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EXECUTIVE SUMMARY: Key expose into controversial Treasury bond issuance


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The report of the Presidential Commission of Inquiry into the controversial Treasury bond issuance was made public this week. The Commission comprised of Presidential Justice K.T. Chitrasiri, Judge of the Supreme Court (Chairman), Justice Prasanna Jayawardena, PC, Judge of the Supreme Court and Kandasamy Veluppillai, Retired Deputy Auditor General. We publish the Executive Summary of the 1,154-page report and the recommendations. 

 

A Report of this nature does not lend itself easily to be summarised in a brief but still comprehensive way.

In Chapter 5 of this Report, we have set out a summary of the relevant evidence given by each of the 71 witnesses who testified before us.

In Chapters 6 to 31 of this Report, we have endeavoured to examine the relevant evidence placed before us with regard to the subject matter of each of these Chapters and set out our findings and determinations on these matters.

In Chapter 32 of this Report, we have set out our report on the specific Issues listed in the Mandate issued to us. In Chapter 33 of this Report, we have set out our Recommendations.

In this Summary, we will only seek to list some of our key findings and determinations with regard to the matters referred to in our Mandate.

Since this will result in some repetition, we will seek to limit the contents of this Chapter to only those key findings and determinations.

Readers who wish to know the several findings and determinations we have made and the background in which these findings and determinations were reached, should read Chapter 1 of this Report in which we referred to the guidelines upon which we conducted the investigation and inquiry and prepared this Report and, thereafter, read Chapters 6 to Chapter 31 of this Report. Where considered necessary, the relevant evidence can be examined by referring to Chapter 5.

A reading of this Executive Summary only, will not be an adequate substitute to reading the Report.

Chapter 7 – Treasury Bills, Treasury Bonds and other Government Securities

In 2008, the Monetary Board has approved the issue of Treasury Bonds by way of Direct Placements only to the ETF and “other Captive Sources” such as the National Savings Bank, the Employees Trust Fund, the State Banks and other Government Institutions.

The Monetary Board has not specifically approved accepting Direct Placements from Primary Dealers. However, from 2008 onwards the Public Debt Department has, over a long period of time, accepted Direct Placements from Primary Dealers.

We note that, this practice of accepting Direct Placements from Primary Dealers has not been questioned by the Monetary Board and has had the tacit approval of the Monetary Board even though the Monetary Board had not given specific approval for this practice.

Chapter 11 – The Primary Market in Treasury Bonds – Auctions and Direct Placements

The merits and demerits of the two modes of issues Based on the evidence, including the Reports prepared by the Auditor General, there is a likelihood that some irregularities have taken place in the acceptance of Direct Placements prior to 2015.

Chapter 14 – The profits made 

by Perpetual Treasuries Ltd. and other facts which single out Perpetual Treasuries Ltd.

The phenomenal profits made by Perpetual Treasuries Ltd. within a very short space of time and on an Issued Capital of only Rs. 300 million, are very much higher than the profits made by other Primary Dealers and led us to consider that, it is necessary, to examine how and why Perpetual Treasuries Ltd. was able to make these remarkable profits.

Further, the evidence placed before us established a series of facts and circumstances which serve to single out Perpetual Treasuries Ltd. as a Primary Dealer, which merited our special attention.

Chapter 15 – Perpetual Treasuries Ltd.

We conclude that, Mr. Geoffrey Aloysius and Mr. Arjun Aloysius have been the sole beneficial owners of Perpetual Treasuries Ltd during the entire period of our Mandate. Although Mr. Arjun Aloysius had resigned from the post of Director of Perpetual Treasuries Ltd. on 16 January 2015, it is evident that, Mr. Arjun Aloysius and Mr. Kasun Palisena were in control of the day-to-day operations and transactions of Perpetual Treasuries Ltd., during the period of our Mandate and can be, properly, considered to be the persons who have primary responsibility for the actions of Perpetual Treasuries Ltd., during that period. Mr. Geoffrey Aloysius also has a measure of responsibility for the actions carried out by Perpetual Treasuries Ltd.

Section 19.2.1 – The Meeting of the Monetary Board held on 23 February 2015

Mr. Mahendran’s proposal to issue a 30-year Treasury bond and the Monetary Board’s decision to issue that Treasury bond was, ex facie, a due exercise of the authority and discretion of the Monetary Board. However, we would mention here, that, in the light of the subsequent events which took place on 27 February 2015 and the role Mr. Mahendran played in the conduct of the Auction held on that day, a question arises as to whether Mr. Mahendran had any personal or ulterior motive when he pressed for the issue of a 30-year Treasury bond at the meeting held on 23 February 2015. In this regard, Perpetual Treasuries Ltd. was known to specialise in trading in long-term Treasury bonds. Further, it has to be noted that, an Auction at which a large value of 30-year Treasury bonds are issued at high yield rates, will result in the long end of the yield curve for Treasury bonds being fixed [at least, for a period] at a relatively high level and will thereby give “leverage” for a person who holds such Treasury bonds, to profitably trade upon them if and when yield rates decline over time. It also has to be noted that, as Deputy Governor Weerasinghe observed, the yield curve for Treasury bonds should be set properly and prudently since it impacts on interest rates in the market and the interest rates applied by commercial banks in their banking transactions.

At the aforesaid meeting held on 23 February 2015, the Monetary Board decided that, the two-tier structure of interest rates of 6.5% per annum and 5% per annum then applied to the overnight standing deposit facility and the interest rate of 8% per annum which was then offered on the overnight standing lending facility, should remain unchanged until the Monetary Board considered the next month’s Monetary Policy Review.

