25 AUS 2009
AFFIDAVIT
IN THE SUPREME COURT OF THE DEMOCRATIC SOC IALI ST REPUBLIC OF SRI LANKA

In the matter of on application
under Article 126 read with Articles
17, 3, 4, Chapters Ill and VI o f the
Cons titution o f th e Democratic
Socialist Republic o f Sri Lanka
Nihal Sri Amarasekera
167 /4, Vipulaseno Mawatha
Colombo 10
Case No. SC [F R] 404/2009
Petitioner
-Vsl.

Ceylon Petroleum
Corpora l ion
109, Rofundo Tower
Galle Road
Colombo 3

2.

Sumith Abeysing he
Secretary to the Treasury
The Secretariat
Colom bo l

3.

Standard Chartered Bonk
Sri Lanka Branch
37, York Street
Colombo 1
Head Office a t l , Basingh o ll
Avenue, London EC2V 500,
U.K .

4.

Citibank
Sri Lanka Branch
65C, Dharmapala Mowotha
Colombo 7
Head Office at Citigroup
Center, 153, East 53rd Stree t,
16/F, Zone 19,
New York, NY 10022, U.S. A.

5.

Deutsc he Bank AG
Sri Lanka Branch
86, Galle Rood, Colombo 3

 Head Office at Th eodorHeuss-Allee
70,
60486,
Frankfurt, Germany
6. ·

Commercial Bank of Ceylo n
PLC
Commercial House
21, Bris'tol Street, Colombo 1

7.

People's Bank
75, Sir Chittampalam A
Gardiner
Mawatha,
Colombo 2

8.

Mr. E A Hettiarachc hi
Contro ll er of Exchange
Exchange
Con trol
Department
Cen tra l Bonk of Sri La nka
71h
Floor, 30, Janadhipathi
Mawatha, Colombo 1

9.

Hon. Atto rn ey Genera l
Attorney
general's
Department
Colombo 12
Respondents

TO:

HIS LORDSHIP THE C HIEF JUSTICE AND THE OTHER HONOURABLE JUDGES OF THE
SUPREME COURT OF THE DEMOCTRATIC SOC IALIST REPUBLIC OF SRI LANKA

I, Ashanth a L F de Mel of 1/9, Parakumba Place, Colombo 6 being a Christian do hereby

make oa th and state as follows :
1.

I am the Deponent abovenamed and depose to the matters herein contained
from my own personal knowledge. I make this affida vit in compliance with the
Order of the Honourable Supreme Court dated l 41h July 2009 and Notice dated
20 1h July 2009 received by me from the Supreme Court.

2.

I state that the Petitioner is seeking to con tend [as per the averments in th e
Petition] , inter olio, that
(a)

th e relevant hedging transactions were "deals in th e nature of
'speculating' and/or 'gambling' and/or 'betting' and/or 'wagering' "
and are th erefor e unlawful and illegal activities;

(b)

th e 1st Resp onde nt was not au th orised o r e mpowered to enter into such
arrangements;

2

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 (c)

3.

4.

5.

the 3rd Respondent has induced and/or enticed and/or comprom ised
public officers into entering into 'questionable dea ls', thereby
perpetrated a fraud on the l st Respondent - it is implicit from the
averments in the Petitioner that I am one of the public officers [as the then
Chairman
of
the
i st
Respondent]
who
was
allegedly
indu ced/en ticed/ compromised.

I state further that it is implicit from the averments in the Petition that the Petitioner
is seeking to make out, inter alio, that
(a)

I did not have th e proper authority to enter into the relevant transa c tions
on behalf o f the l st Respondent;

(b)

that I accepted inducement/enticement from the Banks to enter into the
relevant transactions on beha lf of the l st Respondent, thereby implying
that I accepted bribes and/or otherwise implicating me in acts of bribery
and corrupti o n.

