The report on the controversial bond issue which was tabled in Parliament yesterday (19) 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 Arjuna Mahendran.
By Gagani Weerakoon
The three-member committee appointed to investigate the bond issue of the Central Bank has however called for a full-scale investigation by a proper government authority.
The report of the committee was tabled in Parliament yesterday by Leader of the House Lakshman Kiriella. The committee appointed by Prime Minister Ranil Wickremesinghe was chaired by attorney-at-law Gamini Pitipana and comprised attorneys-at-law Mahesh Kalugampitiya and Chandimal Mendis.
The Terms of Reference (TOR) of the committee were to investigate into the reasons for the Public Debt Department (PDD) of the Central Bank of Sri Lanka (CBSL) to make an announcement to issue a total of Rs 1 billion, the sequences of events and key statistics associated with the said bond Issue with respect to each primary dealer, and the bids received and allocations made by PDD of the CBSL in every bond issue beginning from 1 January 2012 by auctions and private placements.
Prime Minister Ranil Wickremesinghe, in his capacity as the Minister of Policy Planning and Economic Affairs had made available the services of Former Deputy Governor of the CBSL W.A. Wijewardena to assist the committee in technical aspects.
Bond auction
The committee has observed that the bidding pattern of Perpetual Treasuries at the bond auction at question was unusual for two reasons: "a) considering their previous bidding patterns, bids amounting to Rs 2,000,000,000 when the value of bond is Rs 1,000,000,000b) seeking the assistance of BOC to forward bids amounting to Rs 13,000,000,000 given the fact that the value of the bond announced was 1 billion."
"In the interest of the public, since the said transaction involves public funds and fiscal regulations of the government, the committee observes that a full-scale investigation by a proper government authority is warranted."
"The committee further observes that the board of directors of BOC shall initiate a full-scale investigation and if necessary a forensic audit into the activities of the dealer room of BOC, given the fact that it is a State bank. The committee further observes that the Board of Directors of the BOC may call for explanation from the chief dealer and his superior officers with regard to ad-hoc decisions made considering the large portfolio of
BOC funds that are involved as stated above."
The committee has observed that there is a serious lack of transparency pertaining to the activities of the PDD (Public Debt Department) of the CBSL.
There is no proper supervision of the activities between the primary dealers and the PDD.
There is no recording of calls, there is no log of any documents received, no supervision of electronic footprint such as text messages and emails between the officials of the PDD and the primary dealers, the report has maintained.
Since the PDD is dealing with the most sensitive information of the government, the committee is of the opinion that a proper supervisory and monitoring mechanism has to be immediately implemented with regard to the activities of the PDD and the primary dealers.
The committee also observed that an internal document of the Central Bank that contains statistics that are highly confidential is in the public domain. The availability of the said document on the web, newspapers, private circulation, complete with all signatures of CBSL officials leaves room to doubt the sanctity of sensitive confidential information within the secure environment of the CBSL. The committee had been informed by officials of the CBSL that no internal inquiry had been initiated upto date with regard to the question of the said document appearing in the public domain.
The committee said in the report that bonds that are issued are never closed, and the bonds issue several years before are re-adjusted on maturity period and privately placed many years later. "This amounts to a lack of transparency and opening out for manipulation and suspicion."
In another observance, the committee maintained in the report that the monies raised through private placements are far greater than the bond auctions. Even though the officials of the PDD were of the opinion that the private placement is a healthy mechanism, the primary dealers interviewed by the committee were of the opinion that the private placement lacks transparency.
It also noted that there is no proper mechanism with regard to private placement.
"There is no record as to how the decisions with regard to the private placements are made other than records pertaining to the private placements issued on special instructions. The committee observes that an average of 90% of the government debt requirement has been through private placement. This has affected effective participation by primary dealers at auctions. In fact, prior to 27 February the usual bids by primary dealers range between 30 to 50 and occasionally going slightly higher. After 27 February (upon suspension of private placements) the bids received by the CBSL ranges between 130 and 170," the committee observed.
When the Governor was interviewed by the committee he had explained that he made it clear that the restart of auctions was important. He explained that the previous government had borrowed large sums of money both locally and internationally and it had reached beyond the pill level of debt.
Borrow from overseas
He had also opined had the said maximum levels had been reached in early 2014 and the previous government had resorted to borrowing through commercial banks. He had further pointed out to the committee that the previous governor borrowed from the EPF and invested in commercial banks and instructed commercial banks to borrow from overseas.
"In this context he stated that BOC had raised 1 billion dollars and DFCC had raised 200 million dollars. The Governor also stated that when he assumed duties on 23 January there was a repayment of 500 million dollars and the Central Bank did not have enough foreign currency to meet such a payment and that itself created some volatility in the market," the report stated.
Answering the reason to go for a 30-year bond, the Governor had said that the Monetary Board and the PDD decided to start with the longest tenure bond and work backwards. He had explained that if you start at the shorter end, the interest rates will shoot up due to the duration of the curve and the market will start building up interest rates.
When questioned about the effect of the interest rates rising sharply, he had explained that the previous governor's practice of controlling interest rates at 5% for the whole month except for three days was actually confusing the market.
Effective participation
Asked about the success of the new monetary policy, Mahendran had said that there is effective participation in the market and that CBSL is raising record amounts of money in the market. When he was asked if he acted in a manner, which favoured any particular primary dealer, his answer was that he did not do so and that his concern was to raise money for the government and not to see who is funding it.
He had also said that the prior month's failures and additional funding requirements of the government were the main objectives he wished to fulfil.
The committee observed that BOC being a primary dealer had placed bids amounting to Rs 13,000,000,000 and failed to apprise the board of BOC even thereafter.
