Annual Report 2011/12 Financial Services PLC I Annual Report Swarnamahal
FINANCIAL SERVICES PLC Together in No 654, Galle Road, Colombo 03, Sri Lanka. Swarnamahal Financial Services PLC Tel.011 2556160-4, 2595061 Fax: 011 2589823, 2595062 Annual Report 2011/12 E-mail:[email protected] Web.www.sfs.lk Growth Contents ABOUT US CORPORATE INFORMATION Swarnamahal Financial Services PLC is a Public Limited Liability Company Incorporated in Sri Lanka 14th January 2004, under the Companies Name of the Company VAT Registration No. Financial Highlights 2 Act No.17 of 1982, and re-registered 16th September 2008 under the Swarnamahal Financial Services PLC 114363510 – 7000 Chairman’s Message 4 Companies Act No.7 of 2007. The Company is licensed by the Monetary Director/Chief Executive Officer’s Message 8 Board of Directors 11 Board of the Central Bank of Sri Lanka under the Finance Business Act Legal Form Credit Ratings Senior Management Team 16 No.42 of 2011. A Public limited liability Company incorporated 14th January BB+/NP RAM Ratings (Lanka) Limited Management Discussion and Analysis 18 2004, under the Companies Act No.17 of 1982 and Financial Review 22 re-registered 16th September 2008 under the Companies Act Number of employees Sustainability Report 27 VISION No.7 of 2007, registered as a finance Company under the 207 Risk Management 32 To be the Premier Financial Services Provider in LFC market. Finance Business Act No. 42 of 2011 by the Monetary Board of Corporate Governance 37 Annual Report of the Board of Directors the Central Bank of Sri Lanka. Company Secretary on the Affairs of the Company 63 MISSION SSP Corporate Services (Pvt) Ltd Directors’ Statement on Internal Control 69 To create superior long - term value to our shareholders, customers and Registered Office No. 101, Inner Flower Road, Colombo 03 Auditor’s Report on Internal Control 71 employees above the industry standard. No.676, Galle Road, Colombo 03. Statement of Directors’ Responsibilities Auditors to the Company - Financial Year 2011/12 in Relation to Financial Statements 72 Business Office Messrs BDO Partners Chief Executive Officer’s and Senior Finance Manager’s Statement of Responsibility 74 VALUES No. 654, Galle Road, Colombo 03 Chartered Accountants Board Audit Committee Report 75 Highest standards of ethics and integrity Te.l. 011 2556160-4 Fax: 011 2595062 65/2, Sir Chiththampalam A Gardiner Board Integrated Risk Management Always do the right thing and keep commitments. Mawatha, Committee Report (BIRMC) 77 Engage others to build trust and encourage strong communication. Board of Directors Colombo 02. Board Human Resources and Listen and share as a team Mr. J. H. Edirisinghe Remuneration Committee Report 78 Mr. N. P. Edirisinghe Bankers to the Company Independent Auditor’s Report 81 Respect Income Statement 82 Mrs. A. D. Edirisinghe Commercial Bank of Ceylon PLC Respect all through trust, courtesy and open communication Balance Sheet 83 Mr. A. S. Edirisinghe Sampath Bank PLC Statement of Changes in Equity 84 Innovation and continuous improvements Mr. D. S. Abayaratne Seylan Bank PLC Cash Flow Statement 85 Anticipate customer needs and work to exceed their expectations Mr. S. M. Ganegoda Hatton National Bank PLC Significant Accounting Policies 86 Mr. J. F. G. De Silva Notes to the Financial Statements 93 Service Excellence Mr. S. A. Weerasinha Six Years at a Glance 114 Commitment to achieve the highest standard of services quality with Share Information 116 Mr. N. G. M. De Silva personalized services. Glossary of Financial Terms 118 Our Network 121 Learning focused Company Registration No. Notice of Meeting 122 Search new knowledge for innovations PB 594 PQ Form of Proxy 123 Together in
Growth is never achieved singularly and it is by working shoulder to shoulder that visions are created and targets achieved and at the end of another year we have seen results. Here at Swarnamahal Financial Services PLC, we are proudGrowth to work together towards a common goal of development and progress. regardless of differences. The teamwork displayed by our company can be summed up in a few words, “We believe in each other and likewise in the potential of a company whose trust is etched in gold”.
Swarnamahal Financial Services PLC Annual Report 2011/2012 2 Swarnamahal Financial Services PLC Annual Report 2011/2012 Financial Highlights
2011/12 2010/11 Change %
Financial Performance for the year (Rs. Mn) Gross Income 1,069 713 49.93 Net Profit Before Tax (PBT) 247 112 120.54 Tax Expense 106 49 116.33 Net Profit After Tax (PAT) 141 63 123.81 Net Profit per Employee 1. 19 0.57 108.77
Financial Position at the year end (Rs. Mn) Total Assets 5,315 4,079 30.30 Pawning Advances 3,155 2,434 29.62 Other Loans and Advances 473 538 -12.08 Deposits 4,399 3,470 26.77 Shareholders’ Funds 435 294 47.96
Information per Ordinary Share (Rs.) Earnings 0.28 0.13 115.38 Net Asset Value 0.87 0.58 50.00
Key Indicators Return on Average Shareholders’ Funds (%) 38.7% 24.0% 61.18 Return on Average Assets(%) 5.3% 3.5% 51.43 Cost to Income Ratio (%) 54.3% 65.4% -16.99
Capital Adequacy Ratios Core Capital Ratio-Tier I (%) 21.1% 15.7% 34.22 Total Risk weighted Capital Ratio -Tier II (%) 25.1% 21.6% 16.23
Statutory Ratios Shareholders’ Funds to Deposits (%) 9.89% 8.47% 16.71 Liquid Assets Ratio (%) 11.4% 8.47% 34.42
3 Swarnamahal Financial Services PLC Annual Report 2011/2012
Total Assets Gross Income Net Profit (PAT) Rs.Mn
6000 5,315 Rs.1,069 mn Rs. mn 5000 141 4,079 4000
3000 2,419 Total Assets Deposits 2000 1000
0 Rs. 5,315mn Rs. 4,399mn 10 11 12 Year
Profit Before Taxation Profit After Taxation Cost to Income Rs.Mn Rs.Mn %
300 160 100 141 247 140 80.10 250 80 120 65.40 200 100 60 54.26 150 80 63 112 40 60 100 40 20 50 17 26 20 0 0 0 10 11 12 10 11 12 10 11 12 Year Year Year
Total Deposits Pawning Advances Shareholders’ Fund Rs.Mn Rs.Mn Rs.Mn
4,399 4500 3500 500 4000 3,155 450 435 3,470 3000 400 3500 2,434 3000 2500 350 294 300 2500 1,944 2000 231 250 2000 1500 200 1500 864 150 1000 1000 100 500 500 50 0 0 0 10 11 12 10 11 12 10 11 12 Year Year Year 4 Swarnamahal Financial Services PLC Annual Report 2011/2012 Chairman’s Message
“Given your company’s highly respected reputation in the gold loan services market, we will continue to sustain our growth momentum through strategic market expansion of our core business of gold loans in the ensuing year.” 5 Swarnamahal Financial Services PLC Annual Report 2011/2012
It gives me a great pleasure to welcome you all to the 7th Annual During the year, the regulatory and prudential framework of General Meeting and to present the performance of your the financial sector focused on capital enhancements and company for the financial year 2011/12, that evidences a year improvements to corporate governance and risk management of commendable growth, with high returns for all stakeholders. infrastructure.
Economic Overview The performance of the non-bank financial institution sector Globally, financial markets remained sluggish due to rising (LFCs and specialized leasing companies) improved due sovereign debt problems in the European Union and increased to expansion of business activities. There were notable uncertainty about the prospects of the global economy. As a improvements in asset quality, profitability and capital result, investors adopted a cautious approach and prices of adequacy. safe haven assets, such as gold, rose significantly in 2011. The new Finance Business Act was effected in November 2011, Domestically, 2011 was a year of growth for Sri Lanka, with the introducing a stronger system to regulate finance companies. economy recording the highest post independence growth In addition, LFCs were required to list on the Colombo Stock of 8.3%. Inflation remained at single digit levels with annual Exchange by June 2011. average inflation at 6.7%, while year-on-year inflation was 4.9% in December 2011. In the favourable economic climate, imports In 2011, the Central Bank also implemented a mandatory and credit demand continued to grow and in February 2012, deposit insurance scheme under the provisions of the Monetary the Central Bank raised interest rates and capped bank lending Law Act, to safeguard interests of small depositors and maintain to 18% with an additional 5% allowed for foreign funds, to public confidence in the financial system. rein in possible demand fuelled inflation and to contain import related credit to safeguard national foreign exchange reserves. During 2011, the total asset base of the non bank financial To further strengthen external stability, in February 2012, the sector grew by 26% to Rs. 490 billion, compared with a growth Central Bank allowed greater flexibility in the exchange rate of 30% in 2010. The main contributory factor in the expansion by limiting its interventions in the domestic foreign exchange of the asset base was the growth of the accommodations market. Taxes on imported motor vehicles were raised in March portfolio. Accommodations grew by 46% to Rs. 388 billion as 2012 to control vehicle imports and save foreign exchange. at end 2011, compared to a growth rate of 35% during 2010. Finance leases, hire purchases and other secured advances During the first quarter of 2012, despite rising concerns of an were the major sources of the increase in accommodations, Euro zone crisis and a global slowdown, Sri Lanka’s economic accounting for 43%, 30% and 15%, respectively of total growth continued to remain strong. The Sri Lankan economy accommodations. Among the products, finance leasing, other recorded a 7.9% growth between January and March 2012, secured loans and pawning, indicated high growth rates of supported by an agriculture sector growth of 11.5%, an 90%, 58% and 35%, respectively. As at September 2011, LFCs industrial sector growth of 10.8% and services growth of 5.8%. accounted for 4.1% of financial sector assets at Rs. 301 billion and 5.8% of deposits, at Rs. 182.3 billion. Licensed Finance Companies (LFC) In 2011, Sri Lanka’s financial systems continued to remain SFS Performance stable and resilient, sustained by strong domestic economic Your company was able to sustain a strong growth throughout growth, despite the uncertain global financial environment. the financial year 2011/12. As a reputed finance company that has had the trust and confidence of consumers for many years, 6 Swarnamahal Financial Services PLC Annual Report 2011/2012 Chairman’s Message Contd.
compliance with the stronger governance and security process Future Outlook introduced by the Central Bank, through the new Finance The country’s economic growth forecast has been revised Business Act, was easily accommodated. downwards from 8.0%, to 7.2%, for the year 2012. Private sector credit is also expected to contract during the year, due Despite the current negative market sentiments, we are happy to the cap on bank lending and the higher cost of credit. In to announce that the Company’s share price remained buoyant this environment of slow overall national economic growth, our throughout the year, reflecting our strong fundamentals. The challenge will be to retain the growth momentum sustained over Company commenced trading 26th May 2011, and during the past years. the period 26th May 2011 to 31st March 2012, trade volumes reached 53,502, while the traded share volumes rose to 42.1 However, despite the new challenges, we hope to sustain our million, recording a turnover above Rs. 4 billion. The Market growth momentum through strategic market expansion of our Capitalization was over Rs. 3.9 billion as at 31st March 2012. core business of gold loans and also the provision of fixed deposit services. Given the high yield, high security and high The price increase of gold during the year resulted a higher liquidity of gold loans, compared to other lending products, demand for our gold related services that contributed towards expansion of gold loan services will contribute towards the overall profit growth. The increased gold prices also strengthening the Company’s asset base, while ensuring high strengthened our asset base, making SFS one of the most returns. Given your Company’s highly respected reputation in stable and secured finance companies in the country. the gold loan services market and our in-house expertise in gold transactions, I am confident we will be able to sustain a Despite competition from 38 LFCs operating in the country, strong growth in this segment during the ensuring financial year. the total income of your company grew by 49% during the year As a part of our expansion programme, we will add five new under review, to reach Rs. 1.06 billion, compared to the income branches to our network during the financial year 2012/13, with of Rs. 713 million in the previous year. As a result of this strong greater penetration in the North and East of the country, with performance, our profit after tax more than doubled to Rs. 140.7 our expertise. We will also convert a number of our pawning million. This strong growth is a result of the quality of services centres into full service branches. This will enable us to offer and accessibility of services offered by SFS to consumers. a full range of services, including fixed deposits, to a larger Our highly trained and experienced staff, seven days a week market. service, access points at all major cities and modern security facilities have contributed towards establishing SFS as a We also wish to notify our valued shareholders that your premier service provider, particularly in the gold loans market. Company will retain the earnings of the year under review, to strengthen the Company’s Tier 1 capital base and will also wish The rise of interest rates in 2012, caused interest rates of fixed to issue debentures during the new financial year, to strengthen deposits and savings deposits to increase. This upward trend in Tier 11 capital, to meet the Central Bank’s capital adequacy interest rates will exert pressure on the interest rate spread and requirements in line with our expansion plans. cost of borrowing. These changes did not have a significant impact during the financial year under review. However, they In addition, we will continue our endeavours to keep improving may affect the company performance in the new financial year. the quality of our services and maintain our commitment towards the training and development of our staff. 7 Swarnamahal Financial Services PLC Annual Report 2011/2012
Appreciations I would like to extend my wholehearted appreciation to our former Chairperson, Dr.(Mrs) Soma Edirisinghe, for her direction and total dedication in guiding this Company since its inception. I would also like to thank the Board of Directors for their guidance in steering the Company to achieve its current performance.
For their continued support and trust in the company, all our shareholders and customers, deserve my unreserved appreciation. I have no doubt that our shareholders will join me in commending the CEO, his management team and staff of SFS, for their dedication and team spirit that has resulted in the Company for achieving its current success.
J. H. Edirisinghe Chairman 05th June 2012 8 Swarnamahal Financial Services PLC Annual Report 2011/2012 Director/Chief Executive Officer’s Message
“During the Financial Year 2011/12, we continued to surge ahead in a strong growth trajectory with revenues, profits and assets, all showing commendable growth and reflecting consumer trust placed in the Company.” 9 Swarnamahal Financial Services PLC Annual Report 2011/2012
I am happy to announce that your Company has recorded an contributed towards increased demand for our gold loan exceptional performance during the financial year 2011/12. services and we saw higher demand from the North and East of The year under review reported a number of significant the country. As a result the North and East now account for one regulatory and policy changes that directly impacted the LFC third of our total assets. sector and your Company. However, I am confident our strong fundamentals will continue to sustain growth in the coming year. Our fixed deposit portfolio increased from Rs. 3.5 billion to Rs. 4.4 billion in the financial year 2011/12. Due to the higher Performance Overview cost of bank credit, fixed deposits continued to remain as the In the financial year 2011/12, your Company continued to main source of funding for the Company. In addition to the gold surge ahead in a strong growth trajectory with revenues, profits loan services, we also continued to provide credit facilities, and assets, all showing commendable growth and reflecting such as Leasing and Hire Purchase and Education Loans for consumer trust in the Company. The year also saw our asset our customers. base strengthen, with gold backed assets rising to 65% of total assets. This has made SFS one of the most stable and secured Due to the negative trend in the real estate market and the LFCs operating in the country today. downturn in investor sentiments at the Colombo Stock Market, it was necessary to re-evaluate our strategies in the real estate Our overall income grew by 50% to reach Rs. 1.07 billion, sector and equities investments. While adequate provisioning compared to the income of Rs. 713.1 million in the financial have been made against contingencies in the property year 2010/11. Our profit before tax grew by 126%, to reach development market and share market, we are hopeful that Rs. 218.9 million, from Rs. 96.9 million during the previous improved investor confidence in the share market would enable financial year. Profit after tax meanwhile, more than doubled to us to reverse provisioning on share market investment during Rs. 140.7 million, from Rs. 62.7 million in the previous year. Our the new financial year, as our investments are in Blue Chips/ asset base also expanded by Rs. 1.3 billion, to Rs. 5.3 billion high potential companies. However, as an improvement in the from Rs. 4.0 billion. We are happy to announce that our (NPL) real estate sector cannot be envisaged in the short term, new ratio also, indicated a reduction during the year, to 0.3% from strategies will be formulated to ensure the best returns for the 0.4% previously, due to our ongoing efforts to streamline debt Company and to ensure the best interests of our shareholders. collections. During the current financial year we did not continue the purchasing of land. Instead, we adopted a strategy of disposal Our gold loans portfolio continued to expand by 30%, from of low yielding properties and re-investing the funds in higher Rs. 2.4 billion in the previous year, to Rs. 3.2 billion during the yielding products. 2011/12 financial year. The growth in this segment in particular, reflects consumer confidence in the Company’s expertise in During the year, the Company added two new pawning centres gold transactions, including valuations and security facilities. to its network in Batticaloa and Aluthgama, thereby expanding It gives us a great pride to record that SFS has some of the our market coverage. most experienced and highly trained gold assessors in the country, providing the best standard of service for consumers. The year also brought in many significant regulatory changes We maintain utmost integrity in all transactions, ensuring the including the introduction of the Finance Business Act, to security of gold items left in our custody, and their safe return regulate finance companies in the country. As a Company with to the rightful owners. During the year, the rising gold prices a strong brand name built on trust, we welcome these initiatives 10 Swarnamahal Financial Services PLC Annual Report 2011/2012 Director/Chief Executive Officer’s Message Contd.
to improve governance of the LFC sector, as they will boost We are confident our market expansion plan for the year consumer confidence in the sector. As a part of these regulatory 2012/13 will contribute significantly towards reaching our goal changes LFCs were also required to list on the Colombo Stock of being ranked among the top 10 companies in the LFC sector, Exchange (CSE) before end June 2011. Therefore, SFS listed in terms of profitability, over the next two years. its Ordinary Voting Shares on the DiriSavi Board of the CSE and commenced trading activities 26th May 2011. Appreciations On behalf of the shareholders and employees, I extend my Future Outlook warm appreciation to our former Chairperson, Dr (Mrs) Soma In the face of slow economic growth and credit constraints, Edirisinghe for her untiring efforts in guiding the Company to its in the financial year 2012/13, we plan to operationalize our present position. strategic expansion plan, focussing strongly on expanding our geographic coverage of the country, with further emphasis on I also extend my gratitude to the Chairman and my colleagues the North and East. In this context we hope to establish five on the Board, for their active interest in the Company and their new branches in strategic locations in the North and East and strategic guidance. Our shareholders, providers of Credit Lines in the South. In addition, we also plan to convert some of our and depositors deserve my gratitude for the confidence they pawning centres into fully fledged branch offices enabling us to continue to place in us. offer our full range of services to a wider customer base. I also thank our borrowing customers for their patronage and Due to higher credit cost and increased vehicle import taxes, appreciation of our services. we anticipate lower demand for vehicle hire purchase and leasing services. In addition, securitised credit from banks, for I firmly believe that our success is due to the hard work and finance companies, has also slowed down due to the cap on dedication of our team of employees. Our service quality and bank lending. However we plan to meet our funding targets by the quality of our team of personnel, are what differentiates floating Debentures and mobilising more Fixed Deposits. SFS from the competitors in the industry, consolidating the Company’s reputation for trust, reliability and security. However, in an environment of rising inflationary pressures and Therefore, I extend a warm thank to our ‘team SFS’ for its higher requirements for credit, we anticipate higher demand for contribution towards the success of our company. gold loans to be sustained. In the face of rising interest rates, the fixed deposit segment too, can be expected to remain strong. Therefore, in the new financial year, we will continue to focus strongly on growing our fixed deposit and gold loan portfolios. Our geographic expansion will be strategically linked with our gold loan and fixed deposit service expansion. We will S. M. Ganegoda also continue to focus on skills development of our team and Director/Chief Executive Officer th upgrading of technology, to facilitate this process. 05 June 2012 11 Swarnamahal Financial Services PLC Annual Report 2011/2012 Board of Directors
Standing from Left to right :
1. Mr. J. H. Edirisinghe 2. Mr. N. P. Edirisinghe 3. Mrs. A. D. Edirisinghe 12 Swarnamahal Financial Services PLC Annual Report 2011/2012 Board of Directors Contd.
Standing from Left to right :
4. Mr. A. S.Edirisinghe 5. Mr. D. S. Abeyratna 6. Mr. S.M. Ganegoda 13 Swarnamahal Financial Services PLC Annual Report 2011/2012
Standing from Left to right :
7. Mr. J.F.G. De Silva 8. Mr. S. A. Weerasinha 9. Mr. N.G. M. De Silva 14 Swarnamahal Financial Services PLC Annual Report 2011/2012 Board of Directors Contd.
1. Mr. J. H. Edirisinghe Partner: Chairman AbeyRatna & Co., Chartered Accountant, an associate of AGN Managing Director of EAP Edirisinghe group of companies, he International Limited UK and is the 04th largest Accounting counts over 25 years of extensive experience in the fields of association in the world. AGN is represented in102 countries. Gold, Jewellery, Finance, Electronic Media and Management. Chairman: 2. Mr. N. P. Edirisinghe West Asia and African region of AGN. Executive Director Director of EAP Edirisinghe group of companies, he has an Director: expert knowledge in Gold and other precious metals and stones AGN International Board, UK, Navaloka Hospitals PLC, East and counts over 20 years of extensive experience in the fields West Properties PLC, Eastern Brokers Ltd. of Gold, Information Technology, Finance and Management. 6. Mr. S.M. Ganegoda 3. Mrs. A. D. Edirisinghe Director/Chief Executive Officer Executive Director ACA, B.B.Mgt. (Acc), ASCMA Director of EAP Edirisinghe group of companies, she counts over 20 years of experience in the fields of Management and He counts over 15 years of experience in the fields of Finance Finance. and Audit and holds the Business Management Degree from the University of Kelaniya and is an Associate Member of the 4. Mr. A. S.Edirisinghe Institute of Chartered Accountants of Sri Lanka and Society of Executive Director Certified Management Accountants of Sri Lanka. Director of EAP Edirisinghe group of companies, he is a Finalist of the Chartered Institute of Management Accountants (UK) and 7. Mr. J.F.G. De Silva a Member of the Film Association. Independent Non-Executive Director BSc., FCIB (UK) He counts for over 20 years of experience in the fields of Film He counts over 40 years’ experience in the banking and Industry, Gold, Information Technology and Finance. financial sector and is a Fellow Member of the Chartered Institute of Bankers (UK) and holds a Bachelor of Science 5. Mr. D. S. Abeyratna Degree, University of Ceylon, Peradeniya. He is a professional Independent Non-Executive Director banker, primarily served at Bank of Ceylon and retired as the PhD (UH-USA), FCA (SL), FCMA (SL), Senior Deputy General Manager having also been its Country FCMA (UK), CMA (AUS.) Manager in UK (1996 to 2000). He counts over 40 years of experience in the fields of Finance and Audit and a Fellow Member of the Institute of Chartered He also was the Managing Director/CEO of People’s Merchant Accountants of Sri Lanka, Fellow Member of the Institute Bank PLC from May 2003 to September 2007. He has held of Management Accountants of UK, Member of Certified Directorships at the subsidiaries of Bank of Ceylon namely Management Accountants of Australia. He also a Fellow Ceybank Securities Ltd, Ceylease Financial Services Ltd, BOC Member of Certified Management Accountants of Sri Lanka Travels Ltd and Nepal Bank of Ceylon Ltd. and obtained a Doctorate in philosophy, from the University of Honolulu USA. 15 Swarnamahal Financial Services PLC Annual Report 2011/2012
8. Mr. S. A. Weerasinha Independent Non-Executive Director He is a professional banker having over 25 years of banking experience at People’s Bank. He joined the People’s Bank as a Senior Finance Officer in 1979 and retired from the Bank as the Deputy General Manager – Human Resources in December 2006. He was the General Manger of State Mortgage and Investment Bank from November 2006 to November 2009. He has held Directorships at the Board of Uva Development Bank and Ruhunu Venture Capital Company.
9. Mr. N.G. M. De Silva Non-Executive Director FCA (SL), MBA (SRI.J’PURA), FCMA (SL), CMA (Aus) He counts over 25 years of experience in the field of Finance & holds a Master’s Degree in Business Administration (MBA) from the University of Sri Jayawardenapura. He is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka and Society of Certified Management Accountants of Australia. 16 Swarnamahal Financial Services PLC Annual Report 2011/2012 Senior Management Team
3 5 4 8 9 2 7 6 1
1. Mr. S.M. Ganegoda Director/Chief Executive Officer ACA, B.B.Mgt. (Acc), ASCMA
He counts over 15 years of experience in the fields of Finance and Audit and holds the Business Management Degree from the University of Kelaniya and is an Associate Member of the Institute of Chartered Accountants of Sri Lanka and Society of Certified Management Accountants of Sri Lanka.
2. Mr. Dhanuka Perera Senior Manager - Pawning & Gold Sales He counts over 10 years of experience in the fields of Pawning and Gold Sales and holds a Diploma in Business Management from JMC. 17 Swarnamahal Financial Services PLC Annual Report 2011/2012
3. Mr. R.M.G. Ratnayake 8. Mr. R Harendran Senior Manager – Finance Manager – Internal Audit He counts over 08 years of experience in Financial He counts over 05 years of experience in the fields of audit and Sector and holds the Degree of B.Sc.Accountancy & assurance. He holds the Bachelor of Business Administration Financial Management (Special), from the University of Sri (Special Finance Management) Degree from the University Jayawardenapura. Diploma in Treasury Management, Institute of Colombo and is an Associate Member of the Institute of of Bankers of Sri Lanka. Chartered Accountants of Sri Lanka. He counts over 04 years of experience at Ernst and Young (E&Y) Chartered Accountants.
4. Mr. George Samantha 9. Mr. Samith Ganepola Senior Manager – Corporate Relations Manager - IT He counts over 08 years of experience in the fields of He counts over 05 years of experience in the field of Information Banking and Finance and holds the B.Sc Marketing Technology and holds the B.Sc Information Technology Management (Special) Hons. Degree, from the University of Sri (Special) Hons. Degree from the Sri Lanka Institute of Jayawardenapura and is an Associate Member of Sri Lanka Information Technology. Institute of Marketing (AMSLIM).
5. Mr. Mahesha Withanawasam Manager – Branch Operations He counts over 09 years of experience in the fields of Accounting and Finance. He holds the B.Sc. Accountancy & Financial Management (Special) Degree from the University of Sri Jayawardenapura.
6. Mrs. Subhani Edirisinghe Manager - Deposit Mobilizations She counts over 11 years of experience in the field of deposit mobilization. She holds the B.Sc Business Administration(Marketing Special) Degree from the University of Sri Jayawardenapura.
7. Mr. Newton Fernando Manager – Credit He counts over 13 years of experience in the field of Credit and holds the B.Sc Business Administration (Special) Degree from the University of Sri Jayawardenapura. 18 Swarnamahal Financial Services PLC Annual Report 2011/2012 Management Discussion and Analysis
Overview In November 2011, the Finance Companies Act was replaced We are happy to announce that our Company was able to by the Finance Business Act, to regulate finance companies. sustain its growth momentum during the financial year 2011/12 The new law introduced stronger measures to prevent to show commendable growth in revenues, profits and assets. unauthorized deposit-taking, while improving the regulation of finance companies. Unauthorised finance businesses and Swarnamahal Financial Services PLC (SFS), is a public limited deposit-taking are targeted through several measures. These liability Company, incorporated 14th January 2004 in Colombo, include, widening the definition of deposits to cover a broader under the Companies Act No 17 of 1982 and re-registered 16th range of fund mobilisation activities and strengthening the September 2008 under the Companies Act No.7 of 2007 . The powers of the Central Bank to investigate unauthorised entities. Company is licensed by the Monetary Board of the Central Bank The regulatory framework for Licensed Finance Companies of Sri Lanka under the Finance Business Act No.42 of 2011 and (LFC) was also upgraded with enhanced prudential, reporting listed on the DiriSavi Board of the Colombo Stock Exchange. and compliance requirements. In addition, it has been made mandatory for any licensed finance company to have the word SFS is one of the fastest growing finance companies in the non ‘finance’, ‘financing’ or ‘financial,’ as part of its name, to easily bank financial services sector of Sri Lanka, with a highly trained, identify a finance company by its name. Other institutions have experienced staff. The Company provides a wide array of been prohibited from using the word ‘finance’ ‘financing’ or financial services for both corporate and individual customers. ‘financial’ or any of its derivatives, or its transliterations or their These include fixed deposits, pawning and gold loan services, equivalent, in any other language, in their company name or leasing and hire purchase, term loans and savings and minors’ description, without the prior written approval of the Monetary savings accounts. Board.