I state at the onset in this connection that
(a)

I acted at all times material within the confines of the authority vested in
me as Chairman of the l st Respondent;

(b)

I acted a t a ll tim es material in accordance and comp liance w ith the
approvals granted by the Cabinet of M inisters and the Board of Directors
of the l st Respondent Corporation ;

(c)

at a ll tim es material the Board of Directors of the ] st Respondent, the
Central Bank [through its observer on the board of the l st Respondent],
and the Strategic Enterprise Management Agency [through its observer
on th e board of the i st Respondent] were kept inform ed o f details
pertaining to th e relevant hedging transactions;

(d)

I acted at all tim es material in the best interests of the
Corporation and th e Country;

(e)

I never accepted any inducement and/or en ticement and/or other form
of g ratification from th e banks concerned or from a ny other
person/organisation;

(f)

I have not contravened any provision of law in respect of th e transactions
entered into by th e ] st Respondent under my Chairmanship;

(g)

I vehemently deny any involvement in any act or acts o f bribery,
corruption or ot her illegal activity.

Responden t

Without prejudice to the foregoing, I shall hereinafter proceed to provide
information rela tin g to the hedging arrangements within my personal knowledge
as directed by Your Lordships' Court. .

3

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i st

 ..

Background to the hedging arrangements

6.

As for boc k os July 2006, th e form er Cha irma n o f th e i st Responde nt hod been
reques te d by Dr. The nuw oro , Direc tor o f Eco nomic Researc h of the Centra l Bonk,
to partic ipa te a t a p resen ta tion by Deutsche Bonk on Cru de Oil Hedging
m echa nisms .
A tru e copy o f a letter in this co nnec tio n d a ted 3 1st July 2006 is p rod uced
herewith marked os Xl .

7.

This w as followed by a furth er le tter to the th e n c ha irma n o f the l st Responden t
[following a discussion betwee n the Chairman and the G overnor o f the Central
Bo nk] .co nfirming tha t it would be use ful if a m echanism was to b e develope d to
hedge against high o il prices. A paper develop e d by th e Central Bo nk was also
a ttached to this letter, toge ther w ith a specim e n letter c o lling for quotatio ns for
d iffere nt hedge instrumen ts.
Tru e copies of the said lett er doted 30th August 2006 together with the onn exures
thereto ore p roduced herewith m arked as X2, X2(a) and X2(b) .

8.

The said paper developed by the Cen tra l Bonk [m arked as X2(o)] d iscusses the
b asic he d ging mecha nisms ava ilable for co nsidera tion . The paper refers to 3
fre quently used alt ernati ves [th e examp les g iven below ore inc luded for th e
b enefit o f Yo ur Lordshi ps ' Court] .
(i)

Crude Oil Swap - under this mecha nism , a fixed p rice w ill be ag reed upon
[between th e CPC a nd the releva nt fin a nc ia l institution] . If th e m arket
price goes ab ove th e fixe d price, the b a nk will p a y CPC th e difference,
w hile if th e market price fe ll below th e fixed price, C PC would ha ve to
pay th e difference to th e bank. Th e instrum ent req uired th e paym ent of a
premium by CPC [similar to on insuran ce premium] .

(ii)

Crude Oil Cap - Und er thi s m echa nism a 'strike' p rice or 'c op' is agreed
upon. If th e marke t price rises above th e c op, th e bank would p ay th e
differe nce to C PC. However, if th e market price fall s b elow th e cop, CPC
c on opt to p urc hase fro m th e marke t at th e market price w ithout paying
th e d ifference to th e b a nk. Th e m ec ha nism howev er re quires th e
payment o f a premiu m for every barrel under the arrang e men t .

(iii)

Zero-Cost Collar - Unde r this mecha nism a maximum strike price a nd a
minimum fl oor pri ce ore a g reed upo n. No premium is payabl e [he nce th e
term 'zero-cost] . If th e marke t price ris es above th e strike price, th e bank
p a ys the d ifference to C PC. If the marke t p rice hovers b e twee n th e strike
p rice and th e fl oor pri ce, neither party m akes an y p aymen t to th e o th er. If
th e market price fa lls b elow th e floor pri ce, C PC hos to pay th e diffe re nce
to th e ban k.