Section 19.2.3 – The ‘Breakfast Meeting’ on 26 February 2015, the reasons for that meeting and the decisions taken at that meeting

No request was made at the meeting of the Sub-Committee on Economic Affairs held on 24 February 2015 to raise funds at the Treasury Bond Auction to be held on 27 February 2015 for the purpose of paying amounts due on Road Projects or for any other purpose discussed at that meeting;

Section 19.2.4 – The meeting of the Market Operations Committee on 27 February 2015

Although there may have been good reasons requiring an urgent adjustment to the interest rates paid on overnight standing deposit facility, Mr. Mahendran acted improperly and in excess of his authority when he, unilaterally and without the prior approval of the Monetary Board, issued a direction, on 27 February 2015, to withdraw or remove the two-tier interest rate structure of the overnight standing deposit facility and to direct that, only the single interest rate of 6.5% per annum be applied;

The forum which Mr. Mahendran chose to issue that directive – i.e.: the meeting of the Market Operations Committee – was a forum which had nothing to do with the determination of the Interest Rates applicable to the overnight standing deposit facility/standing lending facility.

As a result of Mr. Mahendran’s directive, overnight interest rates in the market increased significantly, for a period of time. This increase in the overnight interest rates would have influenced the short end of the yield curve of the Treasury bond market to move upwards.

This consequence becomes especially significant in the light of the subsequent events which took place on 27 February 2015 and the issue of 30-year Treasury bonds to the value of Rs. 10.058 billion at a weighted average yield rate of 11.7270%, which moved the long end of the yield curve of the Treasury bond market upwards, too.

Bringing about a Treasury bond yield curve which has high yield rates, will give “leverage” for a person who holds Treasury bonds acquired at such high yield rates to profitably trade upon them if and when yield rates decline over time.

Section 19.2.5 – The Treasury Bond Auction held on 27 February 2015 and Arjuna Mahendran’s intervention in that Auction 

Mr. Mahendran knowingly acted improperly and wrongfully, and interfered in the decision-making processes at the Public Debt Department and, thereafter, at the Tender Board, and directed that bids to the value of Rs. 10.058 billion be accepted at the Treasury Bond Auction held on 27 February 2015;

The Public Debt Department had intended to accept bids only to the value of Rs. 2.608 billion at this Auction at a weighted average yield of 10.7244 and, after the closure of the Auction, to raise the balance that were required on 2 March 2015, by way of direct placements. The Public Debt Department would have had no difficulty in raising these balance funds, by way of direct placements, on 2 March 2015.

The CBSL accepted bids to the value of Rs. 10.058 billion at the Treasury Bond Auction held on 27 February 2015 and issued 30-year Treasury bonds to the face value of Rs. 10.058 billion at this Auction, only due to and as a direct result of Mr. Mahendran’s aforesaid instruction.

Mr. Mahendran’s claim made to the Public Debt Department and the Tender Board that, it was necessary to accept Rs. 10 billion to meet additional Government fund requirements, has been demonstrated to be false.

It is disappointing that Deputy Governors Silva and Weerasinghe, who were very experienced officers of the CBSL and bore a responsibility to look after the interests of the CBSL, remained silent and did not counsel Mr. Mahendran to desist from that course of action or, at the very least, record their opposition to the direction he issued to the PDD. We are of the view that, the aforesaid passive attitude adopted by Deputy Governors Silva and Weerasinghe, amounts to negligence and a breach of their responsibilities as Deputy Governors of the CBSL.

With regard Mr. Mahendran’s intervention in the decision-making process of the Tender Board by instructing to Deputy Governor Samarasiri that, Bids to the value of Rs. 10.058 billion should be accepted, we find it disappointing that, Deputy Governor Samarasiri, who, as the Chairman of the Tender Board had a duty to ensure that the Tender Board reached an independent and considered decision, acted in gross breach of this duty and supinely obeyed the instructions given by Mr. Mahendran.

Mr. Samarasiri’s passivity negated the whole purpose for which the Tender Board was constituted. We are of the view that, the aforesaid conduct on the part of Deputy Governor Samarasiri amounts to gross negligence and a grave breach of his duties and responsibilities as the Chairman of the Tender Board and a Deputy Governor of the CBSL.

As a direct result of Mr. Mahendran’s direction given to the PDD to accept bids to the value of Rs. 10.058 billion, Perpetual Treasuries Ltd. obtained Treasury bonds to an aggregate value of Rs. 5 billion at bid prices ranging from 97. 87800 to 91.99280 and yield rates [net of tax] ranging from 11.5002 to 12.5009, at the Treasury Bond Auction held on 27 February 2015.

Mr. Mahendran had to know that, as a result of his direction, Perpetual Treasuries Ltd. would succeed in obtaining Treasury bonds to the value of Rs. 2 billion at high yield rates and at low bid prices.

It is reasonable to conclude that Mr. Mahendran directed that bids to the value of Rs. 10.058 billion be accepted at the Treasury Bond Auction held on 27 February 2015 for the improper and wrongful collateral purpose of enabling Perpetual Treasuries Ltd to obtain a high value of Treasury bonds at that Auction, at low bid prices and high yield rates.

Perpetual Treasuries had “inside information” (or price sensitive information) that bids to a very high value would be accepted at the Treasury Bond Auction held on 27 February 2015 even though only a sum of Rs. 1 billion had been offered at the Auction. Mr. Mahendran was the source from which Perpetual Treasuries Ltd. obtained this “inside information” (or price sensitive information”).

