Treasury Bond issue : Former CB Governor’s cross examination concludes

The Attorney General’s Department assisting the Treasury Bond Commission concluded the cross examination of former Governor of the Central Bank Arjun Mahendran yesterday.

Mahendran was extensively questioned on his involvement in an on sight investigation done on Perpetual Treasuries Limited and investigation on Employees Provident Fund over several transactions it has conducted in the Treasury Bond market.

Mahendran was also grilled over the meeting held by the former Finance Minister for allegedly instructing State Banks to bid low at Treasury Bond auctions on March 29 and 31, 2016.

At the wrapping up of cross examination, the matters of Mahendran’s conflict of interest with regards to his son-in-law Arjun Aloysius and on the allegation that Mahendran gave insider information to the same regarding Treasury Bond auctions which are being probed by the Treasury Bond Commission.

Deputy Solicitor General Milinda Gunatilake questioning Mahendran on the on sight investigation called for PTL in early 2016, observed that Mahendran has shown less enthusiasm in conducting investigation on his son-in-law’s company.

DSG MG: Are you aware that when you were the Governor, there was this regulatory process continued somewhere in September 2016 on PTL?

AM: Arjun Aloysius contacted me and he said that activities of his company have been suspended.

DSG MG: Are you aware of a report making it into the press regarding the report on PTL?

AM: Yes, there was a leakage of report.

DSG MG: Belonging to Perpetual Treasuries Limited?

AM: Yes. All I know is that there was an ongoing investigation. Not only with PTL but also on several other Primary Dealers as well.

DSG MG: Are you talking about the MB paper on Entrust? (A Primary Dealer)

AM: Yes we were very much concerned about the sanctity and confidence of investors in the market affected by Entrust which had gone under serious systematic events.

DSG MG: Entrust was restricted in November 2016?

AM: Yes, I heard so.

DSG MG: Are you aware that somewhere in July 2016, PTL’s license was cancelled?

AM: Yes I am aware.

DSG MG: Would it be possible that this whole process which culminated in PTL being suspended would have happened in January 2016 if that examination on PTL was conducted in January 2016?

AM: Not at all my lord. There were more PDs with whom we had similar issues in similar nature and attitude. I can bring those documents. There were more aggravating issues at that time. So we had to have our act together. And all the supervisory reports were gathered. For example, we issued a letter on HSBC primary dealer who had similar type of discrepancies to PTL. The HSBC closed down their PD. It is not that we gave special treatment to PTL. There was bad practice in the market.

DSG MG: You said compared to what went in the market, what PTL had done was a minor offense?

AM: No, I am not saying that. There was a shortage of officers as well to carry out all these investigations. The priority was to solve this Entrust issue. There were some documents put on my desk with regard to handing over Rs.2.5 billion of money to a company called Standard Finance. I was horrified at this. I asked why do we have to subsidize a finance company, but the Department insisted. Then, the Monetary Board immediately conducted an audit. That audit called for a thorough investigation into this company. Again to our dismay, we found out that the Central Bank has parked Rs. 6 billion in that PD which was lost up to date. These issues should have been addressed earlier. But, we had to prioritize them.

DSG MG: My question was as to why you took so long to transfer the regulatory functions of the PDD to the Supervision Department?

AM: We had an emergency MB meeting on January 1, 2016 to speak on this matter.

DSG MG: How are you in a position to judge that the PTL’s offense was less important or more important than the other investigation?

AM: It was not brought to my attention by the officers, my lord. They did not tell me that the PTL’s investigation is more important than the issue with the Entrust.

DSG MG: The on-sight examination clearly raises the alarm about some serious violations from the part of PTL in January. If that investigation was conducted vigorously, perhaps this Commission will not be sitting today?

AM: I completely disagree.

DSG Gunatilake then questioned Mahendran on gains by PTL in 2015 in the Primary and Secondary Bond Market and Employees Provident Fund’s biddings at an auction held on November 2,2015. He also questioned Mahendran on a decision with regards to installation of call recording system at the EPF.

DSG Gunatilake referred the witness to a document which was a summary of Treasury Bond sales and Capital Gains of the PTL for the month of November 2015.

He pointed out that these documents must have reached the Monetary Board by December 2015.

According to the document, PTL in 2015, have gained 89% of all the capital gains recorded by all stand alone Primary Dealers in the market.

It also shows that the most profitable Primary Dealer in the same year was the PTL. It was also evident DSG Gunatilake pointed out that 53% of the profits made by all Primary Dealers and licensed banks, was of PTL as well.

