MBSL ANNUAL REPORT 2010. by Virtuso Inc Associates.

Foreword... Ever since our inception, we have considered external crises as opportunities. Viewing them as catalysts for internal adjustment, we have consistently demonstrated unique ability to remain flexible, yet strong and open to novelty... whilst remaining in total control. We, once again have closed an year that was considered difficult, quite successfully...and look forward to another that will demand the best in us... and the best of us. And once again we welcome your continued patronage, support and trust in our mission to enhance Companyâ&#x20AC;&#x2122;s brand image and of course ...the value.

Board of Directors and Staff

Following Pages

Business Profile

Corporate Profile

Vision, Mission and Values

Board of Directors

Corporate Management

6 Products and Services

10 Chairman’s Review =

16 CEO’s Report

7 Financial Highlights of the year

14,439

LKR Mn.

Total Assets (Group)

7,589 6,803

6,091

1,648

1,164

1,414

2,332

11,832

2,990

LKR Mn.

Turnover (Group)

06 07 08 09 10

20 Management

Corporate Reporting

Financial Reporting

108

Audit Committee Report

Statement of Value Added

109

Auditors’ Report

Economic/ Financial Indicators

Risk Management

110

Income Statement

Contact Information

Sustainability Report

112

Balance Sheet

Our Team

Management Discussion & Analysis

Corporate Governance

56 Annual Report of the Board of Directors‘ on the Affairs of the Company

59 Directors’ Responsibilities

60 Directors’ Statement of Internal Controls

117

Statement of Changes in Equity

Glossary of Financial Terms

118

Cash Flow Statement

Notice of Meeting

Form of Proxy

Accounting Policies

Notes to the Financial Statements

Chief Executive officer’s & Chief Financial Officers Responsibility Statement

104 Share & Debenture Information

106 Decade at a Glance

Our

Vision

Our

Mission

Our

Values

from

Activity

Customer...

* Financial Lease * Hire Purchase * Operating Lease

* Bills Discounting * Cheque Discounting * Term Loans * Project Loans * Bank Guarantees * Personal Loans * Real Estate/Property Development

* Project Financing * Margin Trading Facilities * Debt & Equity Syndications * Project Structuring & Promotions * Corporate/Financial Restructuring * Feasibility Studies * Company/Business Valuations * Independent Opinions * Mergers and Acquisitions Management and Leverage Buy-outs * Employee Share Ownership Plans * Corporate & Business Plans * Consultancy Services * Structuring of Public Private Partnerships

* Structuring and Acting as Managers & Registrars to Public Share/Debt Issues * Listing through Introductions * Private Placement of Equity and Debt * Rights Issues Share Splits & Stock Dividends * Mandatory Offers * Underwriting * Listing of Debentures/Bonds * Islamic Capital Market Products * Managing De-listings * Portfolio Management/Investment Plans for Corporates & Individuals * Asset Securitization * Trustee Services

* Incorporation of Companies Share Ledger Management * Management of Dividend Payments * Acting as Registrars to Rights, Debt & Bonus Issues

Dividend

Direct Result

Company Group 2010 2009 2010 2009 LKR’000 LKR’000 LKR’000 LKR’000 Income 1,522,980 1,155,731 2,990,053 2,332,321 Interest Income 1,107,121 982,545 2,265,891 1,995,648 Profit before Taxation 650,708 254,264 774,677 358,925 Net Profit after taxation 449,671 200,978 540,977 285,333 Profit attributable to Equity Holders of the Parent 449,671 200,978 492,345 229,562 Shareholders’ funds 2,679,193 2,330,772 2,908,361 2,517,266 Total Liabilities 4,503,408 3,248,153 11,237,268 9,107,383 Total Borrowings 3,896,512 2,733,145 9,722,728 7,800,181 Total Assets 7,182,601 5,578,925 14,438,523 11,832,472 Total Lending Portfolio 5,383,538 4,102,357 10,515,274 8,470,982 Return on Equity 16.78% 11.10% 16.93% 11.50% Earnings per Ordinary Shares (LKR) 3.33 2.19 3.65 2.51 Net assets per Ordinary Shares (LKR) 19.85 17.26 21.54 18.65 Share price (LKR) 45.80 19.50 45.80 19.50

1,996

2,266

LKR Mn. 21.54

1,550

18.65

1,038

6,803

6,091

1,648

7,589

1,310

16.99

18.93

11,832

20.42

14,439

LKR Mn. 2,332

Interest Income (Group)

1,164

1,414

Net Assets per Share (Group) LKR

Total Assets (Group)

2,990

LKR Mn.

Turnover (Group)

06 07 08 09 10

Board of Directors Lalith de Silva holds a Diploma in Journalism from the University of Sri Jayawardenapura. He is a Journalist by profession with extensive experience in media and journalism. He is the media advisor to His Excellency the President of Sri Lanka.

He is the Chairman of Merchant Credit of Sri Lanka Limited, Asian International Hotel School, Asian Vocational Educational Centre. He was also a former executive director of Sri Lanka Export Credit Insurance Corporation.

Lakshman Perera is a Graduate of the University of Peradeniya and holds a Post Graduate Diploma in International Affairs and Masters Degree in Business Administration. He played a pivotal role in partnering the progress and development of the Institute of Chartered Accountants of Sri Lanka as the Secretary and the CEO, for a period of over two and half decades, the position it holds today. He also served the South Asian Federation of Accounts (SAFA) an apex body of SAARC, comprising of National Professional Accountancy Bodies in Bangladesh, Pakistan, India, Sri Lanka and Maldives as Executive Secretary for two terms and was responsible for networking the activities of SAFA during this period. He was a Member of the Graduate Faculty Board of the University of Colombo and also functioned as a member of the Committee appointed by the Securities and Exchange Commission of Sri Lanka to formulate Corporate Governance Rules for listed companies. He was a key player in establishing the Masters Degree Programme at the Institute of Chartered Accountants in collaboration with the University of Southern Queensland, Australia. He served as a Director of MBSL Savings Bank until May 2010 and at present serves as a member of the Board of Directors of MBSL Insurance Company Ltd.

P G RUPASINGHE holds a Special Degree in Economics, a Post Graduate Diploma in Advanced Social Statistics from the University of Sri Jayawardenapura and a Masters Degree in Business Administration (MBA) from the Post Graduate Institute of Management (PIM). Mr Rupasinghe was a former Chairman of National Institute of Business Management (NIBM) and a consultant to the Industrial Development Authority of Western Province. Mr Rupasinghe has also functioned as a Senior Research Officer at DFCC Bank and has over 23 years experience in project appraisal, monitoring & follow-up, economic research, consultancy, planning & branch banking. He has seven years of post graduate teaching experience in Economics, Accounting, Human Resource Management and Organisational Behaviour at the Open University of Sri Lanka.Mr Rupasinghe served as a Member of the Provincial Public Service Commission (WP) and a Director & Trustee of the National Development Trust Fund under the Ministry of Finance. He also served as a Member of the National Sports Council of Sri Lanka and a Member of Government Wages Board in rubber related industries. He has participated in several international professional training programs organized by the EDI of World Bank, UNIDO, UNDP and ADB, ADFIAP, PDCP & AIM of Philippines, Manila.

Dr. Ranjith Bandara is currently working as Chairman Sri Lanka Foundation while serving as a Senior Economic Adviser and Director of the Financial Service Cluster at the Strategic Enterprise Management Agency which comes under the Presidentâ&#x20AC;&#x2122;s Office. Dr. Bandara is also a senior academic staff member attached to the Department of Economics, University of Colombo. He serves as Director in the Board of Directors Merchant Bank of Sri Lanka PLC, Merchant Credit Sri Lanka Limited, MBSL Savings Bank and MBSL Insurance Limited. Dr. Bandara is also a Member of the National Economic Council of Sri Lanka. He serves as senior business adviser/ consultant to a number of business organizations in the country. Dr. Bandara is also managing partner of the Colombo School Business Management. Dr. Bandara earned his B.A in Economics Honours in 1990 from the University of Peradeniya and subsequently completed two Masters Degrees, M.A in Economics in 1992 from the University of Colombo and MSc in Management of Natural Resources and Sustainable Agriculture in 1995 from the Agricultural University of Norway. He earned his PhD in Economics in 2003 from the University of Queensland, Australia. Dr. Bandara has contributed to a number of National and International Journals and is the author of a few books written under various themes in Economics and related subjects. Dr. Bandara is the founder coordinator of two postgraduate degree programmes, Masters in Economics (MEcon) at the Department of Economics, Masters in Business Studies (MBS) and an Executive Diploma in Marketing (EDM) at the Faculty of Graduate Studies University of Colombo.

M R Shah, the Chairman of MBSL, was appointed to the Board in June 2010. Prior to joining the Company, he had served Commercial Bank of Ceylon PLC for 33 years and at the time of retirement, he had held the position of Executive Officer. Mr. Shah has a Diploma in Diplomatic & International Affairs. While serving the Commercial Bank, he having been involved in trade union activities, was elected the Secretary of the Commercial Bank Branch Union of the Ceylon Bank Employees’ Union (CBEU) in 1986 and the President in 1988. In the year 1994, he was elected the General Secretary of the apex body of the prestigious organization of the Ceylon Bank Employees’ Union and elected the President in the year 2000 which position he held until retirement in February 2010. In 2009 he was elected the Secretary General of the Asian Regional Organization of Banks, Insurance and Finance Unions and he continues to hold such position to date. M R Shah is also the Chairman of MBSL Insurance Company Limited and MBSL Savings Bank Limited. He was the former Chairman of City Housing & Real Estate Company PLC and Trillium Residencies Limited. He is a director of Merchant Credit of Sri Lanka Limited and Lanka Securities (Private) Limited.

M S S Paramananda is an Accountant by profession having served the Sri Lankan Government for over 25 years. Mr. Paramananda is a member of the Institute of Public Finance and Development Accountancy in Sri Lanka. He was responsible for the implementation and administration of the fiscal policy of the Government of Sri Lanka. He has specialised in foreign funding management and regulating financial policies of ministries and public enterprises.

Ms. W A Nalani is a career banker with diverse experience in banking and financial services. She is a Fellow of the Institute of Bankers (Sri Lanka) and holds Degrees in Bachelor of Arts (Economics) and Bachelor of Philosophy (Economics). She is presently the Senior Deputy General Manager (Corporate & Offshore Banking) of Bank of Ceylon, managing the largest strategic business segment including Corporate and Offshore Banking Units and the Trade Finance Unit.

His practical knowledge is enriched by hands - on engagements with ADB, JBIC funded development projects of the State.

She joined the Board of Merchant Bank of Sri Lanka on 28.04.2006. She is a Non Executive nominee Director on the Board of Regional Development Bank. She is also Alternate Director on the Boards of Credit Information Bureau, Institute of Bankers of Sri Lanka and BOC Travels (Pvt.) Ltd. Ms. Nalani also represents Bank of Ceylon on the Board of Srilankan Airlines. She is the Senior Vice President of the Association of Professional Bankers of Sri Lanka and a Committee Member of the Alumni Organization, University of Colombo. She also serves as a Director on the Board of Rotary Club of Colombo Central. Ms. Nalani was a co-winner of the “Zonta Award for Excellence” in the Banking category for the year 2009.

V Kanagasabapathy MPA (Harvard), FCA, FPFA, FCMA, FMAAT.is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka, The Institute of Public Finance and Development Accountancy, The Institute of Certified Management Accountants of Sri Lanka, The Association of Accounting Technicians of Sri Lanka and holds a Masters Degree in Public Administration from the Harvard University. Mr. Kanagasabapathy is the Retired Director General of Public Enterprises and was the Financial Management Advisor of the Ministry of Finance and Planning. He is currently the Financial Consultant of the Academy of Financial Studies, Ministry of Finance and Planning with over thirty five years of experience in the public service in several capacities. He Serves as Council Member of the Institute of Chartered Accountants of Sri Lanka and a member of the Governing Council of the Institute of Public Finance and Development Accountancy. He is also a member of the Board of Management of the Post Graduate Institute Management and Chairman of the Distance Learning Centre. He is also on the directorate of several Public Enterprises and Government linked Companies such as Hotel Developers Lanka Ltd, Lanka Hydraulic Institute and De La Rue Lanka Securities and Currency (Private) Ltd while serving as Alternate Director in the Bank of Ceylon. He also serves as member of the National Salaries And Cadres Commission.

My Dear Shareholder,

Chairmanâ&#x20AC;&#x2122;s Review

It is with immense pleasure and pride that I review the 2010 performance of the Merchant Bank Group, which is historical in many respects and am planning to stand before you at the forthcoming Annual General Meeting. The performance of the Bank, during 2010 has been remarkable and since September, 2010, it has recorded the highest ever leasing business and profits during the 29 year old history of the Bank. Accordingly, the Merchant Bank Group was successful in achieving a group turnover of LKR 3.0 billion, Net interest income of LKR 1.2 billion and profits of LKR 492 million. The stable political environment and the renewed interest from the corporate and business communities, together with a highly motivated staff team from all categories of employees to capture the opportunities, have contributed to the performance of your Bank. Global Economic Environment Conditions in the Western World have shown moderate recovery, as evidenced by improvement in consumer spending, a resurgence of private capital investment and other developments, despite concerns about the continuation of the credit contraction, deterioration in the employment opportunities and various other factors.The economies of Europe also have survived, despite concerns such as economic stagnation as a result of the credit contraction. In Asia, the Chinese and Indian economic conditions recovered and the outlook called for further expansion. Similarly, the economies of other countries in the region generally are reporting recovery. But as of late, a surprisingly new phenomenon complementing Asian prudence has surfaced from this murky dilemma. From the time immemorial the Asian nations have relied upon western wisdom of political pragmatism and cohesive economic policies as the role model for growth. Whilst, the very western nations who drummed these theories at us has opted for maverick practices,for which they have paid dearly of late,theAsian nations who followed old norms have escaped the vicious repercussions of the global economic meltdown with only a few bruises. As a result, the west is now turning their old pages to find where they went wrong and what they can learn from flourishing Asia. Although China and India turned to free market reforms from closed state controlled economies, neither country threw the proverbial baby out with the bath water - instead they balanced capitalism with judicious government direction, as against west which has gone ideologically overboard in their own reckless ways sans pragmatism and thus helped precipitate the global financial crisis. Local economic outlook In sharp contrast to these western economies that went into a tailspin, our country reached a monumental milestone during last year. For the first time during past half century, inflation was brought to a single digit and that really is a mammoth achievement. The Governmentâ&#x20AC;&#x2122;s conscious financial policies that addressed a variety of structural factors which were obstructing supply of goods and services have brought down the inflation to 6%. While the ground level inflation in real terms too need to be seriously addressed, this reduction in inflation rate is vital for sound economic growth. The low and benign inflation outlook enabled the Central Bank to unwind its monetary policy stance further, resulting in lower interest rates in all market segments supporting the recovery of domestic economic activity. The net result was that our economy expanded at an 8% during 2010. This was a considerable growth rate compared to 3.5% recorded in 2009. The growth was driven from industrial segment which grew by 8.8% by the end of 3rd quarter in 2010 as against 4.4% in 2009. This growth was underpinned by the restoration of peace, political stability, improved business confidence, a strong macroeconomic environment as well as a gradual recovery of the global economy from its deepest economic recession in the recent past. With higher foreign financial inflows, including disbursements under the IMF Stand-By Arrangement (SBA) facility and proceeds from the third international sovereign bond issue in October 2010, the Balance of Payments (BOP) recorded a surplus by mid October 2010, thereby also raising external reserves to the highest ever level recorded. The Colombo Stock Exchange showed a remarkable performance in 2010, with All Share Price Index improving by 96% to reach 6,636 points and the Milanka Price Index growing by 83% to reach 7,061 points with a market capitalization of LKR 2,210 billion from LKR 1,092 billion in 2009. Though, net foreign outflow is an anxiety, it is an opportunity to attract next level of risk taking investors into the country.

The Secretary to the Treasury has helped His Excellency the President to present an evenly balanced extensively covered Budget, which benefits almost every conceivable sector for growth, from 2011 and beyond, if implemented effectively. Your Company During 2010 MBSL, as a Company and a Group as well, grew at remarkable rate. The new transparent culture that I introduced was a total success as it harnessed the very fundamentals of corporate and employee obligations that finally raised the profit curve. Good Governance not only at MBSL, but also through the entire Group has instilled purpose and direction among the management and the staff. Recognition of talent, proper remuneration, performance incentives, fair treatment and opportunities for career advancement has given new lease of life to staff members, thus the self motivated team commitment has begun to bring desired results handsomely. Group Performance. MBSL Group performance was remarkable whilst the industry in general saw momentous growth. Turnover grew by 28.2% in 2010 to reach LKR 3.0 billion and the profits grew by 114.5% to reach LKR 492.3 million. Our Bank’s performance from share market activities and share portfolio gains contributed LKR 223.8 million to the group’s bottom-line. Good governance that drilled down from the Board of Directors and staff level employee motivation towards team work culture are key success factors that made MBSL to reap the benefits from the opportunities that arose from the market place. We understand the 2011 budget will offer immense opportunities for all banks and Corporate entities in the country. Reduction of Financial Services Value Added Tax and Corporate tax will strengthen our Bank in facing the changing needs of economy. 2011 and the way forward. MBSL is a merchant bank per se, and will continue as is…but, in a much wider scope with a stronger base. It is about time for us to think outside the box and discover our true perspective in the grand scheme of national economy. We no longer can be self contained introverts as the entire country is charging ahead with revitalised energy to catch up with the lost opportunities and restore what was vandalised during last thirty years. We are an intrinsic part of the national fabric and we should realign our wares and tools to discharge our potential in full measure as a truly responsible corporate citizen. We now have to find, build and consolidate our rightful position as the country’s premier merchant bank. Of course, it is easier said than done. But nonetheless this has to be done for prosperity in posterity of your Company and the Country. Be it at macro or micro level, our products and services must be available for all and sundry across the country sans hindrance. And they should find that it is much easier to do business with MBSL over the others in the fray. Our practices should attract them as easy, simple to understand and nothing is hidden in fine print. Our staff team must walk the extra mile to make customers feel at home when they look for assistance. With the government’s development drive many opportunities have emerged and we have to gear ourselves to capitalise on them. The agriculture sector together with tourism and many small and medium scale businesses will require funding as start-up seed money or for expansion. I personally believe that MBSL is at an advantageous position to tap into these sectors and as a ground breaking pilot project we commenced several promotional drives in remote areas such as Kuda Galenbindunuweva. As a diversified venture, we have commenced extension of our services to support farmers in the distant areas and initially planted 11,000 coconut trees and other subsidiary crops. This scheme will assist them from purchasing and preparing land, purchase of seeds and equipment and storage facilities. We want to be the partners to the growth story of emerging Wonder of Asia.

Finally, I am deeply indebted to my colleagues of the Board for their immeasurable advice and support, Chairman of Bank of Ceylon for his wisdom and deep knowledge, Heads of the funding institutions who are assisting us with very reasonable rates. The courage and the strategic strength from the parent Bank of Ceylon is a moral boost to the management and business dealings. This will support us in developing more conducive business relationships with clients and inculcate business opportunities. In the years to come, improved opportunities are expected in the merchant banking industry activities. The governmentâ&#x20AC;&#x2122;s policy direction to boost the economy with equal participation from the urban and the rural areas is expected to materialize. The implementation of the development projects in a package of effective income redistribution and good governance would ensure achieving a sustainable and above-average growth in the socio-economic well-being of the nation. I especially rely heavily upon the highly dedicated and committed staff team of all categories, for whom I have a special corner in my heart, to take our vision and mission forward. I also wish to place on record my gratitude to the Merchant Bank Branch of the CBEU, its leaders and membership, for the evenly balanced approach demonstrated in dealing with all matters concerning and being well focused on the interests of the progress and stability of the bank at all times. While appreciating very much the support of our shareholder, I recall pledging before you for brighter results and I sincerely believe that we have honoured the confidence you placed in us. Once again I would like to pledge that I am looking forward to meet you with yet brighter results, next year.

M R Shah. Chairman

We remain committed to our long - term strategy of good governance and shall not shirk away from our responsibilities ... The outcome will be better than the outlook.

Thinking ahead... 13

Corporate Management

Ranjith Siriwardena

Deputy Director Strategic Planning, & Risk Management.

Gamini Karunathilake Chief Executive Officer Mr Karunathilake is a professional banker with over 33 years of experience in both commercial banking and merchant banking. He obtained a B. Com (Hon) Degree from the University of Sri Jayawardenapura and MBA from the Post Graduate Institute of Management (PIM) of Sri Lanka. He is a fellow member of the Institute of Bankers of Sri Lanka, and was a visiting lecturer on ‘Law and Practice of Banking’ for Bachelor of Commerce and Economics Degree programmes and on ‘Banking and Finance’ for MSc. Management Programme at the University of Sri Jayawardenapura. He also served as a lecturer and Chief Examiner on ‘Law and Practice of Banking’ and ‘Practice of Banking’ at the Institute of Bankers of Sri Lanka. He also is a Director of MBSL Savings Bank, MBSL Insurance Co. Ltd, Lanka Securities (Pvt) Ltd and Hotel Nallur.

- holds a B.Sc (Business Administration) Degree from the University of Sri Jayawardenapura and is an Associate member of the Institute of Chartered Accountants of Sri Lanka. He has over 19 years experience in merchant banking, strategic planning and risk management.

A M A Cader

Deputy Director Corporate Advisory & Capital Markets

Lakshman Kaluarachchi Deputy Director Leasing

- is a holder of a B.Com Special Degree from the University of Kelaniya and has over 26 years experience in a wide range of Finance activities including 17 years experience in Merchant Banking. He presently head the Leasing Division, branch operations and also the Micro Finance Division.

Shyamalie Amaratunge Deputy Director Trade Finance

- holds a B.Com Special Degree and a Post Graduate Diploma on Modern Banking from the University of Sri Jayewardenepura and obtained an MBA from the Post Graduate Institute of Management of Sri Lanka. She also counts over 17 years experience in the field of Trade Finance, Treasury Management, Strategic Planning, Balanced Scorecard (BSC) Performance Management and Accountancy.

- is a Fellow of The Chartered Institute of Management Accountants, London (FCMA) He also holds an MSc in Information Management from Sri Lanka Institute of Information Technology (SLIIT) and Masters in Business Studies (MBS) from University of Colombo. Mr Cader obtained Postgraduate Diplomas in Business Administration and Economic Development (University of Colombo). He has completed the Certificate and Diploma in Marketing at the Chartered Institute of Marketing, London and Post Graduate Diploma in Information Technology by SLIIT and CIMA London. Mr. Cader is a Fellow member of Certified Management Accountants of Sri Lanka and an Associate member of the Institute of Financial Accountants of London. He presently functions as the Deputy Director – Corporate Advisory & Capital Markets as the Head of Division. He has an experience of 20 years at Bank in Corporate Advisory, Capital Markets and Fund Management and 35 years of total experience in Financial Management, Service Marketing, Business Administration and Investment Banking.

Marina Phillips

Assistant Director Company Secretary -MBSL Group - is an Attorney-at-law, Notary Public with over 17 years of experience in all aspects of corporate secretarial practice. She is also widely experienced in Capital Market operations.

Priyantha Herath

Assistant Director Finance & Treasury Management - is an Associate member of the Institute of Chartered Accountants of Sri Lanka and an Associate member of the Certified Management Accountants of Sri Lanka. He holds a B.Sc (Business Administration) Degree from the University of Sri Jayawardenapura and Master of Business Administration from the University of Colombo, Sri Lanka. He counts over 11 years of experience in the field of finance.

Senaka Uduwawela

Assistant Director - Leasing& Administration - accounts for over 28 years of experience in the Banking industry. His areas of speciality covers Credit and Branch operations. He currently supervises Collections and Recoveries of the Leasing Division and Branch network of MBSL.

Amitha Samarasinghe

Assistant Director - Group Human Resources - holds a Bachelor of Arts Degree from University of Peradeniya and a Diploma in Human Resources from the National Institute of Business Management. She is a member of the Institute of Personal Management. She possesses over 25 years of experience in the field of Human Resource Management in diverse businesses such as manufacturing, service and banking.

Shalintha Fernando Assistant Director - Group Internal Audit - is a member of the Institute of Internal Auditors (U.S.A) and is a Certified Internal Auditor â&#x20AC;&#x201C; (U.S.A). He counts over 12 years of experience in the field of internal auditing in local conglomerates, as well as multinational companies.

Chief Executive Officer’s Report It is with great pleasure that I meet you once again, to report your Company’s performance of the year 2010. Now that we have seen the worst of global economic meltdown, western superpower economies gradually have begun to come back on track. I believe that the lessons learnt are illuminating for all and sundry, especially for those in the financial services business as to what not to do. Cowboy behaviour under the pretense of entrepreneurship has landed not only the irresponsible, but many responsible countries too in the red. For a developing country like ours, grappling with a civil conflict during 2008/9, the danger was clear and present. But thankfully, to the monetary and fiscal authorities of Sri Lanka, we managed to turn the corner, ushering peace and economic acceleration simultaneously. Today, the entire country is on the move forward. Many industries from macro to micro level have mushroomed, and are seeking funding options at comfortable rates and simple terms. Recent activities in the capital market have risen to all time high earning Colombo Stock Exchange, the coveted second position in the entire world. Sri Lankan economy, though yet not a rapid growth but steady, has become active and have remarkably managed to bring the inflation down to 6% and the interest rates to 8%. Government’s Budget for 2011 is designed to accelerate growth to 8% over the medium term and then further on to 10% while maintaining inflation around 6%. This ambitious plan will allow the country to enjoy a period of expansion that will add qualitative improvement to the real economy. In that context, when infrastructure is available in all fronts the economic potential and scope will become encouraging. Thus, Sri Lanka is now moving towards a diversified and high value added economy. Many avenues are created for development, and the people who were trapped in war - affected areas have started to revert back to their usual lifestyles and businesses. And also, simplified tax code has begun to pay dividends. The high and complex taxing affected imports and brought the leasing and hire purchase business to a crawl. The customers who had given up buying new vehicles due to unrealistic costs of motor vehicles, has returned with the reduction of import duty during latter part of the year 2010. Year 2010 was an inspiring period as it tested MBSL’s character as a merchant bank. The distressed public over their investments in several failed companies laid high expectations on us to turn the tide around and assure their investment and future income. In record time we managed to stabilize these companies and to honour their commitment to investors. This endeavour has earned MBSL a reputation as saviours that the public will readily rely upon. As a responsible corporate citizen we take a modest pride in this venture as we have saved thousands of depositors from disaster and restored the public confidence in Sri Lankan financial sector that was fast eroding. The elevated brand image enhanced MBSL’s corporate character. Today, all our shareholders hold a stock that is respected not only for it’s value, but also for what it stand for. As much as any other business, we too play for high gain, but will not sidestep from collective national responsibility when help is needed and shall not sacrifice our corporate spirit for unethical profit. In the year 2010, your Company recorded its all time highest income of LKR 1.5 billion recording an increase of 31.8% over the last year. Profit before tax for the year under review was LKR 651 million also is the highest ever profit and it is an increase of 156% over the year 2009. Net interest income for the year was LKR 688 million recording a growth of 73% when compared to LKR 398 million for the year 2009. This was a direct result of reduced borrowing cost by 28% whilst increasing the investments in lending portfolio and other investments. The total assets of your bank as 31 December 2010 was LKR 7.2 billion; a growth of 29% when compared to the previous year. Income from Leasing and Hire Purchase was increased by 10% as against the previous year. More importantly, consequent to the strategic expansion in investment in share portfolio resulted an income of LKR 224 million and LKR 58 million from business rehabilitation, thus these additional sources contributed to enhance the overall profit of the company. It is also significant to note that fee based income from Corporate Advisory Services also reported a remarkable growth compared with year 2009. Out of several IPO’s that we managed during the year namely: Laugfs Gas IPO was oversubscribed by 21 times whilst Raigam was oversubscribed by 19 times. Operating expenses of the company significantly increased during the year as a result of increase in VAT on financial services and business expansion activities. Provisions of loan losses were reduced by 11.6% due to efficient monitoring system of lending portfolios. It is also noteworthy to mention that your company contributed directly to the economy by paying LKR 201 million as corporate tax for the year 2010 as against the tax of LKR 53 million for the year 2009. Due to the above mentioned sound performance of the company, Earnings per Share (EPS) increased by 51.8% during the year.

Performance of the MBSL group also has shown a significant improvement. The group turnover was increased by 28.2% recording LKR 3 billion as against LKR 2.3 billion for the year 2009. The profit after tax of the group increased to LKR 492 million as against the profit of LKR 229.5 million for the year 2009 and it indicates a growth of 114.5% over the previous year. Earnings per Share of MBSL Group has increased to LKR 3.65 from 2.51 in the year 2009. Merchant Credit of Sri Lanka Limited, the major subsidiary of the group, a licensed finance company was the major contributor of the group’s performance. Net interest income from the company has increased by 50% and achieved LKR 112 million profit after tax which is the highest in its history surpassing the previous highest profit achievement. MBSL Insurance Ltd was able to consolidate its position in the market and contributed to the bottom line positively for the year 2010. The significant improvement of the insurance arm of the group indicates it is on its own way with a larger promise in the years to come. Even though, MBSL Savings Bank failed to contribute positively to the bottom line of the group, they managed to perform to its budgetary expectations. This indicates that MBSL Savings Bank is energetically progressing and is expected to break even in the year 2011. Lanka Securities Stock Brokers (Pvt) Ltd, the associated company of the group has posted a very significant profit of LKR 186 million despite accelerated operational expenses during the year. War free environment coupled with positive macro economic variables such as low interest rates, reduced inflation and accelerated growth rate may continue to enhance the investor confidence to participate actively in equity transaction which will in return enhance the future of LSL that is expected to be positive with large volume and clientele. Dear shareholder, for a company or a group, as you will agree these are very good results; but, it is also important to reflect on under what type conditions, be it business or otherwise, they were achieved. Beginning of 2010 was difficult as the tax rates and restrictions that prevailed for imports directly affected your Company’s businesses. Only the fee based income areas performed well and fortunately our carefully planned activities brought desired results. From the third quarter onwards the economic atmosphere relaxed and added with import duty reduction, leasing and hire purchase business had a jump - start. Together with these initiatives our most valued asset: human resource, came alive. Our staff, with whom your Company has a fine relationship rose to the need of the hour and discharged their duties as champions. This underscore the synergy and trust that has been cultivated over long period of time through transparency, recognition, career advancement and welfare. The achievements I have mentioned above were possible only because of their unhesitating, duty conscious commitment. As social responsibility endeavours we have been engaged in many humanitarian projects mainly on ‘need - of - the - hour’ basis and contributed to redress the burdens of the affected people in many parts of the country. In addition, specifically as a mark of our respect for fallen war heroes, we initiated a support programme in 2009 to help their children’s education, and this year we made it a permanent project to support them until their ordinary level examination is completed. In conclusion, I thank all our esteemed customers who continuously offer us the opportunity to serve them and all our stakeholders for their valuable support extended. Looking forward to another exciting year in 2011,

Gamini Karunathilake Chief Executive Officer

It was a good year for all of us: our shareholders, customers and staff. Tough decisions and decisive action ensured that we remain in good shape to meet the challenges that lies ahead... Weâ&#x20AC;&#x2122;ll find the way, or...weâ&#x20AC;&#x2122;ll make one.

Finding direction...

Management

Amitha Snr. Manager Trade Finance Mihirun Snr. Manager Legal Ratnasiri Snr. Manager Galle Keerthi Snr. Manager - Kandy Devika Branch Manager - City

Pathirana Manager Leasing Ananda Manager Legal Sarath Manager Leasing Lalangi Manager Corporate Advisory Chareendra Branch Manager - Trincomalee

Sanjaya Snr. Manager Leasing Fahima Manager Legal Chinthaka Manager IT Asela Manager Finance &Treasury Nivaraj Branch Manager - Baticoloa

Our reputation and strength is firmly anchored in our ability to maintain pragmatism of our approach, whilst our policy is to continue enhancing our professionalism by deploying top bracket personnel to address the needs of the customer. Ranjith Siriwardena Deputy Director â&#x20AC;&#x201C; Strategic Planning and Risk Management.

Saman Manager Kurunegala Janaka Manager Maharagama Gajeeban Manager Portfolio & Investment Nirmalath Manager Ambalantota

Sarvanan Manager Vavuniya Anoma Manager Negombo Lakshman Manager Internal Audit Pradeep Branch Manager - Anuradhapura

Planning Strategically... 21

Management Discussion & Analysis As Sri Lanka experienced one and a half years of peace and security, many sections of the economy that were dormant have begun to gather momentum. Inflation was controlled successfully and with which interest rates also decreased. During 2010 economy expanded at an around eight per cent. This is a remarkable achievement as for the first time during last decade that growth rate exceeded the inflation rate.

borrowing cost. Rehabilitation assignment of six ailing companies in the financial industry is now reaching the final stage. Total assets of the Bank as at 31 December 2010 was LKR 7.2 billion reporting a growth of 28.7% compared to the year 2009. Total equity capital of the bank increased by 15% to LKR 2.7 billion, from the last year’s LKR 2.3 billion.

Mind boggling tax code has been simplified and many obstacles to economic recovery is now removed. Like removing security barriers after the war, when economy is ready to take off certain barriers such as debit tax and different VAT rates had to be removed as they were obstructing growth.

Total income surged by 31.8% from LKR 1,156 million in 2009 to LKR 1,523 million in 2010. While Leasing and hire purchase grabbed the largest slice of the total income pie, income from investment in quoted shares also reported the highest growth. Also the fee income from corporate advisory division reported a remarkable growth.

Central Bank of Sri Lanka maintained a solid banking and financial system that safeguarded the country from external shocks and downside risks that other mighty economies suffered.

492

LKR.Mn

Profit (Group)

Towards latter part of 2010 the daily market turnover has increased and today Colombo Stock exchange is placed at the second best in the world. During this period your Company too did exceptionally well.

As expected, the growth of the country’s economy has doubled and with relaxed financial environment every division of your Company forged ahead to capitalize from the benefits that offered. As a result all divisions posted high revenue, and the most significant was Capital Markets.

230

224

225

264

Continuing from our restoration efforts of ailing businesses to stability we have guided them to prosperity and consolidated investor confidence. Today the investors are content with the safety net we offered and as a result those companies have started to stand on their feet firmly.

06 07 08 09 10

Income

1,156

704

873

1.035

1,523

LKR Mn.

(Company)

06 07 08 09 10

Financial Review Performance of MBSL group Environment conducive for business prevailed during the year due to political stability, peaceful atmosphere together with improved macro economic conditions. MBSL Group maximized in performance to complete another triumphant year, recording the highest ever revenue and the highest profit in the history of MBSL. The Group’s income rose from LKR. 2,332 million to LKR. 2,990 million, recording a growth of 28% over the year 2009. The Group’s profit surged to LKR 492 million, a 114.8% growth for the year 2010 from last year’s profit of LKR 230 million. Total assets of the group as at 31st December 2010 grew by 22% during the year and total assets as at 31st December 2010 stood at LKR 14.4 billion. Performance of Merchant Bank of Sri Lanka PLC MBSL too recorded the highest income in it’s history of 29 years amounting to LKR 1,523 million and it was an 31.8% increase over the year 2009. This was made possible due to timely strategies adapted to garb opportunities available during the year while improving operational efficiency of the Bank. Profit before tax of the company reported a significant growth of 155.9% over the last year consequent to strategic expansion of investment in share portfolio and effective financial management to reduce

Income

The gain of LKR 223.8 million from quoted shares and consultancy income of LKR 57.8 million from business rehabilitation contributed to this growth. Net Interest Income Net interest income for the year amounted to LKR 688 million recording an increase of 72.8% compared to LKR 398 million for 2009. This was mainly due to reduction of borrowing cost by 28.3% while increasing the investments in lending portfolio and other investments. Operating Expenses Operating expenses increased significantly during the year as a result of increase in VAT on financial services due to higher income from liable sources, increase in premises, equipment and establishment expenses and personnel costs due to expansion of branch network. Increases in other expenses are in line with the enhanced income of the company. However, your Company periodically reviews and carefully adopts cost optimization mechanisms to strike a balance with its revenue. Provision for Bad and Doubtful Debts Provisions for loan losses have come down by 11.6% during the year as a result of improvement in recovery of nonperforming loans. In addition to the provisions required by the Central Bank, a general provision of .5% is set aside annually until it reaches 2.5% of the net portfolio to meet the future contingencies, which may arise due to the market uncertainties. Taxation The Bank’s corporate tax expense for the year 2010 was LKR 201 million against LKR 53 million for the previous year. Main reasons for this was an increase in profit, and decrease in leasing disbursements compared to hire purchase disbursements and additional provisions made for pending tax matters. Earnings per Share Earnings per Share (EPS) increase by 51.8% from LKR 2.19 in 2009 to LKR 3.33 in 2010 due to comprehensive performance of the Company. Earnings per Share of the Group too increased to LKR 3.65 in 2010

Today the industry has 74 organisations of which 21 are specialised leasing companies, 34 finance companies, 11 commercial banks and specialised banks, posing tremendous competition. We as a pioneer, have expanded our branch network to Ambalantota, Trincomalee & Vauniya to rejuvenate dormant industries and provide a quality and speedy service to the existing and potential new clients in the North and East regions as well as the Southern region. Leasing division performed well amidst turbulent market conditions and continued to expand its portfolio in Financial Leases, Operating Leases & Hire-purchases. “Siyath Saviya” – Micro Credit Facilities MBSL expanded its business horizons introducing Micro/small and medium scale financial facilities named “Siyath Saviya” to agricultural and small scale business sector with an aim to boost National Agri Production by introducing required financial facilities to self-employed people. Loans will be

651

These loan facilities have been utilised for cultivation of coconut, vegetable, paddy, floriculture, banana & tea plantation. Trade Finance

The Division also expects to achieve higher gains in the coming years, through the enhancement of credit portfolio, aggressive recovery of non performing advances and realization on investment in properties.

