Killer profits for Sri Lanka primary dealer from bids made with central bank funds

ECONOMYNEXT - Sri Lanka's Perpetual Treasuries Plc, a primary dealer in government securities, had placed bids of tens of billions of rupees at bond auctions without funds of their own and defaulted on cash borrowed from the central bank, a leaked report said.

Perpetual Treasuries had won bids for 42 billion rupees at a controversial bond auction in March 2016 and defaulted on 11 billion rupees taken from the Central Bank, a draft investigation report published on LankaTruth, an online publication said.

Naked Bets

The report, which the central bank acknowledged had been leaked, said placing bets of tens of billions of rupees at auction without money to cover them, endangered the entire government securities market.

The March 2016 bond auctions were among the most controversial, as the state debt office, a unit of the central bank, offered 65 billion rupees of bonds and accepted 127 billion rupees sending yields soaring.

Rates later plunged giving billions of rupees of profits to the buyers as the prices on the underlying bonds rose.

The report said Perpetual Treasuries made profits of 4.6 billion rupees in April and May 2016 buying bonds at rates as high as 14.68 percent partly leveraged with central bank money borrowed at 8.0 and 8.50 percent and selling them off.

This means Perpetual had been borrowing money from the central bank at lower rates and loaning it back to the state at almost the double the rate, pocketing profits on the way.

Critics had said that offering smaller amounts at an auction, misleading the market and then accepting more bids amounts to a rigging of the auction and favouring those with inside knowledge.

The first such large scale auction came to public attention in February 2015, though volumes had been varied earlier. In that auction, where Perpetual also figured, money from state-run Bank of Ceylon was used.

Controversial Auction

Perpetual Treasuries, is a firm connected to Arjun Aloysius, son-in-law of Sri Lanka's former Central Bank Governor Arjuna Mahendran who had denied wrong doing.

At an auction on March 29, 2016, the central bank offered 40 billion rupees of bonds, but sold 27 billion rupees of bonds over the original volume, giving 26.4 billion rupees of securities to Perpetual, the report shows.

The leaked investigation report showed that after offering 10 billion rupees of 14-year bonds (maturing in 2030) in March 2016, the central bank actually sold 28.7 billion rupees worth of bonds, giving Perpetual Treasuries 10.31 billion rupees of securities, the entire volume it had asked for and more than the total offered in the maturity.

In 10-year bonds maturing in 2026, it was given 7.6 billion rupees of securities, after upsizing the volume sold from 10 billion to 17 billion rupees. Perpetual had bid for 10.3 billion rupees.

Perpetual was also given 8.45 billion rupees in 9-year bonds maturing in 2025, after it subscribed for 8.6 billion. A total of 21 billion rupees of 2025 bonds were sold after only offering 10 billion at first.

Perpetual only bid a billion rupees and got only 50 million rupees in four-year bonds, where 10 billion was offered and 10.2 billion sold.

The longer the tenor, the larger the capital gains (and big losses to the state) to be made when rates fall.

In a March 31 auction, Perpetual had not submitted any bids for short tenure two- and four-year bonds. But it had got 15 billion rupees of 12-year bonds maturing in 2028, after bidding for 15.7 billion rupees. For five-year bonds the firm had bid 5.1 billion rupees and got 625 million rupees of securities.

No Funds

The money for the winning bids had to be paid on April 01.

The probe report said the firm had to pay 36 billion rupees for the bonds, but it did not have enough funds.

Perpetual Treasuries had asked for 22 billion rupees at an open market operations (OMO) cash auction where the central bank gives overnight liquidity (printed money) against securities, for banks and dealers who may face a cash shortfall.

During the day on April 01, Perpetual had also borrowed 19.98 billion from an intra-day liquidity facility, which has to be settled by the end of the day.

The investigation report said Perpetual was unable to provide securities of 11.1 billion rupees to fully cover its bid at the OMO auction to get the cash.

The primary dealer had then defaulted on the 11 billion rupees from the intra-day liquidity facility. The firm had been fined for both actions.

