Banks accused of pushing the burden of such losses ‘unilaterally’ on exporters

In the wake of unforeseen problems encountered by the exporting community, a demand is now gaining ground for an investigation into foreign exchange derivative contracts.

The demand has picked up steam with a Member of Parliament dashing off a letter to the Prime Minister demanding a “comprehensive independent investigation into malafide dealings in inherently toxic derivatives, which have led to huge losses for exporting units”.

In his letter dated February 3, 2014, T. K. Rangarajan, a Member of Parliament, alleged that the hedging undertaken by banks on behalf of exporters “were done in flagrant violation of FEMA (Foreign Exchange Management Act) and the RBI (Reserve Bank of India) guidelines.’’ Asserting that such derivative contracts entered into with ‘brazen violations’ had led to losses, he accused banks of pushing the burden of such losses ‘unilaterally’ on the exporters.

Hedging “is the most basic recourse” exporters adopted to insulate themselves against vagaries of international marketplace, Mr. Rangarajan said. Banks undertook the hedging exercise on behalf of exporters. It was assumed that the intermediation of the banker would be directed to secure the interest of its charge — the exporter, he added. “However, it is now coming to light that banks had undertaken hedging which betrayed major irregularities and improprieties,” he alleged in his letter to the Prime Minister.

“The derivatives were inherently flawed, exotic and toxic products, which were responsible for the global meltdown,” he said. Mr. Rangarajan alleged that the bankers were aware of the ‘toxic nature’ of the derivatives. Yet, “they subordinated the interest of exporters to the profit of the foreign entities for commission for their respective banks,” he pointed out.

“Alleging grave financial misdemeanour by certain banks,” he urged the Prime Minister to institute a comprehensive investigation into the whole issue.