I am Clean

CB Governor Arjuna Mahindran says he has done nothing wrong, played no role in the Bond issue and his son-in-law had no dealings with Cabraal:

Breaking his silence over the controversial Treasury bond issue, Central Bank Governor Arjuna Mahindran claimed he was not involved in the decision-making process with regard to the Bond issuance.

In an interview with the Sunday Observer, Mahindran said, he was willing to cooperate with any investigation to ascertain the truth and to clear his name.

Following are excerpts from the interview

by Rasika Jayakody

Q: Your role in the Central Bank's Treasury bond issue on February 27 has come under serious criticism from various quarters. This is the first time you are making a public statement on this matter. What was your involvement?

A: This Treasury Bond issue came up when the Finance Minister announced significant salary increases for public sector workers. It was clear that the government would need to raise significant amounts of money to fund that exercise.

Meanwhile, I found that within three weeks - in late January and early February - the Central Bank was unable to raise funds to meet the requirements of the Government by way of weekly issuance of Treasury Bills and Treasury Bonds in the Public Debt Department. On further inspection, I concluded that the methodology adopted by the Central Bank's Public Debt Department to raise money through the issuance of Treasury Bonds differed from international conventions.

Private placements in 2014 were several times the volume of issuance done by auctions in the same year. This practice flouted international conventions whereby private placements should not exceed 10-15 per cent of the total size of issuance on a particular Treasury Bond Issue.

The Monenary Board at its meeting held on February 23, decided to issue a 30-year Bond. The Bond did not indicate the size of such issue and the reason we decided on a 30-year Bond was that 30 years was important to anchor the interest rates paid on the longest maturity at a time when it was anticipated that there would be a surge in Government borrowing.

Meanwhile, the Ministry of Finance had sent the Public Debt Department a communication with its borrowing and cash flow requirements for the month of March 2015. According to this cash flow statement it was envisaged that the Ministry of Finance would require a sum of Rs 13.5 billion.

On Thursday, February 26, it was discovered that the Public Debt Department had only been able to raise Rs 3.5 billion and therefore, the Department needed to raise a further Rs. 10 billion in one working day, Friday, February 27, before the due date of Monday, March 2.

The Public Debt Department, in keeping with its usual practice, had placed an advertisement on the Central Bank of Sri Lanka website on Wednesday, February 25 indicating that bids should be accepted for an issue of a 30- year Treasury Bond, paying a coupon rate of 12.5 per cent. This advertisement was published in major national newspapers on February 26. Bids were to be accepted by 11.00 a.m. on February 27, Friday.

As is customary, the Public Debt Department had advertised the size of Bond issuance at Rs 1 billion. This was because the Department was of the view that the Government may not be able to secure the full amount of Rs. 10 billion that was advertised and thereby the image of the government and the Central Bank could be adversely affected if insufficient funds were raised against the desired amount of Rs. 10 billion.

I was having a meeting on February 27, with the two Deputy Governors, Dr. P. NandalalWeerasinghe and Ananda Silva, just after 12.00 noon. We were discussing the downward pressure of the Sri Lanka rupee, as a result of which, the Central Bank foreign currency reserve would reduce requiring that large amounts of rupees be raised through Treasury Bills and Treasury Bond auctions. This would reduce the pressure on the exchange rate.

I asked both Deputy Governors to accompany me to visit the Public Debt Department and inquire whether a large sums could be raised at the Treasury Bond auction that day.

When we reached there, we were informed by Department officials that a total amount of Rs. 20 billion was offered by primary dealers at varying rates of interest. On perusal of the offered rates, it appeared that there was one bid at a rate of 9.35 per cent for just Rs. 8 million. However, there were several bids of much higher magnitude at a higher rate of interest with some bidders demanding as much as 18 per cent for subscription to this Bond issue. It is well known that some primary dealers make such outlandish "dummy' Bids when they are really not interested in participating in the auction. Primary dealers are required by the Central Bank to bid for at least 10 per cent of what is offered at each Treasury Bill or Bond auction.

When perusing the list of Bids, it was discovered that the Central Bank could accept an amount of Rs 10 billion if it accepted Bids up to 12.5 per cent which was the interest rate published in the newspaper advertisements the particular day.

The Public Debt Department officials who were present, claimed that they could raise Rs. billion from the auction which would adequately meet the needs of the Finance Ministry's funding requirements for Monday, March 2.

At a February 26 meeting with the Finance Minister and the Minister of Highways, the Secretary to the Treasury and Deputy Governor, Dr. P. Nandalal Weerasinghe, it was highlighted that an additional amount of Rs. 15 billion was required to fund the re-commencement of highway construction activity which had come to a half after the Presidential Election.

