Are mounting derivatives losses the result of poor business practices or regulatory confusion?
Mint reports today that a few banks, which are facing lawsuits from companies that bought derivatives from them, are planning to make the Reserve Bank of India (RBI) a party to such cases. This move could make RBI answerable to the courts on the domestic derivatives mess.
Banks could make the case that the RBI Act allows them to sell derivatives of various sorts, and hence companies should not be allowed to walk out of contracts that have now led to losses. They are enforceable.
But, companies have also bought structured products from banks. These products are not defined in securities law the world over. They are customized for clients and hence cannot be cast in legal stone. A regulator can set some broad rules on these structured derivatives. Then it is up to the good sense of the buyer and the ethics of the seller. And both were in short supply. So, what’s RBI got to do with this?