Kotak-Sundaram dispute heads for arbitration

In a move that could set a precedence for a host of derivatives-related cases between banks and companies, Kotak Mahindra Bank has appointed an arbitrator to settle its dispute with Chennai-based Sundaram Brakes and Linings.

Sources familiar with the development, however, said Sundaram Brakes and Linings, which had earlier filed a petition in the Madras High Court, was opposed to the appointment of an arbitrator and might challenge the move on the ground that the decision to appoint an arbitrator had been taken without mutual consent. The company did not respond to a query sent on April 4.

"As per the ISDA (International Swap and Derivatives' Association) agreement with Sundaram Brakes and Linings, we have separately proceeded for arbitration proceedings, where Justice B P Srikrishna has been appointed as the arbitrator," Kotak Mahindra Bank Executive Director Dipak Gupta said in a faxed reply to a questionnaire. He, however, did not provide further details on the ground that the matter is sub-judice.

Under the provisions of the agreement, one party can appoint an arbitrator, but a final decision has to be based on mutual consent. But sources said the two parties were still in dialogue to see if arbitration was possible. The final outcome is likely to be known when the matter comes up for hearing in the court.

The ISDA agreement, which serves as the policy framework for most foreign exchange transactions across the globe, including in India, is executed under the policy framework of the US-based self-regulatory agency.

Kotak Mahindra Bank, along with other new-generation private sector banks, had entered into a number of foreign exchange derivatives deals with companies, of which a large number are proving contentious due to the sharp appreciation of the Swiss franc.

The Swiss franc has been ruling in the range of $1.23-1.25 since October 2006, when most of the deals were struck by Indian banks on behalf of corporate clients. This saw many Indian companies and banks hedging their dollar exposures by working out structured products in the Swiss franc even if the currency was very strong.

Moreover, these products had embedded options since companies did not want to pay the rupee premium to banks, which are very high for the Swiss franc, said a dealer.