Civil courts now try derivatives cases

The Supreme Court has cleared the way for civil courts to decide the vexed question of derivative instruments on foreign exchange, sold by banks to exporters and others.

A Supreme Court Bench headed by Justice S B Sinha has set aside the Punjab and Haryana High Court judgment that transferred Ludhiana-based exporter Nahar Industrial Enterprises’ plea on derivatives pending before a Ludhiana civil court to the Debt Recovery Tribunal, Mumbai. It also rejected Hongkong and Shanghai Banking Corp’s (HSBC’s) plea against Nahar, part of the Oswal group, and Axis Bank’s two petitions, one against Nahar and another against Rajshree Sugars & Chemicals, seeking a transfer of the cases to DRT, Mumbai.

While the apex court has allowed civil courts to decide the legality of such contracts, it said that these courts are competent to try issues like fraud and misrepresentation, as alleged by exporters. However, the Bench also allowed the banks to continue their debt recovery suits in tribunals.

The trade in derivatives is done to hedge against risks due to foreign exchange fluctuation against a specified underlying. The trading is regulated by the Foreign Exchange Management Act (FEMA) and the guidelines issued under it by the RBI.

Axis Bank had sought to transfer the case Rajshree Sugars & Chemicals vs Axis Bank from the Madras High Court to DRT, Mumbai.