Operating Environment To improve governance standards of finance companies and Plagued by the Euro area sovereign debt crisis, slow global to broad-base ownership, LFCs were required to list on the economic recovery and geopolitical uncertainties in some oil Colombo Stock Exchange by June 2011. The public listing is producing Middle Eastern and North African countries, the also expected to facilitate capital augmentation of LFCs. global economy grew at the modest rate of 3.9% in 2011, according to the IMF, and is projected to slow down further The minimum capital requirement for non bank financial to 3.5% in 2012. Despite the sluggish global economy, Sri institutes is being enhanced gradually, to facilitate business Lanka recorded an impressive 8.3% GDP growth in 2011, with expansion in a sustainable manner. As a result, the core capital exports growing by 22% and imports growing by 51%. In the requirement of LFCs, which is currently Rs. 200 million, has first quarter of 2012, the Sri Lankan economy recorded a 7.9% been increased to Rs. 300 million, by 2013, and Rs. 400 million growth supported by an agriculture sector growth of 11.5%, an by 2015. industrial sector growth of 10.8% and services growth of 5.8%. During the year, the Central Bank introduced a mandatory In the Licensed Finance Business sector in Sri Lanka, comprised deposit insurance scheme to safeguard interests of small of 39 LFCs competing directly in the financial services market of depositors and strengthen public confidence in the financial the country. To differentiate our services, and to gain an edge over system. All licensed banks and LFCs are members of the the competition, we continued to invest in our core expertise of scheme, and a premium on eligible deposits, ranging from gold services and enhanced our customer care services to ensure 0.10 % to 0.15%, is levied on a monthly/quarterly basis. The best value for consumers at our 17 branch offices and gold loan premium is credited to a Deposit Insurance Fund, operated and service centres. managed by a separate unit of the Central Bank. Depositors will be compensated through this scheme if required. 19 Swarnamahal Financial Services PLC Annual Report 2011/2012
A number of key national policy changes were introduced to other lending products. Currently pawning and gold loans during the financial year 2011/12, that impacted on our overall are our main lending product, as pawning advances are a low operating environment. The cap on bank lending in February risk lending instrument with short maturity periods and high 2012 introduced constraints to private sector credit. Higher collaterals. vehicle import taxes resulted in increased vehicle prices and rising cost of leasing and hire purchase. However, as these During the year we continued to expand our pawning portfolio developments occurred during the latter part of the financial by offering attractive loans at competitive interest rates to year 2011/12, their impact will be felt more significantly in the customers. The rising world market prices of gold strengthened new financial year. our gold portfolio in 2011. Though the rate of appreciation of world gold prices declined in the first quarter of 2012, it had The Central Bank’s decision to limit its interventions in the no adverse effect on the value of our gold portfolio due to foreign exchange market resulted in the rupee depreciating depreciation of Sri Lankan rupee. However, to mitigate risks in against the US dollar. This caused gold prices to increase in the gold segment, we have maintained a loan to value ratio of the Sri Lankan market, and in turn, generated higher demand 75% on our gold lending. for gold loans and also encouraged customers to redeem their gold articles without defaulting. This situation therefore, was Our gold assessors, who have years of experience in the gold favorable for SFS and the year saw strong growth in our gold market, are a strong asset to the Company in expanding our services. The increased gold prices also strengthened our gold services, by ensuring quick and accurate assessments asset base. Nearly 65% of our asset base is currently backed during gold transactions. This expertise has contributed by gold, making SFS one of the most stable and secured towards building consumer confidence in the Company and financial service providers in the country. helped to reduce assessment risks.
In an operating environment of rising interest rates and We have ensured easy access to our gold services by locating inflationary pressures, the expansion of credit assets can be our gold loan service centres in all major cities and by keeping expected to slow down in the new financial year, while also our gold loan service centres open on all seven days of the increasing the risk of asset quality. The industry will also have to week. During the year, we also opened two new pawning preserve its profit margins in the face of rising interest rates and centres in Batticaloa and Aluthgama. We have invested in higher cost of funding. modern security measures for the safety of all gold stocks in our custody. Principal Activities The Company’s principal lines of business are broadly During the year, our pawning portfolio, which amounted to classified under two categories: Rs. 2,434 million as at 31st March 2011, grew by 30% to reach Lending products and borrowing products. Lending products Rs. 3,155 million by 31st March 2012. The interest income from include pawning and gold loans, leasing, hire purchase and pawning recorded a significant growth of 69% from Rs. 542 term loans, while borrowing products include fixed deposits million in 2010/11 to Rs. 917 million during the financial year and savings accounts. 2011/12. The Company has already identified new strategic locations to open 5 new branches with particular emphasis on Pawning and Gold Loans the North and East. The North and East are strong emerging We focused strongly on expanding our market share of the markets in the gold services sector with growing demand for pawning and gold loans sector during the year, due to the gold services from our existing branches in Vavunia, Jaffna, products high yield, high security and high liquidity, compared Batticaloa and Trincomalee. These areas already account for 20 Swarnamahal Financial Services PLC Annual Report 2011/2012 Management Discussion and Analysis Contd.
nearly one third of our total assets. Supported by our expansion LFCs, at SFS, we do not penalise customers for early withdrawal in the North and East, we hope to augment our gold advances of fixed deposits and our customers are not required to give portfolio to Rs.5.0 billion by the end of the financial year prior notice for pre-mature withdrawals of fixed deposits. As a 2012/13. Company with the customer’s best interest at heart, we facilitate immediate withdrawal of fixed deposits by customers, even Leasing, Hire Purchase and Term Loans in the case of pre-mature withdrawals. This strong customer Our leasing, hire purchase and term loans are designed to suit orientation has resulted in higher customer satisfaction and the requirements of our different customers with competitive repeat customer visits to the Company. interest rates and personalized, efficient support services. We intend to enhance our fixed deposits portfolio to Rs.5.5 The Company’s lease and hire purchase portfolio stood as Rs. billion by the end of the financial year 2012/13. 290 million as at 31st March 2012. Savings Accounts Higher vehicle prices due to increased vehicle import taxes Our savings products are specially designed for corporate and and rupee depreciation, coupled with rising interest rates, individual customers, including children. have resulted in rising leasing and hire purchase costs. This situation is expected to dampen the demand for leasing and •• SFS SAVER – This product is exclusively designed for hire purchase of vehicles in the coming year. depositors who opt to deposit in large volumes. Clients earn higher interest rates on savings, Fixed Deposits depending on the deposit amount. Fixed deposits were the main source of funding for the Company during the year. Reflecting consumer confidence •• NORMAL SAVINGS ACCOUNT – This account in the Company and supported by our flexible customer care provides competitive interest rates for savings services, this segment showed a growth of 26% from Rs. 3.4 regardless of the volume of savings. billion as at 31st March 2011, to Rs. 4.3 billion by 31st March 2012. •• MINOR’S SAVINGS ACCOUNT –The “Kumara Kumari” savings accounts are designed for children, with an Due to rising cost of bank credit, fixed deposits will continue to attractive interest rate to encourage the savings habit be the most cost effective source of funding for the Company among children. in the new financial year. Therefore, we hope to expand our fixed deposits segment by leveraging the existing customer Investments in Shares confidence in the Company and by extending our branch During the year, the Company continued to invest in equities network to new geographic locations. In addition, we intend with strong fundamentals, mainly focussing on Blue Chips / floating a substantial debenture to augment our Tier 2 capital high yield potential companies, trading in the Colombo Share fairly soon. Our expansion plans will be supported by staff Market. Despite their strong potential, due to the downturn training, to provide exceptional and personalised customer care experienced by the Colombo Stock Market, our equities services. portfolio has generated negative returns during the year. While our investment portfolio totaled Rs. 5.7 million, the market Our customer care services are a significant factor value reflected, was Rs.3.9 million, as at 31st March 2012. As differentiating SFS in the LFC sector in Sri Lanka. Unlike many such, adequate provisioning has been made as impairment in the financial accounts of the year 2011/12. However, we are 21 Swarnamahal Financial Services PLC Annual Report 2011/2012
confident of renewed investor confidence in the Stock Market Company has also implemented stringent security procedures reversing the downtrend and our share investments generating to mitigate operational risk. improved returns during the new financial year. Future Outlook Investments in the Property Market A number of challenges have emerged in the new financial The real estate sector in Sri Lanka experienced a downturn year. The increased cost of vehicles and rising cost of credit, during the year under review, prompting us to reconsider our is expected to slow down the growth of the vehicle leasing strategies in this sector. Therefore, during the year, we did not and hire purchase market. We also anticipate restrictions in expand our investments in this sector and instead, adopted a bank funding, due to higher cost of credit and the cap on bank strategy of disposing our property portfolio to mitigate losses lending. However, we hope to address these challenges and in the sector. These incomes have been re-invested in more sustain growth momentum in the coming year, by re-aligning lucrative products. In addition, we have made provisioning our operational and marketing strategies. for losses in this sector in the profit and loss accounts of the financial year under review. We will continue to monitor this Given the lower growth potential in the leasing and hire segment closely in the new financial year, for any potential purchase sector, and rising cost of funding, during the new opportunities. financial year, we hope to focus on expanding our fixed deposit and gold loan services portfolios. To achieve our objective, we Human Resources are planning to expand our branch network to new geographic We believe that our team of employees are our most valuable locations and also increase our service coverage. asset and we are committed towards their development and growth, in parallel with the growth of the Company. As such, We plan on adding five new branches, mainly focussed in the we provide regular training for our employees to upgrade their emerging markets of the North and East, while also increasing skills and to equip them with the skills required to perform their our coverage in the South. This move will increase our total duties, while fulfilling their own goals and ambitions. We also number of branches and pawning centres to 22, from the focus on attracting and retaining the best talent. current 17. In addition, we propose to expand our service coverage to a wider geographic area, by converting some of In the provision of gold services in particular, our experienced our existing pawning centres into branches. Currently out of our and well trained staff have directly contributed towards 17 service points, 10 are dedicated pawning centres. We hope customer confidence and trust in the Company. This in-house to convert some of these pawning centres, located in strategic pool of expertise has also helped to reduce risks associated growth areas, into full service branches, offering the full range with gold transactions, through accurate assessments of the of our services to a larger segment of customers. value of gold items deposited with the company. We are confident that our market expansion programme As at March 31, 2012, our total staff strength was 207 persons. will contribute significantly towards sustaining our growth momentum in the coming financial year and that our medium Information Technology term goal of being ranked among the top 10 companies in the The Company is equipped with a state-of the- art IT system. All LFC sector, in terms of profitability, will be achieved over the branches and pawning centres island wide are electronically next two years. linked, enabling real time transactions through 365 days of the year. The system enables faster service delivery and accuracy, enhancing the overall quality of our customer care. The 22 Swarnamahal Financial Services PLC Annual Report 2011/2012 Financial review
Profitability Profitability Despite a number of key policy changes that affected the Rs.Mn company, SFS recorded a strong performance during the 1200 financial year 2011/12. We are happy to announce that 1069 1000 our overall income grew by 50% to reach Rs. 1.07 billion, 800 compared to the income of Rs. 713.1 million in 2010/11. Our 713 before tax profit surged by 126%, to Rs. 218.9 million, from 600
Rs. 96.9 million during the previous financial year. Profit after 400 425 309 247
tax meanwhile, more than doubled to Rs. 140.7 million in the 190
200 141 112 63 financial year 2011/12, from Rs. 62.7 million in the previous 26 17 0 -39 -39 -12 -12 year. Gross Income -200 PBT 08 09 10 11 12 PAT F. Y.
Total Assets Growth of Total Assets The total asset base of the Company grew from Rs. 4 billion Rs.Mn to Rs. 5.3 billion, an increase of Rs. 1.3 billion. This strong 6000 growth in assets was mainly driven by further enhancement of our gold loan advances and gold stocks. Gold loan 5000 Fixed assets (PPE) advances grew by 29% to reach Rs. 3.2 billion, from Rs. 4000 Other Receivables 2.4 billion in the previous year. In addition, our investments 3000 Other Trading Stock in government securities increased from Rs. 180.2 million Other Loans & Advances to Rs. 336.1 million during the year, also boosting our asset 2000 Pawning Gold Jewellery base. 1000 Other Investments
0 Government Securities 08 09 10 11 12 Cash and cash equivalents F. Y. 23 Swarnamahal Financial Services PLC Annual Report 2011/2012
Interest Income Rs.Mn Interest Income Our interest income increased by Rs. 354.8 million, which is a growth of 50%, to Rs. 1.05 billion during the year, from Rs. 703.8 1,200 million in 2010 / 11. The main contributor to this growth was 1,000 gold loans. Interest income from gold loans increased by 69%, from Rs. 542.2 million during the previous financial year, to Rs. 800 917.3 million during the year under review. Interest income from 600 Treasury Bills too, increased by 54% to Rs. 21.6 million, from Rs. 400 14.0 million. 200
0 08 09 10 11 12
F. Y. Interest on other Investment Interest on Gvt.Securities Interest on other Loan Interest on Pawn Broking
Interest Expenses Interest Expense Interest expenses showed an increase of 38% during the year, Rs.Mn from Rs. 383. 4 million in 2010/11, to Rs. 528.8 million. This 600
rise in expenses was mainly driven by the growth in interest 27 payments for deposits. Interest payments increased by 38% from 500
Rs. 363.5 million in the financial year 2010/11 to Rs. 502.1 million 400 19 in 2011/12. 300 - - 200 -
100 151 228 274 364 502 0 08 09 10 11 12
F. Y.
Interest on other Borrowings Interest on Customer Deposit 24 Swarnamahal Financial Services PLC Annual Report 2011/2012 Financial review Contd
Operating Expenses Operating Expense Operating expenses during the year increased by 34% to Rs. Personnel Expenses 63 292.6 million, from Rs. 217.8 million in the previous financial 87 year. This was mainly due to our geographical expansion Gratuity Provision 1 1 programme that added two additional pawning centres to our Premises, Equipment & Establishment Exp. 22 network, taking the total number of customer contact points 32 to 17 from 15 in the previous financial year. Our administrative Loan Loss provision 3 (1) expenses rose from Rs. 77.5 million to Rs. 125.8 million. Other Administrative Expenses 78 Personnel expenses too, increased from Rs. 63 million to Rs. 126
87.3 million. Financial & Other Expenses 51 47
0 Rs.Mn 20 40 60 80 -20 100 120 140
2011 2012
Total Liabilities Growth in Liabilities Total liabilities of the Company increased by 29%, from Rs. Rs.Mn 3.7 billion, in the financial year 2010/11, to Rs. 4.8 billion, in 5000 2011/12. This augmentation of liabilities was driven by the 4500 increase in customer deposits, interest payable and a sharp 4000 increase in income tax payable. Customer deposits increased 3500 Other Liabilities from Rs. 3.5 billion, to Rs. 4.4 billion. The interest payable, 3000 Other Borrowings 2500 increased to Rs. 109.4 million from Rs. 83.9 million. Meanwhile, Debentures 2000 Retirement Benefit income tax payable increased by 702%, from Rs. 5.5 million 1500 in the previous year to Rs. 44.7 million in the financial year 1000 Tax Payable 2011/12. In addition, our Loans and borrowings stood at Rs. 500 Interest Payable 0 Customer Deposit 112.8 million by the end of the financial year. However, the 08 09 10 11 12 company was able to contain bank overdrafts to Rs. 97. 8 Bank OverDraft F. Y. million from Rs. 110.3 million in the previous financial year, while other liabilities were reduced from Rs. 8.9 million in the previous financial year, to Rs. 6.9 million. 25 Swarnamahal Financial Services PLC Annual Report 2011/2012
Deposit Base Fixed & Saving Deposits Our customer deposit base comprises of fixed deposits and Rs.Mn different categories of savings deposits targeted at individuals, 5000 businesses and children. During the financial year, our deposits 4500 4,399 base grew by 26%, from Rs. 3.5 billion to Rs. 4.4 billion, mainly 4000 due to rising demand for fixed deposits. 3500 3,469 3000 2500
2000 1,896
1500 1,267 1000 1,024
500 65 18 50 51 48 0 08 09 10 11 12
Total Capital and Reserves Year Our shareholders’ funds grew to Rs. 434.5 million during the Fixed Deposit financial year 2011/12, from Rs. 293.7 million in the previous year, Saving Deposit with retained earnings rising from Rs. 26.8 million to Rs. 116.5 million. Our statutory reserves too, increased to Rs. 45 million, from Rs. 16.9 million in the previous year. Shareholders’ Fund As per the Special Resolution passed at the Extraordinary Retained Earnings 27 General Meeting (EGM) held 27th March, 2012, it was resolved 117 that each of the issued and subscribed 25,000,007 Ordinary Investment Fund Voting shares be sub - divided in to 20 (twenty) Ordinary Voting 23 shares without any increase in resource. As a result, the number st of Ordinary Voting shares, that stood at 25,000,007 as at 01 17 Statutory Reserve April 2011, increased to 500,000,140, as at 31st March 2012 and 45 the issued share capital of the company remained unchanged at Stated Capital 250 Rs. 250 million. 250
0 Rs.Mn 50 100 150 200 250 300
Taxation 2012 During the financial year, the VAT payments on financial services 2011 increased to Rs. 28.1 million from Rs. 15 million in the previous year. Income tax expenses of the Company increased from Rs. 34.1 million in the financial year 2010/11 to Rs. 78.1 million. As a result, our financial VAT and Income Tax liabilities increased from Rs. 49 million in the financial year 2010/11 to Rs. 106 million during the financial year 2011/12. 26 Swarnamahal Financial Services PLC Annual Report 2011/2012 Financial review Contd
Profitability Ratios The Company’s Return on Assets (ROA) increased from 3.5% to 5.3% from the previous financial year showing growth in profitability against the asset base. The Return on Equity, which shows profitability against each rupee of shareholder equity improved from 24% in 2010/11 to 38.7% during the financial year 2011/12. Net Interest Margin & Spread Capital Adequacy Ratio The capital adequacy ratio increased from 15.7% in 2010/11 to 21.1% during the financial year 2011/12. The total risk weighted 20% 15.6 16.7 capital ratio was also strengthened to 25.1% from 21.6% in the 16% 15.2 14.9.7 previous year. 13.8 12% 8.3 12.1 8%
2.9 4% 3.5 1.8 Net Interest Margin and Net Interest Spread 0% 08 09 10 11 12 The Net Interest Margin increased from 13.8% in the F. Y. previous financial year to 14.9% in the financial year 2011/12, while the Company’s Net Interest Spread Net Interest Margin increased from 15.6% to 16.7%. Net Interest Spread
NPL (%)
Ratio Asset Quality and Provisioning for Loan Losses 0.6 The Non Performing Loans (NPL) ratio declined 0.6 from 0.4% in the previous year to 0.3% during the 0.5 financial year 2011/12 due to the implementation of 0.4 0.4 improved collection procedures. 0.3 0.3
0.2
0.1 0 0 0 08 09 10 11 12
F. Y. 27 Swarnamahal Financial Services PLC Annual Report 2011/2012 Sustainability Report
We view sustainability as a long term, strategic process We comply with all labour laws of the country and offer a that encompasses social, economic and environmental competitive remuneration package to all our employees in line considerations, while we pursue our business objectives. with the industry standards, based on experience, performance Therefore, while striving to achieve our corporate objectives, and qualifications. In addition, we provide a number of other we fully appreciate the importance of being a good corporate facilities and rewards aimed at motivating our employees. citizen and are committed to deliver sustainable value to all our These include fuel allowances, incentives to employees who stakeholders. achieve their targets, loans for employees at concessionary rates and bonuses twice a year. Further, we maintain a Our Approach to Sustainability retirement gratuity scheme and a health insurance scheme for Our approach to sustainability revolves on adding value to all our employees. our stakeholders by fostering an excellent team sprit among our staff by making them a part of our success and by ensuring Recruitments equitable returns to our other stakeholders, while consciously During the year under review, emphasis was placed on the reducing environmental impacts from our operations. recruitment of Tamil conversant personnel, to support our expansion in the North and East, and to facilitate better Our efforts towards sustainability cover a range of stakeholders; customer care for our customers from those parts of the country. Therefore, during the year, 25 personnel conversant in Employees: We invest in fostering an excellent team spirit, Tamil, were recruited from the areas of Hatton, Jaffna, Vavuniya providing a rewarding, diverse and inclusive workplace. and Batticaloa. These new recruits have been systematically inducted into the Company and have been exposed to the Customers: We believe in providing a superior service that required training, to maintain the high standard of our service to delights our customers. our customers.
Shareholders : We conduct our business operations with a view In addition, we provided on-the-job training opportunities to maximize shareholder wealth. for university students who require corporate exposure, with an attractive allowance during the training period. We also Community: We support communities by providing assistance provided the opportunity for those who successfully completed for the quality of life improvement of disadvantaged persons. their training period, to join our company and advance in their careers. Suppliers: We work with suppliers to improve their social and environmental performance.
Employee Responsibility We are an equal opportunity employer and as such we provide opportunities for employment, development and growth with no discrimination.
28 Swarnamahal Financial Services PLC Annual Report 2011/2012 Sustainability Report Contd.
Analysis of Staff With the growth of the Company, our employee strength has also grown. As at 31st March 2012, our employee strength stood at 207 persons.
Staff Gender Ratio Age Analysis Service at SFS Provincial Distribution of Staff 2% 5% 9% 13% 13%
31% 11% 25% 19% 43% 7% 45% 69% 1% 3% 33% 47% 9%8% 15%
Male Female 20-24 Over 5 years Western North Central 25-29 3-5 Central Sabaragamuwa 30-34 1-2 Eastern Southern Over 35 Below 1 Northern Uva Wayamba
Training and Development Employee Profitability We believe employees are an asset and as such, we invest in As indicated below, the net profit per employee increased by training and development of our employees on a regular basis. 109% year on year, from Rs 0.57 million in 2010/11 to Rs 1.19 Training programs were conducted using internal and external million in 2011/12. resource personnel in order to develop technical skills of our employees covering both front and back office activities. On the Net profit per employee before taxation job training is provided for each category of new employees. Rs.Mn
During the year under review, in addition to ongoing training 1.4 1.2 1.19 programmes we conducted a special training for the 1 employees to develop their leadership skills and communication 0.8 0.57 skills. 0.6 0.4 0.2 1,0.18 0 -0.2 1,024
-0.4 -0.12 -0.6 -0.8 -0.54 08 09 10 11 12
Year 29 Swarnamahal Financial Services PLC Annual Report 2011/2012
Performance Evaluation and Rewards The fifth annual staff get together held at the Jaic Hilton, We believe in fostering a performance oriented culture, to Colombo 02 , 03rd December 2011 proved a grand success. motivate our employees, by acknowledging and rewarding their efforts.
All employees face annual appraisals, against set goals. Rewards and increments are based on the outcome of the appraisals. We also offer job rotation and career path planning for personal growth and development of our employees.
Work Life Balance We believe in maintaining a work life balance for a positive attitude and optimum performance of our employees. As such, while ensuring employment related facilities and support systems, we also provide opportunities for our employees to build team spirit and friendships among colleagues. 2 During the year, we conducted the fifth annual Avurudu Festival, 15th May 2011. This was a wonderful opportunity for all staff grades to have fun and re-establish contacts.
1 3
Photo one above is a scene from the festival. Photos 2 and 3 above depict two pictures of the function. 30 Swarnamahal Financial Services PLC Annual Report 2011/2012 Sustainability Report Contd.
In appreciation of service, a special awards and recognition •• To reduce energy consumption, CFL bulbs have been ceremony was held for employees who completed 05 years of introduced at all our branch offices and our head office service at SFS. •• We limit the use of air conditioners during office hours to reduce electricity consumption. Shareholder Responsibility •• We practice separating recycled paper, polyphone and We provide many opportunities for our valued key shareholders organic waste in separate bins to ensure methodical to contribute suggestions and recommendations to the garbage disposal. management and to discuss company strategies and implementation. Customer Responsibility We have developed a Customer Service Action Plan to enhance We ensure prompt communications with our shareholders by our service delivery and to ensure customer satisfaction in our presenting the financial reports and disclosing other relevant services. Customer feedback is ensured through year round information in a timely manner. engagements with management, marketing and front office staff in the form of promotional visits, direct mails, calls and personal Our shareholders’ wealth grew by Rs. 141 million (48%) to visits. Rs. 435 million, as at 31st March 2012, from Rs.294 million on 31st March 2011. Community Responsibility We are committed to uplift our communities where ever we Compliance with Regulations operate and conduct a number of programmes to assist The Company has complied with regulatory requirements of different community groups. An ongoing programme at relevant authorities. SFS is to contribute towards the the Punarjeewa – Dr. Soma Edirisinghe Fund, which has been set up for the highly Environmental Responsibility commendable purpose of raising funds to assist heart patients We believe awakening an environmental consciousness is faced with financial difficulties in undergoing heart surgery. vital for sustainability in the current age of climatic change and extreme weather patterns, experienced not only in Sri Lanka Our staff raised over Rs.500, 000/= for the Punarjeewa fund but across the globe. Therefore, we believe in conducting our during the year through the sale of Punarjeeva bands. business activities while making a conscious effort to minimize adverse impacts on the natural environment. They also participated in the fund raiser “Walk for Heart Work” organised by Punarjeewa Fund, 26th February 2012 to raise In this context we have invested in a number of sustainable funds for heart patients. initiatives for environmental conservation.
Reduce, Reuse, Recycle •• We have a policy of recycling and reusing waste paper and envelopes within the organization, wherever possible. •• Continuous awareness programs are conducted to reduce printing of e-mails and unnecessary documents and to encourage the use of e-mails and electronic documents instead of printed matter. 31 Swarnamahal Financial Services PLC Annual Report 2011/2012
Over 30 SFS employees donated blood at the Janasarana Foundation’s blood donation campaign, held 25th June 2011, at the Thilakarathnaramaya Temple, Borella.
1
3
2
Photos 1 and 2 above depict staff participation in the fund raiser. 4
Photos 3 and 4 above show the blood donation in progress. 32 Swarnamahal Financial Services PLC Annual Report 2011/2012 Risk Management
Overview Risk Governance and Integrated Risk Management Risk is a possibility that the outcome of an action or event Framework could either result in a direct loss of earnings and/or capital or The Board of Directors has the authority to determine the create constraints on Company’s ability to meet its business overall risk management framework for the Company and has objectives. Such constraints pose a risk as these could hinder the responsibility to oversee the effective implication of risk a company’s ability to conduct its ongoing business or to take management strategies. Accordingly, the Board approves the benefit of opportunities to enhance its business. risk management policies and formulates goals and limits for risk appetite and strategy. The Board has established board Risks are usually defined as adverse impacts on profitability sub committees to effectively manage all types of risks faced by from several distinct sources of uncertainty, while the types and the Company. degree of risks that the Company may be exposed to, depend upon a number of factors such as its size, complexity of Integrated Risk Management Committee business activities, volume, clients, etc,. The key areas of Risks The Board Integrated Risk Management Committee (BIRMC) that our Company focuses on are Credit, Market, Liquidity, is responsible to provide a direction on the risk management Operational, Compliance (Legal & Regulatory), Reputational process and formulations of policies and procedures for the and Strategic. ratification by the Board of Directors and the implementation of such policies and procedures and ensuring that all operations Risk Management policies and procedures are designed to are within the guidelines and policies set by the Board. analyze and address all types of risks, set appropriate risk limits, take apt measures on continuous basis in line with the The established policies, procedures and decision making evolving business requirements and regulatory guidelines to process are integrated into the daily operations of SFS and the ensure risks are within the tolerance levels. internal audit department conducts independent and regular inspections in order to ensure the effectiveness of the risk Our risk management strategy is based on identification, management strategies. measurement, monitoring and controlling risks of the Company to ensure that; The BIRMC is comprised of five Non-Executive Directors, one of whom chairs the meetings and the Director/CEO, a) the individuals who take or manage risks clearly understand Senior management staff that attended meetings were Senior them. Manager-Pawning and Gold Sales, Senior Manager Finance, Senior Manager Corporate- Relations, Manager Credit and b) the organization’s risk exposure is within the limits Manager IT. established by Board of Directors. The Committee oversees the risks of the Company by c) risk taking decisions are in line with the business strategy assessing Market, Credit, Liquidity, Operational, Compliance, and objectives set by the Board. Reputational and Strategic risks regularly, reviews and monitors the functions and the effectiveness of committees d) risk taking decisions are explicit and clear. such as ALCO and Credit to manage the risks of the Company within the set limits. 33 Swarnamahal Financial Services PLC Annual Report 2011/2012
It also has established a compliance function to access the Asset and Liability Committee Company’s compliance with laws, regulations, regulatory The Assets and Liability Committee (ALCO) is headed by the guidelines, internal controls and approved policies in all areas Director/CEO and comprises of selected members of the senior of business operations. management of the key business units.
