Annual Report 2013/14 - People's Merchant Finance...

Annual Report 2013/14

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No.21, Nawam Mawatha, Colombo 02.Tel. 011 7 666333 Fax.0112300190

E-mail: [email protected] : www.pmb.lk

People’s Merchant Finance PLC

Corporate InformationContentsFinancial Highlights .........................................1Chairman’s Statement.....................................2Board of Directors Profile ................................3Corporate Governance....................................5Risk Management and Internal Control.........11Financial Reports Annual Report of the Board .....................16 Directors’ Responsibility for Financial Reporting..................................18 Report of the Audit Committee ................19 Independent Auditor's Report ..................20 Income Statement....................................22 Statement of Comprehensive Income .....23 Statement of Financial Position ...............24 Statement of Changes in Equity ..............25 Cash Flow Statement .............................27 Notes to the Financial Statements...........28Ten Year Summary .......................................66Investor Information.......................................67Our Services..................................................70Notice of Meeting ..........................................71Form of Proxy................................................73Corporate Information ..........Inner Back Cover

Name of CompanyPeople’s Merchant Finance PLC

Legal FormPublic Quoted Company registered under the Companies Act No.17 of 1982 and re-registered under the Companies Act No.07 of 2007

Company Incorporation & Registration No.Incorporated in Sri Lanka on January 26, 1983 bearing Registration No:N(PBS)22

New Registration No: PQ 200

VAT Registration No:134000228 7000

Stock Exchange ListingThe ordinary shares of the Company were listed with the Colombo Stock Exchange in July 1994

Ordinary shares listed – 67,500,000

Registered OfficeNo. 21 Nawam MawathaColombo 02Tel. 2300191Fax. 1200190E-mail:[email protected] : www.peoplesmerchant.lk

Board of DirectorsJ.P. Amaratunga – ChairmanG. Ramanan – Managing Director/CEOP. KudabalageT. H. M. WickramasingheA.P. WeerasingheMs. S.V. AmarasekaraN.C. PeirisMs. L.K. SangakkaraR.S. De Silva

AuditorsKPMGChartered Accountants32A, Sir Mohamed Macan Maker MawathaColombo 03

SecretariesCorporate Services (Pvt.) LimitedNo. 216, De Saram PlaceColombo 10

LawyersFJ & G De SaramAttorney-at-LawNo. 216, De Saram PlaceColombo 10

RegistrarsSSP Corporate Services (Pvt.) Limited101, Inner Flower RoadColombo 03

BankersPeople’s BankHatton National BankBank of Ceylon

Corporate ManagementG. Ramanan - Managing Director/CEOCharith Gunaratne - DGM – Credit & Asset FinanceYasas Ariyaratne - DGM – Business PromotionsMuditha Jayawickrema - DGM – Legal & HR

Senior ManagementJeevana Karunasiri - Chief Manager – Real EstateManoneetha Ariyananda - Chief Manager – RecoveriesGihan Hirimbura - Chief Manager – HRAnuranga Handaragama - Head of IT

Credit Rating‘BB+ (lka)’ outlook is stable: Credit Rating from Fitch Ratings Lanka Ltd

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Annual Report 2013 / 14

Financial Highlights

Company GroupFor the year ended 31 March 2014 2013 Change % 2014 2013 Change %

Income (Rs.000’s) 757,861 661,236 14.61 757,861 661,236 14.61

Profit/(loss) before tax (Rs.000’s) (184,419) (89,740) 106 (180,370) (89,739) (101)

Profit/(loss) for the year (Rs.000’s) (222,355) (90,894) 145 (219,021) (91,383) (140)

Earnings/(loss) per share (Rs.) (3.29) (1.35) - (3.24) (1.35) -

Equity (Rs.000’s) 1,051,032 1,268,155 (17) 1,046,813 1,260,602 (17)

Return on average equity (%) (19.18) (8.41) - (18.98) (8.51) -

Total assets (Rs.000’s) 5,481,125 4,608,663 18.93 5,477,492 4,604,581 18.96

Return on average total assets (%) (4.41) (2.41) - (4.34) (2.43) -

20100

200

400

600

800

Income

2011 2012 2013 2014

Equity

20100

200400600800

100012001400

2011 2012 2013 2014

Total Assets

20100

100020003000400050006000

2011 2012 2013 2014

Rs. M

n.

Rs. M

n.

Rs. M

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Chairman’s Statement

It gives me great pleasure to welcome you to the 31st Annual General Meeting of People’s Merchant Finance PLC, on behalf of the Board of Directors and present to you the Annual Report and the Audited Accounts of your company and its subsidiaries for the year under review.

Global Economic Environment

Despite improved global financial conditions and reduced short-term risk, the world economy continued to expand at a subdued pace. After a marked downturn over the past two years, the global economy has slowly gained momentum in the second half of 2013 and 2014 on the back of accommodative monetary policies in developed and developing economies. Most world regions saw a moderate pick-up in activity, but growth continued to be below potential and employment gains, especially in developed economies will remain weak at best.

Economic slowdown in large developing countries has diminished, but not disappeared. At the same time, new medium-term risks have emerged, including possible adverse effects of unconventional monetary measures in developing economies on global financial stability. These risks have the potential to once again derail the feeble recovery of the world economy.

Local Perspective

The Sri Lankan economy rebounded to record 7.3 per cent growth in 2013, while inflation remained at single digit levels for the fifth consecutive year. Economic growth was broad based with positive contributions from all sectors, supported by favourable weather conditions and improved global demand. Monetary aggregates decelerated toward desired levels by end 2013, while the lagged effect of the previous year’s tight monetary policy measures and the steep decline in gold backed loans lowered credit disbursements to the private sector. The financial sector remained sound and resilient amidst uncertainties that increased volatility in the global financial markets during 2013.

Overall, policy interest rates were reduced by a further 100 basis points during 2013 while increasing liquidity also reflected the accommodative policy stance. Throughout the year, maintaining inflation at single digit levels remained the overarching objective of monetary policy, and declining inflation and benign inflation expectations allowed monetary policy to support the revival of economic activity. Monetary policy decisions taken in a forward looking framework proved effective, with inflation declining to mid single digit levels at the end of the year coupled with a pick up in economic activity during the year.

Stability of the financial system was preserved amidst uncertainties arising from global market developments, while the regulatory and supervisory framework was strengthened further. Stronger capital and liquidity buffers and sound risk management practices ensured that the financial sector remained resilient during the year although non-performing pawning advances affected the asset quality of the financial sector. Total assets of the financial sector rose as a result of an increase in investments, while the expansion of the branch network, particularly outside the Western Province, improved access to finance and financial inclusiveness. During the year, the Central Bank unveiled a Master Plan for financial consolidation, which was formulated with the aim of building a strong, dynamic and internationally competitive financial sector with cross-border linkages and significant overseas presence.

Company Performance

Your company has weathered a challenging period and has come through this period and is now poised for a turnaround. Your Board has made some strategic decisions, which will augur well for the future of the company and assist in returning to profitability

The company is strongly positioned to move forward, taking advantage of the numerous opportunities that is available within a unified and peaceful Sri Lanka

Undoubtedly, People’s Merchant will stand to gain from these initiatives.

I take this opportunity to thank the Chairman of People’s Bank and our Major shareholder People’s Bank for their guidance and continued support. I also wish to place on record my sincere appreciation to my fellow Directors for their valuable contribution, advice and guidance. The management and staff have worked with great commitment under challenging conditions and I thank the Managing Director/Chief Executive Officer, the Management and Staff of People’s Merchant for their untiring efforts.

Finally, I wish to convey my appreciation to all our shareholders for the confidence and trust placed in us.

On behalf of the Board of Directors, I assure you that the Company will continue to steam ahead, overcoming whatever challenges faced through the execution of carefully formulated strategies while upholding the highest standards of Corporate Governance.

J. P. AmaratungaChairman

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Profiles of the Directors

Mr. Jehan Prasanna Amaratunga

Mr. Jehan Prasanna Amaratunga is the Executive Deputy Chairman of MTD Walkers PLC, Sri Lanka. He is a member of the Institute of Chartered Accountants of Sri Lanka and a fellow Charted Management Accountant. Mr. Amaratunga was appointed as Chairman with effect from 01st September 2014 and presently he is the Chairman of the company.

Mr. Amaratunga was awarded First in Order of Merit Prize at the final level examination of The Institute of Chartered Accountants of Sri Lanka. Mr. Amaratunga currently serves as a Director of People’s Bank and People’s Merchant Finance PLC; he is also Chairman of People’s Insurance Limited.

With over 25 years of experience in Finance and Management fields, Mr. Amaratunga has served as a Consultant and Director to numerous corporations and private business entities. At the National Conference of the Institute of Chartered Accountants of Sri Lanka, he presented a paper titled “Value for Money Accounting” which is one of many prominent achievements that stand out in his career. He was also a member of the Governing Council or the Chartered Accountants of the Sri Lanka.

Mr. Govindasamy Ramanan

Mr. Ramanan was appointed as a Director on 6th January 2012. He was appointed as the Acting Managing Director/CEO from 25th March 2013. He is an Experienced Corporate Finance professional counting over 18 years of experience in Insurance, Banking, Fund Management Portfolio Management, Investment Banking and Asset Management. He served as Chief Executive Officer of HNB Securities, Head of Investment Banking of HNB and established an Investments and Corporate Advisory firm in 2009 as a joint venture with the Capital Trust Group. Mr. Ramanan is a CFA holder , an Associate Member of the Chartered Institute of Management Accountants (UK) and he also holds an MBA from the University of Chicago – Booth School of Business. He was selected as the “CIMA Manager of the year” in 2007.

Mr. Piyadasa Kudabalage

Mr. Kudabalage was appointed as a Non Executive Director with effect from 9th July 2013 to People’s Merchant Finance PLC and served the position of the Chairman of the Company until his resignation on the 1st September 2014. He will continue to serve the Board in the capacity of a Non Executive Director.

Mr. Piyadasa Kudabalage is a fellow member of the Institute of Chartered Accountants of the Sri Lanka. He holds a B.com (Hons) Degree from the University of Kelaniya. He is also a fellow member of the Institute of Certified Management Accountants of the Sri Lanka and the Institute of Certified Professional Managers of Sri Lanka.

Mr. Kudabalage is the Managing Director/Chief Executive Officer of Litro Gas Lanka Ltd, Litro Das Terminal Lanka (Pvt) Ltd, Canwill Holdings (Pvt) Ltd, Sinolanka Hotels & Spa(Pvt) Ltd, Taprobane Hotels & Spa (Pvt) Ltd, Helanco Hotels & Spa (Pvt) Ltd and Canowin Hotels and Spas (Pvt) Ltd. He is the Executive Director of Sri Lanka Insurance Corporation Ltd and Management Services Rakshana (Pvt) Ltd. He also Serves the Boards of

Colombo Dockyard PLC, Sri Lanka Insurance Corporation (Pvt) Ltd – Maldives, People’s Bank, People’s Leasing & Finance PLC, People’s Leasing Havelock Properties Ltd and a Senior partner of M/s P Kudabalage & Company, Chartered Accountants.

He has well over 30 years experience in the mercantile sector and held several senior positions prior to assuming the duties of aforesaid companies.

Mr. Tushan Wickramasinghe

Mr. Tushan Wickramasinghe is the Chairman/CEO of Capital TRUST Holdings (Pvt) Ltd, Capital TRUST Credit (Pvt) Ltd, Capital TRUST Financial (Pvt) Ltd, Capital TRUST Property Developers (Pvt) Ltd and Capital TRUST Partners (Pvt) Ltd.

Mr. Wickramasinghe is the Managing Director/CEO of Capital TRUST Securities (Pvt) Ltd, and he has facilitated and arranged many of the strategic transactions in the Colombo Stock Exchange. Under his leadership the company has expanded to have the largest local investor client base which is served through eight branches. In 2010 and FY 2010 / 2011, the company achieved the distinction of being ranked number One among all securities brokering firms in Sri Lanka, in terms of transactions turnover, brokerage income and the number of trades. This is even more significant as the year 2010 was when the country’s stock market recorded the highest ever turnover.

He was a Director of Lanka ORIX Leasing Co. PLC from 2002 to 2009 and is currently a Director of People’s Merchant Finance PLC. Further, he is the Proprietor of Shakthi Institute, an educational institute with over 10,000 registered students.

He holds a Master of Business Administration from the Edith Cowan University in Australia.

Mr. Anil Weerasinghe

Mr. Weerasinghe is a Director of many companies including Silicon Valley Software solutions, JP Weerasinghe & Co. J.P. Weerasinghe Beverages and JSA Business Promoters (Pvt) Ltd. He was formally a Director of People’s Bank and he has also served as a Director of the Export Development Board and Lanka Cement. He also served as the Senior Deputy General Manager of Hyosung Corp Korea and he has overseas experience and exposure by having worked for Etacol in Hong Kong. Mr. Weerasinghe brings with him a wealth of experience in business and banking. Mr. Weerasinghe holds a degree with second class honors in Textile Technology.

Mr. Mark Melville Sarath Kumara Rajapakse

Mr. Rajapakse was appointed as a Director in February 2012. He served as an Assistant Director General of Sri Lanka Tea Board from December 1980 to February 1981 and as the Special Commissioner of the Municipal Council of Negombo (1979- 1980) under the Greater Colombo Economic Commission (now BOI). From 1977 to 1980 he served as an Assistant Regional Manager in the Sri Lanka State Plantations Corporation. He also served as the Chief Executive Officer / Director of Skills Lanka Limited from June 2000 to March 2005. Mr.Rajapakse also have overseas experience by having worked as the president of GMI

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Finance & Investment Co.Ltd, Hong Kong and the General manager of Golden Brand Development Co.Ltd, Hong Kong from 1991- 1992.He was a National Consultant in the UNDP from Oct 1998 to December 2000, and a National officer / Consultant in the UNICEF from 2005 to 2007 and in the UNESCO from 2007 to 2009. He currently holds directorships at Capital Trust Research Private Ltd, Capital Trust Information Technologies Private Ltd, Capital Trust Credit Private Ltd and Capital Trust Markets Limited.

Mr.Rajapakse holds a Master of Economics (Mecon)Degree from University of Colombo(2011), Master of Business (M.Buss) Degree in Financial Management and Economics, Curtin University of Technology, Perth, Western Australia (1990) and Bachelor of Science (B.Sc) Degree in Chemistry , Botany & Zoology , University of Ceylon, Peredeniya (1072). He is also a member of the British Institute of Management (MBIM), Fellow of the Institute of Training and Development (FITD). He also holds a Diploma in Marketing Management awarded by Sri Lanka Institute of Marketing, a certificate in Marketing awarded by National Institute of Business Management. He is currently reading for Ph.D. In Finance at Massey University (University of New Zealand) Palmerston north, New Zealand.

Mr. Neville Chrysoston Peiris

Mr. Peiris was appointed as an independent, non executive director with effect from 20th August 2012. He is a fellow member of the Institute of Chartered Accountants (FCA) and he has at his disposal years of experience and expertise in business and finance which he has amassed by working exclusively in private sector organizations, local as well as international . Presently he serves as an independent director on the Boards of Namunukula Plantations, Hunter & Co. PLC, Lanka Canneries (Pvt) Ltd,Ceylon Leather Products PLC, & South Asian Technologies (Pvt) Ltd.

Mr. Peiris experience and expertise in business and finance spans over a period of forty years during which he held responsible positions such as chief Internal Auditor, Chief Accountant , Financial Director & Company Secretary, Regional financial Controller and Group Finance Director at leading companies both in Sri Lanka and abroad.

Mr. Peiris has added to his experience and expertise through his exposure to different cultures by working abroad in countries such as Zambia, Jamaica, Phillipines, Pakistan.

Mrs. Sita Vinothini Amarasekara

Mrs. Amarasekara was appointed as an independent, non-executive director with effect from 20th August 2012. She is an attorny-at-law, Notary Public, Commissioner of Oaths and a Registered Company Secretary. She has excelled in her profession as a lawyer and presently is a partner of Varners (a leading firm of Lawyers). She has gathered a wealth of experience and expertise by holding responsible positions in organizations both in the private and state sectors in Sri Lanka. She also had a stint in the UK, working at one of the UK’s Leading Building Societies and also at a Firm of lawyers.

During her illustrious career Mrs. Amarasekara has served the Ministry of Finance in the capacity of legal Consultant and has also held the position of a Partner of another reputed law firm in Sri Lanka.

Mrs. Lakshmi Kumari Sangakkara

Mrs. Lakshmi Kumari Sangakkara was appointed as a Non Executive Director with effect from 28th January 2013. She is an Attorney-at-Law and possess over 30 years experience in the fields of Law, Management, Marketing, Hospitality, and Apparels.

1982-1990-Director, Seller’s Sport Wear (Private Limited)

1985-2000-Ronbro International Garments

1983-2004-Sun Island Village, Holiday Resort

Currently serving as a Board member of People’s Bank of Sri Lanka, People’s Leasing Fleet Management of Sri Lanka, Sri Lankan Airlines and also the Chairperson of People’s Travels a subsidiary company of the People’s Bank.

Mr. Rohan S De Silva

Mr. Rohan S De Silva was appointed as an alternate director to Mr. Rajapakse from August 14, 2013. Mr. De Silva is the Chief Operating Officer of Capital TRUST Holdings Limited. His diverse experience spans over 25 years, in the spheres of information Technology, Investment Banking, Educational Services and in Management Consulting, including senior leadership roles in several organizations both locally and overseas, comprising of Head of capital Markets & Research at Union Bank of Colombo PLC and Director/CEO of I-RON Holdings (Pvt.) Ltd of western Australia.

Mr. De Silva is a Fellow Member of the Chartered Management Institute of UK (FCMI), Certified Professional of the International Public Management Association for Human Resources of USA (IPMA-CP) and a Certified Practitioner for Neuro Linguistics Programming of International NLP Trainers Association of USA.

Resigned Directors

Mr. P.A. Ajith Panditharatne

Mr. Panditharatne was appointed as the Chairman with effect from 3rd June 2010. He also served as a Director of People’s Bank and People’s Leasing Property Development Ltd. He was the National Organizer of the Sri Lanka Commerce Student Foundation and as founder member played a dynamic role in establishing , managing and guiding it. Mr. Panditharatne has served in a number of state sector institutions namely at the National Paper Corporation – as a working Director / Chairman, Lanka Cement Limited – as a working Director , Paranthan Chemical Corporation – as the Chairman and Sri Lanka Export Development Board – as an Executive Director.

Resigned with effect from 29th May 2013.

Profiles of the Directors

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Corporate Governance

With the granting of a finance license in April 2012 under the Finance Business Act No.42 of 2011, People’s Merchant Finance PLC has placed greater emphasis in complying with the Corporate Governance practices and procedures set out for the finance business sector under the Corporate Governance Direction No.03 of 2008 issued to finance companies by the Central Bank of Sri Lanka. The Board of Directors of the company is increasingly taking measures to reach for best Corporate Governance practices for proper direction and control of Company operations.

People’s Merchant Finance PLC (PMF) takes all initiatives to carry out its operations in an ethical and socially acceptable manner taking into account of all stakeholders’ interests given

first priority. The company considers Corporate Governance as an essential tool to achieve desired objectives with effective market operations and creation of wealth for the shareholders. The Board provides corporate leadership, direction and instructions for the management for better performance. PMF closely monitors the Corporate Governance requirements issued by the Central Bank of Sri Lanka and other institutions and take appropriate measures to comply with such requirements.

Following (Table 1.1) is the Corporate Governance measures and the appropriate compliance initiatives taken by the company in order to comply with such requirements.

Corporate Governance Rule People’s Merchant Finance PLC’s Compliance Towards the Rule01 Board of Directors

- Composition A single Board is properly constituted of Executive, Non Executive (NED) and Independent Directors. 03 out of 08 NEDs are Independent as at 31st March 2014

-Functions-Segregation of functions of Chairman and CEO-Chairman not being an independent NED, a Director who is an independent NED was appointed as the Senior Director.

-Disclosure in the annual report Brief resumes of each Director are given on pages 3 to 4 of the Annual Report

-Appointments Prior approval from the Central Bank of Sri Lanka and upon obtaining the approval immediately disclose to the Colombo Stock Exchange

-Resignations Prior approval from the Central Bank of Sri Lanka and upon obtaining the approval immediately disclose to the Colombo Stock Exchange

02 Audit Committee-Composition Consist of 03 NEDs as at 31st March 2014-Functions Audit functions are stipulated by the Board-Disclosure in the annual report Functions disclosed under “Audit Committee”

03 Integrated Risk Management Committee-Composition Consist of 03 NED as at 31st March 2014-Functions Committee functions are stipulated by the Board-Disclosure in the annual report Functions disclosed under “ Integrated Risk Management Committee”

04. Rights of shareholders Board effectively communicate with share holders

The Board of Directors

The Board is properly constituted of professionally qualified respected individuals with varied experience in different fields across finance, legal and banking. The Board formulates and approves strategies and provides leadership for the company while

Table 1.1 Corporate Governance rules practiced by the company and its compliances

directing and controlling the operations of the company within a prudent and effective internal control framework with continuous monitoring and feedback communication system.

The composition of the Board and the directorship changes as at 30th October 2014 are demonstrated as follows in table 1.2.

