The company alleged that the bank had entered into a credit arrangement with it in 2007, offering derivative limits to hedge underlying transactions or exposure. Eight option contracts were signed and later the bank advised that huge losses had been suffered by the company related to the contracts, due to unfavourable currency movement. The bank also asked the company to exeucte an ISDA Master Agreement, dated July 2007, stating that they incorporated the standard terms and conditions, it alleged.
The company approached forex experts, who said that the option contracts signed by the company were illegal, violative of Foreign Exchange Management Act (FEMA) and unenforceable in law. The company approached the Court, alleging that the bank has colluded with US-based bankers and financiers and hedged in dollars and franc, while its exports were in the Pound and Euro. It said rather than hedging, the contracts increased the risk for the company in volatile currency situations.
The bank claimed Freelook Fashions' complaint was false, frivolous and malafide and that it had been engaged with the company for several other transactions. The bank further claimed that it had performed its obligations under these transactions and they were not challenged by the company.
Observing the arguments that various banks, including ICICI Bank, had been earlier subject to Reserve Bank of India (RBI) action for allegedly violating its instructions on derivatives, S Malarmannan, Principal Subordinate Judge, Coimbatore said, "Hence the contracts are void, ab-initio illegal in violation of RBI guidelines and unenforceable and not binding on the company".
According to agency reports in 2011, the RBI had imposed penalty on 19 commercial banks for violating instruction issued by it in respect of derivatives, such as failure to carry out due diligence on suitability of products, selling derivative products to users not having risk management policies and not verifying the adequacy of underlying and eligible limits under past peformance route.
Raja Shanmugam, president of Tiruppur Exporters Association alleged various banks have used such derivatives contracts for a short period during the previous Congress-led government's tenure, when the rupee strengthened at Rs 38-39 per dollar, from Rs 46 a dollar. The banks sold the contracts at a higher rate as the dollar value shot up over Rs 50 soon after that.
"The banks have caused a huge loss to the exchequer. The loss from Tiruppur alone would be around Rs 4 billion. We demand a CBI enquiry into the issue," he said.