In addition, a further amount of Rs. 44 billion was needed, to pay for the land acquisitions, to enable the construction of these highways. Despite these requirements being made known, it was decided to stop the size of the Bond auction at Rs 10 billion since raising higher amounts would entail the payment of exorbitant rates of interest exceeding the published interest rate contained in the advertisement.

There had been several instances of the Central Bank accepting amounts larger than those advertised at Treasury Bill and Treasury Bond auctions. The Tender Board therefore, accepted a larger amount than the advertised rate of Rs.1 billion in the 30- year Bond auction.

Q: The three-member committee which looked into the Bond issue arrived at the conclusion that the bid made by Perpetual Treasuries was unusual. Isn't that a sign that some malpractice had taken place?

A: The Committee observed that the Bank of Ceylon had placed bids on behalf of Perpetual Treasuries. What they say is that one primary dealer bidding on behalf of another is unusual and that warrants further investigation. So, it is the bidding pattern.

But we should not pass judgment over such matters as investigations are still underway. It is up to the investigative bodies to conclude whether there has been a problem or not. From my side, I can only explain my role in this entire process.

Q: The Tender Board has failed to identify this unusual bidding pattern. Isn't that a failure on their part?

A: The Tender Board has nothing to do with that. Its duty is to ensure efficient pricing. How people bid and why they bid is examined by the Public Debt Department.

Q: But, the Public Debt Department too has failed to identify this "unusual" bidding pattern. Why is that?

A: I don't consider it a failure. What they see is the bids placed by the Bank of Ceylon. They are not aware of the internal arrangements of the Bank of Ceylon with regard to bids. That information came subsequently.

Q : What is the influence you have over the Tender Board?

A: I don't have any influence over the Tender Board or the Public Debt Department.

I only set policy directions and sit at Monetary Board meetings. I don't sit at Tender Board meetings and I am not privy to any discussions that take place during Tender Board meetings. So, there is no way that I can influence their decisions.

Q: Are you ready to go before the Police Financial Crimes Investigations Division in connection with the Treasury bond issue?

A: I am open to any investigation as I have done nothing wrong. Therefore, I am not afraid to go before law enforcement bodies to clear my name. I will cooperate with any investigation. My name has already been cleared by the Supreme Court. Other investigations too will reveal the truth.

Q: Prime Minister Ranil Wickremesinghe disclosed several serious malpractices that had purportedly taken place witihn the Central Bank in recent years. Your son-in-law too came under criticism for his alleged connections with former bigwigs of the Central Bank. Isn't this an indictment on your son-in-law?

A: No. Before he married my daughter, I asked him whether he had business connections with the top echelons of the previous government, including the former Central Bank Governor. He denied any such involvement and I was satisfied with his answer. I looked into this because I wanted to make sure that he did not have any connections with certain bigwigs of the previous administration. So I don't think he was part of any questionable deals under the previous regime.

Q: What is your son-in-law's connection with the company which is under investigation over the Treasury Bond issue?

A: He was the Chief Executive Officer of a certain primary dealer company. But, when I became the Governor of the Central Bank, he resigned from that company. He stepped down from his position to allow me to discharge my duties without any conflict of interest. Following his resignation, that particular company had appointed a new CEO.

Q: Does your son-in-law have shares in the company?

A: No. he doesn't have any involvement. But some members of his family have shares in that company, as far as I know.

Q: Did you discuss with your son-in-law about the bond issue, perhaps on a personal basis, after this problem was reported in media?

A: I did not discuss the bond issue with him. I didn't raise this matter with him as various bodies were conducting investigations. I will only talk to him about this when the investigations are over.

Q: Some critics feel strongly about the need to have you voluntarily resign from your position as the Governor of Central Bank, in this backdrop. What is your response?

A: I don't know why I should resign when I have done nothing wrong. I made way for a free and fair investigation by going on leave until its conclusion.

I can jeopardize the operations of the Central Bank by resigning from my position and running away from the issue. There were so many developments taking place within the Central Bank. The Bank was working on its Annual Report, which had to be finalized in May. I, as the Governor of Central Bank, had to supervise that process. Had I run away from this problem, it would have made the situation worse.

Q: Are you a citizen of Singapore?

A: Yes, I am a citizen of Singapore. I have applied for Sri Lankan citizenship. But my passport has been impounded. So I cannot proceed with that application.

Q: When you obtain citizenship from another country you have to take an oath pledging your support and loyalty to the Government of that country. Although you work here as the Governor of the Central Bank in Sri Lanka, you have to remain loyal to the Government of Singapore. Doesn't this amount to a conflict of interest?

