Excerpts of Sri Lanka COPE recommendations on bond issue

Oct 31, 2016 (LBO) – Sri Lanka’s Committee on Public Enterprises has made several recommendations to Parliament on last year’s controversial bond issue.

Excerpts of the recommendations, as published by the Sunday Times, are the following:

Evidence has been placed before the COPE, which gives rise to reasonable suspicion that former CB Governor Arjuna Mahendran made an intervention or, used pressure, in the transaction of TBs that took place on February 27, 2015, examined by the COPE.

Evidence placed before the COPE also gives rise to reasonable suspicion that, there was a lack of transparency in the manner in which the transactions took place and this, in turn, has damaged the credibility of the CB of Sri Lanka.

Also, the COPE observed that, one of the Primary dealers, Perpetual Treasuries, obtained massive financial profits in the sale of TBs.

Therefore:
In order to recommend penalties and other directives against CB officials and Institutions responsible for the transactions and, in order to recover the losses incurred by the public and government, the COPE emphasises that legal action be initiated against the persons and institutions responsible for the transactions.

A post-supervision system to ensure that penalties and other directives issued are implemented.

In order to prevent the recurrence of similar issues, the COPE recommends that necessary checks and balances are maintained, and other necessary steps taken.

To ensure the CB maintains the necessary checks and balances, and to ensure the post-supervisory steps are implemented, Parliament should directly intervene, as Parliament has the fundamental responsibility on public finance.

The COPE emphasises it is the responsibility of Parliament to recover the losses incurred by the government and to act under existing laws, and that, the CB and related institutions should give an assurance to Parliament that a suitable mechanism is implemented to prevent the recurrence of such incidents.

The COPE recommends that, a recognised institution with legal powers, should investigate and take necessary measures to prevent the recurrence of similar situations, in which the credibility and transparency of the CB was seriously affected by allowing a single institution– Perpetual Treasuries- gaining undue profit as a Primary dealer.

The Operation guide of the Public Debt Department which has not been updated to date, should be updated immediately, with mention that, State institutions should be given priority in raising funds through the sale of TBs.

Former CB Governor Arjuna Mahendran is directly responsible for the particular TB transaction, and the COPE recommends that legal action be taken against him and the relevant officials of the CB.

Excerpts from Footnotes:-

The 9.48 percent interest was determined by the CB interest rates and not determined independently based on market rates.

In the morning of February 27, 2015, the Operational Committee decided that, the regulation that, if a bank deposits money for more than three days in the CB, the interest rate will be reduced from 6.5% to 5%, was removed. Thereby, it was restored to 6.5%.

The time has been extended beyond 11 pm. for one buyer. That is for the HSBC, for Rs 100 million until 11.04.26 pm.

The evidence recorded shows that the CB called up Primary dealers on the previous day and checked with them about purchase of (TBs) around Rs 10 billion.

Perpetual Treasuries too received a telephone call. Perpetual Treasuries auctioned for Rs 3 billion at 12.5%, Rs 5 billion at 12.75% and Rs 5 billion at 13% and, shortly before the auction, instructions were sent via email to the Bank of Ceylon on February 27, 2015, at 10.48 am. The Bank of Ceylon sent out the bids at 10.57.22 am, 10.57.41 am and 10.57.57 am respectively to the CB. According to records, the HSBC bid was sent at 11.06 am.

The decision to increase the sum to be raised from Rs 1 billion to Rs 10 billion, was a decision taken based on a professional decision by a team, according to Chairman of the Tender Committee, P. Samarasiri.

According to the Superintendent of the Public Debt Department, the former CB Governor had not said “Do it”, but instead, had given the idea “Why don’t you go for 10?”. Even in the Auditor General’s report, it is mentioned that the former CB Governor had told Ms Seneviratne, “Why don’t you go for 10?” There is no other evidence contrary to that

There is no evidence that former CB Governor Arjuna Mahendran or, Deputy Governors Dr Nandalal Weerasinghe and Ananda Silva, made inquiries or, intervened, in the particular auction.