TMI Blog2008 (10) TMI 594X X X X Extracts X X X X X X X X Extracts X X X X ..... edge their receivables and payables against a third currency instead of Indian rupee, subject only to 2 conditions namely (1) that such third currency should be a permitted currency and (2) that it should be actively traded in the market. Swiss Franc satisfies both conditions. Therefore the first ground of attack is unsustainable. Asit is the admitted case of the plaintiff (para 4 of the plaint) that they had export orders to the tune of ₹ 111 crores for the period upto 31-12-2007 and that they had foreign currency loans to the tune of USD 30 million. It is only by showing their foreign currency receivables and payables that the plaintiff entered into the ISDA Master Agreement. Therefore, they cannot now contend that this particular deal alone had no underlying exposure. The Board of Directors of the company cannot feign ignorance of the declaration and risk disclosure statement made by Mr.P.K.Viswanathan, while confirming the deal OPT 727. In such circumstances, the plaintiff cannot be heard to contend that the Bank failed to ensure the existence of a risk management policy, after having allowed Mr.P.K.Viswanathan to sign the declaration and risk disclosure statement. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be the worst case scenario, a famous daily web log commented that the economic collapse triggered by the popping of the derivatives bubble presented the worst case scenario. 4. True to the above criticism, the world of finance and investments, was swept by many a tsunami in the past decade and a half. Some of the derivatives disasters which plunged several institutions and millions of investors into severe crisis (and even led to the homicide by a 46 year old former IITian of his entire family followed by his suicide in US) are as follows:- (i) The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy, after losing about $1.6 billion through derivatives known as "reverse floaters" whose values move inversely with market interest rates. (ii) The collapse of the 233 year old Barings Bank when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in index futures. Through a combination of poor judgement, lack of foresight, a naive regulatory environment and unfortunate outside events like the Kobe earthquake, Leeson incurred a huge loss that bankrupted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xample, it is common knowledge that the price of gold keeps fluctuating. If a manufacturer of gold jewellery anticipates that he would require a particular quantity of gold at a specified distance of time, he may enter into a contract with the seller of gold bars for the supply of the same at a future date, at the rate specified in the contract. This contract reduces the risk for the buyer, against a possible steep rise in the price of gold. It equally reduces the risk of the seller against a steep fall in the price. Thus the contract acts as an insurance cover. When the transaction goes through without any dispute, the contract is fulfilled. But when the transaction fails and the motive behind the transaction is not necessarily the sale and supply of gold, but the receipt or payment of the difference in the price (difference between the prevailing price and the price fixed in the contract), many eyebrows are raised and many questions are asked. This is the point where the transaction takes a detour from a simple contract of insurance. 7. There are atleast 4 categories of derivatives, commonly in use. Some of them are traded through exchanges and they are known as Exchange-Traded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omics, finance and investment feel that derivatives are valuable because they provide efficient ways to manage and transfer risk. A business owner who is exposed to changes in market prices can enter into an appropriate derivatives contract and the risk can be assumed by a trader or speculator who is prepared to live with uncertainty in return for the prospect of achieving an attractive return. A large financial institution can withstand more risk than a small corporate and thus may choose to engage in derivatives products for a reasonable compensation. Nobel Laureate Kenneth Arrow predicted that this would increase economic prosperity since people would be more prepared to engage in risk-taking activities. It could also serve to improve the quality of prediction of future events in the world of finance and investments. Derivatives provide a global network for intelligent assessment, management, and distribution of risk on a large scale. 9. Broadly stated there are two distinct groups of derivatives contracts, which are distinguished by the way they are traded in the market: (i) Over-The-Counter (OTC) derivatives, which are contracts that are traded (and privately negotiated) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment precludes either party from bringing Proceedings in any other Court, tribunal or appropriate forum in India nor will bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction. 11. The aforesaid ISDA Master Agreement dated 14.5.2004 was signed for and on behalf of the plaintiff, by their Chief Financial Officer and Company Secretary by name Mr.P.K.Viswanathan, by virtue of the resolution of the Board of Directors dated 24.3.2004, authorising him for the purpose. The authorisation given to Mr.P.K.Viswanathan was not merely to sign the agreement but actually to deal with all matters concerning derivative transactions. The resolution of the Board of Directors dated 24.3.2004 also recorded the consent of the Board to enter into "interest rate and foreign currency derivatives including interest rate and currency option contracts". 