Mr. Mahendran acted wrongfully, improperly, mala fide, fraudulently and in gross breach of his duties as Governor of the CBSL when: (i) he instructed that bids to the value of Rs.10.058 billion be accepted at the Treasury Bond Auction held on 27 February 2015 for the improper and wrongful collateral purpose of enabling Perpetual Treasuries Ltd. to obtain a high value of Treasury bonds at that Auction at low bid prices and high yield rates; and (ii) when Mr. Mahendran provided “inside information” [or price sensitive information”) to Perpetual Treasuries Ltd. that bids to a very high value would be accepted at that Treasury Bond Auction even though only a sum of Rs. 1 billion had been offered at the Auction; Mr. Mahendran acted with the knowledge of and in collusion with Perpetual Treasuries Ltd.

Section 19.2.6 – The decision to stop direct placements

Mr. Mahendran acted improperly and in excess of his authority when he unilaterally and without the prior approval of the Monetary Board, directed the suspension or stoppage of direct placements with immediate effect from 27 February 2015. Mr. Mahendran acted irresponsibly and, in fact, recklessly, when he suddenly directed the total suspension or stoppage of direct placements on 27 February 2015, without having first instructed the relevant Departments of the CBSL to study and report on the workings of the system of direct placements and ascertain the effect which a suspension or stoppage of direct placements would have on the market and determine the manner in which any proposed suspension or stoppage of direct placements should be implemented.

The sudden removal had a significant impact on the market, which by then was well used to the entrenched practice of CBSL issuing Treasury bonds through the direct placements window.

As a result of the suspension or stoppage of the direct placements from 27 February 2015 onwards, the CBSL had no option but to resort to Auctions whenever it needed to issue Treasury bonds, and raise public debt. This resulted in the CBSL being solely dependent on the yield rates determined by the market when the CBSL raised funds by way of Treasury bonds;

Thus, Mr. Mahendran’s act of suddenly directing the suspension or stoppage of direct placements on 27 February 2015, has caused grave prejudice to the Government and the CBSL ability to raise public debt at the “lowest possible cost” as the PDD is required to do. 

In this connection, although on more than one occasion after 27 February 2015, the Monetary Board discussed whether direct placements should be resorted to on a limited basis, the CBSL did not reintroduce the acceptance of direct placements during the entire period of Mr. Mahendran’s tenure as the Governor. Instead the CBSL was able to raise the required funds by issuing Treasury bonds at Auctions and by means of issuing other Government securities albeit at the rates that were determined by those processes.

We also note that, even though after Dr. Indrajit Coomaraswamy assumed office as the Governor and the Monetary Board considered the re-introduction of a type of direct placements in July 2016, the CBSL considered it possible and advisable to introduce a new system of issuing Treasury bonds, which uses the Auction method as the first “phase” of issuing Treasury Bonds and includes accepting a type of “direct placements” as a possible later “phase” in specified circumstances only more than one year later – i.e.: in July 2017.

This fact highlights the complexity of the issues involved and the numerous factors and considerations which must be taken into account when evaluating the relative merits and demerits of Auctions vis-à-vis direct placements including the comparable costs of raising public debt under the two methods of raising public debt.

In these circumstances, we are of the view that, although the aforesaid prejudice caused to Government and the CBSL by Mr. Mahendran’s act of suddenly directing the suspension or stoppage of direct placements on 27 February 2015, is bound to be very substantial, we do not consider that a monetary loss can be reliably computed due to the many variables and due to the numerous intervening circumstances, which have occurred since 27 February 2015.

Here again, Deputy Governors Silva and Weerasinghe were negligent and failed to fulfil their responsibilities as Deputy Governors by remaining silent when they heard the direction issued by Mr. Mahendran to suspend or stop direct placements.



Section 19.2.8 – The Prime Minister’s Statement in Parliament on 17 March 2015

Mr. Mahendran and Mr. Samarasiri have deliberately and mala fide misled the Prime Minister and suppressed material facts and misrepresented the factual position when they reported the facts and events relating to the Treasury Bond Auction held on 27 February 2015, to the Prime Minister and submitted a Briefing Note to the Prime Minister.

While we do not, for even a moment, presume to make any pronouncement on events that transpired in Parliament, we consider that the Prime Minister would have been better advised, if he had independently verified what had happened at the CBSL on 27 February 2015, before making any statement, placing reliance on what was held out to him by Mr. Mahendran and Deputy Governor Samarasiri;

The evidence establishes that, Mr. Mahendran had not been instructed or directed by the Prime Minister to act unilaterally and immediately suspend or stop direct placements on 27 February 2015.

Instead, the Prime Minister expected Mr. Mahendran to go through the due Procedure – i.e.: of studying the issue and assessing the effect a suspension or stoppage of direct placements will have and, thereafter, if considered appropriate after that study was completed, draw up a considered plan of the manner in which such a decision was to be implemented and obtain the approval of the Monetary Board, before implementing any decision.

Section 19.2.10 – The ‘Pitipana Committee’

The CBSL did not take prompt action to implement the recommendations made in that report to install voice recording facilities and other monitoring mechanisms in the PDD and to improve the supervisory procedures of the PDD. 



Section 19.2.11 – The meeting of the Monetary Board of Sri Lanka on 11 April 2015

The decision taken at the meeting of the Monetary Board on 11 April 2015 held under the Chairmanship of Deputy Governor Samarasiri, to reduce the interest rates applied to the overnight standing deposit facility rate and standing lending facility rate, had a salutary effect and brought about a downward trend in both yield rates and interest rates.

Section 19.2.15 – Did the Treasury Bond Auction held on 27 February 2015 cause a loss to the Government? If so, how much was it?

