Mahendran questioned on conflict of interest as son-in-law was a primary dealer

Mahendran questioned on conflict of interest as Son-in-law was a primary dealer

The witness said yesterday that on February 24, 2015, the Prime Minister precisely advised him to stop direct placement and raise funds through public auctions only.

Mahendran says he decided to stop Direct Placement Method on Feb. 27, 2015 after the auction floor closed and got the Monetary Board approval on March 6

By Shehan Chamika Silva

Additional Solicitor General Dappula De Livera today questioned former CBSL Governor Arjuna Mahendran on whether he had conveyed information relating to the Government’s immediate fund requirement of Rs. 15 billion to Aloysius, since PTL’s total bid at the February 27, 2015 auction was a ‘magical figure’ similar to the Government’s requirement.

Continuing the cross-examination of Former Central Bank Governor Arjuna Mahendran, Additional Solicitor General Dappula De Livera yesterday questioned the witness for the second day after a break of on week of the Presidential Commission of Inquiry (PCoI) proceedings.

At the very beginning, ASG DeLivera questioned the witness on the appointment of the CBSL Governor in January 2015 and the legally bound oath that had to be administered before assuming duties in the position.

It was said that Mr. Mahendran had not taken an oath as the Governor of CBSL at his appointment in January 2015.

ASG De Livera was of the view that section 164 of the Constitution requires the person who was about to hold the position of CBSL Governor should take an oath.

However, Mr. Mahendran replied that he was unaware about that law.

“Are you pleading ignorance of the constitutional provision?” ASG De Livera asked.

Mr. Mahendran said: “It was not ignorance. I was never asked to do so and was told that there was no necessity”

ASG De Livera was of the view that it was a mandatory requirement of a person who was serving in a corporation and the oath would reflect on serving the country faithfully.

ASG De Livera: I suggest to you that you never took an oath. And it was a grave omission with regard to the post you held in the country

Witness: Can’t answer on that.

ASG: You had no intention of serving the country but only yourself and the son-in-law.

Witness: Completely disagree.

ASG De Livera thereafter moved to the February 27, 2015 incident and questioned again about the auction process.

ASG De Livera: You walked into the Public Debt Department (PDD) twice on that day. And on the second visit to the PDD, you came with two other Deputy Governors (Dr Weerasinghe and Ananda Silva). So you called them didn’t you?

W: It was a collective decision to go to the PDD

ASG: These two Deputy Governors gave evidence before this Commission in contradiction to your stance and would there be any reason for them to lie?

W: That I don’t know. I didn’t call them. It was a collective decision.

It was revealed that Mr. Mahendran, Dr. Weerasinghe (Dep. Gov.), Ananda Silva (Dep. Gov.), Mrs. Muthugala (Superintendent of PDD), Dr Aasim and Ms. Srimali (official of PDD) were present at the PDD when the decision was discussed regarding the auction around 12.30 pm on February 27, 2015 after the auction floor was closed.

ASG De Livera was of the view that Dr. Aasim and Mr. Mahendran had an argument with regard to the acceptance volume of the bids. ASG Livera said that Dr Aasim had informed Mr. Mahendran about the PDD’s recommendation of only Rs. 2.6 billion to be accepted from the auction.

Mr. Mahendran however said that there was no argument took place at that moment and it was only a counter proposal of Rs. 2.6 billion to be raised through the auction and rest of the money to be raised through Direct Placement Method. (fund requirement of the time was amounting to Rs. 13.5 billion by March 2)

“I was skeptical about the PDD’s capacity. So, I said if I were you I would have accepted Rs.10.05 billion from the auction and walked away. It was a civil argument”, Mahendran said.

It was explained that after the suggestion by Mr. Mahendran, the PDD had prepared another option sheet recommending Rs. 10 billion to the Tender Board (TB), where the final approval would be given before the Governor’s signature.

After a series of questions, ASG Livera suggested to the witness that he had directed the PDD to first accept Rs. 20 billion and after the discussion at the PDD, he reduced that amount to Rs. 10 billion.

