In an appeal against the rejection of a challenge to an arbitral award, the Bombay High Court upheld the award. It rejected claims that the derivative transactions were void due to alleged RBI circular violations and lack of ISDA execution.
Appeal dismissed; Impugned judgment upholding the arbitral award is affirmed.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION
APPEAL NO.55 OF 2013 IN ARBITRATION PETITION NO.1443 OF 2010 WITH
NOTICE OF MOTION (L) NO.2445 OF 2012
WITH NOTICE OF MOTION NO.1981 OF 2012 IN APPEAL (L) NO.577 OF 2012 IN ARBITRATION PETITION NO.1443 OF 2010
Sportking India Limited Appellant versus H.D.F.C. Bank Limited Respondent
Mr.Venkatesh Dhond, Senior Counsel with Mr.Sharan Jagtiani, MsAnuja Jhunjhunwala and Amey Mirajkar i/by Naik Naik & Co. for Appellant.
Mr.Zubin Behram Kamdin with Ms.Shaheen Parikh, Mr.Dharam Jumani, Mr.Zehaan Trivedi i/by Amarchand & Mangaldas & S.A.Shroff & Co. for Respondent.
CORAM : DR.D.Y.CHANDRACHUD AND S.C.GUPTE, JJ.
DATE : 29 July 2013
JUDGMENT - (PER : DR.D.Y.CHANDRACHUD, J.) :
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"The Respondent do pay to the Claimant-HDFC the Principal sum of Rs.5,93,53,892 together with interest of Rs.1,23,37,967 and cost of Rs.2,31,364.58 (if not already paid) on or before 31st December 2010 failing which it will pay interest on the principal sum of Rs.5,93,53,892 at the rate of 8% per annum from 21st July 2010 until payment/recovery. Having regard to the total number of sittings held, I award the claimant cost
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of the arbitration at Rs.10,00,000 (ten lacs only). The Respondent is given three months time to satisfy the Award, failing which it will pay interest from 21st July 2010 until payment/recovery at the rate of 8% p.a. Award accordingly."
(i) Under a Master circular issued by the Reserve Bank of India on 2 February 2007, a bank which is an authorized dealer, has to be satisfied upon verification of the documentary evidence about the genuineness of the underlying exposure. In the present case, the Respondent had by an e-mail dated 20 December 2007 called upon the Appellant to furnish an underlying confirmation for the derivative deals and in response to which the Appellant sent a confirmation. Hence, it has been submitted that on the date on which the transactions were entered into, there was no confirmation by the Appellant of the underlying transaction and hence, the bank entered into a transaction without being satisfied about the genuineness of the underlying exposure. Consequently, the two derivative transactions were submitted to be void and unenforceable being in breach of the Master circular issued by the Reserve Bank of India;
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(ii) The ISDA agreement on the basis of which the transactions were entered into between the Appellant and the Respondent, has not been signed by the Respondent. In the circumstances, when the agreement was not executed by the bank, it could not have entered into a derivative transaction;
(iii) The arbitral tribunal misconstrued the provisions of the Master circular by holding them to be directory insofar as the dealings inter partes are concerned;
(iv) The arbitral tribunal proceeded on the erroneous basis that the requirements of the RBI circular would not apply to foreign exchange derivatives. The case of the Appellant is that when the derivative transactions were entered into, the Respondent had concealed from the Appellant that it had entered into a mirror transaction and the transactions that were sought to be entered into with the Appellant, were intended to pass on the risk of a currency depreciation to the Appellant.
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award of an arbitral tribunal involving an authorized dealer and its constituent.
1 Regulation 2(v) of Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000
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"Forward Contracts : A1. A person resident in India may enter into a forward contract with an Authorized Dealer Category-I (AD) bank in India to hedge an exposure to exchange risk in respect of a transaction for which sale and/or purchase of foreign exchange is permitted under the Act, or rules or regulations or directions or orders made or issued thereunder, subject to the following terms and conditions :
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 particulars of contract should be marked on such documents under proper authentication and copies thereof retained for verification. However, AD bank may allow importers and exporters to book forward contracts on the basis of a declaration of exposure subject to the conditions mentioned in paragraph A2 of this circular."
