1

BEFORE THE HONBLE SPECIAL INVESTIGATION TEAM ON BLACK

MONEY
(Constituted vide Orders of the Honble Supreme Court of India)

In re: Complaint with respect to Fraud played by Nationalised, Private

and Foreign Banks in the sale of certain Forex Derivative products to
Indian exporters between 2007 and 2009.

To,
Respected Chairman and Vice Chairman,
Special Investigation Team, New Delhi.

Most Respectfully Showeth:

A. This petition is filed with the Honble Special Investigation Team [SIT]
constituted by the Honble Supreme Court of India in my individual capacity
seeking your immediate and decisive intervention.

1. This petition seeks to bring to the immediate attention and decisive intervention
of the Honble Special Investigation Team [SIT]to investigate a gargantuan
fraud within the Indian financial sector between 2007 and 2009, concerning
inter alia certain Nationalised, Private and Foreign Banks in the sale of certain
Forex Derivative products to Indian exporters. For the sake of brevity the
petitioner craves the indulgence of this Honble SIT to term this fraud as
Forex Derivative Scam henceforth in this petition.
What compounds the matter is not merely the fraud perpetuated within the
Banking system but despite being aware of the nature and extent of fraud,
Indian regulators of the Banking Sector, notably the Reserve Bank of India
[RBI], have not commenced much less conducted a full-fledged investigation

2
on the matter even after this considerable period of time. In fact, the approach
of the RBI the Regulator of the Banks in India and other Regulatory and
investigative agencies have been to stymie any investigation whatsoever till
date for reasons beyond the comprehension of the petitioner. And wherever any
investigation was done, it was done in a casual manner with an explicit
intention to bury the truth fathoms deep. What else would explain the complete
silence of the RBI on this matter for over six years despite evidences starring in
the face of RBI? What is worse is that this is not a fraud played by private
parties on the Indian Banking system as is the case with most other frauds
involving the Indian banking system, rather, this fraud is perpetuated by Banks
in India involving certain Nationalised, Private and Foreign Banks - with the
tacit connivance of the RBI, on private parties, mostly Small and Medium
Enterprises.
2. In short this complaint is twofold One on the Forex Derivative Scam
unleashed by the Nationalised, Private and Foreign Banks on the Indian
enterprises most of whom are Small and Medium Enterprises [SME] in India as
much as the refusal of the Regulator notably the Reserve Bank of India [RBI]
to investigate the matter under the provisions of law.
It is this failure of the RBI that is the trigger for this petition as much as
the scale and sweep of the Forex Derivative Scam that compels the
Petitioner to file this petition before this Honble SIT.
3. Thus, in brief the petition seeks the intervention of the Honble SIT in view of
the complex and technical nature of the scam, failure of the regulators to
address the issue and the requirement of multiple agencies including possibly
the involvement of cross border agencies to:
i.

Investigate the legal tenability, especially in the context of FEMA,

of the Forex Derivatives contracts entered into by the nationalised,

3
private and foreign banks on one hand and Indian exporters on the
other;
ii.

Investigate whether the inaction of the Reserve Bank of India in

regulating these contracts and therefore resulting in illegal profits
for the Banks [with concomitant loss to counterparties] falls within
the definition of misconduct within the mischief of the provisions
of sub-clause (iii) of clause (d) of sub-section (1) of section 13 of
the Prevention of Corruption Act;

iii.

Investigate whether nationalised banks ended up with any loss [on

such legally untenable contracts] and whether such loss [with
concomitant gains to third party] attracts the provisions of
Prevention of Corruption Act;

iv.

In view of the fact that these Derivative products were sold by the
nationalised, private and foreign banks in tandem only for a limited
period of time and to specific set of people i.e. Indian exporters
mostly small and medium enterprises, investigate whether there
was a larger conspiracy unleashed on the Indian exporters by
International Bankers through the Indian Banking establishment;

v.

In view of the predicate crimes indicated above falling within the

scheme and scope of the Prevention of Money Laundering Act,
2002, investigate whether the categories of banks mentioned above
also doubled as Money Laundering Vehicle by transferring illegal
profits [estimated to be in excess of USD 6 billion in 2008] so
earned to financial institutions abroad.

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A word about the Petitioner
The petitioner, M R Venkatesh, is a Chartered Accountant with a brilliant
academic record. He was ranked 30th at an All India Level in the final
examination of the Institute of Chartered Accountants of India. As a finance
professional he has been in practice since 1993 and addresses the industry
concerns relating to Economic Policies, International trade and Business
strategies.
He has authored a few books notable among them being Sense Sensex and
Sentiments Failure of Financial Sentinels in 2010 which deals precisely on
this subject. He also authored several articles on a variety of issue including
quite a few on the above-mentioned Derivative Scam. Furthermore, he has
appeared before the Honble Parliamentary Committee for Finance in October
2008 on the said subject. He was also invited by the victims of a similar fraud to
South Korea in 2011 and provided necessary consultation on the said matter.
B. An appreciating Rupee in 2007 provides a perfect backdrop for the fraud
to be wrecked by the Banks in India including nationalised, private and
foreign - on hapless victims most of whom are small and medium sized
exporters from India

1. To understand the genesis of this Forex Derivative Scam we need to understand

the context which by itself would help in appreciating the extent, scope and
nature of the fraud wrecked by the Indian Banking system on hapless victims
(of this fraud). During the first half of 2007, Indian exporters were in the midst
of an unprecedented situation on account of a sudden and steep appreciation of
Rupee against US Dollar. It may be noted that this was unprecedented simply
because Indian Exporters had been historically accustomed to a depreciating

5
Rupee qua the Dollar. Naturally, when the tables were turned and the Rupee
began appreciating, that too without any signal from the RBI, exporters were
confronted with an unfamiliar situation without any effective tool whatsoever to
manage the situation. This unprecedented appreciation had the calculated effect
of dynamiting their finances.
2. This requires some elaboration: Exporters who got say forty-five Rupees in
early 2007 to a US Dollar all of a sudden on account of the appreciation of the
Indian Rupee began to get a mere Forty Rupees to a Dollar in say March, 2007.
In short, what was hit was the topline of every exporter and thus putting
extraordinary pressure on their very commercial viability. This risk of a
fluctuating Rupee vis--vis other currencies technically called Forex Risk
that was nominal till late 2006 had aggravated by the first quarter of 2007. It
may be appreciated that this risk exists in every transaction involving foreign
exchange, which had marginal impact till early 2007 on account of a
historically depreciating Rupee had in 2007 suddenly actualized as Rupee
appreciated rapidly against the US Dollar and thus significantly impacted the
fortunes of Indian exporters.
3. It is at this critical period that Banks, when exporters were financially
susceptible and psychologically vulnerable, began approaching the exporters
[this is crucial as the exporters never approached the bankers in the first
place] and marketed certain exotic derivative products devised by them,
claiming that these contracts are tailor made and structured products, legally
tenable, designed specifically to effectively manage such conditions read
forex risk arising out of the appreciation of the Indian rupee of Indian exporters.
In fact, some averred that these contracts would result in profits over and above
mitigating the extant forex risks faced by Indian exporters thereby explicitly
converting a risk-mitigating tool into a profit-enhancing tool. Such averments

6
flies in the face of the very concept of derivatives which are at best risk
management and mitigating tool and are NOT legally to be a profit enhancing
tool, at-least in the Indian context. To illustrate, SBI, RTMU Treasury, Chennai
on 01st February, 2007 forwarded mails to various customers with forwarding
letters as Please find attached some very interesting structures with potential to
earn huge profits
(A copy of the email-dated 01.02.2007 from SBI, RTMU Treasury, Chennai to
various customers is marked and annexed as Annexure-I).
4. Naturally, exporters were lured into a false sense of complacency as these
exotic derivatives were marketed by Banks, [including Nationalized Banks]
all of whom were supposedly tightly regulated by the RBI through the Foreign
Exchange Management Act on matters involving Foreign Exchange [where
Banks are permitted by the RBI to act as Authorized Dealers in case of
transactions involving foreign exchange]. If the macro-economic scenario on
account of an appreciating rupee turned favorable to these Banks, these very
banks marketed these exotic derivative products with extraordinary audacity
using every conceivable trick to lure gullible exporters across the country to
enter into contracts with them involving such exotic derivatives. The manner
in which these exotic derivative products were marketed with missionary zeal
is a separate subject and dealt with elaborately elsewhere in this petition.
5. It is pertinent to note that the first set of contracts involving exotic derivative
uniformly resulted in profits [in contradistinction to the fact that derivatives
are supposed to be risk mitigating tool] for the exporters across the country.
Unfortunately, it is this profit that lured the exporters into a false sense of
complacency, encouraged by a scheming banker to entice exporters to make
bigger bets and enter into contracts that were designed by the banks [who are
the Authorized Dealers in Foreign Exchange under FEMA] to defraud the

7
exporters without making them aware of the inherent risks involved. Crucially,
as Authorized Dealers the banks failed to caution exporters that these contracts
were in gross violation of the well-intended Regulations of the RBI under
FEMA on Forex Derivatives. Thus, the Banks as Authorized Dealers, with the
complete knowledge of the RBI guidelines and with impunity, designed the
exotic derivative contracts and also marketed them without any let or fear to
the innocent exporters.
(A copy of the sample derivative contracts sold to few customers for
understanding and appreciation is marked and annexed as Annexure-II).

6. In effect, there is a twofold violation of the RBI Regulations: One, in the very
design of these structured products and two in the manner in which these
products were marketed to innocent exporters, both of which are violative of
FEMA and the Regulations made by the RBI thereunder. The net result:
Exporters suffered massive losses on account of such fraudulent contracts as it
exploded in their face. The magnitude of the loss as at December 31, 2008, as
per RBI's own conservative estimate is Rs. 31,719 Crores.

C. A Superficial verification would demonstrate that these contracts were

illegal, one-sided intended to benefit only the Banker while exposing the
gullible exporters to enormous risks and in gross violation of FEMA.

1. Foreign Currency Derivatives are financial instruments intended to be used by

exporters, importers and people who has exposure to foreign currency risk in
order to protect from fluctuations in foreign currency rates. That explains why
Derivatives are held to be a Hedge i.e. a Risk mitigating tool. RBI has defined

8
the term "Risk" as Market risk may be defined as the possibility of loss caused
by changes in the market variables [RBI Guidance Note on Market Risk
Management 2002]. Market variables are generally interest rates or exchange
rates. However, the term hedging is not defined by RBI. Hedge is a trade
designated to reduce risk. Goal of a hedging program is to reduce the risk, not
to increase expected profits [Risk Management in Financial Institutions by John
Hull]. Similar definition in other standard reference works includes the
Encyclopedia of Banking and Finance 10th Edition which state Hedging is an
action taken to reduce risk or market exposure, a form of insurance. It is not
speculation, but the avoidance of speculation. Thus by their very character
derivative contracts are to reduce, not enhance, risks and two, are not to be
wagering i.e. speculative.

