In this boomtown of north India famous for its hosiery and cycles, the rich and famous discuss in hushed tones the losses on derivative trades that many companies in town are sitting on.
A senior executive with a Ludhiana-based company said almost every large company or exporter has dabbled in them. These products were sold by banks much the same way as agents sell life insurance policies.
Experts (forex consultants and CFOs) estimate the notional losses on derivative products in Ludhiana to be Rs 200 crore to Rs 300 crore (Rs 3 billion), with a prominent textile player leading the table. But no company is willing to talk about their exposure or losses.
A few companies, such as Vardhman Textiles, part of the S P Oswal Group, said they had no exposure.
''We have not done a single deal in a decade or so. I have done options to cover my imports. But to convert rupee loans, we have not done any deals,'' said Neeraj Jain, CFO of Vardhman Textiles. He says the company had signed some deals in 1995-96, on which it lost Rs 6-7 crore (Rs 60-70 million), and paid the day the contract matured.
But Vardhman seems to be in a minority.
Companies are obviously circumspect about giving out figures on how much mark-to-market losses they are carrying. But losses are pretty high, spread across 20 to 25 big and small companies, said a forex expert, who tracks the companies in Ludhiana.
Two textile companies have gone for litigation. Nahar Industrial Enterprises, part of the Rs 1941-crore (Rs 19.41 billion) Jawaharlal Oswal Group (Nahar) has moved court against Axis Bank while Garg Acrylics Ltd, part of the Rs 600-crore (Rs 6-billion) Garg Group with interests in steel and textiles, has moved court against ICICI Bank.
Both these companies allege mis-selling by banks. ''To cut interest costs, the banks initially suggested certain cost-reduction structures, like currency swaps, on which we will get some interest cost benefit but won't have any downside risk,'' said Sanjiv Garg, MD, Garg Furnace and a director of Garg Acrylics.
They started with currency swaps, but then went for one-touch options, two-touch options, and offered premiums of $40,000-50,000 per deal.
In guise of this, what they have done is exposed the companies, as an option writer, to unlimited risks, which is not permitted. "We never thought we are going for speculative deals, but thought these were cost-reduction exercises,'' added Garg.
Garg has company. Almost every other CFO said there are lots of small companies involved that one may not have ever heard of.
Kamal Oswal, MD, Nahar Industrial Enterprises, said "The banks suggested it as a cost-reduction exercise. But it may end up as a capital-reduction exercise."
Most companies are cagey about disclosing their exposure or losses, and understandably so. But losses, in some of the cases, are so heavy that they could wipe out the entire capital of a company.
Another reason why firms are reluctant to discuss specifics of the cases is that they don't want to reveal all their cards (arguments) in their legal battle. ''We cannot expose all our arguments; they are the grounds on which our plaint is based,'' said the CFO of a company which has filed a case.
The Reserve Bank of India has mandated that banks doing derivative deals with companies need to ensure that there's an underlying, the company has a risk-management system and the risk appetite, and also the products are appropriate for the company. What they are trying to say in their complaint is that the contracts were speculative, other than
envisaged in the RBI guidelines, an expert said.
Sources said ICICI Bank and State Bank of India, who were aggressive in selling these products, could be in trouble with their deals in Ludhiana.
''Their senior forex managers were camping in town, begging companies to cover their losses through fixed deposits,'' said a corporate observer in Ludhiana. Punjab National Bank and Axis Bank are two others which have exposure here.
Banks are saying that if you are sitting on a mark-to-market loss of Rs 6 crore (Rs 60 million), at least open a fixed deposit for Rs 60-70 lakhs (Rs 6 to 7 million) or 10 per cent of the loss.
Strangely, the banks never asked for any cover (guarantees) while signing the contracts.
It's not that everyone is going for litigation. ''It's the same set of banks that have to lend you money. Lots of people are paying up,'' said a CFO with a leading corporate in Ludhiana on condition of anonymity.
Companies, who have taken a hit beyond their capacity, are going for litigation and are harping on RBI guidelines. ''They have put responsibility on the authorised banks to check whether