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.

“If the guidelines had been adhered to, the losses would have been contained, especially in such instances where the cost of reducing strategies led to increase in risk profile or where contracts far in excess of the genuine underlying exposures were made”, it further added. However, CBI in its reply filed before the apex court did say that some of the allegations raised against the banks were found to be false and that it was a “herculean task” for them to probe the entire matter. It suggested in its reply that such a probe should be conducted by the ED and RBI.

The RBI clarified that FEMA does not prescribe a ceiling on the total of derivative contracts that can be entered into by the country as a whole. However, the central bank has also specifically pointed out that a number of exporters went in for hedging far in excess of their genuine underlying assets or without any underlying assets in violations of the guidelines for which the exporters as well as concerned banks are liable.

Hedging is a risk management tool, but exporters tried to use it as a profit management tools. This has resulted into multiplication of losses suffered by them when the movement of currencies involvement went in a direction opposite to that envisaged by them.

The Reserve Bank of India has accepted that some of the products especially for the cross currency derivative products violated the provisions of FEMA and regulations made there under. “As regard the counter parties for them clients, the counter parties were the concerned banks, whereas for the banks, the counter parties were other Indian/ foreign banks,” it added.

What is pertinent to note is that the RBI itself has not vetted any of the contracts that were sold. Another interesting fact is that for this scam that is estimated to value approximately Rs 32,000 crore some of the erring banks have been penalized negligible amounts ranging from Rs 5 to Rs 15 lakh.

From the information brought out with the aid of the RTI act filed by Mr Karan , we are informed that the RBI claims to have taken action against the banks based on the report of the Annual Financial Inspection which was conducted under Section 35 of the Banking Regulation Act of 1949.

The RBI has imposed penalties under Section 47A (1) (b) read with Section 46(4)(i) of the Banking regulation Act for contravention of various instructions issued by the Reserve Bank in respect to derivatives. The RBI has imposed penalties under Section 47A (1) (b) read with Section 46(4)(i) of the Banking regulation Act for contravention of various instructions issued by the Reserve Bank in respect to derivatives.

The Apex controlling body of all banks has easily washed its hands of the entire incident. According to them it was solely the responsibility of the banks to vet the legality of the products that they were selling thereby raising a very important issue of whether a central regulatory body is the way forward in this industry.

Surprisingly the RBI has no idea what the penal provisions under the India legal system are for illegally selling derivative products. They even are clueless as to who is responsible for their enforcement. The case is still under trial. How and when justice will be meted out is yet unknown.

the CBI probe ordered by the Hon’ble Orissa High Court against 22 erring banks in the forex derivatives transactions of 2007-08 is slated for hearing in the Hon’ble Supreme Court of India on January 23, 2012 as per the latest Advance Cause list published in the Hon’ble Supreme Court of India website.

The impleadment petition of the Forex Derivatives Consumers Forum comprising of exporters from across the  country who were sold the ‘exotic’ derivative products by banks along with the final hearings on the case are expected to come up for hearing before the SC bench on the said date.

“The final hearing and arguments of the counsel of the impleaded parties are expected to be heard during this hearing which incidentally is on a non-miscellaneous day.

We therefore expect substantial arguments to be presented re the case details something that has not happened in earlier hearings on the matter. ” apprises S Dhananjayan, Chartered Accountant and Advisor to the Forex Derivatives Consumers’ Forum. “We hope to see the beginning of the end of this heinous white collar crime committed, as per the CBI and RBI, through flagrant violation of the extant FEMA act and RBI guidelines, on the small and gullible exporters of the country.” It may be noted that the Hon’ble Orissa High Court had passed a judgment on Dec 24, 2009 in response to a PIL filed by an economist, Pravanjan Patra, ordering a CBI enquiry against 22 banks who were involved in selling exotic forex derivative products to exporters in 2007-2008.

