Mahendran pleads ignorance over ‘State Banks meeting’ summoned by Ravi

By Shehan Chamika Silva

* It was revealed that the Central Bank (CBSL) had advertised a Bond auction to be held on March 24, 2016, (before the March 29 and 31 auctions) where the state banks had placed their bids at a much higher rate (the prevailing market rate) which was ultimately cancelled

* According Mahendran the Tender Board had decided not to accept the bids received at March 24, 2016 auction due to the higher rates received at the auction

* Senior State Counsel Shaida Barrie states that in the back drop of the State Banks being asked to bid at lower rates at the March 29 and 31 auction,  PTL gained considerable advantage as Aloysius had received the precise ‘cut off’ point (rate) about the March 29, 2016 auction which was revealed through a deleted phone conversation

* SSC Shaida Barrie says State Banks bidding low at primary auctions helped PTL to gain a monopoly in the secondary market transactions 

Former Central Bank Governor Arjuna Mahendran today told the Presidential Commission of Inquiry (PCoI) that he was unaware about the two meetings summoned by former Finance Minister Ravi Karunanayake, where he had asked the state banks in the presence of public officials to bid at a lower rate at the March 29 and 31, 2016 Treasury Bond auctions with a guarantee that the Central Bank would not accept other bids at a higher yield rate.

During the continuation of former Governor Arjun Mahendran’s Cross-examination Senior State Counsel (SSC) Shaida Barrie questioned him over the two meetings summoned by then Finance Minister Ravi Karunanayake at the Finance Ministry on March 29, and 31, 2016.

Today’s proceedings revealed that the Central Bank (CBSL) had advertised a Bond auction to be held on March 24, 2016, which was ultimately cancelled. According to SSC Shaida Barrie, at the scheduled March 24 auction, the state banks had placed their bids at a much higher rate (the prevailing market rate) and hence there was competition with regard to the bids.

According Mr. Mahendran’s testimony, the Tender Board had decided not to accept the bids received at March 24, 2016 auction due to the higher rates received at the auction.

Later, on March 29, 2016 and March 31, 2016, the Central Bank of Sri Lanka had held two bond auctions to raise funds to the Government. The advertised amount at the March 29, 2016 auction was Rs. 40 billion and it had ultimately accepted Rs. 76 billion. The advertised amount of the March 31, 2016 auction was Rs. 25 billion and the accepted amount was Rs. 50 billion.

During startling evidence by eight witnesses from the three state banks (BoC, NSB and People’s Bank), before the PCoI it was revealed on October 4, 2017 that former Finance Minister Ravi Karunanayake had asked the state banks to bid at lower rates at these two bond auctions with the assurance that other bids at higher rates would not be accepted. However, on both occasions at those auctions the CBSL had accepted bids much more than the advertised amount and at much higher rates.

It was revealed that former Finance Minister Ravi Karunanayake had held two meetings on March 28, 2016 (before the first auction) and March 30, 2016(before the second auction) with the state banks at the Finance Ministry.

Senior State Counsel Shaida Barrie stated yesterday that in the back drop of the State Banks being asked to bid at lower rates at these auctions (March 29, 31) Perpetual Treasuries Ltd (PTL) gained considerable advantage as Aloysius had received the precise ‘cut off’ point (rate) about the March 29, 2016 auction which was revealed through a deleted phone conversation.

There was a deleted phone conversation earlier played before the Commission where, Aloysius was instructing his CEO Palisena on how to bid at the March 29, 2016 auction referring to vital information (including cut off rate) he received from a “friend in the Department” and “friends in powerful places.”. This conversation took place during mid-morning on the March 29 auction day.

Aloysius in the conversation says that there was a “state banks meeting” that had taken place closer to that day. According to what happened at that meeting, Aloysius tells Palisena the exact rates at which the state banks (NSB, BoC, and People’s Bank) would bid at the March 29, 2016 auction.

SSC Shaida Barrie: Now you are aware that according to the evidence led before this Commission, former Finance Minister Ravi Karunanayake had asked the state banks to bid at lower rates, right?

Witness Mahendran: Yes, I was not here listening to the proceedings but got to know from the media reports.

SSC Shaida Barrie: So, would it be a distortion of the Market, if the Public Debt Department knew about this meeting and the Minister’s assurance to the state banks, but still went on to accept bids at higher rates?

