The Government yesterday, amidst growing opposition calls for an independent probe, launched an investigation into allegations of “insider trading” and favouritism in a Treasury bond issue involving the recently appointed Governor of the Central Bank (CB) and his son-in-law – allegations that rocked Colombo’s banking sector this week.
CB Governor Arjuna Mahendran, who said he was not involved in the decision-making process, told the Sunday Times that a lawyer had been tasked by the Government to probe the matter. “It was decided that there should be an independent investigation and hence the reason to appoint an outsider to probe the matter,” he said, without naming the lawyer. He also said he was not resigning.
Bankers and market dealers said the CB was repeating, and even worse this time, its actions in the past where it accepted bids far more than what was advertised. “This has created a serious breach of trust and dealers are not sure when a bond is advertised whether the CB will stick to the prescribed amount or accept more,” one banker said, adding that the money market dealers had complained to the CB in the past to scrap this practice.
Both the United National Party (UNP) and the Janatha Vimukti Peramuna (JVP) demanded an independent investigation into the matter. Asked to comment, JHU National Organiser Nishantha S. Warnasinghe, politely declined saying he was not familiar with the issue.
February 24: The Central Bank (CB) announced monetary policy for the month in which interest rates remain unchanged.
February 26: Finance Minister Ravi Karunanayake, Highways, Investment promotion and Higher Education Minister Kabeer Hashim, Secretary to the Treasury and Governor of Central Bank decide the Government needs additional funding of Rs. 15 billion on an urgent basis to fund the resumption of highways and road construction projects.
February 27: The 30-year bond auction for Rs.1 billion is opened with 36 offers received up to Rs. 20 billion. This enabled the Central Bank Governor to accept Rs. 10 billion. Earlier CB officials had given an indicative rate that interest rates of 9.5 per cent would be taken into consideration with such pre-auction advice being a usual practice.
Stating the Government position, Deputy Economic Planning Minister Harsha de Silva told the Sunday Times that a full investigation would be launched on the CB’s Public Debt Department and also the EPF Department over past malpractices and the current issue.
“Insider trading that took place in the past — issues that I have raised (as an opposition lawmaker) — are continuing to happen. I complained about this many times on how certain persons in the CB’s EPF department and the public debt department got together with some market players and manipulated the market. These crooks are still playing the same game,” he said, however stopping short of commenting on the involvement of a company linked to the Governor’s son-in-law in this deal.
Sarath Amunugama, UPFA Parliamentarian and former Deputy Finance Minister, said this was a major scandal that needed to be investigated independently. “I have great respect for (Governor) Arjuna but this is a blow to his credibility and I believe he should resign.”
Sunil Handunnetti, the JVP’s spokesman on Economic and Trade issues, said that such an issue had broken out during the 100 day programme of the new Yahapalanaya (Good Governance) Government and needed to be further probed.The issue was over primary market dealer Perpetual Treasuries connected to the son-in-law of Governor Mahendran, allegedly benefiting from the bond issue through ‘inside information’.
On Friday, soon after the news broke out, the Government intervened with an explanation that the CB decision to accept bids of Rs. 10 billion, 10 times more than the requested Rs. 1 billion, was based on a combined decision.
But that explanation did not deter the call for an investigation. “There should be an independent probe. It should be held in this era of Yahapalaya (good governance), transparency and furthermore having occurred during the 100-day programme,” Mr. Handunnetti said.
“There have been serious allegations made over the Governor’s alleged involvement because of his son-in-law and hence a probe is necessary. The earlier regime was filled with deals by the ‘pawul samaga (family company) and if there is wrongdoing in the present regime, this should be exposed,” he said, adding that while a family relative of the Governor doing business was acceptable, there should be a clear division on any conflicts of interest.
A top Government politician, who declined to be named, was of the view that even if the Governor was not involved, there is a ‘perception’ problem. “As long as Arjuna’s son-in-law’s company is in the market, this issue will persist even if there is evidence that the Governor is not involved in these decisions.”
The money markets were in an uproar on Friday, February 27 when the CB announced it was accepting bids worth Rs. 10 billion at 9.50-12.50 per cent whereas clients and most primary dealers had made bids between 9.50 and 10.50 per cent, not in the 11-12 per cent range. Only a few bids, including those by Perpetual Treasuries were made in the 12 per cent range.