Board Audit Committee The committee is set up to analyze, review and mitigate the The Committee monitors the effectiveness of Internal Audit asset-liability mismatch risk. Asset-liability mismatch risk arises Function by reviewing and examining the adequacy, efficiency, due to a mismatch in the maturity pattern of assets and liabilities effectiveness of the system of internal controls and procedures of the Company. ALCO is responsible for managing the lending that are in place to mitigate risks in financial reporting. It also and the borrowing rates, balance sheet items including assets reviews the accounting policies, procedures, financial reporting and liabilities, capital structure, business operations and and compliance with other regulatory requirements. The liquidity. This is supported by the implementation of asset committee operates under the direction of the Board. liability management strategies including sensitivity analysis, variance analysis and cash flow forecasts. The Committee meets once a month or more frequently if necessary, to develop long term strategies to maintain the balance sheet structure in an optimal manner and ensure that controls are currently in Risk Management Framework place to address the risks, the Company is exposed to.
Board of Directors
Board Integrated Risk Board Credit Committee Board Audit Committee Management Committee
Assets and Liability Compliance Internal Audit Committee (ALCO)
Business unit heads
Risk exposures Credit, Market, Liquidity, Operational, ect 34 Swarnamahal Financial Services PLC Annual Report 2011/2012 Risk Management Contd.
Board Credit Committee Credit process The Committee evaluates the Credit portfolio of the Company The Company has reviewed its Credit evaluation process to and direct appropriate actions to control and mitigate the avoid weaknesses in grant of credit and to ensure an effective Credit Risk. The Committee reviews the facilities granted under monitoring process. the approval level of the Director/CEO and approves Credit Facilities above his delegated authority level. The Committee Exposure Ceilings: also counter recommends credit facilities recommended by the The Company has clearly defined exposure limits for each Director/CEO for the approval of the Board as per the defined category of customers and strictly adheres to the limits delegated levels of authority of the Company. The committee approved by the Board meets at least once a month, or more frequently if necessary, to review and approve the credit facilities. Delegation of Authority During the year, the delegation of authority structure of the Key Risks and its Mitigation Strategies Company was revised by the Board of Directors and these Credit risk authority levels have been properly communicated to the relevant personnel in the senior management and the credit Credit risk is the likelihood that a debtor or financial instrument committee. The Lending authority assigned to officers is issuer is unwilling or unable to pay interest or repay the commensurate with their experience, ability and personal principal according to the terms specified in a credit agreement character. resulting in economic loss to the Company.
Credit Manual and Policy Credit risk means that payments may be delayed or ultimately The Credit Manual of the Company was reviewed and revised not paid at all, which can in turn cause cash flow problems and by the Board and the Credit policy framework is being reviewed affect the company’s liquidity. for implementation in the ensuring year. Our risk mitigation strategy is to strictly adhere to the approved credit manual and These losses could take the form of outright default or policy of the Company. alternatively, from changes in portfolio value arising from actual or perceived deterioration in credit quality that is short of Credit Administration default. The objective of credit risk management is to minimize A sound credit administration function is in place to maintain the risk and maximize Company’s risk adjusted rate of return and ensure that the credit portfolio is properly maintained. by assuming and maintaining credit exposure within the This includes keeping the credit files up to date, obtaining acceptable parameters. current financial information, sending out renewal notices and preparing various documents such as loan agreements. Credit Risk Mitigation Credit Origination Portfolio Management The Company has established a sound credit evaluation The Credit portfolio of the Company has been properly process for approving credit in a safe and sound manner. The diversified across geographical areas and among large number criteria laid down sets out the eligibility, quantum, types, terms of middle market and retail customers in order to optimize and conditions for grant of credit. The process requires that the benefits associated with diversification and to reduce the sufficient information be gathered to enable a comprehensive potential adverse impact of concentration of exposure to a assessment of true risk profile of the borrower. particular borrower or a sector. 35 Swarnamahal Financial Services PLC Annual Report 2011/2012
Internal Controls Diversification and Stability of Liabilities The Internal Audit Department of the Company conducts The deposits portfolio of the Company is diversified ongoing assessment of the credit risk management process. geographically and among large number of customers, with no All facilities are subjected to individual risk review at least dependence on one or few customers to ensure that there will once a month. The results of such reviews were properly be no significant risk in a sudden withdrawal of funds. documented and reported directly to Board Audit committee with recommendations to take corrective actions. The purpose The Board of Directors and the senior management provide of such reviews is to assess the credit administration process, guidance relating to funding sources and ensure that the the accuracy of credit rating including adequacy of provisions Company has diversified sources of funding for day-to-day for losses and overall quality of credit portfolio. liquidity requirements.
NPL Ratio Interest Rate Risk Non performing ratio has eased from 0.4% in the previous year Interest Rate Risk is the potential negative impact on the Net to 0.3% as at 31st March 2012 due to the implementation of Interest Income and it refers to the vulnerability of Company’s sound recovery process and risk mitigation strategies. financial condition to the movement in interest rates. Changes in interest rate affect earnings, value of assets, liability off-balance Liquidity Risk sheet items and cash flow. Hence, the objective of interest rate Liquidity risk is the potential for loss to the Company arising risk management is to maintain earnings, improve the ability from either its inability to meet obligations as they fall due or to to absorb potential loss and to ensure the adequacy of the fund increases in assets without incurring unacceptable cost or compensation received for the risk taken and effect risk return losses (funding liquidity risk). trade-off.
Liquidity risk management strategy involves not only analyzing Management of interest rate risk aims at capturing the risks the Company’s on and off-balance sheet positions to forecast arising from the maturity and re-pricing mismatches and future cash flows, but also how the funding requirement would is measured both from the earnings and economic value be met. The latter involves identifying the funding market the perspective. Earnings perspective involves analyzing the Company can have access to, understanding the nature of impact of changes in interest rates on accrual or reported those markets, evaluating institution’s current and future use of earnings in the near term. This is measured by measuring such markets. the changes in the Net Interest Income (NII) equivalent to the difference between total interest income and total interest Risk Mitigations Strategies expense. Composition of Assets and Liabilities The strategy is outlined by the mix of assets and liabilities to In order to manage interest rate risk, the Company has maintain liquidity position. been evaluating the vulnerability of their portfolios to the risk of fluctuations in market interest rates. The Asset Liability 89% of the interest earning assets comprised of Pawning Committee (ALCO) of the Company uses the information advances with short maturity periods which enable the contained in the duration gap analysis to guide and frame Company to maintain robust liquidity positions at all times. strategies. 36 Swarnamahal Financial Services PLC Annual Report 2011/2012 Risk Management Contd.
Operational Risk Compliance Risk The Company always lives with the risks arising out of human Compliance Risk is the risk of legal or regulatory sanctions, error, financial fraud and natural disasters. material financial loss or damage to reputation that an institution may suffer as a result of failure to comply with laws, regulations, Operational risk is the risk of loss arising from inadequate rules, self regulatory organization standards and codes of or failed internal processes, people and systems or from conduct applicable to its activities. external events. In order to mitigate the Compliance Risk, a compliance officer Risk Mitigation has been appointed to maintain a better relationship with Key aspects of our operational risk management lie in the such regulatory authorities. The compliance officer maintains Company’s ability to assess its process for vulnerability and a pre-planned schedule of compliance to timely ensure the establish controls to safeguard its assets. compliance with regulatory authorities. In the coming year, the compliance officer position will be filled by an independent A well implemented sound internal control mechanism and dedicated officer. internal audit systems of the Company are used as the primary means of Operational Risk Mitigation. Legal Risk Legal Risk is the risk that the Company will conduct activities Continuous risk education for familiarizing the complex or carry out transactions in which they are inadequately operations at all levels of staff can also reduce operational risk. covered or are left exposed to potential litigation. The legal risk management framework provides an outline of the important Obtaining comprehensive insurance covers are our most issues that Directors and/or Senior Management of the important Operational Risk mitigation strategy. Company may need to consider in ensuring due diligence in the operation of the Company as well as an overview of liability of exposure against this risk. The Company is committed to secure its information by developing, implementing and monitoring comprehensive Reputational Risk system procedures to ensure the integrity, confidentiality and Reputational Risk is the potential for negative publicity availability of such information. regarding an institution’s business practices, whether true or not, that will cause a decline in the customer base, costly Strategic Risk litigation, or revenue reductions. This risk may result from an Strategic risk is the possibility of being unable to implement institution’s failure to effectively manage any or all of the other appropriate business plans, strategies, or take proper decisions risk types. or allocate adequate resources and its inability to adapt to changes in its business environment. The Risk management Policies and Procedures unit of the Company reviews the emerging trends in risk and A plan is underway to adopt sound risk management practices involves in the implementation of the company’s strategic plan. that include the practice of building reputation and earning the goodwill of key stakeholders. 37 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance
The Board of Directors of the Company places the highest emphasis on good governance in every aspect of the Company’s operations. The necessary policies and procedures have been formulated by the Board in order to implement an adequate internal control mechanism in a manner that would enhance stakeholders’ confidence. Accordingly, the Board is assisted by 05 Board Sub Committees to ensure that the business is carried on in compliance with the Corporate Governance Direction No, 3 of 2008 issued by the Central Bank of Sri Lanka including amendments thereto and the Listing Rules of the Colombo Stock Exchange relating to the Corporate Governance.
Corporate Governance Framework
Board of Directors Chairman (Non - Executive Director) 04 Executive - Directors 03 Independent Non - Executive Directors 1 Non - Executive Director
Board Integrated Risk Board Audit Board Credit Board Remuneration Board Executive Management Committee Committee Committee Committee Operations Committee
ALCO 38 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
SECTION 01 Details of Compliance with the Finance Companies (Corporate Governance) Direction No. 03 of 2008, issued by the Central Bank of Sri Lanka
CBSL Description Compliance status Section (2) RESPONSIBILITIES OF THE BOARD OF DIRECTORS 2(1) The Board of Directors shall strengthen the safety and soundness of the Company by ensuring the implementation of the following. (a) Approving and overseeing the Finance Company’s The Board approved the Company’s strategic objectives and strategic objectives and corporate values and ensuring corporate values, ensured that they were communicated that such objectives and values are communicated throughout the company and monitored to ensure that they were throughout the Finance Company. being achieved. (b) Approving the overall business strategy of the The Board approved the Overall Business strategy of the Company, including the overall risk policy and risk Company which is now being implemented management procedures and mechanisms with measurable goals, for at least the next three years. The overall risk management strategies and procedures are being further refined with the assistance of the Integrated Risk management Committee to manage all risks arising from the operations of the Company. (c) Identifying the risks and ensuring implementation of The Board appointed Integrated Risk Management Committee appropriate systems to manage the risks prudently. is in the process of formulating appropriate risk measurement indicators with assistance of Senior Management to address the overall risk of the Company.
Company will strengthen risk measurement areas by initiating action to evaluate all risks such as Credit, Market, Liquidity and Strategic risks. (d) A policy of communication with all stakeholders, An appropriate communication policy will be prepared during including depositors, creditors, shareholders and the Financial Year 2012/13 to communicate with all stakeholders borrowers. including depositors, creditors, shareholders and borrowers of the Company. (e) Reviewing the adequacy and the integrity of the finance The Board reviews the adequacy and the integrity of the company’s internal control system and management of Company’s internal control systems through the Board Audit information systems Committee by reviewing the internal audit reports and upgrades the company’s internal control systems to address such findings. 39 Swarnamahal Financial Services PLC Annual Report 2011/2012
CBSL Description Compliance status Section 2(1) (f) Identifying and designating key management Key Management personnel who are in a position to influence and personnel, who are in a position to control over the business activities and risk management have (i) Significantly influence policy been identified / designated by the Board. (ii) Direct activities and (iii) Exercise control over business activities, operations and risk management. (g) Defining the areas of authority and key responsibilities The Board approved the delegation of authority levels for the for the Board and for the key management personnel. Board and management with clear directions and definitions. (h) Ensuring that there is appropriate oversight of the The policies, procedures and decisions approved by the Board affairs of the finance Company by key management relevant to the Key Management personnel have been duly personnel , that is consistent with the finance communicated to them for proper oversight of the affairs of the company’s policy. Company. (i) Periodically assessing the effectiveness of its The Board assesses periodically effectiveness of its governance governance practices including (i) the selection, practices especially in these three areas. nomination, and election of Directors and appointment of key management personnel (ii) the management of conflicts of interest and (iii) the determination of weaknesses and implementation of changes where necessary. (j) Ensuring the company has an appropriate succession The Board is in a process of developing an appropriate succession plan for key management personnel. plan for all key management personnel.
(k) Meeting regularly with key management personnel to Polices are reviewed regularly with participation of all the key review policies, establish lines of communication and management personnel to monitor progress towards corporate monitor progress towards corporate objectives. objectives. (I) Understanding the regulatory environment. The Board of Directors updates the changes in regulatory environment on regular basis and the Company maintains an effective relationship with all regulatory authorities. (m) Exercising due diligence in the hiring and oversight of The Board carries out the functions of hiring and oversight of external external auditors. auditors through the Board Audit committee and subject to the shareholder approval at the AGM. 40 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
CBSL Description Compliance status Section
2(2) The Board shall appoint the Chairman and Chief The Chairman and the Chief Executive Officer have been Executive Officer and define and approve the appointed by the Board and the positions of Chairman and functions and responsibilities of the Chairman and the Chief Executive Officer are held by two separate individuals. Chief Executive Officer. The Chairman provides leadership to the Board and the Chief Executive Officer carries out day to day operations of the Company. 2(3) There shall be a procedure determined by the Board to enable Directors upon reasonable request to seek A procedure is in place for the Directors to obtain separate independent professional advice in appropriate independent professional advice ,upon reasonable request and circumstances at the company’s expense. when appropriate, at Company’s expense. The Board shall resolve to provide separate independent professional advice to Directors to assist them to discharge their duties to the Company. 2(4) A Director shall abstain from voting on any Board The Directors abstain from voting on matters in which they or their resolution in relation to a matter in which he/she or any relatives have a substantial interest and they are not counted in the of his/her relatives or a concern in which he/she has quorum in relation to such board agenda items. substantial interest, is interested and he/she shall not be counted in the quorum for the relevant agenda item at the Board meeting.
2(5) The Board shall have a formal schedule of matters Complied with specifically reserved to it for decision to ensure that the direction and control of the Finance Company is firmly under its authority. 2(6) The Board shall, if it considers that the finance No such circumstances have arisen during the year 2011/2012 company is, or is likely to be, unable to meet its and the Board shall comply with this requirement if such a obligations or is about to become insolvent or is situation arises. about to suspend payments due to depositors and other creditors, forthwith inform the Director of the Department of Supervision of Non-Bank Financial Institutions of the situation of the finance company prior to taking any decision or action. 2(7) The Board shall include in the Finance Company’s Complied with. Annual Report, an Annual Corporate Governance Report setting out the compliance with this Directions. 41 Swarnamahal Financial Services PLC Annual Report 2011/2012
CBSL Description Compliance status Section
2(8) The Board shall adopt a scheme of self-assessment The Board of Directors will introduce an appropriate scheme of self to be undertaken by each Director annually, and assessment to be undertaken by each Director annually, to fulfill maintain records of such assessments. this requirement.
3. MEETINGS OF THE BOARD 3(1) The Board shall meet at least twelve times a financial The Board Meetings are held regularly on monthly basis and year at approximately monthly intervals. Obtaining the sometimes more frequently when necessary. Instances of obtaining Board’s consent through the circulation of written or Board approval by circulation have been very rare and no electronic resolutions/papers shall be avoided as far approvals have been obtained electronically. as possible. 3(2) The Board shall ensure that arrangements are in The Company has given an equal opportunity for every Director place to enable all Directors to include matters and to include matters and proposals related to the promotion of proposals in the agenda for regular Board meetings business and management of risk of the Company in the Agenda where such matters and proposals relate to the for regular Board Meetings. promotion of business and the management of risks of the finance company. 3(3) A notice of at least 7 days shall be given of a regular Complied with. Board meeting to provide all Directors an opportunity to attend. For all other Board meetings, a reasonable notice shall be given. 3(4) A Director, who has not attended at least two-thirds of There have been instances, where some Directors have failed the meetings in the period of 12 months immediately to meet this attendance requirement. The Board having been preceding or has not attended the immediately informed of such instances, had inquired from such Directors and preceding three consecutive meetings held, shall accepted their explanations. cease to be a Director. Provided that participation at the Directors’ meetings through an alternate Director shall, however, be acceptable as attendance. 3(5) Board shall appoint a Company Secretary, whose M/s Cyrus Corporate Services (Pvt) Limited, engaged as the Secretary primary responsibilities shall be to handle the and Registrar to Company during the Financial Year 2011/12, ended its secretarial services to the Board and shareholder services when its contract expired on 15th May 2012. meetings and to carry out other functions specified in the statutes and other regulations. The Board has appointed SSP Corporate Services (Pvt) Ltd as the new Secretaries and Registrar to the Company which is satisfies the provisions of the Companies Act No. 07 of 2007 and the Finance Business Act No. 42 of 2011 and the directions issued therein, effective from 16th May 2012. 42 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
CBSL Description Compliance status Section
3(6) If the Chairman has delegated to the Company The Agenda is prepared by the Company Secretary in Secretary the function of preparing the agenda for consultation with the Chairman of the Company. a Board meeting, the Company Secretary shall be responsible for carrying out such function. 3(7) All Directors shall have access to advice and services All the Directors have access to obtain advice and services of the of the Company Secretary with a view to ensuring that Company Secretary in order to ensure that Board procedures and Board procedures and all applicable laws, directions all applicable laws, directions, rules and regulations are followed. rules and regulations are followed. 3(8) The Company Secretary shall maintain the minutes The minutes of the Board meetings are maintained by the of Board meetings and such minutes shall be open Company Secretary and are open for inspection by any Director at for inspection at any reasonable time, on reasonable any reasonable time. notice by any Director. 3(9) Minutes of Board meetings shall be recorded in The minutes of the Board Meetings have been recorded by the sufficient detail so that it is possible to gather from the Company Secretary in a manner that these requirements have minutes, as to whether the Board acted with due care been complied with. and prudence in performing its duties. The minutes of a Board meeting shall clearly contain or refer to the following: (a) A summary of data and information used by the Board in its deliberations;
(b) The matters considered by the Board;
(c) The fact-finding discussions and the issues of contention or dissent which may illustrate whether the Board was carrying out its duties with due care and prudence;
(d) The explanations and confirmations of relevant executives which indicate compliance with the Board’s strategies and policies and adherence to relevant laws and regulations;
(e) The Board’s knowledge and understanding of the risks to which the Finance Company is exposed and an overview of the risk management measures adopted; and
(f) The decisions and Board resolutions. 43 Swarnamahal Financial Services PLC Annual Report 2011/2012
CBSL Description Compliance status Section
4. COMPOSITION OF THE BOARD 4(1) The number of Directors on the Board shall not be less The number of Directors on the Board is 9 which is within the than 5 and not more than 13. statutory limits. 4(2) The total period of service of a Director other than a No Director of the Company has served for more than 9 years Director who holds the position of Chief Executive Officer since the Company was incorporated in the year 2004. or Executive Director shall not exceed nine years. The total period in office of a Non-Executive Director shall be inclusive of the total period of service served by such a Director up to the date of this direction.
4(3) An employee of a finance company may be The only employee Director on the Board is the Chief Executive appointed, elected or nominated as a Director of Officer and hence this direction has been complied with. the finance company (hereinafter referred to as an ‘Executive Director’) provided that the number of Executive Directors shall not exceed one-half of the number of Directors of the Board. In such an event, one of the Executive Directors shall be the Chief Executive Officer of the Company. 4(4) The number of Independent Non- Executive Directors, The Board consisted of 09 directors, of whom three Directors are of the Board shall be at least one fourth of the total Independent Non-Executive Directors. number of Directors. A Non-Executive Director shall not be considered independent if such director:
(a) has shares exceeding 2% of the paid up capital of the finance company or 10% of the paid up capital of another finance Company.
(b) has or had during the period of two years immediately preceding his/her appointment as Director, any business transactions with the finance Company as described in Direction hereof, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds of the Finance Company as shown in its last audited balance sheet.
(c) has been employed by the Finance Company during the two-year period immediately preceding the appointment as Director; 44 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
CBSL Description Compliance status Section
4(4) (d) has a relative, who is a Director or Chief Executive Officer or a key member of the Management personnel, or holds shares exceeding 10% of the paid up capital of the Finance Company or exceeding 12.5% of the paid up capital of another finance company.
(e) represents a shareholder, debtor, or such other similar stakeholder of the Finance Company;
(f) is an employee or a Director or has a share holding of 10% or more of the paid up capital in a company or business organization.
(i) which currently has a transaction with the finance Company as defined in 9 of this direction, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds as shown in its last audited balance sheet of the finance company or
(ii) in which any of the other Directors of the finance Company is employed or is a director or holds shares exceeding 10% of the capital funds as shown in its last audited balance sheet of the Finance Company ; or
(iii) in which any of the other Directors of the finance Company has a transaction as defined in paragraph 09 of the Directions, aggregate value outstanding of which at any particular time exceeds 10% of capital funds as shown in its last audited balance sheet of the Finance Company. 4(5) In the event an alternative Director is appointed to No such situation arose during the financial year 2011/12. represent an Independent Non-Executive Director, the person so appointed shall also meet the criteria that apply to the Independent Non-Executive Director. 45 Swarnamahal Financial Services PLC Annual Report 2011/2012
CBSL Description Compliance status Section
4(6) Non-Executive Directors shall have necessary skills All Non- Executive Directors are having necessary skills and and experience to bring an objective judgment to bear experience to bring objective judgments. on issues of strategy, performance and resources. 4(7) With effect from three years from the date of this The Board comprised only of one Executive Director during the Direction, a meeting of the Board shall not be duly financial year 2011/12. The Board meetings held during the constituted, although the number of Directors required to year had fully complied with this direction since quorum of such constitute the quorum at such meeting is present, unless meetings consisted over one half of Non- Executive Directors. at least one half of the number of directors that constitute the quorum meeting are Non-Executive Directors. 4(8) The Independent Non-Executive Directors shall This direction has been fully complied with in all Corporate be expressly identified as such in all corporate communications that disclose the directors’ names. communications that disclose the names of Directors of the Finance Company. The Finance Company shall Profiles of all the Directors are disclosed in pages11 to 15. disclose the composition of the Board, by category of Directors, including the names of the Chairman, Executive Directors, Non-Executive Directors and Independent Non- Executive Directors in the Annual Corporate Governance Report which shall be an integral part of the Annual Report. 4(9) There shall be a formal, considered and transparent New appointments to the Board are based on these well-defined procedure for the appointment of new Directors to the procedures and there are procedures in place for orderly Board. There shall also be procedures in place for the succession. orderly succession of appointments to the Board. 4(10) All Directors appointed to fill a casual vacancy shall If a director is appointed to fill a casual vacancy in the Board, it be subject to election by shareholders at the first shall be subject to election by shareholders at the first General General Meeting after their appointment. Meeting thereafter. 4(11) If a Director resigns or is removed from office , the The Director of Supervision of Non Bank Financial Institutions of Board shall announce to the Shareholders and notify the Central Bank of Sri Lanka has been duly informed regarding the Director of the Department of Supervision of Non resignations of the Directors and in future the Company will take Bank Financial Institutions of the Central Bank of necessary arrangements to disclose to the shareholders as well Sri Lanka ,regarding the resignation of the director as indicating the reasons for such removal or resignation including or removal and the reasons for such resignation but not limited to information relating to the relevant Director’s or removal including but not limited to information disagreement with the Company if any. relating to the relevant Director’s disagreement with the Board, if any. 46 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
CBSL Description Compliance status Section
5. CRITERIA TO ASSESS THE FITNESS AND PROPRIETY OF DIRECTORS 5(1) Subject to the transitional provisioning contained in The director who was over 70 years of age resigned from the the directions, a person over the age of 70 years shall Board with effect from 31st January 2012 in order to comply with not serve as a director of a finance company. this direction. 5(2) A director of a finance company shall not hold office No director holds directorships or any other equivalent positions as a Director or any other equivalent position in in more than 20 companies/societies/ bodies corporate including more than 20 companies/societies/ bodies corporate Subsidiaries or Associate Companies of the Finance Company including Subsidiaries or Associate Companies of or in more than 10 companies that are classified as Specific the Finance Company. Provided that such director Business Entities in terms of the Sri Lanka Accounting and Auditing shall not hold office of a director or any other Standards Act No. 15 of 1995. equivalent position in more than 10 companies that are classified as Specific Business Entities in terms of the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995. 6. DELEGATION OF FUNCTION BY THE BOARD 6(1) The Board shall not delegate any matters to a Board The Board has not delegated any of its functions to Board Sub Committees, Chief Executive Officer, Executive Sub Committees, Chief Executive Officer or Key Management Directors or Key Management Personnel, to an extent personnel to an extent that such delegation would significantly that such delegation would significantly hinder or reduce the ability of the Board to discharge its functions. reduce the ability of the Board as a whole to discharge its functions. 6(2) The Board shall review the delegation processes in The Board reviews the delegation process regularly. place on a periodic basis to ensure that they remain relevant to the needs of the Finance Company. 7. THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER 7(1) The roles of Chairman and Chief Executive Officer The posts of Chairman and Chief Executive Officer are held by shall be separated and shall not be performed by a different persons and their roles have been separated. same person. 7(2) The Chairman shall be a Non-Executive Director In The Chairman is a Non-Executive Director, though not the case where the Chairman is not an Independent independent. Non - Executive Director; the Board shall designate an Independent Non-Executive Director as the Senior The Board intends to appoint an Independent Non- Executive Director with suitably documented terms of reference Director as the Senior Director with suitably documented terms of to ensure a greater independent element. The reference during the financial year 2012/13. designation of the Senior Director shall be disclosed in the Finance Company Annual Report. 47 Swarnamahal Financial Services PLC Annual Report 2011/2012
CBSL Description Compliance status Section
7(3) The Board shall disclose in its Corporate Governance There is no relationship between Mr. J .H. Edirisinghe, the Report, which shall be an integral part of its Annual Chairman and Mr. S. M. Ganegoda, the Chief Executive Officer. Report, the name of the Chairman and the Chief Executive Officer and the nature of any relationship Directors, Mr. J. H. Edirisinghe, Mrs. A.D. Edirisinghe, Mr. N.P. [including financial, business, family or other material/ Edirisinghe and Mr. A. S. Edirisinghe are siblings. Director,Mr. relevant relationship(s)], if any, between the Chairman N.G.M. De Silva is the CEO of ETI Finance Limited, in which the and the Chief Executive Officer and the relationships same siblings and their mother Dr. (Mrs.) S. Edirisinghe are having among members of the Board. substantial interest and all the siblings are Directors. 7(4) The Chairman shall: The Chairman provides the leadership to the Board, and ensures (a) provide leadership to the Board; that the Board works effectively, discharges its responsibilities and key issues are discussed by the Board in a timely manner. (b) ensure that the Board works effectively and discharges its responsibilities; and
(c) ensure that all key issues are discussed by the Board in a timely manner. 7(5) The Chairman shall be primarily responsible for The agenda is prepared by the Company Secretary after preparation of the agenda for each Board meeting; consultations with the Chairman. The Chairman may delegate the function of preparing the agenda to the Company Secretary. 7(6) The Chairman shall ensure that all Directors are The Chairman ensures that the Directors are properly and in a informed adequately and in a timely manner of the timely manner briefed of issues arising at each Board meeting and issues arising at each Board meetings. the agenda and board papers are circulated among the Directors with adequate time prior to each Board Meeting. 7(7) The Chairman shall encourage each Director to make The Chairman ensures that full and active contributions are a full and active contribution to the Board’s affairs and made by each of the Directors and act in the best interest of the take the lead to ensure that the Board acts in the best Company. interests of the Finance Company. 7(8) The Chairman shall facilitate the effective contribution Complied with. of Non-Executive Directors in particular and ensure constructive relationships between Executive and Non-Executive Directors. 7(9) Subject to the transitional provisions contained herein, The Chairman is a Non-Executive Director and does directly the Chairman, shall not engage in activities involving involve in the supervision of key management personnel or in any direct supervision of Key Management Personnel or other executive duties whatsoever. any other executive duties whatsoever. 48 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
CBSL Description Compliance status Section
7 (10) The Chairman shall ensure that appropriate steps Such effective steps have been taken and shareholders views are taken to maintain effective communication with have been communicated to the Board. Further during the last shareholders and that the views of shareholders are year, the AGM and the Extraordinary General Meeting were good communicated to the Board. occasions for the shareholders to share their views and they were encouraged to do so directly with the Chairman, whenever necessary. 7 (11) The Chief Executive Officer shall function as the apex The Chief Executive Officer functions as the apex executive executive-in-charge of the day-to-day-management of in-charge of the day-to-day management of the Company’s the Finance Company’s operations and business. operations and business. 8. BOARD APPOINTED COMMITTEES 8 (1) Every Finance Company shall have at least the two The Board has formed five Sub Board Committees namely: Board committees set out in paragraphs 8(2) and Audit Committee, Integrated Risk Management Committee, 8(3) hereof. Each committee shall report directly to Remuneration Committee, Credit Committee and Executive the Board. Each committee shall appoint a secretary Operation Committee. to arrange its meetings, maintain minutes, records and carry out such other secretarial functions under The stipulated procedures have been followed and reports on the supervision of the chairman of the committee. performance, duties and functions of Board Audit Committee, The Board shall present a report on the performance, Integrated Risk Management Committee and Remuneration duties and functions of each committee, at a Annual Committee are included in this Annual Report which will be in the General Meeting of the Company. hands of shareholders prior to the AGM. 8 (2) AUDIT COMMITTEE The following rules shall apply in relation to the Audit Committee. (a) The Chairman of the Committee shall be a Non- The Chairman of the Audit Committee is a Non-Executive, Executive Director who possesses qualifications and Independent Director and a fellow member of Chartered experience in accountancy and/or audit. Accountants of Sri Lanka and possesses qualifications and related experience. His brief profile is given in page 14. (b) The Board members appointed to the Committee All directors appointed to the Audit Committee are Non-Executive shall be Non-Executive Directors. Directors. (c) The Committee shall make recommendations on The Board Audit Committee makes recommendations to the Board matters in connection with: in compliance with this direction. (i) The appointment of the External Auditor for audit services to be provided in compliance with the relevant statutes; 49 Swarnamahal Financial Services PLC Annual Report 2011/2012
CBSL Description Compliance status Section
8(2)(c) (ii) the implementation of the Central Bank guidelines issued to Auditors from time to time; (iii) the application of the relevant accounting standards; and (iv) the service period, audit fee and any resignation or dismissal of the Auditor; provided that the engagement of the Audit Partner shall not exceed five years, and that the particular Audit Partner is not re-engaged for the audit before the expiry of three years from the date of the completion of the previous term. (d) The committee shall review and monitor the External The Committee reviews and monitors the auditor’s independence Auditor’s independence and objectivity and the and objectivity and the effectiveness of the audit process. effectiveness of the audit processes in accordance with applicable standards and best practices. (e) The Committee shall develop and implement a policy Complied with with the approval of Board on the engagement of an External Auditor to provide non-audit services that are permitted under the relevant statutes, regulations, requirements and guidelines. In doing so, the Committee shall ensure that the provision by an External Auditor of non- audit services does not impair the External Auditor’s independence or objectivity. When assessing the external auditor’s independence or objectivity in relation to the provision of non- audit services, the Committee shall consider: (i) whether the skills and experience of the auditor make it a suitable provider of the non-audit services
(ii) whether there are safeguards in place to ensure that there is no threat to the objectivity and/or independence in the conduct of the audit resulting from the provision of such services by the External Auditor; and
(iii) whether the nature of the non-audit services, the related fee levels individually and in aggregate relative to the auditor, pose any threat to the objectivity and/or independence of the External Auditor. 50 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
CBSL Description Compliance status Section
8(2)(f) The Committee shall, before the audit commences, Company has only one External Auditor. discuss and finalize with the External Auditors the nature and scope of the audit, including: Before commencing and finalizing the audit. The Audit Committee discusses with the External Auditor, with regard to the nature (i) an assessment of the Finance Company’s and the scope of the audit and an assessment of the Finance compliance with the relevant Directions issued Company’s compliance with the relevant Directions, guidelines, under the Act and the management’s internal applying of relevant accounting principles and the company’s controls over financial reporting; internal controls over financial reporting.
