OPERATIONS Sri Lankan economy for 2018, with the rate. Tightening of the US monetary possible recovery of agricultural sector policy has already affected the World Economic Outlook which was badly affected by natural secondary market yields of ISBs disasters in 2017. However, according issued by Sri Lanka. Continuation of The global expansion has weakened. to the Department of Census and such outflows could exert pressure Global growth for 2018 is estimated Statistics the economy grew only by on the Sri Lankan rupee to depreciate at 3.7 percent, as in the October 3.3% during the first nine months of further against the US dollar and other 2018 World Economic Outlook (WEO) 2018 and thus the CBSL downgraded major currencies. In this backdrop, forecast, despite weaker performance the country’s growth projections for sourcing new financing from the in some economies, notably Europe the year in several times, following international market would be more and Asia. The global economy is quarterly economic performance, costly to the government and the projected to grow at 3.5 percent in to be 3.7% from its original stance. corporate sector. 2019 and 3.6 percent in 2020, 0.2 In addition, the ADB and the IMF and 0.1 percentage point below last declined their forecasts on Sri Lanka’s The government took several October’s projections. growth to 3.8% and 3.7% respectively measures to progress in its fiscal for 2018, considering unfavorable consolidation path. The Inland The global economy continues to domestic and external developments. Revenue Act, No. 24 of 2017 expand, but third-quarter growth has Sri Lanka’s economic performance in and the Revenue Administration disappointed in some economies. 2018 is not satisfactory relative to its Management Information System Idiosyncratic factors (new fuel regional peers, countries in South Asia (RAMIS) were introduced in emission standards in Germany, and Southeast Asia. Almost all the order to simplify, standardize and natural disasters in Japan) weighed counties recorded over 5% growth in rationalize tax standards. In addition, on activity in large economies. But 2018. Philippines, Viet Nam, Cambodia several measures were taken to these developments occurred against and India managed to continue their improve public debt management. a backdrop of weakening financial robust growth performance in 2018 However, achieving fiscal targets as market sentiment, trade policy as well. stipulated in the Budget 2018 would uncertainty, and concerns about be challenging due to delays in China’s outlook. While the December Financial System in Sri Lanka implementing several new levies, 1 announcement that tariff hikes have lower revenue collection from been put on hold for 90 days in the Global economic developments bring import duties, increased expenditure US-China trade dispute is welcome, many challenges for Sri Lanka and the on interest payments and natural the possibility of tensions resurfacing stability of the Sri Lankan financial disaster related relief spending. in the spring casts a shadow over system due to its high exposure to Performance of the fiscal sector global economic prospects. While the international markets. Capital outflow, showed improvements in spite of US Federal Reserve raised the target higher financing costs and significant the slippages observed. Despite range for the federal funds rate to depreciation of the rupee are some the fiscal consolidation efforts, the 2.25–2.50 percent in December, it of the major stability concerns. government revenue to GDP ratio signaled a more gradual pace of rate The increase in commodity prices, declined to 6.4 per cent during hikes in 2019 and 2020. particularly due to increase in global the first half of 2018 from 6.7 per oil prices, and upward revision to cent in the corresponding period of Sri Lankan Economic Outlook energy prices and associated second 2017 mainly due to the decline in round effects posed upside risks on tax revenue from import duties. The Asian Development Bank (ADB) inflation. However, the recent decline However, total revenue in nominal and International Monetary Fund in oil prices in the global market terms increased by 5.1 per cent to Rs. (IMF) also initially forecasted a growth may ease the pressure on inflation 920.8 billion during the first half of of 4.2% and 4.8% respectively for the amidst depreciation of the exchange 2018 from Rs. 876.3 billion recorded

Annual Report 2018/19 Swarnamahal Financial Services PLC 11 Management Discussion and Analysis contd.

in the corresponding period of the significant reduction in the staff carder Monetary Board of Central Bank of Sri previous year. with the high attrition levels during Lanka. Further, three tranches of 10% the reporting period. of the total deposit liability together COMPANY PERFORMANCE with accrued interest thereon was Impairment for Loans and paid to the depositors as directed by Interest Income Others the Monetory Board of the Central Bank of Sri Lanka during the period The Interest income of the company The impairment of Rs.23.4mn was under review. stood at Rs. 539mn for the financial reported during the year under review year 2018/19 compared to Rs. 665mn in line with the SLFRS -9 first time The Directors of the Company is reported during the year 2017/18. Out adoption with effect from 01st April now negotiating and finalizing a of total interest income, over 77.9% 2018 with the first day impact up to proposal with a potential investor in of the income was generated through 01st April 2018 was amounting to consultation with the Central Bank Gold Loans, 16.07% from loans and Rs.72mn was adjusted to retained of Sri Lanka to infuse fresh capital, advances and the other balances in earnings, compared to Rs.2mn change the ownership and appoint financial assets. provisioning reversal reported during new directors into SFS in terms of the the financial year 2017/18. regulatory requirements. Interest Expenses We are confident that the prospective The Interest Expense of the Company Loans and Advances investor and the Board of Directors was significantly decreased and stood A significant portion of the Company’s will take appropriate steps to improve at Rs. 297mn during the current earning assets portfolio consist of gold the performance of the company year compared to Rs. 468mn in loans which was stood at Rs.1, 015mn significantly during ensuing years. the preceding financial year. This as at 31st March 2019, compared to significant reduction was mainly driven Rs.1, 087mn reported at the end of by 30% payment of the capital amount the prior year whilst the Company's of fixed deposits liabilities and the other Loans and advanced portfolios; restructured interest rates set forth by Hire Purchase, Leases, term loans and the Central Bank of Sri Lanka, which mortgage loans including Personal is way below the prevailed market Loans were stood at Rs.285mn as interest rates in Non-Bank Financial at 31st March 2019, compared to Institutions as partial fulfillment of Rs.591mn at the end of prior year. the enforcement action taken on the This significant decrease in lending public deposit portfolios with no new portfolios were mainly reported due to deposits were ascertained during the the restrictions imposed by the Central year under review. Bank of Sri Lanka.

Operating Expenses Future Prospects The total operating expenses was The granting of certain credit facilities stood at Rs.146mn for the current were halted due to the restrictions financial year, compared to Rs.164mn imposed by the Central Bank of Sri reported during the preceding Lanka. The Company’s operation financial year. The personal expenses was undertaken by the Panel of was stood at Rs.98mn for the year management appointed by CBSL with under review compared to Rs.113mn effect from 02nd January 2018 in reported during the prior year due to terms of the direction issued by the

12 Annual Report 2018/19 Swarnamahal Financial Services PLC Risk Management

The Board is the apex body which sets Risk Governance effective implementation of the risk the tone for effective risk management management function is carried out in the Company. Integrated Risk The Board of Directors is primarily through the Board Integrated Risk Management Committee with the responsible for the overall risk Management Committee (BIRMC) delegated authority of the Board management and for approving the with the support from the Corporate plays the oversight role by reviewing Compliance and Risk Management Management team of the Company. effectiveness of the Risk Management Strategies. The Board of Directors Framework. Board is responsible assumes overall responsibility The Compliance and Risk Management for setting the risk appetite for the in managing risk through; Board division is mainly responsible for Company. Risk appetite is the level Integrated Risk Management implementing and maintaining of risk that the Company is willing Committee (BIRMC) which drives the risk related procedures to ensure to accept in achieving its objectives Risk Management process presided an independent control process and the risk tolerance levels are the by a nominated Director and key is maintained. The division works defined limits of such risk appetite Corporate Management Executives, closely with the Board Integrated Risk levels. The Company’s risk appetite the Board Audit Committee (BAC), Management Committee (BIRMC) to framework is influenced by the factors Assets and Liability Management ensure that procedures are compliant such as Company’s vision, mission, Committee (ALCO) & Executive with the overall Compliance and Risk values, key strategies, business Credit Committee which comprises Management Framework. model, key stakeholder expectations, of Corporate Management SFS takes every aspect to capture and risk capacity, regulatory changes team implement an effective, measure risks, monitor their impact and external environment etc. The comprehensive and strong internal in real time, manage their outcome Company will remain committed control system, providing reasonable to get the competitive advantage to to maximise shareholder value by assurance that assets are safeguarded, remain in the business of financial growing its business in line with the transactions are authorized and institutions. At our business units Board determined Risk Appetite. properly recorded and irregularities every manager is responsible for are either prevented or detected establishing and implementing Risk is the main cause of uncertainty within a reasonable period of time. in any Organization. Thus, companies risk management policies and increasingly focus more on identifying These committees regularly review practices within their units. We have risks and managing them before they specific risk areas and analyze categorized key risks faced by us into even affect the business. The ability to regular reports on internal controls, three main risk silos, Credit Risk, manage risk will help companies act risk management, portfolio trends, Market Risk and Operational Risk. more confidently on future business policies, delegated authority limits Apart from these three risks, Liquidity decisions. The knowledge of the risks along with the process of internal and Risk, Legal Risk, Reputation Risk, they possess will give them various external audits processes. Regulatory /Compliance Risk, Strategy options on how to deal with potential Risk inter-alia are the key risks faced problems. A robust governance In principle, the Board of Directors by Our Company. framework is the cornerstone for the is responsible for maintenance of During the current financial year we delivery of effective risk management prudent risk management mechanism took several steps to strengthen the and remains as a priority which is and orderly implementation of the existing risk management structure an integral part of business as a key risk framework within the Company. which facilitates for a risk-based strategic objective at Swarnamahal The Board approves the policies, decision making in an objective Financial Services PLC (SFS). strategies and systems and operational approach for risk management. The manner which shall come in to

Annual Report 2018/19 Swarnamahal Financial Services PLC 13 Risk Management contd.

effect from the ensuing financial year, such as implementation of the Burglary alarm system, deployment of new security services, as extra precautionary measures taken to mitigate the risk of the business functions. The Risk & Compliance division is responsible for carrying out the overall risk management function of the Company at operational levels.

Terms of Reference (ToR)

The TOR clearly set out the Objectives, Risk Management Framework, Authority / Delegations, Responsibilities, Composition, Meeting Frequency & Quorum, Agenda & Minutes, and Reporting Procedures of the Committee.

The risk- based decision making is well-supported by the following risk related committees functioning within the Company;

Risk Management Framework

Committee Key Objectives Board Integrated • To oversee the risk management function in line with the Board approved policies and Risk Management strategies. Committee (IRMC) • To ensure that all risks including credit, market, liquidity, operational and strategic risks are managed on a regular basis using appropriate risk indicators and MIS reports. • To ensure the risks of the Company are within the prudent levels decided by the Committee, based on the Company’s risk appetite and the regulatory and supervisory requirements. • To monitor and review all the risk exposures and risk related policies/procedures affecting credit, market and operational areas • More details are given in the Integrated Risk Management Committee Report in page 39. Board Audit The Board Audit Committee Committee (BAC) • Reviews the Audited Financial Statements, Accounting Policies, emerging accounting issues and disclosures. • Reviews the External Auditor’s Management Letter together with the Management Response • Discusses with the External Auditor regarding the issues, problems and reservations arising from the Interim and Final Audits. • Ensures that a sound reporting system is in place to provide timely information to the Board of Directors, Regulatory Authorities, Management and Stakeholders. • Reviews the performance of the Internal Audit Function, adequacy of the scope, resources and the authority of the Internal Auditors. • More details are given in the Board Audit Committee Report in pages 37 and 38. Asset-Liability • To analyze, review and mitigate the assets- liability mismatch risk. Management • To manage the lending and borrowing rates, statement of financial positions, items including Committee (ALCO) Assets and Liabilities, Capital structure and Liquidity.

14 Annual Report 2018/19 Swarnamahal Financial Services PLC Committee Key Objectives

Executive Credit • To review and approve the credit policies/ procedures recommended by the CEO to ensure Committee that all credit portfolios are properly managed within the lending strategies of the Company. • To review and monitor the Company’s Non-Performing Advances (NPAs) and initiate proper credit risk mitigating strategies. • To identify key credit risks, evaluate the credit worthiness and prepare credit risk limits and parameters for the approvals of the Board of Directors. Board Related Party • Reviewing in advance all proposed related party transactions of the Company except those Transaction Review explicitly exempted by the TOR; committee • Adopting policies and procedures to review related party transactions of the Company and overseeing existing policies and procedures; • Establishing guidelines to be followed by the senior management in respect of ongoing related party transactions; • Discussion of a proposed related party transaction for which he or she is a related party, unless such director is requested to do so by the Committee for the express purpose of providing information thereon to the Committee • Ensuring that immediate market disclosures and disclosures in the Annual Report as required by the applicable rules /regulations are made in a timely and detailed manner. • More details are given in the Board Related Party Transaction Review Committee in page 41. Risk Performance

The major risk of the Company is exposed to be Credit, Market, Liquidity, and Operational and Strategic risk. Company always tries to mitigate those risks using effective and efficient procedures as well as employees have an updated knowledge about the Risk Management culture. The risk mitigation procedures and risk performance for each of these types of risks are presented in detail as follows.

Board of Directors

Board Related Party Board Intergrated Board Audit Board Remuneration Risk Committee Committee Transaction Review Committee Committee

CEO and corporate Internal Management Auditor

Invesment/ALCO Executive Credit committee Committee

Annual Report 2018/19 Swarnamahal Financial Services PLC 15 Risk Management Framework

Credit Risk Market Risk Operational Risk Other Risk

• Counter Party Risk Liquidity Risk • Human Error • Capital Inadequacy Risk • Credit Appraisal • Founding Risk • Negligence • Disaster Risk / Force • Exposure Risk • Market Conditions • Audit Compliance Risk Majeure • Monitoring Gaps • Time Risk • Booking Error • External Credit Rating • Recovery Risk • Business Process Design • Human Resources Management Risk • Sector Downturns Forex Risk • Customer Relationship • Strategy and Business • Security Realization Risk • FX Rate Management Environment Risk • Gap Risk • Counter Party Failure • Event Risk, Group • Confidentiality Risk • Settlement Risk Risk,Legal Risk • Distribution Channel • Regulatory Risk, Interest Rate Risk • Documentation Risk Competition Risk • Basis Risk • Execution Risk • Management • Prepayment Risk • Information Common • Risk, Organisation Risk Risk • Re-pricing Risk • Information Security Risk • Yield Curve Risk • Methodology Error • Model Error Other Market Risk • Money Laundering • Commodity Risk • Product Complexity • Country Risk • Settlement Error • Equity Position Risk • Security Risk • Limits Risk • Training Gaps • Price Volatility • Volume Risk • Common Interface Risk • Connectivity Failure • System Customisation Risk • Telecom Failure • Third party/Wonder Failure for Non-IT Outstanding • Service Failure • Project Management Risk • Compliance Risk • Accounting/Taxation Risk

16 Annual Report 2018/19 Swarnamahal Financial Services PLC Risk Management Control Matrix

Mitigation Identified Risk Impact Assessment Control Measures 01 Credit Risk • It is the • Rise in Non • Pre-credit • Insurance cover • Review of possibility of Performing appraisals. over assets Executive Credit financial loss Advances.(NPA) • Post-credit financed and Committee resulting from • Increase in loan portfolio collateral offered • Credit Policies/ the failure or loss provision. reviews. • Mortgage Delegation unwillingness of • Escalation of Cost • Review of protection cover Authority and a counterparty of Funds and product/ for borrowers for Credit Circulars to meet the Break even rates. sect oral loan value. • Post – Credit contractual concentration • Cap on Credit Monitoring of obligations to • Decline in and analysis. Concentrations Conditions/ the Company profitability. Product /Sector- covenants of and the risk that • Erosion of Share • Review of wise. advances and collateral will not Holder Funds/ Delegation of renewal of compensate such Equity. Authority. • Collateral Insurance cover claims. Management, independent pre over assets/ • Apart from risk credit inspection, collateral of default, credit valuation of financed. risk stems from vehicles financed concentration (VIR) and of risk that immovable arises from properties either uneven (PIR) offered as distribution of security. exposures to its borrowers or from uneven distribution of exposures to particular sectors, regions, industries or products.

Annual Report 2018/19 Swarnamahal Financial Services PLC 17 Risk Management Control Matrix contd.

Mitigation Identified Risk Impact Assessment Control Measures 02 Liquidity risk • Liquidity risk is • Possible Non • Monitoring of • A key element • Asset and the potential Payment of capital daily Cash flow of Liquidity Risk Liability vulnerability and interest statements Management is committee of a financial on maturity / and daily monitoring and (ALCO) IS institution for Non Payment of Bank balances assessing the overseeing not being able to borrowers well through treasury firm’s current the mismatch fund increases had fallen due/ Operations and future fund of potential in assets and Non payments of requirements maturities and meet contractual other creditors including debt allocates of and contingent before due dates obligations and the assets to financial planning for mitigate the risk • Since liquidity obligations any unexpected of default and risk arises from as and when funding needs, non- payments mismatches in they fall due regardless of of the overdue the timing of cash without incurring whether they payments. Also flows, effective unacceptable arise from firm- it manages management losses. specific factors, the lending of liquidity is or from systemic and borrowing considered • Liquidity risk is (economy-wided) interest rates of utmost highly dependent factors. optimizing on company’s importance to liquidity position. specific ensure confidence characteristics and smooth such as the functioning maturity profile of Company’s and composition operations. of the company’s assets and liabilities, the quality and marketable value of its liquidity buffer and broader market factors

18 Annual Report 2018/19 Swarnamahal Financial Services PLC Risk Management Control Matrix contd.

Mitigation Identified Risk Impact Assessment Control Measures 03 Interest Rate Risk Interest rate risk is Possible repricing The Company The objective of interest Asset and Liability the potential negative of the deposit monitors the rate risk management is committee (ALCO) impact on the Net liabilities and sensitivity of net to maintain earnings while will monitor the Interest Income borrowings interest income improving the ability to pricing of the core and it refers to the higher than due to changes absorb potential loss and business assets vulnerability of an potential in inters rate to ensure the adequacy and pricing of the institution’s financial repricing of core and ensure that of the compensation deposit rates while condition due to the business assets variation of received for the risk taken. focusing on the Net movement in interest which results in managed within Interest margins to rates. Changes in reduction in Net the appropriate be maintained at interest rates affect Interest Margins. levels. minimum Industry earnings, value of levels. assets/ liability, off- balance sheet items and the cash flows.

04 Operational Risk Operational risk can • Losses due to Extensive on- Some of the key Internal “Internal Control be defined as risk frauds, mis- going training Controls which are in place Matrix” developed of losses resulting conduct and is provided to for mitigating Operational with the assistance from inadequate or negligence ensure that Risk are: of KPMG is used inefficient internal the staff is fully for risk based • Losses due to • Appropriate processes, people aware of their testing for future poor quality of segregation of duties and systems or from responsibility compliance and credit docu- to carry out a process external events. for complying avoids risk of mentation and without independent with the correct operational defects. legal docu- review and to prevent operational mentation. conflicts of interest. Following procedures in • Number of committees in order to optimize • Setting of appropriate customer force for control operational risk limits and controls complaints purposes ; efficiency and along with the and law suits. individual documented policies • Assets and • Frequency of accountability at and procedures, Liability systems break all levels of the internal circulars and Committee downs and Company. monitoring the risks • Executive Credit costs. and adherence to limits Committee on a regular basis. • BIRMC, • Regular MIS reports BAC,RPTRC to capture exceptional transactions and other risk events for management’s investigation.

Annual Report 2018/19 Swarnamahal Financial Services PLC 19 Risk Management Control Matrix contd.

Mitigation Identified Risk Impact Assessment Control Measures 05 Regulatory and Compliance Risk Regulatory and Reprimand / Regular reviews Taking prompt action Controls are being compliance risk is Restrictions on by the Risk/ through internal monitored and observed as the expansion of compliance division circulars. reviewed through potential threat business and and internal audit following high Enhancement to the earnings or imposing fines and division regarding profile committees/ of IT system to business resulting penalties. compliance issues/ key management formalize compliance from violations or returns to CBSL and personals with monitoring & infringement of other regulatory regular checks; process. laws, regulations or authorities. 1. Board Meetings stipulated practices and standards within 2. Board Audit the company, industry Committee and government. 3. Board IRMC It could even lead 4. Compliance to loss of earnings Officer and business opportunities, tarnished Company image and imminent lawsuits.

06 Legal Risk Losses due to legal risk Financial loss Assessment of Strengthening the Controls are being arise from litigation due to litigation, recoverability staff of Legal Division monitored through against the Company, documentation of money from and their capacities following high faulty documentation errors etc. litigation from building to mitigate profile committees/ or business not being borrowers. potential Legal risks key management conducted as per the and issues, if any. personals with Monitoring applicable laws or regular checks; progress of Legal / Monitoring of legal regulations. Arbitration cases. recovery process/ • Legal Officer collection timely • ECC, BIRMC & BAC committees

20 Annual Report 2018/19 Swarnamahal Financial Services PLC Risk Management Control Matrix contd.

Mitigation Identified Risk Impact Assessment Control Measures 07 Reputational Risk • Reputational risk is the • Decline in Regularly monitor • Public relations • Impacts are potential damage to Deposit base/ the responses / Advertising/ being regular- the company, result- business volume from the Brand Building ly monitored ing in loss of earnings • Negative per- customers and campaigns and appreciate or adverse impact on ception from general public on • Business Impact actions are being market capitalization as rating agencies, the perception of Analysis -Business taken timely. a result of stakeholders fund providers the company Continuity Plan • Training of Staff taking a negative view and regulators (BCP). at all levels are of the Company or its • Intensifying provided. actions. Corporate • Adverse publicity to Governance company, its products, Framework. staff etc, thereby cre- ating negative image among General Public, Customers, Regulators, Credit Rating Agencies etc

08 Human Resources Risk • Being a service ori- Loss of business Employee • Company con- Company has ented entity one of due to untimely satisfaction ducts manpower formulated a the Company’s main exit of valuable survey planning in line comprehensive strengths is human staff with expansions Human Resource Empowerment resources. Thus, the and detailed Policy which Cost of ineffective of the staff with Company pays special pre-employment encompasses contribution to a job rotation attention in mitigating screening. Mea- the procedure the business and policy framework risks associated with it. sure the employ- for manpower operations of the ee feedback at planning, • Failure to determine company. exit interviews. recruitments, the appropriate mix of • Continuous focus grievances handling skills required imple- etc. menting our strategy and effort has and the consequent been extended in failure to recruit or de- order to ensure velop the right mix of that effective appropriately qualified recruitment is people, or high levels carried out while of staff turnover, could providing an adversely affect our effective induction ability to operate effec- to the Company’s tively in the market. corporate culture

Annual Report 2018/19 Swarnamahal Financial Services PLC 21 Risk Management Control Matrix contd.

Mitigation Identified Risk Impact Assessment Control Measures 09 Information Technology Risk

The technological Loss of business due IT system error A comprehensive In order to be risk arises from to the unavailability checklists have review of IT controls prepared in terms non- availability of IT of the IT systems been implemented was already of mitigating system, System break to sustain the & monitored undertaken by possible losses, downs, disruptions operations. with the help the company with reducing the and not keeping of the service external consultants likelihood of abreast with the providers in core and remedial occurrence and latest technology and banking system measures are to recover from delivery channels. for improvements being taken where disruptive incidents and modifications appropriate on of system failures, a timely. immediate basis. Business Continuity Plan (BCP) has been established encompassing of planning, establishing, monitoring and continually improving the management system in relation to business continuity.

22 Annual Report 2018/19 Swarnamahal Financial Services PLC Corporate Governance Report

Good corporate governance creates a transparent set of rules and controls in which shareholders, directors and officers have aligned objectives. The corporate governance framework guides the company in formulating, communicating and achieving its corporate strategies and objectives. The Board of Directors is responsible for the governance of the company and developing and establishing an effective governance framework in reviewing and streamlining systems and controls to provide transparency and accountability and, in ensuring adoption of best practices focusing on its stakeholders and in creating shareholder value.

We have continuously refined our structure and systems to ensure governance on the lines as defined, aware at all time that we are accountable to our stakeholders and the general public.

Board of Directors

Board Audit Board Integrated Board Board Related Party Committee Risk Management Remuneration Transactions Review Committee Committee Committee

Minimum disclosures in terms of the Finance Companies (Corporate Governance) Direction No. 3 of 2008 issued by the Central Bank of Sri Lanka (CBSL).

CBSL Description Compliance Status Section 10. DISCLOSURES 10 (1) The Board shall ensure that a. Annual Audited Financial Statements and periodical a. Complied with ; The Annual and Interim Financial Statements are prepared and published Financial Statements have been prepared in accordance with the formats prescribed by the and published in accordance with the supervisory and regulatory authorities and applicable formats prescribed by the supervisory accounting standards and that and regulatory authorities and applicable b. Such statements are published in the newspapers in Accounting Standards. an abridged form, in Sinhala, Tamil and English. b. Not Complied

10 (2) a. A statement to the effect that the Annual Audited Complied with Financial Statements have been prepared in line � statement to this effect has been included in with applicable accounting standards and regulatory the Statement of Directors’ Responsibility in requirements, inclusive of specific disclosures. page 35.

Annual Report 2018/19 Swarnamahal Financial Services PLC 23 Corporate Governance Report contd.

CBSL Description Compliance Status Section (b) A report by the Board on the finance company’s internal Complied with control mechanism that confirms that the financial This report is contained in the Directors’ reporting system has been designed to provide a statement on Internal Control over Financial reasonable assurance regarding the reliability of financial Reporting in page 34. reporting and that the preparation of financial statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements. (c) The External Auditor’s certification on the effectiveness Not Complied of the internal control mechanism in respect of any statements prepared or published. (d) Details of Directors, including Names, Transactions with Complied with the Finance Company. This has been included in the “Annual Report of the Board of Directors on the affairs of the Company” in pages 31 to 33 and in the corporate information.

(e) Fees and remuneration paid by the finance company to Complied with the Directors in aggregate published in the Annual Report. The fees & remuneration paid to the Directors has been disclosed in Note No. 32.2 to the Financial Statements as given in page 98. (f) Total net accommodation as defined in 9(4) outstanding Complied with in respect of each category of related parties and the The total net accommodations granted to net accommodation outstanding in respect of each related parties are disclosed in Note No. 32.4 to category of related parties as a Percentage of the finance the Financial Statements in page 99 Company’s capital funds. (g) The aggregate values of remuneration paid by the Complied with finance company to its key management personnel and Disclosed in Note No. 32.2 to the Financial the aggregate values of the transactions of the finance Statements in page 98. company with its key management personnel during the financial year, set out by broad categories such as remuneration paid, accommodation granted, deposits or investment made in the finance Company. (h) A report setting out details of compliance with prudential Complied with requirements, regulations, laws and internal controls and Status of compliance with prudential measures taken to rectify any material non-compliance. requirements, regulations and laws are set out in the “Annual Report of the Board of Directors on the Affairs of the Company” in page 33. (i) A statement of the regulatory and supervisory concerns on Not Complied lapses in the finance company’s risk management, or non- There were supervisory concerns reported. compliance with the Act, and the rules and directions that The Company is now in a process of rectifying have been communicated by the Director of Supervision such concerns in line with the regulatory of Non-Bank Financial Institutions, if so directed by the requirements. The details of such concerns are Monetary Board to be disclosed to the public, together given in the “Independent Auditors’ Report” in with the measures taken by the finance company to page 43 to 47. address such concerns.

24 Annual Report 2018/19 Swarnamahal Financial Services PLC CBSL Description Compliance Status Section (j) The External Auditor’s certification of the compliance with Not Complied the Act and rules and direction issued by the monetary board published in the annual corporate governance report.

Compliance with the section 7.6 of continuing listing requirements of the Colombo Stock Exchange.

CSE Description Compliance Status Section 7.6 (i) Names of the Directors during the financial year Complied with Names of the Directors are given in the Annual Report of the Board of Directors on the Affairs of the Company in page 32. 7.6 (ii) Principal activities of the Company Complied with Principal activities of the Company are given in the Annual Report of the Board of Directors on the Affairs of the Company in page 31. 7.6 (iii) Top 20 shareholders with the number of share held and Complied with the percentage of such shares held Details are given in the Share Information in page 110. 7.6 (iv) The public holding percentage Complied with The public holding percentage is given in the Share Information in page 111. 7.6 (v) Statement of each Director’s and Chief Executive Officer’s Complied with shareholding of the Company at the beginning and end of Details of the Director’s and Chief Executive the year Officer’s Shareholding of the Company are given in the Annual Report of the Board of Directors on the Affairs of the Company in page 31. 7.6 (vi) Information relating to foreseeable risk factors of the Complied with Company Information relating to foreseeable risk factors mitigating actions/ strategies implemented by the Company is given in the Risk Management in pages 13 to 22. 7.6 (vii) Details of material issues relating to employees and There were no material issues occurred during industrial relations of the Company the year relating to employees and industrial relations.

Annual Report 2018/19 Swarnamahal Financial Services PLC 25 Corporate Governance Report contd.

CSE Description Compliance Status Section 7.6 (viii) Extent, locations,valuations and number of buildings Complied with of the Company and the land holdings and investment Details of property, plant and equipment and properties investment properties are given in Note No 20 & 21 respectively in page 88 to 91 to the Financial Statements 7.6 (ix) Number of shares representing the Company’s stated Complied with capital Number of shares representing the Company’s stated capital is given in the Note No. 28 in page 95. 7.6 (x) A distribution schedule of the number of holders in each Complied with class of equity securities, and the percentage of their total Details are given in the Share Information in holdings pages 110 to 111. 7.6 (xi) Ratios and market price information on: No dividend has been declared during the Equity financial year 2018/19 1. Dividend per share 2. Dividend payout 3. Net asset value per share Complied with Net asset value per share is given in the financial highlights in page 03. 4. Market value per share (highest and lowest values Complied with recorded during the financial year and value as at the Details are given in the Share Information in end of financial year) page 111. 7.6 (xii) Significant changes in the Company’s fixed assets and the Complied with market value of land, if the value differs substantially from Details are given in Note No 21 of Property, the book value Plant & Equipment in page 90. 7.6 (xiii) Details of funds raised through a public issue, rights issue There were no any share issues, right issue or and a private placement private placement taken place during the year. 7.6 (xiv) Information in respect of Employee Share Ownership or The Company has not implemented Employee Stock Option Schemes Share Ownership or Stock Option Schemes during the Financial Year 2018/19. 7.6 (xv) Disclosures pertaining to Corporate Governance practices Complied with in terms of Rules 7.10.3, 7.10.5 c. and 7.10.6 c. of Section Details are given in Corporate Governance 7 of the Listing Rules Report in pages 25 to 30. 7.6 (xvi) Related party transactions exceeding10 percent of the Complied with equity or 5 percent of the total assets of the entity as per Related party transactions exceeding10 percent audited financial statements, whichever is lower of the equity or 5 percent of the total assets of the entity as per audited financial statements, whichever is lower are given in note No. 32.6 on page 100.

