Mumbai: The legal battle over the selling of exotic derivatives contracts has taken a new turn with banks going on the offensive against their clients. ICICI Bank Ltd has filed a criminal suit against Sundaram Multi Pap Ltd, which had earlier moved court against India’s largest private sector lender alleging “mis-selling of certain foreign exchange derivatives contracts for speculative purposes”.
In a related development, the Institute of Chartered Accountants of India (Icai), which regulates the audit business in India, on Saturday asked all companies to disclose and provide for losses on derivatives contracts from the current financial year, which ends Monday. This could raise the pitch of the legal battle between companies and banks.
Read: Icai note asking all firms to disclose and provide for losses on derivatives contract
ICICI Bank has also moved the debt recovery tribunal (DRT) in Mumbai against Sundaram Multi Pap to recover dues from the company. “A few other banks may follow the ICICI Bank example. Once the companies move court, you cannot expect banks to keep quiet,” said an official with a law firm that is advising many banks on such cases and who did not wish to be identified.
ICICI Bank filed the criminal suit after a cheque, issued by Sundaram Multi Pap, bounced. The bank submitted the cheque for clearance to recover part of the losses that the company had suffered from the derivatives contracts, but declined to pay.
“No bank likes to take to litigation, but when a firm takes legal course, it becomes unavoidable. We did it to safeguard our interest,” said an ICICI Bank official, who did not wish to be identified. “In the DRT proceedings, we have got an injunction against the company that bars any of its directors from leaving the country without the court’s permission,” the same official added. The criminal case will come up for hearing this week.
Sundaram Multi Pap suffered total losses of Rs2.92 crore from four exotic derivatives contracts that were closed before they matured to cut losses.
According to a Sundaram Multi Pap executive, who didn’t wish to be identified, the company had given a cheque of Rs1.52 crore to ICICI Bank as “security”, but issued a “stop payment” instruction when it found out that the bank was submitting the cheque for clearing. The Sundaram Multi Pap executive also insisted that the bank was required to consult the company before submitting the “security” cheque for clearance.
The ICICI bank official said that the bank had asked the company to ensure that there were enough funds in the account before sending the cheque for clearance. “Also, when a bank takes a security cheque from a company, no document states that we have to consult the firm before submitting the cheque for clearing,” the bank official added.