The report did not say whether it was the first time a bank or a dealer had defaulted on an intra-day liquidity loan and also failed to provide securities to cover a deal at the OMO auction.

Risky Deals

The investigation report said Perpetual Treasuries had made large bids at auctions without enough funds to cover them, hurting the entire market.

"Such high risk taking can result in a stand alone PD (a primary dealer not connected to a commercial bank) facing liquidity and settlement risks causing negative consequences on the confidence of the government securities market," the report noted.

Perpetual Treasuries had made profits of 4.6 billion rupees in April and May 2016, by borrowing from the central bank's windows, the report said.

From April 01 to April 08 2016, Perpetual had borrowed 66 billion rupees from the Central Bank to fund its portfolio. It was 75 percent of the total borrowings by all primary dealers.

From January 2015 to May 2016, Perpetual had made profits of 9.8 billion rupees, the report said.

The profits were also booked by selling the bonds to Pan Asia Bank, DFCC and the EPF. In the case of DFCC and Pan Asia, the firm had bought back securities, sometimes on the same day, which needed to be probed further, the report said.

The report also recommended a deeper probe of the activities of the EPF.

Sri Lanka's new Central Bank Governor Indrajit Coomaraswamy had already stopped the practice of misleading the market by announcing low volumes and accepting bids for much higher amounts and has said auctions would be further reformed after looking at international best practices.

The central bank said last Friday that its governing board "noted with concern the sharp disparity in the performance of primary dealers" and "certain issues related to the pattern of trading activities."

Meanwhile a probe report by Sri Lanka Parliament's committee on public enterprises is also due to be submitted to the speaker later this month.

Entrust, 3 Sri Lanka finance company depositors to be repaid: central bank

ECONOMYNEXT - Sri Lanka's Central Bank said customers of Entrust Securities, a primary dealer in government securities, and three finance companies will be repaid.

The Central Bank said Rs8.5 billion of investments made at Entrust Securities by 24 funds and investors, which were not covered by government securities, will be repaid.

At The Standard Credit Finance Ltd., City Finance Corporation Ltd. and Central Investments and Finance Plc, Rs4,848 million will be repaid to 11,878 depositors "annually from 2017 over a reasonable period of time with a fair interest rate during this repayment period", the Central Bank said.

The Central Bank said Entrust was made insolvent by fraudulent activities.

The Central Bank said it will set up a new enforcement division in the department of non-bank financial institutions to take legal action against directors and managers who engage in fraud.

"Furthermore, action will be taken to address lapses in the Central Bank, and to strengthen regulatory and supervisory mechanisms on priority basis to ensure the safety and soundness of existing institutions," the Central Bank said.

The full statement is reproduced below:

Central Bank resolves four insolvent financial institutions to protect depositors and promote the financial system stability

As announced to the public on 10.10.2016, the Monetary Board at its meeting held on 14.10.2016 considered resolution issues pertaining to a number of non-bank financial institutions in the context of relevant legal provisions in the interest of protecting the public trust in the financial system. Accordingly, the Monetary Board approved a resolution mechanism for repayment of depositors of three finance companies and legitimate investors in government securities-linked investments in Entrust Securities PLC.

The three finance companies are The Standard Credit Finance Ltd., City Finance Corporation Ltd. and Central Investments and Finance PLC. All three companies got into a chronic financial position in 2008 and 2009 due to fraud and mismanagement of funds and, therefore, these companies did not have assets to pay off deposits. All restructuring efforts made by the Central Bank, from time to time, could not produce envisaged results as those who managed these companies failed to arrange an infusion of new capital.

As a result, these companies became insolvent and were out of business since then. The Entrust Securities PLC, a company with a primary dealer license to trade government securities, got into a chronic liquidity and insolvency crisis during latter part of 2015 as a result of fraudulent use of funds placed by customers for investment in government securities. The Central Bank on January 4, 2016 suspended the Board of Directors of the Entrust and vested its operations in the National Saving Bank to protect the investors.