26 Annual Report 2018/19 Swarnamahal Financial Services PLC Compliance with the section 7.10 of continuing listing requirements of the Colombo Stock Exchange.

CSE Description Compliance Status Section 7.10.1 Non-Executive Directors 7.10.1 (a) The Board of Directors of a Listed Entity shall include at Complied with least, two Non-Executive Directors, or such number of non-Executive directors equivalent to on third of the total number of Directors whichever is higher. 7.10.2 Independent Directors 7.10.2 (a) Where the constitution of the Board of Directors includes Not complied only two Non-Executive Directors in terms of Rule 7.10.1. The Board will ensure to comply with these a above, both such Non-Executive Directors shall be requirements in the ensuing Financial Year. independent. In all other instances two or 1/3 of Non- Executive Directors appointed to the Board, whichever is higher shall be Independent. 7.10.2 (b) The Board shall require each Non-Executive Director to Not complied submit a signed and dated declaration annually of his/ her The Board will ensure to comply with these independence or non-independence against the specified requirements in the ensuing financial year criteria. 7.10.3 Disclosures relating to Directors 7.10.3 (a) The Board shall make a determination annually as to Not complied the independence or non-independence of each Non- The Board will ensure to comply with these Executive Director based on such requirements in the ensuing Financial Year. declaration and other information available to the Board and shall set out in the Annual Report the names of Directors determined to be independent. 7.10.3 (c) The Board shall publish in its Annual Report a brief resume Complied with of each Director on its Board which includes information The brief profile of each Director is given in on the nature of his/her expertise in relevant functional page 08. areas. 7.10.3 (d) Upon appointment of a new Director to its Board, the Complied with Entity shall forthwith provide to the Exchange a brief No new Director has been appointed during resume of such Director for dissemination to the public. the year. 7.10.5 Remuneration Committee 7.10.5 (a) The remuneration committee shall comprise of a minimum Not complied of two independent non-executive Directors (in instances The Board will ensure to comply with these where an Entity has only two Directors on its Board) or requirements in the ensuing Financial Year. Non-Executive Directors, a majority of whom shall be independent, whichever shall be higher

Annual Report 2018/19 Swarnamahal Financial Services PLC 27 Corporate Governance Report contd.

CSE Description Compliance Status Section 7.10.5 (b) The Remuneration Committee shall recommend the No meetings held during the period under remuneration payable to the Executive Directors review. The Board will ensure to hold and Chief Executive Officer of the Listed Entity and/ or committee meetings during the ensuing equivalent position thereof, to the Board of the Listed Financial Year. Entity which will make the final determination upon consideration of such recommendations. 7.10.5 (c) The Annual Report should set out the names of Directors Complied with The names of Directors of comprising the remuneration committee, contain a Remuneration Committee, Statement of statement of the remuneration policy and set out the remuneration policy and the aggregate of aggregate remuneration paid to Executive and Non- remuneration paid to the Executive and Non- Executive Directors. Executive Directors are given in page 40 and in the Note No. 32.2.1 in page 98. 7.10.6 Audit Committee 7.10.6 (a) The Audit Committee shall comprise of a minimum of Not complied two Independent Non-Executive Directors (in Instances The Board will ensure to comply with these where an Entity has only two Directors on its Board) requirements in the ensuing Financial Year. or Non-Executive Directors a majority of whom shall be independent, whichever shall be higher. 7.10.6 (b) Functions of the Committee shall include, Complied with i. Overseeing of the preparation, presentation and Functions of the Board Audit Committee are adequacy of disclosures in the financial statements given in the Board Audit Committee Report in of a Listed Entity, in accordance with Sri Lanka pages 37 & 38. Accounting Standards. ii. Overseeing of the Entity’s compliance with financial reporting requirements, information requirements of the Companies Act and other relevant financial reporting related regulations and requirements. iii. Overseeing the processes to ensure that the Entity’s internal controls and risk management are adequate, to meet the requirements of the Sri Lanka Auditing Standards. iv. Assessment of the independence and performance of the Entity’s external auditors. v. To make recommendations to the Board pertaining to appointment, re-appointment and removal of external auditors and to approve the remuneration and terms of engagement of the External Auditors.

7.10.6 (c) The names of the Directors comprising the Audit Complied with Committee should be disclosed in the Annual Report. Names of the Directors of the Board Audit Committee are given in the Board Audit Committee Report in page 37.

28 Annual Report 2018/19 Swarnamahal Financial Services PLC CSE Description Compliance Status Section 9. Related party transactions 9 (2) The Board shall take the necessary steps to avoid any Complied with. conflicts of interest that may arise from any transaction The Board takes necessary steps to avoid any of the finance company with any person, and particularly conflicts of interest that may arise from any with the following categories of persons who shall be transaction of the Company with its related considered as “related parties” for the purposes of this parties. Direction: The Related Party Transaction Review a. A subsidiary of the finance company; Committee was established in 30th August b. Any associate company of the finance company; 2016 in line with the code of c. A director of the finance company; Best Practices on Related Party Transactions, d. A key management personnel of the finance company; issued by the Securities and Exchange Commission of Sri Lanka (SEC). e. A relative of a director or a key management personnel of the finance company ; f. A shareholder who owns shares exceeding 10% of the The Report of the Related Party Transactions paid up capital of the finance company; Review Committee is given on Page 41 g. A concern in which a director of the finance company or a relative of a director or a shareholder who owns shares exceeding 10% of the paid up capital of the finance company, has substantial interest. 9 (3) The transactions with a related party that are covered in Complied with. this Direction shall be the following: Information in this regard, is disclosed in Note 32.3 to 32.6 on “Related Party Disclosures” in a. Granting accommodation, the Financial Statements in pages 98 to 100 b. Creating liabilities to the finance company in the form of deposits, borrowings and investments, c. Providing financial or non-financial services to the finance company or obtaining those services from the finance company, d. Creating or maintaining reporting lines and information flows between the finance company and any related party which may lead to share proprietary, confidential or otherwise sensitive information that may give benefits to such related party. 9 (4) The Board shall ensure that the finance company does not Complied with except as disclosed in Note No engage in transactions with a related party in a manner 32.5 to 32.6 the Financial Statements in page that would grant such party “more favourable treatment” 99 to 100. than that is accorded to other similar constituents of the finance company

Annual Report 2018/19 Swarnamahal Financial Services PLC 29 Corporate Governance Report contd.

Directors’ Attendance at Meetings during the Financial Year 2018/19 No Board or Board sub Committee Meetings were held, since the Directors are restrained from taking part in Daily Business Operations as per the Direction issued by Monetory Board of the Central Bank of Sri Lanka on 02nd January 2018.

30 Annual Report 2018/19 Swarnamahal Financial Services PLC Annual Report of the Board of Directors on the Affairs of the Company

General Name of the No of Shares held as at Director st st The Directors have pleasure in presenting the Annual 31 March 2019 31 March 2018 Report together with the Audited Financial Statements of Mr. S. M. Ganegoda 20,020 20,020 the Company for the financial year ended 31st March 2019. Swarnamahal Financial Services PLC (“SFS”) is a Public Limited Liability Company, incorporated on 14th January CEO’s Shareholdings 2004 in Colombo, under the Companies Act No. 17 of CEO has not held any share of the Company during the 1982 and re-registered under the Companies Act No.7 of financial year 2018/19. 2007, on 16th September 2008. The Company is licensed by the Monetary Board of the Central Bank of Sri Lanka under the Finance Business Act No. 42 of 2011, the Finance Stated Capital Leasing Act No. 56 of 2000 and has quoted its shares on the The Stated Capital of the Company consists of 500,000,140 Colombo Stock Exchange since May 2011. Ordinary Voting Shares, amounting to Rs. 250,000,070/- as at 31st March 2019. The annual report together with the audited Financial th Statements was approved by the Board of Directors on 28 Information relating to earnings, net assets per share and June 2019. market value Per share are given in pages 03 and 111.

Registered Office and Business Office Shareholders The Registered and Business Office of the Company is There were 1,942 shareholders registered as at 31st March situated at No.05, R.A.De Mel Mawatha, Colombo 04. 2019.

Principal Activities Related Party Transactions The company’s main line of business are Gold Loan In terms of the Sri Lanka Accounting Standards comprising services, Leasing, Hire Purchase, Personal Loans, Mortgage the Sri Lanka Financial Reporting Standard (LKAS 24), Loans and Fixed and Savings Deposits. There were no Related Party Transactions, including written off balances material changes in the nature of the principle business and provisioning for doubtful receivables, have been activities of the Company. disclosed in Note No. 32 to the financial statements in pages 98 and 100 forming the part of the annual report of Directors’ Meetings the board of directors Prior to 02nd January 2018 the meetings of the Board of Directors were held once a month or more frequently Directors’ Remuneration whenever necessary. However, board meetings were Due to the enforcement actions taken by the Central Bank not held from 02nd January 2018 onwards after the of Sri Lanka the company has not paid the Directors’ fees enforcement actions taken by the Central Bank of Sri Lanka, and emoluments during the year and is disclosed in Note since the Directors are restrained from taking part in Daily No.09 to the Financial Statements in page 80. Business Operations. Financial Statements Directors’ Shareholdings Financial Statements of the Company are given in pages 48 The Directors’ interests in Ordinary Shares were as follows to 51

Annual Report 2018/19 Swarnamahal Financial Services PLC 31 Annual Report of the Board of Directors on the Affairs of the Company contd.

Accounting Policies The report of the Board Audit Committee is given in pages The Notes to the Financial Statements in preparation of the 37 to 38. Financial Statements are given in pages 52 to 107 Remuneration Committee Mr. N. P. Edirisinghe - Chairman Auditor’s Report Mr. J. H. Edirisinghe - Director The Auditor’s Report on the Financial Statements is given in pages 43 to 47. The report of the Board Remuneration Committee is given in page 40. Statement of Compliance on the Contents of the Annual Report Integrated Risk Management Committee The Audited Financial Statements have been prepared and Mr. A. S. Edirisinghe - Chairman presented with the relevant disclosures in accordance with the Sri Lanka Accounting Standards and other applicable Management Representatives of the committee are, regulatory requirements. Mr. George Samantha - Chief Executive Officer Corporate Governance Mr. Wishva Wickramaarachchi - General Manager The report on Corporate Governance is given in pages 23 Finance & Administration to 30. The report of the Board Integrated Risk Management Committee is given in page 39. Internal Controls The Board has formed an effective and comprehensive Related Party Transaction Review Committee system of Internal Controls covering financial reporting, Mr. N. P. Edirisinghe - Chairman compliance with rules and regulations of relevant Mrs. A. D. Edirisinghe - Director authorities and risk management to carry on the business Mr. A. S. Edirisinghe - Director in an orderly manner to safeguard its assets and to ensure as far as possible the accuracy and reliability of the The report of the Board Related Party Transaction Review financial records. Committee is given in page 41.

Internal Control mechanism of the Company is reviewed Directorate and improved on a continuous basis, based on the The Board of Swarnamahal Financial Services PLC consists recommendations of the Internal Auditor, findings of the of 5 Directors with a wide array of experience in financial onsite observations of the Central Bank of Sri Lanka and the and commercial sectors as at 31st March 2019. External Auditor during their inspections and audit. The brief profiles of the Directors are given page 08. Directors’ Statement of Internal Control The names of the Directors who are on the Board are given The Directors’ report on Internal Control is given in page below. 34. Executive Directors Board Sub Committees Mr. N. P. Edirisinghe Mrs. A. D. Edirisinghe The Board of Directors of the Company has formed the Mr. A. S. Edirisinghe following Board Sub Committees. Non- Executive Directors Audit Committee Mr. N. P. Edirisinghe - Chairman Mr. J. H. Edirisinghe Mrs. A. D. Edirisinghe - Director Mr. S. M. Ganegoda Mr. A. S. Edirisinghe - Director

32 Annual Report 2018/19 Swarnamahal Financial Services PLC Secretary Company incurred a net loss of Rs.27,820,277/- during the year ended 31st March 2019 and as of that date M/s SSP Corporate Services (Pvt) Ltd engaged as the the Company’s accumulated losses amounting to Rs. Secretary and Registrar to the Company. 1,553,990,396/- and total liabilities exceed total assets by Rs. 1,160,641,208/- As stated in Note 34, these events or Directors’ Responsibility of Financial other conditions, alone or with other matters as set forth Reporting in Note 34 Indicates that a material uncertainty exists that may cast significant doubt on the Company’s ability The Statement of Directors’ Responsibility for financial to continue as a going concern and therefore its ability to statements is given in page 35 and forms an integral part of realize assets and discharge liabilities in the normal course the Annual Report of the Board of Directors. of business. The financial statements do not adequately disclose this matter Human Resources The Company recruits the best talented people and Events after the reporting date provides equal employment opportunities with no There have not been any material events that occurred discrimination. The Human Resource Policies of subsequent to the date of statement of financial position the Company includes comprehensive training and that require adjustments to the Financial Statements. developments programs to enhance skills of new recruits and the existing staff for greater efficiency. Total employees Auditor of the Company was 109 as at 31st March 2019. Messrs KPMG, Chartered Accountants served as the Report on Compliance with Prudential Auditor during the Financial Year under review. During the Requirements, Regulations and Laws Financial Year 2018/19, a sum of Rs. 950,000/-(2017/18 - Rs. 950,000) was provided as audit and audit related fees to The Company has complied with the regulatory and the Auditor, Messrs KPMG, Chartered Accountants. prudential and internal control requirements arising from The Board has accepted the recommendation of the the provisions in the statutes applicable to the Company, Board Audit Committee and has recommended the such as the Finance Business Act No. 42 of 2011, Directions reappointment of Messrs KPMG, Chartered Accountants as issued by the Central Bank of Sri Lanka, Companies Act No. Auditors to the Company for the Financial Year 2019/20 as 7 of 2007, Inland Revenue Act No. 24 of 2017, Value Added they have expressed their willingness to continue in office. Tax Act No. 14 of 2002, Financial Transaction Reporting A resolution to re-appoint the Auditors and to authorize Act No. 06 of 2006, Prevention of Money Laundering the Directors to determine their remuneration will be Act No. 5 of 2006, Sri Lanka Accounting and Auditing proposed at the Annual General Meeting to be held on 30th Standards Act No. 15 of 1995, Listing Rules of Colombo September 2019. Stock Exchange etc. except as disclosed in the Independent Annual General Meeting Auditor’s Report in pages 43 to 47, Note 35 to the Financial The 14th Annual General Meeting of the Company will be Statement in pages 101 to 103 and in the corporate held at Hotel Sapphire, No. 371, Galle Road, Colombo 06, governance report in pages 23 to 30. on 30th September 2019 at 10.30 a.m. Statutory Payments The Board of Directors of the Company is satisfied, to the J. H. Edirisinghe best of their knowledge and belief that all statutory dues to the Government and to the employees of the Company Chairman have been made in full, on time.

Going Concern SSP Corporate Services (Pvt) Ltd As disclosed in Note 34 to the financial statements, the Company Secretaries 28th June 2019

Annual Report 2018/19 Swarnamahal Financial Services PLC 33 Directors’ Statement on Internal Control

In line with the Finance Companies (Corporate • The Internal Audit checks for compliance with policies Governance) Direction No.3 of 2008, the Board of Directors and procedures and the effectiveness of the internal presents this report on Internal Control. The Board of control systems on an ongoing basis and highlights Directors (“Board”) is responsible for the adequacy and significant findings in respect of any non-compliance. effectiveness of Swarnamahal Financial Services PLC’s (“the Audits are carried out on all units, the frequency of Company”) system of internal controls. Such a system is which is determined by the level of risk assessed, to designed to manage the Company’s key areas of risk within provide an independent and objective report. The an acceptable risk profile by highlighting any deviation Annual Audit plan is reviewed and approved by the from the limits, rather than eliminate the risk of failure Audit Committee. Findings of the Internal Audit are to achieve the policies and business objectives of the submitted to the Board Audit Committee for review at Company. their meetings.

Accordingly, the system of internal controls can only • The Audit Committee reviews internal control issues provide reasonable but not absolute assurance against identified by the Internal Audit, Regulatory Authorities material misstatements of management, financial and Management, and evaluates the adequacy and information and records or against financial losses or effectiveness of the Risk Management and internal fraud. The Board has established an ongoing process for control systems. It also reviews the Internal Audit identifying, evaluating and managing the significant risks functions with particular emphasis on the scope of faced by the Company and this process includes enhancing audits and quality of Internal Audits. The minutes of the the system of internal controls as and when there are Audit Committee meetings are tabled to the Board of changes in business environment or regulatory guidelines. the Company. The Board is in the view that the system of internal controls in place is sound and adequate to provide a reasonable assurance regarding the reliability of financial reporting and Confirmation preparation of financial statements for external purposes, Based on the above processes, the Board confirms that and is in accordance with relevant accounting principles the financial reporting system of the Company has been and regulatory requirements. designed to provide reasonable assurance regarding the reliability of financial reporting and that the preparation of The Management assists the Board in the implementation Financial Statements for external purposes has been done of the Board’s policies and procedures on risk and control in accordance with Sri Lanka Financial Reporting Standards by identifying and assessing the risks faced and in the (SLFRS) and regulatory requirements of the Central Bank of design, operation and monitoring of suitable internal Sri Lanka. controls to mitigate and control these risks. For and on behalf of the Board The key processes that have been established in reviewing the adequacy and integrity of the system of internal controls with respect to financial reporting include the following: J. H. Edirisinghe Chairman • Sub Board Committees were established by the Board to assist the Board in ensuring the effectiveness of 28th June 2019 Company’s daily operations and that the Company’s operations are in accordance with the corporate objectives, strategies and the annual budget as well as the policies and business directions that have been approved.

34 Annual Report 2018/19 Swarnamahal Financial Services PLC Statement of Directors’ Responsibilities in Relation to Financial Statements

The responsibility of the Directors of the Company, in Listing Rules of the Colombo Stock Exchange inclusive of relation to the preparation and presentation of the specific disclosures. Financial Statements of the Company in accordance with the relevant provisions of the Companies Act No. The Directors are responsible for ensuring that the 07 of 2007, Finance Business Act No. 42 of 2011 and Company keeps sufficient accounting records, which other Statutes which are applicable in the preparation of disclose the financial position of the Company with Financial Statements are set out in the following statement. reasonable accuracy and enable them to ensure that the financial statements have been prepared and presented as The responsibilities of the External Auditors, in relation to aforementioned. the Financial Statements are set out in the Report of the The Directors of the Company have instituted an Auditors given in pages 43 to 47. effective and comprehensive system of Internal Control for identifying, recording, evaluating and managing the In accordance with the Companies Act No. 07 of 2007, the significant risks faced by the Company throughout the year Directors of the Company are responsible for ensuring, and it is under regular review of the Board of Directors. This the Company keeps proper books of accounts of all the comprises internal reviews, internal audit and the whole transactions and prepare Financial Statements for each system of financial and other controls required to carry financial year. The Financial Statements of the Company out the business of the Company in an orderly manner, are comprised of the Statement of Financial Position as at safeguard its assets, prevent and detect frauds and secure 31st March 2019, the Statement of Profit or Loss and Other as far as practicable, the accuracy and the reliability of the Comprehensive Income, Statement of Changes in Equity, records. Statement of Cash Flows for the year ended 31st March 2019 and notes there to. The Directors of the Company are responsible for preparing and presenting the Financial Statements and have provided Accordingly, the Directors confirm that the Financial the Company’s External Auditor, KPMG, Chartered Statements of the Company give a true and fair view of the Accountants with every opportunity to undertake the state of affairs of the Company as at 31st March 2019. The inspections they considered appropriate and necessary. Directors are responsible to ensure that: i. The appropriate accounting policies have been Compliance Report selected and applied in a consistent manner and The Directors of the Company confirm that to the best material deviations, if any, have been disclosed, of their knowledge and belief, all statutory payments in ii. Judgements and estimates made are reasonable and relation to all relevant regulatory and statutory dues, as prudent and all applicable Accounting Standards have were due and payable by the Company as at the reporting been complied with. date, have been paid or where relevant, provided for. The The Directors accept responsibility to ensure that the Directors are of the view that they have discharged their Company has adequate resources to continue in operation responsibilities as set out in this above statement. to justify applying the going concern basis in preparing By order of the Board these Financial Statements.

The Financial Statements of the Company for the year ended 31st March 2019 are prepared and presented, J. H. Edirisinghe consistent with the underlying books of accounts, in Chairman accordance with the requirements of the Sri Lanka th Accounting Standards issued by the Institute of Chartered 28 June 2019 Accountants of Sri Lanka, the Companies Act No. 07 of 2007, Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, Finance Business Act No. 42 of 2011 and the

Annual Report 2018/19 Swarnamahal Financial Services PLC 35 Statement of Responsibility of the Chief Executive Officer and General Manager – Finance and Administration

The Financial Statements of Swarnamahal Financial policies and procedures of the Company were consistently Services PLC for the financial year ended 31st March 2019 followed. However, there are inherent limitations that have been prepared and presented, consistent with the should be recognized in weighing the assurances provided underlying books of accounts, in accordance with the by any system of Internal Controls and Accounting. requirements of the Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka, the The Company’s External Auditor, Messrs KPMG, Chartered Accountants, has audited the Financial Statements of the Companies Act No. 07 of 2007, Sri Lanka Accounting and Company and their report is given in page 43 to 47. Auditing Standards Act No. 15 of 1995, Finance Business Act No. 42 of 2011 and the Listing Rules of the Colombo The Board Audit Committee reviewed all the Internal Audit Stock Exchange. The formats used in the presentation of inspections, audit plans, the efficiency of Internal Control the Financial Statements and the disclosures are complied Systems and procedures and also reviewed the quality with the formats prescribed by the Institute of Chartered of the significant Accounting Policies and their adhering to the Statutory and Regulatory requirements. To ensure Accountants of Sri Lanka. complete independence, the Internal and External Auditors had full and free access to the members of the Board Audit The significant accounting policies and estimates that Committee to discuss any matter of substance. involved a high degree of judgment and complexity were discussed with the Company’s External Auditor and the We further confirm that the Company has complied with all Board Audit Committee. Comparative information has the guidelines for the audit services. been reclassified whenever necessary to comply with the current presentation and material deviations, if any, have The Company has also complied with applicable laws, regulations and prudential requirements except as been disclosed and explained in the notes to the Financial disclosed in the Independent Auditors’ Report in page 43 Statements. to 47 and in the Corporate Governance report in pages 23 to 30. There are/ were no litigations or proceedings against We confirm, to the best of our knowledge and belief, that the Company in the recent past except as disclosed in Note the Financial Statements of the Company give a true and No. 31.2 in page 97. fair view of the assets, liabilities, financial position and profit of the Company, its cash flows and liquidity position. We also confirm that the Company has adequate resources to continue in operation and have applied the going concern basis in preparing Financial Statements. George Samantha The Board of Directors and the Management of the Company accept responsibility for the integrity and Chief Executive Officer 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 that the Company’s D W K Wickramaarachchi state of affairs is well presented. To ensure this, the General Manager- Finance and Administration Company has taken proper and sufficient care in installing th a system of Internal Controls and accounting records, 28 June 2019 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 ensure that the

36 Annual Report 2018/19 Swarnamahal Financial Services PLC Board Audit Committee Report

The Composition • Review the Audited Financial Statements with the External Auditors in order to monitor the integrity of the Financial Statements and its conformity with the The Board Audit Committee consisted of three Directors as Sri Lanka Accounting Standards, prior to submission to detailed below. the Board. Mr. N.P. Edirisinghe Chairman • Review Accounting Policies, emerging accounting Mrs. A.D. Edirisinghe Director issues and disclosures according to LKAS/SLFRS. Mr. A. S. Edirisinghe Director • Review the External Auditor’s Management Letter together with the management responses thereto. The Chairman of the Committee, Mr. N. P. Edirisinghe • Discuss with the External Auditor regarding the issues, counts over 29 years of extensive experience in the fields of problems and reservations arising from the Interim Gold, Information Technology, Finance and Management. and Final Audits of the Company. The CEO and the General manager finance and • Ensure that a sound reporting system is in place administration were present at all the meetings on to provide timely information to the Board of invitation. Directors, Regulatory Authorities, Management and Stakeholders. Review the performance of the Internal Secretary to the Board Audit Committee Audit Function, adequacy of the scope, resources and the authority of the Internal Auditors. SSP Corporate Services (Pvt) Ltd • Review internal audit programs and its results and Meetings of the Committee ensure that appropriate actions are taken on the recommendations of the Board Audit Committee. No. of meetings held and the members’ attendance at meetings are given in page 30. • Ensure that the internal audit function is independent of the Company’s other activities and that it is Role of the Audit Committee performed with impartially, proficiency and due The Audit Committee assists the Board of Directors in professional care. fulfilling effectively its oversight responsibilities in the • Evaluate and discuss the major findings and financial reporting process and other related affairs of the observations of Internal Auditor and the management Company. responses thereon, periodically.

The Committee has been empowered to: Financial Reporting • Analyze and review risks and examine the adequacy, The Committee assists the Board of Directors in discharging efficiency, effectiveness of the system of internal their responsibilities for the preparation of financial controls and procedures that are in force to mitigate statements that indicates a true and fair view of the risks. affairs of the Company in accordance with the Company’s • Monitor and evaluate the External Auditor’s Accounting Records and in conformity with the Sri Lanka independence, objectivity and effectiveness of the Accounting Standards, the Company’s Act No. 07 of 2007 Audit Process. and the Directions issued by the Central Bank of Sri Lanka. • Meet External Auditor during the year to discuss The Committee liaised with the other Board members, and finalize the Audit approach, procedures, nature reviewed the Company’s annual and interim financial and the scope, including the matters relating to the statements and recommended the issue of such financial Company’s compliance with directions, internal statements to the shareholders. The Committee analyzed control over financial reporting and auditor’s and examined the adequacy, efficiency, effectiveness of independence. the system of internal controls and procedures in place to

Annual Report 2018/19 Swarnamahal Financial Services PLC 37 ensure the reliability of information provided to the Board the Committee has recommended the re-appointment of and other stakeholders. Messrs KPMG, Chartered Accountants as auditors to the Company for the ensuing financial year 2019/20, subject Internal Audit to the approval of the shareholders at the Annual General Meeting, scheduled to be held on 30th September 2019. During the financial year 2018/19, Ernst & Young (E&Y), Chartered Accountants engaged as the Internal Auditor of the Company who is responsible for reviewing and Committee Evaluation reporting on the efficiency of the system of internal The evaluation of the Committee was carried out by Controls mechanism, procedures and compliance with the other members of the Board in order to assess the other regulatory requirements. The weaknesses highlighted effectiveness of the Committee and its performance, which by the Internal Auditors in relation to such control were found to be satisfactory. procedures were critically analyzed and recommendations suggested for implementation; such implementations were followed up and reviewed. The internal audit personnel were invited to the committee discussion as and when required, for further clarification. N. P. Edirisinghe External Audit Chairman - Board Audit Committee The Committee actively monitored the implementation 28th June 2019 of the recommendations of the External Auditor. Prior toCommencement of the audit of the financial year 2018/19, the Auditor’s approach, procedures, nature and the scope of the Audit, including the matters relating to the Company’s compliance with directions were discussed and finalized.

The Committee evaluated the Independence and Objectivity of the Messrs KPMG, Chartered Accountants and reviewed that Non Audit Services provided by them to ensure that the provision of these services does not impair their Independence.

The Committee evaluated the Independence and Objectivity of the Messrs KPMG, Chartered Accountants and reviewed that Non Audit Services provided by them to ensure that the provision of these services does not impair their Independence.

The audit scope, audit approach and audit plan were presented by Messrs KPMG, Chartered Accountants and discussed at the Audit Committee meetings prior to commencement of the Audit for the Financial Year 2018/19.

The Committee is also empowered to recommend the re- appointment and fees of the External Auditor. Accordingly,

38 Annual Report 2018/19 Swarnamahal Financial Services PLC Board Integrated Risk Management Committee Report

The Composition of the Committee is given below; The Committee shall meet at least quarterly and submit a risk management report to the first Board Meeting which Mr. A. S. Edirisinghe Chairman will be held soon after each BIRMC meeting, seeking the Board’s view, concurrence and /or specific directions. Management Representatives who attended the meetings were, Meetings Mr. George Samantha Chief Executive Officer During the Financial Year 2018/19, there were no any Mr. Wishva General Manager - Finance meetings were held during the period under review. Wickramaarachchi and Administration The members’ attendance at the Committee meeting is Brief profiles of the Directors and management given in page 30. representatives of the Company are given in pages 08 to 10.

