14 July, 2020

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The ‘Bond Scams’ Were Caused By A Broken Bond Market – Part II

By Arjuna Mahendran

Arjuna Mahendran

On Thursday 26 February 2015, I had been at the central bank for a month and was still familiarising myself with the bank’s operations. That morning the former ministers of finance and highways and an advisor to the prime minister dropped by my office. They were accompanied by the finance secretary and senior management of the road development authority (RDA). I invited the 3 deputy governors of the central bank to attend the meeting. The meeting was to ascertain how much extra funding was needed by the RDA to revive highway construction that had stalled due to non-payment to contractors. Before the meeting, I requested that economic research staff of the central bank contact the RDA to verify the funding needs of the organisation.

At the meeting I recall that the Chairman RDA requested Rs 15 billion immediately and another Rs. 75 billion in a month’s time. The central bank research staff confirmed that these figures tallied with their estimate of arrears of payments by the RDA. Soon thereafter, I attended a larger conclave called by the minister of finance with over 50 groups of private road construction contractors who were awaiting the payment of their fees to resume the stalled construction of roads and highways. The minister persuaded most contractors to take a substantial haircut on their contract fees in exchange for receiving their delayed payments. It was evident to me that the contractors were in urgent need of the funding.

Prior to the meeting with the ministers at the central bank, the board of the central bank met for its regular fortnightly meeting. The finance secretary, who was an ex-officio member of the board explained how the finance ministry was in urgent need of additional funding as he was receiving several claims of unpaid bills from the previous financial year. A deputy governor told the meeting that an auction to raise funds through the issue of a 30-year bond had been planned early in the year. He also stated that the Employees Provident Fund (EPF) had Rs. 2 billion surplus cash available to invest in this bond. The board agreed to proceed.

Upon further inquiry I found that the finance ministry had already formally asked the central bank to borrow a total of Rs.172 billion in the month of March 2015. Of this large amount, Rs. 13.6 billion had to be raised by Monday 2 March 2015. This implied that the extra funds requested by the Chairman RDA had not been included in the finance ministry’s estimate. Moreover, there was a large repayment of Rs 128 billion worth of bonds which were maturing in mid-march 2015. I discussed this with the senior managers of the department issuing government debt and asked them how they proposed to raise these large sums which far exceeded the sums already borrowed in January and February 2015. They responded that they would hold an auction of 30-year bonds that week for a sum of Rs.1 billion and raise a much larger amount through accepting any extra auction bids in excess of Rs. 1 billion plus a sizeable private placement of bonds with bond dealers. When I suggested that it was absurd to advertise a Rs 1 billion auction when we were expected to borrow an average of over Rs 40 billion a week, they replied that advertising a larger amount would signal the market that the government was in desperate need of funding.

When I looked at the weekly ‘run-rate’ at which the central bank was borrowing money for the finance ministry through private placements over the preceding 6 months, it was evident that borrowing amounts over Rs 5 billion a week would be impossible using private placements as the main funding method. The deputy governor overseeing the debt department reviewed the proposed strategy of the department officials to borrow the large amounts of money required by the finance minister. He agreed that their strategy simply didn’t make sense. 

He had found that the operational manual of the department stipulated clearly that bonds should be raised as far as possible through the conduct of public auctions. This was the diametrical opposite of the staff’s preference to resort to private placements as far as possible. What he also found was that the method of issuing private placements placed enormous discretion in the hands of the front office staff in the debt department. There were no rules for the choice of dealers with whom bonds would be placed privately. Moreover, the staff could award higher rates of interest on bonds sold privately to dealers who offered to buy larger volumes of bonds. There was no limit placed on the extent to which these interest rate ‘incentives’ could vary. In short, private placements conferred enormous power to the debt staff and ample room for corrupt practices, considering the large volumes of money changing hands. When I visited the department I found that telephone calls were not recorded, there were no CCTV cameras and personal mobile phones were being freely used. Moreover, the dealing room of the department had no physical segregation from support staff as is usually prescribed to avoid the spread of inside information outside of the dealing room.

