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Friday, 20 March 2015 00:50 - - {{hitsCtrl.values.hits}}
Equally unfortunate is that the Government has failed to comprehend the fundamental lesson that one does not dig when in a hole, but rather, should find means of getting out of it. Its response undermines its credibility and will inevitably increase cynicism amongst the large group of first time voters who exercised their franchise in January purely for the purpose of facilitating a culture of good governance.
What then, is the issue all about? The Central Bank initially called for bids for a 30-year bond in an amount of Rs. 1 billion. However, it is widely accepted that 30-year bonds are generally unattractive to institutions other than those requiring long term investment options. Moreover, the understanding in the market was reportedly that the bond would carry a yield of around 9.5%, which meant that the demand would have been limited. Industry sources state that the general practice in such auctions is that informal indications are signalled to market participants through institutions such as the Bank of Ceylon and the ETF on the general thresholds expected by the Central Bank.
However, after the closure of the auction, the market was shocked to learn that the Central Bank had arbitrarily increased the accepted bids to Rs. 10 billion, a tenfold increase, in a size hitherto not experienced in the financial markets of Sri Lanka. It was also revealed that the yields varied from between 9.3% to 12.5%, which yet again surprised market participants. To add to the controversy, four of the accepted bids had been made by Perpetual Treasuries Ltd, a company owned by the Governor’s son-in-law and his family and already tainted by accusations of improper conduct in the past.
A further reason for curiosity was that the last bid that made the list of acceptances, i.e. the 26th on the list, was a bid for Rs. 3 billion made by the Bank of Ceylon on behalf of Perpetual Treasuries at an interest rate of 12.5%. The result was that exactly half of the bids accepted had been awarded to Perpetual Treasuries.
Several serious issues arise from this transaction. Why was such an unusual process followed without any semblance of transparency or procedure? Should not the Governor, being a highly experienced professional in financial markets, have been aware of the need for a high standard of ethics in relation to conflicts of interest and more importantly, the need to safeguard those standards in light of the current political climate and context. Would this type of action have even been tolerated in his adopted country or by his previous employers? Do not the circumstances of this transaction, i.e. the tenfold increase of bids accepted; the remarkably high yields at which they were issued; and, the unusually large bids placed by Perpetual Treasuries all raise serious questions?
Financial consequences
It is also important to understand the financial consequences of this transaction. By failing to call for competitive bids through a prior indication of the amount that the Government intended accepting, it clearly deprived itself of the most competitive rates possible. The fact that larger and far sounder financial institutions such as HNB and the Commercial Bank did not bid at the auction clearly reflects this. It is speculated that the profit made by Perpetual Treasuries on this transaction is approximately 150 million per Rs. 1 billion bond, giving it a cool 700 million profit.
The unusual amount bid for by Perpetual Treasuries, the inexplicable arbitrariness of the Central Bank in conducting the auction and the fact that a bid of such a nature could have resulted in a huge loss had the interest rates gone the other way strongly suggest that Perpetual Treasuries had an inside edge on the intentions of the Central Bank. Reports of the Governor’s personal presence in the dealing room compounds the issue further.
The transaction has caused severe damage to the credibility of the Governor and the message of good governance associated with this Government. It has also fed its detractors with heavy ammunition which they will undoubtedly use to drown out the Government’s message. The nauseating sight of persons representing the previous regime protesting in front of the Central Bank, rather than hiding their heads in shame, is ample indication of this.
The transaction will also no doubt be troubling for the President, the Prime Minister and others of the same ilk, such as Harsha De Silva and Eran Wickramaratne, who appeared to be a refreshingly principled band of politicians and who stood out as beacons of hope to a younger generation of citizens in this country. They still remain so.
Hence, they should be mindful of the fact that it was the promise of a transformation to a culture of good governance that impelled a whole generation of voters to make their way to the polling station and cast their vote at the last election. They, in particular, should note that their criticism of the previous regime was also based on perceptions similar, or in certain instances, even less grave than this.
It is therefore hoped that they learn from the lessons of the past and stand by their principles and take meaningful and prompt action to deal with this issue. Any further delay in acting decisively in this matter could result in a perception that they acted out of compulsion and as a last resort, rather than a genuine effort to ensure good governance. The hard reality is that this scandal will not fade away unless it is met head on.
Conversely, the Government’s response to date has been wanting. The three member committee that has been appointed to investigate the matter clearly does not have any known track record either in finance or financial markets and have allegedly been selected for their affiliations to the Party. Hence, whatever decision or finding by them is unlikely to receive public acceptance and will continue to exacerbate the issue.
The ‘private’ inquiry that was conducted by the Securities and Exchange Commission when faced with a similar dilemma when investigating its Chairman Michael Mack, and which resulted in a much damaging backlash on all the parties concerned, should be a good lesson to be remembered.
Sweetheart placements
The Governor has sought to distance himself and his son-in-law from Perpetual Treasuries by stating that the latter had resigned from its Board of Directors and that the decision to increase the amounts accepted was for the purpose of funding certain urgent Government projects. It has also been said by the Government in defence of the transaction that it was a better process than previous precedents where the Central Bank had made sweetheart placements.
Unfortunately, these explanations do him more harm than good. Any person with an iota of commercial knowledge would know that the actual beneficiaries of a company’s operations are not its directors but its shareholders, who remain the Governor’s son-in-law and/or his family.
Moreover, if the Government was in fact in need of additional funds the Central Bank could easily have called for fresh bids with proper notice without enhancing yields by as much as 300 basis points. The fact that the previous regime might have engaged in sweetheart deals before, through private placements, makes no difference since they chose to be judged by a different set of standards. And, that is precisely why the voters sought a change.
Clearly, even given the most charitable interpretation of his conduct, the Governor has been, at best, imprudent. Since the country is at a crucial crossroad, such imprudence cannot be permitted to cloud the Government’s political agenda.
The country needs to protect the image of the President and the Prime Minister more than it needs to protect the Governor. One can therefore only hope that better sense will prevail and that the Governor will resign, without causing more embarrassment to himself or the Government.
If he does not, the Government will have to make a hard choice between the Governor and governance. After all, like the fate of poor Humpty Dumpty, not even all the king’s horses and all the king’s men can put his credibility together again.