12. In pursuance of the ISDA Master Agreement dated 14.5.2004, atleast 10 deals were struck between the plaintiff and UTI Bank (which later became AXIS BANK LTD). Admittedly, 9 out of those 10 deals have already matured without any dispute on either side. But the plaintiff has come to court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , opposed to public policy and unenforceable and not binding on the plaintiff company. (ii) To declare that the deal confirmation of U.S. Dollar V/s Swiss Franc contract dated 22.06.2007 in OPT Contract No.727 with the schedule thereon purportedly made by the CFO on behalf of the plaintiff with the defendant Bank is voidable at the instance of the plaintiff and the plaintiff has therefore avoided the contract and therefore the contract is not binding or enforceable against the plaintiff. (iii) To declare that in the alternative to prayers (a) and (b), this Hon'ble Court be pleased to declare that the Contract is ultra vires the object Clause of the Memorandum of Association of the plaintiff and is, therefore, not binding upon the plaintiff and/or is not enforceable against the plaintiff. (iv) For a permanent injunction restraining the defendants, their men, agents, servants from in any way acting in furtherance of contract in OPT No.727 dated 22.06.2007 with the schedule thereon by initiating any proceedings for recovering any amount from the plaintiff or seeking recovery of any amount from the plaintiffs under the contract and or initiating any measures or proceedings to rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not disclose any cause of action to have arisen within the jurisdiction of this Court. (v) A. No.2446 of 2008 seeking a direction to the plaintiff to give an undertaking to pay such sum by way of damages as the Court may award as compensation in the event of the defendant getting prejudiced by any adverse order passed by this Court and (vi) A. No.2447 of 2008 seeking a direction to the plaintiff to furnish Bank Guarantee to the defendant in a sum of Rs.40 crores, to cover the monetary liability of the plaintiff under the transaction in question. 18. All the above applications were taken up together for hearing and I heard Mr.G.Masilamani, learned Senior Counsel for the plaintiff and Mr.V.Ramachandran, learned Senior Counsel for the defendant. Since there are 8 applications, out of which, 2 are by the plaintiff and 6 are by the defendant, I shall refer to the parties only by their description in the suit and not by their description in the applications. 19. Primarily the plaintiff assails the OPT contract on the grounds inter alia - (a) that it is nothing but a "wagering contract" hit by Section 30 of the Indian Contract Act, 1872; (b) that it was not supported by an un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves rise to a claim for money by the Bank upon the plaintiff, it would come within the definition of the word "debt" under Section 2(g) of Act 51 of 1993. Therefore the learned Senior Counsel contended that the defendant will be entitled to file an application for recovery of such a debt before the appropriate Tribunal, as and when the contingency arises. It is only when an application is filed by the Bank against the plaintiff before the Tribunal, that the plaintiff would be entitled, by virtue of the provisions of Section 19(6), 19(7), 19(8) and 19(9) of Act 51 of 1993, to raise all the issues now raised by them, either by way of defence or by way of set off or by way of counter claim. Since Act 51 of 1993 enables the Tribunal to try a claim for set off or a counter claim in a written statement as a cross suit (by virtue of sub Sections (7) and (9) of Section 19), the plaintiff ought not to have rushed to this Court especially when there is a statutory bar of the jurisdiction of Civil Courts under Section 18. 23. In response, Mr.G.Masilamani, learned Senior Counsel for the plaintiff contended that when the whole transaction is assailed as null and void and illegal, no rights an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on gives rise to a claim by the Bank, of any liability, on the part of the plaintiff, the defendant-Bank may certainly be able to invoke the provisions of Act 51 of 1993. Since the word "debt" is defined to include any claim arising out of the business activity of the bank, it is not necessary that only in those cases where there is an act of lending and borrowing that the provisions of Act 51 of 1993 could be invoked by the Bank. Therefore I have no difficulty in accepting the first limb of the argument of Mr.V.Ramachandran, learned Senior Counsel appearing for the respondent Bank, that if the transaction in question gives rise to a claim by the Bank, the Bank has to go before the Debts Recovery Tribunal. 26. However it does not mean that as a corollary, the present suit is barred by Section 18 of Act 51 of 1993. Even in cases where the transaction between a Bank and its customer is one of mere lending and borrowing, it is not as though a Civil suit at the instance of the borrower, is barred, in all contingencies, without exception. In Mardia Chemicals Ltd Vs. Union of India {2004 (4) SCC 311}, the Supreme Court held in paragraph-80.5 as follows:- "80.5. As discussed earlier i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SCC 120}. 