Initiating his testimony before the Presidential Commission of Inquiry (PCoI), Former CBSL Governor Arjuna Mahendran yesterday said he had never talked with his ‘son-in-law, Arjun Aloysius, or with anybody’ on matters with reference to the Central Bank of Sri Lanka while he was serving as the Governor.
President’s Counsel Romesh de Silva appearing on behalf of Mr. Mahendran led the evidence of Arjuna Mahendran.
At the onset of Mr. Mahendran’s testimony, it was explained that he had obtained academic qualifications with regard to the economics and finance from the Oxford University. He had also acquired more than thirty years of professional experience in different fields in the financial sector.
It was revealed that he had begun his professional career by joining the CBSL in 1982.
After the early 1990s, he had from time to time obtained considerable international experience in several leading commercial banks as an investment advisor. Between the time period 2001-2004, he had served as the Chairman of the Board of Investment (BOI).
After that, it was said, that he had served in a leading bank in Dubai as an investment advisor (wealth management) till 2014.
When Mr. De Silva led evidence from the witness, it was explained that he was asked to take up the CBSL Governor’s position on January 9, 2015.
It was said that his official appointment was given on January 23, 2015.
According to the witness, it was explained he had extended the ‘open door policy’ to the officials in the CBSL when he first assumed duties as the Governor, so that anyone could come to him over any matter and also allowed him to go to any place with regard to official matters in the CBSL.
Mr. Mahendran said that when he was serving first the CBSL in the 1980s former Governers, Mr. Rasaputhram and Dr. Karunathilleke had also been in the practice of walking around the Department to look around.
He also explained the difference between the Public Auction system and the Private Placement Method (Direct Placement) used in raising governments funds by the CBSL.
He said when he assumed duties as the Governor; it was the Private Placement Method (PPM) which was dominating in raising funds.
According to Mahendran he was not in favor of PPM for many analytical reasons and had discussions with several Deputy Governors in this regard.
He was of the view that the Public Auction system is more suitable since it happens only between two parties where negotiations could happen outside any market prevailing norm and also to ensure more participants when raising money for the Government.
He said that in latter part of the January and in the beginning of the February, 2015, the Government was in need of funds.
According to the Mahendran, his advice on that occasion to the Government was to keep borrowing without suddenly stopping because it could lead to much chaos in the country’s economy.
He said that he was of the view at that time that more borrowings could be obtained from the private sector within the country to avoid an economic crisis since at that time the Government was paying 90% of its revenue for the payments on borrowings.
When questioned by Justice Prasanna Jayawardena, the witness said that he had discussed about these matters with the Government officials on January 22 and 23, 2015 including the PPM system which was used to raise money.
Mr. Mahendran said he raised the issue on the way in which the CBSL had previously managed the Government’s debt at the time he assumed duties.
He was of the view that the CBSL was not managing Government debt properly at that time. Showing an example, he said “there was a Sovereign bond repayment to be made on January 22, 2015 amounting to Rs. 500 million and the CBSL had no mechanism as how to pay it without losing the Foreign Reserves of the country”, he said.
Mr. Mahendran also said that the CBSL had sustained a loss of Rs. 39 billion in year 2013 and 2014 and that was a shocking result.
He said with the newly appointed Government (in 2015), Prime Minister Ranil Wickremesinghe wanted transparency in the Government and thereby he also wanted to bring transparency into the CBSL.
He said therefore, he had examined the entire organizational structure and the line of command and the fault lines which had caused these losses to the CBSL with the assistance of the other Deputy Governors.
It was explained there were three Deputy Governors in the CBSL below the Governor.
Mr. Mahendran was also of the view that there was a conflict of interest in the structure of the CBSL as the EPF and the Public Debt Department was under the same Deputy Governor. So he wanted a change.
According to the witness he had introduced three new clusters to the CBSL re-allocating the subjects.
‘Policy Advisory’ - headed by Deputy Governor Dr. Nandalal Weerasinghe. This is the Cluster which contains domestic and international operations including the EPF.
‘Financial regulations and development of the financial activities in the country’- headed by Deputy Governor P. Samarasiri. This is the cluster which contained PDD, banks and non- bank institutions.
Third cluster was ‘Capacity Building,’ which relates to consumer protection and regulations aspects.
Mr. Mahendran was also of the view that he had to transfer several officials who had been serving more than five years at one particular section at the CBSL, because according to the CBSL law it was mandatory to do so.
Mr. Mahendran said that he made all of these changes only in good faith considering the losses that had been sustained by the CBSL over the years.
It was also said that there were Attorney General’s Department officials attached to the CBSL who were instructing on the legal matters relating to the CBSL.
The witness said that he had conveyed about these transfers to them but none of them said that these transfers were bad.
Going into the controversial February 27, 2015 auction, Mr. Mahendran explained his stance as to what happened prior to that auction and thereafter.
Mr. Mahendran said on February 23, 2015 he was told by the Secretary of the Treasury through telephone that there was a fund requirement of Rs. 13.5 billion by March 2, 2015.
He said on February 26, 2015 a meeting took place between himself, the then Finance Minister Ravi Karunanayake, Minister Kabeer Hasheem and Advisor to the PM at that time Malik Samarawickrema.
At this meeting Mr. Mahendran was asked to raise urgent money for the Government within one month period amounting to Rs. 75 billion for the purpose of Road Development.
He also said that when he was asked to give evidence before the COPE in June, 2016 regarding the bond issue, he had requested on June 7, 2016 from the then Finance Minister to send a letter verifying holding of this meeting and about the discussions that had taken place. That letter was later received to the Governor referring those matters from the then Finance Minister.
He also said according to cash flow statements of the treasury the required funds for the Government for the month of March were amounting Rs. 172 billion.