Terms of Reference The Committee gives directions to ensure that the A.S. Edirisinghe Company fulfills its statutory, fiduciary and regulatory responsibilities on risk management. Chairman - Board Integrated Risk Management Committee

The main functions of the committee include 28th June 2019 • Assessing all risks, including credit, market, liquidity, operational and strategic risks on a regular basis using appropriate risk indicators and MIS reports. • Ensuring the risks of the Company are within the prudent levels decided by the Committee, based on the Company’s risk appetite and the regulatory and supervisory requirements. • Taking appropriate actions reported against officers responsible for any failure in risk management to improve the overall effectiveness of risk management at SFS. • Taking prompt corrective measures to mitigate the effect of specific risks in the event such risks are beyond the prudent levels on the basis of the Company’s policies, procedures and regulatory criteria. Compliance with laws, regulations, regulatory guidelines, internal controls and approved policies in all areas of business operations. • Reviewing and updating the business continuity plan, for approval of the Board. • Review specific quantitative and qualitative risk limits for all management level committees viz Credit, Asset Liability etc. and report any risk indicators periodically to the Board.

Annual Report 2018/19 Swarnamahal Financial Services PLC 39 Board Remuneration Committee Report

The Composition Committee Meetings The Composition of the Board Remuneration Committee The Committee meets when necessary and makes is given below, recommendation on bonuses, annual increments and performance incentives to ensure that all level of Mr. N. P. Edirisinghe Chairman employees are sufficiently rewarded on their performance Mr. J. H. Edirisinghe Director and commitments.

The Functions of the Committee The Chief Executive Officer who is responsible for the overall management of the Company attends meetings by • Determining and formulating a set of remuneration invitation. policies and criteria pertaining to the compensation and benefits of the Executive Directors including the The total remuneration paid to the Directors during the Chief Executive Officer while ensuring that no Director period under review is set out in the Note No. 09 of page is involved in setting his/her own remuneration and 80. salaries and the Committee also determines the salaries and benefits of the Corporate Management and Senior Management. • Recommending the objectives and targets to be set for Chief Executive Officer and key managerial personnel N.P. Edirisinghe and evaluating the performance of the Chief Executive Officer and key managerial personnel against the Chairman - Board Remuneration Committee established goals and objectives in order to suggest suitable recommendations to the Board. 28th June 2019 • Implementing a framework for regular performance appraisal of the Staff under various performance parameters in order to obtain feedback of their work performance. • Making independent judgments on the level of payments to the individuals according to their performance.

Policy The set of remuneration policies of the Company is formulated to ensure that the Executive Directors including the Chief Executive Officer and Senior Management are adequately rewarded for their individual contribution to the success of the Company.

The primary objective of the remuneration policy aims to ensure that the remuneration levels are sufficient to attract, motivate, and retain talent with the appropriate professional, managerial and operational expertise necessary to achieve the objectives of the Company to enhance the long term value for all stakeholders of the Company.

40 Annual Report 2018/19 Swarnamahal Financial Services PLC Board Related Party Transactions Review Committee Report

Composition of the Committee Listing Rules of Colombo Stock Exchange. The Board Related Party Transactions Review Committee, appointed by the Board of Directors of Swarnamahal Meetings Financial Services PLC. The composition of the committee is as follows. The Committee held two meeting during the year to recommend the Related Party Policy to the Board and to Mr. Asanka Edirisinghe Chairman review the Related Party Transactions of the Company. The Mr. Nalaka Edirisinghe Director Committee will meet quarterly or more frequently as it Mrs. Deepa Edirisinghe Director deems necessary to carry out its duties and responsibilities. There were no any meeting were held during the period Brief profile of each member of the Committee is given in under review page 08. Related Party Transactions during the year During the financial year under review, there were no Role of the Committee non- recurrent or Recurrent related party transactions as The Board Related Party Transactions Review Committee stipulated by Listing Rules of the Colombo Stock Exchange was established In 30th August 2016 to comply with the other than disclosed in note No. 32.6 to the Financial Code of Best Practices on Related Party Transactions, issued Statements in page 100. by The Securities and Exchange Commission of Sri Lanka (SEC).

The purpose of the Committee is to provide independent review, approval and oversight of Related Party A. S. Edirisinghe Transactions of the Company. Chairman - Board Related Party The main responsibilities of the Committee include the Transactions Review Committee following.

• Develop and recommend policies and procedures to 28th June 2019 review Related Party Transactions of the Company • Review proposed Related Party Transactions of the Company except those explicitly exempted by the Committee Charter • Update the Board of Directors on the Related Party Transactions of the Company • Make disclosures on applicable Related Party Transactions, as required by the applicable rules and regulations

Policies and Procedures The Company has adopted a Related Party Transactions (RPTs) Policy in view of structuring the Company’s policies and procedures to uphold good governance and in the best interests of the Company. The Policy has been prepared in accordance with the rules pertaining to RPTs under the

Annual Report 2018/19 Swarnamahal Financial Services PLC 41 Financial Report

Independent Auditor’s Report 43

Statement of Profit or Loss and other Comprehensive Income 48

Statement of Financial Position 49

Statement of Change in Equity 50

Statement of Cash Flows 51

Notes to the Financial Statements 52

42 Annual Report 2018/19 Swarnamahal Financial Services PLC Independent Auditor’s Report

To the Shareholders of Swarnamahal Financial stated in note 34 and 35, these events or other conditions, Services PLC alone or with other matters as set forth in note 34 and 35 Indicates that a material uncertainty exists that may cast Report on the Audit of the Financial Statements significant doubt on the Company’s ability to continue as a going concern and therefore its ability to realize assets and Opinion discharge liabilities in the normal course of business. The We have audited the financial statements of Swarnamahal financial statements do not adequately disclose this matter. Financial Services PLC (“the Company”), which comprise the statement of financial position as at 31st March We conducted our audit in accordance with Sri Lanka 2019, and the statement of profit or loss and other Auditing Standards (SLAuSs). Our responsibilities under comprehensive income, statement of changes in equity those standards are further described in the Auditor’s and statement of cash flows for the year then ended, and Responsibilities for the Audit of the Financial Statements notes to the financial statements, including a summary section of our report. We are independent of the of significant accounting policies and other explanatory Company in accordance with the Code of Ethics issued by information. CA Sri Lanka (Code of Ethics), and we have fulfilled our In our opinion, because of the significance of the matters other ethical responsibilities in accordance with these discussed in the Basis for Adverse Opinion section of requirements. We believe that the audit evidence we have our report, the accompanying financial statements do obtained is sufficient and appropriate to provide a basis for not give a true and fair view of the financial position of our adverse opinion. the Company as at 31st March 2019, and of its financial performance and cash flows for the year then ended in Key Audit Matters accordance with Sri Lanka Accounting Standards. Key audit matters are those matters that, in our professional judgment, were of most significance in our Basis for Adverse Opinion audit of the financial statements of the current period. As disclosed in note 34 to the financial statements, the These matters were addressed in the context of our audit Company incurred a net loss of Rs. 27,820,277/-during of the financial statements as a whole, and in forming our the year ended 31st March 2019 and as of that date opinion thereon, and we do not provide a separate opinion the Company’s accumulated losses amounting to on these matters. In addition to the matter described in the Rs.1,553,990,396/- and total liabilities exceed total assets Basis for Adverse Opinion section, we have determined the by Rs.1,160,641,208/-. Further the Company has not matters described below to be the key audit matters to be comply with several directions issued by the Central Bank communicated in our report. of Sri Lanka and other regulatory requirement as more fully described in note 35 to the Financial Statements. As

Annual Report 2018/19 Swarnamahal Financial Services PLC 43 Independent Auditor’s Report contd.

1. Impairment of loans and advances and transition the adoption of SLFRS 9 – “Financial Instruments” As described in note 3.1.9 (accounting policy) and note 19.1 (impairment provision for Loan and receivable from other customers, Impairment provision for Lease Rental and Hire purchase receivable), Company’s impairment provision for Loans and Receivables amount to Rs. 213,316,376/- as at 31st March 2019.

Risk Description Our Responses; The company has estimated Rs Our audit procedures to assess impairment of loans and advance to customers 213,316,376/- as impairment provision included: for Loan and Receivable as at 31st • Assessing the design, implementation and operating effectiveness of key March 2019. (As at 31st March 2018 internal controls over the credit evaluation. Rs 117,986,118/-) and there high degree of complexity and judgment • Challenging the validity of the models used and assumptions adopted in involved for the company in estimating Company calculation of the impairment allowances by critically assessing: impairment allowance as at that date. • Input parameters involving management judgement ; Given the complexity of SLFRS 9 and • the overdue statistical data for the loan and receivable portfolios; and its expected pervasive impact on the • Historical loss parameters used. financial sector we focused on the company disclosure of the expected • Assessing the economic factors used in the models to market information to impact of measuring credit losses assess whether they were aligned with market and economic development. on loans and receivable and the • Re-performing credit assessments for the selected impaired loans and significant judgment exercised by the receivables by assessing the forecast of recoverable cash flows through company. The company’s model to inquiry, applying judgement and our own research. We evaluated the calculate Expected Credit Loss (ECL) timing and means of realization of collateral and considered other sources are inherently complex and judgment of repayment asserted by management. We also evaluated the consistency is applied in determining the correct of management’s application of key assumptions and compared them with construct of the model. There are our own data sources. Where available, we made use of post reporting date also a number of key assumptions information to evaluate credit quality with hindsight; made by the Company in applying the requirements of SLFRS 9 to the models Our audit procedures for transition to the SLFRS 9 included the following: including forward looking probability of • Assessing the company’s significant accounting policies against the default (PD), loss given default (LGD), requirements of SLFRS 9 macroeconomic scenarios including their weighting and judgments over the • Assessing the company’s ECL modelling methodology and for a sample of use of data inputs required. models testing key credit modelling assumptions in the ECL models against the requirements of SLFRS 9 and underlying accounting records. As permitted by the transitional • Assessing forward-looking economic assumptions and the development provision of SLFRS 9, the impact of of economic scenarios against external economic information and the adopting SLFRS 9 is considered as an application into the ECL models. adjustment to equity as at 1st April 2018 (Day One), without restating the • Testing data reconciliation controls between the ECL models and comparative information. source systems.

44 Annual Report 2018/19 Swarnamahal Financial Services PLC Risk Description Our Responses; • Testing the accuracy of the modelled calculations by re performing the ECL calculations on a sample basis; and • Assessing the disclosures in the financial statements against the requirements of Sri Lanka Accounting Standards.

2. Valuation of the Investment Property As described in note 3.4 (accounting policy) and note 20 (investment property), Company’s Investment property amounted to Rs. 130,300,000 as at 31st March 2019.

Risk Description Our Responses; The Company owns four investment properties Our Audit Procedures included; located three in Ja- Ella and one in Mount Lavinia. The • Assessing the objectivity, independence, competence Management assessment of fair value of investment and qualifications of the external valuer. properties is based on valuation performed by a qualified • Assessing the appropriateness of the valuation independent valuer in accordance with recognized techniques used by the external valuer, taking into industry standards. account the profile of the investment properties. We identified valuation of investment properties as key • Discussions with management and the external audit matter because the determination of the fair value valuer and compare the key assumptions applied involves significant judgment and estimation, particularly and conclusions made in deriving the fair value and determining the appropriate valuation methodology to comparing the same with evidence of current market be used, and in estimating the underlying assumptions practice where applicable, and challenging them based to be applied. These key assumptions include market on our Knowledge of the business and industry. comparable used, taking into consideration for differences • Assessing the adequacy of the disclosures in the such as location, size and tenure. A change in the key financial statements, including the description and assumptions will have a significant impact on the fair value appropriateness of the inherent degree of subjectivity of investment property and key assumptions in the estimates.

Other Information

Management is responsible for the other information. The In connection with our audit of the financial statements, other information comprises the information included our responsibility is to read the other information and, in the annual report, but does not include the financial in doing so, consider whether the other information is statements and our auditor’s report thereon. materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise Our opinion on the financial statements does not cover appears to be materially misstated. If, based on the work the other information and we do not express any form of we have performed, we conclude that there is a material assurance conclusion thereon. misstatement of this other information, we are required

Annual Report 2018/19 Swarnamahal Financial Services PLC 45 Independent Auditor’s Report contd.

to report that fact. As described in the Basis for Adverse error and are considered material if, individually or in the Opinion section above indicates that a material uncertainty aggregate, they could reasonably be expected to influence exists that may cast significant doubt on the Company’s the economic decisions of users taken on the basis of these ability to continue as a going concern and therefore its financial statements. ability to realize assets and discharge liabilities in the normal course of business. The financial statements do As part of an audit in accordance with SLAuSs, we exercise not adequately disclose this matter. We have concluded professional judgment and maintain professional skepticism that the other information is materially misstated for the throughout the audit. We also: same reason with respect to the amounts or other items in the annual report affected by the failure to disclose the • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or company’s ability to continue as a going concern. error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient Responsibilities of Management and Those and appropriate to provide a basis for our opinion. The Charged with Governance for the Financial risk of not detecting a material misstatement resulting Statements from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional Management is responsible for the preparation of financial omissions, misrepresentations, or the override of statements that give a true and fair view in accordance internal control. with Sri Lanka Accounting Standards, and for such internal • Obtain an understanding of internal control relevant control as management determines is necessary to enable to the audit in order to design audit procedures that the preparation of financial statements that are free from are appropriate in the circumstances, but not for the material misstatement, whether due to fraud or error. purpose of expressing an opinion on the effectiveness of the Company’s internal control. In preparing the financial statements, management is • Evaluate the appropriateness of accounting policies used responsible for assessing the Company’s ability to continue and the reasonableness of accounting estimates and as a going concern, disclosing, as applicable, matters related disclosures made by management. related to going concern and using the going concern basis of accounting unless management either intends to • Conclude on the appropriateness of management’s use liquidate the Company or to cease operations, or has no of the going concern basis of accounting and, based on the audit evidence obtained, whether a material realistic alternative but to do so. uncertainty exists related to events or conditions that may cast significant doubt on the Company’s Those charged with governance are responsible for ability to continue as a going concern. If we conclude overseeing the Company’s financial reporting process. that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related Auditor’s Responsibilities for the Audit of the disclosures in the financial statements or, if such Financial Statements disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained Our objectives are to obtain reasonable assurance about up to the date of our auditor’s report. However, future whether the financial statements as a whole are free from events or conditions may cause the Company to cease to material misstatement, whether due to fraud or error, continue as a going concern. and to issue an auditor’s report that includes our opinion. • Evaluate the overall presentation, structure and content Reasonable assurance is a high level of assurance, but is of the financial statements, including the disclosures, not a guarantee that an audit conducted in accordance and whether the financial statements represent the with SLAuSs will always detect a material misstatement underlying transactions and events in a manner that when it exists. Misstatements can arise from fraud or achieves fair presentation.

46 Annual Report 2018/19 Swarnamahal Financial Services PLC We communicate with those charged with CA Sri Lanka membership number of the engagement governance regarding, among other matters, the partner responsible for signing this independent auditor’s planned scope and timing of the audit and significant report is 2618. audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance a statement that we have complied with ethical Chartered Accountants requirements in accordance with the Code of Ethics Colombo, Sri Lanka regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where 28th June 2019 applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements As required by section 163 (2) of the Companies Act No. 07 of 2007, we have obtained all the information and explanations that were required for the audit and, as far as appears from our examination, proper accounting records have been kept by the Company, except for the matters referred to in the Basis for the Adverse opinion section of our report.

It should be noted that the Company’s net assets are less than half of the Stated Capital resulting in a serious loss of capital situation in terms of Section 220 of the Companies Act.

Further as described in note 35 to the financial statements, the Company does not fulfill the requirements of Central bank of Sri Lanka and other regulatory agencies.

Annual Report 2018/19 Swarnamahal Financial Services PLC 47 Statement of Profit or Loss and other Comprehensive Income

2019 2018 For the Year Ended 31st March Rs. Rs. Note Interest income 539,254,257 664,583,402 Interest expense (296,550,365) (467,518,162) Net interest income 6 242,703,892 197,065,240 Net gain/(loss) from financial instruments at fair value through 7 (408,503) (69,468) profit or loss Other income 8 7,750,783 18,188,669 Total operating income 250,046,172 215,184,442

Operating expenses Personnel expenses 9 (98,407,606) (112,949,870) Impairment (charges) / reversal and fair value adjustment for 10 (23,454,296) 1,781,239 loans and other advances Other expenses (145,849,120) (164,042,279) Operating Loss before value added tax and income tax 11 (17,664,850) (60,026,469) expenses Value added tax on financial services 12 (11,225,259) (6,557,817) Profit/(Loss) before income tax (28,890,109) (66,584,286) Income tax Reversal / (Expense) 13 1,069,832 (1,188,808) Profit/(Loss) for the year (27,820,277) (67,773,094)

Other comprehensive income, net of income tax Items that will never be reclassified to Profit or Loss Actuarial Gain on employee benefits 26 2,406,784 233,142 Deferred tax on actuarial gain on employee benefits (673,899) (65,280) Other comprehensive loss for the year, net of tax 1,732,884 167,862 Total comprehensive income for the year (26,087,392) (67,605,232) 14 Earnings/(Loss) per share (0.06) (0.14)

Figures in brackets indicate deductions. The notes on pages 54 to 109 form an integral part of these financial statements.

48 Annual Report 2018/19 Swarnamahal Financial Services PLC Statement of Financial Position

2019 2018 As at 31st March Rs. Rs. Note Assets Cash and cash equivalents 15 278,535,113 270,540,555 Other investments 16 34,131,403 439,008,677 Financial assets held at fair value through profit or loss 17 1,486,759 1,895,262 Financial assets - fair value through other comprehensive 18 2,500 2,500 income / Available for Sale Loans and advances to customers 19 1,086,420,089 1,559,782,952 Investment property 20 130,300,000 128,000,000 Property, plant and equipment 21 21,667,017 32,320,048 Current tax receivable 22 31,795,578 28,039,543 Other assets 23 80,678,827 99,591,012 Total assets 1,665,017,286 2,559,180,549

Liabilities Bank overdrafts 15.2 342,319,934 2,562,225 Deposits from customers 24 2,389,472,931 3,539,344,527 Deferred tax liabilities 25 - - Retirement benefit Obligation 26 14,315,782 14,977,260 Other liabilities 27 79,549,848 64,729,951 Total liabilities 2,825,658,495 3,621,613,963

Equity Stated capital 28 250,000,070 250,000,070 Statutory reserve fund 29 143,349,119 143,349,119 Retained losses 30 (1,553,990,396) (1,455,782,603) Total equity (1,160,641,208) (1,062,433,414) Total liabilities and equity 1,665,017,286 2,559,180,549

The above statements of finacial position are to be read Conjunction with note to the Financial Statements on pages 54 to 109 It is certified that the financial statements comply with the requirements of the Companies Act No. 07 of 2007.

D.W.K. Wickramarachchi General Manager - Finance & Administration The Board of Directors is responsible for the preparation and presentation of these financial statements. These financial statements were approved by the Board of Directors and signed on their behalf.

J.H.Edirisinghe N.P. Edirisinghe Chairman Executive Director 28th June 2019, Colombo Annual Report 2018/19 Swarnamahal Financial Services PLC 49 Statement of Change in Equity

Statutory Retained earnings Stated capital Total reserve / (loss) Rs. Rs. Rs. Rs. Balance as at 1 April 2017 250,000,070 143,349,119 (1,388,177,371) (994,828,182)

Statement of profit or loss Loss for the year - - (67,773,094) (67,773,094)

Other comprehensive income, net of tax - Actuarial loss - - 167,862 167,862 Total comprehensive income for the year - - (67,605,232) (67,605,233)

Transfers (from) / to retained earnings - - - -

Balance as at 31 March 2018 250,000,070 143,349,119 (1,455,782,603) (1,062,433,414)

Balance as at 1 April 2018 250,000,070 143,349,119 (1,455,782,603) (1,062,433,414)

Impact of adopting SLFRS 9 “Financial Note (72,120,400) (72,120,400) Instruments” as at 1 April 2018 19

Statement of profit or loss Loss for the year - - (27,820,277) (27,820,277)

Other comprehensive income, net of tax - Actuarial Gain - - 1,732,884 1,732,884 Total comprehensive income for the year - - (26,087,392) (98,207,794)

Transfers (from) / to retained earnings - - - -

Balance as at 31 March 2019 250,000,070 143,349,119 (1,553,990,396) (1,160,641,208)

Figures in brackets indicate deductions. The notes on pages 52 to 107 form an integral part of these financial statements.

50 Annual Report 2018/19 Swarnamahal Financial Services PLC Statement of Cash Flows

2019 2018 For the Year Ended 31st March Rs. Rs.

Profit/(Loss) before taxation (28,890,110) (66,584,286)

Adjustment for; Depreciation 13,853,974 14,822,577 Impairment adjustment of “Financial Instruments” as at 1 April 2018 (72,120,400) - Impairment for loan losses 33,531,146 17,307,503 Impairment on stolen articles and other receivable 221,054 (68,160) Fair value gain on investment property (2,300,000) (12,950,000) Provision for gratuity 3,418,305 3,624,473 Unwinding of interest (10,297,904) (19,020,582) Fair value loss / (gain) on FVTPL investments 408,503 69,468 (62,175,431) (62,799,008) Changes in; - loans and advances to customers 450,129,621 501,549,056 - other assets 15,331,030 (17,787,338) - deposit from customers (1,149,871,596) (232,483,240) - other liabilities 14,819,897 (7,700,182) Cash used in operating activities (731,766,480) 180,779,288

Tax paid - - Employee benefit paid (1,673,000) (2,625,500) Net cash used in operating activities (733,439,480) 178,153,788

Cash flows from investment activities Investment / (Disposal) in government securities 404,877,273 (237,701,750) Withdrawal of investments in government securities 103,371,221 Additions to property plant and equipment (3,200,944) (4,415,413) Net cash generated from/(used in) investment activities 401,676,330 (138,745,942)

Net (decrease) / increase in cash and cash equivalents (331,763,150) 39,407,846 Cash and cash equivalents at the beginning of the year 267,978,330 228,570,484 Cash and cash equivalent at the end of the year (63,784,821) 267,978,330

Reconciliation of cash and cash equivalents Cash and cash equivalents (Note 15.1) 278,535,113 270,540,555 Bank overdrafts (Note 15.2) (342,319,934) (2,562,225) (63,784,821) 267,978,330

Figures in brackets indicate deductions. The notes on pages 52 to 107 form an integral part of these financial statements.

Annual Report 2018/19 Swarnamahal Financial Services PLC 51 Notes to the Financial Statements

1. Reporting entity This is the first set of the Company’s for inflationary factors affecting the annual financial statements in which Financial Statements. Swarnamahal Financial Services PLC SLFRS 9 – “Financial Instruments” has (the “Company”) is a public limited company incorporated and domiciled been applied. Changes to significant 2.3 Functional and presentation in Sri Lanka and listed on the Colombo accounting policies are described in currency Note 19 Stock Exchange. The address of the The financial statements are presented Company’s registered office of the The financial statements for the year in Sri Lankan Rupees, which is the Company is located at No. 05, R.A.De ended 31 March 2019 were authorized functional currency of the Company. mel Mawatha, Colombo 04 and the for issue by the Directors on 28th June All financial information presented in principal place of business is situated 2019. Sri Lankan Rupees has been rounded at the same place. to the nearest rupee. 2.2 Basis of measurement The Company is a subsidiary of E.T.I. 2.4 Use of estimates and judgement Finance Limited and the ultimate The Financial Statements of the The preparation of financial parent undertaking and controlling Company have been prepared on the statements in conformity with Sri party of the Company is E.A.P Holdings historical cost basis except for the Lanka Accounting Standards requires Limited. following material items stated in the management to make judgments, Statement of Financial Position. estimates and assumptions that affect The principal activities of the Company the application of accounting policies are granting gold loans, leases, • Investment property is measured and the reported amounts of assets, hire purchases & loan facilities and at fair value liabilities, income and expenses. accepting fixed & savings deposits. • The liability for defined benefit Actual results may differ from these The Company is a registered finance obligations is recognised at the estimates. company under the Finance Business present value of the defined Act No. 42 of 2011. benefit obligation Estimates and underlying assumptions are reviewed on an ongoing basis. The staff strength of the Company as Policy Applicable prior to 01st April Revisions to accounting estimates are at 31 March 2019 is 109 (2018-142). 2018 recognised in the period in which the estimates are revised and in any future • Held for trading financial 2. Basis of preparation periods affected. instruments are measured at fair 2.1. Statement of compliance value. Information about assumptions and The financial statements of the estimation uncertainties that have • Financial investments – Available Company which comprise the a significant risk of resulting in a for sale measured at fair value. statements of financial position, profit material adjustment within the next or loss and other comprehensive Policy Applicable from 01st April 2018 financial year are included in the income, changes in equity, cash following notes: • Financial instruments measured flows and notes thereto have been • Note 16, 17 & 18 – Recognition at fair value through profit or loss prepared in accordance with Sri and measurement of financial are measured at fair value. Lanka Accounting Standards (LKAS & instruments SLFRS) laid down by the Institute of • Financial assets measured • Note 19 – Impairment allowance Chartered Accountants of Sri Lanka, at fair value through other on loans and receivables and comply with the requirements comprehensive income measured of Companies Act No. 07 of 2007 and at fair value. • Note 20 – Investment property Finance Business Act No. 42 of 2011 and amendments thereto, and provide • Defined Benefit Obligation is • Note 25 – Deferred tax liabilities recognized as the present value of appropriate disclosures as required by • Note 26 – Measurement of the defined benefit obligation. the Listing Rules of the Colombo Stock retirement benefit obligation Exchange. No adjustments have been made

52 Annual Report 2018/19 Swarnamahal Financial Services PLC An analysis of financial instruments instruments at initial recognition observable, the difference between measured at fair value as at the end depends on their cash flow the transaction price and model of the reporting period, by the level of characteristics and the business model value is only recognised in the profit the or fair value hierarchy is given in for managing the instruments. or Loss when the inputs become note 5.8 observable, or when the instrument is A financial asset or financial liability derecognised. is measured initially at fair value plus 2.5 Materiality and aggregation or minus transaction costs that are Impairment directly attributable to its acquisition Each material class of similar item is 3.1.3 Classification and Subsequent or issue, except in the case of financial presented separately in the financial Measurement of Financial Assets statements. Items of dissimilar assets and financial liabilities at fair nature or function are presented value through profit or loss as per From 1st April 2018 as per SLFRS 9, the separately, unless they are immaterial SLFRS 9 and trade receivables that Company classifies all of its financial as permitted by the Sri Lanka do not have a significant financing assets based on the business model Accounting Standard - LKAS 01 on component as defined by SLFRS 15. for managing the assets and the assets “Presentation of Financial Statements” contractual terms measured at either; Transaction cost in relation to financial and amendments to the LKAS 01 on assets and financial liabilities at fair “Disclosure initiative”, which was • Amortised cost value through profit or loss are dealt effective from 01st January 2016 with through the Statement of Profit • Fair value through other or Loss and Other Comprehensive comprehensive income (FVOCI) 3. Significant accounting policies Income. • Fair value through profit or loss The accounting policies set out below Trade receivables that do not have (FVTPL) have been applied consistently to all significant financing component are periods presented in these financial The subsequent measurement of measured at their transaction price at statements. financial assets depends on their initial recognition as defined in SLFRS classification. 3.1 Financial assets and financial 15. liabilities Up to 01st April 2018 as per LKAS 39, When the fair value of financial the Company classified its financial Recognition, Classification and instruments (except trade receivables assets into one of the following Subsequent Measurement that do not have significant financing categories: component) at initial recognition 3.1.1 Date of Recognition differs from the transaction price, the • Financial Assets at Fair value Company accounts for the Day 1 profit through profit or loss, and within The Company initially recognises or loss, as described below. Lease and Hire Purchase receivables, this category as : loans and advances, deposits and 3.1.2.1 “Day 1” Profit or Loss - held for trading ; or debt securities issued on the date When the transaction price differs on which they are originated. All - designated at fair value through from the fair value of other observable profit or loss other financial instruments (including current market transactions in the regular way purchases and sales of same instrument, or based on a • Loans and receivables; financial assets) are recognised on valuation technique whose variables • Held to maturity and the trade date, which is the date on include only data from observable which the Company becomes a party markets, the Company recognises the • Available for Sale to the contractual provisions of the difference between the transaction Details of the impact on instrument. price and fair value (a ‘Day 1’ profit or reclassification and measurement loss) in ‘Interest Income and Personnel 3.1.2 Initial Measurement of Financial from LKAS 39 to SLFRS 9 are disclosed Expenses’. In cases where fair value Instruments in transition disclosures given in Note is determined using data which is not The classification of financial 19

Annual Report 2018/19 Swarnamahal Financial Services PLC 53 Notes to the Financial Statements contd.

