CB Governor visited Public Debt Dept. on two occasions, COPE report says
View(s):A Parliamentary Committee on Public Enterprises (COPE) that probed the Central Bank’s Treasury Bond scandal has made serious indictments on the Governor sand his son in law Arjun Joseph Aloysius.
The committee was chaired by D.E.W. Gunasekera and comprised 13 MPs from the COPE. Their report was due to be tabled in Parliament on Friday, June 30. However, a late night meeting of the committee on Thursday night was attended by only eight members. Four of them, the United National Party (UNP) faction were opposed to its presentation. The remaining four, however, were in favour of tabling it the next day.
After strong protests from the four who opposed, Chairman Gunasekera informed the Speaker Chamal Rajapaksa that he had declared in the House that the report would be tabled on July 7. However, before that could happen, Parliament was dissolved.
In explaining Treasury Bonds, the COPE report obtained by the Sunday Times noted that the Central Bank (CB) is the sole authority to issue Treasury Bonds to fulfil the Government’s monthly debt requirements needed by the Treasury. The CB follows two methodologies. One is to invite registered Primary Dealers to submit the bids after advertisements are placed. The other is the “direct/private placement,” accepting funds from primary dealers. The report also explains that Treasury Bonds are complex market instruments. They are issued at fixed interest rates known as coupon rate with maturities longer than a year. The Government is obliged to pay interest semi-annually at the coupon rate on the face value of the bonds. Bonds are quoted by Primary Dealers at bond auctions at different prices, that is, above the face value, at the face value or below the face value.
In 2008 the Monetary Board, concerned about “unwarranted increase in the rate on Government Securities, had approved the commencement of mobilization of funds through direct placement.” Here are edited excerpts from the COPE subcommittee report: The Government fund requirement as at 2 March 2015 amounted to Rs 13.5 billion according to the Cash Flow statement of March 2015 …. of the Director General of the Department of Treasury Operations addressed to the Superintendent of Public Debt of the Central Bank. At their meeting dated 27 February 2015 the Domestic Debt Management Committee (DDMC) which is the committee responsible for managing the domestic public debt comprising 5 members of the Central Bank and the Ministry of Finance recommended to raise Rs 1 billion by primary auction and to raise Rs 12.5 billion by Direct Placement method 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.
Ads placed
By advertisements published on 26 February 2015 on the Treasury Bond issue by Primary Auction, bids were called from 16 registered primary dealers for the bonds to the value of Rs 1 billion at 12.5 per cent Coupon Rate which will mature after a 30 year priod. Acceptance of the bids was closed at 11.10 a.m. (1110 hours) though the normal closing time is 11 am (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 Employee’s Provident Fund and 16 other primary dealers.
The Treasury Bond Tender Committee meeting 2/2015 convened between 1230 hours and 13 10 hours on 27 February 2015 decided to increase the amount of the Primary Bond auction by 10 times to Rs 10,058 million (Rs 10.58 billion) instead of the Rs 1000 million (Rs 1 billion) recommended 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 raised 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. The recommendation of the Treasury Bond Tender Committee and a Minute of the Superintendent of Public Debt was only available. The Public Debt Department has recommended to raise Rs 2.6 billion as the best alternative having analysed 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 the Front Office stating that “Governor instructed to raise funds up to Rs 10 billion taking into consideration additional fund requirement of the Government………..”
The personal representations made before the Committee proved that the Governor had visited the Public Debt Department of the CB in two instances on 27th February 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 of the Auction. Thereafter he had left and returned with two Deputy Governors namely B.D.W.A. De Silva and Dr. P.N. Weerasinghe at 12.30 hours after the bid has been closed. At that time the Governor had looked at the list of all bidders and had initially informed the officials to accept all bids amounting to Rs 20,7 billion. However, Dr. M.Z.M. Azeem, Additional Superintendent of Public Debt and Ms C.M.D.N.K. Seneviratne, Superintendent of 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.