2. Simply put every derivative contract can be compared to a contract of insurance

where the insured in the best of circumstance ends up losing only the premium
and in the worst case scenario ends up with the sum-insured from the insurance
company. In either case no insurance contracts are conceived in such a manner
that an insurance contract be contrived to end up resulting in profits to the
assured. That can never be the objective of an insurance company and even
when it is, it is humbly submitted such a contract of insurance will be void abinitio under the Indian Insurance Laws.
3. Likewise, the intended outcome of a derivative contract as mandated by the
Regulation of the RBI can neither be profits nor can it be wagering in nature.
And it should not be either a profit enhancing tool or wagering contract, or
both, it is humbly submitted that such a contract would be void ab-initio. To
amplify further, in a simple derivative contract the exporter is hedged against
any currency fluctuation by fixing the exchange rate up-front [Technically

9
called Forward Contracts] against which, like in an insurance contract, the
exporter ends up paying a premium to the Banker who is the counterparty to
such contracts and undertakes to carry such risks, much like an insurance
company. It may be recalled that in any insurance contract the sum insured
cannot exceed the insurable interest and the insurance premium has always to
flow from the insured to the insurance company.
4. In direct contrast to these well settled principles, these exotic derivative
contracts were structured in such a manner that turned this classical
understanding of the role of Banks in providing the hedge to exporters upside
down. Even a superficial examination of these contracts (explained in detail
later in this petition) would demonstrate that it was the exporters who ended up
providing a hedge to the bank several times his insurable interest [read
exporters forex exposure] and for which no premium was passed from the
exporter to the banker as stipulated by the RBI. Thus in an amazing reversal of
roles the exporter stepped into the shoes of the Banker, the banker into the
shoes of exporter. This is the first and foremost violation of the Regulation on
Derivatives issued by the RBI.
5. Secondly, it was noticed that in such exotic derivative contracts, the hedge
was extended in currencies where the exporter had no risk in the first place. For
instance, where the exporter had a forex risk in say US Dollar on account of his
exports [technically called underlying] to US, the RBI regulations stipulated
that the Banks could only extend protection on account of currency fluctuation
for the Rupee against the US Dollar and that too to the extent of the exports
undertaken or probably to be undertaken in foreseeable future. Thus, in an ideal
derivative contract for an export of say USD 100,000 an exporter would ideally
be hedged against the fluctuation of the Rupee against the US Dollar by the
Banks. But in these exotic derivative contracts, an exporter in the above

10
mentioned example would end up providing a hedge of say Euros 1,500,000
against the Japanese Yen to the banker, [and not by the banker to the exporter
as explained in the previous paragraph] obviously without any relevance to the
need of the exporter and the extent of his forex risk. Thus, there was a threefold
violation
(i) a role reversal between exporter and banks,
(ii) hedge that exceeded several times the underlying and
(iii) that too in a currency in which there was no risk in the first place.
More to the point, these contracts were devoid of any risk mitigation and in the
alternative were in effect wagering in nature and thus exposed the innocent
exporters several times their original Forex risks.
6. Further, it can be seen that these contracts are a classical case of breach of trust.
These contracts are purely one-sided, intended to help only the banks [and
possibly their foreign counterparts] to make profits on account of structuring the
contracts in gross violation of the Regulation on Derivatives issued by the RBI.
Thus, instead of protecting the exporter from currency risk, it has actually
exposed Indian exporters to enormous risk, several times over and above than
they would have been, had they not entered into these exotic derivative
contracts. Put pithily, these contracts were so structured that it is Banks and
Banks alone who would end on the winning side on each and every exotic
derivative contract and the exporter would always end on the losing side the
classical case of a rigged casino. Even a cursory perusal of the contracts will
demonstrate that these contracts are nothing but wagering in nature. Crucially
the downside to the Bankers are explicitly explained and covered but the
downside for the exporters is a bottomless pit one that would end only when
the exporter is ruined till he is pushed to the brink of bankruptcy. Consequently,
experts on the subject have opined that merely the very design of the contracts

11
that ensures success constantly for one side and loss for the other smacks of
fraud. These contracts can be characterized and the consequences of the such
contracts on the Indian economy as hereunder:
i.

Uniformly these contracts were marketed by banks for a short period in

2007-08 coinciding with the appreciation of the Rupee. These exotic
derivative contracts were never marketed before this period nor were
these contracts marketed later. The very fact that these contracts were
marketed for a particular set of customers and time raises prima suspicion
on the intention of the Bankers who marketed the same with missionary
zeal sometimes even enticing representatives of the exporters through
questionable means.

ii.

Strangely these were marketed only to Exporters never to importers

who too had Forex risks. It is equally perplexing to note that Forex risk
theoretically exists for both the exporters and importers; it is only that the
risk mitigating mechanism for both may be entirely different. Yet all
these exotic Derivative contracts were never marketed even within the
short period of 2007-08 to importers. This marketing of exotic Derivate
products by banks to the exporters and only to the exporters and to the
complete exclusion of the importers in a narrow compass of time clearly
demonstrates the malafide intention of those who were marketing the
same.

iii.

In most cases exporters were sold such contracts of smaller value and in
all cases exporter ended up winners. As pointed out earlier the idea of
marketing these exotic Derivative contracts by Banks were through a
coordinated action. Interestingly, what evidences such a coordinated
action of bankers is that uniformly such contracts resulted in exporters
making profits albeit minimally. As already explained above,

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derivative contracts are never intended to result in profits rather they
are basically risk mitigating tools. If so how and why banks allowed
exporters to make profits initially? How come the exporters were
uniformly making profits in the initial set of these contracts? All these
clearly point out to the fact that these exotic derivative contracts were
structurally faulty.
iv.

And subsequently when exporters were sold the real Exotic derivative
contracts they were thrust with losses several times their net worth.
Once the exporters were assured that these derivative contracts indeed
resulted in making profits banks enticed them with a more toxic variety
but with a crucial difference as explained earlier that it is the exporter
who would be underwriting the risks for the bankers and not otherwise.
This virtually meant that an assured in a contract of car insurance ended
up being the insurer of cars owned by third party to the insurance
company. Naturally when the third party cars were damaged, the proxy
insurer read exporter- was faced with a loss several times the value of
his car. Even to this stage bankers may have an arguable case. But makes
these derivative contracts really exotic was that the terms of contracts
mandated payment equivalent to ten cars for every third party car
destroyed by the proxy insurer to the insurance company.

v.

Thus, in the case of exotic derivative contracts, the banks, not the
exporters, hedged the risks. Secondly, these risks never existed in the first
place and consequently bore no relation to the underlying. Finally the
terms of contracts ensured that the risks were measured exponentially on
the happening or non-happening of certain events, which makes them
contracts of wagering and not valid contracts. And when the events did
occur [or did not occur as the case may be] all hell broke loose.

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vi.

All these have spawned a series of litigation across the country. In the
process the confidence on the financial regulatory architecture of the
country is badly shaken. It is pertinent to note that regulatory and
institutional integrity, especially in the world of finance, is crucial to the
smooth functioning the wheels of commerce and industry. Sadly, the
failure of our regulators notably the RBI to intercede in this matter
and to enforce its well laid out Regulations have dented the confidence of
the common man on its functioning. This needs to be restored pronto.

7. All these factors combined have ensured that only those with complete
knowledge inter alia of finance, foreign exchange, FEMA Regulations issued
by the RBI, Banking laws and practices and the Indian contract law can
comprehend these complex contracts which are popularly in the world of
banking and finance rightly termed as exotic Derivative Contracts.
8. That in brief, the genesis of the fraud which has permeated the entire banking
system leaving our exporters the earners of precious foreign exchange completely devastated. It is the scale and sweep of the fraud that is as
devastating as the silence of the Regulators post the scam.

D. FEMA regulations on derivatives issued by the RBI are well intended and
which explicitly prohibits possible excesses by the Banks on the innocent
exporters yet inexplicably never enforced by the RBI

1. India is one of the very few countries that has a tightly regulated Forex market.
The legislative basis for this regulation stems from Foreign Exchange
Management Act, 1999 [FEMA] and is regulated through the Reserve Bank of
India. Section 47 of FEMA empowers Reserve Bank of India to make

14
regulations to carry out the provisions of this Act and the rules made
thereunder. In exercise of the powers conferred by clause (h) of Sub-Section (2)
of Section 47 of the Foreign Exchange Management Act, 1999, the Reserve
Bank of India has made The Foreign Exchange Management [Foreign
Exchange Derivative Contracts] Regulations, 2000 effective from the 1st of
June 2000. Thereafter periodical instructions and guidelines were being issued
and RBI has the practice of issuing a Consolidated Master Circular every
year on the 1st of July with a sun-set clause of one year and the Master Circular
relevant for the period under dispute is the RBI Master Circular on Risk
Management and Interbank dealings dated the 2nd of July 2007 that lays
down clear cut guidelines to be followed in the sale of derivative contracts.
There is also a Comprehensive Guidelines on Derivatives dated April 20, 2007
issued by RBI that lays down, among other conditions, the suitability and
appropriateness principles to be mandatorily followed by the banks before
selling derivative contracts to counterparties. There is also Sections 45-U and
45-V of the Reserve Bank of India Act, 1934 introduced with effect from the
9th of January 2007 that specifies that transactions in such derivatives, as may
be specified by the Reserve Bank, shall be valid if at least one of the parties to
the transaction is the Reserve Bank, a scheduled bank, or such other agency
falling under the regulatory purview of the Reserve Bank under the Act.
2. As per Section 4 of Foreign Exchange Management (Foreign Exchange
Derivative Contract) Regulations, 2000, A person resident in India may enter
into a Foreign Exchange Derivative Contract in accordance with the provisions
contained in Schedule I, to hedge an exposure to risk.
3. This clearly lays down the fundamental tenet that derivative contracts can be
entered into only to hedge a risk - implying that without underlying exposure in
the form of foreign currency risk, it is not permitted to enter into derivative

15
contracts in India. Absent the risk it is impossible to enter into a derivative
contract. Likewise the hedge has to be restricted to the extent of the risk and
cannot be extended beyond the underlying. Further, the Master Circular on Risk
Management and Interbank dealings dated 02.07.2007 clearly lays down the
terms and conditions subject to which derivative contracts can be sold in India.
Para A1(a) stipulates that the Authorized Dealer bank through verification of
documentary evidence is satisfied about the genuineness of the underlying
exposure, irrespective of the transaction being a current or a capital account
transaction. Full particulars of contract should be marked on such documents
under proper authentication and copies thereof retained for verification.
4. Likewise, the Comprehensive Guidelines on Derivatives dated 20.04.2007
issued by the RBI clearly stipulates the Suitability and Appropriateness
principles to be followed by the banks while offering derivative contracts to
their customers. Para 8.3 of the said guidelines states that The rapid growth of
the derivatives market, especially structured derivatives has increased the focus
on suitability and appropriateness of derivative products being offered by
market-makers to customers as also customer appropriateness. Market-makers
should undertake derivative transactions, particularly with users with a sense of
responsibility and circumspection that would avoid, among other things, misselling.
5. It may not be out of place to mention that these Regulations clearly shift the
onus on the sellers of these products read bankers inter alia to ensure the
suitability and appropriateness of the product to the exporter. Thus, explicitly
through a series of well-intended Regulation the RBI has shifted the onus of
such verification to the Banks and thereby the turning the very idea of caveat
emptor into one of mis-selling. Strangely the Banks never carried out these tests
of suitability or appropriateness of these products for the Indian exporters, most

16
of whom were small and medium enterprises. Crucially, it is their reliance on
bankers on such intricate matters of finance that makes them vulnerable to misselling. It is precisely for this reason that the RBI Regulation has mandated
these checks and balances to be carried out by the bankers and documented as
evidence for posterity. By failing to adhere to these imperial demands of RBIs
Regulations, it is humbly submitted that all these exotic derivative contracts
were mis-sold by the banks with the tacit blessings of the RBI.
6. All these drives to an inescapable conclusion that Reserve Bank of India, taking
into account the skill and sophistication of the market makers vis-a-vis their
counterparties, especially Small and Medium Enterprises, has consciously fixed
the responsibility for regulatory compliance singularly on the Market Maker
namely the banker. Yet it is the banker who has remained the villain of the
piece with the RBI remaining a mute spectator to the gross violation of its own
Regulations by Bankers, who were Authorized Dealers under FEMA.
7. Thus, on a prima facie evaluation anyone would come to a conclusion that these
contracts are grossly violative of the Guidelines on Derivatives issued by
Reserve Bank of India under the Foreign Exchange Management Act. It may be
noted that the RBI has issued detailed guidelines on the manner in which such
derivative contracts must be structured. These include:
i.

