Gov. Mahendran gave arbitrary instructions to raise interest rate while auction was on, says witness

The Central Bank's former Governor Arjuna Mahendran gave instructions to change the Bank’s deposit interest rate from 5 percent to 6.5 percent while the controversial bond auction was going on, the Central Bank's Monetary Board Secretary H.A. Karunaratne said.

He was testifying before the Commission of Inquiry (COI) looking into the issue of treasury bonds from February 1, 2015 to March 31, 2016. The Commission comprises Supreme Court Justices K.T. Chitrasiri, Prasanna Jayawardena and retired Deputy Auditor General V. Kandasamy.

In his evidence on Monday (20), Mr. Karunaratne said the Monetary Board at a meeting on February 23, 2015, decided to maintain the deposit interest rate at 5 per cent for one month. However, at the sales operations meeting on February 27, 2015, the then Governor had arbitrarily instructed the Head of the CBSL’s Operations Department to draft a circular raising the rate to 6.5 percent. The instructions were given while a bond auction was taking place at the Public Dept Department.

Mr. Karunaratne, whose evidence was led by Senior State Counsel Shaheeda Barrie, also said CBSL Governors did not usually attend meetings of the Operations Department.

In replying to a question raised by the Commission, the Monetary Board Secretary said that if a primary dealer had found out that the interest rate had been raised while the bond auction was ongoing, that particular dealer would have stood to profit far more significantly than others who were not privy to the information.

At the Commission’s hearing on Tuesday, President’s Counsel (PC) Romesh De Silva, representing former Governor Mahendran, made a request according to Clause 16 (1) of the Special Presidential Commission of Inquiry Law for his client to be present at the Commission to observe its proceedings. He also requested that Mr. Mahendran be given access to documents related to the Commission’s proceedings.

Additional Solicitor General Dappula de Livera strongly objected to the request and this resulted in a heated exchange of words between the two sides. At one point, Mr. de Silva, told the Additional Solicitor General, “Don’t bark like a dog,” eliciting the retort “I can also bite.”

At this juncture, both counsel were rebuked by Justice Prasanna Jayawardena, who told them they were “behaving like children.”

The three member commission, after consultations regarding the request made by Mr. de Silva, then decided to permit Mr. Mahendran to observe the proceedings of the com- mission. He was also permitted to obtain copies of documents related to the inquiry on the understanding that confidentiality of those documents would be protected.

On Wednesday, Mr. Karunaratne continued to give evidence. He said Mr. Mahendran had removed him from his post as Secretary to the Monetary Board on June 20, 2016 and that this sudden removal had shocked and disappointed him.

During cross examination by President’s Counsel Nihal Prabath, appearing on behalf of Perpetual Treasuries, Mr. Karunaratne said he was aware that during the term of former Central Bank Governor Ajith Nivard Cabraal, the Central Bank had purchased Greek bonds worth 30 million euros without obtaining approval from the Monetary Board and causing losses amounting to billions of rupees.

During cross examination by Attorney-at-Law Chanaka de Silva, appearing on behalf of Mr. Mahendran, Mr. Karunaratne acknowledged that during the tenure of Mr. Mahendran, several new departments were created within the Central Bank and officers were also transferred to serve in these departments. These included the Department of Risk Management, the Department of Supervision of Microfinance Institutions and the Department of Legal and Compliance.

At this point, Mr. de Silva raised concerns whether the earlier statement made by Mr. Karunaratne that Mr. Mahendran transferred some 500 officers in 2015, was correct. However, Mr. Karunaratne said he was quoting from figures given by the Human Resources Department and he made no mention of the creation of new departments as he was only responding to questions raised by officers from the Attorney General’s Department.

On Thursday, former Deputy Governor Ananda Silva giving evidence said that on the day of the bond auction, February 27, 2015, Governor Mahendran had visited the Public Debt Department and after examining the list of bids, instructed officials to accept the Rs.10 billion bid.

Mr. Silva, whose evidence was led by Senior State Counsel Avanthi Perera, said the day before the auction, a special meeting was held in the cafeteria of the bank’s executive officers with the participation of several Government Ministers. Ravi Karunanayake, Kabir Hashim and Malik Samarawickrama were present at the meeting, which had been convened to discuss obtaining money for several road development projects.

Mr. Silva said the meeting was unusual as normally, Central Bank officials would go to meet the ministers, rather than have ministers come to them.