PM relied on info given by Mahendran and Samarasiri

(b) Shouldn’t that ‘due procedure’ have included approval of the Monetary Board and a considered analysis backed by data and discussion with all relevant stakeholders?

(c) As you were aware of the conflict of interest that Mr. Arjuna Mahendran had, did you not consider it prudent to verify and satisfy yourself that the ‘due procedure’ has been followed?

(d) In light of the procedure that was adopted by the present Monetary Board in moving to a new system of issuing treasury bonds, do you not consider the abrupt stopping of Direct Placements by Mr. Arjuna Mahendran to have been irresponsible and reckless, to say the least?”

My reply is as follows-

25 (a) and (b): As stated previously, my expectation was that the bonds should be raised mainly through public auctions. In my previous response to questions 10 and 11 (in the first set of questions) what I stated was that ‘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.’

In this regard the due procedure I expected Mr Mahendran to follow was to work within the rules and guidelines set by the Monetary Board and follow best practices relating to the running of a Central Bank. Beyond this, I was not expecting to give any instructions or exercise any supervisory role.

(c): As stated earlier, I had no reason to believe that Mr Arjuna Mahendran would face a conflict of interest, and there was no special reason to satisfy myself that due procedure had been followed.

(d): Initially the primary concerns conveyed to Mr Mahendran were the lack of transparency and the failure to take into account the market forces, which arose with regard to private placements. It would appear that Mr Mahendran had secured the stoppage of direct placements to address this issue.

I subsequently became aware that, applying the experience of the Sri Lankan money market, and based on expert advice obtained from experts including the US Treasury, the Monetary Board has reviewed the system and adopted a modified system with regard to the issuance of bonds.

The process is periodically reviewed and thus I do not think that Mr Arjuna Mahendran’s abrupt stopping of Direct Placements could be considered irresponsible or reckless, as it was intended to address the lack of transparency associated with the private placement system, and also as the private placement system was not premised on market forces.

13. Question number [26] is as follows-

“[26] In Response to question No.11, you have stated that the previous government had moved away from a market based system in determining the interest rates in government securities, thereby distorting the market. You also say that there was a loss of investor confidence. In this context–

(a) Why have you now permitted a reversal of the fully auction-based system to a hybrid system, notwithstanding those concerns?

(b) Don’t you agree that the present system permits control of the interest rates in phase one of the system?

(c) Even during the fully auction-based system, wasn’t the Central Bank attempting to control interest rates by issuing treasury bills to itself?

(d) Is your reference to investor confidence accurate, as the outflow of foreign funds continued to take place during the pendency of the fully auction-based system?

(e) Is your reference to market confidence accurate, as the evidence shows that the EPF and other State-owned funds have simply shifted large volumes of purchases from the primary market to the secondary market?

(f) When you refer to the market, did you occasion any study with regard to the nature and structure of Sri Lanka’s Government Securities market?”

My reply is as follows-

26 (a) There has not been a reversal of the auction system.

The CBSL presented to the Cabinet Committee on Economic Management:

i. a short to medium Debt Management strategy to address issues of the Public Debt

ii. Recommendations with regard to liability management of the Public Debt portfolio including a proposal with regard to the enactment of a Liability Management Bill

iii. Proposals for ensuring Low Inflation in Sri Lanka

iv. Proposals with regard to a primary issuance system for Treasury Bonds

Following past experience, and expert advise, the current modified auction system was devised by the Monetary Board after reviewing the working of the ongoing Auction based system. I had no role in devising the said system.

In fact the first phase of the current system also involves a pure auction.

On 19th July 2017 the Cabinet Committee on Economic Management decided that the new system will also be reviewed in March 2018 and improved if necessary.

26 (b) and (c)

Phase I of the present system is purely auction based and therefore provides the best safeguards against fraudulent manipulation of interest rates by third parties. I am informed that since the introduction of the new system for Bond issuance, each of the three issues raised all the money required, solely through auction as envisaged in the first phase.

However the Central Bank has control over interest rates, to the extent that it decided the volume of bids that should be accepted, and the rates upto which bids should be accepted.

The Central Bank can also control rates by issuing bills to itself.

