Mumbai: In a judgement that could have significant bearing on several ongoing cases between banks and companies on so-called exotic derivatives the latter bought to protect themselves against foreign exchange risks, the Bombay high court has asked Sundaram Multi Pap Ltd to pay to ICICI Bank Ltd the dues arising out of contracts for structured derivatives the two had signed.
The 15 September judgement is the first in the ongoing legal battle between Indian banks and firms. However, it doesn’t go into the legality of the instruments involved or the motives behind their sale to companies by banks. It merely asks Sundaram to pay up.
Also See Judgement (Document)
On 12 March, ICICI Bank filed a petition in the high court for the “winding up” of Sundaram Multi Pap for “non-payment of a sum of Rs2.94 crore”.
The bank filed the case after a cheque for Rs1.52 crore, issued by Sundaram Multi Pap, bounced. ICICI 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.
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“The company is directed to deposit a sum of Rs2.94 crore within a period of eight weeks” failing which ICICI Bank will be allowed to advertise its winding up proposal in newspapers, the court order from a single bench, headed by Justice S.A. Bobde, said.
ICICI Bank’s general manager, corporate communications, Charudatta Deshpande, declined comment on the issue because he said the bank wouldn’t speak about “individual cases”.
Amrut Shah, chairman, Sundaram Multi Pap, said his company would file an appeal. “It is a disputed matter of exotic derivatives and the case filed by our firm is still pending in the high court.”
Sundaram Multi Pap suffered a Rs2.92 crore loss from exotic derivatives contracts that were closed before they matured to cut losses but it did not pay ICICI Bank which, it claimed, had mis-sold “certain foreign exchange derivatives contracts for speculative purposes”.
The company moved court in December 2007 against ICICI Bank.
Derivatives is a financial term used to describe an instrument whose value is a function of an underlying commodity, stocks, bonds or currencies and which is used as a risk management and mitigation tool.
Also See Significant Ruling (Graphic)
According to the petition filed by ICICI Bank in the high court, Sundaram Multi Pap entered into the agreement “to protect itself from losses arising out of adverse fluctuations in the rate of exchange in import and export transactions.”