By Rajiva Wijesinha –

Prof. Rajiva Wijesinha

The Pronouncements of the Prime Minister, annotated to give a better picture of how the bond scam happened

Vladimir Nabokov’s novel Pale Fire, the memoirs of a king in exile, uses a brilliant technique of adding notes to the narrative. These tell us much more about the king than the narrative, and I thought that perhaps the nation needs to know more about what Ranil was actually up to during the bond scam and in giving answers to the questions he was asked.

Here are some salient points, with regard to the first few questions.

(2)

Upon the formation of the new Government in January 2015 there was a general consensus within the Government (meaning me and my friends, and you should take no notice of others who say they objected to this from the start) that Mr Arjuna Mahendran should be appointed to the post of Governor of CBSL. I discussed the proposed appointment with the then Minister of Finance who agreed that Mr Mahendran was the most suitable candidate. He agreed with me, which linguistically indicates that I made the suggestion, but I would prefer to pass the buck to Ravi.

(3)

The previous incumbent lacked comparable qualifications and experience and the administration of the CBSL during his tenure of his office had been the subject of severe criticism by some of us in the opposition even though he maintained low rates of inflation and high rates of growth compared with what we have managed. Hence, prior to the General Election of 2015 there was a general demand from our political allies (I had actually appointed him well before the General Election, and by the time of the General Election very few people apart from the UNP and Chandrika thought he should continue, but that is a minor point) that a competent person versatile in banking and International finance should be appointed to the post of Governor of the CBSL.

(4)

Although at the time of his appointment Mr Mahendran had ceased to be a citizen of Sri Lanka, he was nevertheless, of Sri Lankan origin.

The fact that Mr Mahendran was not a citizen of Sri Lanka did not affect his suitability or eligibility and was not a legal impediment to his appointment as the Governor of CBSL. In this context, it is to be noted that the very first Governor of the Central Bank, namely, Mr. John Exeter had been an American national.

I ignored the fact that now persons appointed to such positions should take an oath of allegiance to this country, which I could not have expected of Mr Mahendran given that he was not even a dual citizen.

5 (ii)

When Mr. Mahendran was offered the post of the Governor of the CBSL, I insisted –in what will be seen is the loose sense of insistence I use when I am not really bothered – that he should ensure that Mr Aloysius would resign as a Director of Perpetual Treasuries (Pvt) Ltd, and not involve himself in the business activities of that company in anyway. I also strongly recommended that the best course would be for Mr Aloysius to divest himself of his shares in the company. This was conveyed by me both to Mr Mahendran as well as to Mr Aloysius. Subsequently, I became aware that Mr Aloysius had in the month of January itself resigned from the post of Chief Executive Officer and Director of Perpetual Treasuries (Pvt) Ltd. I also became aware that however he remained a Shareholder of that company and he initimated that he would divest himself of the shareholdings as soon as possible (ie my insistence had been ignored). On expressing my concerns on this account, Mr Mahendran reassured me that Mr Aloysius would not under any circumstances play any role in the business activities of the company. I had every confidence in the assurances given by Mr Mahendran and as such I had no reason to apprehend that any conflict of interest would be faced by Mr Mahendran in functioning as the Governor of the CBSL. (I did not think it necessary to check on these matters, not even after the bond scandal broke, because after all I believed the report of the lawyers I appointed cleared Mr Mahendran. So even if Mr Aloysius was involved in Perpetual Treasuries contrary to my instructions, that did not affect Mr Mahendran’s position).

I did on several occasions convey to Mr Mahendran my concerns about a possible conflict of interest arising from his son-in-law Mr Aloysius having a connection with a Primary Dealer. Mr Mahendran as set out above reassured me that Mr Aloysius would not engage in the activities of the company as indicated above. In view of the circumstances, I was confident as set out above that a situation of a conflict of interest would not arise (and my confidence could not be shaken by any evidence to the contrary, since I saw no reason despite evidence of Mr Mahendran’s personal involvement in the bond deal to imagine that he would not have acted always in my best interests)

(7)

I was aware that Mr Aloysius had resigned from the post of Chief Executive and Director of Perpetual Treasuries (Pvt) Ltd, in January itself. But, I was totally unaware of any role that he may have played in that company after his resignation (even though I knew he was a shareholder) . I was confident that in view of the assurances given to me by Mr Mahendran that Mr Aloysius would not participate in the conduct or affairs of the company. (I refuse to discuss if at any point that confidence was eroded, certainly it was totally intact when in the middle of 2016 I wanted Mr Mahendran to be reappointed as Governor).

(8)

The unsatisfactory features in the practice of CBSL raising funds by way of private placements was a matter of grave concern (most obviously to Perpetual Treasuries which wanted high rates of interest and could not get them under that system) and severe criticism (from members of the UNP) during the tenure of office of the previous Government. This issue had been raised in the public domain by civil society (though I cannot now cite any evidence for this claim, and I stand by this even though during the first COPE inquiry other dealers said they had no issues with the process that had been followed)) and had been the subject of discussion in Parliament (by my minions). It was alleged that the favourites of the then Government had been given an opportunity by reason of the acceptance of private placements of making unconscionable profits as there was no transparent selection of the beneficiaries (though Eran Wickremaratne, who does understand the subject, objected for a very different reason, namely that what he called captive investors such as the EPF had to be content with low interest rates. There is no evidence of interest rates being unconscionably high unlike what happened after Mahendran took over, but I will continue to insist that there were allegations though I cannot now recall who made them and I cannot cite anyone who made unconscionable profits).

(9) (ii)

As I stated above, the raising of funds by way of private placements of Treasury Bonds had been subject to severe criticism as it was completely devoid of any transparency. The Monetary Board had authorized the issuance of Treasury Bonds either by way of private placements or by way of public auctions. It was the view of all concerned in the new Government (namely me and Kabir and Malik and Ravi, ie those aware of the massive advertising debt the UNP had to pay off) that in order to achieve more transparency the raising of funds by way of Public Auction was preferable to the private placement method. This view was conveyed to Mr Mahendran (and though we did not say it, we hoped that he would avoid transparency in making clear the amount to be raised, so that no one else would bid and only those in the know would benefit).

(10)

As I stated earlier, the acceptance of private placements of Treasury Bonds was regarded as unsatisfactory primarily due to lack of transparency. In addition, the policy of the new Government was that the rates of exchange and of interest should be determined by market forces, and not be pegged down artificially (ie we wanted our friends in the private sector to get high rates of interest, though on this first occasion it was desirable that only one of our friends should get this benefit, so we advertised a minimal amount and then took much more which no one else anticipated). It was for these reasons that we advocated that Treasury Bonds be accepted mainly through Public Auction. Mr Mahendran as the Governor of CBSL was aware of this. At that time the practice was for majority of the bonds to be issued by recourse to private placements and the balance by Public Auction. Therefore, in February 2015 when I was informed that the CBSL was to issue bonds to raise funds, I insisted (this is in the strong sense of insist, when I really want something done) that Mr. Mahendran should consider the issuance of Bonds by way of Public Auction in accordance with the economic policy of the Government and I expected that he would comply with due procedure. (It was enough that he did my bidding since procedures are irrelevant when I want something, which is why I took no action when he ignored the advice of the Monetary Board, and bullied his officials to recommend much more than had been advertised, even though it turned out that the chief beneficiary was Perpetual Treasuries, as to which I had known that Mr Aloysius continued as a shareholder despite my instructions. Obviously I only wanted Mr Mahendran to follow my instructions on certain issues, and as was clear from my continuing to want him as Governor, I had no reason to feel upset about what he did and did not do.)

To be continued…