It is correct that CBSL did absorb the Treasury Bills to contain upward pressure on interest rates when they were not aligned with market fundamentals.

However, I am informed that as the Government’s fiscal performance improved, the CBSL has significantly reduced its holding of Treasury Bills.

I am advised that this experience has also been taken into consideration in devising the current bond issuance system.

26 (d) International Capital Flows are influenced by a number of factors such as international trends which are beyond our control.

For instance the United States has embarked on a cycle of raising interest rates. As a result there have been periods when there were large-scale capital outflows from emerging markets as a whole, not only Sri Lanka.

26 (e) For many years investment decisions of the EPF and state owned funds were distorted, as considerations other than commercial logic drove the allocation of their investment funds. The investment behaviour of these entities cannot therefore be considered an effective barometer of market sentiment.

26 (f) This is a matter for the Monetary Board and the management of the CBSL as well as my Advisors.

14. Question number [28] is as follows-

“[28] In response to question No.12 you have also stated that Mr. Mahendran informed you on the evening of 26.02.2015 that he may be able to raise money far in excess of Rs.1 billion through the 27.02.2015 bond auction. in this context

(a) In the history of treasury bond auctions conducted up to that time, generally only 2-3 times more than the advertised amount had ever been raised at previous treasury bond auctions. So, do you know on what basis he gave you this assurance with such confidence?

(b) Did you not raise any concerns about raising volumes far in excess of the amount advertised?

(c) Did you not consider the implications on the interest rates?

(d) Did you not consider it to be a transparency and due process concern, if an amount far in excess of the advertised amount was to be accepted?

(e) Did you question Mr. Mahendran on the tenure of the bond and whether raising large volumes on a long tenor bond was in fact in the best interest of the economy?

(f) Did you satisfy yourself whether the Treasury in fact required such large volumes to be raised through this auction or whether some other funding mechanism would be availed of in respect of the RDA’s request for funds?

(g) There is undisputed evidence that Rs.15 Billion of the Rs.20 Billion worth of bids received at the auction of 27th February 2015 had been submitted by Perpetual Treasuries Ltd. (directly and through Bank of Ceylon). In hindsight, do you consider this as a strange coincidence or a deliberate manipulation?”

My reply is as follows-

28(a) The offer of only Rs. 1 Billion through the 27th February 2015 Bond Issue was in my view, and some of the market participants, an extremely low figure.

The CBSL’s rationale for offering such a small amount was based on their concerns regarding uncertain market conditions in the wake of the formation of a minority coalition government during the previous months. In this context it was considered prudent to offer a small amount to the market as a means of containing the interest rates borne by the bids. Notwithstanding the Central Bank’s opinion, the private sector sentiment (which the Governor and many of us became aware of) was that there was potential for raising a far higher amount.

Furthermore, as can be seen from the Bond issuances since 2010 (which is evident from the document issued by the Central Bank and annexed hereto as X6) the market is capable of raising well in excess of Rs. 1 billion.

Hence, it was not an unreasonable expectation that an amount much in excess of Rs. 1 billion could be raised from the market.

In addition, by the time of the Bond Issuance of 27th February 2015, there was a very strong case for raising a sum far in excess of Rs.1 billion. It was becoming increasingly apparent that large amounts of money would be necessary to meet the Government’s obligations (as I have explained previously) including an extremely large amount of unsettled bills from the period of the previous regime, for which no provisions had been made.

28. (b), (c), (d), (e), (f) – Since I did not concern myself with the day-to-day operations of the CBSL including Bond issuances, these were not matters for me.

28. (g) I am not privy to the evidence before the Commission, or the attendant circumstances. As such I am unable to comment.

