India's currency bets turning sour

Shareholders are losing money. Bankers are fuming. Lawyers are smiling. And the auditors "" ah well, they are just waking up.

And all this is happening because skeletons are tumbling out of Indian corporate treasurers' cupboards.

As this column mentioned last week, Jamal Mecklai, chief executive officer of Mumbai-based risk-management consulting firm Mecklai Financial, estimates that Indian companies may have as much as $5 billion in mark-to-market losses on their currency- derivative positions.

Some of that is now beginning to surface. On March 28, Amtek Auto, which makes crankshafts, flywheel ring-gears and other automotive components in factories in the US, the UK, Germany and India, informed the Indian stock exchanges that some of its currency hedges and swaps "could expose'' the company to losses of as much as $18 million over the next two years.

The company, whose shares have declined 40 per cent this year, said it was the victim of the "recent turbulence'' in the currency market and vowed that insider shareholders will bring in money, if required, to meet Amtek's obligations on these contracts through 10-year, zero-interest debt.

Amtek's strategy to deal with the loss appears to be a responsible one: It's neither trying to renege on its obligations, nor is it sending the bill to minority investors.

Wrong bets
The currency bets of Indian treasurers' are unraveling ""and not just at Amtek.

Hexaware Technologies, a Mumbai-based computer software company, has set aside $25 million to cover possible losses from what it says were "potentially fraudulent'' options trades. Sundaram Multi Pap, a stationery maker, says the "speculative option deals'' offered to it by ICICI Bank under "the guise of'' export-risk hedging are legally void.

The courts will see about that. The problem has arisen because rapid globalization of the Indian economy is taking place without commensurate improvements in either the regulatory framework or the risk-management practices of corporate treasuries.

Even the smaller Indian companies have grown at a breathtaking pace in the past few years by acquiring businesses overseas, boosting exports and selling foreign-currency convertible debt to finance their growth.

With increased openness comes the responsibility for managing the new financial risks associated with greater global integration.

And that's where managements have been reckless.

In the process of hedging the risk of the Indian rupee rising or falling against the currencies in which their exports, imports and loans are denominated, treasurers have gone ahead and taken bets against, for instance, the Japanese yen gaining against the dollar.

Since Indian companies were only required to shift to mark- to-market accounting in 2011, they had every reason to seek risks that could remain hidden from shareholders for a long time.