PTL had paid a penalty of Rs.21.3 mln for excessive bidding, CB report reveals
View(s):In a comprehensive internal probe, the Central Bank (CB) has said that bond trader Perpetual Treasuries Ltd (PTL) was once asked to pay a penalty of Rs. 21.3 million for excessive bidding. The report by the CB’s Supervision of Non-Bank Financial Institution Department (SNBFI) gave details of a comprehensive on-site examination of the company’s books and made very strong recommendations to the Monetary Board. The report was leaked to the media amidst claims that some CB high officials were trying to prevent it reaching the Monetary Board. Industry officials said that the company’s profits continued to be high in recent months up to September 2016, data which the CB has as primary dealers have to report all financial information at the end of each month.
Here are extracts of the report:
PTL’s capital base rose to Rs.11.07 billion as at 31-05-2016 from Rs.1.84 billion at 30-09-2015 and Rs.1 billion as at 31-10-2014, a growth of 990 per cent over a 19-month period. During the same period, its post-tax profit was Rs.6.12 billion against Rs. 1 billion and Rs. 713 million, up by 771.67 period over the 19-month period. Total assets were listed as Rs.21.27 billion, Rs. 13.46 billion and Rs. 5.17 billion, up 311 per cent while Interest income rose to Rs. 696 million, Rs. 464 million and Rs. 200 million.
On key supervisory concerns:
The report said the company failed to record customer information in the LankaSecure System promptly and accurately and failed to comply with Know Your Customer Direction There was an absence of board approved internal investment policy guidelines which details the guidelines for investments in securities, bidding, securing funds for third party bids and diversified activities, if any, which lead to excessive bidding without contingency funding
On excessive bidding:
PTL had bid a total of Rs 49.4 billion for T-bond auction on 29—03-2016 and 31-3-2016. On 1-4-2016 PTL had to settle Rs.42 billion to secure the T-bonds accepted at the auctions. However PTL did not have sufficient funds amounting to Rs. 36 billion by the settlement date and it had to resort to borrowing a significant proportion of it from Reverser Repo auction, Intra-day liquidity facility (ILF) and money market. However as PTL was short of acceptable securities to provide to CBSL, it was unable to secure adequate settlement funds. As a result PTL was subjected to a penalty of Rs. 21.3 million.
Practice of bidding off-market rates:
PTL has a practice of bidding at off market rates. In other jurisdictions this practice is not allowed and is a severely punishable offence. Further when few PDs consistently bid at off market rates and when their bids are accepted , this results in the cost of borrowing of the government to escalate substantially. It said the EPF purchased the securities in the secondary market from PTL within a short period of time after the primary auction when the EPF has the ability to bid in the primary auction. DFCC: It is observed that PTL has entered into simultaneous deals with DFCC Bank for the same value date at off market rates favouring PTL. It is recommended to request the Bank Supervision Department to inquire from DFCC Bank the rationale for engaging in these types of deals as these transactions are questionable.
Use of CBSL liquidity facility:
PTL made extraordinary capital gains of Rs. 4.65 billion in April and May 2016 from trading T-bonds purchased from primary auctions. These securities were purchased mainly using CBSL’s liquidity assistance available to market participation (borrowing from Reverse repo and using ILF). Corrective action after May 2016:
The MB appointed a committee to propose regulations on government securities market and PDs to consider these when formulating recommendations:
- For PDs to adhere to best practices and greater transparency, it is essential to introduce a mandatory corporate governance code for PDs. For violation of such rules severe action needs to be taken, including imposing penalties, determining that directors and key management personnel are not fit and proper, cancellation of the licence of the PD
- Sanctions should be introduced for violation of the guidelines/directions issued by PDs such as withdrawal of liquidity support for a specific period, denial of access to the money market, withdrawal of a licence to carrying on the business of a PD
- Develop a system where PDs cannot trade or engage in transactions outside the CDS system which is not only an encouragement of unethical practices but also a threat to customer protection and liquidity issues for the company.
- In order to maintain transparency with regard to imposition of penalties and in conformity with the best practice on disclosure of penalties imposed on the regulator, the details of such penalties levied on a PD shall be publicised
- In order to enhance public confidence and transparency in primary dealer operations it is desirable to diversify the share ownership structure (broadbase) of the primary dealers
- Bring PDs under the purview of the KYC rule of the Financial Intelligence Unit
- PDD should monitor primary auction bidding patterns for bidding off market rates, dummy bids, etc by PDs
- In the context of current investigations by COPE and the AG on T-bonds involving PTL transactions, further investigations are recommended by CBSL as the regulator and the government securities and as the agent of the Government
- It is proposed that MB as the regulator and agent of the government, appoint an independent internal committee to carry out an investigation into the following:
- Whether there has been any insider dealing as the report of the committee of lawyers also stated that a further investigation is warranted with regard to insider dealings;
- Whether the transactions PTL entered into with entities such as EPF, state banks and other institutions have been the most optimum for such institutions and if such deals enabled extraordinary gains to PTL at a cost to these institutions and public at large
- PTL has unusual dealings with holding company Perpetual Capital Holdings Pvt Ltd as very favourable terms to the parent company. This may be construed as a method to circumvent the regulation on dividend distribution and siphon off the profits of the company. Accordingly non arms-length transactions with related parties should be freezed after further investigations.
- FIU to probe the accounts of PTL and the BODS (boards of directors) of PTL.