23 October, 2020

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Finance Minister & The Central Bank Treasury Bond Scam

By Rusiripala Tennakoon

Rusiripala Tennakoon

Rusiripala Tennakoon

In a TV appearance by the Minister of Finance Ravi Karunanayake (Face the Nation Programme TV1 Sirasa TV, 0n 13th June) the subject of the CBSL Treasury Bond issue came up for discussion. The FM in his opinion expressed several concerns in defending the Governor Arjuna Mahendran, and inter-alia, asked has any body calculated any loss arising out of this allegation. In fact, he categorically asked “what was the loss to the government as a result of the Bond deal of February 2015?

By now, all concerned are aware of the calculated loss not only to the Government but even to some of the Primary Dealers as consequential losses on their operations because the matter has been discussed widely in different forums publicly. However, it appears that either the Minister has not been presented with true facts or has been mis-informed. As the Minister of Finance he was the biggest loser resultantly extending the same to the people of this country vis –a- vis the huge unprecedented gain of one primary dealer, who in this instance happens to be a Company having a direct relationship with Arjuna Mahandran, Governor of the Central Bank.

In the context, it will be appropriate to revisit the issue and examine the statistical data to clarify matters.

The 30 year Bond carrying a Fixed interest rate of 12.5% was advertised by the CB for a value of Rs.1 Billion( 12.50%-2045A) for the Auction to be held on27th February 2015. As a practice, with every such advertisement, the Public Debt Department (PDD) of CBSL used to indicate a rate to the Primary Dealers to submit their bids. This rate is based on the prevailing market rates for similar bonds and this was intended to dissuade primary dealers from bidding at rates pretty much above or or far below the prevailing rates. In this manner the Public Debt Department attempts to keep the auction rates as close as possible to the going market rates or, in other words, the prevailing yield curve.

The indicative rate communicated to the primary dealers by CBSL on this impugned bond deal was 9.5% which in effect means that the primary dealers have to submit their bids at a price of around Rs.131/= per Rs.100/= bond. At this price, the Minister of Finance would have got a premium income of Rs 31 for every 100/= rupee bond under this bond issue. In this instance, the indicative rate given by the Public Debt Department has been on the high side since it was based on a 30 year bond carrying an interest rate of 13.5%. When the price is adjusted for the 12.5% rate which the bond in question was expected to carry, the price comes to about Rs. 121/= for every Rs.100/= bond. Even at this price the Minister would still have got a premium income of Rs.21 since the market was willing to buy bonds around that price.

In fact, according to the bid details publicized pertaining to this bond issue by the Three Lawyers’ Committee appointed by the Prime Minister, almost all the primary dealers had submitted bids around that price. The Bank of Ceylon (BOC) itself had submitted a bid on behalf of their customers at 9.5% i.e. At a price of Rs 121/= .However, strangely the same BOC submitted bids after getting an extension of the closing time of the bid (during the last 30 minutes before the closure of the tender) at prices ranging between Rs.87 and Rs.97 on behalf of another Primary Dealer, (the one in the centre of this fiasco) , Perpetual Treasuries. When the Chief Dealer of BOC was questioned by the Three Lawyers’ Committee about this strange pricing of the bids, his answer was, according to the Report, that the CEO of Perpetual Treasuries told him in Sinhala  “Awoth atha thamai” meaning tremendous profits if successful. As all these bids were over and above the amounts declared in the auction, this primary dealer was aware in no–uncertain terms that the government would go for more than Rs.1 Billion, the announced figure, and this information appears to be exclusively available to this primary dealer company.This fact is more than evident when the bid amounts of all other primary dealers are examined.

The Public Debt Department decided to go for Rs 10 Billion at the end of the auction due to the insistence of the Governor of CBSL Arjun Mahendran, according to reports. As a result, Perpetual Treasuries was the all successful bidder in getting 50% of that amount at the highest price compared to others. Even the Three Lawyers Committee which was strangled with a limited terms of reference, have remarked in their report that this was an unusual thing warranting a full investigation.

This Bond which would have been sold in the market for Rs.121/= was sold around Rs.91/=to this Primary dealer causing losses amounting to Rs.1.5 Billion immediately to Minister Ravi Karunanayake. Further, the decline in the market interest rates caused heavy losses to other primary dealers and investors due to their having to capture the loss by marking their portfolios by way of adjustment to the new lower market rates. The biggest loser was the National Savings Bank another State owned institution (however not coming under the Finance minister due to the State Banks being taken out from his domain)!

With such information in the background, perhaps the Minister of Finance could come up with more plausible explanations and clarifications as a responsible Finance Minister setting aside his political affiliations.

*The writer is a former Chairman of BOC and commercial banker

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Latest comments

  • 8
    2

    When Bond issue was first raised in the Parliament and in the media, Ravi’s party leader appointed 3 Party Lawyers to investigate the allegation and submit a report which itself is a questionable act initiated by a Government voted to establish Good Governance. Mr. Ranil Wickreamasinghe just prior to Jan. 8th election made a promise to voters that a fresh investigation will be carried out not only on the alleged Bond Scam but also on several other Bond deals carried during the past regime. Ranil has failed to fulfill this promise to date. According to Mr. Kiriella, Mahendran is to be reappointed disregarding protests made by many quarters. Is this action can be construed as a one initiated by a Clean Person ? This is the type of arrogance Ranil displayed during his past regime towards public outcry against LTTE violations of the Ceasefire which prematurely ended his tenure as the PM and the long awaited Government of the UNP. Trust that the President has not forgotten the sentiments expressed on Mahendran prior to Jan. 8th election. Ranjith

    • 4
      1

      What are Ravi K’s qualifications to be Economics and fiance Minister in the Miracle of Modayas? Just like the corrupt crook Basil Jarapassa former Minister of the subjects.