“In a preliminary report to the court, CBI had gathered data from the Reserve Bank of India that 11 banks had unrealized dues from customers of Rs 755.45 crore between April 2007 and December 2008, while the gross mark-to-market (revaluing assets at their current values) losses of the customers of 22 banks were Rs 31,719 crore between 2006 and 2008,” informs Dhananjayan.

 Further to the same, the FIMMDA had approached the Hon’ble Supreme Court in Feb 2010 urging a stay on the CBI probe. The Apex Court had ordered an interim stay on the probe. Subsequently there have been several hearings.

 The interim stay ordered by the Apex Court continues till the next hearing, which is now coming up on January 23, 2012. says press release.

TWB caught up with Mr.Dhananjayan, Advisor to the Forex Derivatives Consumer Forum, Tirupur earlier this week in town and shared some views about banking

Q) Does the imposition of fines on the erring banks by the Reserve Bank of India in the case of the Rs 32,000 crore exotic forex derivatives now bring the issue to a close?

A) Not at all, the imposition of fine on the erring banks only have vindicated the stand of our Forum that bankers have violate all norms of rules, laws and ethics governing the banking business in India.

But this in no way can be construed as bringing the issue to a close as the pitiable exporter who was saddled with crores of rupees in losses due to the mis-sale of illegal derivative products by these banks are still fighting the legal battle against the mighty bankers, though his legal case get added teeth because of this confirmation of illegality by the apex banking body itself.

Q) The RBI has many a times insisted that the exotic forex derivatives contracts did not represent a systemic risk to the country. In light of the fact that the RBI has now levied fines on the banks do you see this as a perceptible change in the stance of the RBI?

A) We don’t find any definition for the term ‘Systemic Risk’ as this is more of a perception than a defined rule. This opinion of the RBI that such a large scale mis-sale of illegal products by some of the premier banking institutions of the country does not constitute systemic risk is not the kind of perception shared by many industry experts across the country.

This kind of defensive stance on the part of the Reserve Bank creates a suspicion that RBI is espousing the interests of the banks and not acting judiciously the way a banking supervisor should act. The recent levy of penalty on the banks itself might be a result of the pressure created by the Supreme Court where all these mal-practices are likely to get highlighted.

Q) Do you believe that the RBI is sending out a strong signal to erring banks by releasing the report findings and imposing fines on them in advance of the impending hearing of the Hon Supreme Court? Do you believe that this shall prevent and pre-empt such things from happening in the future?

A) No way; On the contrary, we suspect that this levy of fine at this point in time may be a strategy to protect the possibility of banks being subjected to CBI probe by stating before the Supreme Court that RBI has already taken action on the erring bank and no further investigation by CBI is necessary.

Q) Do you think or expect RBI to share/submit its investigation report with Supreme Court?

A) No, we don’t think so –we think that argument that since RBI has already penalized the erring banks, and the civil disputes on the legality of the contracts are already pending at various judicial forums, there is no need for any CBI probe against the banks concerned – will be put forth before the Supreme Court to protect the banks from the risk of facing CBI probe on alleged FEMA violations.

Q) Do you expect any action from the government in this case?

A ) No, the government has already washed off its hands on the ground that the matter is Subjudice.

Q) You have mentioned previously that similar cases of deliberate mis-selling were experienced by exporters in other parts of the world. What action has been taken by courts or regulatory authorities to remedy the situation there? Can you highlight a few specific instances?

A) Similar instances of mis-sale have happened across the globe and the world loss on account of these illegal derivative contracts is pegged at USD 550 Billion. Legal disputes are taking place across the globe in several countries including Germany, Korea, Brazil, Srilanka, Indonesia, etc.

In Germany, the Supreme Court of that country has already held that these kind of contracts are illegal and void contracts under the contract law provisions.

Q) Have any of the banks approached exporters to settle forex derivative issue out of court after RBI fined 19 banks and if yes, why do you think these banks are doing so?

