It is rather ironic that less than one month after Ajit Nivard Cabraal stepped down as Central Bank Governor under a cloud of allegations, his successor Arjuna Mahendran is under fire over a bond deal in which his son-in-law’s firm allegedly had access to inside information. With this important chair being politicised by Cabraal, over [...]

The Sunday Times Sri Lanka

Central Bank Governor under fire


It is rather ironic that less than one month after Ajit Nivard Cabraal stepped down as Central Bank Governor under a cloud of allegations, his successor Arjuna Mahendran is under fire over a bond deal in which his son-in-law’s firm allegedly had access to inside information.
With this important chair being politicised by Cabraal, over the years, and now Mahendran kicking up a political storm, will this position ever be free (or perceived) of political interference or manoeuvering?

While both are political nominees to the post – Cabraal by President Mahinda Rajapaksa and Mahendran by Prime Minister Ranil Wickremesinghe -, there is a string – again ironic – that binds them together: Arjun Aloysius and his family-linked firm, Perpetual Capital and Perpetual Treasuries.

The other connection is that both are professionals. Cabraal was a former UNP politician until crossing over to the SLFP a few months before the 2004 election. Who knows Cabraal, if he stuck with the UNP and given his political ambitions, may have emerged as a high profile Minister even handling Finance, while Mahendran took over the Central Bank! Politics indeed makes strange bedfellows.

The unhealthy links continue. When the EPF investment scam hit the headlines, about three years ago, after this pension fund had been investing in what are called dud stocks, the middle-man (broker) in the deal was Arjun Aloysius and his firm. Reports at the time hinted at a nexus between Aloysius and Cabraal. Incidentally Perpetual is part of the Free Lanka Group of Companies in which Ajit Devasurendra, considered the ‘bond king’ of Sri Lanka, has investment links. Devasurendra has been under the searchlight due to his close connections with Cabraal, who at least once accompanied the Governor on a trip to the north to open some projects.

Now, several years later, Cabraal-supported Aloysius has begun to haunt Mahendran, who flew to Singapore and Los Angeles last week in the midst of an investigation into the bond issue. Bank insiders say his trip was pre-arranged but questions abound particularly in the context of good governance and transparency whether he should have postponed it – however important it was. Furthermore, Mahendran is also believed to be flying out next week on another trip. Certainly not a good idea while opposition politicians are ‘baying for his blood’. Staying back and being present for any clarification while a probe is on would go a long way to prove his innocence – in the eyes of his accusers, at least.
In a nutshell the issue was over the Central Bank announcing a Rs. 1 billion bond issue and at the last minute, without any notice to the market, accepting Rs. 10 billion, putting the market completely off-gear.

The main allegation was that Mahendran’s son-in-law’s family firm had put a bid for Rs. 5 billion and at 12.3 to 12.5 per cent, directly and through the Bank of Ceylon.

Eventually it received 50 per cent of a bond issue in which the subscribed amount was 900 per cent more than announced – a huge jump.
Is this an accepted practice to accept an amount more than the announced level, and if so has it been as high as this, earlier? Were the interest rates accepted at such high levels?

Only the Central Bank can answer this and in the interests of good governance and transparency – if there are no confidentiality issues that endanger the market mechanism and equilibrium – the authorities should consider an open, public inquiry.

On the other hand however, such a public inquiry could also create an unhealthy precedent. Thus the government must ensure that the inquiry is independent as claimed.

Another issue is whether Mahendran should step down until proven innocent.

One example to follow is the insider trading scandal that rocked the stock market in 2003 when Michael Mack, Chairman of the Securities and Exchange Commission (SEC) was accused and subsequently charged with insider trading over shares in Aitken Spence, in which Mack was a former chairman.

The probe was by the SEC’s Director General at the time and one of the flashpoints was Mack continuing as the SEC chairman. The Sunday Times repeatedly said he should step down until the investigation is over to ensure an independent probe. To make matters worse, the commissioners were also reprimanded for seeking their own opinion on a view expressed by the then Attorney General K. C. Kamalasabeysan who said Mack and another Aitken Spence shareholder should be probed for insider trading. Raising a serious conflict of interest issue, the AG made the following observation, according to a Daily FT report: “I am constrained to observe that the Commission has acted improperly in deciding to obtain the said opinion, particularly when the issue involved the Chairman of the Commission”.

Mack held onto his position but when the pressure mounted, he took “leave of absence”, according to the SEC.

It was clearly evident at the time, the conflict of interest but in the absence of a strong environment of good governance, transparency and ethics (which prevails today), the Sunday Times took the position that Mack, to clear his ‘good’ name, should step down (to allow a free and fair probe) and return if and when proven innocent.

Harsha de Silva, the vociferous voice against corruption, finds himself on the wrong side of the fence and in an unenviable position of defending the government. De Silva has said the ‘public has his word on doing right” and given his past, honest actions, one has to wait till the probe is over to judge the independence of the probe.

To be fair by the Government, this kind of open discussion would never have taken place during the previous regime where the media was kept under wraps and good governance activists reluctant (note: the white van menace) to raise issues against the President, his brothers and aides like P.B. Jayasundera, Cabraal or Gamini Senerath. Separately their business cronies and the stock market mafia were also protected from the searchlight.

The fact that the public and the media are able to express their views without fear is a sign that the Maithri-Ranil combination has achieved some good after the departure of the Rajapaksa regime. It now needs to improve this environment and bond with the public with an investigation into the bond issue that would be to the satisfaction of all stakeholders.

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