DailyMirror.lk:
Sri Lanka is deemed to pay a colossal sum of US$ 261 million (nearly Rs. 29 billion) with interest to the three foreign banks that demand compensation from the Sri Lanka Petroleum Corporation (SLPC) regarding the controversial hedging deal as efforts by the government at the arbitration panel in Singapore had failed.
Petroleum Industries Minister Susil Premajayantha said yesterday that Sri Lanka had no other option but to pay the compensation to the three foreign banks in full with interest.
The CITI Bank, Standard Chartered Bank and the Deutsche Bank went for arbitration in London and Singapore in 2008 after the SLPC abrogated the hedging deal following the Supreme Court ruling that the deal was ultra-vires the Constitution.
After the abrogation of the hedging deal the three foreign banks had invoked arbitration demanding US$ 64 million by the Deutsche bank, US$ 103 million by the Standard Chartered Bank and US$ 94 million by the CITI bank from the SLPC.
Minister Premajayantha told the Daily Mirror yesterday that there had been a basic flaw in the agreement that benefited only the banks.
“The current agreement which was rejected by the Supreme Court has misled the Sri Lankan Government. Yes, we must pay the banks if there was a legally correct agreement. Our argument at the arbitration should have based on the illegality of the agreement. It is clear that the arbitration panel has not been in agreement with the position taken by Sri Lanka,” Minister Premajayantha said.
Minister Premajayantha said he was not happy with the way the dispute on the hedging deal had been handled.
“By the time I took charge of the Petroleum Industries Ministry, the case had been already handed over to lawyers and fees had been paid. I had nothing to do in respect of the case,” Minister Premajayantha said.
The Sri Lankan government now has to do only to come to a compromise with the three foreign banks and settle the dispute amicably, he stressed.
A spokesman of the Attorney General’s Department meanwhile said it was of paramount importance to sign the ISDA (International Swap Dealers Association) – a derivative agreement- together with the principal hedging agreement.
The basic flaw of the hedging deal was it had been designed to profit only the banks.
The hedging deal should have benefited both parties on the Zero Cost Collar policy. The three foreign banks have allegedly insisted that CPC go for bulk buying which benefited only the banks, he said.
“The position taken by the Supreme Court was that the contract entered between the three foreign banks and the CPC was ultra-vires as it was against the instructions of the Central Bank (CB).
The CB on the recommendations of the ‘Mandate Study Group’ appointed to look in to the subject had recommended to enter into small quantities for shorter periods of hedging on Zero Cost Collar basis. But the agreement went out of this mandate and had signed in to bulk buying on the insistence of the three foreign banks. In short it was a corrupt deal,” the source emphasized. In fact the study group’s recommendations went to the cabinet and the CPC was instructed by the cabinet to go in to smaller quantities for shorter periods. In turn the CPC board instructed Deputy Finance Manager to enter into an appropriate agreement in accordance with the cabinet instructions but the CPC had done exactly the opposite, he said.