ICICI Bank's option contracts with garment exporter are void
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.