Bonds, bids and blindfolded governance!

Central Bank Governor Arjuna Mahendran seems to have got embroiled in another controversy quite soon into his new job. There was controversy about his appointment itself on two fronts; firstly, he was not a Sri Lankan citizen and secondly, due to his son-in-law’s alleged involvement in an irregular share transaction involving the EPF which was supposedly pending an investigation.
The firs

t issue
The first issue was not particularly important but Mahendran and or his promoter to that office is supposed to have made statements justifying his appointment. The first point that is supposed to have made is that there have been past instances when foreigners held the office of Governor. That is technically correct in that the first Governor John Exter was a foreigner. However, this was when Sri Lanka had no experience whatsoever in central banking. Ever since then the Governors have been Sri Lankans. The second justification was that the present Governor of the Bank of England is also a foreigner.
However, Carney took up British citizenship when he was made Governor. To put matters into perspective, based on his distinguished track record as the Governor of the Bank of Canada, the Chancellor when announcing Carney’s appointment said: “Mark Carney is a quality governor. He is quite simply the best, most experienced and most qualified person in the world to be the next Governor of the Bank of England.”
Notwithstanding his notable background and achievements, I don’t think those who promoted his appointment or even Mahendran himself will attempt to make such a comparison. The third point that was made was that Mahendran will obtain dual citizenship for which he qualifies. However, Singapore, the country that he is said to be a citizen of, does not permit its nationals to have any other nationality.
In reality, citizenship is not a big issue but in this era of supposed transparency it will be good if the Governor were to clearly state whether he is now a Sri Lankan citizen and whether he also holds the citizenship of another country.
The second issue
The second issue that was raised at the time of his appointment does pose a problem since the EPF is managed by the Central Bank which he now heads and any investigation will have to meet the test of independence and comprehensiveness.
The latest controversy which is much more worrying relates to the recent 30-year bond issue. The allegation is that his son-in-law through a group of companies in which he was employed or directly or indirectly owned, had unfairly benefited from advance privileged information. There has been a lot of news (some of which may be untrue) circulating on this matter. There seems to be a reasonable agreement on what really happened but what is more important is to ascertain why whatever happened did happen and who made it happen.
The statement made by the Ministry of Policy Planning, Economic Affairs (and many other disparate things) on this matter raised more questions than it answered. Investigators have been appointed and it is hoped that they will know what to look for and where to look.
Questions to be answered
Apart from specific matters to be checked, it will be good if the investigation seek answers to the following by way of background information.
(a) If there was a need for the Government to have Rs. 15 billion in funding, why was it necessary for Rs. 10 billion to be raised in 30-year money? What was the basis of the decision as opposed to raising the extra amount in shorter-term debt, when was the decision made and who were involved in the decision?

(b) If the decision to increase the issue 10 times was made before the subscription closed, why was it not communicated to the market and participants requested to rebid?
(c) What was the makeup of the bids received? How many participants made bids for the whole issue or more either directly or acting through third parties (Bank of Ceylon has been mentioned) and are there any connections between these parties?
(d) What were the bid prices and is there any pattern relating to bidders and bid prices?
(e) In previous debt issues over the last six months, what was the level of increase in the accepted bids from the offered amounts and what was the highest yield given to investors after the offered amount was filled? (For example, assume an issue was offered at Rs. 3 billion and the bids were received for Rs. 10 billion and Rs. 5 billion was accepted. If the highest yield for the Rs. 3 billion was x, what was the highest yield offered for the top up balance of Rs. 2 billion?) What is the comparable information for the bond issue in question?
(f) How was the decision to determine the cut off rate for acceptance made? Who were the people involved and were aware of the decision?
(g) Did the Government’s captive sources who were previously submitting open bids that were awarded at the average weighted yield submit bids? If not, was there an indication given to them that they should not? If there had been a change in the practice in this regard, was it communicated to the market?
(h) How was the funding arranged for those who submitted bids through Bank of Ceylon or third parties? Did they arrange credit lines in advance, who applied and who approved?
(i) Have there been any unusual increase in the amounts bid by parties directly or indirectly when compared with other debt issues in the previous six months?
(j) It has been alleged that a bidding group who bid several times the amount on offer had sold down their shorter term bonds in the previous two weeks. Was this an unusual activity when compared with their past trading pattern prior to the issue of 10 year+ bonds in the last six months?
The answers to the matters set out above will establish the background to this controversial transaction. It is very difficult in this type of inquiry to be able to find evidence that would justify a conviction in court. What needs to be established is whether there is reasonable circumstantial evidence to ascertain whether the Governor or any other officer of the Central Bank or any other public officer by commission or omission was a party or had knowledge of this unusual transaction and about the involvement of any connected parties. If the answer in relation to the Governor is in the affirmative, he will lose the high level of credibility required to function in that office.