06 07 08 09 10

Earnings per Share (Group) 3.65

The aggressive collection of overdue debts resulted a lower provision for bad debts for the year. However, the impact of low rate of interest affected Division’s income during second half of 2010 and therefore expected growth in terms of income did not realize as desired, but Cheques Discounting and Personal Loan portfolios has shown significant growth during 2010.

254

In 2010 Trade Finance Division recorded the highest disbursements compared to the previous year. The total product portfolio of the Trade Finance Division increased to LKR 1,552 million (by 136%) from LKR 1,143 million in 2009 thus enabling to increase the Divisional contribution of income to the bank’s turnover by 16 %. The Divisional new loans disbursements increased by 137% compared to 2009. The major source of revenue for the Trade Finance Division was bills discounting and the division was able to recover of LKR 30 million from NPL debtors.

2,.51

Leasing & Hire-purchase businesses is the largest piece of the asset pie of the bank, with proceeds directly aligned to Bank’s profitability. In 2010 Leasing Division contributed 57% to the total revenue of the bank with an increase of 11% over the previous year. The disbursements increased to LKR 2.5 Billion recording the highest ever in the MBSL history . The demand for new vehicles has increased due to the duty reduction for brand new & unregistered vehicles, resulting a remarkable increase in the Leasing portfolio. We expect that the demand will grow further in 2011.

(Company)

203

Leasing

Since commencement of these financial facilities, 140 low - income families in the areas of Galenbindunuwewa, Kekirawa,Thambuttegama, Haputale, Neluwa, Kalawana, Narammala, Alawathugoda & Tissamaharamaya have benefitted immensely.

Profit before Tax

2.49

The Company’s Treasury Division raises funds from equity and debt market for its funding requirements. New debentures amounting to LKR 187 million had been raised during the year to minimize borrowing costs capitalizing on lower market interest rates. Commercial paper portfolio of the Company increased from LKR 1,409 million in 2009 to LKR 2,428 million in 2010. LKR 405 million had been raised by way of new borrowings from banks. Total borrowings as at 31st December 2010 increased to LKR 3,897 million as a result of the expansion of lending portfolio and other investments.

• Assistance to convert unutilised resources,talents, assets into performing status.

273

Treasury Activities

• Assistance to small business owners to enhance the present business volumes, reduce cost and improve business efficiency,

2.94

Equity capital of the Company increased by 15% to LKR 2.7 billion as a result of retained profit during the year. The Company’s Return on Equity increased to 16.78% in 2010 from 11.1 % in 2009. Price earnings ratio at the end of year was 13.75 compared to that of the previous years indicated an increase of 54.7%.

2.50

Shareholder Equity and Returns

• Assistance to poultry farming dairy & livestock industry to increase the bird/animal population and development of additional pens, coops and corrals.

LKR.Mn

Directors have recommended LKR 1.25 per share first and final dividend for the year 2010. The dividend payout as a percentage of the Company’s own profit after tax is 37.53%. The Directors have recommended this dividend taking into consideration the sustained profitability and liquidity of the Company.

• Assisting agricultural sector for preparation of land for cultivation, fresh planting, re - planting, purchase of agricultural equipment, storage facilities for harvest, fruits & agro product processing, horti culture & floriculture and also for dairy farming industry, with relaxed adherence to the present collateralize credit policy etc,

269

Dividend Distribution

based on specific purposes which likely to be in the following areas.

LKR

from LKR 2.51 in 2009 mainly due to exceptional performance of MBSL and the subsidiary Merchant Credit of Sri Lanka.

The Division is aiming to further improve quality the portfolio by improving screening process to identify genuine and classy customers, to enhance lending through branches by reaching out to macro and micro level customers, and to consolidate existing corporate customer base by offering custom made services. The cumulative disbursement of Trade Finance division was LKR 574.5 million as against the budgeted amount of LKR 650 million.

06 07 08 09 10

Corporate Advisory And Capital Markets 2010 2009 Change LKR millions LKR millions % Fee based income Fund based income

238

543

Corporate Advisory and Capital Markets division contributed in a sizeable manner throughout the year with LKR 270 million to the top-line. Capital gains for the year reported a significant growth with the share markets improving almost 100%. Capital gains of LKR 215 million and dividends of LKR 8.5 million are admirable. During the year your Company completed two Initial Public Offerings which were tremendous successes. We were the Managers and Registrars for Laugfs Gas Limited that raised LKR 2,505 million and Raigam Wayamba Salterns PLC LKR 200 million. Laugfs Gas IPO was oversubscribed by 21 times whilst Raigam IPO was oversubscribed by 19 times. In addition, we handled rights issue of MBSL Savings Bank Ltd to improve the capital base of the bank. Shareholders Fund

1,660

1,565

1,416

2,331

2,679

LKR Mn.

(Company)

06 07 08 09 10

Total Assets

14,439

LKR Mn.

(Group)

Divisional performance grew over 4 folds against 2009, providing a positive outlook for the Company. Further we completed a private placement for Sri Lanka Catering (Private) Limited lucratively and raised LKR 1.0 billion. With the upturn in the markets and capital market based business opportunities growing, the divisionâ&#x20AC;&#x2122;s performance excelled above 2009 results. Further, we completed a Business Plan for the National Water Supply and Drainage Board for the 5 years, which was well accepted by the Board and the sourcing agents. As a corporate social responsibility initiative, the three seminars on Global Financial Crisis and its impact to Sri Lanka conducted for different levels of the business community were tremendous successes. The Investment Day held on 26 October 2010 successfully received by many participants and was a collective effort for the capital market industry. We expect the year 2011 and onwards will be flourishing on capital expansion and capital placements supporting the growth in the economy and the Colombo Stock Exchange. We are geared to translate all opportunities arising in the market place to capitalise as revenue drivers and will be focused in facilitating many businesses to reach success.

7,589

6,091

6,803

11,832

Corporate Secretarial Services Division:

06 07 08 09 10

The Corporate Secretarial Services Division continued to extend its secretarial support to the Company, the MBSL Group and its external clientele. The Division was selective in expanding its external client portfolio during the year under review. The functions of the Division include payment of dividends to shareholders, timely payment of interest to debenture holders, share ledger management, coordinating the release of financial statements of the Company to Regulatory Authorities and Shareholders within stipulated time lines, incorporation of companies, registration of trade marks etc. The Division is mainly focusing on listed companies for Registrars activities.

Subsidiaries and Associates Merchant Credit of Sri Lanka Limited - Overall performance of the year At MCSL, finance leasing, hire purchase and term loans to individuals and corporate are the main products of the company. The main focus of the company is the SME corporate sector while few large corporate institutions have also been granted facilities. Finance leasing and hire purchase businesses are the major areas of the business of MCSL and they represent 64 per cent of the total accommodations granted at the end of year 2010. Leasing and hire purchase generated the highest income of LKR 408 million, which counts for more than 50% of the total income generated by the company. The income of LKR 895 million also shows 9% growth over the last year while leasing and hire purchase counts for more than 50% of the total income which is core business of the company. Net Interest income also has increased by 50% from LKR. 244.3 million in 2009 to LKR. 366.7 million , which is a significant achievement. This was mainly due to increase in disbursements in core business areas and better management of cost of funds. The company has achieved LKR 112 million Profit after tax , while achieving LKR 139 million of profit before tax which is the highest in the history surpassing the previous highest profit achievements of LKR 71 million Profit after Tax and LKR 91 million Profit before tax last year 2009. There was a capital gain of LKR 49 million from disposing of shares which significantly contributed to the profit increase in the year 2010. The lending portfolio of the company has grown by 52% from LKR 2,316 million in 2009 to LKR 3,525 million in 2010 and the Non performing advances stood at 9.77 % as at 31st December 2010. MBSL Insurance Company Ltd The year 2010 has been extremely satisfying for the Team at MBSL Insurance, as we have remarkably improved in all areas. During 2010, MBSL Insurance crossed the LKR. 500 million GWP of Life & General Insurance Businesses by generating, a turnover of LKR. 565 million. Also we were able to increase the Life GWP by 64% from LKR. 55 million in 2009 to LKR. 90 million in 2010. MBSL Insurance also managed to record a profit of LKR. 9.9 million before tax which is a significant achievement since its inception in 2005. Until 2009, the Company was continuously making losses and as at 31st Dec 2009, the cumulative total loss was LKR. 390 million. The overall growth rate in turnover recorded 75% towards General Insurance and 70% in Life Insurance. Further, MBSL Insurance was able to record the highest growth of 72% among the competitors while the industry growth recorded 7. The key factors that contributed to achieve these significant performances were mainly due to improved standards, motivated staff, sheer determination and high quality customer service by our Underwriting, Claims, Sales & Marketing teams and also strengthening of our distribution channels. MBSL Insurance ranked the 12th position among 19 competitors in 2010. This is a noteworthy improvement as we stood one before the last at the beginning of the year.

MBSL Savings Bank is a Licensed Specialised Bank, established under the provisions of the Banking Act No. 30 of 1988 and the (Amendment) Acts No. 33 of 1995, No.02 of 2005, No.15 of 2006 and No.46 of 2006 and is the only Private Sector Savings Bank in Sri Lanka. The Bank has 12 Extension offices. During the Ceylinco Group Crisis in 2009, the Bank lost more than LKR. 500 million deposits and faced a serious liquidity crisis. Thus, with the approval of the Central Bank of Sri Lanka, your Company acquired 78% stake of the Bank. With the guidance of the newly appointed Board, and the revitalized commitment of the staff, the Bank managed to recover from its precarious position and rebuild the trust and confidence of Customers to recover from the crisis within a very short time. The bank aimed more towards Savings, in order to increase the low cost fund base and as a result managed to increase the Minors Savings base by 26% and the Savings Base by 61% during the year. The Bank focused on Schools to promote Minors Savings in order to inculcate the saving habits of our future generation. MBSL Savings Bank Ltd achieved a gross deposit collection of LKR. 1,013 billion during the year 2010; an increase of 15% over the previous year. The Bank was able to disburse LKR. 942.99 million worth of facilities during the year 2010 Compared with 2009, which was only LKR. 473.99 million. During the year weighted average cost with overhead cost has reduced from 23.77% in December 2009 to 17.17% in December 2010. Cost of funds has come down from 15.43% p.a. to 12.05% p.a. due to the prudent treasury management of the Bank. Also the net NPA Ratio which was 10.65% in December 2009 reduced to 7.90% in December 2010. MBSL Insurance will be emerging in year 2011 as the “Winning Team” by winning the hearts and minds of the employees, customers, shareholders and contributors with value added products thus bringing the benefits of insurance to all Sri Lankans. At present, the MBSL Savings Bank is in a solid footing to meet the challenges ahead and looking forward to a profitable year 2011. Lanka Securities Stock Brokers (Pvt) Limited (LSL) LSL; a trading member of CSE is a Joint Venture Stock broking firm between First Capital Securities Corporation (Pakistan), Bank of Ceylon and Merchant Bank of Sri Lanka PLC. The Colombo bourse witnessed an eventful year in 2010 during the recent past where despite a few hiccups, the market continued its bull run throughout the year. During 2010, a total of LKR. 570.3 billion worth of shares were traded recording a growth of 300% Year on Year. Average daily turnover stood at LKR. 2.6 billion and foreign participation gradually dropped to 18.5% from 30.5%. At the end of the year foreign investors were net sellers with a net foreign outflow of LKR. 26.4 billion. ASI and MPI gained 96.0% and 84.3% during 2010 respectively, thus the market capitalisation was LKR.2.2 trillion at the end of 2010. In the light of these impressive performances the CSE was named the best performing market in the world by 01st Oct 2010, and ended the year as the world’s second best performing market.

Risk Management Constitution of the Committee An Integrated Risk Management Committee was constituted by the Board of Directors during the year in terms of Finance Leasing (Corporate Governance) Direction, No 4 of 2009 relevant to Finance Leasing Establishments, to oversee the risk management functions on regular basis. The members of the committee consist of the followings. Mr V Kanagasabapathy Director Chairman Mr Gamini Karunathilake CEO Member Mr Ranjith Siriwardena Deputy Director Strategic Planning & Risk Management Member Mr Priyantha Herath Assistant Director Finance and Treasury Management Member Mr Lakshman Kaluarachchi Deputy Director Leasing Member Ms Shyamalie Amaratunga Deputy Director Trade Finance Member Mr A M A Cader Deputy Director Corporate Advisory and Capital Market Member The Company Secretary functions as the secretary to the Committee. The other senior management staff members are invited to attend the meeting when their presence is required. Role and scope of the Committee The role and the scope of the Integrated Risk Management Committee (IRMC) is as follows: - To assess all risks faced by MBSL, through appropriate risk indicators and management information. - To supervise broad risk categories, ie credit, market, liquidity, operational and strategic risks and work with key management personnel closely and make decisions on behalf of the Board within the frame work of the authority and responsibility assigned to the committee - To assess all risks faced by MBSL through appropriate risk indicators and management information. - To review the adequacy and effectiveness of all management level committees such as the credit committee and the asset and liability committee to address specific risks and to manage those risks within quantitative and qualitative risk limits as specified by the Committee. - To recommend prompt corrective action to mitigate the effects of specific risks whenever they rise beyond the prudent levels defined by the committee on the basis of Bank’s policies and regulatory and supervisory requirements - To recommend appropriate actions against officers responsible for failure to identify specific risks and take prompt corrective actions as recommended by the Committee, and /or as directed by the Director of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka. - To submit a risk assessment report after each meeting to the Board seeking the Board’s views, concurrence and/or specific directions. - To establish a compliance function to assess the relevant establishment’s compliance with laws, regulations, directions, rules, regulatory guidelines, internal controls and approved policies on all areas of business operations. Activities of the Committee The committee met twice and noted that although there was no formal mechanism to identify, assess, manage and mitigate the risk, the Bank has been adopting informal practices and following control systems that are already in place to mitigate the risk.

Risk

Risk mitigation action

Credit risk

• Detailed credit appraisal process • Segregation of credit execution and approvals • Established credit approval limits • Approval of High value facilities by the Board of Directors • Asset category base exposure limits • Single client exposure limits • Product based pricing • Close monitoring of performances • Maintaining healthy provisioning policy • Obtaining adequate collateral

The risk of possible loss being incurred as the result of a borrower or counterparty failing to meet its financial obligations.

Market risk The risk of potential loss arising from adverse effects on interest rates, foreign-currency exchange rates, equity prices etc. Liquidity risk The risk of MBSL being unable to fund assets or meet obligations at a reasonable level, in case of extreme market volatilities. 26

• Matching the duration of the assets and liabilities • Timely re-pricing of products • Maintaining healthy gearing ratio • Scenario analysis and sensitivity analysis to assess the impact to earning due to interest rate changes • Changes to investment limits base on market condition • Monitor Balance Sheet liquidity and make improvements to maintain healthy gearing ratio • Prepare projected cash flow statements regularly • Daily monitoring of disbursement and collections • Timely re-pricing of products • Maintain additional lines of credit to use as a buffer

• • •

Maintain strong institutional Rating Prepare gap analysis and take prompt actions Close interaction between Finance division and business units for respective cash projections on continual basis

Operational risk The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

• Established processes with internal controls • Segregation of duties between front line employees and back office employees • Approved delegated authority limits • Computer generated MIS for management review on monthly basis • Conduct Senior management meetings on regular basis • Internal audit department • Maintain off-site data backup as per Disaster Recovery Plan requirement • Wide Area Network connection for all branch network to have real time data • Regular review on compliance with Statutory requirement and Central Bank Directions.

Strategic risk

• • • •

The risk associated with business plans and strategies including plans for entering new business lines.

Preparation of Corporate Plan and monthly budget for the financial year Monthly review of the performance with the budget and take corrective actions Prepare detailed analysis on feasibility and profitability of new activities before implementation Review industry trends and take prompt actions to suit the Bank.

The Committee discussed the draft Policy document prepared by the Bank of Ceylon, the parent for inclusion in the Subsidiary Management Charter and decided to align company’s risk management policy to reflects the parent’s expectation as far as practicable and took the following initiatives to improve and formalize the risk management functions of the Bank - - - -

To establish Risk Management framework To formulate Assets and Liability Management Committee (ALCO) with written terms of reference To re-visit and update operation manuals and establish a set of risk measurement indicators. To conduct awareness programme in consultation with the Bank of Ceylon

V Kanagasabapathy Chairman Integrated Risk Management Committee

Sustainability Report The downturn is an opportunity to introduce efficiencies across the business that will become a platform for growth...

Forward thinking and building for future underpin the way we manage our businesses. With a tradition of merchant banking dating back to 1982, MBSL today has come a long way underwriting over 50 billion liabilities of others that were threatening to bring countryâ&#x20AC;&#x2122;s economy to a halt, and loss of over 1,500 jobs that were on the brink of uncertainty. The high water mark was that the general public accepted our assurance and relied on us to turn the tide around. I am extremely pleased to say that we have fulfilled our corporate citizenry obligations. Although it may sound a pure business venture the value it added to our collective brand image is awesome. Any institution can resort to many promotional activities to boost oneâ&#x20AC;&#x2122;s image but when one voluntarily accept the unthinkable as a challenge and restore public confidence, that will last forever and help continuity, or if you will sustainability. Year 2010 was a very good year for MBSL, as we posted highest ever revenue and profits, we look forward to consolidate our commanding position and add more value to our products, services and stock. With the resurgence of long elusive peace, not only the known corporate sector but also the unknown SME sector has come alive with start up or expansion drives that require funding support at rates that are comfortable. The restoration or initiation of businesses in the war devastated areas have become prime focus and we already have laid ground breaking plans in motion.

Gamini Karunathilake. Chief Executive Officer.

Customer relations… Whilst making internal adjustments to bring ourselves closer to customer, we have interacted with them on several occasions as gesture to understand them and their needs better. At the same time we welcomed their probes in order to give them a better understanding of our corporate culture. The three seminars held were part of the Corporate Social Responsibility program of the Bank to the corporate world in general and different levels of the business community. We carried out seminars on Global Financial Crisis and its impact to Sri Lanka, present position of the stock market and the need for regulation and restructuring organisations to achieve market leadership in the emerging economy of Sri Lanka. The Investment Day held on 26 October 2010 successfully celebrated by many participants and was a collective effort for the capital market industry. In addition, the micro level interaction we had with rural folks during ‘Siyath Saviya’ was an illuminating experience, as we gained deep insight into the current needs and aspirations of underprivileged people who are striving to reestablish themselves and pursue prosperity.

Induction Programme – The Vision, Mission and the Values of the Bank cascade to all new recruits, and an Employee Hand-Book is provided to every new employee in order to ensure that they understand and willingly abide by the Ethics and Values expected by the Bank. All members of MBSL team are expected to adhere to the code of ethics of the Bank which imbue core values of: • Displaying professional and personal integrity at all times • Demonstrate mutual respect in all interactions • Be passionate about whatever we do • Be committed to be Customer oriented • Be courageous to change and be positively different Recruitment of Management Trainees – With a view to ensuring an effective Succession Plan for the Bank, arrangements are made to recruit 20 Management Trainees after a vigorous and an intensive screening process. They will be subject to an effective ‘Hands – on’ training consisting of rotations between Branches and Departments in the Head Office. This training will help them assume strategic positions of the Bank in the future. We also offer young under graduates with the opportunity of facing valuable exposure to the Corporate World through our intensive programmes. This scheme is designed to facilitate the practical development to make the graduate students to indulge and thrive in the corporate culture. Age-wise Analysis of Employees

Custome r

18 < 25 < 35 < 40 < 45 < 50 < 55 <

25 35 40 45 50 55 60

care… Customer satisfaction is intrinsic to success of any organization. We have placed a methodical customer survey record base to evaluate and improve our products and services. These findings have helped to shape our focus on many issues; be it business or relationships, to a level that give us a ‘complete scenario’ on many domestic topics.

Gender-wise Analysis of Employees

Employee relations. MBSL Bank is now well recognized as a preferred employer in the financial industry that provide equal opportunity where employment, promotions, rewards and remunerations are handled in a transparent manner. We do our best to recruit team members from every part of the country, especially where the Branches are located, so that our team members continue to live in their neighborhood and communities, giving them a healthier work life.

Male Female

Formulation of Human Resources Policies – Since the Corporate Governance emphasise the need to balance the achievements of corporate objectives against the need for a sound framework of control. HR division remodeled existing policies related to recruitment, selection and promotion procedures including career development plan and introduced a structured salary scheme for all levels of hierarchy to inculcate a culture of accountability, fairness and transparency in the Bank. 29

Service - wise Analysis of Employees

5 < 5 < 10 10 < 15 15 < 20 20 < 25 < 25

Employee Productivity Indicators LKR 2009 2010 Revenue per employee 7,861 9,175 Net profit per employee 1,361 2,725 Learning & Development – Value added per employee 2,660 5,018 Total Assets per employe 39,849 43,305 Learning & Development, a predominant and influential factor in the entirety of the Bank, is centric to our winning culture. With the Annual Training Needs Analysis and Annual Training Plan, the Industrial relationsHR Division make effort to ensure that training needs and training Industrial harmony is important for smooth functioning of the Bank. aspirations are matched according to the Bank’s ultimate vision. Hence, the Bank has extended its invitation to the Trade Union to participate at Corporate Management Meetings and Managers’ Meetings where they could raise their concerns towards the decisions being made by the Management. In addition, they are fully aware of the direction of the Bank, in turn could educate their membership, where it is needed. Signing of Collective agreement for 2011/2012 The Bank renewed the Collective Agreement for 2011/2012, with employees a day prior to its expiry. This agreement has boosted the moral of the staff since there is more transparency and specially introduction of the salary structure covering all levels of hierarchy in the Bank. Breakfast Meeting on the first day of the Calendar Month We strive to develop an open communication culture with our employees, especially when executing the agreed budget and goals of the Bank. We aim to explain and make the staff be aware of the business rationale for changes, clarifying how we plan to implement them and of course, outline what are the changes we envisage suggestions, both from teams and individual perspective at these meeting. This forum is expected to have open discussions where ideas, suggestions and constructive criticism are welcomed and debated. Monthly Meeting with the staff are held by the Departments and Branches where they discuss issues and find solutions pertaining to customer services, business development, general problem solving and grievances with greater effectiveness. Rewards and Recognition – Work quality, timely delivery, cost effectiveness and meeting stipulated targets are some of the vital criteria pertaining to the Performance Management initiative. This process is directly linked to the recognition and rewards. We are proud to announce that our team members of Kurunegala Branch were smart enough to receive ‘Best Branch Award’ of the year, thus they were incentivised with an overseas holiday trip to Malaysia.

Local Training – Out Bound Training – A Corporate Retreat & Team Building Program with the theme “Team Building & Bonding leadership and Re-Energizing” for all staff members was organized at Kitulgala, with the guidance of Green Life Adventures. 125 employees participated in this Program and the key challenges were Creating & Building Trust, Thinking outside the Box, Achieving Goals as a Team, High Morale and Meeting Challenges etc.

Today, we are considered a specialist merchant bank that the public trust. As a result our last yearâ&#x20AC;&#x2122;s growth was dramatic. Every institution we supported have become profitable and contributed significantly to the bottom line. They will be on their own very soon. A M A Cader Deputy Director - Corporate Advisory and Capital Markets.

Progressing together... 31

Overseas Training –

Building Relationships and Entertainment –

Overseas training opportunities are availed to those deserving employees with the aspirations of developing further skills.

Team culture and togetherness can only be nurtured through holistic recreation activities. The Bank emphasise on team welfare to create a more conducive and productive work environment that will ensure happy and contended work force. Hence, the Bank continues annual and periodic events, consisting of families together.

Name & Name Of The Conducted By Designation Workshop/ Programme

Bank’s Anniversary

Mr Gamini 3rd Annual Middle East Bahrain Karunathilake, Risk Management Forum Chief Executive for financial services 2010 Officer

The Bank’s anniversary falls on 4th March and hence, the celebration of 28th Anniversary was held on 4th March 2010, with religious ceremonies invoking the blessings of all religions.

Ms Lalangi Business Growth through NIBM Campus, Goonewardena, Customer Relationship Pune, India Manager – Management Corporate Advisory & Capital Markets Mr J A Pradeep Business Growth through NIBM Campus, Thushara Customer Relationship Pune, India Manager – Management Anuradhapura Branch Mr Ruwan Piyadasa Business Growth through NIBM Campus, Deputy Manager – Customer Relationship Pune, India Finance & Treasury Management Management Ms Amitha Restructuring HR NIBM Campus, Samarasinghe, (Manpower Development Pune, India Asst Director – During Transition) Group HR M Devika Perera, Retain Lending Strategies Branch Manager – City Branch Programme participation

Designation

Senior Management

yyyyyyyY

Senior Manager/ Manager

yyyyyyyYY

Asst. Manager/ Deputy Manager

yyyyyyyYYYYYYYYY

Executive/ Junior Executive

yyyyyyyYYYYYYYYYYY

Clerical & Office Assistant

yyyyyyyYYYYYYYYYYY

No. of Persons

Musical show A musical show of Artists – Victor Ratnayake, Sunil Edirisinghe, Amarasiri Peiris and Neela Wickremasinghe was held on 18th September 2010. The event was organised by the MBSL Welfare & Recreation Club as a fund raising activity.

Investor relations…Return for Equity holders As the vote of confidence our shareholders have placed in us is of paramount importance, we have been continuously enhancing the stock value and offering returns over 12% on their equity. Commitment to lenders… The lending institutions are a vital segment of MBSL overall program and their assistance at rates that are reasonable have enabled us to be more competitive in the market place. Donation to Flood Victims MBSL together with our Subsidiary, Merchant Credit of Sri Lanka Ltd, donated essential items to the Sri Lanka Army, for distribution among flood victims in Eastern Province. Annual Get-together in “Jetliner Ship”The Bank’s Annual Get-together was held on 29th December 2010 on board the vessel; Jetliner giving a novel experience for staff members and their family members with an evening of dazzling glamour and varied of entertainment. Social responsibility… Our responsibility and obligations towards public and social activities continue keenly focusing on identifying areas that need assistance. Instead of ‘Quick - fix’ remedies, we focused more on their abilities and help develop them to become a part of the national development drive. For that we selected several remote areas where the people had talent and raw resources, but hardly any funding or for that matter business direction. They knew how to cultivate, grow livestock, grow flowers or fix machinery. But with no knowledge of how to convert those skills to currency their individual growth was somewhat stunted.

We stepped in as an extension of our social responsibility endeavour to help them think in a little larger scale and assisted them with necessary funding and advice. We are certain that our assistance to convert their unutilised resources, talents and assets into performing status will usher a new lease of life for them. Since the commencement of these financial facilities, 140 low - income families in the areas of Galenbindunuwewa, Kekirawa, Thambuttegama, Haputale, Neluwa, Kalawana, Narammala, Alawathugoda & Tissamaharamaya have benefitted immensely. These loan facilities were utilised for cultivation of coconut, vegetable, paddy, floriculture, banana & tea plantation. Community relations - Scholarships for Ranaviru families. As a mark of gratitude for our fallen war heros, In 2009 we established a Trust Fund to help 30 children of those bereaved families and last year we were joined by MCSL as well to carry this mission forward. This assistance will help fund them until they complete their ordinary level examination. This gesture also is a part of our CSR activities to cultivate potential future human assets that will be useful to the nationâ&#x20AC;&#x2122;s needs. Branch expansion During last year MBSL expanded Ambalantota and Vauniya with much roamed through the township creating in those communities and the response potential.

branch network to pageantry. Our staff a broader awareness indicated tremendous

It is at times like these that our culture shines through ...ever so bright. We’re proud of the way our members have responded to uncertain times. Their tenacity and ‘can - do’ attitude are the qualities we need to springboard ourselves to greater heights... Amitha Samarasinghe. Asst. Director –Group Human Resource.

Building relationships... 35

Environment relationsâ&#x20AC;ŚEffective waste management The environmentally sound initiatives we have established has become a complete success, as every member is now mindful of their obligations. The energy saving, waste minimizing and recycling efforts has become a second nature and the tangible results are heart warming. The new environment conscious culture and practices have now extended to their homesteads and neighbourhoods too.

Moving towards

Green

Their support, be it going green for official or personal purposes, automatic switch off of unused power sources, not only using trash bins for discards but constant clearing them for recycling and supporting every effort that will heal the impaired globe is showing significantly in the balance sheet. The upside of this ambitious venture is that the system is now performing on its own and breeding voluntary commitment from all sides. Respect for individuality. The respect that MBSL as a Company and the staff as a community has for each other is unique and practised at every possible occasion, shows solidarity and equality, where religious and cultural observances are a common place.

Minimising energy

Waste

Healing the world

Garbage Free

society

Compliance with Regulatory Requirements. The Company is fully committed to required regulatory directives and comply with the monthly and quarterly reporting requirements to Central Bank of Sri Lanka. The Company also adheres to Central Bank of Sri Lanka â&#x20AC;&#x201C; Direction No.5 on Finance Leasing (Reserve Fund) by maintaining a Reserve Fund equivalent to 7% of profit for the year. The Company also comply with Tax and other reporting requirements set by the respective regulatory authorities.

We are extending our focus towards customers and markets that have sprung up lately. Weâ&#x20AC;&#x2122;ll go wherever our customers go and provide them with the services and support they need... Lakshman Kaluarachchi.

Deputy Director â&#x20AC;&#x201C; Leasing

Searching markets... 37

Corporate Governance As a responsible corporate citizen, MBSL is committed to building good relationships with its stakeholders including shareholders, management, employees, customers, lenders and the society at large. MBSL believes in maintaining the highest ethical standards in its corporate activities. This aspect is made clear to the Group through the promotion of MBSL’s core value: Good Governance. Our corporate governance practices are intrinsic to the Company’s growth and wellbeing, as it clearly defines the legal and operational framework by which the Company directs and controls its activities in order to create value for its stakeholders. The Board of Directors as the highest governing authority is responsible to stakeholders for the sustainable development of the Company. The Board identifies “Corporate Governance” as one of its key responsibilities and ensures that the company observes highest ethical standards and follows best practices in its pursuit to achieve corporate objectives. The Management also demonstrates its commitment towards good corporate governance through transparency and accountability in conducting business matters in a highly competitive and dynamic corporate environment. The governance structures of the company are subject to constant review by the Board where it verifies the availability of a sound financial reporting system, the integrity of the financial statements being released to stakeholders, compliance with statutory and regulatory requirements etc., The Company mainly complies with Listing Rules issued by the Colombo Stock Exchange as well as the Finance Leasing (Corporate Governance) Direction No.4 of 2009 issued by the Central Bank of Sri Lanka under section 34 of the Finance Leasing Act No.56 of 2000 which is applicable to every registered finance leasing establishment with effect from 1 January 2010.

Compliance with Listing Requirements on Corporate Governance Rules for Listed Companies issued by the Colombo Stock Exchange

CSE Rule No.

Governance Requirement

7.10.1

Non-Executive Directors a. - -

The board of directors of a Listed Entity shall include at least, two non-executive directors; or such number of non-executive directors equivalent to one third of the total number of directors which ever is higher

The total number of directors is to be calculated based on the number as at the conclusion of the immediately preceding Annual General Meeting

Compliance status/ level of compliance

Complied with-All eight directors who comprise the Board are Non-executive Directors

c. any change occurring to this ratio shall be rectified within ninety (90) days from the date of the change. 7.10.2

Independent Directors a.

Where the constitution of the board of directors includes only two non-executive directors in terms of Rule 7.10.1 above, both such non-executive directors shall be “independent “.In all other instances two or 1/3rd of non-executive directors appointed to the board of directors which ever higher shall be “independent”

Complied with- Five out of the eight Directors are independent in terms of the criteria defined by CSE Rule 7.10.4 on Corporate Governance

The board shall require each non-executive director to submit a signed and dated declaration annually of his/her independence or non-independence against the specified criteria.

Complied with-All non-executive directors have submitted their declarations on Independence in conformity with this Rule.

CSE Rule No.

Governance Requirement

7.10.3

Disclosure relating to Directors a. The board shall make a determination annually as to the independence or non- independence of each non-executive director based on such declaration and other information available to the board and shall set out in the annual report the names of directors determined to be independent b. In the event a director does not qualify as “ independent” against any of the criteria set out below but if the board, taking into account all the circumstances, is of the opinion that the director is nevertheless “independent” the board shall specify the criteria not met and the basis for its determination in the annual report. c. In addition to disclosures relating to the independence of a director set out above, the board shall publish in its annual report a brief resume of each director on its board which includes information on the nature of his/her expertise in relevant functional areas. d.

7.10.5

Upon appointment of a new director to its board, the Entity shall forthwith provide to the Exchange a brief resume of such director for dissemination to the public. Such resume shall include information on the matters itemized in paragraphs (a),(b) and (c) above.

Compliance status/ level of compliance

Complied with - The Board reviewed the declarations on independence of directors and determined their independence. Please refer page 52 for details.

As the Board has adequate number of independent directors, there was no requirement to specify a director as independent beyond the criteria set out by the CSE.

Complied with - Resume of each Director is given on pages 8 - 9.

Complied with - The Company has provided the required information to the Exchange upon appointment of new Directors.

Remuneration Committee a. Composition The Remuneration Committee shall comprise ; of a minimum of two independent non-executive directors (in instances where an Entity has only two directors on its Board); or of non-executive directors a majority of whom shall be independent, which ever is higher.

Complied with -Remuneration Committee which is referred to as the Compensation & Corporate Governance Committee (CCGC), consists of four Nonexecutive Directors, three of whom are independent.

One non-executive director shall be appointed as Chairman of the committee by the board of directors b. Functions The Remuneration Committee shall recommend the remuneration payable to the executive directors and Chief Executive Officer of the Listed Entity and/or equivalent position thereof, to the board of the Listed Entity which will make the final determination upon consideration of such recommendations.

Complied withThe Functions of the CCGC are given on page 52.

a. Disclosure in the Annual Report The annual report should set out the names of directors (or persons in the parent company’s committee in the case of a group company) comprising the remuneration committee, contain a statement of the remuneration policy and set out the aggregate paid to executive and non-executive directors.

Complied with-The Names of the members of the CCGC are given on page 52. Fees & other emoluments paid to Directors are disclosed in Notes to Financial Statements on page 101.

Corporate Governance...cont’d/ CSE Rule No.

Governance Requirement

7.10.6

Audit Committee

Compliance status/ level of compliance

a. Composition The audit committee shall comprise; of a minimum of two independent non-executive directors (in instances where an Entity has only two directors on its board); or of non-executive directors a majority of whom shall be independent, which ever shall be higher. One non-executive director shall be appointed as the Chairman of the committee by the board of directors Unless otherwise determined by the audit committee, the Chief Executive Officer and the Chief Financial Officer of the Listed Entity shall attend audit committee meetings. The Chairman or one member of the committee should be a Member of a recognized professional accounting body.

The Audit Committee comprises of three Non - executive Directors who were appointed with a view to ensure effective functioning of the Audit Committee. Two out of the three members are nominee directors from the parent company, Bank of Ceylon, one of whom is the alternate director as well as the Chairman of the Audit Committee of the parent company. He is the only member of the Board having membership in a professional accounting body. The other member is from the senior management staff of the parent company having experience and expertise in the Banking and Finance industry. The Board is in the process of taking appropriate steps to meet the requirement.

b. Functions Shall include, (i) Overseeing of the preparation, presentation, and adequacy of disclosures in the financial statements of a Listed Company, in accordance with Sri Lanka Accounting Standards.

Complied with - The functions of the Audit Committee are given in the Audit Committee Report on page 62.

