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INTRODUCTORY DOCUMENT

FOR OBTAINING THE LISTING OF 3,006,000 ORDINARY VOTING SHARES ON THE DIRI SAVI BOARD OF THE COLOMBO STOCK EXCHANGE.

MERCANTILE INVESTMENTS LIMITED
Incorporated under the Companies Ordinance No.51 of 1938 and registered under the Finance Companies Act No. 78 of 1988. The Company is re-registered under the Companies Act No.07 of 2007

MANAGERS TO THE INTRODUCTION Capital Alliance Limited, Level 05, “Millennium House”, 46/58, Navam Mawatha, Colombo 02. Tel: 2317777 Fax: 2317788

DECLARATION
This Introductory Document has been prepared by Capital Alliance Limited from Information supplied by Mercantile Investments Limited (The Company) or which is publicly available. The Directors of the Company, collectively and individually, having made all reasonable inquiries, confirm that to the best of their knowledge and belief, the information contained herein is true and correct in all material respects and that there are no other material facts, the omission of which, would make any statement herein misleading. While Capital Alliance Limited has taken reasonable care to ensure full and fair disclosure it does not assume any responsibility for any investment decision made by investors based on information contained herein. In making an investment decision, prospective investors must rely on their own examination and assessments of the Company including the risks involved. No person is authorized to give any information or to make any representations not contained in this Introductory Document and if given or made, any such information or representation must not be relied upon as having been authorized by the Company.

For further inquiries, please contact the Managers to the Introduction. If you are in any doubt regarding the contents of this document you should consult your stockbroker, bank manager, lawyer or any other professional advisor.

The delivery of this Introductory Document shall not under any circumstance constitute a representation or create any implication or suggestion, that there has been no material change in the affairs of the Company since the date of this document.

The Colombo Stock Exchange (CSE) has taken reasonable care to ensure full and fair disclosure of information in this Introductory Document. However, the CSE assumes no responsibility for the accuracy of the statements made, opinions expressed or reports included in this Introductory Document.

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ABBREVIATIONS USED IN THIS INTRODUCTORY DOCUMENT
CDS CSE MIL or the “Company” SEC CBSL Ordinary Share(s) EGM Central Depository Systems (Pvt.) Limited Colombo Stock Exchange Mercantile Investments Limited Securities & Exchange Commission of Sri Lanka Central Bank of Sri Lanka Ordinary Voting Share(s) of the Company Extraordinary General Meeting

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TABLE OF CONTENTS 1 2 CORPORATE INFORMATION INFORMATION RELEVANT TO THE INTRODUCTION 2.1 Introduction of Ordinary Voting Shares for Listing 2.2 Collection Points FINANCIAL SECTOR Registered Finance Companies PROFILE OF THE ENTITY 4.1 Overview of the Company and Nature of the Business 4.2 Degree of Dependence 4.3 Corporate Structure 4.4 Human Resources 4.5 Future Plans & Risks Associated with Future Plans 4.6 Assumptions on which future plans are based 4.7 Top Ten Shareholders of Mercantile Investments Limited CAPITAL STRUCTURE 5.1 Stated Capital 5.2 Capitalization of Reserves DETAILS OF THE BOARD OF DIRECTORS SENIOR MANAGEMENT TEAM CORPORATE GOVERNANCE PRACTICES 8.1 Directors 8.2 Remuneration Committee 8.3 Audit Committee STATUTORY AND OTHER GENERAL INFORMATION 9.1 Litigation, Disputes And Contingent Liabilities 9.2 Inspection of Documents 5 6 6 6 10 10 12 12 13 13 13 13 14 15 16 16 17 18 23 26 26 26 27 28 28 28 29 29 30 31 32 33 120

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10 FINANCIAL INFORMATION 10.1 Ratios and Share Information 10.2 Receivables 10.3 Maturity Analysis of Deposits & Borrowings 11 DECLARATION BY THE DIRECTORS AUDITED FINANCIAL STATEMENTS UN-AUDITED INTERIM FINANCIAL STATEMENTS

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1 CORPORATE INFORMATION
Name of the Company Mercantile Investments Limited 15th June 1964 , Colombo

Date and Place of Incorporation Legal Form

A Public Limited Liability Company domiciled in Sri Lanka, incorporated under the Companies Ordinance No.51 of 1938 on 15th June 1964 and re-registered under the Companies Act No. 7 of 2007. The Company is a licensed Finance Company under the Finance Companies Act No.78 of 1988 as amended by Act No.23 of 1991.

Principal Line of Business

The principle activities of the Company consist of finance leasing, hire purchase financing, granting vehicle loans and the mobilization of deposits.

Company Registration No. Registered Office Telephone Fax Company Secretary Company Auditors

PB 76 No. 236, Galle Road, Colombo 3. 011-2343720-7 011-2434524 Mrs. Deepika Sonali Pethiyagoda Messrs. Cecil Arsecularatne & Co. Chartered Accountants, 3, Dr. Lester James Peiris Mawatha, Colombo 05

Bankers

Commercial Bank of Ceylon PLC Sampath Bank PLC Hatton National Bank PLC

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Mercantile Investments Limited – Introductory Document

2 INFORMATION RELEVANT TO THE INTRODUCTION
2.1 INTRODUCTION OF ORDINARY VOTING SHARES FOR LISTING
This Introductory Document dated 06th May 2011 is published for the purpose of obtaining a listing on the Colombo Stock Exchange for the Ordinary Voting Shares of Mercantile Investments Limited. The shares are to be listed on the Diri Savi Board of the Colombo Stock Exchange.

2.2 COLLECTION POINTS
Copies of the Introductory Document may be obtained from the Manager or any member firm and trading member firm of the Colombo Stock Exchange

2.2.1 MANAGERS TO THE INTRODUCTION
Capital Alliance Limited Level 5, ‘Millennium House’ 46/58, Navam Mawatha, Colombo 02. Telephone Fax : 011-2317777 : 011-2317788

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MEMBERS AND TRADING MEMBERS OF THE CSE
2.2.2 MEMBERS AND TRADING MEMBERS OF THE CSE
Members of the CSE Acuity Stockbrokers (Pvt) Limited Level 6, Acuity House, 53, Dharmapala Mawatha, Colombo 03. Telephone: 2206206 Fax: 2206298/9 E-mail: sales@acuitystockbrokers.com Asia Securities (Pvt) Limited Level 21, West Tower, World Trade Center, Echelon Square, Colombo 1. Telephone: 2423905,5320000 Fax: 2336018 E-mail: enquiry@asiacapital.lk Bartleet Mallory Stockbrokers (Pvt) Ltd. Level "G", Bartleet House, 65, Braybrooke Place, Colombo 2. Telephone: 5220200 Fax: 2434985 E-mail: info@bartleetstock.com Ceylinco Stockbrokers (Pvt) Limited Ceylinco House, Level 9, 69, Janadhipathi Mawatha, Colombo 1. Telephone: 4714300, 4714388, 4714389 Fax: 2387228 E-mail: info@ecsbl.com D N H Financial (Pvt) Limited Level 16, West Tower, World Trade Centre, Colombo 01. Telephone: 5732222 Fax: 5736264 E-mail: info@dnhfinancial.com Asha Phillip Securities Limited Level 4, "Millennium House" 46/58, Navam Mawatha, Colombo 02 Telephone: 2429100 Fax: 2429199 E-mail: apsl@ashaphillip.net Assetline Securities (Pvt) Limited 282, Kaduwela Road, Battaramulla. Telephone: 4700111, 2307366 Fax: 4700112 E-mail: dpgsl@sltnet.lk

