ICICI Bank's op­tion con­tracts with gar­ment ex­porter are void

Apparel Online - - Industry Live -

In an in­ter­est­ing case, Freelook Fash­ions ver­sus ICICI Bank, a court in Coim­bat­ore has is­sued an or­der against ICICI Bank in a mat­ter in­volv­ing a set of op­tion con­tracts sub­mit­ted by Freelook Fash­ions.

The bank is in the process of fil­ing an ap­peal against this or­der. De­mand­ing a CBI en­quiry into the is­sue, Raja Shan­mugham, Pres­i­dent, Tirupur Ex­porters As­so­ci­a­tion (TEA), al­leged that var­i­ous banks have used such de­riv­a­tive con­tracts for a short pe­riod dur­ing the pre­vi­ous Govern­ment’s ten­ure, when the ru­pee strength­ened at Rs. 38-39 per dollar, from Rs. 46 a dollar. The banks sold the con­tracts at a higher rate as the dollar value shot up over Rs. 50 soon after that. The banks have caused a huge loss to the ex­che­quer. The loss from Tirupur alone would be around Rs. 4 bil­lion. Freelook Fash­ions, a gar­ment di­vi­sion of Anu­graha Fash­ion Mill, Tirupur that man­u­fac­tures and ex­ports hosiery gar­ments to United Kingdom and Ire­land, had moved the court to de­clare eight op­tion con­tracts that it en­tered into with the bank as void and un­en­force­able. Th­ese op­tion con­tracts were is­sued to hedge the forex, un­der­ly­ing the risks the com­pany is ex­posed to in its ex­ports busi­ness. The gar­ment ex­porter said that the bank had en­tered into a credit ar­range­ment with it in 2007, of­fer­ing de­riv­a­tive lim­its to hedge un­der­ly­ing trans­ac­tions or ex­po­sure. Eight op­tion con­tracts were signed and later the bank ad­vised that huge losses had been suf­fered by the com­pany re­lated to the con­tracts, due to un­favourable cur­rency move­ment. The bank also asked the com­pany to ex­e­cute an ISDA Master Agree­ment, dated July 2007, stat­ing that they in­cor­po­rated the stan­dard terms and con­di­tions, it al­leged.

The com­pany ap­proached forex ex­perts, who said that the op­tion con­tracts signed by the com­pany were il­le­gal, vi­ola­tive of For­eign Ex­change Man­age­ment Act (FEMA) and un­en­force­able by law.

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