3.1.3.1 Business Model Assessment considered in isolation, but as part the contractual cash flows that of an overall assessment of how are unrelated to a basic lending With effect from 01st April 2018, the arrangement do not give rise to Company makes an assessment of the Company’s stated objective contractual cash flows that are solely the objective of a business model in for managing the financial assets payments of principal and interest which an asset is held at a portfolio is achieved and how cash flows on the principal amount outstanding. level and not assessed on instrument- are realised. In such cases, the financial asset is by instrument basis because this The business model assessment required to be measured at FVTPL. best reflects the way the business is is based on reasonably expected In assessing whether the contractual managed and information is provided scenarios without taking ‘worst cash flows are solely payments of to management. The information case’ or ‘stress case’ scenarios into principal and interest on principal considered includes: account. If cash flows after initial amount outstanding, the Company recognition are realised in a way • The stated policies and objectives considers the contractual terms of the that is different from the Company’s instrument. This includes assessing for the portfolio and the operation original expectations, the Company whether the financial asset contains of those policies in practice. In does not change the classification of a contractual term that could change particular, whether management’s the remaining financial assets held in the timing or amount of contractual strategy focuses on earning that business model, but incorporates cash flows such that it would not contractual interest revenue, such information when assessing meet this condition. In making the maintaining a particular interest newly originated or newly purchased assessment, the Company considers: rate profile, matching the duration financial assets going forward. of the financial assets to the • Contingent events that would duration of the liabilities that are 3.1.3.2 Assessment of whether change the amount and timing of funding those assets or realising contractual cash flows are Solely cash flows; cash flows through the sale of the Payments of Principal and Interest • Leverage features; assets; (SPPI test) • Prepayment and extension terms; • How the performance of the As a second step of its classification portfolio is evaluated and process the Company assesses the • Terms that limit the Company’s reported to the Company’s contractual terms of financial assets claim to cash flows from specified management; to identify whether they meet the assets; and SPPI test. For the purposes of this • Features that modify • The risks that affect the assessment, “principal” is defined as performance of the business consideration of the time value of the fair value of the financial asset money. model (and the financial assets on initial recognition and may change held within that business model) over the life of the financial asset 3.1.3.3 Financial assets measured at and how those risks are managed; (for example, if there are repayments Amortised Cost • How managers of the business of principal or amortisation of the As per SLFRS 9, financial asset is are compensated – e.g. whether premium/ discount). measured at amortised cost if it meets compensation is based on the both of the following conditions and is “Interest” is defined as consideration not designated as at FVTPL: fair value of the assets managed for the time value of money and for or the contractual cash flows the credit risk associated with the • The asset is held within a business collected; and principal amount outstanding during a model whose objective is to hold particular period of time and for other • The frequency, volume and assets to collect contractual cash basic lending risks and costs, as well as timing of sales in prior periods, flows; and the reasons for such sales and its profit margin. expectations about future sales • The contractual terms of the In contrast, contractual terms that activity. However, information financial asset give rise on introduce a more than de minimise about sales activity is not specified dates to cash flows that exposure to risks or volatility in are solely payments of principal

54 Annual Report 2018/19 Swarnamahal Financial Services PLC and interest on the principal Assets sold to customers under fixed insignificant risk of changes in their amount outstanding. rate hire agreements, which transfer fair value. There were no cash and Financial assets measured at all risk and rewards as well as the legal cash equivalents held by the Company amortised cost include Lease Rental title at the end of such contractual that were not available for use by the and Hire Purchase Receivables, Loans period are classified as ‘Hire Purchase Company. and Receivables to other Customers, Receivable’. Such assets are accounted Bank overdrafts that are repayable Placements with Banks and other for in a similar manner as finance on demand and form an integral part Finance companies, Cash and Cash leases. of the Company’s cash management Equivalents, Reverse Repurchase After initial measurement, financial are included as a component of cash Agreements and Debt & other assets measured at amortised cost and cash equivalents for the purpose financial instruments. are subsequently measured at gross of the statement of cash flows. Cash As per LKAS 39, ‘Loans and carrying amount using the EIR, less and cash equivalents are carried at receivables’ comprised of non provision for impairment, except amortised cost in the Statement of derivative financial assets with fixed when the company designates at fair Financial Position. or determinable payments that are value through profit or loss. EIR is 3.1.3.4 Financial assets measured at not quoted in an active market, other calculated by taking into account any FVOCI than: discount or premium on acquisition and fees and costs. The amortisation Financial assets at FVOCI include - Those that the Company intends is included in “Interest Income” while debt and equity instruments to sell immediately or in the the losses arising from impairment measured at fair value through other near term and those that the are recognised in “Impairment comprehensive income. charges and other losses” in the Company, upon initial recognition, Statement of Profit or Loss and Other designates as at fair value through As per SLFRS 9, this comprises debt Comprehensive Income. instruments measured at FVOCI and profit or loss equity instruments designated at - Those that the Company, upon 3.1.3.3.1 Reverse Repurchase FVOCI. initial recognition, designates as Agreements Debt instruments at FVOCI available for sale When the Company purchases a A debt instrument is measured at - Those for which the Company may financial asset and simultaneously enters into an agreement to resale FVOCI only if it meets both of the not recover substantially all of following conditions and is not its initial investment, other than the asset (or a similar asset) at a fixed price on a future date, the designated at FVTPL: because of credit deterioration arrangement is called “Reverse Even though the classification Repurchase Agreements” and • The asset is held within a definition varies with SLFRS 9, the accounted for as a financial asset in business model whose objective measurement criteria remain the the Statement of Financial Position is achieved by both collecting same under both standards. reflecting the transaction’s economic contractual cash flows and selling substance as a loan granted by the financial assets; and When the Company is the lessor in Company. a lease agreement that transfers • The contractual terms of the substantially all the risks and rewards 3.1.3.3.2 Cash and Cash Equivalents financial asset give rise on associated with ownership other than specified dates to cash flows that Cash and cash equivalents include of legal title, are classified as finance are solely payments of principal cash in hand and balance at banks leases. Amounts receivable under and interest on the principal and other highly liquid financial assets finance leases, net of initial rentals amount outstanding. which are held for the purpose of received, unearned lease income and meeting short-term commitments FVOCI debt instruments are provision for impairment are classified with original maturities of less than subsequently measured at fair value as “Lease Rental Receivable” in the three months which are subject to an with gains and losses arising due to Statement of Financial Position. changes in fair value recognised in

Annual Report 2018/19 Swarnamahal Financial Services PLC 55 Notes to the Financial Statements contd.

OCI. Interest income and ECL and performance is evaluated on a fair designated at Fair value through reversals are recognised in profit or value basis as they are neither held profit or loss or Available for Sale. loss. On derecognition, cumulative to collect contractual cash flows nor After initial measurement, held to gains or losses previously recognised held both to collect contractual cash maturity financial investments were in OCI are reclassified from OCI to flows and to sell financial assets and subsequently measured at amortised profit or loss. These instruments financial assets designated upon initial cost using the EIR, less impairment comprise Government Securities recognition at fair value through profit provision. Amortised cost is calculated that had previously been classified as or loss. by taking into account any discount or available for sale under LKAS 39. premium on acquisition and fees that As per LKAS 39, financial assets at fair are an integral part of the EIR. The value through profit or loss include amortization is included in ‘Interest Equity instruments at FVOCI financial assets held for trading and Income’ in the Statement of Profit Upon initial recognition, the financial assets designated upon initial or Loss and Other Comprehensive Company occasionally elects to recognition at fair value through profit Income. The losses arising from classify irrevocably some of its or loss. impairment of such investments are equity investments held for strategic recognised in the Statement of Profit or Loss and Other Comprehensive purpose, as equity instruments at 3.1.3.5.1 Financial assets Held for Income in ‘Impairment charges for FVOCI when they meet the definition Trading of Equity under LKAS 32 “Financial loans and other losses’. Instruments: Presentation” and are Financial assets are classified as not held for trading. Such classification held for trading if they are acquired 3.1.3.7 Financial investments – Loans is determined on an instrument-by- principally for the purpose of selling & Receivables (Up to 31st March instrument basis. or repurchasing in the near term or they hold as a part of a portfolio that 2018) Gains and losses on these equity is managed together for short-term As per LKAS 39, After initial instruments are never recycled Profit or position taking. measurement, ‘loans and advances’ to profit or loss instead directly were subsequently measured at transferred to retained earnings at the Financial assets held for trading are amortised cost using the EIR, less time of derecognition. Dividends are recorded in the Statement of Financial provision for impairment except when recognised in profit or loss as other Position at fair value. Changes in fair the Company designates loans and operating income when the right of value are recognised in profit or loss. receivables at fair value through profit the payment has been established. Interest and dividend income are or loss. Amortised cost was calculated Equity instruments at FVOCI are not recorded in ‘interest Income’ and by taking into account any discount subject to an impairment assessment. ‘Net Gains/ (Losses) from Trading’ or premium on acquisition and fees respectively in the Statement of Profit and costs that are an integral part of These instruments comprise unquoted or Loss and Other Comprehensive the EIR. The amortisation is included shares that had been previously Income according to the terms of the in ‘Interest Income’. The losses arising classified as Available for sale under contract, or when the right to receive from impairment are recognised in LKAS 39. the payment has been established. the Statement of Profit or Loss and Other Comprehensive Income in 3.1.3.5 Financial assets measured at 3.1.3.6 Financial investments – Held ‘Impairment charges for loans and FVTPL to Maturity (Up to 31st March 2018) other losses’ in the Statement of Profit or Loss and Other Comprehensive As per SLFRS 9, all financial assets As per LKAS 39, Held to Maturity Income. other than those classified at financial investments were non- amortised cost or FVOCI are classified derivative financial assets with fixed Other financial investments as measured at FVTPL. Financial assets or determinable payments and fixed classified as loans and receivables at fair value through profit or loss maturities, which the Company included debt instruments. After include financial assets that are held had the intention and ability to initial measurement, these were for trading or managed and whose hold to maturity and which are not subsequently measured at amortised

56 Annual Report 2018/19 Swarnamahal Financial Services PLC cost using the EIR, less allowance holding Available for Sale financial held for trading, if they are acquired for impairment. Amortised cost was investments were recognised in the principally for the purpose of calculated by taking into account Statement of Profit or Loss and Other repurchasing in the near term or held any discount or premium on Comprehensive Income as ‘Net Gain/ as a part of a portfolio that is managed acquisition and fees and costs that (Loss) from financial investments’ together for short-term profit or were an integral part of the EIR. The when the right to receive the payment position taking. amortisation was included in ‘Interest has been established. The losses Income’ in the Statement of Profit arising from impairment of such Changes in fair value are recorded or Loss and Other Comprehensive investments too are recognised in in “Net fair value gains/(losses) from Income. The losses arising from the Statement of Profit or Loss and financial instruments at fair value impairment were recognised in Other Comprehensive Income in through profit or loss” with the the Statement of Profit or Loss and ‘Impairment charges for loans and exception of movements in fair value Other Comprehensive Income in other losses’ and removed from the of liabilities designated at FVTPL due ‘Impairment charges for loans and ‘Available for Sale reserve’. to changes in the Company’s own other losses’. credit risk. Such changes in fair value 3.1.4 Classification and Subsequent are recorded in the own credit reserve 3.1.3.8 Available for Sale Financial Measurement of Financial Liabilities through OCI and do not get recycled Investments (Up to 31st March 2018) to profit or loss. Interest paid/payable As per SLFRS 9, the Company classifies is accrued in “Interest expense”, using As per LKAS 39, Available for financial liabilities, other than financial the EIR. sale investments included equity guarantees and loan commitments securities and debt securities. Equity into one of the following categories: The Company has not designated investments classified as Available any financial liabilities upon initial for Sale were those which were • Financial Liabilities at fair value recognition as at fair value through neither classified as held for trading through profit or loss, and within profit or loss. nor designated at fair value through this category as: profit or loss. Debt securities in this category were intended to be held - Held for trading; or 3.1.4.2 Financial Liabilities at Amortised Cost for an indefinite period of time and - Designated at fair value through may be sold in response to needs for profit or loss. Financial instruments issued by the liquidity or in response to changes in Company that are not designated at the market conditions. • Financial Liabilities at amortised fair value through profit or loss, are cost classified as liabilities under ‘Deposits After initial measurement, available The subsequent measurement of Due to Customers ’,‘Subordinated for sale financial investments were financial liabilities depends on their Term Debts’ or ‘Interest Bearing subsequently measured at fair value. classification. SLFRS 9 largely retains Borrowings’ as appropriate, where the existing requirements in LKAS the substance of the contractual Unrealised gains and losses were 39 for the classification of financial arrangement results in the Company recognised directly in Equity through liabilities. having an obligation either to deliver Other Comprehensive Income in the cash or another financial asset to the ‘Available-For-Sale Reserve’. When 3.1.4.1 Financial Liabilities at Fair holder, or to satisfy the obligation these financial investments were Value through Profit or Loss other than by the exchange of a fixed disposed of, the cumulative gain or amount of cash or another financial loss previously recognised in Equity Financial liabilities at fair value asset for a fixed number of own equity is recycled to Statement of Profit through profit or loss include financial shares. The Company classifies capital or Loss and Other Comprehensive liabilities held for trading and financial instruments as financial liabilities or Income in ‘Operating income’. Interest liabilities designated upon initial equity instruments in accordance with earned whilst holding Available recognition as at fair value through the substance of the contractual terms for Sale financial investments was profit or loss. of the instrument. reported as ‘Interest Income’ using the EIR. Dividends earned whilst Financial liabilities are classified as

Annual Report 2018/19 Swarnamahal Financial Services PLC 57 Notes to the Financial Statements contd.

After initial recognition, such financial 3.1.5.2.1 Reclassification of Financial recognised in OCI. EIR liabilities are subsequently measured Instruments - Fair value through determined at initial recognition at amortised cost using the EIR profit or loss is not adjusted as a result of method. Amortised cost is calculated reclassification. • To Fair value through other by taking into account any discount or premium on acquisition and fees or comprehensive income • To Fair value through profit or loss costs that are an integral part of the The fair value on reclassification The fair value on the EIR. date becomes the new gross reclassification date becomes carrying amount. The EIR is the new carrying amount. The The EIR amortisation is included calculated based on the new gross difference between amortised in ‘Interest Expense’ in the carrying amount. Subsequent cost and fairvalue is recognised in Statement of Profit or Loss and changes in the fair value are profit and loss. Other Comprehensive Income. recognised in OCI. Gains and losses are recognised in 3.1.6 De recognition of Financial Statement of Profit or Loss and Other • To Amortised Cost Assets and Financial Liabilities Comprehensive Income when the The fair value on reclassification liabilities are derecognised as well as date becomes the new carrying through the EIR amortisation process. 3.1.6.1 Financial Assets amount. The EIR is calculated based on the new gross carrying The Company derecognises a financial asset (or where applicable a part of 3.1.5 Reclassification of Financial amount. thereof) when the contractual rights Assets and Liabilities to the cash flows from the financial As per SLFRS 9, Financial assets are 3.1.5.2.2 Reclassification of Financial asset expire or it transfers the rights not reclassified subsequent to their Instruments - Fair value through to receive the contractual cash flows initial recognition, except and only in other comprehensive income in a transaction in which substantially those rare circumstances when the all risks and rewards of ownership of Company changes its objective of the • To Fair value through profit or loss the financial asset are transferred or in business model for managing such The accumulated balance in OCI which the Company neither transfers financial assets which may include the is reclassified to profit and loss on nor retains substantially all risks and acquisition, disposal or termination of the reclassification date. rewards of ownership and it does not a business line. retain control of the financial asset. • To Amortised Cost Financial Liabilities are not reclassified On derecognition of a financial asset, The financial asset is reclassified as such reclassifications are not the difference between the carrying at fair value. The cumulative permitted by SLFRS 9. amount of the asset (or the carrying balance in OCI is removed and is amount allocated to the portion of the used to adjust fair value on the asset derecognised) and the sum of reclassification date. The adjusted 3.1.5.1 Timing of reclassification of the consideration received (including amount becomes the amortised financial assets any new asset obtained less any new cost. EIR determined at initial liability assumed) and any cumulative Consequent to the change in the recognition and gross carrying gain or loss that had been recognised business model, the Company amount are not adjusted as a in OCI is recognised in profit or loss. reclassifies all affected assets result of reclassification. prospectively from the first day of the first reporting period following the However, cumulative gain/loss change in the business model (the 3.1.5.2.3 Reclassification of Financial recognised in OCI in respect of equity reclassification date). Accordingly, Instruments at “Amortised Cost” investment securities designated as prior periods are not restated. • To Fair value through other at FVOCI is not recognised in profit or loss on derecognition of such comprehensive income securities as per SLFRS 9. 3.1.5.2 Measurement of The asset is remeasured to reclassification of financial assets fair value, with any difference Any interest in transferred financial

58 Annual Report 2018/19 Swarnamahal Financial Services PLC assets that qualify for derecognition reported in the Statement of Financial SLFRS 9 outlines a “three-stage” model that is created or retained by the Position if, and only if, there is a for impairment based on changes in Company is recognised as a separate currently enforceable legal right to credit quality since initial recognition. asset or liability. offset the recognised amounts and there is an intention to settle on a • Stage 1: A financial asset that is not The Company enters into transactions net basis, or to realise the assets and originally credit-impaired on initial whereby it transfers assets recognised settle the liabilities simultaneously. recognition is classified in Stage on its Statement of Financial Position, 1. Financial instruments in Stage but retains either all or substantially Income and expenses are presented 1 have their ECL measured at an all risks and rewards of the transferred on a net basis only when permitted amount equal to the proportion assets or a portion of them. In such under SLFRSs, or for gains and losses of lifetime expected credit losses cases, the transferred assets are not arising from a group of similar (LTECL) that result from default derecognised. transactions such as in the Company’s events possible within next 12 trading activity. months (12M ECL). When assets are sold to a third party with a concurrent total rate of return • Stage 2: If significant increases in swap on the transferred assets, the 3.1.8 Amortised Cost and gross credit risk (SICR) since origination is transaction is accounted for as a Carrying amount identified, it is moved to Stage 2 and secured financing transaction similar An ‘Amortised Cost’ of a financial asset the Company records an allowance to sale and repurchase transactions or financial liability is the amount at for LTECL. because the Company retains all or which the financial asset or liability is substantially all risks and rewards of measured at initial recognition, minus • Stage 3: If a financial asset is credit- ownership of such assets. principal repayments, plus or minus impaired, it is moved to Stage 3 and the Company recognises an When the Company has transferred the cumulative amortisation using the EIR method of any difference between allowance for LTECL, with probability its right to receive cash flows from of default at 100%. an asset or has entered into a pass- the initial amount and the maturity amount, and for financial assets , through arrangement and has neither • Purchased or originated credit adjusted for any ECL allowance. transferred nor retained substantially impaired (POCI) financial assets: all the risks and rewards of the asset Financial assets which are credit nor transferred control of the asset, The ‘gross carrying amount of a financial asset’ is the amortised cost impaired on initial recognition are the asset is recognised to the extent of categorised within Stage 3 with a the Company’s continuing involvement of a financial asset before adjusting for any ECL allowance. carrying value already reflecting the in the asset. In that case, the Company lifetime expected credit losses. The also recognises an associated liability. Company does not have POCI loans The transferred asset and the 3.1.9 Identification and Measurement as at the reporting date. associated liability are measured on of Impairment of Financial Assets the basis that reflected the rights and obligations that the Company has 3.1.9.2 Measurement of ECL 3.1.9.1. Overview of the ECL retained. principles The Company recognizes loss 3.1.6.2 Financial Liabilities allowances for Expected Credit Losses As per SLFRS 9, the Company records (ECL) on financial investments that are The Company derecognises a an allowance for expected credit not measured at FVTPL. financial liability when its contractual losses for lease rental and hire obligations are discharged or cancelled purchase receivables , loans and No impairment loss is recognised on or expired. receivables to other customers, equity investments. debt and other financial instruments 3.1.7 Offsetting of Financial measured at amortised cost, debt The key inputs into the measurement Instruments instruments measured at fair value of ECL are the term structure of the Financial assets and financial liabilities through other comprehensive income. following variables: are offset and the net amount

Annual Report 2018/19 Swarnamahal Financial Services PLC 59 Notes to the Financial Statements contd.

• Probability of default (PD) financial assets, EAD is determined by The Company considers an exposure • Loss given default (LGD) considering contractual cash flows, to have significantly increased credit prepayments and other factors. risk when contractual payments of a • Exposure at default (EAD) customer are more than 30 days past As described above, and subject to due in accordance with the rebuttable Probability of default (PD) using a maximum of a 12-month PD presumption in SLFRS 9. PD estimates are estimates at a certain for financial assets for which credit date, which are calculated, based risk has not significantly increased, the Company measures ECL considering 3.1.9.4 Definition of default and on statistical models, and assessed credit impaired assets using various categories based on the risk of default over the maximum homogenous characteristics of contractual period over which it is The Company considers a financial exposures. These statistical models exposed to credit risk, even if, for risk asset to be in default when: are based on internally compiled management purposes, the Company data comprising both quantitative considers a longer period. The • The borrower is unlikely to pay its and qualitative factors. Where it maximum contractual period extends credit obligations to the Company is available, market data may also to the date at which the Company in full, without recourse by the be used to derive the PD for large has the right to require repayment Company to actions such as corporate counterparties. of an advance or terminate a loan realising security (if any is held); commitment or guarantee. or Loss given default (LGD) Where modeling of a parameter is • The borrower is past due equal carried out on a collective basis, the more than 90 days on any LGD is the magnitude of the likely loss financial instruments are grouped on material credit obligation to the if there is a default. The Company the basis of shared risk characteristics. Company. In determination of estimates LGD parameters based on The groupings are subject to regular default the Company largely aligns the history of recovery rates of claims review to ensure that exposures with the regulatory definition against defaulted counterparties. The within a particular Company remain of default which is 90 days and LGD models consider the structure, appropriately homogeneous. collateral, seniority of the claim, above. product category and recovery costs The key judgments and assumptions 3.1.9.5 Movement between the of any collateral that is integral to the adopted by the Company in stages financial asset. They are calculated addressing the requirements of SLFRS on a discounted cash flow basis using 9 are discussed below: Financial assets can be transferred the effective interest rate as the between the different categories discounting factor. (other than POCI) depending on 3.1.9.3 Significant increase in credit their relative change in credit risk risk since initial recognition. Financial Exposure at default (EAD) instruments are transferred out When determining whether the risk of stage 2 if their credit risk is no EAD represents the expected exposure of default on a financial instrument longer considered to be significantly in the event of a default. The Company has increased significantly since increased since initial recognition. derives the EAD from the current initial recognition, the Company Financial instruments are transferred exposure to the counterparty and considers reasonable and supportable out of stage 3 when they no longer potential changes to the current information that is relevant and exhibit any evidence of credit amount allowed under the contract available without undue cost or impairment. including amortisation. The EAD of effort. This includes both quantitative a financial asset is its gross carrying and qualitative information analysis, amount. For lending commitments based on the Company’s historical 3.1.9.6 Grouping financial assets and financial guarantees, the EAD experience and expert credit measured on collective basis includes the amount drawn, as well as assessment and including forward Those financial assets for which, potential future amounts that may be looking information. the Company determines that drawn under the contract. For some

60 Annual Report 2018/19 Swarnamahal Financial Services PLC no provision is required under The Company has identified and • restructuring of a loan or advance individual impairment are then documented key drivers of credit risk by the Company on terms that the collectively assessed for ECL. For and credit losses for each portfolio Company would not otherwise the purpose of ECL calculation on of financial instruments and, using consider, collective basis, financial assets are an analysis of historical data, has • indications that a borrower or grouped on the basis of similar risk estimated relationships between issuer will enter bankruptcy, characteristics. Loans and advances macroeconomic variables and credit to other customers are grouped risk and credit losses. The economic • the disappearance of an active into homogeneous portfolios, based variables used by the Company based market for a security, or on product and underlying security on the statistical significance include • Other observable data relating to characteristics. the followings: a group of assets such as adverse changes in the payment status 3.1.9.7 Incorporating Forward Looking Unemployment Base case of borrowers or issuers in the Information Rate scenario group, or economic conditions Interest Rate along with two that correlate with defaults in the The Company incorporates forward- other group. looking information into both its GDP growth Rate In addition, for an investment in assessment of whether the credit scenarios has Inflation Rate an equity security, a significant or risk of an instrument has increased been used prolonged decline in its fair value significantly since its initial recognition (Best Case and below its cost is considered as an and its measurement of ECL using worst Case) objective evidence of impairment. variety of external actual and forecasted information, the Company 3.1.9.8 Identification and formulates a “base case” view of the measurement of impairment of 3.1.9.8.1 Impairment of Financial future direction of relevant economic financial assets under LKAS 39 Assets carried at Amortised Cost variables as well as a representative range (Best Case and worst Case) of At each Reporting date, the Company The Company considered evidence of other possible forecast scenarios. assesses whether there is objective impairment for these assets at both an evidence that financial assets not individual asset and a collective level. This process involves developing carried at fair value through profit All individually significant assets were two or more additional economic or loss are impaired. A financial individually assessed for impairment. scenarios and considering the relative asset or a group of financial assets is Those found not to be impaired were probabilities of each outcome. ‘impaired’ when objective evidence then collectively assessed for any External information includes demonstrates that a loss event has impairment that had been incurred economic data and forecasts published occurred after the initial recognition but not yet individually identified. by both local and international of the asset(s) and that the loss event Assets that were not individually sources. has an impact on the future cash flows significant were collectively assessed of the asset(s) that can be estimated for impairment. Collective assessment The base case represents a most- reliably. was carried out by grouping together likely outcome and is aligned with assets with similar risk characteristics. information used by the Company Objective evidence that financial for other purposes. Such as strategic assets (including equity securities) are In assessing collective impairment, the planning and budgeting. The other impaired can include: company used historical information scenarios represent more optimistic on the timing of recoveries and the and more pessimistic outcomes. • significant financial difficulty of amount of loss incurred, and made an Periodically, the Company carries out the borrower or issuer, adjustment if current economic and stress testing of more extreme shocks • reschedulement of credit credit conditions were such that the to calibrate its determination of these facilities, actual losses were likely to be greater other representative scenarios. or lesser than suggested by historical • default or delinquency by a trends. borrower,

Annual Report 2018/19 Swarnamahal Financial Services PLC 61 Notes to the Financial Statements contd.

An impairment loss was calculated If, in a subsequent period, the fair about a borrower’s financial situation as the difference between an asset’s value of an impaired available for- sale and the net realisable value of any carrying amount and the present debt instrument increases and the underlying collateral. Each impaired value of the estimated future cash increase can be objectively related asset is assessed on its merits, and the flows discounted at the asset’s to an event occurring after the workout strategy and estimate of cash original effective interest rate. Losses impairment loss was recognised, then flows considered recoverable. were recognised in profit or loss and such impairment loss was reversed reflected in an allowance account. through profit or loss; otherwise, any A collective impairment provision is When the company considered that increase in fair value was recognised established for: there were no realistic prospects through OCI. Any subsequent recovery • groups of homogeneous loans and of recovery of the asset, the in the fair value of an available-for-sale advances that are not considered relevant amounts were written off. equity instrument was recognised in individually significant; and If the amount of impairment loss OCI. subsequently decreased and the • groups of assets that are decrease was related objectively to an individually significant but that event occurring after the impairment Impairment Losses on Financial were not found to be individually was recognised, then the previously Assets impaired As per SLFRS 9, the recognised impairment loss was The measurement of impairment Company’s Expected Credit Loss reversed through profit or loss. losses both under SLFRS 9 and LKAS 39 (ECL) calculations are outputs of across all categories of financial assets complex models with a number of requires judgement, in particular, the underlying assumptions regarding 3.1.9.8.2 Impairment of Financial estimation of the amount and timing the choice of variable inputs Investments - Available for Sale of future cash flows and collateral and their interdependencies. For available for sale financial values when determining impairment Elements of the ECL models investments, the Company assesses at losses. As per LKAS 39, the Company that are considered accounting each Reporting date whether there is reviews its individually significant judgements and estimates objective evidence that an investment loans and advances at each reporting include: is impaired. date to assess whether an impairment • The Company’s criteria for loss should be provided in the In the case of debt instruments Statement of Profit or Loss and Other qualitatively assessing whether classified as available for sale, the Comprehensive Income. In particular, there has been a significant Company assesses individually the Management’s judgement increase in credit risk and if so whether there is objective evidence of is required in the estimation of allowances for financial assets impairment based on the same criteria the amount and timing of future measured on a Life time expected as financial assets carried at amortised cash flows when determining the credit loss (LTECL) basis; cost. However, the amount recorded impairment loss. • The segmentation of financial for impairment is the cumulative loss assets when their ECL is assessed measured as the difference between These estimates are based on on a collective basis; the amortised cost and the current fair assumptions about a number of value, less any impairment loss on that factors and hence actual results may • Development of ECL models, investment previously recognised in differ, resulting in future changes to including the various statistical profit or loss. Future interest income the impairment allowance made. formulas and the choice of inputs; is based on the reduced carrying The individual impairment provision • Determination of associations amount/impaired balance and is applies to financial assets evaluated between macro-economic inputs, accrued using the rate of interest individually for impairment and is such as GDP growth, inflation, used to discount the future cash flows based on Management’s best estimate interest rates and for the purpose of measuring the of the present value of the future cash • unemployment and the effect impairment loss. The interest income flows that are expected to be received. on Probability of Default (PD), on such assets too is recorded within In estimating these cash flows, Exposure At Default (EAD) and ‘Interest income’. Management makes judgements Loss Given Default (LGD);

62 Annual Report 2018/19 Swarnamahal Financial Services PLC • Selection of forward-looking from disposal with the carrying amount Category Years of macro-economic scenarios and of property, plant and equipment, and depreciation their probability weightings, to are recognised net within other income derive the economic inputs into in profit or loss. 10 years (Includes the ECL models. Buildings partitions and 3.3.2 Subsequent costs improvements other permanent 3.2 Stated capital The cost of replacing a part of fixtures) Ordinary shares an item of property, plant and Computer Ordinary shares are classified as equity. equipment is recognised in the and software 04 years Incremental costs directly attributable carrying amount of the item if it is to the issue of ordinary shares are probable that the future economic Office equipment 03 years recognised as a deduction from equity, benefits embodied within the part net of any tax effects. will flow to the Company, and its Motor vehicles 04 years cost can be measured reliably. The Furniture and carrying amount of the replaced part 03 years 3.3 Property plant and equipment fittings is derecognised. The costs of the day- Recognition and measurement to-day servicing of property, plant and Leased assets 04 years equipment are recognised in profit or Items of property, plant and loss as incurred. Depreciation methods, useful lives equipment are measured at cost and residual values are reassessed at less accumulated depreciation and each reporting date and adjusted if 3.3.3 Depreciation accumulated impairment losses. appropriate. Depreciation is calculated over the Cost includes expenditure that depreciable amount, which is the 3.3.4 Derecognition is directly attributable to the cost of an asset, or other amount acquisition of the asset. The cost of substituted for cost, less its residual The carrying amount of an item self-constructed assets includes the value. of property, plant & equipment is following: derecognised on disposal or when no Depreciation is recognised in profit future economic benefits are expected • the cost of materials and direct or loss on a straight-line basis over from its use or disposal. The gain labour; the estimated useful lives of each or loss arising from derecognition • any other costs directly part of an item of property, plant and of an item of property, plant & attributable to bringing the assets equipment, since this most closely equipment included in profit or loss to a working condition for their reflects the expected pattern of when the item is derecognised. When intended use; consumption of the future economic replacement costs are recognised benefits embodied in the asset. in the carrying amount of an item Purchased software that is integral of property, plant & equipment, the to the functionality of the related Items of property, plant and remaining carrying amount of the equipment is capitalised as part of the equipment are depreciated from replaced part is derecognised. equipment. the date that they are installed and are ready for use, or in respect of 3.4 Investment property When parts of an item of property, internally constructed assets, from the plant and equipment have different date that the asset is completed and Investment property is property useful lives, they are accounted for as ready for use. held either to earn rental income or separate items (major components) of for capital appreciation or both but property, plant and equipment. The estimated useful lives for the not for sale in the ordinary course current and comparative years of of business, used in the production Gains and losses on disposal of an item significant items of property, plant and or supply of goods or services or for of property, plant and equipment are equipment are as follows: administrative purposes. determined by comparing the proceeds

Annual Report 2018/19 Swarnamahal Financial Services PLC 63 Notes to the Financial Statements contd.

