High court upholds legality of derivatives

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In one of the first cases of its kind in India, it was recently held by the Madras High Court in Rajshree Sugars and Chemicals Limited v AXIS Bank Limited that derivative contracts could not be considered illegal and opposed to public policy.

The plaintiff, Rajshree, a listed company, is engaged in the manufacture and export of sugar to foreign countries, and as an exporter and borrower had both receivables and payables in foreign currencies. In order to hedge the risk of fluctuating foreign currency exchange rates, on 14 May 2004 Rajshree entered into an International Swaps and Derivatives Association (ISDA) master agreement with UTI Bank (now Axis Bank).

Pursuant to the ISDA agreement, 10 deals were struck between the parties, of which nine had already matured at the time of the dispute arising in relation to the 10th deal. The defendant, Axis, paid US$100,000 to Rajshree on that deal. Six months later, Rajshree sent a letter repudiating the contract with no liability to either of the parties. Axis replied, challenging the claim and contending that the contract was still alive and that it was prepared to work out suitable risk mitigation structures.

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The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in, lbhasin@vsnl.com or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.

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