Ceylon - Development Finance Corporation Project

4O'%4./ 520 FILE Copy R ES RRESTRICTED Report No. DB- 31b This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF DEVELOPMENT FINANCE CORPORATION OF CE,YLON November 1, 1967 Development Finance Companies  CURRENCY EQUIVALENTS U$$1.00 2 Turkish Lire (TL) 9.0 TL 1 = US$ 0.11 TL 1,000, OCO = US$ 111,111 WEIGHTS AND MEASUWE8 - METRIC SYSTEM 1 hectare (ha) = 2.47 acres 1 kilometer (km) = 0.62 miles 1 square kilometer (km2) = 0.386 sq. miles 1 meter (m) = 39.37 inches 1 square meter (m2) 10.76 square feet 1 cubic meter (i3) = 35 31 cubic feet 1 million cubic meters (L'm3) = 810.7 ac. ft. 1 millimeter (mm) = 0.039 inches  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT CONF:[DENTIAL FOR EXECUTIVE For consideration o0 DIRECTORS' 2November 16, 1967 MEETING FROM: The Deputy Secretary R67-162/:L November 8, 1967 PROPOSED LOAN - CEYLON Corrigendum Thes following correction should be made in the report entitled "Appraisal of Development Finance Corporation of Ceylon" (DB-3].b) which was circulated on November 3, 1967 as attachment 1 to document R67-162 dated November 3, 1967. Delete contents of inside front cover, and insert: Currency Equivalents U.S.$l.OO = Ceylon Rs. 4.76 Ceylon Rs. I = U.S.$0.21 Ceylon Rs. 1 million = U.S.$210,OOO Distribution: Executive Directors and Alternates President President's Council Executive Vice President, IFC Vice President, IFC Department Heads, Bank and IFC  APPRAISAL OF DEVELOPMENT FINANCE CORPORATION OF CEYLON This report is based on the findings of a mission in Novemnber/ December 1965 to Ceylon, composed of Messrs. Powell and Bose of IFC, and on information obtained subsequently. TABLE OF CONIETS Page Paragraph SUMMARY i - ii i - ix I. INTROLUCTION 1 1 - 3 II. INDUSTRY AND INDUSTRIAL FINANCE 1 - 3 4 - 9 III. THE CORPORATION 3 -6 10 - 3) Powers and Functions 3 1l - 13 Ownership 3 -4 14 - 15 Resources 4 16 - 19s Organization 5 20 - 23 Operational Procedures 6 24 - 30) IV. POLICIES AND OPERATIONS 7 - 10 31 - 48) Policies 7 31 Loan Operations 7 -9 32 - 41 Investments in Shares 9 42 - 45' Other Activities 10 46 - 48 V. FINANC'IAL POLICY AND RECORD 10 - 13 49 - 59 Financial Position 10 - 12 49 - 5 Income and Expenditure 12 54 - 5c Allocation of Income 12 56 - 57 Share 'Value 13 58 Audit 13 59 VI. PROSPECTS AND PROJECTIONS 13 - 17 60 - 74 Prospects for Private Industry 13 - 14 60 - 63 Prospects for DFCC 14 - 15 64 - 66 Forecast of Business 15 - 16 67 - 69 Sources of Funds 16 70 - 71 Financial Prospects 16 - 17 72 - 74 VII. EVALUATION AND RECOMMENDATIONS 17 - 19 75 - 83 Evaluation 17 - 18 75 - 79 Recommesndations 18 - 19 80 - 83  APPRAISAL OF DEVELOPMT FINA1CE CORPORATION OF CEYION LIST OF ANNEXES AMNEX 1 List of Shareholders as at March 31, 1967 2 Board of Directors as at September, 1967 3 Statement of Policy 4 Loan and Investment Operations 5 Financial Statements 6 Forecasts, Fiscal 1968-1970  APPRAISAL OF DEVELOPMENT FINANCE CORPORATION OF CEYLON SU1MRY i. The Development Finance Corporation of Ceylon (DFCC) was estab- lished by statute in 1955 following the recommendation of a Bank survey mission in 1951. It is empowered to undertake the usual functions of a development finance company. ii. DFCC's share capital of Rs. 8 million is presently held 38.6' by private domestic investors, 36.4% by foreign investors and 25% by Government- owned institutions. The Government-held portion of the share capital, which had been as high as 45%, was reduced early in 1967 following sales by the Government-owned Bank of Ceylon, which is at present the largest single shareholder. iii. DFjC received an interest-free, long-term, subordinated Government loan of Rs.15 million in 1956, which is repayable over 15 years from 1982. It also has borrowing facilities from the Bank of Ceylon and the Central Bank of Ceylon. DFCC's low volume of business reflected, in its early years, the s:Low pace of private industrial development in Ceylon and, in recent years, the unfavorable political and business climate, and an acute shortage of foreign exchange. iv. DFCC's nine-member Board of Directors closely controls its work, and has followed sound but perhaps conservative practices. The staff is capable, but its small size has limited the range of skills at DFCC's disposal. DFCC has recently engaged a qualified advisor, and recruited additional staff. v. DFUC's cumulative approvals to August 31, 1967, were Rs.47.4 million in loans and about Rs.7 million in share investments. The current effective interest rate on loans is 7%, and the average yield on share investments about 6%. The quality of DFCC's portfolio is judged to be good, and it has had little problem in regard to debt recovery. DFCC's pre-tax income in fiscal years 1966 and 1967 was about 14.2% and 15.9%, respectively, of average net worth. Its reserves, amounting to 5.6% of present portfolio, are not inadequate, but need to be increased in future. vi. DFtC's policies have been generally sound and appropriate. Given the limits within which it has operated, it has performed useful service to private industry. Though it has yet to acquire importance in Ceylon, DFCC is presently the only institution which specializes in the medium and long-term finance of private industry. The Government-owned Bank of Ceylon, which combines a relatively small amount of medium-term industrial lending with its primary business of commercial banking, has been the only other significant institution in the same field as DFCC. The Government has given an assurance that, if the industrial financing activities of the  - ii - Bank of Ceylon have a substantially adverse effect on DFCC, the Government will take appropriate action to remedy that situation. vii. The future role in Ceylon for a private development finance company will depend largely on the Government's policy and practices, the country's general economic progress, and the foreign exchange situa- tion. The present Government has made administrative improvements and taken other measures to encourage the private sector. Confidence appears to have returned among entrepreneurs. viii. Given the improvement in the investment climate in Ceylon, and on the assumption that foreign exchange will be available to private industry, it is likely that the annual volume of investment in private industry would recover from the low levels of the past two years, and reach about Rs.80 million during each of the next two or three years. During a period of about two years from October 1967, it is estimated that DFCC would be able to approve and sign contracts for new loans of between Rs.25 million and Rs.35 million, but most likely Rs.30 million, of which Rs.19 million to Rs.20 million (about $4 million equivalent) is expected to be in foreign exchange. In addition, it should be able to approvre share investments amounting to about Rs.2 million. DFCC's earnings and administrative costs are both likely to rise. Profitability should improve by fiscal year 1970, and enable DFCC to increase reserves satisfactorily, while maintaining the present 8% dividend. ix. DFCC is a suitable recipient of a Bank loan, which will enable it to meet its foreign exchange requirements, and thus make a largely increased contribution to industrial development in Ceylon. The proposed loan should lbe on the Bank's usual terms of lending to development finance companies. All subprojects needing Bank finance in excess of $30,000 each should require the Bank's prior approval.  APPRAISAL OF DEVELOPMENT FINANCE CORPORATION OF CEYLON I. INTRODUCTION 1. In 1951 a Bank general survey mission recommended the establishment of three institutions to accelerate the economic development of Cey:Lon, one of them a private development finance company. Subsequently, the Bank provided advice and technical assistance in the formation in 1955 of such a company, the Development Finance Corporation of Ceylon (DFCC). In its early years, DFCC did not need any loan, and for about four years from 1961, Ceylon's economic policies precluded any lending by the Bank or IDA in the country. During that period, in 1963, DFCC asked the Bank to con- sider a loan, but the request was not then pursued. 