Hyderabad / Mumbai: In the latest case of derivative bets gone sour, Barclays Bank Plc. has dragged Hyderabad-based cement maker Sanghi Industries Ltd to the London Court of International Arbitration for alleged non-payment of Rs179 crore following losses from transactions executed between January and April, executives from both firms said.
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Sanghi Industries, on its part, claims the transactions were fraudulent and in violation of the Reserve Bank of India (RBI) and Foreign Exchange Management Act guidelines.
Barclays Bank has charged the promoters of Sanghi Industries with breaching an agreement signed on 22 May 2007, under which they were to repay any losses from so-called derivative transactions.
The bank has demanded $36.95 million (about Rs179 crore) plus interest.
In November, the bank served notices to the promoters of Sanghi Industries, the flagship company of the Rs3,000 crore Sanghi group, through its solicitors Allen and Overy Llp. Mint has reviewed copies of the notices.
“Barclays Bank confirms that it has begun arbitration proceedings against Sanghi Industries due to their failure to make payments to Barclays Bank in respect of derivatives transactions,” Clare Williams, a spokeswoman for the bank, wrote in an email. She added that Barclays completely “rejects any claims that it has acted in an inappropriate or non-transparent manner in its dealings with Sanghi Industries.”
Bina Engineer, Sanghi Industries’ chief financial officer, said in an email to Mint that her company “will pursue legal remedies available to it including a claim on the bank for the loss and defamation suffered by it”.
Barclays’s case against Sanghi Industries is the latest in a line-up of disputes between banks and their clients over the legality of such products.
Several firms had entered into contracts with banks in an effort to shield themselves from fluctuations in the foreign exchange market, but found themselves at the wrong end of the deal after strong currency fluctuations. These firms have alleged that they were “mis-sold” the products by the banks involved.
As defined by RBI Act, a derivative is an instrument to be settled at a future date, and whose value is derived from change in interest rate, foreign exchange rate and other securities including interest rate swaps, forward rate agreements, foreign currency swaps and options. The debate is whether these products were sold for hedging or speculation.
In October, the Madras high court had ruled in favour of Axis Bank Ltd in a dispute between it and Coimbatore-based Rajshree Sugars and Chemicals Ltd, saying derivative contracts were not wagering, and thus not illegal, and the lender could approach the Debt Recovery Tribunal.
Earlier in September, the Bombay high court had asked Sundaram Multi Pap Ltd to pay to ICICI Bank Ltd the dues arising out of contracts for structured derivatives the two had signed, but hadn’t gone into the legality of the instruments.
Sanghi Industries, which owns a 2.6 million tonne cement plant at Kutch, Gujarat, has hired senior counsel Harish Salve to argue the case in London and will file a case in India as well, Engineer said.
Engineer of Sanghi added that Barclays Bank had approached Sanghi Industries, which has export earnings of at least $50 million, last year recommending certain derivative transactions to reduce its cost of debt and hedge forex risk. The rupee was then trading below 40 against a weak US dollar, but started depreciating since April.
Engineer said Sanghi Industries had asked Barclays Bank to review the risk in these trades several times and, later, to terminate them, but the bank had advised it to continue with the trades.
“There were very complex trades with multiple currency exposure which were based solely on the Barclays’ recommendation and advice,” Engineer said.
Barclays Bank served its first notice on Sanghi Industries on 3 November asking it to clear its dues by 6 November. Non-payment would be considered an “event of default” under the terms of the master agreement, the bank said in its notice.
When the dues were not cleared, Barclays Bank served another notice intimating 20 November “as the early termination date in respect of all outstanding transactions under the master agreement”.
Sanghi Industries, already embroiled in a legal battle among four Sanghi brothers over the control of the company, has seen its share price fall 67% in 2008. It has a market capitalization of Rs560 crore and paid-up equity capital of Rs304.82 crore.