However, witness Mahendran said he never directed the PDD to do so, because he had only made the suggestion to the PDD considering the huge government fund requirement at that time.

ASG De Livera: PDD made a recommendation of Rs. 10 billion to suit your direction, right?

W: Disagree

ASG: You prevented PDD officials from making an independent recommendation to the Tender Board and you prevented them making a recommendation of Rs. 2.6 billion, which they considered as appropriate, right?

W: I never prevented them

ASG: The recommendation (Rs. 10 billion) of yours sent to the Tender Board had no economic basis, wasn’t it?

W: Disagree.

At this moment, Justice Prasanna Jayawardena questioned the witness.

Justice Prasanna Jyawardena: You became aware about the PDD recommendation of Rs. 2.6 billion after visiting the PDD for the second time, right?

Witness: Yes. Dr Asim told me about it holding an option sheet.

J: Subsequently, another option sheet had been prepared recommending Rs. 10 billion which is similar to your suggestion or the direction as the ASG said.

W: Yes

J: The second option sheet (Rs. 10 billion) which replaced the Rs. 2.6 billion option sheet was precisely what you suggested to the PDD, right?

W: I can’t say precisely on the first option sheet and can’t say the option sheet reflect someone’s view.

Justice Chitrasiri at this moment asked: The PDD would have recommended only Rs. 2.6 billion if you wouldn’t have suggested such an amount, right?

Witness went on to explain what made him to suggest Rs. 10 billion in the backdrop of the Government’s urgent fund requirement.

Justice Jayawardena: There was an option sheet recommending Rs. 2.6 by the PDD and another option sheet thereafter recommending Rs. 10.05 billion, which coincide with your suggestion, right?

W: Yes

ASG Dappula De Livera: You initially suggested to the PDD to accept Rs. 20 billion (all bids at the auction) without knowing or verifying the rates at which the bids had been placed at the auction.

W: I only asked, can we take Rs. 20 billion.

ASG: You went there with the sole purpose of accepting Rs. 20 billion at any cost and you were not considered about the rate but only at fixing the auction.

Witness Mahendran completely rejected that stance.

It was explained that after the discussion at the PDD around 12.30pm on February 27, 2015, Mr. Mahendran had visited his daughter’s residence at Flower Road to have lunch and had returned around 2.00 p.m.

It was revealed that at this moment the Tender Board (TB) meeting had taken place regarding the bond auction at the CBSL and Mr. P. Samarasiri had chaired it.

During the deliberations of the meeting Mr. Samarasiri had telephoned Mr. Mahendran questioning about the situation and at that moment the witness said he was in the car.

“Mr. Samarasiri said that TB members indicated to him about the suggestion made by me regarding the acceptance of Rs. 10 billion. So I told him about the reasons that made me take that decision”, the witness said.

The witness while explaining said that there was a miscalculation by the PDD with regard to the thirty year bond appetite in the market and that made him suggest to accept Rs. 20 billion.

ASG De Livera: So, you told him to take Rs. 10 billion?

Witness: I didn’t direct him. I told that it was reasonable.

When questioned, the witness was of the view that Mr. P. Samarasiri had not conveyed to him about any disagreement among the members of the Tender Board over the acceptance of Rs. 10 billion nor conveyed about the request made by the members seeking an immediate meeting with the Governor.

ASG Dappula De Livera: I suggest to you that Mr. P. Samarasiri and you connived to prevent the Tender Board members from changing the decision.

Witness totally rejected that stance.

ASG De Livera thereafter moved the questioning to a new area and asked about the governments Rs. 75 billion fund requirement discussed at a meeting held on February 26, 2015 with Ministers Ravi Karunanayake, Kabeer Hashim, Prime Minister’s Advisor at that time Malik Samarawickrame and other RDA officials.

However, the witness also explained to the Commission about an immediate Rs. 15 billion fund requirement which was discussed at that meeting on February 26, 2015.