A) Many banks approached the exporters even after the fine by RBI. In our opinion, this may be a result of their legal opinion that their case has gone weaker and weaker every day because of several developments and evidences including the CBI’s and RBI’s report before Orissa High Court, the order of Orissa HC and also the recent slapping of fine by RBI.

Q) What are your expectations from the Hon Supreme Court of India when they meet to hear the case in September?

A) We expect that the Hon’ble Supreme Court of India will look beyond the perceptions and see the reality of the damage caused to small industrialists on account of this grossly illegal acts on the part of the RBI. Also we expect that the Supreme Court will understand that there is more to this iceberg than the tip and order a thorough investigation to be carried out by the apex investigative agency of the country namely the CBI.

Subramanian Dhananjayan, a chartered accountant in Tirupur, Tamil Nadu, had a busy second half of April, advising members of the Forex Derivatives Consumers’ Forum from all over the country. The forum had been first set up by small companies based in Tirupur, who had bought exotic derivative products in 2007 from different banks and were trapped in the not-so-fine print of the complex products they never understood.

Renowned for its hosiery and knitwear products, which it exports across the world. Tirupur is a small town with an unusually high concentration of rich traders. But the ones among them who had bought the forex derivatives suddenly discovered that far from having made any money, they now owed crores to the banks. They also found they were not alone. Entrepreneurs from across the country came clamouring to join the forum, as banks got after them, seeking settlements.

“Now we know why the banks were so keen to settle the disputes,” says Dhananjayan, referring to the April 26 decision of the Reserve Bank of India to levy a penalty on 19 banks for selling such products. The list of banks named by the RBI reads like the who’s who of Indian banking . The RBI said in its press release that the penalties were being levied for “failure to carry out due diligence in regard to suitability of products, selling derivative products to users not having risk management policies and not verifying the adequacy of underlying and eligible limits”.

Forum members have been sufficiently emboldened to say they will file claims for damages. The forex derivative products were essentially contracts signed between the banks and the companies, taking bets on different global currencies like the Swiss franc, the Japanese yen and the euro, without any assessment of the underlying foreign exchange exposure of the buyers’ businesses or their foreign exchangerelated risks, which were mostly US dollar-linked. The products were also sold not as risk management products but as schemes that could add to the profits of the companies. While the first few months brought in some profits, as international currency market trends turned, the contracts started to clock losses. The banks’ losses were limited within the contract. But the buyers’ losses had no limits and quickly ran into crores. In a nightmarish spiral, the banks reported them to the Credit Information Bureau as defaulters, which led interest rates on their existing loans being increased and practically snuffed out their chances of getting future loans.

“We were ignorant and the banks took advantage of us. Luckily, we could organise ourselves,” says Raja Shanmugham, president of the forum, who acknowledges the support of Swadeshi Jagran Manch activist S. Gurumurthy.

E. Palanisamy, an entrepreneur whose company Armstrong Knitting Mills had run up a debt of Rs 27 crore, says banks are now ready to settle for much less. “They were earlier asking me to pay 40 per cent of their claim,” he says. “Now they are asking for 30 per cent only. But after the RBI decision, I will not accept it.”

“Men in suits and ties came to Tirupur from big cities to sell us these products,” he adds. “They have now run away, and local branch officials are trying to find a way to settle.” Meanwhile, following a public interest litigation filed by a Cuttackbased taxation expert, Prabhanjan Patra, the Orissa high court has ordered a Central Bureau of Investigation probe into the forex derivatives. The banks, through their associations like the Fixed Income Money Markets and Derivatives Association of India, and the Indian Banks Association, have appealed against the order in the Supreme Court. The appeal is still pending.

“The banks have lined up the top lawyers of the country,” says Manoj Kumar Mishra, who represents Patra. “But the RBI decision had substantially strengthened our position.” The plight of Tirupur’s traders has also attracted media attention in South Korea, where a similar product called the Kiko wreaked havoc in the nation’s small scale sector. The Kiko – or kick-in kick-out contracts – were suspended by Korean courts in 2009. Over 500 Korean companies had recorded a total loss of $1.2 billion on these contracts till 2008, with many filing for bankruptcy.