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Director (name) Position held on the Board(Chairman/MD/Director)

Nature of Appointment(Executive / Non Executive)

Date of Appointment Date of Resignation

P. Kudabalage *(Note 1)

Chairman Non-Executive 9th July 2013

G. Ramanan Acting Managing Director/CEO from 25/03/2013Managing Director/CEO from 28/01/2014

Non Executive up to 24/03/2013 Executive from 25/03/2013

06th January 2012

J. P. Amaratunga

*(Note 2)

Director Non-Executive 29th October 2010

T.H.M. Wickramasinghe Director Non-Executive 06th January 2012 M.M.S.K. Rajapakse Director Non-Executive 14th February 2012Ms. L.K Sangakkara Director Non-Executive 28th January 2013 A.P. Weerasinghe Director Non-Executive

Independent06th January 2012

N.C. Peiris Director Non-Executive Independent

20th August 2012

Ms. S.V. Amarasekara Director Non-Executive Independent

20th August 2012

Rohan S. De Silva Alternate Director to M.M.S.K. Rajapakse

Non Executive 14th August 2013

P. A. Ajith Panditharathna

Chairman (former) Non-Executive 3rd June 2010 29th May 2013

* Note 1: Mr. P. Kudabalage stepped down from the position of Chairman with effect from 1st September 2014. However, he will continue to act as a Non Executive Director of the Company.

* Note 2: Mr. J.P. Amaratunga was appointed as the Chairman of the Company with effect from 1st September 2014

Table 1.2 Composition of the Board

The brief resumes of directors are provided in the Annual Report under Board of Directors on page 3 to 4. Appointments to the Board, Names and their Resumes are informed to the Stock exchange in order to make this change available to shareholders. The same is provided to the Central Bank of Sri Lanka as well and prior approval is obtained before the appointment of a Director.

The vacancies that arise from the resignations are filled by the remaining directors collectively after taking into consideration of the views of all the directors at the Board meetings. The Board shall appoint the Chairman and the CEO and defines and approve the functions and responsibilities for them.

Duties of Chairman and CEO

The roles of Chairman and CEO are separated and are performed by two unrelated individuals. The Chairman provides leadership to the Board and the CEO carries out leadership for day to day business operations.

The Chairman is responsible for leadership of the Board, conduct of the Board’s functions and meetings as per the agenda for each meeting. The Chairman ensures that all the board members actively contribute to the matters taken up at the board meetings,

and work effectively and discharges their responsibilities and also ensure that all key issues are addressed by the Board in a timely manner. The Chairman directs the Board to act in the best interest of the company and encourage them to make their full commitment towards the Board’s affairs.

The Chairman takes initiative to maintain active and effective communication with shareholders and that the views of shareholders are communicated to the Board.

Board Meetings

People’s Merchant Finance PLC’s Board continues to evaluate and monitor its performance on a monthly basis. This ensures effective discharge of duties and responsibilities owed to the company. This complies with the Corporate Governance Direction No.03 of 2008, issued by the Central Bank of Sri Lanka. The information being provided to the Board allowing sufficient time for them to review and call for additional information. This enhances the performance measurement of operations and internal controls. These meetings also focus on risk faced by the company and risk mitigation strategies adapted on a regular basis.

The date of the Board Meetings held and the participated directors are depicted in table 1.3 as follows.


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Date of the

meeting

P. A. Ajith

Panditharathna

J. P.

Amaratunga

T.H.M.

Wickramasinghe

G. Ramanan A.P.

Weerasinghe

M.M.S.K.

Rajapakse

R.S. De Silva

(Alternate to

Mr. M.M.S.K.

Rajapakse)

Ms. S.V.

Amarasekara

Ms. L.K

Sangakkara

P.

Kudabalage

N.C. Peiris

30th April 2013 P P P P A P P P NM P

07th June 2013 CD P P P P P A P NM P

25th June 2013 P P P A A P P NM P

9th July 2013 P A P P P P P NM P

30th July 2013 P P P P A P P P A

27th August

2013

A P P A P P P P A

27th September

2013

P P P P P P A P P

29th October

2013

P P P A P P P P P

4th December

2013

P P P P P P P P P

07th January

2014

A P P A P P P P P

28th January

2014

P P P P P P P P P

5th March 2014 P P P P P A P P P

25th March

2014

P P P P P P P P P

A= Absent P = Present NM = Not a Member CD = Ceased to be a Director

Table 1.3 Board Meetings

Audit Committee

As per the Corporate Governance rules, People’s Merchant Finance PLC has established an Audit Committee to review the performance and monitor the operations of the company on a continuous basis. The Audit Committee was established by the Board in a formal and transparent manner and the Board ensures the maintenance of the independence of the Committee which consists of three Non Executive Directors. Two out of the three committee members are independent. Chairman of the Audit Committee is a Non Executive, Independent Director appointed by the Board, who possesses qualifications and experience over 30 years in accountancy.

During the year under review, 06 Audit Committee meetings were held to evaluate the operations of lease, hire purchase, loans, real estate and branch operations. They make their recommendations based on the audit findings with the intention of enhancing internal controls, assessment of risk and review of the feedback and management response towards the recommendations.

The names of the members and the dates of meeting held during the Financial Year 2013/14 are set out as follows in table 1.4.

Name of the Member 18/06/13 17/07/13 05/11/13 24/01/14 10/02/14 26/03/14N.C. Peiris P P P P P PA.P. Weerasinghe P A P P P PT. Wickramasinghe P P P P P P

P = Present CM = Ceased to be a member A = Absent

Table 1.4 Audit Committee Composition / Meetings

The main functions of the Audit Committee

Review internal audits and maintain an appropriate relationship with external auditors

Keeping under review the scope, results of the audit, its effectiveness, independence and objectivity of the auditors

Dealing clearly with its authority and duties with terms of reference

Assist Board on;- Preparation presentation and adequacy of disclosures in

the financial statements and review of compliance with related regulations

- To ensure that the PMF’s internal controls and risk management procedures are adequate to meet the standards

- Assessing the company’s ability to continue as a going concern in the foreseeable future

- Continuous review of independence and performance of company’s external auditors


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To make recommendations to the Board pertaining to appointment, re-appointment and removal of external auditors and to approve the remunerations and terms of engagement of external auditors

Discussion of the audit plan, key audit issues , resolutions, management responses and the annual audit of the company

Remuneration Committee

The Remuneration Committee consists of five directors who are all Non Executives. Two out of the five committee members are independent. The Remuneration Committee was established by the Board on a formal and transparent manner and the Board ensures the maintenance of independence. The Chairman of the Committee is a Non-Executive Director.

The names of the members and the date of meeting are shown in the table 1.5.

Name of the Member 04/12/13 06/01/14Mr. J.P. Amaratunga NM PMr. T.H.M. Wickramasinghe NM PMr. R. S. De Silva Alternate to Mr. M. M. S. K. Rajapakse

P P

Ms. S.V. Amarasekera P P Mr. AP. Weerasinghe P P

P = Present CM = Ceased to be a member A = Absent

Table 1.5 Remuneration Committee Composition / Meetings

The main functions of the Remuneration Committee are;

Developing policy on executive remuneration and packages for directors and to ensure that no director is involved in deciding his own remuneration

Recommendation to the Board on the company’s framework for remuneration packages for executive directors and senior management

To seek appropriate professional advice as and when it is required as authorized by the Board

People’s Merchant Finance PLC’s Board consists of Eight Non Executive Directors and one Executive Director, and none of them were paid monthly remuneration

Directors allowances paid during the period are disclosed under Note 11

Integrated Risk Management Committee

The Integrated Risk Management Committee (IRMC) consists of three directors and one director is Non Executive. The committee was established by the Board on a formal and transparent manner and the Board ensures the maintenance of independence.

The names of the members are shown in the table 1.5. No meetings were held during the year.

Name of the Member 07/08/13Mr. J.P. Amaratunga PMr. S. K. Rajapakse PMs. S.V. Amarasekera P

Table 1.5 Composition of the IRMC Committee

The main functions of the Remuneration Committee are;

To assess and evaluate all risks including operational, financial, liquidity, credit interest rate, IT and security risks on a regular basis, following appropriate measures.

Review the internal controls of the company and take initiative to improve the effectiveness of these controls.

Review the adequacy of all the management commitments such as ALCO, Credit, etc.

To closely monitor and update the Company’s Business Plan

In addition to the Corporate Governance direction issued by the Central Bank of Sri Lanka, the Company also followed and complied with the Corporate Governing rules issued by the Colombo Stock Exchange (“CSE”).

Table 1.6 below provides the summary of compliance with the Corporate Governance requirements under the listing rules of the CSE.


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Rule No. Disclosures regarding Board of Directors Compliance Status

Details

i. 7.10.1(a) The correct number of Executive /Non-Executive Directors

Compliant Eight Directors are Non Executive and one Director – MD/CEO is Executive. The Chairman is a Non- Executive Director.

ii. 710.2(a) The correct number of Independent Non-Executive Directors.

Compliant Three out of eight Non - Executive Directors are Independent Directors.

iii. 7.10.2(b) Whether the Non-Executive Directors submitted a declaration annually of his/her independence or non-independence to the Board of Directors

Compliant The Board obtained declaration from the Non-Executive Directors

iv. 7.10.3(a) Confirmed that the Board of directors made an annual determination as to the independence or non-independence of each non-executive director based on the declaration mentioned-above and other information available to the Board and states the names of non-executive directors

Compliant

v. 7.10.3(b) If the Director does not qualify as ‘Independent’, but if the Board taking into account all the circumstances is of their opinion that the non-executive director is ‘Independent’, the Board has specified, in the Annual Report, the qualification not met under Rule 6.4 of the CSE Listing Rules and the basis for determining the director to be ‘Independent’ - Rule 6.3 (b)

vi. 7.10.3(c) Published a brief resume in the Annual Report, of each director of the Board, which includes information on the nature of his/her expertise

Compliant Brief resume of each director is provided on pages 3 & 4

vii. 7.10.5(a) The number of Independent non-executive directors in the Remuneration Committee

Compliant Refer page 8

viii. 7.10.5(a) Whether a separate Remuneration Committee was formed or whether listed parent’s Remuneration Committee used

Compliant Remuneration Committee was formed

ix. 7.10.5(a) Whether the Chairman of the Committee is a non-executive director

Compliant Chairman is a Non-Executive Director

x . 7.10.5(b) Disclosed the functions of the Remuneration Committee

Compliant Provided on page 8 under Remuneration Committee

xi. 7.10.5(c) Names of directors comprising the Remuneration Committee (where the parent company’s Remuneration Committee qualifies to function as the listed company’s Remuneration Committee, a statement in the Annual Report to this effect and disclosed the names of the directors


xii. 7.10.5(c) The Annual Report contained a statement on the Remuneration Policy


xiii. 7.10.5(c) The aggregate remuneration paid to executive and non-executive directors in the Annual Report

Compliant Provided on page 42 Note no.11


10

Rule No. Disclosures regarding Board of Directors Compliance Status

Details

xiv 7.10.6(a) The number of Independent Non-Executive Directors in the Audit Committee

Compliant Two out of three Non Executive Directors are independent

xv 7.10.6(a) Whether the Chairman of the Audit Committee is a Non-Executive Director -

Compliant Chairman is an Non Executive and Independent Director

xvi 7.10.6(a) Whether the Chairman or 1 member of the Audit Committee is a member of a recognized professional accounting body

Compliant Chairman is a member of a professional accounting body

xvii 7.10.6(a) Whether the CEO and CFO attended Audit Committee Meetings, Unless otherwise determined by the Audit Committee

Compliant CEO and CFO attended meetings by invitation

xviii 7.10.6(b) Confirmed that the functions of the Audit Committee as being in accordance with Rule 7.10.6 (b)

Compliant Audit Committee function as stipulated in page 7

xix 7.10.6(c) Whether a separate Audit Committee was formed or whether listed parent’s Audit Committee was used

Compliant Separate Audit Committee was formed

xx 7.10.6(c) Names of directors comprising the Audit Committee (where the parent company’s Audit Committee qualifies to function as the listed company’s Audit Committee, a statement to this effect and disclosed the names of the director


xxi 7.10.6(c) The basis for determining external auditors as being independent

Compliant Disclosed in Report of the Audit Commitee on page 19


11


Risk Management and Internal Control

Risk is the probability of occurrence of an uncertain event which damages or lowers the effectiveness of business processes; ultimately reduce the profitability of the company. Being a finance company, PMF is taking extensive efforts to identify the full spectrum of its risks and also has a sound framework to manage

the impact of those risks based on the concept “prevention is better than cure”. Hence the company has embedded risk management practices into daily operations in order to balance the tradeoff between the risks and returns.

Effective Management of risk is vital to a business to reduce the possibilities of incurring losses and leaving out further opportunities to make profits. Risk Management process of PMF includes policies and practices to systematically identify the probable risk events of each risk category. It has set procedures to assess the risk and guidelines to mitigate or transfer risk factors appropriately. Our company expects its Risk Management Framework to encompass many features including the followings;

Being an integral part of organizational process Capturing a wide range of information to evaluate the

uncertainty in the business process Being systematic but dynamic in responding to the changes

in internal and external environment Being transparent and supportive in the decision making

process

IdentifyingRisks

Identify key risk factors with regards to Credit, Liquidity, Market, Operational and Information Technnology risk

EvaluatingRisks

The risk owners evaluate the risk and discuss the significance of the risks

PrioratizingRisks Risks are prioratized based on their likelihood of cccurence and the impact

StrategicPlanning Appropriate plans are prepared to manage the risk jointly with the risk owners

Implementing Strategies are implemented inorder to mitigate or avoid the risk

ContinuosMonitoring

Monitor the process in order to identify whether the business achieves the expected outcome

Risk Management Process

Board ofDirectors

ALCOBoard Audit Sub

Committee

Internal Audit

RiskManagementCommittee

ComplianceOfficer

CEO and theCorporate

Management

RiskManagement

Board SubCommittee

12

Risk Management Framework

The Board of Directors identifies the optimal risk – return policy at the strategic business level with the support of the Integrated Risk Management Committee and the Audit Committee. Also the Board formulates comprehensive risk management policies and processes based on the recommendation of Management and Board Committees. The CEO bridges the Board and the risk owners by coordinating between the two parties. He is held responsible for continuously monitoring the risk generating of the business activities. Risk owners identify the sources of risks and hold the responsibility of reporting to the board through Integrated Risk Management Committee and CEO.

The Board Audit Committee assists the Board in overseeing management compliance with related acts and regulations through Internal and external audits. Further the committee ensures the effectiveness of the system of internal controls.

Key Risks Faced by the company

1. Credit Risk

Credit risk arises from the potential that a borrower or counterparty of a financial transaction will fail to perform on an obligation. Credit Risk may result in the losses of the principal and the interest amount which will adversely impact on profit and ultimately affecting the overall performance of the company. As a finance company there are different activities which will lead to credit risk including lending, leasing and treasury functions. Since lending and leasing being the main business lines of PMF, credit risk is the highest contributor of overall risk of the company.

PMF manages credit risk through a well structured framework which provides guidelines to take credit decisions within the Company’s risk appetite. This framework defines and communicates Risk acceptance criteria of the company to avoid negative consequences when dealing with high risk generating parties.

PMF has set hierarchical delegation of authority limits to manage its credit risk. The ratification process of disbursement documents is centralized to Head Office and in order to mitigate the risk clear segregation of duties has been in place between the originator and the approver. Establishing single borrower limits and exposure to various segments based on the industry performance are in place to manage the credit risk.

The responsibility of monitoring the credit risk evaluation process is held with Internal Audit and Risk management policy.

2. Liquidity Risk

Liquidity risk refers to the risk that the company does not have sufficient financial recourses to meet its obligations as they fall due or will have to do at an extensive cost. This arises from mismatches in the timing or maturity of cash flows. For a finance company, ensuring adequate liquidity is maintained in all currencies to meet its obligations is crucial for a smooth flow of day to day operations.

Proactively taking necessary measures to mitigate Liquidity risk exposure is critical to maintain customer confidence

towards the finance company. Our company has a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process should include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons. Senior management continuously review information on the company’s liquidity developments and report to the Board of Directors on a regular basis.

Treasury plays a strategic role in maintaining liquidity through having a balanced mix of deposits and money market funds. In order to comply with Central Bank guidelines on Liquidity Management, PMF calculates statutory liquid asset ratio on a daily basis. Through this the company measures the daily liquidity risk of the company and takes necessary control actions. The company forecasts Liquid Asset ratio for future twenty working days to identify short term liquidity position and this forecast is further extended for the next three years to have a clear picture on long term cash movement. Maturity mismatch analysis is another key liquidity risk indicator which assesses the liquidity risk exposure of the company.

3. Market Risk

Market risk refers to the risk of decreasing the value of assets and liabilities arising from adverse movements in external market conditions such as changes in equity prices, interest rates, credit spreads, foreign-exchange rates, commodity prices. Being a member of the financial services industry, it is extremely important to predict above fluctuations to gain a competitive advantage over the other members. Hence having a sound market risk management system which is well aligned with the company’s strategic objectives is essential when managing the adverse consequences arising from the market fluctuations.

At PMF the market risk mitigation is mainly done through policies, limits, and control measures such as segregation of duties. The risk tolerance limits are imposed by ALCO and are subject to regular reviews adjustments according to the market fluctuations.

The key market risks categories are as follows:

3.1 Interest Rate Risk

This refers to the risk of losses resulting from changes in interest rates. As a result of a mismatch in interest rates on its assets and liabilities and/or timing differences in the Maturity. As a financial institution, majority of the profits is based on the interest income and interest expense. Hence, a financial institution may suffer a loss in profit due to the adverse changes in interest rates.

The ALCO is held responsible for review interest rate caps to identify the impact on capital and take actions to re price of the products to ensure the financial stability of the company. Market interest rates and other macroeconomic indicators are monitored closely by the committee and necessary changes are made to mitigate the risk.

3.2 Price Change Risk

This refers to the risk of losses resulting from a decline in the value of assets due to changes in the prices of assets, securities etc. Commodity price risk and Equity price risk


13


are the risk categories which mainly affect the business of PMF. Commodity price risk refers to the uncertainty of the expected value of profit raised from the purchase and sale of different commodities. This includes Price risk which is mainly due to Price volatility and Volume risks related to changes in demand and availability of resources. In PMF pawning business is mainly affected by this risk and to mitigate the adverse impacts, the company has introduced a quicker reprising cycle.

3.3 Equity Price Risk

This refers to the losses due to changes in the prices of equity securities to the public market or stock exchange indices. PMF is a listed entity in the Colombo stock exchange; hence any adverse moments of share price directly affect the performance of the company. PMF has set long term investment strategies to reduce its equity price risk.

4. Operational Risk/ Business Risk

The operational risk refers to the losses resulting from inadequate internal processes, people and systems, or the company’s inability to control external harmful events. Operational risk is a broad discipline which is extremely important in the development of integrated risk management programs which include compliance, business continuity planning, information security and other operational risk related data.

Due to the growing complexity of the financial industry such as new technology, network systems etc, frequent upgrading in regulatory requirements is essential. In this context, corporate governance and excellent management of operational risk of the finance company is getting highlighted and increased attention.

Our company has established a sound process of internal controls which is in accordance with the policies and procedures imposed by the central bank and other regulatory bodies. This process comprises of risk assessment, monitoring

through key risk indicators, reporting, control mechanisms and contingency planning.

The hierarchical risk management framework enables the company to mitigate the risk in each layer. This hierarchy includes Board of Directors, Risk Management Committee of the Board, Risk managers and support groups of risk management. The Board of Directors is the ultimate accountability holder and ensures the effectiveness of the integrated operational risk management framework.

5. Information Technology Risk

Managing information Technology risk has been given a strategic importance within the financial industry due to the fact that all the financial institutions have become the members of the global network. Since the increased dependency on the systems, the chances of unauthorized access to the sensitive information and data theft also have continued to increase. Hence it’s extremely important for a financial institution to have excellent IT controls to minimize risks arising from hardware and software failure, human error, spam, viruses and malicious attacks, as well as natural disasters.

PMF has a comprehensive Information Security Policy which outlines how to select and implement counter measure against information theft. The policy encourages everyone within the organization to consistently behave in an acceptable frame with respect to information security. An Information storage protection that safeguards system /data availability, integrity and confidentiality, operational controls such as personnel security, backup, contingency, off-site have been implemented to ensure sound IT controls.

Risk Owners

Different types of Risk in an organization should be identified effectively and risk ownership should be passed to the most appropriate people in order to avoid or mitigate the risk. Since our company’s risk is managed hierarchically; we have risk owners in each layer who is personally responsible for the effectiveness of the Risk Management Process.

Company Risk Matrix

A Risk Matrix is a tool used by PMF to calculate the level of risk in business activities. Most commonly a Risk Matrix is a mapping between the likelihood of an event happening and the

consequence if the event occurs. A scoring system for risks is a way to quickly see which activities of the company to be treated as highly important and those that can be delayed or ignored completely.

Negligible Marginal Moderate Critical CatastrophicCertain Medium High High Extreme ExtremeLikely Medium Medium High High Extreme

Possible Low Medium Medium High HighUnlikely Low Low Medium Medium High

Rare Low Low Low Medium Medium

Impact/ Severity

Like

lihoo

d

Based on the likelihood and the impact, PMF identifies the risk grade of each business operation. Risk owners closely examine the existing procedure that has been set to mitigate or avoid the

risk and evaluate to see the set procedures are adequate to manage the risk. PMF introduces a new set of policies and procedures to manage risk when and where needed to manage risk more effectively.


Financial ReportsAnnual Report of the Board 16Directors’ Responsibility for Financial Reporting 18Report of the Audit Committee 19Independent Auditor’s Report 20Income Statement 22Statement of Comprehensive Income 23Statement of Financial Position 24Statement of Changes in Equity 25Cash Flow Statement 27Notes to the Financial Statements 28

16

Annual Report of the Board

The Board of Directors has pleasure in presenting to the shareholders their Report together with the audited financial statements of People’s Merchant Finance PLC (the Company) and the audited consolidated financial statements of the Group for the year ended 31st March 2014.

People’s Merchant Finance PLC is a public limited liability company incorporated in Sri Lanka on the 26th January 1983, quoted on the Colombo Stock Exchange in July 1994, re-registered as per the Companies Act No. 07 of 2007 on the 16th September 2008 and registered under the Finance Leasing Act No.56 of 2000 and Finance Business Act No. 42 of 2011.

