BOND REPORT

By Shonel Perera

The report of the Presidential Commission of Inquiry into bond issuance has been published online for public viewing. The President even tweeted about the subject in attempt to keep his promise of good governance and transparency.

The report highlighted who should be held responsible and proper courses of action to be taken against those individuals.

The following are highlights of the controversialbond report;

“Whether any contractual obligations relating to the matter referred to in the said Schedule, have been entered into or carried out, fraudulently, recklessly, negligently or irresponsibly, resulting in damage or detriment to the Government or any statutory body including the CBSL.

[1] The commission stated in its report that, “we have held that, at the Treasury Bond Auction held on 27th February 2015:

(I) Mr. Mahendran acted wrongfully, improperly, mala fide, fraudulently and in gross breach of his duties as Governor of the CBSL when:

(i) he instructed that, Bids to the value of Rs.10.058 billion be accepted at the Treasury Bond Auction held on 27th February 2015, for the improper and wrongful collateral purpose of enabling Perpetual Treasuries Ltd to obtain a high value of Treasury Bonds at that Auction at low Bid Prices and high Yield Rates; and

(ii) when Mr. Mahendran provided insider information to Perpetual Treasuries Ltd that, Bids to a very high value would be accepted at that Treasury Bond Auction even though only a sum of Rs. 1 billion had been offered at the Auction.

(II) Mr. Mahendran committed the aforesaid wrongful, improper, mala fide and fraudulently acts which were in gross breach of his duties as Governor of the CBSL, with the knowledge of and acting in collusion with Perpetual Treasuries Ltd.

 (III) There was no necessity for the CBSL to accept Bids to the value of Rs. 10.058 billion at the Treasury Bonds Auction held on 27th February 2015, especially since accepting Bids to the value of Rs. 10.058 billion resulted in accepting Bids at high Yield Rates and

(IV) The CBSL accepted Bids to the value of Rs.10.058 billion at the Treasury Bond Auction held on 27th February 2015 and issued 30 Year Treasury Bonds to the Face Value of Rs. 10.058 billion at this Auction, only due to and as a direct result of Mr Mahendran’s aforesaid instruction;

In accordance with the above mentioned statement, the report goes on to say that, “ we have held that, at the Treasury Bond Auction held on 27th February 2015, Perpetual Treasuries Ltd obtained Treasury Bonds to an aggregate value of Rs. 5 billion at low Bid Prices and high Yield Rates, at the Treasury Bond Auction held on 27th February 2015, as a direct result of Mr. Mahendran acting wrongfully, improperly, mala fide, fraudulently and in gross breach of his duties as Governor of the CBSL when he instructed that, Bids to the value of Rs.10.058 billion be accepted at the Treasury Bond Auction held on 27th February 2015;

With regard to the Treasury Bond Auction held on 27th February 2015, as set out in Section 19.2.15 of Chapter 19, we have determined that, the Government of Sri Lanka suffered an avoidable loss of Rs. 688,762,100/- as a direct result of the instructions he gave to both the PDD and the Tender Board that Bids to be value of Rs. 10.058 billion must be accepted at the Auction.

WE HAVE ALSO DETERMINED THAT, MR. MAHENDRAN IS LIABLE AND RESPONSIBLE FOR THIS LOSS.

Further, we have determined that, since Mr. Mahendran directed that Rs.10.058billionbeacceptedfortheimproper,wrongfuland mala fide collateral purpose of enabling Perpetual Treasuries Ltd to obtain a high value of Treasury Bonds at that Auction, at low Bid Prices and high Yield Rates and Mr. Mahendran providedinsider information to Perpetual Treasuries Ltd, which Perpetual Treasuries Ltd used to its benefit at the Treasury Bonds Auction held on 27th February 2015, Perpetual Treasuries Ltd is also liable and responsible for this loss Rs. 688,762,100/-.

