Sri Lanka may have lost Rs9.6bn in 2015/16 bond sales: forensic audit

ECONOMYNEXT – Sri Lanka may have lost up to 9.6 billion rupees through multiple bond auctions between February 2015 and March 2016, where there was evidence of insider dealing, a forensic audit has estimated.

BDO India audited a series of auctions, where Perpetual Treasuries Limited (PTL) connected to Arjun Aloysius, the son-in-law of then Central Bank Governor Arjuna Mahendran, bought large volumes at low prices (high yields) and then dumped them on the Employees Provident at high prices (low rates).

The losses to the Treasury could be between 6.6 billion to 9.6 billion rupees, the report estimated.

The government could have lost up to 2.83 billion rupees in an auction on March 29, 2016; 1.1 billion rupees in an action on February 27, 2015; 1.09 billion rupees at an auction on January 08, 2016, and lower amounts at several other auctions, the forensic audit report by BDO India noted.

The central bank accepted large volumes of bids for bonds, after initially telling markets that a lower volume was going to be sold.

The ‘loss’ was calculated as a deviation of a secondary market rate for similar maturities called a ‘base rate’.

In some cases the Employees Provident Fund, also managed by the Central Bank, had completely stayed away and bought bonds in the secondary market giving profits to PTL. Perpetual had also used other dealers such as Pan Asia Bank and DFCC as intermediaries to dump bonds on the EPF.

In the March 2016 auctions were the biggest losses were calculated, the report said there was evidence to show that Perpetual Treasuries Limited (PTL), a primary dealer in gilts connected Arjun Aloysius, son-in-law of then-central bank Governor Arjuna Mahendran, had used insider information to bid.

“There are substantial evidence of leakages of insider information to PLT, enabling it to purchase large amount of securities in Primary Market (sic) at prices below the auction weighted average price and generate substantial gains in the Secondary Market,” the report said.

PTL had also used price sensitive information given to state bank to bid a lower prices and bid high volumes in the auction.

In the first controversial auction in February 2015, bids placed by PTL was 15 times the volume offered by the public debt department which the report said indicated “the exceptional bidding patter of PTL was based on insider information.”

Mahendran had suddenly stopped ‘direct placements’ or off-auction sales suddenly without prior approval increasing pressure on rates.

Mahendran had also ordered the acceptance of the funds without a written request from the Treasury for extra funds.

PTL had dumped bonds taken from primary auction on the Employee’s Provident Fund.

The auditors had reviewed calls made by Kasun Palisena of PTL, Saman Kumara, a dealer at the EPF and Raveesha at Pan Asia Bank.

“..[I]t can be observed that PTL made capital gains in the auction and colluding with Pan Asia in selling securities to the EPF at higher rates than the Secondary Market,” the report said.