It is reasonable to conclude that, as a result of Mr. Mahendran’s intervention and instruction to accept bids to the value of Rs. 10.058 billion at the Auction held on 27 February 2015, the CBSL incurred an avoidable loss of Rs. 688,762,100, which can be correctly and reasonably regarded to be a loss incurred by the Government, as a direct result of Mr. Mahendran’s aforesaid intervention and the instructions he gave. The events of the Treasury Bond Auction held on 27 February 2015 caused considerable disruption and concern in the market and substantial damage to the reputation of the CBSL and the PDD. However, this damage, though grave, is not quantifiable.

There is also evidence which establishes that, the results of the Treasury Bond Auction on 27 February 2015 at which 30-year Treasury bonds were accepted at yield rates as high as 12.5009%, coupled with the removal, on the same day, of the interest rate of 5% per annum paid on the overnight standing deposit facility, caused an increase in Treasury bond yield rates and the interest rates.

However, the evidence establishes that, over a period of time, especially after the reduction, on 11 April 2015, of the interest rates applied to the overnight standing deposit facility and the standing lending facility, interest rates declined and Treasury bond yield rates also declined over time. 

We also aware that, that there are several factors which influence movements in interest rates and yield rates and that it would be artificial to take the view that, the result of the Treasury Bond Auction held on 27 February 2015, is the sole reason for the trend of increasing interest rates and yield rates from 2015 onwards. It has to be recognised that, after the Auction of 27 February 2015, there were a series of intervening events and developments in the economy, which had an effect on effect on interest rates and yield rates and the Government securities market. Further, it hardly needs to be said here that, the economy of Sri Lanka faces several issues, including a massive debt burden, a balance of payments deficit, a trade deficit and several other difficulties which need not be listed here.

In these circumstances it is unreasonable to ascribe all the economic woes of Sri Lanka and the overall increase in interest rates and Treasury bond yield rates after February 2015, solely to the Treasury Bond Auction of 27 February 2015.

In this connection, when this Commission of Inquiry considers whether a loss was caused to the Government as a result of the Treasury Bond Auction of 27 February 2015 and, if so, attempts to estimate such loss, we are obliged to keep in mind the principles of the Law relating to Causation and Remoteness of Damages.

In this connection we also note that the Auditor General has not sought to compute any consequent or long-term losses which were caused by the Treasury Bond Auction held on 27 February 2015. We note that when Sunil Handunnetti, MP gave evidence before us, he stated that COPE did not inquire into consequential losses or long-term losses.

We are of the considered opinion that, Mr. Mahendran is liable and responsible for the aforesaid loss of Rs. 688,762,100 and that this loss should be recovered from Mr. Mahendran.

Further, since Perpetual Treasuries Ltd. used “inside information” (price sensitive information) to its gain and benefit at the Treasury bonds Auction held on 27 February 2015, Perpetual Treasuries Ltd. is also liable and responsible for this loss Rs. 688,762,100 and that this loss should also be recovered from Perpetual Treasuries Ltd.

Section 19.5.1 – Arjuna Mahendran suspends Reverse REPO Auction on 3 March April 2016

The instruction given by Mr. Mahendran on 3rd March 2016 to stop Reverse REPO Auctions contributed towards creating circumstances in which Perpetual Treasuries Ltd. was able to obtain Treasury bonds at high yield rates, at the Treasury bond Auctions held on 29 March 2016 and 31 March 2016.

Section 19.5.3 – Treasury Bond Auction held on 24 March 2016

We see no reason to consider that, the Tender Board acted unreasonably or imprudently when it decided to reject all bids received at the Treasury Bond Auction held on 24 March 2016, for the reason that the yield rates at which bids had been placed were unacceptably high.

Section 19.5.4 – The meeting at the Ministry of Finance on 28 March 2016

In view of the undesirably high yield rates which then prevailed, it was reasonable and justifiable for the Ministry of Finance to wish to bring these yield rates down at the Treasury Bond Auction to be held on 29 March 2016.

There is no evidence before us which suggests that Ravi Karunanayake, MP, the then Minister of Finance, Dr. Samaratunga, Secretary to the Ministry of Finance or any other officer of the Ministry Finance advised the CBSL of the instruction and assurance given to the three State banks or took any steps to ensure that the CBSL would honour that assurance.

Since Dr. Samaratunga, Secretary to the Ministry of Finance, who was present at this meeting, is also a member of the Monetary Board, he was personally obliged to convey to the CBSL that, the three State banks had been instructed to place bids within a specified range of yield rates at the Treasury Bond Auction to be held on 29 March 2016 and that, the three State banks had been given an assurance that, bids at higher yield rates would not be accepted at this Auction. There is no evidence that Dr. Samaratunga did so.

The acceptance of bids at the aforesaid Auction at higher yield rates than the yield rates at which the three State banks had placed their bids, did not result in these three State banks incurring an actual or real loss but did, cause an “opportunity loss” or a “notional loss” to the three State banks.

Section 19.5.6 – The Treasury Bond Auction held on 29 March 2016

We do not see any ex facie irregularity in the decision-making process which led to the CBSL accepting Treasury bonds with an aggregate value of Rs. 77.732 billion at the Treasury Bonds Auction held on 29 March 2016. These bids were accepted to raise part of the massive sum of Rs. 105 billion required on 1 April 2016 by the Department of Treasury Operations.

Mr. Arjun Aloysius has “inside information” (price sensitive information) provided to him by a person or persons within the CBSL as to the likely “cut off rates” up to which the CBSL would accept bids at the Treasury Bond Auctions held on 29 March 2016.