(ii) Overseeing of Entity’s compliance with financial reporting requirements, information requirements of the Companies Act and other relevant financial reporting related regulations and requirements. (iii) Overseeing the processes to ensure that the Entity’s internal controls and risk management are adequate to meet requirements of the Sri Lanka Auditing Standards. (iv) Assessment of the independence and performance of the Entity’s external auditors. (v) To make recommendations to the board pertaining to appointment, re-appointment and removal of the external auditors.

c. Disclosure in the Annual Report The names of the directors (or persons in the parent company’s committee in the case of a group company) comprising the audit committee should be disclosed in the annual report. The committee shall make a determination of the independence of the auditors and shall disclose the basis for such determination in the annual report. The annual report shall contain a report by the audit committee setting out the manner of compliance by the Entity in relation to the above, during the period to which the annual report relates.

The names of members of the Audit Committee and its Report are given on page 62. The Audit Committee has reviewed the performance of the external auditors during the financial year 2010 and is of the view they are independent and do not have any interest in contracts of the Company or its subsidiaries and of its associate Company

finance leasing (corporate governance) direction n0.4 0f 2009 for registered finance leasing establishments

Section

Governance Requirement

The Responsibilities of the Board (i) The Board of Directors (hereinafter referred to the Board) shall strengthen the safety and soundness of the relevant establishment bya) approving and overseeing the relevant establishment’s strategic objectives and corporate values are communicated throughout the relevant establishment; b) approving the overall business strategy of the relevant establishment, including the overall risk policy and risk management procedures and mechanisms with measurable goals, for at least immediate next three years; c) identifying risks and ensuring implementation of appropriate systems to manage the risks prudently; d) approving policy of communication with all stake holders, including lenders, creditors, shareholders and borrowers; e) reviewing the adequacy and the integrity of the relevant establishment’s internal control systems and management information systems; f) identifying and designing key management personnel who are in a position to (i) significantly influence policy ; (ii) direct initiatives; and (iii) exercise control over business activities, operations and risk managements; g) defining the areas of authority and key responsibilities for the Board and for the key management personnel

Compliance status/ level of compliance

Complied with- The Board is responsible for formulating overall strategies of the Company, reviewing & updating risk management mechanisms and ensuring adequacy and effectiveness of internal systems & controls. The Board has also established appropriate processes to cover the following: (i) identification of key management personnel who could influence policy, direct initiatives , exercise control over business operations & activities and risk management. (ii) identification of authority and key responsibilities of the Board and those of the Senior Management (iii) oversight of affairs of the Company by the Senior Management to assess the effectiveness of the Company’s governance practices (v) succession plan for key management personnel (vi) review of policy and progress towards corporate objectives (vii) importance of adhering to regualtory requirements.

h) ensuring that there is appropriate oversight of the affairs of the relevant establishment by key management personnel, that is consistent with the relevant establishment’s policy; i) periodically assessing the effectiveness of its governance practices, including (i) the selection, nomination and election of directors and appointment of key management personnel; (ii) the management of conflicts of interests; and (iii) the identification of weaknesses and implementation of changes where necessary; j)ensuring that the relevant establishment has an appropriate succession plan for key management personnel; k) meeting regularly with the key management personnel to review policies, establish lines of communication and monitor progress towards corporate objectives; l) understanding the regulatory environment m) exercising due diligence in the hiring and oversight of external auditors (2) The Board shall appoint the Chairman and Chief Executive Officer (CEO)and define and approve the functions and responsibilities of the chairman and CEO in line with paragraph 7 of the Direction

Complied with.

Corporate Governance...cont’d/ Section

Governance Requirement

Compliance status/ level of compliance

(3) There shall be procedure determined by the Board to enable directors, upon reasonable request, to seek independent professional advice in appropriate circumstances, at the relevant establishment’s expense. The Board shall resolve to provide separate independent professional advice to directors to assist the relevant director(s) to discharge the duties to the relevant establishment.

The Company has obtained independent professional advice where necessary.

(4) A Director shall abstain from voting on any Board resolution in relation to matter to which he or any of his relatives or a concern, in which he has substantial interest, is interested and he shall not be counted in the quorum for the relevant agenda item at the Board meeting.

No such circumstances arose in the Board during the financial year under review.

(5) The Board shall have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the relevant establishment is firmly under its authority.

Matters to be referred to the Board are listed in the Delegated Authority Manual.

(6) The Board shall, if it considers that the relevant establishment is, or is likely to be, unable to meet its obligations or is about to become insolvent or is about to suspend payments due to lenders and other creditors, forthwith inform the Director of the Department of Supervision of NonBank Financial Institutions of the situation of the relevant establishment prior to taking any decision or action.

N/A

(7) The Board shall include in the relevant establishment’s Annual Report, an annual corporate governance report setting out the compliance with this Direction.

Complied with- the inclusion of this report in the Annual Report from page 38 - 52.

(8) The Board shall adopt a scheme of self – assessment to be undertaken by each director annually, and maintain records of such assessment.

The Board has initiated action to adopt a scheme of self assessment .

Meetings of the Board (i) The Board shall meet at least twelve times a financial year at approximately monthly intervals. Obtaining the Board’s consent through the circulation of written or electronic resolution/ papers shall be avoided as far as possible.

The Board met fifteen times during the financial year under review.

(2) The Board shall ensure that arrangements are in place to enable all directors to include matters and proposals in the agenda for regular Board meetings where such matters and proposals relate to the promotion of business and the management of risks of the relevant establishment.

Although the arrangements are in place, no such proposals have emerged.

(3) a notice of at least 7 days shall be given of a regular Board meeting to provide all directors an opportunity to attend. For other Board meetings, reasonable notice shall be given.

Complied with.

(4) A director who has not attended at least twothirds of the meetings in the period of 12 months immediately preceding or has not attended the immediately preceding three consecutive meetings held, shall cease to be a director. Provided, that participation at the director’s meetings through an alternate director shall, however, be acceptable as attendance.

Complied withThere was only one such instance during the period under review.

Section

Governance Requirement

Compliance status/ level of compliance

(5) The Board shall appoint a company secretary whose primary responsibilities shall be to handle the secretarial services to the Board and shareholder meetings and to carry out other functions specified in the statutes and other regulations.

Complied with- The Board has appointed the Company Secretary who carries out secretarial services to the Board and shareholder meetings and other functions specified in the statutes and regulations.

(6) If the chairman has delegated to the company secretary the function of preparing the agenda for a Board meeting, the company secretary shall be responsible for carrying out such function.

The agenda for Board meetings are prepared by the company secretary under the advice of the chairman.

(7) All directors shall have access to advice and services of the company secretary with a view to ensuring that Board procedures and all applicable laws, directions, rules and regulations are followed.

The company secretary provides all necessary assistance to directors.

(8) The company secretary shall maintain the minutes of Board meetings and such minutes shall be open for inspection at any reasonable time, on reasonable notice by any director.

Minutes of Board meetings are available for inspection upon reasonable notice.

(9) Minutes of Board meetings shall be recorded in sufficient detail so that it is possible to gather from the minutes, as to whether the Board acted with due care and prudence in performing its duties. The minutes of Board meeting shall clearly contain or refer to the following: (a) a summary of data and information used by the Board in its deliberations; (b) the matters considered by the Board; (c) the fact finding discussions and the issues of contention or dissent which may illustrate whether the Board was carrying out its duties with due care and prudence; (d) the explanations and confirmations of relevant executives which indicate compliance with the Board’s strategies and policies and adherence to relevant laws and regulations; (e) the Board’s knowledge and understanding of the risks to which the relevant establishment is exposed and an overview of the risk management measures adopted; and (f) the decisions and Board resolutions.

The Board minutes contain all relevant information and data considered by the Board for deliberations, explanations and confirmations given by officers of the Company relating to compliance with relevant laws and regulations, views and opinions expressed by directors on various aspects of matters which were deliberated including risk mitigation measures etc.

Composition of the Board (i) Subject to the transitional provisions contained herein, the number of directors on the Board shall not be less than 5 and not more than 9. (2) Subject to paragraph 5(1) and the transitional provisions contained herein, the total period of service of a director other than a director who holds position of chief executive officer or executive director shall be inclusive of total period of service served by such director up to the date of this direction. (3) Subject to the transitional provisions contained herein, an employee of a relevant establishment may be appointed, elected or nominated as a director of the relevant establishment (hereinafter referred to as an “executive director”) provided that a number of executive directors shall not exceed one-half of the number of directors of the Board. In such an event, one of the executive directors shall be the chief executive officer of the company. ((4) Commencing 01.01.2013, the number of independent non-executive directors of the board shall be at least one fourth of the total number of directors.

Complied with- The Board including the Chairman, comprises of eight Non – executive Directors. N/A

The Company has not appointed any executive directors.

Complied with- Five out of eight non-executive directors on the Board are independent in terms of section (4) defining independence of a director .

Corporate Governance...contâ&#x20AC;&#x2122;d/ Section

Governance Requirement

Compliance status/ level of compliance

(5) In the event an alternate director is appointed to represent an independent non-executive director. The person so appointed shall also meet the criteria that apply to the independent non-executive director.

No alternative directors have been appointed to the Board.

(6) Non-Executive directors shall have necessary skills and experience to bring an objective judgment to bear on issues of strategy, performance and resources.

Complied with- Directors qualifications and experience are given on pages 8 - 9.

(7) Commencing 01.01.2013, a meeting of the board shall not be duly constituted, although the number of directors required to constitute the quorum at such meeting is present, unless at least one third of the number of directors that constitute the quorum at such meeting are non-executive directors

Complied with.

(8) The independent non-executive directors shall be expressly identified as such in all corporate communications that disclose the names of directors of the relevant establishment. The relevant establishment shall disclose the composition of the board, by category of directors, including the names of the chairman, executive directors, non-executive directors and independent non-executive directors in the annual corporate governance report which shall be an integral part of its annual report.

Complied with.

(9) There shall be a formal, considered and transparent procedure for the appointment of new directors to the board. There shall also be procedures in place for the orderly succession of appointments to the board.

Complied withthere is a formal, transparent procedure in place for the appointment of new directors and for the orderly succession of appointments to the board.

(10)All directors appointment to fill a casual vacancy shall be subject to election by shareholders at the first general meeting after their appointment.

Complied with- all directors appointed to fill casual vacancies on the Board are subject to election by shareholders at the general meeting following their appointment.

(11) If a director resigns or is removed from office, the Board shall announce to the shareholders and notify the Director of the Department of Supervision of Non-Bank Financial Institutions regarding resignation of the director or removal and the reasons for such resignation or removal, including but not limited to information relating to the relevant directorâ&#x20AC;&#x2122;s disagreement with the Board ,if any.

Complied with- Upon resignation of Directors, the Director of the Department of Supervision of Non-Bank Financial Institutions has been notified.

Criteria to assess the fitness and propriety of directors (1) Subject to the transitional provisions contained herein, a person over the age of 70 years shall not serve as a director of a relevant establishment.

All the Directors of the Company are in compliance with this rule.

(2) A director of a relevant establishment shall not hold office as a director or any other equivalent position in more than 20 companies/societies/ bodies/corporate, including associate companies and subsidiaries of the relevant establishment. Provided that such director shall not hold office of a director or any other equivalent position in more than 10 companies that are classified as Specified Business Entities in terms of the Sri Lanka Accounting and Auditing Standards Act No.15 of 1995.

Not relevant.

Section

Governance Requirement

Management functions delegated to the Board (i) The Board shall not delegate any matters to a board committee, chief executive officer, executive directors or key management personnel, to an extent that such delegation would significantly hinder or reduce the ability of the Board as a whole to discharge its functions.

Compliance status/ level of compliance

Complied with- The Delegation of Authority is done by the Board in a manner that it does not hinder or impair the ability of the Board.

(2) The Board shall review the delegation of processes in place on a periodic basis to ensure that they remain relevant to the needs of the relevant establishment.

The Board regularly reviews the delegation process.

The Chairman and the Chief Executive Officer (1) The roles of the chairman and the chief executive officer shall be separated and shall not be performed by the one and the same person after three years commencing from January 1, 2010.

Complied with. The position of the Chairman and Chief Executive Officer are held by two different individuals. The Chairman and the CEO of the Company are Mr. M.R. Shah and Mr. Gamini Karunathilake respectively.

(2) The chairman shall be a non-executive director. In the case where the chairman is not an independent non-executive director, the Board shall designate an independent non-executive director as the Senior Director with suitably documented terms of reference to ensure a greater independent element. The designation of the Senior Director shall be disclosed in the relevant establishmentâ&#x20AC;&#x2122;s Annual Report.

Although the chairman is a Non-executive director, he is non-independent. The Board will be taking steps to comply with this section shortly.

(3) The Board shall disclose in its corporate governance report, which shall be an integral part of its Annual Report, the name of the chairman and the chief executive officer and the nature of any relationship [including financial, business, family or other material /relevant relationship(s)], if any, between the chairman and the chief executive officer and the relationships among members of the Board.

Complied with - There are no business or family relationships between the chairman and chief executive officer and/or among members of the Board which would affect their respective roles.

(4) The chairman shall : (a) provide leadership to the Board; (b) ensure that the Board works effectively and discharges its responsibilities; and (c) ensure that all key issues are discussed by the Board in a timely manner.

Complied with-The Chairman ensures that all important matters concerning the Company are deliberated by the Board of Directors in a timely manner in order that the Board works effectively and discharges its responsibilities The Directors have continuous access to Companyâ&#x20AC;&#x2122;s information from a variety of sources. All relevant information and documents required by the Directors are provided for deliberations. The Directors dedicate adequate time to discharge their duties and responsibilities. The agenda for board meetings is prepared by the company secretary as directed by the chairman.

(5) The chairman shall be primarily responsible for the preparation of the agenda for each Board meeting. The chairman may delegate the function of preparing the agenda to the company secretary. (6) The chairman shall ensure that all directors are informed adequately and in a timely manner of the issues arising at each Board meeting. (7) The chairman shall encourage each director to make full and active contribution to the Boardâ&#x20AC;&#x2122;s affairs and take the lead to ensure that the Board acts in the best interests of the relevant establishment.

The chairman briefs the directors of all issues arising at Board meetings sufficiently and on time.

(8) The chairman shall facilitate the effective contribution of non-executive directors in particular and ensure constructive relationships between executive and non-executive directors.

There are no executive directors on the Board at present.

9) Subject to the transitional provisions contained herein, the chairman shall not engage in activities involving direct supervision of key management personnel or any other executive duties whatsoever.

The Chairman supervises the operations and business of the Company at present.

Corporate Governance...cont’d/ Section

Governance Requirement

Compliance status/ level of compliance

(10) The chairman shall ensure that appropriate steps are taken to maintain effective communication with shareholders and that the views of the shareholders are communicated to the Board.

Complied with- The Annual General Meeting (AGM), Annual Report and Interim Financial Statements of the Company are the principal means of communication with shareholders. The Board invites the shareholders to raise their concerns on the affairs of the Company at the AGM as a means of maintaining an appropriate dialogue with them. The external Auditors and Lawyers are also present at the AGM to answer any queries raised by shareholders.

(11) The chief executive officer shall function as the apex executive-in-charge of day-to-day management of the relevant establishment’s operations and business.

Complied with- the chief executive officer is in charge of the Company’s day to day operations and business.

Board appointed Committees (1) Every relevant establishment shall have at least two board committees set out in paragraph 8(2) and 8(3) hereof. Each committee shall report directly to the board. Each committee shall appoint a secretary to arrange its meetings, maintain minutes, records and carryout such other secretarial functions under the supervision of the chairman of the committee. The board shall present a report on the performances, duties and functions of each committee, at the annual general meeting of the relevant establishment.

The Audit Committee, Compensation and Corporate Governance Committee and the Integrated Risk Management Committee which are Board appointed sub committees, regularly report to the Board.

(2) Audit Committee The following shall apply in relation to the Audit Committee:

a)The chairman of the committee shall be a nonexecutive director who possesses qualifications and experience in accountancy and/or audit.

The Chairperson of this committee is a non - executive director with expertise and wide experience in banking and financial services.

b) The majority of the board members appointed to the committee shall be non-executive directors.

Complied with.

c) The committee shall make recommendations on matters in connection with: (i) the appointment of the external auditor for audit services to be provided in compliance with the relevant statutes; (ii) the implementation of the Central Bank guidelines issued to external auditors from time to time, (iii) the application of the relevant accounting standards; and (iv) the service period, audit fee and any resignation or dismissal of the external auditor, provided that the engagement of an audit partner shall not exceed five years, and that the particular audit partner is not re-engaged for the audit before the expiry of three years from the date of the completion of the previous term.

Complied with.

d) The committee shall review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit processes in accordance with applicable standards and best practices.

Complied with.

Section

Governance Requirement

Compliance status/ level of compliance

e) The committees shall develop and implement a policy with the approval of the board on the engagement of an external auditor to provide nonaudit services that are permitted under the relevant statutes, regulations, requirements and guidelines. In doing so, the committee shall ensure that provision by an external auditor of non-audit services does not impair the external auditor’s independence or objectivity. When assessing the external auditors independence or objectivity in relation to the provision of non-audit services, the committee shall consider:

The external auditors do not provide any non audit services to the Company.

(i) Whether the skills and experience of the auditor make it a suitable provider of the non-audit services; (ii)) Whether there are safeguards in place to ensure that there is no threat to the objectivity and/or independence in the conduct of the audit resulting from the provision of such services by the external auditor; and (iii) Whether the nature of the non-audit services, the related fee levels and the fee levels individually and in aggregate relative to the auditor, pose any threat to the objectivity and/or independence of the external auditor. f) The committee shall, before the audit commences, discuss and finalize with the external auditors the nature and scope of the audit, including: (i) an assessment of the relevant establishment’s compliance with directions issued under the Act and the management’s internal controls over financial reporting; (ii) the preparation of financial statements in accordance with relevant accounting principles and reporting obligations; and (iii) the coordination between auditors where more than one auditor is involved.

Complied with.

g) The committee shall review the financial information of the relevant establishment, in order to monitor the integrity of the financial statements of the relevant establishment, its Annual Report, accounts and periodical reports prepared for disclosure, and the significant financial reporting judgments contained therein. In reviewing the relevant establishment’s Annual Report and accounts and periodical reports before submission to the Board, the committee shall focus particularly on:

Complied withThe Committee reviews Company’s financial statements including the quarterly unaudited financial statements and the audited financial statements prior to recommending same to the Board for approval.

(i) major judgmental areas; (ii) any changes in accounting policies and practices; (iii) significant adjustments arising from the audit; (iv) the going concern assumption; and (v) the compliance with relevant accounting standards and other legal requirements. h)The committee shall discuss issues, problems and reservations arising from the interim and final audits, and any matters the auditor may wish to discuss including those matters that may need to be discussed in the absence of key management personnel, if necessary.

The financial performance of the Company is also reviewed against Budget on regular basis and reported to the Board along with observations and recommendations.

Necessity not arisen.

Corporate Governance...cont’d/ Section

Governance Requirement

Compliance status/ level of compliance

i) The committee shall review the external auditor’s management letter and the management’s response thereto

The external auditor’s management letter and the management response thereto were discussed by the Committee.

j) The committee shall take the following steps with regard to the internal audit function of the relevant establishment:

Please refer the Audit Committee Report on page 62 for details relating to the Internal Audit Function of the Company.

(i) Review the adequacy of the scope, functions and resources of the internal audit department, and satisfy itself that the department has the necessary authority to carry out its work; (ii) Review the internal audit programme and results of the internal audit process and, where necessary, ensure that appropriate actions are taken on the recommendations of the internal audit department; (iii) Review any appraisal or assessment of the performance of the head and senior staff members of the internal audit department; (iv) Recommend any appointment or termination of the head, senior staff members and outsourced service providers to the internal audit function; (v) Ensure that the committee is apprised of resignations of senior staff members of the internal audit department including the chief internal auditor and any outsourced service providers, and to provide an opportunity to the resigning senior staff members and outsourced service providers to submit reasons for resigning; (vi) Ensure that the internal audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care; k) The committee shall consider the major findings of internal investigations and management’s responses thereto; l) The chief finance officer, the chief internal auditor and a representative of the external auditors may normally attend meetings. Other Board members and the chief executive officer may also attend meetings upon the invitation of the committee. However, at least once in six months, the committee shall meet with the external auditors without the executive directors being present.

Please refer the Audit Committee Report on page 62 for details.

m) The committee shall have: (i) explicit authority to investigate into any matter within its terms of reference; (ii) the resources which it needs to do so; (iii) full access to information; and (iv) authority to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary.

n) The committee shall meet regularly, with due notice of issues to be discussed and shall record its conclusions in discharging its duties and responsibilities.

The Committee meets once a month to review performance against budgets and to address other related issues that are within its scope.

o) The Board shall, in the Annual Report, disclose in an informative way, (i) details of the activities of the audit committee; (ii) the number of audit committee meetings held in the year; and (iii) details of attendance of each individual member at such meetings.

Please refer page 52 for details of attendance of each individual member at committee meetings.

Section

Governance Requirement

Compliance status/ level of compliance

p) The secretary to the committee (who may be the company secretary or the head of the internal audit function) shall record and keep detailed minutes of the committee meetings.

The company secretary records and maintains proceedings of committee meetings.

q)The committee shall review arrangements by which employees of the relevant establishment may, in confidence, raise concerns about possible improprieties in financial reporting, internal control or other matters. Accordingly, the committee shall ensure that proper arrangements are in place for the fair and independent investigation of such matters and for appropriate follow-up action and to act as the key representative body for overseeing the relevant establishment’s relations with the external auditor.

The Company has introduced a “whistle blowing policy” to enable employees to report any irregularities of the Company. In the event of any improprieties being reported, the Internal Audit Department is authorised to carry out an immediate inquiry into the matter and report its observations to the Chairman and the Audit Committee.

(3)Integrated Risk Management Committee The following shall apply in relation to the Integrated Risk Management Committee: a) The committee shall consist of at least one non-executive director, chief executive officer and key management personnel supervising broad risk categories, i.e., credit, market, liquidity, operational and strategic risks. The committee shall work with key management personnel closely and make decisions on behalf of the Board within the framework of the authority and responsibility assigned to the committee.

Mr. V Kanagasabapathy who is a non executive director of the Company is the Chairman of the Intergrated Risk Management Committee. Please refer page 26 - 27 for more details.

b) The committee shall assess all risks, i.e, credit, market, liquidity, operational and strategic risks to the relevant establishment on a monthly basis through appropriate risk indicators and management information. In the case of subsidiary companies and associate companies, risk management shall be done, both on the relevant establishment basis and group basis. c) The Committee shall review the adequacy and effectiveness of all management level committees such as the credit committee and the asset –liability committee to address specific risks and to manage those risks within quantitative risk limits as specified by the committee. d) The committee shall take prompt corrective action to mitigate the effects of specific risks in the case such risks are at levels beyond the prudent levels decided by the committee on the basis of the relevant establishment’s policies and regulatory and supervisory requirements. e) The Committee shall, at least quarterly, assess all aspects of risk management including updated business continuity plans. f) The committee shall take appropriate actions against officers responsible for failure to identify specific risks and take prompt corrective actions as recommended by the committee, and/or as directed by the Director of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka. g) The Committee shall submit a risk assessment report within a week of each meeting to the Board seeking the Board’s views, concurrence and/or specific directions.

Corporate Governance...cont’d/ Section

Governance Requirement

Compliance status/ level of compliance

h) The committee shall establish a compliance function to assess the relevant establishment’s compliance with laws, regulations, directions, rules , regulatory guidelines, internal controls and approved policies on all areas of business operations. A dedicated compliance officer selected from key management personnel shall carry out the compliance function and report to the committee periodically. 9

Related Party Transactions (2) The Board shall take necessary steps to avoid any conflicts of interest that may arise from any transaction of the relevant establishment with any person, and particularly with the following categories of persons who shall be considered as “related parties” for the purposes of this Direction:

Necessary steps are being taken to avoid any conflict of interest with related parties.

a) A subsidiary of the relevant establishment; b) Any associate company of the relevant establishment; c) A director of the relevant establishment; d) A key management personnel of the relevant establishment; e) A relative of a director or a key management personnel of the relevant establishment ; (4) The Board shall ensure that the relevant establishment does not engage in transactions with a related party in a manner that would grant such party “more favourable treatment” than that is accorded to an unrelated comparable counterparty of the relevant establishment. For the purpose of this paragraph “more favourable treatment” shall mean: a) Granting of “total net accommodation” to a related party, exceeding a prudent percentage of the relevant establishment’s regulatory capital, as determined by the Board. The “total net accommodation” shall be computed by deducting from the total accommodation, the cash collateral and investments made by such related party in the relevant establishment’s share capital and debt instrument with a remaining maturity of 5 years.. b) Charging a rate of interest lower than the relevant establishment’s best lending rate or paying a rate of interest exceeding the rate paid for a comparable transaction with an unrelated comparable counterparty. outstanding in respect of each category of related parties as a percentage capital funds of the relevant establishment’ c) Providing preferential treatment, such as favourable terms, covering trade losses and/or waiving fees/commissions, that extends beyond the terms granted in the normal course of business with unrelated parties; d) Providing or obtaining services to or from a related-party without a proper evaluation procedure; e) Maintaining reporting lines and information flows between the relevant establishment and any relate party which may lead to share proprietary, confidential or otherwise sensitive information that may give benefits to such related party, except as required for performance of legitimate duties and functions. 50

Complied with _ The Board has taken steps to ensure that the Company does not engage in transactions with a related party in a manner that would seem more favourable than that is extended to an unrelated comparable counterparty of the Company.

Section

Governance Requirement

Compliance status/ level of compliance

Disclosures (1) The Board shall ensure that annual audited financial statements and periodical financial statements are prepared and published in accordance with the requirements of the regulatory and supervisory authorities and applicable accounting standards.

Complied with-The annual audited financial statements and interim financial statements of the Company are published in compliance with accounting standards and applicable laws.

(2) The Board shall ensure that at least the following disclosures are made in the Annual Report: a) A statement to the effect that the annual audited financial statements have been prepared in line with applicable accounting standards and regulatory requirements , inclusive of specific disclosures.

Complied with -Please refer Accounting Policies from page 68 - 77.

b) A report by the Board on the relevant establishment’s internal control mechanism that confirms that the financial reporting system has been designed to provide a reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements has been done in accordance with relevant accounting principles and regulatory requirements.

Please refer page 60 for the relevant report by the Board .

c) The external auditors certification on the effectiveness of the internal control mechanism in respect of any statements prepared or published after 1 January 2011

Please refer page 60 for the external auditor’s certification.

d) Details of directors, including names, transactions with the relevant establishment.

Please refer pages 100 - 101 for details.

e) Fees/remuneration paid by the relevant establishment to the directors in aggregate, in the Annual Report s published after January 1,2011.

Please refer page 101.

f) Total net accommodation as defined in paragraph 9(7) outstanding in respect of each category of related parties and the net accommodation outstanding in respect of each category of related parties as a percentage capital funds of the relevant establishment.

Please refer Note No:53.c under Notes to the Financial Statements on Page 100.

g) The aggregate values of remuneration paid by the relevant establishment to its key management personnel and the aggregate values of the transactions of the relevant establishment with its key management personnel during the financial year, set out by broad categories such as remuneration paid, accommodation granted and borrowing through debt instruments or investments made in the relevant establishment.

Please refer Note No: 21.1 under Notes to the Financial Statements on Page 78.

h) A report setting out the details of the compliance with prudential requirements, regulations, laws and internal controls and measures taken to rectify any non-compliance.

Please refer Annual Report of the Board of Directors on the Affairs of the Company and The Statement of Directors’ Responsibilities on pages 56 - 58 & 59 respectively for details.

i) The external auditor’s certification of the compliance with the Act and directions issued by the Director of Department of Supervision of NonBank Financial Institutions in the annual corporate governance reports published after January, 2012.

Not relevant to the Financial Year under review.

Corporate Governance...cont’d/ Compensation & Corporate Governance Committee The Compensation and Corporate Governance Committee (CCGC), consists of Mr. M R Shah (Chairperson), Dr. Ranjith Bandara, Mr. Lakshman Perera and Mr. P G Rupasinghe all of whom are Non executive Directors. On the recommendation of the CCGC, a new remuneration policy was introduced to the Company based on Structured Salary Scales for all grades, which was effective from December 2010. It replaced the previous remuneration policy of the Company which was based on an appraisal system where achievements were compared against targets and objectives. The aggregate remuneration paid to the Board of Directors, which consists of fees and other emoluments paid by the Company, are disclosed on page 101. Attendance at Meetings of the Board & Sub-committees Meetings held during the FY 2010 Name of Director Board Audit Committee

Compensation & Corporate Governance Committee

No. of Meetings Held

M R Shah /NED/* (Note 1)

Ms. W A Nalani/NED/ *

M S S Paramananda/NED/**

Lakshman Perera/NED/**

P G Rupasinghe/NED/**

V .Kanagasabapathy/NED/*

Ranjith Bandara/NED/** (Note 2)

Lalith De Silva /NED/** (Note 3)

Note:

(1) Mr. M R Shah was appointed to the Board on 02 June 2010 (2) Dr. Ranjith Bandara ceased to be a director w.e.f. 29 April 2010. He was re-appointed to the Board on 02 June 2010. (3) Mr. Lalith de Silva was appointed to the Board on 02 June 2010. Mr. Janaka Ratnayake and Mr. J G B P Tissera who served on the Board during the period under consideration, have each attended four Board Meetings. Mr. Ratnayake has also attended one Meeting of the Compensation & Corporate Governance Committee Meeting while Mr. J G B P Tissera has attended four Meetings of the Audit Committee.

NED -Non Executive Director ** -Independent * -Non Independent

Senior Management Committee The Senior Management Committee (SMC) comprises of professionals with expertise in varied disciplines. The Chairman conducts the SMC Meetings which are held on a regular basis. Two representatives of the Company’s Union are also present at Meetings by invitation. The SMC implements Board decisions, prepares the Annual Budget and monitors performance against the Budget, ensures Statutory & Regulatory compliance, evaluates risks and return on investments. Several members of the SMC also serve on sub-committees of the SMC which operate under delegated authority of the Board. The Credit Committee evaluates credit proposals, conducts periodic reviews on the status of the lending portfolio to determine adequacy of provisioning, maintenance of solvency margins and ratios etc. The Purchasing Committee is authorized to recommend capital expenditure over LKR 20,000. Training Committee identifies and nominates staff members for local and overseas training programmes referred to by the Human Resources Department. Investment Committee provides direction on stock market investments in line with parameters decided by the Board. Incentive Committee ensures the accurate application of guidelines in terms of the Company’s Incentive Payment Policy in making actual payments to employees for a specific period.

Driven by transparent good governance to harmonise all factions with an aim to a single minded objective for the betterment of the company, secretarial support is the pivotal cog that harness the entire mechanism to reflect our true character.... Marina Phillips Asst. Director/ Company Secretary â&#x20AC;&#x201C; Corporate Secretarial Services

Harnessing forces... 53

Annul Report of the Board of Directors on the affairs of the Company

Directors’ Responsibilities

Directors’ Statement of Internal Controls

CEO’s an CFO’s Responsibility Statement

Audit Committee Report

Auditors’ Report

Income Statement

Balance Sheet Statement of Changes in Equity

Cash Flow Statement

Accounting Policies

Notes to the Financial Statements

Share & Debenture Information

104

Decade at a Glance

106

Statement of Value Added

108

Economic/ Financial Indicators

109

Contact Information

110

Our Team

112

Glossary of Financial Terms

117

Notice of Meeting

118

Form of Proxy

Financial Reporting

The Finance & Treasury division ensures financial health of the Company by sourcing funding from debt to equity, and meticulously evaluating the forms of borrowing, their structures, terms and conditions and relative costs while forecasting and managing Companyâ&#x20AC;&#x2122;s cash flows to sustain smooth continuity. Priyantha Herath.

Asst. Director â&#x20AC;&#x201C; Finance & Treasury Management.

Consolidating sustenance... 55

Annual Report of the Board of Directors on the

Affairs of the Company

The Board of Directors of Merchant Bank of Sri Lanka PLC has pleasure in presenting to the members their Annual Report on the affairs of the Company. The audited financial statements of the Company and the audited consolidated Group financial statements for the financial year ended 31st December 2010, and the Report of the Auditors thereon are also included in this Report. The financial statements were accepted and approved by the Board of Directors on 27 April 2011. The details contained in this Report provide the relevant information required by the Companies Act No.7 of 2007, the Rules of the Colombo Stock Exchange and Finance Leasing (Corporate Governance) Direction No. 4 of 2009. Merchant Bank of Sri Lanka PLC is a public listed company on the Colombo Stock Exchange. The Company has been reaffirmed a AA- rating with a stable outlook by RAM Ratings Lanka Limited. PRINCIPAL ACTIVITIES The Company continued to engage in Leasing & Hire Purchase, Trade Financing and Corporate Advisory and Capital Market activities as it’s core business during the period under consideration. During the latter part of the year under review, the Company commenced lending to SMEs and agriculture sector, as an initial step and with the view of diversifying its business activities in into a wider segment of the economy. REVIEW OF OPERATIONS A review of the operations of the MBSL during the financial year 2010 and results of those operations are contained in the Chairman’s Review (pages 10 to 13), the Chief Executive Officer’s Report (pages 16 to 18), and Management Discussion and Analysis (pages 22 to 25). These reports form an integral part of the Annual Report. During the year under review, MBSL continued to extend assistance to several ailing Finance Companies on a mandate given by the Central Bank of Sri Lanka. We are pleased to report that Asian Finance Limited, Ceylinco Building Society and The Finance PLC are now in a position to carry out their business operations independently, without external assistance. The Company expanded it’s branch network in the provinces by opening three new branches in Trincomalee, Ambalanthota and Vavuniya. STATED CAPITAL The Company’s Stated Capital stood at LKR 1,607 million as at 31 December 2010. SHAREHOLDING AND SHARE INFORMATION The Company had 11,507 registered shareholders as at 31 December 2010. The distribution of shareholding and details of the 20 largest shareholders, share performance and valuation information are given on pages 105. FUTURE DEVELOPMENTS An overview of the future developments of the Company is given in the Chairman’s Review (pages 10 to 13), the Chief Executive Officer’s Report (pages 16 to 18), and Management Discussion and Analysis (pages 22 to 25). FINANCIAL STATEMENTS The Audited Financial Statements of the Company and of the Group for the year ended 31 December 2010 have been prepared in line with applicable accounting standards and regulatory and statutory requirements, inclusive of specific disclosures. The said Audited Financial Statements duly signed by the Assistant Director, Finance & Treasury Management, the Chief Executive Officer and two of the Directors of the Company, are given on pages 64 to 65 and form an integral part of the Annual Report of the Board. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies adopted by the Company in the preparation of the Financial Statements and the impact of changes in the Sri Lanka Accounting Standards made during the year, are given on pages 68 to 77. INCOME, PROFIT & APPROPRIATIONS Provided below is a summary of the consolidated Financial results of the Group operations during the year ended 31 December 2010 2010 2009 (restated) LKR’Mn LKR’Mn Income 2,990 2,332.3 Operating profit before taxation 774.7 358.9 Taxation 233.7 73.6 Operating profit after taxation 492.3 229.5 Minority interest 48.6 55.8 Dividends paid 101.2 90.0 Transfer to retained earnings 348.2 116.9 EVENTS AFTER BALANCE SHEET DATE No circumstances have arisen since the balance sheet date, which would require adjustments to, or disclosure in, the accounts, except those disclosed under Note 56 to the Financial Statements.