29. In Abhijit Tea Co. case, the Supreme Court referred to the provisions of Sections 19(6) to 19(11) of the Act and concluded that when the pleas raised by the borrower are inextricably connected with the claim of the bank, they would fall within the categories of set off or counter claim and that therefore the suit filed by the borrower should be transferred to the Tribunal. But in ABS Marine case, the Apex Court explained the ratio in Abhijit Tea Co., case, in paragraph-25 as follows:- "Suffice it to clarify that the observations in Abhijit that an independent suit of a defendant (in the bank's application) can be deemed to be a counter claim and can be transferred to the Tribunal, will apply only if the following conditions were satisfied:- (i) The subject matter of the bank's suit, and the suit of the defendant against the bank, should be inextricably connected in the sense that decision in one would affect the decision in the other. (ii) Both parties (the plaintiff in the suit against the bank and the bank) should agree for the independent suit being considered as a counterclaim in the bank's application before the Tribunal, so that both can be heard and di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable. In all the decisions of the Supreme Court relied upon by the learned Senior Counsel for the defendant-Bank, the suits were not thrown out as not maintainable. They were only transferred to the Tribunals for being treated as set off or counter claim and for being tried along with an application of the Bank. Therefore, I hold that the present suit is very much maintainable. 34. It is interesting to note that even if the defendant in an application before the DRT claims set off or makes a counter claim, it is not necessary for the Tribunal to deal with them together. Sub Section (11) of Section 19 confers an element of discretion upon the Tribunal to treat it as an independent action. It reads as follows:- "19(11). Where a defendant sets up a counter-claim and the applicant contends that the claim thereby raised ought not to be disposed of by way of counter-claim but in an independent action, the applicant may, at any time before issues are settled in relation to the counter-claim, apply to the Tribunal for an order that such counter-claim may be excluded, and the Tribunal may, on the hearing of such application, make such order as it thinks fit." 35. Thus Section 19(11) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions as null and void and not binding upon the Bank. Pending suit, the Bank moved an application for an interim injunction to restrain the Cotton Corporation from using the Bills of Exchange or Hundies involved in the dispute, for the purpose of any suit or other proceedings, including winding up proceedings. Though a limited injunctive relief was granted by the single Judge of the Bombay High Court, the Division Bench granted an injunction, forcing the Cotton Corporation to file an appeal before the Supreme Court. While over turning the decision of the Division Bench, the Supreme Court considered the scope of Section 41(b) of the Specific Relief Act, 1963 and held in paragraphs-5, 7 and 23 as follows:- "5. A very narrow question which we propose to examine in this appeal is: Whether in view of the provision contained in Section 41 (b) of the Specific Relief Act, 1963 ('Act' for short), the Court will have jurisdiction to grant an injunction restraining any person from instituting any proceeding in a Court not subordinate to that from which the injunction is sought? The contention may be elaborated thus : Can a person be restrained by an injunction of the Court from institutin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hierarchy of Courts. To some extent this approach not only effectively circumvented the provision contained in Section 56 of the repealed Act but denuded it of its content. The Legislature took notice of this judicial interpretation and materially altered the language of the succeeding provision enacted in Section 41(b) replacing Section 56(b) of the repealed Act while enacting Specific Relief Act of 1963. The Legislature manifestly expressed its mind by enacting Section 41(b) in such clear and unambiguous language that an injunction cannot be granted to restrain any person, the language takes care of injunction acting in personam, from instituting or prosecuting any proceeding in a Court not subordinate to that from which injunction is sought. Section 41(b) denies to the Court the jurisdiction to grant an injunction restraining any person from instituting or prosecuting any proceeding in a Court which is not subordinate to the Court from which the injunction is sought. In other words, the Court can still grant an injunction restraining a person from instituting or prosecuting any proceeding in a Court which is subordinate to the Court from which the injunction is sought. As a nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. This view of the Supreme Court is found in the following portion of paragraph-8 of the judgment:- " 8. ............ Now access to Court in search of justice according to law is the right of a person who complains of infringement of his legally protected interest and a fortiori therefore, no other Court can by its action impede access to justice. This principle is deducible from the Constitution which seeks to set up a society governed by rule of law. As a corollary, it must yield to another principle that the superior Court can injunct a person by restraining him from instituting or prosecuting a proceeding before a subordinate Court. Save this specific carving out of the area where access to justice may be impeded by an injunction of the Court, the Legislature desired that the Courts ordinarily should not impede access to justice through Court. This appears to us to be the equitable principle underlying Section 41(b)." 41. It was contended before the Supreme Court that Section 41(b) deals only with perpetual injunction and that temporary injunctions are regulated only by CPC and Section 37 of the Specific Relief Act, 1963. But the said contention was repelled on the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power of transfer and withdrawal. A reading of these provisions, gives a clue that unless two Courts fall in a line of hierarchy, one cannot be taken to be subordinate or superior to the other. 