By Rusiripala Tennakoon –

The investigation on the Central Bank Bond issue is proceeding before the COI appointed by the President. It was reported that the Attorney General’s department has submitted a further list of witnesses they wish to be summoned before the commission. The list reportedly includes the Prime Minister, required to give evidence. A few days back a statement coming from Temple Trees announced that PM is ready to come before the COI if called for. It will be a most welcome move for the consolation of all concerned if this is done.

The warrant issued by the President appointing the Commission to investigate and inquire into and report on several aspects related to the issuance of Treasury Bonds during the period 1^st February  2015 and 31^st March 2016, specifically include the following areas;

1.The Management and Administration and conduct of affairs of the CBSL in respect of,

a) The decision making process that preceded the issuance of bonds including decisions relating to 

• Amounts to be raised
• Determination of interest rates
• The bond redeeming process

b) The disposal of Treasury Bonds by the dealers direct and indirect

2.Whether there has been any malpractice or irregularity or non -compliance in the procedure followed;

3.whether the transactions have been carried out fraudulently, recklessly and negligently or irresponsibly resulting in any loss to the State;

4.whether there has been non-compliance or disregard of the proper procedures applicable;

5.whether such non -compliance and disregard of procedures have resulted in the improper or irregular or discriminatory award of bonds;

6. person or persons responsible for any such act, omission or conduct;

7.Whether any inquiry or probe into any of the above, had been obstructed or prevented in any manner resulting in damage or detriment to the Government;

The above provisions inter alia encompass the decisions and directions during the period prior to the issuance of the controversial bonds. Therefore the evidence of Prime Minister Ranil Wickremesinghe as the Minister in charge of the CBSL becomes important to clarify matters related to vital decisions taken based on directives said to be given by him regarding bond issues.

Testimony by the former Governor Arjuna Mahendran himself and several other officials from the CBSL before the COI, establish that the Governor acted on a directive by his Minister to do away with the direct Placement system in the bond  auctions. There is no evidence of this directive being ratified or receiving the approval by the Monetary Board. In accordance with the warrant this matter falls within the ambit of the following;

• Non-compliance in the procedure as it is an arbitrary change of procedure hitherto followed by the Public Debts Department,
• A malpractice because the application of the new procedure was without any notice or pre-warning to the participating Primary Dealers,
• An irregularity since it was not endorsed by the Monetary Board

While the Governor is responsible for his unilateral action, the Minister has to explain and clarify as to how he expected his directive to be implemented besides the circumstances that compelled him to give such a directive. It is only by this one can determine whether  there has been a disregard of the proper procedures applicable as required under the warrant.

The Auditor General, has stated before the 2^nd COPE inquiry and also before the COI that the decision to increase the Bond sales to 10 Bn instead of the 2.6 Bn, recommended by the PDD during the 1^st Bond issuance on 27^th February, has caused a financial loss to the Government. He has quantified the visible immediate loss and shown a projected accruing long term loss. These factors are relevant in the context of the Presidential decree as shown above under the  clause, “person or persons responsible for any such act  omission or conduct”. According to evidence so far , as reported, the governor used the directive given to him by the PM to discontinue the direct placement practice as one of the reasons for his insistence to increase the bond issue to 10 Bn.

Ipso- facto the responsibility extends to the person who gave such a directive as regards the resulting loss.

The adverse effects of this directive becomes more significant and grave when we consider the bond transactions of 29^th  and 31^st  of March 2016. Due to the adhoc decision of the Governor, based on the Ministers directive, CBSL has closed these bond issues, by selling amounts much higher than the offers and at very high weighted average yield rates going far beyond the expected rates for settlement. In the  29^th March bond issue the amount offered was 40 billion but the final accepted value  risen up to 77.7 billion. The WAYR of these accepted bonds range between 12.78 and 14.23 ! This is a rate that could be categorised as unusually high when the relevant financial and economic factors are applied.

Same happened during the 31^st March Bond issue that followed. Having offered to issue 20 Bn. they have issued 50 Billion. The applicable WAYR was  between 11.75 and 13.72 much higher than the estimated rate for settlement. The Coupon rate applicable to the issue was ranging from 8.5% to 11.5 % only. These transactions took place under a virtually dealer dominated back ground as the Bank  was bound by a condition to accept auction offers only. Following factors have to be taken into consideration in this regard;

1. Two previous bond issues scheduled for 10^th and 24^th March were cancelled by the CBSL due to the bids received from the dealers being unacceptable due to unusually high rates

2. The PD company related to Governor’s son-in-law was the highest single beneficiary from these transactions and the procedure.

 

 

 

• It is observed that Perpetual Treasuries have been awarded 60%  of the bonds issued in excess of the original amount called for(ie. 77.7 less 40).
• This company has been provided Rs.36 Bn under the Reverse Repo and Intra Day Liquidity facility of the CBSL to settle their purchase liability on account of these bonds,
• The statistics show that they have obtained over 75% of the total such facilities extended  compared to all other primary dealers.
• This company has failed to settle the CBSL on the due dates on account of these bond purchases and they were subject to a fine of Rs 26 million for this default.

