Several exporters said banks have exposed their clients to risky foreign exchange derivative deals.

The key accusation is over-exposure to the foreign exchange market leading to speculative positions even though the primary objective of the derivative contracts should have been to cover the risk from exchange rate fluctuations.

"In many cases, the cumulative value of contracts exporters have entered into are several times more the turnover of the exporters," said a source close to the development.

Initial estimates suggest Tirupur exporters alone have lost Rs 300-600 crore (Rs 3-6 billion) on account of their forex derivatives deals.

There have also been instances of 'net premium inflows' in favour of client-exporters. The FEMA Master Circulation that was issued by Reserve Bank of India [Get Quote] in 2006 and updated in 2007, clearly states that at no point such inflows should be allowed.

Net premium inflows is the technical term used for instances where the client gets a pre-determined sum (defined in US dollar terms) if the exchange rates move outside a pre-determined lower and upper limit.

Contracts have also been made with a 'no security' option.  Exporters and market experts are questioning the lack of prudence on the part of banks to allow such contracts. 

"The entire FEMA guidelines have been directed at authorised dealers to take all necessary precaution to avoid speculation on the part of the exporters.  Even though exporters have entered into these deals, the primary responsibility to exercise precaution rests with the banks," said B Rajendran, a Chennai based lawyer representing several exporters.

The Fema guidelines also require exporters to take the board of director's approval by defining a risk management policy before entering into the deals. While exporters have made such a declaration, questions are also being raised about the absence of such a board when the banks are dealing with partnership firms. 

"There are no boards of directors in partnership firms. So where is the question of such authorizations being valid?," said M R Venkatesh, a Chennai-based chartered accountant, advising a few exporters.

When contacted, a spokesperson of ICICI Bank [Get Quote], one of the banks involved in such legal disputes, said "It would not be appropriate for the bank to discuss its clients or their business."

Around 50 exporters in various states including Tamil Nadu, Andhra Pradesh, Karnataka and Punjab have taken private banks like ICICI Bank, Axis Bank, Yes Bank [Get Quote], Kotak Mahindra Bank [Get Quote] and HDFC Bank [Get Quote] to court over foreign exchange derivative deals.