46. But de hors the principle of subordination of Courts or hierarchy of Courts, having any relevance to Section 41(b) of the Specific Relief Act, 1963, the Supreme Court appears to have taken a consistent view that anti suit injunctions are possible in respect of proceedings in foreign Countries. In one of the earliest decisions on this aspect, M/s. V/O Tractoroexport, Moscow Vs. M/s.Tarapore Co. {AIR 1971 SC 1}, the Supreme Court granted an injunction restraining a party from proceeding with an arbitration in Moscow. Following the same, the Supreme Court granted an injunction in Oil and Natural Gas Commission Vs. Western Company of North America {AIR 1987 SC 674}, restraining the defendant from proceeding with the action in a foreign Court. This decision was rendered after analysing Section 41(b) and also distinguishing Cotton Corporation case. The relevant portion of the decision of the Supreme Court in Oil and Natural Gas Commission case, reads as follows:- "There is nothing in Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whom, injunction is sought, is amendable to the personal jurisdiction of the Court; (b) if the injunction is declined, the ends of justice will be defeated and injustice will be perpetuated; and (c) the principle of comity respect for the Court in which the commencement or continuance of action/proceeding is sought to be restrained must be borne in mind. (2) In a case where more forums than one are available, the Court in exercise of its discretion to grant anti-suit injunction will examine as to which is the appropriate forum (forum conveniens) having regard to the convenience of the parties and may grant anti-suit injunction in regard to proceedings which are oppressive or vexatious or in a forum non-conveniens. (3) Where jurisdiction of a Court is invoked on the basis of jurisdiction clause in a contract, the recitals therein in regard to exclusive or non-exclusive jurisdiction of the Court of choice of the parties are not determinative but are relevant factors and when a question arises as to the nature of jurisdiction agreed to between the parties the Court has to decide the same on a true interpretation of the contract on the facts and in the circumstances of each cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pressive or whether they could be initiated in a Forum non-conveniens were all said to be other relevent considerations, for the grant of such an injunction. 50. Therefore when the invokation of the jurisdiction of a court on the basis of a jurisdiction clause contained in an agreement, itself cannot be curtailed by an anti suit injunction, the question of injuncting a party from invoking the jurisdiction of a special Forum statutorily created to decide certain disputes, does not arise. In the case on hand, Act 51 of 1993 creates a special Tribunal and confers jurisdiction upon the Tribunal to decide all claims made by Banks and Financial Institutions. Therefore the respondent cannot be injuncted from initiating any proceedings for recovery of any money due to them, before the Debts Recovery Tribunal. 51. The general power of superintendence of the High Courts under Article 226/227 of the Constitution, over all Tribunals and other Forums constituted under special enactments, that was reinforced by the Constitution Bench decision in L.Chandrakumar's case, does not make the Debts Recovery Tribunal, a Court subordinate to this Court. Therefore no injunction can be granted, for res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreements by way of wager, void. -- Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made. Exception in favour of certain prizes for horse-racing. -- This section shall not be deemed to render unlawful a subscription or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be awarded to the winner or winners of any horse-race." In Carlill Vs. Carbolic Smoke Ball Co. {(1892) 2 Q.B. 484, 490} Hawkins J., defined a wager as follows:- "A wagering contract is one by which two persons professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent upon the determination of that event, one shall win from the other, and that other shall pay or hand over to him, a sum or money or other stake; neither of the contracting parties having any other interest in that contract than the sum or stake he will so win or lose, there being n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions unless there is an agreement between the parties to them that they shall not be actually carried out but shall end only in the payment of differences. If there is an agreement to this effect, the transaction will be a wager notwithstanding the fact that the ostensible terms of business give a right to insist on delivery (Chitty on Contracts- Volume II - 29th Edition Page 1119). 57. Until the enactment of the Gaming Act, 1845, wagering contracts were not prohibited by law in England. But Section 18 of the Gaming Act, 1845 (UK) declared that all contracts or agreements by way of wager shall be null and void and that no suit shall be brought or maintained in any Court of law and equity for recovering any sum of money or valuable thing alleged to be won upon any wager. However, certain dealings in investments by way of business are excepted from invalidity under Section 18 even though they might amount to wagering contracts. For example, contracts for differences or bets on stock market indices {City Index Ltd Vs. Leslie (1992) 1 Q.B. 92}. 