Central Bank Blues (greens?)
Posted on March 8th, 2015


When son-in-law makes a killing on moves made by papa-in-law, it’s fishy.  Arjuna Mahendran is on the spot and he cannot pass judgment on himself or his son-in-law.

Financial irregularity was one of the many charges leveled at the Mahinda Rajapaksa regime.  The ‘rot’ so to speak began at the top, according to critics.  It was and still is argued that this state of affairs is a direct or indirect product of a system of governance marked by centralization of power following the dictum ‘power corrupts, absolute power corrupts absolutely’.

Maithripala Sirisena’s campaign theme, naturally, was good governance.  Promises were made to correct institutional flaws, bring to book miscreants and ensure things like transparency and accountability.  Professionalism would replace political patronage, the people were told.

Today, with President Sirisena in effect having transferred his mandate to Ranil Wickremesinghe and conceded (in effect) executive powers to a party with minority representation in Parliament, the political equation is marked by instability.  The Sri Lanka Freedom Party has more MPs than the United National Party. The reform project is at odds with the prerogatives of political expedience with the two major parties engaged in intense brinkmanship.

It is in this context that stability, professionalism and squeaky clean operations at the high temples of financial management are imperative.  Politicians will quibble; that’s a given.  The economy must be on a strong footing with robust rules and regulations to eliminate irregularities of the kind the current dispensation accused its predecessors of indulging and indulging in.

It was hoped that the ‘bad’ were not only swept out, the ‘good’ replaced them.  Today, there are questions about ‘the good’.

The Governor of the Central Bank Arjuna Mahendran made a promise.  He said that the Government would offer a detailed response to allegations that a firm connected to him through his son-in-law Arjun Aloysius may have used ‘advanced knowledge’ to profit from the bond issue.  The Government, however, did not respond.

The Deputy Minister of Policy Planning and Economic Development offered an elaborate ‘explanation’ drawing from theories regarding interest rates, but studiously avoided the issue of insider trading, an issue which his party had routinely charged the previous government of encouraging.

The issue here is that controversial deals were made over the past week by Perpetual Treasuries, a firm connected Aloysius.  Perpetual Treasuries is a fully owned subsidiary of Perpetual Asset Management whose parent company is Perpetual Capital Pvt Ltd, a family run company with Arjun Aloysius functioning as its Chief Executive Office/Director.

Mahendran claimed that Aloysius had resigned from Perpetual before he, Mahendran, took up the post.  But why speak of resignation and appointment in the same breath? After all, Perpetual is a legal entity and there’s no legal requirement for Aloysius to give up a lucrative business just because a relative got a job, surely?

Mahendran, had information which in the hands of a ‘dealer’ would be extremely valuable and moreover ‘convertible’ into billions of rupees.  That conversion was made.  Among the beneficiaries was a company that stands accused of involvement in controversial stock market deals with the Employees Provident Fund (EPF) during the previous regime, deals which were heavily criticized by several individuals who are now ministers and deputy ministers.

The question that arises then is not whether Aloysius should have resigned but whether Mahendran should have been appointed in the first place.  The Government ought to have known that appointing as Governor the father-in-law of a man involved in what was deemed ‘irregular’ was bound to stir controversy.  Well, it has certainly hit the fan, as they say.

The new Government doesn’t have it easy what with deadlines set and lots of things on its to-do list yet to be done.  It cannot afford this kind of distraction.  It can score in terms of commitment if swift action is taken in this matter.

Harsha De Silva has promised an investigation.  This is a welcome move.  Mahendran can help in giving credence to such an investigation by stepping down.

That will not only clear all doubt about the Government’s good intentions, it will considerably boost the UNP’s stocks among the voters.  Ranil Wickremesinghe doesn’t hold all the political aces, but that does not stop him from sorting this issue.  In fact it might get him the extra trumps he desperately needs at this point.

As things stand, inaction, pooh-poohing and/or artfully dodging the issue will only give credence to the view that wrongdoing continues to thrive even after the ‘wrongdoers’ were ‘sent home’.


3 Responses to “Central Bank Blues (greens?)”

  1. Ratanapala Says:

    The concern of the SLFP MPs in the parliament are only about self preservation and their entitlements including their pensions. Giving a pension to MPs pose a conflict of interest in discharging their duties on behalf of the people who elect them. This is clearly seen at the present moment by the happenings around the holding of parliamentary elections. They don’t deserve a pension – They must be given high salaries and no more!

  2. Independent Says:

    Governor Must Resign Now. He knows if he did this in Singapore he would be in Jail by now

    CB Governor faces ‘family company’ charges; calls mount for probe

    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.

  3. NAK Says:

    Actually Ratnapala,it should be the other way around. There should be no salary no pention or any other benefits for MPs. That way all the undesirebles will vanish in to thin air in no time and then some good intentioned people can come in and govern for the benefit of the people.

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