At last action on the bond scam, but two important actions still missing

Thursday, 12 March 2020 00:00 -     - {{hitsCtrl.values.hits}}

The Central Bank has appointed a number of primary dealers. They and the EPF are the only institutions authorised to buy Government bonds at auctions conducted by the Central Bank


The story

I have been writing about the bond scam from when it first happened. Perhaps it’s best to refresh the mind and I will do this by quoting extracts from my previous articles.

Government bonds

The Government needs funds over and above what it collects from taxes. To meet the shortfall it borrows from the public.

Selling bonds

If you can buy a bond at auction at a rate of interest much higher than the prevailing market rate of interest you will be a very happy chappy. You can sell it and make a fat profit with no sweat at all. That is what happened with the Perpetual story, which has given rise to the great bond saga.

Process of selling Government bonds

The Central Bank has appointed a number of primary dealers. They and the EPF are the only institutions authorised to buy Government bonds at auctions conducted by the Central Bank. Primary dealers can and will sell the bonds they buy at auctions.

Before an auction takes place a person at the Central Bank is responsible for informing the primary dealers of the amount (in terms of rupees) that will be put be put up for auction. They may also be told informally the rate of interest the Central Bank expects to pay. Each primary dealer will normally discuss it at their firm and decide on the quantum they will bid for and the rate of interest. They will then line up the finance to pay for the bonds. All very straightforward. 

The great bond sale

Before the date of the auction, the primary dealers were informed that Rs. 1 billion of Government bonds would be put up for auction. On the day of the auction the Government put Rs. 10 billion of bonds for auction. 

The primary dealers at the auction were surprised (that’s a major understatement). Okay they were angry, amazed, and felt deprived of the opportunity to bid as they were not told before the auction that it was Rs. 10 billion (and so they had not arranged the funds to bid). This had never happened before.

One primary dealer, namely Perpetual, was apparently not surprised, had lined up the finance. Perpetual bid and got the bonds at a rate of interest well above the market rate. After the auction Perpetual had a large parcel of Government bonds at attractive rates of interest. This did not make Perpetual rich. It had bonds and a liability to the banks that lent it the money to buy the bonds.

Perpetual would be able to make a profit only and only if it could sell the bonds to someone at a price higher than what it paid for the bonds at auction. This is exactly what Perpetual did.

It sold the bonds at a price higher than what it cost and thereby made a handsome profit. The buyer that enabled it to make a profit was the Employees’ Provident Fund.

That in simple terms is the story of the first bond scam.

The fallout

The whole of our society, rich and the poor, are angry at what happened because Perpetual made its billions by robbing the Employees’ Provident Fund. 

The savings of employees in the private sector are kept in the Employees’ Provident Fund. Robbing it by selling bonds to them at high price when the EPF itself could have gone to the auctions and bought them at a lower price is perceived by many as a heinous crime

Slowly getting to closure

The public has been intrigued and angry that no action has been a taken against anyone.

Now at last the Attorney General has started the legal process. The offences committed by Perpetual in order to make billions are indeed in the grey area of people conspiring to enable acts to take place that enabled Perpetual to make vast profits.

The cream of the private bar will be retained and ranged against the Attorney General’s team. It is not for us to forecast outcomes. The law will slowly grind along. Then there will be appeals and more appeals. It can take a long time before it is all done and dusted. But this should not distract us from demanding action on the two other pieces in this saga that must be addressed before there can be closure 

The missing pieces

The real anger is about the vast profits made by Perpetual and that no action has been taken to take these profits from Perpetual. The second missing piece that also generates anger is the lack of knowledge about who was responsible for ensuring that no action was taken for five years


It is clear how Perpetual made its money. It made it by robbing the EPF by selling at a higher price to EPF the bonds it bought at auction. 

The Government has available to it a simple device to take the profits away from Perpetual. It should bring in a new provision in the Inland Revenue Act that says that a 95% tax will be applicable to all profits made by any person or organisation by selling bonds to the EPF, with such revenue collected to be credited back to the EPF. It should be made retrospective to 2015. I made this very same suggestion in February 2017. The Government at the time was of course not interested in it all. I hope the new Government will take this action. 

Who prevented any action being taken against those who perpetrated the bond saga?

Nivard Cabraal has written a book titled ‘The Great Bond Scam Cover-Up’. In it he comes to the conclusion after giving many reasons for it that “Ranil Wickremesinghe’s direct and indirect involvement in the run-up to the bond scam, the execution of the scam and the intense ‘cover-up’ of the scam has been clearly established”.

He says: “It is inexplicable and shocking why official strictures have still not been made on Wickremesinghe’s misconduct and suspicious actions and why legal action has still not been initiated against him, four-and-a-half years after the scam had been brought to light.