Capital TRUST Securities (Pvt) Limited 42, Sir Mohamed Macan Marker Mawatha, Colombo 3. Telephone: 5335225 Fax: 5365725 E-mail: inquiries@capitaltrust.lk

CT Smith Stockbrokers (Pvt) Limited 4-14, Majestic City, 10, Station Road, Colombo 4. Telephone: 2552290-4 Fax: 2552289 E-mail: ctssales@sltnet.lk J B Securities (Pvt) Limited 150, St. Joseph Street, Colombo 14. Telephone: 2490900, 0772490900 Fax: 2430070, 2446085,2447875 E-mail: jbs@jb.lk

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MEMBERS AND TRADING MEMBERS OF THE CSE
John Keells Stockbrokers (Pvt) Limited 130, Glennie Street, Colombo 2. Telephone: 2306250,2342066-7,2446694-5 Fax: 2342068, 2326863 E-mail: jkstock@keells.com NDB Stockbrokers (Pvt) Limited 5th Floor, NDB Building, 40, Navam Mawatha, Colombo 2. Telephone: 2314170-8 Fax: 2314180 E-mail: mail@ndbs.lk Lanka Securities (Pvt) Limited 228/2, Galle Road Colombo 4. Telephone: 4706757,2554942 Fax: 4706767 E-mail: lankasec@sltnet.lk SC Securities (Pvt) Limited 2nd Floor, 55, D.R. Wijewardena Mawatha, Colombo 10. Telephone: 4711000 Fax: 2394405 E-mail: cscres@sltnet.lk

Somerville Stockbrokers (Pvt) Limited 137, Vauxhall Street, Colombo 2. Telephone: 2329201-5, 2332827, 2338292-3 Fax: 2338921 E-mail: ssb@web-lk.com

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MEMBERS AND TRADING MEMBERS OF THE CSE
Trading Members of the CSE Arrenga Capital (Pvt) Limited 410/115, Bauddhaloka Mawatha, Colombo 07 Tel: 2689107, 0777847720 Fax: 2689106 E-mail: rohan@ascot.lk Capital Alliance Securities (Pvt) Limited Level 5, "Millennium House", 46/58 Navam Mawatha, Colombo 02 Tel: 2317777 Fax: 2317788 E-mail: info@capitalalliance.lk First Guardian Equities (Pvt) Limited 32nd Floor, East Tower, World Trade Centre, Colombo 01 Tel: 5884400 Fax: 5884401 E-mail: info@firstguardianequities.com IIFL Securities Ceylon (Pvt) Limited 27th Floor, East Tower, World Trade Centre, Colombo 01 Tel: 2333000 Fax: 2333383 E-mail: info.ceylon@iiflcap.com

Claridge Stockbrokers (Pvt) Limited 10, Gnanartha Pradeepa Mawatha, Colombo 08 Tel: 2697974 Fax: 2677576 E-mail: fonseka@mackwoods.com Heraymila Securities Limited Level 8, South Wing, ‘Millennium House’ 46/58, Navam Mawatha, Colombo 02 Tel: 2359100 Fax: 2305522 E-mail: info-hasl@heraymila.com New World Securities (Pvt) Ltd 2nd Floor, 45/2, Braybrooke Street, Colombo 02 Tel: 011-2358700 / 20 Fax: 011-2358701 E-mail: info@nws.lk SKM Lanka Holdings (Pvt) Limited 377/3, Galle Road, Colombo 03 Tel: 2372413-4 Fax: 2372416 E-mail: info@skmlankaholdings.com Taprobane Securities (Pvt) Limited 2nd Floor, 10, Gothami Road, Colombo 08 Tel: 5328200 Fax: 5328277 E-mail: info@taprobane.lk

Richard Pieris Securities (Pvt) Limited 69, Hyde Park Corner, Colombo 02 Tel: 7448900 Fax: 2675064 E-mail : communication@rpsecurities.com SMB Securities (Pvt) Limited 47, Dharmapala Mawatha, Colombo 03 Tel: 5539593 Fax: 2339292 E-mail: smbsecurities@gmail.com TKS Securities (Pvt) Limited 19-01, East Tower, World Trade Centre, Colombo 01 Tel: 7857799 Fax: 7857857 E-mail: ralph@tks.lk

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3 FINANCIAL SECTOR
The financial sector in the country, including the Central Bank of Sri Lanka, mainly comprises of the following major financial institutions – Licensed Commercial Banks, Licensed Specialized Banks, Specialized Leasing Companies, Registered Finance Companies, Insurance Companies and Pension and Provident Funds. In total, the asset base of the country’s major financial institutions amounted to Rs. 5,616 billion as at end of December 2009. REGISTERED FINANCE COMPANIES The core activities of Registered Finance Companies (RFCs) revolve around providing financing to customers that do not have easy access to bank finance, through leasing and hire purchase facilities. RFCs are regulated under the Finance Companies Act No.78 of 1988. The total number of RFCs in operation as at end December 2009 was recorded at 35, carrying out operations through a network of 289 branches spread island wide. Out of the total asset base of Rs. 5,616 billion, the total asset base of RFCs for the year 2009 was recorded at Rs. 185 billion, accounting for 3.3% of the total assets of the country’s major financial institutions.

Market share of the two largest RFCs accounted for approximately 37% of the total assets of the industry during 2009, a reduction of 9% from 46% during 2008. The largest nine RFCs accounted for approximately 73% of the total assets, whilst eighteen medium size RFCs accounted for only 24% of total assets. The sector is steadily recovering, with the performance of most of the companies in the sector having been adversely affected in 2009 due to the resultant high interest rates and the heightened credit and liquidity risks which were caused by the collapse of certain unregulated finance companies. The financial distress caused by the collapse of the unregulated finance companies, resulted in a loss of investor confidence in all finance companies and cast a negative outlook on the entire sector. This resulted in most of the Companies scaling down business operations to mitigate their risk factor. Hire Purchase and Lease facilities which accounted for approximately 63% of the RFC industry’s assets saw a slowdown in growth, with many companies curtailing lending

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FINANCIAL SECTOR
and adopting a conservative approach. Thus the growth of total assets of RFCs was recorded at 5% as opposed to a 23% growth in 2008. However, amidst these challenges most of the RFCs have continued to generate positive returns, with 27 of the 35 RFCs complying with the increased minimum capital requirement, and maintaining the capital adequacy well above the statutory minimum indicating the sector’s resilience and ability to withstand its challenges. The sector recovered significantly as a result of the good governance and well adopted business practices undertaken by RFCs. The stability of the sector was preserved primarily through the timely intervention and stringent regulations and supervision undertaken by the CBSL, which undertook several measures to restore the public confidence in the sector and provided advisory services on the recovery process. Further, to enhance and strengthen the regulatory framework of the financial sector, CBSL have proposed certain changes to the framework, which include closely monitoring the compliance with the Finance Companies (Corporate Governance) Direction and making the Board of Directors more accountable for the companies’ performance and risk management practices. In addition, RFCs have been required to list on the Colombo Stock Exchange by the end of June 2011 to broad base the share ownership structure and to improve transparency as well as the imposition of the Finance Companies (Reporting Requirement) Direction No. 05 of 2009 to grant more powers to the CBSL to regulate RFCs.

