WPCRL/344/2009 of PRAVANJAN PATRA Vs REPUBLIC OF INDIA on 24 December 2009

HIGH COURT OF ORISSA: CUTT ACK

W.P.(Crl.)No. 344 of 2009

In the matter of an applicationunder Articles 226 and 227 of the ConstitutionofIndia.

PravanjanPatra

Petitioner

Versus

Republicof India andOthers.

Oppositeparties

For petitioner:

M/s. Manoj Kumar Mishra,D.Mishra.

For Opp. Parties:

Mr.S.D.Das,

Asst.SolicitorGeneralforO.Ps.1and2.

M/s. SourjyaKanta Padhi and

Mrs.M.Padhi

for O.P.3

M/s.D.N.Mishra,S.K.Panda,

U.K.Mishra,S.Swain andAshok Mohanty for O.PA.

PR E S ENT:

THE HONOURABLEACTING CHIEF JUSTICeMR. I.M.QUDDUSIANDTHE HONOURABLEKUMARI JUSTICESANJU PANDA

Date of Judgment:24 -12 -2009

I.M.Quddusi,A.C.J.The petitionerwho is a tax consultanthas filed this writ petition byway of a PublicInterestLitigationprayingfor issuanceof a writ of mandamusdirectingtheoppositepartiestohandovertileinvestigationofoffencescommittedfor erosionof Forex Reserve of the Na.ion to an independentagencypreferablythe CentralBureauof Investigationfor threadbareinvestigationandbook the culpritsand punish them in accordancewith law. He has filed the writpetitionbasingon the informationand documentsobtainedfrom differentprintmediaas wellas theelectronicmediawhichhehasappendedto thewritpetition.

2. Facts of the case are that for almostevery developingcountry,reservesof foreignexchangeis one of the most prestigiousand valuableasset,as same reflects,not only the country'srespect, status and dignity,but also oneof the essentialrequisitesfor imports,culturalexchange,free movementof itscitizensto othercountriesetc. etc. and for this reason,specifically,a law hasbeen enactedto regulate/deal with the foreignexchange.FOREXhedgingisinsuringprice of Dollar or any other Foreign Currencywhich means the exporteror importerwhointendsto deal with Forex will be allowedto exchangeat aparticularprice upto a particularamount for a particularperiod despiteincreaseordeceaseinForexPriceinthemarket.TheContractcreatedbetweenCompanies/personsfor suchexchangeat a fixedpriceand dealersis calledderivativecontract.In India,ReserveBankofIndiais theonlyauthoritytoregulateForest.Dealersare appointedby ReserveBank of India who are onlyauthorizedto buy or sale FOREX.Any individual/Companyhas to buy or saleFOREXthroughdealersonly.They cannotdo it in openmarket.Becauseoffrequentdroppingin Dollar rate as against rupee, it was given to understandtodifferentcorporatehouses and exportersthat there would be further decreaseinDollarrateas againstrupee.Thusthey werehurriedto enterinto derivativecontractswithForex dealers.Learnedcounselfor the petitionerhas submittedthat whenDollar rate rose substantially,all the businesshouses were forced todeal withlowerrate becauseof derivativeagreement,for examplewhen theywere supposedto get Rs.50/- for one Dollar for the price of goods exported,theywerepaid RsAO/-as determinedin derivativeagreement.The differentialpriceof RS.10/-wastakenby the dealer. When dealerswere askedas to what theywere getting,they repliedthat they were getting@ 10 paise per Dollar only. Ifthat be so, where the rest of the money is going and who are the beneficiariesisrequiredto be investigated.The further submissionof the learned counsel for thepetitioneris thatsomeunscrupulouspersonsincludingofficialsof BankandReserveBankofIndiaandUnionofIndiaarehandinglovewithsomebeneficiariesfrom which they are getting huge incentivesat the cost of commoncitizens.The differentialamount of money instead of coming to Forex Reserve ofour countryis going to ForeignCountriesor unknownhands.Thereare manyprivateandoverseasdealerslike MorganandStanley,StandardCharteredBank,HSBCBank,ThomasCook,IndusindBank,Citi Bank,ICICIBank etc.Becauseof frequentdroppingin Dollar rate as againstrupee,it was given to