(ii) the preparation of financial statements in accordance with relevant accounting principles and reporting obligations; and
(iii) the co-ordination between auditors where more than one auditor is involved. (g) The Committee shall review the financial information of the Finance Company, in order to monitor the integrity The audited financial statements of the company were reviewed of the financial statements of the Finance Company, and examined by the Board Audit Committee, in line with this its Annual Report, accounts and periodical reports direction, before submitting for the approval of the Board. prepared for disclosure, and the significant financial reporting judgments,, contained therein. In reviewing The Committee is in the process of preparing a documented the Finance Company’s Annual Report and accounts procedure to comply under this section to improve financial and periodical reports before submission to the Board, reporting standard. the Committee shall focus particularly on: (i) major judgmental areas; (ii) any changes in accounting policies and practices; (iii) significant adjustments arising from the audit; (iv) the going concern assumption; and (v) the compliance with relevant accounting standards and other legal requirements. (h) The Committee shall discuss, issues, problems The Audit Committee meets the External Auditor in the absence of and reservations arising from the interim and final key management personnel as and when necessary. audits, and any matters the Auditor may wish to discuss including those matters that may need to be discussed in the absence of Key Management Personnel, if necessary. 51 Swarnamahal Financial Services PLC Annual Report 2011/2012
CBSL Description Compliance status Section
8(2)(i) The Committee shall review the External Auditor’s The Audit Committee has reviewed the External Auditor’s management letter and the management’s response management letter and the management responses thereto. thereto. (j) The Committee shall take the following steps with All stipulations under this direction have been fully complied with. regard to the internal audit function of the Finance Company; (i) Review the adequacy of the scope, functions and resources of the Internal Audit Department, and satisfy itself that the department has the necessary authority to carry out its work.
(ii) Review the internal audit program and results of the internal audit process and, where necessary, ensure that appropriate actions are taken on the recommendations of the Internal Audit Department.
(iii) Review any appraisal or assessment of the performance of the head and senior staff members of the Internal Audit Department.
(iv) Recommend any appointment or termination of the head, senior staff members and outsourced service providers to the internal audit function.
(v) Ensure that the Committee is appraised of resignations of senior staff members of the Internal Audit Department including the Chief Internal Auditor and any outsourced service providers, and to provide an opportunity to the resigning senior staff members and outsourced service providers to submit reasons for resigning.
(vi) Ensure that the internal audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care. (k) The Committee shall consider the major findings of Complied with. internal investigations and management’s responses thereto. 52 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
CBSL Description Compliance status Section
8(2)(l) The Chief Finance Officer, the Chief Internal Auditor The Senior Manager - Finance and Manager - Internal Audit and a representative of the External Auditors may normally attend the meetings and the Chief Executive Officer normally attend meetings. Other Board Members and attends meetings by invitation. the Chief Executive Officer may also attend meetings upon the invitation of the Committee. However, at least The Audit Committee has met the external auditor without the once in six months, the Committee shall meet with Executive Directors being present, twice last year. the External Auditors without the Executive Directors being present. Representatives of the External Auditor also attended one meeting. (m) The Committee shall have: Terms of Reference of the Committee are being reviewed, to be (i) explicit authority to investigate into any matter submitted to the Board for approval during the ensuing year. within its terms of reference; (ii) the resources which it needs to do so; (iii) full access to information; and (iv) authority to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary (n) The Committee shall meet regularly, with due The Committee Meetings were held regularly with the Agenda and notice of issues to be discussed and shall record papers circulated in a timely manner. Internal audit reports were its conclusions in discharging its duties and discussed, decisions recorded and appropriate actions taken responsibilities. thereon. (o) The Board Shall, in the Annual Report, disclose in an Details of the activities of the Audit Committee have been informative way; disclosed in page 75. (i) details of the activities of the audit committee. (ii) the number of audit committee meetings held in The number of Committee Meetings held during the year and the the year and members’ attendance thereto is given in page 62. (iii) details of attendance of each individual member at such meeting (p) The Secretary of the Committee (who may be the During the financial year 2011/12, the Manager - Internal Audit Company Secretary or the head of the internal audit was the Secretary to the Audit Committee. function) shall record and keep detailed minutes of the committee meetings. 53 Swarnamahal Financial Services PLC Annual Report 2011/2012
CBSL Description Compliance status Section
8(2)(q) The Committee shall review arrangements by The Committee will take appropriate measures to comply with this which employees of the Finance Company may, direction in the ensuing year. in confidence, raise concerns about possible improprieties in financial reporting, internal control or other matters. Accordingly, the Committee shall ensure that proper arrangements are in place for the fair and independent investigation of such matters and for appropriate follow-up action and to act as the key representative body for overseeing the Finance Company’s relations with the External Auditor. 8.3 INTEGRATED RISK MANAGEMENT COMMITTEE (a) The Committee shall consist of at least one Non- The Integrated Risk Management Committee comprises of five Executive Director, the Chief Executive Officer and Non-Executive Directors (out of whom three were independent), key management personnel supervising broad risk the Chief Executive Officer and other key managerial personnel categories, i.e., credit, market, liquidity, operational handling the Company’s credit, market, liquidity, operational and and strategic risks. The Committee shall work with strategic risks. key management personnel very closely and make decisions on behalf of the Board within the framework of the authority and responsibility assigned to the Committee. (b) The Committee shall assess all risks, i.e., credit, Assessment and management of all such risks are done on a market, liquidity, operational and strategic risks to monthly basis by the committee which has taken appropriate the Finance Company on a monthly basis through measures to further strengthen the risk assessment and appropriate risk indicators and management management of the company during the ensuing year information. In the case of Subsidiary Companies and Associate Companies, risk management shall be The Company does not have any subsidiary or associate done, both on the finance company basis and group companies. basis. (c) The Committee shall review the adequacy and The Committee currently assesses the effectiveness of Credit effectiveness of all management level Committees Committee and Assets and Liability Management Committee such as the Credit Committee and the Asset-Liability (ALCO) to further strengthen the risk assessment indicators of the Committee to address specific risks and to manage Company to manage risk categories. those risks within quantitative and qualitative risk limits as specified by the Committee. 54 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
CBSL Description Compliance status Section
8(3)(d) The Committee shall take prompt corrective action The Committee is in the process of formulating benchmark and to mitigate the effects of specific risks in the case tolerance levels for each category of risk indicators to effectively such risks are at levels beyond the prudent levels monitor risks and to take corrective actions accordingly. decided by the Committee on the basis of the Finance Company’s policies and regulatory and supervisory requirements. (e) The Committee shall meet at least quarterly to assess During the Financial Year, Four Risk Management Committee all aspects of risk management including updated meetings were held to assess and improve the risk management business continuity plans. area of the Company. The Business Continuity Plan is being formulated. (f) The Committee shall take appropriate actions Such instances had occurred a few times during the year and against the officers responsible for failure to identify detected by the Line Management or Internal Audit. Corrective specific risks and take prompt corrective actions as action had been taken and reported to the Board. recommended by the Committee, and/or as directed by the Director of the Department of Supervision of The Committee is currently is in the process of preparing codified Non-Bank Financial Institutions of the Central Bank of procedures for disciplinary actions. Sri Lanka. (g) The Committee shall submit a risk assessment report This has been done whenever such instances have occurred. within a week of each meeting to the Board seeking However the reporting to the Board, at its first meeting following the Board’s views, concurrence and/or specific the committee meeting will be through a written report of the directions. committee itself in the future.
(h) The Committee shall establish a compliance function The Company’s compliance function is in place and the to assess the Finance Company’s compliance with Company is in the process of appointing a dedicated laws, regulations, Directions , rules ,regulatory independent compliance officer in place of the present Officer, guidelines, internal controls and approved policies who is not fully dedicated or independent to further strengthen on all areas of business operations. A dedicated the process. compliance officer selected from Key Management Personnel shall carry out the compliance function and report to the Committee periodically. 55 Swarnamahal Financial Services PLC Annual Report 2011/2012
CBSL Description Compliance status Section
9. RELATED PARTY TRANSACTIONS 9(2) The Board shall take the necessary steps to avoid any The Board had taken appropriate measures to avoid any conflicts conflicts of interest that may arise from any transaction of interest that may arise from related party transactions of the of the Finance Company with any person, and company. particularly with the following categories of persons who shall be considered as “related parties” for the purposes of this Direction: (a) Any of the Finance Company’s subsidiary companies; (b) Any of the Finance Company’s associate companies; (c) A Directors of the Finance Company; (d) A Key Management Personnel of the Finance Company (e) A relative of a director or a Key Management Personnel of the Finance Company; (f) A shareholder owns shares exceeding 10% of the paid up capital of the Finance Company; (g) A concern in which a director of the finance company or 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 During the Financial Year 2011/12, the Company has engaged in this Direction shall be the following only in such transactions that occurred in the normal course of (a) Granting accommodation business with no preferential treatment meted out. (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. 56 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
CBSL Description Compliance status Section
9(4) The Board shall ensure that the finance company The Board has taken appropriate measures to ensure that “more does not engage in transactions with a related party, favourable treatment” is not granted to related parties than that is in a manner that would grant such parties “more accorded to other similar constituents of the Company. favourable treatment” than that is accorded to other similar constituents of the finance company. In this context, “more favourable treatment” shall mean
(a) Granting of “total net accommodation” to a related party, exceeding a prudent percentage of the finance company’s regulatory capital, as determined by the Board. The “total net accommodation” shall be computed by deducting from the total accommodation, the cash collateral and investments made by such related party in the Finance Company’s share capital and debt instruments with a remaining maturity of 5 years or more
(b) Charging of a lower rate of interest than the finance company’s best lending rate or paying a rate of interest exceeding the rate paid for a comparable transaction with an unrelated comparable counterparty
(c) Providing preferential treatment, such as favourable terms, covering trade losses and/or waiving fees commissions, that extend beyond the terms granted in the normal course of business with unrelated parties;
(d) Providing or obtaining services to/from a related- party without a proper evaluation procedure;
e) 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 except, as required for the performance of legitimate duties and functions. 57 Swarnamahal Financial Services PLC Annual Report 2011/2012
CBSL Description Compliance status Section
1O. DISCLOSURES 10(1) The Board shall ensure that: The Annual and Interim Financial Statements have been prepared (a) Annual Audited Financial Statements and and published in accordance with the formats prescribed by the periodical Financial Statements are prepared supervisory and regulatory authorities and applicable accounting and published in accordance with the formats standards. Further, such financial statements have been prescribed by the supervisory and regulatory published in all three languages in the national newspapers of authorities and applicable accounting standards, Sinhala, English and Tamil. and that
(b) such statements are published in the newspapers in an abridged form, in Sinhala, Tamil and English. 10(2) The Board shall ensure that the following minimum disclosures are made in the Annual Report: (a) A statement to the effect that the Annual Audited A statement to this effect has been included in the “Statement of Financial Statements have been prepared in line Directors’ Responsibility” in page 72. with applicable accounting standards and regulatory requirements, inclusive of specific disclosures. (b) A report by the Board on the Finance Company’s This report is contained in the “Directors’ statement on Internal internal control mechanism that confirms that the Control over Financial Reporting” in page 69. financial reporting system has been designed to provide a reasonable assurance regarding the reliability of financial reporting, and that the preparation of Financial Statements has been done in accordance with relevant accounting principles and regulatory requirements. (c) The External Auditor’s certification on the effectiveness The External Auditors’ certification on the effectiveness of the of the internal control mechanism in respect of any internal control mechanism appears in page 71. statements prepared or published after March 31, 2010. (d) Details of Directors, including names, transactions This has been included in the “Annual Report of the Board of with the Finance company. Directors on the affairs of the Company” in pages 63 to 68.
(e) Fees and remuneration paid by the finance company The fees & remuneration paid to the Directors has been disclosed to the Directors in aggregate in the annual reports in note No. 7 to the Financial Statements as given in page 94. published after January 1, 2010. 58 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
CBSL Description Compliance status Section
(f) Total net accommodation as defined in 9(4) The total net accommodations granted to related parties are outstanding in respect of each category of related disclosed in note No.34.5 to the Financial Statements in page 110. parties and the net accommodation outstanding in respect each category of related parties as a percentage of the finance Company’s capital funds. (g) The aggregate values of remuneration paid by the Disclosed in note No. 34.2to the Financial Statements in page finance company to its key management personnel 108. and the aggregate values of the transactions of the finance 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 There were no instances of material “non compliance” by the prudential requirements, regulations, laws and internal Company, but minor lapses were reported and addressed by the controls and measures taken to rectify any material Company and communicated to the Director of Supervision of non non-compliance. bank financial institutions. (i) A statement of the regulatory and supervisory No such situation had arisen. concerns on lapses in the finance company’s risk management, or non-compliance with the Act ,and the rules and Directions that have been communicated by the Director of Supervision of non bank financial institutions , if so directed by the Monetary Board to be disclosed to the public, together with the measures taken by the finance company to address such concerns. (j) The External Auditor’s certification of the compliance Complied with. with the act and rules and direction issued by the monitory board in the annual corporate governance report published after January 1, 2011. 59 Swarnamahal Financial Services PLC Annual Report 2011/2012
SECTION 02
Compliance with the section 7.10 of continuing listing requirements of the Colombo Stock Exchange.
CSE Code Description Compliance status No 7.10.1 Non-Executive Directors
The Board of Directors of a Listed Entity shall Complied with as 08 out of 09 Directors of the Board are include at least, two Non-Executive Directors, Non- Executive Directors. The Chief Executive officer is the sole 7.10.1 (a) or such number of Non-Executive Directors Executive Director of the Company as at 31st March 2012. equivalent to one third of the total number of directors whichever is higher. 7.10.2 Independent Directors
Where the constitution of the Board of Directors Complied with as 03 out of 08 Non-Executive Directors are 7.10.2 (a) includes only two Non-Executive Directors in terms independent. of Rule 7.10.1.a above, both such Non-Executive Directors shall be ‘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 Complied with as the Board has determined the independence of Director to submit a signed and dated declaration each Non-Executive Director based on the declarations submitted annually of his/her independence or non- by them and will continue to evaluate them on annual basis. independence against the specified criteria.
7.10.3 Disclosures relating to Directors
The Board shall make a determination annually as Complied with. 7.10.3 (a) to the independence or non-independence of each The following Directors have been determined as Independent Non-Executive Director based on such declaration Non-Executive Directors of the Board and other information available to the board and Mr. D. S. Abeyratna shall set out in the annual report the names of Mr. J. F. G De Silva directors determined to be ‘independent’. Mr. S. A. Weerasinha
7.10.3 (c) The Board shall publish in its Annual Report a Complied with brief resume of each director on its board which The brief profile of each Director has been set out in pages 11 to 15 includes information on the nature of his/her expertise in relevant functional areas. 60 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
CSE Code Description Compliance status No 7.10.3 (d) Upon appointment of a new Director to its Board, Complied with the Entity shall forthwith provide to the Exchange a No new Director had been appointed during the year. brief resume of such director for dissemination to the public. 7.10.5 Remuneration Committee 7.10.5 (a) The Remuneration Committee shall comprise of During the financial year the Committee was comprised of the a minimum of two Independent Non-Executive following four Non-Executive Directors Directors (in instances where an Entity has only Mr. N. P. Edirisinghe - Chairman-Non-Executive Director two Directors on its Board) or Non-Executive Mr. J. F. G. De Silva - Independent Non-Executive Director Directors, a majority of whom shall be Mr. S. A. Weerasinha - Independent Non-Executive Director independent, whichever shall be higher. Mr. D. S. Abeyratna - Independent Non-Executive Director
The Remuneration Committee shall recommend Complied with. 7.10.5 (b) the remuneration payable to the executive The Board remuneration committee was formed in order to ensure directors and Chief Executive Officer of the Listed formal and transparent procedures in developing an effective Entity and/or equivalent position thereof, to the remuneration policy for all Executive Directors including the board of the Listed Entity which will make the Director/CEO (Executive Director) and the Senior Management final determination upon consideration of such personnel. No Director was involved in deciding his or her recommendations. remuneration in order to avoid potential conflict of interest.
7.10.5 (c) The Annual Report should set out the names of Complied with. directors comprising the remuneration committee, contain a statement of the remuneration policy The aggregate of remuneration paid to the Executive and Non- and set out the aggregate remuneration paid to Executive Directors are given in page 94. Executive and Non-Executive Directors.
7.10.6 Audit Committee
7.10.6 (a) The Audit Committee shall comprise of a minimum Complied with. of two Independent Non-Executive Directors (in The Audit Committee of SFS comprises of 05 Non-Executive Instances where an Entity has only two directors Directors, three of whom including the Chairman are Independent on its board) or Non-Executive Directors a majority Directors. of whom shall be independent, whichever shall be higher. 61 Swarnamahal Financial Services PLC Annual Report 2011/2012
CSE Code Description Compliance status No 7.10.6 (b) Functions of the Committee shall include, Complied with. (i) Overseeing of the preparation, presentation Functions of the Board Audit Committee are given in the Board and adequacy of disclosures in the financial Audit Committee Report in page 75. statements of a Listed Entity, in accordance with Sri Lanka 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 Names of the Directors of the Board Audit Committee are given in Committee should be disclosed in the annual the Board Audit Committee Report in page 75. report. 62 Swarnamahal Financial Services PLC Annual Report 2011/2012 Corporate Governance Contd.
Directors’ Attendance At Meetings During The Financial Year 2011/12
Names Directorship Board Audit Integrated Remuneration Committee Risk Management Committee Committee
No. of meetings held 16 4 4 1 Dr.(Mrs.) S. Edirisinghe Chairperson 8/12 (resigned with effect from Non-Executive Director 31/01/2012 Mr. J. H. Edirisinghe Chairman 16/16 Non-Executive Director Mr. N. P. Edirisinghe Non-Executive Director 16/16 4/4 4/4 1 Mrs. A. D. Edirisinghe Non-Executive Director 11/16 1/4 Mr. A .S. Edirisinghe Non-Executive Director 11/16 Mr. D. S. Abeyratna Independent 8/16 3/4 3/4 1 Non-Executive Director Mr. S. M. Ganegoda Director/ 16/16 4/4 Chief Executive Officer Mr. J. F. G. De Silva Independent 15/16 2/4 4/4 1 Non-Executive Director Mr. S. A .Weerasinghe Independent 16/16 4/4 4/4 1 Non-Executive Director Mr. N. G. M. De Silva Non-Executive Director 8/16 63 Swarnamahal Financial Services PLC Annual Report 2011/2012 Annual Report of the Board of Directors on the Affairs of the Company
General Directors’ Shareholdings The Directors have pleasure in presenting the Annual Report The Directors’ interests in Ordinary Shares were as follows: together with the Audited Financial Statements of the Company st for the financial year ended 31 March 2012. No. No. of Shares held as at Name of the Director 31st March 31st March Swarnamahal Financial Services PLC (“SFS”) is a public limited liability Company, incorporated 14th January 2004 in Colombo, 2012 2011 under the Companies Act No. 17 of 1982 and re-registered 1 Dr. (Mrs.) S.Edirisinghe 82,000,020 4,100,001 under the Companies Act No.7 of 2007, 16th September 2008. It (resigned with effect is quoted on the Colombo Stock Exchange from May 2011 and from 31/1/2012) has been registered as a Finance Company under the Finance 2 Mr.J. H. Edirisinghe 82,000,020 4,100,001 Business Act No. 42 of 2011 and under the Finance Leasing 3 Mrs. A. D. Edirisinghe 82,000,020 4,100,001 Act No. 56 of 2000. 4 Mr. N. P. Edirisinghe 82,000,020 4,100,001 The Annual Report together with the Audited Financial 5 Mr. A. S. Edirisinghe 82,000,020 4,100,001 Statements was approved by the Board of Directors, 05th June 6 Mr. S. M. Ganegoda 200,020 1 2012. 7 Mr. N. G M. De Silva 20 1
Registered Office and Business Office Mr. S. M. Ganegoda had purchased 10,000 shares in May 2011 The registered office of the Company is situated at No. 676, and it was duly disclosed to the Colombo Stock Exchange. Galle Road, Colombo 03 and the business office is at No.654, Galle Road, Colombo 03. The increase in the number of Ordinary shares is due to the subdivision of each such Share into twenty shares 27th March Principle Activities 2012. During the Financial year 2011/12, the company continued with Gold Loan services, Leasing, Hire Purchase, Personal Loans Stated Capital and mobilization of Fixed and Savings deposits as its main lines The stated capital of the Company as at 31st March 2011 was of business. There were no material changes in the nature of Rs.250, 000,070/= consisting of 25,000,007 Ordinary Voting the principle business activities of the company. Shares. Each such share was subdivided into twenty shares on 27th March 2012 resulting in 500,000,140 Ordinary Voting shares Directors’ Meetings without affecting the stated capital of the Company. As a result, The meetings of the Board of Directors were held at least once the stated capital of the company consists of 500,000,140 a month or more frequently when ever necessary. The Directors’ Ordinary Voting Shares amounting to Rs.250, 000,070/= as at attendance at the Board Meetings is given in page 62. 31st March 2012.
Share Information Information relating to earnings, net assets and market value per share is given in pages 116 to 117. 64 Swarnamahal Financial Services PLC Annual Report 2011/2012 Annual Report of the Board of Directors on the Affairs of the Company Contd.
Major Shareholders Significant Accounting Policies The details of the top twenty shareholders together with The significant accounting policies adopted in preparation percentages are given in page 116. of the Financial Statements are given in page 86. There have been no changes in the accounting policies adopted by Donations the Company during the year and are consistent with those During the Financial Year, donations of Rs. 1.3 million were adopted in the previous financial year as required by the Sri made in terms of the resolution passed at the Annual General Lanka Accounting Standards (SLAS-3) on “presentation of Meeting held in September 2011. Financial Statements”.
