Mystery ‘man’ asked Perpetual to bid for Sri Lanka 30-year bond auction: bondscam inquiry
ECONOMYNEXT – Perpetual Treasuries had been told by a ‘man’ to bid at a controversial Sri Lanka bond auction on February 2017, according to a taped telephone conversation between the firm and a state bank that was replayed at a commission of inquiry.
A Presidential Commission is inquiring into allegedly rigged auctions from Feb 2015, where long bonds were bought at low prices by primary dealers including Perpetual Treasuries, which is connected to ex-Central Bank Governor Arjuna Mahendran, and later dumped at high prices on the Employees Provident Fund (EPF) among others.
In the first such auction, Bank of Ceylon placed 13 billion rupees of bids on behalf of Perpetual Treasuries, though only a billion rupees of securities were originally offered.
In the taped telephone conversation, Perpetual Treasuries Chief Dealer Kasun Palisena tells Bank of Ceylon Chief Dealer J Dharmapala, that ‘man’ had called yesterday and advised him to talk to the public debt department and to invest in the 30-year bond auction. It was after a gap of two years that such a call had been received from the ‘man’.
The Commission asked Dharmapala who the ‘man’ referred to in the conversation was. It was suggested to him that both parties apparently knew who ‘man’ was. Dharmapala said he was not focusing too closely on that sentence at the time.
A lawyer for Perpetual Treasuries interjected to say the ‘man’ was a Public Debt Department official.
The commission questioned Dharmapala whether a dealer did not talk to public debt officials several times a week and not two years later. Dharmapala confirmed that he did talk often as a dealer with the public debt officials.
In a later recorded conversation Dharmapala asks ‘Steffie’ of the front office of the Public Debt Department whether EPF is not bidding directly at the auction and is going through another dealer, after getting large bids from Perpetual Treasuries at high rates of 12.50 percent and 12.75 percent.
Court questioned Dharmapala why he thought EPF was going through another primary dealer. Dharmapala said only EPF had the fund base to put very large bids which made him suspicious.
Dharmapala said he had at least two telephone conversations with Palisena via his mobile phone which was not recorded in the dealing room system. He was told that Perpetual had an insurer as a client, he said.
Dharmapala had told a parliamentary committee on public enterprises that he believed Perpetual Treasuries had ‘inside information’ on government borrowing requirements to make such bids.
In the first recorded conversation on February 27, Palisena seeks Dharmapala’s assistance in bidding for the 30-year bond auction. After asking why Perpetual does not submit a bid on its own, and being told that it was to make settlement easier, Dharmapala agrees, asking bid details to be sent through email.
The bank had a practice of charging at least 1000 rupees for a bid made on behalf of clients, he told the commission. BoC also bid at the same auction on behalf of the Kaluthara Bodhi Trust and Ceylinco Insurance.
Dharmapala explained to the commission that BoC had decided not to buy the bonds for itself as the maturity was too long and did not match its deposits.
Officials at the front office of the Central Bank’s Public Debt Department which conducted the auction had indicated that a yield of around 9.3 percent, which he considered too low for the risk.
He tells Kaluthara Bodi Trust who wanted to bid 8.0 million rupees at the auction that the central bank had indicated a rate of around 9.25 percent.
Ceylinco Insurance which wanted to put 500 million rupees in the auction asks for a higher rate, close to 10.00 percent.
Dharmapala conveys Central Bank’s indicative rates and comments that in 30-years there can be several economic cycles and if inflation stays low and economic growth picks up it will be ‘Awoth Etha’ (if the tusker/elephant comes) but not otherwise.
When interest rates fall the price of a bond rises, giving a capital gain; if rates go up, the bond price falls, generating a loss.
Questioned by Justice Prasanna Jayawardene, Dharmapala explained that ‘Awoth Etha’ refers to a gain that comes unexpectedly.
Ceylinco Insurance had later asked BoC to put a bid at 10.25 percent which it won. Perpetual’s bid for 12.50 percent was also accepted, creating turmoil in bond markets.
Justice Jayarwardene questioned whether the accepted bids at the auction reflected not just an ‘Etha’ (elephant) but a whole ‘Perahera’ (a procession of elephants). (Colombo/June09/2017)