‘I inisited Mahendran should ensure Aloysius’ resignation as director of PTL’

I, Ranil Wickremesinghe, the Prime Minister and Minister of National Policies & Economic Affairs of “Temple Trees”, Colombo 3 being a Buddhist do hereby solemnly, sincerely and truly declare and affirm as follows,

1. I am the affirmant above named.

2. The PRESIDENTIAL COMMISSION OF INQUIRY TO INVESTIGATE, INQUIRE AND REPORT THE ISSUANCE OF TREASURY BONDS DURING THE PERIOD 01ST FEBRUARY 2015 TO 31ST MARCH 2016, by letter dated 10th October 2017 has sought my replies to the questions set out in the document annexed thereto marked “A”. Accordingly, in response to the said questions I have set out hereunder my answers from my personal knowledge and upon a perusal of the relevant documents.

3. The said questions and my replies thereto are as follows;

[1] Question number 1 is as follows-

“Mr Arjuna Mahendran, former Governor of the Central Bank of Sri Lanka (CBSL) has testified before this Commission of Inquiry that, sometime in early January 2015, you invited him to accept appointment as the Governor of the CBSL.

Is Mr Mahendran’s claim correct?”

My reply is as follows-

Yes. It is correct that sometime in January 2015, 1 Invited Mr Arjuna Mahendran to serve as the Governor of the CBSL of Sri Lanka (CBSL)

[2] Question number 2 is as follows-

“In terms of Section 12 of the Monetary Law Act No. 58 of 1949, as amended, the Governor of the CBSL is to be appointed by His Excellency, the President on the recommendation of the Minister in charge of the subject of Finance.

Was Mr Mahendran appointed to the post of the Governor of the CBSL on a recommendation made by the then Hon. Minister of Finance and/or on a recommendation made by you as the Hon. Minister of National Policies and Economic Affairs (which is the Ministry under which the CBSL has been placed)?”

My reply is as follows-

Upon the formation of the new Government in January 2015 there was a general consensus within the Government that Mr Mahendran should be appointed to the post of Governor of CBSL. I discussed the proposed appointment with the then Minister of Finance who agreed that Mr Mahendran was the most suitable candidate. Accordingly, the then Minister of Finance with my concurrence recommended to His Excellency the President that Mr. Mahendran should be appointed. His Excellency the President acting upon the said recommendation appointed Mr Arjuna Mahendran as the Governor of the CBSL.

[3] Question number 3 is as follows-

“If the answer to Question [1] above is in the affirmative and/or the answer to Question – [2] above is that a recommendation was made by you, please briefly state the reasons why you considered Mr Mahendran to be a fit and proper person to be appointed the Governor of the CBSL?”

My reply is as follows-

Mr Mahendran was selected for appointment in view of his professional qualifications and experience in the field of banking and investments. He had functioned as the Chairman of the BOI during the period 2002 to 2004. He had also held senior positions in the banking industry in Middle East and Singapore. The previous incumbent lacked comparable qualifications and experience and the administration of the CBSL during his tenure of his office had been the subject of severe criticism. Hence, prior to the General Election of 2015 there was a general demand from our political allies that a competent person versatile in banking and International finance should be appointed to the post of Governor of the CBSL.

[4] Question number 4 is as follows-

“At the time of Mr Mahendran’s appointment as the Governor of the CBSL, he was not a citizen of Sri Lanka.

lease briefly state your views on the suitability of a person who is not a citizen of Sri Lanka, performing the duties of the Governor of the CBSL.”

My reply is as follows-

Although at the time of his appointment Mr Mahendran had ceased to be a citizen of Sri Lanka, he was nevertheless, of Sri Lankan origin. He used to regularly visit his parents who were resident in Colombo and as such he had an abiding interest in, and connection with Sri Lanka. Many Sri Lankans had left the country for positions abroad due to the unsettled conditions prevalent in the country at various times.

The fact that Mr Mahendran was not a citizen of Sri Lanka did not affect his suitability or eligibility and was not a legal impediment to his appointment as the Governor of CBSL. In this context, it is to be noted that the very first Governor of the Central Bank, namely, Mr. John Exeter had been an American national. Likewise, Mr. Mark Joseph Carney who is not a British subject but a Canadian national is the current Governor of the Bank of England.

