By Himal Kotelawala
A senior Attorney General Department official assisting the Presidential Commission of Inquiry on the controversial bond issuance yesterday suggested that Former Central Bank Governor Arjuna Mahendran had interfered with due process in the 27 February 2015 treasury bond auction, thereby influencing its outcome. Mahendran denied the allegation, claiming that bids were accepted in concurrence with the then CBSL deputy governors and senior Public Dept Department (PDD) officials, with the objective of raising funds to meet the unprecedentedly massive requirements of the Government.
Acting Solicitor General Dappula de Livera in his cross-examination of Mahendran said the Former Governor had meddled with the due process, with an ulterior motive in mind.
“I totally reject that,” said Mahendran.
Suggesting that Mahendran had “dragged” his two deputy governors, Dr. Nandalal Weerasinghe and Ananda Silva with him to the PDD the second time he is said to have visited it, de Livera said that evidence the two had given, under oath, was that neither of them knew where they were even going.
“They went with you because you called them,” he said.
“We all agreed to go,” countered Mahendran, explaining that his two deputies had come into his office “because we had a problem.”
A sum of Rs. 172 billion had to be raised in March 2015, and Mahendran, he claimed, did not have the “foggiest” on how the Central Bank was going to do that.
“I was expecting them to guide me,” he said, adding that he had then suggested to them to go along with him to the PDD to see how much money the auction had raised.
de Livera, however, argued that, contrary to Mahendran’s pronouncements, Rs. 172 billion was not a big amount for the PDD to raise; but Mahenran insisted that, given the Bank’s track record the previous two months via private placements, it was a “massive amount.”
“There was no hope of them raising that amount at the time,” he sad, adding that the fact that the PDD was not worried had had him worried.
At this point, Commissioner Justice Prasanna Jayawardena inquired, since Mahendran could not have known how much had bid by way of private placements, if he had testified earlier that he discussed the small amounts raised (through private placements) in his office, would that testimony have been false.
de Livera then recounted that, at the PDD, Mahendran was with the two deputy governors, then Superintendent of Public Debt Deepa Seneviratne and her two Additional Superintendents U. L. Muthugala and Dr. M. Z. M. Aazim.
The Acting Solicitor General put to the Former Governor that, once Superintendent Seneviratne had told him that some 20 billion had been received, he had instructed her to “take 20.”
“I asked her, “can we accept 20?” said Mahendran.
“You told her “take 20,”” said de Livera.
“I disagree,” replied Mahendran.
Both Seneviratne and Dr. Aazim, said de Livera, had objected to their Governor’s proposition.
Denying this, Mahendran claimed that Dr. Aazim had informed him that taking the whole 20 billion would’ve raised interest to unacceptable levels due to what is known in the trade as dummy bids – bids placed by primary dealers, according to Mahendran, at “ridiculously high” rates of interest when they don’t wish their bids to be accepted. Dr. Aazim, he claimed, had said “we can take something reasonable.”
de Livera, however, maintained that the Additional Superintendent had argued with the Governor on the basis that accepting 20 billion would’ve created a shock in the market, to which, according to do Livera, Mahendran had said “take 10.”
“I don’t recall that,” responded Mahendran, reiterating that he had simply asked Dr. Aazim how much would’ve been a reasonable amount to accept.
Seemingly unsatisfied with this answer, the Acting Solicitor General stressed that Dr. Aazim had, in fact, presented his case “no less than five times,” defending the PDD’s recommended amount of Rs. 2.6 billion.
The bid sheet was in his hand, he said, and the PDD officials were about to exit the premises and make their way to the Tender Board when Mahendran had “barged in.”
“I did not barge in,” said Mahendran.
When de Livera suggested that he had insisted on accepting 10 billion, Mahendran said he did not insist on the amount but had simply asked Dr. Aazim to, once again, suggest a “reasonable” amount as the Central Bank had to raise Rs. 13.5 billion by the following Monday.
de Livera then said that Mahendran had told the PDD officials to go back to the pre-September 2014 rate and told PDD Superintendent Seneviratne to take 10 billion.
Mahendran denied this, claiming he had said “if I were you, I would accept 10 billion” to her and had walked off.
The Acting Solicitor General then said when Mahendran first visited the PDD on the day of the auction, he had known the PDD was going to accept 1 billion, the amount advertised, as well as the coupon rate. However, on his second visit, suggested de Livera, he had not heeded the advice of the Additional Superintendent of Public Debt.
“It was not advice,” said Mahendran, but rather a civil conversation.
Citing the evidence said to have been given to the Commission by Muthugala, de Livera then said Mahendran had “ordered” Superintendent Seneviratne to accept 10 billion.
“I totally disagree,” said Mahendran.
“You took the bid sheet from Dr. Aazim, and you looked at it. You drew the cutoff,” said de Livera, an allegation which Mahendran denied.
The witness then went on to explain the context in which he had been shown the bid sheet.