2. The Government elected in March 1965 indicated its intention to introduce changes in economic policy, and sought assistance from the Bank. Subsequently, the Bank sent a number of economic missions to Ceylon, the latest ones being in October 1966 and February 1967, whose findings are recorded in Report No. AS-126a, circulated in May 1967. The Bank has also been carrying out sector studies to establish Ceylon's long-term develop- ment needs. The Government revived the request for a Bank loan to [FCC, and a mission visited Ceylon in late 1965 to appraise DFCC, to assess its suitability for financial assistance from the Bank group and to estimate the volume of business likely to be available to it. 3. In anticipation of a Bank loan, the Government and DFCC recently undertook certain basic measures, such as the amendment of DFCC's charter, sale of DFCC share capital held by a Government-ow-ned institution to private investors, and the adoption of a policy statement for DFCC. Loan negotia- tions were held in March/April 1967. This report is based on the findings of the 1965 mission and on information obtained subsequently by corres- pondence and during negotiations. II. INDUSTRY AMD INDUSTRIAL FINANCE 4. MManufacturing industry occupies a minor position in the plantation- based economry of Ceylon; industrial production in 1966 amounted to only 12% of gross domestic product. A major reason for this was the complete ab- sence, until 1960, of protection for local manufacture from imports, together with the hitherto successful reliance on agricultural export receipts to pay for imports. Other contributory factors include traditional investment preferences (in real estate, plantations and trade), the small size of the domestic market, the scarcity of known natural resources and the relative scarcity of entrepreneurial and managerial expertise in industry. 5. In the absence of significant private interest, the Government initiated mamy of the older industrial enterprises, and pre-empted a number  - 2 - of key industries for development by itself.l/ With the introduction of import controls from 1960, private interest in manufacturing activities became comparatively widespread. Government policy aimed at a "mixed" industrial sector. Private industrial units approved by the Governmuent qualified for various benefits such as an initial tax holiday, development rebates, lump sum depreciation allowances and preferential import duties. During a per-iod of about five years from 1959, a large number of small industrial units were established, and industrial production doubled, from a small base. 6. Gross investment in private industry during 1961-1965 is estimated at between Rs *70 million and Rs.90 million annually. Investment increased until the end of 1963, but declined thereafter. The decline was partly due to the extension of import controls to capital goods (as also to raw materials) for private industry in the context of an acute shortage of foreign exchange, and partly to political and economic uncertainties. Most industrial units therefore operated substantially below capacity, and had to postpone plans for replacement and modernization. From mid-1964 until recently the Government did not approve any new private industrial project, although small imports of machinery were permitted in 1966 and 1967. 7. Institutional finance has played only a small role in private industry, wh:ich financed medium and long-term investments mainly frcm the sponsors' own resources and retained earnings. Closely controlled units have been reLuctant to expand ownership; the small organized capital market is dominated by tea and rubber stocks; and pioneers in industry usually star-bed with funds derived from their other interests. 8. Commercial banks dominate the financial system. Of the very few institutuiions which provide medium and long-term finance to private industry, only two are significant, viz.., the Government-owned Bank of Ceylon, and DFCC. The latter is the only institution in Ceylon special- izing in this field. However, in the past the volume of the Bank of Ceylon's tern lending to private industry had been relatively large; since 1965 such lending has amounted to an average annual rate of Rs.12 million, which was substantially more than the rate of loan approvals by DFCC. The Central Bank of Ceylon has a scheme for the grant of medium and long-term refinance loans to credit institutions on approved lending (including loans to industry) to which DFCC has access. 9. The Government has attempted to keep interest rates low. The interest paid on time and savings deposits is 3%. Interest charges on overdrafts and short-term commercial loans on good security are usually in the range of 5% to 7A. Interest rates charged by the Bank of Ceylon and other banks on medium and long-term loans to industry are most commonly around 7% to 710. The Government has encouraged special low-cost financing arrangements for small units in certain fields of agriculture and industry. In recent years the low level of long-term interest rates in the organized 1/ Iron and steel, cement, fertilizers, sugar, salt, chemicals, automobile tires, mineral sands, plywood, paper, indigenous drugs, roofing tiles.  - 3 - monetary sector also reflected the lack of demand, arising from the acute scarcity of foreign exchange needed to complement rupee funds in productive investment, together with the high liquidity of lending institutions. [II. THE CORPORATION 10. DFCC was established in October 1955 by a number of Ceylonese and foreign commercial banks, insurance companies, the Commonwealth Development Finance Company and others, with the active support of the Government of Ceylon. It commenced operations in May 1956. Powers and Functions 11. DECC was created by an Act of Parliament, the DFCC Act, No. 35 of 1955. The Act has been amended twice, in January 1959 and, more sub- stantially, in M-Iarch 1967. It empowers DFCC to undertake the usual functions of a development finance company, viz. lending, investment in shares, underwriting, guaranteeing financial obligations and providing technical assistance. The Act confines DFCC's field of operation to privately owned, limited liability companies in industry, agriculture and commerce; the latter was added by the 1967 amendment. A "priva-te" company is defined as one in which Government shareholding does not exceed 20%. 12. As required by the Act, DFCC adopted in November 1955 a set of "Regulations" on matters not provided for in the Act, but which would usually be included in the articles of association of a company incorporated under company 'law. These Regulations can be amended by the shareho:Lders. 13. In April 1967 DFCC's Board of Directors adopted a Statement of Policy. This statement mentions hotels, transportation, construction and engineering as illustrations of the type of "commercial" companies DFCC would assist. The Corporation will not finance purely trading companies. Ownership 14. DFCC's authorized share capital is Rs.24 million, increased from Rs.8 million by the amending Act of 1967. The subscribed and paid-in capital is presently Rs.8 million, which is held 38.60 by private domestic investors, 36.4% by foreign investors and 25so by Government-owned institu- tions. The Bank of Ceylon is the largest single shareholder, with about 20% of the shares. The list of shareholders as of March 31 1967, is given in Annex 1. 15. fErom March 1956 to September 1966, DFCC's subscribed and paid-in capital had been about Rs.7.12 million. In September 1966 a further amount of about Rs.0.88 million (representing the balance of the then authorized capital of Rs.8 million) was issued to private subscribers in Ceylon. Initially, the entire share capital was privately held. In July 1961 the Bank of Ceylon was nationalized, thereby making the Government a significant shareholder. Subsequently, there were further increases in the Government  shareholding, following the nationalization of life insurance business in January 1964 and sales by foreign insurance companies to the state-owned Insurance Corporation of Ceylon. As a result, the proportion of total share capital held by Government-owned corporations increased to over 45Z. The proportion was reduced to 40% following the September 1966 issue. Early in 1967 the Bank of Ceylon sold over Rs.1.2 million wJorth of shares to private investors in Ceylon, thereby reducing to 25% the Government-held proportion of total capital. Resources 16. DF,CCs resources amount to about Rs.34 million, as follows: Amount Source Rs. Million Share capital, paid-in. 8.0 Reserves and surplus-! 1.8 Government loan 2/ 16.0 Central Bank refinance_ 3.9 Bank of Ceylon overdraft/loan facility 4-5 34.2 17. An interest-free Government loan of Rs.16 million was made to DFCC in 1956 under the provisions of the Act. It is subordinate to the share capital and to other debt in the event of liquidation. The lcoan is repayable in 15 equal annual installments beginning in 1982, after a grace period of 25 years. 18. By an agreement in August 1964, DFCC obtained an overdraft facility with the Bank of Ceylon up to a maximum limit of Rs.4.5 million. Overdrafts were convertible at DFCC's option into 10-year loans, at 4a4o interest through June 1965 and at 5% interest thereafter. DFCC had made use of this facility until the latter half of 1966, since whlen it has been using instead the refinance facilities available from the Central Bank of Ceylon. As of March 31, 1967, DFCC had no outstanding obligations on the Bank of Ceylon facility. In April 1967 a new agreement was entered into, to provide for an overdraft limit of Rs.l million, with the right of conversion of any part of the overdraft into 10-year loans, such loans and the outstanding overdraft together not to exceed Rs.4.5 million, and to be secured by mortgage of DFCC's share investments. The interest will be 5%. 