The authorized dealer banks have been permitted to allow importers and exporters to book forward contracts on the basis of a declaration of exposure and based on past performance up to the average of the previous three financial years' turn over of imports/exports and the actual turn over of the previous year, whichever is higher, subject to various terms and conditions.
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"The Respondent had banking relations with various nationalized banks, such as, SBI, PNB, SBP, including CBoP Bank now HDFC and several private Banks, such as, ICICI, Kotak Mahendra etc. Its relations with CBoP Bank dates back to 1997 and continued at the date of the transactions in 2007. It is also clear that Daljeet Singh and Jasmeet Singh, officers of the Ludhiana Branch of the SBoP bank, regularly visited the office of the Respondent in connection with the operation of its account with the branch. The Respondent was dealing in import and export of various textile materials and in textile manufacture. It is common knowledge that Ludhiana has a large hosiery/textile market. The evidence of Mr.Parveen Gupta shows that the Respondent's turnover was Rs.171.36 crores as on 31.3.2006; Rs.200.18 crores as on 31.3.2007 and Rs.239.30
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crores as in the year 2007-08; these figures being inclusive of exports and imports of Rs.27.04/10.78 crores, Rs.43.78/60.04 crores and Rs.77.37/16.99 crores, respectively in the above years. All the major exports/imports were in USD. The turnover figures disclose a steady rise in the business. The imports in 2006 were to the tune of Rs.60 crores and about Rs.16 crores upto the date of the transaction in 2007."
These circumstances were indeed germane to the decision of the Bank to transact with the Appellant.
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deals in the format which was attached. The Appellant on 20 December 2007 sent a confirmation together with an e-mail as an attachment. The confirmations which were dated 2 July 2007 and 6 September 2007, it must be noted, were with reference to the specific transactions and contained a declaration that the Appellant had not entered into any hedge against the same underlying transaction with any other bank. It was in this background that the arbitrator entered a finding of fact that the confirmation which was addressed by the Appellant to the Respondent was specifically for hedge purposes.
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cannot detain the Court in these proceedings. The arbitral tribunal has held that the requirements of the Master circular stand satisfied. Hence, for the purposes of the appeal, it is not necessary for the Court to dwell upon a wider issue of the construction of the Master circular and its applicability to foreign exchange transactions. We proceed on the basis that the Master circular does apply to the foreign transactions. Even so, the requirements of the Master Circular were fulfilled and on the facts as found by the arbitral tribunal on the basis of the evidence on record, there was nothing to indicate that the transaction was void or unenforceable.
"... ... ... The Claimants did obtain the ISDA Master Agreement (Exh. C-2/C-1), the Deal Confirmations (C-2 & 4), and the Underlying Declarations
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(C-21 & 22, R-28). Admittedly, all these documents were executed by the Respondent's Managing Director Munish Awasthi and Mr.Parveen Gupta, after due verification. Counsel for HDFC therefore argued that the Respondent is bound by these documents and is estopped from contending otherwise. Not only that they had entered into three other similar transactions with HDFC whereunder they earned profits of USD 125,000 from HDFC and received payments. To overcome this fact placed against them the Respondent belatedly offered that they were prepared to return the profit to HDFC. Such a belated offer can have no evidentiary value."
(DR.D.Y.CHANDRACHUD, J.)
(S.C.GUPTE, J.)
MST
2 issues framed by the court
Whether the arbitral award is liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996 on grounds of violation of RBI Master circular and non-execution of ISDA agreement.
Whether the transaction was void and unenforceable as the bank failed to verify the genuineness of the underlying exposure before entering into the derivative transaction.
1 provisions across 1 enactments
Sportking India Limited
H.D.F.C. Bank Limited
DR.D.Y.CHANDRACHUD
S.C.GUPTE
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