Mr. Arjun Aloysius had “inside information” (or price sensitive information) provided to him by a person or persons at the National Savings Bank and/or Bank of Ceylon or elsewhere that, the State banks had been instructed to place bids at low yield rates and were, therefore, likely to place restricted bids at the Treasury Bond Auctions held on 29 March 2016.

Perpetual Treasuries Ltd. used this “inside information” (or price sensitive information) to help Perpetual Treasuries Ltd. to obtain a high value of Treasury bonds, at high yield rates, at the Treasury Bond Auctions held on 29 March 2016.

There are grounds to suspect that the EPF placed bids for very low values at the Treasury Bond Auctions held on 29 March 2016, in order to help Perpetual Treasuries Ltd. obtain a high value of Treasury bonds at high yield.

Section 19.5.7 – The meeting at the Ministry of Finance on 30 March 2016

In view of the undesirably-high yield rates which then prevailed, it was reasonable and justifiable for the Ministry of Finance to wish to bring these yield rates down at the Treasury Bond Auction to be held on 30 March 2016.

There is no evidence that Ravi Karunanayake, MP, the then Minister of Finance or any other officer of the Ministry of Finance advised the CBSL of the assurance given to the three State banks at that meeting.

The acceptance of bids at the aforesaid Auction at higher yield rates than the yield rates at which the three State banks had placed their bids, did not result in these three State banks incurring an actual or real loss but did, cause an “opportunity loss” or a “notional loss” to the three State banks.

Section 19.5.8 – The Treasury Bond Auction held on 31 March 2016

We do not see any ex facie irregularity in the decision-making process which led to the CBSL accepting Treasury bonds with an aggregate value of Rs. 50.010 billion at the Treasury Bond Auctions held on 31 March 2016.



Section 19.5.11 – Did the Treasury Bond Auctions held on 24, 29 and 31 March 2016 cause a loss to the Government? If so, how much was it?

With regard to the Treasury Bond Auction held on 24 March 2016, we have determined that, the Tender Board did not act unreasonably or imprudently when it decided to reject all bids received at the Treasury Bond Auction on 24 March 2016, since the yield rates at which bids had been placed at this Auction were unreasonably high.

Therefore, in these circumstances, we do not consider that, that the Treasury Bond Auction held on 24 March 2016 and the results of that Auction, caused any avoidable loss to the CBSL.

With regard to the Treasury Bond Auction held on 29 March 2016, as stated in Section 19.5.6 above, we have determined that, the evidence does not establish any ex facie irregularity in the decision-making process which led to the CBSL accepting Treasury bonds with an aggregate value of Rs. 77.732 billion at this Auction held on 29 March 2016.

Therefore, in these circumstances, we cannot conclude that, any actions or omission of the part of the CBSL during the course of this Auction, caused an avoidable loss to the CBSL.

The evidence establishes that Mr. Arjun Aloysius and Perpetual Treasuries Ltd. had “inside information” (or price sensitive information) which Perpetual Treasuries Ltd. used to obtain a high value of Treasury bonds, at high yield rates, at the Treasury Bond Auctions held on 29 March 2016;

Since computing the quantum, in monetary terms, of the gain and benefit which Perpetual Treasuries Ltd. obtained by using the “inside information” (or price sensitive information) at the Treasury Bond Auction on 29 March 2016 requires technical expertise and will be time-consuming, we have recommended that the extent to which Perpetual Treasuries Ltd. gained and benefitted from the aforesaid “inside information” (or price sensitive information) is estimated, by means of a forensic audit or similar method, and be recovered from Perpetual Treasuries Ltd.

Finally, with regard to the Treasury Bond Auction held on 31 March 2016, as stated in Section 19.5.8 above, we have determined that, we do not see any ex facie irregularity in the decision-making process which led to the CBSL accepting Treasury bonds with an aggregate value of Rs. 50.010 billion, at this Auction held on 31 March 2016.

Therefore, we cannot, in these circumstances, conclude that, any actions or omission on the part of the CBSL during the course of this Auction, caused an avoidable loss to the CBSL.

Further, as stated earlier, we have no direct or circumstantial evidence before us which establishes or suggests that Perpetual Treasuries Ltd. had “inside information” (or price sensitive information) regarding this Treasury Bond Auction held on 31 March 2016.



Chapter 20 – Perpetual Treasuries in the Secondary Market

The total net cash inflows received [monetary gains made] by Perpetual Treasuries Ltd. from all sales of Treasury bonds bearing seven specified ISINs [which were issued during the period from 1 February 2016 to 31 March 2016] and are relevant to our mandate, aggregate to Rs.11,145,221,479/99.

The total net cash inflows received [monetary gains made] by Perpetual Treasuries Ltd. from the aforesaid sales of Treasury bonds to the EPF and other statutory bodies and Government institutions, aggregate to Rs. 8,529,964,495/61.

Only Rs. 2.615 billion of the aforesaid net cash inflow received by Perpetual Treasuries Ltd. accrued from the sale of Treasury bonds to private entities. The entirety of the balance sum of Rs. 8.539 billion accrued to Perpetual Treasuries Ltd. from the sale of Treasury bonds to the EPF and other statutory bodies and Government institutions;

Chapter 21 – The Employees Provident Fund in the Primary Market and Secondary Market in Treasury bonds

The net cash inflow [monetary gains made] by Perpetual Treasuries Ltd. from the sales of Treasury bonds to the EPF bearing the seven specified ISINs [which were issued during the period from 1 February 2016 to 31 March 2016], in the Secondary Market, during the period relevant to our mandate, aggregate to Rs. 6.4 billion.