[5] Question number 5 is as follows-

“The evidence before this Commission of Inquiry suggests that, Mr Mahendran’s son-in-law Mr Arjuna Aloysius, was the Chief Executive and a Director of the Primary Dealer named Perpetual Treasuries (Pvt) Ltd, in the year 2014 and up to sometime in January 2015, when he is said to have resigned from both posts. The evidence also suggests that, even after the aforesaid resignations in January 2015, Mr Arjuna Aloysius continued to be a Shareholder and Director of Perpetual Capital Holdings (Pvt) Ltd., Perpetual Capital (Pvt) Ltd, which was the ultimate owner of Perpetual Treasuries (Pvt) Ltd.

(i) In 2015 and 2016, were you aware of the matters referred to above?

(ii) If the answer to Question [5](i) is in the affirmative, did you consider that, the aforesaid matters raised a potential conflict of interests which could confront Mr Mahendran in the performance of his duties as the Governor of the CBSL?”

My reply to 5(i) is as follows-

I was aware that Mr. Mahendran’s son-in law Mr. Aloysius was the Chief Executive and Director of the primary dealer Perpetual Treasuries (Pvt) Ltd.

My reply to 5(ii) is as follows-

When Mr. Mahendran was offered the post of the Governor of the CBSL, I insisted that he should ensure that Mr Aloysius would resign as a Director of Perpetual Treasuries (Pvt) Ltd, and not involve himself in the business activities of that company in anyway. I also strongly recommended that the best course would be for Mr Aloysius to divest himself of his shares in the company. This was conveyed by me both to Mr Mahendran as well as to Mr Aloysius. Subsequently, I became aware that Mr Aloysius had in the month of January itself resigned from the post of Chief Executive Officer and Director of Perpetual Treasuries (Pvt) Ltd. I also became aware that however he remained a Shareholder of that company and he initimated that he would divest himself of the shareholdings as soon as possible. On expressing my concerns on this account, Mr Mahendran reassured me that Mr Aloysius would not under any circumstances play any role in the business activities of the company. I had every confidence in the assurances given by Mr Mahendran and as such I had no reason to apprehend that any conflict of interest would be faced by Mr Mahendran in functioning as the Governor of the CBSL.

[6] Question number 6 is as follows-

“In any event, did you inquire from Mr Mahendran with regard to any potential conflict of interest arising from the fact that Mr Mahendran’s son-in-law, Mr Arjuna Aloysius was known to be closely connected to a Primary Dealer?

If so, what did Mr Mahendran tell you?”

My reply is as follows-

I did on several occasions convey to Mr Mahendran my concerns about a possible conflict of interest arising from his son-in-law Mr Aloysius having a connection with a, Primary Dealer. Mr Mahendran as set out above reassured me that Mr Aloysius would not engage in the activities of the company as indicated above. In view of the circumstances, I was confident as set out above that a situation of a conflict of interest would not arise.

[7] Question number 7 is as follows-

“The evidence before this Commission of Inquiry suggests that, although Mr Arjuna Aloysius is said to have resigned from the posts of Chief Executive and Director of Perpetual Treasuries (Pvt) Ltd sometime in January 2015, he continued to play an active role in the day to day operations of that Company from then on during 2015 and 2016?

Were you aware that, Mr Arjuna Aloysius continued to play an active role in the day to day operations of that Company even after he is said to have resigned from the posts of Chief Executive and Director of Perpetual Treasuries (Pvt) Ltd. sometime in January 2015?”

My reply is as follows-

I was aware that Mr Aloysius had resigned from the post of Chief Executive and Director of Perpetual Treasuries (Pvt) Ltd, in January itself. But, I was totally unaware of any role that he may have played in that company after his resignation. I was confident that in view of the assurances given to me by Mr Mahendran that Mr Aloysius would not participate in the conduct or affairs of the company.

[8] Question number 8 is as follows-

“Mr Mahendran has testified before this Commission of Inquiry that, in January 2015 and February 2015, he had conveyed to you alleged unsatisfactory features in the then prevailing practice of the CBSL raising funds by way of “Private Placements” [also sometime termed “Direct Placements”] of Treasury Bonds.

Is Mr Mahendran’s aforesaid statement correct?”

My reply is as follows-

The unsatisfactory features in the practice of CBSL raising funds by way of private placements was a matter of grave concern and severe criticism during the tenure of office of the previous Government. This issue had been raised in the public domain by civil society and had been the subject of discussion in Parliament. It was alleged that the favourites of the then Government had been given an opportunity by reason of the acceptance of private placements of making unconscionable profits as there was no transparent selection of the beneficiaries. With the formation of the new Government in January 2015, this subject was discussed at several Ministerial meetings at which relevant officials were present. Mr Mahendran was also present at some of these meetings and he too agreed that the system of resorting to private placements was unsatisfactory.

