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Stinking details on Bond scam - COPE report reveals
https://www.ceylontoday.lk/90-97387-news-detail-stinking-details-on-bond-scam-cope-report-reveals.html
The interim report on the controversial Treasury Bond issue by the Central Bank of Sri Lanka (CBSL) which was to be presented to Parliament by the Committee on Public Enterprises (COPE) which is now in the public domain had observed that the Governor of CBSL Arjuna Mahendran had in fact, visited the Public Department of the Central Bank, where the auction in question was taking place in two instances on the day of the auction.
Ceylontoday,
2015-07-05 02:00:00
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Stinking details on Bond scam - COPE report reveals
By Gagani Weerakoon
The interim report on the controversial Treasury Bond issue by the Central Bank of Sri Lanka (CBSL) which was to be presented to Parliament by the Committee on Public Enterprises (COPE) which is now in the public domain had observed that the Governor of CBSL Arjuna Mahendran had in fact, visited the Public Department of the Central Bank, where the auction in question was taking place in two instances on the day of the auction.
The initial report by the three-member committee appointed by the Prime Minister Ranil Wickremesinghe on the controversial bond issue has observed that the bidding pattern of Perpetual Treasuries belonging to the son-in-law of the Central Bank Governor and its securing 50 per cent of the accepted bids were unusual even though there was hardly any reference to the conduct of Governor Mahendran.
On the contrary, COPE has established Central Bank Governor Arjuna Mahendran's direct intervention on behalf of his son-in-law Arjun Aloysius owned Perpetual Treasuries.
"First he had visited the department around 10. 45 a.m. while the bidding process was going on. He had remained there up to the time of closing the auction. Thereafter, he has left and returned with two Deputy Governors namely B.D.W.A. De Silva and Dr. P. N. Weerasinghe at 12.30 p.m. 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 B. 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 B from the auction and to convey the message to the Tender Board. Finally, the officials had agreed upon the decision since the Governor had also said he would not allow Direct/Private Placements," the report said.
Suspicious behaviour
The draft report states that the Committee had observed a suspicious behaviour 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 M 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 10.48 a.m.). 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 faults of the system. The last moment transaction limits the decision making abilities of Bank of Ceylon.
SWAP agreement
(d) The Perpetual Treasuries had entered into SWAP agreement with the Bank of Ceylon to settle the bonds obtained through Bank of Ceylon. Further the company has sold a considerable number of Treasury Bills and Treasury Bonds on the subjected auction date of 27 February 2015 to fund the transaction. This proves that they have entered into the transaction without sufficient funds in their hand.
(e) Seventy-five per cent of the total bids received came from the Perpetual Treasuries Limited and 50 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 post on 16 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 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 said 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 of Sri Lanka and Perpetual Treasuries (Pvt) Ltd at that time also, the report said.
Portfolio
The report said when representation was made by CEO of the Perpetual Treasuries Ltd. Kasun Palisena, he had acknowledged that although they once had a portfolio of Rs. 11.7 B in the secondary market, no bid as high as in this case under question had ever been made before.
"He further said 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, and IMF Dollar payments using the information available in its website. Since no auction had taken place during the period from November to February, Palisena said he guessed that the amount to be issued should be larger," the report said.
The report also said Arjun Joseph Aloysius, Director, Free Lanka Trading Co. Pvt. Ltd., who was a former Director of the Perpetual Treasuries Ltd. further confirming the facts said the staff of that company had shown high performances and as such were able to bid in a way that they could obtain a 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 27 February. The maximum amount of the bid offered by them before that is Rs. 250 M. And only
Rs. 27 M from the bid offered to the value of Rs.150 M had been accepted during the period of 26 February 2014 to 30 December 2014."
Alleged scam
The committee had questioned both Mahendran and Aloysius over the alleged scam and the Bank of Ceylon (BoC) had facilitated the investigation by furnishing records of telephone conversations to the probe team.
Even though, BoC had recorded telephone conversations, further interrogation by COPE members had revealed that the Central Bank lacked a similar recording system and it was suggested that tangible remedial action should be taken without further delay.
According to 442-page oral submissions, the committee went to the extent of playing the records on several occasions much to the embarrassment of some of those who appeared before the committee as well as some members of the committee itself.