It has never been explained why the 30-year bond auction was advertised by the debt department as having an interest rate coupon paying 12.5 percent of the bond’s face value, while the staff were reported to be informally telling dealers to bid for the bonds at the auction at a putative interest yield of 9.75 percent. Most likely, this large gap between the advertised rate and the putative rate would give the staff wide discretion to issue bonds through private placements at rates anywhere within this gap. By the date of the auction, Friday 27th February 2015, the staff had only been able to raise Rs. 3.4 billion through private placements. This was why I suggested to the staff of the debt department that they accept Rs. 10 billion at the auction so that we could at least meet the target of Rs. 13.6 billion required by the finance ministry on the following Monday. The Rs.10 billion worth of bids accepted were all made at or below the advertised 12.5 percent rate of interest. I politely told the staff that substantial private placements were not in keeping with best international practice in bond markets and the issue would be reviewed by the board.

The auction bid sheets shown to me by the staff showed that large bids for the bond had been made by the Bank of Ceylon. These bids had been made after 11 am when the bank of Ceylon had asked the debt dept. staff to extend the closing time to accommodate these late bids. I didn’t have any inkling that these bids were made on behalf of another dealer as was later revealed. When questioned by the Commission of inquiry (COI), two years later in 2017, the chief dealer of the bank of Ceylon made a curious revelation. He said he was approached on the day prior to the same 30-year bond auction, by an officer of the central bank (not attached to the debt department) to make a personal bid on this officer’s private account for the 30-year bond at 12.5 percent. This implied that the finance ministry’s need for additional funds was already circulating outside the confines of the debt dept.

The central bank board ratified my decision to suspend private placements temporarily until the practice was fully reviewed. The large borrowings in March 2015 were successfully achieved through several bond auctions where the size of issue advertised was increased to Rs 10 billion each. Thereafter at several board meetings the question of whether private placements should be reinstated was discussed. The conclusion of the board was that the manner in which the private placements were conducted in the past had deviated from international best practice and the department’s own operational manual. Therefore it was not desirable to rely excessively on private placements of bonds as a means of issuance. Auctions have become the norm for issuance of government bonds ever since.

If, as has been alleged, I wished to favour a particular dealer, I needn’t have moved away from the earlier system of private placements and the concomitant wide discretion it afforded central bank staff for cutting off-market deals with favoured dealers in complete secrecy. A dealer could have offered a large volume of funds and privately negotiated a placement of bonds at a very high rate of interest with the central bank without having to bid in a public auction. Rather, my intention was to fix a broken bond market which was not generating the desired volumes of money required by the government.

To be continued………….

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Latest comments

  • 24
    6

    Dear AM,
    :
    Thanks for your articles amidst loads of very likely untruths being in srilanken main stream media. Experts in CB stay mum as has been so far.

    So please first explain AND correct us the news – that you have changed your name today and live under that name in Singapore ? – truth or untruth ?

    I notice your name on the current article is still the same as before – Arjuna Mahendran.
    .
    And if srilanken MAIN MEDIA inclu SIRASA TV could confirm such unsubstantiated information, we the people would not be stopped being misled. Who is telling the truth here ?

    So please first talk to the SRILANKEN press and clear that issue before explaining the true story of BOND SCAM ISSUE.

    As said earlier times, I am very sceptical about this bond scam -I even today dont trust what srilanken press went on saying that this was created by your direction medition together with RW and then foreign minister. Howver, time will reveal the truth – that I firmly believe in: I TRULY know that SIRASA TV was given a contract to paint the picture destroying the image of Ranil wICKRAMASINGHE.

    • 4
      12

      leelagemalli,
      Ask Sunil Hadunneththi who was the Chairperson of COPE. He will tell the truth.

      “Howver, time will reveal the truth”

      Singaporeans are protecting the cro ok.

      • 9
        1

        Eagle Evil,
        .
        I am not goingn to clean anyone but if there would have been sufficient info to catch him in Singapore, they would surely not work going by MEDAMULANA CHINTTHANYA which has been protecting the real criminals as always.

