The Case Study - Seylan Bank

14The Case Study > Seylan Bank PLC Annual Report 2009In pointing out these warning signs, industry experts drew some generalconclusions about management effectiveness at Seylan Bank. Clearly, there wasreason to question the quality of credit appraisals in the Bank’s lending and otherfinancing activities. Risk management practices likewise fell short of reasonablestandards. And the Bank was significantly overstaffed, demonstrating a lack ofadequate human resource policies and procedures.Equally apparent to outside analysts were more specific problems in onecrucial aspect of the Bank’s business conduct - its relationship to the CeylincoGroup, whose principal shareholder and Chairman was also Seylan Bank’schair, Dr. Lalith Kotelawala.The Ceylinco ConnectionFounded in 1939 as the Ceylon Insurance Co., the company now known asCeylinco had just three small subsidiaries and a total of 100 employees whenMr. Kotelawala took on the Chief Executive role in the early 1960s. Underhis leadership, it grew into one of Sri Lanka’s major corporations, employingover 30,000 people and encompassing more than 250 affiliated companies.Some of those companies were publicly held and listed on the Colombo StockExchange; most, however, were owned by other companies within the Group,or by the Chairman and various Ceylinco directors.The complex interrelationships between SeylanBank and many of the companies associated withCeylinco were a further source of unease for analystsexamining the Bank’s financial performance,management practices and corporate governance.Ceylinco was a major shareholder in Seylan Bank from its founding, withan ownership stake averaging approximately 24% through the end of 2008. Inaddition, the two entities entered into a diverse range of business relationshipsover the years. For instance, in 1992, the Bank established a subsidiary, Ceylinco-Seylan Development Company Limited, which involved a partnership betweenthe two businesses. And, as stated earlier, the Bank’s original credit cards wereissued under a franchise agreement with Golden Key Credit Card Co. Ltd.,a company in the Ceylinco Group.