A Rs. 2.29 billion earnings reversal, rising repo exposure and a shrinking equity base place First Capital Treasuries under scrutiny as two senior board members depart and a new Chairman takes charge.
COLOMBO — The sudden boardroom changes at First Capital Treasuries PLC (FCT) have raised important questions about the financial condition, risk management and governance of one of Sri Lanka’s leading government securities dealers.
On 1 October 2026, Ramesh Schaffter stepped down as a Non-Independent Non-Executive Director, while Manjula Mathews relinquished her position as Chairperson, remaining on the Board as a Non-Executive Director. Channa de Silva assumed the Chairmanship, accompanied by the appointment of two new Independent Non-Executive Directors, Dudeepa Ratwatte and Niran Mahawatte.
The simultaneous nature of these developments would ordinarily be viewed as a significant board restructuring. However, the timing becomes considerably more interesting when examined against the company’s latest financial statements.
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For the quarter ended 30 June 2026, FCT reported a loss after tax of Rs. 741 million, compared with a profit of Rs. 1.55 billion in the corresponding quarter of the previous year. During the same period, the company’s repo liabilities increased by Rs. 8.64 billion, total liabilities expanded by Rs. 8.26 billion, and shareholders’ equity declined by Rs. 741 million.
These figures raise legitimate questions about the company’s treasury strategy, its exposure to interest-rate movements and the sustainability of its highly leveraged trading model.
The question confronting investors is whether the board restructuring is simply a planned governance transition or whether it also reflects a reassessment of the company’s financial and operational risks.
There is no publicly established evidence that the resignations were caused by the company’s financial performance. Nevertheless, the coincidence of significant financial deterioration and senior board departures warrants examination.
A sudden change at the top
The departure of Ramesh Schaffter and Manjula Mathews represents a significant development in the governance of FCT.
Schaffter’s resignation as a Non-Independent Non-Executive Director was announced with effect from 1 October 2026. The company reportedly stated that his departure was to facilitate the restructuring of the Board.
Manjula Mathews also stepped down as Chairperson, effective on the same date, but continues as a Non-Executive Director.
The distinction is important. Unlike Schaffter, Mathews has not completely left the Board. Her continued presence means that the transition does not represent a complete separation from the previous board leadership.
The new appointments are equally significant.
Channa de Silva, who previously served as Director General and CEO of the Securities and Exchange Commission of Sri Lanka and held senior positions in the financial and investment sectors, has assumed the Chairmanship.
Dudeepa Ratwatte and Niran Mahawatte have joined as Independent Non-Executive Directors, bringing additional experience in financial markets, treasury management and corporate governance.
The company has therefore introduced a new leadership structure at precisely the time when its latest financial results demonstrate substantial market-related losses.
Whether the changes were planned before the June results or were influenced by the company’s financial position is a question that has not been answered through the available disclosures.
That information would be material to shareholders.
The Rs. 2.29 billion earnings reversal
The most striking feature of the June 2026 quarterly financial statements is the reversal in profitability.
FCT moved from a profit after tax of Rs. 1.553 billion in the June 2025 quarter to a loss of Rs. 741.2 million in June 2026.
This represents an adverse earnings movement of approximately Rs. 2.295 billion.
| Financial performance | June 2026 | June 2025 |
|---|---|---|
| Total income | Rs. 1,465 Mn | Rs. 3,519 Mn |
| Direct income | Rs. 906 Mn | Rs. 3,513 Mn |
| Direct expenses | Rs. 1,204 Mn | Rs. 1,726 Mn |
| Net trading income/(loss) | (Rs. 297 Mn) | Rs. 1,787 Mn |
| Other income | Rs. 559 Mn | Rs. 6 Mn |
| Fair value gain/(loss) | (Rs. 1,171 Mn) | Rs. 745 Mn |
| Net income before operating expenses | (Rs. 909 Mn) | Rs. 2,538 Mn |
| Operating expenses | Rs. 145 Mn | Rs. 285 Mn |
| Profit/(loss) before tax | (Rs. 1,054 Mn) | Rs. 2,253 Mn |
| Profit/(loss) after tax | (Rs. 741 Mn) | Rs. 1,553 Mn |
| Earnings per share | (Rs. 1.20) | Rs. 2.52 |
Source: FCT Statement of Profit or Loss and Other Comprehensive Income, April–June 2026. Amounts in Rs. million.