 [2] Accordingly, we hold that, the person or persons directly responsible for the damage or detriment caused to the Government by way of the aforesaid loss of Rs. 688,762,100/- as a result of the Transactions which took place at the Treasury Bond Auction held on 27th February 2017, are:

  1. Mr.ArjunaMahendran.
  2. PerpetualTreasuriesLtd.

We also hold that the following persons are responsible for the aforesaid damage or detriment caused to the Government:

  1. Mr. Arjun Aloysius.
  2. Mr.KasunPalisena.

In this connection, we wish to state that, as set out in Chapter 15, the evidence before us establishes that, Mr. Geoffrey Aloysius and Mr. Arjun Aloysius are the sole owners of the ultimate Holding Company of Perpetual Treasuries Ltd and have been, jointly, the sole beneficial owners of Perpetual Treasuries Ltd during the entire period of our Mandate and had the ultimate control of Perpetual Treasuries Ltd during the period of our Mandate.

The commission also noted in their report that following the evidence placed before them, Arjun Aloysius and Kasun Palisena were both parties to and directly responsible for the violation and breach of the Code of Conduct for Primary Dealers, by Perpetual Treasuries Ltd and, therefore, fall within the scope of the description “every person who at the time of the commission of the offence was a director or an officer of the body corporate shall be deemed to be guilty of that offence in Section 56B of the Registered Stock and Securities Ordinance No. 7 of 1937.”

It was further recommended that, in view of the determinations referred to above, the Commission to Investigate Allegations of Bribery or Corruption and the other appropriate authorities should consider whether the aforesaid acts of Mahendran amount to acts of “Corruption” as defined in Section 70 of the Bribery Act and, if so, to prosecute  Mahendran under the Bribery Act and other applicable Law.

The bond report towards its latter part of the statement noted the following.

“As set out in Chapter 19, we have determined that, Perpetual Treasuries Ltd                                                                                         Treasury Bond Auction on 29th March 2016 and gained and benefitted thereby.

We have also stated that, given the complexity of the task and the expertise needed, a Forensic Audit or similar process should be carried out to accurately estimate the quantum of the sum to which Perpetual Treasuries Ltd gained profits..

Here too, we recommend that, the Hon. Attorney General or other appropriate authorities consider whether, Perpetual Treasuries Ltd should be prosecuted under the provisions of section 56A(1) of the Registered Stock and Securities Ordinance and, in the event of a conviction being entered by a learned Magistrate after Summary Trial in such a Prosecution, recovering, from Perpetual Treasuries Ltd, a fine which is twice the value of the extent of the gain and benefit gained by Perpetual Treasuries Ltd or such other amount as the Court may be pleased to determine.

We recommend that, the Hon. Attorney General and other appropriate authorities examine whether prosecutions should be instituted, under the Penal Code or other relevant provision of the Law, against Mr. Mahendran, Mr. Arjun Aloysius, Mr. Palisena and relevant officers of the CBSL and the EPF on thebasis of the facts and circumstances established by the evidence placed before this Commission of Inquiry.

As stated earlier in Chapter 22, we recommend that, the Hon. Attorney General or other appropriate authorities consider whether the material contained in the Report  [and related documents] establishes that, some of the evidence given by Mr. Mahendran and Mr. Palisena before us, is shown to have been incorrect and, if that is the case, whether there are grounds to prosecute Mr. Mahendran and Mr. Palisena under Section 179 and/or Section 188 of the Penal Code or other relevant provision of the Law, read with Section 9 of the Commissions of Inquiry Act No. 17 of 1948;

As stated earlier in Chapter 24, we recommend that, the Commission to Investigate Allegations of Bribery or Corruption should consider whether Hon. Ravi Karunanayake, MP, while he was Minister of Finance, derived a substantial benefit from the Lease Payments made by Walt and Row Associates (Pvt) Ltd [which is an Associate Company of Perpetual Treasuries Ltd and which is owned and controlled by the same persons who own and control Perpetual Treasuries Ltd] for the lease of apartment occupied by Hon. Ravi Karunanayake,MP and his family and, if so, determine whether appropriate action should be taken against Hon. Ravi Karunanayake, MP, under the Bribery Act;

As stated earlier in Chapter 24, we also recommend that, the Hon. Attorney General and other appropriate authorities consider whether some of the evidence given by Hon. Ravi Karunanayake, MP before us is shown to have been incorrect and, if that is the case, whetherMr. Karunanayake should be prosecuted under Section 179 and/or Section 188 of the Penal Code or other relevant provision of the Law, read with Section 9 of the Commissions of Inquiry Act No. 17 of 1948.”