understand to different corporate houses and exporters that there would befurther decrease in Dollar rate as against rupee. Thus they were hurried to enterinto derivative contracts with Forex dealers. Forex dealers entered into derivativecontracts with the corporate and export/business firms on long term basis. Asper exposure of Indian Economy, i.e. gross total export and import, they werepermitted to cover only risk factor and up to 500 Billion Dollars. Interesteddealers entered into contract worth 3 trillion Dollars, i.e. six times more than theexposure of India and the RBI merrily consented to this and by this processgambling started. When the business houses were required to enter into contractfor 1 lakh Dollar, out of apprehension, they entered into contract for 2 lakhDollars as a result when Dollar rate rose substantially, all the business houseswere forced to deal with lower rate because of derivative agreement. Therefore,according to learned counsel for the petitioner, there is scam of about RS.25 lakhcrores.

3. On 23.7.2009, the opposite parties were called upon to show causeas to why the investigation of the case should not be handed over to the CentralBureau of Investigation. On 27.8.2009, the learned Assistant Solicitor Generalproduced letter dated 18.8.2009 of the Director (Judicial) of Government of India,Ministry of Home Affairs addressed to the Director, CBI requesting it to takenecessary action in the matter. This Court was of the opinion that the CBI shouldconduct an inquiry on the basis of the allegations made and also ascertain as towhether there is any violation of the Foreign Exchange Management Act, 1999and the Regulations made thereunder. Extra copy of the writ petition was servedon the learned counsel for the CBI and the matter was directed to be listed on4.11.2009asking the CBI to submit a preliminary report on that date. TheReserve Bank of India was also required to keep track of the differential amountin respect of exotic derivative contracts, if any.

4. Pursuant to the aforesaid order, the CBI has submitted an inquiryreport. In the report it has been averred that from a perusal of the relevantprovisions of the FEMA, Derivative Contracts Regulations and the RBI MasterCirculars, it transpires that derivative contracts in foreign currency, both rupee-foreign currency and cross currency are permissible under these provisions,subject to the following terms and conditions:

'".

I

I)The authorizeddealer, through verificationof documentaryevidenceissatisfiedaboutthegenuinenessoftheunderlyingexposure;

11) Optionscontractinvolvingcost reductionsstrategiessuchas the range forwardand the ratio range forwardsshouldbe drawnin such a mannerthat thereis no net inflow ofpremiumto the corporateand furtherthat such structuresdo not result in increasedrisks;

Ill)Allpermissiblederivativesincludingroll overrestructureand innovationare to be conductedat prevailingmarketrate;

IV)Anyderivativeasunderlyingtoanyotherderivativetransactionis not permitted;

V)Themanagementofderivativeactivitiesshouldbeanintegralpart of the overall risk managementpolicyandmechanism.It is desirablethat the Board of DirectorsandSeniorManagementunderstandthe risksinherentin thederivativeactivities being undertaken.

VI)

Marketmakers(banks)shouldhavea "SuitabilityandAppropriatenessPolicy"vis-a-visusersin respectof theproductsoffered,onthelinesindicatedinthesweguidelines.

It is furtherstatedin the report that in order to ascertainas to whetherany losswasbornebytheexporters/corporatesandbanks,ascontendedbythepetitionerand if so whetherany violationof FEMA and the rules and regulationsframedthereunderhad takenplace,a questionnairewas sent to the ReserveBank of India and Directorateof Enforcementand their commentson the samewerecalledfor.ReserveBankoflndia-vldetheirletterdated27.10.2009,enclosedasAnnexure-Ftothereport,forwardedtheircommentsonthequestionnaire.The salient features of the reply, inter alia, are as under:i)Derivativecontractsin foreign currency,both Rupee-ForeignCurrencyand Cross Currencyare allowedunder provisionsof FEMA and rules & regulationsframed thereunder,subjectto the termsand conditionsmentionedin the Regulations,MasterCircularsandComprehensiveGuidelines.While . .r .~