The figures demonstrate that the deterioration was not confined to one expense category.
Net trading income, which had generated Rs. 1.79 billion in the corresponding quarter of 2025, turned into a loss of Rs. 297 million.
More importantly, the company recorded a fair value loss of Rs. 1.171 billion on financial assets measured at fair value through profit or loss.
In the corresponding period of the previous year, the same category generated a gain of Rs. 744.6 million.
The adverse movement of approximately Rs. 1.916 billion in fair valuation was the most significant contributor to the earnings reversal.
For a primary dealer operating in government securities, this is a critical development.
The value of government bonds is sensitive to interest-rate movements. When yields increase, the market value of existing fixed-income securities generally declines. Conversely, when yields fall, the value of existing securities generally increases.
FCT’s performance during FY2025/26 benefited from a declining-yield environment, as acknowledged in its audited annual report. The June 2026 results indicate that the subsequent market environment was considerably less favourable.
The company attributed the deterioration to market volatility, geopolitical uncertainty and an increase in Central Bank policy rates in May 2026.
This explanation is consistent with the nature of its business. However, it does not fully answer the central risk-management question: was the company’s portfolio sufficiently protected against an adverse reversal in interest rates?
The June figures make that question unavoidable.
The audited annual report: a strategy built around market positioning
FCT’s FY2025/26 Annual Report provides important context for understanding the subsequent quarterly loss.
The company described the financial year as a period of measured recovery and tactical repositioning in Sri Lanka’s fixed-income market.
Its management highlighted the favourable operating environment created by improving macroeconomic stability, declining inflationary pressures, greater investor confidence and a gradual compression of government securities yields.
The annual report explains that the company selectively positioned its portfolio within the short- to medium-term segment of the yield curve while capitalising on secondary-market trading opportunities.
The moderation in interest rates generated valuation gains on medium- and long-duration government securities, contributing to overall portfolio performance.
However, the same strategy also exposes the company to adverse valuation movements when yields reverse direction.
This is not unusual for a treasury business. The critical issue is the extent of the exposure and how it is managed.
The annual report also indicates that FCT had been moving away from aggressive interest-rate positioning towards a more balanced trading and holding strategy.
Yet the June 2026 results raise the question of whether this repositioning was sufficient to protect the company against the market movements experienced during the quarter.
The audited annual report and the subsequent interim financial statements therefore reveal two different market environments: a year in which falling yields supported portfolio performance, followed by a quarter in which adverse valuation movements materially affected earnings.
The contrast is central to understanding the current situation.
The balance sheet: expansion financed by increasing liabilities
The balance sheet provides perhaps the most important insight into the company’s risk profile.
At 30 June 2026, FCT reported total assets of Rs. 62.31 billion, compared with Rs. 54.79 billion at 31 March 2026.
This represents an increase of approximately Rs. 7.52 billion, or 13.7%, within three months.
However, total liabilities increased from Rs. 47.14 billion to Rs. 55.40 billion, while total equity declined from Rs. 7.65 billion to Rs. 6.91 billion.
| Balance sheet | June 2026 | March 2026 |
|---|---|---|
| Total assets | Rs. 62.31 Bn | Rs. 54.79 Bn |
| Total liabilities | Rs. 55.40 Bn | Rs. 47.14 Bn |
| Total equity | Rs. 6.91 Bn | Rs. 7.65 Bn |
| Financial assets at fair value | Rs. 53.26 Bn | Rs. 47.44 Bn |
| Financial assets at amortised cost | Rs. 7.09 Bn | Rs. 6.16 Bn |
| Repo liabilities | Rs. 51.86 Bn | Rs. 43.21 Bn |
| Listed debentures | Rs. 3.04 Bn | Rs. 3.28 Bn |
| Net assets per share | Rs. 11.22 | Rs. 12.43 |
Source: FCT Statement of Financial Position, 30 June 2026.