Related Party Transactions Auditor’s Report In terms of the Sri Lanka Accounting Standards 30 (Revised The Auditor’s report on the financial statements is given in 2005), Related Party Transactions, including write off balances page 81. and provisioning for doubtful receivables, have been disclosed in notes to the financial statements as given in pages 108 Statement of Compliance on the Contents of the Annual to 110 forming the part of the Annual Report of the Board of Report Directors while details of the significant transactions are given The Audited Financial Statements included in this Annual below. Report have been prepared and presented with the relevant disclosures in accordance with the Sri Lanka Accounting Name of Related Lending/ Outstanding Outstanding Standards and other applicable regulatory requirements. party Borrowings/ amount as amount as a Other at 31st March percentage of Corporate Governance transactions 2012. capital fund Rs. The Company has placed a very high degree of attention to conforming to the best corporate governance practices and Swarnamahal Term loan 9,282,266/- 2.1% procedures. Accordingly, systems and procedures are revised Jewelers (Pvt) and improved from time to time. A separate report on Corporate Ltd Governance is given in pages 37 to 62. Colombo Hire 837,142/- 0.2% Communication purchase Internal Controls Lavinia Breeze Rent 5,750,000/- 1.3% Sea Food Receivables The Board has formed an effective and comprehensive system Restaurant (Pvt) of Internal Controls covering financial reporting, compliance Ltd with rules and regulations of relevant authorities and risk management to carry on the business in an orderly manner Directors’ Remuneration to safeguard its assets and to ensure as far as possible the The aggregate sum of Directors’ fees and emoluments paid accuracy and reliability of the financial records. during the year was Rs. 8,990,000 and is disclosed in note No. 7 to the Financial Statements in page 94. Internal Control mechanism of the Company is reviewed and improved on a continuous basis, based on the recommendations of the Internal Auditor and on site Financial Statements observations of the Central Bank of Sri Lanka and the Financial Statements of the Company are given in pages 82 to 113. External Auditor during their inspections and audit. 65 Swarnamahal Financial Services PLC Annual Report 2011/2012
Directors’ Statement of Internal Control Integrated Risk Management Committee In line with the Finance Companies (Corporate Governance) Mr. N. P. Edirisinghe Chairman Non-Executive Director Direction No.3 of 2008, the Board of Directors has issued Mrs. A. D. Edirisinghe Non Executive Director a report on the system of Internal Control of the Company Mr. J. F. G. De Silva Independent Non-Executive Director confirming that the financial reporting system of the company Mr. D. S. Abeyratna Independent Non-Executive Director has been designed to provide a reasonable assurance Mr. S. A. Weerasinha Independent Non-Executive Director regarding the reliability of financial reporting, and that the Mr. S. M. Ganegoda Director Chief Executive Officer preparation of financial statements for external purposes has been done in accordance with relevant accounting principles Management Representatives who attended the meetings of the and regulatory requirements. The Directors’ report on Internal Integrated Risk Management Committee were: Control is given in page 69. The assurance report given by the External Auditor on the Directors’ statement of Internal Control is Mr. Dhanuka Tharanga Senior Manager- Pawning & Gold Sales given in page 71. Mr. R M G Ratnayake Senior Manager-Finance Mr. George Samantha Senior Manager-Corporate Relations Board appointed Sub Committees Mr. Samith Ganepola Manager-IT The Board of Directors of the Company has formed the Mr. Newton Fernando Manager-Credit following Board Sub Committees The report of Integrated Risk Management Committee is given Audit Committee in page 77. Mr. D. S. Abeyratna (Chairman) Independent Non-Executive Director Directorate Mr. N. P. Edirisinghe Non-Executive Director The Board of Swarnamahal Financial Services PLC consists Mrs. A. D. Edirisinghe Non-Executive Director of 9 directors with a wide array of experience in financial & Mr. J. F. G. De Silva Independent Non-Executive Director commercial sectors as at 31st March 2012. The brief profiles of Mr. S. A. Weerasingha Independent Non-Executive Director the directors are given in pages 11 to 15. Mr. J. H. Edirisinge Chairman - Non-Executive Director The report of the Audit Committee is given in pages 75 to 76. Mr. N. P. Edirisinghe Non-Executive Director Mrs. A. D. Edirisinghe Non-Executive Director Remuneration Committee Mr. A. S. Edirisinghe Non-Executive Director Mr. N. P. Edirisinghe Chairman- Non-Executive Director Mr. J. F. G. De Silva Independent Non-Executive Director Mr. J. F. G. De Silva Independent Non-Executive Director Mr. D. S. Abeyratna Independent Non-Executive Director Mr. S. A. Weerasingha Independent Non-Executive Director Mr. S. A. Weerasinha Independent Non-Executive Director Mr. D. S. Abeyratna Independent Non-Executive Director Mr. S. M. Ganegoda Director/Chief Executive Officer Mr. N. G. M. De Silva Non-Executive Director The report of the Remuneration Committee is given in page 78. Resignation of Chairperson/appointment of new Chairman Dr. (Mrs.) Soma Edirisinghe, the chairperson of the Company tendered her resignation with effect from 31st January 2012 66 Swarnamahal Financial Services PLC Annual Report 2011/2012 Annual Report of the Board of Directors on the Affairs of the Company Contd.
in terms of the Finance companies (Corporate Governance) the Company to reflect a true and fair view of the state of Direction No 03 of 2008 and Mr. J. H. Edirisinghe was elected affairs of the Company. The Directors are of the view that the as the Chairman of the Company with effect from 01st of Financial Statements of the Company for the year ended 31st February 2012. March 2012, are prepared and presented, consistent with the underlying books of accounts and in conformity with the Re-designation of Directors requirements of the Sri Lanka Accounting Standards issued The following Non-Executive Directors of the Company were by the Institute of Chartered Accountants of Sri Lanka, the re-designated as Executive Directors with effect from 1st of April Companies Act No. 07 of 2007, Sri Lanka Accounting and 2012. Auditing Standards Act No. 15 of 1995, Finance Business Act No. 42 of 2011, the Listing Rules of the Colombo Stock Mr. N. P. Edirisinghe Exchange and the Code of Best Practice on Corporate Mrs. A. D. Edirisinghe and Governance. Mr. A. S. Edirisinghe Human Resources Hence Mr. N. P. Edirisinghe and Mrs. A.D. Edirisinghe will not The Company recruits the best talented people and provides be members of the Board Audit and Remuneration Committees equal employment opportunities with no discrimination. with effect from 1st April 2012. The Human Resources Policies of the Company includes comprehensive training and developments programs to Secretary enhance skills of new recruits and the existing staff for greater M/s Cyrus Corporate Services (Pvt) Limited, engaged as the efficiency. Secretary and Registrar to Company during the Financial Year 2011/12, ended its services when its contract expired 15th May Report on Compliance with Prudential Requirements, 2012. Regulations and Laws The Company has complied with the regulatory and prudential M/s SSP Corporate Services (Pvt) Ltd was appointed as the and internal control requirements arising from the provisions in new Secretary and Registrar to the Company with effect from the statutes applicable to the Company, such as the Finance 16th May 2012 and such changes were duly disclosed to the Business Act No. 42 of 2011, Directions issued by the Central Colombo Stock Exchange. Bank of Sri Lanka, Companies Act No.7 of 2007, Inland Revenue Act No. 10 of 2006,Value Added Tax Act No. 14 of Fair Value of Real Estate Stock 2002, Financial Transaction reporting Act No. 06 of 2006, Sri The Fair Value of Real Estate Stock recorded was Lanka Accounting and Auditing Standards Act No. 15 of 1995, Rs. 229,416,822 as at 31st March 2012, based on the Directors’ Listing Rules of Colombo Stock Exchange etc. valuation that resulted in the company creating a provisioning of Rs. 10,303,789 as an impairment that has occurred during the Statutory Payments financial year 2011/12. The value of the real estate stock as at The Board of Directors of the Company is satisfied, to the best 31st March 2011 was Rs. 242,657,497. of their knowledge and belief, that all statutory dues to the Government and employees have been made in full, on time. Directors’ Responsibility of Financial Reporting The Directors of the Company are responsible for the Going Concern preparation and presentation of the financial statements of The Board of Directors is satisfied, to the best of their knowledge and belief, that the Financial Statements of the 67 Swarnamahal Financial Services PLC Annual Report 2011/2012
Company give a true and fair view of the assets, liabilities, company from 01st April 2012. Accordingly, the Company, with financial position and profit of the Company and is satisfied that the assistance of external professional consultants, is in the the Company has adequate resources to continue in operation process of evaluating the potential effects on financial reporting into the foreseeable future and continue to adopt the going and accounting policies in readiness for the transition. Since the concern basis in preparing Financial Statements. financial year of the Company ended 31st March, the opening balances of the financial statement as at 01st of April 2012 will Events after the Balance Sheet date be prepared in accordance with the new set of Accounting There have not been any material events that occurred Standards. The Company will prepare and present its first subsequent to the date of balance sheet that require financial reports under the SLFRS/LKAS compliance, for the adjustments to the Financial Statements. financial year ending 31st March 2013.
Convergence with SLFRS/LKAS The following table summarizes the financial statement impact The new volumes of Accounting Standards (SLFRS/LKAS), on convergence to SLFRS/LKAS with their corresponding issued by the Institute of Chartered Accountants of Sri Lanka, significance, with the colour code indicating the impact being are effective from the financial period commencing on or after 01st January 2012. These standards are applicable to the
High Medium
SLFRS/LKAS Title Impact Number SLFRS 1 First-time Adoption of SLFRSs SLFRS 5 Non-Current Assets Held for Sale and Discontinued operations SLFRS 7 Financial Instruments: Disclosure SLFRS 8 Operating Segments LKAS 1 Presentation of Financial Statements LKAS 2 Inventories LKAS 16 Property, Plant & Equipment LKAS 17 Leases LKAS 18 Revenue LKAS 24 Related Party Disclosures LKAS 32 Financial Instruments: Presentation LKAS 34 Interim Financial Reporting LKAS 39 Financial Instruments: Recognition and Measurement LKAS 40 Investment Property 68 Swarnamahal Financial Services PLC Annual Report 2011/2012 Annual Report of the Board of Directors on the Affairs of the Company Contd.
Auditor During the Financial Year 2011/12, a sum of Rs. 396,750 was paid as audit fees to the Auditor, M/s BDO Partners.
The Board has accepted the recommendation of the Board Audit Committee and has recommended the appointment of Messrs KPMG Ford, Rhodes, Thornton & Co. as Auditors to the Company for the financial year 2012/13, subject to Shareholders’ approval, at the Annual General Meeting to be held 03rd September 2012, as Messrs BDO Partners have tendered their resignation.
The resolution to be adopted to appoint Messrs KPMG Ford, Rhodes, Thornton & Co. as the Auditors for the year 2012/13 and fix their remuneration will be proposed at the Annual General Meeting 03rd September 2012.
Annual General Meeting The 07th Annual General Meeting of the Company will be held at Hotel Sapphire, No.371, Galle Road, Colombo 6, 03rd September 2012 at 10.30 a.m.
J. H. Edirisinghe Chairman
S. M. Ganegoda Director/Chief Executive Officer
SSP Corporate Services (Pvt) Ltd Company Secretaries
05th June 2012 69 Swarnamahal Financial Services PLC Annual Report 2011/2012 Directors’ Statement on Internal Control
In line with the Finance Companies (Corporate Governance) The key processes that have been established in reviewing the Direction No.3 of 2008, the Board of Directors presents this adequacy and integrity of the system of internal controls with report on Internal Control. respect to financial reporting include the following:
The Board of Directors (“Board”) is responsible for the •• Various Committees were established by the Board to adequacy and effectiveness of Swarnamahal Financial Services assist the Board in ensuring the effectiveness of Company’s PLC’s (“the Company”) system of internal controls. Such a daily operations and that the Company’s operations are in system is designed to manage the Company’s key areas of risk accordance with the corporate objectives, strategies and within an acceptable risk profile by highlighting any deviation the annual budget as well as the policies and business from the limits, rather than eliminate the risk of failure to directions that have been approved. achieve the policies and business objectives of the Company. Accordingly, the system of internal controls can only provide •• The Internal Audit Division of the Company checks reasonable but not absolute assurance against material mis- for compliance with policies and procedures and the statements of management, financial information and records or effectiveness of the internal control systems on an ongoing against financial losses or fraud. basis and highlights significant findings in respect of any non-compliance. Audits are carried out on all units, The Board has established an ongoing process for identifying, branches and pawning centres, the frequency of which evaluating and managing the significant risks faced by the is determined by the level of risk assessed, to provide an Company and this process includes enhancing the system of independent and objective report. The Annual Audit plan is internal controls as and when there are changes in business reviewed and approved by the Audit Committee. Findings of environment or regulatory guidelines. the Internal Audit are submitted to the Audit Committee for review at their meetings held quarterly. The process is regularly reviewed by the Board and accords with the Guidance for Directors of the Company on the •• The Audit Committee of the Company reviews internal Directors’ Statement on Internal Control issued by the control issues identified by the respective Internal Audit Institute of Chartered Accountants of Sri Lanka. The Board Division, regulatory authorities and management, and has assessed the internal control system taking accounting evaluates the adequacy and effectiveness of the risk principles, for the assessment of internal control system, as management and internal control systems. It also reviews given in that guidance. the Internal Audit functions with particular emphasis on the scope of audits and quality of Internal Audits. The Board is of the view that the system of internal controls in place is sound and adequate to provide a reasonable The minutes of the Audit Committee meetings are tabled to assurance regarding the reliability of financial reporting and the Board of the Company on a periodic basis. preparation of financial statements for external purposes, and is in accordance with relevant accounting principles and •• In assessing the internal control system, identified officers regulatory requirements. of the Company collated all procedures and controls that were connected with significant accounts and disclosures The management assists the Board in the implementation of of the Financial Statements of the Company. These in the Board’s policies and procedures on risk and control by turn were observed and checked by the Internal Audit identifying and assessing the risks faced, and in the design, Department for suitability of design and effectiveness on an operation and monitoring of suitable internal controls to mitigate ongoing basis. and control these risks. 70 Swarnamahal Financial Services PLC Annual Report 2011/2012 Directors’ Statement on Internal Control contd.
Confirmation Based on the above processes, the Board confirms that the financial reporting system of the Company has been designed to provide reasonable assurance regarding the reliability of financial reporting and that the preparation of Financial Statements for external purposes has been done in accordance with Sri Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka.
Review of the Statement by External Auditors The external auditor has reviewed the Directors’ Statement on Internal Control included in the annual report of the Company for the year ended 31st March 2012 and reported to the Board that nothing has come to their attention that causes them to believe that the statement is inconsistent with their understanding of the process adopted by the Board in the review of the design and effectiveness of the internal control system of the Company.
For and on behalf of the Board
J. H. Edirisinghe Chairman
D. S. Abeyratna Chairman Board Audit Committee
S. M. Ganegoda Director/Chief Executive Officer
05th June 2012 71 Swarnamahal Financial Services PLC Annual Report 2011/2012 Auditor’s Report on Internal Control
TO THE BOARD OF THE SWARNAMAHAL FINANCIAL Summary of work performed SERVICES PLC Our engagement has been conducted to assess whether the Statement is both supported by the documentation prepared Introduction by or for directors and appropriately reflects the process the We were engaged by the Board of Directors of Swarnamahal directors have adopted in reviewing the system of internal Financial Services PLC (“Swarnamahal Finance”) to provide control for the company. assurance on the Directors’ Statement on Internal Control (“the Statement”) included in the annual report for the year ended The procedures performed were limited mainly to inquiries 31st March 2012. of the Swarnamahal Finance personnel and existence of the documentation on a sample basis that supports the basis Management’s responsibility adopted by the board of directors. SLSAE 3050 does not Management is responsible for the preparation and require us to consider whether the Statement covers all risks presentation of the Statement as required by the section 10 (2) and controls, or to form an opinion on the effectiveness of the (c) of Finance Companies (Corporate Governance) Direction, company’s risk and control procedures. It also does not require N0. 3 of 2008. In the absence of specific detail guideline with us to consider whether the processes described to deal with respect of preparation and presentation of the Statement for material internal control aspects of any significant problems finance companies, in preparing and presenting the statement, disclosed in the annual report will, in fact, remedy the problems. the company has considered “Guidance for Directors of Banks on the Directors’ Statement on Internal Control” issued Our conclusion in compliance with the section 3(8) (ii) (b) of the Banking Based on the procedures performed, nothing has come to our Act Direction No. 11 of 2007, by the Institute of Chartered attention that causes us to believe that the Statement included Accountants of Sri Lanka. in the annual report is inconsistent with our understanding of the process the Board of Directors have adopted in the Our responsibilities and compliance with SLSAE 3050 review of the design and effectiveness of Internal controls of Our responsibility is to issue a report to the board on the Swarnamahal Finance. Statement based on the work performed. In the absence of specific detail guideline with respect of providing assurance report for finance companies on the Director’s Statement on Internal control, we conducted our engagement in accordance with Sri Lanka Standard on Assurance Engagements SLSAE CHARTERED ACCOUNTANTS 3050 – Assurance Report for Banks on Directors’ Statement Colombo 02 on Internal Control issued by the Institute of Chartered 05th June, 2012 Accountants of Sri Lanka. SSR/cc 72 Swarnamahal Financial Services PLC Annual Report 2011/2012 Statement of Directors’ Responsibilities in Relation to Financial Statements
The responsibility of the Directors of the Company, in relation to The Financial Statements of the Company for the year ended the preparation and presentation of the Financial Statements of 31st March 2012 are prepared and presented, consistent with the Company in accordance with the relevant provisions of the the underlying books of accounts and in conformity with the Companies Act No. 07 of 2007, Finance Business Act No. 42 of requirements of the Sri Lanka Accounting Standards issued 2011 and other statutes which are applicable in the preparation by the Institute of Chartered Accountants of Sri Lanka, the of Financial statements are set out in the following statement. Companies Act No. 07 of 2007,Sri Lanka Accounting and The responsibilities of the External Auditors, in relation to the Auditing Standards Act No. 15 of 1995,Finance Business Financial Statements are set out in the report of the Auditors Act No. 42 of 2011, the Listing Rules of the Colombo Stock given in page 81. Exchange and the Code of Best Practice on Corporate Governance. In accordance with the Companies Act No. 07 of 2007, the Directors of the Company are responsible for ensuring, the The Directors are responsible for ensuring that the Company Company keeps proper books of account of all the transactions keeps sufficient accounting records, which disclose the and prepare Financial Statements for each financial year. The financial position of the Company with reasonable accuracy Financial Statements of the Company are comprised of the and enable them to ensure that the financial statements have Balance Sheet as at 31st March 2012, the Income Statement, been prepared and presented as aforementioned. Statement of Changes in Equity, Cash Flow for the year ended 31st March 2012 and notes thereto. The Directors of the Company have instituted an effective and comprehensive systems of Internal Control for identifying, Accordingly, the Directors confirm that the Financial Statements recording, evaluating and managing the significant risks faced of the Company give a true and fair view of the state of affairs of by the company throughout the year and it is under regular the Company as at 31st March 2012. review of the Board of Directors. This comprises internal reviews, internal audit and the whole system of financial and The Directors are responsible to ensure that: other controls required to carry on the business of the Company in an orderly manner, safeguard its assets, prevent and detect •• the appropriate accounting policies have been selected and frauds and secure as far as practicable, the accuracy and the applied in a consistent manner and material deviations, if reliability of the records. any, have been disclosed, The Directors of the Company are responsible for preparing •• judgments and estimates made are reasonable and prudent and presenting the Financial Statements and have provided and the Company’s External Auditor, Messrs. BDO Partners with every opportunity to undertake the inspections they considered •• all applicable Accounting Standards have been complied appropriate and necessary. Messrs. BDO Partners carried with. out reviews and sample checks on the effectiveness of the system of internal controls as they considered appropriate The Directors accept responsibility to ensure that the company and necessary in expressing their independent audit opinion has adequate resources to continue in operation to justify on the Financial Statements and maintenance of accounting applying the going concern basis in preparing these Financial records. Messrs. BDO Partners has examined the Financial Statements. 73 Swarnamahal Financial Services PLC Annual Report 2011/2012
Statements of the Company together with all other financial records and minutes of the meetings of the Board of Directors and expressed their opinion which appears on page 81.
Compliance Report The Directors of the Company confirm that to the best of their knowledge and belief, all statutory payments in relation to all relevant regulatory and statutory dues, as were due and payable by the Company as at the Balance Sheet date, have been paid or where relevant, provided for.
The Directors are of the view that they have discharged their responsibilities as set out in this above statement.
By order of the Board
J. H. Edirisinghe Chairman
S. M. Ganegoda Director/Chief Executive Officer
05th June 2012 74 Swarnamahal Financial Services PLC Annual Report 2011/2012 Chief Executive Officer’s and Senior Finance Manager’s Statement of Responsibility
The Financial Statements of Swarnamahal Financial Services reviewed, evaluated and updated on an ongoing basis. Our PLC for the financial year ended 31st March 2012 have been Internal Auditors have conducted periodic audits to ensure that prepared and presented, consistent with the underlying books the policies and procedures of the Company were consistently of accounts and in conformity with the requirements of the followed. However, there are inherent limitations that should be Sri Lanka Accounting Standards issued by the Institute of recognized in weighing the assurances provided by any system Chartered Accountants of Sri Lanka, the Companies Act No. of Internal Controls and Accounting. 07 of 2007,Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, Finance Business Act No. 42 of 2011 and the The Company’s External Auditor, M/s BDO Partners, Chartered Listing Rules of the Colombo Stock Exchange. Accountants, has audited the Financial Statements of the Company and their report is given in page 81. The formats used in the presentation of the Financial Statements and the disclosures comply with the formats prescribed by the The Board Audit Committee of the Company reviewed all the Institute of Chartered Accountants of Sri Lanka. Internal Audit inspections, audit plans, the efficiency of Internal Control Systems and procedures and also reviewed the quality The significant accounting policies and estimates that involved of the significant Accounting Policies and their adhering to the a high degree of judgment and complexity were discussed Statutory and Regulatory requirements. To ensure complete with the Company’s External Auditor and the Board Audit independence, the Internal and External Auditors had full and Committee. Comparative information has been reclassified free access to the members of the Board Audit Committee to whenever necessary to comply with the current presentation discuss any matter of substance. and material deviations, if any, have been disclosed and explained in the notes to the Financial Statements. We further confirm that the Company has complied with all the guidelines for the audit services. We confirm, to the best of our knowledge and belief, that the Financial Statements of the Company give a true and fair The Company has also complied with all applicable laws, view of the assets, liabilities, financial position and profit of regulations and prudential requirements. There are no the Company, its cash flows and liquidity position. We also material non-compliances and there are/ were no litigations or confirm that the Company has adequate resources to continue proceedings against the Company in the recent past. in operation and have applied the going concern basis in preparing Financial Statements.
The Board of Directors and the Management of the Company accept responsibility for the integrity and objectivity of these Financial Statements. The estimates and judgments relating S. M. Ganegoda to the Financial Statements were made on a prudent and Director/ Chief Executive Officer 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 state of affairs is well presented. To ensure this, the Company has taken proper and sufficient care in installing a system of Internal Controls and R. M. G. Ratnayake accounting records, for safeguarding assets and for preventing Senior Manager-Finance and detecting frauds as well as other irregularities, which is 05th June 2012 75 Swarnamahal Financial Services PLC Annual Report 2011/2012 Board Audit Committee Report
The Composition of the Committee Role of the Audit Committee During the year under review, the Board appointed Audit The Audit Committee assists the Board of Directors in fulfilling Committee comprised of the following five (5) Non - Executive effectively its oversight responsibilities in the financial reporting Directors, three of whom are Independent Directors. process and other related affairs of the Company.
•• Mr. D. S. Abeyratna (Chairman) Independent Director The Committee has been empowered to: •• Mr. J. F. G. De Silva - Independent Director •• Mr. S. A. Weerasinha - Independent Director •• Analyze and review risks and examine the adequacy, •• Mr. N. P. Edirisinghe efficiency, effectiveness of the system of internal controls •• Mrs. A. D. Edirisinghe and procedures that are in force to mitigate risks.
Secretary to the Board Audit Committee •• Monitor and evaluate the External Auditor’s independence, Mr. R Harendren - Manager-Internal Audit objectivity and effectiveness of the Audit Process.
The Chairman, Mr. D. S. Abeyratna (a Fellow Member of the •• Meet External Auditor during the year to discuss and finalize Institute of Chartered Accountants of Sri Lanka, Fellow Member the Audit approach, procedures, nature and the scope, of the Institute of Management Accountants of UK, Member including the matters relating to the company’s compliance of Certified Management Accountants of Australia and Fellow with directions, internal control over financial reporting and Member of Certified Management Accountants of Sri Lanka) auditor’s independence. counts over 40 years’ experience in the fields of Finance and Audit. •• Review the Audited Financial Statements with the External Auditors in order to monitor the integrity of the Financial The Director/CEO and the Senior Manager- Finance were Statements and its conformity with the Sri Lankan present at all the meetings on invitation. Accounting Standards, prior to submission to the Board.
Meetings of the Committee •• Review Accounting Policies, emerging accounting issues During the Financial year 2011/12, four meetings of the and disclosures according to SLAS/SLFRS Committee were held, one per quarter. The proceedings of the committee meetings were recorded and circulated to the Board •• Review the External Auditor’s Management Letter together of Directors regularly for information and advice. The members’ with the management response thereto. attendance at the committee meetings are tabled below. •• Discuss with the External Auditor regarding the issues, problems and reservations Name of the Director Executive/Non Executive/Indepen- Attendance arising from the Interim and Final Audits of dent-Non Executive Director the Company. Mr. D. S. Abeyratna Independent Non-Executive Director 3/4 •• Ensure that a sound reporting system is in Mr. N. P. Edirisinghe Non-Executive Director 4/4 place to provide timely information to the Mrs. A. D. Edirisinghe Non-Executive Director 1/4 Board of Directors, Regulatory Authorities, Mr. J. F. G. De Silva Independent Non-Executive Director 2/4 Management and Stakeholders. Mr. S. A. Weerasinha Independent Non-Executive Director 4/4 76 Swarnamahal Financial Services PLC Annual Report 2011/2012 Board Audit Committee Report Contd.
•• Review the performance of the Internal Audit Function, regulatory requirements. The weaknesses highlighted by the adequacy of the scope, resources and the authority of the Internal Audit Division in relation to such control procedures Internal Audit division. were critically analyzed and recommendations suggested for implementation; such implementations were followed up •• Review internal audit programs and its results and ensure and reviewed. The internal audit personnel were invited to that appropriate actions are taken on the recommendations the committee discussion as and when required, for further of Board Audit Committee. clarification.
•• Ensure that the internal audit function is independent of the External Audit Company’s other activities and that it is performed with During the year under review, the Committee met the External impartially, proficiency and due professional care. Auditor, M/s BDO Partners to discuss the issues reported in relation to the Management Letter of the previous year •• Evaluate and discuss the major findings and observations of and the action plan of the Company to implement such Internal Auditor and the management responses thereon, recommendations. periodically. The Committee actively monitored the implementation •• Review and assess the Internal Audit department’s of the recommendations of the External Auditor. Prior to resources requirements including succession plan. commencement of the audit of the financial year 2011/12, the Auditor’s approach, procedures, nature and the scope •• Financial Reporting. of the Audit, including the matters relating to the company’s compliance with directions were discussed and finalized. The Committee assists the Board of Directors in discharging their responsibilities for the preparation of financial statements The Committee is also empowered to recommend the that indicates a true and fair view of the affairs of the Company appointment and fees of the External Auditor. Accordingly, in accordance with the Company’s Accounting Records and the Committee has recommended the appointment of Messrs in conformity with the Sri Lanka Accounting Standards, the KPMG Ford, Rhodes, Thornton & Co. as auditors to the Company’s Act No. 07 of 2007 and the Directions issued by the Company for the financial year ending 31st March 2013, subject Central Bank of Sri Lanka. to the approval of the shareholders at the Annual General Meeting. The Committee liaised with the other Board members, reviewed the Company’s annual and interim financial statements and Committee Evaluation recommended the issue of such financial statements to the The evaluation of the Committee was carried out by the other shareholders. The Committee analyzed and examined the members of the Board in order to assess the effectiveness of adequacy, efficiency, effectiveness of the system of internal the Committee and its performance, which was found to be controls and procedures in place to ensure the reliability of highly satisfactory. information provided to the Board and other stakeholders.
Internal Audit The Internal Audit division of the Company is responsible for review and report on the efficiency of the system of internal D. S. Abeyratna controls mechanism, procedures and compliance with other Chairman-Board Audit Committee 05th June 2012 77 Swarnamahal Financial Services PLC Annual Report 2011/2012 Board Integrated Risk Management Committee Report (BIRMC)
The Board Integrated Risk Management Committee comprised of •• Establishing a compliance function to assess the Company’s the following five Directors: compliance with laws, regulations, regulatory guidelines, internal controls and approved policies in all areas of business Mr. N. P. Edirisinghe Chairman-Non- Executive Director operations. Mrs. A D Edirisinghe Non-Executive Director Mr. J. F. G. De Silva Independent Non-Executive Director •• Reviewing and updating the business continuity plan, for Mr. D. S. Abeyratna Independent Non-Executive Director approval of the Board. Mr. S. A. Weerasingha Independent Non-Executive Director Mr. S. M. Ganegoda Director - Chief Executive Officer •• Review specific quantitative and qualitative risk limits for all management level committees viz Credit, Asset Liability and Management Representatives who attended the meetings were report any risk indicators periodically to the Board.
Mr. Dhanuka Tharanga Senior Manager- Pawning & Gold Sales •• The Committee shall meet at least quarterly. Mr. R M G Ratnayake Senior Manager-Finance Mr. George Samantha Senior Manager-Corporate Relations •• The Committee shall submit a risk management report to the Mr. Samith Ganepola Manager- IT first Board Meeting which will be held soon after each Mr. Newton Fernando Manager-Credit BIRMC meeting, seeking the board’s view, concurrence and /or Brief profiles of the Directors and management representatives are specific directions. given in pages 11 to 17. Meetings Terms Of Reference During the Financial Year 2011/12, four meetings of the Committee The committee gives directions to ensure that the Company were held one per quarter. fulfills its statutory, fiduciary and regulatory responsibilities on risk management. The proceedings of the committee meetings were recorded and The main functions of the committee include: circulated to the Board of Directors regularly for information and •• Assessing all risks, including credit, market, liquidity, advice. operational and strategic risks on a regular basis using appropriate risk indicators and MIS reports. The members’ attendance at the committee meetings is given on page 62. •• Ensuring the risks of the Company is within the prudent levels decided by the committee, based on the Company’s risk Committee Evaluation appetite and the regulatory and supervisory requirements. The Committee reviewed risk polices, risk management strategies and key risk indicators and discussed possible remedial action •• Taking appropriate actions reported against officers responsible at the meetings. Exposures of the risk of the company are being for any failure in risk management to improve the overall appropriately managed and the Committee is satisfied with the effectiveness of risk management at SFS. effectiveness of the risk management of the Company.
•• Taking prompt corrective actions to mitigate the effects 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. N. P. Edirisinghe Chairman - Board Integrated Risk Management Committee 05th June 2012 78 Swarnamahal Financial Services PLC Annual Report 2011/2012 Board Human Resources and Remuneration Committee Report
The Board Human Resources and Remuneration Committee During the year under review, the Committee evaluated the comprises of four Non-Executive Directors, three of whom are performance of the Director/ CEO and Senior Management Independent: personnel against the established goals and objectives and found it to be highly satisfactory. Composition Mr. N.P. Edirisinghe Chairman Non-Executive Director Committee Meetings Mr. J. F. G. De Silva Independent Non-Executive Director The Committee meets when necessary and makes Mr. S. A. Weerasinha Independent Non-Executive Director recommendation on bonuses, annual increments and Mr. D. S. Abeyratna Independent Non-Executive Director performance incentives to ensure that all level of employees are sufficiently rewarded on their performance and commitments. The Functions of the Committee The Director/Chief Executive Officer who is responsible for •• Determining and formulating a set of remuneration policies the overall management of the Company attends meetings by and criteria pertaining to the compensation and benefits invitation and participates in the deliberations except when his of the Executive Directors including the Chief Executive own performance and remuneration packages are discussed. Officer while ensuring that no director is involved in setting his/her own remuneration and salaries and the Committee The total remuneration paid to the Directors during the period also determining the salaries and benefits of the corporate under review is set out in the Note No. 7 of page 94. management and senior management.