3.4.1 Basis of recognition 3.5.1 Real estate An impairment loss is recognised if the carrying amount of an asset or its Investment property is recognised if Investments in real estate are CGU exceeds its estimated recoverable it is probable that future economic carried at cost or net realisable value amount. Impairment losses are benefits that are associated with the whichever is lower. Cost of purchase, recognised in profit or loss. investment property will flow to the costs of conversion and other costs Company and cost of the investment including selling and distribution An impairment loss is reversed if there property can be reliably measured. expenses that are necessary to bring has been a change in the estimates the asset to the saleable used to determine the recoverable 3.4.2 Measurement condition are included in the carrying amount. An impairment loss is reversed only to the extent that the An investment property is measured value of the property. Net realisable asset’s carrying amount does not initially at its cost. The cost of a value is the price at which inventories exceed the carrying amount that purchased investment property can be sold in the ordinary course would have been determined, net of comprises of its purchase price and of business, less the estimated cost depreciation or amortisation, if no any directly attributable expenditure. of completion and the estimated impairment loss had been recognised. The cost of a self-constructed cost necessary to make the sale. Net investment property is its cost at Realisable Value is determined based the date when the construction or on independent, external valuations 3.7 Employee benefits made by a qualified valuer. development is complete. 3.7.1 Defined contribution plans

The Company applies the fair value 3.6 Impairment of non-financial A defined contribution plan is a post- model for subsequent measurement assets employment benefit plan under which of investment properties in an entity pays fixed contributions accordance with Sri Lanka Accounting The carrying amounts of the into a separate entity and will have Standard (LKAS 40) “Investment Company’s non-financial assets, other no legal or constructive obligation to Property”. Accordingly, investment than deferred tax assets are reviewed pay further amounts. Obligations for properties are stated at fair value at each reporting date to determine contributions to defined contribution and an external independent valuer whether there is any indication of plans are recognised as an employee impairment. If any such indication having an appropriate recognized benefit expense in profit or loss in exists, then the asset’s recoverable professional qualification values the the periods during which services are amount is estimated. properties every year. Any gain or loss rendered by employees. arising from a change in fair value is The recoverable amount of an asset The Company contributes 12% and 3% recognized in statement of profit or or cash-generating unit is the greater of gross emoluments of employees as loss. of its value in use and its fair value provident fund (EPF), and trust fund less costs to sell. In assessing value in (ETF) contribution respectively. 3.4.3 Derecognition Derecognition use, the estimated future cash flows are discounted to their present value Investment properties are using a pre-tax discount rate that 3.7.2 Defined benefit plan derecognized when disposed of or reflects current market assessments A defined benefit plan is a post- permanently withdrawn from use of the time value of money and the employment benefit plan other than because no future economic benefits risks specific to the asset. For the a defined contribution plan. The are expected. Transfers are made to purpose of impairment testing, assets defined benefit is calculated by an and from investment properties only that cannot be tested individually are independent actuary using Projected when there is change in use. grouped together into the smallest Unit Credit method as recommended group of assets that generates cash by LKAS 19 “Employee Benefits” 3.5 Inventory inflows from continuing use that The present value of the defined are largely independent of the cash Inventory mainly consists of real estate benefit obligation is determined by inflows of other assets or group of stock. The Company’s policy for the discounting the estimated future assets (the “cash-generating unit, or accounting of inventory is as follows. cash outflows using the yield on CGU”).

64 Annual Report 2018/19 Swarnamahal Financial Services PLC government bonds at the reporting exactly discounts the estimated future revenue over the term of the facility, date and have maturity dates cash payments and receipts through commencing from the month in which approximating to the terms of the the expected life of the financial asset the lease or hire purchase is executed related liability. or liability (or, where appropriate, a in proportion to the remaining shorter period) to the carrying amount receivable balance of the facility. The Company recognises actuarial of the financial asset or liability. When gains and losses that arise in calculating the effective interest rate, 3.9.3 Dividend income calculating the Company’s obligation the Company estimates future cash Dividend income is recognised in in respect of a plan in statement of flows considering all contractual terms the statement of profit or loss on an other comprehensive income. of the financial instrument, but not accrual basis when the Company’s future credit losses. The present value of the defined right to receive the dividend is established. benefit obligation depends on a The calculation of the effective number of factors that are determined interest rate includes all transaction on an actuarial basis using a number costs and fees that are an integral 3.9.4 Overdue interest of assumptions. Key assumptions used part of the effective interest rate. Overdue interest income from leasing, in determining the defined retirement Transaction costs include incremental hire purchase, gold loans and other benefit obligations are given in Note costs that are directly attributable to loans have been accounted for on a 26. Any changes in these assumptions the acquisition or issue of a financial cash basis. will impact the carrying amount of asset or liability. defined benefit obligations. 3.9.5 Real estate income Interest income and expense Provision has been made for presented in the statement of profit or Revenue is recognized when retirement gratuities from the first loss include interest on financial assets properties are sold and the buyer has year of service for all employees, in and liabilities measured at amortised taken possession of such properties conformity with LKAS 19 “Employee cost calculated on an effective (when the risk and rewards are Benefits”. However, under the interest basis and interest income on transferred to the buyer). However, Payment of Gratuity Act No.12 of available for sale investment securities when there is insufficient assurance 1983, the liability to an employee calculated on an effective interest as to the receipt of the total arises only on completion of 5 years of basis. consideration, income is accounted for continued service. on a cash basis.

The gratuity liability is not externally 3.9.2 Finance lease and hire purchase income 3.9.6 Gains or losses on disposal of funded. property, plant & equipment Assets leased to customers who 3.8 Provisions transfer substantially all the risk and Gains / losses from sale of property rewards associated with ownership plant and equipment is recognized in A provision is recognized if, as a result the period in which the sale occurs. of a past event, the Company has a other than the legal title are classified present legal or constructive obligation as finance leases. Amounts receivable 3.10 Expenses that can be estimated reliably, and it is under finance leases and hire probable that an outflow of economic purchases are included under “Lease Expenses are recognized in profit or benefits will be required to settle the rental receivable”. Leasing and hire loss as they are incurred, in the period obligation. purchases balances are stated in the to which they relate. statement of financial position after 3.9 Revenue deduction of initial rental received. 3.10.1 Operating leases 3.9.1 Interest The excess of aggregate rentals Leases where the lessor effectively Interest income and expense are receivable over the cost of the leased retains substantially all the risks and recognized in profit or loss using assets and hire purchases constitutes rewards of ownership over the lease the effective interest method. The the total unearned income. The term are classified as operating leases. effective interest rate is the rate that unearned income is taken into Payments made under operating

Annual Report 2018/19 Swarnamahal Financial Services PLC 65 Notes to the Financial Statements contd.

leases are recognised in profit and loss 3.10.4.2 Deferred tax 3.10.6 Nation Building Tax on on a straight-line basis over the term financial services Deferred tax is recognized in respect of the lease. of temporary differences between With effect from January 01, 2014, the carrying amounts of assets and NBT of 2% was introduced on supply 3.10.2 Operating expenses liabilities for financial reporting of financial services via an amendment All expenses incurred in day to day purposes and the amounts used for to the NBT Act No. 09 of 2009. NBT is operations of the business and in taxation purposes. chargeable on the same base used for maintaining the property, plant and calculation of VAT on Financial services Deferred tax is measured at the tax equipment in a state of efficiency has as explained in notes to the Financial rates that are expected to be applied been charged to the statement of Statements. to temporary differences when they profit or loss in arriving at the profit reverse, using tax rates enacted or for the year. Provision has also been 3.10.7 Economic Service Charges substantively enacted at the reporting made for bad and doubtful debts, all (ESC) date. known liabilities and depreciation on ESC is payable on the liable turnover property, plant and equipment. Deferred tax assets and liabilities are at specified rates. As per the offset if there is a legally enforceable provision of the Economic Service 3.10.3 Finance expense right to offset current tax liabilities Charge Act No. 13 of 2006 and and assets, and they relate to taxes Finance costs comprise interest subsequent amendments thereto, levied by the same tax authority expense on short term borrowings and ESC is deductible from the income tax on the same taxable entity, or on bank charges. liability. Any unclaimed payment can different tax entities, but they intend be carried forward and set off against to settle current tax liabilities and the income tax payable as per the 3.10.4 Income tax expenses assets on a net basis or their tax relevant provision in the Act. Income tax expenses comprise current assets and liabilities will be realised simultaneously. and deferred tax. Current tax and 3.10.8 Crop Insurance Levy (CIL) deferred tax is recognized in profit or A deferred tax asset is recognised loss except to the extent that it relates As per the provisions of the Section to the extent that it is probable that to items recognized directly in equity 14 of the Finance Act No. 12 of 2013, future taxable profits will be available or in other comprehensive income. the CIL was introduced with effect against which they can be utilised. from April 01, 2013 and is payable to Deferred tax assets are reviewed at the National Insurance Trust Fund. 3.10.4.1 Current tax each reporting date and are reduced Currently, the CIL is payable at 1% of Current tax is the expected tax to the extent that it is no longer the profit after tax. payable or receivable on the taxable probable that the related tax benefit will be realised. income or loss for the year, using 3.11 Earnings per share tax rates enacted or substantively enacted at the reporting date, and any 3.10.5 Value added tax on financial The Company presents basic earnings adjustment to tax payable in respect services per share (EPS) data for its ordinary of previous years. Current tax payable shares. Basic EPS is calculated by The value base for value added tax also includes any tax liability arising dividing the profit attributable to for the Company is the adjusted from the declaration of dividends. ordinary shareholders of the Company accounting profit before tax and by the weighted average number of The provision for income tax is emoluments of employees. The ordinary shares outstanding during based on the elements of income adjustment to the accounting the year. and expenditure as reported in the profit before tax is for economic depreciation computed on prescribed financial statements and computed 3.12 Commitments and contingencies in accordance with the provisions of rates instead of the rates adopted in the Inland Revenue Act No. 24 of 2017 the financial statements. Contingencies are possible assets thereon specified in note 13. or obligations that arise from a past

66 Annual Report 2018/19 Swarnamahal Financial Services PLC event and would be confirmed only The Board of Directors of the Company SLFRS 16 introduces a single, on- on the occurrence or non-occurrence is responsible for the preparation balance lease sheet accounting model of uncertain future events, which are and presentation of these financial for lessees. A lessee recognizes a beyond the Company’s control. statements. right-of use asset representing its right to use the underlying asset and a lease 3.13 Events occurring after the 3.16 Segmental reporting liability representing its obligation reporting date to make lease payments. There are An operating segment is a component optional exemptions for short-term All material events occurring after the of the Company that engages in leases and leases of low value items. reporting date have been considered business activities from which it may Lessor accounting remains similar and where necessary, adjustments to earn revenues and incur expenses, to the current standard – i.e. lessors or disclosure have been made in the including revenues and expenses continue to classify leases as finance financial statements. that relate to transactions with any or operating leases of the Company’s other components, whose operating results are 3.14 Comparative information SLFRS replaces existing leasing reviewed regularly by the Company’s guidelines including LKAS 17 Leases, Comparative information is disclosed Management to make decisions about IFRIC 4 Determining whether an in respect of the previous period in resources allocated to each segment arrangement contains a lease, SIC the Financial Statements in order to and assess its performance, and for 15 Operating Leases Incentives and enhance the understanding of the which discrete financial information SIC – 27 Evaluating the Substance of current period’s Financial Statements is available. For each of the strategic Transactions involving the legal form and to enhance the inter period divisions, the Company’s management of a lease. comparability. The presentation monitors the operating results separately for the purpose of making and classification of the Financial SLFRS 16, will be applicable for the decisions about resource allocation Statements of the previous year are financial periods beginning on or after and performance assessment. amended, where relevant for better 1 January 2019. The Company has two reportable presentation and to be comparable segments, as described in the Note 38. with those of the current year. 4. Regulatory provisions 4.1 Deposit insurance scheme The Company has not restated the 3.17 Statement of cash flows comparative information for 2017/18 The statement of cash flows has been In terms of the Finance Companies for financial instruments within prepared using the indirect method in (Insurance of deposit liabilities) the scope of Sri Lanka Accounting accordance with Sri Lanka Accounting Direction No. 2 of 2010, “Sri Standard – SLFRS 9 on “Financial Standard 7 - Statement of Cash Flows. Lanka Deposit Insurance Scheme Instruments” (SLFRS 9). Therefore, Regulations”, issued on 27 September 2010 and subsequent amendments the comparative information for 3.18 New Accounting Standards thereto all Registered Finance 2017/18 is reported under Sri Lanka issued but not effective as at Companies are required to insure Accounting Standard – LKAS 39 on reporting date their deposit liabilities in the Deposit “Financial Instruments: Recognition The Institute of Chartered Accountants Insurance Scheme operated by the and Measurement” (LKAS 39) and is of Sri Lanka has issued the following Monetary Board in terms of Sri Lanka not comparable to the information new Sri Lanka Accounting Standards Deposit Insurance Scheme Regulations presented for 2018/19. Differences which will become applicable for the No. 1 of 2010 issued under Sections arising from adoption of SLFRS 9 have financial periods beginning on or after 32A to 32E of the Monetary Law Act been recognised directly in equity as 1 April 2019. The Company has not with effect from 1 October 2010. of 01st April 2018 and are disclosed in assessed the potential impact on its Deposits to be insured include time notes to the Financial Statements. financial statements resulting from and savings deposit liabilities and their application. exclude the following: 3.15 Directors’ responsibility • Deposit liabilities to member statement 3.18.1 SLFRS 16 - Leases

Annual Report 2018/19 Swarnamahal Financial Services PLC 67 Notes to the Financial Statements contd.

institutions. 5.2 Risk management framework and external disclosure of accounting policies and financial reporting to the • Deposit liabilities to the The Board of Directors has overall Board. Risk management policies and Government of Sri Lanka inclusive responsibility for the establishment systems are reviewed regularly to of Ministries, Departments and and oversight of the Company’s reflect changes in market conditions, Local Governments. risk management framework. products and services offered. • Deposit liabilities to shareholders, In discharging its governance directors, key management responsibility it operates through two 5.3 Credit risk personnel and other related key committees the Board Integrated parties Risk Management Committee and the Credit risk is the risk of financial Audit Committee. • Deposit liabilities held as collateral loss to the Company if a customer or counterparty to a financial against any accommodation The BIRMC provides the Board the instrument fails to meet its contractual granted. assurance that risk management obligations, and arises principally from strategies, policies and processes are • Deposits falling within the the Company’s loans and advances in place to manage events / outcomes meaning of dormant deposits in to customers, and investment in that have the potential to impact terms of the Finance Companies debt/equity securities. For risk significantly on earnings performance, Act, funds of which have been management reporting purposes the reputation and capital. The approach transferred to the Central Bank of Company considers and consolidates entails active monitoring of the Sri Lanka in terms of the relevant all elements of credit risk exposure level of risk exposure against the Directions issued by the Monetary (such as individual obligor default risk, parameters set in the risk appetite. industry risk etc.) Board. The BIRMC also assists the Board by A premium of 0.15 per centum per assessing and approving significant annum is payable monthly, calculated credit and other transactions 5.3.1 Management of credit risk on total amount of all eligible deposits beyond the discretion of executive The Company has developed a as at end of the month. management. policy which defines the principles encompassing client selection, due The following Executive Management 5. Financial risk management diligence, early alert reporting, Sub - Committees, each with tolerable levels of concentration risk 5.1 Introduction and overview specialized focus, support the BIRMC and portfolio monitoring in line with and are responsible for the co- Company’s risk appetite. The policy is The Company has exposure to ordination of risk matters for each of reviewed at least annually ensuring the following risks from financial the areas of risk management: instruments: consistency with the Company’s business strategy. A monthly Credit • Asset and Liability Committee Policy Meeting chaired by the Chief a. Credit risk (ALCO) Executive Officer, drives policy b. Liquidity risk • Credit Committee decisions and implementation plans. c. Market risks • Remuneration Committee d. Operational risks • Related party transaction review 5.3.2 Exposure to credit risk This note presents information about committee The table below sets out information the Company’s exposure to each of Internal audit undertakes both the above risks (except market risk), about credit quality of loans and regular and ad-hoc reviews of risk advances granted to customers. the Company’s objectives, policies management controls and procedures, and processes for measuring and the results of which are reported managing risk, and the Company’s to the Audit Committee. The Audit management of capital. Committee provides its assessment on the effectiveness of internal audit

68 Annual Report 2018/19 Swarnamahal Financial Services PLC 5.3.3 Age analysis of loans and receivables

0 to 3 3 to 6 6 to 9 9 to 12 12 & Above 31 March 2019 Months Months Months Months Months Total (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) Gold loans 878,724 133,020 2,191 1,049 - 1,014,984 Finance lease receivable 5,351 829 837 810 4,017 11,844 Hire purchase receivables 2,031 40 14 - - 2,085 Other term loans 117,796 20,570 19,183 18,230 95,044 270,823 Total 899,341 139,859 15,669 20,089 31,522 1,299,736

0 to 3 3 to 6 6 to 9 9 to 12 12 & Above 31 March 2018 Months Months Months Months Months Total (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) Gold loans 1,008,033 67,806 3,946 15 6,837 1,086,637 Finance lease receivable 13,404 5,417 - 33 2,717 21,570 Hire purchase receivables 2,680 714 - - 2002 5,395 Other term loans 304,432 61,670 9,517 54 39,632 415,304 Loan to Swarnamahal 148,863 - - - - 148,863 Jewellers Limited Total 1,363,225 135,607 13,463 102 51,188 1,677,769

The following table shows the maximum exposure to credit risk and net exposure to credit risk by class of financial assets (except loans and receivables) 2019 2018

st Maximum As at 31 March Maximum Net exposure Net exposure exposure exposure (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) Financial assets held at FVTPL 1,487 1,487 1,895 1,895 Financial assets fair value through OCI 3 3 3 3 Other investments 34,131 34,131 439,009 439,009 Cash and cash equivalents 278,535 278,535 270,541 270,541 Related party receivables 197 197 133 133 Deposits, prepayments & Other Receivable 37,698 37,698 56,835 56,835 Total 352,051 352,051 768,281 768,281

5.3.4 Allowances for impairment The Company established an allowance for impairment losses on assets carried at amortised cost/available for sale that represents its estimate of incurred losses in its loan and investment debt/equity security portfolio.

Annual Report 2018/19 Swarnamahal Financial Services PLC 69 Notes to the Financial Statements contd.

The main components of this allowance are a specific loss component that relates to individually significant exposures, and, for assets measured at amortised cost, a collective loan loss allowance established for groups of homogeneous assets as well as for individually significant exposures that were subject to individual assessment for impairment but not found to be individually impaired.

Assets carried at fair value through profit or losses are not subject to impairment testing as the measure of fair value reflects the credit quality of each asset.

5.3.5 Collateral held and other credit enhancement and the financial effect The Company holds collateral and other credit enhancements against certain of its credit exposure. The table below sets out principal types of collateral and their approximate collateral percentages that are held against different types of financial assets.

Principal type of Percentage of exposure that is subject to an arrangement Type of credit exposure collateral held for that requires collateralization secured lending 31-Mar-19 31-Mar-18 Loans and advances to retail customers Finance leases Property and equipment 100% 100% Hire purchase Property and equipment 100% 100% Loans against fixed deposit Fixed deposit - 100% Personal loans None - - Mortgage loans Any property with a value 100% 100% Loans and advances to corporate customers Finance leases Property and equipment 100% 100% Hire Purchase Property and equipment 100% 100% Loans against fixed deposit Fixed deposit - 100%

5.3.6 Fair value of collateral held An estimate made at the time of borrowing of the fair value of collateral and other security enhancements held against loans and receivables did not change significantly from the fair values at the reporting date.

5.3.7 Credit quality analysis Below table summarises the credit quality analysis of loans and advances based on number of months on arrears.

Balance as at Performing Non-performing Loan category 31 March 2019 (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) Gold loans 1,014,985 1,008,147 6,837 Finance lease receivables 11,844 5,699 6,145 Hire purchase receivables 2,085 100 1,985 Other term loans 270,823 138,083 132,740 Total gross amount 1,299,736 1,152,029 147,707

70 Annual Report 2018/19 Swarnamahal Financial Services PLC Balance as at Performing Non-performing Loan category 31 March 2018 (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) Gold loans 1,086,637 1,075,839 10,798 Finance lease receivables 21,571 18,821 2,750 Hire purchase receivables 5,396 3,394 2,002 Other term loans 415,304 366,101 49,203 Loan to Swarna Mahal Jewellers 148,863 148,863 - (Private) Limited Total gross amount 1,677,769 1,613,017 64,752

5.4 Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

5.4.1 Management of liquidity risk The Company’s approach to managing liquidity is to ensure, that funds available are adequate to meet credit demands of its customers and to enable deposits to be repaid on demand or upon maturity as appropriate.

The main sources of the Company’s funding are capital, core deposits from customers and access to borrowed funds from the market. The Company also maintains a portfolio of readily marketable securities to further strengthen its liquidity position. The treasury and liquidity policies and compliance there under are reviewed and approved by the ALCO. A summary report, including any exceptions and remedial action taken, is submitted quarterly to ALCO.

5.4.2 Exposure to liquidity risk Liquid assets include cash and short term funds, bills purchased and short term investments. Short term liabilities include savings deposits, repo borrowings and current taxation.

The Company also monitors the maturity profile of its assets and liabilities. Maturity analysis of assets and liabilities which is based on the remaining period as at the date of the statement of financial position to the respective contractual maturity date is given in Note 37 to the financial statements.

The below table depicts the remaining contractual maturities of financial liabilities as at 31st March 2019.

Less than 3 Months More than Carrying Contractual 1-5 Years Total 2018/19 3 Months to 1 Year 5 Years amount cash flow (Rs.000) (Rs.000) (Rs.000) (Rs.000) (Rs.000) Non Derivative Liabilities Deposits 2,389,473 2,389,473 - 2,389,473 - - 2,389,473 Bank overdraft 342,320 342,320 342,320 - - - 342,320 Other liabilities 93,866 93,866 52,308 27,241 - 14,315 93,866

Annual Report 2018/19 Swarnamahal Financial Services PLC 71 Notes to the Financial Statements contd.

Less than 3 Months More than Carrying Contractual 1-5 Years Total 2017/18 3 Months to 1 Year 5 Years amount cash flow (Rs.000) (Rs.000) (Rs.000) (Rs.000) (Rs.000) Non Derivative Liabilities Deposits 3,539,345 3,539,345 1,032,954 1,324,820 1,137,531 - 3,539,345 Bank overdraft 2,562 2,562 2,562 - - - 2,562 Other liabilities 79,707 79,707 23,298 16,954 24,478 14,977 79,707

5.5 Market Risk Market risk is the risk that changes in market prices such as interest rates, equity prices, foreign exchange rates that will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimising the return on risk.

5.5.1 The following assets of the Company are subject to market risk.

Carrying Amount as at 31 Assets subject to market risk Trading portfolio (Rs) Non trading portfolio (Rs) March 2019 (Rs.)

Equity share 1,489,259 2,500 1,486,759 Loans and advances to 1,086,420,089 - 1,086,420,089 customers Reverse repurchase agreements 34,131,403 - 34,131,403

Carrying Amount as at 31 Assets subject to market risk Trading portfolio (Rs) Non trading portfolio (Rs) March 2018 (Rs.)

Equity shares 1,897,760 2,500 1,895,260 Loans and advances to 1,559,782,951 - 1,559,782,951 customers Reverse repurchase agreements 439,008,677 - 439,008,677

Carrying Amount as at 31 Liabilities subject to market risk Trading portfolio (Rs) Non trading portfolio (Rs) March 2019 (Rs.)

Deposits from customers 2,389,472,931 - 2,389,472,931 Bank overdrafts 342,319,934 - 342,319,934

Carrying Amount as at 31 Liabilities subject to market risk Trading portfolio (Rs) Non trading portfolio (Rs) March 2018 (Rs.)

Deposits from customers 3,539,344,527 - 3,539,344,527 Bank overdrafts 2,562,225 - 2,562,225

72 Annual Report 2018/19 Swarnamahal Financial Services PLC 5.5.2 Management of market risk The Company separates its exposure to market risk between trading and non-trading portfolios. Overall authority of market risk is vested with the ALCO. The head of the risk management committee is responsible for the development of detailed risk management policy overseen by the ALCO and for the day to day review of their implementation

Equity Price Risk A sensitivity analysis of the share trading portfolio is shown below at shock level of 10% 15% and 20%

2018/19 2017/18 Impact on Impact on At shock levels statement of Balance on Balance on At shock levels of statement of of profit or loss portfolio (Rs) portfolio (Rs) profit or loss (Rs) (Rs) 10% 148,926 1,638,184 10% 189,526 1,705,734 15% 223,389 1,712,647 15% 284,289 1,610,971 20% 297,852 1,787,110 20% 379,052 1,516,208

5.5.3 Exposure to interest rate risk-Non trading portfolio The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. Interest rate risk is managed

Principally through monitoring interest rate gaps and by having pre-approved limits for re pricing bands. ALCO is the monitoring body for compliance with these limits.

5.6 Operational risks Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company’s involvement with financial instruments, including processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour.

The Company’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Company’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.

Compliance with Company’s standards is supported by a program of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Company.

5.7 Capital management risk Capital Adequacy is a measure of a finance company’s ability to withstand the associated risks of its business. Regulators find it necessary that every finance company to hold adequate capital to absorb unexpected losses as a going concern, while they price their products and services to take care of expected risks.

For the purpose of computing the capital adequacy ratio of finance companies, the constituent of capital shall be:-

Annual Report 2018/19 Swarnamahal Financial Services PLC 73 Notes to the Financial Statements contd.

I. Tier 1 Core capital: representing permanent shareholder’s equity (paid-up shares/common stock) and reserves created or increased by appropriation of retained earnings or other surpluses, i.e. share premia, retained profits and other reserves (core capital minimum of Rs.400Mn); and

II. Tier 2 Supplementary capital: representing revaluation reserves, general provisions and other capital instruments which combine certain characteristics of equity and debt, such as, hybrid capital instruments and unsecured subordinated term debts.

Every finance company shall, subject to the provisions of the Finance Companies (Minimum Core Capital) Direction No. 1 of 2006, at all times, maintain its capital (adjusted for the items that may be specified by the Director) at a level not less than 10 per cent of its risk weighted assets with the core capital constituting not less than 5 per cent of its risk weighted assets, computed as per instructions issued by the CBSL.

2019 2018 Description (Rs. ‘000) (Rs. ‘000)

Total tier 1 capital (1,161) (1,062) Total tier 2 capital - - Total risk weighted assets 627 1,003 Off balance sheet exposure - - Capital adequacy ratio -Tier 1 (%) - Stipulated limit 5% (185.2) (105.89) -Tier 1 &2 (%) - Stipulated limit 10% (185.2) (105.89)

The Company is not compliant with these directions, as at 31 March 2019 (and at 31 March 2018) 5.8 Use of estimates and judgement Management discusses with the Company’s Audit Committee the development, selection and disclosure of the Company’s critical accounting policies and their application, and assumptions made relating to major estimation uncertainties.

Key sources of estimation uncertainty Allowance for credit losses Assets accounted for at amortised cost are evaluated for impairment on a basis described in Note 3.1.9

The specific counterparty component of the total allowances for impairment applies to financial assets evaluated individually for impairment and is based upon management’s best estimate of the present value of the cash flows that are expected to be received.

In estimating these cash flows, management makes judgements about a counterparty’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are independently approved by ALCO

Collectively assessed impairment allowances cover credit losses inherent in portfolios of loans and advances and investment securities measured at amortised cost with similar credit risk characteristics when there is objective evidence to suggest that they contain impaired financial assets, but the individual impaired items cannot yet be identified.

74 Annual Report 2018/19 Swarnamahal Financial Services PLC In assessing the need for collective loss allowances, management considers factors such as credit quality, portfolio size, concentrations and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowances depends on the estimates of future cash flows for specific counterparty allowances and the model assumptions and parameters used in determining collective allowances.

Determining fair values

The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in accounting policy Note 3.1.2.1 for financial instruments that trade

infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.

Level 1 - fair value measurements using quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 - fair value measurements using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

Level 3 - fair value measurements using inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs).