( I,""j

offering foreign exchange derivative products to their clients,banks are required to be guided by general principles laiddown by RBI, particularly those related to "Suitability andAppropriateness Policy".

ii)

Authorised Dealer (AD) category I banks are authorized toenter into Foreign Exchange Derivative Contracts. As onJuly 1,2007, there were 84 AD Category I Banks.

iii)

It was observed that 11 banks had unrealized dues fromcustomers to the tune of RS.755.45 Crores during the periodApril, 2008 to December, 2008 on account of derivativecontracts entered into by them with customers.

iv)The unrealized dues of RS.755.45 Crores were primarily dueto customers failing to meet their obligationsunder thecontracts or disputing the same.v)Manyexportersenteredinto structuredcrosscurrencyderivative contracts to hedge their exposure to exchangerate risks. The transactions were undertaken basically tohedge currency risk on their Current and Capital Accounttransactions.Mostofthesecontractswerestructuresdesigned to reduce the hedging cost to the users and wereprimarily based on a view on the direction of movement ofvariouscurrencies.Such structuresareknownas risktransformation structures where the user looks to shift thecurrency risk from one currency to another or where the payoff is based on movement of one currency against another.

vi)Most of the aforesaid structured cross currencies contractswere based on the common view that US Dollar would beappreciating against rest of the currencies in near future.However, the sub prime crisis in US aggravated during thelatter part of 2007 with the worsening of credit and liquidityconditionsand slow down of housing market.TheUSeconomy was suddenly faced with a recessioinary condition.The Federal Reserve Board of USA, in a bid to improve thecreditmarketandliquidityconditionsandtoprovidepsychological support to the markets started reducing policy ratesaggressivelywhilesimultaneouslyinjectingliquidityinto the system.

vii)Theabovefactorsled toUS dollardepreciatingagainstmajor currenciesand the exchangerate levels envisagedinthestructuredcrosscurrencycontractssignedbytheexporters,whichwere thoughtto be unattainablehitherto,were breached.As a result, most of the options sold by theusersas part of the structuredcontractswereknockedinandexportersand othercustomershad to facenegativeMarkedtoMarket(MTM)positionandobligationtopaycrystallizedlosses (in case of completedcontracts).viii)Similarlosses in derivativecontractswere also sufferedbyexportersin other countrieslike South Korea, China,HongKong, Indonesia,Singapore,Thailandetc. on accountof thesamereasons.However,theMTMpositions(losses)actuallyshow the present value of transactionsbased on thecurrentprices.Most of the aforesaidstructuredcontractswerelong term contractsand, therefore,the MTM positionshallremaindynamicandsubjecttothemovementinexchangerates of various currencies.Moreover,apart fromincurringMTMlosses,thecustomersalsosufferedsubstantiallossesinplainvanilla(IndianRupee-ForeignCurrency)contractsduetosuddendepreciationoftheIndian Rupee vis-a-vis the other currencies.ix)Markedto Market (MTM) losses are basicallyan accountingconceptwherein the financialinstitutionrecords the value ofoutstandingfinancial· contractsat fair value(marketvalue)while preparingfinancialstatements.MTM value,therefore,fluctuateswithchanceinvalueofunderlyingcurrencyrates/interestrates.TheMTMis,therefore,dynamicinnature and changesin line with the marketmovementsand.representsthe replacementcost of the derivativecontracts.As against this, the actual payment/receipton accountof itsloss/gainon the derivativetransactionwill take place at thematurityofthecontractdependingonthemarketrates prevailingon the date of settlement.The MTM,therefore,signifiesonlythecurrentvalueofthecontractandconsequentlyits replacementcost, but not the realizedgainor loss.

x)ReserveBank of India has been monitoringthe gross MTMlossesincurredby the Banks.As in December,2008, thegrossMTMgains (correspondinglosses to the customers)of22banksactivein thebusinessofderivativeswereRs. 31,719Crores,but the crystallizedlosses( unrealizedduestothebanks)wereonlyRs.755.45Croresasenumeratedabove.Most of the contractsweresignedforlong term maturitiesand therefore,the MTM profile of suchcontractsis likely to undergochangesover the periodtillmaturityof the contracts.