Banks could not undertake to always hedge way beyond the forex risk
exposure of the exporters

ii.

Banks are mandated to verify the genuineness and adequacy of the

underlying exposure before offering derivative contracts to customers;

iii.

These must necessarily be in the currency of the risk qua the Rupee ;

iv.

Banks must carry out due-diligence on the exporter, especially in case of

SMEs to determine the suitability and appropriateness of such contracts
[which they failed to carry out in totality].

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8. As these contracts are violative of the Regulations issued by the RBI under
FEMA, these contracts are opposed to public policy and hence void ab-initio.
Unfortunately, given the complexity of the subject and the legal process of our
country, prayers for declaring these contracts void as these were opposed to
public policy are stuck in various courts, mostly lower judiciary. In the
interregnum, banks have demonstrated extraordinary alacrity in recovering their
[illegitimate] dues by using coercive tactics to recover their illegal gains from
the gullible exporters. It may not be out of place that Banks have settled in most
cases at a small fraction of their dues with the exporters, mostly at the mere
whiff of a reference to the courts. That begs a question: if the dues to the Banks
by the exporters are indeed legally tenable as claimed by them why is it that the
bankers have demonstrated undue haste in entering into one time settlement
with exporters and at several instances at a small fraction of what their
legitimate dues.
9. To conclude, the following table, summarises the violations done by these
banks in the sale of derivative contracts to exporters, as listed by RBIs in its
affidavit before Supreme Court :
Sl No Nature

of Remarks

Contravention
1.

Offering
other

structures In terms of Regulation 4 of the Foreign

than

vanilla options

plain Exchange Management (Foreign Exchange

Derivative Contracts) Regulations, 2000
{FEMA

Regulation,

in

short},

and

paragraph 1(c) of AP(DIR series) circular

No. 108 dated June 21,2003 on Foreign
Currency-Rupee Options {Circular on

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Option, in short}, the authorised dealers
could offer only Plain vanilla European
Options
2.

Offering

structures In terms of Regulation 4 of FEMA

resulting in increase in Regulation and Paragraph 1(d)(ii) of

risk to the corporate Circular on Option, a customer can enter
and

receipt of net into packaged products involving cost

premium

by

the reduction

corporate.

structures

provided

these

structures do not increase the underlying

risk and do not involve customers receiving
premium;

3.

Offering
contracts

option In terms of Regulation 4 of FEMA

to

hedge regulation and Paragraph 1(j) of circular on

derived exposures

Option, option contracts cannot be used to

hedge derived exposures (except exposures
arising out of submission of tender bids in
foreign exchange)

4.

Offering

leveraged In terms of Paragraph A-4 of AP(DIR

swap structures

series) circular No. 92 dated April 4,2003

on Risk Management and Inter Bank
Dealings {Circular on Risk Management,
in short}, authorised dealers should not
offer leveraged swap structures to clients

5.

Failure to verify the In terms of Schedule 1 to Regulation 4 of

underlying / adequacy FEMA Regulations, the maturity of the
of underlying

hedge should not exceed the maturity of the

19
underlying

transaction.

In

terms

of

Paragraph A.1(ii) of circular on Risk

Management, the authorised dealers should
verify suitable documentary evidence,
irrespective of the underlying transaction,
being current account or capital account
transaction, to ensure that an exposure
exists, to the extent of the amount of cover
sought.
6.

Not

obtaining In terms of Regulation 4 of FEMA

declaration regarding regulation and Paragraph 2(iii) of Circular

amounts booked with EC.CO.FMD.453/02.03.075/2001-02 dated
other Ads under past December 1,2001 on Booking of Forward
performance route

Contracts based on Past Performance, the

importers /exporters should furnish a
declaration

to

the

authorised

dealers

regarding the amounts booked with other

banks under this facility.
7.

Booking of contracts In terms of Regulation 4 of FEMA

under

the

performance
beyond

50

past Regulation and Paragraph 3 of AP (DIR

route Series) Circular No. 26 dated November 1,
%

of 2004 on Booking of Forward Contracts

eligible limit without based on past performance, booking of

obtaining
Certificate

CA contracts on past performance basis over

and above the 50 % eligible limit could be
permitted by AD banks on being satisfied

20
about the genuine requirements of their
constituents after examination of the
following documents : (i) a certificate from
the Chartered Accountant of the customer
that all guidelines have been adhered to
while utilizing this facility; (ii) a certificate
of import / export turnover of the customer
during the past three years certified by the
Chartered Accountant / Bank in the
prescribed format
8.

Failure

to

adherence

ensure In terms of Regulation 4 of FEMA

to

the regulation and paragraph 1 of AP(DIR

eligible limit under the series) circular No. 22, dated December
past performance route 13,2006 on Booking of Forward Contracts
based on Past performance, the ADCategory 1 banks may allow importers /
exporters to book forward contracts on the
basis of declaration of an exposure and
based on past performance upto the average
of the previous three financial years (April
to March)/ actual import / export turnover
of the previous year, whichever is higher,
subject to specified conditions.
9.

Failure
review

to
reports

obtain In terms of Regulation 4 of FEMA

and Regulation and paragraph A.4(ii) of Risk

annual audit reports Management Circular, the AD-Category-1

21
from the corporates

banks should ensure that the Board of

Directors of the corporate has drawn up a
risk management policy, laid down clear
guidelines for concluding the transactions
and institutionalized the arrangements for a
periodical review of operations and annual
audit

of

transactions

compliance

with

to

verify

regulations.

the
The

periodical review reports and annual

reports should be obtained from the
concerned corporate by the Authorised
Dealer.
10.

Failure to carry out In

terms

of

Paragraph

8.3

of

proper due diligence Comprehensive Guidelines on Derivatives,

regarding

user issued

appropriateness

and DBOD.BP.BC.86/21.04.157/2006-07 dated

suitability of products April

before

vide

20,

2007

circular

(Comprehensive

offering Guidelines in short), a market maker (AD

derivative products to Bank) should

users

carry out

proper due

diligence regarding user appropriateness

and suitability of products before offering
derivative products to users.

11.

Offering

structured In

terms

of

paragraph

8.3

of

products ignoring the Comprehensive Guidelines, the market

customers

maker (AD Bank) should offer derivative

sophistication level

contracts in general and structured products

22
in particular only to those users who
understand the nature of the risks inherent
in these transactions and further that
products being offered are consistent with
users business, financial operations, skill
and sophistication, internal policies and
risk appetite
12.

Failure to document In
pricing and valuation

terms

of

Comprehensive

paragraph

8.3

Guidelines,

of
while

undertaking derivations with or selling

structured derivative products to a user,
market maker (AD Bank) should document
how the pricing has been done and how the
periodical valuation will be done.
13.

Defect in policy not In

incorporating

terms

of

paragraph

8.3

of

Comprehensive guidelines, the market

provision prohibiting maker (AD Bank) should not undertake

deals with customers derivative
without

on their own.
Failure

with

or

sell

risk structured products to users that do not

management policies have

14.

transactions

to

properly

documented

risk

management policies.
provide In

sensitivity analysis

terms

of

paragraph

8.3

of

Comprehensive Guidelines, the market

maker (AD Bank) should share with the
user sensitivity analysis identifying the
various market parameters that affect the

23
product
15.

Failure

to

provide In

terms

of

Paragraph

8.3

of

the

calculator or atleast Comprehensive Guidelines, while selling a

access to a calculator structured product, the selling bank should
which will enable the make available a calculator or atleast
user to mark to market access to a calculator to enable the users to
the structured products mark to market these structured products
on an ongoing basis
16.

on an ongoing basis

Failure to share with In

the

user

terms

of

paragraph

8.3

of

the

scenario Comprehensive Guidelines, the market

analysis encompassing maker (AD Bank) should share with the

both

the

upside

as

possible user scenario analysis encompassing both

well

as the possible upside as well as downside.

downside
17.

Failure to share with IN terms of paragraph 8.3(a) of the

the user description, Comprehensive Guidelines, the market
building blocks and maker (AD Bank) should share with the
rationale

of

the user description, building blocks and

transaction
18.

Failure

to

obtain In terms of paragraph 8.3(g) of the

written

Comprehensive Guidelines, the market

acknowledgement

maker (AD Bank) should obtain a written

from

clients

understanding
disclosed
19.

rationale of the transaction

for acknowledgement from the counterparty

risks for having read and understood the risk
disclosure statement.

Failure to put in place In

terms

of

paragraph

8.6

of

24
acceptable

Comprehensive

methodology
quantifying

Guidelines,

accurate

for measurement of derivative related risks is

financial necessary for proper monitoring

risk in derivatives

and

control.

E. Regulatory insensitivity compounds the matter RBI instead of stepping

into the mess and declaring the contracts void has maintained a deafening
silence. It is this silence of the RBI that makes the RBI an accomplice in this
fraud necessitating a reference to the SIT

1. All these matters were brought to the attention of the RBI as early as 2007-08
by individual exporters. Yet, RBI for reasons best known to it did not interfere
and maintained a studied silence. Then as the disparate outcry of individuals
turned into a desperate chorus of exporters across the country the media took
notice. The Derivative Scam as it was termed by the media began to occupy
prime in the electronic media and made it to the headlines in the print media.
Yet RBI was silent. Several representations were made by associations and
groups of exporters who now saw through the fraud of the Bankers and
provided clear instances, factual evidences and legal averments to buttress their
arguments. Yet RBI remained unmoved. Several attempts were made by
exporters to meet senior officials of the RBI including the then RBI Governor.
Apart from extending usual courtesies, expressing concern and promise to look
into the matter forthwith nothing moved.
Now this silence of the RBI transmogrified into stone walling and was eating
into the vitals of the exporters. Buoyed by this approach of the RBI, Banks
began to go for the jugular and began to virtually resort to extortion to recover

25
their profits [read concomitant loss to the counter-parties] from their hapless
victims. The worse hit were the exporters who had entered into contracts with
their own bankers who threatened to close or withdraw the facilities extended to
the exporters. The legal system that is otherwise dormant in case of delinquent
borrowers was put to good use by banks with amazing alacrity in this matter.
2. Interestingly exporters who had entered into such contracts with bankers who
were not their regular bankers virtually ignored the threats of these bankers to
use the long arm of law to recover their dues. Needless to emphasize such
threats in these cases remained as empty ones as most banks did not effectuate
their threats. And in limited cases where the banks went to courts against
exporters who were not their clients in the first place, such matters are caught in
legal quagmire.
3. Meanwhile, exporters unable to bear the coercive tactics of the Banks and gross
apathy of the RBI approached the Parliamentary Standing Committee on
Finance [The Petitioner appeared before the Parliamentary Committee in his
capacity as an expert on the subject] in October 2008. The Honble standing
committee had given the exporters and RBI a patient hearing spread over two
days. Subsequent to this hearing the RBI probably for the first time
understanding the gravity of the matter issued a circular dated October 29, 2008
directing the banks to keep the amount disputed in a separate account pending
clarity on the matter and not debit the same to the regular working capital
account of the exporter.
This was in late 2008. Worse still, this silence of the RBI has emboldened some
of these banks once again to debit the running account of the exporters. This has
disastrous consequences for the Indian exporters as it lowers drawing power of
exporters, dries up the working capital and strangulates the finances of the
exporters. In effect, the bankers had not only violated the Regulations on

26
Derivatives issued by the RBI with impunity, they went on to do so even after
RBI came up with a circular to park the disputed amount in a separate account
without debiting the running account of the exporters. And despite this RBI
continued to remain silent and continues to do so till date.

F. RBI Acted much later by penalising Banks under the Banking Regulation
Act but not under the FEMA which is the crux of the issue even as it is
suspected that the Banks had Back to Back contracts involving entities abroad
thus making all this a gigantic Money Laundering issue.