Further the report states that, “Mr. Mahendran knowingly acted improperly and wrongfully, and interfered in the decision-making processes at the Public Debt Department and, thereafter, at the Tender Board, and directed that, Bids to the value of Rs.10.058 billion be accepted at the Treasury Bond Auction held on 27th February 2015;

The CBSL accepted Bids to the value of Rs.10.058 billion at the Treasury Treasury Bond Auction held on 27th February 2015 and issued 30 Year Treasury Bonds to the Face Value of Rs. 10.058 billion at this Auction, only due to and as a direct result of Mr. Mahendran’s aforesaid instruction.

Mahendran’s claim to the Public Debt Department and the Tender Board that, it was necessary to accept Rs. 10 Billion to meet additional Government fund requirements, has been demonstrated to be false.

 Mr. Mahendran had to know that, as a result of his direction, Perpetual Treasuries Ltd would succeed in obtaining Treasury Bonds to the value of Rs. 2 billion at high Yield Rates and at low Bid Prices.

It is reasonableto conclude that, Mr. Mahendran directed that Bids to the value of Rs. 10.058 billion be accepted at the Treasury Bond Auction held on 27th February 2015 for the improper and wrongful collateral purpose of enabling Perpetual Treasuries Ltd to obtain a high value of Treasury Bonds at that Auction, at low Bid Prices and high Yield Rates.

Perpetual Treasuries Ltd had insider information (or “price sensitive information) that, Bids to a very high value would be accepted at the Treasury Bond Auction held on 27th February 2015 even though only a sum of Rs. 1 billion had been offered at the Auction.

The report notes that Mr. Mahendran was in fact the source from which Perpetual Treasuries Ltd obtained this insider information.

It further states that, “Mr. Mahendran acted wrongfully, improperly, mala fide, fraudulently and in gross breach of his duties as Governor of the CBSL when: (i) he instructed that, Bids to the value of Rs.10.058 billion be accepted at the Treasury Bond Auction held on 27th February 2015 for the improper and wrongful collateral purpose of enabling Perpetual Treasuries Ltd to obtain a high value of Treasury Bonds at that Auction at low Bid Prices and high Yield Rates; and (ii) when Mr. Mahendran provided insider information to Perpetual Treasuries Ltd that, Bids to a very high value would be accepted at that Treasury Bond Auction even though only a sum of Rs. 1 billion had been offered at the Auction; Mr. Mahendran acted with the knowledge of and in collusion with Perpetual Treasuries Ltd.

Mr. Mahendran acted improperly and in excess of his authority when he unilaterally and without the prior approval of the Monetary Board, directed the suspension or stoppage of Direct Placements with immediate effect from 27th February 2015.

Mr. Mahendran acted irresponsibly and, in fact, recklessly, when he suddenly directed the total suspension or stoppage of Direct Placements on 27th February 2015, without having first instructed the relevant Departments of the CBSL to study and report on the workings of the system of Direct Placements and ascertain the effect which a suspension or stoppage of Direct Placements would have on the Market and determine the manner in which any proposed suspension or stoppage of Direct Placements should be implemented.

Therefore, Mahendran’s act of suddenly directing the suspension of stoppage of Direct Placements on 27th February 2015, has caused grave prejudice to the Government and the CBSL ability to raise Public Debt at the “lowest possible cost” as the PDD is required to do.

Mr. Mahendran had repeatedly assured the Hon. Prime Minister that, Mr. Mahendran would ensure that Mr. Arjun Aloysius severed all connections with Perpetual Treasuries Ltd, However, Mr. Mahendran failed to honour his word.