The Directors approved this Report on the 30th October 2014.

1. Principle Activities

The Principle activities of the Company are Leasing, Hire Purchase, Fixed Deposits and Savings, Foreign Currency,

Trade Finance, Real Estate, Short Term Investments, Pawning, Margin trading and Corporate Finance Services.

The Monetary Board of the Central Bank of Sri Lanka has granted the Company the licence to carry on Finance Business under the Finance Business Act No.42 of 2011 with effect from 17th April 2012.

2. Financial Statements

The Financial Statements of the Company comprise the Income Statement, Statement of Comprehensive Income, Statement of Financial Position, Statement of changes in equity and Cash Flow Statement together with the accounting policies and notes to the financial statements for the year ended 31st March 2014 are given in pages 22 to 65 of this Annual Report.

4. Taxation

Provision for taxation has been computed at the rates given in Note 12 to the Financial Statements.

5. Dividends

The Directors have not recommended the declaration of dividend for the financial year ended 31st March 2014.(Nil as per share for FY 2012/13).

6. Independent Auditors Report

The Independent Auditors Report on the Financial Statements is given on pages 20 to 21.

7. Accounting Policies

The accounting policies adopted in the preparation of the Financial Statements are given on pages 28 to 40. There have been no changes in the accounting policies adopted by the Company during the year under review.

8. Statements of Directors’ Responsibilities

The statement of Directors’ responsibility for the Financial Statements is given on page 18.

9. Directorate The following were the directors of the Company during the

financial year ended 31st March 2014;

Mr. J.P. Amaratunga – Chairman (Appointed on 1st September 2014)

Mr. G. Ramanan – Managing Director/CEO Mr. P. Kudabalage (Appointed Chairman on 9th July 2013

and resigned on 1st September 2014) Mr. T.H.M. Wickramasinghe Mr. A.P. Weerasinghe Mr. Rohan S. De Silva (Alternate Director to Mr. M.M.S.K. Rajapakse – appointed on 14th August 2013) Ms. S.V. Amarasekara Mr. N.C. Peiris Ms. L.K. Sangakkara

3. Summary of Financial Results

For the Year Ended 31st March Company Group 2014 2013 2014 2013 Rs.’000 Rs.’000 Rs.’000 Rs.’000Profit/(loss) before tax (184,419) (89,740) (180,370) (89,739)Tax expense 37,936 1,154 38,651 1,644Profit/(loss)for the year (222,355) (90,894) (219,021) (91,383)Revenue reserve b/f (292,380) (199,773) (298,220) (206,837)Profit/(loss) available for appropriation (514,735) (290,667) (517,241) (298,220)

Appropriation Statutory reserve fund - - - -Actural gain 298 - 298 -Investment fund account - 1,713 - 1,713Ordinary dividend paid - - - -Revenue reserve c/f (514,437) (292,380) (518,656) (299,933)

17


All the Directors including the Chairman are Non Executive Directors except the Managing Director/CEO, Mr. G. Ramanan. Three Directors namely Mr. A.P Weerasinghe, Ms. S.V Amarasekara and Mr. N.C Peiris are Independent Directors.

10. Interest Register

The Interest Register is maintained by the Company as per requirements in the Companies Act No. 7 of 2007. All directors have made declarations as provided for in section 192 (2) of the Companies Act. The related entries were made during the year ended 31st March 2014.

10.1 Directors Emoluments

The Emoluments and other benefits made to the Directors during the year are disclosed in Note 11 to the Financial Statements.

10.2 Directors Interest in Contracts

No Director has any material interest in any transactions or proposed contract involving People’s Merchant Finance PLC other than those disclosed in Note 32 to the financial Statements.

10.3 Directors Interest in Shares

Shareholding of Directors are as follows

No of Shares No of Shares as at 01.04.13 as at 31.03.14Mr. J.P. Amarathunga Nil NilMr. G. Ramanan 6,483,793 6,483,793Mr. P. Kudabalage Nil NilMr. A.P. Weerasinghe Nil NilMr. T.H.M. Wickramasinghe Nil NilMr. M.M.S.K. Rajapakse Nil NilMr. N.C. Peiris Nil NilMrs. S.V. Amarasekara Nil NilMrs. L.K. Sangakkara Nil NilMr. R.S. De Silva Nil Nil

11. Donations

No Donations were made during the year under review (Rs. 10,285,845/- in 2013)

12. Employees

Number of Employees as at 31st March 2014 was 117 (31st March 2013 – 155)

13. Auditors

Messrs. KPMG has expressed their willingness to continue in Office as Auditors of the Company. Accordingly, a resolution to reappoint them as Auditors until the next

Annual General Meeting at a remuneration to be agreed upon with by them by the Board and to audit the Financial Statements of the Company for the accounting period ending 31 March 2015 will be proposed at the Annual General Meeting.

Auditors, Messrs. KPMG were paid Rs. 1,790,093 as audit fee and expenses by the Company. Further they were paid Rs. 1,000,491 as non audit services during the year under review.

Based on the written representation made by the Auditors to the Board, the Directors are satisfied that the Auditors did not have any relationship with or any interest in the Company.

14. Investments in Subsidiaries The details of investment made by the Company are given in

Notes 18 to the Financial Statements.

15. Corporate Governance

The Board of Directors of the Company in complying with the Corporate Governance Directions, with the Corporate Governance Direction, No. 3 of 2008 issued to Finance Companies by the Central Bank of Sri Lanka have placed great emphasis in conforming to the best corporate governance practices and procedures set out therein. The Board is continuing to introduce better systems and procedures for the internal controls, risk management of the Company, and thereby improve accountability and transparency in the Company. The Corporate Governance report of the Company is given on pages 5 to 10.

16. Events subsequent to the Balance Sheet date

There had not been any circumstances since the Balance Sheet date, which would require adjustments to or disclosed in the Notes to the Accounts, except those disclosed in Note 38 to the accounts.

For and on behalf of the Board of Directors.

Mr. J. P. Amaratunga Mr. G. RamananChairman Managing Director / CEO

DirectorCorporate Services (Private) LimitedSecretaries

Colombo, Sri Lanka30th October 2014

Annual Report of the Board

18

Directors’ Responsibility for Financial Reporting

The Companies Act No. 7 of 2007 requires that the Board of Directors of a Company shall prepare Financial Statements which shall give a true and fair view of the state of affairs of the company as a balance sheet date and the profit or loss or income and expenditure as the case may be of the company for the accounting period ending on that balance sheet date. In preparing the above financial statements appropriate accounting policies and standards have been selected and applied consistently. Where necessary reasonable and prudent judgements and estimates have been made in line with Accounting Standards.

The Directors are responsible for ensuring that the Company maintains sufficient accounting records to disclose with reasonable accuracy the financial position of the Company. They are also responsible for taking reasonable measures to safeguard the assets of the Company and in that context, to have proper regard to the establishment of appropriate systems of internal controls with a view of preventing and detecting fraud or and other irregularities.The Directors are of the opinion that the Company has adequate resources to continue in operation to adopt the going concern basis in preparing the accounts.

The Company’s external auditors KPMG have examined the Financial Statements made available by the Board of Directors together with all financial records, related data, minutes of shareholders and Directors meetings and express their opinion in the Auditors’ Report on pages 20 to 21 of the Annual Report.

By order of the Board

People’s Merchant Finance PLCCorporate Services (Private)LimitedSecretaries


19


Report of the Audit Committee

The audit committee is appointed by the Board of Directors and is responsible to the same. The committee comprises of ;

Mr. N. C. Peiris – Chairman - Independent, Non Executive Director

Mr. A. P. Weerasinghe - Independent Non Executive Director

Mr. T. Weerasinghe - Non Executive Director

The Chairman Mr. N C Peiris is a fellow member of the Institute of Chartered Accountants of Sri Lanka with over 42 years of experience in Accounting and Finance and have held very senior positions in the private sector.

Meetings

The Committee met six times during the year under review. The CEO and the Financial Controller attended meetings by invitation. Corporate Services Limited acted as secretaries to the Audit Committee. The proceedings of the Audit Committee were reported to the Board of Directors on a regular basis.

Role of the Committee

The main objectives of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities in the financial reporting process, the system of internal controls and risk management, the independence and the audit process of the external auditors and the process for monitoring compliance with laws and regulations.

Accounting Package & Finance Division

The Audit Committee has recommended to the Board that the Accounting Package be revisited and amendments carried out to the system as necessary to ensure accurate and reliable Financial Statements can be extracted from the system without human intervention or with minimum intervention with proper & effective controls.

The Committee has also recommended to the Board the Finance Team be strengthened.

Internal Audit

The In-house Internal Audit department mainly focused on initiating and improving policies and procedures of the business processes during the year under review.

The Internal Audit is responsible to review and report on the accuracy and integrity of the financial statements, efficiency of the internal control systems and compliance with statutory and other regulations and the accounting and operational policies.

The Internal Auditor resigned from the services of the Company during the year under review and an Audit Firm was appointed to carry out the Internal Audit Function.

External Audit

During the year, the committee met with Messrs KPMG, External Auditors to discuss the Auditors management letter pertaining to the previous year’s audit and Management’s response thereto. Discussions were also held concerning the nature, scope and approach for the audit 2013/14 prior to commencement of the audit. Several meetings were held with the external Auditors on various issues pertaining to the Audit for the year ending 31st March 2014.

The audit committee has recommended to the Board of Directors that Messrs KPMG to be reappointed as Auditors for the financial year ending 31st March 2015 subject to the approval of the shareholders at the Annual General Meeting.

Conclusion

Finally, I would like to thank all the members who served on the Audit Committee during the year for their valuable contribution to the deliberations for the committee.

N.C PeirisChairmanAUDIT COMMITTEE


20

Independent Auditor’s Report

TO THE SHAREHOLDERS OF PEOPLE’S MERCHANT FINANCE PLC

Report on the Financial Statements

We have audited the accompanying financial statements of People’s Merchant Finance PLC (“the Company”) and the consolidated financial statements of the Company and its subsidiary (“the Group”), which comprise the statements of financial position as at March 31, 2014, the statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

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

Scope of Audit and Basis of Opinion

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

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

Except as discussed in following paragraphs, we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit. We therefore believe that our audit provides a reasonable basis for our qualified opinion.

Basis for Qualified Opinion – Company

As explained in note number 22.1 to the financial statements, the general ledger did not agree with the sub ledgers which resulted in differences in relation to assets, liabilities, income and expenses in the Statement of Financial Position and Statement of Comprehensive Income, in the previous year’s financial statements. Any such un-reconciled differences were transferred to a suspense account to be investigated and reconciled by the Company. However the reason for the differences were not specifically identified as at March 31, 2014 and the suspense account is still appearing as a non-current asset in the statement of financial position.

During the year further entries were made to the suspense account due to differences noted during the year and to record certain unrecorded assets and liabilities as specified in note 22.2 to financial statements. Out of these adjustments, entries for Rs. 18,232,576/- could not be verified due to unavailability of supporting information.

As stated in note 22 to the financial statements the balance of the Suspense Account as at March 31, 2014, amounted to Rs. 108,227,808/- which is not verifiable. Had the said balances was written off in the financial statements the total equity would have reduced by Rs. 108,227,808/-.

As stated in note 16 to the financial statements, the Company had provided Rs. 293,642,311/- as provision for individually significant impairment. This provision is based on estimates of future cash flows for the facilities which are individually significant and there are objective evidence of impairment. Due to lack of information, we were unable to establish the reasonability of the assumptions used to arrive at the estimated future cash flows. Had the company used

21


Independent Auditor’s Report

assumptions where the reasonability could be justified, the provision for individually significant facilities would have increased up to Rs. 344,806,957/- and the loss for the year would have increased by Rs. 51,164,646/-.

As stated in the Note 21 to these financial statements, the Company has recorded a receivable from a former director amounting to Rs. 11,632,159/- under current assets as at the reporting date. This balance remains unsettled for a period more than a year. Although this is an indication that the recoverability of this amount is doubtful, no provision had been made in the financial statements to reflect the potential impairment losses.

As stated in the Note 21 to these financial statements, the Company has recorded VAT recoverable balance amounting to Rs. 18,467,695/-. However the supporting documents were available only for Rs. 15,170,834/-. We were unable to verify the existence of a balance VAT receivable amounting to Rs. 3,296,861/- out of such recoverable.

Opinion – Company

In our opinion except for the possible effects of the matters described in the preceding paragraphs, the financial statements give a true and fair view of the financial position of the Company as at March 31, 2014, and of its financial performance and its cash flow for the year then ended in accordance with Sri Lanka Accounting Standards.

Basis for Qualified Opinion – Group

As explained in note number 22.1 to the financial statements, the general ledger did not agree with the sub ledgers which resulted in differences in relation to assets, liabilities, income and expenses in the Statement of Financial Position and Statement of Comprehensive Income, in the previous year’s financial statements. Any such un-reconciled differences were transferred to a suspense account to be investigated and reconciled by the Company. However the reason for the differences were not specifically identified as at March 31, 2014 and the suspense account is still appearing as a non-current asset in the statement of financial position.

During the year further entries were made to the suspense account due to differences noted during the year and to record certain unrecorded assets and liabilities as specified in note 22.2 to financial statements. Out of these adjustments, entries for Rs. 18,232,576/- could not be verified due to unavailability of supporting information. As stated in note 22 to the financial statements the balance of the Suspense Account as at March 31, 2014, amounted to Rs. 108,227,808/- which is not verifiable. Had the said balances was written off in the financial statements the total equity would have reduced by Rs. 108,227,808/-.

As stated in note 16 to the financial statements, the Company had provided Rs. 293,642,311/- as provision for individually significant impairment. This provision is based on estimates of future cash flows for the facilities which are

individually significant and there are objective evidence of impairment. Due to lack of information, we were unable to establish the reasonability of the assumptions used to arrive at the estimated future cash flows. Had the company used assumptions where the reasonability could be justified, the provision for individually significant facilities would have increased up to Rs. 344,806,957/- and the loss for the year would have increased by Rs. 51,164,646/-.

As stated in the Note 21 to these financial statements, the Company has recorded a receivable from a former director amounting to Rs. 11,632,159/- under current assets as at the reporting date. This balance remains unsettled for a period more than a year. Although this is an indication that the recoverability of this amount is doubtful, no provision had been made in the financial statements to reflect the potential impairment losses.

As stated in the Note 21 to these financial statements, the Company has recorded VAT recoverable balance amounting to Rs. 18,467,695/-. However the supporting documents were available only for Rs. 15,170,834/-. We were unable to verify the existence of a balance VAT receivable amounting to Rs. 3,296,861/- out of such recoverable.

Opinion – Group

In our opinion, except for the possible effects of the matters described in the preceding paragraphs the consolidated financial statements give a true and fair view of the financial position of the Company and its subsidiary dealt with thereby as at March 31, 2014, and of its financial performance and its cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

Report on Other Legal and Regulatory Requirements

These financial statements also comply with the requirements of Sections 153(2) to 153(7) of the Companies Act No. 07 of 2007.

CHARTERED ACCOUNTANTSOctober 30, 2014Colombo

22

Income Statement

FOR THE YEAR ENDED 31 MARCHIn Rupees Thousand Note Company Group 2014 2013 2014 2013

Interest income 750,661 640,259 750,661 640,259Interest expense 591,995 425,598 592,002 425,598Net interest income 4 158,666 214,661 158,659 214,661Fee and commission income 5 4,421 6,954 4,421 6,954Net trading income 6 2,778 14,023 2,778 14,023Net gain from financial assets 7 12,402 561 12,402 561Other operating income 8 27,423 38,392 32,057 33,914Total operating income 205,690 274,591 210,317 270,113Net impairment charges on financial assets 9 (177,733) (66,776) (177,733) (59,646)Net operating income 27,957 207,815 32,584 210,467Staff costs 10 95,101 117,442 95,101 117,590Other expenses 11 117,275 177,045 117,853 179,548Operating loss before value added tax (VAT) (184,419) (86,672) (180,370) (86,671)Value added tax (VAT) on financial services - 3,068 - 3,068Loss before tax (184,419) (89,740) (180,370) (89,739)Tax expense 12 37,936 1,154 38,651 1,644Loss for the year (222,355) (90,894) (219,021) (91,383)Loss attributable to:Equity holders (222,355) (90,894) (219,021) (91,383)Non-controlling interest - - - -Loss for the year (222,355) (90,894) (219,021) (91,383)Earnings per share on profitBasic Loss per ordinary share 13 (3.29) (1.35) (3.24) (1.35)

The notes to the Financial Statements from page 28 to 65 form an integral part of these Financial statements.

Figures in brackets indicate deductions.

23


Statement of Comprehensive Income

FOR THE YEAR ENDED 31 MARCHIn Rupees Thousand Note Company Group 2014 2013 2014 2013

Loss for the year (222,355) (90,894) (219,021) (91,384)

Other comprehensive income

Net change in fair value of available for sales reserve 17,188 - 17,188 -

Available for sales reserve reclassify to Income Statement (12,254) - (12,254) -

Actuarial gain on defined benefit plans 298 - 298 -

Revaluation of property, plant and equipment - 465,498 - 465,498

Other comprehensive income for the year, net of taxes 5,232 465,498 5,232 465,498

Total comprehensive (Loss)/ Income for the year (217,122) 374,604 (213,789) 374,114

Attributable to:

Equity holders (217,122) 374,604 (213,789) 374,114

Non- controlling interests - - - -

(217,122) 374,604 (213,789) 374,114



24

Statement of Financial Position

AS AT 31 MARCHIn Rupees Thousand Note Company Group 2014 2013 2014 2013

AssetsCash and Cash Equivalents 14 231,787 168,791 232,155 169,323Investment in Fixed Deposits 23,742 114,057 23,742 114,057Financial Investments - Held for Trading 15 2,241 2,094 2,241 2,094Loans and advances to customers 16 3,467,030 3,041,401 3,467,030 3,041,401Financial investments - Available for sale 17 498,461 23 498,461 23Investments in subsidiaries 18 - - - -Amounts due from related parties - - - -Property, plant and equipment 19 972,740 989,402 968,719 985,381Intangible assets 20 2,814 4,330 2,814 4,330Other assets 21 174,083 149,981 174,103 149,418Suspense account 22 108,227 138,552 108,227 138,552Total Assets 5,481,125 4,608,633 5,477,492 4,604,581LiabilitiesDue to banks 23 57,225 584,129 57,225 584,129Deposits from customers 24 4,237,339 2,675,424 4,237,339 2,675,424Debt securities issued 25 10,000 10,000 10,000 10,000Current Taxation - - 546 -Deferred taxation 26 42,787 4,852 42,432 4,327Other liabilities 27 82,741 66,073 83,137 70,099Total Liabilities 4,430,093 3,340,478 4,430,679 3,343,979EquityStated capital 28 1,078,227 1,078,227 1,078,227 1,078,227Statutory reserve funds 29 16,810 16,810 16,810 16,810Revaluation Reserve 465,498 465,498 465,498 465,498Available For Sales Reserve 4,934 - 4,934 -Retained earnings 30 (514,437) (292,380) (518,656) (299,933)Total Equity 1,051,032 1,268,155 1,046,813 1,260,602Total Equity and Liabilities 5,481,125 4,608,633 5,477,492 4,604,581Contingent liabilities and commitments 31 5,883 49,900 5,883 49,900

The notes to the Financial Statements from page 28 to 65 form an integral part of these Financial Statements.

The Financial Statements are in compliance with the requirements of Companies Act No. 7 of 2007.

S. FernandoFinancial Controller

Approved and signed for and on behalf of the Board of Directors.

J.P. Amaratunga G. RamananChairman Managing Director/ CEO


25


Statement of Changes in Equity - Company

In R

upee

s Thou

sand

St

ated

St

atut

ory

Res

erve

s

C

apita

l Fi

nanc

e Le

ase

Inve

stm

ent

Rev

alua

tion

Avai

labl

e Fo

r R

etai

ned

Tota

l

Res

erve

Fun

d Fu

nd

Res

erve

Sa

le R

eser

ve

Earn

ings

Eq

uity

R

s. R

s. R

s. R

s. R

s. R

s. R

s.

Bala

nce

as a

t 01s

t Apr

il 20

12

1,07

8,22

7 7,

259

7,83

8 -

- (1

99,7

73)

893,

551

Tota

l com

preh

ensi

ve in

com

e fo

r the

yea

rLo

ss fo

r the

Yea

r -

- -

- -

(90,

894)

(9

0,89

4)O

ther

com

preh

ensiv

e in

com

e fo

r the

yea

r -

- -

465,

498

- -

465,

498

Tota

l com

preh

ensi

ve in

com

e fo

r the

yea

r -

- -

465,

498

- (9

0,89

4)

374,

604

Tran

sact

ions

with

equ

ity h

olde

rs, r

ecog

nise

d di

rect

ly in

equ

itySt

atut

ory

Rese

rve

Tran

sfer

s -

- 1,

713

- -

(1,7

13)

-To

tal t

rans

actio

ns w

ith e

quity

hol

ders

-

- 1,

713

- -

(1,7

13)

-

Bala

nce

as a

t 31s

t Mar

ch 2

013

1,07

8,22

7 7,

259

9,55

1 46

5,49

8 -

(292

,380

) 1,

268,

155

Bala

nce

as a

t 01s

t Apr

il 20

13

1,07

8,22

7 7,

259

9,55

1 46

5,49

8 -

(292

,380

) 1,

268,

155

Com

preh

ensi

ve In

com

e fo

r the

yea

rLo

ss fo

r the

Yea

r -

- -

- -

(222

,355

) (2

22,3

55)

Oth

er C

ompr

ehen

sive

Inco

me,

Net

of T

axA

ctua

rial G

ain

- -

- -

- 29

8 29

8N

et ch

ange

in fa

ir va

lue

of av

aila

ble

for s

ales

rese

rve

- -

- -

17,1

88

- 17

,188

Avai

labl

e fo

r sal

es re

serv

e re

clas

sify

to In

com

e St

atem

ent

- -

- -

(12,

254)

-

(12,

254)

Tota

l com

preh

ensi

ve in

com

e fo

r the

yea

r -

- -

- 4,

934

(222

,057

) (2

17,1

22)

Tran

sact

ions

with

equ

ity h

olde

rs, r

ecog

nise

d di

rect

ly in

equ

ityTo

tal t

rans

actio

ns w

ith e

quity

hol

ders

-

- -

- -

- -

Bala

nce

as a

t 31s

t Mar

ch 2

014

1,07

8,22

7 7,

259

9,55

1 46

5,49

8 4,

934

(514

,437

) 1,

051,

032

Figu

res i

n br

acke

ts in

dica

te d

educ

tions

.