4

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 9.

In X2(a ), th e Centra l Bank had analysed potential gains to CPC und er th e above
alternative mechanisms based on past and forecast ed o il prices, and concluded
that the best op tion for CPC wou ld be th e Ze ro-Cos t Collar option. In fact at
paragraph 6.2 [under the heading 'Deciding on suitable hedging instrument'] it
has been stated as follows:
"The main objective of Sri Lanka entering the derivative market is to avoid
potential price instability arising from high volatility in inte'rnational oil prices. The
ZC collar will provide protection from rise in oil price beyond the agreed
maximum strike price without payment of premia. There will be losses only if price
falls below the minimum floor price. Therefore the best option for Sri Lanka at the
initial stage will be ZC collar hedging . ... " [emphasis added]

l 0.

Consequently, the Governor of the Central Bonk, Mr. Ajith Nivard Cobrool, mode
a presentation to the Cabinet of Ministers on the 61h of September 2006 on
hedging under the topic 'Ma intaining Stability in o Volatile G lobal Oil Market',
which was followed by o discussion. Consequently the Cabinet decided that o
study group should be formed consisting, inter olio, of officials from the Cen tral
Bonk, Ministry of Finance and Planning and Ministry of Petroleum and Petroleum
Resources Development to study th e subject further and report to the Cabinet so
that a decision could be taken .
A true copy of a document in this co nnection confirming the said Cabinet
Decision is produced herewith marked as X3.
I also p rod uce herewith a true copy of o letter doted 20 1h Sept ember 2006
addressed to th e Secretary o f the Ministry of Petroleum and Petroleum Resources
Development by th e Secre tary to th e Treasury, marked as X4.

11 .

Consequently, a study group was appointed as directed by th e Cabin et to study
the subject and report back to th e Cabinet .
A tru e copy o f a le tt er dated l 91h October in this con nection addressed t o
me mbers of the study group by th e Secretary to th e Treasury is produced
herewith marked as XS .

12.

Thereafter the Study G roup appoin ted as aforesaid submitted th eir report to the
Secre tary of th e Treasury on or about the l 6'h o f November 2006.
True cop ies of th e cove ring letter in this connec ti on doted l 61h November 2006
and the said report are produced herewith marked as X6 and X7 respec tive ly.

13.

Accordin g to the Report o f th e Study Group, th e following recommendations
were ma de:
(i)
(ii)
(iii)

CPC to hedge purchase o f petroleum products, both c ru de oil and
refined p roduc t, in the international market.
Use Zero-cost Co ll ar as th e hedging ins trument with th e upper bound
based on market developmen ts.
Commence hedging w ith sma ller quan titi es for a shorter period and
gradually in crease th e qua ntity and dura ti on .

5

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 (iv)
(v)

14.

Grant authority to CPC to ca ll for quotations for oil hedging, decide on
future prices and purchase hedging instruments from reputed banks.
Grant authority to CPC to change the instrument based on the
developments in the market.

Consequently, th e 1st Respondent called for quotations from several banks based
on the zero-cost col lar mechanism for hedging its oil purchpses.
I produce herewith in this co nnection true copies of letters calling fro quotes from
banks, marked as X8(a) , X8(b), X8(c), XB(d) and X8(e).
A tru e copy of a letter dated 11th December 2006 addressed by me to the
Secretary to the Treasury notifying the quotations received, is annexed hereto
marked as X9 .

15.

Thereafter, in or around January 2007, I suggested to the Hon. Minister of
Petroleum and Petroleum Resources Development that an expert in the oil
hedging field be hired since the hedging mechanism required expertise and
hands-on experience.
A tru e copy of a letter dated 91h January 2007 addressed in this con nection by
me to the Hon. Minister is produced herewith marked os Xl 0.

16.

