The Hindu Business Line : Cos await legal verdict on the complaint of mis-selling by banks

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Cos await legal verdict on the complaint of mis-selling by banks

Forex derivatives contracts

Our Bureau

Chennai, March 17 Companies that had entered into complex foreign exchange derivatives contracts with their banks and that had taken a hit are awaiting judgments on the cases they had filed against the banks in the high courts. Interest now centres around the suit filed by Sundaram Brake Linings Ltd (one of the affected companies), a ruling on which, the Madras High Court, according to sources in the know, is expected to deliver shortly.

At least three companies – Hexaware Technologies, Sundaram Multi Pap Ltd and Sundaram Brake Linings Ltd – have filed cases in the high courts, disowning the contracts and seeking the courts’ direction not to pay the margin money that the banks had demanded of them. In the notes for the quarterly results ended December 31, 2007, Sundaram Brake Linings contended that the currencies involved and the volume of transactions clearly established that they were beyond the underlying exposure.

Any hedging strategy should have been offered by the banks only to minimise the risk of underlying exports, it had further argued.

The company also said that it had been advised that such contracts were void from the beginning, apart from being in violation of prescribed regulations. The company said it had rejected a demand of Rs 1.76 crore received from one of the banks; had made no provision in the accounts besides returning the monies received from the banks under such transactions. A corporate consultant advising companies on hedging foreign exchange exposure explained the situation thus. When the rupee was consistently appreciating against the dollar in early 2007, with the prospect of a further appreciation in the future banks sold contracts that conferred on these companies the right to sell future dollar receivables (exports) at a hefty premium to the prevailing spot rate. Such a right would have required the companies to pay a fee to the banks. But the latter structured compensating contracts in currencies such as Swiss franc, Japanese yen and the euro against the dollar.

But the difference this time was that the companies were the risk takers (on adverse currency movements) and the banks were the ones that enjoyed protection. To compound matters, the fee that the company was entitled to receive from the bank was relatively small and hence had to take on an exposure that was at least a few times larger than the original cover for export receivables that they had obtained from banks.

It is not clear, the consultant added, if companies really understood the risks or even if they did were lulled into a false sense of security by the banks’ assurance that the possibility was remote. But as it happened, the US sub-prime crisis put paid to any hopes that the adverse currency movements would not materialise and corporates betting against that eventuality ended up on the losing side.