The committee received the expert advice of former Deputy Governor of the Central Bank Dr. W.A. Wijewardene while acting Auditor General W.P. C. Wickramaratne and veteran public administrator Lionel Fernando assisted the group.
Evidence
The committee had decided against interpreting evidence or exploiting the situation to target any particular individual.
It had recorded statements of over 40 persons, including BoC, CB, NSB officials as well as primary dealers.
Meanwhile, top officials of the Debt Department of CBSL, when questioned by the committee, had said they were under the impression that it was the BoC that was bidding right throughout the auction and had no idea that the bank was bidding on behalf of another primary dealer.
The chief dealer of the BoC giving evidence before the committee had admitted that he received the request from the Perpetual Treasuries Ltd through his mobile phone at around 10.45 a.m. and he took the decision to bid on behalf of the company by 10.48 a.m. and closed bidding by 10.57 a.m.
Risky decision
The committee was concerned about the fact that an official- chief dealer- could take such a risky and important decision on behalf of the BoC on his own accord within just three minutes, even though it is natural that dealers had to make quick decisions while in the auction. It also raised questions as to how he was able to take mobile phones in, when it was not accepted.
Meanwhile, CB Governor giving evidence before the committee had implied that he went for the auction on strong directives of the Prime Minister under whose purview the Central Bank is in.
While giving his oral submissions Mahendran had revealed that he initially suggested to officials in the Public Debt Department (PDD) of the Bank to accept Rs. 20 B out of the Rs.20.708 B worth of bids received at the controversial bond auction, the officials at PDD, however, turned down his suggestion.
"Once I knew we had bids to the tune of over Rs.20 B, my initial suggestion was to accept Rs. 20 B itself. However, the officials at the department agreed that they would only accept Rs.10 B," Mahendran had said.
Alternative
The Domestic Debt Management Committee (DDMC) had originally recommended to raise Rs.1 B out of the auction. However, the Public Debt Department upon receiving Rs. 20.7 B worth of bids on 27 February had also initially recommended raising only Rs. 2.6 B as the best alternative having analyzed different options to the said 30-year Treasury Bond.
"...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 B. However, Dr. M. Z. M. Azim, Additional Superintendent of Public Debt and 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 B 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 said he would not allow Direct/Private Placements," the report said.
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.
Primary dealers
(a) In instances after 27 February 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 M 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 fulfil 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 behavioural change of the primary dealers was observed after 27 February. The private sector primary dealers effectively contributed to the primary auctions after the decision is one such example.
(e) The 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.
The interim report on the controversial Treasury Bond issue by the Central Bank of Sri Lanka (CBSL) which was to be presented to Parliament by the Committee on Public Enterprises (COPE) which is now in the public domain had observed that the Governor of CBSL Arjuna Mahendran had in fact, visited the Public Department of the Central Bank, where the auction in question was taking place in two instances on the day of the auction.
The initial report by the three-member committee appointed by the Prime Minister Ranil Wickremesinghe on the controversial bond issue has observed that the bidding pattern of Perpetual Treasuries belonging to the son-in-law of the Central Bank Governor and its securing 50 per cent of the accepted bids were unusual even though there was hardly any reference to the conduct of Governor Mahendran.
On the contrary, COPE has established Central Bank Governor Arjuna Mahendran's direct intervention on behalf of his son-in-law Arjun Aloysius owned Perpetual Treasuries.
"First he had visited the department around 10. 45 a.m. while the bidding process was going on. He had remained there up to the time of closing the auction. Thereafter, he has left and returned with two Deputy Governors namely B.D.W.A. De Silva and Dr. P. N. Weerasinghe at 12.30 p.m. 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 B. 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 B from the auction and to convey the message to the Tender Board. Finally, the officials had agreed upon the decision since the Governor had also said he would not allow Direct/Private Placements," the report said.
Suspicious behaviour
The draft report states that the Committee had observed a suspicious behaviour 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 M 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 10.48 a.m.). 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 faults of the system. The last moment transaction limits the decision making abilities of Bank of Ceylon.
SWAP agreement
(d) The Perpetual Treasuries had entered into SWAP agreement with the Bank of Ceylon to settle the bonds obtained through Bank of Ceylon. Further the company has sold a considerable number of Treasury Bills and Treasury Bonds on the subjected auction date of 27 February 2015 to fund the transaction. This proves that they have entered into the transaction without sufficient funds in their hand.