      • 5
        0

        EE@

        You guys to the same manner, interpret the COVID statistics as if SRILANKA may have succeeded it. So what is hte point of talking you EE ? But the truth is …. as many other like minded countries, srilanka failed it….creating new divisions and hardup situation in suffering people.
        .
        Demented man of your nature would think that SH as the former president of COPE may have confirmed that AMahendran should be convicted. … I beg to differ, he though revealed it and that body has no legality to make conclusions, besices, the case filed against AM did not proceed further. for likely valid reasons… and his lawyers from Spore, did not have sufficent evidence to go for it… the very same case is seen with Udayanga WEERATHUNGA… so, what is the point of talking about that ? yet today, as we exchange on CT, if AM should be the person to be charged with, … as a right respecting STATE with strict law and order performances and one would not neglect common wealth principles Singapore would not stay unturn .. not having done the due.
        :
        Besides, if AM is to be convicted, how can he stay scot free ?

    • 6
      2

      Mr Ranil Wickremasinghe,
      .
      When I first read through this article there were only two comments: those by “leelagemalli” and by Raj.
      .
      I was impressed by the rational tone of the two comments, and of the article by Arjuna Mahendran. I then went back to the earlier article:
      .
      https://www.colombotelegraph.com/index.php/bond-scams-reflect-a-broken-bond-market/
      .
      As I now type I see six comments; by the time what I write gets displayed there’ll be forty – The last that I now see by “Ashan” makes a very important point:
      .
      “It is because of this stupid crime, that the present lot were able to get back into power.” For now, let’s remove even the word “crime”; let’s call it “bungling” or “misjudgement”. Please read the rest of Aahan’s comment. Let’s recall the legend of “Sri Sanga Bo”. Have you not had a long enough innings? Can’t you, even now, issue a statement on the lines of that by Mangala Samaraweera?
      .
      For so long you and your Colombo henchmen fixers used your connections to deny democracy a chance. This is leading us inexorably towards military government. I don’t consider Sajith Premadasa to be perfect; he’s there mostly because his father successfully challenged your mafia.

      • 7
        0

        Dear Mr SM,
        .
        Great you are back to your commenting mode again – I thought you might have been abducted on your way back home from COlombo. Either I missed your comments or you did not add any all these days to CT.
        However, thank god, that has not been the case. You are back to normal and add your thoughts and minds to the manner you have always been. Anyways, any impossible and everything in unprecedented nature is inevitable in today’s context in my home country today. How people would be improved their awareness is questionable because I believe only wayout to come out of the pit is through improvement of the people’s awareness. More they are fed with, much better it will be in terms of their knowledge based on “UNIVERSAL FRANCHISE”.
        :
        With world oil prices being drastically gone down, we enjoy the price reductions of petroleium for the last 4 months, but srilankens are not even arguing on that even if they are kept away from the concession. Why such highly affecting issues are paid with a blind eye by srilanken media is not comprehensible to me, what do you make of this Mr SM ?

    • 4
      2

      PART TWO
      .
      You didn’t allow democracy within the UNP. Had you given others a chance, we don’t know what worthier leader would have emerged from within your own party. Or even Sirisena, now so much of a joke, may have asserted himself as Thomas Gray muses.
      .
      “Some village-Hampden, that with dauntless breast
      The little tyrant of his fields withstood;”
      .
      My attempt at communicating this message may be a bit inept given that you used to be called “Amden” – which rhymes; also, your wife may say the lines are hackneyed. But dash it all, can’t you get the message?
      .
      I won’t try to analyse our Economy or the Bond Scam. I can’t. Our country has a population of almost 22 million, and 20 million are younger than us. Do what we may, we will soon have to depart this life. Ours was a good cohort to belong to. Nothing was ever perfect, and our country certainly saw a good deal of suffering. More than most other countries. It is time to step down, and let succeeding generations say that we redeemed something of value for those who have much more of their lives ahead of them.

      • 7
        2

        Mr. SM,
        I agree with you. But in the same time, I question myself if the current bunch would be experienced enough to settle the problems that the country is now facing with

        .I wish CBK, RW and other seniors could work together for the benefit of the poor who are really in need. Many leaders in their retirement do lot more good to those unfortunate/less fortunate than to own families. However, the total opposite is seen in Mahinda Rajaakshe Charactor – even if a devil dance would be able to get rid of him and his greediness to continue his vicious politcs. The kind of personalities are common in tribal africa and several countries in Latin america.
        Fortunatley, in UK and US do lot more good to the poor in their countries.
        :
        No retired presidents and senior men as former leaders would stay leeched to politics. As human beings, they would want to focus them on the essence of rest of their lives. President Obama is very young at his leaving from the office – today he has been doing a good work for the people who need his support but not necessarily in party politics.
        In today’s context, entire world will not remain the same as prior to COVID pandemic. More or less, almost everyone is hit by the crisis and its consequences. to be ctd :