1. Interestingly on April 26, 2011 the RBI sought to bring the matter to an abrupt
closure by imposing a penalty aggregating to Rs 195 Lacs on nineteen banks
operating in India. It is not clear why the RBI chose to penalise the banks under
the Banking Regulation Act when the matter squarely fell within the domain of
FEMA. By shifting the issue from FEMA to Banking Regulation Act, the RBI
ensured that the victims of this gargantuan fraud were neither represented
before it on this matter nor were they heard. It is pertinent to mention here that
while the cumulative loss under the present derivative scam is believed to be
roughly Rs. 31,719 crores as per RBIs estimate, RBIs penalty stretched over
19 erring banks was a meager sum of Rs. 1.95 crores which even does not
constitute a single percent of the alleged fraud. It is further submitted that
section 46(4)(i) of Banking Regulation Act, 1949 empowers RBI with residuary
power to impose penalty ..extending to one crore or twice the amount involved
in such contravention or default where such amount is quantifiable, whichever
is more... RBI on the contrary chose to impose penalty as less as Rs. 5 lakhs
against an erring bank, which demonstratively speaks volume as to how RBI

27
has shielded banks against aversive/deterrence actions. It is indeed surprising to
note that RBI despite acknowledging the violations under FEMA by the Banks
while marketing such exotic derivative contracts inexplicably chose to
penalise the banks under the Banking regulation Act. It may be noted that RBI
which is the trustee of the Forex reserves in India under FEMA was duty bound
to have referred the matter to the Enforcement Directorate under the provisions
of FEMA. By penalising the Banks, that too with paltry amounts under the
Banking Regulation Act, the RBI failed in its duty as the Regulator. It is this
gross failure of the Banking Regulator in regulating such contracts that compels
the petitioner to come before this Honble SIT.
It is pertinent to mention here that even the Reserve Bank of Indias
Development Research Group on Monetary Policy, Forex Markets, And
Feedback Under Uncertainty In An Opening Economy concluded that:
Some had entered into so called hedging deals, which were actually
bets on the value of the 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 were taking.
(A copy of the relevant portion of Development Research Group on
Monetary Policy, Forex Markets, And Feedback Under Uncertainty
In An Opening Economy is marked and annexed as AnnexureIIA)

28
G. Meanwhile a Public Interest Litigation was filed before Orissa High Courtand the Honble Court had observed the issue in greater detail and come to a
conclusion on the nature and extent of the fraud perpetuated by the Banks on
the innocent exporters

1. Meanwhile a PIL was filed in the Honble High Court of Orissa in 2009. The
prayer made out in these writ petition was to issue Rule Nisi calling upon the
opposing parties to show cause as to why a writ in the nature of mandamus or
any appropriate writs(s) shall not be issued directing the opposing Parties to
hand over the instant matter to an independent investigating agency preferably
the Central Bureau of Investigation for thread bare investigation and book the
culprits and punish them in accordance with law and upon causes shown in any
or upon insufficient causes shown make the said rule absolute and pass such
other order / orders as deemed just and proper.
2. After hearing the stakeholders involved including the RBI, the Hon'ble High
Court of Orissa, had correctly arrived at the conclusion vide Para 15 of the
Judgement that the instant matter is a matter of national interest. Some of the
important factors and the criminality involved in the instant matter was brought
before the Orissa High Court and the Hon'ble High Court after appreciating the
evidence reached to the conclusion:
i.

The original reference of the High Court of Orissa to carry out a Preliminary
inquiry by CBI was to ascertain whether there is any violation of Foreign
Exchange Management Act, 1999 and the Regulations made thereunder. In
response to this Public Petition, both CBI and RBI came back with an
affirmative response that there were serious irregularities and violation
FEMA taken place in the sale of derivative contracts by Banks.

29
ii.

As per the facts captured by the Orissa High Court vide Para 2 of the
impugned judgement, it is stated As per exposure of Indian Economy, i.e.
Gross total export and import, they were permitted to cover only risk factor
and upto 600 Billion Dollar. Interested dealers entered into contract worth 3
Trillion dollars, i.e. Six time more than the exposure of India and the RBI
merrily consented to this and by this process, the gambling started. This
observation is confirmed by the statement of Reserve Bank of India which is
contained in Para 7 of the Impugned Judgement which states that the total
notional principal outstanding in respect of derivatives including forward
foreign exchange contracts were to the tune of Rs. 71,71,570/- crore (USD
1646 Billion) and Rs. 1,17,94,707 crore (USD 2435 Billion) as on 31st of
March 2007 and 31st December 2008 respectively
(A copy of the of the judgment of the Honble Orissa High Court dated
24.12.2009, is annexed and marked as Annexure-III)

iii.

As already stated, Foreign Currency Derivatives could be used only to

hedge an existing underlying exposure in the form of a foreign currency
risk. Generally exports and imports are the two major transactions that give
rise to foreign currency risk. The total value of exports and imports per
annum is only of the order of USD 600 Billion. Assuming that the entire
exports and imports of the nation are hedged, the total value of foreign
currency derivatives cannot exceed Rs. 600 Billion. The very fact that
notional outstanding foreign currency contract as on 31.12.2008 is Rs. 2.435
trillion which is more than four times the total value of exports and imports
of the country clearly points out that speculation in currency is rampantly
taking place right under the nose of RBI.

iv.

In Para 4(x) of the Impugned Judgement, while reproducing the submissions

of Reserve Bank of India, it was stated that As in December 2008, the gross

30
MTM Gains (corresponding losses to customers) of 22 banks active in the
business of derivatives wereRs. 31,719 cores. In Para 4(xiii),it is stated that
losses suffered by the customers may not represent the gains made by the
banks.... the MTM losses indicated above do not reflect the profits made by
the banks. These two statements of RBI reproduced in the impugned
Judgement raises a question as to where the amount of Rs. 31,719 crores of
loss money went - clearly indicating an international conspiracy to fritter
away the precious foreign exchange reserve of the nation.
v.

It was apparent that the derivative contract contains extremely skewed risk
reward profile, as mentioned in para 6 of the impugned judgement which
states On a perusal of contracts presented before you in paper book at FlagD which shows that these contracts are purely one sided. For example, the
profit in contract at Flag-D would be restricted to USD 8000. However, in
the case of appreciation of Euro, the loss that would be suffered by the
exporter is unlimited and depends on actual spot rate of euro as on date of
maturity. In the illustration given on margin of Flag-D, the actual loss
suffered by the exporter is Rs. 2.38 Crores. It is clear from the above facts
that the derivative contracts sold are purely one-sided intended to benefit
only the bankers and their foreign counterparties and never intended for
hedging the currency risk of the exporters.

vi.

The Directorate of Enforcement also confirmed vide their letter dated

15.12.2009 that intelligence was received from reliable source and press
report that several banks have indulged in illegal forex derivatives resulting
in huge losses (See, Para 8 of Judgment of Honble Orissa High Court
dated 24.12.2009).

vii.

Both RBI as well as CBI came out with clear finding that there were
serious irregularities and violations of FEMA and RBI Guidelines did take

31
place in the sale of derivative contracts by banks. Besides, RBI has clearly
pointed out ten types of violations by banks in following the stipulated RBI
guidelines [See para 4(xix) of the judgment of the Honble Orissa High
Court dated 24.12.2009].
viii.

Taking into account the findings of the preliminary inquiry conducted by

CBI and RBI and considering the magnitude of the losses suffered by
exporters of the country, the High Court of Orissa has ordered the CBI to
investigate into the offences in the sale of derivative contracts.

ix.

It may not be out of place to mention that the matter had reached the
Honble Supreme Court and the Honble Supreme Court was pleased to
grant a stay on this matter on 15.03.2010. Now the matter is pending before
the Honble Supreme Court since then.

H. At the root of the present imbroglio involving the derivatives is that

there has been a blatant violation of regulations issued by the RBI on
derivatives acknowledged by RBI yet refuses to take action under
FEMA

1. The present dispute predominantly centers on certain exotic derivative

contracts sold by bankers. It is pertinent to note that regular hedging
instruments like forward contracts and plain vanilla option contracts are
not the subject matter of the present case at all. This distinction is crucial
as the dispute is NOT on the plain vanilla hedging instruments. The
Reserve Bank of India itself has clearly made out this distinction vide its
circular dated 29.10.2008 whereby it has instructed the banks to park the
proceeds of derivative contracts other than forward contracts and plain
vanilla option contracts in a separate account and not to mix up with

32
regular running accounts of the customer. For the sake of brevity those
derivative contracts other than forward and plain vanilla option are called
exotic derivative contracts.
2. One of the most important aspect to be highlighted here is that in these
contracts are purely one-sided - meaning that if the profit accrues to the
exporter, it is capped at a particular amount - on the contrary, if loss
started accruing to the exporter, it is a bottomless pit [See Annexure-II].
In fact, de hors the technicality, it is humbly submitted that these
exotic derivative contracts are sophisticated wagering contracts.
As these contracts are genetically flawed and by definition, complex,
these are expressly prohibited through a detailed set of regulations issues
by the RBI which in contrast only allows plains vanilla contracts. It may
not out of place to mention that these exotic derivatives are prohibited
by the RBI not only merely because they contain ingredients of a
wagering contract, but also their complexity lends itself for being
misunderstood, misinterpreted and hence mis-sold to innocent exporters
who may lack the financial sophistication to appreciate the suitability and
appropriateness. It is pertinent to note that even in financially matured
markets like London and USA there are express Regulations to govern
such exotic derivatives. It is for these reasons that the RBI had shifted
the onus [as explained earlier in this petition] of examining the suitability
and appropriateness to the Banks rather than leave it to the judgement of
the individual exporters.
3. The table given in page 269 of the Impleader petition of the Forex
Derivatives Consumer Forum in the Honble Supreme Court which
clearly demonstrates the scenario analysis in respect of a series of
derivative contracts wherein the actual loss suffered by the exporter out

33
of one contract is almost twenty to forty times the maximum profit that
could possibly be made by an exporter in respect of each such contract.
No exporter or importer in the country would be agreeing to sign such a
contract if the fact of such skewed nature of the contract was duly
presented to them by the bank. More to the point it may be recalled that
the Derivatives are risk mitigation tools in the first place. That begs the
question: How and Why should the exporters end up with such
gargantuan loss if indeed the derivatives are risk mitigating tool in the
first place?
(A copy of the relevant portion of the impleadment application of Forex
Derivatives Consumer Forum is marked and annexed as AnnexureIV).
4. Similarly, the IMF working paper by Mr. Randall Dodd that elaborately
analyses these types of exotic derivative contracts categorically
concludes that such type of Knock In Knock Out [KIKO] instruments are
neither suitable for hedging nor for speculation-then a question arises as
to why such contracts were sold by sophisticated financial dealers across
the country causing havoc to the finances of many of the countrys
exporters.
(A copy of the IMF Working Paper, Randall Dodd, Exotic Derivatives
Losses in Emerging Markets: Questions of Suitability,Concerns for
Stability is marked and annexed as Annexure-V)
5. All these factors clearly points out to a Prima Facie case of larger
conspiracy to defraud the exporters of their hard earned earning [where
bankers enticed the exporters to sign such one sided contracts without
properly appraising the risk inherent in such contracts] and launder the
same through a series of transactions and simultaneously projecting such

34
ill-gotten wealth as untainted property in their books. And that is the crux
of the issue on hand.
6. Further, evidences available reveal that exorbitant bonuses and
commissions were payed to certain bankers and is the singular reason for
the rampant marketing of such illegal products in India. The fact that
banks made enormous profits on account of these derivatives is
abundantly clear from the audited financial statements of ICICI Bank
whose Fee Income which includes the income on account of derivative
transactions grew from a mere Rs. 847 Crores in the year 2003 to Rs.
6627 Crores in the year 2008 - an eight-fold increase within a span of
five years
(A copy of the relevant portions of 14th Annual Report of ICICI bank is
annexed and marked as Annexure-VI).
In the case of State Bank of India, it is a Five-fold increase in three years
where the treasury profits grew from Rs. 835 Crore in the year 2006-07
to Rs. 3750 Crores in the year 2008-09
(A copy of the relevant portions of Rajesh Chakrabarti, Grit, Guts and
Gumption highlighting the same is annexed and marked as AnnexureVII).
It is common knowledge within the banking circles that a portion of these
profits were shared with the treasury department staff that enticed them
to indulge in marketing these illegal contracts causing devastation to the
finances of thousands of small and medium enterprises across the
country.
7. Another allegation thrown at the exporters is that some customers tried to
use the derivative contracts as a profit management tool rather than using
them as risk management tool. The E-mail communications received

35
from officials of State Bank of India [See Annexure I, supra] clearly
proves the fact that it was the banks who projected such contracts as
profit management tools [when they should not have as derivatives are
merely risk mitigating tools] and enticed the exporters into signing them
with a view to earn huge bonuses and commissions.
8. Further, the modus operandi followed by the banks while selling the
derivative contracts looks extraordinary. It is reliably understood that the
banks went to the extent of offering free foreign trips to CFOs of the
companies with a view to entice them to facilitate sale of derivative
contracts to their companies. Such practices are unprecedented in Indian
banking history where even for opening a small savings account, a
customer has to run from pillar to post while for selling such complex
financial instrument, banks resorts to strategy of enticement and luring. It
is humbly submitted that this piece of evidence is crucial for
understanding the machinations of Banks.
Naturally all these raise some pertinent questions:
i.

