Ships,banks,a court case and Iran sanctions add up to a diplomatic headache for India

Such has been the sequence of events that Iran has now chosen to detain an Indian ship,the M V Desh Shanti,citing pollution rules,and summoned the Indian ambassador in Tehran to remind him about the fate of M V Dianthe. The story leading up to this diplomatic drama is complex and intriguing.

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Like most Iranian ships,the Dianthe is affected by the sanctions on Islamic Republic of Iran Shipping Lines. As a result,financial transaction related to the purchase of the ship from its original owner could not be completed. And so,Nordbank AG — the bank involved in the transaction over the vessel — was on the lookout to initiate legal action.

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The firm chose to act when the vessel was berthed in India. Invoking admiralty rules and maritime laws that apply on international waters,Nordbank filed a petition in the Bombay High Court in August 2011,seeking a stay on the movement of the vessel just days before it was to sail out. From here,began a legal process that has now got the Indian government in a tangle.

The case by itself was simple,with the petitioner seeking to settle a financial claim. The court held many hearings and eventually on December 13,2012,passed an order that the ship could be allowed to sail on providing a security of about $ 18 million,the value of the vessel as estimated by the petitioner. This was Rs 99 crore at the then prevalent exchange rate of Rs 54.30 to the dollar.

Then started the problems. Iran could not pay in US dollars because of the sanctions regime which would come down hard on any financial institution dealing with Iranian money. So,Tehran turned to the Indian government to access the money accumulated in its UCO Bank account,specifically created for India’s oil payments to Iran.

This landed India in a spot. Running a rupee account for oil is permissible since oil and petroleum has not been targeted in the UN sanctions,but the UN has specifically sanctioned IRISL,and India’s stand has been that while it would seek exemptions from US sanctions,it would not violate decisions taken by the UN. (It was for this reason,in fact,that Iran-o-Hind,a shipping joint venture between the countries,was scrapped.)

In the Dianthe case,the question was whether the payment of security money from the UCO Bank account for the release of an IRISL entity would attract sanctions. The issue was placed before the Bombay High Court,where the point was made that no nationalised bank would entertain this money unless cleared by the Reserve Bank of India.

In its last order in March,the court asked the RBI to examine the matter. Hearings have gone on,but the general understanding is that India would risk violating UN sanctions if the money is used to free this ship.

While these complexities were being deliberated within the government,the Iranian government decided to raise the diplomatic stakes by detaining an Indian ship. For the record,Tehran says that the two cases are not connected.

Meanwhile,sources said India has stepped up efforts to complete the paperwork on Desh Shanti to address the Iranian objections.