I state that since there was some delay in obtaining the necessary approvals and
proceeding with the recommended hedging arrangements, th e Governor of the
Central Bonk and I exchanged a series of correspondence, wherein the Governor
impressed upon me the need to urgently enter into suitable hedging
arrangements.
True copies of letters dated l 0 1h January 2007 addressed by the Governor of the
Central Bank to me, 11th January 2007 addressed to the Governor by me, 16 1h
January 2007 addressed by the Governor to me and 23rd January 2007 addressed
by the Centra l Bonk to me in this connection are produced herewith marked as
Xll(a), Xll(b), Xll(c) and Xll(d) respectively.

17.

Consequently the Hon . Minister of Petroleum and Petrol eum Resources
Development submitted a Memorandum to the Cabinet dated l 31h January 2007
seeking the approval of the Cabinet to implement the above recommendations
o f the Study Group.
A true copy of the said Cabinet Memorandum is produced herewith marked os

Xl2.
I also produce herewith a true copy of a document dated 3 1st January 2007
issued by Hon . Mahinda Rajapakse, in his capacity os the Minister of Finance and
Planning stating that he has no objection to the above proposal, marked as Xl3.
18.

I state the Cabinet o f Ministers consequently, on or about th e 171h o f January
2007, approved the proposals and directed that the same be implemented
without delay.

6

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 .. - ---

A tru e copy of th e Cabine t Approva l in this connec ti on is produce herewith
marked as Xl 4.
19.

Thus and otherwise I state that the Cabinet of Ministers, based on the
recommendations of the study group, unambiguously granted approval for the
CPC to,
.

(i)
(ii)
(iii)
(iv)
(v)

I

hedge purchase o f pe troleum products. both crude oil and refined
product, in th e international market;
use Zero-cost Collar as the hedging instrument with the upper bound
based on market developments;
commence hedging w ith sma ller quantities for a shorter period and
g radually increase th e quantity and duration;
to call for quotations for o il hedging , decide on future prices and
purchase hedging instrum ents from reputed banks;
change th e instrument based on the developments in the market;

0

20.

It is th·erefore manifestly c lear that the decision to enter into hedging
arrangements based on the zero-cost collar mechanism was a decision of the
Cabinet of Ministers based on recommendations of the Central Bank and a
specially appointed study group. What must also be noted is that at the time the
primary conce rn was th e in creasing oil prices, hence the recommendation and
direction that the hedging instrument be upper bounded based on market
developments.

21.

I state that co nseque ntly, th e board of directors of th e l st Respondent d iscussed
th e proposed arrangements at length and approved the l st Respondent entering
into hedging arrangements with Citibank, Standard Chartered Bank, Deutsche
Bank, Peoples Bonk and Commercia l Bank. In this connec ti on I state as follows:
(a)

All master hedging agreements [ISDA agreements] entered into w ith
banks were cleared with M/s Nithya Partners, a leading firm of
commerc ial lawyers, prior to execution.
Tru e cop ies o f co rrespondence in this connection exchanged be tween
the l st Respondent, M/s Nithya Partners and the relevant banks is produce
herewith compend iously marked as Xl 5.

(b)

A representative from the Centra l Bank sot in on a ll board meetings and
was kept abreast of a ll developments pertaining to the hedging
arrangements.

(c )

Mr. P L K Karunaratne, DGM-Finonce o f th e Jst Respondent, was th e pt
Respondent's expert on financial matte rs, and all hedging arrangements
were first c leared wi th him. In fact , I placed my signature on the
agreements on ly af ter th e said DGM-Finance had first cleared the
documen t and signed same.

(d)

The board of direc tors o f th e l st Respondent authorised me and the said
DGM-Finonce to sign all documents on behalf of the 2nd Respondent.

7

'•

 I produce herewith in this con nection true copies of minutes of th e
meetings of the board of directors of th e ]st Respondent he ld during
February and March 2007 marked as Xl 6 a nd Xl 7.
I also produce herewith true copies of certified extracts of board
resolutions authorising the 1st Respondent to enter into the relevant
hedging agreements and for me and th e said Mr. K,:arunaratne to sign the
agreements on behalf of the 1st Respondent, marked as Xl 8, Xl 9 and
X20.
22.