How much profit or loss did the bankers make in India from such
illegal contracts?

ii.

How much was the concomitant loss or gain for the exporters in
India?

iii.

How much was recovered by the banks from the exporters?

iv.

How much was settled by the banks for lesser amounts?

v.

How much waived by the banks in India?

vi.

If the contracts were indeed legal what was the compelling need
for the bankers to settle the same for a lower amount that too with
such great haste?

36
vii.

How much of the contract value are under litigation in various

courts in the country as on date?

viii.

How much of these profits transmitted to financial institutions out

of India?

ix.

Was all this part of a larger conspiracy involving foreign

institutions and international players?

x.

Why is it that all these coincided with the global financial crisis of
2008?

xi.

Was all this part of a larger global game plan with some
institutions within India part of the charade?

xii.

How come the RBI despite acknowledging the fact that these
contracts were violative of FEMA as early as in 2009 not refer the
matter to Enforcement Directorate till date?

xiii.

Why did RBI take action on the Banks under the Banking
Regulation Act and not under FEMA?

xiv.

Why did RBI despite overwhelming evidence of a massive FEMA

violation allow banks with a mild penalty under the Banking
regulation Act?

xv.

Was this an elaborate Money Laundering exercise carried out in

full public glare with the tacit consent of all Regulators in India?

xvi.

If

the banks

sold

such

illegal

derivatives

and

despite

acknowledging the same why RBI has remained silent?

xvii.

Why did the banks sell such exotic derivatives in tandem only to
exporters [and not to importers] in 2008-09 coinciding with the
steep appreciation of the Rupee?

xviii.

Why is it that banks stopped marketing such products since then

either to exporters or to other players in the Forex markets?

37
xix.

The fact that all these nineteen banks marketed similar structured
products, each contract being identically worded and designed as
the other and with the banks emerging as the ultimate beneficiary
of such contracts being violative of FEMA, points out to a prima
facie evidence of a conspiracy. Despite such an overwhelming
evidence, why is it that no investigating agency ever taken up this
angle.

xx.

Was there a foreign counterparty to the Indian Banks who entered

into wholesale contracts and retailed the same to hapless innocent
Indian exporters who were predominantly small and medium
enterprises? If so, was the profits from such contracts too shifted
abroad as a ruse to honor these contracts?

Questions that remain unanswered till now.

I. The Derivative scam, its size and scope, the brazenness displayed by the
bankers coupled with the silence of the Regulators notably the RBI as well
as the failure of other investigative agency to investigate the scam as well as
complexity of the issue on hand lends itself as a perfect case for an
investigation by the SIT

1. It may be recalled that the Special Investigation Team was formed in May
2014 by an order of the Honble Supreme Court subsequent to a writ filed by
Mr Ram Jethmalani & others. It is in this connection that the Honble
Supreme Court had observed in a landmark judgement: In light of the
above, we had proposed to the Union of India that the same HLC constituted
by it be converted into a Special Investigation Team, headed by two retired
judges of the Supreme Court of India. The Union of India opposes the same,

38
but provides no principle as to why that would be undesirable, especially in
light of the many lapses and lacunae in its actions in these matters spread
over the past four years. [Para 43]
2. The Court elaborating on the scope of the said SIT proposed to be formed
also observed: We are of the firm opinion that in these matters
fragmentation of government, and expertise and knowledge, across
many departments, agencies and across various jurisdictions, both within
the country, and across the globe, is a serious impediment to the conduct of a
proper investigation. We hold that it is in fact necessary to create a body
that coordinates, directs, and where necessary orders timely and urgent
action by various institutions of the State. We also hold that the continued
involvement of this Court in these matters, in a broad oversight capacity, is
necessary for upholding the rule of law, and achievement of constitutional
values. However, it would be impossible for this Court to be involved
in day to day investigations, or to constantly monitor each and every
aspect of the investigation. [Para 44]
3. Dwelling precisely on the issues necessitating the SIT the Honble Court
outlined the need for the SIT in the context of the failure of the Central
Government to tackle generation of illicit wealth. It is in this connection the
Court observed: The issue is not merely whether the Union of India is
making the necessary effort to bring back all or some significant part of the
alleged monies. The fact that there is some information and knowledge
that such vast amounts may have been stashed away in foreign banks,
implies

that

the State has the primordial

responsibility, under the

Constitution, to make every effort to trace the sources of such monies,

punish the guilty where such monies have been generated and/or taken
abroad through unlawful activities, and bring back the monies owed to

39
the Country. We do recognize that the degree of success, measured in terms
of the amounts of monies brought back, is dependent on a number of
factors, including aspects that relate to international political economy
and relations, which may or may not be under our control. The fact remains
that with respect to those factors that were within the powers of the Union of
India, such as investigation of possible criminal nexus, threats to national
security etc., were not even attempted. Fealty to the Constitution is not a
matter of mere material success; but, and probably more importantly from
the perspective of the moral authority of the State, a matter of integrity of
effort on all the dimensions that inform a problem that threatens the
constitutional projects. Further, the degree of seriousness with which efforts
are made with respect to those various dimensions can also be expected to
bearfruit in terms of building capacities, and the developmentof necessary
attitudes to take the law enforcement part of accounting or following the
money seriously in the future. [Para 46]
4. Defining precisely the scope of the proposed SIT the Honble Court
concluded: That the Special Investigation Team, so constituted, shall be
charged with the responsibilities and duties of investigation, initiation of
proceedings,

and

prosecution, whether in the context of appropriate

criminal or civil proceedings of: (a) all issues relating to the

matters

concerning and arising from unaccounted monies of Hassan Ali Khan and
the Tapurias; (b) all other investigations already commenced and are
pending, or awaiting to be initiated, with respect to any other known
instances of the stashing of unaccounted monies in foreign bank accounts
by Indians or other entities operating in India; and (c) all other matters
with respect to unaccounted monies being stashed in foreign banks by
Indians or other entities operating in India that may arise in the course of

40
such investigations and proceedings. It is clarified here that within the ambit
of responsibilities described above, also lie the responsibilities to ensure
that the matters

are

also

investigated,

proceedings initiated

and

prosecutions conducted with regard to criminality and/or unlawfulness

of activities that may have been the source for such monies, as well as
the criminal and/or unlawful means that are used to take such
unaccounted monies

out of

and/or

country, and use of such monies

Investigation Team shall

bring such monies back into the

in India or

abroad. The Special

also be charged with the responsibility of

preparing a comprehensive action plan, including the creation of necessary

institutional structures that can enable and strengthen the countrys
battle against generation of unaccounted monies, and their stashing
away in foreign banks or in various forms domestically. [Para 49(iv)].
5. A plain reading of the above judgement clearly demonstrates that the SIT
has ample scope to take the matter on its own especially given the fact that
this scam is extremely complex, given the reluctance or inability of any
investigative agencies to investigate the matter, tacit involvement of the
Regulator Viz., the RBI on this matter and given the fact that attempts to
seek judicial intervention has not yielded appropriate results for the victims
of this fraud. Another fact that is brought about by this Petition that remains
undisputed is the absolute lack of coordination within the various agencies
that is responsible for the sorry state of affairs. It is precisely the reason why
the Honble SC had mandated the SIT to step in and do the needful.

J. Understanding the criminality associated with the scam it is not merely

an innocent FEMA violation as is admitted by the RBI but a larger

41
conspiracy that remains to be unearthed including the role of the RBI in
refusing to investigate the scam

It is at this point the Petitioner humbly craves the indulgence of this Honble
SIT to revisit the following submissions:
1. The Derivative contracts were entered into by these 19 Banks and with only
Exporters. While importers too deal with Foreign exchange and may well
have exchange rate volatility and consequently require such sophisticated
products these products were not offered to the Importers. Why? Why
were importers excluded when Forex volatility hits both? Why the exporters
were targeted, especially when the Rupee appreciated in 2007? By that logic
importers to should have been offered such products to hedge against the
possible depreciation of the Rupee. When all these happened in 2008-09 the
importers were caught completely unawares. In short, such sophisticated
derivative products were offered ONLY to exporters. Obviously there was
some thought that went into the minds of the bankers and an agreement
which is an outcome prima facie indicates the meeting of minds to target
only exporters at the exclusion of importers.
2. Further, it is not one transaction by one bank with one exporter, nor is it by
several banks with one exporter. In fact, such transactions have been entered
into by several banks with several exporters across the country beginning
State Bank of India to ICICI and exporters from Tiruppur in South India to
Ludhiana in North India. Admittedly, all these transactions were in gross
violation of the FEMA. It is humbly submitted that gross violation one time
by one bank or even several times by one bank can be condoned as an
accident. But several banks entering into such contracts in gross violation of

42
with several exporters over a period of 12-15 months period time span
coinciding with the appreciation of the Rupee [when the exporters were
psychologically at their vulnerable best] prima facie reveals a meeting of
minds by various banks guided by some superior force to design and enter
into such transactions.
3. It is to be further noted that the RBI has penalized these Banks on April 26,
2011 explicitly stating that the banks had contravened various instructions
issued by the RBI in respect of Derivatives which in turn relate to these
contracts. As already pointed out earlier that these contracts were violative
of FEMA and hence had to be investigated by the Enforcement Directorate
under FEMA. Strangely, these banks were penalized by the RBI under the
Banking Regulation Act where the exporters the statement of the victims
were not even recorded. It is reiterated that such a colorable exercise
attempted by the RBI is bad in law as it militates against the basic structure
of a fair enquiry. Be that as it may, even without the participation of the
victims the RBI has proceeded to penalize the Banks under the provisions of
the Banking Regulation Act. Needless to emphasize such attempts to
penalize the Banks, despite an abridged enquiry process, points out to larger
issue: these contracts being opposed to public policy u/s 23 of the Contract
Act are void ab-initio. Yet, the Banks have refused to put the exporters in
the same position as they were prior to entering into such void contracts as
laid out under Contract Act by refusing even to this date to cognize the
RBIs position on this matter much less taken initiatives to take the RBI
Circular to a logical end by returning the money to the exporters.
4. In direct contrast it may not be out of place to mention that CBI had
summoned the Exporters as early as October 2009. Consequently the