"He further stated that this is not a credit facility. When the committee questioned the chief dealer of BOC, he further stated that Perpetual Treasuries made a call with regard to placing the said bids and mentioned that the funding for such bid is by an insurance company. The chief dealer of BOC also stated that he inquired from the CEO of Perpetual Treasuries as to the reason for a high amount of yield net of tax and the reply he received from the CEO of Perpetual Treasuries was 'awoth athe thamai' – a colossal profit, if successful," the report stated.
However, answering questions by the committee, the CEO of Perpetual Treasuries had denied that he mentioned that their source of funding is by an insurance company. He had also disputed that it was he who said 'awoth athe thamai' and that it was said by the chief dealer of the BOC.
The committee had observed following discrepancies:
• Though there is no legal bar, it is unusual for a primary dealer to forward bids through another primary dealer
• The chief dealer of the BOC had acted without board approval and had failed and neglected to apprise the board of BOC thereafter.
• The chief dealer of the BOC had failed to exercise due diligence in checking the source of funding.
• The lack of transparency and disparity in statements of the chief dealer of the BOC and CEO of Perpetual Treasuries.
• The discrepancy of statements made by each other.
When the committee interviewed the CEO of Perpetual Treasuries specifically of the unusual bidding pattern at this auction by his institution he explained that they were well aware that the government would be raising unusually high funds for payments of several projects.
Answering the question by the committee as to whether they possessed any inside information to that effect, he had answered that the said information was available in the public domain and did not amount to insider information.
The reason to request BOC to forward bids on behalf of Perpetual Treasuries he had said was due to the cash influx needed for settlement and with the capacity of BOC he thought fit to seek the support of BOC. He had further said that he sought the assistance of Acuity Holdings but was unsuccessful due to the unavailability of the director.
He had also noted that Perpetual Treasuries always had an aggressive approach and this was no different. He had also said that the Central Bank had, at times, rejected Perpetual Treasuries, because they were too aggressive on TAP issues.
The CEO had in fact said that they were successful in securing 50% of the accepted bids due to their careful analysis of the market elements and all factors considered.
The report stated that the committee, given its limited scope of TOR, is not empowered to make any assumption with regard to its observation of Perpetual Treasuries securing 50% of the accepted bids as unusual or on its bidding pattern.
However, in the interest of the public since the transaction involves public funds and fiscal regulations of the government, the committee had observed that a full-scale investigation by a proper government authority is warranted.
The committee had further observed that the board of directors of the BOC shall initiate a full-scale investigation and if necessary a forensic audit into the activities of the dealer room of BOC given the fact that it is a State bank.
It further observed that the board of directors may call for explanation from the chief dealer and his superior officers with regard to ad hoc decisions made, considering the large portfolio of BOC funds that were involved.
Though not directly within the mandate of the TOR, the committee had questioned Deepa Seneviratne, the superintendent of PDD; Dr. M.Z.M. Aazim, Assistant Superintendent of PDD; and P. Samarasiri, Acting Governor of the CBSL; whether this bond issue had caused any loss to the government and if so if a rough estimate could be provided.
All three had stated that there was a loss to the government given the fact that market conditions vary with regard to Treasury bonds depending on various factors and the volume of funds raised.
The committee observed that there is no impediment for the government and or Parliament and or any organization with public interest to engage in the necessary mechanism in establishing the loss to the government, if existent.
The committee had also observed, from the information placed before the committee, that there is a serious lack of transparency pertaining to the activities of the PDD of the CBSL.
There is no recording of calls, there is no log of any documents received, no supervision of electronic footprints such as text messages and emails between the officials of the PDD and the primary dealers, the report stated.
"Since the PDD is dealing with the most sensitive information of the government, the committee is of the opinion that a proper supervisory and monitoring mechanism has to be immediately implemented with regard to the activities of the PDD and the primary dealers. The committee also observed that an internal document of the Central Bank that contains statistics that are highly confidential is in the public domain," the report added.
The availability of the said document on the web, newspapers, private circulation, complete with all signatures of CBSL officials leaves room to doubt the sanctity of sensitive confidential information within a secure environment of the CBSL that no internal inquiry had been initiated up to date with regard to the question of the said document appearing in the public domain, it was further stated in the report.
Sensitive information
The committee had further observed that the sentiments expressed by several primary dealers establish a conjecture that sensitive information of the Central Bank and the secrecy of the same may have been compromised on occasions.
"The committee is very careful to take note that this is only an assumption bordering on an allegation and nothing more. However, given the fact that a document containing sensitive information is available in the public domain, there may be a possibility of the secrecy of information possessed by the CBSL being compromised. In view of these, the committee observes that a full-scale investigation by a proper government authority is warranted upon the activities of the PDD and its officials and any other department of the CBSL and its officers, to ascertain whether there is any truth in the assumptions pertaining to the sensitive information of the CBSL being compromised," the report stated.
Given the sanctity and the obligations vested with the CBSL in managing the lifeblood of commerce in Sri Lanka and the onerous responsibility that calls for conduct beyond reproach, the committee had observed that it is not unfair for the general public to expect a high level of integrity in the conduct of the officials of the CBSL that includes the deputy governors and the Governor.
"Therefore, the monitoring of the digital footprints of the officials of the CBSL will espouse the cause in maintaining public trust," it was observed in the committee report.
The committee re-iterated that this was only a fact finding committee with a limited mandate granted on the TOR. The committee had requested Prime Minister Wickremesinghe who is also the Minister of Policy Planning and Economic Affairs to take all necessary steps within the powers vested in him in taking further remedial measures that are necessary.
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