BONDS AGAIN- THE VENTS AT CENTRAL BANK

Sequence of events: Suspicions all round HE DID IT

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The Monetary Board of the Central Bank (CB) met Monday, February 23 and on the following day issued its monthly monetary policy stating that the interest rates were unchanged. Thereafter between February 24 and 26, an interested party sold treasury bonds (that it held) with the date of payment settlement being a week from then, compared to the norm of a two-day settlement from the purchase period.

On the morning of Friday, February 27 (day of the controversial auction) the CB spoke to some dealers while a few others had called the regulator. They were told that the possible rate at which the CB would purchase the bonds was at 9-9.7 per cent.  Such calls and providing an indicative rate are a normal practice and not unusual. When the auction was announced at noon, dealers were not only surprised at the total amount accepted but also the interest rates. “This was shocking because the CB in the morning said the rates will be around 9-10 per cent and now we find they have gone up as high as 12.5 per cent. Something was wrong,” one dealer recalled.

To add fuel to the fire, 2-3 hours after the auction, the CB announced the removal of restrictions to place excess funds of commercial banks in a CB facility.
Furthermore the decision on ‘excess funds’ was believed to have been taken by the Monetary Board on Monday but only announced on Friday coinciding with the bond auction. “Why was the announcement delayed till Friday? Did anyone in the market know about this decision together with the CB move to increase the bond auction quantity?” the dealer asked.

On Monday, March 2 as a result of these twin moves interest rates jumped by 100-150 basis points. More was in store for unsuspecting market dealers. On Tuesday/Wednesday, March 3-4, one of the parties was reported to have begun buying bonds raising questions. Was any party actually re-stocking its bond portfolio ahead of the March 6 payment settlement when it had to find bonds it had (short sold) sold the previous week? “There was suspicion that Perpetual resorted to short selling – which means selling something you don’t have/own which is illegal – and was the reason for it to buy bonds to balance its books when it had to offload by March 6,” the dealer said, adding that all these issues should be probed by the committee.

He said that transactions at the bond auction should be taken in conjunction with the transactions on February 24-26 and March 3-4 along with the CB’s auction and policy announcement on February 27, to arrive at whether there was insider trading or not. “This complex set of transactions needs to be closely examined by experts which the committee should co-opt,” the dealer said.

Another issue that was of a suspicious nature was that a party made a bid far more than its equity base which no trader does. The company, which had an equity base of Rs. 300 million when it started trading in April 2014 after receiving a licence in October 2013, had made an offer of Rs. 2 billion and another Rs. 3 billion through the Bank of Ceylon (totalling Rs. 5 billion). “This is an unbelievably high amount and a massive risk. All traders have limits placed by their board of directors and this seemed very suspicious,” the dealer said.

He said to succeed through such a risky decision, the trader either had inside information about rates and the total to be accepted, or had a buyer lined up who would take such a large amount. “In the market there is no one that could absorb such a huge amount,” he said

Bond issue: Probe committee to question dealers on inside info

By Feizal Samath

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A Government-committee probing the controversial Treasury bond issue is to summon bond dealers for questioning this week to ascertain if any party benefitted from ‘inside information’. There were also concerns on whether any party had engaged in any ‘short selling’ of bonds prior to the controversial bond auction. ‘Short selling’ of bonds, which is illegal, is where a party sells bonds or stock that do not belong to it.

“While politicians from both sides are focusing on the size of the bond issue and the high interest rate, missing in their pronouncements is the sequence of events before and after the bond issue involving this trader. It reveals some very suspicious deals,” said a senior bond trader, who declined to be named, adding “I hope the committee would examine all these issues without bias.”

The committee led by Gamini Pitipana and including two other lawyers, all affiliated to the United National Party (UNP), was appointed by Prime Minister Ranil Wickremesinghe on March 10. Mr. Pitipana, reached by phone yesterday by the Sunday Times, declined to comment except to say a report would be ready in two to three weeks. However, sources close to the committee said it has held three meetings so far in which some “persons” have been questioned at the committee office at the Prime Minister’s Secretariat at Sir Ernest de Silva Mawatha (Flower Road), Colombo.

The committee was bringing in other expertise and is also due to appoint a bond expert as an advisor to help understand the complex structure of the bond and treasury markets. Unlike normal banking where borrowing rates are lower than lending rates, the reverse happens in bonds where dealers make money on selling a bond at a rate lower than what it was purchased at.

