'Naduwa' or 'Naduth Hamuduruwange Baduth Hamuduruwange' ?


Mr Arjuna Mahendran, Governor of the Central Bank

The state owned ITN recently aired a live program titled ‘Naduwa’. It was an interview of Mr Arjuna Mahendran, Governor of the Central Bank hereafter referred to as AM by Mr Mahesh Senanayake, a Marketing Manager in a mercantile establishment experienced in TV presentations but not experienced in the workings of financial markets. The topic was the much talked about alleged Treasury Bond scam which resulted in AM taking a leave of absence from office till a government initiated inquiry was completed.

The line of questioning to say the least was mild and often gave the impression of leading to a set of pre-arranged answers. Considering the gravity of the issue involved and it being a much debated hot topic, the program format should have been one that permitted in-depth cross questioning of AM. A more appropriate format would have been the presence of a knowledgeable retired banker to counter AM’s assertions when appropriate and an independent moderator which would have been useful to dispel the perception of a bond scam in the minds of the general public as well as assist AM in reinforcing his claim of impartiality and innocence of wrong doings in this whole sad saga. Instead, the chosen format and line of questioning creates further doubts in the minds of the discerning public due to the lack of transparency in the subject Bond sale and the role played by AM, especially in light of the main beneficiary being alleged as a company owned at that time by his son-in-law.

Having listened to the program several times, the writer wishes to pose a few questions which are by no means comprehensive but nevertheless covers a few of the issues in question.

1. AM states previous government left office without making any arrangements to meet financial obligations falling due in March 2015 in order to create financial difficulties for the present government. AM also speaks of an increase in public sector salaries by 40% due to the need for new government to honour election promises. Former President and his government did not even dream of being defeated in the elections and had no intentions of leaving office. Was it not the responsibility of the new government to find money to make good their election promises? By making such statements, is AM attempting to mislead the general public and distract their attention from the core issue?

2. AM repeatedly referred to Treasury Bonds being sold through Private Placements in the past through institutional fund managers such as EPF, ETF and other captive sources such as Bank of Ceylon, Peoples Bank and National Savings Bank. Can AM confirm that favoured private individuals have benefited through such Private Placements in the past and if so, name them? Or were they state institutions holding government funds such as EPF, ETF and NSB?

3. Confirmation is available from authoritative sources that all Private Placements made in the past have been within the range indicated by the Central Bank to Primary Dealers and more closer to the Weighted Average Yield of the auction. Can AM confirm Private Placements made at 30% above the Weighted Average Yield prior to 27 February 2015 as in this instance when indicated range was 9.35% to 9.75% and bids accepted at 12.5 % ?

4. Can AM confirm of instances prior to this Treasury Bond issue when 75% of bids received (Rs 15 billion out of a total of Rs 20 billion) has been from one single Primary Dealer – in this case Perpetual Treasuries ?

5. AM states an advertisement was placed offering Rs 1 billion at 12.5% interest and even offered to produce a copy of the relevant advertisement. What the advertisement actually stated was Rs 1 billion carrying a coupon of 12.5%. In reality, the actual rate of return (interest rate) will depend on a combination of coupon rate and the level at which bids were accepted by the Central Bank. In fact, the Weighted Average Yield in this particular auction was 11.72% as published in the newspapers. Therefore is not AM’s ‘statement’ factually incorrect and meant to mislead the general public?

6. The general public came to know through the media that the Central Bank had raised Rs 10 billion through a 30 year bond at a Weighted Average Yield of 11.72%. Considering that intended range as advised to Primary Dealers in the morning of 27 February 2015 was 9.35% - 9.75%, can AM provide reasons for Central Bank to pay an enhanced rate of 12.5% which is 30% above the range given that morning and who are the beneficiaries of this decision?

7. Can AM deny that over 60%of this benefit accrued to Perpetual Treasuries and another connected party, as alleged?

8. Authoritative sources state most Primary Dealers and Banks made their bids at interest rates lower than 11% based on indications received from the Public Debt Dept. and prevailing market conditions due to excess liquidity. However Perpetual Treasuries, a company with a stated capital of Rs 350 million, owned by AM’s son-in-law submitted bids worth Rs 15 billion at an interest rate of 12.5%. Total bids received from the market amounted to Rs 20 billion. At the end of the auction, Bonds worth Rs 10 billion were sold at a Weighted Average Rate of 11.72% of which Bonds to the value of Rs 6 billion or 60% were allocated to Perpetual Treasuries and one of their associates at 12.5% enabling them to make a profit of Rs 300 million on the same day which increased to over Rs 500 million within a few days when the Central Bank effected a decrease in interest rates. Does AM consider the manner in which this Bond sale has been conducted to be transparent and beneficial to the country?

9. To the question raised by Senanayake "at the time of the transaction, was your son-in-law a member of the senior management of that company", AM responded stating "no, he had resigned from that company on the day I became Governor of the Central Bank". He further stated "the Public Debt Dept. was notified of his resignation and that notification effectively meant he was no longer involved with that company". Can AM inform the general public that besides resigning from the company, his son-in-law had also disposed of all his holdings in Perpetual Treasuries and did not hold a single share on 27 February?

The government appointed a three member committee, comprising of three eminent lawyers to investigate the alleged irregularities have found that AM "had no direct role" in deciding to accept bids over and above the one billion rupees stipulated in the 30-year bond tender and accept up to 10 billion rupees. The committee has also observed that the bidding pattern of Perpetual Treasuries was unusual and warranted further investigation besides making far reaching recommendations to ensure transparency and better governance at the Central Bank while also observing several deficiencies in the Public Debt Dept.

No disrespect is intended to the three eminent lawyers in the investigating committee, but it must be noted that none of them have had any involvement in financial markets and financial instruments. For the sake of transparency and credibility, it may have been prudent to have had at least one reputed and eminent retired banker of the calibre of Mr Rienzie Wijetilleke in the investigating committee, who is well versed in the relevant areas.

These few questions cover only a part of grey areas not covered in the interview. All told, the more appropriate term for this interview should have been "Naduth Hamuduruwange, Baduth Hamuduruwange" !


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