Three foreign banks with offices in Colombo were written to by the Central Bank last week calling for explanations on matters identified during the ongoing preliminary investigation into the oil hedging contracts between themselves and the Ceylon Petroleum Corporation, authoritative official sources said yesterday.

The three banks addressed are the Standard Chartered Bank, Deutsche Bank and Citibank. They have been required to submit their explanations on the matters queried within seven days of the service of the individual letters, the sources said.

The final determination of whether the banks have been compliant or not with Central Bank directives on the hedges will be made after the explanations are in.

Two local banks, Commercial Bank of Ceylon and the People’s Bank, had also entered into hedging arrangements with CPC but these were relatively small.

These transactions too will be investigated shortly, the sources said.

The letters that had been sent out by the Central Bank suggests that there are grounds to believe that the concerned banks had failed to comply with the letter and spirit of the Central Bank directive in several areas including giving CPC’s board of directors relevant and adequate information on hedging and maintaining the highest levels of transparency.

Given CPC profitability in the last three years averaging around USD 50 million, questions have also arisen whether the commercial banks concerned in their credit risk evaluation considered the fact that CPC was exposed to a risk of around USD 450 million – nine times its average annual profit.

``If the transaction had not adhered to the directions that have been issued, the Central Bank may well hold that they are not valid,’’ a senior financial analyst said. ``It is also likely that the bank will report its findings to the Supreme Court.’’

The court on Friday directed the Monetary Board to carry out an investigation on the impugned transactions and take action thereon.

In the course of a fundamental rights hearing in the Supreme Court on Friday, a three-judge bench headed by Chief Justice Sarath N. Silva with Justices K. Sripavan and P.A. Ratnayake held that "that the petitioners had made out a case for the grant of interim relief."

"Considering the admitted conduct of the Chairman, CPC, we make order suspending him with immediate effect from functioning as the Chairman of the Ceylon Petroleum Corporation," the Court directed.

The court said that it was unable to agree with President’s Counsel for Minister A.H.M. Fowzie that the minister had taken due steps in supervising this (hedging) transaction.

It said that it appeared that the minister had continuously defended the actions of the chairman and in any event failed prima facie to exercise an element of control and supervision vested in by Section VII of the Ceylon Petroleum Corporation Act.

"In the circumstances, we are of the view that His Excellency the President should consider taking over these functions under his purview in terms of Article 44(2) of the Constitution and to appoint a suitable person to function as Chairman."

The court said that pending such appointment, the Secretary to the Treasury ``is hereby authorized to function as Chairman of CPC.’’