“The RBI’s penal action has vindicated our point that derivatives were mis-sold to exporters, which led to heavy losses to them and banks should now compensate for,” A Sakthivel, President of Tirupur Exports Association said.

Exporters have alleged that the banks by violating RBI and FEMA guidelines, issued derivatives and caused them losses of more than Rs. 32,000 crore. Sakthivel, who was also president of Federation of India Export Organisation, said exporters in Tirupur alone incurred losses to the tune of Rs. 400 crore.

While welcoming the RBI’s action, Forex Derivatives Consumers Forum of Tirupur said: “The RBI decision vindicates our stand and gives a boost to our ongoing fight for a CBI enquiry into the whole issue.”

RBI has imposed maximum penalty to erring banks under the Banking Regulation Act, Forum’s advisor S Dhanajayan said, adding, the association was also contemplating filing damage suits against banks. Derivatives are complex business contracts that aim to minimise 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 indexes.

Yesterday, RBI slapped a penalty of Rs. 1.95 crore on 19 banks, including heavyweights SBI, HDFC Bank, ICICI Bank and Citibank, for violating norms on derivatives, an instrument used to hedge financial risks.

One of the cases pertaining to losses incurred on account of derivatives contract is still pending in the Supreme Court.

There’s a nice little story going around in commercial banking circles to describe the situation: There was once a classroom with 22 children, each of who turned out to be ill-disciplined at the end of their school term. In such a situation, rather than holding all the students responsible, wouldn’t the finger of blame point towards the teacher?

By penalizing 19 banks, the central bank has effectively said that almost all the banks offering over-the-counter (OTC) derivatives to customers stand guilty of violating its rules. It’s valid, therefore, to ask the question: What was the central bank doing when its regulated entities were flouting rules en masse?

It’s important to note here that the central bank’s formal observation on the whole forex derivatives mess comes more than three years after the problem had reached its peak. At the end of its long investigation, RBI has concluded: “These banks contravened various instructions issued by the Reserve Bank in respect of derivatives, such as, failure to carry out due diligence in regard to suitability of products, selling derivative products to users not having risk management policies and not verifying the underlying or adequacy of underlying and eligible limits under past performance route.”

The central bank is known for its tough inspection process and it’s unfortunate that the above missteps went unnoticed or were ignored when the alleged mis-selling of derivatives products was happening.

But the larger problem, as pointed out in this column before, is that the central bank fostered a non-transparent OTC market for currency derivatives, instead of encouraging a more transparent exchange-traded market. True, India now has a relatively liquid exchange-traded currency futures and currency options markets. But remember that work on this began thanks to a push from the ministry of finance and initiatives by the Securities and Exchange Board of India.

The messy legal battles between Indian banks and their corporate customers to deal with losses in the derivatives market could have been avoided if the trades were either exchange-traded or even centrally cleared to ensure that margins were being collected systematically. Even now, the central bank’s new guidelines on OTC derivatives fail to address the need for a more comprehensive risk management system. It has taken measures to safeguard the system against misselling of products and has restricted the sale of structured derivative products to listed companies and unlisted companies with a net worth of Rs. 100 crore.

But while the world is moving towards centralized clearing and settlement, the central bank doesn’t yet seem to be convinced about its utility. It can be argued here that adopting central clearing for structured derivatives would be difficult. But it must be noted that this isn’t an impossible task, since complex derivatives can be broken into pieces and those pieces can in turn be margined. Importantly, the practice of collecting mark-to-market margins brings the needed discipline into the markets that no amount of inspection can achieve.