FOR

TH

E Y

EAR

EN

DED

31

MA

RCH

26

Statement of Changes in Equity - Group

In R

upee

s Thou

sand

St

ated

St

atut

ory

Res

erve

s

C

apita

l Fi

nanc

e Le

ase

Inve

stm

ent

Rev

alua

tion

Avai

labl

e Fo

r R

etai

ned

Tota

l

Res

erve

Fun

d Fu

nd

Res

erve

Sa

le R

eser

ve

Earn

ings

Eq

uity

R

s. R

s. R

s. R

s. R

s. R

s. R

s.

Bala

nce

as a

t 01s

t Apr

il 20

12

1,07

8,22

7 7,

259

7,83

8 -

- (2

06,8

37)

886,

487

Tota

l com

preh

ensi

ve in

com

e fo

r the

yea

rLo

ss fo

r the

Yea

r -

- -

- -

(91,

383)

(9

1,38

3)O

ther

com

preh

ensiv

e in

com

e fo

r the

yea

r -

- -

465,

498

- -

465,

498

Tota

l com

preh

ensi

ve in

com

e fo

r the

yea

r -

- -

465,

498

- (9

1,38

3)

374,

115

Tran

sact

ions

with

equ

ity h

olde

rs, r

ecog

nise

d di

rect

ly in

equ

itySt

atut

ory

Rese

rve

Tran

sfer

s -

- 1,

713

- -

(1,7

13)

-O

ther

Com

preh

ensiv

e In

com

e, N

et o

f Tax

Tota

l tra

nsac

tions

with

equ

ity h

olde

rs

- -

1,71

3 -

- (1

,713

) -

Bala

nce

as a

t 31s

t Mar

ch 2

013

1,07

8,22

7 7,

259

9,55

1 46

5,49

8 -

(299

,933

) 1,

260,

602

Bala

nce

as a

t 01s

t Apr

il 20

13

1,07

8,22

7 7,

259

9,55

1 46

5,49

8 -

(299

,933

) 1,

260,

602

Com

preh

ensi

ve In

com

e fo

r the

yea

rLo

ss fo

r the

Yea

r -

- -

- -

(219

,021

) (2

19,0

21)

Oth

er C

ompr

ehen

sive

Inco

me,

Net

of

Tax

Act

uaria

l Gai

n -

- -

- -

298

298

Net

chan

ge in

fair

valu

e of

avai

labl

e fo

r sal

es re

serv

e -

- -

- 17

,188

-

17,1

88Av

aila

ble

for s

ales

rese

rve

recl

assif

y to

Inco

me

Stat

emen

t -

- -

- (1

2,25

4)

- (1

2,25

4)To

tal c

ompr

ehen

sive

inco

me

for t

he y

ear

- -

- -

4,93

4 (2

18,7

23)

(213

,789

)Tr

ansa

ctio

ns w

ith e

quity

hol

ders

, rec

ogni

sed

dire

ctly

in e

quity

Tota

l tra

nsac

tions

with

equ

ity h

olde

rs

- -

- -

- -

- Ba

lanc

e as

at 3

1st M

arch

201

4 1,

078,

227

7,25

9 9,

551

465,

498

4,93

4 (5

18,6

56)

1,04

6,81

3

Figu

r es i

n br

acke

ts in

dica

te d

educ

tions

.

FOR

TH

E Y

EAR

EN

DED

31

MA

RCH

27


Cash Flow Statement

FOR THE YEAR ENDED 31 MARCH Company GroupIn Rupees Thousand 2014 2013 2014 2013

Cash Flows from Operating ActivitiesProfit before taxation (184,419) (89,740) (180,370) (89,739)Adjustment for:Non-cash items included in profits before taxReversal of interest from investing activities (68,606) (18,435) (68,606) (18,435)Reversal of fair value change on shares (148) (561) (148) (561)Reversal of fair value gain from AFS Reserve (12,254) - (12,254) -Depreciation reversal 16,179 13,657 16,179 13,682Amortization reversal 1,517 1,695 1,517 1,695Reversal of profit from disposal of property, plant & equipment (4,054) - (4,054) -Reversal of Impairment on Loans and advances to customers 178,006 66,776 178,006 59,646Reversal of Impairment on other assets (272) - (272) -Reversal of other write-off 2,623 - 2,623 -Reversal of employee benefits 3,508 2,265 3,508 2,265Suspense entries affected to income statement - (23,324) - (23,324)Effect of Assets Liabilities write-off and write back (7,268) - (10,242) -Change in Loans and advances to customers (588,155) (1,086,441) (588,155) (1,079,311)Change in Other assets (11,741) 3,794 (12,324) 3,794Change in operating liabilities 9,574 31,978 8,918 32,225Change in deposits form customers 1,568,617 1,274,944 1,568,617 1,274,944Gratuity paid (2,526) (559) (2,526) (559)Tax paid (732) (14,673) (732) (14,673)

Net cash generated from operating activities 899,849 161,375 899,685 161,648

Cash Flows from Investing ActivitiesInterest income on short term investment 41,240 18,435 41,240 18,435Investment in available for sale securities (749,587) - (749,587) -Proceeds from sale of available for sale securities 295,705 - 295,705 -Acquisition of property, plant & equipment (646) (24,527) (646) (24,527)Proceeds from the sale of property, plant & equipment 5,183 454 5,183 454Disposals of shares - 1,524 - 1,524Net purchase of intangible assets (2) (4,120) (2) (4,120)Net cash generated from investing activities (408,106) (8,235) (408,106) (8,235)

Cash flows from Financing ActivitiesRepayment of bank loan (177,183) (224,594) (177,183) (224,593)Net cash from financing activities (177,183) (224,594) (177,183) (224,593)

Net cash change 314,560 (71,453) 314,396 (71,180)Cash and cash equivalents at the beginning of the year (74,137) (3,524) (73,605) (3,265)Cash write off during the year (2,478) - (2,478) -Suspense entries affected to cash & cash equivalents 10,319 840 10,319 840Cash and cash equivalents at the end of the year 248,264 (74,137) 248,632 (73,605)

Cash and cash equivalents at the end of the yearCash, Current and Savings Accounts at the end of the year 231,787 168,791 232,155 169,323Investment in Fixed Deposits 23,742 114,057 23,742 114,057Bank Overdraft at the end of the year (7,265) (356,986) (7,265) (356,986) 248,264 (74,137) 248,632 (73,605)



28

Notes to the Financial Statements

1 REPORTING ENTITY

1.1 Corporate Information

People’s Merchant Finance PLC (“Group”), regulated under the Finance Business Act No. 42 of 2011, is a Public Limited Liability Company incorporated on 26th January 1983 and domiciled in Sri Lanka under the provisions of the Companies Act No. 17 of 1982 and re-registered under the Companies Act No. 7 of 2007.

The registered office of the Group is situated at No. 21, Nawam Mawatha, Colombo 2 and the principal place of business is situated at the same place.

The consolidated financial statements of the Group for the year ended 31st March 2014 include the Group and its Subsidiaries (together referred to as the “Group” and individually as “Group entities”).

The staff strength of the Group as at 31st March 2014 is 117(2013 - 155).

1.2 Principal Activities and Nature of Operations

1.2.1 Group

The principal activities of the Group continued to be Leasing, Hire Purchase, Trade Finance, Real Estate, Short-term investments and Corporate Finance services.

1.2.2 Subsidiaries

The Company’s only subsidiary is PMB Services Limited.

2 BASIS OF PREPARATION

2.1 Statement of Compliance

The consolidated Financial Statements of the Group comprising the Statement of Financial Position, Statement of Comprehensive Income, Statement of Changes in Equity and Statement of Cash Flows together with Notes (“the Financial Statements”) are prepared and presented in accordance with Sri Lanka Financial Reporting Standards (SLFRSs) & Sri Lanka Accounting Standards (LKASs) (hereafter “SLFRS”) laid down by the Institute of Chartered Accountants of Sri Lanka (ICASL). The presentation of the Financial Statements is also in compliance with the requirements of the Companies Act No. 07 of 2007 and Finance Business Act No. 42 of 2011.

The Financial Statements were authorised for issue by the Management on 30th October 2014.

2.2 Directors’ Responsibility for the Financial Statements

The Board of Directors is responsible for the preparation and fair presentation of these Financial Statements in

accordance with new Sri Lanka Accounting Standards and as per the provisions of the Companies Act No. 07 of 2007 and Finance Business Act No. 42 of 2011. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of Financial Statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

The Board of Directors acknowledges their responsibility as set out in the “Annual Report of the Board of Directors”.

2.3 Basis of Measurement

The Financial Statements have been prepared on the historical cost basis except for the following material items in the Statement of Financial Position;

• Held for trading investments in quoted equity instruments are measured at fair value.

• Liability for Defined Benefit Obligations is measured at the projected unit credit method of the defined benefit obligations.

• Available-for -sale financial assets are measured at fair value.

• Land is measured at fair value.

2.4 Functional and Presentation Currency

The Financial Statements are presented in Sri Lankan Rupees, which is the Group’s functional currency. All financial information presented in Rupees has been rounded to the nearest thousand unless indicated otherwise. The functional currency is the currency of the primary economic environment in which the Group operates.

2.5 Materiality and Aggregation

Each material class of similar items is presented separately in the Financial Statements. Items of dissimilar nature or function are presented separately unless they are immaterial.

2.6 Significant Accounting Judgments, Estimates and Assumptions

The preparation of the Financial Statements of the Group in conformity with SLFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

29


The most significant areas of estimation, uncertainty and critical judgments in applying accounting policies that have most significant effect on amounts recognised in the Financial Statements of the Group are as follows:

Fair Value of Financial Instruments Note 3.3.6 Impairment Losses on Loans and Advances Note 3.3.10 Defined Benefit Obligation Note 3.5.3.2 Revaluation of land Note 3.4.1.4

3 SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these Financial Statements unless otherwise indicated.

3.1 Basis of Consolidation

The Consolidated Financial Statements include the Financial Statements of the Group, its Subsidiaries and other Companies over which it has control in terms of LKAS – 27 “Consolidated and Separate Financial Statements”. All intra Group balances, income and expenses and profits and losses resulting from Intra Group transactions are eliminated in full.

3.1.1 Subsidiaries

Subsidiary is an entity controlled by the Group. Control exists when the Group has the power directly or indirectly to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account.

An investment in Subsidiary is treated as long-term investments and is valued at cost less any impairment losses in the parent Group’s financial statements in accordance with the LKAS 27 - Consolidated and Separate Financial Statements.

The financial statements of a Subsidiary are included in the consolidated financial statements from the date that control commences until the date that control ceases.

These consolidated financial statements are prepared to a common financial year end of 31 March. The accounting policy of Subsidiary has been changed when necessary to align them with the policies adopted by the Group. All the assets and liabilities of the Group and the Subsidiary are included in the consolidated statement of financial position.

3.1.2 Loss of Control

Upon the loss of control, the Group derecognizes the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising

on the loss of control is recognized in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date of control is lost. Subsequently it is accounted for as an equity accounted investee or in accordance with the Group’s accounting policy for financial instruments depending on the level of influence retained.

3.1.3 Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the Consolidated Financial Statements. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains but only to the extent that there is no evidence of impairment.

3.2 Foreign Currency Transactions

Transactions in foreign currencies are translated to Sri Lankan Rupees at the foreign exchange rate prevailing at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are translated to Sri Lankan Rupees at the foreign exchange rate ruling as at the Statement of Financial Position date. Foreign exchange differences arising on the settlement or reporting of the Group’s monetary items at rates different from those, which were initially recorded, are dealt with in the Statement of Comprehensive Income.

Non-monetary assets and liabilities denominated in foreign currencies that are stated at historical cost at the Statement of Financial Position date are translated to Sri Lankan Rupees at the foreign exchange rate ruling at the date of initial transaction.

Non monetary assets and liabilities that are stated at fair value, denominated in foreign currencies are translated to Sri Lanka Rupees at the exchange rate ruling at the dates that the value were determined.

Foreign exchange differences arising on translation are recognized in the Statement of Comprehensive Income.

3.3 Financial Instruments

Initial Recognition, Classification and Subsequent Measurement

3.3.1 Initial Measurement of Financial Instruments

The classification of financial instruments at initial recognition depends on their purpose and characteristics and the management’s intention in acquiring them.

30

Financial assets and liabilities are initially measured at their fair value plus transaction costs, except in the case of financial assets and liabilities recorded at fair value through profit or loss.

Transaction cost in relation to financial assets and financial liabilities at fair value through profit or loss are dealt with through the Statement of Comprehensive Income.

3.3.2 Classification and Subsequent Measurement of Financial Assets

At inception financial assets are classified into one of the following categories:

At Fair value through profit or loss Held for trading ; or Designated at fair value through profit or loss.

Loans and receivables Held-to-maturity Available for Sale

The subsequent measurement of the financial assets depends on their classification.

3.3.2.1 Financial Assets at Fair Value through Profit or Loss

Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss which are discussed below.

3.3.2.1.1 Financial Assets Held for Trading

Financial assets are classified as held for trading if they are acquired principally for the purpose of selling or repurchasing in the near term or holds as a part of a portfolio that is managed together for short-term Profit or position taking.

Financial assets held for trading are recorded in the Statement of Financial Position at fair value. Changes in fair value are recognised in profit or loss.

The Group evaluates its financial assets held for trading to determine whether the intention to sell them in the near term is still appropriate. When the Group is unable to trade these financial assets due to inactive markets and management’s intention to sell them in the foreseeable future significantly changes, the Group may elect to reclassify these financial assets in rare circumstances.

Financial Assets held for Trading comprises investment in share

3.3.2.1.2 Financial Assets Designated at Fair Value through Profit or Loss

The Group designates financial assets at fair value

through profit or loss in the following circumstances:

• The assets are managed, evaluated and reported internally at fair value;

• The designation eliminates or significantly reduces an accounting mismatch, which would otherwise have arisen; or

• The asset contains an embedded derivative that significantly modifies the cash flows that would otherwise have been required under the contract.

Financial assets designated at fair value through profit or loss are recorded in the Statement of Financial Position at fair value. Changes in fair value are recorded in ‘Net gain or loss on financial assets and liabilities designated at fair value through profit or loss’. Interest earned is accrued in ‘Interest Income’, using the EIR, while dividend income is recorded in ‘other operating income’ when the right to the payment has been established.

The Group has not designated any financial assets upon initial recognition as at fair value through profit or loss.

3.3.2.2 Loans and Receivables

‘Loans and receivables’ include non derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

• Those that the Group intends to sell immediately or in the near term and those that the Group, upon initial recognition, designates as at fair value through profit or loss

• Those that the Group, upon initial recognition, designates as available for sale

• Those for which the Group may not recover substantially all of its initial investment, other than because of credit deterioration

‘Loans and receivables’ include Cash and Cash Equivalents, Loans and advances to customers and Other assets.

3.3.2.3 Held to Maturity financial Investments

Held to Maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities, which the Group has the intention and ability to hold to maturity. After initial measurement, held to maturity financial investments are subsequently measured at amortised cost using the Effective Interest Rate (EIR), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortisation is included in ‘Interest Income’ in the Statement of Comprehensive Income. The losses arising from impairment of such investments are recognised in the Statement of Comprehensive Income in ‘impairment charges for loans and other losses’.


31


The Group has not designated any financial assets as held to maturity.

3.3.2.4 Available for Sale Financial Investments

Available-for-sale investments include equity and debt securities. Equity investments classified as Available-for-Sale are those which are neither classified as held for trading nor designated at fair value through profit or loss.

After initial measurement, available for sale financial investments are subsequently measured at fair value.

Unrealised gains and losses are recognised directly in Equity through Other Comprehensive Income in the ‘available-for-sale reserve’. When the investment is disposed of, the cumulative gain or loss previously recognised in Equity is recognised in the Statement of Comprehensive Income in ‘Other Operating Income’. Where the Group holds more than one investment in the same security, they are deemed to be disposed of on a first-in first-out basis. Interest earned whilst holding Available-for-Sale financial investments is reported as ‘Interest Income’ using the EIR.

Dividends earned whilst holding Available-for-Sale financial investments are recognised in the Statement of Comprehensive Income as ‘Other Operating Income’ when the right to receive the payment has been established. The losses arising from impairment of such investments are recognised in the Statement of Comprehensive Income in ‘Impairment losses on financial investments’ and removed from the ‘Available for Sale reserve’.

3.3.3.5 Cash & Cash Equivalents

Cash and cash equivalents comprise of cash in hand and cash at bank and other highly liquid financial assets which are held for the purpose of meeting short-term cash commitments with original maturities of less than three months which are subject to insignificant risk of changes in their fair value.

Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

3.3.4 Classification and Subsequent Measurement of Financial Liabilities

At inception a financial liability is classified into one of the following categories:

• At fair value through profit or loss ° Held for trading; or ° Designated at fair value through profit or loss.• At Amortised cost

The subsequent measurement of financial liabilities depends on their classification.

3.3.4.1 Financial Liabilities at Fair Value through Profit or Loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired principally for the purpose of selling or repurchasing in the near term or holds as a part of a portfolio that is managed together for short-term profit or position taking. Gains or losses on liabilities held for trading are recognised in the Statement of Comprehensive Income.

The Group has not designated any financial liabilities upon initial recognition as at fair value through profit or loss.

3.3.4.2 Financial Liabilities at Amortised Cost

Financial instruments issued by the Group that are not designated at fair value through profit or loss, are classified as liabilities, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

Financial liabilities at amortised cost include Due to Bank, Deposits from customers, Debt securities issued and other liabilities.

3.3.5 Amortised Cost Measurement

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.

3.3.6 Fair Value Measurement

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date.

When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.

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If a market for a financial instrument is not active, then the Group establishes fair value using a valuation technique. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum useof market inputs, relies as little as possible on estimates specific to the Group, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Group calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument, i.e. without modification or repackaging, or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in profit or loss on an appropriate basis over the life of the instrument but not later than when the valuation is supported wholly by observable market data or the transaction is closed out.

Any difference between the fair value at initial recognition and the amount that would be determined at that date using a valuation technique in a situation in which the valuation is dependent on unobservable parameters is not recognised in profit or loss immediately but is recognised over the life of the instrument on an appropriate basis or when the instrument is redeemed, transferred or sold, or the fair value becomes observable.

Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes a third-party market participant would take them into account in pricing a transaction.

To make disclosures required by Sri Lanka Accounting Standards, the company should classify fair value measurements using a fair value hierarchy which is categorized in to following levels.

Fair value measurement hierarchy

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

3.3.7 Reclassifications

Reclassifications of financial assets, other than as set out below, or of financial liabilities between measurement categories are not permitted following initial recognition.

Held for trading non-derivative financial assets are transferred out of the held at fair value through profit or loss category in the following circumstances:

- To the available for sale category, where, in rare circumstances, they are no longer held for the purpose of selling or repurchasing in the near term; or

- to the loans and receivables category, where they are no longer held for the purpose of selling or repurchasing in the near term and they would have met the definition of a loan and receivable at the date of reclassification and the Group has the intent and ability to hold the assets for the foreseeable future or until maturity.

Financial assets are transferred out of the available-for-sale category to the loan and receivables category where they would have met the definition of a loan and receivable at the date of reclassification and the Group has the intent and ability to hold the assets for the foreseeable future or until maturity.

Held-to-maturity assets are reclassified to the available-for sale category if the portfolio becomes tainted following the sale of other than an insignificant amount of held-to-maturity assets prior to their maturity.

Financial assets are reclassified at their fair value on the date of reclassification. For financial assets reclassified out of the available-for-sale category into loans and receivables, any gain or loss on those assets recognised in shareholders’ equity prior to the date of reclassification is amortised to the income statement over the remaining life of the financial asset, using the effective interest method.


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3.3.8 Derecognition

The group derecognises financial asset when the contractual rights to the cash flows from the financial asset expires, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the Consolidated Statement of Financial Position. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and consideration received (including any new asset obtained less any new liability assumed) is recognised in profit or loss.

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

3.3.9 Off Setting

Financial assets and liabilities are offset and the net amount presented in the Consolidated Statement of Financial Position when, and only when, the Group has a legal right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

Income and expenses are presented on a net basis only when permitted under LKASs/SLFRSs, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity.

3.3.10 Identification, Measurement and Assessment of Impairment

At each reporting date the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s), and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably.

Objective evidence that financial assets (including equity securities) are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in

the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

The Group considers evidence of impairment for loans and advances and held-to-maturity investment securities at both a specific asset and collective level. All individually significant loans and advances and held-to-maturity investment securities are assessed for specific impairment. All individually significant loans and advances and held-to-maturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together loans and advances and held-to-maturity investment securities with similar risk characteristics.

In assessing collective impairment the Group uses of historical trends of the probability of default, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical data.

Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. Impairment losses are recognized in profit or loss and reflected in an allowance account against loans and advances. Interest on impaired assets continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available for sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an

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impaired available-for-sale equity security is recognised in other comprehensive income.

The Group writes off certain loans and advances and investment securities when they are determined to be uncollectible.

