ECONOMYNEXT – Sri Lanka may have lost up between 9.9 to 10.4 billion rupees in over 1,100 direct placements of bonds made by-passing auctions, between 2005 and 2015, a forensic audit has estimated.
The audit by BDO India was commissioned following a recommendation of a presidential commission of inquiry into so-called ‘bondscams’ in 2015 and 2016 through rigged auctions.
Losses are estimated as deviations from a ‘base rate’ calculated from secondary market yields.
A separate report estimated that between 6.6 billion rupees and 9.6 billion rupees may have been lost in 2015 and 2016 though rigged auctions, where insider information may been used by dealers like Perpetual Treasuries Ltd, connected to a relative of then-Central Bank Governor Arjuna Mahendran.
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The bonds were then dumped on the EPF at higher prices (lower interest rates). The forensic audits also found that dumping on the EPF had begun during the direct placement period.
Data for 2002 to 2004 were not available at the central bank, the auditors said.
The forensic audit report said there were multiple irregular practices in direct placements, and questionable or unauthorized sales of bonds.
Some bonds had been issued to different rates on the same day, the report said. Market prices however can change at different times of the day.
Most the ‘losses’ calculated had however gone to the Employees Provident Fund and state banks.
Out of 10.4 billion in losses to the EPF was estimated to have received 6.4 billion rupees of the losses, the Bank of Ceylon 1.5 billion, NSB Fund Management 1.5 billion and People’s Bank 497 million rupees.
A separate report said that the EPF had also been sold bonds by the central bank at low rates, making it suffer big losses.
The Monetary Board of the central bank had approved direct placements in 2008 (when Sri Lanka was in the midst of a war and balance of payments trouble) to so-called ‘captive’ state agencies in a belief that it would bring down rates.
The practice had continued with private banks and dealers also being given bonds.
In 2008 however Sri Lanka’s domestic borrowings more than doubled to 314 billion rupees from 145 billion, and foreign borrowings were negative perhaps for the first time in post-independent history, according to fiscal data.
Twelve month Treasury bills had hit 19 percent.
First Capital Treasuries was estimated to have benefitted up to 118 million rupees, Commercial Bank was estimated to have benefitted up to 117 million rupees, Acuity Securities 81 million rupees, Wealth Trust Securities 50 million, Seylan Bank 25 million, Capital Alliance 23 million, Entrust Securities 22 million, Seylan Bank Asset Management 12 million, HSBC 11 million, NatWealth Securities 8 million and Perpetual Treasuries 0.25 million rupees.
At the time Perpetual Treasuries was not active in the primary market, and it was buying bonds from other dealers and dumping on the EPF, a separate forensic audit said. (Colombo/Jan24/2020 – Update II)