Source: Central Bank of Sri Lanka – Annual Report 2009

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4 PROFILE OF THE ENTITY
4.1 OVERVIEW OF THE COMPANY AND NATURE OF THE BUSINESS
Mercantile Investments Limited is a licensed Finance Company under the Finance Companies Act No. 78 of 1988 as amended by Act No. 23 of 1991 for the year ended 31st March 2010. It was incorporated in Sri Lanka on 15th June 1964 under Companies Ordinance No. 51 of 1938 and re-registered under the Company Act No.07 of 2007. Vision – “To be a leading financial institution committed to excellence in our sphere of activities with a deep sense of social responsibility.” Values – “To treasure the aspirations of the valued customers of Mercantile Investments Limited and always endeavor to fulfill them, harnessing their talents, expertise and resources.” The core business of the Company consists of finance leasing, hire purchase financing, granting vehicle loans and the mobilization of deposits. Finance Leasing – Finance Leasing is the most popular of all the products of MIL which has grown to the zenith during the last four decades of its existence. The product is tailor made to suit the customers’ needs, strengths and aspirations providing relief within the 24 hours of application. The recent government policies on slashing of import duties on vehicles gave the needed boost to the leasing business that is predominantly a highly competitive market. As at 28th February 2011 the finance leasing accounted for 31 % of the loan book portfolio of the Company. Hire Purchase – MIL provides a customer-attractive product providing unique advantages in financing registered vehicles with some of the most attractive terms in the market, and has a portfolio balance of Rs. 4.1 Billion as at 28th February 2011. In addition to hire purchase vehicle financing, the Company provides finance for the leasing of plant and machinery, office equipment and information technology equipment. Further, MIL has also ventured into financing the transportation industry with the introduction of both commercial and industrial vehicle hiring inclusive of passenger and transport vehicles at very reasonable and attractive terms.

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PROFILE OF THE ENTITY
Term Loans – MIL offers term loans for both individuals and corporate bodies, to meet variable financial requirements. As at 28th February 2011 the loan portfolio accounted for 5 % of the total loan book portfolio of the Company. Deposits – Deposits are the core-center of the establishment, and is the financial strongarm of the Company. As at the beginning of March 2011 the deposit base has surpassed the Rs. 4 Billion mark that comprises mainly of fixed deposits. MIL provides the utmost security to its depositors, whilst offering competitive returns in the field of financial activities.

4.2 DEGREE OF DEPENDENCE
The Company is not dependent on any customers either in terms of the deposit portfolio or the lending portfolio. Further, it should also be noted that the Company is not dependent on any of its suppliers.

4.3 CORPORATE STRUCTURE
Mercantile Investments Limited is not a subsidiary nor is it a holding Company.

4.4 HUMAN RESOURCES
The total staff strength of the Company is 317 as at 31st December 2010, in comparison to 289 employees as at 31st March 2010. Further, the Company does not have any Labour Unions and has not entered into any collective agreement with employees.

4.5 FUTURE PLANS & RISKS ASSOCIATED WITH FUTURE PLANS
Diversifying the branch network to key provinces of the Country

The Company has an expansion strategy which is phased out over the next two to three years. The Company intends to grow the overall lending portfolio annually by 20% and mobilize deposits at a growth rate of 25%.

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PROFILE OF THE ENTITY
The risks associated with this strategy include the ability of the Company to generate the expected return on investment in the initial years, as the return generated from the new branches would be lower in comparison to more established locations. Venturing out into new products and services

This strategy will be based on the prevalent demand for the new products and services. At present, the Company has plans to carry out pawing services at selected locations. Furthermore, the Company plans to grow its non-fund based income lines through new product and service lines to boost the overall income of the MIL by an additional 5% within the next two years. The associated risks include strong competition for products already in the market as well as high initial set up costs.

4.6 ASSUMPTIONS ON WHICH FUTURE PLANS ARE BASED
The future plans of the Company have been based on the following general assumptions:

The prevailing average credit growth of 20% in the financial services sector would continue to prevail at the same levels.

The ongoing economic resurgence is expected to boost business, further creating greater demand for credit.

The slashing of import duties will remain for at least the next one year, in order to generate the required levels of demand necessary for the leasing business for future growth.

Ongoing economic development would improve key sectors of the economy such as Hotel, Banking and Finance and Communication Industries, which would enable positive sentiments to prevail in the Colombo Stock Market. The Company expects to generate an annual growth rate of 25% growth from stocks held in the above mentioned sectors.

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PROFILE OF THE ENTITY
4.7 TOP TEN SHAREHOLDERS OF MERCANTILE INVESTMENTS LIMITED

ORDINARY SHAREHOLDERS AS AT 23 March 2011 Nilaveli Beach Hotels (Pvt) Ltd. Mr. G. G. Ondaatjie Ms. A. M. Ondaatjie Mr. T. J. Ondaatjie Mercantile Fortunes (Pvt) Ltd. Mr. G. L. A. Ondaatjie Tangerine Tours (Pvt) Ltd. Mrs. P. R. Divitotalawela/ Mrs. R. D. Madugalle Mrs. P. R. Divitotalawela/ Mrs. A. D. Galagoda Mr. N. H. V. Perera Others TOTAL
rd

NUMBER OF SHARES 626,250 477,213 477,213 477,213 410,820 268,535 200,469 12,525 12,525 10,020 33,217 3,006,000

SHARE PERCENTAGE 20.83% 15.88% 15.88% 15.88% 13.66% 8.93% 6.67% 0.42% 0.42% 0.33% 1.10% 100.00

It should be noted, that on 07th January 2011, Mr. G L A Ondaatjie transferred 34,000 shares to Tangerine Tours (Pvt) Ltd at a consideration of Rs. 1,000/- per share. Subsequently, on 18th March 2011, these shares were transferred from Tangerine Tours (Pvt) Ltd to Mr. G G Ondaatjie, Ms. A M Ondaatjie and Mr. T J Ondaatjie in equal proportions of 11,333 shares for the same consideration of Rs. 1,000/- per share. Further, subsequent to the Capitalization of reserves, on 08th March 2011, Mr. G L A Ondaatjie transferred 415,780 shares each to Mr. Travice John Ondaatjie, Mr. Gerard George Ondaatjie and Ms. Angeline Myrese Ondaatjie. There was no consideration paid for the transfer of shares.

As at the date of the Introductory Document the public holding percentage of the Company is 11.20%

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5 CAPITAL STRUCTURE
The Company has not redeemed or re-purchased any shares within the two years preceding the date of this Introductory Document, nor has there been a reduction in the stated capital of the Company. Further the Company does not have any outstanding convertible debt securities as at the date of this Introductory Document. There are no statutory restrictions on the free transferability of Securities. Further there are no restrictions applicable to non-residents shareholders holdings shares of the Company.

5.1 STATED CAPITAL
Ordinary Shareholding Structure as at 25th March 2011 Level of Shareholding 1 1,001 5,001 10,001 50,001 100,001 500,001 Over Total 1,000 5,000 10,000 50,000 100,000 500,000 1,000,000 1,000,000 No. of Shareholders 3 1 6 6 1 No. of Shares 1,153 2,004 65,130 2,311,463 626,250 3,006,000 % of Shareholding 0.04 0.07 2.17 76.89 20.83 100.00

MIL capitalized a portion of the revenue reserves of the Company in order to enhance the stated capital of the Company. The details of which are given below. Apart from the Capitalization of reserves, no classes of shares have been issued in the last two years preceding the date of this Introductory Document.