Instead, Mr. Arjun Aloysius continued to be closely involved in the day-to-day operations of Perpetual Treasuries Ltd, was a key decision-maker at Perpetual Treasuries Ltd and was in control of Perpetual Treasuries Ltd. Mr. Aloysius also did not dispose of his beneficial ownership of Perpetual Treasuries Ltd.

Prime Ministers involvement.

In the report in states that they  consider that, Hon. Prime Minister would have been better advised, if he had independently verified what had happened at the CBSL on 27th February 2015, before making any statement, placing reliance on what was held out to him by Mr. Mahendran and Deputy Governor Samarasiri;The evidence establishes that, Mr. Mahendran had not been instructed or directed by the Hon. Prime Minister to act unilaterally and immediately suspend or stop Direct Placements on 27th February 2015.

The report follows that, “Instead, the Hon. Prime Minister expected Mr. Mahendran to go through the due Procedure – ie: of studying the issue and assessing the effect a suspension or stoppage of Direct Placements will have and, thereafter, if considered appropriate after that study was completed, draw up a considered plan of the manner in which such a decision was to be implemented and obtain the approval of the Monetary Board, before implementing any decision.”

We are of the considered opinion that, Mr. Mahendran is liable and responsible for the aforesaid loss of Rs. 688,762,100/- and that this loss should be recovered from Mr. Mahendran.

We consider that, the confidence which theHon. Prime Minister states he placed in the assurances given to him by Mr. Mahendran, was misplaced. We are of the view that, the more prudent course of action would have been for the Hon. Prime Minister to have independently verified whether Mr. Mahendran was, in fact, honouring the assurances he gave the Hon. Prime Minister. We regret that, the Hon. Prime Minister did not take that course of action.

With regard to Direct Placements, the instruction given by the Hon. Prime Minister to Mr. Mahendran was only that, Mr. Mahendran should consider the change and was not an instruction to immediately act unilaterally and order that the acceptance of Direct Placements be immediately stopped or suspended.Next, when the results of the Treasury Bond Auction held on 27th February 2015 became known and there were several allegations that, Mr. Mahendran had interfered in the Auction, to benefit Perpetual Treasuries Ltd, the Hon. Prime Minister appointed the three-member pitipana committee.While we do not, for even a moment, presume to make any pronouncement on events that transpired in Parliament, we consider that, the Hon. Prime Minister would have been better advised, if he had independently verified what had happened at the CBSL on 27th February 2015, before making any statement, instead of relying on the Briefing Note and report submitted to him by Mr. Mahendran and Deputy Governor, Samarasiri.We note that, the report of the Pitipana Committee did not determine that there was any impropriety in the conduct of the Treasury Bond Auction held on 27th February 2015 and that, consequently, Mr. Mahendran [who had been on leave pending the completion of the inquiry of the pitipana committee and the submission of its report)resumed duties as Governor of the CBSL when there was no finding of impropriety.

Ravi Karunanayake

The report makes statements regarding the Fmr. Finance Minister noting that, “We are of the view that the evidence before us suggests that, Hon. Ravi Karunanayake, while he was Minister of Finance derived a substantial benefit from the Lease Payments made by Walt and Row Associates (Pvt) Ltd, which is an Associate Company of Perpetual Treasuries Ltd and which is owned and controlled by the same persons who own and control Perpetual Treasuries Ltd.

We are of the view that, these facts and circumstances should be examined by the Commission to Investigate Allegations of Bribery or Corruption, who may determine whether appropriate action should be taken against Hon. Ravi Karunanayake, MP, under the Bribery Act No.11 of 1954.

We also are of the view that, the Hon. Attorney General and other appropriate authorities should also consider whether some of the evidence given by Hon. Ravi Karunanayake has been shown to have been incorrect and, if that is the case, whether there are grounds for prosecutions under Section 179 and/or Section 188 of the Penal Code or other relevant provision of the Law, read with Section 9 of the Commissions of Inquiry Act No. 17 of 1948.

The complete report can be viewed online on presidentsoffice.gov.lk

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