India was always a very difficult market to deal with and forex is highly restricted there. It seems that several high profiled banks such as Citi and HSBC have allegedly tried to circumvent the rules but are now facing major problems as an official investigation was launched to investigate this matter.

MUMBAI: A two-judge bench of the Orissa High Court has ordered a full fledged enquiry by Central Bureau of Investigation (CBI) into foreign exchange derivatives contracts sold by some Indian banks between 2007 and 2008. In the order the HC judges have indicated that the CBI could expose ‘a large financial scam affecting the economy’.

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Earlier, through an interim enquiry report the CBI had told the court in Cuttack that banking regulator Reserve Bank of India (RBI) had already initiated an enquiry against a number of banks in the same matter. The interim report had also mentioned that there were several instances of violation of Foreign Exchange Management Act (FEMA) by these banks in India when they sold those exotic contracts to companies, importers and exporters, resulting in huge losses.

In its interim investigation report, done under court orders, the CBI had pointed out at least eight different types of FEMA violations by some of the banks in India, although it did not name any of the banks. These included selling contracts structured in a way that violated FEMA and led to increase in risks, and net inflow of premium to the company buying the contract. This the CBI contended were in violation of forex rules which permit use of forex derivatives for mitigation of forex loss and no inflow of premium to the buyer of the contract. The CBI also pointed out that there were instances of false declarations, made to enter into forex derivatives contracts.

During investigation, CBI had sought information relating to banks’ forex derivatives business and on some of the points raised in the petition, from eight banks: SBI, HDFC Bank, HSBC, Standard Chartered Bank, Citi Bank, ICICI Bank, ABN Amro Bank and Axis Bank. Speaking to TOI, a top banker at one of the banks said that all the eight banks, along with a bankers’ trade body, had replied to CBI’s queries. However, most banks that TOI spoke to, declined to comment on the matter at this stage.

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