    • 0
      7

      USA jailed, Rajarathnam, Arjuna Mahendran, majority drugs smugglers of the world, LTTE terrorists are Tamils. Indian proverb “if you see TAMIL and COBRA kill TAMIL first”, most of the racketers in this world mostly TAMILS and they changed and still changing their names, even ex Sri Lanka ex-finance minister Ravi Karunanayaka also changed his name. His name is Ravi Karunanayagam (Tamil Name) Arjuna Mahendran also changed his name.

      • 5
        1

        USA jailed Rajarathnam. but never jaield Arjuna Mahendran…
        .
        So please dont spread lies. At the time, AM was appointed to the CBSL AM’s profile and curriculum vitae were unbelmished.
        :
        He had worked for several banks in Middle East and back in Singapore – so those experts should also see it is right to put the blame on former PM on the selection of AM as the CBSL.
        .
        I never trusted srilanken media news, and I dont thinkt there were such BOND SCAM manner they interpreted it. However, If there should have been one, I agree he shoul d be charged.
        :
        In the same time, his predecessor should also be charged going by the evidence revealed by former President Sirisena who said that his experts revealed the LOSS claimed by Kabral period under his boss MEGALO MANIAC Mahinda Rajakashe the scam losses were unestimable and should be 100 times more than that of MS-RW govt claimed.

        Sirisena is a joker to the eyes of anyone.. even to see him in real and live is a sorry sight to many as of today.

        However these men would not seem to be away from our sight also for next few years – that will be the curse for this country.

  • 6
    1

    This comment was removed by a moderator because it didn’t abide by our Comment policy.

    For more detail see our Comment policy https://www.colombotelegraph.com/index.php/comments-policy-2

    • 5
      0

      Dear SCP,
      thanks for making it that short.
      :
      Greetings
      LM

  • 19
    4

    Mr Mahendran

    Irrespective of the Bond market & financial situation of SL at the time, the crux of the matter is your son in law made a killing & even if you deny any insider trading or ‘assistance’, it implies conflict of interest. In any business organisation, the accepted policy is that, an employee should not be involved in any matter which concerns family or acquaintances, therefore, I am sure you would know that presiding over a matter where you own family stands to benefit is unethical or haven’t your high level of education & years of holding top positions taught you that? Obviously, honour, pride of professionalism is not in your understanding of how success is measured.

    In a capitalist world, the rich get richer on the back of the poor. Enjoy life while you can. Take sleeping pills if you can’t sleep at night but the fact is, you are a fugitive. Explanations are not going to change it.

  • 8
    1

    Thanks Mr Mahandran for keeping your promise to continue these series of articles.

    Will you actively engage with any serious comments or observations to your series of articles in CT?

    First about your name?

    • 5
      1

      Who is telling the truth ?

      How can they make breaking news – if Arjuna Mahendran has not changed his name ?
      :
      Is it legally allowed SRILANKEN media to resound if it is not a fact ?

      CT please reveal what you know about the credentials of the AM ..

  • 8
    2

    Srilanka is a full corrupt nation since 2005. The fraud was from top to bottom. Judiciary is no exception. It was under a dictatorship and almost all the government MPs were ministers and no one is there to say I am not a fraud. Ministers were allowed to do whatever they want in order to raise their hand for 18th amendment. Like Corona terrorism, they had LTTE terrorism to cover up their crimes.
    It is true that Arjun Mahendran (Tamil) was the Chairman of the Central Bank but all others in the Central Bank are not his relatives or Tamils. Most of them are Sinhalese. Like the Muslim doctor ( SHO) who worked in a Sinhalese Hospital in Sinhala area did 800 sterilise operations himself Arjun Mahendran is not the only Tamil in the Central Bank. Arjun Mahendran may be or not involved in this bond scam but there are number of people must have involved in this scam. The truth can be only revealed by a proper unbiased investigation by an independent organization by international participation. Even. the investigation commission report by the former President is not available to public. Why the president or Prime minister are not bothered too much about it. Similarly Easter Bombing investigation is an eye wash and there is no talk about former Presidents role in that. Why?
    This is a country of Criminals.

