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Former CB Governor Mahendran testifies before Bond Commission

Former Central Bank Governor Arjun Mahendran yesterday testified before the Treasury Bond Commission with regards to the February 27, 2015 and March 29, 31, 2016 auctions in question which are under the scrutiny of the Commission.

Mahendran’s position was that he was in full agreement with the Tender Board decision taken on February 27, 2015 auction to accept 10.5 billion bids.

He also disagreed with the Auditor General’s position that a loss was incurred by the government at the said auction. Mahendran also expressed his disagreement with Auditor General’s loss calculation in his special audit report on the Treasury Bond issue. Mahendran also stated that he was not involved in the decision making processes of March 29 and 31 2016 auctions, under the Commission’s probe.

Legal Representative of former Governor Mahendran, President’s Counsel Romesh de Silva made a submission reserving their rights to withdraw from giving evidence at any point that his client was not treated with dignity and fairness.

Mahendran gave evidence before the Commission on changes he made at the Central Bank when he was appointed as the Governor and also rationalized why he thought public auction was a better method to raise debts more than the private placement method. He also gave evidence on the decision making process of the February 27, 2015 auction. He also gave reasons for walking into a Market Operations Committee on the same day, which was chaired by Deputy Governor Dr.Nandalaal Weerasinghe.

Speaking of the backdrop at which the February 27, 2015 auction was held, Mahendran said the biggest economic issue the newly appointed government faced in 2015 was the large debts it had to service. For March 2015, the government requirement was Rs. 72 billion which was a large sum of money, and drastic actions were necessary to meet the demand, Mahendran pointed out.

Legal representative of former CBSL Governor Mahendran, President’s Counsel Romesh de Silva led evidence through Mahendran yesterday. At the initial stage of the proceeding, de Silva PC stood to make a submission on behalf of Mahendran.

De Silva PC pointed out that Arjun Mahendran is not a resident of Sri Lanka, so that, he cannot be compelled to give evidence nor he could be compellable to give an affidavit or to respond to any summon.

“Mahendran is not legally obliged to give evidence. We are also aware of the order the Commission gave in particular regarding to Aloysius. Well aware of all these facts Mahendran has decided to give evidence in order to assist the Commission.” Romesh de Silva PC informed the tribunal.

“My submission is that Mahendran is not a citizen of Sri Lanka and should be treated with dignity without being insulted by officers assisting the Commission. If that happens we reserve our rights to make an application at that time to withdraw,” Romesh de Silva PC said.

The Tribunal pointed out that the Commission has endeavoured to treat all witnesses in a fair and equal manner. It is our duty to treat all in the witness box with respect. Following an audible “Why we have to treat him with reverence?” and a few chuckles from the Attorney General’s panel, De Silva PC said that he is very confident that the Tribunal will be fair to his client but it would not be the case with “all the AG’s officers assisting the Commission.”

De Silva PC then proceeded with leading evidence through Mahendran on several allegations levelled against his conduct as the Central Bank Governor, especially his decision making relating to February 27 2015 auction.

Romesh de Silva PC: Did you know about the government requirement for 02 March 2015? And how much was that?

Arjun Mahendran (AM): Yes I knew. The government required Rs. 13.55 billion 02 March.

RSPC: How were you notified and when?

AM: I was given a call by the Secretary to the Treasury saying this amount was needed.

RSPC: At about that time, did you have a meeting?

AM: Yes, on 26 February 2015 morning at the Central Bank with participation of Finance Minister, Minster of Highways and advisory to the Prime Minister.

De Silva PC then questioned Mahendran on a letter provided by him to the Commission signed by former Minister of Finance Ravi Karunanayake. De Silva PC asked if the letter confirms that a request was made from the Governor on 26 February 2015 to raise Rs. 75 billion in a month’s time urgently needed for road development project, to which Mahendran answered in affirmative. When asked as to how he got the said letter, Mahendran said the letter was given by then Finance Minister in June 2016 as a refreshment of memory as to what took place at the 26 February 2015 meeting. According to Mahendran, he requested the said letter prior to going before the second COPE subcommittee investigating into the Treasury bond issue.

Mahendran then explained that he noted the Central Bank failing to meet the requirements and falling short. Given the large amount we were tasked to raise, we had to take drastic action, Mahendran explained.

Mahendran also said that he felt the need to signal the market that the government wants to move to a market friendly approach. “By this time auction method has completely ceased. I wanted to change that.” he continued.

RSPC: So it was in that background this Treasury bond was advertised?

AM: Yes.

RSPC: How much was advertised?

AM: 01 billion at 12.5 coupon rate.

RSPC: Why advertise for 1 billion when the requirement was 13.5 billion?

AM: I was not sure why. I had discussed with the Deputy Governor in charge and other officials as how to raise this money. They told me that they are going to advertise 01 billion as the government requirement.

RSPC: But why?

AM: They told me that if they advertised higher, the market would be aware of the high requirements and the yield would go up. The PDD officers told me that it is their preferred way of advertising. They also said that they could raise the rest of the money through Private Placements, of which I was not particularly happy with. But I gave them the benefit of the doubt.

Explaining further Mahendran said, “I was expecting the Secretary to the Finance Ministry to send me an amended cash flow following this sudden requirement of 13.5 billion. But the amended cash flow requirement only came in by the end of April.” Allegations were leveled against Mahendran that the cash flow requirement for the month of March does not indicate the said sudden government requirement.