The sources said the committee was expecting a large set of documents on Tuesday from the Central Bank pertaining to the transaction which then has to be attested (relating to its authenticity) before being examined. Asked whether the committee would examine issues relating to bond deals prior to the bond in question, one source said, “At the moment the committee is concentrating on the disputed bond issue. If there is a need they may examine others but that would be only after a report is submitted on this issue”.

In Parliament this week, the Prime Minister spoke of many irregularities in bond issues in the past, saying “private placements were usually as large as 10 times bigger than the amount of Government bonds sold through the auctions”. Referring to bond issues during the previous regime, he said that in one instance in 2013, Rs. 16 billion worth of 5-year bonds were sold by auction at a yield of 10.9 per cent and thereafter Rs. 76 billion of the same bond were sold through private placements at a higher yield of 11.42 per cent.

“Who stood to benefit from such acts? The answer is obvious. As a result of such anti-competitive practices the primary dealers had lost sight of their principal role in making for a transparent, liquid and competitive bond market. They were asking the Central Bank to dictate to them at what interest rate they should bid at the bond auctions,” the Prime Minister said.

Meanwhile, primary market operators, registered dealers to handle bonds and Treasury bills (t-bills), are to meet Central Bank (CB) officials tomorrow (Monday) including the Superintendent of Public Debt, who oversees bonds and t-bills. Dealers have, even earlier during former Governor Ajith Nivard Cabraal’s tenure, said the tendency to accept bids for more than the advertised amount was an unhealthy practice as it could lead to manipulation and possible insider trading. They were expected to urge the CB to discontinue this practice in the context of good governance.

The Primary Dealers Association, which had requested the meeting, was informed last week that CB Governor Arjuna Mahendran would also attend the meeting but the communication came just before Mahendran took leave pending the probe. Yesterday, Mr. Mahendran declined to comment when asked for his views on the ongoing dispute. “I won’t be commenting on any Central Bank issue until the investigation is over and a report submitted,” he told the Sunday Times.

While the Governor, whose son-in-law Arjun Aloysius’ family firm Perpetual Treasuries has been accused of insider trading, and the Government have denied any wrongdoing, the sequence of market deals by Perpetual Treasuries between February 24 and around March 6 coupled with a related CB policy decision cast further doubt on the company’s February 27 transaction. 

The money markets went out of gear on February 27 when the CB accepted Rs. 10 billion as against an advertised Rs. 1 billion in Treasury bonds at higher than market interest rates. The moment it was revealed that Perpetual Treasuries secured half the amount (Rs. 5 billion) at 12.5 per cent interest, suspicion grew as to whether the company had inside information on that the CB was going to accept 10 times the advertised amount, and at higher interest rates.

The Government defence of the bond issue has been criticised in and out of parliament urging the Prime Minister to recommend the appointment of a Parliamentary Select Committee on the matter. Mr. Wickremesinghe on Tuesday called for the appointment of a PSC to probe this issue and a formal request was handed over on Wednesday to the Secretary General of Parliament.

Powerful business group, the Chamber of Commerce, it is reliably understood, has also expressed concern to the PM’s office over the issue saying the governor’s position was unsustainable. Chamber officials declined to comment but the position they were believed to be taking was that in any country such a conflict between a Central Bank Governor and a relative would never have been tolerated. “Let alone this transaction, the moment there is a conflict of interest it raises serious questions of impropriety,” one top businessman said.

SLFP media spokesperson Dilan Perera told the Sunday Times the prime minister and his party were resorting to double standards in this issue.
“When we were in power, Mr. Wickremesinghe and his party criticised us for appointing Sri Lankans with foreign citizenship (Gotabaya and Basil Rajapaksa). After all that criticism, they now appoint a Sri Lankan who is a Singapore citizen and not even having dual citizenship,” he said.

Mr. Perera pointed out to another serious flaw saying the CB is now coming under the PM’s Ministry of Economic Planning instead of the traditional practice of being under the purview of the Finance Ministry. “Nowhere in the world does the Central Bank come under a ministry other than finance,” he said adding that the Government needs to respond to this question and also the one on the UNP’s earlier criticism about Sri Lankans with foreign passports holding important government positions.