      Ravi K. is a joke and he is shy! Ravi K is ashamed of exposing the rot in the finance ministry and CB and Ravi is talking about CB REPUTATION loss if Mahendran’s bond scam is exposed and damage to the reputation of the country’s investment profile, because exposure of corruption at CB will drive FDI and foreign investors away.
      So Ravi K’s solution is to bury the truth and keep piling on the corruption in CB.

      Mahendran should be arrested for hiding information and trying to erase it.

      But the logic here is backward:

      Kiriella who is Ravi’s clown says ” There were various allegations thrown at Mahendran, none of them have been proved so far, hence there was no need to remove him from the current position of Governor.” None of the allegations against Mahendran have been proved because he is refusing to release information and blocking investigations. How can the Central Bank investigate, headed by a corrupt crook who wants to delete information investigate the Panama Papers names, when Mahendran is a financial criminal?! The Sri Lankan economy is crashing because of the corruption at the CB and not because of the EXPOSURE OF corruption in the CB.

      AYahalapanaya arguments to cover up Cabraal’s and Mahendran’s criminality on the basis that exposure of their financial crimes will negatively impact the already collapsed Sri Lankan economy is JOKE!

      This is how IMF and WOrld Bank think and they have legalized corruption and off shore Banking tax havens for corrupt elites in the Third World, rather than help crashing economies to go after and bring back looted funds stored in Europe and US to pay of DEBT.

      Good Governance activists must challenge this non-sense and Mahendran’s and the IMF’s BULLSHIT!

  • 3
    1

    The fact that the CB governors of the current & previous regime happen to be cronies, arguably whether suitably qualified or not, raises the question if this is the norm in SL for highly responsible positions of the state or because there were no suitable candidates, in this case, the position of CB Governor, within CB or even among the banking circles in SL.

    The current Governor of the Bank of England is a Canadian who was apparently head hunted internationally, which was surprising, that a developed country like the UK had failed to groom suitable people within UK for such an important position of the State. Obviously he was the best man for the job, selected from a number of qualified people & there has been no objection from the Opposition, which indicates the appointment was not controversial. His salary & benefits are around £800k PA (subject to prevailing normal tax laws) which, including his expenses, are available for public scrutiny.

    In UK, any misuse, abuse or mismanagement by any state official would be immediately taken up by the appropriate ‘shadow’ Minister of the opposition in Parliament & by the media, who would be howling for blood as such officials are expected to be above board in all their dealings. In this light, it would be interesting to know the the salary & expenses of the CB governor of SL in comparison with his counterpart of the 5th largest economy in he world.

  • 7
    1

    The question is why the Priminister and his stooges are trying so hard to defend and protect a person who has done enormous damage to his trust as well as the reputation of the Central Bank and a huge loss for the people of Sri Lanka. People of Sri Lanka has to pay for the sins of these political decisions. Insider trading is the trading of stock of other securities, in this case bonds by individuals with access to non public information about the bonds issue. Trading based on insider information is illegal. That is how Arjuna Mahendran sold CB bonds to his son in law. This is a massive daylight robbery where people will never forget or forgive. Why are the authorities are so silent on this crime? Where are the legal actions, what is the reason to suppress the COPE report, Is Ranil really clean or is it a façade? or not smart enough to understand basic economics or right from wrong.

  • 1
    3

    Goes to show that little Sri Lanka is yet again, attempting to do all kinds of high-flung crookery, intended only by major powers that use crookery to keep their dynamic status, and screw smaller countries. If they can do it, then we also want to do it, is the Lankan attitude (isn’t there a saying in Sinhalese for this avaricious thought, whilst breaking coconuts?). And the fellows making the “Awoth atha thamai” are clinking Champaign glasses in the West and felling very smug indeed. Come to think of it, the OK must have come from the highest office on the globe, to force Sri Lankan right into the global equation.

    When bond issues and other capitalistic ventures come into Sri Lanka, there should be a think-tank with e.g. Buddhist priests at the helm, to make sure intricate and sophisticated capitalism works most honorably for the country and its Masses. In this way, will we secure our country sovereignty and our National pride irrespective of who’s out there.

    But Yahapalanaya scorns the instincts of the Masses. Hence this is what happens with Yahapalanaya decided to throw caution to the wind and decides to use the ingenuity of typical Lankan crookery Elite to bid on things – all sanctioned by foreign powers of course.

  • 1
    1

    CBSL has not followed best practices to avoid market distortion. This is what The Debt Management Office (DMO) in uk may guidelines say regarding allocation.

    “The DMO at its own discretion, decline to allot stock to a bidder if it is
    deemed likely that a large allocation may lead to post-auction market distortion. In conventional auctions, the maximum permitted allocation for any single bidding institution is set at 25% of the nominal amount on offer, and in index-linked auctions the figure is 40%.”

    If Such a LIMIT was set and practised at CBSL, Perpetual might not have received 50% of the issue on offer!

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