De Silva PC then questioned on Mahendran if he was confident that the Public Debt Department would raise approximately 10.5 billion within the short period of time including a weekend in the given background.

“I was informed of the attempts to raise money through private placements about a week before the auction was held. But they were only able to raise 3.5 billion. The attempt must have started by 25 February 2015.” Mahendran said. “I asked them if it is feasible for them (PDD) to raise 12.1 billion through private placements. They said they are raising. So I told them it was a test of their ability to raise this amount.”

Mahendran was then questioned as to why he walked into a Market Operation Committee meeting held on 27 February 2015 morning. According to Mahendran, he was informed of a rise in net open positions to high level and of a falling forward exchange rate, of which he wanted to speak with Dr. Nandalal Weerasinghe, who was the Deputy Governor who was responsible for Policy Advisory cluster.

AM: I usually start my office hours by 7 in the morning. I reached my office and asked my secretary to see if Dr. Weerasinghe was available. My secretary then let me know that he was in a meeting, which was the MOC meeting. The meeting was held adjacent to my office.

RSPC: So you went into where the meeting was held?

AM: Yes, I walked into the room. I did not realize he was chairing the meeting. I did not want to drag him out of a meeting for me to talk. I told him about the concern I has and told him that I was worried about the condition. While discussing, Dr.Weerasinghe suggested changing the 5% penal rate and going for 6.5%. I argued on my points on the removal.

The decision on the rate cut was taken by the MOC, I suggested and they discussed and agreed. Following the meeting, Dr. Weerasinghe walked into my office with a file and informs me about the decision. I take the full responsibility of this decision which was conquered by the MOC.

De Silva PC then requested Mahendran to what transpired when he walked into the Public Debt Department on 27 February 2015. Many Central Bank officers who testified before the Commission gave evidence suggesting that a Governor walking into the PDD when an auction was going on was not usual.

AM: When I went down to PDD, the officials told me 20 billion bids were received. I went to the PDD twice. I was waiting for results of the auction. I walked around the PDD< had a meeting and just after noon, I went again to the PD.

RSPC: With whom?

AM: At the first time, I went with two officers including a security officer who followed me almost everywhere. The second time, I had two Deputy Governors accompanying me to the PDD.

RSPC: How is the bidding done?

AM: Electronically.

RSPC: Can you gain anything from this auction?

AM: No, I went there to get the results of the auction. I was also keen to find how PDD operates. I wanted to see for myself how it operates.

RSPC: Then you saw a document?

AM: Yes. The PDD officials showed me the bid sheet. It was around 12.15 noon.

RSPC: Were the information in the bid sheet gives out the identity of the bidders?

AM: No.

RSPC: So then you saw the bid results?

AM: Yes, The bids received were 20 billion. It was one of reliefe I felt. PDD officers were pescimistic about raising money through public auctions. This showed that the private sector had an appetite in invest in government bonds. It was also a good sign for the amount of 72 billion requirements.

I then asked the PDD officers if we could accept all 20 billion bids, Mahendran explained. “But she (referring to Superintendent of Public Debt Deepa Seneviratne) told me there were dummy bids among the 20 billion bids. According to her these are bids at ridiculously high rates. That was the first time I heared of such a dummy bid.” Mahendran explained.

RSPC: So ultimately what happened?

AM: They told me the reasonable amount to accept was 10.5 billion. The ideal coupon rate was 12.5 and the yield rate was 11.75. If 01 billion was accepted, the yield rate could have been somewhere around 10.5 where as if 10 billion it was only 11.75 yield rate.

RSPC: So in whose hands the final decision was?

AM: In the Tender Board.

RSPC: So the final decision to take the 10.5 billion was a tender Board decision?

AM: Yes.

RSPC: Did the PDD submit an option sheet to the Tender Board?

AM: They should have.

RSPC: Then the Tender Board took a decision to accept the 10.5 billion?

AM: Yes.

RSPC: The decision of the Tender Board was sent to you?

AM: Yes.

RSPC: You could have vetoed the decision?

AM: Yes.

RSPC: But you did not?

AM: No I did not. I was fully involved in the acceptance process.

Asked if he ever discussed about his business matters with his family, Mahendran said he never discussed such matters with his family. In a lighter tone, De Silva PC asked if he would have spoken of private placement with your wife, to which Mahendran with a smile answered, “No, She would not have been interested!” Amusement was also apparent when Mahendran explained as to why he did not reside in the Bank House, which is the official residence of a CBSL Governor. “The bank house was in a very bad condition. It was not maintained well. Furniture was basic. There was dog urine on the carpets.” Justice P.S. Jayawardena was curious to know who lived at the Bank House before. “I believe it was the previous Governor.” Mahendran answered.

Meanwhile, Mahendran told the Commission that he wanted to address serious issues in the Central Bank which has caused the CBSL to incur losses up to Rs. 39 billion in 2013-2014 years. Following his appointment, Mahendran said he was keen to solve these issues because the CBSL cannot make losses.

“The most worrying thing was that the Central Bank had incurred losses. Large losses. In the year 2013-2014 in their reporting year, from the numbers I got from the Chief Accountant, it was indicated that the loss was over Rs. 39 billion.” Mahendran said.

“This was rather shocking, because CBSL cannot make losses as they have license to print money. So this showed that there was something pretty rotten at the heart of the Central Bank. So I wanted to attend to this matter really fast,” Mahendran said. He explained that his decision to relocate staff and restructure the operations came following this concern.

Mahendran is to testify before the Treasury Bond Commission today as well.