Standard Chartered is being sued by a group of multibillion-dollar hedge funds, including Arrowgrass, Highbridge and Pine River, over who should hold the losses on derivative contracts tied to the bonds of an Indian car-parts company.
The hedge funds allege that the company, Castex Technologies, manipulated its own share price so it could force the conversion of its convertible bonds into equity.
The dispute stems from a period between March and July 2015, when Castex’s share price rose steeply before falling just as dramatically. The hedge funds say in court papers that the swings are “consistent only with manipulation” and are “suspicious”.
Castex had issued $130m in bonds in 2012, with the British bank as the lead arranger. Standard Chartered then sold the hedge funds a type of call option called “asset-swapped convertible option transactions”, or Ascots. Pine River also owns some of the bonds directly.
Under the terms of the bond, Castex was entitled to convert the bonds into equity at a fixed price if its share price exceeded Rs130, an amount more than twice its average trading level, after April 5 2015 for 30 consecutive trading days.
During the share price swings in mid-2015, the stock reached as high as about Rs344 in July. It is now trading at close to Rs14.
Standard Chartered has told the funds that they must pay more than $30m to buy the shares issued in place of the bonds related to their options and to pay the bank the value of the bonds.
While the dispute itself is not as large as many that banks face, the allegation from several leading hedge funds is still an added headache for Standard Chartered as it grapples with the fallout from the referendum vote in Britain, and what that means for the future of the country’s financial sector.
The funds have asked the High Court in London to rule whether the Castex share price was manipulated, and therefore that the conversion should never have happened. If the court does decide that the conversion was valid, then the funds are seeking assurance from the court that they are not obliged to buy the Castex shares, but rather options over those shares.
The dispute ultimately comes down to who should be holding the losses, Sue Prevezer QC, representing the hedge funds, said at a court hearing in the case in London on Friday.
“The real issue between the parties [is] where that damage should fall and where it should be recovered,” Ms Prevezer said.
“It’s easy to see why SCB is taking the position it’s taking,” she added, referring to Standard Chartered. “It’s seeking to pass that loss on.”
In a statement, Standard Chartered emphasised that the hedge funds were not alleging that the bank had committed any wrongdoing.
“Other issues arising from this matter are in dispute between the parties, and subject to legal proceedings,” the bank said. “As such we are unable to comment further at this stage.”