The Monetary Board reviewed the lack of progress so far and took cognizance of the fact that there was no further room to revive these companies to enable them to repay depositors and investors in the foreseeable future. Given the long-delay involved so far, the Monetary Board approved the company resolution plans submitted by the Department of Supervision of Non-banking Financial Institutions to repay deposits and investments annually commencing from 2017 over a reasonable period of time with a fair interest rate during this repayment period.

In the case of the three finance companies, repayment will cover Rs. 4,868 mn of nearly 11,878 depositors. In the case of the Entrust, investments secured with government securities amounting to Rs. 3,100 mn belonging to 107 investors will be settled in the coming weeks. In respect of unsecured investments in the Entrust amounting to Rs. 8,508 mn belonging to 24 individuals and entities, government securities will be allocated and be repaid under the repayment plan to be implemented with the managing support of the Seylan Bank PLC.

The Central Bank will complete the required administrative procedures and communicate details to all those depositors and investors. Once the repayment plan is legally finalized, those companies will be dealt with through applicable laws for liquidation. The Monetary Board is of the view that this is the only option that now remains as there are no assets in these companies and no investors have been willing to revive these companies and repay above depositors and investors.

As part of the resolution plans, the Central Bank will set up a new Enforcement Division in the Department of Supervision of Non-bank Financial Institutions to institute legal action against Directors and managers who have been responsible for the fraud and misappropriation of funds and to make every effort to recover such funds from them. In the case of the Entrust, the law enforcement authorities, in association with the Central Bank, have already initiated legal actions. The Enforcement Division will also introduce a routine procedure to take legal action against parties who have committed similar fraudulent practices in existing companies, in the event such instances are detected by the examination staff. Further, action will be taken to address lapses in the Central Bank and to strengthen regulatory and supervisory mechanisms on a priority basis to ensure the safety and soundness of existing institutions.

However, it is important to stress that the regulation and supervision do not mean a guarantee for each and every deposit and investment made by the public in banks and financial institutions. Those who make such deposits and investments and those who undertake businesses based on these funds are primarily responsible for their business decisions regarding prudent management of their funds. In fact, almost all funds placed in the above distressed companies have been mobilized through unauthorized financial products. Even large depositors and investors have been negligent in not undertaking the normal due diligence on risks and return, despite being sufficiently knowledgeable and skillful to do so. The responsibility of the Central Bank is only to provide an external safeguard through regulation and supervision to the extent permitted in law while facilitating institutions to carry on their businesses essential for the economy and general public in a safe and sound manner in a stable financial system.

Therefore, all those who are stakeholders to these resolution plans are kindly requested to co-operate with the Central Bank in order to end this long-standing issue in the public interest. In the event of non-cooperation, the Central Bank will have no option but to reluctantly permit these companies to be wound up under the law.

Colombo Stock Exchange Market Review – 18th Oct 2016

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Colombo Stock Exchange Trade Summary 18-Oct-2016

Colombo stock market concluded the trading session in a strong support level on Tuesday despite the lackluster investor activity. All Share index started the session with a gain of 17 index points but failed to sustain the momentum and the benchmark index closed with a loss of 9.82 index points (-0.15%) at 6,442.87. High caps constituent, S&P SL20 index shed 6.70 index points (-0.19%) to close at 3,591.74.

Blue-chips namely, John Keells Holdings (closed at LKR 150.00, -0.7%), Sri Lanka Telecom (closed at LKR 36.20, -1.6%) and Ceylon Beverage Holdings (closed at LKR 600.00, -7.4%) pinned the index in negative territory. Gains were recorded in Lanka Orix Leasing & Company (closed at LKR 81.50, +1.8%) and People’s Leasing & Finance (closed at LKR 18.40, +1.7%).

Daily market turnover reached LKR 390mn, supported by crossings in selected high caps. Negotiated deals were recorded in John Keells Holdings (0.36mn shares at LKR 151.00), Hatton National Bank (0.2mn shares at LKR 227.00) and Dialog Axiata (2mn shares at LKR 11.50). Aggregate value of crossings represented 32% of the turnover.

