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Tuesday, 26 July 2016 00:02 - - {{hitsCtrl.values.hits}}
By Janitha Devapriya
Chandra Jayaratne has written an open letter to Central Bank Governor Dr. Indrajith Coomaraswamy (Daily FT 21 July) suggesting that the Central Bank should hand over the function of regulatory oversight and accountability over the Government bond issues and related secondary market transactions to the Securities and Exchange Commission, to ensure that engaged intermediaries duly discharge their professional commitments in line with best market practices, an essential imperative of a well-governed securities market in Sri Lanka. He adds, “Such a governance framework is also an essential investor right.” No one can argue on the reasoning but the problem lies in the solution he proposes.
The salient points in his representations are,
Some of these matters though not directly concerned with the Central Bank, may however come under the purview of the players in the Sri Lanka’s financial market, namely the banks including the Central Bank in certain circumstances, Dealers, brokers, financial institutions and related entities. It therefore becomes a collective responsibility of the stake holders to ensure that ethical best practices envisaged in good governance principles to safeguard public interests and the rights of citizens are adhered to, as Jayaratne emphasises.
He claims that, the Central Bank suffers from definite conflicts of interests, due to its role being the primary issuer and manager of the Government bond issues and being the effective manager and portfolio investor of the largest securities market player in Sri Lanka – the Employees Provident Fund.
His next claim is quite serious. He says: “In addition, it is commonly believed that the secondary market information data set maintained by the Central Bank is inadequate and incomplete for effective regulation of market and associated intermediaries. It is reported that the records maintained in the Central Bank, covering the secondary market transactions, fail to record the basic market data relevant to the prices at which the secondary market transactions have taken place.”
If Jayaratne can substantiate his claim with reliable data or unimpeachable evidence, this certainly is a serious matter that needs to be investigated by the Ministry of National Policies and Economic affairs under whose purview the Central Bank is functioning.
The Central Bank of Ceylon was established by the Monetary Law Act (MLA) No.58 of 1949 and commenced operations on 28 August 1950 and later named Central Bank of Sri Lanka (CBSL ) in 1985. The Central Bank was given wide powers to administer and regulate the entire money, banking and credit system of the country and was also given the sole right and authority to issue currency and it also became the custodian of the international reserves of the country.
The Central Bank’s other responsibilities were maintenance of domestic price stability, stability of exchange rate, maintenance of high level of production, employment and real income, encouraging full development of productive resources in the country. In discharging these wide-ranging responsibilities entrusted to the Central Bank, it was inevitable that it performs the function of Regulator of the monetary system in the country.
One of the main points in Jayaratne’s letter is the conflict of interest aspect in the CBSL Treasury Bonds issues. The Central Bank is the custodian of the Employees Provident Fund established by Act No. 15 of 1958 where it comes within the management purview of the Commissioner of Labour. The funds held in the EPF running to a huge asset base are mainly invested in Government securities since the best gilt-edged securities in the financial market are Treasury bonds and Treasury bills.
The EPF department in the Central Bank is managed by experienced officers with good credentials. They are usually not found to act irresponsibly. The investments of EPF funds are not decided by one or two individuals but usually by an investment committee which follows the Investment Policy Guidelines of the Central Bank. The Treasury bonds are sold by the Public Debt Department which has a separate management structure with its own procedural guidelines. So the possibilities of conflict of interest can be considered minimal.
The Treasury bonds are sold by an auction process or private placements and the EPF is also another bidder vying along with other primary dealers. Conflict of interest in many transactions can be putative but not necessarily factual. For example, a subsidiary or an affiliate company of a bank can invest in the debentures issued by the parent bank since debentures are reliable debt instruments that can be utilised for future financial needs. Though investments of EPF funds in Treasury bonds are not exactly the same as investments in debentures of a parent bank by its own subsidiary, it is not entirely dissimilar.
The conflict of interest in such instances therefore is not clearly excogitated.
Coming back to Jayaratne’s main contention, “ In the light of above it is urged that the Monetary Board resolves to assign the role and responsibility to for regulatory oversight over Government bond issues and the related secondary market transactions to the Securities & Exchange Commission at the earliest opportunity,” it would appear quite strange and somewhat illogical for a person of the calibre of Jayaratne, one-time Chairman of the Ceylon Chamber of Commerce, to suggest one regulatory apex body to be supervised by another regulatory body.
The Securities and Exchange Commission earmarked by him to supervise CBSL bond issues cannot boast of a good track record in the discharge of its duties and responsibilities in the not too distant past and two of its senior officials were even indicted in courts over financial irregularities recently. By this unusual suggestion, he belittles the Central Bank staffers in the EPF as well as the Public Debt Department. By extrapolation, his suggestion appears to insinuate the credibility of the Auditor General who audits the accounts of the Central Bank as well as the Employees Provident Fund.
The solution therefore lies not in getting one regulator to supervise the activities of another regulator but every financial institution, be it Central Bank or any other institution with fiduciary responsibility, but to adhere to strict international financial reporting and international accounting standards and good governance practices accepted the world over.
