Treasury Bond Commission: Startling revelations queer the pitch | Sunday Observer

Treasury Bond Commission: Startling revelations queer the pitch

A whirlpool of startling evidence revealed before the Treasury Bond Commission attracted undivided public attention to the Commission proceedings last week.

At the cross examination conducted by Senior Additional Solicitor General Dappula de Livera, the witness, former Governor Arjun Mahendran revealed that the decision to stop issuing Treasury Bonds through private placements came in the backdrop of the newly elected government having to pay Rs. 1.4 trillion unpaid bills of year 2014.

He explained that there was an urgent requirement of Rs. 15 billion to pay arrears due for the already completed road development projects. Mahendran pointed out to the Commission that the Private Placement method was not raising enough funds, and that the fund requirement was urgent and crucial.

Conflict of Interest  

According to Mahendran, the Treasury “was facing the crunch” of the massive payments, including, the unpaid bills of year 2014, amounting to Rs. 1.4 trillion. “So, we had to reach out to the International Monetary Fund to request emergency funding.” Mahendran explained.

“I spoke to the Secretary to the Treasury, both, in person and over the phone extensively. The government communicated with the IMF Head and discussed the matter of the urgent fund requirement. I met the Secretary to the Treasury after every Cabinet sub-committee meeting. We discussed the matter throughout January and February 2015, and beyond.” Mahendran said.

“Then the Secretary to the Treasury went to the IMF and made an elaborate presentation regarding the matter.

This was a serious issue for both, the public and private sector. Even the IMF wrote a report on the matter, elaborating its magnitude.” Mahendran explained. According to Mahendran, the presentation to the IMF was done on February 10, 2015, in New York.

The conflict of interest was a constantly probed matter at the Treasury Bond Commission from the beginning. At Monday’s cross examination Mahendran was extensively questioned on the conflict of interest in the positions held by him and his son-in-law Arjun Aloysius.

Aloysius’s Company, Perpetual Treasuries Limited deals in the Treasury Bond Market, whereas Mahendran was the Chief Executive Officer of the Central Bank which regulates all Primary Dealers.

SASG De Livera suggested that Mahendran failed to disclose the conflict of interest between him and his son-in-law while living under the same roof. Mahendran previously informed the Commission that he was living with his daughter, son-in-law and the little child, from January 22, 2015 in Sri Lanka.

SASG: So, knowing the fact that you would have to approve Tender Board decisions on bids, and the fact that you would be the regulatory supervisor regarding the bond auction, you still continued to hold the position as Governor?

AM: Despite the conflict of interest, I maintained an arm’s length distance in my activities as Governor of CBSL.

Following Mahendran’s answer, De Livera asked, “What is your arm’s length?” and a smiling Mahendran who was sitting at the witness box stretched his arms to display the length. Amid laughter from those present at the hearing, De Livera, in a lighter tone commented “Oh, is that it?” meaning that the arm’s length is not enough distance.

Commissioner Supreme Court Judge P.S. Jayawardena too questioned Mahendran on the same matter.

JJ: You saw a potential conflict of interest, right?

AM: Yes

JJ: And maintained an arm’s length?

W: Yes

J: Despite all other things, do you think it was appropriate to live in the same house with Aloysius, who was the owner of a primary dealer company?

W: Yes. I never consider it improper, because in my family we don’t talk about such matters with each other.

De Livera then questioned Mahendran on Aloysius’s resignation from the CEO position of the PTL. He pointed out that the resignation was tendered on January 16 2015, which was prior to Mahendran being appointed the Governor. “Does not this mean you started talking about your job with your son –in-law?” De Livera asked. Mahendran said, he was already “packing his bags” to return to Sri Lanka and his family got to know about his appointment including Aloysius. “My appointment was not market or price sensitive information!” Mahendran pointed out.

Goose and Gander   

De Livera then asked Mahendran why he did not decline the position of CBSL Governor because of the conflict of interest.

Mahendran said, he discussed about the conflict of interest with the responsible parties. “I maintained an arm’s length. I never discussed my official endeavors with my family. I had already told him not to expect any favouritism from me pertaining to his company. I stayed away from all Monetary Board meetings where documents relating to PTL were discussed. I have also asked him not to mention Primary Dealer names in the progress reports as well.” Mahendran explained.

The Commissioner, Justice P.S. Jayawardena commenting on the matter of the conflict of interest, said, it was the same case with former Governor Ajith Nivaard Cabral who had his sister as a Director of Perpetual Capital Holdings. Previous evidence suggests, PTL received its licence as a Primary Dealer while Cabraal’s sister was a Director of PCH. “However, I am not for a moment suggesting that it is correct to have a conflict of interest. Two wrongs do not make a right,” Justice Jayawardena said. It is a matter of what is good for the goose is good for the gander as well, he added, never in short of witty sparks.