58. Though every wagering contract is speculative in nature, every speculation need not necessarily be a wager. In Bhagwandas Parasram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in rise and fall of price of wheat in future, was a wager and whether it was hit by Section 30 of the Contract Act. But the Supreme Court held that such a partnership was not illegal, although the business for which the partnership was formed, was held to involve wagering. It was held therein as follows:- "(1) Under the Common Law of England a contract of wager is valid and therefore both the primary contract as well as the collateral agreement in respect thereof are enforceable; (2) after the enactment of the Gaming Act, 1845, a wager is made void but not illegal in the sense of being forbidden by law, and thereafter a primary agreement of wager is void but a collateral agreement is enforceable; (3) there was a conflict on the question whether the second part of Section 18 of the Gaming Act, 1845, would cover a case for the recovery of money or valuable thing alleged to be won upon any wager under a substituted contract between the same parties: the House of Lords in Hill's case{(1921) 2 KB 351} had finally resolved the conflict by holding that such a claim was not sustainable whether it was made under the original contract of wager between the parties or under a substitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw prohibiting such contracts and declaring them illegal and not for this Court to resort to judicial legislation." 62. Keeping the above principles in mind, if we look at the transaction in question namely OPT 727, which is the subject matter of the present controversy, it is seen that the essence of the deal between the plaintiff and the defendant is as follows:- (a) Under Part-A of the deal, if during the period from 22.6.2007 (taken as Trade date) to 19.6.2008 (taken as Fixing date-1), the spot never trades at 1.2385, the plaintiff would receive USD 100,000. In simple terms, if the exchange rate of 1 USD never touches 1.2385 CHF during the above period, the Bank is obliged to pay to the plaintiff, USD 100,000. (b) Under Part-B, there are 3 contingencies each in respect of 2 different fixing dates. With reference to fixing date 19-6-2008, under contingency No.1, if the rate of exchange of 1 USD never touches 1.1250 and 1.2385 CHF, there is no exchange of principal. Under contingency No.2, if the rate of exchange of 1 USD ever touches 1.2385 CHF, there is no exchange of principal. Under contingency No.3, if the rate of exchange of 1 USD ever touches 1.1250 CHF, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same. 64. The purchase of USD 20 million at the rate of 1.3300 CHF per Dollor, under OPT 727, would certainly make the plaintiff lose a huge amount, especially since the market rate on the crucial date would be lower than 1.3300 CHF. But that by itself would not make the contract a wager. The contract confers a right to seek actual delivery. In other words, the performance of the contract can always be compelled, by the plaintiff insisting on actual delivery. If actual delivery can be compelled, it cannot be termed as a wager. Thus, the contract does not have the necessary ingredients of a wager. 65. At any rate, the records do not show any common intention between the plaintiff and the Bank to enter into a wagering transaction, which is a sine quo non for the transaction to be dumped as a wager. What preceded this OPT 727 deal confirmation, would throw light both upon the question as to whether Mr.P.K. Viswanathan had the authority to enter into the transaction and as to whether the transaction was intended and is in fact, a wager or not. The events that preceded this deal confirmation are listed as follows:- (a) On 24.3.2004, the Board of Directors of the plaintiff-Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enclosure is filed as plaint document No.6. It is only in confirmation of the terms and conditions contained in plaint document No.6 that Mr.P.K.Viswanathan sent the letter of consent under plaint document No.7. It is this plaint document No.7 which is the subject matter of this litigation. Thus, the entire correspondence by e-mail between the parties discloses at least three fundamental facts viz., (i) that Mr.P.K.Viswanathan was duly authorised by the Board of Directors of the plaintiff to enter into such transactions with authorised dealers like the defendant herein; (ii) that the defendant did not enter into the transaction with any unauthorised person but acted entirely on the basis of the Board Resolution; (iii) that the defendant apprised the plaintiff's representative of the risk involved, by making a full disclosure. (f) In OPT 727, filed as plaint document No.7, the parties covenanted as follows:- "(a) If the Counter Party is an entity other than a Bank or Primary Dealer, then the Counter Party represents and warrants as follows: (i) The Counter Party is entering into this transaction solely for the purpose of hedging its foreign currency Balance Sheet exposu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PT 727 stood knocked out with no subsequent liability to either party. A copy of this letter is filed as plaint document No.18. In this letter, the plaintiff acknowledged the fact that in the last couple of weeks, the defendant advised them about various options to mitigate the risks under OPT 727. Incidentally, this letter was signed by Mr.P.K.Viswanathan. 69. After the aforesaid letter dated 12.12.2007, one Mrs.Rajshree appears to have met the officials of the defendant-Bank in Delhi and held negotiations for risk mitigation. This was confirmed in a e-mail dated 14.12.2007 sent by the Assistant Vice President of the defendant-Bank to Mr.P.K.Viswanathan, filed as plaint document No.19. Mrs.Rajshree, as seen from plaint document Nos. 1 and 2, is one of the promoters of the plaintiff and a signatory to the Memorandum and Articles of Association. 