•• Recommending the objectives and targets to be set for Director/CEO and key managerial personnel and evaluating the performance of the Director/CEO and key managerial personnel against the established goals and objectives in order to suggest suitable recommendations to the Board. N. P. Edirisinghe Chairman - Board Human Resources and Remuneration •• Ensuring that remuneration levels are sufficient to attract, Committee motivate, and retain talent with the appropriate professional, 05th June 2012 managerial and operational expertise necessary to achieve the objectives of the Company.
•• 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. Independent Auditor’s Report 81 Income Statement 82 FinancialreportBalance Sheet 83 Statement of Changes in Equity 84 Cash Flow Statement 85 Significant Accounting Policies 86 Notes to the Financial Statements 93 Six Years at a Glance 114 Share Information 116 Glossary of Financial Terms 118 Our Network 121 Notice of Meeting 122 Form of Proxy 123 80 Swarnamahal Financial Services PLC Annual Report 2011/2012 81 Swarnamahal Financial Services PLC Annual Report 2011/2012 Independent Auditor’s Report
TO THE SHAREHOLDERS OF SWARNAMAHAL An audit includes examining, on a test basis, evidence supporting FINANCIAL SERVICES PLC the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and Report on the Financial Statements significant estimates made by management, as well as evaluating We have audited the accompanying financial statements of the overall financial statement presentation. Swarnamahal Financial Services PLC, which comprise the balance sheet as at 31st March, 2012, the income statement, statement We have obtained all the information and explanations which to the of changes in equity and cash flow statement for the year then best of our knowledge and belief were necessary for the purposes of ended, and a summary of significant accounting policies and other our audit. We therefore believe that our audit provides a reasonable explanatory notes as set out on pages 86 to 113. basis for our opinion.
Management’s Responsibility for the Financial Statements Opinion Management is responsible for the preparation and fair presentation In our opinion, so far as appears from our examination, the Company of these financial statements in accordance with Sri Lanka maintained proper accounting records for the year ended 31st March, Accounting Standards. This responsibility includes: designing, 2012 and the financial statements give a true and fair view of the implementing and maintaining internal control relevant to the Company’s state of affairs as at 31st March, 2012 and its profit and preparation and fair presentation of financial statements that are cash flows for the year then ended in accordance with Sri Lanka free from material misstatement, whether due to fraud or error; Accounting Standards, selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Report on Other Legal and Regulatory Requirements a) These financial statements also comply with the requirements Scope of Audit and Basis of Opinion of Section 151(2) of the Companies Act No. 07 of 2007. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in b) These financial statements present the information required by accordance with Sri Lanka Auditing Standards. Those standards the Finance Business Act No.42 of 2011. require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
CHARTERED ACCOUNTANTS Colombo 05th June, 2012 SSR/af 82 Swarnamahal Financial Services PLC Annual Report 2011/2012 Income Statement
For the year ended 31st March 2012 2011 note Rs. Rs.
Income 3 1,068,578,140 713,159,059 Interest Income 4 1,058,661,625 703,847,788 Interest Expense 5 (528,873,188) (383,425,628) Net Interest Income 529,788,436 320,422,160 Other Operating Income 6 9,916,515 9,311,271 Profit from Operations 539,704,951 329,733,431 Less: Operating Expenses Staff Costs (87,337,607) (63,050,777) Provision for Staff Retirement Benefits (1,024,791) (739,159) Premises, Equipment and Establishment Expenses (32,279,084) (22,041,847) Provision for Loan Losses 755,302 (3,045,022) Administration Expenses (125,884,069) (77,561,778) Other Expenses (46,838,771) (51,378,393) Profit from Operations 7 247,095,930 111,916,455 Value Added Tax on Financial Services (28,153,127) (15,000,000) Profit before Taxation 218,942,803 96,916,455 Provision for Income Taxation 8 (78,196,771) (34,122,268) Profit for the year 140,746,031 62,794,187
Earnings Per Share 9 0.28 0.13
The Accounting Policies and notes on pages 86 through 113 form an integral part of the Financial Statements.
Colombo, 05th June 2012 83 Swarnamahal Financial Services PLC Annual Report 2011/2012 Balance Sheet
As at 31st March 2012 2011 note Rs. Rs.
ASSETS Cash in Hand and at Banks 10 205,787,319 129,901,452 Investment in Government Securities 336,117,284 180,212,295 Investments in Banks/Other Institutions 11 8,661,665 9,322,981 Investment in Securities 12 3,948,898 3,817,670 Pawning Advances 13 3,155,398,616 2,433,638,104 Loans and Advances 14 173,626,503 200,923,788 Lease Rentals Receivables 15 41,304,284 30,509,895 Hire Purchase Receivables 16 249,018,753 278,041,525 Interest Receivables 17 403,027,988 323,980,283 Gold Stock 18 271,601,960 785,920 Real Estate Stock 19 229,416,822 242,657,497 Other Debtors, Deposits and Prepayments 75,710,958 80,702,202 Group Loans & Advances 20 9,282,266 27,773,444 Investments on Properties 21 54,800,000 54,800,000 Property, Plant and Equipment 22 97,313,584 83,601,698 Total Assets 5,315,016,900 4,080,668,754
LIABILITIES Bank Overdraft 23 97,837,043 110,393,728 Customer Deposits 24 4,399,005,830 3,469,979,521 Other Liabilities 6,984,149 8,928,846 Interest Payable 109,484,320 83,989,263 Other Taxes Payable 2,572,718 3,362,289 Income Tax Payable 25 44,712,470 5,571,471 Deferred Tax 26 2,970,185 2,908,114 Retirement Benefit Obligation 27 2,781,271 1,756,480 Unsecured, Unlisted, Subordinated Redeemable Debentures 28 100,000,000 100,000,000 Loans and Borrowings 29 112,863,586 - Lease Creditor 30 1,280,254 - Total Liabilities 4,880,491,827 3,786,889,712
SHAREHOLDERS’ FUNDS Stated Capital 31 250,000,070 250,000,070 Reserves Statutory Reserve 32 45,093,957 16,944,750 Investment Fund 22,882,378 - Retained Earnings 116,548,668 26,834,221 434,525,073 293,779,041 Total Equity and Liabilities 5,315,016,900 4,080,668,754
These Financial Statements are in compliance with the requirements of the Companies Act No. 07 of 2007.
R. M. G. Ratnayake Senior Manager - Finance
The Board of Directors is responsible for the preparation & presentation of these financial statements signed for and on behalf of the Board by
N. P. Edirisinghe S. M. Ganegoda Director Director/Chief Executive Officer
The Accounting Policies and notes on pages 86 through 113 form an integral part of the Financial Statements.
Colombo, 05th June 2012 84 Swarnamahal Financial Services PLC Annual Report 2011/2012 Statement of Changes in Equity
For the year ended 31st March 2012 Stated Statutory Investment Retained Revaluation total Capital Reserve Fund earnings Reserve Rs. Rs. Rs. Rs. Rs.
Balance as at 01.04.2010 250,000,070 4,385,913 - (32,101,129) 8,700,000 230,984,854
Net Profit for the Year - - - 62,794,187 - 62,794,187
Transfer to Statutory Reserve - 12,558,837 - (12,558,837) - -
Transfer from Revaluation Reserve - - - 8,700,000 (8,700,000) -
Balance as at 31.03.2011 250,000,070 16,944,750 - 26,834,221 - 293,779,041
Net Profit for the Year - - - 140,746,031 - 140,746,031
Transfer to Investment Fund - - 22,882,378 (22,882,378) - -
Transfer to Statutory Reserve - 28,149,206 - (28,149,206) - -
Balance as at 31.03.2012 250,000,070 45,093,957 22,882,378 116,548,668 - 434,525,073
The Accounting Policies and notes on pages 86 through 113 form an integral part of the financial statements.
Colombo, 05th June 2012 85 Swarnamahal Financial Services PLC Annual Report 2011/2012 Cash Flow Statement
For the year ended 31st March 2012 2011 Rs. Rs.
Cash Flow from/(used in) Operating Activities Profit Before Taxation 218,942,803 96,916,455
Adjustment for : Provision for Impairment - Real Estate 10,303,789 - Provision for Impairment - Investment in Securities 1,763,958 86,580 Provision for Doubtful Rent Receivables 5,750,000 - Unrecoverable Other Receivable Written-off 3,825,043 - Unrecoverable Interest Receivable on Fixed Deposit Written-off 257,194 - Unrecoverable Interest Receivable on Fixed Deposit Written-off 661,316 - Loan loss Provision (755,302) 3,045,022 Depreciation 24,686,827 15,479,607 Provision for Staff Retirement Benefit 1,024,791 739,159 Operating Profit Before Changes in Operating Assets & Operating Liabilities 266,460,420 116,226,823
Increase / Decrease in Operating Assets Investments in Call Deposits - 118,460,869 Investments in Government Securities (155,904,989) (54,543,161) Funds Advance to Customers (677,272,954) (1,584,527,811) Inventories 2,936,886 57,192,932 Gold Stocks (270,816,040) - Other Debtors, Deposits and Prepayments (4,583,799) 5,094,483 Interest Receivable (79,304,899) (204,911,369)
(Increase) / Decrease in Operating Liabilities Deposit from Customers 929,026,309 1,525,529,483 Creditors & Accruals 22,760,789 (10,877,338) Cash Generated from/(used in) Operating Activities 33,301,722 (32,401,669) Gratuity Paid - (435,000) Net Cash from/(used in) Operating Activities Before Income Taxation 33,301,722 (32,836,669)
Tax Paid (28,478,134) (5,097,690) ESC Paid (10,454,036) (6,665,014) WHT Paid (208,828) (2,028,974) Net Cash from/(used in) Operating Activities (5,839,275) (46,628,347)
Cash Flow from Investing Activities Purchase of Property Plant and Equipment (36,691,708) (31,291,990) Purchase of Investments (1,632,731) (3,815,170) Loan Repayment by Related Parties 18,491,178 13,615,926 Net Cash from Investing Activities (19,833,261) (21,491,234)
Cash Flow from Financing Activities Loans and Borrowings Obtained 390,962,214 - Repayment of Loans and Borrowings (276,391,623) - Lease Rentals Paid (455,503) - Net Cash Used in Financing Activities 114,115,088 -
Net Increase /(Decrease) in Cash and Cash Equivalents 88,442,552 (68,119,581) Cash and Cash Equivalents at the Beginning of the Year (Note A) 19,507,724 87,627,305 Cash and Cash Equivalents at the End of the Year (Note B) 107,950,276 19,507,724
Analysis of Cash and Cash Equivalents Note B Note A Cash in Hand & Cash at Bank 205,787,319 129,901,452 Bank Overdraft (97,837,043) (110,393,728) 107,950,276 19,507,724
The Accounting Policies and notes on pages 86 through 113 form an integral part of the financial statements.
Colombo, 05th June 2012 86 Swarnamahal Financial Services PLC Annual Report 2011/2012 Significant Accounting Policies
1. CORPORATE INFORMATION These Financial Statements are presented in accordance with 1.1 general Sri Lanka Accounting Standard No.33 Revenue Recognition and Swarnamahal Financial Services PLC is a limited liability company Disclosures in Financial Statements of Finance Companies. incorporated and domiciled in Sri Lanka. On 26th May 2011, the Company listed 25,000,007 of its Ordinary Voting Shares on 2.1.2 Going Concern the DiriSavi Board of the Colombo Stock Exchange (CSE) and The Directors have made an assessment of the Company’s ability commenced trading activities on the CSE. The registered office of to continue as a going concern and they do not intend either to the Company is situated at No.676, Galle Road Colombo 03, and liquidate or to cease trading. the principal place of business is situated at No 654, Galle Road, Colombo 03. 2.1.3 Comparative Information The accounting policies have been consistently applied by the 1.2 Principal Activities and Nature of Operations Company consistent with those used in the previous year. During the year the principal activities of the company were acceptance of Deposits, granting Lease facilities, Hire Purchase, 2.1.4 Materiality and Aggregation loans and other credit facilities, Real Estate Developments and Pawn Each material class of similar items is presented separately in the Brokering. The company has been granted a license in accordance financial statements. Items of a dissimilar nature or function are with section 7 of the finance companies Act No. 78 of 1988 to carry presented separately unless they are immaterial. out finance business with effect from 01st August, 2006 and it is being renewed annually. 2.1.5 Changes in Accounting Policies The accounting policies adopted are consistent with those of the 1.3 Parent Enterprise and Ultimate Parent Enterprise previous financial year. The Company does not have an identifiable parent of its own. 2.2 Significant Accounting Judgments, Estimates And 1.4 Date of Authorization for Issue Assumptions The Financial Statements of Swarnamahal Financial Services PLC Judgements for the year ended 31st March 2012 were authorized for issue in In the process of applying the Company’s Accounting Policies, accordance with a resolution of the Board of Directors on 05th June, the management is required to make judgments, apart from those 2012. involving estimation, which may have a significant effect on the amounts recognized in the Financial Statements. 2. BASIS OF PREPARATION These Financial Statements have been prepared on a historical cost Impairment Losses on Loans and Advances basis, except for investment properties and real estate stocks that In addition to the provision made for possible loan losses based on have been measured at fair value. The Financial Statements are the parameters and directives for specific provisions on Loans and presented in Sri Lankan Rupees. The preparation and presentation Advances issued by the Central Bank of Sri Lanka, the Company of these Financial Statements is in compliance with the Companies reviews its Loans and Advances Portfolio at each reporting date or Act. No. 07 of 2007 and Finance Business Act No. 42 of 2011. more frequently, if events or changes in circumstances necessitate to assess whether a further provision for impairment against exposure 2.1 Statement Of Compliance which although not specifically identified as requiring specific The Financial Statements of Swarnamahal Financial Services provisions have a greater risk of default than when originally granted. PLC have been prepared in accordance with Sri Lanka Accounting The judgments by the management are required in the estimation of Standards (SLAS). these amounts and such estimation is based on assumptions about 87 Swarnamahal Financial Services PLC Annual Report 2011/2012
number of factors and actual results may differ, resulting in future 2.3 Summary Of Significant Accounting Policies changes to the allowance. 2.3.1 Property, Plant and Equipment Review of Impairment Losses on Non-Financial Assets Property, Plant and Equipment is stated at cost, excluding the The Company assesses whether there are any indicators of costs of day to day servicing, less accumulated depreciation and impairment for all non-financial assets at each reporting date or accumulated impairment in value. Such cost includes the cost of more frequently if events or changes in circumstances require doing replacing part of the Property, Plant and Equipment when that cost is so. This requires the estimation of the ‘value in use’ of the cash incurred, if the recognition criteria are met. generating units. Estimating value in use requires management to make an estimate of the expected future cash flows from the cash Depreciation is calculated on a straight line basis over the useful life generating unit and also to select a suitable discount rate in order to of the assets are as follows. calculate the present value of the relevant cash flows. This valuation requires the Company to make estimates about expected future cash Buildings Integrals 10 years flows and discount rates and hence, they are subject to uncertainty. (Includes partitions and other permanent fixtures) Computer Hardware & Software 04 years Useful lives of Property, Plant and Equipment Office Equipment 03 years The Company reviews the asset’s residual values, useful lives and Motor Vehicles 04 years methods of depreciation at each reporting date. Judgment by the Furniture & Fittings 03 years management is required in the estimation of these values, rates and Air Conditioners 04 years methods, and hence, they are subject to uncertainty. We determine the depreciation charge separately for each significant Estimates and Assumptions part of an item of property, plant & equipment and begin to The key assumptions concerning the future and other key sources depreciate when it is available for use. of estimation uncertainty at the balance sheet date , that have a significant risk of causing a material adjustments to the carrying Restoration Costs of Property, Plant & Equipment amounts of assets and liabilities within the next financial year are Expenditure incurred on repairs or maintenance of property, plant discussed below. & equipment in order to restore or maintain the future economic benefits expected from originally assessed standard of performance, Value of Unquoted Equity Investments is recognized as an expense in the Income Statement, when The unquoted equity investments have been accounted at cost & incurred. were valued by Directors by considering the recoverability of the investment. Derecognition Derecognition of an item of property, plant & equipment upon Defined Benefit Plans disposal or when no future economic benefits are expected from The defined benefit obligation and the related charge for the year is its use or disposal. Any gain or loss arising on derecognition of determined using actuarial valuation. The actuarial valuations involve the asset (calculated as the difference between the net disposal making assumptions about discount rates, future salary increases proceeds and the carrying amount of the asset) is included in the and mortality rates etc. Due to the long-term nature of such Income Statement in the year the asset is derecognized. obligations, these estimates are subject to significant uncertainty. 88 Swarnamahal Financial Services PLC Annual Report 2011/2012 Significant Accounting Policies Contd.
Gains or losses on Disposal of Property, Plant & Equipment determined, net of depreciation, had no impairment loss been We account for net gains and losses resulting from the disposal of recognized for the asset in prior years. Such reversal is recognized in property, plant & equipment on an accrual basis. the income statement unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. 2.3.2 Impairment of Non Financial Assets The Company assesses at each reporting date whether there is 2.3.3 Real Estate Stock an indication that an asset may be impaired. If any such indication Investments in real estate are carried at cost or net realizable value exists, or when annual impairment testing for an asset is required, whichever is lower. Cost of purchase, costs of conversion and other the Company makes an estimate of the asset’s recoverable costs including selling and distribution expenses that are necessary amount. An asset’s recoverable amount is the higher of an asset’s to bring the asset to the saleable condition are included in the or cash-generating unit’s fair value less costs to sell and its value carrying value of the property. Net realizable value is price at which in use and is determined for an individual asset, unless the asset inventories can be sold in the ordinary course of business, less the does not generate cash inflows that are largely independent of estimated cost of completion and the estimated cost necessary to those from other assets or groups of assets. Where the carrying make the sale. amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. 2.3.4 Valuation of Assets and their Basis of Measurement In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that Rentals Receivable on Leased Assets reflects current market assessments of the time value of money and Assets leased to customers, which is transfers substantially all the the risks specific to the asset. In determining fair value less costs risks and rewards associated with the ownership other than legal to sell, an appropriate valuation model is used. These calculations title, are accounted as finance lease in accordance with the Sri are corroborated by valuation multiples or other available fair value Lanka Accounting Standard No. 19 (Revised 2005) on ‘Leases’, indicators. and are reflected in the balance sheets after eliminating unearned interest income and provision for doubtful debts. Impairment losses of continuing operations are recognised in the income statement in those expense categories consistent with Hire Purchase Agreements the function of the impaired asset, except for property previously Assets hired to customers under hire purchase agreements, which revalued where the revaluation was taken to equity. In this case the transfer all the risks and rewards incidental to ownership as well as impairment is also recognised in equity up to the amount of any the legal title at the end of such contractual period, are classified as previous revaluation. hire purchase receivables. Such assets are accounted for in a similar manner as those of finance leases. For assets, an assessment is made at each reporting date as to whether there is any indication that previously recognized Loans and Advances impairment losses may no longer exist or may have decreased. Loans and advances to customers are stated net of provision for bad If such indication exists, the Company makes an estimate of and doubtful loans and interest not accrued to revenue. recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to Provision for Loan Losses determine the asset’s recoverable amount since the last impairment Provision for possible loan losses is made on the basis of a loss was recognized. If that is the case the carrying amount of continuous review of all advances to customers in accordance the asset is increased to its recoverable amount. That increased with the Finance Companies Direction No. 3 of 2006 (Provision for amount cannot exceed the carrying amount that would have been bad and doubtful debts) issued by the Central Bank of Sri Lanka. Accordingly, specific provisions have been made as follows: 89 Swarnamahal Financial Services PLC Annual Report 2011/2012
Period Outstanding Minimum Provision Made Net of Subsequent to initial recognition, investment properties are stated at Realizable Value of Security fair value, which reflects market conditions at the balance sheet date. Gains or losses arising from changes in the fair values of investment 6-12 months 50% properties are included in the income statement in the year in which 12 months and over 100% they arise.
In addition, wherever it is considered prudent, further provisions are Investment properties are derecognised when either they have made on specifically identified loans and advances. been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from 2.3.5 Investments its disposal. Any gains or losses on the retirement or disposal of Dealing Securities an investment property are recognised in the income statement in Investments in quoted shares are acquired and held with the the year of retirement or disposal. The Company has a policy to fair intention of resale over a short period of time. Such quoted shares value the investments property once in 3 years. are initially measured at cost and subsequently measured at lower of cost or market value as at the Balance Sheet date. Currently, investment properties are held for capital appreciation.
Investment Securities 2.3.7 Cash and Cash Equivalents Investment securities are stated at cost. Cash and cash equivalents are defined as cash in hand, demand deposits and short-term highly liquid investments, readily convertible The carrying amounts are reduced to recognize a decline other to known amounts of cash and subject to insignificant risk of than temporary, determined for each investment individually. These changes in value. reductions for other than temporary declines in carrying amounts are charged to the Income Statement. For the purpose of cash flow statement, cash and cash equivalents consist of cash in hand and deposits in banks net of outstanding Investments in Treasury Bills and Bonds bank overdrafts. Investments with short maturities i.e. three months Investment in Treasury Bills and Treasury Bonds are stated at cost or less from the date of acquisition are also treated as cash plus a portion of discount or premium. equivalents.
Disposal of Investment 2.3.8 Foreign Currency Translation On disposal of an investment, the different between net disposals Company’s functional and presentation currency is Sri Lankan proceed and the carrying amount is recognized as income or Rupees. Transactions in foreign currencies are initially recorded at expense. the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies 2.3.6 Investment Properties are retranslated at the functional currency rate of exchange ruling at Investment properties are measured initially at cost, including the period end date. All differences are taken to profit or loss. Non transaction costs. The carrying amount includes the cost of monetary items that are measured in terms of historical cost in a replacing part of an existing investment property at the time that foreign currency are translated using the exchange rates as at the cost is incurred if the recognition criteria are met; and excludes the dates of the initial transactions. Non monetary items measured at fair costs of day to day servicing of an investment property. value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. 90 Swarnamahal Financial Services PLC Annual Report 2011/2012 Significant Accounting Policies Contd.
2.4 Liabilities And Provisions the Projected Unit credit Method (PUC) as required by Sri Lanka Accounting Standards No.16, Employee Benefit (Revised 2006). 2.4.1 Deposits from Customers The item is stated under Retirement Benefit Liability in the Balance Deposits include term deposits, savings deposits etc. These deposits Sheet. are accounted at the gross value of the outstanding balance. Interest paid is charged to the Income Statement. The gains/losses are recognized over the expected average remaining working lives of the employees participating in the plan. 2.4.2 Deposit Insurance Scheme In terms of Finance Companies (Insurance of deposit liabilities) Recognition of Past Service Cost directions No 2 of 2010, all Registered Finance Companies shall Past Service Cost are recognized as an expense on a straight line insure their deposit liabilities in the Deposit Insurance Scheme basis over the average period until the benefits become vested. operated by the Monetary Board in terms of Sri Lanka Deposit If the benefits have already been vested, immediately following Insurance Scheme Regulations No. 1 of 2010 issued under Sections the instruction of, or changes to the plan, past service costs are 32A to 32E of the Monetary Law Act with effect from 1st October, recognized immediately. 2010. Funding Arrangement The company is required to pay a premium of 0.15% on eligible The Gratuity liability is not externally funded. deposits. Deposits to be insured include demand, time and savings deposit liabilities and exclude the following. b) Defined Contribution Plans – Employees’ Provident Fund & Employees’ Trust Fund - Deposit liabilities to Member banks and finance companies Employees are eligible for Employees’ Provident Fund Contributions - Deposit liabilities to Government of Sri Lanka and Employees’ Trust Fund Contributions in line with respective - Deposit liabilities to Shareholders, directors, key management Statutes and Regulations. The Company contributes 12% and 3% of personnel, other related parties gross emoluments of employees to Employees’ Provident Fund and - Deposits held as collateral against any accommodation granted Employees’ Trust Fund respectively. and deposits falling within the meaning of abandoned property in terms of the Banking Act and dormant accounts in terms of the 2.5 taxation Finance Companies Act. a) Current Taxes Income tax assets and liabilities for the current and prior periods 2.4.3 Provisions are measured at the amount expected to be recovered from or paid When the Company has a present obligation (legal or constructive) to the Commissioner General of Inland Revenue. The tax rates and as a result of a past event, where it is probable that an outflow of tax laws used to compute the amount are those that are enacted or resources embodying economic benefits will be required to settle substantively enacted by the balance sheet date. the obligation and the Company can reliably estimate the amount of the obligation, recognize it as a provision in accordance with the The provision for income tax is based on the elements of income and Sri Lanka Accounting Standard No. 36 on Provisions, Contingent expenditure as reported in the financial statements and computed in Liabilities and Contingent Assets. accordance with the provisions of the Inland Revenue Act.
2.4.4 Retirement Benefit Liability b) Deferred Taxation Deferred income tax is provided, using the liability method, on a Defined Benefit Plan – Gratuity temporary differences at the balance sheet date between the tax The Company measures the present value of the promised bases of assets and liabilities and their carrying amounts for financial retirement benefits for gratuity, which is a defined benefit plan reporting purposes. with the advice of an independent professional actuary using 91 Swarnamahal Financial Services PLC Annual Report 2011/2012
Deferred income tax liabilities are recognised for all taxable Revenue is measured at the fair value of the consideration received temporary differences except where the deferred income tax or receivable net of trade discounts and sales taxes. The following liability arises from the initial recognition of an asset or liability in a specific criteria are used for the purpose of recognition of revenue. transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or a) Interest Income from Leasing activities and Hire Purchase loss. agreements Income from Finance leases is recognized on the basis of the Deferred income tax assets are recognised for all deductible financing method. The excess of aggregate rental receivable over temporary differences, carry-forward of unused tax assets and the cost of the leased assets constitute the total unearned income at unused tax losses, to the extent that it is probable that taxable the commencement of the contract. The earned income is taken into profit will be available against which the deductible temporary revenue over the term of the lease, commencing from the month in differences, and the carry-forward of unused tax assets and unused which the lease is executed, in proportion to the declining receivable tax losses can be utilised except where the deferred income tax balance of the lease. asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not Income arising from the residual interest in hire purchase a business combination and, at the time of the transaction, affects agreements is credited to the profit and loss account as it accrues in neither the accounting profit nor taxable profit or loss; and proportion to the declining receivable balance of the agreement.
The carrying amount of deferred income tax assets is reviewed However, accrual of income both from leases and hire purchase at each balance sheet date and reduced to the extent that it is no agreements ceases when the account is overdue for more than longer probable that sufficient taxable profit will be available to allow six months in compliance with Direction No. 15 of 1991 (Accrued all or part of the deferred income tax asset to be utilised. Interest) and thereafter recognized on a cash basis.
Deferred income tax assets and liabilities are measured at the b) Interest Income from Loans and Advances tax rates that are expected to apply to the year when the asset is Interest income from loans and advances is recognized on an realised or the liability is settled, based on tax rates (and tax laws) accrual basis. However, income from loans and advances ceases that have been enacted or substantively enacted at the balance when the account is overdue for more than six months in compliance sheet date. with Direction No. 15 of 1991 (Accrued Interest) issued by the Central Bank of Sri Lanka and thereafter recognized on a cash basis.
