Do not allow the bond saga to end up as a damp squib or pus vedilla

Friday, 8 September 2017 00:00 -     - {{hitsCtrl.values.hits}}

According to the Oxford Dictionary, a squib is a slow-burning firework.After burning slowly it explodes with a bang with sparklers.A damp squib (a common English expression) is one that is damp and burns slowly anddoes not end with a bang.

A pus vedilla is more elaborate.A gun is loaded and aimed at the person who has to be woundedand then fired.It gives a big bang, there is smoke,a flash of flame and a smell of gunpowder,but the person who was shot at stands smilingand notwounded,as there was no bullet in the barrel.

The bond saga has already passed the damp squib phase twice.There was a lawyers’ enquiry that turned into a damp squib.Then we had the COPE report.We all expected fireworks from it,but that did not happen.It too was a damp squib.It burned nicelyfor a while but at the end it went ‘phut’ when itshould have gone with a bang with sparklers.

The saga continues

The bond saga continues.We now have the Commission of Inquiry with three highly-respected judges.The tantalising question is whether it will possibly turn out to bea pus vedilla.

If at the end of the inquiry Perpetual gets to keep the vast amount of profit it made, then it is a pus vedilla.

In November last year I wrote a piece to set out in simple terms the story of the bond saga.It was like a pencil and charcoal sketch.It captured the scene accurately,but like charcoal and pencil sketches it did not have the fine detail of an oil painting

The Commission of Inquiry on the other hand is developing the picture like a fine old master painting.Like a Rubens or a Michaelangelo.There is excellent detail and clarity in all parts of the picture.There is nothing left for the imagination.It is likely that it will all be therein a splendid composition.

A brief history helps

Here are extracts from what I wrote during the early days of this saga:

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

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

Before an auction takes place a person in the Central Bank is responsiblefor informing the primary dealers of the amount of bondsthat will be put up for auction.

On the day

The day before the much-discussed auctionthe primary dealers were informed that one billion rupeesof Government bondswould be put up for auction.On the day of the auction the Government put 10 billion of bonds up 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 10 billion and so had not arranged the funds to bid.This had never happened before.

One primary dealerwas apparently not surprised, and had linedup the financeand also arranged for another primary dealer, the Bank of Ceylon, to also buy for them.

Perpetual got the bonds at a rate of interest well above prevailing rates.


After the auction,Perpetual had a large parcel of bonds.This did not make Perpetual rich. It had bonds,and a liability to the banks that lent it the money to buy bonds.Perpetual would be able to make a profit only and only if it could sell the bondsto someone at a price higher than what it paid for the bonds at auction.This is exactly what Perpetual did,and thereby made a very handsome profit.The buyer that enabled them to make aprofit was the EPF (Employers’Provident Fund).

The anger

The anger was triggered by the vast profits Perpetual made.The anger was further stoked as it was made by selling bonds at a profitto the EPF.The EPF is what keeps our savings and hopefully makes them grow.Denting its incomein any manner will arouse strong feelings of anger.

Apus vedilla? 

Can Perpetual be charged and fined or can the directorsbe charged ofa criminal offence whichif proved will keep them in jail for a longtime? Can aCommission of Inquirydeliver either one of these conclusions, namely a fine on Perpetual or a criminal charge against the directors? Probably not.

If Perpetual at the end of the inquiry can keep all its profits,in the eyes of the public it is a pus vedilla. If that is the eventual outcome, it is not the fault of the Commission of Inquiry.It is what it is,an inquiry.It is not a court to dispense justice. 

Did those who appointed the Commission of Inquiryknowfrom the outset that it had to be a pus vedillaand that Perpetual would be able to keep all their money? That is a good question.

Technically Perpetual did nothing wrong

In my article I said, “Perpetual in a technical sense has done nothing wrong.As a primary dealer, it went to the auction,bid for thebondsputup for auction, its bid was accepted by the Central Bank and subsequently it sold the bonds.All very normal activityof a primary dealer.”

But the Commission’s picture being built up in old master style of clarity of detail may showthat all the money was made by direct and indirect sale of the bonds to the EPF.This raises the moral issue of it being wrong to make money at the expense of the EPF.The EPF is the custodian of the savings of millions of people and who lookforward to see their savings growso that they will get a larger sum when they retire.

Nothing wouldraise the angerof the people more, than when they knowthat their lifesavings in the EPF have been usedby private firms to make profits.


Society will feel that justice is done only when Perpetual’s profits are taken away from it.This can be done by Parliament.Retrospective taxlegislation should be passed to tax at 95% all profits made by primary dealers by selling directly or indirectly to the EPF.The tax socollected should be credited to the EPF.Now that will be a proper vedilla with a bullet in the chamber.

That will bring closure and be an equitable end to this saga.

If the Government does not take this action, the opposition should present a bill to achieve this.