The said company had bid for a total of Rs. 3 billion worth of bonds (directly and indirectly), when a majority of the 26 accepted bids had offered Rs. 100 million or less for a bond worth Rs. 1 billion. Some of this company’s bids were also alleged to have been routed through the Bank of Ceylon. (See timeline on the crisis)“If the CB wanted only Rs. 1 billion and dealers generally offer around 10 per cent per dealer of such an amount, how come this company offered Rs. 3 billion and at higher than market rates. Did they have inside information?” asked one dealer , adding that this was probably the first time the CB had accepted bids that were 1000 per cent more than the required amount. “The earlier administration would increase it by say 100 per cent or more but this is a huge surge,” he said.
This allegation was countered, to a certain extent, by Friday’s Ministry statement that at a February 26 meeting it was revealed that Rs. 15 billion was needed and a decision taken to raise Rs. 12 billion urgently through bond issues for highways and road construction projects. Thus when the bids were opened the next day and there was Rs. 20 billion available, this enabled the CB Governor to accept Rs. 10 billion in accordance with the decision for urgent funds, the statement said.
However dealers said this still didn’t answer questions of a higher rate of interest being accepted, a point also raised by Mr. Handunnetti, who said “there are many allegations that must be investigated. We shouldn’t have a situation where there is no transparency in such decision-making”.
Defending the decision, Mr. Mahendran told the Sunday Times that there was no impropriety in the decision to accept more than the subscribed amount. “At the time, the Rs. 1 billion bond issue was open on February 27 there was a request for Rs. 15 billion for various government payments. So we decided to accept Rs. 10 billion. Yes the rates also went up but that was market driven.”
Mr. Mahendran said there were other dealers who had also offered bids in excess of Rs. 1 billion adding that the regulator in the past too had accepted bids over and above the requested amount. Referring to the allegations against his son-in-law, an issue that also delayed his appointment last month, the Governor said Arjun Aloysius resigned from the family firm and was no longer involved.
However when pressed that these issues would continue to nag the Governor in future money market transactions, Mr. Mahendran pondered in his response: “Well … I don’t know. My son-in-law resigned from the firm when the issues arose during the time my appointment was being formalised. I don’t know … maybe I should ask them (the company) to close or not operate in the market.”
Perpetual Treasuries was the dealer behind an earlier crisis that rocked the market — during the tenure of former Governor Ajith Nivard Cabraal — when questions were raised, often by Dr. de Silva, on the Employees Provident Fund (EPF) and the Employers Trust Fund (ETF) investing in ‘dud’ stocks in the stock market.
Dealers say they lost millions of rupees on this bond deal and others earlier, blaming the CB for the fiasco. They said the twin decision on Friday to accept Rs. 10 billion in offers that went up to 12.5 per cent and removing the 5 per cent Special Standing Deposit Facility Rate, dealt a severe blow to the market.
“There was chaos when the market opened on Monday (March 2),” another dealer said adding that interest rates were jacked up due to the two decisions. He said jitters in the bond auction could have been easily averted if the CB had informed primary market dealers on February 26, after the Government decision was taken the same day to seek Rs. 15 billion, that they were planning to accept Rs. 10 billion (and not Rs.1 billion) and ask dealers to amend the bid. “All these transactions are electronic and can be done within minutes,” he said, adding “That could have deflated much of the criticism … that is if this was a clean bond issue and no single firm was favoured”.
UPFA Parliamentarian Amunugama said this was a serious deviation of procedure with the Monetary Board not authorising the increase. “What one fails to understand is how a company connected to the Governor was allowed to trade in the first place. This is tantamount to criminal fraud,” he said.
The Government, he said, talks of good governance but is not practising what it preaches and is not even halfway in its 100-day programme. “There were so many allegations during the previous government on EPF fraud, etc but this fraud is nothing compared to that,” he asserted.
Courtesy - http://www.sundaytimes.lk/150308/news/cb-governor-faces-family-company-charges-calls-mount-for-probe-139578.html