The table below analyses financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair value measurement is categorised:

Annual Report 2018/19 Swarnamahal Financial Services PLC 75 ------Total Total 1,897,760 1,489,259 1,489,259 1,897,760 ------2,500 2,500 2,500 2,500 Level 3 Level Level 3 Level ------Fair value (Rs.) value Fair Fair value (Rs.) value Fair Level 2 Level Level 2 Level ------1,895,260 1,486,759 1,486,759 1,895,260 Level 1 Level Level 1 Level 926,213 1,897,760 2,562,225 1,897,760 1,489,259 1,489,259 Total Total 34,131,403 22,340,174 64,729,951 79,549,848 439,008,677 342,319,934 278,535,113 270,540,554 1,086,420,089 1,559,782,951 3,539,344,527 3,606,636,703 2,291,672,356 2,811,342,713 2,389,472,931 1,400,012,818 ------2,562,225 64,729,951 79,549,848 342,319,934 liabilities liabilities 3,539,344,527 2,389,472,931 3,606,636,703 2,811,342,713 Other financial Other financial ------2,500 2,500 2,500 2,500 Fair Value Value Fair Fair Value Value Fair through OCI through through OCI through ------Carrying amount (Rs.) Carrying amount Carrying amount (Rs.) Carrying amount 926,213 34,131,403 22,340,174 439,008,677 278,535,113 270,540,554 1,086,420,089 1,559,782,951 1,400,012,818 2,291,672,356 Amortised Cost Amortised Cost ------1,895,260 1,486,759 1,486,759 1,895,260 Fair Value Value Fair Fair Value Value Fair through P&L through through P&L through 31 March 2018 31 March 31 March 2019 31 March

Reverse repurchase repurchase Reverse agreements Financial assets measured at fair value value fair at measured Financial assets shares Equity repurchase Reverse agreements Financial assets measured at fair value measured at fair Financial assets shares Equity and other Trade receivables Financial assets not measured at fair value* not measured at fair Financial assets to Loans and advances customers Trade and other Trade receivables Financial assets not Financial assets value* fair at measured to Loans and advances customers Cash and cash equivalents equivalents Cash and cash Cash and cash equivalents equivalents Cash and cash value* fair at Financial liabilities not measured customers Deposits from Bank overdrafts & other payables Trade Bank overdrafts & other payables Trade Financial liabilities not measured at fair value* Financial liabilities not measured at customers Deposits from to be significantly values of these fair the anticipate doesn’t company The statements. in the financial cost at amortised carried are *These financial instruments consider the impact as non-material. value and carrying to their different

76 Annual Report 2018/19 Swarnamahal Financial Services PLC Following non-financial instruments are also measured at fair value at the end of the reporting period.

Carrying Value Fair Value (Rs) 31 March 2019 (Rs) Level 1 Level 2 Level 3 Total Investment properties valued at fair value No 10, De Alwis Avenue, Mount 120,550,000 - - 120,550,000 120,550,000 Lavinia 03 commercial parcels in Reality 9,500,000 - - 9,500,000 9,500,000 Plaza 130,300,000 - - 130,300,000 130,300,000

Carrying Value Fair Value (Rs) 31 March 2018 (Rs) Level 1 Level 2 Level 3 Total Investment properties valued at fair value No 10, De Alwis Avenue, Mount 118,500,000 - - 118,500,000 128,000,000 Lavinia 03 commercial parcels in Reality 9,500,000 - - 9,500,000 9,500,000 Plaza 128,000,000 - - 128,000,000 128,000,000

There are various limitations inherent in this fair value disclosure particularly where prices may not represent the underlying value due to dislocation in the market. Not all of the Company’s financial instruments can be exchanged in an active market.

5.8.1 Movement of financial investments Financial assets at Fair value through Amortise Cost fair value through OCI (Available for (Loans and Total profit and loss Sale ) Receivables) As at 01st April 2017 1,964,730 2,500 2,179,318,126 Purchases/New Granting - - 7,050,162,948 7,050,162,948 Disposals/Write offs - - - - Maturities/Settlements - - (8,167,812,227) (8,167,812,227) Fair value adjustment of (69,468) - - (69,468) financial assets Amortisation adjustments/ - - 616,100,222 616,100,222 Interest Accrual As at 31st March 2018 1,895,262 2,500 1,677,769,069 1,679,666,831 Purchases/New Granting - - 3,613,155,038 3,613,155,038 Disposals/Write offs - - - - Maturities/Settlements - - (4,498,185,369) (4,498,185,369) Fair value adjustment of (408,503) - - (408,503) financial assets Amortisation adjustments/ - - 506,997,727 506,997,727 Interest Accrual As at 31st March 2019 1,486,759 2,500 1,299,736,465 1,301,225,724

Annual Report 2018/19 Swarnamahal Financial Services PLC 77 Notes to the Financial Statements contd.

Given below are the methodologies and assumptions used in fair value estimation

Loans and receivable

Approximately 97% of the total portfolio of loans and receivables to customers have a remaining contractual maturity of less than one year. Therefore it’s assumed that fair value equals the carrying value.

Deposits

In terms of the Monetary Board direction dated 02nd January 2018, All customer deposits are either repayable on demand or have a remaining contractual maturity of less than one year. Therefore fair value of customer deposits approximate to their carrying value as at the reporting date.

78 Annual Report 2018/19 Swarnamahal Financial Services PLC 2019 2018 For the Year ended 31st March Rs. Rs.

6. Net interest income 6.1 Interest income- Loans and receivables Interest income on Gold Loan 416,373,525 455,678,096 Interest Income on Loan against FD 3,162,065 13,109,900 Interest Income on Term Loan 79,480,473 134,388,538 Interest Income on Staff Loans 26,109 77,670 Interest Income on Non Performing Loans 279,261 436,863

6.2 Interest income- Hire Purchase 237,909 1,496,272

6.3 Interest Income-Leases Interest income on Finance Leases 3,490,039 6,060,832

6.4 Interest Income on Money Market Investment 5,914,935 2,129,518 6.5 Interest Income - Gold Auction & Default charges 3,948,346 4,852,052

6.6 Financial investments - available for sale Interest Income on Fixed Deposits 7,891,008 1,012,191 6.7 Interest Income from Sri lanka government securities/ Reverse Pur- 18,450,587 45,341,471 chase Agreements 539,254,257 664,583,402 6.7.1 Notional Tax credit on Secondary Market Transactions Interest income from Government Securities were subjected to withholding tax at source (Notional Tax) as per the Inland Revenue Act No. 10 of 2006, effective up to 31st March 2018. Accordingly, interest income accrued or received on outright or reverse repurchase transactions on Government Securities, Treasury Bills and Treasury Bonds was grossed up by the amount of Notional Tax. However, as per the provision of the Inland Revenue Act No. 24 of 2017 effective from 01st April 2018, interest income from Government Securities are excluded from withholding tax. Hence, notional tax credit hitherto claimed by the Company was discontinued from 01st April 2018 with implementation of Inland Revenue Act No. 24 of 2017.

Interest expense Interest on deposits from customers 296,550,365 467,518,162 Total interest expense 296,550,365 467,518,162

Net interest income 242,703,892 197,065,240

Annual Report 2018/19 Swarnamahal Financial Services PLC 79 Notes to the Financial Statements contd.

2019 2018 For the Year ended 31st March Rs. Rs. 7. Net (loss) / gain from financial instruments at fair value through profit or loss

Investment in Quoted shares (408,503) (69,468) (408,503) (69,468)

2019 2018 For the Year ended 31st March Rs. Rs. 8. Other income / (Expense) Service income 48,595 437,719 Sundry income 4,800,380 5,807,669 Loss on gold stock sales - (1,341,334) Change in fair value of investment property 2,300,000 12,950,000 Rent income from Investment Properties 360,000 75,000 Dividend income 104,635 88,180 Fair value adjustment on rent in advance & refundable deposits. (114,707) 141,213 Recovery of Bad Debts Written Off 251,880 30,222 7,750,783 18,188,669

2019 2018 For the Year ended 31st March Rs. Rs. 9. Personnel expenses Salaries and wages 62,678,286 70,721,562 Directors fees and related Expense - 2,250,000 Contributions to defined contribution plans 9,266,709 9,935,905 Contributions to defined benefit plans 3,418,305 3,624,473 Over time payment 1,864,357 2,317,140 Fuel expense 5,217,917 8,400,634 Staff welfare 1,369,726 2,288,118 Others 14,592,306 13,412,039 98,407,606 112,949,870

80 Annual Report 2018/19 Swarnamahal Financial Services PLC 2019 2018 For the Year ended 31st March Rs. Rs. 10. Impairment charges / (reversals) and fair value adjustment for loans and other advances Impairment charge / (reversal) on collective impairment (Note 10.1) 33,531,146 17,307,503 Net impact reversals on fair value adjustments (Note 19.6.1) (10,297,904) (19,020,582) Impairment charge / (reversal) on stolen articles and other receivable 221,054 (68,160) 23,454,296 (1,781,239)

10.1 Impairment charge / (reversal) on collective impairment Impairment charge / (reversal) on gold loans - (1,341,334) Impairment charge on lease rentals receivables 1,899,602 (57,869) Impairment charge / (reversal) on hire purchase receivable (620,076) (279,694) Impairment charge / (reversal) on other term loans 32,251,621 18,986,400 33,531,146 17,307,503 The Company has not written off any loan, lease and Hire purchase facilities during the period against the impairment provisioning account since no specific impairment provision has been made in respect of such loans and no specific portion of the collective impairment in respect of those loans could be identified. Impairment provisioning as at 31.03.2019 has been assessed excluding these loans which are written off.

11. Operating Profit /(Loss) before Value added Tax on FS (VAT on FS) and National Building Tax (NBT) Operating Profit / (Loss) before Value added Tax on FS and National Building Tax is stated after charging all the Expenses Including the followings; 2019 2018 For the Year ended 31st March Rs. Rs. Professional Fees 2,618,664 8,540,469 Auditors Remuneration - Statutory Audit 950,000 950,000 - Non Audit Services 350,000 350,000 Depreciation on Property, Plant & Equipment 13,853,974 14,822,577 Loss on Burglary Stock - 12,741,469 Donations 2,500 6,000 Deposit Insurance Premium 4,307,674 5,064,461 Crop Insurance Levy 6,030,087 1,026,964 Personal Expense (Note 9) 98,407,606 112,949,870

12. Value added tax on financial services Current VAT on financial services 10,713,939 6,399,522 Under / (over) provision adjustment for previous year 511,320 29,188 11,225,259 6,557,817

Annual Report 2018/19 Swarnamahal Financial Services PLC 81 Notes to the Financial Statements contd.

2019 2018 For the Period Ended Rs. Rs.

13. Income tax Current income tax (Note 13.1) - 1,406,120 Under / (over) provision in respect of prior year (395,933) (152,032) Deferred tax expense (Note 25) (673,899) (65,280) Total income tax (1,069,832) 1,188,808

13.1 Reconciliation of Accounting Profit to 2019 2018 Income tax Expense Leasing Other Business Leasing Leasing Net profit before tax - (28,890,110) (874,941) (874,941) Adjustments: Disallowable expenses - 79,713,398 15,619,186 15,619,186 Allowable expenses - (67,206,596) (9,722,389) (9,722,389) Total statutory income - (16,383,308) 5,021,856 5,021,856 Less : Deductions under Section 32 - - - - Taxable income / (loss) - (16,383,308) 5,021,856 5,021,856 Taxable income transfer against taxable - - - - loss Net taxable income / (loss) - (16,383,308) 5,021,856 5,021,856 Current Income Tax Expense @ 28% - - 1,406,120 1,406,120

13.2 Carried forward Tax Loss Brought forward tax Loss for the period 1,874,154,096 Taxable loss for the year 2018/19 16,383,308 Carried forward Tax Loss to Next Year 1,890,537,404 14. Earnings/(Loss) per Share Basic Earnings /(Loss) per share has been calculated by dividing the profit/(Loss) for the year attributable to equity holders of the Company by the weighted average number of ordinary shares on issue during the year, as per the requirements of the Sri Lanka Accounting Standard (LKAS 33) - “Earnings per share”. 2019 2018 For the year ended 31st March Rs. Rs. Profit /(Loss) for the year attributable to equity holders of the Company (Rs.) (27,820,277) (67,773,094) Weighted average number of ordinary shares (Note 14.1) 500,000,140 500,000,140 Basic Earnings/(Loss) Per Share (Rs.) (0.06) (0.14)

14.1 Weighted Average No of Ordinary Shares At the beginig of the year 500,000,140 500,000,140 Issued During the year - - Total as at end of the year 500,000,140 500,000,140

82 Annual Report 2018/19 Swarnamahal Financial Services PLC 2019 2018 As at 31st March Rs. Rs.

15. Cash and cash equivalents Cash and cash equivalents (Note 15.1) 278,535,113 270,540,555 Bank overdraft (Note 15.2) (342,319,934) (2,562,225) (63,784,821) 267,978,330

15.1 Cash and cash equivalents Cash in hand 67,089,325 76,344,482 Cash at bank 94,276,025 87,545,662 Investment in FD (Note 15.3) 117,169,764 106,612,191 Stamps on hand - 38,220 278,535,113 270,540,555 15.2 Bank overdrafts Bank overdrafts (342,319,934) (2,562,225) (342,319,934) (2,562,225)

15.3 Investment in Fixed Deposit Investment in Fixed Deposit 117,193,147 106,612,191 Provision for impairment as per SLFRS 09 (23,384) - 117,169,764 106,612,191 16. Other Investments

Reverse repurchase agreements (Note 16.1) 34,131,403 439,008,677 34,131,403 439,008,677

16.1 Balance at the beginning of the year 439,008,677 304,678,148 Movement During the year (404,877,273) 134,330,529 Gain/(Loss) from Marked to Market Valuation - - Balance as at end of the year 34,131,403 439,008,677

2019 2018 As at 31st March Rs. Rs. 17. Financial assets held at fair value through profit and loss Quoted shares (Note 17.1) 1,486,759 1,895,262 1,486,759 1,895,262

17.1 Balance at the beginning of the year 1,895,262 1,964,730 Gain/(Loss) from Marked to Market Valuation (408,503) (69,468) Balance as at end of the year 1,486,759 1,895,262

Annual Report 2018/19 Swarnamahal Financial Services PLC 83 Notes to the Financial Statements contd.

As at 31st March

17.2 Quoted shares 2019 2018 Rs. Rs. No. of shares No. of shares Cost of the Market Cost of the Quoted shares: at the end of at the end of Market value Investment value Investment the period the period Commercial Bank of Ceylon 12 - 1,265 12 - 1,630 PLC - Voting Commercial Bank of Ceylon 4883 278,100 410,172 4,802 278,100 499,408 PLC - Non voting John Keells Holdings PLC 1740 297,100 271,440 1,740 297,100 277,704 Sampath Bank PLC 1253 292,000 216,756 1,193 292,000 357,900 Lanka Century Investment 500 41,650 4,600 500 41,650 5,450 PLC Hatton National Bank PLC - 1070 145,953 154,326 1,061 145,953 197,770 Non Voting Aitken Spence PLC 1,000 187,000 45,000 1,000 187,000 50,600 Renuka Foods PLC 4,000 143,000 63,200 4,000 143,000 64,800 Sierra Cables PLC 200,000 1,140,000 320,000 200,000 1,140,000 440,000 2,524,803 1,486,759 2,524,803 1,895,262 Mark to market gain /(loss) (408,503) (69,468)

As at 31st March 2019 2018 Rs. Rs. 18. Financial assets - fair value through other comprehensive income Share investment - unquoted company 2,500 2,500 (Note 18.1) 2,500 2,500

18.1 Balance at the beginning of the year 2,500 2,500 Movement During the year - - Gain Loss from Mark to Market Valuation - - Balance as at end of the year 2,500 2,500

18.2 Share investment - unquoted company 2019 2018 No of Cost of Market Cost of Cost of shares investment value investment investment 25 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 18.2.1 All unquoted equity instruments are recorded at cost, since there is no market value for these investments and the Company intends to hold them for the long term.

84 Annual Report 2018/19 Swarnamahal Financial Services PLC 19. Loans and advances to customers at amortised cost 2019 2018 As at 31st March Rs. Rs. Impairment Impairment allowance/ Carrying allowance Carrying Quoted shares: Gross Amount Gross Amount fair value amount / fair value amount adjustment adjustment Gold loans (Note 19.2) 1,014,984,510 (16,088,966) 998,895,545 1,086,637,239 (16,088,966) 1,070,548,274 Finance lease receiv- 11,843,901 (6,635,270) 5,208,630 21,569,608 (2,732,817) 18,836,790 able (Note 19.3) Hire purchase 2,084,756 (1,987,544) 97,212 5,394,793 (2,009,310) 3,385,483 receivables (Note 19.4) Other term loans 270,823,298 (188,604,596) 82,218,702 415,304,318 (86,857,121) 328,447,198 (Note 19.5) Loan to Swarnamahal Jewellers Limited - - - 148,863,111 (10,297,904) 138,565,207 (Note 19.6) 1,299,736,465 (213,316,376) 1,086,420,089 1,677,769,069 (117,986,118) 1,559,782,951

Impairment Impairment Net Change Impact of adopting SLFRS 9 “Financial allowance/ fair allowance/ fair Adjusted to Retain Instruments” as at 1 April 2018 value adjustment as value adjustment as Earnings As at per LKAS 39 per SLFRS 9 01.04.2018 Gold loans 16,088,966 16,088,966 - Finance lease receivable 2,732,817 4,735,668 2,002,852 Hire purchase receivables 2,009,310 2,607,620 598,310 Other term loans 86,857,121 156,352,976 69,495,855 Loan to Swarnamahal Jewellers Limited 10,297,904 10,297,904 - Investment in FD - 23,384 23,384 117,986,118 190,106,518 72,120,400

Annual Report 2018/19 Swarnamahal Financial Services PLC 85 Notes to the Financial Statements contd.

2019 2018 As at 31st March Rs. Rs.

19.1 Allowance for impairment and fair value adjustments Collective Allowance for impairment Balance as at 1 April 77,224,621 77,032,479 Impairment loss for the year - Impact of adopting SLFRS 9 “Financial Instruments” as at 1 April 2018 72,097,017 - Charge / (Reversal) for the year 30,158,191 19,212,724 - Change in net impact on fair value adjustment (Note 19.6.1) (10,297,904) (19,020,582) Balance as at reporting date 169,181,925 77,224,621

Individual impairment Balance as at 1 April 40,761,497 42,666,718 - Charge / (Reversal) for the year 3,372,956 (1,905,221) Balance as at reporting date 44,134,452 40,761,497

Total Impairment Provision 213,316,376 117,986,118

19.2 Gold loans Gold loans - 1 months 571,900,238 695,693,170 Gold loans - 3 months 244,109,686 232,823,585 Gold loans - 6 months 184,788,858 108,661,128 Gold loans - 12 months 7,348,620 42,622,250 Gold stock for auction 6,837,107 6,837,107 Gross gold loans 1,014,984,510 1,086,637,239

19.3 Finance lease receivable Gross investment in finance leases, receivable -Less than one year 11,288,787 16,284,859 -Between one and five years 4,629,292 13,529,723 15,918,079 29,814,581

Unearned finance income (4,074,178) (8,244,974) Net investment in finance lease 11,843,901 21,569,608

Net investment in finance leases, receivable - Less than one year 7,214,609 10,978,947 - Between one and five years 4,629,292 10,590,661 11,843,901 21,569,608 There were no lease receivables beyond five years.

86 Annual Report 2018/19 Swarnamahal Financial Services PLC 2019 2018 As at 31st March Rs. Rs.

19.4 Hire purchase receivables Gross investment in hire purchase, receivable - Less than one year 3,907,349 6,703,071 - Between one and five years - 838,990 3,907,349 7,542,060

Unearned finance income (1,822,593) (2,147,267) Net investment in hire purchase 2,084,756 5,394,793

Net investment in hire purchase, receivable - Less than one year 2,084,756 4,597,237 - Between one and five years - 797,556 2,084,756 5,394,793 There were no hire purchase receivables beyond five years.

19.5 Other term loans Medium term loans 270,201,605 348,970,912 Wedaduru loans 621,694 861,267 Revolving loans - 405,442 Staff loans - 361,068 On-time loans - 64,705,629 270,823,298 415,304,318

19.6 Loan to Swarnamahal Jewellers Limited Gold loan to Swarnamahal Jewellers Limited - 148,863,111 Net impact on fair value adjustments (Note 19.6.1) - (10,297,904) - 138,565,207

19.6.1 Net impact on fair value adjustments Balance as at 1 April (10,297,904) (29,318,486) Unwinding of interest 10,297,904 19,020,582 Balance as at reporting date - (10,297,904)

The gold loan granted to Swarnamahal Jewellers Limited is unsecured and the loan amounting to Rs.676,800,000 was rescheduled on 31st July 2014, payable in 60 equated monthly installment of Rs. 16,101,025/- (together with interest). The interest rate of this loan originally was 24% and which has been reduced to 15% at the date of rescheduling. However it’s stated at amortised cost based on the original EIR in accordance with LKAS 39. Furthermore, above loan was fully settled by 31 Jan 2019

Annual Report 2018/19 Swarnamahal Financial Services PLC 87 Notes to the Financial Statements contd.

2019 2018 As at 31st March Rs. Rs.

20. Investment property Investment Property (Note 20.1) 130,300,000 128,000,000 130,300,000 128,000,000

20.1 Balance as at Beginning of the year 128,000,000 115,050,000 Change in fair value 2,300,000 12,950,000 Balance as at end of the year 130,300,000 128,000,000

20.2 Valuation of investment properties Land held for undetermined future use Land held for undertermined future use 2019 2018 Date of Market Date of Location Extent Cost Market value valuation value valuation No 10, De Alwis Avenue, Mount Lavinia Land & Building 0A-1R-05.42P 46,550,000 21.03.2019 120,550,000 26.03.2018 118,500,000

03 commercial parcels in Reality Plaza Vacant units held to be rented - Unit A/F1/U17 301 Sq. Ft 6,750,000 6,750,000 - Unit A/F1/U18 150 Sq. Ft Unit already rented out 10,405,722 26.03.2019 25.03.2018 Unit A/F3/U13 269 Sq. Ft 3,000,000 2,750,000

Rental income from the Unit A/F1/U/17 and A/F1/U/18 recognised during the period is depicted in Note 8, the Company is yet to rent out Unit A/F3/U13 in Reality Plaza and Mount Lavinia Property to date. No direct operating expenses were incurred by the Company for the above investment properties. Fair value of the Company’s investment property as at 31 March 2019 has been arrived on the basis of a valuation carried out by Mr. G.J. Sumanasena incorporated valuer having recent experience in the location and the category of the investment property being valued. He has used the contractor’s test method for Mount Lavinia property and investment method in arriving at the valuations for Reality Plaza property. Further, as at 31 March 2018 He has used the Same investment method in arriving at the valuations of both porperties.

88 Annual Report 2018/19 Swarnamahal Financial Services PLC 20.3 Methods and assumptions used in the fair valuation of investment properties As at 31st March 2019 Significant Inter-relationship between key Valuation Location unobservable Valued at unobservable inputs and fair technique inputs value measurement Mount lavinia - Contractor's Price per Land value taken at Rs. 2,850,000 The estimated fair value would Land Test Method perch per perch, land value was increase (decrease) if: expected determined by taking into market value per perch were consideration, land values and higher (lower). recent selling price of the lands in the same area. Reality Plaza- Investment Rent per Valuer has used market rentals (A The estimated fair value would Ja-ela method square feet range of Rs. 65.00 to Rs. 75.00 per increase (decrease) if: expected sq. ft) based on the current market market rentals were higher rental of comparable commercial (lower), the risk adjusted property and has been adjusted to discount rate were lower take cognisance of location. Further, (higher). valuer has used Rs. 33,500/- rent income per month for Unit A/ F1/U/17 and A/F1/U/18 (which is currently rented out for Rs. 30,000/).

As at 31st March 2018 Significant Inter-relationship between key Valuation Location unobservable Valued at unobservable inputs and fair technique inputs value measurement Mount lavinia - Contractor's Price per Land value taken at Rs. 2,800,000 The estimated fair value would Land Test Method perch per perch, land value was increase (decrease) if: expected determined by taking into market value per perch were consideration, land values and higher (lower). recent selling price of the lands in the same area. Reality Plaza- Investment Rent per Valuer has used market rentals (A The estimated fair value would Ja-ela method square feet range of Rs. 50.00 to Rs. 65.00 per increase (decrease) if: expected sq. ft) based on the current market market rentals were higher rental of comparable commercial (lower), the risk adjusted property and has been adjusted to discount rate were lower take cognisance of location. Further, (higher). valuer has used Rs. 33,500/- rent income per month for Unit A/ F1/U/17 and A/F1/U/18 (which is currently rented out for Rs. 30,000/).

Annual Report 2018/19 Swarnamahal Financial Services PLC 89 Notes to the Financial Statements contd.

20.4 Measurement of fair value - fair value heirachy The carrying amount of investment property is the fair value of property as determined by an external, independent property valuer, having an appropriate recognized professional qualification and recent experience in the location and the category of the property being valued. Fair values were determined having regard to recent market transactions for similar properties in the same location as the company’s investment property. The fair value measurement for the investment property has been categorised as a Level 3 for 2019 & 2018 based on the inputs to the valuation technique used.

Building Office Furniture & Motor Computers & Total As at 31st March Improvements equipment fittings vehicles software Rs. Rs. Rs. Rs. Rs. Rs. 21. Property, plant & equipment Cost Balance as at 1 April 2017 66,968,777 46,717,697 20,604,338 3,973,575 38,148,431 176,412,819 Additions 103,200 1,576,219 1,374,194 - 1,361,800 4,415,413 Balance as at 31 March 67,071,977 48,293,916 21,978,534 3,973,575 39,510,229 180,828,232 2018

Balance as at 1 April 2018 67,071,977 48,293,916 21,978,534 3,973,575 39,510,229 180,828,232 Additions 828,707 2,142,737 180,000 - 49,500 3,200,944 Disposals - (4,470,592) (548,890) - (5,019,482) Balance as at 31 March 67,900,684 45,966,061 21,609,641 3,973,576 39,559,730 179,009,693 2019

Accumulated depreciation Balance as at 1 April 2017 41,837,202 40,740,524 16,610,141 3,973,575 30,524,160 133,685,607 Charge for the year 6,167,433 3,521,223 2,386,338 - 2,747,583 14,822,577 Balance as at 31 March 48,004,635 44,261,747 18,996,479 3,973,575 33,271,743 148,508,184 2018

Balance as at 1 April 2018 48,004,635 44,261,747 18,996,479 3,973,576 33,271,743 148,508,184 Charge for the year 5,505,823 3,378,947 2,254,070 - 2,715,134 13,853,974 Disposal / write-offs - (4,470,592) (548,890) - - (5,019,482) during the year Balance as at 31 March 53,510,458 43,170,104 20,701,659 3,973,576 35,986,878 157,342,675 2019

Written down value As at 31 March 2018 19,067,342 4,032,169 2,982,055 - 6,238,486 32,320,048 Balance as at 31 March 14,390,226 2,795,957 907,982 - 3,572,852 21,667,017 2019

Lease commitments on building improvements are disclosed in Note 31.

90 Annual Report 2018/19 Swarnamahal Financial Services PLC 21.1 Fully depreciated property, plant & equipment The cost of fully-depreciated property, plant & equipment of the Company which are still in use as at the statement of financial position date is as follows: 2019 2018 As at 31st March Rs. Rs. Building Improvements 6,419,365 6,419,365 Office equipment 40,107,350 38,160,314 Furniture and fittings 19,661,975 14,326,185 Computer equipment 29,001,231 28,486,951 Motor Vehicles 3,973,576 3,973,576 99,163,497 91,366,391

2019 2018 As at 31st March Rs. Rs. 22. Current tax receivable Income tax payable (Note 22.1) (423,986) (819,919) Economic Service Charge receivable 12,711,901 9,599,662 Notional tax receivable on treasury bill and treasury bonds interest 17,905,230 17,905,230 WHT receivable 1,602,433 1,354,571 Balance at the end of the year 31,795,578 28,039,542

22.1 Income tax payable Balance as at beginning of the year (819,919) (4,757,727) Income tax paid - - Income tax charge for the year - (1,406,120) Under / (over) provision adjustement for previous year 395,933 152,032 ESC Set off - 5,191,895 Balance as at end of the year (423,986) (819,919)

2019 2018 As at 31st March Rs. Rs. 23 Other assets Deposits & prepayments 33,017,063 31,900,276 Other Receivable 729,143 22,207,434 Receivable from Related Parties (23.1) 197,071 132,739 Real estate stock (Note 23.3) 42,783,750 42,623,480 Other Inventories 3,951,801 2,727,083 80,678,827 99,591,012

Annual Report 2018/19 Swarnamahal Financial Services PLC 91 Notes to the Financial Statements contd.

2019 2018 As at 31st March Rs. Rs.

23.1 Receivable from Related Parties Lavinia Breeze Sea Food Restaurant (Private) Limited (Note 23.2) - - E.A.P. Films & Theaters (Note 32.4) 197,071 132,739 197,071 132,739

23.2 Rent receivable from Lavinia Breeze Sea Food Restaurant (Private) Limited Rent receivable from Lavinia Breeze Sea Food Restaurant (Private) Limited 6,720,417 6,720,417 Provision for rent receivable from Lavinia Breeze Sea Food Restaurant (6,720,417) (6,720,417) (Private) Limited - -

23.3 Real estate stock As at 31 March 2019 Kandy Total Balance at the beginning of the year 42,623,480 42,623,480 Additions / Transfers during the year 160,270 160,270 Disposals during the year - - Balance at the end of the year 42,783,750 42,783,750

As at 31 March 2018 Balance at the beginning of the year 42,623,480 42,623,480 Additions / Transfers during the year - - Disposals during the year - - Balance at the end of the year 42,623,480 42,623,480

In order to ascertain the Net Realizable Value of the real estate stock, a valuation was carried out as at 31 March 2019 by professionally qualified independent valuer, Mr. G.J. Sumanasena and it was valued at Rs. 50,500,000. The valuation was carried out by taking into account the observable prices in active market and recent market transactions on arm’s length term. The Net Realizable Value was compared with the Net Book Value and have been accounted for in accordance with LKAS 2.

