The Committee on Public Enterprises (COPE), which investigated allegations into insider trading in the Treasury bond auction of 27 February 2015, has established that it is evident that the Primary Dealer, Perpetual Treasuries Limited and the Central Bank had a Related Party Transaction.
The 18 page draft interim report which was published by the Colombo Telegraph website last week states that the personal representations made before the Committee proved that the Governor had visited the Public Debt Department of the Central Bank in two instances on 27th February 2015 where the auction in question had taken place, which had never happened before.
“First he had visited the Department around 10 45 hours while the bidding process was going on and remained up to the time of closing the Auction. Thereafter he has left and returned with two Deputy Governors namely Mr. B.D.W.A. De Silva and Dr. P. N. Weerasinghe at 1230 hours after the bid had been closed. At that time, the Governor had looked at the list of all bidders (Auction sheet) and had initially informed the officials to accept all bids amounting to Rs. 20.7 billion. However, Dr. M Z M Azim, Additional Superintendent of Public Debt and Mrs. C M D N K Seneviratne, Superintendent of the Public Debt Department had not agreed with that decision and were able to convince the Governor that it was not a proper decision considering the volume and the too high rates then the Governor had instructed them to raise funds by Rs. 10 billion from the auction and to convey that message to the Tender Board. Finally the officials had agreed upon the decision since the Governor had also stated that he would not allow Direct/Private Placements,” the report said.
The draft report states the Committee had observed a suspicious behavior on the part of Perpetual Treasuries Ltd with regard to the particular bond issue both soon before and after the bond issue due to the following reasons.
(a) The Company had the capital of Rs. 1,020.84 Million and according to the Public Debt Department Circular No. 08/24/002/0005/006 dated 22 June, 2006, it can only bid up to 12.5 times of the Capital, and that amounted to Rs. 12,760.60 approximately as at 27 February, 2015 and it had bid for Rs.15, 000 million or 14.9 times the limit.
(b) This is the first time that a primary dealer had bid through another primary dealer.
(c) The Company had asked Bank of Ceylon to bid on behalf of them at the last few minutes of the auction time. (That is around 1048 hours). Bank of Ceylon had requested an extension of 10 minutes from CBSL indicating that there are large bids on their hands. Central Bank of Sri Lanka as well had granted the extension even though the extensions are given only for valid reasons such as technical defaults of the system. This last moment transaction limits the decision making abilities of Bank of Ceylon.
(d) The Perpetual Treasuries had entered into SWAP agreement with the Bank of Ceylon to settle the bonds obtained through Bank of Ceylon. Further that the Company have sold a considerable amount of Treasury Bills and Treasury Bonds on the subjected auction date of 27 February 2015 to fund the aforesaid transaction. This proves that they have entered into this transaction without sufficient funds in their hand.
(e) Seventy five per cent of the total bids received came from the Perpetual Treasuries Limited and fifty per cent of the awarded bonds were obtained by Perpetual Treasuries Limited.
Perpetual Treasuries Ltd. a fully owned subsidiary of Perpetual Capital (Pvt) Ltd is equally owned by shareholders Geoffrey Joseph Aloysius and Arjun Joseph Aloysius.The son-in-law of the Central Bank Governor Mahendran, Arjun Aloysius was a Director of Perpetual Treasuries Ltd. but resigned from the said post on 16th January 2015.
“Since the Perpetual Treasuries Ltd. is a fully owned subsidiary of Perpetual Capital (Pvt) Ltd. the interest with the Perpetual Treasuries Ltd. with Mr. Arjun Aloysius cannot be ruled out. Thereby, it is evident that the Primary Dealer Perpetual Treasuries Limited and the Central Bank had a Related Party Transaction,” the report said.
Meanwhile, the report added that Ms. Shiromi Noel Wickremasinghe, a sister of the former Governor of the Central Bank was appointed as a director of Perpetual Treasuries (Pvt) Ltd on 23 December 2013.
“She continued as a Director of Perpetual Treasuries Ltd till 09 March 2015. Therefore it was observed that there could have been related party transactions in between the Central Bank and of Sri Lanka and Perpetual Treasuries (Pvt) Ltd at that time also,” the report has noted.
The report said that when representation was made by CEO of the Perpetual Treasuries Ltd. Kasun Palisena, the CEO had acknowledged that although they had once had a portfolio of Rs. 11.7 billion in the secondary market, no bid as high as in this case under question had ever been made before.
“He further stated that the capital adequacy required to make higher bids had been achieved only in November, 2014. It was mentioned that he materialized the bond by analyzing the requirement of the Central Bank in terms of the debt maturities, coupon payments, sovereign, IMF Dollar payments etc. using the information available in its web site.Since no auction had taken place during the period from November to February, Mr. Palisena stated that he guessed that the amount to be issued should be larger,” the report noted.