19. The refinance scheme of the Central Bank of Ceylon, as revised in April 1966, makes available finance up to 15 years, at 3% interest to DFCC, subject to a lending rate of not more than 6%. Funds are prov-ided up to 100% of the face value of the Corporation's loans pledged in mortgage. As of August 31, 1967, DFCC had borrowed about Rs.3.9 million under the scheme / Amounts at March 31, 1967. 2 Amount outstanding as of August 31, 1967.  Organization 20. The Board. The general supervision, control and administration of DFCC's business is vested in its Board of Directors, whose membership is listed in Annex 2. The Government's statutory seat on the Board is at present vacant. The Board members consist of the two ex-officio non-voting Directors (the Director of the Ceylon Institute of Scientific and Industrial Research rCISIR 7 and the General Manager of DFCC) and six "shareholder-directors", as against the maximum of eight permitted under the amended Act. The Directors in the latter class were initially appointed by the Minister of Finance in 1956, but were subsequently elected or reappointed by the shareholders, with one Director retiring annually. The present six Directors consist of an industrialist, a lawyer, a newspaper- chain proprietor, a commercial banker and one representative each of the Bank of Ceylon and the British shareholders. The Bank of Ceylon is represented by its General Manager. The Goverment would thus usually be represented, directly or indirectly, by two persons. The Chairman, Mr. Richard Pieris, is a respected businessman with family industrial interests. The Board has directed the relatively small business of DFGC on sound but conservative lines. 21. Management and Staff. The General Manager, appointed by the Board, is DFCC's chief executive officer. The present (and seconcl) General Manager, Mr. L. A. Weerasinghe, F.C.A., was appointed in July 1963, and was formerly the Auditor-General of Ceylon. He is expected to continue in office until about 1970. 22. Till mid-1967, DFCC had only two professional staff memb)ers, neither of whom had a technical background. That limited the Corporation's capacity and capabilities, especially in the technical and economic appraisal of projects, and prompted the management from time to time to seek outside technical assistance. Early in 1967 DFCC drew up plans to reorganize and strengthen its administration. In July 1967 it promoted the two professional staff members to the position of Assistant General Managers, one of them in charge of accounts, administration and end-use supervision, and the other of operations. The former is an accountant by training; the latter was for some years an official of the Bank of Ceylon, and attended an EDI course in W4ashington in 1966. There are now five other staff members, three of them recruited in July. The Corporation also hopes to recruit an engineer to work both on project appraisal and end-use supervision. By broadening the range of skills available and enabling some specialization, the new arrangements should improve DFCC's capacity to handle the increased business volume which it expects to secure through the use of' the proposed loan. 23. DFCC has recently engaged a qualified advisor, acceptabLe to the Bank, to give support to the management during the next two or three years. The advisor would help to develop investment banking skills in the staff and advise on all operational and policy matters. His salary and expenses will be financed partly by the British Government under the Colombo Plan, and partly by DFCC.  -6- Operational Procedures 24. The Board closely controls the work of DFCC. Apart from deciding all policy matters, it also considers every application for financial assistance. It meets usually once a month. 25. DFCC's practice has been, and wrill be, to consider applications only for those industrial projects which have received the necessary permits from the Ministry of Industries. Each project is examined by a professional staff member, changes sometimes are suggested and the terms of possible DFCC finance are tentatively agreed upon. 26. Coverage of financial information in the appraisal reports is good, though the financial analysis and projections could be improved. Basic importance is attached to the security available for a loan. An area where DFCC's appraisal work is not strong is in the analysis of economic viability, particularly marketing and economic factors. 'The lack of adequate statistics in the country is a handicap. DFCC has found it useful to refer to the assessments of project feasibility made by the Ministry of Industries' Development Division. 27. In its early years most of the technical assistance needed by DFCC was provided by CISIR, but in recent years CISIR has not undertaken much project appraisal work for DFCC. Apart from CISIR, occasional use is made of consultants. Where foreign technical collaboration is involved, reliance is placed on the project reports or on the calibre of the technical partners. The industries which have developed in the private sector in Ceylon are not technically complex. In future, DFCC would have to continue to rely to some extent on outside technical assistance, from CISIR, from a newly established firm of industrial consultants associated with the Bank of Ceylon, and from others. 28. The period between approval in principle and actual disbursement of an investment varies greatly (sometimes taking up to a year or two), depending in part on the time taken to complete the involved, security- oriented legal requirements, such as the examination of title, valuation of property and machinery, and legal documentation. If finance is required during this period, the practice has been to make appropriate advance payments against promissory notes. 29. Project supervision consists primarily of a study of audited annual accounts submitted by clients. It is customary to submit an annual progress report to the Board for each project. Efforts are made to visit projects every year, but in practice visits have been less frequent. 30. I)FCC realizes that it needs to improve and broaden the basis of its project appraisal (thereby reducing its excessive dependence on security considerations) and undertake more active follow-up. The recruitment of the advisor, together with the other measures to strengthen the staff referred to above, are satisfactory initial steps towards equipping DFCC to achieve those objectives.  - 7 - IV. POLICIES AND OPERATIONS Policies 31. DFCC's work had been based on operational guidelines evolved by its Board, but in April 1967 it adopted a Statement of Policy, which is reproduced in Anmex 3. This contains the principal elements normal:Ly covered by policy statements of development finance companies. Its more important provisions are referred to in subsequent sections of this report. Loan Operations 32. Approvals. From the commencement of operations in May 1956 up to March 31, 15967, DFCC had approved 111 loans to 71 firms, amounting to Rs.46.5 million, of which Rs.40 million had been disbursed and Rs.23.7 million Lafter provisions) was outstanding. During the fiscal years 1966 and 1967- approvals were given to 10 loans each year, amounting to Rs.3.07 million and Rs.6.47 million, respectively. The volume of approvals declined continuously between 1963 and 1966 (when investment in private industry in Ceylon also fell) but they recovered in 1967. Between April 1 and August 31, 1967, only two loans of about Rs.0.9 million were approved; a number of others are under consideration; some cannot be approved until foreign exchange becomes available. Particulars of loan and share investment operations are given in Annex 4. 33. The volume of DFCC's operations has been relatively modest. Reasons for this have been scarcity of industrial investment opportlnities in the private sector, limited by the Government's policies prior to 1965, and by the acute scarcity of foreign exchange in recent times. Contributory factors had been the lack of dynamism of DIFCC's Board in dealing with opportunities that existed; and the small size of staff. 34. Ex:tent of Assistance and Security. The extent of DFCC's individual commitments has been governed by the principle that total DFCC loans out- standing to an existing project should be matched by the financial stake (capital, re!tained earnings, loans) of the sponsors in the project at the time. For rLew projects, no loan has exceeded the borrower's share capital. In practice, most DFCC loans amounted to less than half of the total project cost. In future, DFCC's policy may be somewhat more flexible but, in accordance with its policy statement, it will exercise prudence by relating its own financing for a project to the total cost of the project and to the soundness of the resulting financial structure for the enterprise. 