At this moment, ASG De Livera intensively objecting to the witness’ stance said that he had never mentioned about a Rs. 15 billion fund requirement in his previous testimony. The ASG was of the view that it was he who drew the attention over the remark made by the Prime Minister in Parliament on March 2015, stating about a funding requirement of Rs. 15 billion.

ASG De Livera was of the view that earlier the witness had stated about an urgent fund requirement of Rs. 75 billion and had submitted documentary evidence in a letter given by the then Finance Minister Ravi Karunanayake, to the Commission which reflects a Rs. 75 billion money requirement.

The ASG said that even the then Finance Minister Ravi Karunanayake had not mentioned about a Rs. 15 billion urgent requirement before the Commission. ASG De Livera said the witness was contradicting his own evidence at the moment.

However, Mr. Mahendran said there was a halt in road development projects at that time due to funding issues and at the February 26 meeting the ‘economic research department’ officials had suggested a Rs. 15 billion requirement to start those paused projects immediately.

Justice Prasanna Jyawardena questioned at this moment: However that was the funding requirement for the March of 2015 and not an immediate requirement in February 2015, right?

Witness: Yes

ASG Dappula De Livera questioning the witness suggested that there was no single word reflected in the statement given by the witness to the first COPE (D.E.W. Gunasekara) regarding such an urgent fund requirement.

ASG: You did not utter a single word about an urgent fund requirement to this COPE?

W: I have to check about that.

ASG: You had mentioned about neither a Rs. 15 billion nor a Rs. 75 billion urgent requirement any time in 2015, right? There was no such requirement. Your testimony is false.

W: Can’t answer that without checking.

It was revealed that a Cabinet sub committee meeting took place on February 24, 2015 in the presence of Mr. Mahendran, the Prime Minister, Ravi Karunanayake, Kabeer Hashim, Dr Harha de Silva, Saman Ekanayake, Dr Samaratunge (Secretary to the Treasury) and other RDA officials, where matters relating to road development projects were also discussed.

ASG De Livera submitting the minutes of that meeting said: “These minutes say that all RDA projects should be prioritized with the available funds. So there was no decision taken at that meeting regarding an urgent fund requirement”.

However, the witness was of the view that the minutes would not state what was exactly discussed at the meeting.

At this moment ASG De Livera brought out the minutes of another meeting held at Temple Trees with the same people on March 3, 2015. He said that even in that meeting such urgent fund requirement for RDA projects had not been discussed.

The ASG was of the view that the witness was unable to support his stance with other evidence except the document provided as AM 22, which was given to him by the then Finance Minister verifying the holding of a meeting on February 26, 2015.

After a short adjournment of today’s proceedings, ASG De Livera questioned Mr. Mahendran again about the urgent fund requirement of Rs. 15 billion.

ASG De Livera: This Rs. 15 billion is a magical figure wasn’t it?

W: Can’t see any magic in it.

ASG: At the February 27 auction, it was only Rs. 1 billion that was advertised and somehow your son-in-law’s company bid 15 times more than the advertised amount, right?

W: Yes

ASG: So, Aloysius received 50% of the accepted bids (Rs. 10.05 billion)

W: Yes

ASG: And PTL had bid 15 billion at the auction, which is 75% of the total bids, right?

W: Yes

ASG: So, don’t you think this Rs. 15 billion is a magical figure?

W: No

ASG: As a stand alone Primary Dealer, how would he have this information?

W: I can’t answer for him

ASG: Would you consider this practice as unusual of a primary dealer?

W: I told this earlier also. PTL would have gone bankrupt if all of the Rs. 15 billion were accepted.

ASG: So, Rs. 5 billion of PTL was ultimately accepted at the auction. When compared with the track record of PTL it was a lifetime achievement, wasn’t it?

W: I don’t know about lifetime achievement. That was well within the permitted regulatory amounts.

ASG: Have you given a gift to Arjun Aloysius by providing price sensitive information?