According to Mahendran’s testimony yesterday, 13.5 billion was the realistic amount CBSL could’ve raised, given the fact that private placements had apparently not generated much. He claimed that Dr. Aazim had told him that if a line was drawn at the 10 billion mark, it would’ve been the rate at which the coupon equaled the highest bid – 12.5% would correspond to the 12.5% of the highest bid under 10 billion. The weighted average rate of all the bids would be 11.73%, he said, adding that he had then asked him what the weighted average rate of the previous 30-year bond auction held in May 2014 had been.
“He said 11.75%.”
Given that some Rs. 2 billion had been raised at that particular action, Mahendran said he had remarked that his suggestion seemed to be a ‘very good solution,” in that the Central Bank would get 10 billion, five times the previous amount, at a rate slightly below 11.75%.
de Livera, however, argued that rates had already been going down anyway.
“They were brought down artificially,” responded Mahendran.
“They were down, artificially or otherwise,” countered de Livera, adding that what Mahendran did had an adverse effect on the rates.
“You shocked the market,” he said, pointing out that after the 27 February auction, market rates shot up sharply.
Primary dealers other than Perpetual Treasuries (Pvt) Ltd (PTL), said the senior official, was “up in arms” about this development.
“I disagree,” said Mahendran.
de Livera then went on to suggest that the Former Governor had “fixed” the yield rate and volume at the auction – a decision, he said, that nobody had agreed to.
“I totally disagree,” said Mahendran.
Having failed at getting PDD officials to accept 20, de Livera went on, the Former Governor succeded at 10 billion at a rate of 11.73%. Mahendran refuted this.
“You did not prescribe the yield rate?” asked de Livera.
“No, I said ‘this is something I would agree to,’” answered Mahendran.
Going to be Mahendran’s second visit to the PDD, de Livera said he was told by PDD officials that their recommendation to the Tender Board was 2.6 billion.
Calling the procedure prescribed by the rules, regulations and manuals of the CBSL “due process” – a legal term Mahendran claim to not understand – de Livera said the Former Governor had interfered or stifled or meddled with the due process.
“I totally reject that,” countered Mahendran.
Ravi Karunanayake’s letter contradictory to Prime Ministers statement – Additional Soicitor General
Cross-examining Former Central Bank Governor Arjuna Mahendran before the Presidential Commission of Inquiry on the controversial bond issuance, Acting Solicitor General Dappula de Livera yesterday alleged there’s an “absolute contradiction” in the statement made to Parliament by Prime Minister Ranil Wickremesinghe on 17 March 2015 and a letter issued by Former Finance Minister Ravi Karunanayake with regard to funds said to have been requested from the Central Bank.
de Livera went as far as to suggest that Mahendran had “concocted” his testimony about two Government Ministers, namely Karunanayake and Kabir Hashim, asking the Central Bank to raise Rs. 75 billion for urgent road development projects, leading up to the 27 February 2015 auction.
The Prime Minister had in his statement, recalled de Livera, that there had been an urgent funding requirement of Rs. 15 billion, which he said was a “glaring contradiction” to Karunanayake’s statement (bearing No. AM22).
Mahendran disagreed, claiming that there had been references to medium term and short term requirements. Rs. 15 billion had been initially needed by at least the beginning of the following week, and a further Rs. 75 billion subsequently.
At this point, de Livera accused Mahendran of lying, calling this particular testimony a material contradiction. Citing testimony by senior Treasury officials who, according to de Livera, had said there was no documentation for such a request to their knowledge.
“I totally disagree,” said Mahendran.
Asked if Mahendran still advances his assertion that there was this urgent funding requirement in the face of “all this evidence,” the Former Governor said that it was “verbally indicated” to him by the Ministers and that it was on the back of his mind on 27 February, the day of the auction.
Pointing to the bids made by Perpetual Treasuries (Pvt) Ltd (PTL) that day, de Livera then said said the primary dealer had bid a total of 15 billion. When Mahendran said there was no reference to a 15 billion on the bid sheet, de Livera said Bank of Ceylon had bid 13 billion on behalf of PTL. The private company, it transpired, had bid only 2 billion on its own.
de Livera asked how PTL had arrived at this “magical figure” of 15 times the offered amount.
Mahendran agreed that it was, indeed, unusual for a primary dealer to bid that many times the offered amount.
“It would’ve bankrupted them,” he said, explaining that, as per evidence led before the Commission, PTL did not have sufficient funding to meet that amount.
When de Livera said it seemed coincidentally match the amount in the Premier’s statement, Mahendran pointed out that that the PM had also referred to Rs. 100 billion in his speech.
In order for PTL to have bid so successfully (to the tune of 5 billion at the auction – 50% of the amount taken), de Livera asked Mahendran if it was possible that the company had access to price sensitive information.
“It doesn’t necessarily follow. There’s no connection between having price senitive information and bidding 15 billion,” said Mahendran.
Asked again to explain how he thought PTL would’ve managed to capture 50% of the market at 11.73%, having bid 15 times the offered amount, the Former Governor said the company had been “very aggressive” in making bids, and attributed its success to borrowing “enormous amounts” which he said was not the norm.