Value Added Tax on Financial Services c) Interest Income from Other Sources The base for the computation of Value Added Tax on Financial Interest income from Government of Sri Lanka Treasury Bills on a Services is the accounting profit before income tax adjusted for the time proportion basis as discounts on purchase are amortized to economic depreciation and emoluments of employees computed on income on a straight line basis over periods of maturity. prescribed rate. Income from all other interest bearing investments is recognized as 2.6 Income Statement revenue on an accrual basis. 2.6.1 Revenue Recognition Revenue is recognized to the extent that it is probable that the d) Dividend Income economic benefits will flow to the Company and the revenue and Dividend income is recognized on a cash received basis. associated costs incurred or to be incurred can be reliably measured. e) Commission Income We recognize commission income on insurance on a cash basis. 92 Swarnamahal Financial Services PLC Annual Report 2011/2012 Significant Accounting Policies Contd.
f) Overdue Interest 2.6.4 Cash Flow Statement Overdue interest income from leasing and other loans have been The cash flow statement has been prepared using the indirect accounted for on a cash received basis. method in accordance with Sri Lanka Accounting Standard 9 - Cash Flow Statements. g) Real Estate Income Revenue is recognized when properties are sold and the buyer 2.6.5 Segment Reporting has taken possession of such properties. However, when there is A segment is a distinguishable component of the Company that insufficient assurance as to the receipt of the total consideration, is engaged in providing an individual product or service (Business income is accounted for on a cash received basis. segment) or in providing services within a particular economic environment (Geographical segment) which is subject to risks h) Gains or losses on Disposal of Property, Plant & Equipment and rewards that are different from those of other segments. Profit/loss from sale of property plant and equipment is recognized in In accordance with the Sri Lanka Accounting Standard 28 – the period in which the sale occurs. Segmental Reporting, segmental information is presented in respect of the company. The business segments comprise of i) Profit or loss on sale of securities leasing, hire purchase, pawning, loans, factoring, real estate Profit or loss arising from the sale of marketable securities is and investments in government securities in excess of statutory accounted for on the date of the transaction in the income statement. requirements. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be j) Profit from Gold Sale allocated on a reasonable basis. Profit/loss from gold sale is recognized in the period on a cash basis. 2.7 effect Of Sri Lanka Accounting Standards Issued k) Other Income But Not Yet Effective Other income is recognized on an accrual basis The Institute of Chartered Accountants of Sri Lanka has issued 2.6.2 Expenses Recognition the new volume of Sri Lanka Accounting Standards which will be All expenditure incurred in the running of our business and in applicable for financial periods beginning on or after 01 January maintaining the property, plant & equipment in a state of efficiency 2012. Accordingly these Standards have not been applied in has been charged to income in arriving at the profit for the year. preparing these Financial Statements as they were not effective for Expenses in the Income Statement recognize on the basis of a direct the year ended 31 March 2012. association between the cost incurred and the earning of specific items of income. These Sri Lanka Accounting Standards comprise Accounting Standards prefixed both SLFRS (Corresponding to IFRS) and Interest and other expenses payable are recognized on an accrual LKAS (Corresponding to IAS). Application of Sri Lanka Accounting basis. Standards prefixed SLFRS and LKAS for the first time shall be deemed to be an adoption of SLFRS. 2.6.3 Borrowing Costs Borrowing costs are recognized as an expense in the period in The Company is currently in the process of evaluating the potential which they are incurred, except to the extent that they are directly effects of these standards on its Financial Statements and the impact attributable to the acquisition, construction or production of a on the adoption of these Standards has not been quantified as at qualifying asset, in which case they are capitalized as part of the Balance Sheet date. cost of that asset. 93 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notes to the Financial Statements
3. INCOME 2011/12 2010/11 Rs. Rs.
Interest Income (Note 4) 1,058,661,625 703,847,788 Other Income (Note 6) 9,916,515 9,311,271 1,068,578,140 713,159,059
4. INTEREST INCOME
Interest on Leases 6,694,116 6,699,184 Interest on Hire Purchase 58,369,879 69,855,739 Interest on Term Loans 37,880,154 52,345,180 Interest on Pawn Broking 917,357,641 542,298,882 Interest on Fixed Deposits - 5,033,717 Income on Factoring - 4,303,149 Overdue Interest 6,522,219 8,328,731 Income on Money Market Investments 2,104,434 674,828 Interest on Treasury Bills 21,697,939 14,068,991 Interest on Commercial Papers 3,755,855 218,921 Interest on Repo Investments 988,032 20,466 Interest on Treasury Bonds 791,747 - Interest Income on Group Loans 2,499,610 - 1,058,661,625 703,847,788
Notional tax credit for withholding tax on Government securities on secondary market transactions The Inland Revenue Act No 10 of 2006 provides that a company which derives interest income from secondary market transactions in Government securities would be entitled to a notional tax credit (being one ninth of the net interest income), provided such interest income forms part of the statutory income of the company for that year of assessment.
Accordingly, the net interest income earned from secondary market transactions in Government securities for the year has been grossed up in the financial statements for the year 2011/2012. The resulting notional tax credit amounts to Rs.2.3 Million for the company.
5. INTEREST EXPENSE 2011/12 2010/11 Rs. Rs.
Interest on Deposits 502,172,309 363,594,476 Interest on Debentures 17,473,701 17,255,029 Interest on other borrowings 6,479,059 2,576,123 Interest on Securitization 2,719,368 - Interest on Leases 28,751 - 528,873,188 383,425,628 94 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notes to the Financial Statements Contd.
6. OTHER INCOME 2011/12 2010/11 Rs. Rs.
Service Income 1,479,819 2,621,030 Sundry Income 4,235,085 4,450,599 Profit on Gold Sales 4,201,611 2,239,642 9,916,515 9,311,271
7. PROFIT BEFORE TAX IS STATED AFTER DEDUCTING ALL EXPENSES INCLUDING THE FOLLOWING
Directors’ Emoluments 8,990,000 7,241,509 Auditors’ Remuneration 396,750 350,000 Depreciation - Property, Plant & Equipment 24,686,827 15,479,607 Gratuity 1,024,791 739,159 Legal Expenses 893,192 433,369 Employees’ Provident Fund contributions 5,349,744 4,057,483 Employees’ Trust Fund contributions 1,334,851 1,018,216 Provision for Bad Debts (755,302) 3,045,022 Provision for impairment of Real Estate 10,303,789 - Provision for Doubtful Rent Receivables 5,750,000 - Unrecoverable Other Receivable written - off 3,825,043 - Unrecoverable interest receivable on fixed Deposit written off 918,513 -
8. Income Tax Expense The major components of income tax expense for the years ended 31st March are as follows:
Income Statement Current Income Tax Current Income Tax charge 78,134,701 31,228,847
Deferred Income Tax Deferred Taxation Charge (Note 26) 62,070 2,893,421 Income tax expense reported in the Income Statement 78,196,771 34,122,268
95 Swarnamahal Financial Services PLC Annual Report 2011/2012
8.1 Reconciliation Of Accounting Profit To Income Tax Expense
31st March 2012 31st March 2011 Other Other Businesses Leases Businesses Leases Rs. Rs. Rs. Rs.
Profit Before Tax 216,753,375 2,189,428 95,624,758 1,291,697 Add: Aggregate Disallowed Items 83,666,185 15,153,245 45,319,198 13,491,503 300,419,560 17,342,673 140,943,956 14,783,200 Less: Aggregate Allowable Expense (29,245,653) (15,953,899) (21,253,507) (9,348,589) Assessable Income 271,173,907 1,388,774 119,690,449 5,434,611 Tax Loss Utilized - - (37,218,384) - Taxable Profit/(Loss) 271,173,907 1,388,774 82,472,065 5,434,611
Statutory Tax Rate 28% 28% 35% 35%
Liability to Income Tax 28% 75,928,694 388,857 28,865,223 1,902,114 Deemed Dividend Tax 1,817,150 SRL - - 432,978 28,532 Taxation for the Year 77,745,844 388,857 29,298,201 1,930,646
2011/12 2010/11
8.2 Tax Loss Brought Forward - 37,218,384 Tax Loss for the Year - - Tax Loss utilised (Attributable to 35% of the Statutory Income) - (37,218,384) Tax Loss Carried Forward - - 96 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notes to the Financial Statements Contd.
9. eARNINGS PER SHARE 2011/12 2010/11 Rs. Rs.
The calculation of Basic Earnings per share is based on profit attributable to ordinary shareholders for the year divided by the weighted average number of ordinary shares outstanding during the year.
Profit Attributable to Ordinary Shareholders - Voting 140,746,031 62,794,187 Weighted Average Number of Ordinary Shares - Voting 500,000,140 500,000,140 Basic Earnings per Ordinary Shares - Voting 0.28 0.13
As per the special Resolution passed at the Extraordinary General Meeting (EGM) held on 27th March 2012, it was resolved that each of the issued and subscribed 25,000,007 voting ordinary shares be sub - divided in to Twenty Ordinary Shares fully paid up. Therefore, the number of ordinary shares outstanding is increased without an increase in resources.
10. CASH AND CASH EQUIVALENTS
Cash in Hand 66,657,831 43,890,432 Cash at Bank 138,945,874 85,933,719 Stamps on Hand 183,614 77,301 205,787,319 129,901,452
11. INVESTMENT IN BANKS / OTHER INSTITUTIONS
Fixed Deposits 9,322,981 9,322,981 Less : Unrecoverable Interest Receivable Write-off (661,316) - 8,661,665 9,322,981 97 Swarnamahal Financial Services PLC Annual Report 2011/2012
12. INVESTMENT SECURITIES
2011/12 2010/11 No. of Cost Market Value no. of shares Cost Market Value shares Rs. Rs. Rs. Rs.
Unquoted Companies Credit Information Bureau of Sri Lanka Ltd 25 2,500 2,500 25 2,500 2,500
Quoted Companies (12.1) 3,946,398 3,946,398 3,815,170 3,815,170 3,948,898 3,948,898 - 3,817,670 3,817,670
12.1 Quoted Companies
Commercial Bank of Ceylon PLC 6,430 628,636 557,240 3,000 588,300 597,000 John Keels Holdings PLC 1,333 285,600 274,598 1,000 297,100 285,600 Seylan Bank PLC 1,000 75,200 66,900 1,000 100,500 75,200 LB Finance PLC 2,000 175,100 269,800 2,000 278,000 175,100 Pan Asia Bank PLC 2,000 102,600 47,000 2,000 104,800 102,60 Sampath Bank PLC 1,000 288,300 179,800 1,000 292,000 288,300 Distilleries Lanka PLC 1,000 180,000 145,000 1,000 172,000 180,000 Environmental Resources PLC 500 38,650 8,400 500 41,650 38,650 Hatton National Bank PLC 2,000 426,600 189,000 2,000 438,000 426,600 Aitken Spence PLC 1,000 162,300 112,700 1,000 187,000 162,300 Cargill’s PLC 1,000 228,300 174,000 1,000 184,900 228,300 Ceylon Theaters PLC 1,000 200,000 150,100 1,000 189,000 200,000 SMB Leasing PLC - - - 500,000 1,000,000 1,000,000 Laughs Lanka PLC 1,600 55,520 24,960 1,600 28,500 55,520 Vallible One PLC 51700 1,590,750 982,300 - - - Coco Lanka PLC 2000 143,000 104,600 - - - Sierra Cables PLC 200000 1,129,800 660,000 - - - 5,710,356 3,946,398 3,901,750 3,815,170 Less: Fall in Value of Investments (1,763,958) (86,580) Total 3,946,398 3,946,398 3,815,170 3,815,170 98 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notes to the Financial Statements Contd.
13. PAWNING ADVANCES 2011/12 2010/11 Rs. Rs.
Pawning Capital 3,155,398,616 2,433,638,104 3,155,398,616 2,433,638,104
14. LOANS AND ADVANCEs
Term Loans/Short Term Loans (Note 14.1) 173,626,503 201,146,821 Advances for Factoring - (223,033) 173,626,503 200,923,788
14.1 term Loans/Short Term Loans
Medium Term Loans 49,275,788 62,408,506 Wedaduru Loans 24,190,453 42,637,473 Revolving Loans 18,397,293 24,642,792 Wisdom Loans - 3,000,000 Staff Loans 2,585,549 2,564,359 On-time Loans 87,427,539 73,189,033 181,876,622 208,442,163
Less: Interest in suspense Medium Term Loan (1,521,267) (1,264,639) Interest in Suspense Wedaduru (969,909) (158,717) Interest in Suspense Staff Loans (121,016) (78,410) Interest in Suspense On-time Loans (219,380) (379,200) Interest in Suspense PPS Loans (2,260) (2,260) Provision for Bad Debts (5,416,288) (5,412,116) 173,626,503 201,146,821
Receivable within one year 106,754,449 104,061,788 Receivable after one year 66,872,054 97,085,033 173,626,503 201,146,821 99 Swarnamahal Financial Services PLC Annual Report 2011/2012
15. LEASE RENTAL RECEIVABLE 2011/12 2010/11 Rs. Rs.
Gross Rentals Receivables 65,924,879 47,598,196 Less: Unearned Interest Income (20,789,551) (12,671,097) Pre-paid Rentals (1,726,758) (2,341,435) Earned income Non Performing (916,468) (679,209) VAT Suspense of Lease (170,721) (141,724) Early Settlement of Lease 430,156 8,926 Provision for Bad Debts (1,447,252) (1,263,762) 41,304,284 30,509,895
16. hIRE PURCHASE RECEIVABLES
Gross Rentals Receivables 331,078,738 380,534,318 Less : Unearned Interest Income (76,823,592) (94,330,707) Pre-paid Rentals (4,194,704) (6,213,248) Earned Income Non Performing 525,691 561,506 Provision for Bad Debts (1,567,380) (2,510,344) 249,018,753 278,041,525
Within 1 Year 1-5 Years Over 5 Years Total 2012 2011 2012 2011 2012 2011 2012 2011 Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Gross Investment Lease Rentals 37,128,892 19,042,849 28,795,987 28,564,273 - - 65,924,879 47,607,122 Hire Purchase Receivables 177,160,233 186,407,469 153,918,505 194,126,849 - - 331,078,738 380,534,318 214,289,125 205,450,318 182,714,492 222,691,122 - - 397,003,617 428,141,440 Less : Unearned Income (56,122,820) (34,744,774) (47,543,128) (81,071,140) - - (103,665,948) (115,815,914) Less : Provision for Bad & Doubtful Debts (140,989) (3,774,106) (2,873,644) - - - (3,014,633) (3,774,106) Net Investment 158,025,316 166,931,438 132,297,720 141,619,982 - - 290,323,036 308,551,420
17. Interest Receivables 2011/12 2010/11 Rs. Rs.
Interest Receivables 403,285,182 323,980,283 Less Unrecoverable interest receivable write off (257,194) - 403,027,988 323,980,283 100 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notes to the Financial Statements Contd.
18. gOLD Stock 2011/12 2010/11 Rs. Rs.
Gold Stock 56,035,018 50,920 Old Gold Purchased Stock - 715,000 Gold Reserve Stock 215,566,942 20,000 271,601,960 785,920
19. Real Estate Stock Investments in Lands Thalawathugoda Boralesgamuwa nawala Kandy Total
Balance at the beginning of the year 65,448,130 10,100,000 130,795,140 36,314,227 242,657,497 Additions/transfers during the year - - 7,000 1,961,829 1,968,829 Disposals during the year - (4,905,715) - - (4,905,715) Impairment during the year (1,231,308) (1,394,285) (6,860,140) (818,056) (10,303,789) Balance at the end of the year 64,216,822 3,800,000 123,942,000 37,458,000 229,416,822
The fair value of real estate stocks as at 31.03.2012 was decided by the Directors of the Company .
20. gROup Loans & Advances 2011/12 2010/11 Rs. Rs.
Swarnamahal Jewellers (Pvt) Ltd. 9,282,266 27,773,444 9,282,266 27,773,444
Gold stock balance amounting to Rs.27,773,444/- carried forward from previous year, and physically retained by Swarnamahal Jewellers (Pvt) Ltd, has been converted to a term loan with effect from 01st of March, 2011 with the consent of the directors. The Company has entered into a repayment agreement on 01st of March, 2011 with Swarnamahal Jewellers (Pvt) Ltd (Related Party) to recover the balance due along with the interest repayment, terms and conditions are as follows.
Loan Amount : Rs.27,773,444/- Date Commencement of Repayment : 11th April, 2011 Loan Settlement Period : 12 months - (25th April, 2011 to 25th March, 2012) Monthly Installment : Rs.2,314,454/- Interest Rate : 18% No .of installments due as at 31.03.2012 : 4 101 Swarnamahal Financial Services PLC Annual Report 2011/2012
21. INVESTMENT ON PROPERTIES Additions transfers Balance as at during the during the Balance as at 01.04.2011 Year Year 31.03.2012 Rs. Rs. Rs. Rs.
Land 46,020,000 - - 46,020,000 Building 8,780,000 - - 8,780,000 54,800,000 - - 54,800,000
21.1 List of Investment Property Cost Directors Valuation Description Location Rs. Rs.
Land (46.2 P) No. 10, De Alwis Avenue, Mount Lavinia. 34,515,000 46,020,000 Building (6,505 Sq. ft) Do- 12,035,000 8,780,000 46,550,000 54,800,000
The fair value of investment property as at 31.03.2012 was decided by the Directors of the Company .
22. PROPERTY, PLANT & EQUIPMENT 22.1 gross Carrying Amounts Balance Balance as at as at At Cost 01.04.2011 Additions transfers Disposals 31.03.2012 Rs. Rs. Rs. Rs. Rs.
Freehold Assets Building Partitions 54,309,678 7,963,906 - - 62,273,584 Office Equipment 32,130,618 3,703,518 - - 35,834,136 Furniture & Fittings 14,325,451 2,975,151 . - 17,300,602 Air Conditioner 4,461,718 697,526 - - 5,159,244 Motor Vehicle 1,164,325 18,160,062 - - 19,324,387 Computers & Software 25,139,537 3,191,545 - - 28,331,082
Leasehold Assets Computer Hardware - 1,707,005 - - 1,707,005 131,531,327 38,398,713 - - 169,930,040 102 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notes to the Financial Statements Contd.
22.2 Depreciation
Balance Charge Balance as at for the as at 01.04.2011 Period transfers Disposals 31.03.2012 At cost Rs. Rs. Rs. Rs. Rs.
Free Hold Assets Building Partitions 11,705,661 5,753,907 - - 17,459,568 Office Equipment 16,347,985 7,943,488 - - 24,291,473 Furniture & Fittings 7,495,897 3,726,587 - - 11,222,484 Air Conditioner 1,708,230 1,016,062 - - 2,724,292 Motor Vehicle 531,128 2,321,187 - - 2,852,315 Computers & Software 10,140,728 3,850,768 - - 13,991,496
Leasehold Assets Computer Hardware - 74,828 - - 74,828 47,929,629 24,686,827 - - 72,616,456
22.3 net Book Values 2011/12 2010/11 Rs. Rs.
Free Hold Assets Building Partitions 44,814,016 42,604,017 Office Equipment 11,542,663 15,782,633 Furniture & Fittings 6,078,118 6,829,554 Air Conditioner 2,434,952 2,753,488 Motor Vehicle 16,472,072 633,197 Computers & Software 14,339,586 14,998,809
Leasehold Assets Computer Hardware 1,632,177 - Total Carrying Amount of Property, Plant & Equipment 97,313,584 83,601,698 103 Swarnamahal Financial Services PLC Annual Report 2011/2012
23. BANK OVERDRAFT 2011/12 2010/11 Rs. Rs.
Bank Overdraft 97,837,043 110,393,728 97,837,043 110,393,728
24. CUSTOMER DEPOSITS
Fixed Deposits (Note 24.1) 4,349,146,510 3,419,388,871 Other Deposits (Note 24.2) 49,859,320 50,590,650 4,399,005,830 3,469,979,521
24.1 Fixed Deposits
Fixed Deposts - General 1,354,356,311 1,491,938,745 SFS - Abhimana 2,993,919,170 1,924,109,844 Staff Fixed Deposits 871,030 3,340,282 4,349,146,510 3,419,388,871
24.2 Other Deposits
Savings - General 29,292,485 30,841,850 SFS Kumara Kumari 15,787,260 14,586,542 Staff Savings 560,306 329,864 Misellanceous Savings 899,392 1,539,766 Dhanajaya Savings 386,623 383,104 Capital Suspence Savings 131,999 217,150 Savings Intermediate Account - (68) SFS Saver 2,721,405 2,620,273 Dhana Pragathi 79,851 69,669 Savings Suspence Punchipanchi - 2,500 49,859,320 50,590,650 104 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notes to the Financial Statements Contd.
25. Income Tax Payable/(Recoverable) for the year 2011/12 2010/11 Rs. Rs.
Balance as at the beginning of the year 5,571,471 (11,865,698) Charge for the year 78,134,701 31,228,847 SRL Paid during the year (439,222) (97,690) Income tax paid during the year (23,726,694) (5,000,000) WHT deducted at source - interest (2,556,600) (2,028,974) ESC Payments (10,454,036) (6,665,014) Deemed Dividend Tax for 2010/2011 (1,817,150) - Balance as at the end of the year 44,712,470 5,571,471
26. Deferred Taxation The Deferred tax assets/liabilities on each temporary differences which were recognized in the financial statements are disclosed below.
Temporary Difference on Property, Plant & Equipment 17,295,148 12,379,245 Temporary Difference on Lease Receivables (198,957) 3,540,983 Temporary Difference on Retirement Benefit Obligation (2,781,271) (1,756,480) Temporary Difference on Bad Debts Provision (3,707,116) (3,777,625) Total Temporary Difference 10,607,804 10,386,123 Tax effect 2,970,185 2,908,114
26.1 Deferred tax assets, liabilities and income tax relate to the following:
Deferred Tax Liability
Capital Allowances for Tax Purposes 4,786,934 4,457,664 4,786,934 4,457,664
Deferred Tax Assets Defined Benefit Plans (778,756) (491,814) Bad Debts Provision (1,037,992) (1,057,735) Deferred Tax Income / (Expense) (1,816,748) (1,549,549) Net Deferred Tax Liability 2,970,185 2,908,114 105 Swarnamahal Financial Services PLC Annual Report 2011/2012
27. RETIREMENT BENEFIT OBLIGATIONS 2011/12 2010/11 Rs. Rs.
Retirement Benefit Obligations - Gratuity Balance at the beginning of the year 1,756,480 1,452,321 Amount Charged/(Reversed) for the year (Note 27.1) 1,024,791 739,159 Payments made during the year - (435,000) Balance at the end of the year 2,781,271 1,756,480
An actuarial valuation of the gratuity was carried out as at 31st March 2012 by Piyal S. Goonetilleke and Associates, a firm of professional actuaries. The valuation method used by the actuaries to value the Fund is the “Projected Unit Credit Method”, recommended by SLAS No.16.
27.1 the Principal assumptions used in determining the cost of employee benefits were;
Expenses on Defined Benefit Plan Current Service cost for the year 664,276 493,594 Interest cost for the year 329,243 216,219 Recognition of Transition Liability (Note 27.2) 31,272 29,346 1,024,791 739,159
27.2 Recognition of Transitional Assets/Liability
Transitional liability Recognized 88,038 117,384 Amortization for the year 31,272 (29,346) Unamortized Transitional Liability as at the end of the year 56,766 88,038
27.3 the Principal assumptions used in determining the cost of employee benefits were;
Discount Rate 12% 12% Salary Scale 10% 10% Staff Turnover 0.01% to 8% 0.01% to 8% Retirement Age - Normal Retirement Age, or Age on Valuation date, if Greater. 106 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notes to the Financial Statements Contd.
28. unsecured, Unlisted, Subordinated Redeemable Debentures 2011/12 2010/11 Rs. Rs.
Number of Debentures 1,000,000 1,000,000 Value of Debentures 100,000,000 100,000,000
The Rs.100,000,000/- Unsecured Redeemable Subordinated Unlisted Debentures were issued at following rates and will mature on 31st March 2015 .
Catergory I nterest payable Amount (Rs. ) Interest rate
Type “A” 147,335/- 11,565,000/- 15% Type “B” 6,458/- 500,000/- 15.50% Type “C” 1,186,203/- 72,275,000/- 16% Type “D” 257,017/- 15,660,000 16.50%
29. LOANS AND BORROWINGS
Balance new Payments Balance Balance as at Loans Made during as at as at 01.04.2011 Obtained the Year 31.03.2012 31.03.2011 Interest Rate
Commercial Papers - 55,000,000 (55,000,000) - - 12.25% -14% Securitization - 167,000,000 (67,105,360) 99,894,640 - 11.50% Re - purchase Agreement - 167,255,209 (154,286,263) 12,968,946 - 7% -9.9% - 389,255,209 (276,391,623) 112,863,586 - -
29.1 2011/2012 2010/2011 Amount Amount Balance Amount Amount Balance Payable Within Payable After as at Payable Within Payable After as at One Year One Year 31.03.2012 OneYear One Year 31.03.2011 Rs. Rs. Rs. Rs. Rs. Rs.
Commercial Paper ------Securitization 79,492,298 20,402,342 99,894,640 - - - Re - purchase Agreement 12,968,946 - 12,968,946 - - - 33,371,288 79,492,298 112,863,586 - - - 107 Swarnamahal Financial Services PLC Annual Report 2011/2012
30. LEASE CREDITOR 2011/2012 2010/2011 Rs. Rs.
Commercial Bank of Ceylon PLC Balance as at beginning of the year - - Add : New Lease obtained 1,822,012 - Less: Payments (455,503) - Balance as at end of the year 1,366,509 -
Interest In Suspense Balance as at beginning of the year - - Add: Interest of New Lease 115,006 - Less: Transferred to Income A/C (28,751) - Balance as at end of the year (86,255) - 1,280,254 - Payable Within one year 1,280,254 - Payable After one year - -
31. STATED CAPITAL 2011/12 2010/11 number Rs. number Rs.
Fully paid ordinary shares 500,000,140 250,000,070 25,000,007 250,000,070
As per the Special Resolution passed at the Extraordinary General Meeting (EGM) held on 27th 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 is increased without an increase in resources. 108 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notes to the Financial Statements Contd.
32. STATUTORY RESERVES 2011/12 2010/11 Rs. Rs.
Balance at the beginning of the year 16,944,750 4,385,913 Transfer during the year 28,149,206 12,558,837 Balance at the End of the Year 45,093,957 16,944,750
Reserve Fund is a capital reserve which contains profits transferred as required by Section 3(b)(ii) of Central Bank Direction No. 1 of 2003.
33. eVENTS OCCURRING AFTER THE BALANCE SHEET DATE
There have been no other material events that occurred between the balance sheet date and the date on which the financial statements are authorized for issue which require adjustments to or disclosure in the financial statements.
34. Related Party Disclosures 34.1 Key Management Personnel Information Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the company as well as its related parties, directly or indirectly, including any director (whether executive or otherwise) of the company.
34.2 Compensation to Key Managerial Personnel 2011/12 2010/11 Rs. Rs.
Short Term Employment Benefits Paid 8,990,000 8,134,309 8,990,000 8,134,309
There were no post employment benefits or long term benefits provided to key management personnel.
34.3 Parent and Ultimate Parent Party The Company does not have an identifiable parent of its own. 109 Swarnamahal Financial Services PLC Annual Report 2011/2012
34.4 Dr. (Mrs.) Soma Edirisinghe, Mr. Jeewaka Edirisinghe, Ms. Deepa Edirisinghe, Mr. Nalaka Edirisinghe, Mr. Asanka Edirishighe, Mr. D. Sunil Aberathne, Mr. N.G Mahendra Silva; the Directors of the company are also Key Management Personnel of the following companies and have had transactions as disclosed below.
Dr. (Mrs.) Soma Edirisinghe has resigned from her directorship and Chairpersonship positions with effect from 31st January 2012, and Mr. Jeewaka Edirisinghe was appointed as the Chairman. S.Edirisinghe (Mrs.) Dr. Mr.J.H.Edirisinghe Mrs.A.D.Edirisinghe Mr.N.P.Edirisinghe Mr.A.S.Edirisinghe D.S.Abeyratna Mr. Mahendra Silva Mr N.G.
Edirisinghe Trust Investment Ltd X X X X X X X Swarnamahal Jewelers (Pvt) Ltd X X X X X PLMTT Muthukaruppan Chettiar (Pvt) Ltd X X X X X Swarnamahal Property Developers (Pvt) Ltd X X X X X EAP Network (Pvt) Ltd X X X X X Intermedia Productions (Pvt) Ltd X X X X X Colombo Communications (Pvt) Ltd X X X X X Lavinia Breeze Sea Food Restaurant (Pvt) Ltd X X X X X EAP Security Services (Pvt) Ltd X X X X X EAP Films & Theaters (Pvt) Ltd X X X X X Hotel Sapphire (Pvt) Ltd X X X X X 110 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notes to the Financial Statements Contd.
34.5 Transactions with entities that are controlled, jointly controlled or significantly influenced by Key Managerial Personnel or their close member of family, or shareholders who have either control, significant influences or joint control over entity.
Transactions with Related Parties 2011/12 2010/11 Name of the Company Description of Transaction Rs. Rs.