W: No

At this moment President’s Counsel Romesh De Silva observed that the ASG was denying about a requirement of a Rs. 15 billion at one point but contrary to that again he questioned about the Rs. 15 billion requirement relating to the Auction.

However, ASG De Livera said that the Commission was in the process of revealing the truth, so that he needs to question the witness.

During this questioning it was also revealed that there was a Criminal investigation initiated by the Criminal Investigation’s Department as well on the Bond issue.

When questioned it was also revealed that Mr. Mahendran in his capacity as the Governor had never initiated an internal inquiry regarding the February 27, 2015 auction. According to the witness, when the ‘Pitipana Committee’ was appointed by the Prime Minister to scrutinize the incident Mr. Mahendran had voluntarily kept away from his position until the investigation was over.

ASG De Livera and the Commission thereafter questioned the witness regarding the decision to stop the use of the ‘Direct Placement Method’.

According to the witness, the Prime Minister had been instructing him to have a transparent process in CBSL matters since his appointment as the Governor in January, 2015.

Mr. Mahendran said he interpreted that this transparency should include the procurement process at the CBSL as well.

The witness said yesterday that on February 24, 2015, the Prime Minister precisely advised him to stop direct placement and raise funds through public auctions only.

And thereafter, on February 27, 2015, 12.30 p.m. Mr. Mahendran had decided to stop raising money through the direct placement method and told the PDD to accept funds only through public auctions, after the February 27 auction floor was closed. This auction was however, initially advertised for only Rs. 1 billion and the raising of other money was expected to be done through direct placements.

During a series of questions, Justice Prasanna Jayawardena asked the witness: Be careful of facts of your evidence. According to you the Prime Minister wanted public auctions in so many words, right?

W: Yes

Justice Jayawardena: And you conveyed this to the PDD on February 27, 2015?

W: Yes

J: Did the Prime Minister tell you about the complaints received by him from Primary Dealers regarding Direct Placements?

W: Yes

J: Who were those Primary Dealers?

W: That I didn’t know

The witness was of the view that he was told by the Prime Minister at the meeting held on February 24, 2015 to stop the direct placement method.

It was revealed that there was a Monetary Board meeting on February 23, 2015 and another on March 6, 2015.

It was said that in order to implement the policy decision to stop the Direct Placement method, it had to go through the Monetary Broad.

However, on this occasion, Mr. Mahendran had decided about stopping direct placements on February 27, 2015 and then obtained the approval of the Monetary Board later on March 6, 2015.

ASG De Livera questioning the witness contested that there was no decision taken by the Monetary Board with regard to the Direct Placement method on March 6, 2015.

However, the witness was of the view that there was no objection raised at that meeting held on March 6 and rejected the ASG’s stance saying that there was another occasion in June, 2015 where, the Monetary Board did not re-instate the Direct Placement method.

At this point, Justice Prasanna Jayawardena questioned the witness.

Justice Jayawardena: You have said that you and the Prime Minister were having discussions over the removal of the Direct Placement method?

W: Yes

J: So, why didn’t you discuss about that at the Monetary Board meeting held on February 23?

Witness was silent for a while and said “Yes I did not talk about it at that meeting”.

During Justice Jayawardena’s further questioning it was revealed that the witness had provided information to the Prime Minister continuously regarding shortfalls of the Direct Placement Method and then based on that instruction, the Prime Minister had decided to stop DPM on February 24, 2015.

However, ASG De Livera also submitting the Minutes of the February 24, 2015 cabinet sub committee meeting said that the minutes reflect no decision regarding the Direct Placement Method at that meeting.

The witness said “Minutes are very sketchy. I would say that what transpired at the meeting are not reflected in the minutes”

“You are lying again”, ASG said

“I’m not”, said the witness.

ASG: According to your evidence, you were privy to this information (about the stoppage of Direct Placement Method) from February 24, 2015, right?

W: Yes

ASG: And the auction was held on February 27, 2015, right?

W: Yes

ASG: Would it be correct to say that it was you who conveyed this vital information to Arjun Aloysius before the auction?