3.4 Non Financial Assets and Basis of Measurement

3.4.1 Property, Plant & Equipment

Property, plant and equipment are tangible items that are held for servicing, or for administrative purposes and are expected to be used during more than one period.

3.4.1.1 Basis of Recognition

Property, plant and equipment are recognized if it is probable that future economic benefits associated with the assets will flow to the Group and cost of the asset can be reliably measured.

3.4.1.2 Measurement

An item of property, plant and equipment that qualifies for recognition as an asset is initially measured at its cost. Cost includes expenditure that is directly attributable to the acquisition of the asset and cost incurred subsequently to add to, replace part of, or service it. The cost of self constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of computer equipment.

3.4.1.3 Cost Model

The Group applies cost model to property, plant and equipment except for freehold land and records at cost of purchase or construction together with any incidental expenses thereon less accumulated depreciation and any accumulated impairment losses.

3.4.1.4 Revaluation Model

The Group applies the revaluation model to the entire class of freehold land. Such properties are carried at a revalued amount, being their fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Freehold land and buildings of the Group are revalued every five years on a roll over basis to ensure that the carrying amounts do not differ materially from the fair values at the reporting date. On revaluation of an asset, any increase in the carrying amount is recognised in Other Comprehensive Income and accumulated

in equity, under capital reserve or used to reverse a previous revaluation decrease relating to the same asset, which was charged to the Statement of Income. In this circumstance, the increase is recognised as income to the extent of the previous write down. Any decrease in the carrying amount is recognised as an expense in the Statement of Income or debited in the Other Comprehensive Income to the extent of any credit balance existing in the capital reserve in respect of that asset. The decrease recognised in Other Comprehensive Income reduces the amount accumulated in equity under capital reserves. Any balance remaining in the revaluation reserve in respect of an asset is transferred directly to Retained Earnings on retirement or disposal of the asset.

3.4.1.5 Subsequent Costs

The cost of replacing part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within that part will flow to the Group and its cost can be measured reliably. The costs of day-to-day servicing of property, plant and equipment are charged to the income statement as incurred.

3.4.1.6 Derecognition

The carrying amount of an item of property, plant and equipment is derecognized on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from the de recognition of an item of property, plant and equipment is included in income statement when the item is derecognized.

When replacement costs are recognized in the carrying amount of an item of property, plant and equipment, the remaining carrying amount of the replaced part is derecognized. Major inspection costs are capitalized. At each such capitalization, the remaining carrying amount of the previous cost is derecognized.

3.4.1.7 Depreciation

Depreciation is based on the cost of an asset less its residual value. Significant components of individual assets are assessed and if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately.

The Group provides depreciation from the date the assets are available for use up to the date of disposal. Depreciation is recognized in profit or loss on a straight- line basis over the estimated useful lives of each component of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.


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The depreciation is provided at the following rates for each category.

Category Rate (per annum) Buildings 10% Motor vehicles 20% Computers 25% Office equipment, furniture, fittings 15%

Depreciation methods, useful lives and residual values are reviewed at each reporting date.

Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal Group that is classified as held for sale) and the date that the asset is derecognized.

3.4.2 Intangible Assets

An intangible asset is an identifiable non monetary asset without physical substance held for use in the production or supply of goods or services, for rent to others or for administrative purposes.

3.4.2.1 Basis of Recognition An intangible asset is recognised if it is probable that

the future economic benefits that are attributable to the asset will flow to the entity and the cost of the assets can be measured reliably. An intangible asset is initially measured at cost.

3.4.2.2 Software

All computer software costs incurred, licensed for use by the Group, which are not integrally related to associated hardware, which can be clearly identified, reliably measured and it’s probable that they will lead to future economic benefits, are included in the Statement of Financial Position under the category intangible assets and carried at cost less accumulated amortisation and any accumulated impairment losses.

3.4.2.3 Subsequent Expenditure

Expenditure incurred on software is capitalised only when it is probable that this expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance and this expenditure can be measured and attributed to the asset reliably. All other expenditure is expensed as incurred.

3.4.2.4 Amortization

Intangible assets, except for goodwill, are amortised on a straight line basis in the Income Statement from the

date when the asset is available for use, over the best estimate of its useful economic life based on a pattern in which the asset’s economic benefits are consumed by the Group.

3.4.2.5 Derecognition

An intangible asset is derecognised on disposal or when no future economic benefits are expected from its use and subsequent disposal.

3.4.3 Inventory – Real Estate

Real Estate inventories are stated at cost or market values whichever is lower. These costs include cost of purchase of the land and expenses on development that are capitalized.

3.4.4 Impairment of Non-Financial Assets

The carrying amounts of the Group’s non-financial Assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its related Cash-Generating unit (CGU) exceeds its estimated recoverable amount.

The Group’s corporate assets do not generate separate cash inflows and are utilised by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated.

Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis.

Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised.

3.5 Non Financial Liabilities and Provisions

3.5.1 Deposits from Customers

Deposits include saving deposits, term deposits and

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deposits payable at call. They are stated in the Statement of Financial Position at amount payable. Interest paid / payable on these deposits based on effective interest rate is charged to the Statement of Comprehensive income.

3.5.2 Provisions

A provision is recognised in the Statement of Financial Position when the Group has a legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation and the amount of the provision can be measured reliably in accordance with LKAS 37 - ‘Provisions, Contingent Liabilities and Contingent Assets’. The amount recognised is the best estimate of the consideration required to settle the present obligation at the Reporting date, taking into account the risks and uncertainties surrounding the obligation at that date. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is determined based on the present value of those cash flows.

3.5.3 Employee Benefits

3.5.3.1 Defined Contribution Plan Employees’ Provident Fund and Employees’ Trust Fund

A Defined contribution plan is a post- employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to Defined Contribution plans are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees.

3.5.3.1.1 Employees’ Provident Fund (EPF)

The Group and employees contribute 12% and 8% respectively on the salary of each employee to the Employees Provident Fund.

3.5.3.1.2 Employees’ Trust Fund (ETF)

The Group contributes 3% of the salary of each employee to the Employees’ Trust Fund.

3.5.3.2 Defined Benefit Plan – Retirement Benefit Obligations

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan.

The Company and the Group are liable to pay retirement benefits under the Payment of Gratuity Act, No. 12 of 1983. Provision has been made for retirement gratuities using “Project Unit Credit” (PUC) method as recommended by LKAS 19 “Employee Benefits”.The present value of the defined benefit obligation is determined by discounting the estimated future cash

flows based on the actuarial valuation carried out by an independent qualified actuary. The actuarial gains and losses are charged or credited to the Income Statement in the period in which they arise. The assumptions based on which the results of actuarial valuation was determined are included in Notes to the Financial Statements. The liability is not externally funded.

However, according to the payment of Gratuity Act No. 12 of 1983, the liabilities for the gratuity payment to an employee arise only on the completion of 5 years of continued service with the Group.

3.5.4 Commitments and Contingencies

All discernible risks are accounted for in determining the amount of all known liabilities. Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be reliably measured. Contingent liabilities are not recognized in the Statement of Financial Position but are disclosed unless they are remote.

3.6 Statement of Comprehensive Income

3.6.1 Interest income and expense are recognised in profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses.

The calculation of the effective interest rate includes all transaction costs and fees that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability.

Interest income and expense presented in the Statement of Comprehensive Income include:

- interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest basis;

- the effective portion of fair value changes in qualifying hedging derivatives designated in cash flow hedges of variability in interest cash flows, in the same period that the hedged cash flows affect interest income/expense;

- the ineffective portion of fair value changes in qualifying hedging derivatives designated in cash flow hedges of interest rate risk; and

- fair value change in qualifying derivates, including


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hedge ineffectiveness, and related hedged items in fair value hedges of interest rate risk.

Fair value changes on other derivatives held for risk management purposes, and all other financial assets and liabilities carried at fair value through profit or loss, are presented in net trading income in the Statement of Comprehensive Income.

Interest income on available-for-sale investment securities calculated on an effective interest basis is also included in interest income.

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

3.6.2 Fee and Commission

Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees are recognised as the related services are performed. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. Fee and commission expenses are recognised on an accrual basis.

3.6.3 Profit on Real Estate Sales

Profit on real estate sales are recognized as follows:

The non-refundable deposits are recognized as a liability in the year of receipt.

The Company recognize the profit on sale of land and sale of houses constructed, when the Company has transferred the significant risk and rewards of ownership of the goods to the buyer upon settlement of the total value of the land.

3.6.4 Other Income

3.6.4.1 Dividend Income

Dividend income is recognized in profit or loss on the date that the Group’s right to receive payments is established.

3.6.4.2 Profit on Disposal of Property, Plant & Equipment

Net gains and losses of a revenue nature arising from the disposal of property, plant and equipment are accounted for in the Statement of Comprehensive Income, after deducting from the proceeds on disposal, the carrying

amount of such assets and the related selling expenses.

All other income is recognized on accrual basis.

3.6.5 Expenditure

All expenditure incurred in running of the business and in maintaining the property, plant & equipment in a state of efficiency has been charged to revenue in arriving at the profit for the year.

For the purpose of presentation of income statement, the Directors are of the opinion that function of expense method present fairly the elements of the enterprise’s performance, hence such presentation method is adopted. Expenditure incurred for the purpose of acquiring, expanding or improving assets of a permanent nature by means of which to carry on the business or for the purpose of increasing the earning capacity of the business has been treated as capital expenditure.

Repairs and renewals are charged to the income statement in the year in which the expenditure is incurred. The profit earned by the Group is before income tax expense and after making provision for all known liabilities and for the depreciation of property, plant & equipment.

3.6.6 Income Tax Expense

Income tax expense comprise of current and deferred tax. Income tax expense recognized in profit or loss except to the extent that it relates to items recognized directly in equity in which case it is recognized in equity.

3.7 Current Taxation

Current tax assets and liabilities consist of amounts expected to be recovered from or paid to the taxation authorities in respect of the current as well as prior years. The tax rates and tax laws used to compute the amounts are those that are enacted or substantially enacted by the Reporting date.

Accordingly, provision for taxation is made on the basis of the accounting profit for the year as adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and the amendments thereto. Notes to Financial Statements include the major components of tax expense, the effective tax rates and a reconciliation between the profit before tax and tax expense as required by the Sri Lanka Accounting Standard – LKAS 12 on ‘Income Taxes’.

3.8 Deferred Taxation

Deferred tax is provided using the balance sheet liability method, providing for the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the

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tax base of assets and liabilities, which is the amount attributed to those assets and liabilities for tax purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted by the reporting date.

Deferred tax assets including those related to temporary tax effects of income tax losses and credits available to be carried forward, are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

3.9 Value Added Tax on Financial Services

VAT on Financial Services is calculated in accordance with the amended VAT Act No. 7 of 2003. The base for the computation of Value Added Tax on Financial Services is the accounting profit before income tax adjusted for the economic depreciation and emoluments of employees computed on prescribed rate.

3.10 Basic Earning Per Share (EPS)

Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, for the effects of all dilutive potential ordinary shares.

3.11 Segment Reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the Group’s Management to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available.

For each of the strategic divisions, the Group’s management monitors the operating results separately for the purpose of making decisions about resource allocation and performance assessment.

Segment performance is evaluated based on operating profits or losses which, in certain respects, are measured differently from operating profits or losses in the Financial Statements. Income taxes are managed on a Group basis and are not allocated to operating segments. (Refer note 35)

3.12 Cash Flow Statement

The Cash Flow Statement has been prepared using the “Direct Method” of preparing Cash Flows in accordance with the LKAS 07 - “Cash Flow Statements”. Cash and cash equivalents comprise short term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. The cash and cash equivalent include cash in hand and favorable balances with banks.

3.13 Comparative Figures

Where ever necessary amounts shown for the previous year have been reclassified to facilitate comparison with the current year’s presentation.

3.14 Regulatory provisions

3.14.1 Investment Fund Account

As proposed in the Budget 2011, an investment fund has been established and operated in the manner described below.

As and when taxes are paid after 1 January 2011, following funds are transferred to the Investment Fund Account and build a permanent fund in the Group.

8% of the profits calculated for the payment of Value Added Tax (VAT) on financial services on the dates as specified in the VAT Act for the payment of VAT.

5% of the profits before tax calculated for payment of income tax purposes on dates specified in Section 113 of the Inland Revenue Act for the self assessment payments of tax.

The funds in the Investment Fund Account are utilized in the following manner within three months from the date of transfer to the Investment Fund Account.

Invest in long-term Government securities and/or bonds with maturities not less than seven years.

Lend on maturities not less than five years at interest rates not exceeding 5 year Treasury bond rates plus 2%.

Facilities granted only for the following purposes;

i. Long-term loans for cultivation of plantation crops / agriculture crops including fruits, vegetables, cocoa and spices and for livestock and fisheries.

ii. Factory / mills, modernisation / establishment / expansion.

iii. Small and medium term enterprises; Loans up to Rs. 30 million or Loans over Rs. 10 million to enterprises with


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an annual turnover less than Rs. 300 million an employee’s less than 400

iv. Information Technology related activities and Business Process Outsourcing.

v. Infrastructure development.vi. Education - vocational training and tertiary

education.vii. Restructuring of loans extended for the above

purposes. Facilities will only be in Sri Lankan Rupees.

Funds are invested in short term Government Securities until the commencement of utilisation of funds as stated above.

Facilities will not be granted for subsidiary companies, associate companies, holding group or any director or any other related party of such RFCs.

3.14.2 Deposit Insurance Scheme

In terms of the Banking Act Direction No 5 of 2010 “Insurance of Deposit Liabilities” issued on 27th September 2010 and subsequent amendments there to all Licensed Commercial Banks are required to insure their deposit liabilities in the Deposit Insurance Scheme operated by the Monetary Board in terms of Sri Lanka Deposit Insurance Scheme Regulations No 1 of 2010 issued under Sections 32A to 32E of the Monetary Law Act with effect from 1st October 2010. Deposits to be insured include demand, time and savings deposit liabilities and exclude the following.

- deposit liabilities to member institutions

- deposit liabilities to Government of Sri Lanka

- deposit liabilities to Directors, key management personnel and other related parties as defined in Banking Act Direction No 11 of 2007 on Corporate Governance of Licensed Commercial Banks

- deposit liabilities held as collateral against any accommodation granted

- deposit liabilities falling within the meaning of abandoned property in terms of the Banking Act and dormant deposits in terms of the Finance Companies Act funds of which have been transferred to Central Bank of Sri Lanka

Licensed Commercial Banks are required to pay a premium of 0.10% on eligible deposit liabilities if the bank maintains a capital adequacy ratio of 14% or above as at the end of the immediately preceding financial year and a premium of 0.125% on eligible deposit liabilities for all other Licensed Commercial Banks calculated on the total amount of eligible deposits as at the end of the quarter within a period of 15 days from the end of the quarter.

3.14.3 Reserve Fund

The Company is maintaining a reserve fund and transfer reserves out of the net profits of each year, after due provision has been made for Taxation and Bad and Doubtful Debts on following basis,

So long as the capital funds are not less than twenty five (25) per cent of total deposit liabilities, a sum equal to not less than five (5) per cent of the net profits;

So long as the capital funds are less than twenty five (25) per cent of total deposit liabilities, but not less than ten (10) per cent thereof, a sum equal to not less than twenty (20) per cent of the net profits; and so long as the capital funds are less than ten (10) per cent of the total deposit liabilities, a sum equal to not less than fifty (50) per cent of the net profits.

3.15 New Accounting Standards Not Effective At The Reporting Date

The Institute of Chartered Accountants of Sri Lanka has issued the following new Sri Lanka Accounting Standards which will become applicable for financial periods beginning on or after 1st January 2014.

Accordingly, these Standards have not been applied in preparing these Financial Statements.

(a) Sri Lanka Accounting Standard - SLFRS 13,Fair Value Measurement

This SLFRS defines fair value, sets out in a single SLFRS a framework for measuring fair value; and requires disclosures about fair value measurements.

This SLFRS will become effective from 1st January 2014.

This SLFRS shall be applied prospectively as of the beginning of the annual period in which it is initially applied. The disclosure requirements of this SLFRS need not be applied in comparative information provided for periods before initial application of this SLFRS.

The Company has started the process of evaluating the potential effect of this. Although many of the IFRS 13 disclosure requirements regarding financial assets and financial liabilities are already required, the adoption of IFRS 13 will require the Company to provide additional disclosures. Given the nature of the Company’s operations, this standard is not expected to have a pervasive impact on the Company’s financial statements.

(b) Sri Lanka Accounting Standard – SLFRS 9 Financial Instruments

The objective of this SLFRS is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful

40

information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows.

An entity shall apply this SLFRS to all items within the scope of LKAS 39 Financial Instruments; Recognition and Measurement.

The effective date of this Standard has been deferred.

(c) Sri Lanka Accounting Standard –SLFRS 10 Consolidated Financial Statements

The objective of this SLFRS is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.

An investor is expected to control an investee if and only if the investor has all the following:

(i) power over the investee;

(ii) exposure, or rights, to variable returns from its involvement with the investee; and

(iii) the ability to use its power over the investee to affect the amount of the investor’s returns

This Standard will require the Company to review the group structure in the context of the new Standard and its requirements. Accordingly adoption of this standard is expected to have an impact on the group structure, and consolidated reporting.

SLFRS 10 will become effective from 1st April 2014 for the Group with early adoption permitted. This SLFRS will supersede the requirements relating to consolidated financial statements in LKAS 27. Consoliadated and Separate Financial Statements.

None of these is expected to have a significant effect on the Financial Statements of the Group. The extent of the impact has not been determined.


41


4. Net Interest Income In Rupees Thousand Company Group 2014 2013 2014 2013 Interest income Loans and advances to customers 682,055 621,824 682,055 621,824 Short term investments 68,606 18,435 68,606 18,435 Total interest income 750,661 640,259 750,661 640,259 Interest expenses Due to banks 21,993 77,821 22,000 77,821 Due to customers 570,002 347,777 570,002 347,777 Total interest expenses 591,995 425,598 592,002 425,598 Net interest income 158,666 214,661 158,659 214,661

5. Fee and Commission Income In Rupees Thousand Company Group 2014 2013 2014 2013 Fee and commission income 4,421 6,954 4,421 6,954 Comprising Guarantees 126 2,657 126 2,657 Others 4,295 4,297 4,295 4,297 Total 4,421 6,954 4,421 6,954

6. Net Trading Income In Rupees Thousand Company Group 2014 2013 2014 2013 Foreign exchange gain 1,560 1,456 1,560 1,456 Equities - (565) - (565) Profit on real estate sales 1,218 13,132 1,218 13,132 Total 2,778 14,023 2,778 14,023

7. Net Gain from Financial Assets In Rupees Thousand Company Group 2014 2013 2014 2013 Realized gain from Financial Assets - Available For Sale 12,254 - 12,254 - Financial assets - Held for trading 148 561 148 561 Total 12,402 561 12,402 561

8. Other Operating Income In Rupees Thousand Company Group 2014 2013 2014 2013 Gain on sale of property, plant & equipment 4,054 - 4,054 - Dividend income 66 64 66 64 Staff loan income 5,269 5,999 5,269 5,999 Bad debt recoveries 2,560 25,002 4,225 20,524 Net Assets and Liabilities write-off/ write back 7,268 - 7,268 - Sundry income 8,207 7,327 11,175 7,327 Total 27,423 38,392 32,057 33,914

For the year ended 31 March

42

9. Net Impairment Charges on Financial Assets In Rupees Thousand Company Group 2014 2013 2014 2013 Loans and advances to customers (178,006) (54,740) (178,006) (54,740) Other assets 273 (12,036) 273 (4,906) Total (177,733) (66,776) (177,733) (59,646)

9.1 Provision for Bad & Doubtful Debts In Rupees Thousand Company Group 2014 2013 2014 2013 Individual impairment reversals for bills of exchange (2,300) (8,134) (2,300) (8,134) Individual impairment charges for pawning 36,383 - 36,383 - Individual impairment charges for margin trading 162 - 162 - Individual impairment charges/ (reversals) for loans 109,678 (36,100) 109,678 (36,100) Individual impairment charges/ (reversals) for lease 37,788 (4,051) 37,788 (4,051) Individual impairment charges/ (reversals) for hire purchase 30,937 (139) 30,937 (139) Total 212,648 (48,424) 212,648 (48,424)

Collective impairment reversals for bills of exchange - (5,047) - (5,047) Collective impairment charges/ (reversals) for loans (70,866) 33,435 (70,866) 33,435 Collective impairment charges for lease 33,887 51,951 33,887 51,951 Collective impairment charges for hire purchase 2,338 22,825 2,338 22,825 Total (34,642) 103,164 (34,642) 103,164 Total impairment made during the year 178,006 54,740 178,006 54,740

10. Staff Costs In Rupees Thousand Company Group 2014 2013 2014 2013 Salary and bonus 88,263 110,586 88,263 110,734 Contributions to defined contribution plans 3,508 2,265 3,508 2,265 Amortisation of prepaid staff loans 3,330 4,591 3,330 4,591 Total 95,101 117,442 95,101 117,590

11. Other Expenses In Rupees Thousand Company Group 2014 2013 2014 2013 Directors’ emoluments 988 1,451 988 1,451 Auditors’ remunerations

Audit fee and expenses 1,143 1,500 1,268 1,720 Audit related services and expenses 1,258 - 1,258 - Non audit services and expenses - 845 125 895

Professional and legal expenses 6,305 9,371 6,633 9,528 Depreciation of property, plant and equipment 16,179 13,657 16,179 13,682 Amortisation of intangible assets 1,518 1,695 1,518 1,695 Office amortisation and establishment expenses 22,148 39,642 22,148 39,652 Outsourced Recovery commission - - - 3,277 Overhead expenses 67,736 108,884 67,736 107,649 Total 117,275 177,045 117,853 179,548



