By Sandun A. Jayasekera
Petroleum Industries Minister Susil Premjayantha said Sri Lanka was not likely to pay the huge compensation of US$ 261 million or the equivalent of little over Rs. 30 billion demanded by three foreign banks for the abrogation of the controversial hedging deal with the CPC.
Minister Premjayantha told the Daily Mirror yesterday he was studying the documents including the recommendations made by Attorney General Mohan Peiris.
“I have given the top priority to the hedging deal issue and attempt to work out a strategy to settle the dispute in a mutual and agreeable manner,” he said.
Attorney General Peiris has already participated in several rounds of arbitrations on behalf of Sri Lanka in London and Singapore and has been successful in arriving at understandings with the Deutsche Bank, CITI Bank and the Standard Chartered Bank of England on the hedging deal signed with the CPC in January, 2007.
According to Mr. Peiris, the three banks have even agreed to come to a compromise after Sri Lanka took the position that the hedging agreement signed between the CPC and the banks was basically ultra-vires and against the bilateral and international norms of financial agreements based on Investment Protection Treaty.
A high powered legal team headed by Mr. Peiris is negotiating with the three foreign banks that had entered into the hedging agreement with the CPC, Minister Premajayantha said.
Following the Supreme Court ruling given against the agreement 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 CPC.
The legal team has been able to save over Rs 30 billion for the country following its successful performance before the arbitration panel in Singapore and commercial High Court in London, he stressed.
According to the recommendations of Mr. Peiris it was of paramount importance to sign the ISDA (International Swap Dealers Association) a derivative agreement- together with the principal hedging agreement. They had failed to sign it and were not entitled to any extra payment.
“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 entering 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,” Mr. Peiris has recommended, Minister Premjayantha 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.
“In short this is a case of misleading and breach of treaty. The three foreign banks now want to settle this amicably on mutually beneficial terms. They do not want to confront Sri Lanka. They have no other choice. Hence, payment of compensation to the three banks is very slim. We have filed our answers with the arbitration panel in Singapore and Commercial High Court in London, he said.
An order from London and Singapore is expected in early June. The members of the Sri Lankan team comprised Senior State Counsel Janak De Silva and Senior State counsel Milinda Gunatilaka assisted by Senior State Counsel in London, Prof. James Crawford - a world authority on state responsibility.