The increase in total assets was accompanied by a substantially larger increase in liabilities.
The company’s shareholders’ equity declined by approximately Rs. 741 million, broadly corresponding to the quarterly loss.
Net assets per share fell from Rs. 12.43 to Rs. 11.22, a reduction of approximately 9.7% in three months.
This is particularly relevant to shareholders because the decline reflects an actual reduction in the reported equity base.
Although the company’s total assets expanded, the additional assets were accompanied by increased financing obligations.
The company’s balance sheet therefore became larger but more leveraged.
Repo financing: the central issue behind the financial position
The most significant liability in FCT’s balance sheet is its securities sold under repurchase agreements.
Repo liabilities increased from Rs. 43.21 billion at the end of March 2026 to Rs. 51.86 billion at the end of June 2026.
This represents an increase of approximately Rs. 8.64 billion, or 20%.
At the end of June, repo liabilities accounted for approximately 93.6% of total reported liabilities.
Meanwhile, financial assets measured at fair value stood at Rs. 53.26 billion.
The comparison demonstrates the extent to which the company’s securities business is financed through repo arrangements.
It is important to recognise that repo financing is a normal and established funding mechanism for primary dealers. Its existence does not establish financial distress.
However, the scale of FCT’s repo exposure makes funding liquidity, collateral management and interest-rate risk particularly important.
A leveraged securities portfolio can generate attractive returns when market conditions are favourable. But adverse market movements can have a disproportionate effect on equity when the portfolio is funded substantially through borrowing.
Furthermore, a decline in collateral values may lead to additional margin requirements or collateral substitution obligations.
This can create liquidity pressure even where the underlying securities remain capable of generating returns over their full maturity.
The available financial statements do not establish that FCT experienced a collateral shortfall or default on any financing obligation.
Nevertheless, the expansion of repo liabilities alongside the quarterly valuation loss makes the company’s funding structure one of the most important areas requiring further disclosure.
The key questions are whether the company’s repo financing is appropriately matched with the maturity of its investments, whether collateral buffers remain adequate under stressed market conditions, and how much of its portfolio is exposed to further yield increases.
These are matters that the new Board should address transparently.
Leverage is increasing while the equity cushion is declining
The company’s total liabilities increased by approximately Rs. 8.26 billion during the quarter, while equity declined by approximately Rs. 741 million.
Consequently, total liabilities relative to equity increased from approximately 6.16 times to 8.02 times.
Although conventional industrial-company leverage measures should be interpreted cautiously when applied to a financial intermediary, the direction of movement is important.
FCT is operating a larger balance sheet against a smaller equity base.
This does not automatically indicate insolvency or an inability to meet obligations.
However, it means that adverse movements in the value of financial assets can have a greater relative impact on shareholders’ funds.
The company reported a net asset value per share of Rs. 11.22 at the end of June 2026, compared with Rs. 12.43 three months earlier.
For investors, the question is no longer limited to whether the company can recover its trading profitability.
It is also whether its existing capital base is sufficient to support the scale and risk characteristics of its securities operations.
The Rs. 558.6 million related-party income: an important earnings distinction
Another significant feature of the June financial statements is the recognition of Rs. 558.6 million in other income, compared with Rs. 6.4 million in the corresponding quarter of 2025.
Note 1 identifies approximately Rs. 552.1 million as management fee and branch commission recoveries, including related interest.
The disclosed amounts include:
| Description | Amount |
|---|---|
| Management fees previously charged by First Capital Holdings PLC | Rs. 216.8 Mn |
| Branch commission previously charged by First Capital Limited | Rs. 238.6 Mn |
| Interest thereon | Rs. 96.7 Mn |
| Total disclosed recovery | Rs. 552.1 Mn |
The company states that these amounts were recognised in accordance with Central Bank guidelines.
This is a material disclosure because the recovery contributed significantly to the reported income for the quarter.