15. Question number [29] is as follows-

“[29] In response to question No.15, you have stated that your officials have traced in your Secretary’s computer, a briefing note forwarded by former Deputy Governor of the Central Bank, Mr. P. Samarasiri and you have produced same annexed to your Affidavit dated 20.10.2017 as X1. In this context –

a) On what date did you receive this briefing note?

b) Since the briefing note does not contain a date, author or addressee, was it sent to you with a covering letter?

c) Since it appears that what is available in your possession is a soft copy of this briefing note, was such document sent to your office via email by former Deputy Governor Mr. P. Samarasiri?

d) If the answer to the above is in the affirmative, are you able to produce that email?

e) Did you satisfy yourself of the accuracy of the contents of the briefing note?

f) In paragraph 3 of the briefing note, referring to the past practice of the Public Debt Department, it is stated that the ‘underlying assumption was to prevent high yields in the market due to pressure from high government borrowing’. Did you consider prevention of high yields/cost implications to GOSL as a reasonable policy concern?

g) Paragraph 5 of the briefing note refers to ‘internal senior management concerns” and that ‘at the time of the auction, the senior management was considering to impose an interim suspension on direct placements’. Did you satisfy yourself of the accuracy of this statement?

h) Are you aware that a member of the Monetary Board at the time has denied any such discussion having taken place?

i) Paragraph 6 of the briefing note states that ‘it was an opportune time to stop direct placements… without affecting the long term interest rate structure that prevailed for at the time of the last 30 year bond issue in June 2014’. But, are you not aware that, after the bond auction, the short term interest rates in fact went up abruptly?

j) Did you not call for an explanation on causing such volatility in the market?

k) Did you consider policy justification for considering the interest rates that prevailed for 30 year bonds as far back as June 2014, when the market rates do not remain static and may well have moved downwards?

l) The briefing note refers to the removal of the 3rd layer of the policy rates. Are you aware that once again the briefing note is misleading, as the Governor had in fact removed the so called penal interest rate in the morning of the 27th February 2015, prior to the auction?

m) In light of the evidence that 75% of the bids received at the 27th February 2015 bond auction were submitted by or on behalf of Perpetual Treasuries Ltd., would you consider the statement in the briefing note that the auction was in the interest of the majority of the market to be misleading and false?

n) There is undisputed evidence before this Commission that many of the primary dealers had placed dummy bids at the 27th February 2015 bond auction, as that they did not in fact wish to invest in 30 year bonds. Therefore, isn’t the above statement in the briefing note misleading and false?

0) For the same reasons, isn’t the reference to ‘market information gathered from this auction’ also misleading and false?

p) What action would you recommend in respect of submitting a misleading, inaccurate and false briefing note to the Prime Minister?”

My reply is as follows-

In response to the questions contained in paragraphs 29(a)-(d), I state that, the briefing note was sent to, and received by, the official email of the Secretary to the Prime Minister (secpm@pmoffice.gov.lk) from Mr. P. Samarasiri, then Deputy Governor of the Central Bank (psamara@cbsl.lk) on 11th March 2015. There was no covering letter, and the note was attached to the email, a copy of which is annexed hereto as X7.

In replying to the questions raised at paragraph 29 (e) to (m) at the very outset I wish to state that I am only answerable to Parliament in respect of Ministerial statements made in Parliament.

Without prejudice to this position, I wish to state that whenever I am due to make a statement in a Parliamentary debate I obtain material and briefing notes from the official(s) responsible for the particular subject(s).

However, I do not use the entirety of the matters set out in these material and briefing notes. I only use what I feel is relevant, and which can be dealt with due to constraints of time.

With regard to this briefing note provided by the Chairman of the Tender Board, the only matter that was relevant to what was raised in Parliament was the reference to the events of 27th of February 2015 and that the interest rate was 11.73% compared to 11.75% in June 2014. The briefing note was used by me to that limited extent, and only to assist me in my speech in Parliament.

As far as the query in paragraph 29 (n) and (o), I wish to state that I am not aware of the evidence placed before the Commission.

In view of the matters set out above, the query in paragraph 29(p) does not arise.

16. Question number (32] is as follows-

“[32] In response to question No.20 and the reference in your statement to Parliament on 17th March 2015 that ‘the allegation that Mr. Mahendran interfered in the decision of the Tender Board was factually incorrect”, you have stated that you relied on the information provided by Mr. Mahendran and Mr. Samarasiri. In this context-

(a) In the context of the evidence given before this Commission by Mr. P. Samarasiri that the decision to accept Rs. 10 Billion at the 27th February 2015 was made subsequent to instructions received from Governor Mahendran by telephone, would you now consider the above Statement to Parliament as incorrect or misleading, or a partial rendition of the truth?

