BOC bid on behalf of Primary Dealer for the first time : CBSL officer unusually knew about acceptance of bids at high rates

By Shehan Chamika Silva

It was revealed at the Bond Commission that the Bank of Ceylon (BOC) had bid on behalf of a primary dealer (Perpetual Treasuries Ltd) for the first time at the thirty year bond auction of Central Bank took place on February 27, 2015.

Initially, the Central Bank of Sri Lanka had originally intended to sell 1 billion rupees ($7 million) of 30-year bonds at the primary auction held on February 27. Thereby, primary dealers, like BOC, could bid in the auction directly or on behalf of there customers.

The BOC had decided not to bid directly at the auction due to various possible economic fluctuations in thirty years but had bid on behalf of three companies, Kaluthara Bodi Trust, Ceylico Insurance and the Perpetual Traesuries Ltd.

The Perpetual Treasuries were significant in this process since it was also a primary dealer who could directly place bids at the thirty year auction.

However, it was revealed that the PTL bided via BOC to get settlement easiness opportunity.

At the leading evidence of former Chief Dealer of Bank Of Ceylon Treasury Division, Mr. J.K. Dharmapala, it was explained that when the auction was being held on February 27, 2015, Chief Executive Officer, Mr.Kasun Palisena had contacted Mr. Dharmapala and requested to bid on behalf of them at the bond auction and subsequently, the bidding rates of PTL were sent to the BOC.

Senior State Counsel Dr Awanthi Perera who led the evidence also played few recordings of phone conversations happened between Mr. Dharmapala and Palisena before the Commission and questioned intensely over doubtful conversations from the witness.

Mr. Dharmapala said that the bids were at 12.50% interest rate and the bidding amount was Rs.13 billion. According to his evidence it was revealed that such high rate could not have been seen as acceptable by the CBSL since the acceptable interest rate for bids should be below 10%.

He said that he thought the bidding of PTL as dummy bids because such high rates would never be accepted by the CBSL.

However, he went on to proceed with the PTL bids without obtaining approval of the heads of the BOC and it was also revealed that due to the irregularities occurred during this course of bidding the BOC’s disciplinary division had conducted an internal inquiry against the witness and cautioned him.

However, after the auction results, Mr. Dharamapala said that he was shocked because he was informed that the Former Governor had unusually visited twice the Public Debt Department while the auction was taking place and had instructed to accept all bids even at the rate of 12.50%.

Out of the 13 billion bids at the rate of 12.50, which were bid by BOC on behalf of PTL; three billion were accepted by the CBSL.

“After the acceptance of such amount of bids at a rate of 12.50%, I was of the view that whether the PTL had the knowledge of information regarding such possible acceptance of CBSL, because generally, the CBSL would not accept bids at such a high rate nor accept such amount of bids” he said.

In the meantime, Mr. Dharmapala revealed to the commission that there was an officer attached to the Information Technology Department of CBSL, Mr. Sulochana had come to the BOC on February 26, prior to the thirty year bond auction, in expectation of bidding in the auction at a rate of 12.50 %.

“It was quite unusual coincidence, since that officer had told the back office official of BOC when forwarding his application that bids at 12.50 rate would be accepted tomorrow (27 February)”, he said

And also witness said that Perpetual Treasuries had paid the amount due on March 2 to the BOC and the BOC gained a bidding transaction commission of Rs. 234,000 as a profit for bidding on behalf of the PTL.

It was also revealed at the commission that the BOC had later issuing a board memorandum set regulations and restrictions when bidding on behalf of customers and specifically setting regulation put the compulsory permission requirement of heads of BOC when bidding on behalf of primary dealers.

The Commission comprised with Supreme Court Judges Kankanithanthri T. Chitrasiri, Prasanna Sujeewa Jayawardena and former Deputy Auditor General Kandasamy Velupillai will resume the inquiry tomorrow..