BDO reports on bond deals runs into 1200 pages
View(s):BDO India was assigned most of the forensic audit work in relation to the probe on bond transactions.
Mr. Arjuna Mahendran.
In its report on bond transactions from January 2002 to end February 2015 by the Public Debt Department (PDD) of the CB, it said:
Following concerns being expressed in the public domain about the propriety of former Governor Arjuna Mahendran’s intervention in the Treasury Bond Auction held on February 27, 2015 and questions raised on the conflict of interest his relationship with Arjun Aloysius of Perpetual Treasuries Ltd (PTL), the Presidential Commission of Inquiry (PCOI) was formed to inquire into the irregularities in the issue of Treasury Bonds by the PDD of the CB during the period February 2015 to March 2016.
The PCOI recommended the CB for an appropriate investigation / forensic audit of ascertaining significant irregularities and closely examine the procedures followed in the PDD and decision-making process applied for raising public debt.
In view of the above, the Monetary Board of the CB decided that although the forensic audit / investigation as per the recommendation of the PCOI is required to cover the issue of Treasury Bond from 2008 to 2014, the period from 2002 to 2007 shall also be examined, thereby covering the policies and practices of debt issuances of the full period from January 2002 to February 2015.
Subsequently, BDO India was appointed to conduct forensic audit / investigation on the allegations of losses caused to the Government of Sri Lanka in the process of issue of Treasury Bonds during January 2002 to February 2015 by the PDD and / or to ascertain if a non-government entity has gained unlawfully.
On February 27, 2015, the PDD discontinued the Direct Placements as a method for raising public debt based on the instructions given by Mr. Mahendran, then CB Governor.
Inappropriate behaviour of Mr. Mahendran
The Direct Placements were suspended by Mr. Mahendran without prior approval of the Monetary Board and, the report pointed out that the powers of the Monetary Board cannot be delegated to the Governor, to exercise in his individual capacity. Also, this decision can be treated as unapproved decision as the Monetary Board did not ratify subsequently, the instruction by Mr. Mahendran.
It was an inappropriate action by the PDD by relying on verbal instruction of the Governor instead of the written approval from the Monetary Board for discontinuing Direct Placements as a method of raising public debt by the PDD.
Based on an analysis of prevailing Secondary Market yield rates across yield curve, it can be concluded that suspension of Direct Placements was one of the major factors for the subsequent upward shift in yield rates across all maturities.
The PDD or the Monetary Policy Committee had not conducted any impact assessment study before suspension of Direct Placements. There had not been a study conducted to assess any implications on the market and the ability of the PDD to successfully raise Public Debt at acceptable costs. During the interviews, current and former employees of PDD confirmed that they were not instructed to conduct any such study or evaluation.
Referring to the sequence of events on February 27, 2015 and the Governor’s instructions on suspension of direct placements, the report said that as per the facts stated in PCOI, on February 27, Mr. Mahendran visited the PDD and inquired about the auction details and specifically on the bids that had been received. The requisite details could not be shared with him since the auction was in progress and details were not available. At the closure of the auction, the PDD prepared the option sheet for the auction and after evaluation, the PDD recommendation was to accept bids valuing to Rs. 2.6 billion.
CB official Dr. M.Z.M. Aazim stated before the PCOI that at the second visit to the PDD, Mr. Mahendran inquired about the auction results and instructed to accept all bids. The senior management of the PDD raised concerns on acceptance of all bids amounting to Rs. 20 billion as it would increase the yield rates in the Secondary Market. Thereafter, Mr. Mahendran instructed to accept bids to a value of approximately Rs. 10 billion.
Mr. Mahendran said his decision to continue only public auctions and stop Direct Placements was agreed at the Monetary Board. The Governor informed the Monetary Board of his decision but “it cannot be concluded that the Monetary Board provided its approval for suspension of Direct Placements method for raising funds”.
Based on above facts and analysis, it can be concluded that Mr. Mahendran acted improperly and in excess of his authority by immediate suspension of Direct Placements without prior approval of the Monetary Board. Due to the suspension of Direct Placements, there was an increase in yield rates of ISIN in the market and apparently lost control on governing the yield rates.
Governor Dr. Indrajit Coomaraswamy confirmed before the PCOI that such powers are vested in the Monetary Board only and “cannot be delegated to the Governor to exercise as an individual”.