How to Square a Circle: Exploring the Legality of Financial Derivatives in India
Deepaloke Chatterjee & Ranjini Das
Volume 2 Issue 2 (2009)
Section 30 of the Indian Contract Act, 1872 makes agreements by way of wager void. In spite of the above provision declaring wagering contracts as void, there has existed for some time now, a practice of entering into derivative contracts in the financial market. Such contracts are especially resorted to when it comes to dealings with foreign exchange on account of fluctuations in the exchange rates. Numerous Indian companies who have made losses due to trading in derivatives, have argued that the contracts the banks entered into with them were illegal, in violation of Reserve Bank of India (“RBI”) guidelines, opposed to public policy and unenforceable, and not binding on them. Under Indian exchange control laws, an Indian corporate, being a person resident in India, can enter into a foreign currency derivative contract only to hedge an exposure to foreign exchange risk and not for speculating and chasing profits. The authors during the course of the present paper will examine the validity of such contracts in light of Sections 30 and 23 of the Indian Contract Act, 1872. The authors will seek to answer the question of whether these companies can at their convenience now state that such contracts are unenforceable or whether this has implications on their past profits.