Mumbai: A national body of foreign exchange and bond dealers is to join hands with bankers to stop a probe by the Central Bureau of Investigation (CBI) into the alleged mis-selling of derivatives contracts in 2007 and 2008.
The Fixed Income Money Market and Derivatives Association, or Fimmda, is planning to challenge a Orissa high court order directing an inquiry into the contracts sold by some Indian banks to buyers who sought to use them as a hedge against currency fluctuations. The derivatives holders were caught on the wrong side of a surprise appreciation of the rupee during the period.
The Indian Banks Association (IBA), the national bankers’ body, is also backing Fimmda and the lenders, which say the appropriate investigating authority is the Reserve Bank of India (RBI) and not the CBI.
Many private banks including ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd, Yes Bank Ltd and Kotak Mahindra Bank Ltd were sued by corporations for what they claimed was the mis-selling of derivative products dating to that period. Many of these cases have been settled out of court.
The Orissa order, following a public interest litigation filed by tax consultant Pravanjan Patra, calls on the government and others to hand over the “investigation of offences committed for erosion of forex reserve of the nation to an independent agency preferably the Central Bureau of Investigation.”
Top Supreme Court lawyer Harish Salve has assured Fimmda and the banks that they have a strong case, according to a senior official of IBA who spoke on condition of anonymity.
Fimmda chief executive officer C.E.S. Azariah declined to make any comment. “At the moment, we are unable to comment anything in the matter you are enquiring about,” he said in an email response.
An email to Salve’s office did not elicit any response.
The treasury head of a private sector bank, which is also fighting a case against a company over the issue, said Fimmda was seeking support from lenders in challenging the court order.
“They have approached us also,” he said. “Fimmda’s board of directors will have to ratify the decision” to appeal against the Orissa high court order.
The CBI had told the court in Cuttack in an interim inquiry report that the central bank had conducted an inquiry into 22 banks active in derivative transactions and concluded that it was not a systemic issue.
Based on information gathered during discussions with the chief executives of the banks, RBI decided to monitor the exposure of all banks, strengthen the prudential framework for derivatives and also constitute an inter-departmental group to review transactions in such instruments by lenders and recommend appropriate supervisory action, said the high court judgement.
RBI also pointed out irregularities pertaining to Foreign Exchange Management Act, or Fema, guidelines. These included selling contracts structured in a way that violated the law and led to an increase in risks besides the net inflow of premiums to the company buying the contract. This, the CBI contended, was in violation of rules which permit use of derivatives for mitigation of foreign exchange losses but don’t allow the inflow of premiums to the buyer of the contract. The CBI also said there were instances of false declarations made to enter into the contracts, pointed the high court order.
Some of the products themselves, especially cross-currency derivative instruments, also violated Fema, according to the central bank.
As part of its ongoing investigation, CBI had sought information from eight banks—State Bank of India, HDFC Bank, The Hongkong and Shanghai Banking Corp. Ltd, India (HSBC India), Standard Chartered Bank, Citibank NA, ICICI Bank, ABN Amro Bank NV and Axis Bank.