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By Himal Kotelawala
Testifying before the Presidential Commission of Inquiry on the controversial bond issuance yesterday, former Central Bank Governor Arjuna Mahendran said he had recommended public auctions over private placements for treasury bonds taking into account the “stunningly large” amounts required by the Government for March 2015.
This decision, he claimed, reflected Government policy at the time and had been arrived at after holding discussions with the relevant Deputy Governor of the Central Bank who had, according to Mahendran, agreed with his suggestion.
The former Governor, during his examination by his attorney President’s Counsel Romesh De Silva, also implied that his “open door” policy was among the reasons he had visited the Public Debt Department around the time of the 27 February 2015 auction and that his visit offered him no advantage in terms of prior knowledge of the auction.
Before his client took the witness stand, PC De Silva told the commission that Mahendran was not a citizen of this country, nor was he a resident of this country, and therefore he could not be compelled to give evidence nor furnish any affidavits. He need not have even responded to the summons, he said. The Counsel also made a reference to last week’s order in respect of the compellability of witnesses to give evidence, particularly with regard to Mahendran’s son-in-law and former Perpetual Treasuries Ltd. (PTL) Director Arjun Aloysius.
“Well aware of that, [Mahendran] will testify in order to prove his innocence and to assist the commission,” declared De Silva.
However, reiterating that Mahendran was not a citizen of Sri Lanka, the senior lawyer said his client deserves to be respected with “dignity and decorum” and not be “insulted by officers assisting the tribunal”, failing which he reserves the right to make an application to withdraw.
At this point, Deputy Solicitor General Milinda Gunatillake asked if this was solely because Mahendran was a foreigner. Objecting to the interruption, De Silva said every witness deserves to be treated that way. Commissioner Justice Prasanna Jayawardena intervened, informing De Silva that the commission was aware of its duty to treat every witness with due courtesies.
During his examination, Mahendran responded to questions pertaining to his background, with particular emphasis on his previous ten-year stint at the Central Bank of Sri Lanka (CBSL) from 1983 to 1993. Mahendran said, prior to his appointment as Governor in January 2015, he was already reasonably aware of the procedures and internal manuals of CBSL.
Mahendran, it transpired, had worked under former CBSL Governors Dr. Warnsena Rasaputram and Dr. H.N.S. Karunatilake, both of whom he described as having a very hands-on style of governance. The structure at the CBSL as it was then, what with its smaller office space, meant a much more intimate environment, he said.
Everybody knew each other and interacted very closely with each other, and there was a lot more “walking about” and correspondence across divisions, he added.
In response to a question by PC De Silva, Mahendran said that in his commencement speech the day he took up duties as Governor, he had informed his staff of his wish to implement an “open door policy”. De Silva asked if this meant senior members could have walked into his room and vice versa at any time, to which his client responded in the affirmative.
Delving into the debate over public auctions versus private placements, Mahendran recalled that he had been informed at the time of his appointment that the latter had been CBSL’s preferred method - something he claimed to have been surprised by, considering it’s not the norm in many markets.
A “very large” debt had been accumulated by the time the new Government had taken office, he said, despite which it had presented a mini-budget in January 2015 to boost revenues to meet the debt service, leaving little for development activities.
In this backdrop, Mahendran claimed to have made a suggestion to the President, the Prime Minister and the Minister of Finance that there was sufficient funding in the private sector which could be mobilised reasonably quickly to meet the Government’s borrowing needs. In order to ensure this, he claimed to have said the Government needed to move away from what he called the “closed system of private placements” that was not giving the desired results.
Responding to a question from Justice Jayawardena, Mahendran said he had made this recommendation over the weekend that followed his letter of appointment (23 and 24 January 2015). Prior to the 8 January Presidential election, Mahendran had met Common Presidential Candidate Maithripala Sirisena and then Opposition Leader Ranil Wickremesinghe casually at a seminar in Colombo.
‘Rotten at the heart of bank’
PC De Silva, examining his client, asked Mahendran if he had thought public auctions were preferable to private placements.
“Definitely,” said Mahendran, adding that it also reflected Government policy at the time (early 2015) as gathered from conversations he had had with senior ministers.
In discussions with the deputy governor in charge, said Mahendran, both officials had agreed that “bonds should be issued as far as possible by auction.”
When he had assumed duties on 26 January 2015, the biggest concern that had confronted Mahendran, he said, was the “large losses” - amounting to over Rs. 39 billion - CBSL had made. An unlikely event, given CBSL had a license to print money.
“This showed there was something pretty rotten at the heart of the bank,” he said, adding that he wanted to “get to grips with it fast”.
The newly-appointed Governor subsequently decided to restructure CBSL, as there was a conflict of interest in the way subjects had been assigned to the deputy governors, he said.
Answering a question by De Silva, Mahendran said CBSL had no permanent legal department, but rather a team of senior officers from the Attorney General’s Department advising it, visiting the CBSL premises three to four times a week.
