As scams continue to rock our nation, here is another one that has been brewing for a while. The Reserve Bank of India has been investigating violations of the extant rules by several banks in India. As a direct result of these violations, several gullible importers, exporters and other companies were sold foreign exchange derivative contracts in 2008 resulting in massive losses. What recently has come to light is the fact that the banks seem to have violated not only the apex banks guidelines themselves but also the FEMA Act! What is pertinent to note is that the RBI itself has not vetted any of the contracts that were sold. The scam is estimated to value approximately Rs 32000 crore. Some of the erring banks have been penalized negligible amounts ranging from Rs 5 to Rs 15 lakh.
In an interview, noted lawyer Karan Jain, who filed for information on the matter under the RTI Act, tells us of the responses he has received on a number of issues by the RBI. The responses were in relation to RIA No. 249-2011/12 filed by Mr Karan Jain.
Here are excerpts of the interview:
- 1. Under what sections/provisions of the RBI/FEMA Act has a fine of Rs 5 to Rs 15 lakh been levied on 19 banks, been based on?
Karan Jain: The RBI claims that the action that was taken against the banks was based on the report of the Annual Financial Inspection which was conducted under Section 35 of the Banking Regulation Act of 1949. Since the information that was received was of top priority clearance only, it has been held in fiduciary capacity. Any further disclosure will end up in prejudicing the economic interests of the state and the bank’s competitive position. Further information was exempt from disclosure. The amount of the fine is in relation to how far the violation goes.
The RBI has imposed penalties under Section 47A (1) (b) read with Section 46(4)(i) of the Banking regulation Act for contravention of various instructions issued by the Reserve Bank in respect to derivatives.
- 2. Were the contracts also investigated for violations of FEMA?
Karan Jain: The Reserve Bank has clearly stated in it’s reply that compliance function in certain banks had failed to ensure strict observance of the provisions of FEMA. However, the RBI has not replied as to whether any action was taken or penalties imposed for violation of the FEMA.
- 3. Have the banks that have been penalized right now in effect been fined or found guilty in relation to similar cases of derivative contracts in India or abroad?
Karan Jain: Once again the RBI claims not to have access to the relevant information.
- 4. Does it fall under the purview of the RBI to vet all products sold by banks? If yes, then shouldn’t have derivative products been reviewed? Who is to be held responsible for RBI’s failure to do so?
Karan Jain: As per the response I received from the RBI, they claim not to be responsible for the review of all the products that are sold by banks. By inference the RBI seems to be clearly stating that it was the responsibility of the banks to vet the legality of the products that they were selling thereby raising a very important issue of whether a central regulatory body is the way forward in this industry.
- 5. What are the penal provisions under the Indian legal system for illegally selling derivative products and who is responsible for their enforcement?
Karan Jain: Surprisingly, the RBI has indicated that they did not have the required information to answer this question! They also stated that the question was not specific. It is in the nature of seeking legal opinion which is not “information” as defined under the RIA2005.
- 6. Has the RBI been able to put together a set of rules to prevent such violations in the future?
Karan Jain: Though RBI claimed that the information sought was not really specific in nature, they mentioned that the derivative guidelines had recently been altered as with Circular DBOD No. BP BC 27 / 21.04.2011-12 dated August 2nd 2011.