Without the Rs. 558.6 million in other income, the company’s net loss before operating expenses would have been approximately Rs. 1.468 billion rather than Rs. 909 million.
This does not imply that the recovery was inappropriate or incorrectly recognised.
However, investors should distinguish between income generated from ordinary treasury operations and income arising from the recovery of previously charged management fees, commissions and associated interest.
The distinction matters when assessing recurring earnings.
The related-party nature of the disclosed transactions also makes the approval process, commercial basis and treatment of the recoveries relevant governance considerations.
In particular, shareholders should understand whether similar recoveries are expected in future periods or whether this was a one-off adjustment.
Cash flows: positive operating cash flow does not tell the whole story
FCT reported net cash generated from operating activities of Rs. 66.6 million during the June 2026 quarter, compared with an operating cash outflow of Rs. 3.19 billion in the corresponding quarter of 2025.
The improvement is notable.
However, the cash flow statement reveals that the positive operating cash flow occurred alongside significant movements in financial assets and financing liabilities.
During the quarter:
- Financial assets measured at fair value increased, absorbing Rs. 6.98 billion.
- Financial assets at amortised cost increased, absorbing Rs. 925.5 million.
- Receivables from related companies increased by Rs. 553.2 million.
- Repo financing generated approximately Rs. 7.93 billion in cash.
- Cash and cash equivalents increased from Rs. 35.7 million to Rs. 61.3 million.
The figures demonstrate that the company’s securities portfolio expansion was closely associated with repo financing.
The positive operating cash flow should therefore be interpreted alongside the financing movements rather than as an independent indication of improved financial strength.
At 30 June 2026, cash and cash equivalents amounted to only Rs. 61.3 million, compared with total assets of Rs. 62.31 billion.
This is not necessarily unusual for a securities dealer whose liquid assets may include government securities and other financial instruments.
Nevertheless, it highlights the importance of examining the liquidity of the entire portfolio rather than relying on the reported cash balance alone.
The interest-cover ratio: a warning indicator
The company’s disclosed financial ratios provide another area of concern.
According to the June 2026 investor information section, interest cover declined from 1.40 times at March 2026 to 0.11 times at June 2026.
The reported debt-to-equity ratio increased from 6.08 times to 7.95 times, while the quick asset ratio declined from 1.24 times to 1.17 times.
| Financial ratio | June 2026 | March 2026 |
|---|---|---|
| Debt/equity | 7.95x | 6.08x |
| Quick asset ratio | 1.17x | 1.24x |
| Interest cover | 0.11x | 1.40x |
The sharp deterioration in interest cover deserves particular attention.
However, interest-cover calculations for financial institutions and treasury businesses can differ from those used for conventional operating companies.
The methodology and earnings components used in the company’s calculation should therefore be reviewed before interpreting the ratio as a direct measure of its ability to service all financing obligations.
Even with this qualification, the movement from 1.40 times to 0.11 times reinforces the need for additional disclosure on earnings, funding costs and the company’s capacity to withstand further market volatility.
What the audited annual report says about funding costs
The FY2025/26 Annual Report also reveals the importance of repo financing to FCT’s operating model.
Direct expenses declined by approximately 1.4% to Rs. 6.08 billion during the year, compared with Rs. 6.17 billion in FY2024/25.
Interest expenses on repo borrowings amounted to Rs. 5.62 billion, compared with Rs. 5.92 billion in the previous year.
Repo interest therefore represented the dominant component of the company’s direct expenses.
This demonstrates that funding costs are central to the company’s profitability.
A treasury operation must generate sufficient returns from its securities portfolio to cover the cost of financing, operating expenses and market-related losses.
When interest rates and yields move favourably, the company can benefit from trading gains and valuation appreciation.
When market conditions reverse, however, it can face simultaneous pressure from funding costs and asset valuations.
The June quarter illustrates this vulnerability.
The company recorded direct expenses of Rs. 1.204 billion against direct income of only Rs. 906 million, producing a trading loss of Rs. 297 million.
This means the company was unable to cover its direct expenses through direct income during the quarter.
