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Relief for garment cos as court rules forex derivatives illegal

Tirupur: In a major relief, a Coimbatore court has said that the exotic forex derivatives sold by banks to garment exporters during the global financial crisis in 2008 were illegal. The Tirupur Forex Derivatives Consumer Forum (TFDCF), which was formed by 25 exporters from Tirupur, who lost more than Rs 400 crore in the issue, moved the Subordinate Court in Coimbatore stating that as many as 19 banks were involved in the fraud by selling the product that was not authorised by the Reserve Bank of India (RBI).
“Last week, the court completed the trial and passed its judgment. The court has clearly observed that the products sold by the banks were against the country’s laws and public policy, and also against RBI rules and guidelines,” Raja M Shanmugham, President, TFDCF told TOI.
It has been confirmed that the banks have been involved in the fraud, which was responsible for at least Rs 38,750 crore moving out of the country. It has made our stand strong in seeking CBI probe into the issue. We will take the issue forward on basis of the trial court’s judgment,” he said.
Exporters are now upping the ante seeking a Central Bureau of Investigation (CBI) into the issue, which allegedly caused losses to the tune of Rs 38,750 crore to exporters across various industries. Garment exporters incurred losses due to fluctuations in currency rates while getting payments from overseas buyers. For instance, in 2007-08, the rupee had appreciated sharply to 39 to the US dollar from 46 in just 15 days.
Many banks, including nationalised, private and foreign banks, came up with these exotic derivatives products promising exporters that they would be a good hedge against the risk of such fluctuations. Several export-oriented firms had taken forward covers and complex derivative products as a hedge against a volatile rupee in 2008-09. While the rupee appreciated 8% against the US dollar in 2007-08, it depreciated 28% in 2008-09. This resulted in huge forex losses. Several companies opted for an out-of-court settlements with banks. Companies and banks had agreed to share the losses on a 60:40 and 55:45 basis in such cases. Many exporters invested hundreds of lakhs of rupees in buying them. But when the rupee started to depreciate sharply against the US dollar, banks asked the exporters to bear the losses. So, the master agreement between the exporters and the banks became defunct. Sensing the alleged fraud involved by the banks, a public interest litigation was filed in the Odisha High Court (HC), which in turn, ordered a CBI probe into the issue.
But the Indian Banks Association and Fixed Income Money Market Derivatives Association of India (Fimmda) filed a special leave petition before the Supreme Court. Following this, the apex court granted an interim stay on the Odisha HC’s judgment. And the status quo have been maintained till now.