43


12. Tax Expenses In Rupees Thousand Company Group 2014 2013 2014 2013 Current tax expense

Current Year - 4,455 546 5,034 Prior year's over provision - (32) - (32)

Deferred tax expense 37,936 (3,269) 38,105 (3,358) Total tax expense 37,936 1,154 38,651 1,644

12.1 Reconciliation of Tax Expenses In Rupees Thousand Company Group 2014 2013 2014 2013 Loss before tax (184,419) (89,740) (180,370) (89,739) Tax at domestic rate of 28% (51,637) (25,127) (50,503) (25,127) Tax effect on exempted income (287) (18) (287) (18) Tax effect on disallowable expenses 20,982 35,372 20,866 36,644 Tax effect on capital allowances (151,065) (137,120) (151,242) (136,740) Tax effect on leasing activities 145,692 113,352 145,692 113,352 Tax effect on SLFRS adoption - - - -

Effect of taxable losses 36,315 17,996 36,021 16,922 Tax Expenses - 4,455 547 5,034 Effective tax rate - (5%) - (6%)

13. Earning per Share In Rupees Thousand Company Group 2014 2013 2014 2013 Net profit attributable to ordinary equity holders (222,355) (90,894) (219,021) (91,384) Net profit attributable to ordinary equity holders adjusted for the effect of dilution (222,355) (90,894) (219,021) (91,384)

Weighted average number of ordinary shares adjusted for the effect of dilution 67,500 67,500 67,500 67,500 Basic earning per ordinary share (3.29) (1.35) (3.24) (1.35) As at 31 March

14. Cash and Cash Equivalents In Rupees Thousand Company Group 2014 2013 2014 2013 Cash in hand 2,860 5,987 2,860 5,987 Cash at bank 48,397 39,887 48,765 40,419 Money at call and short notice Investments in repos 180,529 122,917 180,529 122,917 Total 231,787 168,791 232,155 169,323

15. Financial Investments - Held for Trading In Rupees Thousand Company Group 2014 2013 2014 2013 Equity securities

Cost (Note 15.1) 3,386 3,386 3,386 3,386 Fair value changes (Note 15.2) (1,144) (1,292) (1,144) (1,292)

Total 2,241 2,094 2,241 2,094


44

15.1a Quoted Equity Securities Held by the Company

Sector 2014 2013 No. of Cost MV No. of Cost MV Shares (Rs. 000) (Rs. 000) Shares (Rs. 000) (Rs. 000) Bank, Finance & Insurance Nations Trust Bank PLC 3,000 214 194 3,000 214 183 Vanik Incorporation PLC 61 3 - 61 3 - People's Leasing & Finance PLC 69,000 1,242 986 69,000 1,242 901 Sampath Bank PLC 23 6 4 23 6 5 1,465 1,184 1,465 1,089 Sector Percentage 53% 52%

Hotel & Travel Keells Hotels PLC 7,085 150 89 7,085 150 94 Hotel Services Ceylon PLC 43,500 1,320 682 43,500 1,320 605 1,470 771 1,470 698 Sector Percentage 34% 33%

Manufacturing ACL Cables PLC 4,700 451 286 4,700 451 307 451 286 451 307 Sector Percentage 13% 15%

Total 3,386 2,241 3,386 2,094

15.1b Quoted Equity Securities Held by the Group 2014 2013 Sector No. of Cost MV No. of Cost MV Shares (Rs. 000) (Rs. 000) Shares (Rs. 000) (Rs. 000) Bank, Finance & Insurance Nations Trust Bank PLC 3,000 214 194 3,000 214 183 Vanik Incorporation PLC 61 3 - 61 3 - People’s Leasing & Finance PLC 69,000 1,242 986 69,000 1,242 901 Sampath Bank PLC 23 6 4 23 6 5 1,465 1,184 1,465 1,089 Sector Percentage 53% 52%

Hotel & Travel Keells Hotels PLC 7,085 150 89 7,085 150 94 Hotel Services Ceylon PLC 43,500 1,320 682 43,500 1,320 605 1,470 771 1,470 698 Sector Percentage 34% 33%

Manufacturing ACL Cables PLC 4,700 451 286 4,700 451 307 451 286 451 307 Sector Percentage 13% 15%

Total 3,386 2,241 3,386 2,094

As at 31 March


45


15.2 Movement in Fair Value Changes In Rupees Thousand Company Group 2014 2013 2014 2013 Opening balance 1,292 1,853 1,292 1,853 Reversal during the year (148) (561) (148) (561) Closing balance 1,144 1,292 1,144 1,292

16. Loans and Advances to Customers In Rupees Thousand Company Group 2014 2013 2014 2013 Gross loans and advances 3,908,041 3,310,989 3,908,041 3,310,989 (Less): Allowances for individual impairment (293,642) (87,577) (293,642) (87,577)

Allowances for collective impairment (147,369) (182,011) (147,369) (182,011) Net loans and advances 3,467,030 3,041,401 3,467,030 3,041,401

16.1 Analysis In Rupees Thousand Company Group 2014 2013 2014 2013 By product

Pawning 203,441 179,872 203,441 179,872 Leasing (Note 16.3) 1,561,549 1,321,753 1,561,549 1,321,753 Hire purchase (Note 16.4) 937,653 901,931 937,653 901,931 Margin trading 660,821 222,980 660,821 222,980 Staff loans - 675 - 675 Staff leases/Loans 20,839 31,163 20,839 31,163 Bills of exchange 22,256 24,557 22,256 24,557 Term loans 452,961 622,590 452,961 622,590 Cash Backed Loans 48,520 5,468 48,520 5,468

Gross total 3,908,041 3,310,989 3,908,041 3,310,989

By currency Sri Lankan Rupee 3,908,041 3,310,989 3,908,041 3,310,989

Gross total 3,908,041 3,310,989 3,908,041 3,310,989

16.2 Movements in Individual and Collective Impairment During the Year In Rupees Thousand Company Group 2014 2013 2014 2013 Individual impairment charges Opening balance 87,577 136,001 87,577 136,001 Charge/(write back) to income statement 212,648 (48,424) 212,648 (48,424) Reversal to suspense account (6,583) - (6,583) - Closing balance 293,642 87,577 293,642 87,577 Collective impairment charges Opening balance 182,011 78,844 182,011 78,844 Charge/(write back) to income statement (34,642) 103,167 (34,642) 103,167 Closing balance 147,369 182,011 147,369 182,011 Total 441,011 269,588 441,011 269,588

16.3 Finance Lease Receivables In Rupees Thousand Company Group 2014 2013 2014 2013 Gross investment in finance lease

Less than one year 881,733 515,484 881,733 515,484 Between one and five years 679,816 793,052 679,816 793,052 More than five years - 13,218 - 13,218

Total gross investment in finance leases 1,561,549 1,321,753 1,561,549 1,321,753

As at 31 March

46

16.4 Hire Purchase In Rupees Thousand Company Group 2014 2013 2014 2013 Gross investment in hire purchase

Less than one year 598,036 432,927 598,036 432,927 Between one and five years 339,617 469,004 339,617 469,004 More than five years - - - -

Total gross investment in hire purchase 937,653 901,931 937,653 901,931

17. Financial investments – Available for sale In Rupees Thousand Company Group 2014 2013 2014 2013 Treasury Bills 490,065 - 490,065 - Treasury Bonds 8,373 - 8,373 - Equity Securities 23 23 23 23 Debt Securities 48 48 48 48 (Less): Impairment charges (48) (48) (48) (48) Net Available for Sale Investments 498,461 23 498,461 23 a. Movements in impairment charges during the year In Rupees Thousand Company Group 2014 2013 2014 2013 Opening balance 48 48 48 48 Charge/ (Write back) to income statement - - - - Closing balance 48 48 48 48

18. Investments in subsidiaries In Rupees Thousand Company Group 2014 2013 2014 2013 Unquoted equity share (Note 18.1) 175,000 175,000 - - (Less): Impairment charges (Note 18.2) (175,000) (175,000) - - Net total - - - -

18.1 Movements in unquoted equity shares In Rupees Thousand Company Group 2014 2013 2014 2013 Opening balance 175,000 175,000 - - Additions/ (Disposals) - - - - Closing balance 175,000 175,000 - -

18.2 Movements in impairment charges during the year In Rupees Thousand Company Group 2014 2013 2014 2013 Opening balance 175,000 175,000 - - Charge to income statement - - - - Closing balance 175,000 175,000 - -

18.3 Unquoted equity shares comprised by In Rupees Thousand 2014 % 2013 % PMB Services Ltd. 175,000 100 175,000 100 Closing Balance 175,000 175,000

18.4 The investment on equity shares of PMB Services Ltd. was fully impaired due to the continuous losses incurred by the Subsidiary.

As at 31 March


47


19. Property, Plant and Equipment a. Property, Plant and Equipment – Company

In Rupees Thousand Land Buildings Motor Furniture Computer Office Total Total Vehicle & Fittings Equipment 2014 2013 Cost/fair value Opening balance 921,400 20,386 39,239 15,705 25,942 16,989 1,039,661 550,638 Additions - 89 - 17 33 507 646 24,527 Disposals - - (5,677) (32) (5) (29) (5,743) (1,002) Revaluation gain - - - - - - - 465,498 Closing balance 921,400 20,475 33,562 15,690 25,970 17,467 1,034,564 1,039,661

(Less): Accumulated depreciation Opening balance - 3,632 15,969 7,539 15,381 7,738 50,259 37,150 Charge for the year - 2,040 6,357 2,032 3,896 1,853 16,179 13,657 Disposal - - (4,613) - - - (4,613) (548) Closing balance - 5,672 17,713 9,571 19,277 9,591 61,825 50,259 Net book value as at 31/03/2014 921,400 14,802 15,849 6,119 6,694 7,876 972,740 - Net book value as at 31/03/2013 921,400 16,753 23,270 8,166 10,561 9,251 - 989,402 b. Property, Plant and Equipment – Group

In Rupees Thousand Land Buildings Motor Furniture Computer Office Total Total Vehicle & Fittings Equipment 2014 2013 Cost/fair value Opening balance 921,400 19,963 35,859 17,971 31,758 22,049 1,049,000 559,977 Additions - 89 - 17 33 507 646 24,527 Disposals - - (5,677) (32) (5) (29) (5,743) (1,002) Revaluation gain - - - - - - - 465,498 Closing balance 921,400 20,052 30,182 17,956 31,786 22,527 1,043,904 1,049,000

(Less): Accumulated depreciation Opening balance - 3,632 16,063 9,805 21,320 12,799 63,619 50,485 Charge for the year - 2,040 6,357 2,032 3,896 1,853 16,179 13,682 Impairment - - - - - - - - Disposal - - (4,613) - - - (4,613) (548) Closing balance - 5,672 17,807 11,837 25,216 14,652 75,185 63,619

Net book value as at 31/03/2014 921,400 14,379 12,375 6,119 6,571 7,875 968,719 - Net book value as at 31/03/2013 921,400 16,330 19,796 8,166 10,438 9,250 - 985,381

19.1 Information on the Freehold Land of the group Location

Extent Revalued Cost of amount Land (Perches) Rs.000's Rs.000's No. 21, Nawam Mawatha, Colombo 02. 108.40 921,400 455,902

The Company had revalued its land in 2013 and the fair value of the Land was assessed using Contractor's test method by Mr. N. M. Jayathilake, Dip. In Val, B,Sc Est.Mat & Val., N.C.T.(Q.S), M.I.Q.S. an incorporated valuer.

The surplus on revaluation of land was recognized in the Revaluation Reserve. Title restriction on Property, plant and equipment There were no restriction existed in the title of the Property, plant and equipment of the Group as at reporting date.

Property, plant and equipment pledged as securities The company has obtained a Rs.100 million loan from People's Bank PLC on 30 March 2012. The company property at No.21,

Nawam Mw, Colombo 02 is mortgaged for the said loan.

As at 31 March

48

20. Intangible Assets In Rupees Thousand Company Group 2014 2013 2014 2013 Cost Opening balance 17,955 13,835 18,594 14,474 Additions 2 4,120 2 4,120 Disposals - - - - Closing balance 17,957 17,955 18,596 18,594

Accumulated amortized cost Opening balance 13,625 11,930 14,264 12,569 Charge for the year 1,518 1,695 1,518 1,695 Disposals/Write off - - - - Closing balance 15,143 13,625 15,782 14,264 Netbook value 2,814 4,330 2,814 4,330

21. Other Assets In Rupees Thousand Company Group 2014 2013 2014 2013 Cost Deposits and prepayments 10,480 7,223 10,500 7,244 Real estate inventories ( Note 21.1) 58,808 61,781 58,808 61,781 Prepaid staff cost 5,238 10,923 5,238 10,923 Stationary stock 1,246 1,097 1,246 1,097 Vehicle stock 14,076 17,671 14,076 17,671 ESC receivable 14,120 8,014 14,120 7,430 Recoverable from Director 11,632 13,132 11,632 13,132 VAT Recoverable 18,468 18,473 18,468 18,473 Others (Note 21.2) 40,015 11,666 40,015 11,666

Total 174,083 149,981 174,103 149,418

21.1 Real estate inventories In Rupees Thousand Company Group 2014 2013 2014 2013 Opening Balance 72,777 68,346 72,777 68,346 Purchased during the year - 17,705 - 17,705 Adjustments 171 (1,369) 171 (1,369) Disposals during the year (5,036) (11,905) (5,036) (11,905) Closing Balance 67,912 72,777 67,912 72,777 Impairment (9,104) (10,996) (9,104) (10,996) Net assets 58,808 61,781 58,808 61,781

21.2 Others In Rupees Thousand Company Group 2014 2013 2014 2013 Gross assets 47,120 51,128 47,120 51,128 Impairment (7,105) (7,857) (7,105) (7,857) Net assets 40,015 43,271 40,015 43,271

As at 31 March


49


22. Suspense Account In Rupees Thousand Company Group 2014 2013 2014 2013 Cost Suspense Account 108,227 138,552 108,227 138,552 Total 108,227 138,552 108,227 138,552

22.1 The general ledger did not agree with the sub ledgers which resulted in differences in relation to assets, liabilities, income and expenses in the Statement of Financial Position and Statement of Comprehensive Income, in the previous year's financial statements. Any such un-reconciled differences were transferred to a suspense account to be investigated and reconciled by the Company. However the reason for the differences were not specifically identified as at 31st March 2014 and the company continued to maintain the suspense account as a non-current asset in the Statement of Financial Position.

During the year further entries were made to the suspense account due to differences noted during the year and to record certain unrecorded assets and liabilities.

22.2 The summary of the suspense account after adjusting the entries during the year is given below.

Caption Opening Further Closing Balance Adjustments Balance

During Year Finance lease 63,684 (6,369) 57,315 Hire purchase 23,131 (4,950) 18,181 Loans (11,736) (879) (12,615) Margin trading - (1,405) (1,405) Cash - (10,319) (10,319) Deposits from customers

Fixed deposits 7,443 (7,443) - Other deposits from customers 16,168 682 16,850

Other assets and liabilities 16,537 8,397 24,934 Receivables for tractor sales - (4,650) (4,650)

Adjusting the unrecorded Assets - (6,826) (6,826)Adjusting the unrecorded Liablities - 3,436 3,436

Difference in relation to Statement of Financial Position 115,227 (30,325) 84,902

Interest income 5,085 - 5,085 Interest expense 14,480 - 14,480 Other expenses 3,760 - 3,760

Difference in relation to Statement of Comprehensive Income 23,325 - 23,325 Total 138,552 (30,325) 108,227

As at 31 March

50

23. Due to Banks In Rupees Thousand Company Group 2014 2013 2014 2013 Borrowings 49,960 227,143 49,960 227,413 Overdraft 7,265 356,986 7,265 356,986 Total 57,225 584,129 57,225 584,399 The remaining borrowing balance contains a Rs.100 million loan obtained from People's Bank on 30th March 2012. The company

property at No.21, Nawam Mw, Colombo 02 is mortgaged for the said loan.

The repayment of the said loan is as follows. Rental No of Rs.'000 Rs.'000 Installments People's Bank Rs.100 million loan 2,085 47 97,995 2,005 1 2,005 100,000

24. Deposits from customers In Rupees Thousand Company Group 2014 2013 2014 2013 Deposits from customers 4,237,339 2,675,424 4,237,339 2,675,424 Total 4,237,339 2,675,424 4,237,339 2,675,424

24.1 Analysis In Rupees Thousand Company Group 2014 2013 2014 2013 By product

Fixed deposits 2,921,945 2,514,314 2,921,945 2,514,314 Commercial paper 1,285,689 119,616 1,285,689 119,616 Promissory notes - 9,213 - 9,213 Savings 29,706 32,281 29,706 32,281

Total 4,237,339 2,675,424 4,237,339 2,675,424

By currency Sri Lankan Rupee 4,217,460 2,661,014 4,217,460 2,661,014 Euro 1,641 - 1,641 - United States Dollar 18,238 14,410 18,238 14,410

Total 4,237,339 2,675,424 4,237,339 2,675,424

25. Debt Securities Issued In Rupees Thousand Company Group 2014 2013 2014 2013 Preference shares 10,000 10,000 10,000 10,000 Total 10,000 10,000 10,000 10,000

Due within 1 year - - - - Due after 1 year 10,000 10,000 10,000 10,000 Total 10,000 10,000 10,000 10,000

25.1 Details of Debt Securities Issued Type Interest Rate & Face Repayment Company Group In Rupees Thousand Value Terms 2014 2013 2014 2013 Issued by the Company Preference shares 10,000 6% 10,000 10,000 10,000 10,000 cumulative non redeemable preference shares Total 10,000 10,000 10,000 10,000 10,000

As at 31 March


51


26. Deferred Taxation In Rupees Thousand Company Group 2014 2013 2014 2013 Deferred tax assets (Note 26.1) (57,555) (21,273) (57,555) (21,273) Deferred tax liabilities (Note 26.2) 100,342 26,125 99,987 25,600 Net Deferred Tax Assets 42,787 4,852 42,432 4,327

26.1 Deferred tax assets Balance as at 1st April 21,273 4,978 21,273 4,978 Originated/(reversed) during the year 36,282 16,295 36,282 16,295 57,555 21,273 57,555 21,273

Deferred tax on gratuity 3,436 3,244 3,436 3,244 Deferred tax on intangible assets - 32 - 32 Deferred tax on tax losses 54,119 17,996 54,119 17,996 57,555 21,273 57,555 21,273

26.2 Deferred tax liabilities Balance as at 1st April 26,125 13,099 25,600 12,663 Originated/(reversed) during the year 74,218 13,026 74,387 12,937 100,342 26,125 99,987 25,600

Deferred tax on property plant & equipment 2,463 2,463 2,107 1,938 Deferred tax on intangible assets 788 - 788 - Deferred tax on lease assets 97,092 23,662 97,092 23,662 100,342 26,125 99,987 25,600

The company has incurred a tax loss of Rs. 193,281,401 from which company has recognised a deffered tax asset amounting to Rs. 54,118,792.

27. Other Liabilities In Rupees Thousand Company Group 2014 2013 2014 2013 Preference shares dividends payable 1,800 1,800 1,800 1,800 Employee benefit (Note 27.1) 12,271 11,587 12,271 11,587 Real estate advance 4,489 7,866 4,489 7,866 Other payable 64,182 44,820 64,577 48,846 Total 82,741 66,073 83,137 70,099

27.1 Employee Benefits In Rupees Thousand Company Group 2014 2013 2014 2013 Balance brought forward 11,587 9,881 11,587 9,881 Interest cost 1,275 1,087 1,275 1,087 Current service cost 2,233 1,880 2,233 1,880 Actuarial gain (298) (702) (298) (702) Payments made during the year (2,526) (559) (2,526) (559) Balance carried forward 12,271 11,587 12,271 11,587

The Company carried out an actuarial valuation of the gratuity as at 31st March 2014 by Mr. M. Poopalanathan, AIA, Messrs Actuarial and Management Consultant (Pvt) Ltd, a firm of professional actuaries. The valuation method used by the actuaries to value the liability is the “Project Unit credit Method”, the method recommended by the LKAS 19.

Discount rate used 10% ( 2013-11%) Future salary increase 10% ( 2013-10%)

As at 31 March

52

28. Stated Capital In Rupees Thousand No of Shares Company Group ( '000) 2014 2013 2014 2013 Ordinary Shares 67,500 1,078,227 1,078,227 1,078,227 1,078,227 Total 1,078,227 1,078,227 1,078,227 1,078,227

29. Statutory Reserve Fund In Rupees Thousand Company Group 2014 2013 2014 2013 Opening balance 16,810 15,097 16,810 15,097 Transfer during the period - 1,713 - 1,713 Closing balance 16,810 16,810 16,810 16,810

29.1 Statutory Reserve Fund In Rupees Thousand Company Group 2014 2013 2014 2013 Reserve fund (Note 29.2) 7,259 7,259 7,259 7,259 Investment fund account (Note 29.3) 9,551 9,551 9,551 9,551 Closing balance 16,810 16,810 16,810 16,810

29.2 Reserve Fund This represent a reserve fund created in FY 2005/06, as per the directions issued by the Department of Non Banking Financial

institution of Central Bank of Sri Lanka, under the direction No. 06 of 2005 of Finance Leasing act No. 56 of 2000.

After registering the Company under the Finance Business Act No. 42 of 2011 in April 2012, this reserve fund is utilized for building up the reserve fund required under CBSL direction 01 of 2003 Finance Companies (Capital Fund).

However, due to reporting losses for the year ended 31st March 2014, no transfers were made to the reserve fund.

29.3 Investment Fund Account As proposed in the Government Budget 2011, every person or partnership that is in the business of banking or financial services

is required to establish and operate an Investment Fund Account (IFA).

Investment Fund Account consist of 8% of the profits calculated for the payment of Value Added Tax on financial services and 5% of the Profit Before Tax calculated for payment of Income Tax purposes during the year.