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CAPITAL STRUCTURE
5.2 CAPITALIZATION OF RESERVES
Mercantile Investments Limited (MIL) issued 6,000 (Six Thousand) Ordinary Voting Shares by way of a Capitalization of revenue reserves in the proportion of one (1) share for every five hundred (500) shares held by the existing shareholders of the Company. The shares were allotted to the shareholders of the Company as at 10th February 2011. The objective of the issue was to enhance the stated capital of the Company. The consideration for which the shares were issued were Rs.1,000. The Company and the Directors were of the opinion that the issue price of Rs. 1,000.00 per share is fair and reasonable for the Company and to all the existing shareholders of the Company. The allotted shares rank equal to the existing shares issued by the Company and include full voting rights and the right to participate in any dividend or distribution that may be declared after the allotment of shares. The shares were offered to the Shareholders in terms of a Prospectus which has been filed with the Registrar of Companies. The details of allotment of shares pertaining to the Capitalization of reserves are as follows:
Name of Shareholder G L A Ondaatjie Nilaveli Beach Hotels Limited Mercantile Fortunes (Pvt) Limited G G Ondaatjie A M Ondaatjie T J Ondaatjie A M & J S Dominic C A Ondaatjie P R Divitotawela/ R D Madugalle P R Divitotawela/ A D Galagoda N H V Perera R M D Abeygunawardena S Senanayake S Fernando J A S S Adhihetty Tangerine Tours Limited A M Rajapakse A D Rajapakse Shareholding prior Entitlement of to Capitalization of Shares Reserves 1: 500 1,512,850 625,000 410,000 50,000 50,000 50,000 150 2,000 12,500 12,500 10,000 10,000 5,000 5,000 10,000 234,000 500 500 3,000,000 3025.70 1250.00 820.00 100.00 100.00 100.00 0.30 4.00 25.00 25.00 20.00 20.00 10.00 10.00 20.00 468.00 1.00 1.00 6,000 Shares Alloted 3,025 1,250 820 100 100 100 1 4 25 25 20 20 10 10 20 468 1 1 6,000 No. of Shares held % of Shares held subsequent to subsequent to Capitalization the Issue 1,515,875 626,250 410,820 50,100 50,100 50,100 151 2,004 12,525 12,525 10,020 10,020 5,010 5,010 10,020 234,468 501 501 3,006,000 50.43% 20.83% 13.67% 1.67% 1.67% 1.67% 0.01% 0.07% 0.42% 0.42% 0.33% 0.33% 0.17% 0.17% 0.33% 7.80% 0.02% 0.02% 100.00%

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6 DETAILS OF THE BOARD OF DIRECTORS

As at the date of the Introductory Document, the Board of Directors of Mercantile Investments Limited comprise of the following Directors. The

Directors bring in a range of talents, skills and expertise needed to guide the Company in the interest of all stakeholders.
QUALIFICATIONS EXPERIENCE OTHER DIRECTORSHIPS

NAME & ADDRESS OF

DIRECTOR

Mr. Gerard George Ondaatjie – B.Sc.Degree Possesses over 15 years of experience services, trading industry tourism and in financial Arizona State University, USA in Accountancy from

Managing Director :

The Nuwara Eliya Hotels Co.PLC Mercantile Fortunes (Pvt) Ltd Grand Hotel (Pvt) Ltd

Chairman/ Managing Director

18, Queens Road,

Colombo 3

Exe. Deputy Chairman:

Nilaveli Beach Hotels (Pvt) Ltd Director : Tangerine Beach Hotel PLC Royal Palms Beach Hotels PLC Security Ceylon (Pvt) Ltd Tangerine Tours (Pvt) Ltd Global Films Ltd International Fortunes (Pvt) Ltd Mercantile Orient (Pvt) Ltd Director :

Mr.

Shermal

Hemaka

Counts for over 18 years of experience in the financial services, insurance, manufacturing and trading sectors.

Mercantile Fortunes (Pvt) Ltd Security Ceylon (Pvt) Ltd The Finance Houses Association

Jayasuriya– Director Finance

Associate member of The Institute of the Chartered Accountants of Sri Lanka Fellow Member of The Chartered Institute of Management Accountants (UK)

175/17, Nawala Rd,

Colombo 5

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DETAILS OF THE BOARD OF DIRECTORS
QUALIFICATIONS EXPERIENCE OTHER DIRECTORSHIPS

NAME & ADDRESS OF DIRECTOR

Mr. Shermal Hemaka Jayasuriya

(Contd…)

Fellow member of the Society of Certified Management Accountants of Sri Lanka Holder of a Master’s Degree in Business Administration (MBA) from the Postgraduate Institute of Management of the University of Sri Jayewardenepura, Sri Lanka.

Ms. Angeline Myrese Ondaatjie Holder of a Master’s Degree Holder of a B.Sc. Degree services, tourism &

Counts for over 17 years experience in the financial manufacturing sectors.

Managing Director :
Jt. Managing Director :

Tangerine Tours (Pvt) Ltd Tangerine Beach Hotels PLC Royal Palms Beach Hotels PLC Director : Security Ceylon (Pvt) Ltd Nilaveli Beach Hotels (Pvt) Ltd Global Films Ltd The Nuwara Eliya Hotels Co.PLC Mercantile Fortunes (Pvt) Ltd Grand Hotel (Pvt) Ltd Lighthouse Hotel PLC International Fortunes (Pvt) Ltd Mercantile Orient (Pvt) Ltd

– Director

20/1, Queens Rd, Colombo 3

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DETAILS OF THE BOARD OF DIRECTORS
QUALIFICATIONS EXPERIENCE OTHER DIRECTORSHIPS

NAME & ADDRESS OF DIRECTOR

Mr. Travice John Ondaatjie – B.Sc.Degree Managing Director : Director : experience in the financial services, tourism & manufacturing sectors. Counts for over 17 years

Nilaveli Beach Hotels (Pvt) Ltd Tangerine Beach Hotels PLC Royal Palms Beach Hotels PLC Security Ceylon (Pvt) Ltd Tangerine Tours (Pvt) Ltd Global Films Ltd The Nuwara Eliya Hotels Co.PLC Mercantile Fortunes (Pvt) Ltd Grand Hotel (Pvt) Ltd International Fortunes (Pvt) Ltd Mercantile Orient (Pvt) Ltd

Director

18, Queens Road, Colombo 3

Mrs.

Mignonne

Bernadette

Counts for over 42 years extensive experience in the financial services sector

Assauw - Director – Deposits

9, Wattegedara Road,

Maharagama

Mr.

Pathiranage

Mahes

Possesses almost 25 years of experience In the financial service sector

Director:

Security Ceylon (Pvt) Limited

Amarasekera -

Director - Recoveries

25A,Kandawatte Lane, Nugegoda

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DETAILS OF THE BOARD OF DIRECTORS
QUALIFICATIONS EXPERIENCE OTHER DIRECTORSHIPS

NAME & ADDRESS OF DIRECTOR

Mr. Counts for over 43 years experience in the financial service sector.

Justin

Savarimuttu

Dominic – Director

1D, Tower Building Station Rd,

Colombo 4 B.Sc. (Lond), MICE, FIE (SL), FSSE(SL), C.Eng.
in Civil/Structural Engineering design & Project Managements in UK, Sri Lanka, India & Maldives experience as a Consultant Counts for over 32 years

Saroja Hemakumar

Director:

International Civil Engineering Consultants (Pvt) Limited

Jayawickrema Weerasooriya

No. 9, 2nd Lane,

Meda Welikada Road, Rajagiriya

Henaka Arachchillage Sajitha
Chartered Accountants of Sri Lanka Associate Member of Chartered Institute of Management Accountants – UK

Associate Member of the Institute of

Counts for over 15 years experience in Audit, Account & Management and Finance Planning fields.