Accordingly, John Keells Holdings emerged as the top contributor to the turnover with LKR 70mn followed by Central Finance (LKR 60mn), Hatton National Bank (LKR 50mn) and Dialog Axiata (LKR 36mn).

Losers outweighed the gainers 69 to 58, while 81 scripts remained unchanged. John Keells Holdings, Commercial Credit & Finance, Teejay Lanka and Ceylon Grain Elevators were the most traded stocks during the session.

Meanwhile, Lee Hedges announced an issue of shares by way of a sub-division in the proportion of one into five. Nevertheless, stock declined by 3.4% to LKR 407.00 with thin volumes.

Good Hope advanced by 13.4% to LKR 1,476.10, subsequent to share repurchase announcement made by four companies namely, Good Hope, Indo Malay, Selinsing and Shalimar. Price of Indo-Malay remained unchanged at LKR 1,429.60 while Selinsing and Shalimar ended the day without trades.

Foreign investors stood on the buy side with a net foreign inflow of LKR 98mn. Foreign participation was 38%. Net foreign inflows were seen in Hatton National Bank (LKR 46mn), Dialog Axiata (LKR 32mn) and ACL Cables (LKR 13mn). Net foreign outflow was mainly seen in CIC Holdings (LKR 12mn).

Source: LSL

Sri Lankan shares fall for 7th session to post 1-mth closing low

Reuters: Sri Lankan shares fell for a seventh straight session on Tuesday and posted their lowest close in a month as cautious investors awaited a flurry of corporate results and next month's national budget, while fresh political concerns also weighed on sentiment, brokers said.

The benchmark index of the Colombo Stock Exchange ended 0.15 percent weaker at 6,442.87, its lowest close since Sept. 20.

"Investor sentiment will be the same until the budget next month. The market is also concerned about political stability after the president's speech last week," said a stockbroker, asking not to be named.

The head of Sri Lanka's anti-corruption body resigned on Monday, days after President Maithripala Sirisena implied her agency was favouring the rival party of his prime minister.

This is likely to delay one of the promises of Sirisena's coalition government of eliminating corruption and implementing rule of law and might have an adverse impact on business confidence, analysts said.

Turnover stood at 389.6 million rupees ($2.65 million), compared with this year's daily average of around 743 million rupees.

Foreign investors, who have sold a net 2.24 billion rupees worth of shares so far this year, bought a net 98.2 million rupees worth equities on Tuesday.

Blue chips John Keells Holdings Plc fell 0.66 percent, while top fixed-line phone operator Sri Lanka Telecom Plc dropped 1.63 percent.

Sri Lanka's quarterly earnings season started last week but the bulk of locally listed firms will not report until late October or early November.

($1 = 146.7500 Sri Lankan rupees) 

(Reporting by Shihar Aneez; Editing by Subhranshu Sahu)

Colombo Stock Exchange Market Review – 17th Oct 2016

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Colombo Stock Exchange Trade Summary 17-Oct-2016

Colombo bourse slumped for the sixth consecutive session on Monday amid low market activity. All Share index conclude the day with a loss of 29.85 index points or 0.46% at 6,452.69 while 20-scrip S&P SL index lost 16.68 index points or 0.46% to end the day at 3,598.44. 

Price drops in high caps namely, Commercial Bank (closed at LKR 146.00, -1.4%), John Keells Holdings (closed at LKR 151.00, -0.7%) and People’s Leasing & Finance (closed at LKR 18.10, -2.2%) drove the index performance to the negative territory.

Daily market turnover fell to a six week low of LKR 291mn. Expolanka Holdings was the top contributor to the turnover with LKR 82mn underpinned by two crossings of 11mn shares at LKR 6.50. Counter accounted for 28% of the day’s turnover. John Keells Holdings (LKR 36mn), Ceylon Grain Elevators (LKR 12mn) and ACL Plastics (LKR 12mn) were among top contributors.

Market breadth was negative where out of 200 scripts, 111 slipped, 25 advanced while 64 remained unchanged.