DIVIDENDS The Directors have declared a First and Final Dividend of LKR 1.25 per share for the year 2010 (2009- LKR 0.75 per share) to be paid to holders of 135,000,000 ordinary shares issued by the Company. The Board is satisfied with the solvency test in terms of the provisions of the Companies Act No. 07 of 2007 immediately after the distribution of the proposed dividend payment for the year 2010. The Statement of Solvency prepared by the Board, was authorized by the Company’s Auditors, M/s SJMS Associates, Chartered Accountants. 56

CORPORATE DONATIONS During the year under review, the Company has made donations amounting to LKR 797,000.00 (2009 – LKR 93,000.00) in terms of the resolution passed at the last Annual General Meeting. This amount excludes contributions towards the Company’s Corporate Social Responsibility initiatives. TAXATION The Company is liable for income tax at the rate of 35% and Financial VAT at 20%. STATUTORY PAYMENTS The Board of Directors confirms that to the best of their knowledge and belief, statutory payments to all relevant regulatory and statutory authorities have been paid by the Company. PROPERTY, PLANT & EQUIPMENT The details of property, plant and equipment of the Company are given under Note 36 on page 91. DEBENTURES The total value of Debentures issued by the Company as at 31 December 2010 amounted to LKR 716.8 million details of which are given under Note 43 to the Financial Statements on page 93. OUTSTANDING LITIGATION In the opinion of the Directors and the Company’s lawyers, pending litigation against the Company disclosed under Note 49.2 of the Financial Statements will not have a material impact on the financial position of the Company or on its future operations. GOING CONCERN After considering the Financial position, operating conditions, regulatory and other factors and such matters, required to be addressed in terms of the Finance Leasing (Corporate Governance) Direction No. 04 of 2009 issued by the Central Bank of Sri Lanka, and the continuing Listing Rules of the Colombo Stock Exchange of Corporate Governance, the Directors have a reasonable expectation that the Company possesses adequate resources to continue in operation for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Financial Statements. THE BOARD OF DIRECTORS The Board assumes overall responsibility to the shareholders for setting the direction of the Company through the establishment of policies and key strategic objectives and ensuring that their implementation is in line with the Company’s vision and values. The Directors are accountable for proper guidance of the Company’s affairs and share collective responsibility in ensuring the highest standards of ethics and integrity in the conduct of business of the Company. The Board also bears ultimate responsibility for maintaining the integrity of Financial information and the effectiveness of the Company’s systems of internal control and risk management. The Board has also appointed Board sub-committees, namely the Audit Committee, Integrated Risk Management Committee and the Compensation & Corporate Governance Committee, to ensure oversight, control over certain affairs of the Company conforming to corporate governance standards of the Central Bank of Sri Lanka, the Listing Rules of the Colombo Stock Exchange by adopting the best practices. It is the considered view of the Board that the Company has taken necessary precautions to safeguard the interests of its stakeholders. Please refer page 38 for the Report on Corporate Governance for further details. As at 31 December 2010 the Board of Directors of the Company consisted of eight Directors with wide commercial knowledge and experience. Brief profiles of Board of Directors are given on pages 8 to 9. M R Shah (Chairman) Ms. W A Nalani M S S Paramananda Lakshman Perera P G Rupasinghe V Kanagasabapathy Ranjith Bandara Lalith De Silva

Non Executive Director Non Executive Director Non Executive Independent Director Non Executive Independent Director Non Executive Independent Director Non Executive Director Non Executive Independent Director Non Executive Independent Director

In terms of Article 88 of the Articles of Association of the Company, Mr. Lakshman Perera retires by rotation and being eligible, offers himself for re - election. In terms of Article 94 of the Articles of Association of the Company, Dr. Ranjith Bandara and Mr. Lalith De Silva who were appointed to the Board since the last Annual General meeting of the Company, offer themselves for re- election. APPOINTMENTS AND RESIGNATION OF DIRECTORS Mr. Janaka Ratnayake resigned from the Directorate with effect from 12 May 2010. Mr. J G B P Tissera resigned from the Directorate with effect from 17 May 2010. Mr. M R Shah was appointed to the Board as the Chairman with effect from 02 June 2010. Dr. Ranjith Bandara who ceased to be a Director with effect from 29 April 2010 was re - appointed to the Board on 02 June 2010. Mr. Lalith De Silva was appointed to the Board with effect from 02 June 2010. INTERESTS REGISTER In terms of the Companies Act No.7 of 2007, an Interests Register is maintained by the Company. All the Directors have made general declarations as provided for in section 192(2) of the Companies Act No. 7 of 2007. Note No 53 to the Financial Statements dealing with related party disclosures includes details of their interests in transactions of the Company. 57

Annual Report of the Board of Directors on the Affairs of the Company...cont’d/ DIRECTORS’ REMUNERATION Directors’ fees and emoluments paid during the year are as follows: Company Group LKR. LKR. Directors’ Fees and Emoluments 4.6. million 12.9 million The Board appointed Mressrs. Lakshman Perera, M S S Paramananda and P G Rupasinghe to oversee the functions of The Finance Company PLC, Asian Finance Limited and Ceylinco Building Society respectively and approved a monthly allowance of LKR 75,000.00 to be paid to each director. (Mr Laksman Perera from June - Dec 2010, Mr. M S S Paramananda from May - Oct 2010 and Mr P G Rupasinghe from June - October 2010). Details of Directors’ fees and other emoluments paid during the year 2010 are provided under Note No. 53.d to the Financial Statements on page 101. DIRECTORS’ MEETINGS The number of Directors Meetings which comprises of Board meetings, Audit Committee meetings, Integrated Risk Management Committee meetings and the Compensation & Corporate Governance Committee meetings together with the attendance of each Director at these meetings during the year are tabulated in the Corporate Governance Report in page 38 of this Report. DIRECTORS’ INTEREST IN SHARES OF THE COMPANY Except Mr. J G B P Tissera who held 3000 shares at the date of his resignation from the Board of MBSL on 17 May 2010, none of the other Directors of the Board held shares of the Company during the year under review. DIRECTORS’ RESPONSIBILITY FOR FINANCIAL REPORTING The Directors are responsible for the preparation of the financial statements of the Company to reflect a true and fair view of its state of affairs. The Directors are of the view that these Financial Statements have been prepared in conformity with the requirements of Sri Lanka Accounting and Auditing Standards, Companies Act No. 7 of 2007 and the Listing Rules of the Colombo Stock Exchange. The statement of Directors’ Responsibilities given on page 59 forms an integral part of the Annual Report of the Board of Directors. RELATED PARTY TRANSACTIONS The Directors have also disclosed the transactions, if any, that could be classified as related party transactions in terms of Sri Lanka Accounting Standard 30, Related Party Disclosures (revised 2005), which is adopted in the preparation of the Financial Statements. Those transactions disclosed by the Directors are given in Note 53 to the financial statements forming part of the Annual Report of the Board. ENVIRONMENT The Company has used its best endeavours to comply with the relevant environmental laws and regulations. The Company has not engaged in any activity that is harmful or hazardous to the environment. CORPORATE GOVERNANCE In the management of the Company, the Directors have placed emphasis in conforming to the best corporate governance practices and procedures. Accordingly, systems and structures have been introduced / improved from time to time to enhance risk management measures and to improve accountability, transparency and financial discipline.The Company’s status of compliance with these rules is stated in the Corporate Governance Report on pages 38 to 52. COMPLIANCE WITH LAWS AND REGULATIONS MBSL as a listed company has at all times ensured that it complied with the applicable laws and regulations including the listing rules of the Colombo Stock Exchange. The respective divisional heads responsible for compliance, table a report on compliance at monthly meeting of the Board of Directors. RISK AND INTERNAL CONTROLS The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by MBSL and this process includes enhancing the system of internal controls as and when there are changes to business environment or regulatory guidelines. The Board has established an ongoing process for identifying an , evaluating and managing the significant risks faced by MBSL and this process includes enhancing the system of internal controls as and when there are changes to business environment or regulatory guidelines. HUMAN RESOURCES The Company continued to implement appropriate Human Resource Management Policies to develop employees and optimize their contribution towards the achievement of corporate objectives. These policies and procedures ensure the equitable treatment of all employees which has resulted in high motivation. AUDITORS The Company’s Auditors during the period under review were M/s SJMS Associates, Chartered Accountants.The Board has authorized the payment of LKR 715,000 as Audit Fees for the year 2010. (The Auditors were paid LKR 650,000.00 as Audit Fees for the year 2009). The retiring Auditors, M/s SJMS Associates, Chartered Accountants, have expressed their willingness to continue in office for the financial year 2011. A resolution to re-appoint M/s SJMS Associates and to authorize the Directors to determine their remuneration will be proposed at the Annual General Meeting to be held on 24 June 2011. ANNUAL GENERAL MEETING The Annual General Meeting will be held on the 24 June 2011. The notice of the meeting relating to the Twenty Ninth Annual General Meeting is given on page 118. This Annual Report is signed for and on behalf of the Board of Directors by:

M R Shah Dr. Ranjith Bandara Ms. Marina Phillips Chairman Director Company Secretary 58 27th April 2011

Statement of Directorsâ&#x20AC;&#x2122; Responsibilities The Directors of the Company are responsible for the preparation and presentation of the Companyâ&#x20AC;&#x2122;s financial statements to the shareholders in accordance with the relevant provisions of the Companies Act No.07 of 2007 and other statutes which are applicable in the preparation of financial statements. The responsibilities of the External Auditors in relation to the Financial Statements are set out in the Auditorsâ&#x20AC;&#x2122; Report in page 63 of the Annual Report. The Financial Statements comprise of: *

A Balance Sheet, which presents a true and fair view of the state of affairs of the company and its subsidiaries as at the balance sheet date; and

An Income Statement, which presents a true and fair view of the profit and loss of the Company and its subsidiaries as at the balance sheet date

In preparing the financial statements of the Company and its subsidiaries for the year ended 31 December 2011, the Directors confirm that appropriate accounting policies have been selected and applied consistently. Reasonable and prudent judgments and estimates have been made and applicable accounting standards have been followed. The Directors are of the view that the Company and its subsidiaries have adequate resources to continue in business for the foreseeable future and have applied the going concern basis in the preparation of these financial statements. The Directors have also taken such reasonable steps to safeguard the assets of the Company and its subsidiaries to prevent and detect frauds and other irregularities. In this context, the Directors have given due consideration to the establishment of appropriate internal control systems. The Directors are responsible to ensure that the Company and its subsidiaries maintain sufficient accounting records enabling to disclose, with reasonable accuracy , the financial position of the entities and also to be able to ensure that the Financial Statements of the Company and its subsidiaries meet with the requirements of the Companies Act, Listing Rules of the Colombo Stock Exchange, Directions issued by the Central Bank of Sri Lanka and generally accepted accounting policies and principles. . The Directors have provided the external auditors with every opportunity to carry out any reviews and tests which they consider appropriate and necessary for the performance of their responsibilities. The Directors also confirm to the best of their knowledge that all taxes, levies and financial obligations of the Company and the subsidiaries have been either paid or adequately provided for in the Financial Statements. The Directors are of the view that they have discharged their responsibilities as set in this Statement. By Order of the Board

Ms. Marina Phillips Company Secretary 27th April 2011

Directors’ Statement on Internal

Controls

RESPONSIBILITY In line with the Finance Leasing Direction No. 4 of 2009, section 10 (2) (b), the Board of Directors present this report on Internal Controls. The Board of Directors (“Board”) is responsible for the adequacy and effectiveness of Merchant Bank of Sri Lanka PLC’s (MBSL) system of internal controls. However, such a system is designed to manage the MBSL’s key areas of risk within an acceptable risk profile, rather than eliminate the risk of failure to achieve the policies and business objectives of MBSL. Accordingly, the system of internal controls can only provide reasonable but not absolute assurance against material misstatement of management and financial information and records or against financial losses or fraud. The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by MBSL and this process includes enhancing the system of internal controls as and when there are changes to business environment or regulatory guidelines. The Board is of the view that the system of internal controls in place is sound and adequate to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements for external purposes is in accordance with relevant accounting principles and regulatory requirements. The management assists the Board in the implementation of the Board’s policies and procedures on risk and control by identifying and assessing the risks faced and monitoring of suitable internal controls to mitigate and control these risks. KEY FEATURES OF THE PROCESS ADOPTED IN APPLYING AND REVIEWING THE DESIGN AND EFFECTIVENESS OF THE INTERNAL CONTROL SYSTEM ON FINANCIAL REPORTING The key processes that have been established in reviewing the adequacy and integrity of the system of internal controls with respect to financial reporting include the following: •

Various committees are established by the Board to assist the Board in ensuring the effectiveness of MBSL’s daily operations and that the MBSL’s operations are in accordance with the corporate objectives, strategies and the annual budget as well as the policies and business directions that have been approved.

Internal audit function established by the Board during the month of November 2010 is to assist the Board to ensure that MBSL complies with policies and procedures, and to evaluate the effectiveness of the internal control system in place on an ongoing basis.

•

The Audit Committee of MBSL, review internal control issues identified by the, regulatory authorities and management, and evaluate the adequacy and effectiveness of the risk management and internal control systems. The minutes of the Audit Committee meetings are tabled to the Board on a periodic basis. Further details of the activities undertaken by the Audit Committee of MBSL are set out in the Audit Committee Report on page 63.

•

In assessing the internal control system, identified officers of MBSL collated all procedures and controls that are connected with significant accounts and disclosures of the Financial Statements of MBSL.

THE CONFIRMATION BY THE BOARD Based on the above processes, the Board confirms that the financial reporting system of MBSL has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes has been done in accordance with Sri Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka. REVIEW OF THE STATEMENT BY EXTERNAL AUDITORS The external auditors have reviewed the above Directors Statement on Internal Control included in the annual report of MBSL for the year ended 31 December 2010 and reported to the Board that nothing has come to their attention that causes them to believe that the statement is inconsistent with their understanding of the process adopted by the Board in the review of the design and effectiveness of the internal control system over financial reporting of MBSL. By order of the Board

Ms. W A Nalani Chairman Audit Committee

Chief Executive Officer’s & Chief Financial Officer’s

Responsibilty Statement

The Financial Statements of Merchant Bank of Sri Lanka PLC (Company) and the Consolidated Financial Statements of the Company and its Subsidiaries as at 31 December 2010 are prepared in compliance with the Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka, Companies Act No 7 of 2007, Sri Lanka Accounting and Auditing Standards Act No 15 of 1995, the Banking Act No 30 of 1988 and amendments thereto and the Listing Rules of the Colombo Stock Exchange. The Accounting Policies used in the preparation of the Financial Statements are appropriate and consistently applied by the Group. Material departures, if any, are disclosed and explained in the notes to the Financial Statements, and there has been no departures from the prescribed Accounting Standards in their adoption. Comparative information has been reclassified wherever necessary to comply with the current presentation. The significant accounting policies and estimates that involve a high degree of judgment and complexity were discussed with our External Auditors and the Audit Committee. The Board of Directors and the Management of the Company accept responsibility for the integrity and objectivity of these Financial Statements. The estimates and judgments relating to the Financial Statements were made on a prudent and a reasonable basis, thus the Financial Statements reflected in a true and fair manner, the form and substance of transactions and that the Company’s state of affairs are reasonably presented. To ensure this, the Company has taken proper and sufficient care in installing a system of internal control and accounting records, for safeguarding assets and for preventing and detecting frauds as well as other irregularities, which are reviewed, evaluated and updated on an ongoing basis. However, there are inherent limitations that should be considered in weighing the assurances provided by any system of internal controls and accounting. The Financial Statements of the Group were audited by Ms. SJMS Associates, Chartered Accountants, an independent auditor. Their report is given on page 63 of the Annual Report. The Audit Committee of the Company meets periodically with the internal audit team and the independent external auditors to review their audit plans, assess the manner in which the auditors are performing their responsibilities and to discuss their reports on, internal controls and financial reporting issues. To ensure complete independence, the external auditors and the internal auditors have full and free access to the members of the Audit Committee to discuss any matter of substance. The Audit Committee pre-approves the audit and non audit services provided by our external auditors, M/s SJMS Associates, in order to ensure that the provision of such services does not impair SJMS’s independence. We confirm that, - the Company and its Subsidiaries have complied with all applicable laws, regulations and prudential requirements; - there are no material non compliances ; and - there are no material litigations that are pending against the Group other than those disclosed in the Notes 49.2 to the Financial Statements in the Annual Report.

Priyantha Herath Gamini Karunathilake Asst. Director - Finance & Treasury Management Chief Executive Officer

Audit Committee Report

COMPOSITION: The Audit Committee comprises three Non-Executive Directors namely, Ms. W.A. Nalani, Mr. V. Kanagasabapathy and Dr. Ranjith Bandara. Ms. W.A. Nalani functions as the Chairperson of the Audit Committee. The profiles of the members of the Audit Committee are given on pages 8 to 9. The members of the Audit Committee have a strong banking, accounting and finance knowledge and background. Mr. V. Kanagasabapathy is a fellow of the Institute of Chartered Accountants of Sri Lanka. The Company Secretary functions as the Secretary to the Audit Committee. The Chairman, Chief Executive Officer, Head of Finance and Head of Group Internal Audit attend the meetings by invitation. Other members of the Senior Management are also invited to attend meetings by invitation. MEETINGS: The Committee met eleven times during the financial year under review. Agendas for the Meetings were prepared and distributed to members in advance along with relevant briefing material. Minutes of the Audit Committee meetings along with observations and recommendations of the Committee are reported to the Board regularly for ratification. The progress of action initiated in response to observations made by the Committee are constantly reviewed and followed up at successive meetings. OBJECTIVE: The key objective of the Audit Committee is to ensure that sound internal control systems are financial reporting system is in place to present accurate and timely financial information to the Board of Directors, Regulators and other stakeholders and to oversee the preparation, presentation and adequacy of disclosures in the financial statements in accordance with Sri Lanka Accounting Standards and other relevant laws and regulations. The terms of reference of the Audit Committee provide authority to investigate into any matter of concern within its scope and in this respect the Committee has unrestricted access to the members of the Management, Staff and any information required to carry out its responsibilities. ACTIVITIES DURING THE YEAR: During the financial year under review, the Audit Committee as a part of its responsibility to oversee the Company’s financial reporting process on behalf of the Board of Directors, • • • • •

Monitored the adequacy and effectiveness of internal controls and procedures for the mitigation of risk Reviewed interim and year-end financial statements with the Senior Management to ensure the integrity of such financial statements prior to recommending same to the Board for adoption. Reviewed significant accounting and reporting issues, disclosure and compliance with the requirements of the Companies Act No.07 of 2007 and Regulations, accounting policies and standards and other financial reporting requirements to ensure that Company’s operations conform to applicable laws rules and regulations Follow up action on External Auditors management letter and management responses thereto Reviewed the performance of the Company and its subsidiaries against budgets

• Internal Audit Function During the latter part of the year under review, the Company established its own Group Internal Audit Department to cover the internal audit functions of the Company and its subsidiaries, Merchant Credit of Sri Lanka Limited and MBSL Insurance Company Limited. Since the internal audit is functioning effectively, the services of the external audit firm, which carried out the internal audit functions earlier, was discontinued. On the recommendation of the Audit Committee, the Company has recently adopted the Audit Committee Charter and the Group Internal Audit Charter which are effective from January 2011. • External Auditors The Audit Committee having reviewed the performance of the External Auditors, M/s SJMS Associates during the financial year under review is of the view that the External Auditors are independent and do not have any interest in contracts with the Company or its subsidiaries and/or associate company and accordingly recommend to the Board that the existing Auditors be re-appointed as Auditors for the financial year ending 31st December 2011 at the forthcoming Annual General Meeting of the Company.

Ms. W A Nalani Chairperson - Audit Committee

27th April 2011

Auditors’ Report Independent

Cor respondent Fir m to

SJMS Associates Chartered Accountants No. 02, Castle Lane, Colombo - 04. Sri Lanka. Tel: + 94 (11) 2 580409, 2 503262, Fax: +94 (11) 2 582452, Restructure & Corporate Recovery Tel: 5 364293, 5 444420, Fax: 5 364295,

INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF MERCHANT BANK OF SRI LANKA PLC

E-mail: sjms@sjmsassociates.com Website: www.sjmsassociates.lk

Report on the Financial Statements We have audited the accompanying financial statements of Merchant Bank of Sri Lanka PLC, and the consolidated financial statements of the Company and its subsidiaries, which comprise the balance sheet as at December 31, 2010, the income statement, the statement of changes in equity and the cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. 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 principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of our audit. We therefore believe that our audit provides a reasonable basis for our opinion. Opinion - Company In our opinion, so far as appears from our examination, the Company has maintained proper accounting records for the year ended December 31, 2010, and the financial statements give a true and fair view of the Company’s state of affairs as at December 31, 2010, and of its profit and cash flows for the year then ended, in accordance with Sri Lanka Accounting Standards. Opinion – Group In our opinion, the consolidated financial statements give a true and fair view of the state of affairs as at 31st December 2010, and the profit and cash flows for the year then ended, in accordance with Sri Lanka Accounting Standards, of the Company and of its subsidiaries dealt with thereby so far as concerns the shareholders of the Company. Emphasis of Matter – Group Without qualifying our opinion on the group financial statements, we draw attention to Note 55 to the financial statements. Report on Other Legal and Regulatory Requirements MBSL Savings Bank Limited faces a serious loss of capital situation in terms of Section 220 of the Companies Act No. 07 of 2007. Except for the effect of the matter discussed above, these financial statements of the Company and the group also comply with the requirements of Sections 151(2) and 153(2) to 153(7) of the Companies Act No. 07 of 2007.

SJMS ASSOCIATES Chartered Accountants Colombo 27th April 2011

P. E. A. Jayewickreme. M. B. Ismail, Ms. A. M. J. Patrick, T. Krishnakumar, Ms. S. L . Jayasuriya, D. S. W. Andradi G. J. David, Ms. F. M. Marikkar, Ms. M. S. J. Henry, Ms. A. U. M. Keppetipola

Income Statement

Company

Group

For the year ended 31 December 2010 2009 Change 2010 2009 Change Note LKR ‘ 000 LKR ‘ 000 % LKR ‘ 000 LKR ‘ 000 % Restated INCOME 16 1,522,980 1,155,731 31.8 2,990,053 2,332,321 28.2 Interest income 17 1,107,121 982,545 12.7 2,265,891 1,995,648 13.5 Less: Interest expense 18 419,041 584,247 28.3 1,092,162 1,274,896 14.3 Net interest income 688,080 398,298 72.8 1,173,729 720,752 62.8 Insurance premium income - - 0.0 140,615 66,944 110.0 Fee and commission income 19 109,034 76,632 42.3 106,423 78,390 35.8 Dividend income 8,481 21,260 -60.1 11,425 4,076 180.3 Other income 20 298,344 75,294 296.2 465,699 187,263 148.7 Operating income 1,103,939 571,484 93.2 1,897,891 1,057,425 79.5 Less: OPERATING EXPENSES 21 Personnel expenses 22 174,893 132,539 -32.0 418,642 303,541 -37.9 Premises, equipment and establishment expenses 44,486 36,648 -21.4 121,935 79,846 -52.7 Fee and commission expenses 4,331 4,465 3.0 8,662 6,885 -25.8 Provision for staff retirement benefits 15,795 8,993 -75.6 26,656 14,540 - 83.3 Provision for loan losses 23 65,787 74,436 11.6 129,423 28,750 - 350.2 Reversal of provision for fall in value of investments - (42,771) -100.0 3,640 (46,580) -107.8 Value added tax on financial services 119,461 53,833 -121.9 174,699 81,389 -114.6 Other overhead expenses 111,117 77,577 -43.2 322,196 258,629 -24.6 535,870 345,720 -55.0 1,205,853 727,000 - 65.9 PROFIT FROM OPERATIONS 568,069 225,764 151.6 692,038 330,425 109.4 Share of profit of associate company 24 82,639 28,500 190.0 82,639 28,500 190.0 PROFIT BEFORE TAXATION 650,708 254,264 155.9 774,677 358,925 115.8 Less: Income tax expense 25 201,037 53,286 -277.3 233,700 73,592 -217.6 PROFIT AFTER TAXATION 449,671 200,978 123.7 540,977 285,333 89.6 Attributable to: Equity holders of the parent 449,671 200,978 123.7 492,345 229,562 114.5 Minority interest - - 48,632 55,771 -12.8 PROFIT FOR THE YEAR 449,671 200,978 123.7 540,977 285,333 89.6 BASIC EARNINGS PER SHARE (LKR.) 26 3.33 2.19 51.8 3.65 2.51 45.5 The Accounting Policies and Notes to the Financial Statements from page 68 to 102 form an integral part of the financial statements.

Company

Balance Sheet Group

As at 31 December 2010 2009 Change 2010 2009 Change Note LKR ‘ 000 LKR ‘ 000 % LKR ‘ 000 LKR ‘ 000 % ASSETS Restated Cash in hand and at bank 27 71,097 39,511 79.9 146,956 145,518 1.0 Government treasury bills 28 279,765 387,847 -27.9 1,626,575 1,291,653 25.9 Dealing securities 29 331,752 217,429 52.6 464,851 333,444 39.4 Investment securities 30 10,024 10,024 0.0 10,044 15,159 -33.7 Bills receivable 31.1 619,395 446,346 38.8 619,624 446,575 38.8 Loans 31.2 947,639 697,015 36.0 3,340,952 2,989,240 11.8 Lease / hire purchase receivable 31.3 3,816,504 2,958,996 29.0 6,554,698 5,035,167 30.2 Investment in real estate - - 0.0 30,288 28,643 5.7 Other assets 32 211,567 144,180 46.7 867,911 787,198 10.3 Investment in associate 33 121,617 95,022 28.0 121,617 95,022 28.0 Investments in subsidiaries 34 446,710 259,524 72.1 - - 0.0 Investment properties 35 281,124 283,764 -0.9 386,869 391,729 -1.2 Property, plant and equipment 36 44,047 37,844 16.4 159,599 150,924 5.7 Intangible assets 37 1,360 1,423 -4.4 108,539 122,200 - 11.2 Total assets 7,182,601 5,578,925 28.7 14,438,523 11,832,472 22.0 LIABILITIES Deposits from customers 38 - - 0.0 5,676,955 4,897,367 15.9 Borrowings 39 3,179,712 1,658,985 91.7 3,311,089 1,733,170 91.0 Insurance provision - Life 40 - - 0.0 66,937 42,745 56.6 Insurance provision - Non Life 41 - - 0.0 252,774 181,569 39.2 Current tax liability 42 172,970 45,511 280.1 172,970 45,511 280.1 Debentures 43 716,800 1,074,160 -33.3 734,684 1,169,644 -37.2 Deferred tax liability 44 20,994 23,716 -11.5 20,994 23,716 -11.5 Retirement benefit obligation 45 74,396 58,601 27.0 105,421 79,652 32.4 Other liabilities 46 338,536 387,180 -12.6 895,444 934,009 -4.1 Total liabilities 4,503,408 3,248,153 38.6 11,237,268 9,107,383 23.4 EQUITY Stated capital 47 1,607,000 1,607,000 0.0 1,607,000 1,607,000 0.0 Statutory reserves 48.1 91,261 59,784 52.65 149,239 106,344 40.3 Retained earnings 48.2 980,932 663,988 47.7 1,152,122 803,922 43.3 Total equity attributable to equity holders of the Company 2,679,193 2,330,772 14.9 2,908,361 2,517,266 15.5 Minority Interest - - 0.0 292,894 207,823 40.9 Total Equity 2,679,193 2,330,772 14.95 3,201,255 2,725,089 17.5 Total liabilities and Equity 7,182,601 5,578,925 28.7 14,438,523 11,832,472 22.0 Commitments and Contingencies 49.1 7,117 32,568 -78.1 36,967 143,442 -74.3 Net assets value per ordinary share (LKR.) 19.85 17.26 14.9 21.54 18.65 15.5 The Accounting Policies and Notes to the Financial Statements from page 68 to 102 form an integral part of the financial statements. These financial statements are in compliance with the requirements of the Companies Act No. 7 of 2007. Priyantha Herath Gamini Karunathilake Asst. Director - Finance & Treasury Management Chief Executive Officer The Directors are responsible for the preparation and presentation of these financial statements. Approved and signed for and on behalf of the Board M R Shah Ms. W A Nalani Chairman Director 27th April 2011 Colombo, Sri Lanka 65

Statement of Changes

in Equity

For the year ended 31 December 2010 Stated Statutory Retained Total Capital Reserves Earnings LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Company Balance as at 01.01.2009 1,067,000 45,716 567,078 1,679,794 Profit for the year 200,978 200,978 Transfers to reserve fund - 14,068 (14,068) Rights issue 540,000 - - 540,000 Dividend paid - - (90,000) (90,000) Balance as at 31.12.2009 1,607,000 59,784 663,988 2,330,772 Profit for the year - - 449,671 449,671 Transfers to reserve fund - 31,477 (31,477) Dividend paid - - (101,250) (101,250) Balance as at 31.12.2010 1,607,000 91,261 980,932 2,679,193 Stated Statutory Retained Minority Total Capital Reserves Earnings Interest LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Group Balance as at 01.01.2009 1,067,000 83,658 687,046 172,208 2,009,912 Profit for the year as restated (Note 54) - - 229,562 55,771 285,333 Transfers to statutory reserve/reserve fund - 22,686 (22,686) - Rights issue 540,000 - - - 540,000 Investment in subsidiaries - - - (556) (556) Dividend paid - - (90,000) (19,600) (109,600) Balance as at 31.12.2009 1,607,000 106,344 803,922 207,823 2,725,089 Profit for the year - - 492,345 48,632 540,977 Transfers to Statutory reserve/reserve fund - 42,895 (42,895) - Rights issue - - - 32,428 32,428 Disposal of subsidiary - - - 4,011 4,011 Dividend paid - - (101,250) - (101,250) Balance as at 31.12.2010 1,607,000 149,239 1,152,122 292,894 3,201,255 Statutory reserves represent the reserve fund of the Company in terms of Direction No.05 of 2006 issued by Central Bank of Sri Lanka under Section No.34 of the Finance Leasing Act No.56 of 2000 and statutory reserve of the subsidiary, Merchant Credit of Sri Lanka represents its reserve fund in terms of Direction No.01 of 2003 issued by Central Bank of Sri Lanka under Section No.46 of the Finance Companies Act No. 23 of 1991.

Cash Flow Statement

Company

Group

For the year ended 31 December 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Cash flow from operating activities Interest and commission receipts 1,023,330 764,393 2,150,877 1,642,032 Interest payments (563,855) (429,952) (1,040,177) (821,630) Receipts from other operating activities 306,825 75,294 600,866 337,875 Cash payments to employees and suppliers (245,831) (194,669) (394,655) (443,894) Payments for other operating activities (186,791) (95,586) (690,580) (444,173) Operating profit before changes in operating assets/ liabilities 333,678 119,480 626,331 270,210 (Increase)/Decrease in operating assets: Operating assets (57,970) 7,859 (40,743) (280,060) Funds advanced to customers (1,281,181) (166,764) (2,165,801) (741,080) Increase/(Decrease) in operating liabilities Operating liabilities (48,644) 116,735 120,517 325,100 Deposits from customers - - 711,199 1,115,366 Net cash from operating activities before income tax (1,054,117) 77,310 (748,497) 689,536 Income tax paid (46,623) (24,316) (60,949) (37,251) Net cash inflow/(outflow) from operating activities (1,100,740) 52,994 (809,446) 652,285 Cash flows from investing activities Purchase of property, plant & equipment (18,327) (14,266) (55,399) (51,056) Dividend received 33,110 26,733 35,506 9,549 Investments (733,024) (384,635) (1,039,036) (664,042) Proceeds from sale of property, plant & equipment 7,940 810 30,353 10,620 Proceeds from sale of investments 872,427 329,971 1,100,244 415,914 Investments in subsidiary companies (200,000) (238,605) - Net cash and cash equivalents on acquisition of subsidiaries - - - 261,376 Net cash inflow/(outflow) from investing activities (37,874) (279,992) 71,668 (17,639) Cash flows from financing activities Proceeds from issue of shares - 540,000 32,428 540,000 Dividend paid (101,250) (90,000) (101,250) (111,640) Cash inflow from long-term borrowings 909,995 151,885 909,995 151,885 Repayment of long-term borrowings (966,237) (687,113) (1,043,837) (726,287) Cash inflow from short-term borrowings 3,643,962 1,592,582 3,693,962 1,592,582 Repayment of short-term borrowings (2,474,773) (801,505) (2,454,773) (930,104) Net cash inflow/(outflow) from financing activities 1,011,697 705,849 1,036,525 516,436 Net increase / (decrease) in cash and cash equivalents (126,917) 478,851 298,747 1,151,082 Cash and cash equivalents at the beginning of the period ( Note 1 ) 412,999 (65,852) 1,378,627 227,545 Cash and cash equivalents at the end of the period (Note. 1 ) 286,082 412,999 1,677,374 1,378,627 Note 1: Reconciliation of cash and cash equivalents Government treasury bills 279,765 387,847 1,626,575 1,291,653 Cash in hand and at bank ( Note. 27 ) 71,097 39,511 146,956 145,518 Bank overdrafts ( Note. 39 ) (64,780) (14,359) (96,157) (58,544) 286,082 412,999 1,677,374 1,378,627 The Accounting Policies and Notes to the Financial Statements from page 68 to 102 form an integral part of the financial statements.

Accounting Policies 1. REPORTING ENTITY Merchant Bank of Sri Lanka PLC is a public quoted Company incorporated and domiciled in Sri Lanka. The registered office and principal place of business of the Company is located at the Bank of Ceylon Merchant Tower, No. 28, St Michael’s Road, Colombo 03. The shares of the Company are listed in the Colombo Stock Exchange. The consolidated financial statements of the company for the year ended 31 December 2010 comprise the Company (Parent company) and its subsidiaries (together referred to as the “Group”) and the Company’s interest in associate company. In the opinion of the directors, the Company’s parent enterprise and its ultimate parent enterprise is Bank of Ceylon. The financial statements for the year ended 31 December 2010 were authorised for issue on 27th April 2011, in accordance with the resolution of the Directors passed on 27th April 2011. 2.

PRINCIPAL ACTIVITIES AND NATURE OF OPERATIONS

2.1 Company The principal activities of the Company are leasing and hire purchase, trade financing, corporate advisory services, capital market operations, fund management and corporate secretarial services. 2.2 Subsidiaries The principal activities of the Company’s subsidiaries, namely, Merchant Credit of Sri Lanka Limited, MBSL Savings Bank, and MBSL Insurance Company Limited, are leasing and hire purchase, trade financing, accepting of fixed deposits and certificates of deposit, real estate development, and banking and insurance services. 2.3 Associate The principal activities of the Company’s associate company, Lanka Securities (Pvt) Ltd, are trading in equity and debt securities, equity and debt security broking and undertaking placement of equity and debt securities. 3.