New procedure
If this procedure was not followed and the Treasury Bonds were issued according to the approval given previously to raise Rs 1 billion it could have been possible to award the bids to the first 7 bidders on the 10.4652 maximum weighted average yield rate to raise the said amount by categorizing the bids received at the auction according to the lowest to the highest weighted average yield rate……
“…..It was observed during the examination by the Committee that if the Treasury Bond issue by Primary Auction was restricted to Rs.1 billion as aforesaid the bidders who were not included in the above 7 categories and placed No. 8 to 26 would not have been able to invest on the Treasury Bonds, Further it was observed that Perpetual Treasuries who was placed in No 16, 17, 20 and 21 positions and the bids placed through the BOC would not have been able to invest on the Treasury Bonds as well. Similarly Perpetual Treasuries has placed bids for 75 per cent (Rs. 2 billion directly and Rs. 13 billion indirectly through the Bank of Ceylon) out of the total bids received amounting to Rs 20,7 billion. Out of this Rs 5 billion was awarded to Perpetual Treasuries out of the total bids placed by them which are approximately 50 per cent.
The Committee also observed that after calling for bids for Rs. 1 billion on the Primary Auction method by the advertisements published on 25 and 26 February 2015 and once the primary dealers forwarded their bids the said amount was increased by the Rs. 9 billion. A policy decision has been taken to cancel the earlier decision to raise Rs. 12.5 billion by direct placement method approved Domestic debt management programme relevant to March 2015 and to raise the said amount also from the Primary auction method. Although the Treasury Bond Tender Committee sent their observations, by the time acceptance of the bids were closed at 1100 hours (approximately 1110) on 27.02.2015 the Monetary Board of the CB had not approved the said variation of the Treasury bond issue. The Board paper No. MB/ER/5/3/2015 dated 06.03.2015 discloses that they were informed by the CB Governor of the temporary suspension of the direct placement method used to issue Treasury Bonds. The said decision conveyed to the Board was ratified by them subsequently. The Minutes of the Board on 23 February 2015 shows that the Board had instructed the Public Debt Department to go for a 30 year Bond auction during the week and there was no decision taken to deviate from direct placement to primary auction method…………
Opportunity cost
“………Therefore, it is observed that from the two methods followed by the CB in the issue of Treasury bonds for a while, the use of the direct placement method was suddenly stopped at the time the Tender Committee decision was taken. This was done after the bids were called and accepted for the issue of Treasury bonds on 27.02.2015. As a consequence of this decision, the weighted average yield rate net of tax was increased to 11.7270 in the financial market from the manageable level of 10.4652 which was the weighted average yield rate net of tax at the point of Rs. 1 billion and the Government would have been able to avoid an opportunity cost a commitment to the Government of Rs. 526 million in the form of paying a discount to investors which was not necessary. According to the data published by CB in its Weekly Economic Indicators as at 27th February 2015, investors had been willing to buy a 30 year bond maturing in 2044 in the secondary market at a premium price of Rs. 131.02 corresponding to the yield rate of 10.16 per cent). Hence, the view of the CB officials that there was a risk of being unable to raise all the money by resorting to direct placement method is not substantiated by market evidence. However, there is no evidence that the Direct Placement method had failed to generate the required funds at any time previously. Certainly, it would not be the case when the market had been flooded with an excess liquidity of Rs. 287 billion as per the data released by the CB in the same Weekly Economic Indicators. Further, it was revealed that no financial impact assessment has been done by the CB 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……..
After 27 February 2015 all the Treasury Bonds issued up to now has been through the Primary Association method and the following factors were observed in this regard:
(a) Even though Perpetual Treasuries Ltd 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 the 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 CB has accepted the bids by primary dealers for the entire fund requirement. The Committee observed during the examination that the CB has incurred an opportunity cost and commitment to the Government from the first bid so awarded.
Deviation
The Committee further observed that due to the decision taken by the CB Governor 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 for the inception of the bidding. The CB has accepted those bids until they fulfilled their cash requirement.