W: Not at all.

ASG: And that information enabled Aloysius to succeed in the auction.

W: Totally disagree. I would not have done such a foolish thing destroying my carrier after having an experience in the field for years.

ASG: You never expected to testify before this Commission, wouldn’t you?

W: Since my appointment, I was well aware about this issue and therefore I had to work always in arms length with Aloysius. I never discussed matters with my Son-in-law.

ASG: You, daughter and son-in-law, Aloysius, lived in the same house at flower road, right?

W: Yes

ASG: So, when did you got your appointment as the Governor?

W: January 23,2015

ASG: At that time Aloysius was the CEO of Perpetual Treasuries Ltd, right?

W: That I didn’t know

ASG: Don’t you know about what your Son-in-law does (asked in a sarcastic manner)

W: No

After a series of questions, the witness said that he was unaware about the ownership of the companies relating to the PTL but knew about who were running the Company.

ASG: Aloysius resigned from his position as the CEO on January 16, 2015, and that is well before your appointment right?

W: He told me something to that effect. Even though my appointment was given on January 23, it was communicated to me a week before.

ASG: That was not known to the General Public. So, how would Aloysius have known it?

W: I would have told them

ASG: You told him, right?

W: Yes

ASG De Livera in a sarcastic manner quipped at this moment that “it tells that you have been telling him things quite earlier since January 2015”

The witness was of the view that considering the potential conflict of interest between Aloysius and him, he maintained an arms length distance in his CBSL matters with Aloysius as there was also speculation in Media with regard to that interest at that time.

ASG: Why did Aloysius resign from PTL?

W: That I can’t answer.

ASG: So, considering the potential conflict of interest, why didn’t you decline the position as the Governor?

W: I talked about this matter with others too and subject to the proviso that I would do my activities keeping an arms length, I continued.

ASG: So, the Prime Minister agreed to your stance and continued with the post, having known the conflict of interest, right?

W: Not only the PM other Ministers also agreed to it.

ASG: So, having known the fact that you would have to approve the Tender Board decisions on bids and having known the fact that you would be the regulatory supervisor regarding the bond auction, you still continued to hold the position as the Governor?

W: Despite the conflict of interest, I practiced the arms length distance in my activities as the Governor of CBSL.

ASG: Show us what your arms length would be like.

Witness raised his hand and the court room burst out in laughter.

Justice Prasanna Jayawardena at this moment made an observation in relation to the revelation that transpired during the previous proceedings.

Justice Jayawardena considering that two wrong doings don’t’ make it right, said that there was also an incident where former Governor Cabral’s sister happened to be a director of PTL in 2014.

The Justice also said that this has happened in the past and that past practice should not be an excuse for what happens in the future.

Justice Jayawardena also quipped: “Wonder whether Nivard Cabral and his sister lived in the same house too”.

Questioning the witness on his relationship with Aloysius, ASG De Livera questioned the witness whether he had ever disclosed about the relationship to the CBSL. 

The ASG was of the view that Mr. Mahendran had not disclosed it to the Monetary Board or the CBSL and the witness said that he could prove that he did.

Justice Jayawardena finally asked the witness.

J: You saw potential conflict of interest, right?

W: Yes

J: And maintained an arms length due to that

W: Yes

J: Despite all other things, do you think it was appropriate to live in the same house with Aloysius, who was a primary dealer.

W: Yes. I never consider it bad, because in my family we don’t talk about such matters with each other.

When Justice Jayawardena asked about comparable incidents where he and his family ever worked with potential conflict of interest, earlier the witness was of the view that when he was working at the HSBC bank in Singapore his daughter was an analyst in an investment company while his son was an employee at the KPMG audit firm.

Justice Jayawardena: Are you really telling that these two instances are comparable to living with a Primary Dealer while being the Governor of CBSL?

W: Yes

At the end of the yesterday’s proceedings Justice Jayawardena observed that the Commission was concerned about the time constraints and therefore would like to finish its proceedings by next week considering the importance of writing the report.