RESPONSIBILITY FOR FINANCIAL STATEMENTS

The Board of Directors is responsible for the preparation and presentation of the financial statements of the Company and its subsidiaries as per the provisions of the Companies Act No. 07 of 2007 and Sri Lanka Accounting Standards. The Board of Directors acknowledges this responsibility as set out in the ‘Annual Report of the Board of Directors’,‘Statement of Directors’ Responsibility’ and in the statement following the Balance Sheet on pages 56, 59 and 65 respectively, of this Annual Report. These financial statements include the following components: •

An Income Statement providing information on the financial performance of the Company and the Group for the year under review (refer page 64 of this Annual Report)

•

A Balance Sheet providing information on the financial position of the Company and the Group as at the year-end (Refer page 65 of this Annual Report)

•

A Statement of Changes in Equity depicting all changes in shareholders’ equity during the year under review (Refer page 66 of this Annual Report)

•

A Cash Flow Statement providing the information to the users, on the ability of the Company and the Group to generate cash and cash equivalents and the needs to utilize those cash flows (Refer page 67 of this Annual Report) and

•

Notes to the Financial Statements comprising Accounting Policies used and other Notes (Refer pages 68 to 102 of this Annual Report)

4. STATEMENT OF COMPLIANCE The balance sheet, income statement, statement of changes in equity and cash flow statement, together with accounting policies and notes (the “financial statements”) of the Company and the Group are prepared in accordance with Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka, and comply with the requirements of the Companies Act No 07 of 2007 and the Finance Leasing Act No 56 of 2000, the Finance Companies Act No 78 of 1988 and the Banking Act No 30 of 1988. 5. COMPARATIVE INFORMATION The accounting policies adopted by the Group are applied consistently with those of the previous financial years. However, wherever the presentation or classification of items in the financial statements is amended, comparative amounts are also reclassified to conform to the current year’s presentation. 6. 68

CHANGES TO THE ACCOUNTING POLICIES

There were no changes to the accounting policies adopted by the Group during the year under review. Effect of Accounting Standards issued but not yet effective:

The Institute of Chartered Accountants of Sri Lanka has issued a new volume of Sri Lanka Accounting Standards which will become applicable for financial periods beginning on or after 1 January 2012. Accordingly, these Standards have not been applied in preparing these financial statements as they were not effective for the year ended 31st December 2010. These Sri Lanka Accounting Standards comprise Accounting Standards prefixed both SLFRS (corresponding to IFRS) and LKAS (corresponding to IAS). Application of Sri Lanka Accounting Standards prefixed SLFRS and LKAS for the first time shall be deemed an adoption of SLFRSs. The Company is currently in the process of evaluating the potential effects of these Standards on its financial statements, but due to the complex nature of the effect of these Accounting Standards, the impact of adoption cannot be estimated as at the date of publication of these financial statements 7. BASIS OF PREPARATION 7.1 Bases of measurement These financial statements have been prepared on an accrual basis under historical cost convention and applied consistently with no adjustment being made for inflationary factors affecting the financial statements except the dealing securities, which are stated at lower of cost and market value on an aggregate portfolio basis. Assets and liabilities are grouped by their nature and are listed in an order that reflect their relative liquidity. The accounting principles are applied consistently other than where specially disclosed with due regard to prudence, materiality and substance over form criteria as explained in Sri Lanka Accounting Standard No. 03- Presentation of Financial Statements (Revised 2005). Where appropriate, the accounting policies are disclosed in the succeeding notes. 7.2 Functional and presentation currency. The financial statements are presented in Sri Lankan rupees, which is the Group’s functional currency. All the financial information presented in Sri Lankan rupees have been rounded to nearest thousands, unless otherwise stated. 7.3 Significant accounting judgments, estimates and assumptions. The preparation of financial statements requires the 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 an accounting estimate are recognised in the period in which the estimate is revised and in any future periods affected. The key items which involve these judgments, estimates and assumptions are discussed below: 7.3.1 Defined benefit plans The gratuity obligation is determined using actuarial valuation which involves making assumptions about discount rates, future salary increases and mortality rates. Due to the nature of these plans being long-term, such estimates are subject to significant uncertainty. All assumptions are reviewed at each reporting date. 7.3.2 Impairment of goodwill Determining whether goodwill is impaired requires an estimation of “the value in use” of the cash-generating units to which goodwill has been allocated. The “value in use” calculation requires the directors to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. Estimation of expected future cash flows and selection of discount rates require a high degree of judgment and hence, are subject to uncertainty. 7.3.3 Deferred tax Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profits will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based on the likely timing and level of future taxable profits, together with future tax planning strategies. 7.5 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, in accordance with Sri Lanka Accounting Standard No.03 - Presentation of Financial Statements. 8. SIGNIFICANT ACCOUNTING POLICIES 8.1 Basis of consolidation The financial statements of all the entities controlled by the Company are consolidated in the Group’s financial statements in terms of the Sri Lanka Accounting Standard No. 26 (Revised) - Consolidated and Separate Financial Statements, and proportionate share of the profit/loss of its associates in terms of Sri Lanka Accounting Standard No. 27 - Investment in Associates. 8.1.1 Subsidiaries Subsidiaries are the entities that are controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control is effectively transferred to the Company until the date that control effectively ceases. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The consolidated financial statements are prepared as at the common financial year ending 31 December. 69

Accounting Policies...cont’d/ Minority interests represent the share of profit or loss and net assets not owned, directly or indirectly by the company and are presented separately in the consolidated income statement and consolidated balance sheet within equity, separately from the equity attributable to the equity-holders of the parent Company. 8.1.2 Associate Associate is an entity in which the company has significant influence, but no control, over the financial and operating policies. The consolidated financial statements include the company’s share of the total recognised gains and losses of the associates under the equity method, from the date that significant influence effectively commences until the date that significant influence effectively ceases. Under the equity method, investment in the Associate is carried in the Balance Sheet at cost plus post-acquisition changes in the Company’s share of net assets of the Associate. 8.1.3 Transactions eliminated on consolidation All intra-group balances and transactions and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with Associate are eliminated to the extent of the Group’s interest in Associate. Unrealised losses are eliminated in the same way as unrealised gains. 8.2 Going concern The directors have made an assessment of the Group’s ability to continue as a going concern in the foreseeable future, and they do not intend to liquidate, cease, or curtail the trading. 8.3 Foreign currency transactions The consolidated financial statements of the Company are presented in Sri Lankan rupees, which is the Company’s functional and presentation currency. Transactions in foreign currencies are initially recorded using the closing exchange rate of the functional currency ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to Sri Lankan rupees at the middle rate of exchange ruling at that date. Nonmonetary items denominated in foreign currencies that are stated at historical cost at the balance sheet date are translated to Sri Lankan rupees at the foreign exchange rate ruling at the date of the initial transaction. Exchange differences arising on settlement of monetary items and retranslation of monetary items, are recognised in profit or loss in the year in which they arise. 9. ASSETS AND BASIS OF THEIR VALUATION 9.1 Cash and cash equivalents Cash and cash equivalents include cash in hand, demand deposits and short-term highly liquid investments which are readily convertible to known amounts of cash and are subject to insignificant risk of changes in value. The cash flow has been prepared by using the “Direct Method” of preparing cash flows. For the purpose of cash flow statement, cash and cash equivalents consist of cash in hand and treasury bills net of outstanding bank overdrafts. 9.2 Investments/Securities 9.2.1 Investment in Treasury Bills held to maturity Investment in treasury bills held to maturity is reflected at the value of bills purchased and the discount/premium accrued thereon. Discount received/premium paid is taken to the income statement based on the pattern reflecting a constant periodic rate of return. 9.2.2 Dealing securities Dealing securities are marketable securities acquired and held with the intention of resale over a short period of time. Such securities are stated at the lower of cost and market value on an aggregate portfolio basis in accordance with Sri Lanka Accounting Standard No.22 - Accounting for Investments. 9.2.3 Investment securities Investment securities are acquired and held for yield or capital growth in the medium/long-term with the positive intent and ability to hold until maturity. Such securities are carried at cost. Changes in market values of these securities are not taken into account, unless it is considered to be a diminution in value which is other than temporary. 9.2.4 Investment in subsidiaries Investment in subsidiaries is stated at cost in the Company’s financial statements in accordance with the Sri Lanka Accounting Standard No 26 - Consolidated and Separate Financial Statements. 9.2.5 Investment in Associate Investment in associate is accounted for at cost in the Company’s financial statements and under the equity method in the consolidated financial statements. Under the equity method, the investments in Associate is initially accounted for at cost, and the carrying amount is adjusted for post acquisition changes in the Group’s share of net assets of the Associate less any impairment in the Group’s net investment in the Associate.

9.3 Loans and advances to customers Loans and advances to customers are stated in the balance sheet at the recoverable amount represented by the gross value of the outstanding balance adjusted for provision of loan losses and interest in suspense (interest that is not accrued to revenue). 9.3.1 Non - performing loans Loans, advances and finance leases that are 06 months or more in arrears of due capital and / or interest are classified as Non Performing Loans (NPL). Provision for possible loan losses are made on the basis of a continuous review of all advances to customers, in accordance with the directions issued by the Central Bank of Sri Lanka, and Sri Lanka Accounting Standard No 33 - Revenue Recognition and Disclosures in the Financial Statements of the Finance Companies. 9.3.2 Provision for loan losses Full provision has been made for all the loans and advances outstanding for more than 6 months, net of the realisable value on securities. Provisions for loans are made after giving credit to the forced sale value (FSV) of the mortgaged immovable property by applying the Haircut Discount rate on the forced sale value according to their age of the debt as given below.

Age of arrears 3 months to 1 year 1 – 2 years 2 – 3 years 3 – 4 years 4 – 5 years 5 years above

Haircut % (discount rate) 0% 20% 25% 30% 35% 40% or at discretion of management

9.4 (a) Rental receivable on Leased assets and Hire Purchase assets Assets leased to customers, which transfer substantially all the risks and rewards associated with ownership other than legal title, are accounted as finance leases in accordance with Sri Lanka Accounting Standard No 19 - Leases (Revised 2005) and reflected in the balance sheet as balance capital recoverable after deducting unearned interest income, rental collections and provision for doubtful debts. Assets hired to customers under the hire purchase agreements, which transfer the risks and rewards incidental to ownership as well as the legal title at the end of such contractual period are classified as hire purchase receivables. Such assets are accounted for in a similar manner as finance leases. 9.4 (b) Provision for loan losses on rental receivables A specific provision for possible losses is made on the amount of outstanding rental receivable net of realisable security value (net exposure at risk) in accordance with the directions issued by the Central Bank of Sri Lanka. Such provisions are subject to the minimum of: * Twenty percent (20%) on all receivables (net of unearned income) which are in arrears for a period of 6 to 12 months. *

Fifty percent (50%) on all receivables (net of unearned income) which are in arrears for a period of 12 to 18 months.

Hundred percent (100%) on all receivables (net of unearned income) which are in arrears for a period of 18 months or more.

9.4 Bills of exchange Bills receivable are reflected at the value of the bills initially paid to the customers and the discount/premium accrued thereon. Discount is taken to the income statement based on a pattern reflecting a constant periodic rate of return. 9.5.1 Provision for bills receivable Bills of Exchange outstanding for more than 6 months are provided in full after deducting the realisable value on securities. 9.6 General provision In addition to the specific provision made, a further general provision is made as a measure of prudence against potential credit losses that are specifically not identified. This general provision will be created by providing annually a minimum 0.5% of the aggregate value of net loan portfolio (i.e:. leasing, hire purchase, bills of exchange & loans) after the specific provisions, subject to a cumulative general provision not exceeding 2.5% of the net portfolio. This provision can be utilised in unexpected situations with the approval of Board of Directors. 9.7 Property & Equipment Property and equipment are stated at cost less subsequent accumulated depreciation and any subsequent accumulated impairment losses. All items of property and equipment are initially recorded at cost. Items of property and equipment are derecognised upon disposal or when no future economic benefits are expected from their use. Any gain or loss arising on de-recognition of an asset is included in the income statement in the year the asset is derecognised. 71

Accounting Policies...cont’d/ 9.7.1 Depreciation Provision for depreciation is calculated by using a straight-line method on the cost of all property and equipment, other than freehold land, in order to write off such amounts over the estimated useful economic lives of such assets. The estimated useful lives of such assets are as follows:

Motor vehicles Computers & accessories Building Other assets

04 years 04 years 20 years 08 years

Depreciation of an asset begins when it is available for use and ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized. 9.8 Intangible assets 9.8.1 Basis of recognition. Intangible assets are 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 in accordance with Sri Lanka Accounting Standard No. 37 - Intangible Assets. Accordingly, these assets are stated in the balance sheet at cost less accumulated amortisation and impairment losses. 9.8.2(a) Goodwill Goodwill arising on the acquisition represents the excess of the cost of the acquisition over the Group’s interest in the fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities at the date of acquisition. Upon transition to revised Sri Lanka Accounting Standard No. 25 - Business Combinations, goodwill will no longer be amortised. Instead, goodwill will be tested for impairment annually and assessed for any indication of impairment at each reporting date to ensure that its carrying amount does not exceed its recoverable amount. If an impairment loss is identified, it will be recognised immediately in the income statement. 9.8.2(b) Computer software All computer software costs incurred which are not integrally related to associated hardware which can be clearly identified, reliably measured, and it is probable that they will lead to future economic benefits, are classified as intangible assets in the balance sheet and stated at cost less accumulated amortisation and any accumulated impairment loss. 9.8.3 Subsequent expenditure Subsequent expenditure on an intangible asset is capitalised only when it increases the future economic benefits embodied in these assets. All other expenditure is expensed as incurred. 9.8.4. Amortisation The useful lives of intangible assets are assessed to be either finite or infinite. Intangible assets with finite lives are amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expenses category consistent with the function of the intangible asset. The estimated useful life of software is four years. 9.9 Investment properties Investment properties are properties held either to earn rental income or for capital appreciation or for both. 9.9.1 Basis of recognition Investment property is recognised if it is probable that future economic benefits that are associated with the investment property will flow to the company and cost of the investment property can be measured reliably. 9.9.2 Measurement An investment property is measured initially at its cost. The cost of a purchased investment property comprises of its purchase price and any directly attributable expenditure. The Company adopts the cost model for subsequent measurement of investment properties in accordance with Sri Lanka Accounting Standard No. 40 - Investment Property (Revised 2005). Accordingly, land classified as investment property is stated at cost, and buildings classified as investment property are stated at cost less any accumulated depreciation and any accumulated impairment losses. Provision for depreciation is made over the period of 20 years at the rate of 5% per annum using the straight-line method for buildings classified as investment property. Land is not depreciated.

9.10 Impairment Non-financial assets The group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. Asset’s recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered as impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognised in the income statement.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. Previously recognised impairment losses other than in respect of goodwill, are reversed only if there has been an increase in the recoverable amount of the asset. Such increase is recognised to the extent of the carrying amount had no impairment losses been recognised previously. 10. LIABILITIES AND PROVISIONS. 10.1 Provisions for liabilities Provisions are recognised when the Company/Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligations in accordance with Sri Lanka Accounting Standard No.36 - Provisions, Contingent Liabilities and Contingent Assets. 10.2 Defined contribution plan – Employees’ Provident Fund and Employees’ Trust Fund Employees are eligible for Employees’ Provident Fund contributions and Employees’Trust Fund contributions in line with respective statutes and regulations.The Company/Group and employees contribute 12% and 8% of gross emoluments of employees to Employees’ Provident Fund. The Company/Group contributes 3% of gross emoluments of employees to the Employees’ Trust Fund. 10.3 Defined benefit plan – Gratuity Gratuity is a defined benefit plan. Provision has been made in the accounts for retiring gratuities. An actuarial valuation of the retirement benefit is performed by a qualified actuary as at the balance sheet date using the projected unit credit (PUC) method in terms of Sri Lanka Accounting Standard No 16 (Revised 2006) - Employee Benefits. The provision is not externally funded. However, as per the payment of Gratuity Act No.12 of 1983, the liability arises only upon completion of five years of continued service. 10.4 Commitments and contingencies All discernible risks are accounted for in determining the amount of all known liabilities. The Company’s share of any contingencies and capital commitments of a Subsidiary or an Associate for which the Company is also liable severally or otherwise is included with appropriate disclosures. Contingent liabilities are possible obligations whose existence will be confirmed only by occurrence or non-occurrence of uncertain future events not wholly within the control of the entity or present obligations where the transfer of economic benefit not probable or cannot be reliably measured. Contingent liabilities are recognised in the balance sheet unless they are remote. 11

INCOME STATEMENTS

11.1 Revenue recognition 11.1.1 Interest income Interest receivable is recognised on accrual basis except for the interest receivable on term loans. Interest ceased to be taken into revenue when the recovery of interest and/or principal is in arrears for six months or more. Interest receivable on advances classified as non-performing is accounted for on cash basis. Interest falling due on non-performing advances is credited to interest in suspense account. In addition, interest accrued up to 6 months on such non-performing advances is also eliminated from the interest income and transferred to interest in suspense. 11.1.2 Income from Finance Lease and Hire Purchase. The excess of aggregate lease contracts receivable over the cost of the leased assets constitutes the total unearned income at the commencement of the lease contract. The unearned income is recognised as income over the term of the lease commencing from the month the lease is executed in proportion to the declining investment in lease. Non- performing leases are those where the rentals are overdue for 6 months or more. Lease income accrued is suspended from the date on which a lease is classified as non-performing and credited to the interest in suspense. Thereafter such income is recognised on cash basis. Income from hire purchase is recognised in the same way income from finance lease is recognised. 11.1.3 Income from discounting of bills of exchange and cheques Interest income from discounted trade bills and cheques is recognized proportionately from the date of discount to the maturity date.

11.1.4 Dividend income on shares Dividend income from shares is recognised when the company’s right to receive the payment is established. 11.1.5 Fees and commission income Fees and commission income including insurance agency commission and commission on bank guarantees are recognised as the related services are performed. 73

Accounting Policies...contâ&#x20AC;&#x2122;d/ 11.1.6 Overdue interest Default charges for late payment of finance lease and hire purchase rentals, and for delayed redemption of bills of exchange, are recognised as income on collection. 11.1.7 Share issue management fee Income from management of initial public offering and private placement of shares of clients is recognised on an accrued basis. 11.1.8 Management fees Fee received from the companies which are managed by Merchant Bank of Sri Lanka has been classified as consultancy fees and are recognized in the income statement on an accrual basis. 11.1.9 Interest income from loans and margin trading. Interest income from staff loans and margin trading is recognised on an accrual basis. However income from term loans and personal loans are recognised on a cash basis. 11.2 Expenditure recognition Expenses are recognised in the income statement on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenditure incurred in running the business and in maintaining property and equipment in a state of efficiency has been charged to the income statement. 112.1 Interest expenses In terms of the provisions of Sri Lanka Accounting Standard No 33 - Revenue Recognition and Disclosures in the Financial Statements of Finance Companies, interest and other expenses payable are recognised on an accrual basis. 11.2.2 Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset that normally take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time the assets are substantially ready for their intended use or sale. Income earned from temporarily investing specific borrowings pending their expenditure on a qualifying asset is deducted from the borrowing costs eligible to be added to the carrying amount. All other borrowing costs are recognised in profit or loss in the year in which they are incurred in accordance with Sri Lanka Accounting Standard No. 20 - Borrowing Costs. 11.2.3 Income tax expenses Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement. 11.2.3.a Current tax 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 amount are those that are enacted or subsequently enacted by the Balance Sheet date. Accordingly, provision for taxation is made based on the profit for the year adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and the amendments thereto, at the rates specified in Note No 25 to the financial statements. 11.2.3.b Deferred tax Deferred tax is provided on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all temporary differences, except: * Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profits nor taxable profits or loss; and * In respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profits will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised, except: * Where the deferred tax assets relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss; and * In respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profits will be available against which the temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax assets to be utilised. Unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax assets to be recovered. Deferred tax assets and liabilities 74

are measured at the tax rates that are expected to apply in the year when the assets are realised, or the liabilities are settled, based on tax rates and tax laws that have been enacted or substantially enacted at the balance sheet date in accordance with Sri Lanka Accounting Standard No 14 - Income Taxes. 11.2.4 Value Added Tax on Financial services. The bases for the computation of value added tax on financial services is the accounting profit before income tax adjusted for the economic depreciation, computed on prescribed rates and emoluments of employees based on “Value addition attributable method”. 12. SEGMENTAL INFORMATION The Company’s internal organisation and management is structured based on individual products and services, which are similar in nature and process and where the risk and return are similar. The primary segments represent this business structure. The secondary segments are determined based on the Company’s geographical spread of operations. The geographical analysis of turnover and profits are based on location of customers and assets respectively. The activities of each of the reported business segments of the Company and the group are detailed in Note No 52. 13. EVENTS AFTER THE BALANCE SHEET DATE All material events occurring after the balance sheet date are considered, and where necessary, adjustments are made to the financial statements. 14.

SIGNIFICANT ACCOUNTING POLICIES THAT ARE SPECIFIC TO THE BUSINESS OF THE SUBSIDIARY MBSL INSURANCE COMPANY LIMITED

14.1 Non-Life Insurance business 14.1.1(a)Gross Written Premium Premium is generally recorded and recognised as written at the inception of the policy and is earned primarily on a pro-rata basis over the term of the related policy coverage. However, for those contracts for which the period of risk differs significantly from the contract period, premium is earned over the period of risk in proportion to the amount of insurance protection provided. (b) Reinsurance Premium Reinsurance premium assumed is estimated based on information provided by ceding companies. The information used in establishing these estimates is reviewed and subsequent adjustments are recorded in the period in which they are determined. This premium is earned over the terms of the related reinsurance contracts. (c) Unearned Premium Unearned premium is the portion of gross written premium and reinsurance premium written in the current year in respect of risk related to subsequent periods. Unearned premium is calculated on the 24th basis in accordance with the rules made by the Insurance Board of Sri Lanka under the Regulation of Insurance Industry Act, No. 43 of 2000. (d) Unexpired risk Provision is made where appropriate for the estimated amount required over and above unearned premiums to meet future claims and related expenses on the business in force as at 31st December. (e) Deferred acquisition expenses Deferred acquisition expenses represent commission related to unearned premium and is calculated on the 24th basis in accordance with the rules made by the Insurance Board of Sri Lanka under the Regulation of Insurance Industry Act No. 43 of 2000. (f) Premiums receivable According to the Premium Payment Warranty (PPW) ruling by the Insurance Board of Sri Lanka (IBSL), all policies issued and not recovered over 60 days are cancelled. (g) Reinsurance receivable Reinsurance assets include the balances due from both insurance and reinsurance companies for paid and unpaid losses and loss adjustment expenses. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded gross in the Balance Sheet unless a right to offset exists. (h) Claims Provisions for anticipated losses are posted if the future premiums and proportional investment income in a portfolio will probably not be sufficient to cover the expected claims and costs. Whilst the directors consider that the provision for claims related reinsurance recoveries are fairly stated on the basis of information currently available, the ultimate liability will vary as a result of subsequent information and events. This may result in adjustments to the amounts provided. Such amounts are reflected in the financial statements for that period. The methods used and the estimates made are reviewed regularly.

Accounting Policies...cont’d/ 14.1.2 Life Insurance business Gross Written Premiums Premium from traditional life insurance contracts, including participating contracts and annuity policies with life contingencies, is recognised as revenue when cash is received from the policyholder. Benefits and expenses are provided against such revenue to recognise profits over the estimated life of the policies. Moreover, for single premium contracts, premium is recorded as income when received with any excess profit deferred and recognised in income in a constant relationship to the insurance in-force or, for annuities, the amount of expected benefit payments. Reinsurance Premium Reinsurance premium expenses are accrued on active policies. Benefits, losses and expenses Death claims are recorded on the basis of notifications received. Surrenders, maturities and annuity payments are recorded when due. Claims payable include direct costs of settlement. Interim payments and surrenders are accounted for only at the time of settlement. Actuarial valuation for long-term insurance provision The directors agree to the long-term-insurance provision for the Company at the year-end on the recommendations of the Consultant Actuary following his annual investigation of the life insurance business. The actuarial valuation takes into account all liabilities and is based on assumptions recommended by the Consultant Actuary. 15.

SIGNIFICANT ACCOUNTING POLICIES THAT ARE SPECIFIC TO THE BUSINESS OF THE SUBSIDIARY MBSL SAVINGS BANK LIMITED.

15.1 Non-performing loans and advances The loans and advances are classified as Non-Performing Advances (NPA) based on the period in arrears of due capital and/or interest. Credit facilities that are 02 months or more in arrears of due capital and / or interest are classified as NonPerforming Loans (NPL). Provision for possible loan losses are made on the basis of a continuous review of all loans and advances to customers in accordance with the Sri Lanka Accounting Standard 23 - Revenue Recognition and Disclosures in the Financial Statements of the Banks, and Directions issued by the Central Bank of Sri Lanka 15.2 Provision for loan losses 15.2.1 Specific provisions for loan losses are made as follows: Bank makes specific provisions in respect of loans and advances, based on period in arrears, on the following basis: Period outstanding Category of NPA credit Minimum specific Credit quality Provision Requirements 5-11 Months Sub-standard 20% 11-17 Months Doubtful 50% > 17 Months Loss 100% The provision made relates to all categories of loans and advances identified as substandard, doubtful and loss. Values assigned to collateral held for non-performing loans secured by properties are determined based on the realisable values of the properties, being the forced sale value provided by independent parties/valuers. 15.2.1 General Provision The Direction issued by the Monetary Board of the Central Bank of Sri Lanka on 8th May 2008, in terms Section 46 of the Banking Act No 30 of 1988, as amended, in “Requirement to Maintain a General Provision for Advances” requires all licensed specialised banks to maintain a general provision of 1% of the total on balance sheet performing loans and advances, net of interest in suspense and credit facilities secured by cash deposits, gold or Government securities with the same bank. The Direction referred to above was replaced by the Direction issued on 27th September 2010, thereby the banks are required to make general provision of 0.5% of total outstanding on-balance sheet performing loans and total outstanding of special mention on-balance sheet credit facilities commencing on 1st January 2012. According to the said Direction, banks shall reduce the existing general provision requirements of 1% to 0.5% at a rate of 0.1 per quarter during the five quarters commencing 1st October 2010. 15.3 Revenue recognition on non-performing loans When an advance is classified as non-performing, if due capital and/or interest were in arrears for more than 2 months, the interest ceases to be accrued and is taken to income on cash basis thereafter. 15.4 Liabilities and provisions 15.4.1 Deposits from customers Deposits include non interest bearing deposits, savings deposits, term deposits, deposits redeemable at call, and certificates of deposit. They are brought to account at the gross value of the outstanding balance. Interest paid is charged to the Income statement. 76

15.4.2 Securities sold under Re-purchase agreements Securities sold under agreements to re-purchase are recorded separately in the Financial Statements. The difference between the sale and the purchase price represents interest expense, which is recognised in the Income statement over the period of the re-purchase agreements. 15.5 Revenue recognition 15.5.1 Interest income Interest income from loans and advances is recognized on an accrual basis. Interest ceases to be accrued when the recovery of interest or principal is in arrears for more than two (2) months. Interest on non-performing advances is accounted for on a cash basis. Interest on non-performing debts is credited to the â&#x20AC;&#x2DC;Interest in suspense accountâ&#x20AC;&#x2122; which is netted in the Balance Sheet against the relevant balance. Interest income from investments is recognised on an accrual basis.

Notes to the Financial

Statements

Company

Group

16 INCOME For the year ended 31 December 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Interest income (Note 17) 1,107,121 982,545 2,265,891 1,995,648 Fee & commission income (Note 19) 109,034 76,632 106,423 78,390 Dividend income 8,481 21,260 11,425 4,076 Other income (Note 20) 298,344 75,294 465,699 187,263 Insurance income - - 140,615 66,944 1,522,980 1,155,731 2,990,053 2,332,321 17 INTEREST INCOME Gross earnings under: Finance leases 283,693 312,154 433,742 467,148 Hire purchase 480,565 383,638 873,278 700,638 Loans 132,419 95,210 572,406 407,683 Bills discounting 68,550 71,264 68,550 71,264 Treasury bills and money market 29,308 26,081 152,995 176,224 Overdue interest 94,699 79,068 139,718 150,081 Others 17,887 15,130 25,202 22,610 1,107,121 982,545 2,265,891 1,995,648

18 INTEREST EXPENSES Customer deposit - - 659,602 667,814 Debentures 116,323 237,314 121,551 246,547 Long-term borrowings 38,717 87,631 38,717 87,631 Short-term borrowings 261,296 256,605 265,968 269,523 Cash margins 1,456 1,270 1,456 1,270 Overdraft and others 1,249 1,427 4,868 2,111 419,041 584,247 1,092,162 1,274,896 19 FEE AND COMMISSION INCOME Insurance commission 12,875 15,157 6,109 17,580 Commission on bank guarantee 1,541 2,893 1,541 2,980 Fee and consultancy income 94,618 58,582 98,773 57,830 109,034 76,632 106,423 78,390 20 OTHER INCOME Proceeds from lease contracts written-off 5,323 5,350 10,091 5,350 Gain on sale of quoted investments 215,282 10,909 293,458 35,508 Gain on sale of unquoted investments 25,629 - 21,463 Service charges on hire purchase 14,527 8,261 21,130 17,318 Gain on disposal of leased/hire purchased assets 172 467 172 467 Miscellaneous income 3,355 2,119 56,952 11,926 Income from seminars 512 649 512 649 Gain on disposal of fixed assets 5,336 810 11,523 5,896 Gain/(Loss) on sale of real estate - - (561) (196) Gain on sale of treasury bills/bonds 22,315 - 36,266 34,283 Gain on disposal of properties 5,893 46,729 14,693 76,062 298,344 75,294 465,699 187,263

21 OPERATING EXPENSES Operating expenses, among others, include the following: Legal expenses 7,974 4,891 12,584 9,340 Depreciation of property, plant and equipment 8,927 6,668 39,255 29,795 Amortisation of intangible assets 656 569 2,278 1,972 Depreciation of investment properties 853 970 3,073 3,005 Directors’ emoluments (Note 21.1) 4,568 5,705 12,891 7,307 Auditors’ remuneration 715 650 2,261 1,379 Donations 797 93 1,252 96 21.1 Directors’ emoluments Emoluments to the Chairman 498 3,677 1,378 4,341 Emoluments to Non-Executive Directors 4,070 2,028 11,513 2,966 4,568 5,705 12,891 7,307

Company 22 Personnel expenses

2010 LKR ‘ 000

2009 LKR ‘ 000

Group 2010 LKR ‘ 000

2009 LKR ‘ 000

Salary 127,820 103,584 332,079 252,368 Defined contribution plan - EPF 11,459 9,122 32,016 20,551 Defined contribution plan - ETF 2,864 2,281 7,076 3,091 Bonus 32,750 17,552 47,471 27,531 174,893 132,539 418,642 303,541 23 PROVISION FOR LOAN LOSSES Specific provision/ (reversal) on bills receivable (1,910) 910 (1,910) 910 General provision on bills receivable 4,591 2,094 4,591 2,094 Specific provision on loans and advances 1,307 2,501 14,595 (87,624) General provision on loans and advances 7,009 9,434 7,009 3,354 Specific provision on lease/hire-purchase receivable 30,558 67,845 58,401 70,342 General provision on lease/ hire-purchase receivable 24,232 (8,348) 30,349 (6,993) Total provisions made during the year 65,787 74,436 113,035 (17,917) Written off - - 16,388 46,667 65,787 74,436 129,423 28,750 24 SHARE OF ASSOCIATE COMPANY’S PROFIT BEFORE TAXATION Name of the Company Percentage holding % Lanka Securities (Pvt) Ltd 29 82,639 28,500 82,639 28,500 25 INCOME TAX EXPENSE 25.1 (a) Current tax expenses Income tax on profit for the year 128,913 57,354 162,076 71,118 Under-provision in the previous years 74,846 3,511 74,346 10,053 203,759 60,865 236,422 81,171 (b) Deferred tax expenses Reversal of deferred taxation (Note 44.1) (2,722) (7,579) (2,722) (7,579) Total income tax expenses 201,037 53,286 233,700 73,592 25.2 Reconciliation of accounting profit and taxable income: Accounting profit 650,708 254,264 774,677 358,925 Add: Disallowed expenses 1,181,133 1,165,252 1,507,733 1,623,155 Less:- Capital allowance and other income 1,395,602 1,206,288 1,702,018 1,728,380 Adjusted trade profit 436,239 213,228 580,392 253,700 Less:-Tax savings on the utilisation of tax losses/qualifying payments 152,711 74,630 203,509 76,360 Taxable income 283,528 138,598 376,883 177,340 Income tax charged at: Income tax at 35% 99,235 48,509 131,909 62,069 Social responsibility levy 1.5% 1,489 728 1,978 932 Current & deferred tax share of associate company 31,415 10,982 31,415 10,982 Notional tax credit (3,226) (2,865) (3,226) (2,865) Deferred tax (reversal) (2,722) (7,579) (2,722) (7,579) Under provision in the previous years 74,846 3,511 74,346 10,053 Total income tax expense 201,037 53,286 233,700 73,592 25.3 The applicable tax rates for the Company and the Group is at 35.00%

Notes to the Financial Statements ...cont’d/ 26 26.1 EARNINGS PER ORDINARY SHARE Basic Earnings per Share (EPS) has been calculated by dividing the profit attributable to equity holders of the Company, b y the weighted average number of ordinary shares in issue during the year.

Company

Group

For the year ended 31 December 2010 2009 2010 2009 Profit attributable to ordinary shareholders (LKR’000) 449,671 200,978 492,345 229,562 Number of ordinary shares used as denominator (‘000) 135,000 91,603 135,000 91,603 Basic Earnings per Ordinary Share (LKR) 3.33 2.19 3.65 2.51 26.2 DIVIDEND PER SHARE Final dividend proposed (LKR’ 000) 168,750 101,250 168,750 101,250 Dividend per ordinary share (LKR) 1.25 0.75 1.25 0.75 The directors recommended a final dividend of LKR 1.25 per share for the year ended 31 December 2010 for approval by the share holders’ at the Annual General Meeting to be held on 24th June 2011. As stipulated by SLAS 12 (revised) Event occurring after the balance sheet date, this proposed dividend is not recognised as a liability as at 31 December 2010. However, for the purpose of computing Dividend per Share, the proposed final dividend has been taken in to consideration. 27 CASH IN HAND AND AT BANK LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Cash in hand 259 135 11,809 10,340 Cash at bank 70,838 39,376 135,147 135,178 71,097 39,511 146,956 145,518 28 GOVERNMENT TREASURY BILLS Treasury bills 279,765 387,847 1,626,575 1,100,653 Treasury bills - Re-purchase agreements - - - 191,000 279,765 387,847 1,626,575 1,291,653 29 DEALING SECURITIES Company 2010 2009 No.of Cost Market No.of Cost Market Ordinary Value Ordinary Value 29.a Quoted Shares Shares LKR ‘ 000 LKR ‘ 000 Shares LKR ‘ 000 LKR ‘ 000 Bank, Finance and Insurance Hatton National Bank PLC 5,500 818 2,199 33,900 5,041 5,771 Hatton National Bank PLC-Non Voting 75,100 15,291 16,116 National Development Bank PLC 14,600 3,560 5,103 31,000 4,811 6,386 Commercial Bank of Ceylon PLC 14,300 2,503 3,717 11,000 1,854 2,085 Development Finance Corporation of Ceylon 61,800 6,883 12,372 100,000 15,365 16,700 Seylan Bank PLC 37,900 3,207 3,707 Pan Asia Banking Corporation PLC 333 7 17 68,000 1,144 1,411 Janashakthi Insurance Company PLC 805,100 11,413 12,882 Central Finance Company PLC 2,000 619 635 Nations Trust Bank PLC 61,400 5,062 5,121 50,000 1,796 1,838 Nations Trust Bank PLC - W2010 50,000 431 413 Sampath Bank PLC 10,000 1,736 2,043 Ceylon Investment Co PLC 35 6 9 Lanka Orix Leasing Co. PLC 25,400 2,939 3,480 Lanka Ventures PLC 40,000 566 690 Ceylinco Insurance Co PLC 13,800 3,143 5,258 CF Venture Fund PLC 537,000 11,099 10,203 Seylan Merchant Bank PLC 50,000 82 95 Seylan Merchant Bank -Non Voting 1,600,000 1,465 1,600 SMB Leasing W2011 PLC 1,600,000 960 SMB Leasing W2011 PLC 2,000,000 1,818 1,600 66,351 80,950 36,308 41,461 80

Company Group 2010 2009 No.of Cost Market No.of Cost Market Ordinary Value Ordinary Value Shares LKR ‘ 000 LKR ‘ 000 Shares LKR ‘ 000 LKR ‘ 000 Diversified Holdings John Keells Holdings PLC 135,300 25,670 40,374 75,000 10,670 12,863 Hayleys PLC 15,000 2,494 2,576 Richard Pieris & Company PLC 1,854,200 9,984 19,469 150,000 5,655 5,850 CT Hodings PLC 22,200 2,360 4,056 38,014 63,899 18,819 21,289 Services John Keells PLC 23,700 3,578 3,626 - - 3,578 3,626 Information & Technology E-Channelling PLC 20,000 237 195 PC House PLC 400,000 4,400 4,520 4,400 4,520 237 195 Beverages, Food & Tobacco Distilleries Co of Sri Lanka PLC 129,800 18,476 23,091 117,300 12,181 12,346 Lanka Milk Foods (CWE) PLC 81,903 8,285 9,255 22,000 1,428 1,425 Cargills (Ceylon) PLC 5,000 311 326 Ceylon Tobacco Company PLC 10,000 1,784 1,850 The Lion Brewery Ceylon PLC 5,000 422 408 Coco Lanka PLC 105 5 7 10,000 397 483 Kotmale Holdings PLC 50,000 837 800 Renuka Agri Food PLC 1,339,300 3,013 3,013 26,765 32,353 20,373 20,651 Hotels and Travel Asian Hotels & Properties PLC 65,900 10,821 12,785 30,000 2,081 2,835 Keells Hotels PLC 883,333 18,285 17,667 59,800 794 1,346 Stafford Hotels PLC 22,800 631 1,395 41,600 1,120 1,144 Ceylon Hotels Corporation PLC 55,100 1,841 2,011 25,100 665 596 The Fortress Resorts PLC 120,000 1,939 2,472 70,000 891 858 Rivarina Hotels PLC 42,200 2,865 2,870 Marawila Resorts PLC 6,300 41 93 915,900 6,012 5,266 Eden Hotel Lanka PLC 270,800 7,130 15,598 315,800 8,274 8,132 Galadari Hotels (Lanka) PLC 167,900 6,336 6,011 31,600 499 474 Hotel Developers (Lanka) PLC 3,000 411 354 Hotel Reefcomber PLC 23,100 52 49 Serendib Hotels PLC 10,000 674 663 Serendib Hotels PLC- Non-Voting 84,700 3,341 3,324 Taj Lanka Hotels PLC 4,600 107 107 Tangerine Beach Hotels PLC 10,000 707 653 Hotel Services Ceylon PLC 2,992,300 64,884 77,800 3,562,500 58,998 67,688 111,907 135,832 87,491 96,359 Manufacturing ACL Cables PLC 4,900 397 417 26,500 1,871 2,034 ACL Plastics PLC 5,000 330 370 Ceylon Grain Elevators PLC 40,000 563 570 Pelwatte Sugar Industries PLC 30,800 1,122 844 - Hayleys Exports Ltd 62,600 2,738 2,567 - Caltex PLC 12,200 1,443 1,729 Tokyo Cements Co.(Lanka) PLC 6,250 186 344 50,000 869 988 Tokyo Cements Co.(Lanka) PLC -Non Voting 7,500 - 302 - - Royal Ceramic Lanka PLC 40,000 1,851 2,660 Lanka Cement PLC 60,400 2,106 1,691 55,000 1,978 1,279 Lanka Tiles PLC 15,000 734 998 Dipped Products PLC 13,500 1,272 1,161 Lankem Ceylon PLC 96,400 3,912 4,338 Lanka Walltile PLC 21,200 973 1,214 Richard Pieris Exports PLC 5,000 129 139 Ceylon Leather Products PLC 113,600 10,748 10,519 Central Industries PLC 200,100 15,529 18,009 32,825 34,693 15,925 17,480 81