The additional fair value loss further increased the overall deterioration.
The central issue is therefore whether the company’s trading strategy can generate sustainable returns across different interest-rate environments, rather than only during favourable market cycles.
Is FCT in serious financial trouble?
The available financial information establishes that FCT experienced a significant deterioration in its financial performance during the June 2026 quarter.
It also establishes that its repo liabilities increased materially, equity declined and the company’s disclosed interest-cover ratio weakened.
These are genuine financial concerns.
However, the available statements do not establish that FCT is insolvent, unable to meet its obligations, or facing an imminent liquidity crisis.
The company continues to report substantial financial assets, including government securities, and positive operating cash flow for the quarter.
The correct assessment is therefore that FCT is facing a significant market-risk and earnings challenge, with an increasingly leveraged balance sheet that warrants close monitoring.
Whether this represents a temporary market setback or a more structural problem depends on factors that cannot be determined from the published quarterly figures alone.
These include the maturity and duration of its portfolio, the proportion of realised versus unrealised losses, the maturity profile of repo obligations, collateral arrangements and the company’s regulatory capital position.
The distinction between financial stress and financial failure is essential.
The former is supported by the available figures. The latter is not established.
Channa de Silva: a new Chairman taking over at a difficult time
The appointment of Channa de Silva gives the boardroom restructuring additional significance.
De Silva previously served as Director General and CEO of the Securities and Exchange Commission of Sri Lanka and held senior positions in the financial and investment sectors.
He joined the FCT Board as an Independent Non-Executive Director in January 2025 before being appointed Chairman with effect from 1 October 2026.
His experience in capital markets, financial regulation and corporate governance makes his appointment particularly relevant to a company whose earnings are closely connected to market movements and financial risk management.
However, he is not entering the company as a completely new outsider.
Having previously served on the Board, he would already have had exposure to the company’s governance and strategic environment.
This makes the transition different from appointing an entirely external professional to investigate or take control of a troubled institution.
The question being raised by the financial developments is whether the new Chairmanship will bring a fundamental reassessment of the company’s risk appetite, funding model and trading strategy.
Calling de Silva a ‘guinea pig’ would imply that he has been appointed to absorb responsibility for problems created by others. There is no evidence currently available to establish such an arrangement.
Nevertheless, his appointment comes with substantial responsibilities.
He will be expected to provide effective oversight of the company’s risk exposure, ensure transparent financial reporting and establish whether the existing trading and funding strategies remain appropriate.
The appointment of two additional independent directors could strengthen the Board’s capacity to examine these matters.
But the ultimate test will be the substance of the decisions taken, rather than the professional credentials of the individuals appointed.
The accountability question: who was responsible for the risk strategy?
One of the most important questions arising from the current situation concerns accountability.
FCT’s financial performance is not simply the result of external market conditions.
Although government bond yields and interest rates are determined by broader economic and monetary developments, the company’s portfolio positioning, financing structure, risk limits and hedging decisions are matters of management and board oversight.
A loss arising from a general market movement is not necessarily evidence of poor management.
However, the scale of the loss raises questions about whether the company’s exposure was consistent with its approved risk appetite.
Shareholders should therefore seek clarity on whether the June valuation losses were within approved limits, whether any internal risk thresholds were breached, and whether the Board had been receiving adequate information about the portfolio’s sensitivity to interest-rate changes.
The simultaneous board changes make these questions even more relevant.
Did the restructuring follow a routine board evaluation? Was it planned before the June quarterly results? Were there disagreements over strategy or risk management? Did any director raise concerns regarding the company’s financial position?
The publicly available information reviewed for this article does not answer these questions.
They should not be treated as allegations against any individual director.
Rather, they are questions of corporate governance that deserve clear responses from a listed company whose business model involves substantial leveraged exposure to government securities.
First Capital Holdings and the wider group relationship
FCT is part of the First Capital group, with First Capital Limited holding approximately 89.36% of its shares as at 30 June 2026.
The remaining 10.64% represents the public holding.