(e) Seventy-five per cent of the total bids received came from the Perpetual Treasuries Limited and 50 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 post on 16 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 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 said 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 of Sri Lanka and Perpetual Treasuries (Pvt) Ltd at that time also, the report said.
Portfolio
The report said when representation was made by CEO of the Perpetual Treasuries Ltd. Kasun Palisena, he had acknowledged that although they once had a portfolio of Rs. 11.7 B in the secondary market, no bid as high as in this case under question had ever been made before.
"He further said 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, and IMF Dollar payments using the information available in its website. Since no auction had taken place during the period from November to February, Palisena said he guessed that the amount to be issued should be larger," the report said.
The report also said Arjun Joseph Aloysius, Director, Free Lanka Trading Co. Pvt. Ltd., who was a former Director of the Perpetual Treasuries Ltd. further confirming the facts said the staff of that company had shown high performances and as such were able to bid in a way that they could obtain a 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 27 February. The maximum amount of the bid offered by them before that is Rs. 250 M. And only
Rs. 27 M from the bid offered to the value of Rs.150 M had been accepted during the period of 26 February 2014 to 30 December 2014."
Alleged scam
The committee had questioned both Mahendran and Aloysius over the alleged scam and the Bank of Ceylon (BoC) had facilitated the investigation by furnishing records of telephone conversations to the probe team.
Even though, BoC had recorded telephone conversations, further interrogation by COPE members had revealed that the Central Bank lacked a similar recording system and it was suggested that tangible remedial action should be taken without further delay.
According to 442-page oral submissions, the committee went to the extent of playing the records on several occasions much to the embarrassment of some of those who appeared before the committee as well as some members of the committee itself.
The committee received the expert advice of former Deputy Governor of the Central Bank Dr. W.A. Wijewardene while acting Auditor General W.P. C. Wickramaratne and veteran public administrator Lionel Fernando assisted the group.
Evidence
The committee had decided against interpreting evidence or exploiting the situation to target any particular individual.
It had recorded statements of over 40 persons, including BoC, CB, NSB officials as well as primary dealers.
Meanwhile, top officials of the Debt Department of CBSL, when questioned by the committee, had said they were under the impression that it was the BoC that was bidding right throughout the auction and had no idea that the bank was bidding on behalf of another primary dealer.
The chief dealer of the BoC giving evidence before the committee had admitted that he received the request from the Perpetual Treasuries Ltd through his mobile phone at around 10.45 a.m. and he took the decision to bid on behalf of the company by 10.48 a.m. and closed bidding by 10.57 a.m.
Risky decision
The committee was concerned about the fact that an official- chief dealer- could take such a risky and important decision on behalf of the BoC on his own accord within just three minutes, even though it is natural that dealers had to make quick decisions while in the auction. It also raised questions as to how he was able to take mobile phones in, when it was not accepted.
Meanwhile, CB Governor giving evidence before the committee had implied that he went for the auction on strong directives of the Prime Minister under whose purview the Central Bank is in.
While giving his oral submissions Mahendran had revealed that he initially suggested to officials in the Public Debt Department (PDD) of the Bank to accept Rs. 20 B out of the Rs.20.708 B worth of bids received at the controversial bond auction, the officials at PDD, however, turned down his suggestion.
"Once I knew we had bids to the tune of over Rs.20 B, my initial suggestion was to accept Rs. 20 B itself. However, the officials at the department agreed that they would only accept Rs.10 B," Mahendran had said.
Alternative
The Domestic Debt Management Committee (DDMC) had originally recommended to raise Rs.1 B out of the auction. However, the Public Debt Department upon receiving Rs. 20.7 B worth of bids on 27 February had also initially recommended raising only Rs. 2.6 B as the best alternative having analyzed different options to the said 30-year Treasury Bond.
"...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 B. However, Dr. M. Z. M. Azim, Additional Superintendent of Public Debt and 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 B 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 said he would not allow Direct/Private Placements," the report said.
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.
Primary dealers
(a) In instances after 27 February 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 M 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 fulfil 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 behavioural change of the primary dealers was observed after 27 February. The private sector primary dealers effectively contributed to the primary auctions after the decision is one such example.
(e) The 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.
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