Losses of CBSL   
 
Meanwhile, the Treasury Bond Commission also questioned Mahendran on losses which have been incurred by the Central Bank when he took office as Governor in 2015. At the outset, the Commissioner, Supreme Court Judge P.S. Jayawardena said it is important for the Commission to have an understanding of these losses since a Central Bank cannot make losses of any kind. “I find it extraordinary for a Central Bank to make losses.” Justice Jayawardena said. At a previous proceeding, it was mentioned that a Central Bank cannot incur losses as it has the option to print money.

According to former Governor Mahendran, the Central Bank had made some imprudent investments in managing foreign reserves, which eventually had incurred losses. “Of course, there was this Greek Bond issue.

But the bigger issue was Gold. I couldn’t get to the bottom of this. Allegedly, there had been huge window dressing exercises where the CBSL has sold from its gold reserve end of December and repurchased it in January, at a much higher price, so that they could show profit for the preceding year.” Mahendran said.

“The cost of gold that the CBSL held was 1,600 dollars an ounce. However, the market price has fallen to 1,100 dollars an ounce. We were already sitting on a 500 dollar loss on each ounce. That was a big loss to the Central Bank. The gold prices started to fall somewhere towards the end of 2013. Through that period we had recorded massive losses in the foreign exchange devaluation account.” Mahendran explained.

Then the second loss is when the Central Bank took a big position on the Australian dollar, Mahendran further explained. The Australian dollar then collapsed all the way to seventy five US cents causing CBSL much losses, he said.

“In 2013, three Sri Lanka banks, NSB, DFCC and BOC went to the international market and issued dollar bonds to the extent of 1.35 billion dollars, and in the budget of that year the President at that time, made a statement that the CBSL would guarantee the foreign exchange losses at that time to these banks who issued these dollar bonds in case the rupee depreciated during the period of those bonds. The CBSL gave a zero cost option to buy back the foreign exchange to repay the bonds at the cost of the Central Bank,” Mahendran said. According to Mahendran, these three major reasons including others, have caused the Central Bank to incur losses in the years 2012 and 2013.

Removal of direct Placement method

Mahendran denied ASG de Livera’s suggestion that the Monetary Board disagreed with the decision to do away with the direct placement method. Mahendran pointed out, the Public Debt Department requested at a later stage, somewhere in late June 2015, to re-introduce a private placement dominant method, which was not accepted by the Monetary Board. If the MB disagreed with the initial decision to stop the direct placement method, the MB could have accepted the PDD’s proposal, Mahendran said.

Mahendran, explaining the large borrowing requirement suffered by the newly elected government in 2015, said there was a meeting on February 26 2015 on the matter. Apart from a total borrowing requirement for Rs. 75 billion to service debts, he said there was another Rs. 15 billion requirement as discussed at the said meeting.

However, SASG de Livera suggested that this Rs. 15 billion is an “imaginary figure” which came out of nowhere. He pointed out that Mahendran’s statement to the first COPE subcommittee probing into the Treasury Bond issue does not reflect “a single word” about a 15 billion requirement.

“You had mentioned about neither a Rs. 15 billion nor a Rs. 75 billion urgent requirement any time in 2015, right? There was no such requirement. Your testimony is false,” SASG De Livera suggested. However, Mahendran said, he needs to check his statement to the COPE in order to comment on De Livera’s suggestion.

It was revealed before the Commission on Wednesday that former Finance Minister, Ravi Karunanayake directed three state banks to bid at low rates on given volumes at the March 29 and 31 2016 Treasury Bond auctions.

Eight witnesses, including, Hemasiri Fernando, Chairman, People’s Bank, Ronald C. Perera, Chairman, Bank of Ceylon and Aswin De Silva, Chairman National Savings Bank and four more witnesses from the said state banks gave evidence before the Bond Commission that they received such instructions from former Minister Ravi Karunanayake at two meetings held on March 28 and 30, 2016, respectively.

The NSB Consultant Treasury, N.P. Lionel, BOC Assistant General Manager (Treasury) Wasantha Wickramaarachchi, Retired BOC Deputy General Manager Sarathchandra Jayasooriya and CEO GM of People’s Bank Wasantha Kumar were the other witnesses who gave evidence before the Commission.

According to these witnesses, these two meetings were held at the Finance Ministry and both chaired by former Finance Minister Ravi Karunanayake. According to evidence led before the Commission, member of Economic Sub Committee R. Paskaralingam, Secretary to Finance Ministry Dr. R.H.S. Samaratunga, NSB CEO and General Manager Dhammika Perera, officials of the Central Bank Public Debt Department and General Treasury had participated in one or both these meetings.