35. All of DFCC's loans (except one2/) are secured by mortgages on assets. The Corporation's practice has been conservative in that loans secured by mortgages on fixed assets are limited to 755: of the value of land / The fiscal year is from April 1 to March 31; fiscal 1966 means April 1, 1965 to March 31, 1966. The references in this chapter are to fiscal years, umless otherwise stated.. This loan was made against promissory notes of the borrower, a subsidiary of a large international company.  - 8 - and buildings, or to 60% of the depreciated value of other fixed assets. In addition,, the personal guarantees of directors of client companies have often been obtained, such guarantees being required for all loans to private limited companies. 36. Terms. When DFCC commenced operations in 1956, the interest rate was 57,and it has since been increased in step with the general level of interest rates. The current effective rate of interest is 7%, but this is initially specified as 8%, with a stipulation that only 7% would be collected if repayment is prompt. If and when DFCC refinances a loan under the Central Bank's scheme, the interest is reduced to 6%. The Corporation does not levy a commitment fee at present, but charges Rs.l,000 as fee for processing each application for refinance from the Central Bank. In 1966 and 1967, the average interest earned on outstanding loans was 6.3% and 6.4%, respectively. 37. Size. Through March 31, 1967, the average size of loans approved was about RT:;Tl9,OOO, and the average lending to a firm, Rs.654,0o0. The largest number of loans approved has been in the range of Rs.l00,O000 to Rs.250,000, while the biggest volume of lending (31% of total) was in the Rs.1.5 million to Rs.4 million range (Annex 4B). 38. According to DFCC's recently adopted policy, it wJill not normally make a loan or share investment of less than Rs.100,000; this is an increase from the previous Rs.50,000 minimum. Exceptions might be made in respect of the requirements of existing clients. The aggregate amount of DFCC's exposure in an individual enterprise by way of loans, share investments and guarantees will not normally exceed 15% of the sum of its equity (share capital, surplus and free reserves) and the outstanding amount of the Government loan. NAs of March 31, 1967, this limit worked out to Rs.3.86 million. On that date, the limit was exceeded in the case of one company to which DFCC's loans and share investment totalled Rs.5.16 million, equivalent to 20% of DFCC's equity and outstanding Government loan. 39. Purpose and Period. Loans are granted to finance the acquisition of long-term and durable capital assets such as land, buildings, plant, machinery and equipment. The duration of loans approved has ranged from two and one-half years to 16 years, with the weighted average at about 12 years. Loans of less than six years' duration are few in number. Loans for 10 to 12 years constitute the largest group in number, 63 out of 111; 46% of the total value of loans were for 13 to 16 years (Annex 4C). Grace periods for repayments range from three months to two years (there was an exceptional one for five years) but the most common is one year. 40. Distribution by Industrial Branch. DFCC's loan portfolio is disbributed over a wide range of consumer goods industries and over a limited number of certain other types of industries such as engineering and building materials. This represents a cross-section of industries in Ceylon. The largest number of loans has been to food preparation industries, and the largest amount to chemical products (Annex 4D). There have been two loans to agricultural projects totaling Rs.3.35 million.  - 9 - 41. Geographical Distribution. Most of the enterprises financed are located in Colombo, or its suburbs, which is representative of industrial location in Ceylon. Investments in Shares 42. Operations. From the commencement of operations to August 31, 1967, DFCC imadei-2Bshare investments totaling about Rs.7 million; Rs.5.2 million (after deduction of provisions) in investments in 20 companies was outstanding at the latter date. The share investments amounted to only 13% of total loan and investment approvals. DFCC has been investing much more in preferred stock than in ordinary shares. Almost four-fifths of outstanding investments are in redeemable cumulative preference shares, whose usual redemption period is 10 years. The preference shares of one company carry conversion rights into ordinary shares, and those of another have participating features. The returns on investments in preference shares have been reasonably good, dividends ranging from 5% to 9%, with 8% being the most common. Shares of few of the companies are quoted on the market. Of the eight companies in which DFCC now holds ordinary shares, four have dividend histories. In 1967, the dividend return to DFCC as a percentage of average outstanding share investments was 9.5%, but this wxas inflated by the receipt of substantial arrears of preferred dividends, without which the return would have been about 6%. The return in 1966 was just over 5%. 43. Policy and Application. DFCC's recently adopted policy statement limits its share investments in an individual enterprise, in normal circum- stances, to not more than 10% of its own equity. As of March 31, 1967, that limit worked out to Rs.976,200, and was slightly exceeded in two cases by investments of Rs.l million each, equivalent to 10.24% of DFCC's equity. Most of the share investments have been Rs.250,000 or less each. 44. As provided in its policy statement, DFCC will not normally manage or acquire a controlling interest in any enterprise, except in case of jeopardy. It will not normally take up more than 25% of the issued share capital of an enterprise. In DFCC's portfolio as of August 31, 1967, that limit was exceeded in respect of investments in seven companies, in which the percentage of DFCC's holdings ranged from 29% to 50%. In one of those companies some shares were acquired as a result of an underwriting commitment. In six of the seven companies, DFCC holds preference shares, and in five of them the shares are redeemable. Normal redemptions would reduce DF'CC's holdings in those five companies over a period of five years to the maximum level envisaged in the policy statement. In none of the companies has DFCC exercised any control. DFCC is permitted by the Act, and usually reserves the right, to appoint a director to the Board of a company in whichL it has invested. It is represented on the Board of six companies (out of 20). 45. Piblic participation in the equity of industrial companies has not been popular in Ceylon. DFCC 'has often tried to persuade clients to "go public." Its own cautious approach to true equity investment and liking for redeemable preference shares is explained in terms of thle desirability of a balancing factor against the uncertain yields and prices of ordinary shares; and of having re-use of funds. The fixed returns on preference shares have usually approximated to interest rates on lcans.  - 10 - Other Activities 46. DFCC's only other activities have been in underwriting share issues and advising clients. In 1957 and 1959 DFCC fully underwrote two share issues of Rs.600,000 and Rs.350,000, respectively, of which ilt had to take up shares worth Rs.15,100 and Rs.301,250, respectively. The commission charged was unusually low, being one-half of one percent of the total par value of each issue. No underwriting operations are likely in the near future. 47. Apart from assistance given in initial project preparation, an active interest is often taken in companies on whose Boards DFCC is represented. DFCC's advice has been sought and given on accounting practice, cost accounting systems, and representations to the Government. 48. Prior to the amendment of the Act in 1967, DFCC's authority to guarantee loans had been restricted to loans from private investnient sources, and it has done no guarantee business. The amended Act nowr enables the Corporation to guarantee loans from any investment source, including Government-owned banks. Consequently, DFCC might consider guaranteeing loans of the Bank of Ceylon. V. FINANCIAL POLICY AND RECORD l/ Financial Position 49. DFCC's balance sheets and income statements from 1957 to the present are given in Annex 5, and those for recent periods are summarized below: (in Rs. 1,000) March 31 Aug. 31 1966 1967 1967 Assets Uninvested and temporarily invested funds 34 232 1,378 Statutory investment 570 831 851 Loans 22,818 23,689 23,588 Investments in shares 4,426 5,293 5,248 Property, etc. 23 18 29 27,871 30,063 31,094 Liabilities Accounts payable, accrued expenses, etc. 1,703 1,375 755 Long-term ,Loans 1,688 2,926 3,888 Government subordinated loan 16,000 16,000 16,000 Share capital and retained earnings 8,480 9,762 10,451 27,871 30,063 31,09b / In this chapter all references are to fiscal years unless otherwise stated. Thus 1967 means, for example, the period from April 1, 1966 to March 31, 1967.  