High investor activity was witnessed in Hayleys Fabric & Teejay Lanka, subsequent to the Premier’s visit to Brussels to discuss on GSP+. Hayleys Fabric remained at LKR 17.80 and Teejay Lanka declined by 1.7% to LKR 46.00. Further, Ceylon Grain Elevators, Access Engineering and Sinhaputhra Finance preference share witnessed high investor activity.

Foreign investors were net buyers with a net foreign inflow of LKR 1mn. Foreign participation was 13%. Net foreign inflows were seen in Expolanka Holdings (LKR 2.0mn), John Keells Holdings (LKR 1.4mn), Vidullanka (LKR 0.9mn) while net foreign outflow was mainly seen in Central Industries (LKR 1.0mn).

Meanwhile, according to External Sector Performance report published by CBSL, trade gap has reduced by 10%YoY to USD 541.6mn in July 2016 amid 6.6%YoY drop in imports. Tourism earnings improved by 19.1% while workers’ remittances recorded a drop of 4.4% in July 2016.

Source: LSL

Sri Lankan shares fall for 6th day; turnover slumps to 6-wk low

Reuters: Sri Lankan shares closed down for a sixth straight session on Monday with turnover slumping to a six-week low as cautious investors awaited a flurry of corporate results and next month's national budget.

The benchmark index of the Colombo Stock Exchange ended 0.46 percent weaker at 6,452.69, its lowest close since Sept. 21. It shed 1.5 percent last week.

Turnover stood at 291.3 million rupees ($1.99 million), its lowest since Sept. 5 and less than half of this year's daily average of around 745 million rupees.

Foreign investors, who have sold a net 2.34 billion rupees worth of shares so far this year, bought less than 700,000 rupees worth equities on Monday.

John Keells Holdings fell 0.66 percent, while top lender Commercial Bank of Ceylon lost 1.35 percent.

Sri Lanka's quarterly earnings season started last week but the bulk of locally listed firms will not report until late October or early November.

($1 = 146.3700 Sri Lankan rupees) 

(Reporting by Shihar Aneez; editing by John Stonestreet)

Colombo Stock Exchange Market Review – 14th Oct 2016

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Colombo Stock Exchange Trade Summary 14-Oct-2016

Colombo bourse wrapped the weekly activities in a negative note on Friday despite the higher foreign investor participation. All Share index hovering around 6,494 levels and closed the session at 6,482.54, with a drop of 0.36 index points or 0.01% while 20 scrip S&P SL index edged lower by 0.36 index points or 0.01% to end at 3,615.12. 

Price decline in Lion Brewery (closed at LKR 400.20, -3.3%), John Keells Holdings (closed at LKR 152.00, -0.5%) and Aitken Spence (closed at LKR 70.50, -1.8%) weighed down the index. However, gains in Dialog Axiata (closed at LKR 11.50, +0.9%) and Asiri Hospital Holdings (closed at LKR 29.80, +2.4%) eased the pressure on the index. 

Daily market turnover was LKR 569mn. Ceylon Tobacco emerged as the top contributor to the turnover with LKR 184mn supported by a single crossing of 0.2mn shares at LKR 850.00. Lion Brewery was the next best contributor with LKR 181mn underpinned by two crossings of 0.4mn shares at LKR 400.00. Aggregate value crossings represented 59% of the turnover.

Commercial Bank voting (LKR 32), Commercial Bank non-voting (LKR 17mn) and Chevron Lubricants (LKR 11mn) were among contributors to the turnover.

Losers outweighed the gainers 80 to 41, while 160 scripts remained unchanged. High investor activity was witnessed in Sinhaputhra Finance preference share, Asia Capital and Galadari Hotel. Stock of Chevron Lubricants advanced to LKR 171.00 but closed at LKR 170.20 (+1.3%) subsequent to the dividend announcement.

Foreign investors were net buyers with a net foreign inflow of LKR 26mn. Foreign participation was 68%. Net foreign inflows were seen in Commercial Bank (LKR 32mn), Bairaha Farms (LKR 1mn) and Alumex (LKR 0.4mn). Net foreign outflow was mainly seen in Sunshine Holdings (LKR 3mn).

Source: LSL