The report added that Arjun Joseph Aloysius, Director, Free Lanka Trading Co. Pvt. Ltd., who was a former Director of the Perpetual Treasuries Ltd. further confirming above facts said that staff of that company had shown high performances and as such were able to bid in a way that they could obtain huge amount at the auction.
“Moreover, participation details of the Perpetual Treasuries Ltd in CBSL Treasury Bonds as a primary dealer, shows extraordinary performances after 27th February 2015. The maximum amount of the bid offered by them before that is Rs. 250 million. And only Rs. 27 million from the bid offered to the value of Rs.150 million had been accepted du the period of 26.02.2014 to 30.12.2014.”
“Further from 10th March 2015 onwards, they have offered bids ranging from Rs. 300 million to Rs.3, 000 million and received bids in range of Rs. 50 million to Rs. 3000 million.
The report however did not say the amount of Direct Placements, Perpetual Treasuries received by the Central Bank since the company obtained a Primary Dealer licence in 2013.
The parliamentary committee comprised Chairman of the COPE, DEW Gunasekera, Minister Rajitha Senaratne, State Minister Rosy Senanayake, Deputy Minister Eran Wickramaratna, Deputy Minister Sujeewa Senasinghe, Minister Arjuna Ranatunga, and fmr MPs Lasantha Alagiyawanna, Sunil Handunetti, Susil Premajayantha, Hassan Ali, Prof. Rajiva Wijesinha, Weerakumara Dissanyake and E. Saravanapavan.
Following are extracts reproduced from the report
The procedure adopted up to 27 February 2015 had been to get a minor portion of the Government’s monthly debt requirement from the primary auction and to get the rest by the direct placement method. The composition of the monthly cash requirement as fulfilled through these two methods for the period January 2014 to May 2015 is described as depicted in the Chart.
Further, according to Monetary, Board Paper No. MIVPD/1/2612008 in the year 2008, the Monetary Board being concerned about the unwarranted increase in the interest rate on Government Securities, had approved the commencement of mobilization of funds through direct placement. It had also recommenced issuing Treasury Bonds to Employees Provident Fund and other captive sources at an interest rate five basis points above the secondary market rates through private placements to improve the market liquidity in terms of Board Paper No. MB/PD25/20/2008.
The Committee also observed that the Guidelines of the Central Bank clearly states that
“the Front office has to make arrangements to meet financing needs as much as possible through auctions. The balance fund requirements of the Government as indicated in the approved borrowing program may be arranged through private placements with PDs”
“After closing each T-bill and T-bond auction the Front Office prepares following documents and provides them to Treasury Bill/Bond Tender Board Committee which is appointed to take decisions on the amount to be accepted that gives the lowest and optimal cost and risk combination.”
The Government fund requirement as at 02 March 2015 amounted to Rs.13.5 billion according to the Cash flow Statement of March 2015 which was annexed to the letter No. TO/DO/CFS/01 dated 20 February, 2015 of the Director General of the Department of Treasury Operations addressed to the Superintendent of Public Debt Department of the Central Bank. At their meeting dated 27 February, 2015 the Domestic Debt Management Committee (DDMC) which in the committee responsible for managing the domestic public debt with a view to minimizing the cost and risk of government public debt comprising 05 members of the Central Bank and the Ministry of Finance recommended to raise Rs. 1000 million by primary auction and to raise Rs. 12.550 million by Direct Placement method together to satisfy the said fund requirement of the Government.
Subsequently the approval of the Governor of the Central Bank of Sri Lanka was obtained for the said recommendation on 2 March. 2015.
By advertisements published on 26 February, 2015 on the Treasury Bonds issue Primary Auction, bids were called from 16 registered primary dealers for the bonds to the value of Rs. 1000 million at 12.5 per cent Coupon Rate which will mature after a 30 year period. Acceptance of the bids were closed at 1110 hours though the normal closing time is 1100 hours on 27 February, 2015.
From the examination of the records and the representations made it was observed that the bids have been received for Rs 20.7 billion from the Employees Provident Fund and 16 other Primary Dealers.
The Treasury Bond Tender Committee meeting No. 2/2015, convened between 12 30 hours to 13 10 hours on 27 February. 2015 decides to increase the amount of the Primary Bond auction by ten times to Rs.10.058 instead of the Rs. 1 billion recommended by the Domestic Debt Management Committee. This is a deviation from the decision already taken by the Domestic Debt Management Committee to issue Rs.12.5 billion through the Direct Placement method.
Accordingly at the auction Rs. 10 billion was by issuing 30 year Treasury Bonds on 9.3510 to 11.7270 weighted average yield rate (WAYR) from 14 Primary Dealers who submitted bids at the auction.