Thus and otherwise I sta te that a t a ll tim es material I acted within the scope of the
authority granted to me, with the approval and sanction o f th e board o f directors
and in the best interests of th e Jst Respondent. Furthermore, all hedging
transactions e ntered into by the 1st Respondent were within th e scope o f the
approval granted by the Cabinet o f Ministers referred to herein above.

23.

I state although much has been said about the losses being suffered on the
hedging transa c tions, what must be borne in m ind is that the sa id transactions
had been in operation for over 18 months. Until August/ September 2008 the 1st
Respondent was gaining on the hedging transactions due to the high world oil
prices .

24.

Hedging transactions were entered in to to protect against a steep rise in oil
prices. It could not have been anticipated at the time that the prices of oil wou ld
cras h so drastically. In this connect ion I state that even finan cia l ana lys ts th e
Goldman Sachs Group, the foremost authority on oil price forecasts, in both
August and September 2008 maintained that according to their forecasts the
price of oil would be USD 149 per barrel by year end 2008 .
I produce herewith the said forecasts o f the Goldman Sachs Group for Augus t
and September 2008, marked as X21 and X22 respectively.

25.

I sta te that even in November 2008, when the Cabinet was considering th e
unexpected and una ntic ipated situation that had arise n with re gard to th e
hedging arrangements pursuant to a c rash in global oil prices, I was appointed to
the 'Hedging Risk Management Committee'. Th e terms of reference for th e said
committee were, inter olio , to negotiate w ith hedge providers to restructure th e
hedge positions and eva luate th e risk o f active hedge con tra c ts in re lation to
price forecasts.
I produce herewith true cop ies of draft cabinet decisio ns in this regard marked as
X23( a) and X23(b) respectively together w ith Cabine t Memorandum dated 1 7th
November 2008 and the terms of refere nce for th e Hedging Risk M a na gement
Commit tee marked as X24(a) and X24(b).

26.

I state in hindsight, th e zero-cost coll ar option may not hove been t he bes t option
g iven the presen t scenario. While the 'crude oil cap' option , where for the
payment of a premium no losses would be in curred on the downside may hove
served the 1st Respondent b e tter given the present situation, such option was
cons idered to be no t viable given th e 1st Respondent 's cash flow situation (the
premium was payable upfront]. It was in this background that the Central Bank
and the study group .recommended the zero-cost collar option .

8

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 27.

I sta te that even Lanka IOC, th e o th er p layer in the marke t entered into similar if
not identical hedging agreements with hedge providers . Therefore Lanka IOC,
which is on independent private entity, also took similar commercial decisions to
hedge the risk of high oil prices . This dem o nstra tes tha t the decisions taken by the
1st Respo ndent in respec t o f th e hedging agreements were commercia lly
re aso na ble give n th e th en marke t forecasts for oil.

I prod uce herewi th in this connec tio n a true copy of a document dated 101h July
2008 issue d by Citiba nk to La nka IOC PLC, marked as X25 .
28.

I sta te that th e Centra l Ba nk in its An nual Reports for 2006 and 2007 has expressly
no ted the ac hievements of the 1st Respondent including th e enteri ng into of the
hedging agreements . In the said report the Central Bank has clearly re ferred to
the number of agreements entered into and the risk mitigating income earned by
th e 1st Respondent from such agreem en ts during the year.
I p~oduce herewith true copies of the re levant pages from the Central Bank
Annua l Reports for 2006 a nd 2007, marked as X26(a) and X26(b) .

29 .

I sta te t ha t as per the averments in the Petition, the allegations of
inducement/enticemen t aga inst me are based on the contention that the banks,
more parti c ularly the Jrd Respondent Sta ndard C hartered Bo nk, paid m y air travel
cos ts [paragrap h 10 o f the Petitio n] . In th is co nnec tion I sta te as fol lows:
(a )

In order for us to d e termin e w hat hed g ing options were a p p ro p ria te for
th e 1st Responde nt, it was necessary for us to obta in a . proper
un dersta nd ing o f th e na ture o f d e ri vatives a nd how hed g ing tra nsactions
operated in th e in te rn a tio na l marke t.