Thus, the net cash inflows [monetary gains made] by Perpetual Treasuries Ltd. from the sales of the aforesaid Treasury bonds to the EPF, amounts to 57% of the total net cash inflow of Rs. 11.145 billion received by Perpetual Treasuries Ltd. from all sales of the aforesaid Treasury bonds, in the Secondary Market, during the period relevant to our mandate.

These stark figures raise questions with regard to the circumstances in which the transactions between Perpetual Treasuries Ltd. and the EPF were entered into. 

However, we are obliged to take note that, as stated in Chapter 13, the CBSL has conducted an examination of the transactions entered into by the EPF and has submitted a report to the Monetary Board. The Monetary Board has advised us that, it is taking appropriate action with regard to the matters set out in the report and that this report must be treated as confidential. Therefore, we did not require the production of this report in evidence, taking into account the reasons stated by the Governor of the CBSL.

We trust that the Monetary Board and the CBSL will carry out a full and complete investigation into the transactions entered into by the EPF and identify whether a loss was caused to the EPF and, if so, identify the persons responsible and, seek to recover such loss from the persons responsible.

We trust that, where appropriate, the Monetary Board and CBSL will consider whether persons who are found to have committed any dishonest acts or who have received inducements in return for entering into transactions on behalf of the EPF, should be prosecuted.

In this connection, we hardy need to point out that, the Monetary Board and the senior officers of the CBSL act in the capacity of trustees with regard to the EPF.

In view of these circumstances, we did not examine, in detail, the transactions entered into by the EPF in the Secondary Market.

However, in Chapter 21, we set out several pertinent observations with regard to the manner in which the EPF transacted its business and concerns which this Commission of Inquiry has, in that regard.

We trust the CBSL will take due note of these observations too, in the course of its investigation and action in this regard. 

Chapter 23 – Perpetual Treasuries Ltd.’s profits and how they were made

The evidence establishes that Perpetual Treasuries Ltd. has made the major part of its profits by means of using “inside information” (price sensitive information) and by means of “market manipulation”. We are of the view that, in the aforesaid circumstances, Perpetual Treasuries Ltd. has knowingly violated and acted in breach of the provisions of the Code of Conduct for Primary Dealers, which has been issued by the CBSL under and in terms of the Regulations issued under the Registered Stock and Securities Ordinance No. 7 of 1937;

We are of the view that, the total net cash inflows [monetary gains made] amounting to Rs. 8,529,964,495/61 received by Perpetual Treasuries Ltd. from the sales of Treasury bonds, during the period relevant to our Mandate, to the EPF and other statutory bodies and Government institutions, were made by “inside information” (price sensitive information) and by “market manipulation”.

We are of the view that, in the aforesaid circumstances, the Attorney General and other appropriate authorities should consider whether Perpetual Treasuries Ltd. is liable for prosecution for an offence in terms of the aforesaid S: 56A(1) of the Registered Stock and Securities Ordinance and, in the event of a conviction being entered by a learned Magistrate after Summary Trial, Perpetual Treasuries Ltd .could be held liable to a fine equivalent to twice the value of the aforesaid sum of Rs. 8,529,964,495/61 or in such other sum as the Court may determine.

We are also of the view that, the evidence placed before us establishes that Mr. Arjun Aloysius and Mr. Kasun Palisena were both parties to and directly responsible for the aforesaid violation and breach of the Code of Conduct for Primary Dealers, by Perpetual Treasuries Ltd. and, therefore, fall within the scope of the description “every person who at the time of the commission of the offence was a director or an officer of the body corporate shall be deemed to be guilty of that offence” in Section 56B of the Registered Stock and Securities Ordinance No. 7 of 1937. 

Chapter 24 – Perpetual Treasuries Ltd. and Ravi Karunanayake, MP – the apartment and the meetings at Ministry of Finance in March 2016

We are of the view that the evidence before us suggests that Ravi Karunanayake, while he was Minister of Finance derived a substantial benefit from the lease payments made by Walt and Row Associates Ltd., which is an Associate Company of Perpetual Treasuries Ltd. and which is owned and controlled by the same persons who own and control Perpetual Treasuries Ltd.

We are of the view that, these facts and circumstances should be examined by the Commission to Investigate Allegations of Bribery or Corruption, who may determine whether appropriate action should be taken against Ravi Karunanayake, MP, under the Bribery Act No.11 of 1954.

We also are of the view that the Attorney General and other appropriate authorities should also consider whether some of the evidence given by Ravi Karunanayake has been shown to have been incorrect and, if that is the case, whether there are grounds for prosecutions under Section 179 and/or Section 188 of the Penal Code or other relevant provision of the Law, read with Section 9 of the Commissions of Inquiry Act No. 17 of 1948.

Chapter 25 – Arjuna Mahendran – Was there a conflict of interest due to his relationship with Arjun Aloysius? Did some of Arjuna Mahendran’s actions assist Perpetual Treasuries Ltd.?

A Governor of the CBSL has a duty to not allow himself to be placed in a situation where he has a relationship with a Primary Dealer or with any person who has a material beneficial interest in a Primary Dealer or who may derive a material financial benefit from a Primary Dealer or who is in a position to control the operations of a Primary Dealer.

We consider that, the Governor of the CBSL is bound to observe the duty of good faith and act in a fiduciary capacity when he performs the functions of his office. We consider that the Governor can be correctly regarded as a trustee of the interests of the CBSL who has to act bona fide in the best interests of the CBSL.

Further, the character of the office of a Governor of the CBSL, places a duty on the Governor to refrain from placing himself in a position where there is a conflict of interest between his personal interests and his duties to the CBSL.

