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Bonds sold at high rates on Sri Lanka Central Bank Governor’s orders: inquiry

ECONOMYNEXT – Sri Lanka’s Central Bank has sold 30-year bonds at high interest rates on the order of Governor Arjuna Mahendran, where a company connected to his son-in-law has benefitted, over-ruling officials of the debt office, a draft report of a parliamentary inquiry shows.

The Central Bank’s Public Debt Department which issues debt on behalf of the Treasury, sold 10 billion rupees of 30-year bonds on February 27, after calling bids for only a billion rupees.

Around 5.0 billion rupees of bonds were to Perpetual Treasuries, a firm connected to his son-in-law, Arjuna Aloysius where 3.0 billion rupees was awarded at 12.5 percent.

The controversial deal, sent 30-year yield rocketing to 11.73 percent at the auction, up from around 9.5 percent, driving up yields across maturities. A shell-shocked gilt market came to a standstill for almost two days with dealers were unable to price securities in any maturity.

The parliaments’ Committee on Public Enterprises (COPE) which interviewed connected officials had found that the controversial deal had occurred amid objections of Public Debt officials.

A tender committee had recommended that only 2,608 million rupees be raised from the auction.

The probe committee had found a minute by the Superintend of Public Debt (SPD) saying "Governor instructed to raise up to Rs 10 Billion taking into consideration additional fund requirement of the Government."

The draft report said the Governor Mahendran had visited the debt office twice on February 27, "which had never happened before."

He had first come to the department at 1045 hours, before the bidding had closed. He had left after bidding closed and then come back with two deputy governors at 12.30 p.m.

The Public Debt Department had recommended the acceptance of 2,608 million rupees of 30-year bonds.

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Mahendran had then looked at the bids and asked officials to accept all bids valued at 20 billion of which 15 billion rupees of bids had come from Perpetual Treasuries.

However the Additional Superintended of Public Debt and the Superintended had disagree and "they were able to convince the Governor that it was not a proper decision" as the rates were too high. Mahendran had then asked officials to accept 10 billion rupees in bids and "convey the message to the Tender Board".

"Finally the officials had agreed upon the decision since the Governor had also stated that he would not allow Direct/Private Placement," the report said.

The original plan had been to raise 1.0 billion rupees by auction and place the balance at the auction rate, the report said.

From December 2013 to March 2015, Shiromi Wickremasinghe, a sister of ex-Central Bank Governor Nivard Cabraal had been a director of Perpetual Treasuries, raising concerns over related deals, the report said.

The report was not tabled in parliament before it was dissolved last week.

Governor Mahendran had denied wrongdoing and Prime Minister Ranil Wickremesinghe had also defended the deal and the opposition had gleefully seized upon the scandal to show that the "good governance" or "yahapalanaya" credentials of the new administration had been shattered.

Update II

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