This ownership structure makes the relationship between FCT and its parent group particularly relevant to governance and financial transparency.
The June financial statements disclose the recovery of previously charged management fees and branch commissions involving First Capital Holdings PLC and First Capital Limited.
Such arrangements are not automatically problematic. Group companies commonly provide management and operational services to subsidiaries.
However, the commercial basis of these transactions, the approval processes and their effect on the financial performance of the subsidiary are important considerations for minority shareholders.
The parent company’s influence over FCT also makes the distinction between subsidiary-level accountability and group-level strategic oversight relevant.
The new Board should ensure that FCT’s financial interests, risk appetite and regulatory obligations are adequately protected within the wider group structure.
The questions the new Board must answer
The board restructuring creates an opportunity to address the concerns arising from the latest financial statements.
The following disclosures would materially improve shareholder understanding:
1. Interest-rate exposure: What was the duration and yield sensitivity of the securities portfolio at 30 June 2026, and what would be the impact of further increases in market yields?
2. Repo financing: What is the maturity profile of the Rs. 51.86 billion repo liability, and what proportion is subject to short-term refinancing?
3. Collateral protection: What collateral haircuts and liquidity buffers are maintained, and has the company experienced any material margin calls?
4. Trading losses: What proportion of the Rs. 1.171 billion fair value loss was realised, and what proportion remained unrealised?
5. Risk limits: Were any approved market-risk or portfolio exposure limits breached during the quarter?
6. Related-party recoveries: What was the commercial and accounting basis for the Rs. 552.1 million recovery, and should shareholders expect similar income in future periods?
7. Capital adequacy: How does the company assess its regulatory capital position following the reduction in equity and increase in leverage?
8. Board restructuring: Were the resignations planned before the June results, and did the changes follow a formal board evaluation or a reassessment of the company’s strategic and financial risks?
These are not merely questions about past performance. They are essential to determining whether the company can sustain its present business model.
Conclusion: the board has changed, but the financial questions remain
First Capital Treasuries has entered October 2026 with a substantially different board leadership structure and a financial position that deserves careful scrutiny.
The June quarter produced a Rs. 741 million loss after tax, reversing a Rs. 1.55 billion profit a year earlier. Fair value movements turned from a substantial gain to a significant loss. Repo liabilities increased by Rs. 8.64 billion, total liabilities expanded, and net assets per share declined from Rs. 12.43 to Rs. 11.22.
The FY2025/26 Annual Report demonstrates that the company’s business model benefited from a favourable interest-rate environment during the previous financial year. The June results show how quickly this performance can reverse when market conditions change.
The company is not, on the available evidence, established to be insolvent or unable to meet its obligations. But the scale of the earnings reversal and the increase in leveraged funding make it essential for investors to understand the risks embedded in its balance sheet.
Against this background, the departures of Ramesh Schaffter and Manjula Mathews raise important governance questions.
Whether the changes represent a planned restructuring, a strategic shift or a response to concerns about financial performance remains unconfirmed.
Channa de Silva now assumes the Chairmanship at a time when the company needs more than a change of leadership. It needs a clear demonstration that its risk-management framework, capital structure and treasury strategy are capable of operating through adverse market conditions.
The new Chairman should not be judged merely by whether the next quarterly results return to profitability. The more important measure will be whether the company can demonstrate that its earnings are sustainable, its leverage is appropriately managed and its financial risks are transparently disclosed.
The real story at First Capital Treasuries is therefore not simply who resigned and who replaced them.
It is whether the boardroom restructuring will lead to meaningful accountability for the risks that have emerged in the company’s financial statements.
The financial numbers have already raised the questions. The responsibility now rests with the new Board to provide the answers.
Editorial note: This article is based on FCT’s provisional financial statements for the quarter ended 30 June 2026, the audited FY2025/26 Annual Report and publicly reported board announcements dated 30 September and 1 October 2026. The June 2026 financial statements are unaudited. No allegation of misconduct, insolvency, undisclosed disagreement or causation between the financial results and directors’ resignations is made. All amounts are presented in Sri Lankan rupees.
