hey.. am looking for some information on major scams in derivative markets in india.. so i request you to help me in that.

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Swapna
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scams in derivatives market in india ppt

IT’S A scam with an estimated value of approximately Rs 25 lakh crore, much bigger than the 2G scam that rocked the country in 2010. Nineteen banks, which violated the Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA) guidelines to advise and sell forex derivatives to Indian exporters in 2008, resulting in humongous losses to them, have been penalised by the RBI negligible amounts ranging from Rs 5 lakh to Rs 15 lakh each. Several other countries have also faced major economic crises in recent times, as a result of volatility due to similar derivative contracts. Even Barack Obama has noted that unregulated derivative contracts are the main cause of recent financial crises. In the Indian context, the RBI has stated that the losses sustained by customers do not amount to gain by the banks as a result of such derivatives. The question then is — who stands to gain from derivatives during volatility in the money market?

Amidst the dying embers of the 2G scam, and the sparks flying from the anti-corruption movement led by Anna Hazare, however, there is one scam that has somehow got buried.

The RBI recently investigated violations of FEMA by 19 banks. The immediate victims of these violations were importers, exporters and firms selling foreign exchange derivative contracts, resulting in massive losses due mainly to fluctuations in the value of the dollar. What has recently come to light is that the RBI itself had not vetted any of the contracts that were sold, a fact it has admitted. A few of the erring banks have been penalised relatively negligible amounts of Rs 5-15 lakh. “The scam is estimated to be valued at approximately Rs 25 lakh crore, much bigger than the 2G scam,” says Orissa High Court advocate Manoj Mishra.

As per the CBI affidavit in the Orissa High Court, “The RBI has been monitoring the gross mark-to-market (end-to-end) losses incurred by the banks. As on December 2008, the gross mark-to-market gains (that correspond to losses incurred by consumers) of 22 banks that were in the business of derivatives work out to Rs 31.719 crore,” says RP Luthra, advocate, Delhi High Court.

This figure, however, is contested by Pravajan Patra, an eminent economist, in a PIL filed in the Orissa High Court. His contention is that the total value of derivative contracts sold in India and approved by the RBI is $3 trillion, based on the statement of the then finance minister P Chidambaram in the Rajya Sabha. Compare this to the total GDP of India, which is not more than $1 trillion, or its total export and import (including oil bills), that do not exceed $500 billion a year on average. The fluctuation in the value of the dollar during the period in question in 2008, however, was Rs 8.50-10. If this difference is multiplied by even the (conservative) estimate proposed by Chidambaram, that of $3 trillion, we end up with a loss in excess of Rs 25 lakh crore. Compare this to the estimated loss incurred by the exchequer in the 2G scam — Rs 1.76 lakh crore. Peanuts.

Based on the PIL, the Orissa High Court ordered a CBI investigation into these missing funds. The court directed the CBI to hold a preliminary inquiry. Instead, the CBI just sent a questionnaire to the RBI and investigated the president of a forex derivative consumer forum, mere eyewash as opposed to the inquiry that was required.

In addition to this, the 19 banks which violated RBI and FEMA guidelines have paid a negligible penalty. The RBI penalised the banks in its order of April 19, 2011 for violations of its guidelines under the Banking Regulations Act, 1949, and found the banks guilty on various counts, ranging from failure to carry out due diligence with regards to suitability of products, to selling derivative products to users without risk management policies, for not verifying the adequacy of underlying and eligible limits under the past-performance clause. Then in August 2011, the RBI, in response to an rti filed by Delhi lawyer Karan Jain, admitted that the banks had flouted FEMA and RBI guidelines.

But how did 19 major banks manage to violate FEMA rules simultaneously and with impunity, without being in conjunction with a larger purpose? With the very economy of the country at stake, could this monetary crisis possibly have been generated to siphon off significant amounts of money abroad? Where this money has gone can only be a matter of speculation, and leaves one to believe that there is, indeed, a larger conspiracy.

Apart from this, a surprising admission by the RBI was that it does not vet all forex derivative products sold by banks in the country, in effect leaving the door open for a repeat of such scandals in the future. A CBI probe is definitely needed to look into how these violations took place, and how exporters, who are the main victims of the scam, can get some reprieve.