Mr. Mahendran has unequivocally admitted that there was a potential conflict of interest which arose from the relationship he had with his son-in-law. There is no doubt that, Mr. Mahendran full well recognised that there was potential for a grave conflict of interest arising from the fact that he was the Governor of the CBSL and his son-in-law was closely associated with the Primary Dealer named Perpetual Treasuries Ltd.

Having admitted that there was a potential for conflict of interest, Mr. Mahendran went on to state that he was confident that he could “handle it” and avoid a conflict of interest arising by performing his duties as Governor “in a transparent manner” and by keeping any decisions affecting Perpetual Treasuries Ltd. “at arm’s length”.

Mr. Mahendran had repeatedly assured the Prime Minister that Mr. Mahendran would ensure that Mr. Arjun Aloysius severed all connections with Perpetual Treasuries Ltd. However, Mr. Mahendran failed to honour his word.

Instead, Mr. Arjun Aloysius continued to be closely involved in the day-to-day operations of Perpetual Treasuries Ltd., was a key decision-maker at Perpetual Treasuries Ltd. and was in control of Perpetual Treasuries Ltd. Mr. Aloysius also did not dispose of his beneficial ownership of Perpetual Treasuries Ltd. Mr. Mahendran had to be aware of the role Mr. Aloysius continued to play in Perpetual Treasuries Ltd.

Although Mr. Mahendran admitted that there was a potential for a conflict of interest, there is no record of Mr. Mahendran having formally advised the Monetary Board that there was a potential for a conflict of interest arising from the fact that his son-in-law was closely associated with the Primary Dealer named Perpetual Treasuries Ltd. There is also no record of Mr. Mahendran having recused himself from decisions which affected Perpetual Treasuries Ltd.

Further, although Mr. Mahendran stated that he was confident that he could “handle it” and avoid a conflict of interest arising by performing his duties as Governor “in a transparent manner” and by keeping any decisions affecting Perpetual Treasuries Ltd. “at arm’s length”, there were several instances where Mr. Mahendran had acted in a manner which benefitted Perpetual Treasuries Ltd.



Chapter 26 – The Prime Minister’s role in matters relevant to our mandate

Mr. Arjuna Mahendran was appointed the Governor of the CBSL on 23 January 2015 and, thus, the appointment of Mr. Mahendran was made before the period of our mandate commenced and we have no jurisdiction to determine the merits or demerits of that appointment.

However, in view of the circumstances referred to in Chapter 26, we decided to briefly look at these issues, though we will not, in view of the confines of our mandate, venture to arrive at any determination on these issues.

When Mr. Mahendran was appointed as Governor of the CBSL, he had: a “hands-on” knowledge of the CBSL after having worked at the CBSL for a considerable period of time; working experience in the field of Fiscal Policy at the Ministry of Finance; a long and successful career in international banking thereafter, where he held high-level management positions and gained in-depth exposure to and experience of international finance; knowledge of international markets which Sri Lanka needs to participate in; and also experience as a Chairman of the Board of Investment of Sri Lanka.

In this connection, we also note that, from 2004 onwards, the Governor of the CBSL has been a person appointed to that post from outside the cadre of officers of the CBSL and have been persons with no experience in “Central Banking”. In fact, to the best of our knowledge, Mr. Mahendran is the only Governor during the period from 2004 who has had extensive experience in “Banking”.

Next, although we believe Mr. Mahendran was a Sri Lankan citizen at birth, he has assumed citizenship of the Republic of Singapore at some point before 2015. Thus, at the time he was appointed the Governor of the CBSL, Mr. Mahendran was not a citizen of Sri Lanka. He has not assumed citizenship of Sri Lanka after 2015. The provisions of the Monetary Law Act, the Constitution and the Law do not require that the Governor of the CBSL must be a citizen of Sri Lanka.

It is also clear that, Mr. Mahendran, who, we believe was a Sri Lankan citizen at birth and, further, had his primary and secondary education in Sri Lanka and appeared to have been well qualified to handle the duties of a Governor of the CBSL, has deep roots in Sri Lanka and has had continuous connections with Sri Lanka despite working abroad for many years and assuming citizenship of the Republic of Singapore, at some point in time.

In these circumstances, the question of whether or not the fact that Mr. Mahendran was not a citizen of Sri Lanka precluded him from being appointed the Governor of the CBSL was not a “Question of Law.” Instead it was a “value judgment” which had to be made by those who considered the wisdom of appointing Mr. Mahendran, who was not a citizen of Sri Lanka, as the Governor of the CBSL. Prior to 2015, the CBSL was placed under the Ministry of Finance. In 2015, the CBSL has been brought under the Minister of National Policies and Economic Affairs. That is a decision taken by the Executive which is entirely outside the scope of our mandate.

At the time Mr. Mahendran was appointed the Governor of the CBSL, the Prime Minister had been aware of the potential for a conflict of interest and has directed that Mr. Mahendran must ensure that, Mr. Arjun Aloysius resigns from all positions he held in Perpetual Treasuries Ltd. and that Mr. Aloysius must not have any connection with the operations of Perpetual Treasuries Ltd. Further, the Prime Minister has recommended that Mr. Aloysius divests himself of any shareholdings in Perpetual Treasuries Ltd. Subsequently, Mr. Aloysius has resigned from all positions he held in Perpetual Treasuries Ltd.

Mr. Mahendran has repeatedly assured the Prime Minister that, Mr. Aloysius “would not under any circumstances play any role in the business activities of” Perpetual Treasuries Ltd.

It appears that the Prime Minister has relied on those assurances given by Mr. Mahendran.