(b) As you have stated that neither you nor the Monetary Board were the proper authority to inquire into the issue, and given that you were aware of the lurking potential for conflict of interest, did you not consider it imprudent to deny interference on the part of Mr. Mahendran without first calling for a comprehensive study?”

My reply is as follows-

I note that the question concerns a statement made by me in Parliament, for which I am solely accountable to Parliament.

Without prejudice to this position, I reiterate that I relied on information provided to me by Mr Mahendran and Mr Samarasiri, and that the statement was made by me bona fide and in a responsible manner.

According to the information provided to me, I was informed that the Governor advised that in view of the requirements of the country, bids upto Rs. 10 Billion could be accepted, but had not interfered in the process of the award of bids.

I have already explained that there was no reason for me to suspect that any conflict of interest would arise.

I further state that as I am not privy to the evidence given before the Commission, I am unable to further comment.

17. Question number [33] is as follows-

“[33] In response to question No. 21, you have stated that you have instructed the Attorney General to take steps according to law against any persons who are culpable, irrespective of their status of party affiliation. Can you furnish a copy of these instructions?”

My reply is as follows-

I am producing herewith the following letters:

X8 Letter dated 31st October 2016 written by the Secretary to the Leader of the House of Parliament to the Hon. Attorney General as directed by me.

X9 Letter dated 2nd November 2016 written by my Secretary to the Hon. Attorney General

X10 Letter dated 7th November 2016 sent by the Attorney General’s Department, to my Secretary

In addition, the instructions given to the Attorney General, (who is the chief legal officer of the State, and its primary lawyer) to take steps according to law against any persons who are culpable were given by me orally, as was the established practise.

18. Question number [34] is as follows-

“[34] In response to question No.26, you have denied that you have provided any Minutes of Monetary Board meetings/papers to Mr. Aloysius and that you resent the insinuation. The text message is self-explanatory in that Mr. Aloysius’s Personal Assistant Steve Samuel appears to be reminding Mr. Aloysius to request you or a person named “RV to get a copy of the said documents. Therefore, why do you think Mr. Aloysius expected that he could make a such a request from you?”

My reply is as follows-

I reiterate that I did not agree to provide, or provide, copies of minutes of meetings of the Monetary Board / papers to Mr. Aloysius.

I further note that in terms of the question 26 in the first set of questions sent to me, the authenticity of the alleged text message appear to be doubted.

Thus, while I am unaware as to the authenticity of the alleged text message, even assuming same to be genuine, I am unaware and cannot comment as to the state of mind of the sender of the text message, or of Mr. Aloysius.

19. Question number [35] is as follows-

“[35] Are you aware that the Central Bank has taken regulatory measures against Perpetual Treasuries Ltd. prior to culminating in the suspension of the license?

(a) If so, did Mr. Arjun Aloysius speak to you about these measures?

(b) If so, when and where did Mr. Aloysius speak to you on this matter?

(c) If you had in fact discussed the matter with Mr. Aloysius, do you consider such action as having been appropriate in hindsight?”

My reply is as follows-

Yes, The Governor of the Central Bank informed that they were inquiring into Perpetual Treasuries and they had enough evidence to proceed against them. I therefore advised him to seek and obtain the advise of the Attorney General.

The Hon. Attorney General had appointed Mr. Milinda Gunetilleke, DSG and Mrs. Shaheeda Barrie, SSC to advise on same. In this regard I annex a copy of letter dated 8th November 2016 sent by Secretary, Ministry of National Policies and Economic Affairs to the present Governor of the Central Bank (and copied to inter alia the Hon. Attorney General) as X11.

(a) Mr. Aloysius sought an appointment from me in November 2016. Although he did not mention the purpose for which he sought the appointment, I granted the appointment.

(b) I spoke to Mr. Aloysius in November 2016, at my office at Temple Trees. He informed me that he wished to discuss the Central Bank inquiry into his Company. I told him that I had no powers with regard to same, and that he should make representations in writing. He subsequently forwarded written representations to me, which I forwarded to the present Governor of the Central Bank, since he is the authority on the matter.

(c) My discussions were limited to the matters set out in (b), which I do not consider inappropriate.

Affirmed to at Colombo on this 18th day of November 2017]

Concluded