Sri Lanka CB employee tried to bid at same rate as Perpetual: bondscam inquiry witness
ECONOMYNEXT – A Central Bank official tried to enter a controversial bond auction in February 2015 at the same rate that Perpetual Treasuries won a bid, raising concerns over insider information, a commission of inquiry was told.
State-run Bank of Ceylon placed bids of 13 billion rupees on behalf of Perpetual Treasuries at a controversial bond auction where only a billion rupees of securities was originally offered.
A 3.0 billion rupee bid at 12.5 percent was accepted, throwing markets into shock, raising the 30-year yield over 300 basis points and pushing all other maturities up as well, Bank of Ceylon Chief Dealer J Dharmapala said. Another two bids of 5.0 billion rupees missed the auction.
In a phone recording played at the commission of inquiry, Dharmapala tells the front office of the Central Bank’s Public Debt Department that the day before the auction a Central Bank employee asked Bank of Ceylon to place a bid at 12.50 percent, when market rates were around 9.35 percent.
The Central Bank employee had asked 750,000 rupees of his own money to be placed at 12.50 percent, saying the bonds would be auctioned at that rate. Dharmapala said BoC had refused, saying the minimum bid was 5.0 million rupees and it was the coupon that was 12.50 percent and not the auctioned rate. He thought it was crazy (pissu) to bid at 12.50 percent. But, after the auction on February 27, when bids of 12.50 percent was accepted by the Central Bank, he began to think differently.
A Central Bank employeed was one ‘Sulochana’ , he said answering questions from a state attorney. He believed the person worked in the Central Bank’s IT department.
Chief Executive of Perpetual Treasuries Kasun Palisena had called him on February 27, 2015, and asked him to place some bids. Dharmapala asks why Perpetual does not bid directly and is told that it would make settlement easier.
Dharmapala said the bank had excess liquidity and a large statutory reserve, and could settle the bids if they were accepted.
Even if Perpetual Treasuries defaulted, he could sell the bonds, which were placed at asking yields as high as 12.50 percent and 12.75 percent, far above the market at the time.
But, he was personally convinced that the bids would not be hit as they were too high. Two auctions yields would usually move round 20 basis points either way, he felt. For a 30-year bond, even 05 basis points was a lot, he said.
With only a billion rupees of bonds on offer, he thought the Central Bank would accept two or three billion rupees of bids extra, at most.
Dharmapala thought Perpetual Treasuries was making ‘dummy bids’, which has no chance of succeeding.
His conversations with front office officials at the Public Debt Department before the auction indicated that the rate was around 9.35 percent, but there was no firm direction, he felt. He was told to forward any bids he had.
When the bids were accepted on February 27, he thought Perpetual Treasuries had inside information on borrowing plans of the government.
It could have come from either the Treasury or the Central Bank, he said under questioning. (Colombo/June07/2017 – updated)