70. In the meantime, the Bank also wrote a letter dated 7.1.2008 to the Chairman and Managing Director of the plaintiff-Company, filed as plaint document No.21. By this letter, the Bank expressed their protest against the claim of the plaintiff in the letter dated 12.12.2007 that the transaction got knocked out. It is only thereafter tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... speculative in nature. But the plaintiff cannot be heard to raise such a contention in view of the covenant (or declaration) made by the plaintiff to the defendant in OPT 727 that there was an underlying exposure and that the transaction was not for the purpose of speculation. Even assuming for the sake of argument that there was an intention on the part of the plaintiff to speculate, no such intention on the part of the Bank to speculate, is made out by the plaintiff in the plaint. Thus, there was certainly no common intention to wager, even if it is accepted for the sake of argument that there was an intention on the part of the Officer of the plaintiff to speculate. In such circumstances, the transaction in question cannot certainly be termed as a wagering contract. Therefore the plaintiff cannot avoid the contract on the ground that it was a wager. 73. To substantiate their contention that OPT 727 is speculative in nature and thus amounted to a wager, the plaintiff contends that there was no underlying to the deal. It is the contention of the plaintiff that OPT 727 did not correspond to any underlying exposure and hence could not be raised to the level of a valid contract enf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll of which were signed and confirmed only by Mr.P.K.Viswanathan; (iv) 9 out of those 10 deals sailed smoothly to the shores, perhaps profitting the plaintiff and hence they are not questioned by the plaintiff; (v) the amount of USD 100,000 paid by the defendant Bank under OPT 727 (the deal in question), way back on 27-6-2007, was accepted and utilised by the plaintiff and never challenged as tainted; (vi) some of the e-mails sent by the Bank were actually forwarded by Mr.P.K.Viswanathan to others as seen from plaint document No.8; (vii) the letter dated 12-12-2007 filed as plaint document No.18 sent on behalf of the plaintiff claiming that the entire structure got knocked out in terms of Part-C of the deal, was also signed only by Mr.P.K.Viswanathan on behalf of the plaintiff; (viii) the e-mail dated 14-12-2007 sent by the bank and filed as plaint document No.19 discloses that the Bank had discussions with Mrs. Rajshree at Delhi for risk mitigation against new exposures (this Mrs.Rajshree is one of the promoters of the plaintiff and a signatory to the Memorandum and Articles of Association of the plaintiff as seen from plaint document Nos.1 and 2). At no point of time, from the da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sured pays premium to the insurer and not vice versa. Therefore, according to the plaintiff, the payment of the amount by the bank made it an unlawful deal. 80. The above argument of the plaintiff is to be stated only to be rejected. The claim made by the plaintiff in their letter dated 12-12-2007, filed as plaint document No.18, exposes the hollowness and untenability of this argument. The plaintiff claimed in that letter that the USD/CHF touched the level of 1.2385 on 22nd and 23rd June 2007 and that therefore, in terms of Part-C of OPT 727, the entire structure was knocked out and a payment of USD 100,000 was received by the plaintiff on 27-6-2007. In the light of such a stand taken by the plaintiff themselves, the payment of USD 100,000 cannot be treated as a premium for the contract. After claiming that the said payment was in fulfilment of the obligations arising under the contract, it is not open to the plaintiff to paint it as a premium. 81. Therefore the argument that the contract was a wager, that it was brought forth by misrepresentation, that Mr.P.K.Viswanathan had no authority and that there was a payment of premium by the Bank, are all rejected. As a matter of fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from 3 different perspectives namely (1) Forwards/Futures Trading in commodities (2) forwards/futures trading in stocks and securities and (3) forwards/futures trading in currencies. While the history of futures trading in commodities is fairly long, the history of futures trading in stocks and securities is shorter and the history of futures trading in foreign currencies is only a few decades old, in our country. FUTURES TRADING IN COMMODITIES 84. Futures trading in commodities, through recognised Exchanges, got entrenched firmly in India more than a century ago. Organized futures market evolved in India with the setting up of "Bombay Cotton Trade Association Ltd." in 1875. But, following widespread discontent amongst leading cotton mill owners and merchants over the functioning of the Association, a separate association by the name "Bombay Cotton Exchange Ltd." was constituted in 1893. Futures trading in oilseeds was organized in India for the first time with the setting up of Gujarati Vyapari Mandali in 1900. Futures trading in Raw Jute and Jute Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd., in 1919. Later East Indian Jute Association L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ittee (June 1980) recommended reintroduction of futures trading in most of the major commodities. After the introduction of economic reforms since June 1991 and the consequent liberalization in both the domestic and external sectors, the Govt. of India appointed a committee on Forward Markets under the Chairmanship of Prof. K.N. Kabra. The Committee recommended that futures trading be introduced in various commodities such as Basmati Rice etc. The committee also recommended the upgradation of some of the existing commodity exchanges particularly the ones in pepper and