3. The action taken by the MOF Ravi Karunanayake, as revealed in evidence before the COI, to prevent the State banks from bidding freely at both auctions has immensely contributed towards the resulting illegitimate culmination

4. The decision making influenced by the auction only process to accept whatever the bid rate submitted by the dealers has caused a big loss to the government, estimated by the Auditor General as Rs.784 million only for the day for the 29^th March 2016 bond issue.

The direction given by Governor Mahendran to increase the Bank rate ( also known as SDF rate) to 6.5% from 5% on the morning of the 1^st Bond issue of 27^th February, helped him to justify the increase of the issuance to 10 Bn. This decision was contrary to a previous decision not to increase the rates by the Monetary Board. In effect the decision also contributed to creating a favourable secondary market  to the successful bidders. It is established that his son-in-law’s company acquired 50% of the total bonds issued in that auction. However the rates were again reduced back to the previous position in April 2015.

In a strangely similar manner the SDF rates have been increased prior to the second bond issue on 29^th March2016 in the following manner;

• On 30^th December 2015, the rates were increased to 6.0% and 7.5%
• On 19^th February 2016 again the rates were increased to 6.5% and 8.00%

This undoubtedly lead to the creation of an artificial favourable market for bond dealers to demand high rates from the CBSL and also to sell them at an excessively higher rate in the secondary market subsequently. The transactions in the aftermath to the bond issue clearly establish the purpose and intentions of this manoeuvre. The overall resulting damage to the detriment of the Government is reflected in the following;

• The market movements which caused an inflationary trend beyond the regulated limits,
• EPF paying excess amounts to invest its funds in the secondary market,
• The instant loss to the CBSL by selling bonds at very low prices offered by favoured PDs 

The COI will decide whether this is an irresponsibility resulting in losses to the state and who are the persons that should be held responsible for such.

There are other fundamental issues centered round the relevant decision making process,

Viz. the failure and /or avoiding of proper precautionary action immediately following the furore of the 27^th February 2015 bond issue;

1. 1. Failure to suspend  Governor or to send him on compulsory leave at least pending the various investigations which were proceeding at a public level, 3 man committee appointed by the Minister, and two parliamentary COPE inquiries and suppressing  the no confidence motion in the order book of parliament against the Governor signed by 90 MPs.
   2. Not taking any action against the intransigence displayed by certain CBSL officials by not releasing required information to the Auditor General who was conducting an investigation on a directive by the COPE. It will be recalled that the Attorney General clarified the matter and stated that there is no reason for the CBSL officials not to provide the information sought by the auditor general. This is a lapse on the part of the Minister in charge of the CBSL since it is he who should have intervened in the matter due to the governor being under investigation.
   3. There appears to be the existence of some  collusion  between the Minister of Finance and the Governor of the CBSL due to the accommodation of  certain unprecedented acts like the placement of a central bank official above the head of treasury in the NSB and holding a meeting of Ministers and others to request funds from the CBSL by passing the Treasury.

The  Minister in charge of the CBSL has to explain his position regarding these matters without which it would be difficult to determine whether there has been any omissions, oversights any lapses in the conduct of affairs falling within his responsibility.

The other area which needs to be explained or clarified is whether any inquiry or probe had been obstructed or prevented in any manner resulting in damage or detriment to the Government by any authority. It is the Ministers evidence that will be important in this regard. Any internal investigation following the revelations should have received his attention. Following events also need some authoritative explanation both in public interest and for assisting the COI.

• • • The reason for the PM to appoint a committee of inquiry on the same day of the disputed 1^st bond issue on 27^th February 2015
    • Why was this report not allowed to be discussed in the parliament
    • Why did  the PM state in the parliament that the Governor has done no wrong while the 3 man committee appointed by him was proceeding with its findings
    • Why did he recommend to dissolve the parliament on the day it was scheduled to table the 1^st COPE report
    • Why did he not report to the parliament that the previous regime had entered into contracts beyond the provisions
    • Why did he give further instructions to the 3man committee while it was in progress
    • Why did the PM refer the COPE report that was tabled in parliament to the Attorney General before the parliament decided on the course of action to be taken.

In appointing  the COI, the Presidential decree has stated as follows;

“And noting that this investigation and inquiry under this warrant is in addition to  and without prejudice to any measures that have been taken or which will be taken by relevant authorities including the CBSL in the exercise of their statutory and legal responsibilities”

According to this the Minister in charge of the CBSL will have to explain and detail whether there are any ongoing other investigations under his purview or whether he has taken any steps towards such a course of action. In an issue of this magnitude, while obstructing and preventing will be considered as an irregularity, not taking any action that should be taken also will  be considered as a non-compliance. The Public will welcome some explanation by the Minister in this regard.