ECONOMYNEXT - Sri Lanka's Employees Provident Fund had used its cash to finance bond purchases of a controversial primary dealer in bonds through short term loans, after bidding for smaller volumes at the primary auction, the Auditor General has revealed.
EPF had then bought bonds from the secondary market at higher prices (lower yields), the AG said.
Perpetual Treasuries, a primary dealer in gilts, was involved in Sri Lanka's largest securities scam where bonds were purchased from rigged auctions conducted by the central bank at high yields (low prices) and dumped on the Employees Provident Fund at low yields (high prices).
Auctions were systematically rigged by taking larger volumes than first announced to market participants misleading genuine bidders, according to critics.
The Auditor General, in his report on the accounts of the EPF for 2016, said that out of 62 bond auctions conducted in 2016, the EPF had stayed out of 16 of them.
In the case of 19 others, bids had been submitted at what the AG called "unrealistically high" rates, which are generally known in the market as 'dummy bids'.
In one controversial bond auction which was settled in April 2016, out of 40,000 billion rupees in bonds sold, the EPF had bought 2.1 billion rupees of bonds, about half the funds that were earmarked for the auction.
The EPF had cash of 8.8 billion rupees at the time and the middle office had recommended that 4 billion rupees be used at the auction leaving the balance for contingencies such as withdrawals.
The cash had then been loaned at rates of 6.5 percent to 8.0 percent to primary dealers though reverse repo transactions.
Between 61 to 94 percent of the funds had been loaned short term to Perpetual Treasuries until April 12, which the Auditor General referred to as the "private entity under contention".
In the first controversial auction of February 27, 2015, Perpetual Treasuries had borrowed short term money from the Bank of Ceylon to finance its bids.
Meanwhile in the auction settled in April 01, an "extremely small amount" of a 2030 bond (LKB01530E152) that had been auctioned at yields of around 13.65 percent and 13.70 percent had been bought by the EPF, the AG said.
But from April 12 to April 25, the EPF had bought 6.373 billion rupees of similar bonds at yields around 12.42 to 12.5 percent (a higher price) in the secondary market, the AG said.
Another bond (LKB01226F014) maturing on 2026 which was auctioned at 13.43 percent had been bought by the EPF at 12.2 percent in the secondary market, the AG said. (Colombo/Feb11/2019 - SB).