Notes to the Financial Statements ...cont’d/ 2010 2009 No.of Cost Market No.of Cost Market Ordinary Value Ordinary Value Shares LKR ‘ 000 LKR ‘ 000 Shares LKR ‘ 000 LKR ‘ 000 Trading Brown & Company PLC 93,100 10,803 22,986 22,900 1,347 1,706 C.W.Mackie & Co. PLC 300 13 26 25,000 834 900 Tess Agro PLC 2,900 5 8 175,000 327 263 10,822 23,020 2,508 2,869 Telecommunication Dialog Telekom PLC 103,600 898 1,222 310,000 4,643 2,248 Sri Lanka Telecom PLC 24,900 1,136 1,220 24,900 1,136 1,145 2,034 2,443 5,779 3,393 Power and Energy Lanka IOC PLC 108,300 2,296 2,047 - - Hemas Power PLC 59,600 1,316 1,162 Laugfs Gas PLC. - Voting 166,100 3,820 4,302 Laugfs Gas PLC. - Non Voting 227,100 3,407 4,201 Pan Asian Power PLC 1,876,600 5,630 5,630 15,153 16,180 1,316 1,162 Health Care Nawaloka Hospitals PLC 100,000 360 370 200,000 623 620 Asiri Hospital Holdings PLC 260,200 2,325 2,290 20,000 172 205 2,685 2,660 795 825 Land and Property York Arcade PLC 25,000 745 603 Colombo Land & Development Company PLC 40,000 289 260 The Colombo Fort Land & Building Company PLC 15,000 441 469 Colombo Land & Development Company PLC- W 25,000 101 98 CT Land Development PLC 33,500 770 938 51,100 1,174 1,111 City Housing & Real Estate Co. PLC 10,000 346 213 East West Properties PLC 1,200 16 15 Overseas Realty (Ceylon) PLC 383,500 6,808 5,868 15,000 221 233 8,338 7,424 2,572 2,384 Chemical & Pharmaceuticals Chemical Industries (Colombo) PLC 5,000 302 704 132,500 8,101 8,348 Chemical Industries (Colombo) PLC - Non Voting 9,600 374 959 77,800 2,959 3,054 Chemanex PLC 1,000 159 122 Haycarb PLC 30,200 5,282 5,089 Colombo Dockyard PLC 5,300 1,488 1,458 7,604 8,331 11,060 11,402 Plantation Kegalle Plantations PLC 600 44 97 5,000 171 168 Agalawatte Plantation PLC 10,000 238 218 Maskeliya Plantations PLC 4,000 130 111 10,200 211 189 174 208 620 575 Footware & Textile Hayleys MGT Knitting Mills PLC 4,000 148 128 258,100 9,661 9,034 148 128 9,661 9,034 Total carrying value of dealing securities 327,221 412,639 217,042 232,705 29.b Listed debentures Bank of Ceylon 8,700 1,083 1,175 3,700 387 387 Seylan Bank Debenture - 1 2,000 215 200 Seylan Bank Debenture - 2 3,400 364 340 Seylan Bank Debenture - 3 1,500 154 150 Total net carrying value of listed debentures 1,816 1,865 387 387 29.c Unit Trusts Namal Acquity VF 28,300 2,715 2,547 2,715 2,547 - Total net carrying value of dealing securities and investments 331,752 417,051 217,429 233,092 82

Group 2010 2009 For the year ended 31 December No.of Cost Market No.of Cost Market Ordinary Value Ordinary Value 29.d Quoted Shares Shares LKR’000 LKR’000 Shares LKR’000 LKR’000 Bank, Finance and Insurance Hatton National Bank PLC 14,800 2,893 4,195 33,900 5,041 5,771 Hatton National Bank PLC-Non Voting 75,100 15,291 16,116 National Development Bank PLC 14,600 3,560 5,103 31,000 4,811 6,386 Commercial Bank of Ceylon PLC 14,300 2,503 3,717 11,000 1,854 2,085 Development Finance Corporation of Ceylon 61,800 6,883 12,372 100,000 15,365 16,700 Seylan Bank PLC 168,500 16,943 16,479 Pan Asia Banking Corporation PLC 2,833 108 147 68,000 1,144 1,411 Janashakthi Insurance Company PLC 805,100 11,413 12,882 205,000 2,460 1,947 Central Finance Company PLC - - - 2,000 619 635 Nations Trust Bank PLC 72,500 5,947 6,047 110,000 3,844 4,028 Nations Trust Bank PLC - W2010 20,000 644 1,152 50,000 431 413 Sampath Bank PLC - - - 10,000 1,736 2,043 Ceylon Investment Co PLC - - - 35 6 9 Lanka Orix Leasing Co. PLC - - - 25,400 2,939 3,480 Lanka Ventures PLC - - - 45,000 652 776 Ceylinco Insurance Co PLC 14,300 3,257 5,449 CF Venture Fund PLC 760,000 15,566 14,390 Seylan Merchant Bank 86,800 168 132 Seylan Merchant Bank - Non Voting 1,600,000 1,465 1,600 SMB Leasing PLC W2011 1,600,000 - 960 SMB Leasing PLC W2011 2,000,000 1,818 1,600 Amana Takaful PLC 195,800 655 587 Asia Capital PLC 12,200 558 573 Merchant Bank of Sri Lanka PLC 17,000 917 779 People’s Merchant Bank PLC 6,200 200 182 Seylan Bank PLC - Non Voting 41,700 2,120 2,043 First Capital Holdings PLC 95,000 1,742 1,805 Seylan Development PLC 10,000 218 168 94,869 108,478 40,902 45,684 Diversified Holdings John Keells Holdings PLC 167,926 35,240 50,110 75,000 10,672 12,863 Hayleys PLC - - - 15,000 2,494 2,576 Richard Pieris & Company PLC 1,854,200 9,984 19,469 150,000 5,655 5,850 CT Holdings PLC 32,200 4,016 5,883 Hemas Holdings PLC 3,900 183 174 49,423 75,636 18,821 21,289 Services John Keells PLC - - - 23,700 3,578 3,626 - - 3,578 3,626 Information & Technology E-Channelling PLC 13,300 301 293 20,000 237 195 PC House PLC 483,100 5,314 5,459 5,615 5,752 237 195 Beverages, Food & Tobacco Distilleries Co of Sri Lanka PLC 129,800 18,476 23,091 129,800 13,436 13,662 Lanka Milk Foods (CWE) PLC 81,903 8,285 9,255 22,000 1,428 1,425 Cargills (Ceylon) PLC - - - 5,000 311 326 Ceylon Tobacco Company PLC - - - 10,000 1,784 1,850 The Lion Brewery Ceylon PLC 63,000 12,197 11,661 5,000 422 408 Coco Lanka PLC 5,105 263 329 10,000 397 483 Kotmale Holdings PLC 228,200 5,775 9,858 50,000 837 800 Renuka Agri Food PLC - - - 1,350,200 3,038 3,013 Nestle Lanka PLC - - - 1,000 329 31 44,995 54,194 21,982 21,998

Notes to the Financial Statements ...

cont’d/ 2010 2009 For the year ended 31 December No.of Cost Market No.of Cost Market Ordinary Value Ordinary Value Shares LKR ‘ 000 LKR ‘ 000 Shares LKR ‘ 000 LKR ‘ 000 Hotels and Travel Asian Hotels & Properties PLC 68,900 11,283 13,367 30,000 2,081 2,835 Keells Hotels PLC 1,286,633 26,848 25,733 59,800 794 1,346 Stafford Hotels PLC 22,800 631 1,395 41,600 1,120 1,144 Ceylon Hotels Corporation PLC 55,100 1,841 2,011 25,100 665 596 The Fortress Resorts PLC 123,700 2,022 2,548 70,000 891 858 Rivarina Hotels PLC - - - 42,200 2,865 2,870 Marawila Resorts PLC 11,300 122 167 915,900 6,012 5,266 Eden Hotel Lanka PLC 312,300 9,775 17,988 841,100 21,869 21,724 Galadari Hotels (Lanka) PLC 219,100 8,455 7,844 31,600 499 474 Hotel Developers (Lanka) PLC - - - 3,000 411 354 Hotel Reefcomber PLC - - - 23,100 52 49 Serendib Hotels PLC - - - 10,000 674 663 Serendib Hotels PLC- Non-Voting - - - 84,700 3,341 3,324 Taj Lanka Hotels PLC - - - 4,600 107 107 Tangerine Beach Hotels PLC - - - 10,000 707 653 Hotel Services Ceylon PLC 3,027,150 65,821 78,706 7,476,875 123,308 142,061 Amaya Leisure PLC 4,214 337 383 The Lighthouse PLC 4,600 305 290 Mahaweli Reach Hotels PLC 8,100 307 284 127,746 150,716 165,396 184,324 Manufacturing ACL Cables PLC 4,900 397 417 26,500 1,871 2,034 ACL Plastics PLC - - - 5,000 330 370 Ceylon Grain Elevators PLC - - - 40,000 563 570 Pelwatte Sugar Industries PLC 30,800 1,122 844 - Hayleys Exports PLC 62,600 2,738 2,567 - Caltex PLC - - - 12,200 1,443 1,729 Tokyo Cements Co.(Lanka) PLC 6,250 186 344 50,000 869 988 Tokyo Cements Co.(Lanka) PLC - Non Voting 7,500 - 302 Royal Ceramic Lanka PLC - - - 40,000 1,851 2,660 Lanka Cement PLC 60,400 2,106 1,691 55,000 1,978 1,279 Lanka Tiles PLC 2,400 241 322 15,000 734 998 Dipped Products PLC - - - 13,500 1,272 1,161 Lankem Ceylon PLC - - - 96,400 3,912 4,338 Lanka Walltile PLC 2,000 212 278 21,200 973 1,214 Richard Pieris Exports PLC - - - 5,000 129 139 Ceylon Leather Products PLC 245,800 22,813 22,761 Central Industries PLC 431,700 33,503 38,853 Piramal Glass Ceylon PLC 200,000 788 1,560 Raigam Wayamba Salterns PLC. 47,500 119 190 64,224 70,129 15,925 17,480 Trading Brown & Company PLC 109,300 14,046 26,986 22,900 1,347 1,706 C.W.Mackie & Co. PLC 300 13 26 25,000 834 900 Tess Agro PLC 139,900 380 378 175,000 327 263 Ceylon & Foreign Trades PLC 100,000 702 770 15,142 28,160 2,508 2,869 Telecommunication Dialog Telekom PLC 103,600 898 1,222 310,000 4,643 2,248 Sri Lanka Telecom PLC 24,900 1,136 1,220 24,900 1,136 1,145 2,034 2,443 5,779 3,393 Power and Energy Lanka IOC PLC 108,300 2,296 2,047 12,500 228 216 Hemas Power PLC 15,000 487 443 59,600 1,316 1,162 Laugfs Gas PLC 166,100 3,820 4,302 Laugfs Gas PLC. - Non Voting 227,100 3,407 4,201 Pan Asian Power PLC 1,905,800 5,718 5,718 15,728 16,711 1,544 1,378

For the year ended 31 December No.of Cost Market No.of Cost Market Ordinary Value Ordinary Value Shares LKR ‘ 000 LKR ‘ 000 Shares LKR ‘ 000 LKR ‘ 000 Health Care Nawaloka Hospitals PLC 470,000 1,826 1,739 200,000 623 620 Asiri Hospital Holdings PLC 295,200 2,640 2,598 20,000 172 205 Asiri Surgical Hospital PLC 39,900 359 347 4,825 4,684 795 825 Land and Property York Arcade PLC 45,800 1,368 1,104 Colombo Land & Development Company PLC 20,000 505 388 40,000 289 260 The Colombo Fort Land & Building Company PLC - - - 15,000 441 469 Colombo Land & Development Company PLC- W - - - 25,000 101 98 CT Land Development PLC 33,500 770 938 51,100 1,174 1,111 City Housing & Real Estate Co. PLC - - - 10,000 346 213 East West Properties PLC 1,200 16 15 Overseas Realty (Ceylon) PLC 403,500 7,259 6,174 40,000 544 621 9,917 8,619 2,895 2,772 Chemical & Pharmaceuticals Chemical Industries (Colombo) PLC 45,000 5,883 6,332 132,500 8,101 8,348 Chemical Industries (Colombo) PLC - Non Voting 9,600 374 959 77,800 2,959 3,054 Chemanex PLC 1,000 159 122 Haycarb PLC 30,200 5,282 5,089 Colombo Dockyard PLC 13,400 3,900 3,686 11,400 2,043 2,790 15,597 16,187 13,103 14,192 Plantation Kahawatta Plantations PLC - - - 198,100 6,218 6,141 Kegalle Plantations PLC 600 44 97 5,000 171 168 Agalawatte Plantation PLC - - - 10,000 238 218 Maskeliya Plantations PLC 4,000 130 111 10,200 211 189 Balangoda Plantations PLC 21,500 1,412 1,234 Kotagala Plantations PLC 12,300 1,183 1,438 2,769 2,880 6,838 6,716 Footware & Textile Hayleys MGT Knitting Mills PLC 65,600 2,330 2,100 834,100 30,067 29,194 2,330 2,100 30,067 29,194 Investment Trust Equity One PLC 40,600 3,244 2,274 Equity Two PLC 18,200 539 442 Environmental Res. Inv. PLC 35,000 4,137 3,007 Touchwood Investment PLC 25,000 864 708 8,784 6,431 - Total gross carrying value of dealing securities 463,999 553,118 330,370 355,935 Less: Cost of dealing securities of MBSL Savings Bank 23,317 - 20,858 Add: Market Value of dealing securities of MBSL Savings Bank 22,853 - 23,545 Total gross carrying value of dealing securities 463,535 553,118 333,057 355,935 Provision for fall in value of dealing securities ( Note 29.1 ) (3,640) - Total net carrying value of dealing securities 459,895 553,118 333,057 355,935 29.e Listed debentures Bank of Ceylon 8,700 1,083 1,175 3,700 387 387 Seylan Bank PLC Debenture - 1 2,000 215 200 - - Seylan Bank PLC Debenture - 2 3,400 364 340 - - Seylan Bank PLC Debenture - 3 1,500 154 150 - - Total net carrying value of listed debentures 1,816 1,865 387 387 29.f Unit Trusts Namal Acquity VF 32,800 3,140 2,952 3,140 2,952 - Total net carrying value of dealing securities and investments 464,851 557,935 333,444 356,322 29.1 Provision for fall in value of dealing securities Company Group 2010 2009 2010 2009 LKR’000 LKR’000 LKR’000 LKR’000 Balance on 01 January - 42,771 - 46,580 Add: Provision / (Reversal) for the year - (42,771) 3,640 (46,580) - - 3,640 - 85

Notes to the Financial Statements ...cont’d/ 30 INVESTMENT SECURITIES 30.a Company For the year ended 31 December 2010 2009 Cost Market Cost Market Value/ Value/ Directors’ Directors’ Valuation Valuation LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Mega Containers Limited 10,000 5,000 10,000 5,000 Ceylinco Investment Company Limited (Note 30.1) 5,000 5,000 5,000 5,000 Credit Information Bureau of Sri Lanka Limited 24 24 24 24 15,024 10,024 15,024 10,024 Less: Provision for fall in value of investment securities (Note 30.2) (5,000) (5,000) Total net investment in investment securities 10,024 10,024 10,024 10,024 30.b Group For the year ended 31 December 2010 2009 Cost Market Cost Cost Value/ Value/ Directors’ Directors’ Valuation Valuation LKR ‘ 000 LKR ‘ 000 Mega Containers Limited 10,000 5,000 10,000 5,000 Ceylinco Investment Company Limited (Note 30.1) 5,000 5,000 5,000 5,000 Credit Information Bureau of Sri Lanka Limited 44 44 44 44 San Michele Limited 500 - 500 Capital Reach Holdings Limited - - 5,115 5,115 15,544 10,044 20,659 15,159 Less: Provision for fall in value of investment securities (Note 30.2) (5,500) (5,500) Total net investment in investment securities 10,044 10,044 15,159 15,159 30.1 Although the Company has acquired 46.35% equity capital of Ceylinco Investment Company Limited, the investment has not been classified as an associate c ompany due to pending court decision on the ownership structure of the company. 30.2 Movement in provision for fall in value of investment securities Company Group 2010 2009 2010 2009 LKR’000 LKR’000 LKR’000 LKR’000 Balance on 1 January 5,000 5,000 5,500 5,000 On acquisition - - - 500 Balance as at 31 December 5,000 5,000 5,500 5,500 According to share valuation carried out by the Company’s Corporate Finance Division the value of an ordinary share of Mega Containers Ltd as of 31 December 2010 based on the net asset value method was LKR.17.60 The percentage of shares held by Merchant Bank of Sri Lanka PLC in Mega Containers Limited was 16.37% as at 31 December 2010 However, the Directors are of the view that the provision made in year 2004 for fall in value of investments should remain unchanged as of 31 December 2010. 31.1 Bills receivable Bills discounted 649,442 474,830 649,943 475,331 Less: Deferred income 4,262 5,380 4,262 5,380 645,180 469,450 645,681 469,951 Less: Loan loss provision (Note 31.1.1) 25,785 23,104 26,057 23,376 619,395 446,346 619,624 446,575

Company

Group

2010 2009 2010 2009 LKR’000 LKR’000 LKR’000 LKR’000 31.1.1 Movement in provision for bills receivable Specific provision Balance on 1 January 13,719 12,809 13,764 12,854 Add : Amount provided/(reversed) (1,910) 910 (1,910) 910 Less: Amount written-off - - - Balance on 31 December 11,809 13,719 11,854 13,764 General provision Balance on 1 January 9,385 7,291 9,612 7,518 Add: Amount provided / (reversed) 4,591 2,094 4,591 2,094 Less: Amount written off - - - 13,976 9,385 14,203 9,612 25,785 23,104 26,057 23,376 31.2 Loans Term loans 676,871 547,907 2,301,620 1,748,038 Personal loans 22,932 25,220 22,932 25,220 Cheque discounting 82,394 50,767 82,394 50,767 Commercial papers - - 68,208 450,000 Pawning - - 108,369 75,305 Real estate loans - - 12,382 21,603 Loans against fixed deposits - - 159,546 132,487 Housing loans - - 402,961 384,279 Margin trading 165,299 75,827 165,299 75,827 Staff loans 41,142 29,512 106,377 92,781 Textile debt recovery fund 1,735 2,102 1,735 2,102 Susahana loan scheme 1,742 1,840 1,742 1,840 992,115 733,175 3,433,565 3,060,249 Less: Loan loss provision (Note 31.2.1) 44,476 36,160 92,613 71,009 Loans and advances after provision 947,639 697,015 3,340,952 2,989,240 31.2.1 Movement in provision for Loan losses Specific provision Balance on 1 January 14,877 12,917 44,838 27,014 On acquisition - - - 105,989 Add : Amount provided/(reversed) 1,307 2,501 14,595 (87,624) Less: Amount written off - 541 - 541 Balance on 31 December 16,184 14,877 59,433 44,838 General provision Balance on 1 January 21,283 11,849 26,171 11,849 On acquisition - - - 10,968 Add : Amount provided 7,009 9,434 7,009 3,354 Less: Amount written off Balance on 31 December 28,292 21,283 33,180 26,171 Total provision 44,476 36,160 92,613 71,009 31. 3 Lease and Hire purchase rentals receivable 31.3.a Finance leases/hire purchase receivable within one year from balance sheet date Total Lease rental receivable 5,280,026 4,142,251 8,995,381 7,241,181 Less: Lease rental receivable after one year 3,061,520 2,195,819 5,387,315 3,866,142 Lease rental receivable within one year from the Balance Sheet date 2,218,506 1,946,432 3,608,066 3,375,039 Less : Unearned lease income 695,649 551,191 1,170,880 1,009,438 Loan loss provision 109,909 122,605 136,318 186,033 1,412,948 1,272,636 2,300,868 2,179,568 31.3.b Finance leases/hire purchase receivable after one year from balance sheet date Lease rental receivable after one year from the balance sheet date 3,061,520 2,195,819 5,387,315 3,866,142 Less : Unearned lease income 506,290 425,271 929,945 810,082 Loan loss provision 151,674 84,188 203,540 200,461 2,403,556 1,686,360 4,253,830 2,855,599 Net investment in leases and hire purchase 3,816,504 2,958,996 6,554,698 5,035,167

Notes to the Financial Statements ...cont’d/

31.3.c Movement in the provision for bad and doubtful lease and hire purchase receivable: Company Group For the year ended 31 December 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Specific provision Balance on 1 January 141,714 203,757 310,230 364,169 On acquisition - - 5,607 Add : Amount provided 30,558 67,845 58,401 70,342 Less: Written off - 129,888 135,386 129,888 Balance on 31 December 172,272 141,714 233,245 310,230 General provision Balance on 1 January 65,079 73,427 76,264 73,427 On acquisition - - 9,830 Add : Amount provided / (reversed) 24,232 (8,348) 30,349 (6,993) Less: Amount reversed - - - Balance on 31 December 89,311 65,079 106,613 76,264 Total provision 261,583 206,793 339,858 386,494 31.4 Non-performing loans and advances Net exposure on non-performing loans and advances as at 31 December, before discounting the value of the securities obtained is given below: Bills receivable 139,755 117,547 139,755 117,547 Loans and advances 118,540 57,381 409,290 355,931 Lease / Hire purchase receivable 217,180 282,266 555,265 674,730 Gross non-performing loans and advances 475,475 457,194 1,104,310 1,148,208 Less: Provision for bad and doubtful debts 331,844 266,057 458,528 480,879 Net exposure 143,631 191,137 645,782 667,329 Percentage of net non-performing loans 8.32% 10.47% 10.06% 12.83% Percentage of net exposure 2.67% 4.66% 6.14% 7.88% 31.5 Concentration of Credit Risk Sector - wise analysis of the loans and advances portfolio reflecting the exposure to credit risk in the various sectors are given below: Company Group For the year ended 31 December 2010 2009 2010 2009 LKR’000 % LKR’000 % LKR’000 % LKR’000 % Tourism & allied 708,373 12.39 25,036 0.57 793,751 2.12 190,165 2.12 Industrial 137,746 2.41 129,144 2.96 697,640 4.47 400,412 4.47 Agricultural & fishing 958,958 16.78 99,926 2.29 1,400,164 5.90 528,356 5.90 Commercial trading 618,639 10.82 1,954,944 44.75 916,870 20.87 1,868,421 20.87 Import & export 313,514 5.49 39,164 0.90 313,514 0.92 82,749 0.92 Property development 85,275 1.49 161,211 3.69 85,275 0.25 22,109 0.25 Share market 67,472 1.18 89,832 2.06 67,472 1.13 100,745 1.13 Manufacturing 1.178,771 20.62 122,317 2.80 1,178,771 4.24 379,559 4.24 Housing & construction 105,011 1.84 61,144 1.40 793,564 5.42 485,191 5.42 Transport 1,093,736 19.14 1,509,600 34.56 2,430,276 37.42 3,349,339 37.42 Others 447,887 7.84 176,096 4.02 2,296,505 17.26 1,544,815 17.26 Total loans & advances 5,715,382 100.00 4,368,414 100.00 10,973,802 100.00 8,951,861 100.00 32 OTHER ASSETS 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Amounts due from subsidiary companies ACT on dividend Insurance receivable Economic Service Charge Interest receivable Short-term investments held for sale (Note) Other debtors and receivable Advance payments Others Note: 88

5,175 32,826 27,225 15,697 10,015 - 46,597 14,403 59,629 211,567

11,815 33,550 26,185 13,236 10,976 - 22,855 16,428 9,135 144,180

5,516 32,826 171,974 74,270 67,414 257,041 46,597 37,264 180,525 867,911

33,550 30,431 65,452 71,861 276,801 27,707 34,773 246,623 787,198

In accordance with SLAS 38, Non Current Assets held for sale and discontinued operations, the Management of the Bank committed to a plan to sell and recover the carrying amount through a sale transaction rather than continuing of use. The Directors are of the view that the Company will be able to sell above properties by the end of 2011 with the increasing demand for properties.

33 INVESTMENTS IN ASSOCIATE COMPANY Company/Group For the year ended 31 December 2010 2009 Country of Principal No. of Holding Net asset Directors’ Net asset Directors’ Incorporation activity Shares % value Valuation value Valuation LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Unquoted Lanka Securities Sri Lanka Share 4,054,200 29.00% 121,617 121,617 95,022 95,022 (Pvt) Limited Broking Balance at the end of the year 121,617 121,617 95,022 95,022 33.1 Movement in investments in Associate company Company/Group For the year ended 31st December 2010 2009 LKR’000 LKR’000 Net asset as at 1 January 95,022 82,977 Add: Profit accruing to the Group (After tax) 53,961 17,518 Less: Dividend received 27,366 5,473 Net asset as at 31 December 121,617 95,022 33.2 Summarised Financial Information of Associate company For the year ended 31st December Income 372,808 121,387 Expenses 87,847 21,013 Profit before taxation 284,961 100,374 Income tax expense 98,890 37,867 Net profit for the period 186,071 62,507 Total Assets 705,854 504,490 Total Liabilities 286,483 176,824 34 INVESTMENTS IN SUBSIDIARIES 2010 2009 For the year ended 31 December

Country of Principal No. of Holding % Cost Incorporation activity Shares LKR’000 Unquoted Merchant Credit of Sri Lanka Ltd Voting Sri Lanka Note -1 2,099,989 51.00 2 0,918 MBSL Savings Bank Voting Sri Lanka Note -2 87,185,520 68.00 87,186 Ltd. Non voting 100,000,000 150,000 MBSL Insurance Ltd Voting Sri Lanka Insurance 187,848,702 100.00 188,606

Balance at the end of the year 446,710

Directors’ Cost Directors’ Valuation Valuation LKR’000 LKR’000 LKR’000 20,918

20,918

87,186

100,000

150,000

188,606

138,606

446,710

259,524

Note-1 Activities of a registered finance company Note-2 Activities of a specialized licensed bank

34.a Investment in MBSL Savings Bank Ltd., 2010 2009 No. of No. of Shares LKR’000 Shares LKR’000 Balance as at 01 January 100,000 100,000 - Investments in voting shares of MBSL Savings Bank Ltd - - 100,000 100,000 Investments in Non-voting shares of MBSL Savings Bank Ltd 100,000 150,000 - Less: Disposal of voting shares 12,814 12,814 - Balance as at 31 December 187,186 237,186 100,000 100,000 89

Notes to the Financial Statements ...cont’d/

34.b Investment in MBSL Insurance Ltd 2010 2009 No. of No. of Shares LKR’000 Shares LKR’000 Balance as at 01 January 138,606 138,606 - Investments in voting shares of MBSL Insurance Ltd 50,000 50,000 138,606 138,606 Balance as at 31 December 188,606 188,606 138,606 138,606 35 INVESTMENT PROPERTIES For the year ended 31 December 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Cost as at 1 January 286,914 341,520 396,914 341,520 Additions /Improvements 2,659 - 2,659 110,000 Disposals (4,798) (54,606) (4,798) (54,606) Cost as at 31 December 284,775 286,914 394,775 396,914 Accumulated depreciation as at 31 December 2010 3,651 3,150 7,906 5,185 Net book value as at 31 December 281,124 283,764 386,869 391,729 Accumulated depreciation Balance as at 01 January 3,150 2,433 5,185 2,433 Charge for the year 853 970 3,073 3,005 Disposals (352) (253) (352) (253) Balance as at 31 December 3,651 3,150 7,906 5,185 35.1 Investment Properties held by the Company As at 31 December 2010 Cost/Carrying amount Fair Value Building Extent Land Building Total Land Building Total sq.ft perches LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 No. 64 & 66, Nonagama Road, 16.61p 1,750 - 1,750 13,000 N/A 13,000 Pallegama, Embilipitiya. Lot No. 2 & 3, acquired by RDA 20.4p 714 - 714 1,000 N/A 1,000 of Muttuweowita. No 300/8, Thalawathugoda Road, 2,478 16.15p 2,465 2,635 5,100 13,727 1,000 14,727 Madiwela, Kotte. No 385/1, Kotte Road, 2,896 19.01p 2,958 1,730 4,688 3,343 1,955 5,298 Pitakotte. No 116,116/1,118,120, 12.35P 1,249 - 1,249 1,249 N/A 1,249 1st Cross Street, Colombo 01. No 43.45.49.51 & 53, 7.5P 9,950 - 9,950 75,000 N/A 75,000 New Olcott Mawatha, Colombo 11. No 102 & 104, Dam Street, 7,925 1R-10.7P 17,970 4,989 22,959 44,065 11,964 56,029 Colombo 12. Kumbuththukuliya watte, Bangadeniya Road, Puttalam. 2.0A 600 - 600 3,400 N/A 3,400 Mirissawelawatta hena; Thekka watta Dambadeniya - 1A-0R-28.0P 162 - 162 600 N/A 600 Rukgahakottunuwa, Gehenuwala, Meepe - 38.33P 2,418 - 2,418 890 N/A 890 No 299 Union Place Colombo 02 10,456 50.00p 225,085 10,100 235,185 233,000 2.922 235,922 265,321 19,454 284,775 389,274 17,841 407,115 The fair value of the investment properties as at 31. 12. 2010 was based on market valuations carried out by Mr D N Dhammika Baranage RICS (UK), DIV AIS (SL) and Mr H A W Perera B.Sc. Estate Management & Valuation ( Special), who are independent valuers not connected with the company. The directors have reviewed values of the investment properties as at 31. 12. 2010 and concluded that there were no impairment. 35.2 Investment Property held by Subsidiary Company - Merchant Credit of Sri Lanka Ltd. As at 31 December 2010 Cost/Carrying amount Fair Value Building Extent Land Building Total Land Building Total sq.ft perches LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 No 50/21, Old Kesbawa Road, 44,877 2A 1R 04.35P 65,604 44,396 110,000 136,600 92,475 229,075 Raththanapitiya, Boralesgamuwa. 65,604 44,396 110,000 136,600 92,475 229,075 Total Investment Property held by Group 330,925 63,850 394,775 525,874 110,316 636,190 Professional valuation has been carried out by Mr. A G Gunarathna, B.Sc(Estate Management and Valuation), F.I.V (Sri Lanka) and Incorporated valuer, on basis of Market Approach (Direct Comparison Method)on 23 and 24 July 2009.

PROPERTY, PLANT AND EQUIPMENT 36.a Company Land Building Motor Computer Office 2010 2009 Vehicles Equipment Equipment Total Total & Furniture LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Cost Balance as at 01 January 9,961 2,943 18,994 57,796 34,192 123,886 113,163 Additions during the year 7,571 3,963 6,200 17,734 13,993 Disposals during the year (10,030) - - (10,030) (3,270) Balance as at 31 December 9,961 2,943 16,535 61,759 40,392 131,590 123,886 Accumulated Depreciation Balance as at 01 January - 577 8,349 50,343 26,773 86,042 82,644 Charge for the year - 147 3,588 3,216 1,976 8,927 6,668 Disposals (7,426) - - (7,426) (3,270) Balance as at 31 December - 724 4,511 53,559 28,749 87,543 86,042 Net book value as at 31.12.2010 9,961 2,219 12,024 8,200 11,643 44,047 Net book value as at 31.12.2009 9,961 2,366 10,645 7,453 7,419 37,844 36. b Group Cost Balance as at 01 January 9,961 2,943 49,110 190,539 119,616 372,169 163,184 On acquisition - 172,919 Additions during the year - - 10,922 16,867 23,885 51,674 50,783 Disposals during the year - - (14,538) - (35) (14,573) (14,717) Balance as at 31 December 9,961 2,943 45,494 207,406 143,466 409,270 372,169 Accumulated Depreciation Balance as at 01 January - 577 20,290 131,569 68,809 221,245 118,718 On acquisition - 83,264 Charge for the year - 147 8,291 18,106 12,711 39,255 29,765 Disposals - - (10,794) - (35) (10,829) (10,532) Balance as at 31 December - 724 17,787 149,675 81,485 249,671 221,215 Net book value as at 31.12.2010 9,961 2,219 27,707 57,731 61,981 159,599 Net book value as at 31.12.2009 9,961 2,366 28,820 58,970 50,807 150,924 37 INTANGIBLE ASSETS Company Group For the year ended 31 December 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000

Cost as at 1 January 19,049 On acquisition Goodwill on acquisition Additions and improvements during the year 593 Cost as at 31 December 19,642

18,775 148,626 - - 274 1,586 19,049 150,212

28,030 885 119,437 274 148,626

Accumulated amortization as at 1 January 17,626 On acquisition Share of Goodwill on Disposal of investment in Subsidiary - Amortisation for the year 656 Accumulated amortization as at 31 December 18,282 Net book value as at 31 December 1,360

17,057 26,426 - - 12,969 569 2,278 17,626 41,673 1,423 108,539

23,967 487 1,972 26,426 122,200

Intangible assets include followings (at cost) Computer Software 19,642 19,049 30,775 29,189 Goodwill - - 106,468 119,437 19,642 19,049 137,243 148,626 Market value of the lands of the company as at 31.12.2010 was LKR 34,400,000.00 as per the valuation carried out by Mr D N Baranage RICS (UK), DIV AIV (SL). Based on the assessment of potential impairment carried out internally by the board of directors as at 31 December 2010, no provision was required to be maid in the financial statements as at the Balance Sheet date. 38 CUSTOMER DEPOSITS Company Group For the year ended 31 December Time deposits Savings and other deposits 39 BORROWING For the year ended 31 December 2010 2009 LKR ‘ 000 LKR ‘ 000

2010 LKR ‘ 000 5,182,822 494.133 5,676,955 2010 LKR ‘ 000

2009 KR ‘ 000 4,557,274 340,093 4,897,367 2009 LKR ‘ 000

Call money borrowings 150,030 - 250,030 30,000 Commercial papers 2,428,159 1,409,001 2,428,159 1,409,001 Overdrafts 64,780 14,359 96,157 58,544 Long-term borrowings 536,743 235,625 536,743 235,625 3,179,712 1,658,985 3,311,089 1 ,733,170

Notes to the Financial Statements ...cont’d/

40 a. Insurance provision - Life Long-term insurance contract liabilities included in the Life Insurance Fund, result primarily from traditional non-participating life insurance products. Short duration contract liabilities are primarily accident and health insurance products. The insurance provision has been established based on the following: - Interest rates vary according to the product - mortality rates based on published mortality tables adjusted for actual experience as required by regulations issued by Insurance board of Sri Lanka - s urrender rates based on actual experience, by geographic area and modified to allow for variations in policy form. “The valuation of the insurance provision – life insurance business, as at 31 December 2010 was made by Mr R Kahakachchi of Actuarial & Management Consultants (Pvt) Limited for and on behalf of MBSL Insurance Company Ltd. According to the consult ant actuary’s report, the reserve for the year amount to LKR 66,364,916 (2009 - 41,336,000). In the opinion of consultant actuary, the reserve is adequate to cover the liabilities pertaining to the life insurance business. Further the actuary has estimated that the solvency margin required under the regulation of insurance industry act, No 43 of 2000 is LKR 3,200,000 (2009 LKR 2,032,000). This solvency margin is maintained in the long-term insurance fund. “ b Movement in Insurance Provision Fund Group 2010 2009 LKR ‘ 000 LKR ‘ 000 Balance as at 1 January 42,745 28,842 Increase in Life fund 24,192 13,903 Balance as at 31 December 66,937 42,745 41 Insurance provision - Non Life This note details the provisions related to the non-life insurance. Refer accounting policy 14.1 on page no 77. The reserve for net unearned premium indicates the amount of premium (net of reinsurance) which is attributable t o policies written as at 31st December 2010, but covering period after 31st December 2010. The reserve for net deferred acquisition cost refers to the commission adjustment (net of reinsurance) linked to t he above reserve. The reserve for gross outstanding claims refer to amount of claims which remain unclaimed as at 31st D ecember 2010. This reserve includes a reserve for claims incurred but not reported (IBNR). Reserve for net unearned premium 41 a 188,504 157,059 Reserve for net deferred acquisition cost 41 b (11,717) (11,080) Reserve for gross outstanding claims 41 c 75,986 35,590 Balance as at 31st December 252,774 181,569

a Reserve for Net Unearned Premium Balance as at 1st January 157,059 82,906 Increase during the year 31,445 74,153 Balance as at 31st December 188,504 157,059 b Reserve for Net Deferred Acquisition Cost Balance as at 1st January (11,080) (1,258) Increase / (decrease) during the year (637) (9,822) Balance as at 31st December (11,717) (11,080) c Reserve for Gross Outstanding Claims Balance as at 1st January 30,479 17,232 Claims incurred during the year 242,814 94,986 Claims paid during the year (208,350) (81,739) Balance as at 31st December 64,943 30,479 IBNR & IBNER claims reserve as at 1st January 5,111 9,720 Increase in IBNR & IBNER claims reserve 5,933 (4,609) IBNR & IBNER claims reserve as at 31st December 11,044 5,111 Total Gross Outstanding Claims 75,987 35,590 Directors are of the opinion that the total of future claims and related expenses will not exceed the unearned p remium and premium related to unexpired risks. IBNR/IBNER claims reserve are determined based on information currently available. However, it is inherent to the nature of the business that the ultimate l iability may vary as a result of subsequent developments. The incurred but not reported claim reserve and incurred but not enough reported claim reserve have been actuarially computed by Mr. N.K. Parikh of Ms K.A. Pandit Consultants & Actuaries. The valuation is based on i nternationally accepted actuarial methods, and is performed on annual basis.