43
President of the Tirupur Forex Derivative Forum had made a statement to
the CBI explaining the impact of the contracts on the exporters of Tiruppur.
(See Para 6 of the order of Honble Orissa High Court). It may not be out of
place to mention that the Exporters had made appropriate representations
before the RBI and met the Deputy Governor and Governor of the RBI in
July 2008. Subsequently the Forum made representations to the
Parliamentary Committee in October 2008. Based on this representation the
RBI was compelled to provide a circular on 27th October 2008 directing the
banks not to compel exporters to pay up the disputed amounts, account for
the same in a separate account and also not reckon this for the purposes of
computing the NPA status. In short, the exporters as early as in 2008 have
been taking several proactive steps to remedy the situation while the Banks
despite the order of the RBI have not taken one step to remedy the situation.
5. The derivative products were offered between the first quarter of 2007 and
second quarter of 2008. Why is it that these Banks are not offering similar
products to the exporters now? Do the exporters not require such products
now? It is pertinent to note that the Rupee has been volatile since then as it
had been in 2007-08. Yet the Bankers have not ventured into providing such
contracts as it is impossible to provide such contracts today. Obviously, the
timing of the contracts in 2007-2008 is extremely crucial coinciding with the
appreciation of the Rupee vis-a-vis the USD. The sequence is first the Rupee
appreciated dramatically and unprecedentedly, then these contracts were
entered into by the banks and finally the Rupee depreciated dramatically
causing huge loss to the exporters. Interestingly, no one bank was caught in
the wrong end of the contracts obviously indicating that these banks were
acting unanimously and that they were a part of a larger conspiracy. This is
possible only on the meeting of minds and hence prima facie attracts the

44
mischief of S 120A of the IPC. The reason for the same is explained in
greater detail hereunder. It is humbly submitted that Section 120A of I.P.C.
defines criminal conspiracy. According to this Section when two or more
persons agree to do, or cause to be done (i) an illegal act, or (ii) an act which
is not illegal by illegal means, such an agreement is designed as aa criminal
conspiracy. The crucial question whether the acts of the banks constitute
conspiracy? Whether the banks were acting in tandem to de-fraud small and
medium exporters? It is submitted that prima facie that this suggests a huge
conspiracy.
6. It is humbly submitted that the derivative contracts were typical in
structuring almost all contracts were typical in its structure, risk-reward
ratio as well as their outcome. Interestingly, the first few contracts typically
and uniformly ended into profits for the Exporters and thereby induced the
exporters to take bigger and better bets. Subsequently the sizes of the
contracts were increased and crucially the roles were reversed. Interestingly
by this time the exporters had become option writers and the Banks became
the insured in gross violation of FEMA guidelines. Consequently,
exporters had to suffer huge loss as insurers of a contract that was structured
to disproportionately favor the Banks with not even a theoretical chance of
exporters gaining at the expense of the Banks. It is pertinent to note that
even in terms of their violation of FEMA these contracts were identical and
hence the RBI Press Release [Press release 2010-2011/1555] was able to
neatly summarize these violations for all the banks under one press release
and impose penalty on the bank.
7. These derivative contracts are typically governed by the provisions of
FEMA and tightly regulated by the RBI. Further all these banks are

45
Authorized Dealers under FEMA and are strictly bound by the rules,
regulations, notifications or directions issued by the RBI relating to the
doing or desisting from doing any act relating to foreign exchange. Being
Authorized Dealers the Contracting Banks cannot plead ignorance or even
negligence in such matters. Unless Banks decided to violate the well laid out
guidelines of the RBI Master Circular, it is impossible to devise, design and
execute such contracts in such large numbers across the country, identically.
8. It is humbly submitted that the IDG Report which brings about the
violations, which are serious in nature, and lists out several irregularities
of the Banks (See para xix at page 13 of order of the Honble Orissa High
Court). Surely, these are not mere one time slippages or violations by banks.
Such violations are not restricted to one bank or several times with one
exporter. Rather it was a uniform phenomenon in 2007-08 affecting the
small and medium exporters across the length and breadth of the country
with several cases not even reported and several exporters had paid up the
banks without any demur on account of extraordinary and unprecedented
coercion unleashed by the Banks on their hapless victims.
9. In short, the violations of notifications and guidelines of FEMA by Bank is a
well thought out, pre-planned and well-designed operation resulting in a
criminal conspiracy for a period of 12-15 months targeting identical set of
small and medium exporters, with identical set of contracts in which the risk
to the bank is minimal while the exporters are exposed to limitless risk and
in an identical period of time (2007-08).
K. The size and nature of the scam lends by itself to a CBI Investigation
And despite an Order by the Honble HC of Orissa RBI and Banks have
stalled an CBI investigation on specious grounds.

46
1. It is humbly submitted that the RBI had issued Circular RBI/2011-12 /74
[FrMC. BC. No. 1/23.04.001/2011-12] dated July 01, 2011. Accordingly:
Under Para 6.2 of the said Circular Public sector banks should report fraud
cases involving amount of Rs. 1 crore and above to CBI and those below Rs.
1 crore to local police, as detailed below:
Cases to be referred to CBI
(a) Cases of Rs. 1.00 crore and above uptoRs. 7.50 crore
Where staff involvement is prima facie evident CBI (Anti Corruption
Branch)
Where staff involvement is prima facie not evident CBI (Economic
Offences Wing)
(b) All cases involving more than Rs.7.50 crore Banking Security and
Fraud Cell of the respective centres, which is specialised cell of the
Economic Offences Wing of the CBI for major bank fraud cases.
2. It is to be noted that this reference to the CBI by Banks is an automatic one
especially in All cases (emphasis supplied) involving more than Rs 7.50
crores and there is no reference to the prima facie involvement of Staff of
Banks] and gets triggered when the amount involved exceeds the limits
prescribed above.
It is to be noted that the term Fraud is not defined under the CrPC and for
these matters reliance is placed on S 17 of the Contract Act which defines
fraud. Accordingly: Fraud means and includes any of the following acts
committed by a party to a contract, or with his connivance, or by his agents,

47
with intent to deceive another party thereto his agent, or to induce him to
enter into the contract;
(1) the suggestion as a fact, of that which is not true, by one who does
not believe it to be true
(2) the active concealment of a fact by one having knowledge or belief
of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be
fraudulent.
Explanation Mere silence as to facts likely to affect the willingness of a
person to enter into a contract is not fraud, unless the circumstances of the
case are such that, regard being had to them, it is the duty of the person
keeping silence to speak, or unless his silence, is, in itself, equivalent to
speech.
3. It is to be noted that these are not ordinary contracts. These are contracts
entered into by banks in their individual capacity but strictly governed by the
well intentioned rules and regulations laid out by RBI for such derivative
contracts. These rules and regulations are laid out in the Circulars dated 2nd
July 2007 and April 20, 2007 issued by the RBI. Needless to emphasize, any
contract entered into by parties [Banks and exporters in the instant case] in
violation of these stipulations contained in these circular are opposed to
public policy as laid out in S 23 of the Contract Act. Further, Banks are
authorized agents under S 10 of FEMA and cannot plead innocent violation
of these guidelines repeatedly on a uniform basis across the country on an

48
identical set of contracts to an identical set of customers, viz., exporters.
Based on the evidences submitted it is humbly submitted that there is a
prima facie indication that these contracts were fraudulent in nature.
4. It is further submitted that Banks have lost Rs 755.45 crores [See Para
4.8(iv) of the order of the Honble Orissa High Court ] of which Rs 203.79
crores have been written off by various banks. This by itself calls for the
matter being referred to the CBI probe as this loss by banks is an Illegal,
Illicit gain for counterparties. Further, the balance of approximately Rs 550
crores is either disputed or under arbitration. Surely, with the RBI circular
clearly demonstrating that these contracts were opposed to public policy, it
would next to impossible to recover this money implying that these are
huge loses to banks [with concomitant gains to the counterparties] and hence
mandatorily have to be referred to the CBI as mandated by the RBI circular.
In short, this loss of 755 crores to the banks is itself illegal and is a huge
scam and mandatorily warrants a reference to the CBI by the banks under
the RBI circular.
More to the point all these raise a fundamental question if these derivative
contracts are akin to contracts of insurance and banks earn fees for
underwriting such contracts how is it that the banks have ended up with a
loss on such transactions? It is inconceivable that on a fee based activity a
bank could end up with a loss at a gross level. Obviously banks were taking
certain risks and were couching this loss as fee based when it was not a
fee based loss but in effect a loss arising from transactions on which they
had taken positions as a principal.
5. Before I proceed any further it is instructive to have a detailed look at the
Table A below which provides details of the results of these contracts /
transactions. Further, in Annexure-II we explain three of these contracts in

49
greater detail so as to explain the element of dishonesty in each of these
contracts. From the plain reading of the contract it is clearly demonstrated
that the loss for the Banks were clearly and tightly capped while it was
actually a bottomless pit for the exporters. While this too is acceptable the
fact remains that the contracts had the calculated effect of converting
exporters into Option writers by Banks in gross violation of the FEMA
Guidelines.

TABLE A
In short, what is claimed as loss by Banks (with a concomitant profit to the
exporters) is nothing but disguised premiums as consideration for exporters
to underwrite these contracts. And as a result of this machination, the
exporters (who as per the FEMA guidelines were only to be insured) turned
into insurance providers to Banks thereby overturning the very
requirement of the Hedging requirement. The manner in which this was
done was explained in the earlier part of this petition.

50
6. Simultaneously, it may not be out of place to mention that the Banks have
made a counter claim against various exporters [admittedly being in excess
of Rs 30,000 crores]. It is humbly submitted that it is this fraud that is the
subject matter of this petition. Nevertheless a reference has been made to the
loss suffered by the Banks to the extent of Rs 755 crores and their refusal to
refer the matter to the CBI to merely demonstrate that the intransigent
attitude of the banks. Based on the above submissions it is humbly submitted
that a prima facie case is made out for an investigation by the CBI over and
above

an

investigation

by

Enforcement

Directorate.

Yet

despite

overwhelming evidence that a gargantuan fraud has taken place neither the
Banks have refused to refer the matter to CBI nor has the RBI referred the
matter to CBI. In fact both the Banks and the RBI have opposed any
investigation by CBI despite a prima facie case being made out for a CBI
investigation even on the loss suffered by the Banks. In the instant case the
Report by the IDG of the RBI [See, Para xviii Page 13 of the Honble
Orissa High Court] clearly demonstrate illegality of the derivative contracts
entered by the Banks and exporters, the CBI is duty bound under the circular
mentioned above register a case and investigate the same.