Subsequently Central Bank of Sri Lanka has issued a guideline on the operation of the investment account on 7th August 2014. The operation of Investment Fund Account will cease with effect from 1st October 2014. Accordingly, Licensed Finance Companies (LFCs)/ Specialized Leasing Companies (SLCs) shall transfer the remaining balance in Investment Fund Account to retained earnings through the Statement of Changes in Equity.

As at 31 March


53


30. Retained Earnings In Rupees Thousand Company Group 2014 2013 2014 2013 Opening balance ( 292,380) ( 199,773) ( 299,933) ( 206,837) Loss for the year ( 222,355) ( 90,894) ( 219,021) ( 91,383) Actuarial gain 298 - 298 - Transfers to other reserves - ( 1,713) - ( 1,713) Closing balance ( 514,437) ( 292,380) ( 518,656) ( 299,933)

31. Contingent Liabilities and Commitments In Rupees Thousand Company Group 2014 2013 2014 2013 Guarantees 5,883 49,900 5,883 49,900 Total 5,883 49,900 5,883 49,900

31.1 The company had issued Letters of Guarantee to the value of Rs.5.8mn.

31.2 Litigation against the company

DLM 00026/2010

This case was filed by S P Y D Lakmali against the Company since she has given her immovable property to the Company as a security for the loan which was taken by her and her father and the case is pending in the District Court of Colombo and it has been called to see whether there would be settlement on 14/10/2014.

H C (Civil) 502/2009/MR

Yasunaga Residencies (Pvt) Ltd has filed the above mentioned action in the Commercial High Court against the Company by asking a sum of Rs. 26,500,000/- and the Bank has filed the Answer claiming a Mortgage Bond action against the Yasunaga Residencies (Pvt) Ltd. Terms of settlement were entered in courts. Two more plots to be sold and to be released according to the settlement.

32. Related Party Disclosures

The company carried out transactions in the ordinary course of its business on normal commercial terms basis with parties who are defined as related parties in Sri Lanka Accounting Standard 24 “Related Party Disclosures”, the details of which are reported below.

32.1 Amounts due from Related Parties In Rupees Thousand 2014 2013 PMB Services Ltd 18,046 17,655 Less : Impairment provision (18,046) (17,655) - -

32.2 Transaction with Subsidiaries In Rupees Thousand

Name of Related Party Relationship Transaction Type Amount paid PMB Services Ltd Subsidiary Settlement of amount payable 650 Expenses incurred by Parent 1,068 Asset Transferred to Parent 27

The Company has invested Rs. 175mn in PMB Services Ltd, for which full provision has beeen made due to the impairment of the investment. Further the Company has fully provided for the amount receivable from PMB Services Ltd.

The Company has provided the letter of comfort to its subsidiary confirming its intention to continue to provide financial and other support and meet liabilities to enable the subsidiary to continue as going concern.

As at 31 March

54

32.3 Transaction with Other Related Parties

Name of Related Relationship Name of common Transation type Limit / Amount Amount Party Director Value paid as at

31.03.2014 Peoples Bank Major Shareholder Mr .J. P Amaratunga Overdraft( Secured ) 225,000 225,000 225,000 Director Interest 1,368 Mrs L. K. Sangakkara Term Loan (Secured) 100,000 25,020 49,960 Director Interest 10,152 Mr. P.Kudabalage Overdraft( Secured ) 12,500 12,500 - Director Interest 6 Preference Shares 10,000 - 10,000 J.P.Weerasinghe & Company Director Mr A.P Weerasinghe Lease Contract 455 26 - Director Interest 29 Walkers Piling Ltd. Director Mr J.P Amarathunga Lease Contract 16,500 2,964 17,361 Director Interest 3,310 Lease Contract 3,500 648 3,546 Interest 698 Lease Contract 6,100 1,043 6,241 Interest 1,171 Lease Contract 4,500 199 6,603 Interest 241

Capital Trust Securities (Pvt ) Ltd Director Mr T.H.M Wickramasighe Margin Trading Portfolio - - 660,821 Ms L.K Sangakkara Director Fixed Deposit Investments - - 7,745

32.4 Transactions with Key Management Personnel (KMP)

According to Sri Lanka Accounting Standard 24 "Related Party Disclosures", Key Management Personnel are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly, the dirctors of the Company (including executive and non executive directors) and their immediate family members having classified as KMP of the Company.

Immediate family member is defined as spouse or dependent. Dependent is defined as anyone who depends on the respective director for more than 50% of his or her financial needs.

In addition to their salaries and fees, the Company provides non cash benefits to KMP. Remunerations paid to key management personnel are disclosed in Note No. 11.

As at 31 March


55


33 Financial Risk Management

33.1 Introduction and Overview

The Company has exposure to following risks from financial instruments:

1. Credit risk 2. Liquidity risk 3. Market risk 4. Operational risk.

This note provides information about the Company’s exposure to each of the above risks, the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further quantitative disclosures are included throughout this financial statements.

Risk Management framework

The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Board is responsible for developing and monitoring the Company’s risk management policies. The board manages the risk through Integrated Risk Management Committee (IRMC) and the Audit Committee.

(a) Credit risk

'Credit risk' is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from customers and investment securities.

The Companys Credit management process includes the following:

- Credit evaluation, business feasibility, verifying CRIB status of clients, financing assets approved by CEO and Board of Directors depending on the quantum of the financial facility

- Setting up individual customer and item financing credit exposure levels.

- Formulating and regular review of credit policies for changing business requirements.

- Setting up and simplifying documentary and legal procedures and compliance with statutory requirements.

Credit Quality by Class of Financial Assets

Credit quality of the company based on the class of financial assets is analysed below.

As at 31 March 2014 Neither past due Past due but Individually Total not individually not impaired impaired individually

impaired In Rupees Thousand

Cash and Cash Equivalents 231,787 - - 231,787 Investment in Fixed Deposits 23,742 - - 23,742 Financial Investments - Held for Trading 2,241 - - 2,241 Loans and advances to customers 3,908,041 - - 3,908,041 Less : Impairment - (147,369) (293,642) (441,011) Financial Investments - Available for Sale 498,461 - - 498,461 4,664,272 (147,369) (293,642) 4,223,261

(b) Liquidity risk

Liquidity risk is that which the Company will encounter difficulties in meeting obligations associated with its financial liabilities which are settled by delivering cash or other financial assets. The Company ensures that sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions and maintain Company’s reputation. The treasury division manages the liquidity of the Company by obtaining information from credit and other divisions regarding the liquidity requirements of their financial needs on a continuos basis and with estimated cash flows from business operations. The Company maintains a portfolio

56

of short-term liquid assets, made up of cash and cash equivalents, deposits and government securities, to ensure that sufficient liquidity. Further, Company maintains unutilized credit facilities from banks in order to use if the requirement arises.

Maturity analysis of the Company’s interest bearing assets and liabilities disclosed in the Note 34 to the financial statements.

(c) Market Risk

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

(d) Interest Rate Risk

Interest Rate Risk arises due to fluctuations in the interest rate resulting in adverse impact to future cash flows or the fair values of financial instruments of the Company.

The Company’s main sources of funding lines are deposits and other debt instruments bearing fixed interest rates for various durations from one month to five years. The Assets and Liabilities Committee (ALCO) of the Company regularly reviews the current cost of borrowing with the market rates and Company’s views on future trends in market rates along with the competitor rates in determining rates for borrowings funds for various tenors and lending rates. The Company attracts more deposits for a one year period which allows for reprising when market rates fluctuate. The typical period of Company’s advances are for three/four years which leads to rate mismatches. With repayments on monthly basis this mismatch is reduced to a certain level.

(e) Exchange Risk

Exchange Risk arises due to changes in exchange rates of currencies. The Company mitigates the exposure to exchange risk by matching foreign currency liabilities with corresponding assets in the same currency.

(f) Operational Risk

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

The Company’s objective is to manage operational risk in a cost effective manner for avoiding/minimising financial losses and damage to the Company and without imposing restrictions on initiative and creativity. The senior management takes primary responsibility for the development and implementation of controls to address operational risk related to each division supported by the continuous improvement including:

• Requirementsforappropriatesegregationofduties,includingtheindependentauthorisationoftransactions. • Requirementsforthereconciliationandmonitoringoftransactions. • Compliancewithregulatoryandotherlegalrequirementsandkeepinguptodatewithchanges. • Documentationofcontrolsandprocedures. • Trainingandprofessionaldevelopment. • Riskmitigation,includinginsurancewhereitiseffective.

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


57


33.2 Capital Management

The Regulatory Capital requirements for the Finance Companies are set by the Central Bank of Sri Lanka.

The details of the computation of risk weighted assets, capital and the ratios of the Company are given below:

Capital Adequacy

Total Risk Weighted Assets Computation

As at 31 March In Rupees Thousand Balance Risk

Weight Risk Weighted Balance 2014 2013 Factor % 2014 2013 Assets Cash and Cash Equivalents 231,787 168,791 0% - - Deposits with Banks 23,742 114,057 20% 4,748 22,811 Sri Lanka Govt/ Central Bank Securities 498,438 - 0% - - Financial Investments - Held for Trading

(excluding items deducted from the total Capital) 2,241 2,094 100% 2,241 2,094 Loans and Advances to Customers 940,347 737,280 100% 940,347 737,280 Lease Rental and Hire Purchase Receivables 2,311,104 2,118,781 100% 2,311,104 2,118,781 Financial Investments - Available for Sale 23 23 0% - - Loans and Advances against deposits with the Company 48,520 5,468 0% - - Loans against Gold and gold jewellery 167,059 179,872 25% 41,765 44,968 Other Assets 285,123 288,533 100% 285,123 288,533 Property, Plant and Equipment 972,740 993,733 100% 972,740 993,733 Total Risk Weighted Assets 5,481,124 4,608,634 4,558,069 4,208,201

Total Capital Base Computation

As at 31 March 2014 2013 Tier I : Core Capital

Stated Capital 1,078,227 1,078,227 Statutory Reserve Fund 16,810 16,810 Non redeemable preference shares 10,000 10,000 Retained Earnings (514,437) (292,380) Avaiable for Sales Reserve 4,934 - Total Tier I Capital 595,534 812,657 Tier II : Supplementary Capital Eligible Revalution Reserves 465,498 465,498 General Provisions 56,976 54,596 Total Eligible Tier II Capital 522,474 520,094 Total Capital 1,061,032 1,332,751 Deductions Investments in capital of other banks - - Capital Base 1,061,032 1,332,751 Computation of Capital Adequacy Ratios Core Capital Ratio (Minimum Requirement 5%) 13.07% 19.31% Core Capital x 100 Risk Weighted Assets Total Risk Weighted Capital Ratio (Minimum Requirement 10%) 23.28% 31.67% Capital Base x 100 Risk Weighted Assets

58

33.3

Fa

ir V

alue

s of F

inan

cial

Inst

rum

ents

Th

e fa

ir va

lues

of fi

nanc

ial a

sset

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s, to

geth

er w

ith th

e ca

rryi

ng a

mou

nts s

how

n in

the

stat

emen

t of fi

nanc

ial p

ositi

on, a

re a

s fol

low

s:

A

s at

31st

Mar

ch 2

014

31st

Mar

ch 2

013

Car

ryin

g A

mou

nt

F air

Val

ue

Car

ryin

g A

mou

nt

F air

Val

ue

In R

upee

s Thou

sand

C

ompa

ny

Gro

up

Com

pany

G

roup

C

ompa

ny

Gro

up

Com

pany

G

roup

A

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at a

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cost

Fi

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2,

241

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2,09

4 2,

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2,09

4

Fina

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– A

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(Not

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1 49

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8,46

1 49

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23

23

23

Lo

ans a

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o cu

stom

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Not

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3,

467,

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3,46

7,03

0 3,

467,

030

3,46

7,03

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041,

401

3,04

1,40

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041,

401

3,04

1,40

1

Cas

h &

Cas

h Eq

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s (N

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231,

787

232,

155

231,

787

232,

155

168,

791

169,

323

168,

791

169,

323

In

vest

men

t in

Fixe

d D

epos

its (N

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23,7

42

23,7

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23,7

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23,7

42

114,

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114,

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114,

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114,

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4,22

3,26

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223,

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3,32

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326,

899

Li

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t am

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st

Due

to b

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(Not

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57

,225

57

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57

,225

57

,225

58

4,12

9 58

4,12

9 58

4,12

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4,12

9

Dep

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from

cus

tom

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Not

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4,

237,

339

4,23

7,33

9 4,

237,

339

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7,33

9 2,

675,

424

2,67

5,42

4 2,

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424

2,67

5,42

4

4,

294,

564

4,29

4,56

4 4,

294,

564

4,29

4,56

4 3,

259,

552

3,25

9,55

2 3,

259,

552

3,25

9,55

2

The

met

hodo

logi

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nd a

ssum

ptio

ns u

sed

to e

stim

ate

the

fair

valu

es o

f the

fina

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l ins

trum

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, whi

ch a

re n

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fair

valu

e ar

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follo

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a)

Fina

ncia

l Inv

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- Hel

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– Th

e ca

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nt o

f the

se in

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ts re

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last

trad

ed p

rice

at st

ock

exch

ange

.

b) F

inan

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inve

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ents

– Av

aila

ble

for s

ale

– Th

e ca

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mou

nt o

f thi

s sho

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tmen

ts in

Gov

ernm

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ecur

ities

and

Cre

dit I

nfor

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Bure

au o

f Sri

Lank

a. A

s thi

s is

a Pr

ivat

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ompa

ny u

nabl

e to

find

mar

ket v

alue

s. It

is as

sum

ed th

at th

e ca

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ng a

mou

nts a

ppro

xim

ate

thei

r fai

r val

ues.

c)

Loan

s and

adv

ance

s to

cust

omer

s – Th

e ca

rryi

ng a

mou

nt re

flect

ing

amor

tised

cost

of l

oan

and

adva

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. Thus

its c

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amou

nt ap

prox

imat

es to

the

fair

valu

e.

d) C

ash

and

cash

equ

ival

ents

– Th

e ca

rryi

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mou

nt o

f cas

h an

d ca

sh e

quiv

alen

ts ap

prox

imat

e its

fair

valu

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the

rela

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ort m

atur

ity o

f the

fina

ncia

l ins

trum

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.

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Inve

stm

ent i

n Fi

xed

Dep

osits

– Th

e ca

rryi

ng a

mou

nt o

f inv

estm

ent i

n fix

ed d

epos

its ap

prox

imat

e its

fair

valu

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the

rela

tivel

y sh

ort m

atur

ity o

f the

fina

ncia

l in

stru

men

ts.

f)

Due

to b

anks

- Fa

ir va

lue o

f the

se fi

nanc

ial i

nstr

umen

ts w

ith re

mai

ning

mat

urity

of l

ess t

han

1 ye

ar ap

prox

imat

e the

ir ca

rryi

ng a

mou

nts d

ue to

the

rela

tivel

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ort m

atur

ity

of su

ch in

stru

men

ts.

g) D

epos

its fr

om c

usto

mer

s – Th

e ca

rryi

ng a

mou

nt re

flect

ing

amor

tised

cost

of D

epos

its fr

om c

usto

mer

s. Th

us it

s car

ryin

g am

ount

appr

oxim

ates

to th

e fa

ir va

lue.


59


34. Maturity Profile of Assets and Liabilities Allocation of Amounts Amounts were allocated to respective maturity groupings based on installments falling due as per contract. The amounts therefore represent total amount receivable or payable in each maturity grouping.

34.1(a) Group As at 31.03.2014 Up to 3 - 12 1 - 3 3 - 5 More than Total In Rupees Thousand 3 Months Months Years Years 5 Years

Interest bearing assets Cash & Cash Equivalent 232,155 - - - - 232,155 Investment in Fixed Deposits 3,815 19,927 - - - 23,742 Financial Investments - Held for Trading 2,241 - - - - 2,241 Financial investments – Available for sale 169,718 321,473 - - 7,270 498,461 Loans and advances to customers 1,704,245 648,112 806,254 308,418 - 3,467,029 Total Interest bearing assets 2,112,175 989,512 806,254 308,418 7,270 4,223,629 Total Non - Interest bearing assets 141,164 98,816 28,233 14,117 971,533 1,253,863 Total assets 2,253,339 1,088,328 834,487 322,535 978,803 5,477,492

Percentage 41.14% 19.87% 15.23% 5.89% 17.87% 100.00%

Interest bearing liabilities Due to Banks 13,520 18,765 24,940 - - 57,225 Deposits from customers 1,917,888 1,970,411 146,175 202,865 - 4,237,339 Debt securities issued - - - - 10,000 10,000 Total interest bearing liabilities 1,931,408 1,989,176 171,115 202,865 10,000 4,304,564 Total Non- Interest bearing Liabilities 33,968 37,599 8,355 4,178 42,432 126,532 Equity - - - - 1,046,396 1,046,396 Total liabilities & equity 1,965,376 2,026,775 179,470 207,043 1,098,828 5,477,492

Percentage 35.88% 37.00% 3.28% 3.78% 20.06% 100.00%

34.1(b) Company As at 31.03.2014 Up to 3 - 12 1 - 3 3 - 5 More than Total In Rupees Thousand 3 Months Months Years Years 5 Years

Interest bearing assets Cash & Cash Equivalent 231,787 - - - - 231,787 Investment in Fixed Deposits 3,815 19,927 - - - 23,742 Financial Investments - Held for Trading 2,241 - - - - 2,241 Financial investments – Available for sale 169,718 321,473 - - 7,270 498,461 Loans and advances to customers 1,704,245 648,112 806,254 308,418 - 3,467,029 Total Interest bearing assets 2,111,807 989,512 806,254 308,418 7,270 4,223,261 Total Non - Interest bearing assets 141,156 98,808 28,231 14,115 975,554 1,257,864 Total assets 2,252,963 1,088,320 834,485 322,533 982,824 5,481,125

Percentage 41.10% 19.86% 15.22% 5.88% 17.93% 100.00%

Interest bearing liabilities Due to Banks 13,520 18,765 24,940 - - 57,225 Deposits from customers 1,917,888 1,970,411 146,175 202,865 - 4,237,339 Debt securities issued - - - - 10,000 10,000 Total interest bearing liabilities 1,931,408 1,989,176 171,115 202,865 10,000 4,304,564 Total Non- Interest bearing Liabilities 33,098 37,233 8,274 4,137 42,787 125,529 Equity - - - - 1,051,032 1,051,032 Total liabilities & equity 1,964,506 2,026,409 179,389 207,002 1,103,819 5,481,125

Percentage 35.84% 36.97% 3.27% 3.78% 20.14% 100.00%

60

34. Maturity Profile of Assets and Liabilities

34.2(a) Group As at 31.03.2013 Up to 3 - 12 1 - 3 3 - 5 More than Total In Rupees Thousand 3 Months Months Years Years 5 Years

Interest bearing assets Cash & Cash Equivalent 169,323 - - - - 169,323 Investment in Fixed Deposits 9,522 104,535 - - - 114,057 Financial Investments - Held for Trading 2,094 - - - - 2,094 Financial investments – Available for sale - - - - 23 23 Loans and advances to customers 798,237 807,650 1,115,564 314,862 5,089 3,041,402 Total Interest bearing assets 979,176 912,185 1,115,564 314,862 5,112 3,326,899 Total Non - Interest bearing assets 44,169 245,802 18,705 - 969,005 1,277,681 Total assets 1,023,345 1,157,987 1,134,269 314,862 974,117 4,604,580

Percentage 22.22% 25.15% 24.63% 6.84% 21.16% 100.00%

Interest bearing liabilities Due to Banks 516,645 18,405 49,079 - - 584,129 Deposits from customers 927,706 1,191,798 555,908 11 - 2,675,423 Debt securities issued - - - - 10,000 10,000 Total interest bearing liabilities 1,444,351 1,210,203 604,987 11 10,000 3,269,552 Total Non- Interest bearing Liabilities 16,036 42,181 16,210 - - 74,427 Equity - - - - 1,260,601 1,260,601 Total liabilities & equity 1,460,387 1,252,384 621,197 11 1,270,601 4,604,580

Percentage 31.72% 27.20% 13.49% 0.00% 27.59% 100.00%

34.2(b) Company As at 31.03.2013 Up to 3 - 12 1 - 3 3 - 5 More than Total In Rupees Thousand 3 Months Months Years Years 5 Years

Interest bearing assets Cash & Cash Equivalent 168,791 - - - - 168,791 Investment in Fixed Deposits 9,522 104,535 - - - 114,057 Financial Investments - Held for Trading 2,094 - - - - 2,094 Financial investments – Available for sale - - - - 23 23 Loans and advances to customers 798,237 807,650 1,115,564 314,862 5,089 3,041,402 Total Interest bearing assets 978,644 912,185 1,115,564 314,862 5,112 3,326,367 Total Non - Interest bearing assets 44,307 247,158 18,764 - 972,036 1,282,265 Total assets 1,022,951 1,159,343 1,134,328 314,862 977,148 4,608,632

Percentage 22.20% 25.16% 24.61% 6.83% 21.20% 100.00%

Interest bearing liabilities Due to Banks 516,645 18,405 49,079 - - 584,129 Deposits from customers 927,707 1,191,798 555,908 11 - 2,675,424 Debt securities issued - - - - 10,000 10,000 Total interest bearing liabilities 1,444,352 1,210,203 604,987 11 10,000 3,269,553 Total Non- Interest bearing Liabilities 15,376 40,007 15,542 - - 70,925 Equity - - - - 1,268,154 1,268,154 Total liabilities & equity 1,459,728 1,250,210 620,529 11 1,278,154 4,608,632

Percentage 31.67% 27.13% 13.46% 0.00% 27.73% 100.00%


61


35 Segment Information- Business Segments

35.1 Company For the year ended 31 March 2014 Trade Bills Leasing Hire Real Pawning Margin Other Total In Rupees Thousand & loans Purchases Estate Trading