People’s Bank CEO/GM Wasantha Kumar was the first to get into the witness box. Attorney General’s Panel who led evidence played a telephone call recording of PTL CEO Kasun Palisena and PTL Owner Arjun Aloysius. The conversation between the two suggests that Aloysius was in possession of highly sensitive market and price information regarding the March 29 and 31 2016 auctions.

Speaking of the March 28 2016 meeting, CEO/GM Wasantha Kumar said former Finance Minister Ravi Karunanayake informed the state bank representatives that they should bid at low rates to take down the high interest rates prevailing in the market. According to the witness, Karunanayake gave them a range of rates within which the state banks needed to bid at the March 29 2016 auction. According to him, these bids were lower than the prevailing market rates. He also said, an assurance was given that the Central Bank would not accept bids at higher rates. However, according to the witness, the March 29 2016 auction turned out different. The Central Bank accepted bids at higher rates and subsequently People’s Bank, as well as other state banks had incurred an immediate opportunity loss for not being allowed to bid at higher rates.

Similar meeting

CEO/GM Wasantha Kumar then explained about a held on March 30 2016 at the Finance Ministry. According to him, this meeting which too was chaired by former Finance Minister Ravi Karunanayake, was on the auction which was to be held on March 31 2016.

The witness said, Karunanayake gave specific rates and volumes at which the State Banks were to bid. According to evidence, the State Banks were asked to bid 7.5 billion each at the March 31 2016 auction.

Meanwhile, it was observed that no legal representative of Former Finance Minister Ravi Karunanayake was present at the Treasury Bond Commission. Senior Additional Solicitor General Dappula de Livera then rose to point out to the Tribunal that former Finance Minister Ravi Karunanayake’s legal counsels were informed about today’s proceedings by Additional Solicitor General Yasantha Kodagoda.

Chairman of the Commission Supreme Court Judge K.T. Chitrasiri said the Secretary to the Commission also informed Karunanayake’s counsels regarding the same, two days before. President’s Counsel Rienzie Arsakularatne represented Karunanayake when he testified before the Commission on August 2 2017.

Chairman, People’s Bank Hemasiri Fernando then took the witness box and was examined on the same two meetings. Speaking of the March 28 2016 meeting, Fernando said former Minister Karunanayake requested them to bid at lower rates to stabilize the rupee and lower the market rates. “He (Ravi Karunanayake) proposed some interest rates but gave a range of rates to us to decide on. We had to agree because the Treasury is the owner of our Banks. These rates were low, but we had no option since the Finance Minister and the Treasury gave instructions,” Fernando said. Asked if he was given instructions on which volumes to bid, Fernando said, Karunanayake asked them to re invest in the 8 million bonds they had been in possession of.

A Consultant to NSB Treasury N.P. Lionel, testifying before the Commission gave similar evidence regarding the matter under probe. SASG De Livera asked the witness how Chief Dealer Naveen Anuradha came into the NSB and his official relationship with him.

SASG De Livera: When you were DGM who was the dealer for NSB?

Lionel: Abeysinghe.

SASG: Then a new dealer came in?

L: Yes, on February 2 2016. We were looking for a dealer.

SASG: Was there a need to recruit a new dealer?

L: Yes.

SASGL What was Naveen Anuradha designated as?

L: The Chief Dealer for the NSB.

SASG: You advertised for a dealer, when Abeysinghe was there?

L: Yes.

SASG: Did he approach you?

L: Yes, he told me, if I am doing any deals to go through him. But I told him I do not care about what you say.

SASG: So, he had the audacity to tell you such a thing when you were the DGM?

L: Yes.

SASG: How did he get that authority?

L: I do not now.

SASG: Then what happened?

L: My dealing limit which was 1 billion, was withdrawn from me later.

SASG: Did Naveen Anuradha tell you how he got to the NSB?

L: He said he knew the then Finance Minister Ravi Karunanayake very well.

Justice Jayawardena: Did you find anything unusual with Naveen Anuradha’s dealings?

L: Yes, he was dealing with Perpetual Treasuries Limited, Aquity, Pan Asia, DFCC. We have dealt with them before, but not to that magnitude. The profits were the same.

JJ: Did you report this to someone?

L: Yes.

The Chairman of the Presidential Commission of Inquiry investigating into the Treasury Bond issue, Supreme Court Judge K.T. Chitrasiri informed, the proceedings of the Commission had to wind up by the end of the coming week, so that it will have sufficient time to write the report which will be presented to the President.

Commissioner Justice P.S. Jayawardena on the same subject observed that there would be no point in conducting extensive investigations and receiving a series of evidence from relevant parties, if they have a limited time to write a comprehensive report on the inquiry. 

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