Year Ended March 31 Apr. 1 - (in Rs. 1,000) A4ug. 31, 1966 1967 1L96'7 Income Statements Gross income 1,705 2,036 8',2 Expenses 515 586 16-3 Earnings before tax 1,190 1,450 639 Tax 487 4h45 NTet earnings 703 1,005 50. The borrowing facilities from the Bank of Ceylon and the Central Bank have enabled DFCC to manage with comparatively small amounts of current assets in relation to those of current liabilities. 51. Dbbt/Equity Ratios. DFCC's total long-term indebtedness, as ratios of its equity (share capitaL, reserves and surplus) were 2.1 and 1.9 at the end of 1966 and 1967, respectively. At the same dates, its debt/equity ratios, calculated by counting the subordinated Government loan in equity but not in dlebt, were 0.07 and 0.1', respectively. DFCC's policy restricts its long-term indebtedness (other than any subordinated Government loan) to a maximum of three times the sum of its equity and outstanding Government loan. 52. Reserves. The general reserve at M4arch 31, 1967, was Rs.750,0001 equivalent to 2.6% of loan and share investment portfolio. The special reserve at t;hat time was Rs.851,000. Taken together, the two types of reserve amoumted to 5.5%/ of portfo-Lio. Taking into account the facts that the portfolio is fairly diversified, that many of the loans are seasoned, and that separate provisions have been made for bad and doubtful debts and investments (paragraph 53), the reserves are adequate for DFCC's present portfolio. 'However, in view of the expected increase in the size of the portfolio and of expected commitments to new ventures, DFCC intends to build up the reserves (paragraph 56). 53. Provisions and Portfolio Value. From its inception through March 31, 1967, DFCC had made provisions for bad and doubtful loans and investments amounting to a cumulative total of Rs.1,271,570. Against that, a total-amount of Rs.641,570 (equivalent to 1.2% of cumulative approvals) had been written off, leaving the present outstanding provision at Rs.630,000, of which Rs.380,000 is in respect of loans and Rs.250,000 of share insvestments. The respective provisions are equivalent to 1.6% and 4.8% of the outstanding loan and share investment portfo'lios as of August 31, '1967. At September 22, 1967, only one loan was in arrears of repayment of principal, the amountsin arrears and outstanding being both Rs.6,500. In addition, tFCC considers loans and investments totaling  - 12 - Rs.131,500 to be bad or doubtful. The provisions thus appear adequate. The assets in the balance sheet do not include the value of bonus shares received by DFCC in 1967 from two companies, of the face value of Rs.400,000, wh-ch thus constitutes a hidden reserve. It is judged that DFCC's 'Loan and share portfolios are not overvalued at the balance sheet figures. Income and Expenditure 54. Interest is by far the largest iten of income, about 85% and 74% of gross income in 1966 and 1967, respectively. Administrative expenses have been relatively low, somewhat less than 1% of outstanding portfolio in recent years, due mainly to DFCC having an unusually small staff. Before-tax returns on average net worth were 13.4%, 14.2% and 15.9% in 1965, 1966 and 1967, respectively; the corresponding after-tax retu-ns were 6.6%, 8.h% and 11%, respectively. The results for 1967 were inflated by the receipt of substantial arrears of preferred dividends and by tax refunds. The before-tax return (on an annual basis) on average net worth for the first five months of 1968 was 16.3/%. DFCC's profitability is on the average lower than that of development finance companies associated with the Bank group which are of comparable age. 55. The interest-free Goverrnment loan makes the cost of resources (including dividends on share capital) to DFCC low, about 3.9c% and 3.8/O in 1966 and 1967, respectively. The average yield from share investments in 1967 was about 6.1% (excluding dividends received as past years' arrears) while interest on loans averaged 6.h%, giving an overall average yield on all investments of about 6.3%. There was thus a margin of 2.5p betwJeen the yield from and costs of resources in 1967. Allocation of Income 56. DF'CC is restricted by the Act to a maximum dividend of 12%. It is also required to set aside at least 20% of its net profits in a statutory special reserve until this fund equals the outstanding Government loan. Such reserve cannot be used in the business but has to be invested in securities approved by the Board. DFCC's policy states that it will aim to build up its total reserves to a level appropriate to its loan and investment portfolios. DFCC intends to increase the size of its reserves in relation to its portfolio, but that may not be possible in the near future. 57. DuLring the last three years, the average percentage allocations of total appropriated income to general reserve, special reserve and dividends were 16%, 17% and 67%, respectively. The proportion paid out as dividends is high. For 1966 and 1967, the rates of dividends were 7% and 8%, respec- tively. DFCC has indicated that,;ifor the next two or three years, it does not intend to raise the dividend above the 8% level.  - 13 - Share Value 58. Transactions in DFCC shares on the Colombo stock markbt have been infrequent. Before 1967 share prices had ranged between Rs.55 and Rs.7lh per share of Rs.100. During fiscal 1967 the price rose steadil'y, fo;llowving the payment of a 7% dividend and the prospect of a share issue qualifying for tax incentives under the budget measures. That issue, which took place in September 1966, was made at par and was oversubscribed. So far during calendar 1967, the highest and lowest quotations have been 115 (buyer 109, seller 117) and 95 (buyer 94, seller 102), respectively, per share. On September 22, 1967, the quotation was 115. The book value of the shares as of IIarch 31, 1967, was 122% of par. Audit. 59. DICC's accounts are audited by qualified chartered accountants, acceptable to the Bank. The accounts of 1967 were certified by them to exhibit a true and correct view of the Corporation's affairs. VI. PROSPECTS AND PROJECTIONS Prospects for Private Industry 60. The main conditions for a resumption of growth in private industria. investment are that the Government desires and welcomes it, pursues wzith increasing ad:ministrative efficiency policies designed to encourage it-, and - probably most important in the immediate future - makes available to private industry enough foreign exchange to enable it to operate at an economic level of activity. 61. The present Government, in its budget statements for 1966 and 1967 and elsewhere, indicated its genera'l willingness to encourage private enter- prise in industry. In March 1966, it piublished a White Paper inviting foreig-i private investment in a wide range,of industries. Furthermore, it has taken a number of steps to improve the administration of policies. These include the establishment of a Ministry of Planning and Economic Affairs, headed by the Prime Minister. The Develop;ient Division in the Ministry of Industries and Fisheries, which administers industrial promotion privileges and is generally concerned with private industrial development, has been strengthened by the creation of an Industrial Development Board and a programming unit which will help in identifying priorities for new induistrial investment. The extent to wh:ich it will be possible to translate these improvements into a quicker pace of industrial growth is largely a matter of the a,mount of exchange available for imports of machinery and raw materials. Despite a continuing very tight exchange situation, exchange allocations for private industry were increased in the calendar years 1966 and 1967. As for the longer-term future, no marked improvement in Ceylon's exchange earnings is in prospect. The amount available for private industry will therefore depend heavily on Ceylon' s success in increasing domestic production of import substitutes (particularly of food) and on continuing large financial support from abroad.  - 14 - 62. The Government's actions indicate a more flexible approach than that of its predecessor to the respective roles of the public and private sectors in industry. It has indicated willingness to consider selected private projects in a few areas hitherto reserved for the public sector. Early in calendar year 1967, the Government announced a scale of priorities among the types and branches of industry to be promoted. Confidence is returrning to private industrialists, who are willing to implement their investmeent plans as soon as foreign exchange and the necessary Government consent are availab'e.. 63. The outlines of an investment program designed to accelerate economic growth and lessen Ceylon's dependence on imports and ex-ternal assistance are now being drawn up. Tentatively, it is estimated that total investment will have to increase by more than 10%$ annually, and the growth of industrial investment is not likely to be less than this. Public sector corporations will continue to occupy an important position in industrial development, particularly in fields where, in the Government's view, the economies of scale require investments beyond the capacity of private domesti entrepreneurs, e.g., in oil refining and fertilizer and cement prodtuction. However, the scope left to private industry is fairly large. It will be up to private entrepreneurs to provide the large variety of manufactures require4i to meet the demand for consumer goods, which will be generated in thie process of expanding domestic agricultural production, and to explore the possibili- ties of domestic production of goods needed in carrying out an expanded investment program. In the immediate future, private investment will be stimulated by the accumulated demand for replacement and balancing invest- ments. Given the availability of foreign exchange, over the next few years private entrepreneurs should be capable of investing in industry at least at the average of the 1961-1965 level (paragraph 6) or about Rs.80 million per year. Prospects for DFCC 6h. It is likely that in future the share of institutional funds in financing private industrial investment in Ceylon would be higher than that during 1961-1965. Industrial development in the early 1960's was characterize,'A by the mushrooming of large numbers of small-scale units (mainly of the artisan type) producing a limited range of consumer goods whose import had been banned, and sponsored largely by importers writh other sources of funds; established financial institutions were approached relatively infrequently. Industrial development in future is expected to be more broad-based in terms of products, more mechanized and of larger average size, and increasingly sponsored by entrepreneurs whose own resources are likely to be limited. In the circum- stances, the demand for institutional finance is likely to be greater. The share of the greater volume of business that DFCC obtains will depend on the competition that it faces and on its own ability to obtain and handLe that business. The outlook in regard to both is better now than in the past. 65. DECC and the Bank of Ceylon have been, and are likely to remain, effectively the only institutions offering long-term finance to private industry in Ceylon. The Bank of Ceylon is much the larger institution and  - 15 - is aggressively led, but the bulk of its business is in commercial banking. It is now being reorganized and strengtlhened. This could result in a relatively greater activity by the Bank of Ceylon in the field of long-terrm industrial lending. However, the Government has informed DFCC and the Bank that it considers the long-term financing of private industry to be primarily the responsibility of DFCC. The Government has provided an assurance that, if the indust;rial financing activities of the Bank of Ceylon have a substan- tially adverse effect on DFCC's operations and finances, the Government will take appropr-iate action to remedy that situation. 66. If DFCC acquires foreign currency resources, it will be placed in a favorabLe competitive position vis-a-vis any othler institution which commands only rupee funds, since the difficult foreign exchange situation is expected to continue. Forecast of Business 67. At present a number of projects approved by the Government from 1962 onwards are awaiting execution. DFCC has under examination around 50 projects which require finance in the range Rs.19 million to Rs.20 million. Many of those are projects of existing clients. In addition, preliminary approaches have been made to DFCC by a few prospective clients with sizeable textile and hotel projects. Taking into account the projects in sight and the time required for administrative procedures, DFCC is likely to be able to commit (sign contracts for) a total of between Rs.25 million and Rs.35 millio: in loans during a period of about two years from October 1967; the most likely amount is Rs.30 million with a foreign exchange ccmponent of Rs.l9 million to Rs.20 million. In fact, several projects are now being prepared for submiss on to the Bank soon after the proposed loan is approved. DFCC's equity invest- ments are expected to be small in amount, around fls.l million per year. 68. The above estimate represents annual approvals (and disbursements) substantially greater than the highest annual figure to date, which was less than Rs.7 miLlion. Of the estimated total annual investment in the private manufacturing sector of some Rs.80 million, DFCC's share would increase to between 14% and 16%, from its earlier share of 4% to 6%'. Given the advantage of access to foreign exchange resources, and the factors indicated in para- graph 62, the demand for finance from DFCC should increase to make that possible. 69. Although the projected commitments would represent, relatively, a considerable advance on past performance, in absolute terms the increase would not be large. The number of new projects to be appraised should not be excessive. Of the total value of estimated commitments, probably around two- thirds would be to existing projects or to projects of existing clients, about whom muich was already known. The average size of projects is likely to increase with rising prices and increasing complexity. Moreover, depending on the Goverinmentts practice on the demarcation between the public and private sectors, there is a possibility that the flow of smaller projects will be  - 16 - augmented by some relatively big ones, for instance, in textiles. Overall, the prospective increase in the volume of business should not be beyond DFCC's capacity to handle, given the engagement of the advisor to its management and the strengthening of staff already effected and planned. Sources of ands_ 70. DFCC's requirements of rupee funds for the business projected can be met almost entirely from loan co'llections and by the use of the Central Bank's refinance scheme. Its overdraft and loan facilities with the Bank of Ceylon should provide it with any additional funds required, or funds for projects for which Central Bank refinance is not available. As of August 1967 the entire amount of the Rs.4.5 million accommodation from the Bank of Ceylon was unused. 71. The foreign exchange component of DFCC's estimated loan commitments for a period of about two years could be met by a Bank loan. Financial Prospects 72. DFCC has been considering measures to increase its profitability. It has decided to charge 9% interest on foreign currency loans. On local currency lending, it intends to charge 6% interest and thereby maintain the 3% spread it now gets from the use of the Central Bank's refinance. It plans to introduce a commitment fee, expected to be 1%; and a single commission, possibly at the rate of 1% for foreign currency loans and V for local cur- rency loans. However, substantial additional administrative expenses are expected to arise from the costs of the advisor (partially borne by DFCC) and from reorganization and recruitment; those are likely to offset at least in part the expected increase in earnings. According to estimates, adminis- trative expenses as a proportion of average portfolio would rise sharply, to 1.36% and 1.45% in 196841and 1969, respectively, from 1.01$ in 15967, but fall to the more satisfactory level of 1.2% in 1970. 73. In Annex 6 are given projections for 1968-1970, which assume gross loan disbursements of Rs.4 million, Rs.ll million and Rs.lh million in the respective years, with about two-thirds of total disbursements in foreign currencies. The funds flowi (net basis) is summarized below: 1/ In this c'hapter the references are to fiscal years; e.g. 1968 means the twelve-month period from April 1, 1967, to I4larch 31, 1968.  - 17 - 1968 1969 1970 (Rs. 1,000) Sources Funds from operations 315 355 500 Rupee borrowings, net (100) 1,800 2,574 Proposed IBRD loan 1,000 7,000 8300 1,215 10,757 11,374 Uses Loan disbursements, net of collections (200) 7,500 10,000 Net equity investments 1,000 1,000 1,000 Increase in special reserve fLund investments 93 145 164 Other 322 510 210 1,215 10,757 11,374 74. The estimates show that not until 1970 would DFCC achieve a reasonably aidequate level of operations and profitability. Income in each of 1968, 1969 and 1970 is expected to be lower than that in 1967. However, since the results for 1967 were inilated by the receipt of substantial arrears of dividends and by tax refunds, a more appropriate comparison might be with the results of 1966. Profitability, measured by pre-tax income as a percent- age of average net worth, was 14.2%' in 1966, and would be 13.2%, 12.9% and 15% in 1968, 1969 and 1970, respectively; the corresponding percentages for after-tax irncome are 8.4%, 8.5%, 8.3% and 9.5%, respectively. Between 1967 and 1970 DFCC's total reserves are expected to increase from Rs.1.6 million to Rs.2.3 million but, because of the greater volume of business, they would decline slightly as a proportion of the portfolio. Nevertheless, the level of reserves is likely to be satisfactory. The total debt/equity ratios at the end of 1968, 1969 and 1970 would be 2, 2.8 and 3.8, respectively, as compared to 1.9 at the end of 1967. The debt/equity ratio (including the subordinated Government loan in the equity and excluding it from debt) was 0.12 at the end of 1967, and would be an estimated 0.15, 0.48 and 0.89 at the end of 1968, 1969 and 1970, respectively. VII. EVALUATION AND RECOMENDATIONS Evaluation 75. DFCC has been a small operation throughout its 12-year life, during which period it slowly committed its initial, modest resources of $4.8 million equivalent. For the first part of its life, it operated in an environment in which little growth took place in private manufacturing industry; in the second part, import restrictions provided a stimulus to industrial growth, but that was increasingly offset by a shortage of foreign exchange and by un- favorable political factors which inhibited the activities of private industry;  - 18 - 76. Apart from the paucity of investment opportunities, another factor which circumscribed the Corporation's activities has been the conservatism of its Board and management. Security has been the paramount consideration in operations, and little effort has been made to actively seek business opportunities. The small size of the staff had handicapped DFCC, chiefly in the fields of economic analysis and technical appraisal; the range of its capabilities was correspondingly limited. 77. In its first 12 years, DFCC has invested some Rs.54 million in 71 firms, helping to bring to fruition a total investment of over twice its own financing. Its own investments represented only about 4% to 6% of estimated total investment in private industry in the country, and about 30% of that part of this financing which was provided institutionally; a larger proportion was financed by the Bank of Ceylon. DFCC has not acquired anything like national importance, and it has had a small impact on the country. 78. Although DFCC's record has been unspectacular and it has not been venturesome, it has certain assets. It is soundly managed and its policies have been gen,erally appropriate. Given the limits within which its operations have been confined, it has performed useful service to a representative cross- section of private industry in Ceylon. It enjoys the good-will of the businer;s community and the Government. The quality of the Corporation's portfolio is judged to be good, and it has had little problem in regard to debt recovery. Its profitability is not high, but should improve. It has recently taken measures to improve its ability to handle efficiently a larger volume of business through strengthening its management and staff. 79. DFCC is the only institution in Ceylon which specializes in medium and long-term finance to private industry, although the Bank of Ceylon also plays a large role. However, the Government has indicated that DFCC would have the prinary responsibility in this field, and is prepared to take reme- dial measures if competition from Government-owned financial institutions adversely affects DFCOC. Recommendations 80. DFCC is a suitable institution to receive a Bank loan. It is likely to be able to commit for productive use Rs.19 million to Rs.20 mil- lion (about $4 million equivalent) in foreign currencies over the next two years. 81. The proposed Bank loan to DECC should have the usual features of recent Bank loans to development finance companies. As provided in the Act, the Government would guarantee the loan and bear the exchange risk. 82. Any overdraft or loan from the Bank of Ceylon to DFCC is secured by mortgage cf portions of DFCC's share investment portfolio. The Bank should obtain the right to secure a pari passu position with such security, in respect of any loan, and of overdrafts in excess of Rs.l million. As required by legislation, the Central Bank has a mortgage on portions of DFCC's loan portfolio, in consideration for refinance provided. The Bank  - 19 - should exempxt such mortgage from its usual "negative pledge" requirement, rather than seek amendment to the legislation, especially since the Government's guarantee of the proposed loan would enable the Bank to have recourse to the Government's (including the Central Bank's) assets. 83. Initially, all DFCC's sub-loans which call for finance from the Bank loani of $30,000 or over should require the Bank's prior approval. Numerically, over half of DFCC's sub-loans, estimated to represent between 80% and 90% of total value, are likely to equal or exceed $30,000 each. The loan agreement should include a provision limiting DFCC's permissible long-term indebtedness (excluding the Government loan) to a maximum of three times the sum of its equity and outstanding subordinated Government loan.  ANNEX 1 Page 1 DEVELOP!ENT FINA1NCE CORPORATION OF CEYLON LIST OF SH4AREHOLDERS (as at March 31, 1967) No. of Shares (Rs. 100 each) Government Bank of Ceylon 15,640 Insurance Corporation of Ceylon 4,220 People's Bank 152 20,012 Private Domestic Companies cr Organizations Ceylon Insurance Co.,,Ltd. 5,000 Messrs. G.B.S. Gomes, E.E.C. Abhayasekara, B.D. I)hirasekara c/o The Associated Newspapers of Ceylon Ltd. Provident Fund 3,500 Associated Newspapers of Ceylon Ltd. 2,000 Ceylon Guardian Investment Trust Ltd. 2,000 Hunter &: Co. Ltd. 802 Free Lanka Insurance Co. Ltd. 668 Messrs. G.B.S. Gomes, B.A. Abeyewardene, A.M. Karunaratne c/o The Lakie House Printers & Publishers Provident Fund 600 Ceylon Investment Co. Ltd. 500 Messrs. G.B.S. Gomes, B.A. Abeywardene, A.M. Earunaratne c/o The Lake HIouse Investments Ltd. 400 Gulamhusein Lukmanjee & Adamjee Eu1e.ianjce L Sons Ltd. 310 Associated Cables Ltd. 250 Associated Hiotorways Ltd. 250 Associated- Rubber Industries Ltd. 250 3o,ala Graphite Ltd. 250 Ceylon 'Synthetic Textile Miills Ltd. 250 Individuals Mrs. E. R. Amarasuriya 1,000 R. S. Deraniyagala 650 J. P. Deraniyagala 400 R. St. I. P. Deraniyagala 350 H. V. Perera 300 Dr. S. Rlajanayagam 300 N. C. Bhatt 250 M. M. Ucleshi 250 278 others (holding less than 250 shares each) 10,234 30,764  ANNEX 1 Page 2 '.o. of Shares Foreign (Hs. 1Ci each) National & Grindlays Bank Ltd. (U.K.) 6,ooo Chartered Bank (U.K.) 5,000 Hongkong & Shanghai Banking Corporation (U.K.) 4,000 Commonwealth Development Finance Co. Ltd. (U.K.) 3,250 Mercantile Bank Ltd.(U.K.) 3,000 Eastern Bank Ltd. (U.K.) 2,000 Indian Overseas Bank Ltd. (India) 1,229 National Mutual Life Association of Australasia Ltd. (Australia) 1,150 Sun Life Assurance Co. Ltd. of Canada 1,150 Prudential Assurance Co. Ltd. (U.K.) 750 Habib Bank (Overseas) Ltd. (Pakistan) 500 Indian Bank Ltd. (India) 500 10 others (holding less than 250 shares each) 695 29, 224 80,000 SUMMARY :\o. o.i Sl3ares Percent (Rs. 100 each) OI total GovernmerLt 20,012 25.0 Private Domestic 30,764 38.5 Foreign 29,224 36.5 80,000 100.0 IFC/DFC May 9, 1967  ANNEX 2 THE DEVELOPMENT FINANCE CORPORATION OF CEYLON BOARD OF DIRECTORS (as of September 22, 1967) H. A. Richard Pieris - Chairman of the Board of Directors. Has served on the Board from DFCC's inception, and as Chairman from January 1, 1959, Chairman and Managing Director of Richard Pieris & Co. Ltd., and Arpico Finance Co. Ltd; *Vice Chairman of Ceylon Merchants' Chamber and the Ceylon Association of Manufacturers. C. Nadesan, MoB.E., J.P. - Director from DFCC's inception. Head Shrc,ff, Ceylon Branch of Indian Overseas Bank Ltd; *Executive Committee, Member, Ceylonese National Council of the Internationa:L Chamber cf Commerce. N, E, Weerasooria, Q.C. - Director from DFCC's inception. Lawyer. Director, The Ceylon State Mortgage Bank, Cargills (CeyLon) Ltd. and IvMllers Ltd. C. Loganathan, B. Com. (Lond.), A.I.B. (Enge) - Director since 19571. General ,ranager, Bank of Ceylon; *Chairman, Ceylonese National Council of the International Chamber of Commerce. GOB.S. Gomes - Director since 1959. Managing Director, The Associated Newspapers of Ceylon Ltd; Director, Pure Beverages Co. Ltd; Chairmah, Board of Directors