General Insurance provision 252,774 181,569 Re - Insurance receivable on outstanding claims (18,833) (3,537) 233,941 178,032 42 Current tax liability Company Group For the year ended 31 December 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000

Balance on 1 January 45,511 Add: Provision for taxation 169,622 Less : Set-off against ESC/ACT 42,163 172,970

37,873 45,511 37,873 49,883 202,285 49,883 42,245 74,826 42,245 45,511 172,970 45,511

43. DEBENTURES

43 a. Company Company For the year ended 31 December 2010 2009 Investor Purpose of Security Interest Allotment Term of Interest rate debenture payable date redemption frequency 2010 2009 LKR ‘ 000 LKR ‘ 000 Employees’ Trust Fund Board To replace short-term Nil Bi Annually 10-Jan-10 10-Jan-11 11.24% 22.22% 50,000 430,000 Unlisted Debenture money market 10-Jan-10 10-Jul-11 11.24% 25,000 borrowings. 10-Jan-10 10-Jan-12 11.24% 25,000 ` 10-Jan-10 10-Jul-12 11.24% 25,000 10-Jan-10 10-Jan-13 11.24% 25,000 10-Jan-10 10-Jul-13 11.24% 25,000 10-Jan-10 10-Jan-14 11.24% 25,000 National Savings Bank To replace short-term Nil Bi Annually 05-Dec-09 05-Dec-11 10.39% 12.29% 330,000 330,000 Unlisted Debenture money market borrowings. Ceylon Hospital PLC To fund the Nil Bi Annually 31-Mar-10 31-Mar-13 11.64% 6,800 leasing business Asian Alliance Insurance PLC To fund the Nil Bi Annually 31-Mar-10 31-Mar-13 13.00% 80,000 leasing business Sri Lanka Insurance To fund the Nil Bi Annually 31-Aug-10 31-Aug-13 13.00% 100,000 Corporation Ltd leasing business Unsecured Redeemable To replace short-term Nil Bi Annually 31-Mar-07 31-Mar-10 17.00% 17.00% 14,160 unlisted Public Debentures money market borrowings. Employees’ Provident Fund Board To fund the Nil Bi Annually 05-Oct-07 05-Oct-10 17.85% 17.85% 300,000 Unlisted Debenture leasing business 716,800 1,074,160

43 b. Debentures held by Subsidiary Company

MBSL Savings Bank Group Investor Purpose of Security Interest Allotment Term of Interest rate 2010 2009 debenture payable date redemption frequency 2010 2009 LKR ‘ 000 LKR ‘ 000 For the year ended 31 December Unsecured subordinated redeemable Enhancement of Nil Quarterly 31-Dec-04 31-Dec-09 14.00% - 2,500 Leasing & Housing Loan Port folio Unsecured subordinated redeemable Enhancement of Nil Note 43 B.1 17,884 92,984 Leasing & Housing Loan Port folio 17,884 95,484 Total debentures held by Group 734,684 1,169,644

43 b.1 Unsecured subordinated redeemable debentures MBSL Savings Bank issued 900,000 unsecured subordinated redeemable debentures of LKR 100/- each. The tenure of debentures range from 1 to 5 years from 2007 to 2011 The applicable interest rates for debentures with and without put option are as follows: Interest on debenture without put option Nominal rate Quarterly 13.5% p.a. Annually 14.00% p.a. At maturity 16.00% p.a. Interest on debenture with put option Quarterly 12.00% p.a. Annually 13.00% p.a.

Notes to the Financial Statements ...cont’d/

Company Group 44 DEFERRED TAXATION For the year ended 31 December 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Deferred tax liability 20,994 23,716 20,994 23,716 20,994 23,716 20,994 23,716 Company Group 44.1 Deferred tax liability For the year ended 31 December 2010 2009 2010 2009 Temporary Tax Temporary Tax Temporary Tax Temporary Tax Difference Effect Difference Effect Difference Effect Difference Effect LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 As at beginning of the year 67,761 23,716 89,414 31,295 67,761 23,716 89,414 31,295 Amount originating/(reversing) during the year (9,722) (2,722) (21,653) (7,579) (9,722) (2,722) (21,653) (7,579) Effect of change of tax rate 16,940 16,940 As at end of the year 74,979 20,994 67,761 23,716 74,979 20,994 67,761 23,716 Deferred tax liability is consisted of the following: Leased assets (391,829) (109,712) (412,479) (144,368) (391,829) (109,712) (412,479) (144,368) Retirement gratuity 74,396 20,831 58,601 20,510 74,396 20,831 58,600 20,510 Fixed assets (5,450) (1,526 ) (3,334) (1,169) (5,450) (1,526) (3,340 ) (1,169) Tax losses 247,904 69,413 282,778 98,973 247,904 69,413 282,778 98,973 (74,979) (20,994) (67,761) (23,716) (74,979) (20,994) (67,761) (23,716) Carried forward tax loss of the Company as at 31 December 2010 was LKR 458,470,158 (31 December 2009 LKR 780,628,620). It would

create a deferred tax asset of LKR 128,371,644. Recognition of the total unutilised tax loss would result in an additional credit of LKR.128,371,644 to the income statement which will cause wide fluctuations i n the income statement this year. Therefore, deferred tax asset of LKR 69,413,000 was created after considering projected taxable profit of LKR 708,000,000 for next three years. 45 Retirement benefit obligation For the year ended 31 December 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Balance on 1 January 58,601 50,612 79,652 63,975 Acquisition - - - 4,068 Add: Provision for the year 45.1 15,795 8,993 26,656 14,540 Less : Payments made during the year - 1,004 887 2,931 Balance as at 31 December 74,396 58,601 105,421 79,652 45.1 Retirement benefit expense plan for the year ending 31.12.2010 is calculated as follows 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Current service cost at 01 January 6,015 3,064 7,743 7,170 Interest cost at 31 December 8,900 6,321 9,575 6,472 Recognition of actuarial loss/(gain) 880 (392) 9,338 898 Retirement benefit expense for the year 15,795 8,993 26,656 14,540 As at 31 December 2010 the gratuity liability was actuarially valued under the projected unit credit method by Chartered Actuary Mr. Piyal S Goonetilleke. The liability is not externally funded. Principal assumptions used are as follows: 2010 2009 Discount rate 9.55% 14% Salary increase 10% 14% Labour turnover rates Age 20 25 30 35 40 45 50 55 60 Turnover rate 10% 10% 10% 5% 3% 1% 1% 1% 0%

46 OTHER LIABILITIES Company Group For the year ended 31 December 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 Accruals 126,648 293,686 572,052 671,777 Prepaid loan installment 28,648 16,928 34,198 25,451 Cash margin 121,391 11,730 121,391 11,730 Others 61,849 64,836 167,803 225,051 338,536 387,180 895,444 934,009 47 STATED CAPITAL For the year ended 31 December Issued and fully paid 1,607,000 1,607,000 1,607,000 1,607,000 No of shares in issue 135,000 135,000 135,000 135,000

Company Group 48 RESERVES For the year ended 31 December 2010 2009 2010 2009 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 LKR ‘ 000 48.1 Statutory reserves Opening balance 59,784 45,716 106,344 83,658 Add: Transfer during the year 31,477 14,068 42,895 22,686 Closing balance 91,261 59,784 149,239 106,344 48.2 Retained earnings Opening balance 663,988 567,078 803,922 687,046 Less: Dividend paid 101,250 90,000 101,250 90,000 Less: Transfer to reserves 31,477 14,068 42,895 22,686 Add: Profit for the year 449,671 200,978 492,345 229,562 Closing balance 980,932 663,988 1,152,122 803,922 49 COMMITMENTS AND CONTINGENCIES 49.1 Contingent Liabilities Guarantees to the customers 7,117 32,568 36,967 143,442 Total commitments and contingencies 7,117 32,568 36,967 143,442 In the normal course of business, the Company makes various irrevocable commitments and incurs certain contingent liabilities with legal recourse to its customers. Even though these obligations may not be recognised on the balance sheet, they do contain credit risk and therefore form part of the overall risk of the Company.No material losses are anticipated as a result of these transactions. 49.2 Pending litigations In the normal course of business, the Company incurs certain contingent liabilities with legal recourse to its customers and would be party to litigation due to its operations. No

Case No.

D.C Col 17969/MR

The Plaintiff claims damages alleging unlawful re-possession of a vehicle by the Company

S.C CA 81/2010

The Bank obtained possession of the subject Mortgage Property through an MB case and Writ of Ejectment. However the occupants of the previous owners took possession through a stay order. Bank has appealed against this order.

D.C Kandy 487/SPL

Declaration of Title sought to set aside the Title Deed in favour of MBSL and also subsequent transfers

D.C Colombo 19426/L

Owner of the property denies the signature on the Bond

D.C Kandy 14789/P

A Third Party claims an interest in Mortgaged Property.

D.C Empilipitiya 9473/L

Declaration of Title to the property, mortgaged and owned by MBSL.

i.C.A (Restitutio Intergrum) No. 198/07

Restitio in integrum filed against the Company seeking to set aside the Judgment of Commercial High Court in favour of the Company.

ii.D.C Negombo 7300/L

Declaration of Title sought by the same party.

D.C Mt.Lavinia 2357/7/L

Declaration of Title sought by Third Party.

D.C Gampaha 1922/L

Seeking a declaration of Title subject to the Mortgage

SC (CHC) Appeal No 12/2003 [HC (Civil) Case No. 15/2002/2]

This is an Appeal against the judgment given in favour of MBSL on 07/01/2003 in the Commercial High Court, where the Commercial High Court Judge dismissed the Application made by the Petitioners to set aside, inter alia, the transfer of the 625,000 ordinary shares held by MBSL in GSL to Mr. D. Kanagaratnum of U.K for a sum of LKR 40 Million and ordered that the said transfer of shares is valid in Law.

CA Application No. 810/2003 [HC (Civil) Case No. 15/2002/2]

This is an Application seeking Writs of Certiorari and Mandamus challenging, inter alia, the decision of the Controller of Exchange with regard to the validity of the transfer of the said 625,000 ordinary shares held by MBSL in GSL to Mr. D. Kanagaratnum of U.K.

MC Attanagalle Case Nos. 7302, 7303, 7304 and 7305

For settlement of the EPF liabilities of Furni Lanka Limited amounting to a total sum of LKR 4,449,347.

PHC Gampaha Appeal Nos. 10/2008, 11/2008, 32/2008 and 33/2008

To set aside the orders made against Mr. J. Peiris in MC Attanagalle Case Nos. 7304, 7303, 7302 and 7305.

CA (PHC) Appeal Nos.176/07, 177/07, 178/07 and 179/07

To set aside the Orders made against Mr. J. Peiris in MC Attanagalle Case Nos. 7302-7305 & PHC Gampaha Revision Application Nos. 35-38/2003.

Notes to the Financial Statements ...cont’d/ 50

MATURITY ANALYSIS Definition of Maturity An analysis of assets and liabilities of the company as at December 2010, based on the remaining period at the balance sheet date to the respective contractual maturity dates are given below: 50.1 Company 50.1.a Assets For the year ended 31 December Up to 1 month to 3 month 1 year More than 2010 2009

1 month 3 months to 1 year to 5 years 5 years LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Interest earning assets Government treasury bills and other securities - - 279,765 - 279,765 387,847 Loans and advances 1,084,206 17,764 95,219 369,845 - 1,567,034 1,143,361 Leases & Hire purchase rentals receivable 249,556 214,599 948,793 2,402,436 1,120 3,816,504 2,958,996 1,333,762 232,363 1,323,777 2,772,281 1,120 5,663,303 4,490,204 Non - Interest earning assets Cash in hand and at bank 71,097 71,097 39,511 Investment securities 10,024 10,024 10,024 Dealing securities 331,752 331,752 217,429 Investments in associate 121,617 121,617 95,022 Investments in subsidiaries 446,710 446,710 259,524 Investment properties 281,124 281,124 283,764 Property, plant and equipment 44,047 44,047 37,844 Intangible assets 1,360 1,360 1,423 Other assets 178,975 32,592 211,561 144,180 581,824 32,592 - 336,555 568,327 1,519,298 1,088,721 Total Assets 1,915,586 264,955 1,323,777 3,108,836 569,447 7,182,601 5,578,925 Percentage 26.67% 3.69% 18.43% 43.28% 7.94%

50.1.b Liabilities For the year ended 31 December Up to 1 month 3 month 1 year More than 2010 2009 1 month to 3 months to 1 year to 5 years 5 years LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Interest bearing liabilities Customers deposits - - - - - - Borrowings 555,689 931,876 1,362,891 329,256 3,179,712 1,658,985 Debentures and other securities 50,000 - 355,000 311,800 716,800 1,074,160 605,689 931,876 1,717,891 641,056 - 3,896,512 2,733,145

Non - Interest bearing liabilities

For the year ended 31 December Up to 1 month 3 month 1 year More than 2010 2009 1 month to 3 months to 1 year to 5 years 5 years LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Current tax liability - - 172,970 - - 172,970 45,511 Deferred tax liability - - - 20,994 - 20,994 23,716 Retirement benefit obligation - - - 74,396 - 74,396 58,601 Other liabilities 187,050 55,493 95,993 - 338,536 387,180 187,050 55,493 268,963 95,390 - 606,896 515,008 Shareholders’ Fund - - - - 2,679,193 2,679,193 2,330,772 Total liabilities and shareholders’ funds 792,738 987,369 1,986,854 736,446 2,679,193 7,182,601 5,578,925 Percentage 11.04% 13.75% 27.66% 10.25% 37.30%

50.2 Group 50.2.a Assets Total

For the year ended 31 December Up to 1 month 3 months 1 year More than 2010 2009 1 month to 3 months to 1 year to 5 years 5 years LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Government treasury bills and other securities 3,700 404,091 614,765 604,019 - 1,626,575 1,291,653 Loans and advances 1,227,298 51,422 354,356 2,115,544 211,956 3,960,576 3,435,815 Leases & Hire purchase rentals receivable 337,583 375,224 1,588,061 4,225,446 28,384 6,554,698 5,035,167 1,568,581 830,737 2,557,182 6,945,009 240,340 12,141,849 9,762,635 Non - Interest earning assets Cash in hand and at bank 146,956 - - - - 146,956 145,518 Investment securities - - - 10,034 10 10,044 15,159 Dealing securities 404,416 49,104 11,331 - - 464,851 333,444 Investments in associate - - - - 121,617 121,617 95,022 Investments in subsidiaries - - - - - Investment properties - - 105,745 281,124 - 386,869 391,729 Investment in real estate - - 14,794 15,494 - 30,288 28,643 Property, plant and equipment 19,013 - - 99,666 40,920 159,599 150,924 Intangible assets 710 - - 107,829 - 108,539 122,200 Other assets 443,107 40,051 285,492 31,950 67,311 867,911 787,198 1,014,202 89,155 417,362 546,097 229,858 2,296,674 2,069,837 Total assets 2,582,783 919,892 2,974,544 7,491,106 470,198 14,438,523 11,832,472 Percentage 17.82% 6.37% 20.63% 51.95% 3.26% An analysis of total assets employed as at 31.12.2010 based on the remaining period at the balance sheet date to the respective contractual maturity dates.

50.2.b Liabilities

For the year ended 31 December Up to 1 month 3 month 1 year More than 2010 2009 1 month to 3 months to 1 year to 5 years 5 years LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Interest bearing liabilities Customers’ deposits 796,054 1,061,595 2,885,235 793,481 140,590 5,676,955 4,897,367 Interest bearing borrowings 687,066 931,876 1,362,891 329,256 - 3,311,089 1,733,170 Debentures and other securities 54,150 - 368,734 311,800 - 734,684 1,169,644 1,537,270 1,993,471 4,616,860 1,434,537 140,590 9,722,728 7,800,181 Non - Interest bearing liabilities Current tax liability - - 172,970 - - 172,970 45,511 Deferred tax liability - - - - 20,994 20,994 23,716 Retirement benefit obligation 6,989 - 1,442 84,010 12,980 105,421 79,652 Long-term insurance fund 66,937 - - - - 66,937 42,745 Non-Life insurance reserve 252,774 - - - - 252,774 181,569 Other liabilities 405,270 99,584 193,960 196,611 19 895,444 934,009 731,970 99,584 368,372 301,615 12,999 1,514,540 1,307,202 Shareholders’ fund 2,908,362 2,908,361 2,517,266 Minority interest 292,894 292,894 207,823 Total liabilities and shareholders’ funds 2,269,240 2,093,055 4,985,232 1,736,152 3,354,845 14,438,523 11,832,472 Percentage 15.72% 14.50% 34.53% 12.02% 23.25% An analysis of total liabilities as at 31.12.2010 based on the remaining period at the balance sheet date to the respective contractual maturity dates. Notes Matured loans & advances and lease & hire purchase rentals receivable have been classified into “up to 1 month category” (However, major part of this has been provided for bad and doubtful debts), whereas unmatured loans & advances and lease & hire purchase rentals receivable have been classified according to the respective contractual maturity dates.

Loans and advances are shown net of interest in suspense and provision for bad and doubtful debts.

Total shareholders’ funds are classified into “over 5 years category” since no contractual date of maturity can be identified.

LOANS TO EXECUTIVES Company Group

For the year ended 31 December

2010

2009

2010

2009

LKR ‘000

Balances on 1 January

23,891

20,566

51,301

Add :

Disbursed during the year

30,383

10,235

47,663

45,456 26,629

Less :

Recoveries during the year

(15,661)

(6,910)

(24,147)

(20,784)

Balance as at 31 December

38,613

23,891

74,817

51,301

Notes to the Financial Statements ...cont’d/ 52

SEGMENT REPORTING 52.1 Company

Leasing Trade Corporate Money Eliminations / Total Finance Finance Market Unallocated For the year ended 31 December 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Revenue from external customers Interest 67,870 55,965 229,048 194,935 14,839 8,189 29,308 26,025 1,734 1,639 342,799 286,753 Lease income 764,322 695,792 - - - - - - - - 764,322 695,792 Commission 12,875 15,157 1,541 2,893 - - - - - - 14,416 18,050 Others 21,459 15,312 8,823 48,494 256,045 36,222 47,944 18,360 67,172 36,748 401,443 155,136 Total revenue from external customers 866,526 782,226 239,412 246,322 270,884 44,411 77,252 44,385 68,906 38,387 1,522,980 1,155,731 Inter-segment revenue - - - - - - - - - - - - Segment results 244,150 111,611 31,354 73,874 156,686 41,262 77,251 48,890 141,267 (21,373) 650,708 254,264 Profit from operations 568,069 225,764 Income from associate company 82,639 28,500 Income tax expense (201,037) (53,286) Net profit for the year 449,671 200,978 Other Information Segment assets 3,977,281 3,004,036 1,652,056 1,326,600 565,794 309,270 360,877 446,678 58,266 137,795 6,614,274 5,224,379 Investment in associate /subsidiaries - - - - - 568,327 354,546 568,327 354,546 Unallocated assets - - - - - - - Total assets 3,977,281 3,004,036 1,652,056 1,326,600 565,794 309,270 929,204 801,224 58,266 137,795 7,182,601 5,578,925 Segment liabilities 72,164 50,444 132,165 29,186 - 3,992,379 2,995,271 306,700 173,252 4,503,408 3,248,153 Unallocated liabilities - - - - - - - - - - - - Total liabilities 72,164 50,444 132,165 29,186 - - 3,992,379 2,995,271 306,700 173,252 4,503,408 3,248,153 Information on cash flows Cash flows from operating activities (711,488) 258,628 (181,308) (284,779) 14,485 (7,017) (88,047) 161,459 (134,382) (75,297) (1,100,740) 52,994 Cash flows from investing activities - - - 62,582 172,512 (90,513) (200,000) (238,605) - - (27,487) (266,536) Cash flows from financing activities - - - - - - 1,011,697 705,849 - - 1,011,697 705,849 Capital expenditure - - - - - - - - (10,386) (13,456) (10,386) (13,456)

52.2 Group Leasing Trade Corporate Money Insurance Eliminations / Total Finance Finance Market Unallocated For the year ended 31 December 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Revenue from external customers Interest 86,122 69,733 621,880 481,766 23,543 8,189 148,713 144,696 29,425 26,493 33,801 14,278 943,484 745,155 Lease income 1,322,407 1,250,493 - - - - - - - - - - 1,322,407 1,250,493 Commission 15,312 15,672 1,202 2,980 - - - - - - - 3,403 16,514 22,055 Premium received - - - - - - - - 140,615 66,944 - - 140,615 66,944 Others 82,841 38,272 12,925 48,520 254,905 42,256 74,647 64,690 25,903 - 115,812 53,936 567,033 247,674 Total revenue from external customers 1,506,682 1,374,170 636,007 533,266 278,448 50,445 223,360 209,386 195,943 93,437 149,613 71,617 2,990,053 2,332,321 Inter-segment revenue - - - - - - - - - - - Segment results 415,119 328,062 (9,700) 60,573 156,686 41,262 74,440 35,057 9,978 (36,391) 128,154 (69,637) 774,677 358,925

Profit from operations 692,038 330,425 Financing costs Income from associate company 82,639 28,500 Income tax expense (233,700) (73,592) Minority interest (48,632) (55,771) Net profit for the year 492,345 229,562 Other Information Segment assets 6,732,890 5,080,919 3,940,214 3,511,979 565,794 332,815 1,467,731 1,246,109 632,413 449,365 997,864 1,116,263 14,316,906 11,737,450 Investment in associate - - - - - - - - 121,617 95,022 121,617 95,022 Unallocated assets - - - - - - - - - - - - - Total assets 6,732,890 5,080,919 3,940,214 3,511,979 565,794 332,815 1,467,731 1,246,109 754,030 544,387 997,864 1,116,263 14,438,523 11,832,472 Segment liabilities 2,100,330 1,438,956 1,436,755 993,203 - - 6,368,924 5,226,660 493,928 365,344 837,331 1,083,220 11,237,268 9,107,383 Unallocated liabilities - - - - - - - - - - - - Total liabilities 2,100,330 1,438,956 1,436,755 993,203 - - 6,368,924 5,226,660 493,928 365,344 837,331 1,083,220 11,237,268 9,107,383 Information on cash Flows Cash flows from operating activities (1,249,298) 642,747 (250,650) (1,103,166) 14,485 (7,017) 499,541 1,242,748 223,005 27,491 (46,529) (150,518) (809,446) 652,285 Cash flows from investing activities - - - 62,582 225,609 (90,513) - (195,930) (142,335) (14,718) 13,440 261,376 96,714 22,797 Cash flows from financing activities - - - - - - 881,697 416,436 - 100,000 154,828 - 1,036,525 516,436 Capital expenditure - - - - - - - - (5,840) (128) (19,206) (40,308) (25,046) (40,436)

52.3 SECONDARY SEGMENT INFORMATION (Based on Geographical location) 52.3 a Company Western Southern Central North North North Eastern Total Central Western LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Revenue Leasing 387,315 97,223 98,240 75,441 196,083 1,334 10,890 866,526 Trade Finance 223,956 310 6,999 6,267 1,880 - - 239,412 Corporate Finance 270,884 - - - - - - 270,884 Money market 77,252 - - - - - - 77,252 Others 68,906 - - - - - - 68,906 1,028,313 97,533 105,239 81,708 197,963 1,334 10,890 1,522,980 Assets Leasing 1,765,275 454,289 410,243 306,273 890,585 38,802 111,814 3,977,281 Trade Finance 1,558,085 8,233 36,211 27,035 22,417 - 75 1,652,056 Corporate Finance 565,794 - - - - - - 565,794 Money market 929,204 - - - - - - 929,204 Others 48,773 2,698 1,195 487 4,184 - 929 58,266 4,867,131 465,220 447,649 333,795 917,186 38,802 112,818 7,182,601 Liabilities Leasing 54,238 1,338 2,398 2,977 10,116 884 213 72,164 Trade Finance 123,845 4,109 1,361 135 2,716 - - 132,165 Corporate Finance - - - - - - - Money market 3,992,379 - - - - - - 3,992,379 Others 291,742 7,254 3,042 397 4,265 - - 306,700 4,462,203 12,701 6,801 3,509 17,097 884 213 4,503,408 SECONDARY SEGMENT INFORMATION (Based on Geographical location) 52.3 b Group Western Southern Central North North North Eastern Total Central Western LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Revenue Leasing 771,076 146,676 193,355 75,441 307,911 1,334 10,890 1,506,682 Trade Finance 515,255 4,128 36,783 6,267 73,574 - - 636,007 Corporate Finance 278,448 - - - - - - 278,448 Money market 206,840 1,428 7,711 - 7,381 - - 223,360 Others 344,625 109 426 - 396 - - 345,556 2,116,243 152,341 238,275 81,708 389,262 1,334 10,890 2,990,053 Assets Leasing 3,397,053 695,468 785,802 306,273 1,397,678 38,802 111,814 6,732,890 Trade Finance 3,316,521 27,255 211,627 27,035 357,701 - 75 3,940,214 Corporate Finance 565,794 - - - - - - 565,794 Money market 1,467,731 - - - - - - 1,467,731 Others 1,651,615 18,519 18,101 487 42,243 - 929 1,731,894 10,398,714 741,242 1,015,530 333,795 1,797,622 38,802 112,818 14,438,523 Liabilities Leasing 1,064,563 219,771 342,537 2,977 469,385 884 213 2,100,330 Trade Finance 969,312 20,595 153,398 135 293,315 - - 1,436,755 Corporate Finance - - - - - - - Money market 6,368,924 - - - - - - 6,368,924 Others 1,250,941 21,863 18,652 397 39,406 - - 1,331,259 9,653,740 262,229 514,587 3,509 802,106 884 213 11,237,268

Notes to the Financial Statements ...cont’d/ 53

RELATED PARTY DISCLOSURE The Company carried out transactions in the ordinary course of business with parties who are defined as related parties in Sri Lanka Accounting Standard 30

(revised 2005)- Related Party disclosures”, the details of which are reported below.

53 a.

Transactions with key management personnel (KMP)

According to Sri Lanka Accounting Standard (revised 2005) “related party disclosure”, Key Management Personnel are those having authority and responsibility

for planning and directing and controlling the activities of the entity. Accordingly, the directors of the Company (including Executive and non-executive directors)

and their immediate family members have been classified as KMP of the Company.

Therefore, officers who are only directors of the Subsidiaries and not of the Company have been classified as KMP of that respective subsidiary only.

53 b

Compensation paid to KMP

Company Group

Short term benefit (LKR. 000’)

4,568

12,891

53.c Transaction with/ between Subsidiaries Related party transactions Company Bank of Ceylon

Merchant Credit of Sri Lanka Limited

Name of the Director

Position

Relationship

Nature of transaction

Mr. M R Shah Appointed w.e.f. 02.06.2010

Nominee Director of BOC on the Board of MBSL as Chairman

BOC holds 72% of the share capital of MBSL

Mr. Janaka Ratnayake Resigned w.e.f. 12.05.2010

Nominee Director of BOC on the Board of MBSL as Chairman

Ms. W A Nalani

Senior DGM of BOC and Nominee Director of BOC on the Board of MBSL

Mr. V Kanagasabapathy

Alternate Director of BOC and Nominee Director of BOC on the Board of MBSL

BOC has advanced loans and granted normal banking facilities including a Term Loan of LKR 300 Million, O/D facility of LKR 50 million Money Market Loan Facility of LKR 100 million balances of which as at 31.12.2010 are Term Loan Facility LKR 81.6 million and O/D balance of LKR 25.9 million. There is no balance against the Money Market Loans. MBSL acts as Registrars to BOC Debenture Issue of 2008/2013 and has received a fee of LKR 360,000 and LKR 299,750 as reimbursable expenses.

MBSL holds 51% of the ordinary share capital of MCSL

MBSL provided secretarial services to MCSL and has received a fee of LKR 176,250 and LKR 45,226 as reimbursable expenses. Consultancy Income of LKR 600,000

MBSL holds 100% of the ordinary share capital of MBSL Insurance Company Limited

MBSL provided secretarial services to MBSL Insurance and has received a fee of LKR 646,500 and LKR 64,411 as reimbursable expenses. Further MBSL has received LKR 600,000 as consultancy Income and LKR 10.66 million as Insurance Agency Commission. The outstanding Insurance Agency Commission is LKR 335,190.

MBSL holds 29% of the ordinary share capital of LSL

MBSL provided secretarial services to Lanka Securities (Pvt) Limited and has received a fee of LKR 105,200 and LKR 14,898.75 as reimbursable expenses. MBSL has received LKR 24.6 million as dividends from Lanka Securities (Pvt) Limited.

MBSL holds 68% of the Ordinary share capital of MBSL Savings Bank Limited

MBSL has received LKR 600,000 as consultancy income from MBSL Savings Bank Limited.

Mr. Janaka Ratnayake Resigned w.e.f. 12.05.2010 Mr. M R Shah Appointed w.e f 04.06.2010.

Director

Mr. Lalith De Silva Appointed w.e f. 04.06.2010

Chairman

Dr. Ranjith Bandara Ceased to be a Director w.e.f. 29.04.2010 and re appointed on 04.06.2010

MBSL Insurance Company Limited

Lanka Securities (Pvt) Limited

Director

Mr. Janaka Ratnayake Resigned w.e.f. 12.05.2010

Chairman

Mr. J G B P Tissera Resigned w.e.f. 17.05.2010

Director

Mr. M R Shah Appointed w.e.f 22.06.2010

Chairman

Dr. Ranjith Bandara Appointed w.e.f 22.06.2010

Director

Mr. P G Rupasinghe Appointed w.e.f 22.06.2010

Director

Mr. Lakshman Perera Appointed w.e.f 22.06.2010

Director

Mr Janaka Ratnayake Resigned w.e.f 12.05.2010

Director

Mr M R Shah Appointed w.e.f. 07.07.2010

Director

Mr Lakshman Perera

100

Director

Mr. V Kanagasabapathy (appointed w.e.f. 04.06.2010

Mr P G Rupasinghe

MBSL Savings Bank Limited

Chairman

Director Director

Mr Janaka Ratnayake Resigned w.e.f. 12.05.2010

Chairman

Mr M R Shah Appointed w.e.f 03.06.2010

Chairman

Dr Ranjith Bandara Appointed w.e.f. 03 .06.2010

Director

Name of the Director

Position

Mr P G Rupasinghe

Director

Mr Lakshman Perera Resigned w.e.f. 03.06.2010

Director

Mr M S S Paramananda Appointed w.e.f. 03.06.2010

Director

Ms W A Nalani

Alternate Director

MBSL has invested LKR 23,300 in shares of CRIB and LKR 4,500 was received as dividend. MBSL obtained services of the CRIB for a fee of LKR 851,782.40.

BOC Travels (Pvt) Ltd

Ms W A Nalani

Alternate Director

MBSL Provided secretarial services to BOC Travels (Pvt) Ltd and has received a fee of LKR 72,200 and LKR 15,570.75 as reimbursable expenses.

City Housing & Real Estate Company PLC

Mr. Janaka Ratnayake Resigned w.e.f. 27.08.2010

Chairman

Mr M R Shah Appointed w.e.f 06.09.2010

Chairman

Trillium Residencies Limited

Mr. Janaka Ratnayake Resigned w.e.f. 27.08.2010

Chairman

Related party transactions Company

Relationship

Nature of transaction

Investment in Companies Credit Information Bureau of Sri Lanka Limited

Professional Services

Chairman

Mr M R Shah Appointed w.e.f 06.09.2010

MBSL resigned as Secretaries Registrars of City Housing & Real Estate Company PLC w.e.f. 20.05.2010

MBSL provided secretarial services to City Housing & Real Estate Company PLC and received a fee of LKR 205,700 and LKR 145,988.14 as reimbursable expenses.

MBSL resigned as Secretaries of Trillium Residencies Ltd w.e.f. 20.05.2010

MBSL provided secretarial services to Trillium Residencies Limited received a fee of LKR 29,400.00 and LKR 4,164.75 as reimbursable expenses.

The Finance Company PLC

MBSL acted as Managing Agents of TFC upon an Agreement entered between the two companies

MBSL has received LKR 36 million as consultancy Income from The Finance Co. PLC.

Asian Finance Limited

MBSL acted as Managing Agents of Asian Finance Limited upon an Agreement entered between the two companies

MBSL has received LKR 12 million as consultancy Income from Asian Finance Limited.

Ceylinco Building Society

MBSL acted as Managing Agents of Ceylinco Building Society upon an Agreement entered between the two companies which ceased w. e. f. 01.12. 2010

53.d Directors fees and emoluments paid by the Company during FY 2010. Mr. M R Shah Mr. Janaka Ratnayake Ms. W.A. Nalani Mr. M.S.S. Paramananda Mr. Lakshman Perera Mr. J G B P Tissera Mr. P.G. Rupasinghe Mr. V. Kanagasabapathy Dr. Ranjith Bandara Mr. Lalith De Silva

Chairman Chairman (Resigned 12 - 05 - 2010) Director Director Director Director (Resigned 12 - 05 - 2010) Director Director Director Director

MBSL has received LKR 9 million as Consultancy Income from Ceylinco Building Society.

Rs. 375,000.00 123,750.00 375,000.00 891,000.00 891,000.00 118,500.00 816,000.00 438,000.00 337,500.00 202,500.00

101

Notes to the Financial Statements ...cont’d/ 54 RETROSPECTIVE RESTATEMENT OF ERRORS - GROUP The reinsurance payable to the specific insurance contract for the year ended 31. December 2009 has not been accrued by the company in the financial statements. This error has been accounted for retrospectively and the comparative financial statements for the year ended 31 December 2009 have been restated in line with Sri Lanka Accounting Standard 10 (Revised 2005) - Accounting policies, changes in accounting estimates and errors. The effect of the change on 2009 is given below. Opening retained earnings for 2010 has decreased by LKR 53,521,000 which amount of the adjustment relating to prior period 31 December 2009. Effect on 2009 LKR’000 Increase in reinsurance premium (53,521) Decrease in profits (53,521) Increase in reinsurance payable to reinsurance creditors (53,521) Decrease in equity (53,521) 55 a. Going concern of Subsidiary - MBSL Savings Bank Ltd MBSL Savings Bank Ltd is an associate Company of the Bank of Ceylon and a subsidiary of Merchant Bank of Sri Lanka PLC and is prominent in the current market. During the year 2010, the Bank successfully completed a rights issue of 121,685,328 ordinary non-voting shares to the value of LKR.182,527,992, and the required level of capital adequacy as per CBSL guideline has been met as of 31 December 2010. The Bank has budgeted to offer a fresh issue of LKR. 600 Million ordinary shares and list the Bank on the Colombo Stock Exchange by 31 December 2011 in order to comply with the CBSL guidelines. The above budget has been approved by the Board of Directors and the capital infusion will allow the Bank to overcome the serious loss of capital in May 2011. Also,the Bank has sought approval from the CBSL to convert the 12 extension offices to fully-fledged branches. That will allow the Bank to explore many opportunities and enhance business volumes, which will eventually increase the profitability of the Bank. Considering the above, the directors are of the view that it is appropriate to adopt the going concern assumption in preparation of the financial statements for the year ended 31 December 2010. 55 b. The prospectus published by the Bank with regard to the share issue during the year 2008 included a statement to the effect that Ceylinco Shriram Securities Holding (Pvt) Ltd had given an assurance to prospective shareholders to buy back the shares after the 36th month from the allotment date at LKR. 16 per share. The Board of Directors reconfirm that there is no contingent liability to the Bank, from the assurance given by the aforementioned Company. 55 c. The Central Bank of Sri Lanka (CBSL) issued the circular dated 11 December 2006 on “Minimum Capital Require ment of Licenced Specialised Bank” requiring all licenced specialised banks to maintain a capital of LKR. 2 billion. However, CBSL has decided to grant time till 31 December 2011 for MBSL Savings Bank Limited to comply with the minimum capital requirement.