(b )

Fo r this purpose, it b ecam e necess ary for us to participa te in
tra ining /fa miliarisa tio n programm es arra nged by the releva nt b a nks an d
a lso to m eet w ith th e releva nt officia ls of the b a nks at th eir o ffices .

(c )

I state in this connectio n tha t in my c apacity as c ha irma n of the
Responden t, I was sen t overseas as per th e details g iven below:
(i )
(ii)

(iii)

(iv)
(v)

Two trips to Singa p ore a nd once to Dubai - arranged by Sta ndard
C hartered Bank to m ee t with its offi c ia ls at its reg ional o ffices.
O ne trip to Lo nd o n arrang e d by Citiba nk for a tra ining progra mme
o n deri vatives and an informati ve visit to th e Lo ndon Inte rnationa l
Commodities Exc ha nge
O ne trip to New York and Housto n arranged by Citiba nk for a
fam iliarisa tion visit to a n oil rig [in Housto n] an d a visit to th e New
York Mercan tile Exc ha nge
______________________________________________
O
ne tri p to Singapore arranged by Deutsche Ban k to its regiona l
______________________________________
offices
to familiarise myself w ith the deri va tives p roduct
One tri p to Singapore arranged by People's Bank to meet with
o ffic ia ls of Goldman Sachs.

9

·.

] st

 (d)

The banks concerned sponsored only my airfare and hotel
accommodation in connection with th e above trips and a ll trips were of
short duration - most only lasting one or two days.

(e)

All the aforesaid foreign trips were on offic ial busin ess in con nec tion with
my duties as c hairman of the ] st Respondent.

(f)

In addition to the above mentioned trips, the Indian Regional Office of
Standard Chartered Bank extended an invitation to me to participate at
a CEO's conference held in Goa, India. This was a client event named
"Incredib le India 60". Participants' families were also hosted by the Indian
regional office of the Bank and conseq uently my wife and daughter a lso
accompanied m e . We trave ll ed o n eco nomy class to Goa and back.
Over l 00 other CEOs from th e regio n togeth er w ith th eir famili es also
partic ipated at the even t.

30.

In all of th e circumstances I deny that I was part o f any 'unp ro fessional '
indu ceme nt a nd /or e nticement as hos been alleged by the Petitioner. At no
stage have I accepted any gratification , inducement, entice m ent or bribe in th e
performan ce o f my public duties, neither has any allegation or stricture been cast
against m e in that regard.

31.

I state that at various times insinuations hove been made to the effec t that I
personally gained from the hedging transactions. Aspersions were also cas t upon
my daughter. I state that my daughter, Stephanie de Mel followed an internship
programme with Standard Charters Bank for just over one and a half months Lo
January/February 2008 [i.e. well after the hedging contracts were entered into]
as part of her University requirement. Th ere was nothing irregular or underhand
about such internship, and such internships are offered by most banks and
companies to University students.
I produce herewith in this connection two letters issued by Standard Chartered
Bank to my daughter, marked as X27(a) and X27(b) respectively.

32.

In all of the circumstances I state that
(a)

I acted at all times with th e approval o f the Cabinet of Ministers and the
Board of Directors of the l st Respondent;

(b)

I consulted and obtained the advise of experts and those experie nced in
the subject when taking a ll decisions;

(c)

I kept the board o f directors of the ] st Respondent informed at al l times of
the position in respect of the hedging agreements;

(d)

I acted at all tim es in the best interests of the

(e)

I acted at all times in accordance w ith good business practice, took all
precautions and followed a ll requisite protocols in relation to th e hedging
agreements en tered into by th e Js 1 Respondent.

10

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] st

Respondent Corporation;

 33.

I reserve the right with the permission of Your Lordships' Court to te nder such
furth er affidavits/information if so required.

The contents of th e foregoing
affidavit having been read
and und ers tood by th e
deponent
abovenamed
sworn to and signed at
Colombo on this'Z./Sbay of
August 2009

~I
Before me
0

e of the Peace

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