The battle between banks and companies over the legality of sophisticated foreign exchange derivatives is hotting up.
At least two firms have filed cases against two banks, in Haryana—a new front in the battle. Hitherto, almost all court cases related to these products have been confined to the western and southern parts of the country.
Garg Acrylite Ltd has filed a case against India’s largest private sector lender, ICICI Bank Ltd, and Ludhiana-based textiles firm Nahar Industrial Enterprises Ltd has moved court against Axis Bank Ltd.
ICICI Bank’s spokesperson declined to comment. Axis Bank too did not comment on the development.
At last count, at least eight cases have been filed by firms against banks and many more are likely to be filed in the next few weeks. “In Kolkata, quite a few firms are ready to file cases against banks but there are not too many legal firms equipped to handle such cases. Lawyers are being flown in from Mumbai,” said a consultant who is advising a few firms but does not wish to be named.
A senior official of a legal firm that is advising banks said: “It’s going to be a long drawn-out battle.”
According to the official, who does not want to identified, if a court verdict goes in favour of a bank, then the firms will lose their interest in moving the courts, but if a bank loses, then most of the cases will go on appeal, right up to the Supreme Court.
ICICI Bank has at least four court cases against it at Karur, Hyderabad, Haryana and Mumbai. The list of firms that have moved court against the bank includes Garg Acrylite, NCS Sugars Ltd, Sabare International Ltd and Sundaram Multi Pap Ltd. ICICI Bank has filed a criminal case against Sundaram Multi Pap after a cheque issued by the firm bounced.
The bank has also moved the debt recovery tribunal in Mumbai against the company to recover dues.
Risk management consultants and audit firms say the Institute of Chartered Accountants of India’s (Icai) insistence that all companies should disclose and provide for losses on derivatives contracts from the current financial year will act as a trigger for more and more court cases. If a firm moves court and manages to get a stay order, it can convince its auditor that it has a “good case” and escape the provisioning requirement to take care of the mark-to-market losses in derivatives transactions, say these consultants and audit firms.
Most court cases have been filed against ICICI Bank, Yes Bank Ltd, Kotak Mahindra Bank Ltd and Axis Bank.
These banks, along with HDFC Bank Ltd and a few foreign banks, including Citibank and Standard Chartered Bank, have aggressively sold complex derivatives products to their clients. At the core of the issue is a debate over whether the products sold by the banks to these companies were for hedging or speculation.
The companies are alleging that they were sold products that were beyond their requirements of hedging and were “complex exotic derivatives products.”
They are also alleging that officials from the banks mis-sold these products without informing companies about the risks attached to these instruments.
Details of the foreign exchange derivatives exposure of Indian companies started coming to light in late November, when software firm Hexaware Technologies Ltd said it had made provisions of $20-25 million (Rs78.8-98.25 crore then) to cover exposure from unauthorized deals, that involved derivatives, entered into by an employee.
Hexaware Technologies settled the issue out of court with banks that had sold it these products.