Resurrection of CBSL bond probe: May the truth prevail
With the resurfacing of a probe on the Central Bank bond issue by COPE (Committee of Public Enterprises), there is likely to be a serious public focus on the matter. It was considered an important issue due to various underlying aspects with allegations f fraud and improprieties in addition to raising issues of good governance practices. It is now history how this matter ended up abruptly due to the sudden dissolution of the last Parliament when the COPE had concluded its inquiry and was ready with a report to be tabled.
The promises given at the time was to resume the inquiry procedure after the reopening of the Parliament. Although it has taken some time now under the new Parliament it is a welcome move to take this matter up and clear the air remaining polluted with suspicions and conjectures.
Viewed in retrospect there are certain important milestones to this episode which in recapitulation shows how this subject became the centre of interest to many. Now that the cupboard is going to be opened again for the exposure of the skeletons let us have a look at those events.
Timeline
- The estimated fund requirements of the Government for March 2015 was conveyed to PDD (Public Debt Department) of the Central Bank (CB) by letter dated 20-02-2015 in accordance with the cash flows by the Treasury. The amount so determined was Rs. 13,550 billion.
- The Monetary Board meets on 23/02/2015 and decides to issue 30 year Treasury Bonds through bond auctions.
- The Monetary Board takes a decision on 23/02/2015 (before the announcement of the disputed bond) not to change the prevailing monetary policy on interest rates for a further period of one month from the date of the meeting.
- The PDD announces a bond issue of Rs. 1 billion on 24/02/2015.
- According to the PM’s statement to Parliament the Treasury came up with an immediate fund requirement of Rs. 15 billion at a meeting held at the Treasury attended by Minister of Finance, Highways Minister, Secretary-Finance, CB Governor, Deputy Governor and other officials on 26/02/2015.
- Bank of Ceylon (BOC) requests for an extension of the closing time by 10 minutes on February 27, the day of closing the bids.
- The CB Tender Committee submits its recommendation to accept Rs. 10,058 million net of tax WAVR of 11.873 per cent to the Governor at 13.10 hours for his approval. The approval is granted by the Governor under his signature to the document.
- Immediately after the acceptance of the offers for the bond issue the CB announces a change in the policy of rates contrary to the policy decision taken on February 23 not to change the rates for another month.
Accordingly the prevailing rates of 6.5 per cent for REPO and 8 per cent for REV REPO are changed and the SDF rate available for banks at 5 per cent was removed.
- The market becomes perturbed with this sudden decision with no rationale to change the policy rate taken just three days after the Monetary Board decision not to change it for one month! It is conjectured as ‘favouration’ extended to benefit a few to manipulate the Treasury bond market.
PM’s statement in Parliament March 17, 2015
In his statement the PM confirms that the Governor instructed the Tender Board of the PDD to accept bids up to Rs.10 billion out of a total offer of over Rs. 20 billion. The PM further confirms that such instructions were given in the presence of two deputy governors. According to the PM there was an immediate fund requirement of Rs.15 billion as determined at the meeting at the Treasury held on February 26. In his statement to Parliament the PM says he insisted on an auction procedure and to do away with private placements.
Interestingly, at that time the CB was also issuing Bond 2044 (29 years. 6 months) as private placements at 9.50 per cent! The question arises as to why the PM’s directive to avoid direct/private placement was not carried out. If it was done the call for bids should have been at least Rs. 13 billion, the estimated cash flow requirement. Calling for Rs. 1 billion when Rs.13 billion is the requirement poses a question how the CB could get the funds without direct placement? Another interesting position is why did the PM decide to appoint a committee of inquiry on February 27 the day the bids were closing? Because the PM states that he appointed this committee on the day itself.
Other salient factors
- It was strongly suspected that the fact that the CB was going to accept bids upto Rs. 10 billion although it called for Rs. 1 billion at the auction was known to some favoured primary dealers.
- This is evident from the unusual bidding by the company – Perpetual Treasuries Ltd (PTL) for a total of Rs. 5 billion and that too at the highest rates offered compared to other bidders.
- Out of this Rs. 5 billion, Rs. 3 billion was issued at the highest rate of 12.50 per cent p.a. and Rs. 1 billion was issued at 12.25 per cent p.a. It was revealed that this company had submitted Rs.3 billion at 12.50 per cent through the BOC and Rs. 2 billion by the bank itself.
- The company, it is said, has tried to hide their bid at 12.50 per cent under the name of BOC.
- The company is owned by parties related to the Governor. He was aware of this because he has stated that his son –in –law has resigned from the chairmanship on his appointment as the Governor.
- Nevertheless it has also been revealed that the son-in –law is the Chairman of the holding company of PTL.
Impact and consequences of this BOND issue
- There was no panic situation to go for this fund mobilization in this manner by going for Rs.10 billion bonds of 30 year duration.
- The need would have been more easily fulfilled by issuing 2 to 5 year bonds below 8 per cent as there was an abundance of liquidity in the money market.
- In consequence the Government suffered a huge interest loss. If they accepted only up to Rs. 1 billion as purportedly envisaged in the auction offer, the weighted average rate would only be 10.38 per cent and that too without any shock to the market.
- With this market appetite information the CB would have gone for a 30 year bond issue subsequently.
- Inflation rates on a point to point basis declined to 0.6 per cent in February 2015. This was indicative of a declining trend. So it is difficult to comprehend the logic of the Governor Arjun Mahendran to accept 30 year bonds at a rate of 11.735. As a result of this the interest rates of Treasury Bills and Bonds moved up significantly.
These factors clearly indicate that the entire transaction is tainted and warrants an independent inquiry as even suggested in the three-member Committee report appointed by the PM where they clearly state that their scope was limited due to the very narrow terms of reference given to them.
(The writer is a retired banker, a good governance activist and can be reached at rusiri41@sltnet.lk)