Tilakasiri Senanayake

494/1, Rajagiriya Road,

Rajagiriya

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DETAILS OF THE BOARD OF DIRECTORS

The Chairman nor any Director of the Company has been or is involved in any of the following events:

a petition under any bankruptcy laws filed against such person or any partnership in which he was a partner or any corporation of which

he was an executive officer;

conviction for fraud, misappropriation or breach of trust or any other similar offence which the CSE considers a disqualification.

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7 SENIOR MANAGEMENT TEAM
Mr. Gerard George Ondaatjie – Chairman and Managing Director 18, Queens Road, Colombo 3 Mr. Gerard Ondaatjie was appointed to the Board on 02nd December 1993 and was appointed Executive Deputy Chairman on 27th September 2001. He has over 15 years experience in the financial services, tourism and trading sectors. He holds a BSc Degree in Accountancy from the Arizona State University, USA. He is presently the Managing Director of The Nuwara Eliya Hotels Company PLC and Mercantile Fortunes (Pvt) Ltd. He is also the Executive Deputy Chairman of Nilaveli Beach Hotels (Pvt) Ltd and a Director of seven other companies which includes Royal Palms Beach Hotels PLC and Tangerine Beach Hotels PLC.

The Chief Executive Officer (The Managing Director of the Company) is not and has not been involved in the following events: petition under bankruptcy laws filed against such person or any partnership in which he was a partner or any corporation of which he was an executive officer. convicted for fraud, misappropriation or breach of trust or any other similar offence which the CSE considers a disqualification.

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SENIOR MANAGEMENT TEAM
Designation
AGM – Credit & Marketing the field of credit and marketing. Has 17 years experience in the Financial services sector especially in the field of credit and recoveries. Has over 16 years experience in the field of Finance and accounting. Has 28 years experience in the related field. Has experience of 7 years in the related field. Has 9 years experience in the Financial services sector especially in the field of credit and marketing. Has 10 years experience in the Financial services sector especially in the field of credit and marketing. Has 12 years experience in the Financial services sector especially in the field of credit and marketing. Has 10 years experience in the Financial services sector especially in the field of credit and marketing. Has over 13 years experience in the Financial services sector especially in the field of credit and recoveries. Has over 23 years experience in the in the field of Finance and accounting.

Name

Business experience
Has 13 years experience in the Financial services sector especially in

1. Danushka Fonseka AGM – Recoveries AGM – Finance GM – Work shop Senior Manager – Legal Senior Manager – Corporate leasing

2. Buddika Kasturiratne

3. Deva Anthony

4. Ravi Ekanayake

5. Jayanka Kahawevithana

6. Hirantha Pandithasekara Senior Manager – Credit administration

7. Ravi De Mel

8. Darshana Senarath

Senior Manager – Leasing

9. Lahiru Dayananda

Regional Manager – Credit

10. Shehan Cooray

Manager – Recoveries

11. Prasad Wickramasinghe

Accountant

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SENIOR MANAGEMENT TEAM
Designation
Accountant accounting. Has over 5 years experience in the field of Finance and accounting.

Name

Business experience
Has over 11 years experience in the in the field of Finance and

12. Chandana Nanyakkara

13. Raminda Maganaarachchi Manager - Insurance

Accountant

14. Kumudini Jayasekara Manager - Insurance

Has over 27 years experience in the Financial services sector.

15. Chaminda Paranayapa Manager- Negombo

Has over 21 years experience in the Financial services sector.

16. Kingsly Lowe Manager - IT

Has over 30 years experience in the Financial services sector.

17. Wiraj Arachchi Manager – IT software

Has over 20 years experience in the related field.

18. Indika Prasad Manager - Deposits

Has over 16 years experience in the related field.

19 Uma Maheswaran Manager - Leasing

Has over 12 years experience in the Financial services sector.

20. Dinesh Perera Manager- Balangoda

Has over 12 years experience in the Financial services sector.

21. Avindra Wijesundara

Has over 13 years experience in the Financial services sector.

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8 CORPORATE GOVERNANCE PRACTICES
8.1 DIRECTORS
The Independent, Non-Executive Directors of Mercantile Investments Limited compromise of the following Directors: Mr. J S Dominic Mr. S H J Weerasuriya Mr. H A S T Senanayake It should however be noted that according to the criteria set out in the Rule No. 7.10.4 (e) of Colombo Stock Exchange Listing Rules; Mr. J S Dominic does not fall under the classification of an “Independent” Director as he has represented the Board of Mercantile Investments Limited for a period of more than nine (9) years consecutively.

The Board of Directors of MIL, however, do determine that although Mr. J S Dominic does not meet the criteria of an “Independent” Director as per rule no. 7.10.4 (e), as stated above, he does in fact fulfill all other criteria for defining ‘Independence’ as set out by the CSE listing rules. Further, having reviewed the actual role played by Mr. Dominic on the Board of Directors, the Board does determine that he does in fact function in the capacity of an “Independent” Director.

8.2 REMUNERATION COMMITTEE
The Remuneration Committee constitutes of the following Directors: Mr. J S Dominic (Chairman) – Independent Non-Executive Director Mr. S H J Weerasuriya – Independent Non-Executive Director Mr. H A S T Senanayake – Independent Non-Executive Director

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CORPORATE GOVERNANCE PRACTICES
Statement of the Remuneration Policy The Committee is responsible for setting up the remuneration policy and making recommendations to the Board on the following matters:

A competitive and fair remuneration package payable to the Executive Directors, and Senior Management of the Company, which is satisfactory to both the interests of the shareholders and the employee in concern. Performance based remuneration for Senior Management Evaluating prevailing market remuneration levels when making remuneration policy amendments

The aggregate remuneration paid to the Executive and Non-Executive Directors of the Company is Rs. 22.8 million for the nine months ended 31st December, 2010.

8.3 AUDIT COMMITTEE
The Audit Committee constitutes of the following Directors:

Mr. J S Dominic (Chairman) – Independent Non-Executive Director Mr. S H J Weerasuriya – Independent Non-Executive Director Mr. H A S T Senanayake – Independent Non-Executive Director Mr. H A S T Senanayake is an Associate Member of the Institute of Chartered Accountants of Sri Lanka and an Associate Member of the Chartered Institute of Management Accountants - UK

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9 STATUTORY AND OTHER GENERAL INFORMATION
9.1 LITIGATION, DISPUTES AND CONTINGENT LIABILITIES
The Company has not been involved, nor is it currently involved in any legal arbitration or mediation proceedings in the recent past, which may have had a significant effect on the Company's financial position and profitability. There have been no penalties imposed by Regulatory or State Authorities on the Company. The Company does not have any contingent liabilities that would have a material adverse impact on the current and future profits of the Company.

9.2 INSPECTION OF DOCUMENTS
The Introductory Document and Articles of Association of Mercantile Investments Limited will be hosted on the Company’s website at www.mi.com.lk and on the CSE website at www.cse.lk for a period of not less than fourteen (14) days.