Of course, the role played by the Clearing Corporation of India Ltd (CCIL) can’t be ignored here. It already acts a central counterparty for forex forwards and short duration swaps. And in the options segment, CCIL will soon start a trade repository which will gather details of transactions in the segment. As and when volumes pick up, it will start settling these trades on a non-guaranteed basis. But it has stayed away from structured products.

Thankfully for users of currency derivatives, a rather robust exchange-traded market has now developed. The market has reached a size where even large Indian companies can meet some of their hedging needs. While this is a great development, there is also a need for an OTC derivatives market and the central bank needs to consider improving the risk management framework in this market further.

Industry, especially the exporting community, welcomed the recent move of the Reserve Bank of India slapping a maximum penalty, according to the Banking Regulation Act, on 19 commercial banks for mis-selling illegal derivative products to exporters.

The RBI has recently imposed penalties on 19 commercial banks for contravention of various instructions issued by the central bank in respect of derivatives, such as, failure to carry out due diligence in regard to suitability of products, selling derivative products to users not having risk management policies and not verifying the underlying/adequacy of underlying and eligible limits under past performance route.

In 2007-08, many exporters suffered enormous losses from currency derivatives due to extreme volatility in the currency markets. Majority of them were small and medium enterprises (SMEs) involved in export activities which were not having enough expertise in parking their funds abroad. Now even the income-tax department is treating these losses as speculative in nature and disallowing in the computation of income of corporates/SMEs. This adds fuel to the fire of the already loss-suffered exporters.

Though the regulator’s action was very late and the amount was a paltry sum, this move of the central bank would vindicate the three-year old stand of industry associations like the Forex Derivative Consumers’ Forum that the banks sold illegal products, besides helping exporters/SMEs in getting justice from various courts. In the last three years, the small and medium scale exporters suffered enormous difficulties, financial loss and mental agony pursuant to the derivative losses booked on them. Some exporters peg their actual financial loss in the range of Rs.1.5-2 crore annually.

Further industry experts like S. Dhananjayan noted that even though the RBI charged these banks a maximum penalty as per the law, this action was grossly inadequate taking into account the actual losses suffered by the exporters were of the order of Rs.32,000 crore. Considering the huge disparity between the losses suffered and the penalties imposed, is it time to introduce legislation with more teeth so that market participants are deterred from indulging in such blatantly and patently illegal activities

Accountability

There is a need to fix the accountability as to at which stage of the decision making process these illegal products were permitted to be sold to gullible exporters and action taken on the culpable bank officials.

This requires a thorough and systematic investigation, which is beyond the domain of the RBI. However, the Fixed Income Money Market and Derivative Association of India (FIMMDA), a self regulatory organisation of bankers dealing in derivatives, obtained a stay from the Supreme Court against the Orissa High Court order, which directed for a thorough CBI probe in this issue. In the year 2007, few banks started aggressively marketing certain exotic derivative contracts projecting the same as an alternative profit making mechanism available to exporters whereas actually these contracts had exposed the exporters to enormous risk. Within a few months, the contracts started resulting in huge losses to the exporters.

A PIL was filed before the Orissa High Court by Pravanjan Patra in April 2009 seeking direction to order for a CBI probe on the issue of forex derivatives. The Orissa High Court ordered preliminary enquiry to be conducted by the CBI and the RBI. In response to the order, both the RBI and the CBI confirmed that serious irregularities and violation of the Foreign Exchange Management Act had taken place in these forex derivative contracts sold by banks.

 Taking into account the submissions of various parties and the findings by the CBI and the RBI, the Orissa High Court on December 24, 2009, ordered the CBI to register a case and carry out thorough investigation. During February 15 to 18, 2010, the CBI has sought presentations from various organisations including several banks, the Forex Derivative Consumers’ Forum and the RBI.

Subsequently on February 19, 2010, the Supreme Court has stayed the CBI investigation upon a petition to this effect filed by FIMMDA. The last hearing of the Supreme Court was on November 8, 2010. Now the matter will come for further hearing on September 26, 2011.

