Banks and companies in India found to have transacted in currency derivativies face penalties for violating the Foreign Exchange Regulations Act (FEMA), says the Economic Times, citing the Reserve Bank of India (RBI).
According to the Times, derivatives are financial instruments used for speculation and as insurance against fluctuations in the markets. But during the market boom many companies were looking to boost profits and bought derivative contracts which initially helped them and banks charged fees on those transactions.
The Times reveals that many Indian banks and companies got into litigation in 2008 after companies were burdened with millions of dollars of losses in currency derivatives which they claim were sold by banks. But banks claimed that these companies bought those currency derivatives knowing the risks well but blamed banks when they incurred losses.