Treasury Bond fiasco taken to Supreme Court via FR application

The controversial Treasury Bond issue of 27 February has gone to the Supreme Court following a Fundamental Rights application filed by three good governance activists on Friday.
The petitioners in their application expressed the belief that the Rs. 1 billion 30 Year Treasury Bond issue was steeped in serious irregularities, lacked transparency and adherence to accepted best practices of good governance and was possibly tainted by conflicts of interests and related party transactions.
The public interest litigation was filed by Dr G. Usvatte-Aratchi (an economist and former member of the UN Secretariat in New York), Dr. A.C. Visvalingam (retired engineering consultant and former member of the Public Service Commission) and Chandra Jayaratne (former Chairman of Ceylon Chamber of Commerce) throughAttorney-at-Law Lilanthi De Silva and has been settled and will be supported by Attorney-at-Law Saliya Peiris and Attorney-at-Law Pulasthi Hewamanne.

 

 
The Monetary Board, Central Bank Governor Arjuna Mahendran, Deputy Governor and Chairman Treasury Bond Tender Committee P. Samarasiri and the Registrar of Public Debthave been cited as the first to fourth respondents. Additionally, the Policy Planning and Economic Affairs Secretary, Perpetual Treasuries, Arjun Aloysius and the Attorney General are the other respondents.
The petitioners are praying among others for a declaration that the 2nd, 3rd and 4th respondents have not discharged their duties in a manner that is necessary for the preservation of public trust; The Monetary Board to carry out an independent inquiry by a competent panel of professionals well-versed in the rules, systems, procedures and processes applicable to the public debt management under the supervision of Court and to report thereon; and direct the Monetary Board and other associated Respondents, in consultation with stakeholders, to formulate new systems, processes, rules and regulatory frameworks which assure transparency and best good governance practices are in place in respect of future public debt issuance.

 

 
The Petitioners stated that on or around 25 February the Public Debt Department (PDD) of the Central Bank advertised the Rs. 1 billion 30 Year Treasury Bond auction with a coupon rate of 12.5%. The Petitioners said that the price guidance i.e (yield net of tax) informed to the primary dealers was to be 9.25%-9.75%. At such price guidance the Government would expect to receive Rs. 118 for a bid with a face value of Rs. 100.
The Bond issue received massive oversubscription with bids worth Rs. 20.7 billion received and Rs. 10.05 billion (10 times the offered amount) accepted. The weighted average yield was 11.73%. Following a diligent survey done by the Petitioners they came to being aware that there were 26 bids received by PDD, the lowest accepted bid price was Rs. 90.1690 per Rs. 100 for a net of tax yield to maturity of 12.5009% per annum and the highest accepted bid price was Rs. 119.3342 per Rs. 100 with a yield of 9.351% per annum.
Based on the recorded bids the Petitioners stated that had the PDD issued the original amount of Rs. 1 billion instead of increasing the amount 10 fold, the highest accepted bid price would have been at Rs. 104.5073 per Rs. 100 for a net of tax yield just below 10.75% per annum, and a weighted average yield of approximately 10.35% per annum.

 

 
It has been subsequently been ascertained that of the Rs. 10.05 billion of accepted bids, Rs. 5 billion made of up 5 bids had been allocated to the 6th respondent Perpetual Treasuries of which Rs. 3 billion was bid through Bank of Ceylon on their behalf. These bids were at prices ranging from Rs. 98.878 to Rs. 90.1699 per Rs. 100 at yields of 11.5% to 12.5% per annum.
Each of the bids accepted from Perpetual Treasuries were well below the Rs. 10.4.5073 per Rs. 100 which would have been the lowest price accepted had the issue been for the originally announced amount of Rs. 1 billion. The weighted average price of bids accepted from Perpetual Treasuries was Rs. 91.514 per Rs. 1000.

 

 
The 6th Respondent had secured Rs. 5 billion or almost half of the issue. The Petitioners are reliably informed the bid for Rs. 3 billion made by Bank of Ceylon was also on behalf of the said Respondent Perpetual Treasuries.
They claimed that the 6th Respondent had prior insider knowledge on the increase in the bid amount by over 10 times, which has never happened before in any bond issue and increasing the weighted average yield significantly above the price guidance issued by the PDD.
The Petitioners stated the PDD is obliged to raise funds for the Government as cheaply as possible therefore upsizing the issue would have been justified only if the acceptances were upsized on the back of demand at or around the guidance rate that was given. The Petitioners state that there was no evidence of such. There was a lack of transparency as to how the 6th respondent Perpetual Treasuries was backed by a State Bank to submit a bid for 3 times the bid (auction) amount and the actions of any one or more of the Respondents therefore reflect a dereliction of duties entrusted to them in public trust.

 

 
The Petitioners verily believe that the direct impact of the transaction where bids were accepted at a lower price from Perpetual Treasuries is that the PDD received approximately Rs. 650 million less for the Rs. 5 billion accepted from the said Respondent compared with what would have been received if the bid had been at the highest price applicable to the original issue amount of Rs. 1 billion. The yield on the 7 year issue which was 7.05% on 1 January 2015 increased to 9.17% on 16 March 2015. The yield on the 10 year Bond increased from 7.88% on 1 January 2015 to 10.09% on 16 March 2015. This transaction thus amount to an immediate loss to State and fails to satisfy the stated objectives of the PDD in managing Public Debt issuance, the Petitioners have stated.

 

 
The expressed the belief that yields on government securities across all tenors and in particular long tenors for 7 and 10 year Bonds have increased sharply for issues after 27 February. This will result in a significant increase in the cost of borrowing for the Government.
The Petitioners verily believe that therefore the public will be forced to pay higher interest rates on all forms of borrowing including housing loans, short and long term bank and finance company loans as well as consumption loans and pawning linked loans causing an undue burden on the general public. The Petitioners further believe that there will be an increase in finance costs of business, commerce and trading and once these costs are passed on to consumers through price increases in the supply of goods and services, the average household expenses, already stained by inflation, will add to the burdens borne by the people.

 

 
The Petitioners also stated that the severe lack of transparency and lack of accountability surrounding the Treasury Bond auction of 27 February fails to engender public trust in State which holds the powers and exercises the duties required of it by law in the public trust. The petitioners are of the reliable apprehension that due to the actions and/or inactions of any one or more of the Respondents, the economy of the State will be severely affected, thus detrimentally affecting the people as a whole.
They also stated that the conduct of the Respondents have raised serious integrity issues in relation to the financial sector.