CB: No need to pay banks

Hedging - Citi Bank seeks arbitration, puts CPC in a spot

By Feizal Samath

(February 01, Colombo, Sri Lanka Guardian) The Central Bank this week responded with a firm ‘no’ on whether Standard Chartered Bank, Citi Bank and three other banks are now able to recover their dues running into millions of US dollars from the Ceylon Petroleum Corporation (CPC).

However an action, filed in an international tribunal by Citi Bank to arbitrate on the payments could result in the CPC being compelled to fulfill its dues – payment of millions of US dollars --under the hedging contracts. If this happens – with the liability in the region of around $800 million – the country’s depleted foreign reserves would further shrink.

Citi Bank, it is learnt, had prior to the Supreme Court verdict earlier this week (January 27), filed the international action. Citi Bank CEO Dennis Hussey, when contacted by this newspaper on Thursday, declined (through his secretary) to comment on any issue related to the hedging deals. The general practice of commercial arbitration is under ICC (International Chamber of Commerce) guidelines, when a payment or related issue is in dispute, and filing action in London. In this case it is believed to be under the aegis of the ISDA (International Swaps and Deriva tives Association) rules. Central Bank (CB) officials also said they have learnt of the international action filed by Citi Bank but didn’t have details.

On Tuesday, the Supreme Court ruled that it was terminating proceedings in the hedging cases (see inside for more details) because the government was not fully implementing its orders in terms of fuel pricing. With that the interim orders on the suspension of CPC Chairman Asantha de Mel, its DGM (Finance) Lalith Karunaratne and payments by the CPC to the banks including Commercial, Deutsche and People’s, were vacated (withdrawn).

While that completely threw off-gear the entire process and meant the CPC’s payments to the banks will resume and also that the two CPC officials will be reinstated, CB officials insist the situation remains unchanged. Other sources said that Mr De Mel is unlikely to be reinstated though the situation regarding Mr Karunaratne, both of whom were accused of corruption in the one-sided hedging deal, is unclear.
The CB also quickly issued a statement the following day (Wednesday) saying that irrespective of the Court ruling, instructions and/or directions issued by the CB to the respective banks in accordance with the law, will continue to be in force.

The CB said that its investigations revealed substantial non-compliance with the prudential directions it issued relating to derivative transactions, and non-compliance with best market practices and prudential norms generally applicable to such transactions.

“In view of the findings, the CB’s Monetary Board concluded that the hedging transactions entered into by the CPC with a number of banks were materially affected and substantially tainted. In the circumstances, on December 16, 2008 the CB instructed the respective banks not to proceed with, or give effect to, these transactions,” it said.

The CPC liability to the banks is said to be in the region of $800 million. Crude oil prices in the meantime has been rising and was between the $43-46 per barrel range this week, up from around $30 and lower a few weeks back. Oil industry analysts said that every time crude price rises its beneficial to the CPC as its liability to the banks, under contracts that end next June, reduces.

Explaining further, a highly-placed CB official said the investigation into the hedging issue began on media reports and before the fundamental rights petitions on hedging were filed in Court.

“On that investigation, we found the contracts were flawed and told the banks not to proceed. Hence they cannot resume these contracts and/or payments under it,” the official said. That the CB would proceed with their investigation even if the Court withdrew the interim orders suspending payments, was also reported in The Sunday Times FT on January 17.

The official said the CB legal team has advised that there is no need to send another directive, after the court ruling this week, to banks to ensure they comply with the CB directive of not proceeding with the contracts. “If they proceed, we will take action under the Monetary Law Act,” he said. -Sri Lanka Guardian