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Bond issue: Probe begins amid growing demand for CB Governor to step down
View(s):Three lawyers nominated by the United National Party (UNP) began their investigations this week on a controversial Treasury bond issue that has rocked the ruling party as demands grew this week for under-fire Central Bank Governor Arjuna Mahendran to quit or ‘take leave of absence’ while the probe was pending.
The Governor is being investigated for alleged ‘insider dealing’ and allegedly helping his son-in-law Arjun Aloysius’ company Perpetual Treasuries get an unfair advantage in a Rs. 10 billion Treasury bond transaction a fortnight back.
The three -member committee comprise Gamini Pitipana (Chairman), Mahesh Kalugampitiya and Chandima Mendis. Their names were forwarded to Prime Minister Ranil Wickremesinghe for the investigation by UNP vice president (Legal) Daya Pelpola.
What was seen as a party inquiry into the matter of national importance was criticised by the Janatha Vimukthi Peramuna (JVP) and good governance activists.
“The committee announced as appointees to constitute the inquiry panel, totally lacked the required capability (knowledge, skills, attitudes and values) and appeared to have questionable independence due to conflicting network connections to a political party which constitutes your government,” said good governance activist Chandra Jayaratne in a letter to President Maithripala Sirisena on Friday.
Urging an independent inquiry into the February 27 controversial bond issue in which the CB had accepted Rs. 10 billion against an advertised amount of Rs. 1 billion, Mr. Jayaratne suggested the appointment of a four-member committee of experts including former CB Deputy Governor W. A. Wijewardena, retired experienced treasury manager Sanjiva Senanayake and two financial and accounting specialists.
Sunil Handunnetti, the JVP’s spokesperson on economic issues, repeated his call for a credible investigation. He told the Sunday Times yesterday that the Governor should either step down to enable an independent investigation or the Government should replace him. “Our position is that there should be a proper investigation. Furthermore this investigation should be credible and (should) be carried out irrespective of whether or not it had anything to do with a relative of the Governor,” he said.
Meanwhile, Mr. Mahendran, who couldn’t be reached on the phone yesterday for comment, had flown to Singapore and Los Angeles on official business, returning to work on Friday.
The Government, earlier said the decision to hurriedly increase the bond issue (from Rs. 1 billion to Rs. 10 billion) was based on a need to raise Rs. 12 to 15 billion to pay off urgent bills from road construction work handled by the previous government.
Deputy Economic Planning Minister Harsha de Silva defended the Government’s actions that were taken so far. However he said, “I won’t defend anyone if wrong has been committed”. Yesterday, asked to comment, Dr. de Silva said “something will happen (next week). Wait for the completion of the probe committee process”.
Market dealers said if the Government desperately needed funds, the CB could have announced another emergency bond, more transparently, rather than catching the market off-guard by accepting more bids than the advertised amount.
Around 9.30 am on February 27, some dealers were informed by the CB that the indicative interest rate (the rate at which the bonds were most likely to be accepted) would be around 9-9.5 per cent.
The auction was taking place at 11 am on the same day, and, according to one dealer “we were shocked that two hours later the CB had accepted bids up to 12.5 per cent.”
The usual practice is for the CB to accept the lowest bids but in this case, interest rates in the market which were around 9-9.5 per cent shot up to 12.5 per cent, substantially increasing the cost of borrowing to the Government by at least 300 basis points (3 per cent). “This is a huge jump and costly borrowing,” one economist said.
This week, the CB had five bond auctions at three to 20 year tenure periods raising a total of Rs.89.2 billion at interest rates ranging from 9 per cent to 11+ per cent. “Interest rates have gone up due to the February 27 bond auction coupled with a CB policy announcement on the same day,” one dealer said.
The Government’s expenditure plans have gone haywire due to a shortfall in tax revenue and a surge in huge bills for road construction which it says was not settled by the previous administration.
Economists said the cost of borrowings will sharply rise owing to the emergency requirement of Rs. 15 billion this month while the outstanding amount to be paid for land acquisition alone was reported to be Rs. 44 billion.
Dealers in the primary market have urged the CB to discontinue the practice of accepting bids more than what is advertised as it results in manipulation, possible insider trading and undue advantage. (See details in the Business Times)
They, however, praised the CB decision to scrap private placements of bonds, introduced by the previous regime, as they benefited some market players.
(Please see Comment in Business Times section.)