An “unusual” manual intervention -Central Bank bond probe
Posted on April 17th, 2017

The Presidential Commission of Inquiry probing the controversial Treasury bond issuance in February 2015 met this week too, continuing the recording of evidence from Assistant Governor of the Central Bank of Sri Lanka (CBSL) S. Sepala Ratnayake. One of the most significant factors revealed before the Commission on Monday (April 3) was that the principle of offering the same rates to different investors for the same bond for the same volume when making private placements had been violated on certain occasions.

Ratnayake said that offering the same rates to different investors for the same bond of the same volume was a basic principle followed by the Public Debt Department of the CBSL during direct placements. He added that they did not find any reasonable reason to violate the practice during the placements.

However, Harsha Fernando, the legal counsel of Deputy Governor of the CBSL P. Samarasiri, showed the Commission one example at a bond issuance in 2011 where the People’s Bank had made two placements of Rs 500 million each and the Employees Provident Fund (EPF) had made a placement of Rs 500 million. Two different rates, amounting to a difference of eight basis points, had been given for the placements made by the People’s Bank and the EPF.

With eight cents per every 100 (Sri Lankan) rupee unit, the impact an eight base point difference would make on an offer of Rs 1 billion is almost Rs 80 million. It was brought to light that such a violation of the practice would greatly disadvantage a primary dealer.

Ratnayake who was the day’s witness said that the rates for the private placements are offered by the officials in the front office of the Public Debt Department. The counsel who were appearing for the Perpetual Treasuries Limited (PTL) and former Governor of the CBSL Arjuna Mahendran also questioned the witness over the authenticity, acceptance and the methodology which he had used to prepare the graphs produced by him before the Commission last week.

During the cross examining, Ratnayake reiterated that he had pointed out to the rest of the members of the Tender Board that they should not accept others’ instructions even if they were held at gunpoint and forced to do so. Senior Deputy Solicitor General Priyantha Nawana who led the evidence of Ratnayake asked about the reactions of Samarasiri. The witness did not mention any objection being raised by Samarasiri during the Tender Board meeting on February 27, 2015. However, Samarasiri who gave evidence before the Commission during the previous week said that it was he who had opposed  the instructions given by Mahendran.

The second day of the week began with the recording of statements from Additional Director of the Information Technology (IT) Department of the CBSL, K. Vasantha Kumara Alwis. Deputy Solicitor General Milinda Gunetilleke leading the evidence for the day said that throughout a specific date, PTL had funded all the purchases of Treasury bonds through the borrowings of Treasury bonds and the intraday liquidity facility (ILF). The Commission requested Alwis to analyze how the CBSL’s IT system functions. He explained to the Commission using data printouts derived from the Real-Time Gross Settlement System (RTGS). However, the time period was limited from February 29, 2016 to April 1, 2016. Gunetilleke showed the Commission that an ILF provided for a primary dealer is to be returned at the end of every day. An ILF is not a loan but free money given by the CBSL to a primary dealer that should be settled within the same day.

He further added that the PTL had a total outstanding of Rs 11.6 billion worth ILF by April 1, 2016. He pointed out that based on the said default, the PTL had been fined. It has happened only four times in the past. The largest other violation of the ILF is Rs 350 million. The PTL’s violation is 33 times more than the past largest violation,” the Attorney General’s Department told the Commission.

However, counsel for the PTL, Nihal Fernando PC, explained to the Commission that the ILF taken from the CBSL was entirely based on government securities. He also said that almost all other primary dealers had followed the same practice of borrowing from the CBSL in order to purchase Treasury bonds. His explanation came during the Attorney General’s Department official’s questioning of the witness and Gunetilleke strongly objected to the PTL counsel’s intervention.

The Commission Chairman subsequently had to intervene to sort out the issue.

The Commission did not sit for its hearings on Wednesday, and Thursday’s session began again with Alwis. On Thursday, the significant factor that was revealed was Gunetilleke suggesting that when the total amount of ILF outstanding due on April 1, 2016 was settled by the PTL on April 4, 2016, an unusual” manual intervention had released them from paying a sum of Rs 88 million.

Alwis admitted that a sum of Rs 88 million was credited through an authorization issued by the Public Debt Department, signed by Deputy Governor of the CBSL, Dr. P. Nandalal Weerasinghe and Assistant Governor of the CBSL, Janaki Mampitiya (the latter has retired since).

The witness further said that such a manual intervention to the CBSL’s Lanka Settle System had never been done before according to his knowledge. He also said that the payment system must be closed daily at 4.30 pm but on this particular day, the system had been kept open until the PTL could complete their returns.

Fernando PC contradicted the suggestion of an unusual manual intervention” being made to the CBSL’s Lanka Settle System. However, he admitted that it was a costly mistake on the part of his client for not having bid under smaller portions, adding that the Company had failed to pay the defaulted amount as at April 1, 2016.

He said that his client had settled all amounts outstanding by the next working day and had also paid a penalty of Rs 13.6 million for the delay.

Meanwhile, the Commission also observed Mahendran who had previously obtained special permission to observe the proceedings of the hearings, using his mobile for over 20 minutes during the period the sessions were going on.

The Commission chairman warned Mahendran’s counsel and advised him to inform his client to switch off the mobile phone during the time the sessions were in progress.

On Friday, Director of the Domestic Operations Department of the CBSL, P.W.D.N.R. Rodrigo was summoned before the Commission. Rodrigo also reiterated that Mahendran had visited the Public Debt Department twice and on the second occasion had been accompanied by two other officials. He also narrated what took place on 2015 February 27. He said that almost all the Monetary Board members were surprised with the suggestion to raise Rs 10 billion made by the Public Debt Department on the instructions of Mahendran. He said that the most vocal in terms of opposition to the move was Ratnayake and Additional Director of the Statistics Department of the CBSL, Dr. M.Z.M. Aazim. He also added that, Samarasiri’s body language showed that he was also not happy. At the request of the Monetary Board members, he tried to contact Mahendran via intercom, but had failed.”

Rodrigo also said that Samarasiri who went out of the room, came back after around five to six minutes and had spoken in Sinhala, Apita meka ganna wenawa (We will have to take this)”. He also said that the minutes were dictated by Samarasiri. The counsel appearing for the PTL suggested that the unusual manual intervention” to the CBSL’s LankaSettle System which was previously revealed by Alwis was purely done to rectify an error made by the system. He also suggested that the reason why the system gates were kept open beyond the usual time was upon the request by the PTL in order to rectify the said error. Rodrigo admitted that he had received a letter from the PTL in this regard. The sittings of the Commission were concluded for the week on Friday and it will meet again on April 24 following the New Year vacation.

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