SC ruling to aid banks in forex derivatives’ defaults

“If the banks did not have any procedural lapse and presented scenario analyses to clients, then ethically, clients should pay up,” said KN Dey, director, Basix Forex & Financial Solutions.

Several of the cases have already been sorted out between banks and their customers. For instance, Rajshree Sugars and Chemicals, which had entered into derivatives contracts, one of them in Swiss Francs, ultimately paid Axis Bank Rs 25 crore in an out-of-court settlement. Sundaram Brake Linings also resolved the issue through an out-of court settlement. In 2009, after Finolex Industries refused to pay Deutsche Bank, the bank approached the Debt Recovery Tribunal DRT alleging it was a willful defaulter. ICICI Bank had declared Emcure Pharmaceuticals a willful defaulter for not paying up on a derivatives deal. In the Calcutta HC, Hindustan National Glass had challenged Kotak Mahindra Bank’s decision declaring it a willful defaulter.

The companies argued that the RBI covers only defaults in “borrower-lender transactions” and that derivatives transactions did not involve a borrower-lender relationship. As such, they did not fall within the purview of the RBI circular. Companies also felt that once termed as a willful defaulter, they might find it difficult to access credit from other banks.

The genesis of the spurt in derivatives contracts lay in the increasing use of the Japanese yen and the Swiss franc as ‘carry trade’ currencies given that interest rates in these countries were relatively low. However, the sharp depreciation in these

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