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The bond scandal: Killing the duck
Killing the duck or goose that lays golden eggs is a metaphorical cautionary tale that serves as a reminder for everyone to consider the sustainable and enduring value of an 
The auction for Rs. 1 billion 30-year bond on 27 February 2015.
On 24 Feb., 2015, the Domestic Debt Management Committee (DDMC) of the Central Bank of Sri Lanka (CBSL) and the Ministry of Finance recommended raising Rs 1 billion from a primary auction and Rs 12.5 billion by direct placement and announced on 25 February 2015. The CBSL Public Debt Department contacted commercial banks and primary dealers for bids.
The auction, opening at 10:00 AM witnessed overwhelming demand, receiving 36 bids totaling Rs. 20 billion, in contrast to the initial offer of Rs. 1 billion, the CBSL extended acceptance to bids totaling Rs. 10.058 billion. Predominantly, 26 bidders sought amounts of Rs. 100 million or less, offering interest rates within the range of 9.5% to 10.5%, weighted average rate was 11.73%.
Remarkably, a faction of bidders, notably Perpetual Treasuries Limited (PTL), advocated for elevated interest rates ranging from 11% to 12%, with a substantial Rs. 15 billion of both direct and indirect bids. Despite the intended closure at 11:00 AM, the auction was extended until 11:05 AM to facilitate late bids, predominantly from PTL.
Inside information
Banks are permitted to place their surplus liquid funds with the Central Bank of Sri Lanka (CBSL) at Standing Deposit Facility Rate (SDFR) of 6% per annum, but only for three days. Subsequently, any such deposits extending beyond three days attract a reduced rate of 5%, termed as the restrictive SDFR. The abolishing of the three-day restriction was indicated within the CBSL three days prior (on 24th February 2023). Surprisingly, there was a 1% increase in market rates means this inside information would have been leaked to outsiders.
More seriously, his decision was against the Monetary Board’s decision to maintain the existing policy. This decision was then disclosed (only within the CBSL) in the morning, but publicly announced only in the afternoon on February 27, 2015, and subsequently ratified by the Monetary Board (MB) on March 3, 2023, without seeking explanations for the unilateral deviation from the initial decision.
At the auction, CBSL accepted bids up to Rs 10.058 billion against the earlier decision that collecting only Rs1 billion through auction and the rest through direct placement. Notably, Rs 15 billion bids were submitted by single Primary Dealer (PTL). The auction’s closing time was extended until 11:05 to accommodate late bids, particularly those submitted directly by PTL and indirectly through the Bank of Ceylon.
However, only a week after the bond issue, the Monetary Board ratified this decision on 3 March 2015 and officially implemented them.
Freezing of Assets and Legal Action:
In January 2018, it was revealed in parliament that CBSL had frozen financial assets worth Rs.12 billion of PTL.Parliament sought the advice of the Attorney General on the possibility of the government taking over the frozen Rs. 11 billion through legal avenues in September 2018.
Appointing commissions
A three-member committee and a Presidential Commission were appointed to investigate the matter, revealing an avoidable loss of Rs. 0.9 billion according to the Auditor General’s report. The freezing of financial assets worth Rs. 12 billion in January 2018 and subsequent legal actions underscored the gravity of the scandal.
This bond scandal not only exposes the vulnerabilities within the financial system but also highlights the need for robust governance, transparency, and regulatory oversight to prevent such incidents and safeguard the integrity of the nation’s financial institutions. However, it’s troubling to note that similar transactions occurred on a much larger scale—approximately 9-10 times greater—on 29th March 2016.
Collusions and absence of action
This adds to the concern, as the absence of any actions against the parties involved in the auction on February 27, 2023, seems to have encouraged a repeat of the scandal on a larger scale. This worrisome pattern prompts important questions about the effectiveness of oversight mechanisms and underscores the urgency of implementing stronger regulatory measures to prevent the repeated occurrence of such financial irregularities.
The Employees’ Provident Fund, overseen by the CBSL, has consistently been involved in collisions with bidders. These collusions may be attributed not only to monetary benefits but also to familial connections, given that the then-governor’s sister was simultaneously a board member of PTL. The Presidential Commission asserts that similar incidents, as disclosed in the Commission Report, occurred as early as 2008, pointing to a longstanding pattern of favoritism and potential fraudulent deals.
The Treasury bond scandal, marked by irregularities in bond issuances, criminal offence such as insider dealing, pump and dump deals, front running, SWICTHING, market manipulation etc., and subsequent investigations, had far-reaching consequences on Sri Lanka’s financial sector. The sequence of events outlined in this report sheds light on the critical decisions, policy changes, and investigations that unfolded during this tumultuous period impacting the country’s economic landscape.
(The writer, a senior Chartered Accountant and professional banker, is Professor at SLIIT University, Malabe. He is also the author of the “Doing Social Research and Publishing Results”, a Springer publication (Singapore), and “Samaja Gaveshakaya (in Sinhala). The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of the institution he works for.)