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10 FINANCIAL INFORMATION
10.1 RATIOS AND SHARE INFORMATION
Year Ended 31.03.2010 31.03.2009 Net Interest Income / Total Average Assets (%) Non-Interest Income / Total Average Assets (%) Personnel & Other Non-Interest Expenses / Net Interest Income & Non-Interest Income (%) Gross NPL Ratio (%) Liquid Assets / Customer Deposits & Short – Term Funds Capital Adequacy Ratio (%) Debt/Equity Ratio Book Value per Share (Rs.) Earnings per Share (Rs.) Profit after Tax / Average Equity (%) Return on Average Assets (%) Effective Tax Rate (%) Dividends / Profit after Tax (%) 9.57 3.02 38.29 10.27 13.90 8.04 0.94 49.63 8.98 15.37 Latest Interim 31.12.2010 5.53 6.06 30.68 7.33 12.85

Comparative Interim 31.12.2009

7.00 2.16 59.98 11.75 13.28

26.72 0.11 1,177.29 105.50 10.17 3.92 44.60 4.36

24.02 0.37 898.14 77.79 8.63 2.91 29.67 4.18

19.35 0.33 1,558.51 218.55 16.14 6.79 15.48 4.57

23.31 0.14 1149.32 93.60 8.88 3.42 6.68 4.91

Source: Mercantile Investments Limited

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FINANCIAL INFORMATION
10.2 RECEIVABLES 10.2.1 POLICY FOR CLASSIFICATION OF NON-PERFORMING RECEIVABLES
As per the Direction issued by the Central Bank of Sri Lanka with regard to nonperforming Loans and advances, all the loans and advances which are more than six months arrears/ageing as of the date are categorized as non-performing loans and advances by the Company.

10.2.2 COMPOSITION OF RECEIVABLES:
YE 31.03.2010 (%) Performing Loans & Advances Less than 3 months 3-6 months 7-12 months 13 - 24 months More than 24 months Total (%) Total Performing Loans (Rs.) Non Performing Loans & Advances 1-2 months 3-6 months 7-12 months 13-24 months More than 24 months Total (%) Total Non-Performing Loans (Rs.) Total (Rs.) 3.59 4.19 2.49 10.27 536,164 5,219,962 6.04 2.29 0.66 8.98 542,427 6,040,633 1.53 1.97 3.83 7.33 452,400 6,169,997 5.13 4.45 2.17 11.75 633,425 5,393,077 87.24 2.49 89.73 4,683,798 80.47 10.55 91.02 5,498,206 91.62 1.05 92.67 5,717,597 79.71 8.54 88.25 4,759,652 YE 31.03.2009 (%) Latest Interims 31.12.2010 (%) Comparative Interims 31.12.2009 (%)

Source: Mercantile Investments Limited

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FINANCIAL INFORMATION
10.3 MATURITY ANALYSIS OF DEPOSITS & BORROWINGS
YE 31.03.2010 (%) Maturity Period Less than or equal to 3 months More than 3 months less than or equal to 1 year More than 1 year less than or equal to 3 years More than 3 years less than or equal to 5 years More than 5 years Matured (waiting for customer instructions) TOTAL 35.30 48.41 12.62 3.01 0.66 100.00 41.35 39.47 14.01 5.17 100.00 44.72 38.64 15.49 0.88 0.27 100.00 33.29 49.34 11.78 5.02 0.57 100.00 YE 31.03.2009 (%) Latest Interims 31.12.2010 (%)
Comparative Interims 31.12.2009 (%)

Source: Mercantile Investments Limited

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11 DECLARATION BY THE DIRECTORS
We, the undersigned, who are named in the Introductory Document as Directors of Mercantile Investments Limited, hereby declare and confirm that we have read the provisions of the Companies Act No. 07 of 2007 and the Colombo Stock Exchange Listing Rules and any amendments to it relating to the issue of this Introductory Document and that those provisions have been complied with. This Introductory Document has been seen and approved by us and we collectively and individually accept full responsibility for the accuracy of the information given and confirm that provisions of the CSE Listing Rules and of the Companies Act No. 7 of 2007 and any amendments to it from time to time have been complied with after making all reasonable enquiries and to the best of our knowledge and belief, there are no other facts, the omission of which would make any statement herein misleading or inaccurate.
Director Gerard George Ondaatjie Shermal Hemaka Jayasuriya Pathiranage Mahes Amarasekera Mignonne Bernadette Assauw Angeline Myrese Ondaatjie Travice John Ondaatjie Justin Savarimuttu Dominic Saroja Hemakumar Jayawickrama Weerasooriya Henaka Arachchilage Sajitha Tilakasiri Senanayake Signature Signed Signed Signed Signed Signed Signed Signed Signed Signed

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Mercantile Investments Limited

CHANGES IN EQUITY
Other Reserves
Stated
Property, Plant & Equipment Revaluation Reserve Revaluation Reserve Investments Long-term Quoted

For the Nine Months ended 31 December 2010
Statutory Reserve Fund Rs' 000 Rs' 000 Rs' 000 General Reserve Fund Rs' 000 Unappropriated Profit/( Loss) Carried Forward Rs' 000 Rs' 000 Total Equity

Capital

Rs' 000

Balance as at 01.04.2009 Net Profit for the Period Dividends for 2009 Revaluation Surplus/ (Defecit) on Investments Balance as at 31.12.2009 614,226 30,000 30,000 341,400 619,628 321,400 614,226

30,000

321,400

307,713

1,402,430

18,641 280,789 (13,800) 493,472 801,185 837,080 1,402,430 1,702,431 285,630 1,344 656,974 (30,000)

2,694,410 280,789 (13,800) 493,472 3,454,871

Balance as at 01.04.2010 Net Profit for the Period Dividends for 2010 Revaluation Surplus/ (Defecit) on Investments Balance as at 31.12.2010 30,000 341,400

619,628

526,026 1,363,106

1,702,431

628,318

3,531,883 656,974 (30,000) 526,026 4,684,883

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010

Mercantile Investments Limited

Business Segments
Hire Purchase 2010 2009 2009 Investments/Property 2010 2009 Insurance 2010 Operating Leases 2010 2009 Unallocated 2010 2009 Total 2010 2009

For the Nine Months Ended 31st December

Finance Lease 2010 2009

Income from External Operation

Interest Commission Rent Capital Gains Dividends Total Revenue 323,239 615,506 821,939 2,401 504,564 35,421 542,386 2,332 100,628 12,369 115,329

266,968

323,239

615,506

821,939

0

0

266,968

0 18,835 0 0 0 18,835

0 18,921 0 0 0 18,921

0 0 14,705 0 0 14,705

0 0 13,352 0 0 13,352

147,651 0 0 0 0 147,651

99,395 0 0 0 0 99,395

1,030,125 18,835 17,106 504,564 35,421 1,606,051 833,752 (176,778) 656,974

1,244,573 18,921 15,684 100,628 12,369 1,392,175 325,080 (44,292) 280,788

Profit before Tax & Vat Tax & Vat on Financial Services Profit After Tax

Other Information As at 31st December 1,087,313 620,360 466,953 3,639,014 2,123,492 1,515,522 3,188,497 1,819,177 1,369,320 3,832,999 2,236,690 1,596,309 1,808,995 1,032,111 776,884 0 0 0 0 8,900 5,193 3,707 8,195 4,675 3,520 2,181,466 1,272,962 908,504 1,951,756 1,113,562 838,194 11,249,167 6,564,284 4,684,883 8,044,757 4,589,886 3,454,871

Segment Assets Segment Liabilities Net Assets

1,586,788 925,947 660,841

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010
Explanatory Notes The accounting policies and methods of computation followed in preparing the financial statements for the nine months ended 31st December 2010 are the same as those disclosed in the Audited Financial statements for the year ended 31st March 2010. There have been no material events occurring after the interim balance sheet date that require adjustments to or disclosure in the Financial Statements There has not been a significant change in the nature of the Contingent Liabilities which were disclosed in the Annual Report for the year ended 31st March 2010.

