The Hindu Business Line : Forex derivatives: Significant hearings in SC this week

The Supreme Court is likely to begin hearings this week on two different, but related cases, the outcome of which others facing similar cases are looking forward to.

The cases pertain to disputes banks have with two companies – Rajshree Sugars & Chemicals Ltd and Nahar Industrial Enterprises Ltd – on payments due to the banks on foreign currency derivatives transactions.

The banks want the cases to be heard by debt recovery tribunals, which these two companies are opposing.

According to reliable sources, the cases are likely to come up for hearing in the Supreme Court on January 28.

Pvt sector banks

Information available on the Supreme Court’s Web site shows that the cases are between Axis Bank and Rajshree Sugars and between Axis Bank and HSBC against Nahar Industrial Enterprises.

“We are waiting for the outcome of these cases before we can proceed on the others,” said an advocate representing a company against a bank on foreign currency derivatives transactions, requesting not to be identified.

The case in point

More than a dozen companies filed cases against mainly private sector banks alleging that the banks sold them exotic derivatives contracts for speculative purposes, which the banks have denied.

In the notes to the accounts for the results of the second quarter of 2008-09, the Coimbatore-based Rajshree Sugars & Chemicals referred to the derivatives contract case and said “the counterparty has raised a claim against the company. The company has filed an appeal in the High Court of Chennai, and a Division Bench has granted an order of status quo in the matter.”

A Single Judge had held against the company, which order was stayed by a Division Bench, according to advocates tracking the cases.

Nahar Industrial Enterprises, a Ludhiana-based vertically integrated textile manufacturer, said in the notes to the accounts for the results of the second quarter of this financial year, that a “liability of Rs 50.73 crore on derivatives transactions on foreign exchange matured/early terminated during the half year ended September 30, 2008 has not been considered in the book of accounts as the said derivatives transactions have been challenged in the courts.”

The Chennai-based Sundaram Brake Linings Ltd, part of the TVS group, which had filed a case in the Madras High Court against its banks on the derivatives contract, had provided for Rs 34.23 lakh for the third quarter ended December 31, 2008.

It said in the notes (for the results announced on January 21, 2009) that the disputes relating to the derivative transactions had come to an end with all but one bank. “The net amount paid by the company on this account has been shown as extra-ordinary expenditure.”

The company said that the dispute with Yes Bank still continued and the bank had informed it that it had unilaterally closed the transaction as of October 3, 2008. The net demand so far received from the bank was Rs 3.90 crore, including an amount of Rs 1.73 crore that the bank had claimed for unilateral closure for which no provision had been made in the accounts as the company’s suit in the Madras High Court was still pending.

Sundaram Brake Linings said that Yes Bank had filed an application before the Debt Recovery Tribunal, Mumbai, demanding recovery of Rs 98.39 lakh.

The company had provided bank guarantee for this amount to Yes Bank without prejudice to its rights and contentions.