Witness Mahendran: There are two things here. First is the instruction given by the Finance Ministry to the state banks to bid at lower rates. I don’t know whether that was true or false. As far as the Public Debt Department (PDD at (CBSL) is concerned the PDD got bids at those auctions and considering the Governments fund requirements they had accepted it. When those bids keep coming, they compare it with the previous auction and select the necessary cut off rate. Then gives to the Tender Board for approval and then comes to me for the final approval. That is the process.  Don’t confuse PDD’s matters with what the Finance Ministry does.

At this moment the Senior State Counsel said that there was a phone conversation between an official of the Treasury Operation Department of People’s Bank and Mr. Sarathchandra (Superintendent of the PDD at that time), where the People’s Bank official was seeking an assurance over the undertaking given by the Minister at the meeting on the rates.

Mr. Sarathchandra in the phone conversation says that he would convey the message to the Tender Board.

It was also revealed during the evidence of eight officials of NSB, BoC and People’s Bank that there were several officials present from the CBSL and the Treasury at the two meetings held with Minister Ravi Karunanayake.

At this moment Counsel Chanaka de Silva who was appearing on behalf of Mr. Mahendran objecting to the questioning moved that it was not fair to question on something which happened between third party witnesses.

The Commission was also concerned about the relevancy of the questioning.

SSC Shaida Barrie was of the view that these two auctions happened during Mr. Mahendran’s watch, so that whether he would take the responsibility on those auctions.

However, the witness said that he had absolutely no knowledge of the meetings.

SSC Shaida Barrie said that there was significant market uproar at that time regarding the two auctions that took place on March 29 and 31.

“There are uproars in various markets, this country is practicing a wide range of democracy and everybody was shouting due to that”, said witness Mahendran.

At this moment Justice Jayawardena smiled and replied “That is true.”

When the Senior State Counsel continued to question Mahendran on the PTL’s advantages in the secondary market due to the state banks bidding at lower rates at the primary auction, Counsel Chanaka de Silva objected and said that it was based on the third party evidence and not fair to be put the witness.

He also observed that the Superintendent of the Public Debt Department was also not questioned on this regard and the officials at the Public Debt Department were treated as angels.

SSC Shaida Barrie: I suggest to you that before the March 29 and 31, 2016 auctions then Finance Minister Ravi Karunanayake had asked the state banks to bid at a lower rate at the auction on the undertaking that other bids at higher rates would not be accepted. Therefore PTL on the other hand gained an advantage having possessed the precise cut off rate at the auction. Their bids were accepted at a much higher rate than the state institutions so that they gained a monopoly at the secondary market.

W: I have no any knowledge on any of these events and I can’t comment.

SSC Shaida Barrie: But those auctions took place during your tenure as the Governor. Have you heard of these things?

W: I’ve never heard about them. I got to know about them through news papers. And there should be a proper investigation. Nobody had investigated about them in great depth therefore. I don’t think anybody could come to this conclusion.

Justice Prasanna Jayawardena: Now the bids placed at the March 24 auction were not accepted on the rationale of high rates, right?

W: Yes

Justice Jayawardena: Subsequently, on March 29, 2016, the bids were accepted?

W: Yes

J: Were you informed anything about meetings conducted by the Finance Ministry with the state banks before the auctions?

W: No

J: Did the PDD inform you about the Finance Ministry’s meetings with state banks?

W: No

In the meantime during yesterday’s proceedings, when Mahendran was questioned on the decision which had been taken by him to suspend the Direct Placement method, he said he took the decision on the auction day (February 27) after he entered the auction floor (PDD) for the secondtime and it was his sole individual decision.

According to Mahendran it was explained that, he was having continuous discussions with the Monetary Board and other relevant officials at the CBSL to suspend the Direct Placement Method (DPM) before the February 27, 2015 auction.

According to his testimony it was revealed that he had discussed also with the Prime Minister regarding the suspension of the DPM and on February 24, 2015 the Prime Minister agreed to suspend the DPM.

While questioning, Senior State Counsel Shaida Barrie observed that under the Monetary Law Act, relating to the CBSL, there was no provision to its subject Ministry to give directions regarding Monetary Policy decisions and it should only come from the Monetary Board.

The Presidential Commission of Inquiry (PCoI) comprising Justice K.T. Chitrasiri (Chairman), Justice Prsanna Jayawardena and retired Deputy Auditor General Velupillai Kandasamy, will meet again at 10 am on Monday (10) and Deputy Solicitor General Milinda Gunetilleke will cross-examine witness Mahendran.