Recent judicial rulings in favour of ICICI Bank, which was taken to court by six companies over losses that arose from forex derivative deals, have emboldened other banks facing similar cases with their clients not to seek out-of-court settlements.
Axis Bank and YES Bank are two examples of those that have decided not to settle forex derivative disputes with their clients out of court. As reported by FE earlier, in the last two months, court rulings against clients of ICICI Bank on forex derivatives cases have enabled the bank to either file recovery petitions via the debt recovery tribunal or obtain a stay order to prevent the sale of assets by these companies.
YES Bank founder, managing director & CEO Rana Kapoor said, ?To date, two companies have dragged us to court over forex derivatives. The final judgement on this ongoing tussle is yet to be passed. Both the companies have, however, shown willingness to pay us a partial amount towards full and final settlement. But we are not ready to go for such settlements, as we do not believe in compromise solutions at this stage.?
Axis Bank?s legal department chief, Gopal Krishnan, confirmed an ongoing legal tussle with Chennai-based Rajashri Sugar and Ludhiana-based Nahar Industries over derivatives contracts. The Rajshree Sugars case was heard on July 11 by the Chennai High Court, which is yet to issue an interim judgment. The Nahar Industries? case is scheduled for hearing on August 22 in the Ludhiana district court.
Both Rajshree and Nahar have asked the courts for a permanent injunction against Axis Bank?s proposed move to recover the bad debts by liquidating their assets. Partho Mukherjee, senior vice-president (forex & treasury) at Axis Bank, said the bank has no intention to go for out-of-court settlements with its clients. Especially after the judiciary?s stance in favour of banks, Axis bank will stick to sorting out these issues in court.
Bangalore-based silk export company Himatsingka Seide took HDFC Bank to court over losses of more than Rs 100 crore incurred on account of derivatives contracts issued by the bank in April 2007. A senior executive of HDFC Bank said the Himatsingka case is sub-judice and that a ruling is awaited from the debt recovery tribunal. ?However, following the recent ruling in favour of ICICI Bank, we are not willing to opt for an out-of-court settlement with Himatsingka Seide,? he said.
Derivatives?financial contracts that derive their value from an underlying asset like an interest rate or foreign currency?are used to manage risk, reduce cost and enhance returns. Many Indian companies entered into such contracts to hedge their interest-rate and currency risks in the past while assuming a certain exchange value of the Indian rupee against the US dollar.
In the last quarter of fiscal 2007-08, 12 such companies dragged private lenders like Axis Bank, ICICI Bank, YES Bank, HDFC Bank and Kotak Mahindra Bank to court in Karur, Hyderabad, Mumbai, Chennai and Ludhiana alleging ?mis-selling? of exotic derivative instruments by the banks, causing severe losses to them.
Some of the companies that had dragged ICICI Bank to court include Karur-based home furnishing company Sabare International, Chennai-based Sundaram Multi Pap, Ludhiana-based Garg Acrylite, and Hyderabad-based NCS Sugars.