L. A classic case of Breach of Trust where the terms of contracts were

one-sided by banks and the complaints of such illegal contracts were dealt
in the most unprofessional manner by the RBI by refusing to cognise much
less recognise the scam in all its dimensions

1. It is humbly submitted that the entire set of facts needs to be examined in the
context of Criminal Breach of Trust, both by the Bankers as Authorised

51
Dealers of Foreign Exchange under FEMA as well as RBI for its failure to
regulate the matter. Section 405 of the IPC deals with Criminal Breach of
Trust. Accordingly Whoever, being in any manner entrusted with property,
or with any dominion over property, dishonestly misappropriates or converts
to his own use that property, or dishonestly uses or disposes of the property
in violation of any direction of law prescribing the mode in which such trust
is to be discharged, or of any legal contract, express or implied, which he has
made touching the discharge of such trust, or willfully suffers any other
person so to do, commits `criminal breach of trust'."
Further S. 409 of the IPC deals with criminal breach of trust by public
servant, or by banker, merchant or agent. Accordingly Whoever, being in
any manner entrusted with property, or with any dominion over property in
his capacity of a public servant or in the way of his business as a banker,
merchant, factor, broker, attorney or agent, commits criminal breach of trust
in respect of that property, shall be punished with [imprisonment for life], or
with imprisonment of either description for a term which may extend to ten
years, and shall also be liable to fine.
2. In the instant case, it is humbly submitted that there is a criminal breach of
trust leading to wrongful gain to Banks [and possibly Unknown persons] and
in the process wrongful loss has been caused to the exporters who relied on
the officers of these banks and believed that they were entering into
legitimate contracts with banks.
The manner of attracting the mischief of S 409 especially on the
entrustment of property - of the IPC is explained hereunder. In Mir Nagvi
Askari v. C.B.I. the Honble Supreme Court [2010 AIR SC 528] held An
officer of a bank holds a position of trust. Each one of them, keeping in view
the nature and extent of duties required to be performed, is expected to do so

52
not only in terms of statutory directions, but as also the directions issued by
the Reserve Bank of India and his own employer. The Honble Court
added: Moreover, it must be noted in this respect that Banking norms and
established practices and procedures would contain directions of law
prescribing the mode in which the trust is to be discharged. It further added
The trust in this regard would therefore have to be discharged in terms of
such directions. Acting in violation thereof causing wrongful gain to A3 and
loss to the Bank would bring the action within Section 409 IPC.
It finally concluded Established banking norms are binding on an officer of
the Bank in the matter of discharge of the trust i.e. in dealing with the money
entrusted to him. He is required to follow the same and that would be an
implied term of his contract of service as an officer of the bank. The accused
before us here acted in breach of the same.
3. Further it may be submitted that S. 409 of the IPC is linked to S 405 of the
IPC as the words criminal breach of trust used in S 409 is defined U S 405
of the IPC. The crucial phrase used u/s 405 is dishonestly uses or disposes
of that property in violation of any direction of law prescribing the mode in
which the trust is to be discharged. Under the issue on hand, the FEMA
guidelines create a trust by users of Foreign Exchange on Authorized dealers
and also prescribes the mode and only by which the said trust is to be
discharged. The moment this trust is discharged in any other manner other
than the manner prescribed under FEMA, S 405 gets triggered and such acts
attracts criminal breach of trust.
4. It is humbly submitted that the terms of these derivative contract clearly
demonstrate dishonest intentions and consequential Breach of Trust. The
Honble Supreme Court in SW Palanikar v. State of Bihar, [(2002) 1 SCC
241] explained the concept of Breach of Trust u/s 405 of the IPC as It must

53
in this regard be emphasized that an act of breach of trust simpliciter
involves a civil wrong of which the person wronged may seek his redress for
damages in a civil court but a breach of trust with mens rea gives rise to a
criminal prosecution as well. The element of dishonest intention' is
therefore an essential element to constitute the offence of Criminal Breach of
Trust.
5. So far as the aspect of dishonest intention is concerned, the term
`Dishonestly' is defined by Section 24 of the IPC: "`Dishonestly'- Whoever
does anything with the intention of causing wrongful gain to one person or
wrongful loss to another person, is said to do that thing dishonestly." Thus,
an act done with the intention to cause wrongful gain can be said to be
dishonest. It is now apparent that the there was a wrongful gain to some
banks and unknown persons and definitely wrongful loss to the exporters.
The question is one of intention a fact that would be known only after a
thorough investigation, but prima facie at this point clearly points out to the
fact that the banks were clearly breaching the trust reposed on them by the
exporters.
6. Obviously the Bankers being experts in the field of finance have clear idea
of FEMA guidelines and how the hedging contracts are to be structured.
They must know that they cannot be the insured and the exporters cannot be
providing insurance. Importantly, they are well aware being Authorized
Dealers, as to the implication of FEMA circulars and guidelines issued from
time to time by the RBI, its importance, seriousness and implications of
violating the same. What is astounding is that the Banks having secured such
lop sided contracts need not take any back-to-back contacts with anyone as
the contracts are clearly structured in such a way that it is impossible for the
banks to lose any money (except the premiums) and for the exporters to gain

54
in any manner (except the premiums). Strangely the banks are insisting
[Refer Para 7 of the impugned order.] that they had back to back
contracts with certain foreign banks to hedge themselves of the risks.
7. But what is unexplained in the first place they had de-risked themselves with
a contract with the exporters and then take a back-to-back contract with
foreign counter parties that re-risks them all over once again. Or was it the
other way around that they entered into wholesale contracts of extraordinary
risks and retailed them to the innocent Indian exporters and in the process
de-risked themselves? This is crucial to understand the role of banks in the
entire conspiracy.
8. It may not be out of place to mention that the several bankers who sold these
products to exporters were heavily rewarded. Some banks had even enticed
the exporters with a foreign visit to sell these products to the exporters.
There is no parallel for any banks having sold any product by enticing
customers with a foreign visit.
9. In NOIDA Entrepreneurs Association v. NOIDA &Ors, AIR 2011 SC 2112
the Honble Supreme Court held The State or the public authority which
holds the property for the public or which has been assigned the duty
of grant of largesse etc., acts as a trustee and, therefore, has to act fairly and
reasonably. It added Every holder of a public office by virtue of which he
acts on behalf of the State or public body is ultimately accountable to the
people in whom the sovereignty vests. As such, all powers so vested in him
are meant to be exercised for public good and promoting the public interest.
Every holder of a public office is a trustee.

State actions required to be

non-arbitrary and justified on the touchstone of Article 14 of the

Constitution. Action of the State or its instrumentality must be in conformity
with some principle which meets the test of reason and

relevance.

55
Functioning of a democratic form of Government demands equality
and absence of arbitrariness and discrimination.
It concluded The rule of law prohibits arbitrary action and commands the
authority concerned to act in accordance with law. Every action of the State
or its

instrumentalities

discrimination, nor

even

should

neither

apparently

give

be
an

suggestive

impression

of

of
bias,

favouritism and nepotism. If a decision is taken without any principle or

without any rule,
antithesis

to

it

is

unpredictable

and

such

decision

is

the decision taken in accordance with therule of law. The

Public Trust Doctrine is a part of the law of the land. The doctrine has grown
from Article 21 of the Constitution. In essence, the action/order of the State
or State instrumentality would stand vitiated if it lacks bona fides, as it
would only be a case of colourable exercise of power. The
Rule of Law is the foundation of a democratic society.
10.Power

vested

by

the

State

in

Public

Authority

should

be

viewed as a trust coupled with duty to be exercised in larger public and

social interest. Power is to be exercised strictly adhering to the
statutory

provisions

and

fact-situation

of

case.

"Public

Authorities cannot play fast and loose with the powers vested in
them".

A decision

taken

in

arbitrary

manner

contradicts

the

principle of legitimate expectation. An Authority is under a legal

obligation to exercise the power reasonably and in good faith to
effectuate the purpose for which power stood conferred. In this
context,

"in

good faith" means "for legitimate reasons". It must be

exercised bona fide for the purpose and for none other.
11.In the instant case the Banks were Authorised Dealers for the Foreign
Exchange Reserves held by the RBI. They could use the precious Foreign

56
Exchange only in such manner as prescribed by the Rules, Regulations and
Circulars of the RBI permitted the banks from using it in a manner know to
law. The preamble of FEMA clearly states that the ACT aimed to
consolidate and amend the law relating to foreign exchange with the
objective of facilitating external trade and payments and for promoting the
orderly development and maintenance of foreign exchange in India.
To achieve this the act empowers RBI under Section 10 to authorise any
person to be known as authorised person to deal in foreign exchange or in
foreign securities, as an authorised dealer, money changer or off-shore
banking unit or in any other manner as it deems fit. Under Sub-section (2)
of section 10 an authorisation by the RBI shall be in writing and shall be
subject to the conditions laid down therein.
Further, u/s 11(1) of FEMA the Reserve Bank may, for the purpose of
securing compliance with the provisions of this Act and of any rules,
regulations, notifications or directions made thereunder, give to the
authorised persons any direction in regard to making of payment or the
doing or desist from doing any act relating to foreign exchange or foreign
security.
Further under sub-section (2) of Section 11, the RBI may, for the purpose
of ensuring the compliance with the provisions of this Act or of any rule,
regulation, notification, direction or order made thereunder, direct any
authorised person to furnish such information, in such manner, as it deems
fit.
And the Authorized persons are strictly to adhere to the rule, regulation,
notification, direction or order made there-under by the RBI in matters
relating to the Foreign Exchange Transactions. Since these Forex
transactions entered into even by Authorized Dealers are tightly regulated

57
for decades by RBI, there is a doctrine of legitimate expectation that these
contracts are legal and valid. The exporters are not merely challenging these
contracts simply because they have encountered loses. Rather it is the
illegality associated with the contracts, the gross violation of the rule,
regulation, notification, direction or order of the RBI without any let or fear
of any regulatory authority across states and for over a period of 15 months
period with several exporters resulting in uniform loss to the exporter and
concomitant gains to the banks that is the crux of the issue.
It is unprecedented that the Authorised Dealers who are tightly regulated by
the RBI could find some mechanism to violate the FEMA guideline, rules,
regulations, circulars and orders issued by the RBI with impunity.

As

authorized dealers these banks are to exercise their powers so vested on then
under FEMA only for public good and promoting the public interest.
Every holder of a public office is a trustee and by violating the
same the AD banks have violated the trust reposed on them not only by the
exporters but by the overall public on the matters relating to administrating
Foreign Exchange of the Country.
12.Public trust doctrine has grown over the years through a proactive
interpretation of Article 21 by the Supreme Court. Consequently, a decision
is taken without any principle or without any rule or in violation of any rule
is unpredictable and such a decision is antithesis to the decision
taken in accordance with the rule of law. Surely public authorities cannot
play fast and loose with the powers vested in them. And when
such public authorities do so, they breach the trust reposed on them by the
public of which the exporters is a small sub-set.
13.Surely these contracts are colourable contracts drawn with a view to
circumvent the FEMA guidelines on derivative contracts. At the same time

58
the allegations are serious in nature. Further, there has been significant loss
to the exporters not because of the dynamics or market movement of the
foreign currencies but simply because by the very terms of these exotic
derivative contracts they became the insurers to the banks. And as banks
failed to hedge the exporters and instead sought to convert exporters into
hedgers the banks have violated the public trust doctrine as laid out in
Article 21 of the Constitution. This is the crux of the issue that results in
huge loss to the exporters and concomitant gains to banks. If only the Banks
entertained genuine hedging as contemplated by the RBI, the Exporters
would have at best lost their premium [which would have been the
corresponding income to the banks]. The scenario turns upside down when
the banks take the place of the exporters and exporters play the role of
bankers. And that in pith and substance the case for a Breach of trust.

