Sri Lanka’s hedging and Golden key scandals figured in a conversation I had with an accountant recently.
He said that the mistake the authorities made when entering into hedging agreements with banks is by not hedging against the possible downside risk. Banks on their part however had upper limits fixed in their hedging agreements with the state owned Ceylon Petroleum Corporation (CPC), thereby ensuring that in the event the price of crude oil went beyond a certain maximum they won’t be obligated to pay the CPC.
Similarly CPC too should have had hedged against the downside risk in the event oil prices fell below a certain price, which however they didn’t, the root cause of the current hedging imbroglio, the source who did not want to be named said.
Oil prices fell from a high of US$ 140 a barrel to US$ 40 after the commodity bubble burst in mid 2008, with CPC taking a hit as their hedging arrangements with the banks did not cover themselves against the possible downside risks of oil prices falling. Their hedging was only against the upside risk.
When CPC however refused to pay their hedging liabilities to the banks after the oil prices fell. The three affected foreign banks, namely Standard Chartered Bank (SCB), Deutsche Bank and Citibank then went into arbitration. Recently a London court ruled in favour of SCB, directing CPC to pay US$ 162 million together with interest to that bank. The other two hedging claims are pending.
However, in a seeming tit for tat, Central Bank of Sri Lanka (CBSL) which previously pushed CPC to hedge against rising oil prices then, has had fined SCB double that of its hedging claim for alleged foreign exchange violations.
The source said that such an alleged tit for tat charge by CBSL however give investors the wrong signal. The last thing that investors would want to do is to come to a country where banks are not protected, he said.
And on CBSL absolving itself from the Golden Key scandal on the grounds that it’s not a registered finance company (RFC), the source said then what’s the point in being an RFC?
It’s then better for a finance company not to register with the CBSL, but rather, operate on its own, just like what Golden Key did, the source said. Probably being registered with CBSL far outweighs the cost of being a RFC?
Howbeit CBSL’s investigation of Golden Key prior to its collapse was mired in legal arguments, on the basis that that fraudulent company insisting that their’s is not a deposit taking institution, thereby not having to be burdened by being registered with CBSL, but instead its activities akin to being taking security deposits against the issuance of credit cards, though there had been customers who had had opened illegal fixed deposits with it, but got no credit cards nor asked for credit cards in return.