Swarnamahal Jewellers (Pvt) Ltd Loan capital recovered 18,491,178 Interest Received 2,187,159
Lavinia Breeze Sea Food Restaurant (Pvt) Ltd Rent Income Received 500,000 Provision for doubtful rent receivable 5,750,000
EAP Films & Theaters (Pvt) Ltd Borrowings - Commercial Papers 55,000,000 Interest paid for Commercial papers 3,972,571
EAP Network (Pvt) Ltd Lease Rentals Received - 1,145,458 Interest Received - 751,123 Advertising Expenses 15,000,000 -
EAP Security Services (Pvt) Ltd Security Expenses 6,818,665 10,497,328
Edirisinghe Trust Investment Ltd Vehicle Hire Rentals Paid 1,200,000 60,000 Unrecoverable Other Receivable Write-off 5,342,134
35. COMMITMENTS & CONTINGENCIES There were no commitment and contingencies existing as at the Balance Sheet date. 111 Swarnamahal Financial Services PLC Annual Report 2011/2012
36. SEGMENTAL INFORMATION Treasury Pawning Leasing Hire Loans Factoring Real Bills Other Total Purchase Estate Bonds Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
For the Year ended 31st March, 2011
Income Interest Income 542,298,882 6,699,184 69,855,739 52,345,180 4,303,149 - 14,068,991 14,276,663 703,847,788 Other Income 2,239,642 293,595 1,258,500 886,177 710,444 - - 3,922,913 9,311,271 Total Income 544,538,524 6,992,779 71,114,239 53,231,357 5,013,593 - 14,068,991 18,199,576 713,159,059 Percentage 77% 1% 10% 7% 1% - 2% 2% 100%
Less : Interest 293,435,973 3,624,904 37,798,689 28,323,789 2,328,418 - 7,612,680 7,725,051 380,849,505 Other Expenses 168,066,576 2,076,178 21,649,344 16,222,558 1,333,611 17,260,088 4,360,192 4,424,552 235,393,099 Total Expenses 461,502,549 5,701,082 59,448,033 44,546,347 3,662,029 17,260,088 11,972,872 12,149,603 616,242,604 Profit Before Taxation 83,035,975 1,291,697 11,666,206 8,685,010 1,351,564 (17,260,088) 2,096,119 6,049,973 96,916,455 Less : Income Tax (26,290,439) (324,774) (3,386,579) (2,537,674) (208,615) - (682,059) (692,127) (34,122,268) Profit After Taxation 56,745,535 966,923 8,279,627 6,147,336 1,142,949 (17,260,088) 1,414,059 5,357,846 62,794,187
Segment Assets 2,747,821,787 30,509,895 278,041,525 235,177,072 - 255,523,134 183,699,439 349,895,902 4,080,668,754 Percentage 67% 1% 7% 6% - 6% 5% 9% 100% Segment Liabilities 2,551,245,233 28,327,247 258,150,708 218,352,735 - 237,243,260 170,557,762 323,012,767 3,786,889,712
For the Year ended 31st March, 2012
Income Interest Income 917,357,641 6,694,116 58,369,879 40,379,764 - - 23,477,718 12,382,507 1,058,661,625 Other Income 4,796,725 606,139 796,905 530,889 - - - 3,185,857 9,916,515 Total Income 922,154,366 7,300,255 59,166,784 40,910,653 - - 23,477,718 15,568,364 1,068,578,140 Percentage 87% 1% 6% 4% - - 2% 1% 100%
Less : Interest 458,282,277 3,344,164 29,159,708 20,172,427 - - 11,728,710 6,185,901 528,873,188 Other Expenses 274,870,887 2,005,780 17,489,559 12,099,122 - 3,551,883 7,034,706 3,710,211 320,762,148 Total Expenses 733,153,165 5,349,944 46,649,267 32,271,549 - 3,551,883 18,763,416 9,896,112 849,635,336 Profit Before Taxation 189,001,201 1,950,311 12,517,517 8,639,104 - (3,551,883) 4,714,302 5,672,252 218,942,804 Less : Income Tax (67,759,522) (494,453) (4,311,421) (2,982,603) - - (1,734,153) (914,619) (78,196,771) Profit After Taxation 121,241,679 1,455,858 8,206,096 5,656,501 - (3,551,883) 2,980,148 4,757,633 140,746,032
Segment Assets 3,813,228,241 41,304,284 249,018,752 180,249,271 - 229,416,822 345,983,038 455,816,492 5,315,016,900 Percentage 72% 1% 5% 3% - 4% 7% 9% 100% Segment Liabilities 3,501,480,731 37,927,484 228,660,418 165,513,132 - 210,661,028 317,697,465 418,551,569 4,880,491,827 112 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notes to the Financial Statements Contd.
37. CONCENTRATION OF ASSETS, LIABILITIES AND OFF BALANCE SHEET EVENTS
37.1 The following disclosures of Assets and Liabilities pertain to the Financial Statements of Swarnamahal Financial Services PLC as required under Sri Lanka Accounting Standards SLAS 33 Revenue Recognition and Disclosures in the Financial Statements of Finance Companies.
Pawning Leasing & HP Loans Real Estate Others Total Rs. Rs. Rs. Rs. Rs. Rs.
Segement Assets 3,813,228,241 290,323,036 180,249,271 229,416,822 801,799,530 5,315,016,900 Segement Liabilities 3,501,480,731 266,587,902 165,513,132 210,661,028 736,249,033 4,880,491,827
37.2 OFF BALANCE SHEET EVENTS There were no off balance sheet events existing as at the balance sheet date. 113 Swarnamahal Financial Services PLC Annual Report 2011/2012
37.3 MATURITY ANALYSIS OF ASSETS AND LIABILITIES
Assets/Liabilities Maturity period Less than 1-3 3-12 1-5 Over 5 total 1 month Months Months Years Years Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Total Assets 656,262 566,419 3,411,608 527,538 153,190 5,315,017 Cash 66,257 - - - - 66,257 Due from Banks 139,531 - - - - 139,531 Investments- Treasury Bills 313,309 - - 22,808 - 336,117 - Fixed Deposits - - 8,662 - - 8,662 - Commercial Papers ------CRIB - - - - 2 2 - Public Shares 3,946 - - - - 3,946 Loans & Advances - - Pawning 88,837 231,565 2,834,997 - - 3,155,399 - Leasing 1,909 3,883 17,469 18,043 - 41,304 - HP 11,147 22,202 99,909 115,760 - 249,018 - Term Loans 20,718 18,063 77,255 65,798 1,074 182,908 Interest Receivable 10,608 19,104 373,316 - - 403,028 Real Estate Stock - - - 229,417 - 229,417 Gold Stock - 271,602 - - - 271,602 Property, Plant & Equipment - - - - 97,314 97,314 Investment Property - - - - 54,800 54,800 Other Assets - - - 75,712 - 75,712
Total Liabilities 532,562 1,081,408 2,198,620 1,041,141 461,286 5,315,017 Due to Banks - - 97,837 - - 97,837 Deposits - Fixed 462,910 1,007,976 2,016,355 861,906 - 4,349,147 Deposits - Savings 34,072 - - - 15,787 49,859 Debentures - - - 100,000 - 100,000 Accrued Interest 14,869 17,327 48,309 28,979 - 109,484 Other Liabilities 20,711 56,105 36,119 50,256 10,974 174,165 Share Holders’ Funds - - - - 434,525 434,525
Maturity Gap 123,700 (514,989) 1,212,988 (513,603) (308,096) -
Cumulative Gap 123,700 (391,289) 821,699 308,096 - 114 Swarnamahal Financial Services PLC Annual Report 2011/2012 Six Years at a Glance
Rs.Mn. Year ended 31st March (Audited) 2007 2008 2009 2010 2011 2012
Profit Performance Gross Income 155 190 309 425 713 1,069 Interest Income 142 164 256 417 704 1,059 Interest Expenses 102 151 228 274 381 529 Interest on Customers Deposits 102 151 228 274 364 502 Interest on Other Borrowings - - - - 17 27 Net Interest Income 40 13 28 143 323 530 Other Income 13 26 53 8 9 10 Operating Expenses * 48 78 93 121 217 293 Loan Losses Provisioning - - - 4 3 - Profit Before tax (PBT) 5 (39) (12) 26 112 247 Income Tax & Other Tax Expenses ** 2 - - 9 49 106 Profit After Tax (PAT) 3 (39) (12) 17 63 141
Assets Cash and Cash Equivalents 5 88 55 122 130 206 Investments In Government Securities 104 124 148 126 180 336 Other Investments 114 153 156 130 13 13 Pawning Gold Jewellery - 6 84 864 2,434 3,155 Hire Purchase Receivable - 53 87 211 278 249 Lease Rentals Receivable 4 20 21 23 31 41 Other Loans & Advances 545 569 505 304 229 183 Value of Non Performing Advances - - - 9 11 13 Other Trading Stock 49 172 263 272 243 501 Other Receivables 40 104 256 245 403 479 Fixed Assets 72 82 89 122 138 152 TOTAL ASSETS 933 1,371 1,664 2,419 4,079 5,315
Liabilities Fixed Deposits 682 1,120 1,285 1,896 3,419 4,349 Savings 11 18 65 48 51 50 Borrowings (Refinance) - - - 100 100 214 Other Liabilities 32 64 157 144 215 267 TOTAL LIABILITIES 725 1,202 1,507 2,188 3,785 4,880
Shareholders’ Funds Stated Capital 200 200 200 250 250 250 Reserves 8 (31) (43) (19) 44 185 TOTAL SHAREHOLDERS’ FUND 208 169 157 231 294 435 TOTAL EQUITY & LIABILITIES 933 1371 1664 2419 4,079 5,315
Other Information Number of Staff as at 31st March 42 69 83 131 198 207 Number of Branches & Pawning Centers 4 4 9 11 15 17 115 Swarnamahal Financial Services PLC Annual Report 2011/2012
Year ended 31st March (Audited) 2007 2008 2009 2010 2011 2012
Ratios Growth of Income -9.4% 22.6% 62.6% 37.5% 67.8% 49.9% Cost to Income Ratio 90.6% 200.0% 114.8% 80.1% 65.4% 54.3% Growth of Deposits -27.4% 64.2% 18.6% 44.0% 78.5% 26.8% Growth of Advances -45.6% 18.0% 7.6% 101.1% 112.0% 22.1% ROA (Before Tax) 0.5% -3.4% -0.8% 1.3% 3.5% 5.3% ROE (After Tax) 1.6% -20.7% -7.4% 8.8% 24.0% 38.7% Advances to Deposits & Borrowings 80.5% 57.9% 54.2% 70.2% 84.5% 79.5% Total Assets to Shareholders Funds (times) 4.5 8.1 10.6 10.5 13.9 12.2 EPS (after Tax) (Rs.){considered Subdivision} 0.01 -0.10 -0.03 0.03 0.13 0.28 Net Asset Value P.S. (Rs.) {considered Subdivision} 0.52 0.42 0.39 0.46 0.59 0.87 Interest Cover (times) 1.4 1.1 1.1 1.5 1.8 2.0 Net Interest Margin 4.8% 1.8% 3.5% 12.1% 13.8% 14.9% Net Interest Spread *** 3.6% 2.9% 8.3% 15.2% 15.6% 16.7% Liquid Assets Ratio 15.7% 18.6% 13.6% 11.9% 8.5% 11.4% Government Security / TB Ratio 11.9% 12.6% 12.4% 8.6% 9.9% 10.9% NPL Ratio 0.0% 0.0% 0.0% 0.6% 0.4% 0.36% Core Capital Ratio 28.8% 16.8% 12.9% 16.0% 15.7% 21.1% Total Risk Weighted Capital Ratio 28.8% 16.8% 12.9% 23.7% 21.6% 25.1%
Year ended 31st March (Audited) 2007 2008 2009 2010 2011 2012 * Operation Expenses Staff Cost 18 26 34 37 64 88 Administration Expenses 22 33 42 65 99 158 Selling,Financial & Other Expenses 8 19 17 19 54 47 48 78 93 121 217 293
** Income Tax & Other Tax expenses Value Added Tax on Financial Services 0 0 0 2 15 28 Provision for Income Tax 2 0 0 7 34 78 2 0 0 9 49 106
*** Interest Spread Interest Income 142 164 256 417 704 1,059 AVG Earning Assets 889 846 963 1,330 2,412 3,571 Interest Income Ratio 16.0% 19.4% 26.6% 31.4% 29.2% 29.7%
Interest Expenses 102 151 228 274 381 529 AVG Deposits & Borroeings 824 916 1,244 1,697 2,807 4,092 Interest Cost Ratio 12.4% 16.5% 18.3% 16.1% 13.6% 12.9% Interest Spread 3.6% 2.9% 8.3% 15.2% 15.6% 16.7% 116 Swarnamahal Financial Services PLC Annual Report 2011/2012 Share Information
1. 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 three months from the Balance Sheet date.
2. tWenty largest Ordinary Shareholders as at 31st March 2012
Name of the Shareholder no. of Shares Percentage (%)
1 Mrs. A.D. Edirisinghe 82,000,020 16.40 2 Mr. A.S. Edirisinghe 82,000,020 16.40 3 Mr. J. H. Edirisinghe 82,000,020 16.40 4 Mr. N. P. Edirisinghe 82,000,020 16.40 5 Dr. S. Edirisinghe 82,000,020 16.40 6 Edirisinghe Trust Investments Ltd 40,000,000 8.00 7 Mr. K. M. D. R. Kulathunga 1,850,000 0.37 8 Mr. N. Dinapala 1,815,600 0.36 9 Mr. A. B. Athukorala 1,760,000 0.35 10 Mrs. R. A. Hathiramani 1,565,000 0.31 11 Mr. N. H. Godahewa 1,563,200 0.31 12 Mr. R.R.F.Ferdinando 1,258,800 0.25 13 Mr. K. A. N. H. Kasturiratna 1,155,360 0.23 14 Mr. P. H. P. Jayalath 1,147,120 0.23 15 Mr. S. M. Wijesinghe 1,044,000 0.21 16 Mr. K. S. D. Senaweera 970,880 0.19 17 Mr. B. D. D. L. Ariyasinghe 846,800 0.17 18 Mr. C. M. Mannapperuma 820,000 0.16 19 Mr. J. M. R. P.Jayasekara 802,000 0.16 20 Mr. H.H.Kalum Sanjeewa 762,000 0.15 Others 32,639,280 6.53 Total 500,000,140 100
The stated Capital of the company consisting solely issued and fully paid up Ordinary Voting Shares of 500,000,140 as at 31st March 2012. 117 Swarnamahal Financial Services PLC Annual Report 2011/2012
3. Market price of an Ordinary Share 31st March 31st March 2012 (Rs.) 2011 (Rs.)
Highest 181.50 - Lowest 80.60 - Closing 158.80 -
No. of Ordinary Voting Shares 500,000,140** 25,000,007
** In accordance with the Special Resolution passed at the Extraordinary General Meeting held on 27th March 2012, each of the issued and fully paid up Voting Ordinary Shares of the Company subdivided into twenty (20) issued and fully paid up Ordinary Voting Shares consequent to which the Ordinary Voting Shares of the Company increased from 25,000,007 to 500,000,140. The said subdivision was effected on 27th March 2012 and subsequent to the subdivision, the trading of the shares commenced on 02nd April 2012.
4. Number of Ordinary shareholders as at 31st March 2012
SHARE HOLDINGS RESIDENT NON RESIDENT TOTAL Number of No of Percentage No of No of Percentage Number of No of Percentage Shareholders Shares (%) Shareholders Shares (%) Shareholders Shares (%)
1 to 1000 89 21,240 0 0 0 0 89 21,240 0 1001 to 10,000 259 1,137,080 0.23 2 10,000 0 261 1,147,080 0.23 10,001 to 100,000 216 7,968,140 1.59 1 14,000 0 217 7,982,140 1.59 100,001 to 1000,000 91 27,100,500 5.42 2 590,000 0.12 93 27,690,500 5.54 Over 1,000,000 14 461,594,180 92.32 1 1,565,000 0.31 15 463,159,180 92.63 Total 669 497,821,140 99.57 6 2,179,000 0.43 675 500,000,140 100
Public holding as a percentage of Issued Share Capital as at 31st March 2012 9.96%
Categories of shareholders No. of shareholders no. of shares Percentage (%)
Individuals 653 457,988,280 91.60 Institutional 22 42,011,860 8.4 Total 675 500,000,140 100 118 Swarnamahal Financial Services PLC Annual Report 2011/2012 Glossary of Financial Terms
Accounting Policies Corporate Governance The specific principles, bases, conventions, rules and practices The process by which corporate entities are governed. It is adopted by an entity in preparing and presenting Financial concerned with the way in which power is exercised over the Statements. management and direction of entity, the supervision of executive actions and accountability to owners and others. Accrual Basis Recognition of the effects of transactions and other events when Cost Income Ratio they occur without waiting for receipt or payment of cash or its Operating expenses as a percentage of net income. equivalents. Credit Risk Amortization Credit risk is the risk of financial loss to the Bank if a customer or The systematic allocation of the depreciable amount of an intangible counter party to a financial instrument fails to meet its contractual asset over its useful life. obligations, and arises principally from the loans and advances to customers and other banks and investment debt securities. Capital Adequacy The percentage of risk-adjusted assets supported by capital as Credit Ratings defined under the framework of risk based capital standards An evaluation of a corporate entity to assess its ability to repay developed by the Bank for International Settlement (BIS) and as its obligations or likelihood of not defaulting, carried out by an modified to suit local requirements by the Central Bank of Sri Lanka. independent rating agency.
Capital Reserves Dealing Securities Capital Reserves consist of revaluation reserves arising from These are marketable securities acquired and held with the intention revaluation of properties owned by the Company and Reserve Fund to resale over a short period of time. set aside for specific purposes defined under the Finance Business Act No. 42 of 2011 and shall not be reduced or impaired without the Deferred Tax approval of the Monetary Board. Sum set aside in the financial statements for taxation that may become payable in a financial year other than the current financial year. Cash Equivalents Short-term highly liquid investments that are readily convertible to Depreciation known amounts of cash and which are subject to an insignificant The systematic allocation of the depreciable amount of an asset risk of changes in value. over its useful life.
Commitments Earnings Per Share (EPS) Credit facilities approved but not yet utilized by the clients as at the Profit attributable to ordinary shareholders, divided by the number of Balance Sheet date. ordinary shares in issue.
Contingent Liabilities Effective Tax Rate Conditions or situations at the Balance Sheet date, the financial Provision for taxation, excluding deferred taxation, divided by the effect of which are to be determined by the future events which may profit before tax. or may not occur. 119 Swarnamahal Financial Services PLC Annual Report 2011/2012
Equity Interest Earning Assets Total of shareholders’ fund; share capital + statutory reserves+ other Assets which earn interest; Loans and Advances, Bills, Leases, Call reserves money, etc.
Equity Method Interest in Suspense The equity method is a method of accounting whereby the Interest suspended on non-performing loans and advances. investment is initially recognized at cost and adjusted thereafter. Investment Properties Fair Value Investment property is property (land or a building – or part of a Fair value is the amount for which an asset could be exchanged building - or both) held (by the owner or by the lessee under a between a knowledgeable, willing buyer and a knowledgeable, finance lease) to earn rentals or for capital appreciation or both, willing seller in an arm’s length transaction. rather than for use or sale.
Finance Lease Investment Securities A lease in which the lessee acquires all the financial benefits and Securities acquired and held for yield or capital growth purposes risks attaching to ownership of whatever is being leased. and are usually held to maturity.
General Provisions Key Management Personnel General provisions are established for loans and advances for Key Management Personnel are those persons having authority and anticipated losses on aggregate exposures where credit losses responsibility for planning, directing and controlling the activities cannot yet be determined on individual facility basis. of the entity, directly or indirectly, including any Director (whether Executive or otherwise) of that entity. Impairment This occurs when recoverable amount of an asset is less that its Liquid Assets carrying amount. Assets that are held in cash or in a form that can be converted to cash readily, such as deposits with other banks, bills of exchange Interest Margin and treasury bills. Net interest income as a percentage of average interest earning assets. Loan Losses and Provisions Amounts set aside against possible losses on loans, advances and Interest Spread other credit facilities as a result of such facilities becoming partly or This represents the difference between the average interest rate wholly uncollectible. earned and the average interest rate paid on funds. Market Risk Interest Cover This refers to the possibility of loss arising from changes in the value A ratio showing the number of times interest charges is covered by of a financial instrument as a result of changes in market variables earnings before interest and tax. such as interest rates, exchange rates, credit spreads and other asset prices. 120 Swarnamahal Financial Services PLC Annual Report 2011/2012 Glossary of Financial Terms Contd.
Net Asset Value per Share Revenue Reserve Shareholders’ funds divided by the number of ordinary shares in Reserves set aside for future distribution and investment. issue. Return on Equity (ROE) Net-Interest Income (NII) Net income, less preferred share dividends if any, expressed as a The difference between what a Company earns on assets such as percentage of average ordinary shareholders’ equity. loans and securities and what it pays on liabilities such as deposits refinance funds and other borrowings. Related Parties Parties where one party has ability to control the other party or Non-Performing Loans (NPL) exercise significant influence over the other party in making financial All loans are classified as non-performing when a payment is 180 and operating decisions, directly or indirectly. days’ in arrears. Revenue Reserves NPL Ratio Reserves set aside for future distribution and investment. Total non-performing advances (net of Interest in Suspense) divided by total advances portfolio (net of Interest in Suspense). Return on shareholders’ fund An accounting ratio, expressing the profit for the financial year as a Off Balance Sheet Transactions percentage of average shareholders’ funds. Transactions that are not recognized as assets or liabilities in the Balance Sheet, but which give rise to contingencies and Segmental Analysis commitments in the balance sheet as at Balance Sheet date. Analysis of financial information by segments of an enterprise specifically, the different industries and the different geographical Operational Risk areas in which it operates. This refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Shareholders’ Funds Total of issued and fully paid share capital and revenue reserves. Price Earnings Ratio (P/E Ratio) Market price of an ordinary share divided by earnings per share Statutory Reserve Fund (EPS). A capital reserve created as per the provisions of the Finance Business Act No. 42 of 2011. Provision for Bad and Doubtful Debts A charge to income which is added to the allowance for loan losses. Core Capital (Tier I) Specific provisions are established to reduce the book value of Core Capital includes selected items of capital funds. Major core specific assets (primarily loans) to estimated realizable values. capital items are share capital, share premium, statutory reserve funds, retained profits, general reserves, surpluses/losses after tax Return on Average Assets (ROA) arising from the sale of fixed and long-term investments. Net income expressed as a percentage of average total assets, used along with ROE, as a measure of profitability and as a basis of Supplementary Capital (Tier II) intra-industry performance comparison. Supplementary Capital includes, approved revaluation reserves, general provisions, hybrid (debt/equity) capital items and approved subordinated term debts. 121 Swarnamahal Financial Services PLC Annual Report 2011/2012 Our Network
FULLY FLEDGED BRANCHES
Jaffna No.338, Hospital Road, Jaffna 021 2220245 Kollupitiya No. 654, Galle Road, Colombo 03 011 2556160-4 Negombo No. 18, Greens Road, Negombo 031 2222619 Nugegoda No. 31, St. Thilakaratna Mw, Nugegoda 011 2810666 Ratnapura No.15, Main Street, Ratnapura 045 2226270 Trincomalee No.31, Central Road, Trincomalee 026 2226677 Vavuniya No.141, Kandy Road, Vavuniya 024 2226233
PAWNING CENTRES Jaffna
Aluthgama No. 164, Galle Road, Aluthgama 034 2226233 Batticaloa No. 190, Trincomalee Road, Batticaloa 065 2222880 Chilaw No. 24A, Bazaar Street, Chilaw 032 2224888 Gampaha No. 14, Baudhaloka Mawatha, Gampaha 033 2248444 Hatton No.15, Main Street, Hatton 051 2224466 Ja-Ela No.120, Negombo Road, Ja-Ela Vavunia 011 2249085 Kandy No.156, Kotugodella Street, Kandy 081 2226126 Tr incomalee Ragama No. 62A, Tewatte Road, Ragama 011 2957053 Sea Street No. 147, Sea Street, Colombo 11 011 2452245 Wattala No. 416, Negombo Road, Wattala 011 3193340
Batticoloa
Chilaw
Kandy Negambo Je-Ela Gampaha Ragama Wattala Sea Street Hatton Kollupitiya Nugegoda
Rathnapura
Aluthgama 122 Swarnamahal Financial Services PLC Annual Report 2011/2012 Notice of Meeting
Notice is hereby given that the seventh (07th) Annual General Meeting of Swarnamahal Financial Services PLC will be held at Hotel Sapphire, No. 371, Galle Road, Colombo 06 on Monday, the Third (3rd) day of September 2012 at 10.30 a.m. for the following purposes.
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 2012 with the Report of the Auditors thereon.
2. To appoint Messrs KPMG Ford, Rhodes, Thornton & Co., Chartered Accountants as Auditors and authorize the Directors to determine their remuneration.
3. To authorize the Directors to determine contributions to charities for the financial year ending 31st March 2013.
BY ORDER OF THE BOARD S S P CORPORATE SERVICES (PRIVATE) LIMITED
Secretaries
No.101, Inner Flower Road, Colombo 03 2nd August 2012
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 (Pvt) Ltd .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. 123 Swarnamahal Financial Services PLC Annual Report 2011/2012 Form of Proxy
I/We...... ……………………………………………………………………………………….……of ………………………………………………………
…………………………………………………...... being a member/members of Swarnamahal Financial Services PLC hereby appoint :
Mr. J. H. Edirisinghe or failing him Mr.N. P. Edirisinghe or failing him Mrs.A.D. Edirisinghe or failing him Mr.A. S. Edirisinghe or failing him Mr.D.S. Abayaratne or failing him Mr.S. M .Ganegoda or failing him Mr.J.F.G. De Silva or failing him Mr. S.A. Weerasinha or failing him Mr.N.G.M. De Silva or failing him
------of ------(National Identity Card Number) 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, the Third (3rd) day of September 2012 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 2012
2. To appoint Messrs KPMG Ford, Rhodes, Thornton & Co., Chartered Accountants as the External Auditor of the Company for the ensuring year and to authorize the Directors to fix their remuneration.
3. To Authorize the Directors to determine contributions to charities for the ensuring year
Signed this ...... day of ...... Two Thousand and Twelve.
Signature: …………………………….
Note :
(a) *Please delete the inappropriate words. (b) Instructions are noted on the reverse hereof. 124 Swarnamahal Financial Services PLC Annual Report 2011/2012
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 completed 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 far 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. Contents ABOUT US CORPORATE INFORMATION Swarnamahal Financial Services PLC is a Public Limited Liability Company Incorporated in Sri Lanka 14th January 2004, under the Companies Name of the Company VAT Registration No. Financial Highlights 2 Act No.17 of 1982, and re-registered 16th September 2008 under the Swarnamahal Financial Services PLC 114363510 – 7000 Chairman’s Message 4 Companies Act No.7 of 2007. The Company is licensed by the Monetary Director/Chief Executive Officer’s Message 8 Board of Directors 11 Board of the Central Bank of Sri Lanka under the Finance Business Act Legal Form Credit Ratings Senior Management Team 16 No.42 of 2011. A Public limited liability Company incorporated 14th January BB+/NP RAM Ratings (Lanka) Limited Management Discussion and Analysis 18 2004, under the Companies Act No.17 of 1982 and Financial Review 22 re-registered 16th September 2008 under the Companies Act Number of employees Sustainability Report 27 VISION No.7 of 2007, registered as a finance Company under the 207 Risk Management 32 To be the Premier Financial Services Provider in LFC market. Finance Business Act No. 42 of 2011 by the Monetary Board of Corporate Governance 37 Annual Report of the Board of Directors the Central Bank of Sri Lanka. Company Secretary on the Affairs of the Company 63 MISSION SSP Corporate Services (Pvt) Ltd Directors’ Statement on Internal Control 69 To create superior long - term value to our shareholders, customers and Registered Office No. 101, Inner Flower Road, Colombo 03 Auditor’s Report on Internal Control 71 employees above the industry standard. No.676, Galle Road, Colombo 03. Statement of Directors’ Responsibilities Auditors to the Company - Financial Year 2011/12 in Relation to Financial Statements 72 Business Office Messrs BDO Partners Chief Executive Officer’s and Senior Finance Manager’s Statement of Responsibility 74 VALUES No. 654, Galle Road, Colombo 03 Chartered Accountants Board Audit Committee Report 75 Highest standards of ethics and integrity Te.l. 011 2556160-4 Fax: 011 2595062 65/2, Sir Chiththampalam A Gardiner Board Integrated Risk Management Always do the right thing and keep commitments. Mawatha, Committee Report (BIRMC) 77 Engage others to build trust and encourage strong communication. Board of Directors Colombo 02. Board Human Resources and Listen and share as a team Mr. J. H. Edirisinghe Remuneration Committee Report 78 Mr. N. P. Edirisinghe Bankers to the Company Independent Auditor’s Report 81 Respect Income Statement 82 Mrs. A. D. Edirisinghe Commercial Bank of Ceylon PLC Respect all through trust, courtesy and open communication Balance Sheet 83 Mr. A. S. Edirisinghe Sampath Bank PLC Statement of Changes in Equity 84 Innovation and continuous improvements Mr. D. S. Abayaratne Seylan Bank PLC Cash Flow Statement 85 Anticipate customer needs and work to exceed their expectations Mr. S. M. Ganegoda Hatton National Bank PLC Significant Accounting Policies 86 Mr. J. F. G. De Silva Notes to the Financial Statements 93 Service Excellence Mr. S. A. Weerasinha Six Years at a Glance 114 Commitment to achieve the highest standard of services quality with Share Information 116 Mr. N. G. M. De Silva personalized services. Glossary of Financial Terms 118 Our Network 121 Learning focused Company Registration No. Notice of Meeting 122 Search new knowledge for innovations PB 594 PQ Form of Proxy 123 Annual Report 2011/12 Financial Services PLC I Annual Report Swarnamahal
FINANCIAL SERVICES PLC Together in No 654, Galle Road, Colombo 03, Sri Lanka. Swarnamahal Financial Services PLC Tel.011 2556160-4, 2595061 Fax: 011 2589823, 2595062 Annual Report 2011/12 E-mail:[email protected] Web.www.sfs.lk Growth