None of those officers had said anything about the new Governor’s restructuring process, he said.
Prior to the 27 February auction, Mahendran had been notified by the Secretary to the Treasury of a requirement of Rs. 13.55 billion to be raised by 2 March. About the same time, it was noted in the examination, at a meeting held between Mahendran, the Ministers of Finance and of Highways as well as an adviser to the Premier, he had been requested to raise a sum of Rs. 75 billion within a month for urgent road construction work. There was another requirement for a “stunningly large” Rs. 172 billion, also to be raised by March, which Mahendran presumed was consequential to a budget allocation for public sector salary increments.
Raising that much money in such a short period of time, said Mahendran, was would have been challenging even for a larger economy.
In January, there had been a shortfall in the range of tens of millions of rupees in what CBSL had been able to raise, requiring a “drastic” change given the massive requirement.
Public auctions, in this backdrop, were “extremely important” for the market to convey to the Government its ability to fund it.
The original auction was advertised for Rs. 1 billion at a rate of 12.5%. When he had asked why it was only Rs. 1 billion, the Public Debt Department (PDD) had advised him, said Mahendran, that bids would be in excess of that amount.
Bids up to nearly Rs. 20 billion
Prior to the 27 February public auction, an attempt had been made through private placements to raise money, but the PDD had only managed to raise Rs. 3.4 billion.
On the day of the auction, Mahendran said responding to questions by his counsel, there had been a meeting of the CBSL Market Operations Committee (MOC), in a conference room adjacent to his office, chaired by the Deputy Governor. The Governor is not a member of the MOC, so Mahendran walked to the conference room to meet his deputy to discuss a matter pertaining to concerns he had about the currency going into a possible freefall due to a 50 cent drop.
Said De Silva: “So this was your style of work? You didn’t summon him to your office; you went to where he was,” asking Mahendran if this was the style he had been accustomed to both here and abroad.
Mahendran agreed.
When Mahendran had gone down to the PDD premises, he claimed, he was informed there had been bids up to approximately Rs. 20 billion.
“I went there twice,” he said. First at 11.00 a.m., when he was told the auction would finish and he had assumed the result would be available instantaneously, only to be told by the Superintendent of Public Debt that the results would not be ready for another hour. The auction had started at 8.30 a.m. and bids were coming in electronically over a secure channel between the computer of CBSL and those of the primary dealers.
There was no advantage in terms of knowledge on the auction by visiting the PDD, said Mahendran, responding to De Silva’s questions.
He claimed to have just been keen to find out what the PDD had looked like in terms of security layout, etc.
Asked what his reaction was when he found out that bids had been made up to Rs. 20 billion, Mahendran said it was one of relief, as the PDD had been pessimistic about raising that kind of money through a public auction.
He had first wanted to accept the total Rs. 20 billion, but his recommendation, he told the commission, had been rejected by the Superintendent of Public Debt on the grounds that according to her it would not have been practical as some of the bids were at “ridiculously high” rates of interest (she had called these dummy bids, he recalled).
Following a few minutes of discussion, a “reasonable number” had been arrived at: Rs. 10.058 billion, as according to Mahendran this meant the highest yields would be around 12.5%, which happened to coincide with the coupon advertised for the bond.
He said the weighted average yield rate the Government would pay for the entire auction would be 11.73%, lower than the previous 30-year bond auction held in late May 2014 for Rs. 2 billion at 11.75%.
This, he said, responding to PC De Silva, was one of the reasons to accept bids up to Rs. 10 billion. The decision was up to the Tender Board of CBSL, an autonomous body the Governor is not a member of.
The PDD had produced an auction sheet to the Tender Board recommending offers up to Rs. 10 billion. Mahendran claimed to not have seen the auction sheet, let alone played a part in the PDD’s recommendation to the Tender Board.
The Governor does, however, have the power to veto a Tender Board decision - which Mahendran told Justice Jayawardena he had done on previous occasions - but he opted not do so as he was fully in agreement with their decision.
Asked by PC De Silva if the AG Department officials had said any wrongdoing had been done at this point, Mahendran said they had not.
De Silva then pointed to an assessment by the Attorney General that CBSL had suffered a loss consequent to the auction. Mahendran said he disagreed with this assessment as the AG’s calculations had been made on certain assumptions - mainly that money could be raised in large amounts through private placements that had no factual basis.
Answering questions about his son-in-law’s primary dealer business, Mahendran denied having any stake in the company. PC De Silva asked who had attended his daughter’s wedding to Aloysius in October 2012. Among the names recalled by Mahendran were former President Mahinda Rajapaksa’s three sons and then Central Bank Governor Ajith Nivard Cabraal.
De Silva asked if all political and business leaders had thus been aware of Mahendran’s connection to a primary dealer which had received long before his appointment as CBSL Governor, which meant that it would not have been a secret that came to light after his appointment?
His client agreed, while also claiming never to have discussed CBSL matters with any member of his family including Aloysius.
Mahendran will continue his testimony today.