(b) The CB an opportunity cost and a commitment to the Government of Rs. 526 million due to the acceptance of the bids which was submitted by the primary dealers below the par valve at a higher yield interest rate to fulfill their monetary requirement.
(c) Certain auctions had been entirely rejected by the CB 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 CB acceptable rate.
(d) A clear behavioural 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 in 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 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 from the CB objective of economic and price stability and financial system stability………
“….CEO of the Perpetual Treasuries Ltd Kasun Palisena stated that they had once had a portfolio of Rs.11.7 billion in the secondary market and further mentioned that no bid as high as in this case under question had ever been made before. He further stated that capital adequacy required to make higher bids had been achieved only in November, 2014. It was mentioned that he materialized the bond by analysing the requirement of the CB in terms of the debt maturities, coupon payments, sovereign, IMF Dollar payments, etc. using the information available in its website. 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. Arjun Joseph Aloysius, Director, Free Lanka Trading Co. Pvt Ltd, who was a former Director of the Perpetual Treasuries Ltd, further confirming above facts, stated that the staff of that company had shown high performances at the auction. He also stated that the company had, strong assets to liability ratio, market volatility, etc. Moreover, participation details of the Perpetual Treasuries Ltd. in CB Treasury Bond as a Primary Dealer shows extraordinary performances after 27th February 2015. The maximum amount of the bid offered 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 during the period of 26.02.2014 – 30.12.2014. Further from 10th March 2015 onwards they have offered bids ranging from Rs.300 million to Rs.3 billion and received bids in the range of Rs 50 million to Rs. 3 billion. Even though Perpetual Treasuries 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 the institution have been accepted……..
“…….The main objective of the CB is to stabilize the money market. The decision taken on February 27 2015 was dependent upon the supply and demand behaviour of the market caused by creating an uncertainty offering prospects for participants and the causing of upward movement in the interest rate structure followed rate volatility.
Role of Arjun Aloysius
“Perpetual Treasuries Ltd (PV 88550) is a fully owned subsidiary of Perpetual Capital (Pvt) Ltd. Geoffrey Joseph Aloysius and Arjun Joseph Aloysius are shareholders of Perpetual Capital (Pvt) Ltd. They have equal shares of the company. Mr. Arjun Joseph Aloysius was a director of Perpetual Treasuries Ltd and he has resigned from the said post on 16th January 2015. The aforesaid Director of Perpetual Capital (Pvt) Ltd Arjun Joesph Aloysius is the son in law of the CB Governor. Since 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 Ltd and the CB had a related party transaction.
Ms. Shiromi Noel Wickremasinghe was appointed as a director of Perpetual Treasuries (Pvt) Ltd on 23 December 2013. She continued as a Director of Perpetual Treasuries (Pvt) Ltd till 9 March 2015. She is a sister of the former Governor of the Central Bank. 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 committee referring to the behaviour of Perpetual Treasuries Ltd with regard to this particular bond issue and soon before and after the bond issue, noticed suspicious behaviour 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). The Bank of Ceylon had requested an extension of 10 minutes from the CB indicating that there are large bids on their hands. The CB 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 the Bank of Ceylon.
No sufficent funds
d) Perpetual Treasuries had entered into a SWAP agreement with the Bank of Ceylon to settle the bonds obtained through Bank of Ceylon. Further the company has 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 hands.
a) 75 per cent of the total bids received came from Perpetual Treasuries Ltd and 50 per cent of the awarded bonds were obtained by Perpetual Treasuries Ltd.
“According to Section No. 6 of Ceylon Treasury Operations Manual, the Primary Dealer Unit should not process applications without verification of funds, Signatures and other vital data. They also should adhere to the K.Y.C. guidelines especially in case transactions. Though the Primary Dealer Unit was aware that the Perpetual Treasuries Ltd. did not have sufficient funds to settle the bids in the event of success, the Bank of Ceylon as a Primary Dealer, had agreed to act on behalf of another Primary Dealer………