Income Interest Income 60,747 310,149 204,946 - 38,096 68,117 68,606 750,661

Other Income Fee and commission income - 2,211 2,211 - - - - 4,421 Net trading income - - - 1,218 - - 1,560 2,778 Net gain/(loss) from financial assets - Held for trading - - - - - - 12,402 12,402 Other operating income 1,705 6,001 123 - - - 19,595 27,423 47,025

Total Income 62,452 318,360 207,279 1,218 38,096 68,117 102,163 797,686

Percentage 7.83% 39.91% 25.99% 0.15% 4.78% 8.54% 12.81% 100.00%

Expenses Interest 53,033 183,633 114,307 8,043 23,104 62,716 147,160 591,995 Other expenses 55,302 136,738 73,776 957 44,569 3,162 75,605 390,109 Total 108,335 320,371 188,082 9,000 67,673 65,878 222,766 982,105 Profit before taxation (45,883) (2,011) 19,197 (7,782) (29,577) 2,239 (120,603) (184,419) Income tax expense 37,936 Profit for the year (222,355)

Segment Assets 421,417 1,863,716 1,095,475 75,299 213,906 845,923 965,389 5,481,124 Percentage 7.69% 34.00% 19.99% 1.37% 3.90% 15.43% 17.61% 100.00% Segment liabilities 340,608 1,506,340 885,413 60,860 172,888 683,713 780,271 4,430,093

Information on Cash Flows For the year ended 31 March 2014

Cash flow from operating activities 69,185 305,971 179,847 12,362 35,118 138,877 158,491 899,849 Cash flow from investing activities (31,377) (138,766) (81,565) (5,606) (15,927) (62,984) (71,880) (408,106) Cash flow from financing activities (13,623) (60,247) (35,412) (2,434) (6,915) (27,345) (31,207) (177,183)

62

35. Segment Information- Business Segments

35.2 Group For the year ended 31 March 2014 Trade Bills Leasing Hire Real Pawning Margin Other Total In Rupees Thousand & loans Purchases Estate Trading


Other Income Fee and commission income - 2,211 2,211 - - - - 4,421 Net trading income - - - 1,218 - - 1,560 2,778 Net gain/(loss) from financial assets - Held for Trading - - - - - - 12,402 12,402 Other operating income 1,705 6,001 123 - - - 24,228 32,056 51,658

Total Income 62,452 318,360 207,279 1,218 38,096 68,117 106,796 802,319

Percentage 7.78% 39.68% 25.84% 0.15% 4.75% 8.49% 13.31% 100.00%

Expenses Interest 53,033 183,633 114,307 8,043 23,104 62,716 147,167 592,002 Other expenses 55,302 136,738 73,776 957 44,569 3,162 76,183 390,687 Total 108,335 320,371 188,082 9,000 67,673 65,878 223,351 982,689 Profit before taxation (45,883) (2,011) 19,197 (7,782) (29,577) 2,239 (116,555) (180,370) Income tax expense 38,651 Profit for the year (219,021)

Segment Assets 421,137 1,862,481 1,094,749 75,249 213,764 845,362 964,749 5,477,493 Percentage 7.69% 34.00% 19.99% 1.37% 3.90% 15.43% 17.61% 100.00% Segment liabilities 340,653 1,506,539 885,530 60,868 172,911 683,803 780,374 4,430,679


Cash flow from operating activities 69,172 305,916 179,814 12,360 35,111 138,852 158,462 899,685 Cash flow from investing activities (31,377) (138,766) (81,565) (5,606) (15,927) (62,984) (71,880) (408,106) Cash flow from financing activities (13,623) (60,247) (35,412) (2,434) (6,915) (27,345) (31,207) (177,183)


63



35.3 Company For the year ended 31 March 2013 Trade Bills Leasing Hire Real Pawning Margin Other Total In Rupees Thousand & loans Purchases Estate Trading


Other Income Fee and commission income - 3,477 3,477 - - - - 6,954 Net trading income - - - 13,132 - - 891 14,023 Net gain/(loss) from financial assets - Held for trading - - - - - - 561 561 Other operating income 4,637 12,169 8,196 13,390 38,392 59,930

Total Income 111,492 254,469 225,827 13,132 26,713 34,602 33,956 700,189

Percentage 15.92% 36.34% 32.25% 1.88% 3.82% 4.94% 4.85% 100.00%

Expenses Interest 44,554 116,917 78,748 5,705 16,611 20,592 142,471 425,598 Other expenses 15,317 129,631 77,740 3,989 11,613 14,397 111,644 364,331 Total 59,871 246,549 156,488 9,694 28,224 34,988 254,114 789,929 Profit before taxation 51,621 7,920 69,339 3,437 (1,512) (387) (220,158) (89,740) Income tax expense (1,154) Profit for the year (90,894)

Segment Assets 482,461 1,266,053 852,728 61,781 179,872 222,980 1,542,758 4,608,633 Percentage 10.47% 27.47% 18.50% 1.34% 3.90% 4.84% 33.48% 100.00% Segment liabilities 349,703 917,674 618,083 44,781 130,377 161,622 1,118,238 3,340,478


Cash flow from operating activities 16,894 44,332 29,859 2,163 6,298 7,808 54,021 161,376 Cash flow from investing activities (862) (2,262) (1,524) (110) (321) (398) (2,757) (8,235) Cash flow from financing activities (23,512) (61,699) (41,556) (3,011) (8,766) (10,867) (75,184) (224,595)

64


35.4 Group For the year ended 31 March 2013 Trade Bills Leasing Hire Real Pawning Margin Other Total In Rupees Thousand & loans Purchases Estate Trading


Other Income Fee and commission income - 3,477 3,477 - - - - 6,954 Net trading income - - - 13,132 - - 891 14,023 Net gain/(loss) from financial assets - Held for trading - - - - - - 561 561 Other operating income 3,807 9,989 6,728 - - - 13,390 33,914 55,452

Total Income 110,661 252,289 224,359 13,132 26,713 34,602 33,956 695,711

Percentage 15.91% 36.26% 32.25% 1.89% 3.84% 4.97% 4.88% 100.00%

Expenses Interest 44,594 117,020 78,817 5,710 16,625 20,610 142,221 425,598 Other expenses 15,622 130,432 78,280 4,028 11,727 14,538 105,225 359,852 Total 60,216 247,453 157,097 9,738 28,353 35,147 247,447 785,450 Profit before taxation 50,446 4,837 67,262 3,393 (1,640) (546) (213,491) (89,739) Income tax expense (1,644) Profit for the year (91,383)

Segment Assets 482,461 1,266,053 852,728 61,781 179,872 222,980 1,538,706 4,604,581 Percentage 10.48% 27.50% 18.52% 1.34% 3.91% 4.84% 33.42% 100.00% Segment liabilities 350,377 919,444 619,276 44,867 130,628 161,934 1,117,452 3,343,979


Cash flow from operating activities 16,937 44,446 29,936 2,169 6,315 7,828 54,018 161,649 Cash flow from investing activities (863) (2,264) (1,525) (110) (322) (399) (2,752) (8,235) Cash flow from financing activities (23,533) (61,753) (41,593) (3,013) (8,773) (10,876) (75,052) (224,593)


65


36. Directors Responsibility Statement

The Board of Directors take the responsibility for the preparation and presentation of the financial statements.

Please refer page 16 of the Annual Report for the Statement of Directors Responsibility for Financial Reporting.

37. Reclassification of Comparative Figures

Where appropriate comparative information have been reclassified to confirm the classification of 31st March 2014 financial statements.

38. Post Balance Sheet Events

No circumstances have arisen subsquent to the date of the balance sheet which would require adjustment or disclosure in the financial statements.

39. Proposed Consolidation of Finance and Leasing Companies

Consequent to the Central Bank's proposal for consolidation of Finance and Leasing companies of Sri Lanka, the Company is still in the process of evaluating its options and the consolidation process is still in progress as at the date of approval of these financial statements.

66

Ten Year Summary

In Rupees Thousand Year ended 31 March '14 '13 '12 '11 '10 '09 '08 '07 '06 '05 OPERATING RESULTS Income 757,861 661,236 505,096 586,830 543,749 540,922 376,090 303,306 220,774 166,064 Interest Income 750,661 640,259 492,823 550,215 501,796 497,933 351,071 270,372 181,211 139,181 Interest expenses 591,995 425,598 301,641 383,609 387,053 351,822 215,396 129,669 83,903 54,470 Profit/(Loss) before taxation (184,419) (89,740) 106,245 (215,320) (14,286) 51,653 21,817 68,827 58,753 41,586 Profit/(Loss) for the year (222,355) (90,894) 92,740 (202,500) (20,409) 28,849 14,791 44,789 36,468 32,434 EQUITY 1,051,032 1,268,155 893,551 470,553 673,653 460,291 442,042 459,101 192,571 181,703 SHARE INFORMATION Net assets per share (Rs.) 15.57 18.79 13.24 12.28 17.7 18.01 17.28 17.96 14.61 13.74 Earnings/(Loss) per share (Rs.) (3.29) (1.35) 1.88 (5.42) (0.66) 0.95 0.57 2.38 2.33 2.55 Market value per share (Rs.) 16.90 13.50 12.90 23.50 23.50 29.75 56.50 23.00 33.00 20.50 Dividend per share (Rs.) 0.40 0.40 1.25 2.00 2.00 Gross ordinary Dividend (Rs.000's) 10,000 10,000 31,250 25,000 25,000

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Investor Information

Range of Shareholding Residents Non - Residents TotalNo. of Share

Holders

No. of Shares

(%) of Share

Holding

No. of Share

Holders

No. of Shares

(%) of Share

Holding

No. of Share

Holders

No. of Shares

(%) of Share

Holding1 - 1,000 10,116 1,714,399 2.54 16 3,609 0.01 10,132 1,718,008 2.55

1,001 - 10,000 1,028 3,422,069 5.07 12 39,020 0.06 1,040 3,461,089 5.1310,001 - 100,000 140 3,786,179 5.61 3 143,800 0.21 143 3,929,979 5.82

100,001 - 1,000,000 12 2,661,757 3.94 - - - 12 2,661,757 3.941,000,000 & Above 6 46,581,494 69.01 2 9,147,673 13.55 8 55,729,167 82.56

11,302 58,165,898 86.17 33 9,334,102 13.83 11,335 67,500,000 100.00

Distribution of Share Holdings as at 31 March 2014

Categories of Share Holders - Individuals/ Institutions

Categories of Share Holders - Resident/Non-Resident

31.03.2014 31.03.2013No. of Share

HoldersNo. of Shares (%) of Share

HoldingNo. of Share


HoldingIndividual 11,171 10,976,318 16.26 11,644 12,517,517 18.54Institutions 164 56,523,682 83.74 180 54,982,483 81.46Total 11,335 67,500,000 100.00 11,824 67,500,000 100.00

31.03.2014 31.03.2013No. of Share


HoldingNo. of Share


HoldingResident 11,302 58,165,898 86.17 11,796 59,825,200 88.63Non - Resident 33 9,334,102 13.83 28 7,674,800 11.37Total 11,335 67,500,000 100.00 11,824 67,500,000 100.00

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No Name of Share Holder Shareholding 31.03.2014

% Shareholding 31.03.2013

%

1 PEOPLES BANK 17,639,984 26.13 17,639,984 26.132 PEOPLE'S LEASING COMPANY LIMITED 8,819,992 13.07 8,819,992 13.073 HSBC INTERNATIONAL NOMINEES LTD-SSBT-DEUSTCHE BANK

AG SINGAPORE A/C 016,680,046 9.9 6,680,046 9.90

4 SEYLAN BANK LTD/ GOVINDASAMY RAMANAN 6,483,793 9.61 6,483,793 9.615 SAMPATH BANK PLC/CAPITAL TRUST HOLDINGS PRIVATE LIM-

ITED5,500,000 8.15 5,500,000 8.15

6 SEYLAN BANK PLC/CAPITAL TRUST HOLDINGS (PVT) LTD 5,000,000 7.41 5,000,000 7.417 COMMERCIAL BANK OF CEYLON PLC/CAPITAL TRUST HOLDINGS

(PRIVATE) LIMITED3,137,725 4.65 3,137,725 4.65

8 REDWIN HOLDINGS LIMITED 2,467,627 3.66 792,245 1.179 MR. H. A. D. A. GUNASEKERA 659,932 0.98 295,316 0.44

10 MR. H. A. PAKIANATHAN 302,000 0.45 278,817 0.4111 MR. C. N. PAKIANATHAN 245,504 0.36 261,900 0.3912 MR. A. SITHAMPALAM 243,576 0.36 303,576 0.4513 MR. Z. G. CARIMJEE 192,825 0.29 192,825 0.2914 MR. K. S. D. SENAWEERA 189,900 0.28 286,245 0.4215 MRS. S. UMESHWARY 180,000 0.27 180,000 0.2716 MISS. S. DURGA 180,000 0.27 180,000 0.2717 MR. S. ABISHEK 148,733 0.22 148,733 0.2218 MR. H. BERUWALAGE 116,200 0.17 116,200 0.1719 MR. B. W. KUNDANMAL 102,100 0.15 - -20 MRS. R. P. JAYAWARDANA 100,987 0.15 - -

58,390,924 86.53 56,297,397 83.42


As per the rule No. 8.7 (h) of the Colombo Stock Exchange public holding as at 31.03.2014 was 20,918,381 (20,918,381 as at 31st March 2013) Public Holding as a % of shares was 30.99% (30.99% as at 31st March 2013)

Twenty Major Shareholders

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Financial Year ended 31.03.2014 31.03.2013 31.03.2012 31.03.2011 31.03.2010

Market value of shares Highest price during the year (Rs.) 17.1 17.90 42.00 35.90 61.75 Lowest price during the year (Rs.) 10.4 11.60 12.00 19.90 23.50 Closing price (Rs.) 16.9 13.50 12.90 23.50 23.50

Investor Ratios Price Earnings Ratio - - 6.86 - - Net Asset Value per share (Rs.) 15.57 18.79 13.24 12.28 17.7

Share Trading Number of transactions 2,434 3,086 27,194 18,631 6,106 Number of shares traded 4,349,773 10,078,311 89,795,017 33,394,800 7,648,900 Value of shares traded (Rs.000's) 63,075 139,207 2,132,042 934,953 288,451 Market Capitalisation (Rs.000's) 1,140,750 911,250 870,750 881,250 881,250

Share Information

70

Deposit Division Fixed Deposit and SavingsSFIDA - Savings & FD in Local Currency Encashment of Foreign Corrency & Travellers cheques

Asset Finance Division Short/Medium - Term LoansBills Discounting Bank Guarantees Leasing of vehicle and equipmentOperating Leases Hire Purchase Margin Trading Pawning Gold Loans Real Estate Sale of property DevelopmentsOwner Behalf sale

Branches

Kurunegala183c, 02nd, Floor, Colombo Rd, Kurunegela.

MataraNo.213, Anagarika Dharmapala Mawatha, Nupe, Matara.

Negombo51A,Thammita Road, Negombo.

Awissawella75, Yatiyantota Road, Avissawella.

Matugama74B, Neboda Road, Mathugama.

Elpitiya10/5, Pituwala Road, Elpitiya.

Kandy145, Kotugodella Street, Kandy. Trincomalee118, N.C Road, Trincomalee. Anuradhapura9, Maithripala Senanayake Mw, Town Hall Place, Anuradhapura. Gampaha64, Queens Mary’s Road, Gampaha. Wellawatte pawning center118D, Galle Road, Wellawatte.

Our Services

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Notice of Meeting

NOTICE IS HEREBY GIVEN that the 31st Annual General Meeting of PEOPLE’S MERCHANT FINANCE PLC will be held at the People’s Merchant Finance PLC Office complex at No.21, Nawam Mawatha, Colombo 02 on 8th December 2014 at 10.00 a.m for the following purposes.

To receive and consider the Annual Report of the Board of Directors on the affairs of the Company and the Financial Statements for the year ended 31st March 2014 together with the report of the Auditors thereon

To reappoint Messers KPMG, Chartered Accountants, as the Auditors of the Company until the next Annual General Meeting at a remuneration to be agreed upon with them by the Board of Directors and to audit the Financial Statements of the Company for the accounting period ending 31st March 2015

To authorise the Board to determine donations and contributions for the ensuing year

By order of the Board

CORPORATE SERVICES (PRIVATE) LIMITED

Secretaries

PEOPLE’S MERCHANT FINANCE PLC

Colombo,on this 30th October 2014

Note: A Shareholder entitled to attend and vote at this meeting is entitled to appoint a proxy to attend and vote in his/her seat and a form of proxy is sent herewith for this purpose. A proxy need not be a shareholder of the company.

The completed form of proxy must be deposited at the Head Office of the Company, No:21 Nawam Mawatha, Colombo 2, not later than 48 hours prior to the time appointed for the holding of the meeting.

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Notes

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73


Proxy Form

I/We..............................................................................................................................................................................................of

..................................................................................................................................................................................................being

A shareholder/shareholders of People’s Merchant Finance PLC, hereby appoint.....................................................................................

.............................................................................................................................................................................................of

.......................................................................................................................................................................................................or

Failing him/her Mr. J.P Amaratunga or failing him/her Mr. G. Ramanan or failing him/her Mr. P. Kudabalage or failing him/her Mr. T.H.M

Wickramasinghe or failing him/her Mr. A.P Weerasinghe or failing him/her Mr. M.M.S.K Rajapakse/alternate, Mr. Rohan S. De Silva or

failing him/her Ms. S.V Amarasekara or failing him/her Mr. N.C Peiris or failing him/her Ms. L.K Sangakkara as my/our proxy to attend and

vote/speak at the 31st Annual General Meeting of the Company to be held on the 8th day of December 2014 and at any adjournment thereof.

As witness my/our hand this ................................day of ..................................... Two Thousand and Fourteen

............................................. Signature

Note: Delete what is inapplicable Please see overleaf for instructions as to completion

(1) To receive and consider the Annual Report of the Board of Directors on the affairs of the Company and the Financial Statements for the year ended 31st March 2014 together with the report of the Auditors thereon

(2) To reappoint Messers KPMG, Chartered Accountants, as the Auditors of the Company until the next Annual General Meeting at a remuneration to be agreed upon with them by the Board of Directors and to audit the Financial Statements of the Company for the accounting period ending 31st March 2015

(3) To authorise the Board to determine donations and contributions for the ensuing year

For Against

74

INSTRUCTION AS TO COMPLETION

1. In order to appoint a proxy, this form duly completed, together with any attorney under which it is signed, must be deposited at the Registered Office of the Company, No.21 Nawam Mawatha, Colombo 02, not later than 48 hours prior to the time appointed for the holding of the meeting

2. The proxy appointment need not be a shareholder of the Company

3. You are kindly requested to bring with you, your National Identity Card or other valid source of identification (eg.Passport, Driving License).

Corporate InformationContentsFinancial Highlights .........................................1Chairman’s Statement.....................................2Board of Directors Profile ................................3Corporate Governance....................................5Risk Management and Internal Control.........11Financial Reports Annual Report of the Board .....................16 Directors’ Responsibility for Financial Reporting..................................18 Report of the Audit Committee ................19 Independent Auditor's Report ..................20 Income Statement....................................22 Statement of Comprehensive Income .....23 Statement of Financial Position ...............24 Statement of Changes in Equity ..............25 Cash Flow Statement .............................27 Notes to the Financial Statements...........28Ten Year Summary .......................................66Investor Information.......................................67Our Services..................................................70Notice of Meeting ..........................................71Form of Proxy................................................73Corporate Information ..........Inner Back Cover

Name of CompanyPeople’s Merchant Finance PLC

Legal FormPublic Quoted Company registered under the Companies Act No.17 of 1982 and re-registered under the Companies Act No.07 of 2007

Company Incorporation & Registration No.Incorporated in Sri Lanka on January 26, 1983 bearing Registration No:N(PBS)22

New Registration No: PQ 200

VAT Registration No:134000228 7000

Stock Exchange ListingThe ordinary shares of the Company were listed with the Colombo Stock Exchange in July 1994

Ordinary shares listed – 67,500,000

Registered OfficeNo. 21 Nawam MawathaColombo 02Tel. 2300191Fax. 1200190E-mail:[email protected] : www.peoplesmerchant.lk

Board of DirectorsJ.P. Amaratunga – ChairmanG. Ramanan – Managing Director/CEOP. KudabalageT. H. M. WickramasingheA.P. WeerasingheMs. S.V. AmarasekaraN.C. PeirisMs. L.K. SangakkaraR.S. De Silva

AuditorsKPMGChartered Accountants32A, Sir Mohamed Macan Maker MawathaColombo 03

SecretariesCorporate Services (Pvt.) LimitedNo. 216, De Saram PlaceColombo 10

LawyersFJ & G De SaramAttorney-at-LawNo. 216, De Saram PlaceColombo 10

RegistrarsSSP Corporate Services (Pvt.) Limited101, Inner Flower RoadColombo 03

BankersPeople’s BankHatton National BankBank of Ceylon

Corporate ManagementG. Ramanan - Managing Director/CEOCharith Gunaratne - DGM – Credit & Asset FinanceYasas Ariyaratne - DGM – Business PromotionsMuditha Jayawickrema - DGM – Legal & HR

Senior ManagementJeevana Karunasiri - Chief Manager – Real EstateManoneetha Ariyananda - Chief Manager – RecoveriesGihan Hirimbura - Chief Manager – HRAnuranga Handaragama - Head of IT

Credit Rating‘BB+ (lka)’ outlook is stable: Credit Rating from Fitch Ratings Lanka Ltd

Annual Report 2013/14

Des

igne

d &

Prin

ted

by: C

eylo

n Pr

inte

rs P

LC

No.21, Nawam Mawatha, Colombo 02.Tel. 011 7 666333 Fax.0112300190

E-mail: [email protected] : www.pmb.lk

People’s Merchant Finance PLC

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