A highly confidential document by the Department for the Supervision for Non-Bank Financial Institutions of the Central Bank has been leaked, with the report highlighting serious concerns against the manner in which the controversial Perpetual Treasuries Limited (PTL) had conducted itself, while also benefiting vastly in terms of borrowing billions of rupees under extremely low interest rates during the tenure of Arjuna Mahendran as the Central Bank Governor.
The 25 page report in the possession of Colombo Telegraph is addressed to the Monetary Board based on the findings of the on-site examination of PTL which was conducted by the Public Debt Department.
The onsite investigation conducted during the periods of 24th to 26th November 2015, 26th to 28th July 2016 and 4th to 8th August 2016 has highlighted several concerns with regard to the company, which initially had direct links to Arjun Aloysius, the son in law of Mahendran.
In the findings submitted to the Monetary Board, the department raised several concerns including the company’s failure to record the customer information in the Lanka Secure System promptly and accurately; Failure to enter into Master Repurchase/Reverse Repurchase Agreements with customers, although by May 2016 PTL had already signed 172 MRAs and 132 customer agreements.
Another crucial concern highlighted in the document following the on-site inquiry was that PTL’s excessive bidding at auctions without adequate funding lines. According to the document, PTL bid a total of Rs. 49.4 billon for T-bond auctions held on March 29, 2016 and March 31, 2016. On April 1, 2016, PTL had to settle Rs. 42 billion to secure the T-bonds accepted at the auctions.
However, PTL did not have sufficient funds amounting to Rs. 36 billion by the settlement date and it had to resort to borrowing a significant portion of it from the Reverse Repo Auction, Intra Day Liquidity Facility and Money Market. “However, as PTL was short of acceptable securities to provide to the Central Bank, it was unable to secure adequate settlement funds. As a result, PTL was subject to a penalty of Rs. 21.3 million,” the document said.
The document also said that PTL had a practice of bidding off-market rates. The document noted that bidding at off market rates in other jurisdictions is not allowed and is also a severely punishable offence.
Despite initially not having the necessary funding, PTL is reported to have made extraordinary capital gains of Rs. 4,652.7 million in April and May 2016 from trading T-bonds purchased from Primary Auctions, the document said.
“These securities were purchased mainly using Central Bank’s liquidity assistance available to market participates (borrowing from Reverse Repo and using ILF. By the memo dates 08.04.2016, Domestic Operations Department has highlighted their observation on the excessive use of re-repo facility by Primary Dealers. As informed by the Domestic Operations Department, from 1st to 8th April from the total borrowed amount of Rs. 89 billion by all PDs, out of which PTL had borrowed Rs. 66 billion (75%),” the document said.
Meanwhile, a highly placed official attached to the Ministry of Finance said that this report that had been leaked appeared to be authentic.
“I am familiar with the style of reports being prepared in Central Bank and from that familiarity, I can vouch that it is an authentic report. The report highlights arbitraging where Arjuna Mahendran deliberately kept the interest rates low and allowed PTL to borrow from Central Bank at low rates and invest in government bonds at high rates. Hence, PTL did business out of Central Bank money,” he told Colombo Telegraph.
“Insiders at Central Bank told me that the officer who had prepared that report, a Deputy Director Ms. Enoka Mohotty, had been transferred out of the department a month ago; the views of the staff at Central Bank is that Perpetual Treasuries having known that the report is damaging to them had colluded with a Deputy Governor who is still working for them to get her transferred out to kill the report. So far the report has not been submitted to Monetary Board and the author is out of the department; but a whistleblower has leaked it to the press,” the official said.
However, another official attached to the Central Bank said that he was not aware if it was a leaked document, but the document appears to be an Internal report following an Onsite Oversight Review. “But, I cannot vouch for the authenticity of this purported report – but the facts in it appear to be what we have believed had happened from earlier,” the official said.
Perpetual Treasuries Limited, recorded a profit of Rs. 5.1 billion for the year ending March 2016. The firm has seen a staggering increase in its profits of up to 430 percent in comparison to the previous year. Since the bond scandal, Aloysius is reported to have resigned and no longer plays an active role in the company. Earlier, he headed Perpetual Treasuries as its CEO.