[Part 3 of this series was published on December 2, 2017]
Question number [26] is as follows-
“[26] In Response to question No. 11, you have stated that the previous government had moved away from a market based system in determining the interest rates in government securities, thereby distorting the market. You also say that there was a loss of investor confidence.
(a) Why have you now permitted a reversal of the fully auction-based system to a hybrid system, notwithstanding those concerns?
(d) Is your reference to investor confidence accurate, as the outflow of foreign funds continued to take place during the pendency of the fully auction-based system?
(e) Is your reference to market confidence accurate, as the evidence shows that the EPF and other State-owned funds have simply shifted large volumes of purchases from the primary market to the secondary market?
(f) When you refer to the market, did you occasion any study with regard to the nature and structure of Sri Lanka’s Government Securities market?”
My reply is as follows-
26 (a) There has not been a reversal of the auction system.
Following past experience, and expert advise, the current modified auction system was devised by the Monetary Board after reviewing the working of the ongoing Auction based system. I had no role in devising the said system.
In fact the first phase of the current system also involves a pure auction.
This is precisely what happened previously, when an auction set a rate, around which the Bank offered direct placements. Mr Mahendran’s so-called pure auction system, in reality a system designed to erode confidence since the figure advertised was increased dramatically when hardly anyone bid except one company believed to be in the know, has been abolished but obviously I cannot admit that we went back to the old system. That system was put in place after a decision by the Monetary Board whereas Mr Mahendran’s sudden change was entirely his own, though he lied about it – and it was never approved by the Board, the Minutes simply record that he said he had made the change.
26 (d) International Capital Flows are influenced by a number of factors such as international trends which are beyond our control. So if my claim that investor confidence was restored is not in accordance with the facts, that is because such matters are beyond my control and you must accept that my blithe generalizations are not really meant to be tested against facts.
Question number [28] is as follows-
“[28] In response to question No. 12 you have also stated that Mr. Mahendran informed you on the evening of 26.02.2015 that he may be able to raise money far in excess of Rs.1 billion through the 27.02.2015 bond auction. in this context
(a) In the history of treasury bond auctions conducted up to that time, generally only 2-3 times more than the advertised amount had ever been raised at previous treasury bond auctions. So, do you know on what basis he gave you this assurance with such confidence?
(b) Did you not raise any concerns about raising volumes far in excess of the amount advertised?
(c) Did you not consider the implications on the interest rates?
(d) Did you not consider it to be a transparency and due process concern, if an amount far in excess of the advertised amount was to be accepted?
(e) Did you question Mr. Mahendran on the tenure of the bond and whether raising large volumes on a long tenor bond was in fact in the best interest of the economy?
(f) Did you satisfy yourself whether the Treasury in fact required such large volumes to be raised through this auction or whether some other funding mechanism would be availed of in respect of the RDA’s request for funds?
(g) There is undisputed evidence that Rs.15 Billion of the Rs.20 Billion worth of bids received at the auction of 27th February 2015 had been submitted by Perpetual Treasuries Ltd. (directly and through Bank of Ceylon). In hindsight, do you consider this as a strange coincidence or a deliberate manipulation?”