 The RBI has laid down well intended guidelines taking into account the potential damage that could be caused on
account of mis-sale of these derivative products.

The present derivative fiasco could have been entirely avoided if the guidelines of the RBI were followed. Instead of
responsibility and circumspection, one could evidently see aggression and recklessness on the part of the banks while
marketing these exotic derivative products.

It is also worth mentioning the remark made in the Development Research Group report of the RBI under study No.
32 titled “Monetary Policy, forex markets, and feedback under uncertainty in an open economy” in page 14 of the
report which reads: “In 2007, market expectations of the rupee-dollar rate had even reached 32, many corporates
borrowed abroad based on such expectations increasing currency risk. Some had entered into the so called hedging
deals, which were actually bets on the value of Swiss franc. With the volatility in currency markets and steep rupee
depreciation in 2008, many firms lost money. Many such deals, where Indian banks were often a front for foreign
banks, sidestepped existing rules that prevented leverage or underlying risk that exceeded export income.

Although firms were not allowed to write options, deals were structured so that in effect firms were writing options.
The deals were so complex that firms sometimes did not understand what the risks they are taking.”
This is a clear finding by the RBI which reveals the extent to which banks have side stepped the regulations while
selling these derivative contracts.

MUMBAI -(Dow Jones)- India’s central bank Tuesday said it penalized 19 banks including the country’s top three lenders–State Bank of India (500112.BY), ICICI Bank Ltd. (532174.BY) and HDFC Bank Ltd. (500180.BY)–for failing to comply with its rules on derivatives.

The order may give a fresh twist to the ongoing legal dispute between the lenders and several small and mid-sized companies, which allege that the misselling of derivative products had caused them billions of rupees in losses. The matter is now in the Supreme Court which will hold its next hearing in the case in September.

“On a careful examination of the banks’ written replies and the oral submissions made during the personal hearings, the Reserve Bank found that the violations were established and the penalties were thus imposed,” the central bank said in a notification.

The list of penalized banks also includes the local units of Barclays PLC (BARC.LN), BNP Paribas S.A. (BNP.FR), Citigroup Inc. (C), Credit Agricole S.A. (ACA.FR), Royal Bank of Scotland Group PLC (RBS.LN), Standard Chartered PLC (STAN.LN), Bank of America Corp. (BAC), Deutsche Bank AG (DB), HSBC Ltd. and JPMorgan Chase & Co. (JPM).

Other domestic banks include Axis Bank Ltd. (532215.BY), Kotak Mahindra Bank Ltd. (500247.BY), Yes Bank Ltd. (532648.BY), ING Vysya Bank Ltd. (531807.BY) and Development Credit Bank Ltd. (532772.BY).

The Reserve Bank of India’s penalty, ranging from 500,000 Indian rupees ($11,234) to INR1.5 million ($33,700), was imposed for violation of rules such as failure to carry out due diligence in regard to suitability of products and selling derivative products to users not having risk management policies, the central bank said in a notification.

“The central bank’s decision has vindicated our stand that we have been missold derivative products and it will strengthen our case in the apex court,” S Dhananjayan, advisor to Forex Derivatives Consumers’ Forum, which has 40-odd companies as members, told Dow Jones Newswires over the phone. The forum is representing the companies which allegedly suffered losses due to these products.

The firms, including a large number of textile exporters, had bought derivative products from banks to hedge against currency volatilities in 2007-2008. However, the global meltdown affected them badly. With none of the parties ready to take the blame, the matter moved to the court of law.

“The foreign banks will have the highest exposure to these derivative losses followed by top Indian lenders,” a senior banking analyst with a Mumbai-based brokerage firm, not wanting to be named, told Dow Jones Newswires over phone.

“Most lenders have already provided for it in the last couple of years. The smaller banks though could face some stress if the court decision goes in favour of the companies,” he said, adding the RBI order has weakened the case for the banks.

The lenders were not immediately available for comments.