castor seed, to the level of international futures markets. In pursuance of the National Agricultural Policy announced in July 2000, the Government issued notifications on 1.4.2003 permitting futures trading in many commodities. Thus, historically, futures trading in commodities is more than a century old in India. FUTURES TRADING IN STOCKS/SECURITIES AND CURRENCIES 87. While Forward contracts in commodities other than securities and currencies were regulated under the Forward Contracts (Regulation) Act, 1952, the futures market in stocks and securities were regulated by the Securities Contracts (Regulation) Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing securities;" As is obvious, the above definition is only inclusive and hence the natural meaning of the word "DERIVATIVE" was not lost. 89. Following the above amendment to the Securities Contracts (Regulation) Act, with effect from 22.2.2000, the Reserve Bank of India notified certain regulations known as "Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000", in exercise of the powers conferred under Section 47 (2)(h) of the Foreign Exchange Management Act, 1999. These regulations were issued, with the professed object of "promoting orderly development and maintenance of foreign exchange market in India", as seen from the preamble to these regulations. 90. Regulation 4 of the aforesaid regulations permitted a person resident in India to enter into a foreign exchange derivative contract. Regulation 2 (v) of the Regulations defined "Foreign Exchange Derivative Contract" as follows:- " 'Foreign exchange derivative contract' means a financial transaction or an arrangement in whatever form and by whatever name called, whose value is derived from price movement in one or more underlying assets, and includes, (a) a transaction which involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment, Sections 45U, 45V, 45W and 45X were inserted in the Act. Section 45U contained definitions. Clause (a) of Section 45U defined a "derivative" as follows:- "(a) "derivative" means an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called "underlying"), or a combination of more than one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency-rupee options or such other instruments as may be specified by the Bank from time to time." Section 45V(1) declared that all transactions in derivatives as may be specified by the Reserve Bank shall be valid if one of the parties to the transaction is the Reserve Bank or a Scheduled Bank or an Agency falling under the purview of the Reserve Bank, the Banking Regulation Act or the Foreign Exchange Management Act. Sub-section (2) of Section 45V gave retrospective effect to the validity of such transactions. Section 45V reads as follows:- "45V. (1) Notwithstanding anything contained in the Securities C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above circular are as follows:- "A reference is invited to A.D. (M.A. Series) Circular No.26 dated 23rd December 1994 whereby authorised dealers have been permitted to offer forward cover to resident customers to any currency of their choice. 2. Customers will ordinarily require forward cover facilities for the foreign currency in which their receivables or payables are denominated, against the Indian rupee. If for any reason, customers wish to hedge them against a third currency instead of the rupee, authorised dealers may provide forward sale or purchase facilities as appropriate, in the currency of the receivables or payables against the third currency provided the latter currency is also a permitted currency and is actively traded in the markets. Partial hedging may also be permitted whereby the customer hedges the currency of receivables or payables against the third currency first and completes the hedge against the rupee subsequently. Partial hedging may also be permitted in reverse order wherein the third currency is hedged against the rupee first. 3. Authorised dealers are advised that they should bring to the notice of their customers the possibilities of exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to time and the Regulations framed by RBI under the FEMA, 1999 permit such transactions. Such transactions have the sanction of law the world over, despite the mishaps such as Orange County, Barings Bank, Long Term Capital Management, Lehman Brothers, AIG etc . Admittedly, the Nationalised Banks in our country also offer such products, though their marketing strategy is not so aggressive, on account of conservative outlook. Therefore, the contention of the plaintiff that the deal is opposed to public policy is archaic. 101. Realising the futility of seeking an outright rejection of the deal as illegal, in the light of the above express stipulations contained in the Master Circulars and the Regulations, the plaintiff assails the OPT 727 deal as illegal, on the grounds inter alia-- (a) that their receivables and payables are not denominated in Swiss Franc and hence a forex option in USD/CHF was wholly unauthorised and not permitted; (b) that the deal was not with reference to any particular underlying exposure and hence it was violative of the Master Circulars; (c) that the defendant Bank had an obligation under the Master Circulars to see that there is a risk management pol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lations, there was a prohibition from entering into such contracts without underlying exposure. According to the plaintiff the Bank (authorised dealer) also had a duty cast upon it, to satisfy itself, through verification of documentary evidence about the genuineness of the underlying exposure. 106. It is true that paragraph-A.1.