The said decision was conveyed to the Public Debt Department verbally by the Senior Management of the Central Bank of Sri Lanka recommendation of the Treasury Bond Tender Committee and a Minute of the Superintendent of the public Debt Department only available.
The Public Debt Department has recommended to raise Rs. 2.608 billion as the best alternative having analyzed different options to the said 30 year Treasury Bond. But at the end of the said document, there is a Minute by the Superintendent of Public Debt Department which was addressed to the Head of Front Office stating that “Governor instructed to raise funds up to Rs. 10 billion taking into consideration of the additional fund requirement of the Government”.
The approval of the Domestic Debt Management Committee for the Debt Department borrowing program for March 2015, also containing the details of the auction held on 27 February, 2015 at 1110 hours had been obtained at the meeting of the Domestic Debt Management Committee held at 15 00 hours the same day. The Governor of the Central Bank approved the Debt Borrowing Program only on 2 March, 2015 by placing a minute that the bonds be issued under the established rates to Employees Provident Fund, NSB Fund Management Company Ltd.and the Sri Lanka Insurance Corporation.
By the aforesaid approval it is evident that the Governor of the Central Bank of Sri Lanka has given approval to go for Direct Placement method in the award of Treasury Bonds for March 2015 as well. There was no indication of the discontinuance of the Direct Placement method in the aforesaid approval of the Governor.
Further, it was revealed that no financial impact assessment had been done by CBSL before it chose to discontinue the Direct Placement method and completely go for the Primary Auction method when issuing Treasury bonds thereafter. It appears to be a decision taken without proper study or evaluation. On the other hand it was also observed during the Committee’s examination that in the Direct Placement system of awarding the Treasury Bonds is done by direct land line communication to the Primary Dealers and thus there is no clear documentation in this system as in placing the bids competitively.
Any way the rates offered by the CBSL, are not much competitive. Therefore, there is no huge competition among the primary dealers for the available bids. Although the Central Bank of Sri Lanka was able to minimize the costs during this process of raising funds by way of Direct Placement method there are no available records pertaining to any rejection of the funds so demanded in the department other than the records available to the issuance of Treasury Bonds to fulfill the necessary fund requirement.
There was no such evidence of complaints received regarding not receiving the bonds through direct placement.
The committee observed the particular decision of the tender board of which any person could easily read the bid pattern which had leaked to the media and was widely available. This is a confidential document to be kept in the Central Bank of Sri Lanka which has signatures of the members of the tender board. This was identified as serious internal controls lapse of the Central Bank and recommended to hold an immediate internal inquiry by the Central Bank.
After 27 February 2015 all the Treasury Bonds issue to now has been through the Primary Auction method and the following factors observed in this regard.
(a) Even though Perpetual Treasuries Limited has submitted bids for the treasury bonds previously the said bids have not been accepted in significant amounts prior to 27.02.2015. But after this date majority of the bids placed by this institution was a success.
(b) The bids received in certain issues of the Treasury Bonds were for discounted price from the first bid onwards. In these circumstances also the Central Bank of Sri Lanka has accepted the bids placed by primary dealers for the entire fund requirement. Committee observed during the examination that the Central Bank of Sri Lanka need an opportunity cost and commitment to the Government from the first bid so awarded.
The Committee further observed that due to the decision taken by the Governor of the Central Bank to deviate from the previous practice (accepting a lower amount at acceptable interest rates and offer the balance to primary dealers at the weighted average rate of the issue which was below the cutoff rate) and solely follow the primary auction method, has resulted the following consequences.
(a) In instances after 27 February 2015 the primary dealers have offered a discounted price from the inception of the bidding. The Central Bank has accepted those bids until they fulfilled their cash requirement.
(b) The Central Bank an opportunity cost and a commitment to Government of Rs. 526 million due to the acceptance of the bids which was submitted by the primary dealers below the par value at a higher yield interest rate to fulfill their monetary requirement.
(c) Certain auctions had been entirely rejected by the Central Bank because of the high interest rates of the bids received Thus it demonstrates that the primary dealers have submitted bids at a level higher than the central bank acceptable rate.
(d) A clear behavioral change of the primary dealers was observed after 27 February 2015. The private sector primary dealers effectively contributed to the primary auctions after the said decision is one such example.
(e) This decision had led to the increase of the entire interest rate structure of all bonds, which is depicted in the yield curves attached herewith.
(f) The accepted bidder out of the total bids received bought bonds at lower prices and sold the same at higher prices in the secondary market thereby making immediate profits. This also led to fluctuations in the rate of interest in the market and it created an unstable situation. This deviates the Central Bank objective of economic and price stability and financial system stability.
(g) The aforesaid decision was unexpected and it surprised the market