DSG MG: When you saw this document (Referring to the summery of Treasury bond sales in November 2015) in December 2015, was there anything you were concerned?

AM: No, not really.

DSG MG: In November 2015, EPF bought 12 bilion in the Primary Market where as it bought Rs. 45 billion in the Secondary Market. Did not this receive you with some concern?

AM: Not at all. On the contrary, they were doing their job. They are marking considerable profits from trading in Secondary Market.

They were doing so in 2014 as well, which was an outstanding effort and achievement from the EPF team. They were making substantial profits, even while their outflows were increasing. They had to find additional income in order to make up for the short falls.

DSG MG: Why buying from the Secondary market when they can buy from the Primary Market?

AM: You cannot predetermine how much you buy from the Primary Market. They have to compete with the others in the Primary Market. The solution to EPF getting more bonds in the Primary Market, will be to give a separate amount of bonds to the EPF. The Monetary Board can take a decision with effect to that.

DSG MG: On November 2, 2015, EPF did not buy Treasury bonds in the Primary Market. But they bought the same bond in the secondary market. Is this probe worthy?

AM: Yes.

DSG MG: You must have known about this contemporaneously?

AM: No.

DSG MG: But you were in charge?

AM: Yes.

DSG MG: You were sent daily summery reports from EPF?

AM: Yes. Data on these transactions were presented in December 2015. At theJanuary 2016 Monetary Board meeting, Krishantha Perera brought up this issue.

DSG MG: But why did you not inquire about it?

AM: There were several other high officials looking into the matter down the line.

My presumption on EPF’s conduct was that they acted in good faith. There could have been several reasons as to why they bought from the secondary market instead of the primary market. Several EPF officers reasoned out with regards to this decision as well.

DSG MG: I am asking you why you waited one month until Krishantha Perera raised this issue at the monetary Board?

AM: My lord, I am not perfect. Somethings slipped my gaze.

DSG MG: So this slipped your gaze?

AM: Yes

DSG MG: Have you acted then, it could have been different?

AM: I do not agree. We started inquring into this in January. BEPF superintendent recommended that certain lapses were noticed but it does not warrant any action being taken against the officer concered at that time. His recommendation was to keep watching the process and the officers concered.

DSG MG: Who were the officers?

AM: I do not recall exactly.

DSG MG: Could have been Indiaka Saman Kumara?

AM: Yes possibly. The Front Office also had several more officers working there.

Subsequent to more vigorous questioning by DSG Gunatilake, Mahendran admitted that it was a slip of his gaze due to which an expedite examination was not conducted on the said transactions done on November 2, 2015, by the EPF in the Treasury Bond market.

DSG Gunatilake then suggested that Mahendran purposefully delayed installing a telephone call recording system at the EPF.

Taking former Superintendent of the Employee’s Provident Fund, Assistant Governor R.A. Jayalath in to consideration, DSG Gunatilake suggested that Mahendran did not pay attention to a report prepared by Jayalath on certain malpractices taken place in the EPF.

In response, Mahendran said he requested Jayalath to conduct an investigation on the practices of EPF following a concern raised by Krishantha Perera at a Monetary Board meeting.

DSG Gunatilake asked Mahendran as to what prompt him top request for a probe. Mahendran said there was a “Kele Paththaraya” regarding the EPF because of which the concerns were raised and a probe was conducted.

Meanwhile, Senior Additional Solicitor General Dappula de Livera questioned Mahendran on a meeting chaired by former Minister Ravi Karunanayake where he alleged to have instructed the State Banks to bid at low rates at the March 29 and 31, 2016 Treasury Bond auctions. SASG De Livera asked Mahendran if he was aware or not about the aforesaid meeting. Mahendran denied knowing of any such meeting.

SASG de Livera then asked Mahendran if he was aware that his son-in-law was paying for a penthouse occupied by former Minister Ravi Karunanayake and his family. Mahendran said he never knew until it came up in evidence at the Commission.

SASG de Livera repeatedly questioned Mahendran on the penthouse until Commissioner Justice P.S.Jayawardena pointed out that “You have repeated the same question ten times now!”.

Mahendran’s Counsel President’s Counsel Romesh de Silva told De Livera that “he is making a speech!” while Aloysius’s Counsel Anuja Premaratne PC also objected the line of questioning. Justice Jayawardena then said, “Just let Mr. Livera say what he wants to say” and continued saying “It appears to be Mr. de Livera’s evidence!”. Following de Livera’s continued grilling of the witness, Justice Jayawardena said “This (De Livera’s statements) appears to be for the press!”.

Mahendran said he is unable to answer questions with regards to a penthouse or a meeting that he never knew. 

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