Mumbai firm sues ICICI Bank

Sundaram Multi Pap, a Mumbai-based paper stationery manufacturer, today disowned exotic hedging contracts entered into with ICICI Bank, saying the bank had misled the company into taking derivatives positions much beyond their underlying export risks.

This is a classic case of fancy hedging structures, where exporters convert their dollar receivables into Swiss franc, which has begun to hurt exporters as the otherwise stable Swiss currency has appreciated against the weakening US currency.

The paper stationery maker has filed a petition in the Bombay High Court as the country's second largest bank demanded that the company pay about Rs 6 crore as margin money to cover for losses, which are higher than the Rs 4.44 crore of net profit it earned in 2006-07. The company's total income in 2006-07 was Rs 84.81 crore.

This is the second company to announce losses because of wrong currency calls. Hexaware Technologies, an IT services company, earlier said it was providing Rs 80-100 crore for some "fraudulent" foreign exchange transactions.

The company as well as its chairman and managing director, Amrut Shah, have jointly filed a suit in the high court for cancellation of derivatives transactions it entered into with ICICI Bank, alleging that the transactions were for speculative purposes and not for hedging.

The suit also sought the cancellation of personal guarantees given by the directors of the company for hedging, the company's lawyer, K J Hakani, said.

Madhabi Puri-Buch, executive director, ICICI Bank, said "Sundaram Multi Pap is our client. We cannot discuss any client-specific details. However, at a generic level, (such) actions proposed by corporates are not likely to stand in the court of law."

She said the bank in such transactions recorded the conversation of the client and subsequently sent a confirmation letter, a copy of which is signed by the authorised signatory of corporate clients and returned to them.

Sundaram's Shah alleged that the purpose of the transaction was to hedge export risks. But the bank "misguided" the company and entered into contracts beyond the limit of Rs 1.52 crore on a single transaction in Indian rupees and the total annual limit turnover of Rs 25 crore. The actual transaction in derivatives breached these limits.

The impugned derivatives contracts were entered into between October 24 and 30, 2007. A naked contract for $6 million was entered into on October 24, 2007, $5 lakh buy-sell swap with underlying exposures on October 25, 2007, and another naked contract for $7.5 million on October 30, 2007, Shah said.

The Swiss franc has appreciated to $1.12 a dollar from 1.17 on October 24 and $1.16 on October 30, when the derivatives transactions were entered into.

ICICI Bank's Puri-Buch said, "There is also an issue of precedence set in the market. As long as the market was doing well, companies reaped profits. Now that they are making losses, they want to renege on the transactions. Full disclosures are made to the clients.''

Banking sources said, "At the moment, corporates are under stress. They are being advised by some unscrupulous consultants to take legal recourse to buy time and try and find loopholes in the system."