November 16th, 2011
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32,000 crore banking scam, RBI caught unawares

Banking scam

Special Story / Niranjalli Varma

New Delhi: India is celebrating the season of scams as the biggest ever corruption cases were unearthed more recently. Though most of us come across some kind of corruption in our everyday lives, every reader’s eye, popped out, each time they heard the humungous figures, attached with each scam, be it the 2G spectrum scam, the Commonwealth game scam, Aadarsh housing scam or the Sathyam scam.

We came out in the open and screamed enough is enough. The corrupt politicians and multinationals had tested our patience. We also expressed our solidarity towards the timely entry of the anti corruption crusader Anna Hazare. Though the 2G scam successfully cast its bewitching spell on the media and fed the starving  press and readers, the brewing Rs 32,000 crore banking scam remained buried and failed to attract much media attention.

In a profit craving frenzy the banks have managed to demolish all legal and financial barriers. This shocking news comes at a time when India has been basking in the glory of all the praises showered upon her by the developed nations of the world. Even when US and every developed country of the world were facing the second depression or the financial recession of all times, RBI was lauded for its exemplary services and stringent rules. The common man and investors felt safe in the hands of our banks.

It is this trust that has been breached. Banks have managed to violate the extant rules as a result of which gullible importers, exporters and other companies were sold foreign exchange derivative contracts in 2008 resulting in massive losses. The banks seem to have violated not only the apex banks guidelines themselves but also the FEMA Act. Exporters have alleged that the member banks of Fixed Income Money Market Derivatives Association of India (Fimmda) , by violating RBI and FEMA guidelines, issued derivatives and caused them losses of more than  Rs 32,000 crore.

Derivatives are complex business contracts that aim to minimize or hedge investment risks. They can also be used for making money through speculation. Some of the common derivative instruments include futures contracts, forward contracts, options and swaps and involve assets like stocks, bonds, commodities, currencies, interest rates and market indices. An Orissa based businessman, Pravanjan Patra, filed a writ petition in the High Court of Cuttack, Orissa alleging that banks have induced the exporters to engage into forward contracts that resulted into loss of thousands of crore of rupees.

Acting on a petition filed by Pravanjan Patra, the High Court had on December 24, 2009, directed a CBI probe into the alleged sale of forex derivatives to exporters in gross violation of foreign currency laws of RBI and FEMA. The petitioner alleged that the banks induced the corporate houses to enter into derivatives to the extent of six times the normal or required limit thus violating the RBI guidelines.

The Fixed Income Money Market Derivatives Association of India (FIMMDA) however, challenged the High Courts directive on CBI inquiry before the Supreme Court. The Supreme Court had directed some exporters, who requested that they be made a party in the case, to file their replies, which was later referred to the registrar of the apex court for verification.

In June 2010, Forex Derivatives Consumers Forum, who had suffered losses as a result of the alleged scam by banks and lenders owing allegiance to FIMMDA had approached the apex court requesting that they too be made a party in the case. They had requested the apex court to allow a CBI inquiry into the scam by lifting a stay on High Court order.

The Central Bureau of Investigation (CBI), the nodal investigating agency of the Union Government after preliminary investigations  stated that the banks and exporters have violated the guidelines of FEMA. In a submission to the Orissa High Court, the agency said that the banks and corporates have used the hedging tools as profit making tools. “Violation of guidelines were committed by  banks and exporters, who in many cases entered into derivative contracts far in excess of their genuine underlying exposure and also tried to use the hedging tools as profit making tools.

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