As at 31st March 2019 2018 Rs. Rs. 24. Deposits from customers Fixed deposits 2,356,024,501 3,495,304,493 Saving Deposits 33,448,429 44,040,034 2,389,472,931 3,539,344,527

24.1 Analysis of Deposits from customers by Maturity Date As at 31 March 2019 1-3 Months 3-12 Months 1-5 Months Total Fixed deposits - 2,356,024,501 - 2,356,024,501 Saving Deposits 33,448,429 - - 33,448,429 33,448,429 2,356,024,501 - 2,389,472,931

92 Annual Report 2018/19 Swarnamahal Financial Services PLC As at 31 March 2018 1-3 Months 3-12 Months 1-5 Months Total Fixed deposits 1,032,953,969 1,324,819,787 1,137,530,736 3,495,304,493 Saving Deposits 44,040,034 - - 44,040,034 1,076,994,004 1,324,819,787 1,137,530,736 3,539,344,527

25. Deferred tax liabilities Deferred tax asset Deferred tax liability Net deferred tax asset/ liability Recognised deferred tax 2019 2018 2019 2018 2019 2018 (asset) and liabilities Provision for gratuity (4,008,419) (4,193,633) - - (4,008,419) (4,193,633) Property plant and - - 3,091,915 4,698,955 3,091,915 4,698,955 equipment Lease rentals - - 1,716,428 427,461 1,716,428 427,461 Fair Valuation of - - 20,536,398 19,892,398 20,536,398 19,892,398 Investment Property Tax losses carried forward (21,336,322) (20,825,182) - - (21,336,322) (20,825,182) Total (25,344,741) (25,018,814) 25,344,741 25,018,814 - -

Movement in Balance as Recognised Balance as Recognised Balance as Recognised Recognised deferred tax at 31 March in profit or at 31 March in profit or at 31 March in OCI in OCI during the year 2017 loss 2018 loss 2019 Provision for (3,979,199) (279,714) 65,280 (4,193,633) (488,685) 673,899 (4,008,419) gratuity Property plant and 5,703,596 (1,004,641) - 4,698,955 (1,607,040) - 3,091,915 equipment Lease rentals 1,426,521 (999,060) - 427,461 1,288,967 - 1,716,428 Fair Valuation - 19,892,398 - 19,892,398 644,000 - 20,536,398 of Investment Property Tax losses carried (3,150,918) (17,674,264) - (20,825,182) (511,140) - (21,336,322) forward - (65,280) 65,280 - (673,899) 673,899 -

The company has recognised deferred tax assets to the extent of the deferred tax liability accruing to the company. Accordingly a deferred tax asset of Rs. 21,336,322/- has been recognised as at 31st March 2019. The company has not recognised deferred tax asset amounting to Rs 508,014,151/- arising from carried forward tax losses as it is not probable that the future taxable profits will be adequate to utilise the available tax losses in the foreseeable future.

Annual Report 2018/19 Swarnamahal Financial Services PLC 93 Notes to the Financial Statements contd.

2019 2018 As at 31st March Rs. Rs.

26 Retirement benefit obligations 26.1 Retirement Benefit Liability Recognized in Statement of Financial Position Balance as at beginning of the year 14,977,260 14,211,429 Amounts Recognised in Statement of Profit or Loss 3,418,305 3,624,473 Amounts Recognised in Other Comprehensive Income (2,406,784) (233,142) Payments during the Year (1,673,000) (2,625,500) Balance as at end of the year 14,315,782 14,977,260

26.2 Amounts recognized in Income Statement Current service cost 1,572,612 1,634,314 Interest cost 1,845,693 1,990,159 3,418,305 3,624,473

26.3 Amounts recognized in other comprehensive income Actuarial Gain (2,406,784) (233,142) (2,406,784) (233,142)

26.4 Defined Benefit Obligation Reconciliation Defined benefit obligation as at 1 April 14,977,260 14,211,429 Current service cost 1,572,612 1,634,314 Interest cost 1,845,693 1,990,159 Benefits paid during the year (1,673,000) (2,625,500) Actuarial Gain (Note 26.3) (2,406,784) (233,142) Defined benefit obligation as at reporting date 14,315,782 14,977,260

An actuarial valuation of the gratuity liability was carried out as at 31st March 2019 by Mr. M. Poopalanathan, AIA, of Messrs Actuarial and Management Consultants (Pvt) Ltd, a firm of professional actuaries. The valuation method used by the actuaries to value the Fund is the “Projected Unit Credit Method”, the method recommended by the Sri Lanka Accounting Standard (LKAS 19) “Employee Benefits”.

2019 2018 As at 31st March Rs. Rs. 26.5 Actuarial assumptions Retirement age 55 Years 55 Years Discount rate 11.0% 10.5% Salary increment 10% 15.0% Staff Turnover 44% 30.0%

Discount rate has been determined by reference to market yield at the end of the reporting period on government bonds. Staff turnover & salary increment rates have been determined by taking into account of estimated future changes as well as changes occured within 2018/19.

94 Annual Report 2018/19 Swarnamahal Financial Services PLC 2019 2018 As at 31st March Rs. Rs.

26.6 Sensitivity of Assumptions employed in Actuarial Valuation The following table demonstrates the sensitivity to a reasonably possible change in the key assumptions employed with all other variables held constant in the employment benefit liability measurement. 31st March 2019 Effect in rupees Increase Decrease Discount rate (1% movement) 13,739,856 14,946,788 Future salary growth (1% movement) 15,007,489 13,673,751

2019 2018 As at 31st March Rs. Rs. 27. Other liabilities Accounts payable 72,810,684 53,918,949 Payable to Related Parties (Note 27.1) 1,953,754 3,071,606 Other tax payables (27.2) 4,785,411 7,739,396 79,549,848 64,729,951

27.1 Payable to Related Parties E. A. P. Security Services (Private) Limited (Note 32.4) - 944,265 E. A. P. Holdings Limited (Note 32.4) 1,760,000 1,760,000 Swarna Solutions Limited (Note 32.4) 193,754 367,341 1,953,754 3,071,606

27.2 Other tax payables WHT Payables 28,706 347,425 VAT on FS Payables 4,210,992 6,521,285 Stamp Duty Payable 45 - NBT Payable 545,668 870,686 4,785,411 7,739,396

2019 2018 As at 31st March Rs. Rs. 28. Stated capital Ordinary Shares (Note 28.1) 250,000,070 250,000,070 No of shares (Note 28.2) 500,000,140 500,000,140

28.1 Movement of Stated Capital At the beginning of the year 250,000,070 250,000,070 Issued During the year - - At the end of the year 250,000,070 250,000,070

Annual Report 2018/19 Swarnamahal Financial Services PLC 95 Notes to the Financial Statements contd.

2019 2018 As at 31st March Rs. Rs.

28.2 Movement of no. of shares At the beginning of the year 500,000,140 500,000,140 Issued During the year - - At the end of the year 500,000,140 500,000,140

As per the Special Resolution passed at the Extraordinary General Meeting (EGM) held on 27 March 2012, it was resolved that each of the issued and subscribed 25,000,007 Voting Ordinary shares be sub - divided in to 20 (Twenty) Ordinary shares (Voting) fully paid up. Therefore, the number of ordinary shares outstanding was increased without an increase in resources.

2019 2018 Rs. Rs. 29. Statutory reserve fund Statutory reserve fund (Note 29.1) 143,349,119 143,349,119 143,349,119 143,349,119

29.1 Statutory reserve fund Balance as at 1 April 143,349,119 143,349,119 Transfers during the year - - Balance as at Reporting date 143,349,119 143,349,119

Statutory reserve is a capital reserve which contains profit transferred as required by Section 3(b)(ii) of Central Bank Capital Fund Direction No. 1 of 2003, issued to Finance Companies. As per the said Direction, every Licensed Finance Company shall maintain a Reserve Fund and transfer to such reserve fund out of the net profits of each year after due provisions have been made for taxation and bad and doubtful debts on the following basis:

Capital funds to Deposit Liabilities % of transfer to Reserve Fund Not less than 25% 5% Less than 25% and not less than 10% 20% Less than 10% 50%

2019 2018 Rs. Rs. 30. Retained Earnings Balance at the beginning of the year (1,455,782,603) (1,388,177,371) Impact of adopting SLFRS 9 “Financial Instruments” as at 1 April 2018 (72,120,400) - Total Comprehensive income - Profit for the year (27,820,277) (67,773,094) Other comprehensive Income 1,732,884 167,862 Statutory Reserve Transfer - - Balance at the end of the year (1,553,990,396) (1,455,782,603)

96 Annual Report 2018/19 Swarnamahal Financial Services PLC 2019 2018 As at 31st March Rs. Rs.

31. Contingent Liability and Commitments 31.1 Future Monthly Commitment on Operating Lease The company Leases no of office buildings under operating lease . The Leases typically run for a period of 10 to 15 years within an option to renew the lease after the date. The future minimum lease payments under operating leases are as follows;

Not later than one year 45,080,480 46,063,470 Later than one year & less than five years 161,596,478 168,335,737 Later than five years 49,416,758 84,007,979 256,093,716 298,407,186

Company has recognised the operating lease expense amounting to Rs 47,982,546 during the year (2018 - Rs 44,722,336). Minimum lease payment for the year was Rs. 46,213,470 (2018 - 44,228,440)

31.2 Litigations against the Company In the opinion of the Company’s lawyers, there are no pending litigations against the Company that will have an impact on the reported financial results or the future operations of the Company.

32. Related party disclosures The Company carried out transactions in the ordinary course of business on an arm’s length basis at commercial rates with parties who are defined as related parties other than the transactions with Loan granted to Swarnamahal Jewelers ltd as per the Sri Lanka Accounting Standard - LKAS 24 “Related Party Disclosures”, the details of which are reported below.

32.1 Parent and ultimate controlling party The Company’s parent company is ETI Finance Ltd with 90% shareholding and ultimate parent undertaking and controlling party of the Company is E.A.P Holdings Limited.

32.2 Key Management Personnel (KMP) According to Sri Lanka Accounting Standard - LKAS 24 “Related Party Disclosures”, Key Management Personnel are those having authority and responsibility for planning, directing and controlling the activities of the entity directly or indirectly including any director(whether executive or otherwise of that entity).

KMP of the Company The Company considers the members of its Board of Directors and the Chief Executive Officer (CEO) as Key Management Personnel (KMP) of the Company.

Annual Report 2018/19 Swarnamahal Financial Services PLC 97 Notes to the Financial Statements contd.

Year Ended 32.2.1 Transactions with KMP 32.2.1.1 Compensation to KMP 31.03.2019 31.03.2018 Directors fees and related expenses - 2,250,000 Short term employment benefits 7,920,000 7,600,000 Post Employee benefits - -

There were no post employment benefits or long term benefits provided to key management personnel and the director’s emoluments are subject to maximum limit of CBSL direction.

32.3 Mr. Jeewaka Edirisinghe, Ms. Deepa Edirisinghe, Mr. Nalaka Edirisinghe, Mr. Asanka Edirisinghe and Mr.Sameera Ganegoda are the Directors of the Company and Key Management Personnel (KMPs) of the following companies and have had transactions as disclosed below.

Company names Mr. S. Mr. Mr. J.H. J.H. Mr. Mr. N.P. N.P. Mr. the Year Mr. A. S. Mr. Mrs. A.D. A.D. Mrs. Ganegoda Edirisinghe Edirisinghe Edirisinghe Edirisinghe Changes During Changes EAP Holdings Limited a a a a ETI Finance Limited a a a a a Swarnamahal Jewellers Limited EAP Films & Theatres Limited Hotel Sapphire (Pvt) Limited a a a a Hotel Concord (Pvt) Limited a a a a

EAP Broadcasting Company Limited 32.3.1 Note Ref- Lavinia Breeze Sea Food Restaurant (Pvt) Limited a a a a EAP Security Services (Pvt) Limited Mr. Sameera Ganegoda is a Non Executive Director of the Company and the CEO of ETI finance Limited.

32.3.1 During the year of 2018/2019 following changes has occurred to the Related parties During the year of 2018/19 above four directors has resigned from their directorships of EAP Holdings Limited. However, Shareholdings has remained unchanged.

On 04th May 2018 both E.A.P Films and Theatres (Pvt) Ltd and Swarna Mahal Jewelers (Pvt) Ltd was disposed from EAP Group. Hence,with effect form 05th May 2018 above KMPs have resigned from their directorships.

On 04th May 2018, 40% of EAP Broadcasting Company Limited and Swarna Solutions Limited was disposed from EAP Group and the balance 60% was disposed on 06th July 2018. Hence, with effect form 07th July 2018 above KMPs have resigned from their directorships.

On 02nd April 2019, (Subsequent to the year of 2018/19) 98% ownership of the Hotel Sapphire (Private) Limited and 100% owneship of the Hotel Concord (Pvt) Limited was transferred by ETI finance Limited to the Ben Holdings (Private Limited). Hence, with effect from 03rd April 2019 above KMPs have resigned from their directorships.

98 Annual Report 2018/19 Swarnamahal Financial Services PLC 32.4 Transactions with entities that are controlled, jointly controlled or significantly influenced by Key Management Personnel or their close member of family, or shareholders who have either control, significant influences or joint control over entity are as follows;

Transactions with related parties Name of the Company Amounts Balance as at Balance as at Description of Relationship paid/(received) 31-Mar-19 31-Mar-18 Transaction Rs. Rs. Rs. Swarnamahal Jewellers Fellow Settlement (159,251,455) - 148,863,111 Limited Subsidiary of loan / Outstanding balance E. A. P. Security Services Fellow Security expenses (1,789,998) - - (Private) Limited Subsidiary charged for the period Payment made 2,734,263 - (944,265) during the year E. A. P. Holdings Limited Ultimate parent Reimbursement - - - of expense Payment made - (1,760,000) (1,760,000) during the year Lavinia Breeze Sea Food Fellow Rent Receivable - 6,720,417 6,720,417 Restaurant (Private) Subsidiary Limited Provision for rent - (6,720,417) (6,720,417) not received Swarna Solutions Limited Fellow Reimbursement (540,358) - - Subsidiary of expense Payment made 713,947 (193,754) (367,342) during the year E.A.P. Films & Theaters Fellow Reimbursement 839,996 - - Limited Subsidiary of electricity & water expenses Cash Received (775,664) 197,071 132,739 during the year Hotel Sapphire (Private) Fellow Company AGM (104,064) - - Limited Subsidiary expenses 2018 Payment made 104,064 - - during the period Refer Note 32.3.1 for changes occurred to the related parties during the year of 2018/19

32.5 Related party lending to Swarnamahal Jewellers Limited This accommodation was unsecured and exceeded the Single Borrower Limit set by the CBSL Directions. It was rescheduled in March 2014 effective from 1 April 2014, by reducing the rate of interest from 24% to 16% and waiver of penal interest. Further on 31 July 2014 the same loan was again rescheduled by reducing the rate of interest from 16% to 15% and extended the period from 3 years to 5 years. Furthermore above loan was fully settled by 31st Jan 2019

Annual Report 2018/19 Swarnamahal Financial Services PLC 99 Notes to the Financial Statements contd.

Related Party transactions exceeding 10% of the Equity or 5% of the total assets of the Entity as per Audited Financial Statements, whichever is lower. Value of Related Party Terms of the Rationale for Name of the Value of Related Party Relationship Transaction as a % of transaction entering in to Related Party Transaction Assets the transaction 2019 2018 2019 2018 Swarnamahal Fellow - 193,212,300 - 6.72% Settlement of Note 01 Jewellers Subsidiary loan Limited

Note 01- Due to sharp drop in gold prices in 2015, unredeemed gold articles which were not received satisfactory bids at auctions were transferred to SMJ on a consignment basis and subsequently the amount receivable was converted to a term loan.

In addition to the above details, No further Recurrent Related Party Transactions which aggregate value exceeds 10% of the gross revenue/income of the Income Statement.

32.7 Directive of Securities and Exchange Commission of Sri Lanka (SEC) In light of the non-compliance with Corporate Governance requirements of the Listing Rules of the Colombo Stock Exchange, SEC has issued a directive on 18th January 2017 (SEC/LEG/17/01/12) to the company prohibiting it from entering into any Related Party Transactions including any write off of outstanding or making of adjustments which will reduce the outstanding balances (except by way of recovering outstanding debts from related party transactions) until such time the Corporate Governance requirements of the Listing Rules of the Colombo Stock Exchange are complied with.

33. Events after the reporting date There have been no other material events occurred between the reporting date and the date on which the financial statements are authorised for issue which require adjustments to or disclosure in the financial statements.

34. Going concern The Company Incurred a Loss of Rs.27,820,277/- during the year ended 31 March 2019. However, as of that date the Company’s total liabilities exceeded it total assets by Rs 1,160,641,208/- and the retained losses amount to Rs.1,553,990,396/-.The financial statements of the Company have been prepared on a going concern basis without making adjustment that may be required to the recorded assets and the classification of liabilities if the Company is unable to continue as a going concern. Further the In terms of the Monetary Board direction dated 02nd January 2018, the Central Bank of Sri Lanka has taken the regulatory action by appointing a Panel to Management to overlook the affairs of the company, Restrict the withdrawal of maturing deposits and authorized to pay the 30% of deposit liability of the company on 30.06.2018 , 30.09.2018 and 30.03.2019 respectively at 10% equal installments together with the interest outstanding while the remaining 70% of the deposit liabilities was renewed for a period of six months commencing from 30th March 2019 as per agreed terms and conditions.

100 Annual Report 2018/19 Swarnamahal Financial Services PLC 35 Non-Compliance with Directions Issued by Central Bank of Sri Lanka (CBSL) The Company has not complied with the following directions issued by the CBSL on 09.03.2019 under the provisions of the Finance Business Act No. 42 of 2011 and requires to disclose the consequences of non- compliances with the externally imposed capital requirements as per paragraph 135 ( e ) of LKAS 1 - Presentation of Financial Statements.

Finance Companies (Minimum Core Capital) Direction No. 2 of 2017 Every finance company should continue to maintain an unimpaired core capital at a level not less than Rs. 1,500 million with effect from 01st January 2019. The minimum core capital as at year end was Rs. 1,160,641,206/- negative.

Finance Companies (Risk Weighted Capital Adequacy Ratio) Direction No. 2 of 2006 Every finance company shall, subject to the provisions of the Finance Companies (Minimum Core Capital) Direction No. 1 of 2006, at all times, maintain its capital (adjusted for the items that may be specified by the Director) at a level not less than 10 percent of its risk weighted assets with the core capital constituting not less than 5 percent of its risk weighted assets, computed as per instructions issued by the Director. Due to the erosion of capital and continuous decline in the risk-weighted asset base, the Company has failed to comply with section 3 of the cited Direction by not maintaining a core capital and total capital at 5% and 10%, respectively. As at 31st March 2019 the ratios were 185.2%% and 185.2% negative respectively.

Finance Companies (Capital Funds) Direction No. 1 of 2003 Every finance company shall : a. maintain a reserve fund; and b. transfer to such reserve fund out of the net profits of each year, after due provision has been made for Taxation and Bad and Doubtful Debts : i. so long as the capital funds are not less than twenty five (25) percent of total deposit liabilities, a sum equal to not less than five (5) percent of the net profits; ii. so long as the capital funds are less than twenty five (25) percent of total deposit liabilities, but not less than ten (10) percent thereof, a sum equal to not less than twenty (20) percent of the net profits; and iii. so long as the capital funds are less than ten (10) percent of the total deposit liabilities, a sum equal to not less than fifty (50) percent of the net profits. As the Company has incurred a net loss of Rs. 27,820,277 for the year 2018/19, no transfer has been made during the year, which is fully described in Note no 29 in the Financial Statements.

Finance Companies (Capital Funds) Direction No. 1 of 2003 Every finance company shall maintain capital funds which shall not at any time be less than ten (10) percent of its total deposit liabilities. The Company’s capital funds to the total deposit liability as at 31st March 2019 was - 48.5% (negative). Every finance company shall maintain a minimum holding of liquid assets as defined in Section 74 of the Finance Business Act, No. 42 of 2011 which shall not, at the close of the business on any day, be less than the total of : i. Ten (10) percent of :– a. The outstanding value of the time deposits received by the finance company and accrued interest payable at the close of the business on such a day; and b. The face value of non-transferable certificates of deposit issued by the finance company and accrued interest payable at the close of the business on such a day; and ii. Fifteen (15) percent of the outstanding value of savings deposits accepted by such company and accrued interest payable at the close of the business on such a day. The value of liquid assets held by the company as at 31st March 2019 was Rs. 63,784,820/- (negative) against the requirement of Rs. 240,619,715/-

Annual Report 2018/19 Swarnamahal Financial Services PLC 101 Notes to the Financial Statements contd.

35 Non-Compliance with Directions Issued by Central Bank of Sri Lanka (CBSL) (Continued...) Finance Companies (Liquid Assets) Direction No. 4 of 2013 Every finance company shall at all times maintain assets in the form of Sri Lanka Government Treasury Bills, Sri Lanka Government Securities and the Central Bank of Sri Lanka Securities equivalent to seven and a half (7.5) percent of the average of its month end total deposit liabilities and borrowings of the twelve months of the preceding financial year. Such holdings of the Sri Lanka Government Treasury Bills, Sri Lanka Government Securities and the Central Bank of Sri Lanka Securities should not be considered for computation of Investment Fund Account utilization. Investments in government securities and Treasury Bills was Rs 34,131,403.49. as at 31st March 2019, against the requirement of Rs. 266,623,950/-

Special Direction issued by the Monetary Board of Sri Lanka letter dated 26.03.2015 The Special direction issued by the Monetary Board at its meeting No. 5/2015 held on 06.03.2015, i. To infuse capital amounting to Rs. 2bn by 30.04.2015 ii. To recover all loan granted to related companies by 30.04.2015 iii. Reduce the concentration on pawning advances below 50% of total accommodations by 30.09.2015 iv. Immediately appoint an adequate number of independent non - executive directors v. To reduce the deposit liability up to 2.5bn by 31.12.2015 The company maintain the deposit liability of Rs. 2,389,472,931 against the requirement of Rs. 2.5 bn as at 31st March 2019 of the above direction and recovered all loan granted to related party companies by 31st January 2019. The concentration on gold Loan advances as at 31st March 2019 was 77.57% against the requirement of below 50%. The infusion of capital amounting to Rs. 2bn and the appointment of independent of non-executive directors have not yet been materialized by 31st March 2019

Finance Companies (Single Borrower Limit) Direction No. 4 of 2006 Every finance company shall maintain, a. the maximum of a single accommodation or the aggregate of accommodations granted to by a finance company and outstanding at any point of time from an individual borrower, shall not exceed 15 per cent of the capital funds of such finance company as shown in the last audited balance sheet and b. the maximum of a single accommodation or the aggregate of accommodations granted to by a finance company and outstanding at any point of time from any group of borrowers or from subsidiary companies and/or associate companies of such finance company shall not exceed 20 per cent of the capital funds of such finance company as shown in the last audited balance sheet. c. the maximum of a single unsecured accommodation or the aggregate of unsecured accommodations granted to by a finance company and outstanding at any point of time from a single borrower shall not exceed 1 per cent of the core capital of such finance company as shown in the last audited balance sheet. The aggregate of unsecured accommodations granted to and outstanding at any point of time from all borrowers shall not exceed 5 per cent of the capital funds of such finance company as shown in the last audited balance sheet The company had granted an unsecured loan to a Related Party company M/s Swarnamahal Jewellers (Pvt) Ltd of Rs. 678,600,000/- on 31st July 2014, exceeded the required Single Borrower Limit of 15% of Rs. 60mn notional capital requirement from the required core capital of Rs. 400mn. And also the company had granted the unsecured accommodation in excess 1% of the notional core capital of Rs. 4mn from the required capital requirement of Rs.400mn. This unsecured related party loan was fully settled on 31st January 2019.

102 Annual Report 2018/19 Swarnamahal Financial Services PLC Finance Companies (Structural Changes) Direction No. 1 of 2013 Every Finance company to which a license has been issued shall, without the prior approval in writing of the Director; Outsource any of its functions other than Mail, Courier services, Catering services, Housekeeping and Janitorial services, Security of premises, Payroll and Secretarial functions The company had outsourced the financial accounting and management information services, Information Technology services, Human Resource Management services, etc. without prior approval of CBSL .However, the company has discontinued the above practice with effect from 30th September 2018.

35.1 Non Compliances with the Code of Best Practice on Corporate Governance and Enforcement Actions of Colombo Stock Exchange (CSE) In addition to the above non compliances, The company was unable to appoint independent Non- Executive Directors to reconstitute the board and Board sub committees effectively to comply with the Corporate Governance Requirements of the Section 7.10.2.(a), 7.10.5 (a) ,7.10.6 (a) and 9.2.2 of the listing rules of the CSE, In addition to the CBSL Corporate Governance Direction No. 03 of 2008 due to the continuous negative net worth position that effected its going concern. “The securities of the company was suspended with effect from 30th June 2018 due to noncompliance with corporate governance rules 7.10.2 (a) and 7.10.6 (a) of the CSE Listing Rules subject to the following enforcement action as per the Rule 7.10’7 of the CSE Listing Rules: - ln the event the trading of securities remains suspended for six (6) months the securities of the company shall be delisted by the Board of Directors of the CSE. However, up to 28th June 2019 the company has not complied with above CSE listing rules.

36 Analysis of financial assets and liabilities by measurement basis

Fair value Fair Value through other Amortised through profit Total comprehensive Cost or loss income 36.1 As at 31 March 2019 Assets Cash and cash equivalents - - 278,535,113 278,535,113 Other investment (Repurchase agreements) - - 34,131,403 34,131,403 Financial assets held at fair value through - 1,486,759 - 1,486,759 profit or loss Financial assets -fair value through other 2,500 - - 2,500 comprehensive income Loans and advances to customers - - 1,086,420,089 1,086,420,089

Fair Value Other through profit Financial Total or loss Liabilities Liabilities Deposits from customers - 2,389,472,931 2,389,472,931 Bank overdrafts - 342,319,934 342,319,934

Annual Report 2018/19 Swarnamahal Financial Services PLC 103 Notes to the Financial Statements contd.

As at 31 March 2018 Fair Value Available for Loan and Assets through profit Total sale Receivable or loss Cash and cash equivalents - - 270,540,555 270,540,555 Other investment (Repurchase agreements) - 439,008,677 439,008,677 Financial assets held at fair value through - 1,895,262 - 1,895,262 profit or loss Financial assets available-for-sale 2,500 - - 2,500 Loans and advances to customers - - 1,559,782,952 1,559,782,952

Fair Value Other Liabilities through profit Financial Total or loss Liabilities Deposits from customers - 3,539,344,527 3,539,344,527 Bank overdrafts - 2,562,225 2,562,225

36.2 Fair value hierarchy for assets carried at fair value The table below analyses financial investments measured at fair value at the end of the reporting period, by the level of the fair value hierarchy. As at 31 March 2019 Financial assets Level 1 Level 2 Level 3 Total Financial assets held at fair value through 1,486,759 - - 1,486,759 profit or loss Financial assets -fair value through other comprehensive income - Share investment - unquoted company* - - 2,500 2,500

As at 31 March 2018 Financial assets Financial assets held at fair value through 1,895,262 - - 1,895,262 profit or loss Financial assets available-for-sale - Share investment - unquoted company* - - 2,500 2,500

* Note This comprise the 25 No of shares held at Credit Information Bureau of Sri Lanka. Since it’s deemed immaterial the cost is reconised as its fair value as at the reporting date.

104 Annual Report 2018/19 Swarnamahal Financial Services PLC 37. Maturity of assets and liabilities An analysis of the total assets employed and total liabilities as at the year end ,based on the remaining period at the reporting date to the respective contractual maturity dates is given below.

Maturity period Up to 1-3 3-12 1-5 Over 5 Total 1 month Months Months Years Years 31-Mar-19 Interest earning assets Cash at bank 94,276,025 94,276,025 Reverse repurchase agreements - 34,131,403 - - - 34,131,403 Investment in FD - - 117,169,764 - - 117,169,764 Loans & receivables * - - Gold Loans 686,652,834 175,981,729 136,260,982 - - 998,895,545 - Leasing 1,331,511 300,994 1,363,915 2,212,211 - 5,208,631 - HP 17,040 26,087 54,085 - - 97,212 - Term Loans 30,967,236 4,061,354 17,880,515 29,309,599 - 82,218,704 813,244,646 214,501,567 272,729,262 31,521,810 - ,331,997,284

Non interest earning assets Cash in hand 67,089,325 - - - - 67,089,325 Financial assets held at fair value 1,486,759 - - - - 1,486,759 through profit and loss Financial assets - fair value through other comprehensive - - - - 2,500 2,500 income Real estate stock - - 42,783,750 - - 42,783,750 Property, plant & equipment - - - - 21,667,017 21,667,017 Investment property - - - - 130,300,000 130,300,000 Other assets 264,623 3,951,801 661,590 31,795,578 33,017,063 69,690,655 68,840,706 3,951,801 43,445,340 31,795,578 184,986,581 333,020,006 Total assets 882,085,352 218,453,368 316,174,602 63,317,388 184,986,581 1,665,017,289

Percentage - 31st March 2019 52.98 13.12 18.99 3.80 11.11 100.00

Interest bearing liabilities Bank overdrafts - 342,319,934 - - - 342,319,934 Deposits from customers - - 2,389,472,931 - - 2,389,472,931 - 342,319,934 2,389,472,931 - - 2,731,792,864 Non interest bearing liabilities Other liabilities 3,056,460 49,251,928 27,241,461 - 14,315,782 93,865,630 Equity - - - - (1,160,641,208) (1,160,641,208) 3,056,460 49,251,928 27,241,461 - (1,146,325,426) (1,066,775,578) Total liabilities 3,056,459 391,571,861 2,416,714,393 - (1,146,325,426) 1,665,017,286

Percentage - 31st March 2019 0.18 23.52 145.15 0.00 -68.85 100.00

* Loans and receivables are reported net of impairment

Annual Report 2018/19 Swarnamahal Financial Services PLC 105 Notes to the Financial Statements contd.