A: I was a citizen of Sri Lanka until 2006. The reason why I obtained citizenship from Singapore is very clear. I was the Chairman of BOI until 2004 and I had to resign from that position when the UNP Government changed. In a country like Sri Lanka, you cannot get a decent job after a political appointment of that nature. No one wants to hire you as you have worked for a Government that has been defeated. So I found a job in Singapore. In Singapore, there is a policy that compels you to obtain citizenship from that country when you do a high profile job. So I had to obtain citizenship to protect my job. That doesn't mean I love Singapore more than I love Sri Lanka. I consider myself a Sri Lankan. Sri Lanka is where I studied and grew up in. My father was a diplomat who represented Sri Lanka.

When I was invited to head the Central Bank of Sri Lanka, I was quite happy to apply for Sri Lankan citizenship again.

Q: Don't you think this controversy has tarnished our image and reputation to a great extent?

A: No. I don't think so. I have utmost faith in the country's legal system. The Supreme Court has cleared me already and I am confident that other investigations too will clear my name. What happened in this case was the local media blew it out of proportion due to political motives. Some thought it would reflect badly on the government. Foreign media, on the other hand, ignored this issue. I am clean in my conscience as I have done nothing wrong.

There are highs and lows in one's life and one should not worry about such things.

Q: Who approached you to become the Governor of Sri Lanka?

A: The Prime Minister approached me first and President MaithripalaSirisena gave me the letter of appointment. The Minister of Finance was very happy about my appointment and several top members of the government congratulated me.

Q: Are you a personal friend of the Prime Minister?

A: I always had a good relationship with the Prime Minister. He had a good relationship with my father as well. When the Prime Minister was the Deputy Minister of Foreign Affairs in the J.R. administration, my father worked in the Foreign Service. I first worked with him in 1991 when I helped him with his industrialization programmes.

Q: Over the past few years, the Central Bank of Sri Lanka came under a lot of criticism over various questionable deals. Why did you resign from a high profile job in Singapore knowing the state of affairs in the Central Bank?

A: I started my career at Central Bank And I always had a respect for this place. I worked here for 11 years and I was familiar with its set-up and its people. I maintained close relations with them even when I was abroad. When I was approached to become the Governor of Central Bank, I thought it was a good opportunity to come back and contribute to the economic development of Sri Lanka. That was my motivation when I took up the position.

Q: There was some criticism over your signature on currency notes stating you were the first Governor of Central Bank to sign in English after 27 years. What is your reply to this criticism?

A: In fact in the annual report of the Central Bank I have signed in Sinhala and Tamil. But, when signing currency notes, my lawyers advised me to use my normal signature on currency notes due to legal requirements. My normal signature is in English. Had I used other signatures, it would have caused technical issues during counterfeit-cases.

Q: Some in the political circles have raised concerns over your appointment stating that you are not aware of ground-realities of the Sri Lankan economy and issues at the grassroots level. What do you have to say about this?

A: As I clearly stated before, I studied and grew up in Sri Lanka. I first worked in Central Bank and then I worked in the private sector too. I am quite aware of the 'ground-realities' and I challenge anyone to question my so called lack of knowledge in this regard.

Speed Read

* Government needed money to fund the salary increases announced by the Finance Minister

*Central Bank unable to raise funds to meet the requirement of Government

* Private placements in 2014 flouted international convention

* Board decided to issue 30-year Bond to anchor the interest rates paid on the longest maturity

*Ministry of Finance needed Rs. 13.5 billion but able to raise only 3.5 billion

*Rs 10 billion needed to be raised in one working day

* The Public Debt Department advertised the size of Bond issuance at Rs 1 billion

* A total amount of Rs. 20 billion was offered by primary dealers at varying rates of interest

*One bid was at a rate of 9.35 per cent for just Rs. 8 million

* There were several bids of much higher magnitude at a higher rate of interest

* Some bidders demanded as much as 18 per cent for subscription to the Bond issue.

*Primary dealers are required by the Central Bank to bid for at least 10 per cent of what is offered at each auction.

*The Central Bank could accept an amount of Rs 10 billion if it accepted bids up to 12.5 per cent

* The Public Debt Department officials believed they could raise Rs. 10 Billion from the auction

*An additional amount of Rs. 15 billion was required to fund the re-commencement of highway construction activity

*A further Rs. 44 billion was needed to pay for the land acquisitions, to enable the construction of the highways.

*Despite these requirements it was decided to stop the size of the Bond auction at Rs 10 billion

*The Tender Board accepted a larger amount than the advertised rate of Rs.1 billion