(a) and (b) of Schedule-I to the Regulations, extracted in paragraph-103 above, imposes an obligation upon the authorised dealer to satisfy itself about the genuineness of the underlying exposure through documentary evidence. But the purpose of the same is to prevent Bankers from indulging in "kite flying operations" throwing public money into heavy risks. Moreover, the Master Circular No.06/2006-07 dated 1.7.2006 issued by the Reserve Bank of India on "Risk Management and Inter Bank Dealings" gives a leverage to the authorised dealers. Part-A, Section 1, paragraph A.1(a) of the Master Circular contains a clause which reads as follows:- "(a) the AD bank through verification of documentary evidence is satisfied about the genuineness of the underlying exposure, irrespective of the transaction being a current or a capital account transaction. Full particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 109. Ground No.3: Relying upon paragraph-A.7 of the very same circular, it was contended on behalf of the plaintiff that the authorised dealers are obliged to ensure that the Board of Directors of the Corporate had drawn up a risk management policy, laid down clear guidelines for concluding the transactions and institutionalised the arrangements for a periodical review of operations and annual audit of transactions to verify compliance with the Regulations. According to the plaintiff, there was no risk management policy in place in the company and the defendant Bank simply went ahead with the transaction on the basis of the declaration made by Mr.P.K.Viswanathan and that therefore, the transaction was violative of the Master Circulars. 110. But the above contention is wholly untenable. As stated earlier, the Bank was entitled in terms of Part-A, Section 1, paragraph A.1(a) of the Master Circular, to act on the basis of a declaration signed by the customer, with regard to risk management. In the present case, the Bank had in fact obtained, such a declaration (in clause 'd' of OPT 727). The declaration formed part of OPT 727, which is filed as plaint document No.7. Apart from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter dated 12-12-2007 claiming that the entire structure got knocked out, was signed only by Mr.P.K.Viswanathan. Even in the subsequent letters and the meeting that Mrs.Rajshree had with the officilas of the Bank at Delhi, the validity of the declaration signed by Mr.P.K.Viswanathan was never questioned. Having allowed its authorised signatory to make a declaration regarding the existence of a risk management policy, and having failed to question the same at the earliest, the plaintiff cannot now turn around and say that there was none. If the plaintiff says that there was no risk management policy, it would mean that the declaration made on their behalf was false. If it was a false declaration, then the plaintiff cannot take advantage of the fact that it was false. Nullus commodum capere potest de injuria sua propria-No one can take advantage of his own wrong. The plaintiff was not only aware of the transaction but also aware of the declaration signed by Mr.P.K.Viswanathan, since OPT 727 was always available in the records of the company. 112. It is not the case of the plaintiff that the Board of Directors never had an occasion to see the document OPT 727. Such a stand cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pulation contained in the Master Circular. 114. At the outset, I do not agree that the payment of USD 100,000 under OPT 727 was by way of premium. Even as per the letter dated 12-12-2007 of the plaintiff (plaint document No. 18) it was a payment in terms of the structure. The OPT 727 was confirmed by the plaintiff on 22-6-2007. The payment was received by the plaintiff on 27-6-2007 when USD/CHF touched the level of 1.2385. Therefore the plaintiff received the payment and also understood the nature and purpose of the payment as anything but a premium. 115. The contention that the amount of USD 100,000 paid by the Bank to the plaintiff is a premium, has arisen out of a misconception. As we have seen above, a put option is the right to sell and a call option is the right to buy. A combination of the two is called a zero cost option and it is permitted by Clause d.(iii) of Annexure-VII of the Master Circular, extracted in para 111 above. The combination of put and call options is called a "zero cost option" because there will be no financial outlay for the customer in the form of premium. Such options have evolved on account of the fact that a majority of the customers have both fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained in the ISDA Master Agreement does not confer exclusive jurisdiction upon the courts in Mumbai, by the use of the words "only" or "alone". The averments in the plaint proceed on the basis that a part of the cause of action arose at Chennai within the jurisdiction of this court. Therefore the grant of leave to sue under clause 12 of the Letters Patent, was proper. The jurisdiction of the court to try a lis has to be tested at this stage, only in the light of the plaint averments. The plaint averments do disclose a cause of action, sufficient to entertain this suit. It is contended by the defendant bank that under OPT 727 no cause of action would arise till the contingency stipulated therein arises or till the expiration date (or fixing date) is reached. But that is only for enforcing the contractual obligations. When a contract is assailed as null and void, the cause of action cannot be said to arise only on the expiration date. Therefore, the contention that the plaintiff could not have filed the suit before the expiration date was reached or before the happening of the event stipulated therein, cannot be accepted. In view of the nature of the reliefs prayed for, it cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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