37. Maturity of assets and liabilities An analysis of the total assets employed and total liabilities as at the year end ,based on the remaining period at the reporting date to the respective contractual maturity dates is given below.

31-Mar-18 Maturity period Up to 1-3 3-12 1-5 Over 5 Total 1 month Months Months Years Years Interest earning assets Cash at bank 87,545,662 87,545,662 Reverse repurchase - 31,458,908 407,549,769 - - 439,008,677 agreements Investment in FD - 30,284,795 76,327,396 - - 106,612,191 Loans & receivables * - Gold Loans 796,459,946 164,832,989 109,255,338 - - 1,070,548,275 - Leasing 2,517,951 1,368,509 4,687,709 10,262,621 - 18,836,791 - HP 679,283 434,417 1,476,024 795,759 - 3,385,483 - Term Loans 76,402,289 41,112,837 173,258,727 176,238,552 - 467,012,404 963,605,130 269,492,455 772,554,961 187,296,931 - 2,192,949,481 Non interest earning assets Cash in hand 76,382,702 - - - - 76,382,702 Financial assets held at fair value through 1,895,262 - - - - 1,895,262 profit and loss Financial assets - fair value through other - - - - 2,500 2,500 comprehensive income Real estate stock - - 42,623,480 - - 42,623,480 Property, plant & - - - - 32,320,048 32,320,048 equipment Investment property - - - - 128,000,000 128,000,000 Other assets 132,739 2,363,481 19,843,953 28,039,543 34,627,359 85,007,075 78,410,703 2,363,481 62,467,433 28,039,543 194,949,907 366,231,068 Total assets 1,042,015,834 271,855,937 835,022,394 215,336,475 194,949,907 2,559,180,549

Percentage - 31st 40.72 10.62 32.63 8.41 7.62 100.00 March 2018 Interest bearing liabilities Bank overdrafts - 2,562,225 - - - 2,562,225 Deposits from 467,242,883 609,751,120 1,324,819,787 1,137,530,736 - 3,539,344,527 customers 467,242,883 612,313,346 1,324,819,787 1,137,530,736 - 3,541,906,752 Non interest bearing liabilities Other liabilities 3,071,606 9,163,313 52,495,032 - 14,977,260 79,707,211 Equity - - - - (1,062,433,414) (1,062,433,414) 3,071,606 9,163,313 52,495,032 - (1,047,456,154) (982,726,203) Total liabilities 470,314,490 621,476,659 1,377,314,819 1,137,530,736 (1,047,456,154) 2,559,180,549 Percentage - 31st 18.38 24.28 53.82 44.45 -40.93 100.00 March 2018 * Loans and receivables are reported net of impairment

106 Annual Report 2018/19 Swarnamahal Financial Services PLC 38. Segmental information

Gold loans Term Loans Other Total For the year ended 31 March 2019 Income Interest income 420,321,871 82,947,908 35,984,479 539,254,257 Other income - 500 7,341,780 7,342,280 Total income 420,321,871 82,948,409 43,326,258 546,596,537 Percentage 76.90% 15.18% 7.93% 100.00%

Less : Interest 228,041,335 45,002,811 23,506,219 296,550,365 Other expenses 214,496,455 42,329,797 22,110,029 278,936,281 Total expenses 442,537,791 87,332,609 45,616,248 575,486,646 Loss before taxation (22,215,920) (4,384,200) (2,289,990) (28,890,110) Less : income tax 822,679.85 162,351.73 84,800.82 1,069,832 Loss after taxation (21,393,240) (4,221,848) (2,205,189) (27,820,277)

Segment assets 1,342,481,968 150,023,756 172,511,563 1,665,017,286 Percentage 80.63% 9.01% 10.36% 100.00% Segment liabilities 2,278,292,007 254,601,500 292,764,987 2,825,658,495

For the year ended 31 March 2018 Income Interest income 460,530,148 148,012,970 56,040,283 664,583,402 Other income (1,341,334) 140,652 19,319,884 18,119,202 Total income 459,188,814 148,153,622 75,360,167 682,702,604 Percentage 67.46% 21.70% 11.04% 100.00%

Less : Interest 314,454,800 101,456,343 51,607,020 467,518,162 Other expenses 189,518,902 61,146,768 31,103,058 281,768,729 Total expenses 503,973,702 162,603,110 82,710,078 749,286,891 Loss before taxation (44,784,889) (14,449,489) (7,349,912) (66,584,286) Less : income tax (799,598) (257,984) (131,227) (1,188,808) Loss after taxation (45,584,486) (14,707,472) (7,481,139) (67,773,094)

Segment assets 1,655,377,739 655,702,985 248,099,825 2,559,180,549 Percentage 64.68% 25.62% 9.69% 100% Segment liabilities 2,342,601,085 927,915,416 351,097,459 3,621,613,963

The management has chosen to organise entity around differences in product & services. According to the Sri Lanka Accounting Standard - SLFRS 8, product types of gold loans and term loans are identified as reportable segments based on revenue derived from each segment.

Annual Report 2018/19 Swarnamahal Financial Services PLC 107 Ten Years at a Glance

Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Year Ended 31st March (Audited) 2010* 2011 2012 2013 2014 2015 2016 2017 2018 2019

Profit Performance Gross Income 425 714 1,079 1,340 317 120 631 773 683 546 Interest Income 417 706 1,061 1,331 1,058 658 622 716 665 539 Interest Expenses 274 383 529 794 814 571 430 437 468 296 Interest on customers deposits 274 363 502 762 784 553 430 437 468 296 Interest on other borrowings - 20 27 32 30 18 - - - - Net Interest Income 143 323 532 537 244 87 192 279 197 243 Other Income 8 8 18 9 (741) (538) 9 57 18 7 Operating Expenses * 121 230 315 325 276 195 203 243 277 244 Impairment charges/(reversals) for loans 4 126 (27) 1 455 (394) (54) 21 (2) 23 and other losses Profit before tax (PBT) 26 (25) 262 220 (1,228) (252) 52 72 (60) (17) Income Tax & Other Tax expenses ** 9 49 102 98 17 6 36 13 8 10 Profit after tax (PAT) 17 (74) 160 122 (1,245) (258) 16 59 (68) (27) Other comprehensive income for the - (1) (7) 1 8 (2) (3) (1) - 1 year, net of tax Total comprehensive income for the year 17 (75) 153 123 (1,237) (260) 13 58 (68) (26)

Assets Cash and cash equivalents 122 130 205 104 308 170 170 118 271 278 Investments In Government Securities/ 126 183 339 449 441 631 413 425 439 34 REPOs/R-REPOs Other Investments 130 68 75 80 40 62 66 117 130 131 Pawning Gold Jewellery 864 2,714 3,694 4,610 2,261 1,447 1,519 1,284 1,071 999 Hire Purchase Receivable 211 192 219 227 140 102 47 13 3 1 Lease rentals receivable 23 31 42 54 31 16 34 34 19 5 Other Loans & Advances 304 233 189 217 950 642 637 728 467 82 Value of non performing Advances 9 11 13 530 505 43 35 65 110 155 (gross) Other Trading Stock 272 243 274 220 203 48 36 43 43 43 Other Receivables 245 80 71 70 67 82 58 68 84 70 Fixed assets 122 74 86 72 53 39 43 43 32 22 TOTAL ASSETS 2,419 3,948 5,194 6,103 4,494 3,239 3,023 2,873 2,559 1,665

Liabilities Fixed Deposits 1,896 3,502 4,456 5,345 5,068 4,097 3,951 3,716 3,495 2,356 Savings 48 50 50 55 65 71 64 56 44 33 Borrowings (Refinance) 100 102 215 162 102 - - - - 342 Other Liabilities 144 138 164 109 64 136 60 96 82 94 TOTAL LIABILITIES 2,188 3,792 4,885 5,671 5,299 4,304 4,075 3,868 3,621 2,825

Shareholders' Funds Stated Capital 250 250 250 250 250 250 250 250 250 250 Reserves (19) (94) 59 182 (1,055) (1,315) (1,302) (1,245) (1,312) (1,410) TOTAL SHAREHOLDERS' FUND 231 156 309 432 (805) (1,065) (1,052) (995) (1,062) (1,160)

TOTAL EQUITY & LIABILITIES 2419 3,948 5,194 6,103 4,494 3,239 3,023 2,873 2,559 1,665

108 Annual Report 2018/19 Swarnamahal Financial Services PLC Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Rs.Mn. Year Ended 31st March (Audited) 2010* 2011 2012 2013 2014 2015 2016 2017 2018 2019

Other Information Number of Staff as at 31st March 131 196 198 137 112 119 138 144 142 109 Number of Branches & Pawning 11 15 17 17 17 17 17 17 17 17 Centers

Ratios Growth of Net Interest Income 410.7% 125.9% 64.7% 0.9% -54.6% -64.3% 120.7% 45.3% -29.4% 23.4% Cost to Income Ratio 80.1% 69.5% 57.3% 60.6% 113.1% 195.0% 101.0% 72.3% 128.8% 97.6% Growth of Deposits 44.0% 82.7% 26.9% 19.8% -4.9% -18.8% -3.7% -6.1% -6.2% -32.5% Growth of Advances 101.1% 126.1% 30.7% 23.3% -33.8% -34.7% 1.4% -8.0% -24.2% -30.3% ROA (before Tax) 1.3% -0.8% 5.7% 3.9% -23.2% -6.5% 1.7% 2.4% -2.2% -0.8% ROA (After Tax) 0.8% -2.3% 3.5% 2.2% -23.5% -6.7% 0.5% 2.0% -2.5% -1.3% ROE (after Tax) 8.8% -38.8% 65.8% 33.2% -200.0% -27.8% 1.2% 5.7% -6.6% -2.3% Advances to Deposits & Borrow- 70.2% 88.0% 88.7% 92.8% 65.4% 53.9% 56.6% 55.4% 44.6% 40.3% ings Total Assets to Shareholders funds 10.5 25.3 16.8 14.1 -5.6 -3.0 -2.9 -2.9 -2.4 -1.4 (times) EPS (after Tax) (Rs.){considered 0.03 -0.15 0.32 0.24 -2.49 -0.52 0.03 0.12 -0.14 -0.05 Subdivision} Net Asset Value P.S. (Rs.) {consid- 0.46 0.31 0.62 0.86 -1.61 -2.13 -2.10 -1.99 -2.12 -2.32 ered Subdivision} Interest Cover (times) 1.5 1.8 2.0 1.7 1.3 1.2 1.4 1.6 1.4 1.8 Net Interest Margin 12.1% 13.2% 13.6% 10.7% 5.2% 2.6% 7.0% 10.9% 8.8% 15.6% Net Interest Spread *** 15.2% 14.4% 14.0% 10.7% 7.2% 7.3% 11.6% 15.7% 15.4% 19.6% Liquid Assets Ratio 11.9% 8.4% 11.2% 9.0% 13.1% 17.3% 13.9% 13.7% 19.2% -2.7% Government Security / TB Ratio 8.6% 10.0% 11.1% 10.2% 7.1% 10.5% 8.2% 9.9% 11.5% 0.0% NPL Ratio 0.6% 0.3% 0.31% 10.17% 12.2% 1.8% 1.5% 3.0% 6.6% 11.9% Core Capital Ratio (as per CBSL 16.0% 10.3% 17.4% 22.3% -43.5% -85.6% -124.9% -118.3% -105.9% -185.2% regulation) Total Risk Weighted Capital Ratio 23.7% 16.9% 21.8% 25.3% -43.5% -85.6% -124.9% -118.3% -105.9% -185.2% (as per CBSL Regulation) Shareholder's Funds to Deposits 4.39% 6.86% 8.00% -15.68% -25.55% -26.20% -26.38% -30.01% -48.56%

*Ratios for the FY’s before 2011 have been calculated based on the Financial Statement prepared in accordance with the SLAS.

Annual Report 2018/19 Swarnamahal Financial Services PLC 109 Share Information

Colombo Stock Exchange The Company’s Ordinary Voting shares were listed on the “DiriSavi” Board of the Colombo Stock Exchange with effect from 26th May 2011. The interim financial statements of the Company were submitted to the Colombo Stock Exchange within two months from the reporting date.

The securities of the company were suspended with effect from 30th June 2018 due to noncompliance with corporate governance rules 7.10.2 (a) and 7.10.6 (a) of the CSE Listing Rules subject to the following enforcement action as per the Rule 7.10.7 of the CSE Listing Rules:

ln the event the trading of securities remains suspended for six (6) months the securities of the company shall be delisted by the Board of Directors of the CSE. However, up to 28th June 2019 the company has not complied with above CSE listing rules.

Twenty Largest shareholders as at 31st March 2019

Name of the Shareholder No. of Shares Percentage (%) 1 ETI Finance Ltd 450,000,100 90.00 2 Mrs. S.E.Melluish 3,428,541 0.69 3 Mr. V.S.Rajasooriyar 2,512,906 0.50 4 Mr. K.L.G. Udayananda 2,506,694 0.50 5 Mrs. N.Muljie 2,148,580 0.43 6 Mr. R.E. Rambukwelle 2,095,000 0.42 7 Mrs. T.H.Fernando 1,700,000 0.34 8 Mr. J.F.I.Abeydeera 1,426,802 0.29 9 MBSL/D.L.J.Priyadharshana 1,400,000 0.28 10 MBSL/J.V.G.Sumithra 1,215,617 0.24 11 Mr. U.G.R.S.V.Dharmasiri 1,013,500 0.20 12 Mr. U.G.R.S.H.Dharmasiri 928,500 0.19 13 Mr. M.S.M. Iqbal 900,000 0.18 14 Seylan Bank/R.P.Sugathadasa 803,325 0.16 15 Peoples’ Leasing & Finance/ K.L.Udayananda 802,590 0.16 16 Mr. R.A.Priyadharshana 743,712 0.15 17 Mr. R.R.H.Perera 461,730 0.09 18 Mr. A.Y.Gunawardane 450,000 0.09 19 Mr. M.S.D. Perera 442,538 0.09 20 Mrs. L.J.Weerasinghe 400,000 0.08 20 Mrs. M. Arudpragasam 400,000 0.08 21 Others 24,220,005 4.84 Total 500,000,140 100.00

The stated capital of the company consisting solely issued and fully paid up ordinary voting shares of 500,000,140 as at 31st March 2019

110 Annual Report 2018/19 Swarnamahal Financial Services PLC Public Holding

Public holdings as a Percentage of issued share capital as at 31st March 2019 was 10% comprising of 1,942 Shareholders.

Market price of an Ordinary Share

31st Mar 2019 31st Mar 2018 Rs. Rs. Highest - 2.80 Lowest - 0.60 Closing 2.40 No. of Ordinary Voting Shares 500,000,140 500,000,140

31st Mar 2019 31st Mar 2018 Earnings/ (Loss) per Ordinary Share Rs. Rs. (0.06) (0.14)

Number of Ordinary Shareholders as at 31st March 2019 Resident Non Resident Total Share Holdings Number of Number of No of Number of No of Shares % % No of Shares % Shareholders Shareholders Shares Shareholders 1 to 1,000 896 293,165 0.06 1 100 0.00 897 293,265 0.06 1,001 to 10,000 646 2,802,971 0.56 3 24,800 0.00 649 2,827,771 0.56 10,001 to 100,000 320 10,043,991 2.01 0 - 0.00 320 10,043,991 2.01 100,001 to 1,000,000 65 16,746,973 3.35 2 640,400 0.13 67 17,387,373 3.48 Over 1,000,000 9 464,319,199 92.86 2 5,128,541 1.03 11 469,447,740 93.89 1936 494,206,299 98.84 8 5,793,841 1.16 1944 500,000,140 100

Categories of shareholder Number of Shareholders Number of Shares Percentage (%) Individuals 1895 44,216,221 9 Institutional 49 455,783,919 91 Total 1944 500,000,140 100

Float Adjusted Market Capitalization The securities of the company was suspended with effect from 01st July 2018 due to noncompliance with corporate governance rules 7.10.2 (a) and 7.10.6 (a) of the CSE Listing Rules, Hence, market capitalization is not available as at st31 March 2019 and unable to calculate the Float Adjusted Market Capitalization as at 31st March 2019.

Annual Report 2018/19 Swarnamahal Financial Services PLC 111 Glossary of Financial Terms

Accounting Policies Commitments Credit Ratings The specific principles, bases, Credit facilities approved but not An evaluation of a corporate conventions, rules and practices yet utilized by the clients as at the entity to assess its ability to repay adopted by an entity in preparing and reporting date. its obligations or likelihood of presenting Financial Statements. not defaulting, carried out by an Contingent Liabilities independent rating agency. Accrual Basis Conditions or situations at the Dealing Securities Recognition of the effects of reporting date, the financial effect of transactions and other events when which are to be determined by the These are marketable securities they occur without waiting for receipt future events which may or may not acquired and held with the intention or payment of cash or its equivalents. occur. to resale over a short period of time.

Amortization Core Capital (Tier I) Deferred Tax The systematic allocation of the Core Capital includes selected items of Sum set aside in the financial depreciable amount of an intangible capital funds. Major core capital items statements for taxation that may asset over its useful life. are share capital, share premium, become payable in a financial year statutory reserve funds, retained other than the current financial year. profits, general reserves, surpluses/ Capital Adequacy losses after tax arising from the sale of Depreciation The percentage of risk-adjusted assets fixed and long-term investments. supported by capital as defined under The systematic allocation of the the framework of risk based capital depreciable amount of an asset over Corporate Governance standards developed by the Bank for its useful life. International Settlement (BIS) and as The process by which corporate modified to suit local requirements by entities are governed. It is concerned Earnings Per Share (EPS) with the way in which power is the Central Bank of Sri Lanka. Profit attributable to ordinary exercised over the management and shareholders, divided by the number direction of entity, the supervision of Capital Reserves of ordinary shares in issue. executive actions and accountability to Capital Reserves consist of revaluation owners and others. reserves arising from revaluation of Effective Tax Rate properties owned by the Company Cost Income Ratio Provision for taxation, excluding and Reserve Fund set aside for specific deferred taxation, divided by the profit Operating expenses as a percentage of purposes defined under the Finance before tax. Business Act No. 42 of 2011 and shall net income. not be reduced or impaired without Equity the approval of the Monetary Board. Credit Risk Total of shareholders’ fund; share Credit risk is the risk of financial loss capital + statutory reserves + other Cash Equivalents to the Bank if a customer or counter reserves. Short-term highly liquid investments party to a financial instrument fails that are readily convertible to known to meet its contractual obligations, Equity Method amounts of cash and which are subject and arises principally from the loans to an insignificant risk of changes in and advances to customers and other The equity method is a method of value. banks and investment debt securities. accounting whereby the investment is initially recognized at cost and adjusted thereafter.

112 Annual Report 2018/19 Swarnamahal Financial Services PLC Fair Value Interest in Suspense Net Asset Value per Share Fair value is the amount for which an Interest suspended on nonperforming Shareholders’ funds divided by the asset could be exchanged between loans and advances. number of ordinary shares in issue. a knowledgeable, willing buyer and a Knowledgeable, willing seller in an Investment Properties Net-Interest Income (NII) arm’s length transaction. Investment property is property (land The difference between what a or a building – or part of a building - or Company earns on assets such as Finance Lease both) held (by the owner or by the loans and securities and what it pays A lease in which the lessee acquires lessee under a finance lease) to earn on liabilities such as deposits refinance all the financial benefits and risks rentals or for capital appreciation or funds and other borrowings. attaching to ownership of whatever is both, rather than for use or sale. being leased. Net interest margin (NIM) Investment Securities The measure of the difference General Provisions Securities acquired and held for yield between the interest income General provisions are established for or capital growth purposes and are generated and the amount of interest loans and advances for anticipated usually held to maturity. paid out to their lenders. losses on aggregate exposures where credit losses cannot yet be determined Key Management Personnel Non-Performing Loans (NPL) on individual facility basis. Key Management Personnel are All loans are classified as those persons having authority and nonperforming when a payment is 180 Impairment responsibility for planning, directing days’ in arrears. This occurs when recoverable amount and controlling the activities of the of an asset is less that it’s carrying entity, directly or indirectly, including NPL Ratio amount. any Director (whether Executive or Total non-performing advances (net of otherwise) of that entity. Interest in Suspense) divided by total Interest Margin advances portfolio (net of Interest in Net interest income as a percentage of Liquid Assets Suspense). average interest earning assets. Assets that are held in cash or in a form that can be converted to cash Off Financial Position Transactions readily, such as deposits with other Interest Spread Transactions that are not recognized as banks, bills of exchange and treasury This represents the difference assets or liabilities in the statement of bills. between the average interest rate financial position, but which give rise earned and the average interest rate to contingencies and commitments in paid on funds. Loan Losses and Provisions the statement of financial position as Amounts set aside against possible at reporting date. Interest Cover losses on loans, advances and other credit facilities as a result of such A ratio showing the number of times Operational Risk facilities becoming partly or wholly interest charges is covered by earnings This refers to the risk of loss resulting uncollectible. before interest and tax. from inadequate or failed internal processes, people and systems or from Market Risk Interest Earning Assets external events. This refers to the possibility of loss Assets which earn interest; Loans and arising from changes in the value of Advances, Bills, Leases, Call money, Price Earnings Ratio (P/E Ratio) a financial instrument as a result of etc. Market price of an ordinary share changes in market variables such as divided by earnings per share (EPS). interest rates, exchange rates, credit spreads and other asset prices.

Annual Report 2018/19 Swarnamahal Financial Services PLC 113 Provision for Bad and Doubtful Debts Return on shareholders’ fund A charge to income which is added An accounting ratio, expressing the to the allowance for loan losses. profit for the financial year as a Specific provisions are established percentage of average shareholders’ to reduce the book value of specific funds. assets (primarily loans) to estimated realizable values. Segmental Analysis Analysis of financial information by Return on Average Assets (ROA) segments of an enterprise specifically, Net income expressed as a percentage the different industries and the of average total assets, used along different geographical areas in which it with ROE, as a measure of profitability operates. and as a basis of intra-industry performance comparison. Shareholders’ Funds Total of issued and fully paid share Revenue Reserve capital and revenue reserves. Reserves set aside for future distribution and investment. Statutory Reserve Fund A capital reserve created as per the Return on Equity (ROE) provisions of the Finance Business Act Net income, less preferred share No. 42 of 2011. dividends if any, expressed as a percentage of average ordinary Supplementary Capital (Tier II) shareholders’ equity. Supplementary Capital includes, approved revaluation reserves, general Related Parties provisions, hybrid (debt/equity) capital Parties where one party has ability items and approved subordinated to control the other party or term debts. exercise significant influence over the other party in making financial and operating decisions, directly or indirectly.

Revenue Reserves Reserves set aside for future distribution and investment.

114 Annual Report 2018/19 Swarnamahal Financial Services PLC Our Network

Fully Fledged Branches NO. Branch Address Tel No. 01. Batticaloa No. 190, Trincomalee Road, Batticaloa. 065 - 2222880 02. Chilaw No. 24A, Bazaar Street, Chilaw. 032 - 2224888 03. Hatton No. 15, Main Street, Hatton. 051 - 2224466 04. Jaffna No. 338, Hospital Road, Jaffna. 021 - 2220245 05. Kandy No. 156, Kotugodella Street, Kandy. 081 - 2226126 06. Bambalapityiya No. 5, R.A. De Mel Mawatha, Colombo 04. 011 - 7534814 07. Negombo No. 93, Rajapaksha, Brodway, Negombo. 031 - 2222619 08. Nugegoda No. 31, St. Thilakaratna Mw, Nugegoda. 011 - 2810666 09. Ratnapura No 15, Main Street, Ratnapura. 045 - 2226270 10. Trincomalee No. 31, Central Road, Trincomalee. 026 - 2226677 11. Vavuniya No. 141, Kandu Road, Vavuniya. 024 - 2226233

Gold Loan Centers Jaffna NO. Branch Address Tel No. 12. Aluthgama No. 164, Galle Road, Aluthagama. 034 - 2271775 13. Gampaha No. 216, Maket Street, Gampaha. 033 - 2248444 14. Ja-Ela No. 120, Negombo Road, Ja-Ela. 011 - 2249085 15. Ragama No. 62A, Tewatte Road, Ragama. 011 - 2957053 16. Jampettah No. 05, Jampettah Street, Colombo 13. 011 - 2452245 17. Wattala No. 416, Negombo Road, Wattala. 011 - 3193340 Vavuniya

Trincomalee

Batticaloa

Chilaw

Kandy Negombo Ja-Ela Gampaha Ragama Wattala Hatton Sea Street Bambalapityiya Nugegoda Ratnapura

Aluthgama

Annual Report 2018/19 Swarnamahal Financial Services PLC 115 Notice of Meeting

NOTICE IS HEREBY GIVEN THAT THE FOURTEENTH (14TH) ANNUAL GENERAL MEETING OF SWARNAMAHAL FINANCIAL SERVICES PLC WILL BE HELD AT HOTEL SAPPHIRE NO. 371, GALLE ROAD, COLOMBO 06, ON MONDAY, 30TH SEPTEMBER 2019 AT 10.30 AM, AND THE BUSINESS TO BE BROUGHT BEFORE THE MEETING WILL BE:

AGENDA

1. To consider and adopt the Annual Report of the Board of Directors on the Affairs of the Company and the Statements of Accounts for the year ended 31st March 2019 with the Report of the Auditors thereon.

2. To re-elect Mr. Sameera Maulika Ganegoda who in terms of Article 20(5) of the Articles of Association of the Company retires by rotation at the Annual General Meeting as a Director

3. To re-appoint Messrs KPMG, Chartered Accountants as Auditors of the Company for the ensuing Year and to authorize the Directors to fix their remuneration

BY ORDER OF THE BOARD S S P CORPORATE SERVICES (PRIVATE) LIMITED

SECRETARIES No.101, Inner Flower Road, Colombo 03.

30th August 2019

Note:-

A member is entitled to appoint a proxy to attend and vote instead of himself/herself and a Proxy need not be a member of the Company. A Form of Proxy is enclosed for this purpose. The instrument appointing a proxy must be deposited at the Registered Office of the Secretaries, S S P Corporate Services (Private) Limited, 101, Inner Flower Road, Colombo 03.

Security Check:-

We shall be obliged if the shareholders/proxies attending the Annual General Meeting produce their National Identity Card to the security personnel stationed at the entrance.

116 Annual Report 2018/19 Swarnamahal Financial Services PLC Notes

Annual Report 2018/19 Swarnamahal Financial Services PLC 117 Notes

118 Annual Report 2018/19 Swarnamahal Financial Services PLC Form of Proxy

Swarnamahal Financial Services PLC

I/We………………………………………………………………………………………………….holder of National Identity Card No………………………………

of …….……………………...... ………………………………………………………………………………………...... being a member/members of

Swarnamahal Financial Services PLC hereby appoint …………………….... ………………………………holder of National Identity Card

Number No…………………….of …………………………………………………………………………………or failing him/her.

Mr. Jeewaka H. Edirisinghe or failing him Mr.Nalaka P. Edirisinghe or failing him Mrs.A.Deepa Edirisinghe or failing him Mr.Asanka S. Edirisinghe or failing him Mr.Sameera M .Ganegoda

as * my/our proxy, to represent *me/us and to vote as indicated hereunder for *me/us on *my/our behalf at the Annual Meeting of the Company to be held at Hotel Sapphire No. 371 Galle Road, Colombo 6 on Monday, Thirtieth (30th) day of September 2019 at 10.30 a.m and at any adjournment thereof and at every poll which may be taken in consequence thereof: FOR AGAINST

1. To consider and adopt the Annual Report of the Board of Directors together with the Financial Statements of the Company for the year ended 31st March 2019.

2. To re-elect Mr. Sameera Maulika Ganegoda who in terms of Article 20(5) of the Articles of Association of the Company retires by rotation at the Annual General Meeting as a Director

3. To re-appoint Messrs KPMG, Chartered Accountants as Auditors of the Company for the ensuing Year and to authorize the Directors to fix their remuneration.

Signed this ...... day of ...... Two Thousand and Nineteen.

Signature: …………………………….

Note:

a. *Please delete the inappropriate words. b. Instructions are noted on the reverse hereof.

Annual Report 2018/19 Swarnamahal Financial Services PLC 119 INSTRUCTIONS TO COMPLETE PROXY

1. Kindly perfect the form of proxy by filling in legibly your full name and address, your instructions as to voting, by signing in the space provided and filling in the date of signature. 2. Please indicate with a ‘X’ in the cages provided how your proxy is to vote on the Resolutions. If no indication is given, the proxy in his/her discretion may vote as he/she thinks fit. 3. A Proxy for a Shareholder is entitled to attend and be heard at a meeting of shareholders as if the proxy was the shareholder 4. In case of a Company or corporate body, the form of Proxy must be completed and signed under its Common Seal, which should be affixed and attested in accordance with the Articles of Association or the Constitution of that Company or corporate body. 5. In case of a proxy signed by an Attorney, the original or a certified copy of the Power of Attorney should also accompany the computed Form of Proxy, in the manner prescribed in the Articles of Association. 6. Every alteration or addition to the Proxy must be duly authenticated by the shareholders with the full signature. Such signature should as for as possible be placed in proximity to the alteration. 7. The completed Proxy should be deposited at the Registered office of the Secretaries ,at No. 101 ,Inner Flower Road ,Colombo 03,not less than 24 hours before the time appointed for holding of the Meeting.

Note:

If the shareholder is a Company or body corporate, Section 138 of Companies Act No.7 of 2007 applies to Corporate Shareholders of Swarnamahal Financial Services PLC. Section 138 provides for representation of Companies at meetings of Companies. A Corporation, whether a Company within the meaning of this Act or not, may-where it is a member of another Corporation, being a Company within the meaning of this Act, by resolution of its Directors or other governing body authorized as aforesaid shall be entitled to exercise the same power on behalf of the Corporation which it represents, as that Corporation could exercise if it were an individual shareholder.

120 Annual Report 2018/19 Swarnamahal Financial Services PLC