GOVERNMENT OF INDIA
Ministry of Finance
DEPARTMENT OF FINANCIAL SERVICES
UNSTARRED QUESTION NO 2406
TO BE ANSWERED ON TUESDAY, APRIL 15, 2008 CHAITRA 26, 1930 (SAKA)
Legal Suits by Companies against Banks Dealing in Derivations
SHRI RAJEEV CHANDRASEKHAR
Will the Minister of FINANCE be pleased to state:-
(a) whether there has recently been a spate of legal suits by companies against banks that have sold them derivatives and caused losses;
(b) how many such cases are there wherein banks are involved; what are the kind of derivates sold, the names of the banks which are doing this business and how much losses have been caused to the companies; and
(c) what is the role of RBI in such matters?
The Minister of State in the Ministry of Finance
(Shri Pawan Kumar Bansal)
(a) & (b): The banks enter into the derivative transactions with companies as a part of their business. Most of the commercial banks undertake derivative transactions. However, the new private sector banks such as ICICI Bank, HDFC Bank, Kotak Mahindra Bank, AXIS Bank, Yes Bank are actively dealing in derivative products, which include Cross Currency Swaps, Currency Options. Corporates often enter into derivative transactions with banks to hedge against adverse currency movements having bearing on their earnings. Reserve Bank of India (RBI) has reported that certain cases of alleged losses by the companies on account of derivatives sold by the banks have come to its notice. However, the existing Management Information System of RBI does not generate the information about the loss caused to the companies or involvement of banks in legal suits on account of derivative transactions.
(c) : To provide a framework for undertaking derivative transactions from a regulatory perspective, RBI has issued comprehensive guidelines on derivatives vide its circular dated 20th April, 2007. The guidelines emphasise the need for a proper risk management framework and appropriate corporate governance practices. To protect the market-maker against the credit, reputation and litigation risks that may arise from a user’s inadequate understanding of the nature and risks of the derivative transactions, the guidelines also provide that market-makers should adopt a board approved ‘Customer Appropriateness and Suitability Policy’ for derivative business. As a regulator of foreign exchange market, RBI also issues policy guidelines to Authorised Dealers to facilitate hedging by residents / corporates their foreign currency exposure by use of derivatives such as Forwards, Swaps and Options.