of Ceylon Agricultural and General Insurance Co, Ltd, D. P. Barrington - Director since 1965. Manager, Ceylon Branch of National and Grindlays Bank Ltd. L. A. Weeras he F.C.A. - Ex-officio Director and General Manager since July e3. *President of the Council of the Institute of Chartered Accountants of Ceylon. *Member of the Board of Management of the Ceylon Institute of Scientific and Industrial Research. Dr. G. Ponnamperuma, B,Sc., Ph.D. (Lond.), D.I.C., A.R.I.C., M.I. Chem,E, - Ex-officio Director since 1965. Director and Vice Chairman, Ceylon Institute of Scientific and Industrial Research; Chairman and Managing Director, Ceylon Cement Corporation. Note: The Government's statutory seat on the Board is presently vacant. The Government was most recently represented by Mr. W. Tennekoon, formerly Senior Deputy Governor, Central 3ank of Ceylcn. * Honorary appointments. IFC/DFC September 26, 1967  ANNEX 3 Page 1 DEVELOPMENT FINANCE CORPORATION OF CEYLON ST'TEIENT OF POLICY (Adopted by the Board of Directors, April 11, 1967) 1. The function of the Development Finance Corporation of Ceylon (the Corporation) is to further the economic development of Ceylon by assisting in the promotion, establishment, expansion and modernization of private industrial, agricultural and commercial enterprises in Ceylon and encouraging the participation of private capital, both internal and external, in such enterprises. Commercial enterprises eligible for financing by the Corporation will include projects in fields such as hotels, transportation, construc- tion and engineering, which are conducive to the economic development of Ceylon. However, the Corporation will not finance enterprises which are solely engaged in trading activities, i.e., the buying and selling of goods. 2. The Corporation will provide finance in the forms which it considers most appropriate and as empowered by tne DFCC Act, namely, by medium- and long-term loans with or without security, by share participation, by underwriting operations and by guaranteeing loans from other sources. 3. The Corporation will assist in promoting The growth of a capital market in Ceylon by selling investments from it's portfolio when it can do so on satisfactory terms, and by underwritin'g security issues in suitable cases. 4. The Corporation will develop and maintain a strong and well-balanced organization capable of appraising the projects financed by it and of assisting its clients, if necessary, in the formulation and execution of their projects. 5. The Corporation will ensure that every application for assistance is considered on its financial, technical and economic merits. 6. The Corporation will not normally make a loan or a share investment of less than Rs. 100,000. 7. In considering the amount and 'form of its financial assistance to an enterprise, the Corporation will take account of the total financial requirements of the project and the soundness of the resulting finan- cial structure for the enterprise. 8. The Corporation will not in normal circumstances manage enterprises which it assists in promoting. It will not seek in any enterprise it finances a controlling interest or other interest which will give it the primary responsibility for management of that enterprise. It  ANNE, X 3 Page 2 will not normally take up more than 25' of the issued share capital of any individual enterprise. Notwithstanding the above limitations, in any case of jeopardy it may take such action as it considers nccessary to protect its investment. 9. The Corporation will develop a balanced portfolio by distributing its loans and share investments among the various economic sectors. 10. (a) The aggregate amount of the Corporation's loans to, share invest- ments in and guarantees on behalf of any individual enterprise will not normally exceed 15% of the sum of the Corporation' s equity and the outstanding amount of the subordinated Government loan. (b) The Corporation will not normally commit to any individual enterprise in the form of share investments more than 10%O of the Corporation's equity. (c) The aggregate of the Corporation's share investments will not exceed its equity. 11. The Corporation will restrict its long-term indebtedness (not in- cluding the subordinated Government loan) to a maximum of three times the sum of its equity and the outstanding amount of the subordinated Government loan. For the purposes of paragraphs 10 and 11, the Corporation's equity is defined as the sum of its share capital, surplus and reserves not al- located to cover specific liabilities. 12. The Corporation will protect itself fully against any foreign exchange risks which it may assume in respect of borrowings which are repayable in foreign currencies. 13. The Corporation will levy charges for its loans and services which, together with the earnings on its share investments, will enable it to pay a satisfactory dividend and to accumulate reserves consistent with soumd financial practice. It will make adequate provisions for bad debts and other losses on iLnvestments. In addition to the special reserve the Corporation is required to provide in accordance with the DFCC Act, it will allocate an adequate portion of its income to a general reserve, so as to build up total reserves to a level appropriate to the size and quality of its portfolio of loans and share investments. 14. Subject to the restriction of dividends as provided in the DFCC Act and subject to the observance of sound financial policies, the Corpora- tion will pay such dividends to its shareholders as will give them a reasonable return on their investment. IFC/DFC April 19, 1967  ANNEX 4 Page 1 DEVELOPMENT FINANCE CORPORATION OF CEYLON LOAN AND INVESTMENT OPERATIONS A. Approvals - Chronological Loans Share Investments Fiscal Year No. Amount No. Amount Rs. Rs. Nay 1956/Aarch 1957 6 4,310,000 3 456,100 April 1957/:March 1958 11 3,375,000 6 1,541,000 1959 13 3,700,000 4 651,250 1960 12 6,680,000 1 13,000 1961 11 3,405,000 2 450,000 1962 4 1,240,000 3 600,000 1963 16 5,903,000 4 1,350,000 1964 6 4,385,000 1 300,000 1965 12 3,935,000 2 400,000 1966 10 3,o65,000 - - 1967 10 6,465,000 2 1,250,000 Total 111 46,463,000 28 7,011,350 No. Amount Loans and Share Investments Total 139 Rs. 53,474,350  ANNEX 4 Page 2 B. Approvals - By Size (May 1956 - March 1967) Share Loans Investments Total No. -Amount No. Amount No. Amount Rs. Rs. Rs. Below Rs. 100,000 17 895,000 8 308,100 25 1,203,100 Rs. 100,000 and below Rs. 250,000 37 5,650,Poo 9 1,450,000 46 7,100,000 Rs. 250,000 and below Rs. 500,000 31 9,835,000 7 2,051,250 38 11,886,250 Rs. 500,000 and below R3. 1,000,000 15 9,083,000 2 1,202,000 17 1L0,285,000 Rs. 1,000,000 and below Rs. 1,500,000 6 6,500,000 2 2,000,000 8 8,500,000 Rs. 1,500,000 up to Rs. 4hO00,000 5 14,500,000 - - L L4,500,000 Total 111 46,463,000 28 7,011,350 139 53,474,350 C. Duration of Loans Apuoved .(May 1936 - arch 1967) No. Amount Percentage Rs. 1,000 3 to 6 years 11 1,740 3.8 7 to 9 years 11 6,235 13.4 10 to 12 years 63 17,290 37.2 13 to 16 years 26 21,198 45.6 Total 1 46,463 100.0  ANNEX 4 Page 3 D. Industrial Distribution of Approvals (May 1956 to March 1967) In Rs. No. of Investments Industrial Branch Pirms Loans in Shares Total Beverages 3 2,165,000 601,250 2,766,250 Building Materials 3 5,200,000 - 5,200,000 Electrical Products 7 2,308,000 1,652,000 3,960,000 Engineering 8 3,150,000 1,300,000 4,450,000 Large Scale Agriculture 2 3,350,000 - 3,350,000 Metal Products 7 1,375,000 50,000 1,425,000 Chemical Products 7 9,675,000 600,000 10,275,000 Food Preparations 9 2,375,000 708,100 3,083,100 Printing & Packaging 6 2,380,000 200,000 2,580,000 Ready-made Garments 6 5,345,000 300,000 5,6b5,000 Rubber Products 3 2,.450,000 100,000 2,550,000 Textiles 2 3,200,000 1,000,000 4,200,000 aMscellaneous 8 3,490,000 500,000 3,990,000 Trotal 71 46,463,000 7,011,350 53,h74,350 IFC/DFC April 25, 1967  ANiNEX 5 Pa ge 1 DEVOPMENT FINANCE CORPORATION OF CEYLON FIThACI4L STATEMENTS (A) Summary Balance Sheets as of iarch 31, 1957-1964 In Rs. 1,000 Assets 1957 1958 1959 1960 1961 1962 1963 1964 Uninvested and temporarily invested funds 22,203 16,929 13,689 8,418 5,071 3,458 1,970 1,03? Special reserve fund invest- rients, at cost 36 125 195 250 310 375 485 Loans, less provisions 560 5,665 8,169 12,671 16,025 17,574 19,435 20,920 Investments in shares, at cost less provisions 441 730 1,807 2,558 2, 916 2,896 3,204 3,116 Property at cost, less depreciation 28 28, 51 59 58 49 39 36 Unamortized organiL- zation expenses 122 98 50 25 _ 23,354 23,486 23,891 23,926 24h320 24,287 25,023 25,591h Liabilities Accounts payable) accrued expenses, etc. 235 214 472 418 733 586 1,208 1,499 Long-term loan from Gov't.., subordinated :16,000 16,000 16,000 16,000 16,000 16,C00 16,000 16,000 Share capital 7,118 7,118 7,118 7,118 7,118 7,118 7,118 7,118 Retained earnings: General reserve - - 5