Readers will recall that over the last few months several companies had entered into derivative transactions with banks wherein they were required to pay significant amounts of money to banks. When faced with claims from the banks, these companies challenged the validity of these derivative transactions in various courts in India, including on the ground that derivatives constituted wagering contracts that were void under the Contract Act.
Recent newspaper reports seem to indicate that courts are willing to uphold the claims in favour of the banks. LiveMint reports that in a September 15 judgment, the Bombay High Court ordered Sundaram Multi Pap Ltd to pay ICICI Bank Ltd the dues arising out of contracts for structured derivatives. The order is available here. However, this order was passed in a winding up petition, and the court has not analysed the legality of derivative transactions.
In a further development, LiveMint reports that the Madras High Court has indeed ruled on the substance of the transactions, again in favour of the banks. This was a case involving Axis Bank and Rajshree Sugars and Chemicals Ltd. It appears that the court has ruled that derivative contracts are not wagering contracts and further that the debt under such contracts qualify for recovery by the banks through the Debt Recovery Act. A further detailed analysis will have to await a review of the judgment once it is available.
For previous discussions on this topic, see: Trading in Futures – Financial Instruments of Mass Destruction?, Derivatives - a constructive critique and More on the Indian Derivatives Saga