Loans and Advances on respective interim balance sheet date include balances as follows:
31.12.2010 Rs.,000 Personal Loans Loans against Fixed Deposits Other Loans Bad Debts Provision Interest In Suspense 178,453 63,765 86,927 (68,958) (6,030) 254,157 31.12.2009 Rs.,000 115,699 77,682 98,514 (63,539) (2,659) 225,698

Movement of Loan Loss Provision 31.12.2010 Loan Loss Provision as of 1st April Provision Made during the Period Provision written back during the Period Loan Loss Provision as of 31st December Aggregate amount of loans & advances for which interest is not accrued 31.12.2010 Non Performing Other Loans & Advances 99,838 31.12.2009 107,207 62,398 14,110 (7,550) 68,958 31.12.2009 42,631 34,842 (13,934) 63,539

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Accounting Policies 1. Corporate Information 1.1 General Mercantile Investment Ltd is a public limited liability company incorporated on June 15 1965 and domiciled in Sri Lanka. It is a Licensed Finance Company regulated under the Finance Companies Act No 78 of 1988 as Amended by Act No 23 of 1991. The registered office of the Company is located at No. 236, Galle Road, Colombo 03. 1.2 Principal Activities The company provides a range financial services including accepting deposits, granting of loans, lease financing, hire purchase financing, fleet management and share trading. There were no significant changes in the nature of the principle activities of the company during the financial year under review. 1.3 Parent Enterprise & Ultimate Parent Enterprise The company doesn’t have an identifiable parent of its own. 2. Significant Accounting Policies 2.1 Statement of Compliance The Financial Statements of the company as at 31st March 2009 are prepared in accordance with the Sri Lanka Accounting Standards laid down by the Institute of Chartered Accountant Of Sri Lanka and in compliance with the requirements of the Companies Act No 7 of 2007 and the Finance Companies Act No 78 of 1988 as Amended by Act No 23 of 1991. Basis of Preparation The Financial Statements of the company are prepared under the historical cost convention, except Dealing Securities & Land & Buildings that are stated at valuation as explained in Notes 14, 20 to the Financial Statements .Assets and Liabilities are grouped by nature and listed in an order that reflects their relative liquidity. Where appropriate the Significant Accounting Policies are disclosed in the succeeding notes. The Financial Statements are prepared in Sri Lanka Rupees which is the Company’s functional currency unless otherwise stated.

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010
Going Concern Company Directors have made an assessment of the Company’s ability to continue as a going concern and they do not intend either to liquidate or cease trading. Comparative Information The Accounting Policies adopted by the Company are consistent with those of the previous financial year as permitted by Sri Lanka Accounting Standards No 3 (Revised 2005) on Presentation of Financial Statements. Comparative information is reclassified whenever necessary to comply with the current presentation. Significant Accounting Judgments, Estimates and Assumptions In the process of applying the Company’s Accounting Policies, the management is required to make judgments, apart from those involving estimation, which may have a significant effect on the amounts recognized in the Financial Statements. The key estimates concerning the future and other key sources of assumptions uncertainty at the balance sheet date that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are discussed below. Impairment Losses on Loans and Advances In addition to the provision made for possible loan losses based on the parameters and directives for specific provisions on Loans and Advances by the Central Bank of Sri Lanka, the Company reviews its Loans and Advances portfolio at each reporting date or more frequently ,if events or changes in circumstances necessitates to assess whether a further provision for impairment against exposure which although not specifically identified as requiring specific provisions have a greater risk of default than when originally granted. Review of Impairment Losses on Non –Financial Assets The Company assesses whether there are any indicators of impairment for all non financial assets at each reporting date or more frequently if events or changes in circumstances require doing so. This requires the estimation of the value in use of the cash generating units. Estimating value in use requires management to make an estimate of the expected future cash flows from the cash generating unit and also to select a suitable discount rate in order to calculate the present value of the relevant cash flows.

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010
This valuation requires the company to make estimates about expected future cash flows and discount rates and hence they are subject to uncertainty. Taxation Income Tax We provide for the income tax liability on the basis of the profit for the year as adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and the amendments thereto. We measure current income tax assets and liabilities for the current and prior periods at the amount expected to be recovered from or paid to the commissioner general of Inland Revenue. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Deferred Taxation We provide deferred income tax, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. We recognize deferred income tax liabilities for all taxable temporary differences: except Where the deferred income tax liability 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 taxable profit or loss; and In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except 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. We recognize Deferred income tax assets for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilized: except where the deferred income tax asset 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 taxable profit or loss; and

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010
In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. We review the carrying amount of deferred income tax assets at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. We measure Deferred income tax assets and liabilities at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. We recognize in equity the deferred income tax relating to items recognized directly in equity, and not in the income statement Post Balance Sheet Events We consider all material events occurring after the balance sheet date and, where necessary we make adjustments or disclosures to these financial statements. Borrowing Cost We recognize borrowing costs as an expense in the Income Statement, in the period in which they are incurred in terms of the Sri Lanka Accounting Standard No. 20 on Borrowing Costs. Foreign Currency Translation The Financial Statements are presented in Sri Lanka Rupees, which is the Company’s functional and Presentation currency. We do not engage in any foreign currency transactions at present that may require additional adjustments or disclosures in the Financial Statements.

2.2 Valuation of Assets and their Basis Of measurements Finance Leases We classify assets leased to customers, which transfer substantially all the risk and rewards associated with the ownership other than legal title are accounted as finance

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010
lease in accordance with the Sri Lanka Accounting Standard No 19 (Revised 2005) on Leases Amount receivable under finance leases net of initial rentals received, unearned lease income, interest in suspense and provision for rentals doubtful of recovery are classified as Lease Receivable in the Balance Sheet. Operating Leases We classify assets leased to customers under agreements in which we retain substantially all the risks and rewards associated with ownership and legal title as operating leases. We recognize such assets as property, plant & equipment in the Balance Sheet. Hire Purchase Agreements We classify advances granted under agreements that transfer substantially all the risks and rewards associated with ownership other than legal title, as hire purchase advances. Amount receivable under hire purchases net of unearned interest, interest in suspense and provision for rentals doubtful of recovery are classified as Hire Purchases Receivable in the Balance Sheet. Loans and Advances We determine the carrying amounts of loans and advances to customers in the Balance Sheet netting off provisions for possible loan losses and also the interest, which we have not accrued to revenue. Provision for Bad & Doubtful Debts We determine the adequacy of provisions for possible loan losses in accordance with Finance Companies (Provision for Bad & Doubtful Debts) Direction No. 03 of 2006 issued by the Monetary Board of the Central Bank of Sri Lanka based on an aged classification of advances as follows: Period Outstanding Minimum Provision Made Net of Realizable Value of Security 50% 100%

6 – 12 months 13 months and over

We perform regular ongoing reviews to identify any further provisions need to be made.

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010
Investments in Treasury Bills and Bonds We record investment in Treasury Bills and Treasury Bonds at the value of the Bills/Bonds purchased and the discount/premium accrued thereon based on a pattern reflecting a constant yield being earned on the investment. Investments Dealing Securities In accordance with Sri Lanka Accounting Standard No 22 accounting for investments, we classify marketable securities acquired and held with the intention of resale over a short period of time as dealing securities. We record such securities at the lower of cost and market value determined on an aggregate portfolio basis in total, with any resulting gain or loss recognize in the income statement. The cost of an investment is the cost of acquisition inclusive of brokerages, fees, duties and bank fees

Investment Securities We record long term quoted investments at their revalued value based on the market value of such investments on individual investment basis. We recognize any appreciation as an appropriation and credit to the long term investment revaluation reserve in accordance with Sri Lanka Accounting Standards. We charge any decrease in carrying amount arising from the revaluation of a long- term investment to the revaluation reserve to the extent that it offsets a previous increase, for the same investment, that has been credited to the revaluation reserve. In all other instances, any decrease in carrying amount we recognize as an expense. We also recognize any increase on revaluation directly as an income to the extent it relates to a previous decrease in carrying amount for the same investment that was recognized as an expense.

