SC ruling to aid banks in forex derivatives’ defaults

Dec 12 2012, 01:31 IST
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SummaryA Supreme Court ruling on Tuesday, to the effect that non-payment of dues against a foreign exchange derivatives contract by a company will qualify as wilful default, will arm banks with greater powers to deal with such cases.

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 currencies against the dollar resulted in mark-to-market losses on these contracts. In July 2010, the RBI issued guidelines for currency options and banned exotic derivatives. Currency options have ever since remained subdued and are still avoided by companies. “Options are becomig popular, but it is a slow process,” said P Mukherjee, head of treasury at Axis Bank.

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