    • 1
      0

      “Like the Muslim doctor ( SHO) who worked in a Sinhalese Hospital in Sinhala area did 800 sterilise operations himself”
      From which snake pit did you pick this tale?

  • 6
    1

    They may try to justify this crooked bond scam, but the bottom line is the UNP gave ammunition for this present lot to point out just how corrupt the UNP is (which is laughable considering just how corrupt that entire family and their cronies are).
    It was pot calling the kettle black.
    It is because of this stupid crime, that the present lot were able to get back into power.
    It has been only a few months, and the Rajapaksa’s have already shown they are willing to act above our laws, and have surrounded themselves with child killers.
    Now the idiots in the UNP can’t get their act together, and RW and Sirisena are still unable to realize just what a miserable failure they have been, and that they failed this country.

  • 3
    0

    It all boils down to who the private bond buyers were……(were there any “Kabali(film 2016)” style guys twirling mustaches?). So, the proof is in the pudding : Will anyone stand up and corroborate Arjuna’s story about his insistence against the private placement of bonds?
    *
    Yet it was a terrible state of affairs with CB, finance ministry, country in general, lacking money. Didn’t China grant Motherland much money?….Chinese Port city itself – wasn’t SL paid off handsomely for that? Shameful lack of system controls and insider trading from receptionist level and upwards at CSE. Has the EPF been replenished since?

  • 6
    1

    Aejuna

    I am glad you havent changed your name to ” Punci Banda orWeeratunga ”

    The ‘Bond Scams’ Were Caused By A Broken Bond Market – Part II

    I am glad you havent changed your name to ” Punci Banda orWeeratunga ”

    *** There is no need to go on and on to prove your innocence and for me the bottom line is that SC cleared you of any wrong doing. In his case Mahintha hailed the SC verdict as a victory for democracy but he cant accept that in your case. Your own Government refused to extradite you. Yesterday Mahintha posted an Article and I asked him a few questions all of them had some relevance to your case but he failed to answer. The Bond scam cost the treasury only Rs. 1.6 Billion that is pittance compared to what Ali Baba ( Basil) and 40 thieves who are around him have cost. During the COVID melt down the big sharks made a killing and that is share dealing. MR, Gotha Basil Weeratunga . Wimal the Wansa stole TRILLIONS but the 6.6 million Racists have elected them so you my friend are clear of all the charges . Rest in peace.and hope your son in law and daughter are safe in a foreign Country otherwise they will end up with a bullet to their head like Rajeeva. At he had the honor of being dumped in Independence Square

  • 0
    0

    Well…let’s just say that Arjuna merely dipped his toe into the Palk at this time.
    Any more and Hanuman is eagerly awaiting to throw in the multitude of stones.

  • 2
    2

    Under our law, people are not guilty until they are shown to be guilty in a court of law and convicted. Arjuna Mahendran’s explanation is satisfactory. If he was interested in a bond scam, he would not have been in favor of changing the private placement system to a public placement system. It is now up to the Relevant people in the Central Bank to contradict A.M.

    The forensic reports produced by international audit firms should be used to file action against all the offenders and allow the courts to pass judgement on who is guilty and who is not.

  • 2
    0

    N.Perera

    The USA jailed, Rajarathnam, Arjuna Mahendran, majority drugs smugglers of the world,

    Like Eagle Eye Perera also suffers from anti=Tamil phobia. It is true Rajaratnam was jailed in the USA, but not Arjuna Mahendran.

    There are crooks in all communities. What about Basil Rajapaksa? He built a house at a cost of Rs. 240 million on a 16 acre land in Malwana in Gangabada Road, Malwana, but later denied ownership.
    The land was valued at Rs. 60 million.

    What about Gotabaya Rajapaksa? Gotabaya Rajapaksa when he was the Defence Secretary and Secretary to the Urban Development Ministry built the Rajapaksa Mausoleum and Museum at Medamulana using statue resources. It costed Rs.80.2 but he paid only 33.9 million leaving a balance of Rs. 47.3 million payable to Sri Lanka Land Reclamation and Development Corporation (SLRDC). How can Gotabaya talk about corruption when he himself is corrupt?

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