Sundaram Multi Pap is an exporter of paper and stationery; its average annual exports are around Rs20 crore and the company does not have any exports to the US, European Union and other Western countries.
According to the court order, which has been reviewed by Mint, the Sundaram Multi Pap board passed a resolution enabling it to enter into the derivatives contract “on terms, regulations and conditions laid down” by ICICI Bank. It also executed the International Swaps and Derivatives Association or ISDA agreement, commonly used to document derivatives transactions.
Though Sundaram Multi Pap does not dispute the document and the contract between the two parties, it has issues with two transactions and “challenged” them as “illegal” and not binding on it. It had also said it entered into the ISDA agreement only for the purpose of exports and the resolution taken by the company is not in accordance with its article of association (a sort of statement of purpose that all companies file while being incorporated) as it exceeds its borrowing limit.
The court, however, didn’t find any merit in the company’s contention. According to the judgment, “there is no dispute that the resolution to enter into these derivative transactions and execute agreements...was passed by the company”. It also said that the mere filing a suit challenging the deals before the bank sent a notice claiming its dues, cannot make the company’s actions “bona fide”.
The judgement said that the “the truth or otherwise of the defence taken by the company (Sundaram Multi Pap) would be liable to be tested by the court in the suit or other proceedings filed by the petitioner (ICICI Bank) before the debt recovery tribunal”. It added that the observations made are “only prima facie and restricted to the present proceedings for winding up.”
“This will have a bearing on all other cases that many other firms have been fighting in various parts of the country,” said a consultant who have been advising some of the firms involved and who did not want to be named.
Several private sector banks such as ICICI Bank Ltd, Axis Bank Ltd, HDFC Bank Ltd, Kotak Mahindra Bank Ltd and Yes Bank Ltd are facing litigations related to the alleged mis-selling of foreign exchange derivatives to companies.
Among the companies that have gone to court against their banks that sold such derivatives are Sundaram Brake Linings Ltd, Rajshree Sugars and Chemicals Ltd, NCS Sugars Ltd and Sundaram Multi Pap.
The issue first came to light in late November last year, when software firm Hexaware Technology Ltd announced that it had made provisions of $20-25 million to cover exposure from unauthorized deals entered into by an employee that involved derivatives. The company later reported a net loss of Rs81 crore for the quarter ended December after the actual damage on account of these transactions ended up being Rs103 crore.