He also said that the treasury had informed that there was a considerable short fall in January by CBSL in terms of meeting the Treasury’s fund requirement.
According to Mahendran, it was in this backdrop that the February 27, 2015 auction was initially publicized as for only Rs. 1 billion.
He also said that he did not agree with the PDD officials for advertising such a low amount but the PDD officials were of the view that if they advertise more then the bidders would come up with higher rates and that could lead to an increase of the rates.
Eventhough he did not agree with them, he said he had given the benefit of the doubt to them and proceeded.
He also said that the PDD officials had only managed to obtain Rs. 3.4 billion using the Private Placement Method a week prior to February 27, 2015.
Mr. Mahendran said that on the February 26, 2015 morning he found out from some media reports about a fall in ‘forward exchange rates’ and some other financial factors that could effect the market badly. Therefore, he had the idea of removal of the ‘fiver percent penal rate’.
He said he wanted to talk about this matter immediately with the Deputy Governor Dr. Weerasinghe at that time.
According to the witness, thereby he had visited a Market Operation Committee (MOC) meeting, which was chaired at that time by Dr. Weerasinghe.
He said he purely went there to meet Dr. Weerasinghe to talk about the urgent requirement. He said he was new at that time and walked into the room while that meeting was happening
It was also revealed that he had discussed with Dr Weerasinghe about the importance of the increase of the interest rate at that point by removing the ‘penal rate’.
However, this decision was contrary to the Monetary Board decision at that time therefore needed ratification.
Mr. Mahendran however had discussed with Deputy Governor Dr. Weerasinghe in this regard and the witness said that he was told by Dr. Weerasinghe that the ratification could be got from the Monetary Board at the next meeting.
It was also said that this decision to remove the ‘penal rate’ was later ratified by the Monetary Board on March 6, 2015. It was also said that the decision was not argued about. Mr. Mahendran yesterday took the complete responsibility on taking such decision as it was very urgent.
Mr. Mahendran also explained as to why he went inside the PDD while the auction was happening on February 27, 2015.
He said he first went to the PDD at 11 a.m. in the morning to see the result of the bidding with his security person and then came to know that the auction was not concluded.
He said that he was told at that time that the auction would finish within an hour. Then he had left the floor and gone back again with two other Deputy Governors to see the result at about 12.15 pm.
He was of the view that it was his first auction and he also wanted to see it and the activities inside the PDD.
He said prior to him seeing the result of the auction he did not ask about the identity of the bidders.
He said that then he found out that there were bids amounting to Rs. 20 billion at the auction.
In the backdrop of the Government’s huge fund requirement, he said that he wanted to accept the whole amount, but the PDD officials disagreed to that pointing out about some dummy bids and the some of the rates at which bids had placed.
However, after having a discussion with the PDD staff and the two Deputy Governors, the witness said that the PDD came to a conclusion to accept up to Rs. 10.05 billion in bids.
He said that thereafter, the PDD passed that recommendation to the Tender Board as the Tender Board would have to approve it. Finally it goes to the approval of the Governor.
He said he never directed the Tender Board (TB) to approve the amount or express his view of accepting Rs. 10.05 billion to the members of the TB.
Mr. Mahendran also contesting the methods used by the Auditor General in loss calculation said that it was highly erroneous since the two assumptions adopted in calculating such losses were not acceptable.
Mr. Mahendran said that he had nothing to do with the EPF and he had not engaged in any decision making of the EPF in it secondary market transactions; selling or purchase of bonds.
But he said he knew about the fact that the EPF was gaining profits through the secondary market transactions too from the reports submitted to the Monetary Board by the EPF. He said those reports also did not contain the counter parties that the EPF had engaged in their secondary market transactions.
He said that he had nothing to do with the decisions that had been taken in March 2016 auction (29 and 31). He said it was the Tender Board which took all the decisions and he did not alter them ultimately.
It was revealed that the Governor of the CBSL has the ultimate veto power to approve the Tender Board decision.
When Justice Jayawardena asked, whether he had ever changed TB’s decisions, Mr. Mahendran said that there were several occasions that he had suggested a few recommendations before approval.
Mr. Mahendran yesterday also revealed those who attended his daughters wedding where she married Arjun Aloysius in 2012.
It was revealed that, Prime Minister Ranil Wickremasinghe, Ravi Karunanayake, John Amaratunge, John Seneviratne, Nimal Siripala De Silva, Sajith Premadasa, Sagala Rathnayake, three sons of Mahinda Rajapakse, and some leading business individuals in the country were present at this wedding according the witness.
President’s Counsel Romesh de Silva who led the evidence was of the view that it was a well known fact that Mahendran’s daughter had married Arjun Aloysius and it was not a secret.
Mr. De Silva was of the view that Arjun Aloysius obtained his Primary Dealer license in 2013 much prior to Mr. Mahendran assuming duties as the Governor of CBSL and it was also a well known fact.
He said when Mahendran was appointed as the Governor, everyone knew about the relationship of Aloysius and it was not an unknown fact.
It was also revealed that Mr. Mahendran had resided in his residence at Flower Road, during the period he served as the CBSL Governor. The residence was gifted to his daughter by him after her marriage.
It was revealed that at that time his daughter and her husband Aloysius were also residing at the same residence in which Mr. Mahendran lived.
When questioned by Justice Prasanna Jayawardena it was revealed that Mr. Mahendran had not used his official residence given to a CBSL Governor. This he said was because the condition of the official residence which not suit him. He said there were damages to the carpets in the rooms and the furniture was basic.
However, Mr. Mahendran said despite him residing with his daughter and her husband Aloysius at the same residence while he was serving as the Governor, he had never talked with them at any point on matters relating to the CBSL (Shehan Chamika Silva)