M. A Prima Facie case under the Prevention of Corruption Act too where
the officers of the Banks and RBI have acted in gross violation of the
Public trust the very touch stone of Prevention of Corruption Act

1. Now to the facts of the case. It is now prima facie demonstrated that the Acts
of the Bankers and other public servants, having violated the FEMA
Guidelines, are without any public interest. In fact the Act of the bankers at
best demonstrate gross negligence and at worst a deep-rooted conspiracy.
Even assuming it is gross negligence a prima facie case is made out under
the Prevention of Corruption Act. Having demonstrated the violations of
FEMA guidelines, having been penalized by the RBI for such violations,
having repeatedly conducted such violations, having carried out such
violations across the length and breadth of the country, such contracts it is

59
humbly submitted are without any public interest. Consequently it is
submitted that we have made out a prima facie case of criminal misconduct
under Section 13(1)(d)(iii) of the Prevention of Corruption Act. That in turn
triggers a statutory investigation U S 17 of the PCA by the CBI.
2. At the outset let us examine the Implications of S 13(1)(d)(iii) of the
Prevention of Corruption Act. Section 13 of the Prevention of Corruption
Act deals with Criminal misconduct by a public servant. Accordingly
(1) A public servant is said to commit the offence of criminal misconduct
(a) ***
(b) ***
(c) ***
(d) If he
(i) by corrupt or illegal means, obtains for any other person any valuable
thing for himself or for any other person any or pecuniary advantage
valuable thing or pecuniary advantage; or
(ii) by abusing his position as a public servant, obtains for himself or for any
other person any valuable thing or pecuniary advantage; or
(iii) while holding office as a public servant, obtains for any person any
valuable thing or pecuniary advantage without any public interest;
It is in this connection it is humbly submitted that the Honble High Court of
Delhi in Runu Ghosh v. CBI [CRL. A. 482/2002, Decided On: 21.12.2011]
held:
75. It would be profitable to emphasize that public servants are an entirely
different class, and the level of trust reposed in them by the society is
reflected in the high standards of behaviour and rectitude expected of them,
both in the discharge of their duties, and otherwise. In the case of ministers who are members of the council of Ministers (the Cabinet) in the Union and

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State Governments, as well as holders of other constitutional offices there is a
requirement that before their appointment, each of them has to subscribe to an
oath of office and secrecy according to the form set out in the Schedule, to the
Constitution of India by which holders of such offices are required to take
oath that he or she would discharge her or his duties in accordance with the
Constitution and the law without fear or favour, affection or ill will. This
requirement is a constant reminder to the holder of that office that she or he is
a trustee and custodian of public interest, and all decisions taken in that
capacity are to be based on that factor alone. Holders of other public offices,
under the State (a compendious term) are equally bound by such a condition.
To ensure that they are afforded the amulet protection and immunity, the
Constitution has mandated some safeguards (in the case of members of a
service or holders of office under a State or the Union, the protection from
arbitrary loss of employment, under Article 311, and the protection of status
accorded by virtue of rules or enactments made, pursuant to Article 309 of the
Constitution of India). There is an added layer of immunity in the form of
requirement of sanction under Section 197 or other similar provisions, to
protect public servants from needless harassment. However, when the public
servant acts in a manner that is devoid of public interest, not only would the
action become suspect, then, having regard to the nature of his action, and the
heightened degree of blameworthiness, he is said to have transgressed the
bounds of protection afforded to his decisions, and is then exposed to
prosecution.
78. In a previous part of this judgment, what constitutes "public interest" and
the trust element, which informs every decision of a public servant or agency,
was discussed and emphasized. The State in its myriad functions enters into
contracts, of various kinds, involves itself in regulation, awards or grants
largesse, and holds property. Each action of the State must further the social
or economic goals sought to be achieved by the policy. Therefore, when a
public servants decision exhibits complete and manifest disregard to public
interest with the corresponding result of a third party obtaining pecuniary
advantage or valuable thing, he is fastened with responsibility for "criminal
misconduct" under Section 13 (1) (d) (iii). There is nothing reprehensible in
this interpretation, because the "act" being "without public interest" is the
key, the controlling expression, to this offence. If one contrasts this with
"abuse" of office resulting in someone "obtaining" "pecuniary advantage or
valuable thing", it is evident that Section 13 (1)(d) (ii) may or may not entail
the act being without public interest. This offence- under Section 13 (1) (d)
(iii) advisedly does not require proof of intent, or mens rea, because what
Parliament intended was to punish public servants for acts which were
without public interest. This kind of offence is similar to those intended to
deal with other social evils, such as food and drug adulteration, (offences
under Prevention of Food Adulteration Act, Section 13 (1), Drugs and
Cosmetics Act:; Section 7 (1) Essential Commodities Act, 1955, Section 25,
Arms Act, 1959), possession of explosives, air and water pollution, etc.
79. What then is the behaviour or act which attracts such opprobrium as to
result in criminal responsibility? It is not every act which results in loss of
public interest, or that is contrary to public interest, that is a prosecutable
offence. There can be no doubt that all acts prejudicial to public interest, can
be the subject matter of judicial review. In those cases, courts consider
whether the decision maker transgressed the zone of reasonableness, or
breached the law, in his action. However, it is only those acts done with
complete and manifest disregard to the norms, and manifestly injurious to
public interest, which were avoidable, but for the public servants
overlooking or disregarding precautions and not heeding the safeguards he or
she was expected to, and which result in pecuniary advantage to another that
are prosecutable under Section 13(1) (d) (iii). In other words, if the public
servant is able to show that he followed all the safeguards, and exercised all
reasonable precautions having regard to the circumstances, despite which
there was loss of public interest, he would not be guilty of the offence. The
provision aims at ensuring efficiency, and responsible behaviour, as much as

61
it seeks to outlaw irresponsibility in public servants functioning which
would otherwise go unpunished. The blameworthiness for a completely
indefensible act of a public servant, is to be of such degree that it is
something that no reasonable man would have done, if he were placed in that
position, having regard to all the circumstances. It is not merely a case of
making a wrong choice; the decision should be one such as no one would
have taken.
80. In this context, it would be useful to notice the following passage from the
work Errors, Medicine and the Law by Alan Merry and Alexander McCall
Smith: Criminal punishment carries substantial moral overtones. The
doctrine of strict liability allows for criminal conviction in the absence of
moral blameworthiness only in very limited circumstances. Conviction of any
substantial criminal offence requires that the accused person should have
acted with a morally blameworthy state of mind. Recklessness and deliberate
wrongdoing, levels four and five are classification of blame, are normally
blameworthy but any conduct falling short of that should not be the subject of
criminal liability. Common-law systems have traditionally only made
negligence the subject of criminal sanction when the level of negligence has
been high -- a standard traditionally described as gross negligence.
Blame is a powerful weapon. When used appropriately and according to
morally defensible criteria, it has an indispensable role in human affairs. Its
inappropriate use, however, distorts tolerant and constructive relations
between people. Some of life's misfortunes are accidents for which nobody is
morally responsible. Others are wrongs for which responsibility is diffuse.
Yet others are instances of culpable conduct, and constitute grounds for
compensation and at times, for punishment. Distinguishing between these
various categories requires careful, morally sensitive and scientifically
informed analysis.
82. It would be useful to in this context, take recourse to certain examples.
For instance, in not adopting any discernable criteria, in awarding supply
contracts, based on advertisements calling for responses, published in
newspapers having very little circulation, two days before the last date of
submission of tenders, which result in a majority of suppliers being left out of
the process, and the resultant award of permits to an unknown and untested
supplier, would result in advantage to that individual, and also be without
public interest, as the potential benefit from competitive bids would be
eliminated. Likewise, tweaking tender criteria, to ensure that only a few
applicants are eligible, and ensure that competition (to them) is severely
curtailed, or eliminated altogether, thus stifling other lines of equipment
supply, or banking on only one life saving drug supplier, who with known
inefficient record, and who has a history of supplying sub-standard drugs,
would be acts contrary to public interest. In all cases, it can be said that the
public servant who took the decision, did so by manifestly failing to exercise
reasonable proper care and precaution to guard against injury to public
interest, which he was bound, at all times to do. The intention or desire to
cause the consequence may or may not be present; indeed it is irrelevant; as
long as the decision was taken, which could not be termed by any yardstick, a
reasonable one, but based on a complete or disregard of the consequence, the
act would be culpable.
83. The test this Court has indicated is neither doctrinaire, nor vague; it is
rooted in the Indian legal system. A public servant acts without public
interest, when his decision or action is so unreasonable that no reasonable
man, having regard to the entirety of circumstances, would have so acted; it
may also be that while deciding or acting as he does, he may not intend the
consequence, which ensues, or is likely to ensue, but would surely have
reasonable foresight that it is a likely one, and should be avoided. To put it
differently, the public servant acts without public interest, if his action or
decision, is by manifestly failing to exercise reasonable precautions to guard
against injury to public interest, which he was bound, at all times to do,
resulting in injury to public interest. The application of this test has to

62
necessarily be based on the facts of each case; the standard however, is
objective. Here, one recollects the following passage of Justice Holmes in
United States v. Wurzbach 1930 (280) US 396:Wherever the law draws a
line there will be cases very near each other on opposite sides. The precise
course of the line may be uncertain, but no one can come near it without
knowing that he does so, if he thinks, and if he does so it is familiar to the
criminal law to make him take the risk.

3. From the above decision of the Honble Court it is apparent that a public
servant acting contrary to public interest or public policy benefits a third
party. In this case it is established at the prima facie level that the banks have
benefitted to the extent of Rs 30,000 crores in gross violation of the
Regulations on derivatives issued by RBI. Yet, the RBI and being in the
know of the entire fact and admitting the same in their responses to the
Honble High Court of Orissa have failed to initiate investigations under S
13 of FEMA when they were legally bound to. It would have been altogether
a different matter if RBI was unaware of these violations. But the fact of the
matter is that the RBI was admittedly aware of these violations which has
benefitted. Therefore the question remains whether officers of the RBI
obtained for any person [i.e. Nationalized, Private and Foreign Banks], any
pecuniary advantage without any public interest and thereby are guilty for
misconduct under the provisions of sub-clause (iii) of clause (d) of subsection (1) of Section 13 of the Prevention of Corruption Act, 1988.
4. The answer to the question is obviously a resounding yes. It is an established
fact that these Derivative contracts are admittedly violative of FEMA. Hence
these contracts are opposed to public policy. And by extension the profits
emanating to the Banks are illegal and therefore certain employees of the
Banks attracts the mischief of the provisions of sub-clause (iii) of clause (d)
of sub-section (1) of Section 13 of the Prevention of Corruption Act, 1988 as
they have ensured profits for the third party [Read Banks] without any
public interest.

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5. But there is another and larger dimension to this issue. Once illegal these
contracts out to have been investigated by the RBI and the guilty penalized
under the provisions of S 13 of FEMA. Strangely and despite being aware
[in fact RBI has acknowledged the FEMA violations repeatedly] it has failed
to refer the matter to the Enforcement Directorate under FEMA. It is
pertinent to note that in some contracts the Banks have allegedly incurred
losses [albeit at a fraction of the sums allegedly made by the exporters]
while in case of majority of the cases the exporters have incurred losses,
allegedly several times the losses incurred by the Banks. Either way, when
the banks ended with a loss or when the exporters ended with a loss, the RBI
should have stepped in and referred the matter under the provisions of
Prevention of Corruption Act as such contracts are illegal contracts in the
first place. And in the first instance these illegal contracts resulted in loss to
the Banks while in the second case banks benefitted were illegally enriched
and that it is humbly submitted is opposed to public policy. And the RBI
despite being in the know of these matters strangely failed to refer the matter
to the RBI to investigate the violations of the PCA.
6. To summarize the violations alleged above is twofold one by the banks
employees to have allowed banks to make illegal profits or loss and two of
the RBI which again is twofold: one it failed to refer the matter to the ED for
investigations under FEMA and two despite overwhelming evidence of
professional misconduct by bankers it failed to refer the matter to CBI for
investigations and thereby violated the provisions of sub-clause (iii) of
clause (d) of sub-section (1) of Section 13 of the Prevention of Corruption
Act, 1988.
N. Prayer

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Therefore in the light of the above facts and circumstances, it is humbly prayed:
i.

It is humbly prayed that the Honble Special Investigation Team as appointed

by the Honble Supreme Court of India may take cognizance of this massive
fraud on the national economy played out by few foreign banks in collusion
with Indian Banks with a tacit support of RBI.

ii.

It is Humbly prayed that the matter be referred to the ED for commencing the
Adjudication under the FEM Act.

iii.

It is humbly prayed that simultaneously ED be instructed to investigate for

looking into possible Money Laundering Angle.

iv.

It is humbly prayed that the CBI be directed to investigate under the provisions
of the Prevention of Corruption Act the failure of RBI in referring the matter to
ED under the FEM Act even while admitting that the Banks violated FEMA.

v.

It is humbly prayed that the SIT must monitor the entire investigation by ED
and CBI and on a routine monthly basis or as desired necessary seek Progress
Report from the agencies and lead it to a logical conclusion.

Place: New Delhi

Date: 07.04.2016

Filed by

M. R. Venkatesh
1D3, Taj Apartment
Sector 12, R K Puram
New Delhi-110022
Email: mrv10000@gmail.com