[9] Question number 9 is as follows-

“Mr Mahendran testified before this Commission of Inquiry that, sometime in early February 2015, you instructed him that, all procurements made by the CBSL should be carried out “in a transparent manner”.

(i) Is Mr Mahendran’s aforesaid statement correct?

(ii) If the answer to Question [9](i) is in the affirmative, did such instructions given by you also apply to the raising of Public Debt by the Public Debt Department?

(iii) If the answer to Question [9](ii) is in the affirmative, what did you intend to convey when you instructed that, the raising of Public Debt by the Public Debt Department should be carried out “in a transparent manner”?”

My reply is as follows-

(i) Yes. This was applicable not only to CBSL but also to all Departments and Institutions under the purview of my Ministry.

(ii) Yes. As I stated above, the raising of funds by way of private placements of Treasury Bonds had been subject to severe criticism as it was completely devoid of any transparency. The Monetary Board had authorized the issuance of Treasury Bonds either by way of private placements or by way of public auctions. It was the view of all concerned in the new Government that in order to achieve more transparency the raising of funds by way of Public Auction was preferable to the private placement method. This view was conveyed to Mr Mahendran.

[10] Question number 10 is as follows-

Mr Mahendran has subsequently claimed before this Commission of Inquiry that, on 24th February 2015, you instructed him that, the practice of accepting Private Placements of Treasury Bonds should be stopped. Mr Mahendran went on to suggest that, he interpreted that alleged instruction to mean he should immediately stop the practice of accepting Private Placements of Treasury Bonds.

Did you, in fact, instruct Mr Mahendran, on 24th February 2015, to immediately stop the practice of accepting Private Placements of Treasury Bonds?’

My reply is as follows-

As I stated earlier, the acceptance of private placements of Treasury Bonds was regarded as unsatisfactory primarily due to lack of transparency. In addition, the policy of the new Government was that the rates of exchange and of interest should be determined by market forces, and not be pegged down artificially. It was for these reasons that we advocated that Treasury Bonds be accepted mainly through Public Auction. Mr Mahendran as the Governor of CBSL was aware of this. At that time the practice was for majority of the bonds to be issued by recourse to private placements and the balance by Public Auction. Therefore, in February 2015 when I was informed that the CBSL was to issue bonds to raise funds, I insisted that Mr. Mahendran should consider the issuance of Bonds by way of Public Auction in accordance with the economic policy of the Government and I expected that he would comply with due procedure.

[11] Question number 11 is as follows-

“The evidence before this Commission of Inquiry suggests that, any sudden stoppage of the practice of accepting Private Placements of Treasury Bonds was likely to significantly impact the Government Securities Markets, the Treasury Bond Yield Curve and Interest Rates paid and offered by Bank, especially since, by February 2015, the practice of the CBSL accepting Private Placements of Treasury Bonds had become entrenched in the Government Securities Market and Private Placements accounted for over 80% Public Debt raised by way of Treasury Bonds during a period of two years or so. Further, the evidence before this Commission of Inquiry suggests that, in terms of the Monetary Law Act and the procedures which then prevailed in the CBSL, any proposal to stop the entrenched practice of accepting Private Placements of Treasury Bonds, should be considered by the Monetary Board and decided upon by the Monetary Board, before it was implemented.

If your answer to Question [10] above is in the affirmative, in the light of the aforesaid considerations, what did you expect Mr Mahendran to do in pursuance’ of any instruction you may have given to him, on 24th February 2015, with regard to Private Placements?”

My reply is as follows-

During the tenure of the office of the previous Government, the determination of interest rate in the Government securities market had been distorted by moving away from a market based mechanism. This had led to a loss of investor confidence.

To the best of my knowledge, private placements were not entrenched in the securities market.

Furthermore, as private placements invariably took funds from captive sources such as the EPF, the beneficiaries of such funds received diminished returns on their savings. Our policy has always been to encourage market mechanisms and to further macro economic liberalization including the rates of interest and exchange to be determined by the market. Therefore, traders and other relevant stakeholders would have reasonably expected a return or revival of the public auction system as much as possible as envisaged in the CBSL manual in determining interest rates. Consequently, any adverse impact on the market would have been minimal in the short term and off set by long-term investor confidence.

In the circumstances, it was expected that Mr Mahendran would take appropriate steps in accordance with due procedures to give effect to the objectives of the Government as expeditiously as possible in the light of concerns expressed by me.