102

EVENTS AFTER THE BALANCE SHEET DATE

No circumstances have arisen since the Balance Sheet date which would require adjustments to or disclosure in the Financial Statements.

Effective high loan disbursements, and their timely recovery is intrinsic to Companyâ&#x20AC;&#x2122;s continued success. While all efforts are aimed to enhance credit portfolio , careful screening of fund seekers, assessing their repayment capacity and methodical recoveryâ&#x20AC;Śhas minimized unnecessary costs. Shyamalie Amaratunge. Deputy Director â&#x20AC;&#x201C; Trade Finance.

Assessing Opportunities... 103

Share & Debenture

Information

SHARE & DEBENTURE INFORMATION 1. Stock Exchange Listing The issued ordinary shares of Merchant Bank of Sri Lanka PLC are listed on the Colombo Stock Exchange. 2. Ordinary Shareholders as at 31 December 2010 Resident Non - Resident Total Range of No.of No.of % No.of No.of % of No.of No.of % of Shareholding Shareholders Shares Shareholding Shareholders Shares Shareholding Shareholders Shares Shareholding

1 - 1,000 1,001 - 10,000 10,001 - 100,000 100,001 - 1,000,000 1,000,001 - & Above TOTALS

8,480 2,490 426 36 3 11,435

2,356,807 8,470,410 12,113,214 8,531,759 102,478,546 133,950,736

1.75 6.27 8.97 6.32 75.91 99.22

38 23 10 1 0 72

9,455 101,859 239,150 698,800 0 1,049,264

0.01 0.08 0.18 0.51 0.00 0.78

8,518 2,366,262 2,513 8,572,269 436 12,352,364 37 9,230,559 3 102,478,546 11,507 135,000,000

Individual Company Range of No.of No.of % No.of No.of % of No.of Shareholding Shareholders Shares Shareholding Shareholders Shares Shareholding Shareholders

1.76 6.35 9.15 6.84 75,91 100.00

Total No.of % of Shares Shareholding

1 - 1,000 8,351 2,323,276 1.72 167 42,986 0.03 8,518 2,366,262 1.75 1001 - 10,000 2,392 8,021,705 5.94 121 550,564 0.41 2,513 8,572,269 6.35 10,001 - 100,000 363 9,729,136 7.21 73 2,623,228 1.94 436 12,352,364 9.15 100,001 - 1,000,000 20 4,928,423 3.65 17 4,302,136 3.19 37 9,230,559 6.84 1,000,0001 - & Above - 0 0.00 3 102,478,546 75.91 3 102,478,546 75,91 TOTALS 11,126 25,002,540 18.52 381 109,997,460 81.48 11,507 135,000,000 100.00 The percentage of shares held by the public as at 31 December 2010 was 27.86.%. (31 December 2009- 27.86%). The Total Number of Shareholders as at 31 December 2010 was 11,507 (31.12.2009-8,676).The number shares in issue as at 31st December 2010 were 135,000,000 3. Book Value ( as at 31 December)

2010

Net Assets per share 4 Share Prices (LKR) Lowest Highest Last Transaction

19.85

2009 17.26

16.75 (13.01.2010) 59.70 (23.09.2010) 45.80 (31.12.2010)

7.75 (08.01.2009) 32.00 (07.10.2009) 19.50 (30.12.2009)

5. Share Trading No. of transactions 43,787 No. of shares traded 84,879,700 Value of shares traded (LKR) 2,942,506,810

14,243 26,989,500

6. Earnings as at 31 December (LKR) Earnings per share 3.33 Price earning ratio 13.75 7. Performance at the Colombo Stock Exchange as at 31 December 2010 (a)Market Capitalisation of MBSL Value LKR Rank

104

2.19 8.90

6,156,000,000 69

2,632,500,000 71

(b)Price Movement All Share Price Index 6,635.87 3,385.55 Milanka Price Index MBSL Midcap Index

7,061.46

3,849.38

12,257.07

7,194.32

8. Directors Shareholding The number of shares held by the Directors as at 31.12.2010 Mr. M R Shah (Chairman - appointed w.e.f. 02 - 06 - 2010)) Nil Mr. Janaka Ratnayake (Chairman - resigned w.e.f. 12 - 05 - 2010) - Ms. W.A. Nalani Nil Mr. M.S.S. Paramananda Nil Mr. Lakshman Perera Nil Mr. J.G.B.P.Tissera (resigned w.e.f. 17.05.2010) Mr. P.G. Rupasinghe Nil Mr. V. Kanagasabapathy Nil Dr. Ranjith Bandara Nil Mr. Lalith De Silva (appointed w.e.f. 02 - 06 -2010) Nil 9. Shares held by the Chief Executive Officer Mr. Gamini Karunathilake

31.12.2009

Nil Nil Nil Nil Nil 3000 Nil Nil Nil Nill

Nill

10. MAJOR SHAREHOLDERS AS AT 31 DECEMBER 2010 Name of the Shareholder 2010 1 Bank of Ceylon No. 1 Account 97,392,136 2 Bank of Ceylon A/C Ceybank Unit Trust 2,836,410 3 Seylan Bank PLC/Ms.Prime Lands (Pvt) Ltd 2,250,000 4 Mr. M.M. Udeshi 878,276 5 Mr. N.Balasingam 698,800 6 Employees Trust Fund Board 568,014 7 Mr. M.Premjayanth 551,001 8 Merryl J Fernando & Sons (Pvt) Ltd 538,065 9 D S L Investments (Private) Limited 344,003 10 Mr. A. Chelliah 333,800 11 Freudenberg Shipping Agencies Limited 325,000 12 Seylan Bank Limited/Dinesh Nagendra Sellamuttu 286,301 13 First Capital Markets Limited/Mr. E.P.I. Fernando 282,400 14 Waldock Mckenzie Limited/Mr.L.P. Hapangama 261,500 15 Mr. R. Veerasuntharam 250,000 16 Sithlanka (Private) Limited 235,000 17 Chemanex PLC A/C No. 1 210,000 18 Sampath Bank Limited - Account No.03 207,600 19 Mr. A.M. Weerasinghe 200,650 20 Mr. M.N. Cader 200,300 11. Unsecured Redeemable Three year Unlisted Debentures 2007/2010

Nill

2009

72.14 2.10 1.67 0.65 0.52 0.42 0.41 0.40 0.25 0.25 0.24 0.21 0.21 0.19 0.19 0.17 0.16 0.15 0.15 0.15

97,392,136 4,512,110 2,162,150 288,476 - 955,314 479,801 438,465 - - - 400,765 764,700 250,000 - - 207,600 234,750

72.14 3.34 1.60 0.21 0.71 0.36 0.32 0.30 0.57 0.19 0.15 0.17

The Redemption of the above Debentures totaling to a value of LKR 14.16 million was completed on 31.08.2010. Unsecured Redeemable Unlisted Debentures of LKR 100/- each The Debentures were categorized as Types A, B C, and D as described below; 1. Type A - 3 year debentures carrying a Fixed Interest rate of 13% payable bi - annually 2. Type B - 4 year debentures carrying a Fixed Interest rate of 13% payable bi - annually 3. Type C- 3 year debentures carrying a Floating Interest rate payable bi - annually 4. Type D- 4 year debentures carrying a Floating Interest rate payable bi - annually The Bank has issued 1,800,000 unsecured redeemable three year debentures (Type A) of LKR 100/- each carrying a Fixed Interest Rate of 13% to the value of LKR 180.0 million in the year 2010. The Bank has also issued 68,000 unsecured redeemable four year debentures (Type D) of LKR 100/- each carrying a Floating Interest Rate to the value of LKR 6.8 million in the year 2010. The bi - annual Interest rate for these debentures was 11.64% during 2010. Floating rates of interest is calculated bi - annually on the basis that the effective rate of interest per annum in respect of Debentures Type C and D is equivalent to one and half percentage points (1.5%) above the simple average of the six (06) months Weighted Average Treasury Bill Rate (before withholding tax) at the last four (04) primary auctions held prior to the date of determination/ renewal of the Interest Rate. 105

Decade at

a Glance

Company For the year ended 31 December 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Operating Results Income 1,522,980 1,155,731 1,035,227 872,598 704,355 539,001 434,969 386,645 346,641 425,384 Interest expenses 419,041 584,247 547,386 333,204 189,017 185,914 148,969 150,565 196,135 252,379 Operating expenses & provisions 535,870 345,720 300,898 273,261 257,190 188,207 163,370 176,480 149,252 226,948 Share of Associate Company 82,639 28,500 16,471 7,136 11,033 22,450 5,340 16,271 5,821 1,066 Profit before income tax 650,708 254,264 203,414 273,269 269,181 187,330 127,970 75,871 7,075 (52,877) Income tax on profit 201,037 53,286 (1,664) 34,799 59,638 28,903 3,204 4,378 - Profit after income tax 449,671 200,978 205,078 238,470 209,543 158,427 124,766 71,493 7,075 (52,877) Minority interest - - - - - - - - - Net profit for the year 449,671 200,978 205,078 238,470 209,543 158,427 124,766 71,493 7,075 (52,877) Balance Sheet Information Assets Government Treasury Bills and Bonds 279,765 387,847 131,084 41,735 - 193,516 2,214 577 56,219 50,251 Investments on Securities & Properties 622,900 511,217 395,616 410,456 185,641 121,930 76,655 88,656 203,413 203,970 Loans and advances 1,567,034 1,143,361 807,469 570,618 485,594 629,908 461,447 481,588 640,435 716,282 Lease receivable 3,816,504 2,958,996 3,128,124 3,154,198 2,628,564 2,117,444 1,764,896 1,399,246 1,091,034 1,091,576 Property Plant & Equipment 44,047 37,844 30,519 24,517 26,344 29,232 31,361 25,115 30,441 33,232 Investments in associate & Subsidiary companies 568,327 354,546 103,895 95,543 51,944 55,365 40,213 44,463 36,395 34,222 Other Assets 284,024 185,114 171,421 107,015 125,610 125,501 98,655 88,564 107,714 242,988 TOTAL ASSETS 7,182,601 5,578,925 4,768,128 4,404,082 3,503,697 3,272,896 2,475,441 2,128,209 2,165,651 2,372,521 Liabilities Deposits from customers - - - - - - Debentures 716,800 1,074,160 1,144,160 1,327,510 1,260,600 1,400,600 1,303,350 1,150,000 1,200,000 1,375,000 Borrowings 3,179,712 1,658,985 1,553,949 1,079,083 400,370 242,000 157,735 98,258 201,258 197,274 Other liabilities & Deferred Taxation 606,896 515,008 390,225 432,773 426,481 356,092 273,398 263,759 219,695 262,624 4,503,408 3,248,153 3,088,334 2,839,366 2,087,451 1,998,692 1,734,483 1,512,017 1,620,953 1,834,898 Minority Interest - - - - - - - - - Net Assets 2,679,193 2,330,772 1,679,794 1,564,716 1,416,246 1,274,204 740,958 616,192 544,698 537,623 Capital Employed Stated Capital 1,607,000 1,607,000 1,067,000 1,067,000 1,067,000 1,067,000 617,000 2,070,000 2,070,000 2,070,000 Retained Profit/(Loss) & Reserve fund 1,072,193 723,772 612,794 497,716 349,246 207,204 123,958 (1,453,808) (1,525,302) (1,532,377) 2,679,193 2,330,772 1,679,794 1,564,716 1,416,246 1,274,204 740,958 616,192 544,698 537,623

Ratios and Related Information

Company For the year ended 31st December 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Operating Ratios Return on Net Assets - % 16.78% 11.10% 12.21% 15.24% 14.80% 12.43% 16.84% - - Net Profit - % 29.53% 17.39% 19.81% 27.33% 29.75% 29.39% 28.68% 18.49% 2.04% -12.43% Cost to Income Ratio - % 42.58% 54.95% 53.30% 41.14% 42.32% 46.73% 51.36% 49.19% 61.46% 85.66% Income Growth - % 31.78% 11.64% 18.64% 23.89% 30.68% 23.92% 12.50% 11.54% -18.51% 6.60% Profit Growth - % 123.74% -2.00% -14.00% 13.80% 32.26% 26.98% 74.51% 910.50% -113.38% -84.57% Assets Growth - % 28.75% 17.00% 8.27% 25.70% 7.05% 32.21% 16.32% -1.73% -8.72% -17.72% Net Assets Growth - % 14.95% 38.75% 7.35% 10.48% 11.15% 71.97% 503.12% 28.00% 2.70% -25.24% Gearing Ratios Debt to Equity - Times 1.45 1.17 1.61 1.54 1.17 1.29 1.97 (11.14) (8.62) (9.04) Interest Cover - Times 2.55 1.44 1.37 1.82 2.42 2.01 1.86 1.50 1.04 0.79 Liquidity Ratios Quick Ratio - Times 0.93 1.04 1.19 1.57 0.91 1.61 2.62 2.85 2.19 1.27 Investors Ratios Market value of a voting share - LKR. 45.80 19.50 7.25 14.25 16.25 14.25 9.25 9.00 6.00 7.50 Basic earnings per share - LKR. 3.33 2.19 2.28 2.65 2.33 2.52 2.49 1.43 0.14 (1.06) Net assets value per share - LKR. 19.85 17.26 18.66 17.39 15.74 20.24 14.79 (3.67) (5.14) (5.24) Price earnings ratio - Times 13.75 8.89 3.18 5.38 6.98 5.66 3.71 6.31 42.15 (7.10) Earning yield - % 7.27% 11.25% 31.43% 18.59% 14.33% 17.66% 26.92% 15.85% 2.37% -14.09% Dividend per share - LKR. 1.25 0.75 1.00 1.00 1.00 0.75 0.50 - - Dividend Cover - Times 2.66 1.98 2.28 2.65 2.33 2.35 4.16 - - Dividend yield ratio - % 2.73% 3.85% 13.79% 7.02% 6.15% 5.26% 5.41% - - Dividend Payout ratio - % 37.53% 34.18% 43.89% 37.74% 42.95% 29.80% 20.08% - - -

106

Group For the year ended 31 December 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 LKR’000 Operating Results Income

2,990,053 2,332,321

1,647,537

1,443,925

1,163,678

905,927

776,966

759,131

683,967

671,792

Interest expenses

1,092,162 1,274,896

921,486

658,647

440,614

368,701

316,227

352,091

416,419

405,076

Operating expenses & provisions

1,205,853

727,000

494,628

464,824

429,735

332,336

320,244

327,848

232,656

294,046

82,639

28,500

16,471

7,136

11,033

22,450

5,340

16,271

5,821

1,066

Profit before income tax

774,677

358,925

247,894

327,590

304,362

227,340

145,835

95,463

40,713

(26,264)

Income tax on profit

233,700

73,592

4,908

38,134

59,737

30,037

6,945

3,187

4,634

3,370

Profit after income tax

540,977

285,333

242,986

289,456

244,625

197,303

138,890

92,276

36,079

(29,634)

Share of Associate Company

Minority interest Net profit for the year

48,632

55,771

18,574

24,984

19,693

21,050

7,116

11,083

14,212

13,888

492,345

229,562

224,412

264,472

224,932

176,253

131,774

81,193

21,867

(43,522)

Balance Sheet Information Assets Government Treasury Bills and Bonds

446,084

362,499

323,054

485,110

239,041

411,332

236,000

165,750

768,975

430,930

452,165

230,839

183,766

143,860

148,082

351,086

286,428

Loans and advances

3,960,576 3,435,815

1,672,490

887,570

805,632

725,016

742,370

820,513

967,780

878,804

Lease receivable

6,554,698 5,035,167

4,660,299

4,814,920

Investments on Securities & Others

1,626,575 1,291,653 892,052

4,471,315 3,615,485 2,994,126

2,595,780 2,087,155 1,890,013

Property Plant & Equipment

159,599

150,924

44,466

37,360

43,528

49,446

47,342

42,438

43,863

Investments in associate & Subsidiary companies

121,617

95,022

82,977

74,625

31,026

34,447

19,295

23,545

15,477

13,304

Other Assets

1,123,406 1,054,916

251,782

173,608

185,807

349,255

127,360

110,747

254,011

377,483

TOTAL ASSETS

14,438,523 11,832,472

7,589,028

6,802,747

6,091,201 5,442,525 4,313,394

46,667

4,152,437 3,955,372 3,658,449

Liabilities Deposits from customers

5,676,955 4,897,367

2,199,270

1,813,329

2,142,949 1,848,626 1,587,357

1,766,390 1,499,140 1,078,211

734,684 1,169,644

1,144,160

1,327,510

1,260,600 1,400,600 1,303,350

1,150,000 1,200,000 1,375,000

Borrowings

3,311,089 1,733,170

1,682,372

1,240,575

490,384

242,000

157,735

98,258

211,258

197,274

Other liabilities & Deferred Taxation

1,514,540 1,307,202

553,314

564,407

539,798

466,051

347,907

359,634

357,330

356,399

11,237,268 9,107,383

5,579,116

4,945,821

172,208

153,634

Debentures

Minority Interest

292,894

207,823

4,433,731 3,957,277 3,396,349 128,650

113,859

96,728

3,374,282 3,267,728 3,006,884 89,612

80,294

66,082

Net Assets

2,908,361 2,517,266

1,837,704

1,703,292

1,528,820 1,371,389

820,317

688,543

607,350

585,483

Capital Employed Stated Capital

1,607,000

1,067,000

Retained Profit/(Loss) & Reserve fund

1,301,361

910,266

770,704

636,292

2,908,361 2,517,266

1,837,704

1,703,292

1,067,000 1,067,000 461,820

304,389

1,528,820 1,371,389

617,000

2,070,000 2,070,000 2,070,000

203,317 (1,381,457) (1,462,650) (1,484,517) 820,317

688,543

607,350

585,483

Ratios and Related Information

Group For the year ended 31st December 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Operating Ratios Return on Net Assets - % 16.93% 11.50% 12.21% 15.53% 14.71% 12.85% 16.06% - - - Net Profit - % 18.09% 12.23% 14.75% 20.05% 21.02% 21.78% 17.88% 12.16% 5.27% -4.41% Cost to Income Ratio - % 56.53% 70.44% 55.15% 45.21% 46.64% 53.93% 51.27% 46.53% 62.66% 75.72% Income Growth - % 28.20% 41.56% 14.10% 24.08% 28.45% 16.60% 2.35% 10.99% 1.81% 12.75% Profit Growth - % 89.60% 17.43% -16.05% 18.33% 23.98% 42.06% 50.52% 155.76% -221.75% -90.77% Assets Growth - % 22.02% 55.92% 11.56% 11.68% 11.92% 26.18% 3.88% 4.98% 8.12% -4.85% Net Assets Growth - % 15.54% 36.98% 7.89% 11.41% 11.48% 67.18% 835.99% 42.15% 10.19% -25.45% Gearing Ratios Debt to Equity - Times 3.34 3.10 2.73 2.57 2.55 2.55 3.72 (34.23) (19.26) (16.08) Interest Cover - Times 1.71 1.28 1.27 1.50 1.69 1.62 1.46 1.27 1.10 0.94 Liquidity Ratios Quick Ratio - Times 0.69 0.85 0.87 1.00 0.70 0.87 1.03 1.00 1.38 0.82 Investors Ratios Market value of a voting share - LKR. 45.8 19.5 7.25 14.25 16.25 14.25 9.25 9.00 6.00 7.50 Basic earnings per share - LKR. 3.65 2.51 2.49 2.94 2.50 2.80 2.63 1.62 0.44 (0.87) Net assets value per share - LKR. 21.54 18.65 20.42 18.93 16.99 15.24 13.67 (2.23) (3.85) (4.29) Price earnings ratio - Times 12.56 7.78 2.91 4.85 6.50 5.09 3.52 5.56 13.64 (8.62) Earning yield - % 7.96% 12.85% 34.39% 20.62% 15.38% 19.65% 28.43% 18.00% 7.33% -11.60% Dividend per share - LKR. 1.25 0.75 1.00 1.00 1.00 0.75 0.50 - - - Dividend Cover - Times 2.92 2.27 2.49 2.94 2.50 2.61 4.39 - - - Dividend yield ratio - % 2.73% 3.85% 13.79% 7.02% 6.15% 5.26% 5.41% - - - Dividend Payout ratio - % 34.27% 29.93% 40.10% 34.03% 40.01% 26.79% 19.01% - -

107

Statement of Value Added

Value Added Year 2010 LKR Mn

Year 2009 LKR Mn

Payments to Employees 18%

Retained 37%

Gross Value added 1,605 1,185 Cost of borrowings & support services (584) (705) Provision for bad debts & investments (66) (31) 955 449 Value Allocated Payments to Employees 175 133 Dividends to share holders 101 90 Government Tax 320 107 Depreciation 10 8 Retained 349 111 955 449 Depreciation Government 1% - Tax Sources & Utilization of Income 33% Sources of Income Dividend Income 1% Interest Income 1,107 983 Fee & Commission income 109 77 Other Income 19% Other Income 298 75 Dividend Income 8 21 Share of profit of Associate Company 83 29 1,605 1185 Fee & Commission Utilization of Income Income 7% Payment to lenders 419 584 Payments to employees 175 133 Support services 165 121 Depreciation 10 8 Provisions for bad debts & Investments 66 31 Government Taxes 320 107 Dividends 101 90 Retained Profit 349 111 1,605 1,185

Dividends to Shareholders 11%

Payments to Lenders 26%

Retained Profit 22%

Payments to Employees 11%

Dividend 6%

Support Services 10%

Government Taxes 20% Provision for Bad Debts & Investments 4%

108

Interest Income 68%

Share of Profit of Associate Company 5%

Depreciation 1%

Economic / Financial Indicators 2010 2009 GDP Growth Rate 8.1% 3.5% Inflation- Annual Average Rate 5.9% 3.4% Exchange Rate US $ 112.03 115.15 Yen 1.38 1.26 S. Pound 173.8 183.41 Euro 150.04 165.39 Rate of Change against LKR % US $ -2.71% 0.98% Yen 9.52% -0.79% S. Pound -5.24% 11.19% Euro -9.28% 2.62% Interest Rate

T-Bills Rate : 3-Months 7.24% 7.67% 6-Months 7.35% 8.65% 12-Months 7.55% 9.32%

Overnight repurchase rate Commercial Bank WADR Commercial Bank WAPLR

7.22% 6.23% 9.29%

8.39% 8.01% 10.85%

Stock Market ( as at year end) ASPI MPI MBSL Midcap Change in API % Change in MPI % Change in MIDCAP % Market capitalization LKR ( Billion) Annual Turnover LKR (Billion)

6,635.87 3,385.55 7,061.46 3,849.38 12,257.07 7,194.32 96.01% 125.25% 83.44% 135.96% 70.37% 125.45% 2,210.45 1,092.14 570.3 142.5

109

Contact

@ MBSL

CORPORATE

TELEPHONE

FAX

E-MAIL

General

4711711 2565636

2565666

mbslbank@mbslbank.com

Mr Gamini Karunathilake Chief Executive Officer

4711700

CORPORATE SECRETARIAL SERVICES Ms. Marina Phillips Company Secretary

4711766

STRATEGIC PLANNING & RISK MANAGEMENT Mr. Ranjith Siriwardena Deputy Director

4711762

GROUP HUMAN RESOURCES & ADMINISTRATION Ms. Amitha Samarasinghe Assistant Director LEASING Mr. Lakshman Kaluarachchi Deputy Director Mr. Senaka Uduwawala Assistant Director Mr. Ananda Attanayake Manager (Legal) Mr. Sanjaya Ranathunga Senior Manager Mr. Sarath Ediriarachchi Manager Mr. Priyalal Pathirana Manager TRADE FINANCE Ms. Shyamalie Amaratunga Deputy Director Mr. Amitha Athulathmudali Senior Manager Ms. Mihirun Jayasinghe Senior Manager (Legal) CORPORATE ADVISORY & CAPITAL MARKETS Mr. A.M.A.Cader Deputy Director Ms. Lalangi Goonawardena Manager Ms. Fahima Ishar Manager (Legal) Mr. S Gajeeban Manager - Portfolio & Investment FINANCE & TREASURY MANAGEMENT Mr. Priyantha Herath Assistant Director Mr Asela Wijayabandara Manager

110

4711704

4711751 4711750

marinap@mbslbank.com

ranjiths@mbslbank.com

4711712 4711703

amithas@mbslbank.com Hotline: 4711722 4711759

lakshmank@mbslbank.com

4711734

senakau@mbslbank.com

4711733

anandaa@mbslbank.com

4711797

sanjayar@mbslbank.com sarathe@mbslbank.com priyalalp@mbslbank.com

4711706

4711739

4711709

4711769

mihirunj@mbslbank.com 4711741

4711746

fahimat@mbslbank.com

4711761

4711732

4711771

INTERNAL AUDIT Mr. Shalintha Fernando Assistant Director - Group Internal Audit

4711764

cader@mbslbank.com

lalangig@mbslbank.com

4711747

4711749

shyamalia@mbslbank.com amithaa@mbslbank.com

4711781

INFORMATION TECHNOLOGY Mr. Chinthaka Elvitigala Manager

Mr. Lakshman Perera Manager - Internal Audit

gaminik@mbslbank.com

gajeebans@mbslbank.com 4711765

priyanthah@mbslbank.com aselaw@mbslbank.com

chinthakae@mbslbank.com shalinthaf@mbslbank.com

lakshmanp@mbslbank.com

BRANCH OFFICES

TELEPHONE

FAX

E-MAIL

Galle Mr. Ratnasiri Mayakaduwa Senior Manager

091-2234751 091-4924912/3

091-2234750

ratnasirim@mbslbank.com

Kandy Mr. Keerthi Ramanayake Senior Manager

081-4481702 081-2224818-20

081-4481701

keerthir@mbslbank.com

Kurunegala Mr. Saman Pathmadeera Manager

037-4692006 037-4939836

037-2223916

samanp@mbslbank.com

Maharagama Mr. Janaka Fernando Manager

2745431 4306096/7

2745451

janakaf@mbslbank.com

Anuradhapura Mr. Pradeep Jayasekera Branch Manager

025-4580507 025-2234485

025-4580508

pradeepj@mbslbank.com

Negombo Ms. Anoma Van Hoff Manager

031-4933922 031-4932230

031-2228466

anomav@mbslbank.com

City Ms. Devika Perera Branch Manager

4361571 4361581

2328688

devikap@mbslbank.com

Trincomalee Mr. Chareendra de Silva Branch Manager

026-4928888 026-4595151

026-2226784

chareendrad@mbslbank.com

Ambalantota Mr Nirmalath Fernando Manager

047-4933660 047-4933661

047-2225610

Vavuniya Mr R. Saravanan Manager

024-4925475 024-4588685

024-2226108

saravananr@mbslbank.com

Batticaloa Mr. P Nivaraj Branch Manager

065-4926799 065-4926787

065-2228575

nivarajp@mbslbank.com

nirmalatha@mbslbank.com

111

Our Team

Kaushalya

112

Priyantha

Nimali

Cader

Buddhika

Vajira

Jude

Thilina

Lalangi

Dilip

Wood

Nirmala

Chintha

Chaminda

Lakmal

Bashini

Dayani

Jayawardena

Chandima Isanka

Gajeeban

Asela

Niranjala Susantha

Sulani

Premalal

Athula

Senaka

Lasitha

Roshan

Premalal Shanaka

Ruweena

Tharanga Chamara

Shyaman

Gamini

Saman

Shalintha Marina

Nishantha Asanka

Fahima

Asanka

Suganya

Janith

Chandima

Hewasagara

Leonard Jayaratne Chandrakumara

Kamal

Chamathi

Sanjeewa

Mahinda

Chandani Hasintha

Sriyani

Asanka

Nirani

Pradeep

Anoma

Viranga

Dilanga

Shiranthi Ruwan

Mihirun

Udaya

Pathirana Chrishanthi Sanjaya

Ajith

113

Lakshman

Amitha

Hijas

Niduka

Chandima Gayan

Ananda

114

Nishani

Ajantha

Nishantha Susil

Sandamali Amila

Tharanga Chinthaka Darshika

Kosala

Janaka

Charith

Hemali

Shyamalie

Chinthaka

Janaka

Lasantha

Priyanga

Ranjith

Chaminda

Roshini

Dayani

Lalith

Sarath

Keerthi

Niluka

Deshapriya

Prabath

Shashikala

Dishan

Rangana

Suranga

Devika

Wasantha Chandana

Indika

Judith

Munasinghe Vinitha

Roshan

Ratnasiri

Dhammika Sangeeth

Madhawa Madusha

Sunil

Senaka

Piyaratne Darshani

Chathura

Hansini

Monika

Amitha

Pradeep

Damitha

Emil

Nilanga

Fareeza

Roshan

Senthil

Erani

Amarasinghe Danushka

Harshana

Vindani 115

Sulakshi

Amila

Rachitha

Chareendra Savrvanan

Supun

116

Lakshman

Nivaraj

Siyahul

Nirmalath

Christable

Chamara

Chalana

Jashitha

Kaushalya

Bagya

Lushani

Siva

Sampath

Manoj

Gopinath

Kalpa

Milinda

Risintha

Janaka

Janarthanan

Viraj

Balakrishnan

Glossary of

Financial Terms

Associate Company A company other than a subsidiary in which a holding company has a participating interest and exercises a significant influence over its operating and financial policies. Discounting of Bills of Exchange To advance cash on a bill of exchange prior to its maturity after deducting a sum for interest. Capital Reserves The profits of a company that for various reasons are not regarded as distributable to shareholders as dividends. These include gains on the revaluation of capital assets and share premium. Contingent Liabilities Conditions or situations prevailed as at the balance sheet date, the financial effects of which are to be determined by future events which may or may not occur. Corporate Governance The process by which corporate entities are governed. It is concerned with the way in which power is exercised over the management and direction of entity, the supervision of executive actions and accountability to owners and others. Cost method A method of accounting whereby the investment is recorded at cost. The income statement reflects income from the investment only to the extent that the investor Receives distributions from accumulated net profits of the investee arising subsequent to the date of acquisition. Cost to Income Operating expenses excluding provision for bad & doubtful debts as a percentage of total operating income net of interest cost. Deferred Tax Sum set aside for tax in the accounts of an organization that will become payable in a period other than that under review. Gross Dividend Portion of current and retained earnings, inclusive of tax withheld, distributed to shareholders. Earnings per Share Profit after tax divided by the number of ordinary shares in issue. Equity method A method of accounting whereby the investment is initially recorded at cost and adjusted thereafter for the post acquisition change in the investor’s share of net assets of the investee. The income statement reflects the investor’s share of the results of operations of the investee. Finance Lease A contract whereby a lessor conveys to the lessee the right to use an asset for rent over an agreed period of time which is sufficient to amortise the capital outlay of the lessor. The lessor retains ownership of the asset but transfers substantially all the risks and rewards of ownership to the lessee. Floating Rate Note A debt security carrying a floating rate of interest which is reset at regular intervals, typically quarterly or half-yearly, in relation to some predetermined reference rate, typically Guarantee A promise made for fee by a third party (guarantor), who is not a party to the contract between two others, that the guarantor will be liable if one of the parties fails to fulfill the contractual obligations. Interest Earning Assets Assets, which earn interest – the total of Advances, Bills, Leases, Government Bills & Bonds, Call Money and Placements with other institutions. Interest in Suspense Interest income of Non Performing Loans; these are accrued but not considered as profits.

Market Capitalisation The market value of a company at a given date obtained by multiplying the share price by the number of issued shares. Net Assets per Share Net assets (total assets less total liabilities) divided by the number of ordinary shares in issue. This represents the theoretical value per share if the company is broken up. Net Interest Income The difference between what a bank earns on assets such as loans and securities and what it pays on liabilities such as deposits, refinance funds and inter-banking borrowings. Operating Lease Any form of lease other than finance lease, i.e., one that does not transfer all the benefits and risks of ownership to the lessee. Portfolio A combination of income generating assets such as loans, finance leases, investment securities and bills discounted. Post Balance Sheet Events Significant events that occur between the balance sheet date and the date on which financial statements are approved by the Board of Directors. Price Earnings Ratio Market price of an ordinary share divided by annual earnings per share. Provisions for Bad & Doubtful Debts Specific provisions made for possible loan losses according to the period of non-performance and the exposure over the collateral. Related Party An individual, partnership of company that has the ability to control or exercise significant influence over another organization. REPOs Repurchase Agreements : The securities sold to creditors (who lend money for funding purposes), with the intention of buying them back at a set price. Return on Average Assets (ROAA) Profit after tax as a percentage of Average Assets. Return on Equity (ROE) Profit after tax as a percentage of Average Equity. Return on shareholders’ Funds Profit after tax divided by average shareholders’ funds (total of share capital and reserves). Return on Total Assets Profit after tax divided by average total assets. Revenue Reserves Reserves which may be distributed to shareholders as dividends. Segment Reporting Segment reporting indicates the contribution to the revenue derived from business segments such as banking operations, leasing operations, stock broking & securities dealings, property and insurance. Shareholders’ Funds Shareholders’ funds consist of issued and fully paid ordinary share capital plus capital and revenue reserves. Subsidiary Company A company is a subsidiary of another company if the parent company holds more than 50% of the nominal value of its equity capital or holds some shares in it and controls the composition of its board of directors. Value Added Value added is the wealth created by providing banking services less the cost of providing such services. The value added is allocated among the employees, the providers of capital, to government by way of taxes and retained for expansion and growth.

117

Notice of

Meeting

NOTICE IS HEREBY GIVEN that the Twenty Ninth Annual General Meeting of Merchant Bank of Sri Lanka PLC will be held at the Jubilee Hall, Galle Face Hotel, Colombo on 24 June 2011 at 10.30 h for the following purposes; 1.

To receive and consider the Annual Report of the Board of Directors and the Audited Financial Statements of the Company for the year ended 31 December 2010 together with the Report of the Auditors thereon.

To declare a final dividend of LKR 1.25 per ordinary share for the year ended 31 December 2010 as recommended by the Directors.

To re-elect Mr. Lakshman Perera as a Director pursuant to his retirement by rotation in terms of article 88 of the Articles of Association of the Company.

To elect Dr. Ranjith Bandara as a Director who has been appointed to the Board since the last Annual General Meeting, in terms of article 94 of the Articles of Association of the Company.

To elect Mr. Lalith De Silva as a Director who has been appointed to the Board since the last Annual General Meeting, in terms of article 94 of the Articles of Association of the Company.

To re-appoint M/s SJMS Associates, Chartered Accountants, as the Companyâ&#x20AC;&#x2122;s Auditors for the ensuing year and to authorise the Directors to determine their remuneration.

To authorize the Directors to determine donations for the year 2011.

By Order of the Board of MERCHANT BANK OF SRI LANKA PLC

Mrs. M Phillips Company Secretary Colombo 31st May 2011. NOTES: 1. 2. 3.

118

A Form of Proxy is attached hereto, for use if necessary, in which event, it should be completed and returned to the Registered Office of the Company not less than 48 hours before the time appointed for the holding of the meeting. A Shareholder entitled to attend and vote is entitled to appoint a Proxy to attend and vote instead of him/her. A proxy need not be shareholder. The instrument appointing a proxy may be by writing under the hand of the appointer or of his/her Attorney, duly authorized in writing, or if such appointer is a corporation under its common seal or the hand of its Attorney or duly authorized person. The instrument appointing a proxy should be deposited together with the proxy at the Registered Office of the Company.

Form of

Proxy

I/We……………………………………………………………………………………..................................................................... of………………………………………………………………………………………...................................................................... being a member/members of the Merchant Bank of Sri Lanka PLC, hereby appoint …………………………………… …….............................................. …………………………………………………………………………………….....................of ……………………………………………………………………………………….......................................................................or failing him/her any one of the Directors of the Company as *my/our Proxy, to represent * me/us, to speak and to vote on *my/our behalf at the Annual General Meeting of the Company to be held at the Jubilee Hall, Galle Face Hotel, Colombo on 24 June 2011 and at any adjournment thereof and at every poll which may be taken in consequence thereof. *I/We the undersigned hereby authorize my/our Proxy to vote on *my/our behalf in accordance with the preference indicated below:

1. To receive and consider the audited financial statements for the year ended 31 December 2010 and the Auditors’ Report thereon

2. To declare a final dividend of LKR 1.25 per ordinary share

3. To re-elect Mr. Laskshman Perera as a Director

4. To elect Dr. Ranjith Bandara as a Director

5. To elect Mr. Lalith De Silva as a Director

6. To re-appoint M/s SJMS Associates as the Company’s Auditors

For

Against

7. To authorize the Directors to determine donations for the financial year 2011

Signed this……………..day of………………Two Thousand and Eleven. ………………………….. Signature Notes: 1. * Please delete the inappropriate words. 2. A proxy so appointed shall have the right to vote on a show of hands or on a poll and to speak at the Meeting.

119