7/26/2009

Greed of Standard Chartered Bank officials and the folly of Sri Lanka state officials lead to fuel hedging


(July 26, 2009 - Lanka Polity) Today's Sunday Leader reproduced a document that explained some vital facts related to oil hedging deal between the Ceylon Petroleum Corporation (CPC) and the Standard Chartered Bank (SCB). The affidavit filed on July 24 by Kimarli Fernando, formerly of Standard Chartered Bank, in the Supreme Court last week was published by Sunday Leader with the permission of Ms. Fernando.

In the affidavit, Ms. Fernando cites that the SCB local office projected a commission of approximately one billion rupees in Sri Lanka, and looked at commissions to be booked at one billion rupees overseas.

Recalling her discussions with Mr. Asantha De Mel, the former Chairman of CPC at his office on the 24th of October 2007, Ms. Fernando says that he informed her that he had no appetite to lose money and he had no interest on one year structures and looked for short tenors. He also had said that he expected the banks to guide him daily to ensure that the transaction had value and profits.

However, she cites, "I noticed that the CEO Mr. Clive Haswell was very adamant that the oil hedging deals were concluded as soon as possible given the commissions for the bank. This was mainly because the bank’s earnings are directly linked to the CEO and the other top management’s bonus. I was aware that the CEO Mr. Clive Haswell did not have prior experience of working in risk management, corporate or as a CEO and explained to him at least the following as I recall.

"The oil hedging transaction can expose CPC to unbearable losses if the oil prices decline because there was no down side protection for CPC. I explained that CPC did not have the understanding and expertise to consider the risks involved.

"I highlighted that CPC and Sri Lanka can be exposed to severe foreign exchange exposure and repayment will need capital outflow from the country, which requires the approvals of the Central Bank of Sri Lanka as per exchange control guidelines.

"I explained that no sensible private sector company will enter into such risky oil hedging instrument which appeared to me one sided and that to me the transactions appeared extremely speculative.

The affidavit is filed as directed by the Suprem Court in relation to Case No. 404/2009 filed on May 25th 2009, by public interest activist Nihal Sri Amarasekara. The petition states regardless of specific directions given in or about December 2008 by the CB’s Monetary Board, Standard Chartered Bank has remitted in valuable foreign exchange a sum exceeding US$100 million between December 2008 and April 2009, and was endeavouring to remit a further sum exceeding US$20 million on ‘Back to Back Agreements’ entered into with one or more foreign parties.

In another petition filed in June 2009, Nihal Sri Amarasekara seeks an interim order from the Supreme Court to restrain the Ceylon Petroleum Corporation (CPC) and the Treasury Secretary from participating in any arbitration proceedings or litigation with any of the banks involved in the hedging contracts until a final determination is made on the application. He is also asking that the interim order be converted into a permanent order upon the final determination of the application.

Mr. Ameresekere cited that he understood Standard Chartered Bank had instituted legal action in the UK High Court, making a claim against CPC, while Deutsche Bank has filed for arbitration in the International Center for Settlement of Investment Disputes (ICSID) in the US, and Citibank has instituted arbitration proceedings in the U.K, in the London Court of International Arbitration. He said that to date, he understood the arbitration (defence) alone had amounted to around Rs.25 million which is public money.

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