We consider that, the confidence which the Prime Minister states he placed in the assurances given to him by Mr. Mahendran, was misplaced. We are of the view that, the more prudent course of action would have been for the Prime Minister to have independently verified whether Mr. Mahendran was, in fact, honouring the assurances he gave the Prime Minister. We regret that the Prime Minister did not take that course of action.

With regard to direct placements, the instruction given by the Prime Minister to Mr. Mahendran was only that Mr. Mahendran should consider the change and was not an instruction to immediately act unilaterally and order that the acceptance of direct placements be immediately stopped or suspended.

The evidence establishes that the Prime Minister fully expected Mr. Mahendran to comply with due procedure and conduct a comprehensive study into the matter and for this study to be considered by the Monetary Board, before a decision was taken with regard to direct placements.

Next, when the results of the Treasury Bond Auction held on 27 February 2015 became known and there were several allegations that Mr. Mahendran had interfered in the Auction, to benefit Perpetual Treasuries Ltd., the Prime Minister appointed the three-member ‘Pitipana Committee’ to inquire into and report on the matter. We are of the view that the members of the ‘Pitipana Committee’ (comprising of three senior and reputed Attorneys-at-Law) did not possess technical knowledge or practical knowledge in the considerably complex arena of Government securities and public debt.

Although we see that the Prime Minister has sought to supplement that lack of expertise by ensuring that the members of the ‘Pitipana Committee’ had the assistance of Dr. W.A. Wijewardena [a former Deputy Governor of the CBSL] with regard to the technical aspects of the matter being inquired into, we consider that a more effective inquiry could have been done if the Pitipana Committee also had members who had knowledge and experience in the technical and practical aspects of the matter being inquired into.

Next, with regard to the statement made in Parliament by the Prime Minister on 17 March 2017, in which he states, inter alia, that Mr. Mahendran had not interfered in the Treasury Bond Auction of 27 February 2015, we have held that, the evidence establishes that Mr. Mahendran and Deputy Governor Samarasiri deliberately and mala fide misled the Prime Minister and suppressed material facts and misrepresented the factual position when they reported the events relating to the Treasury Bond Auction held on 27 February 2015 to the Prime Minister and also when they submitted a Briefing Note to the Prime Minister with regard to the events of that Auction.

While we do not, for even a moment, presume to make any pronouncement on events that transpired in Parliament, we consider that the Prime Minister would have been better advised if he had independently verified what had happened at the CBSL on 27 February 2015, before making any statement, instead of relying on the Briefing Note and report submitted to him by Mr. Mahendran and Deputy Governor Samarasiri.

We note that the Report of the ‘Pitipana Committee’ did not determine that there was any impropriety in the conduct of the Treasury Bond Auction held on 27 February 2015 and that consequently Mr. Mahendran [who had been on leave pending the completion of the Inquiry of the Pitipana Committee and the submission of its report) resumed duties as Governor of the CBSL when there was no finding of impropriety.

In any event, soon thereafter, Parliament has resolved to inquire into the Treasury Bond Auction held on 27 February 2015, through the COPE of the Seventh Parliament and, later, through the COPE of the Eighth Parliament. That process of Inquiry by Parliament was completed only in October 2016.

The Prime Minister has stated that, since the matter was in the hands of the Parliament, the Prime Minister could not have taken further steps in that regard. We consider that the position may have been different if the Committee or other body which carried out this Inquiry had the benefit of members who had knowledge and experience in the technical and practical aspects of the matter being inquired into. In the meantime, since no finding of impropriety or bad faith had been made against him, Mr. Mahendran continued to serve as Governor of the CBSL until his term ended on 30 June 2016 and he was not reappointed.

While we are fully cognisant that Parliament has supreme authority and control over public finance and matters related thereto, we are of the view that Inquiries into highly technical and complex matters such as the issue of Government securities and the raising of public debt are more effectively and completely carried out by an Investigative Committee or an Investigative Tribunal which has some legal training and, importantly, is equipped with knowledge and experience in the technical and practical aspects of the matter being inquired into or has the ability to effectively draw on the resources of persons who have such knowledge and experience.

Chapter 29 – Perpetual Treasuries Ltd. deletes telephone call recordings and crashes a computer

The evidence establishes that Perpetual Treasuries Ltd. wrongfully and fraudulently deleted call recordings for the purpose of concealing the true nature of the transactions entered into by Perpetual Treasuries Ltd. and attempted to suppress evidence with regard to wrongful acts of Perpetual Treasuries Ltd.

The evidence establishes that Mr. Arjun Aloysius and Mr. Kasun Palisena were the persons responsible for the aforesaid acts and that Mr. Nuwan Salgado and Mr. Sachin Devathanthri carried out the orders given to them by Mr. Palisena who acted on the instructions of and/or with the full knowledge of Mr. Arjun Aloysius. 

We are of the view that the Attorney General and other appropriate authorities should consider whether these acts amount to criminal offences under Chapter X and Chapter XI of the Penal Code, including Sections 175, 189, 193, 198 and 201 of the Penal Code read with Section 9 of the Commissions of Inquiry Act No. 17 of 1948 and, if considered so, institute appropriate prosecutions against the appropriate persons.

Further, we note that the Attorney General and other appropriate authorities consider whether Mr. Palisena’s statements in the affidavit affirmed to by him were false and, if that is the case, whether there are grounds for prosecutions under Section 179 and/or Section 188 of the Penal Code or other relevant provision of the Law, read with Section 9 of the Commissions of Inquiry Act No. 17 of 1948.

Click here to read the recommendations of the Presidential Commission of Inquiry into the Treasury bond issuance


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