We determine the market value of such investments based on the last traded price of the security for the financial year. Inventory Inventory consists of spare parts, lubricants and others. We value inventories at the lower of cost and estimated net realizable value, after making due allowance for obsolete and slow moving items, using weighted average cost formula. We determine the cost of stock at actual cost.

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010
Property, Plant, & Equipment We state property, plant & equipment at cost, excluding the costs of day to day servicing, less accumulated depreciation and accumulated impairment in value. Such cost includes the cost of replacing part of the plant and equipment when that cost is incurred, if the recognition criteria are met. We measure land and buildings at fair value less depreciation on buildings and impairment charged subsequent to the date of the revaluation. We perform valuations on every 3-5 years to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. We credit any revaluation surplus to the revaluation reserve included in the equity section of the balance sheet, except to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss, in which case the increase is recognized in profit or loss. We recognize a revaluation deficit in profit or loss, except that a deficit directly offsetting a previous surplus on the same asset is directly offset against the surplus in the asset revaluation reserve. Subsequent Cost These are costs that are recognized in the carrying amount of an item if it is probable that the future economic benefits embodied within that part will flow to the company and it can be measured. Depreciation We calculate the provision for depreciation using straight line method to write down cost of property, plant & equipment to their residual values over following useful lives. We do not depreciate land. Buildings Plant and Machinery Computer Equipment Office Equipment Furniture and Fittings Fixtures Motor Vehicles Office Bicycles Tools 40 to 75 yrs 5 yrs 4 yrs 10 yrs 10 yrs 10yrs 6 2/3 yrs 10 yrs 4 yrs

We now determine the depreciation charge separately for each significant part of an item of property, plant and equipment and begin to depreciate when it is available for use, rather than adopting a method whereby property, plant and equipment are depreciated fully in the year of disposal with no such charge being accounted for in the year of purchase.

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010
Derecognizing We derecognize an item of property, plant and equipment upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognized. Leasehold Property Leasehold property is stated at recorded carrying value as per the Sri Lanka Accounting Standard No 19 (Revised 2005) on Leases. Such carrying amounts are amortized over the remaining lease term or useful life of the leased property whichever is shorter. No further revaluation of this leasehold property will be carried out. Cash & Cash Equivalents We consider highly liquid investment instruments with an original maturity of three months or less to be cash & cash equivalents. For the purpose of cash flow statement, cash and cash equivalents consist of cash in hand and deposits in banks net of outstanding bank overdrafts. Investments with short maturities as defined above are also treated as cash equivalents. Other Assets Other Assets are stated at the amounts they are estimated to realize net of provisions for bad and doubtful receivables.

2.3 Liabilities and Provisions Provisions When our company has a present obligation (legal or constructive) as a result of a past event, where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and the company can reliably estimate the amount of the obligation, we recognize it as a provision in accordance with the Sri Lanka Accounting Standard No. 36 on Provisions, Contingent Liabilities and Contingent Assets.

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010
Commitments and Contingencies All discernible risks are taken into account in determining the liabilities of the Company. All other capital commitments and contingencies, for which the Company is liable, are disclosed in Notes 31 & 32 to the Financial Statements.

Retirement Benefit Obligations Defined Benefit Plan-Gratuity Gratuity is a defined benefit plan. We determine the adequacy of gratuity liability in terms of Payment of Gratuity Act No. 12 of 1983. In order to meet this liability, we carry forward a provision in the balance sheet, based on half month’s salary of the last month of the financial year of all our employees for each completed year of service, commencing from the first year of service. We recognize the resulting difference between brought forward provision at the beginning of the year and the carried forward provision at the end of the year as an income or expense. We do not fund or obtain an actuarial valuation for this gratuity liability and classify such liability under Other Liabilities in the balance sheet. Defined Contribution Plans-Employees’ Provident Fund & Employees’ Trust Fund Employees are eligible for Employees’ Provident Fund Contributions and Employees’ Trust Fund Contributions in line with the respective statutes and regulations. Our Company contributes 12% and 3 % of gross emoluments of our employees to Employees’ Provident Fund and Employees’ Trust Fund respectively.

2.4 Income Statement Revenue Recognition We recognize revenue to the extent that it is probable that the economic benefits will flow to the Company and such revenue can reliably measure the associated costs incurred or to be incurred. We measure revenue at the fair value of the consideration received or receivable net of trade discounts and sales taxes. We use the following specific criteria for the purpose of recognition of revenue. Interest Income We recognize interest income on an accrual basis. We do not accrue interest when the recovery of principal or interest is in arrears for six months or more. Thereafter

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we account for interest on cash basis. We transfer the interest falling due on nonperforming advances to Interest in Suspense Account.

Finance Lease Income We consider the excess of aggregate rentals receivable over the cost of the leased asset as unearned interest income. We recognize the interest income from unearned income on the lease on an accrual basis over the term of the lease in proportion to the remaining balance of the lease. However, we cease the recognition of income when the recovery of principal or interest is in arrears for six months or more. Thereafter we account interest income on a cash basis. We transfer interest falling due on non-performing leases to Interest in Suspense Account. Operating Lease Income We recognize rental income as revenue on an accrual basis. However, we do not accrue rental as income when such rentals are in arrears for six months or more. Thereafter we account for rental income on cash basis. Interest Income from Other Sources We recognize interest income from Government of Sri Lanka Treasury Bills on a time proportion basis as discounts on purchase are amortized to income on a straight line basis over periods of maturity. We also recognize income from all other interest bearing investments as revenue on an accrual basis. Dividend Income We recognize dividend income when our right as shareholders’ to receive the payment is established.

Gains or Losses on Share Trading We determine net gains and losses resulting on share trading on an accrual basis.

Gains or losses on Disposal of Property, plant & Equipment We account for net gains and losses resulting from the disposal of property, plant & equipment on an accrual basis.

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010
Restoration Costs of Property, Plant & Equipment Expenditure incurred on repairs or maintenance of property, plant and equipment in order to restore or maintain the future economic benefits expected from originally assessed standard of performance, is recognized as an expense in the Income Statement, when incurred.

Commission Income We recognize commission income on insurance on a cash basis. Rental Income We recognize rental income is on an accrual basis. Other Income We recognize other income on an accrual basis. Expenses Recognition All expenditure incurred in the running of our business and in maintaining the property, plant & equipment in a state of efficiency has been charged to income in arriving at the profit for the year. We recognize expenses in the income statement on the basis of a direct association between the cost incurred and the earning of specific items of income. We use accrual basis to calculate the interest payable.

For the purpose of presentation of the Income Statement our directors are of the opinion that nature of expenses method presents fairly the elements of the Company’s performance, and hence such presentation method is adopted.

2.5 Cash Flow Statement We prepare the Cash Flow Statement using the “Direct Method”, whereby gross cash receipts and gross cash payments of operating activities, finance activities, and investing activities have been recognized.

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UN-AUDITED INTERIM FINANCIAL STATEMENTS – 31ST DECEMBER 2010
2.6 Segment Reporting We present segment information in respect of our Company’s business in accordance with the Sri Lanka Accounting standard No 28 on reporting financial information by segment. These segments comprise finance lease, hire purchasing, insurance, investments/ property and operating lease.

2.7 Directors’ Responsibility Statement The Board of Directors is responsible for the preparation and presentation of these Financial Statements.

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