xi)xxxxxxxxxii)Someusers/customersalso undertookhedgetransactionsinexcessoftheirexposures(GenuineUnderlying)inviolationof FEMA provisionsby makinga faise deciarationunderthe past performanceroute or the underlyingroute.This compoundedtheir losses. The provisionsof FEMA andrulesmadehereunderare Applicableto banksand theircustomersalike.

xii)xxxxxxxx

xiii)Lossessufferedby the customersmaynot representthegainsmadeby the banks.Banks are allowedto take openpositionsin the.forexmarket,includingderivativemarket,withinthe limits prescribedby ReserveBank of India. TheBanksarenotallowedto takeopenpositionsoncrosscurrencycontracts.However,banks which meet the specificprudentialcriteriaareallowedtorunforeigncurrency-Rupeeoptionbook within the overallnet open positionandAggregateGap Limits approvedby ReserveBank. All othertransactionsare requiredto be coveredby the banksbackto backwithanotherbankin Indiaor an overseasbank.

Therefore,the MTM lossesindicatedabovedo not reflectthe profits made by the banks.

xiv)RBIhadconstitutedaninterdepartmentalCommitteetocreatesuitableregulatoryenvironmentforderivativetransactions.Based on recommendationsof the committee,the "ComprehensiveGuidelineson Derivatives"were issuedby RBI in April,2007. The guidelinesdetailedthe generalprinciplesfor undertakingboth rupee and foreignexchangederivativesand addressedvariousother issuesrelatingtoderivativessuchasboardprinciplesforundertakingderivativestransactions.Risk Managementand CorporateGovernanceAspects, Suitabilityand appropriatenessPolicy,Documentation,Identificationof Risk and risk measurement etc.

xv)ReserveBankofIndiacarriedoutspecialscrutinyinselectedbanks active in derivativetransactions.A Portfolioapproachwasadoptedtowardsthederivativebusinessofferedbysuchbanks,duringthecourseofAnnualFinancialInspections2007 and 2008 Cycles,The RBI helddiscussionswith Chief executivesof 22 banks active in thefieldofderivativetransactionstoassessthesystemicimpactThe RBI has concludedthat this is not a SystemicIssue.

xvi)Basedon the informationgatheredduringdiscussionswiththe CEOsof 22 banks, furtheractionswere takenby RBI,whichincludedi) monitoringof derivativeexposuresof allbanks,ii)strengtheningofprudentialframeworkforderivativesandiii) theconstitutionofInter-DepartmentalGroup(lOG)to review' thederivativetransactionsof thebanks and recommendedappropriatesupervisoryaction,xvii) The lOG examinedthe observationsrelatingto violationofregulatoryguidelinesin the AFI reportsrelatingto the year2007 and 2008 in respectof 22 banks and specialscrutinyreports of banks. These violationsgenerallyrelated to failureto verifythe underlyingof derivativetransactions,offering structuresresultingin increasein risk and receiptofnetpremiumby the corporate,bookingof contractsunder pastperformanceroutebeyondtheeligiblelimits,offeringleveragedproducts etc.

xviii) ThelOGhasidentifiedviolations,whichareseriousinnature,andtheyarebeingexaminedforfurtheractionagainstthebanksconcerned.In thelightof findingsofspecialscrutiny,AFls and meetingswith banks,the FEMARegulationsandComprehensiveGuidelinesonForexDerivativesare being revisited.It has been announcedbyRBI in the SecondQuarterReviewof the MonetaryPolicy2009-10that the draft guidelinesin Forex CommodityandFreight are being placed on ReserveBank web site by end -November,2009forwiderdisseminationandcomments/views.

xix)RBI has pointedout the followingirregularities/deviationsincomplianceof FEMA notificationsand Guidelines:a)Offeringstructuresthatwerein violationofextantregulationsvizstructuresthatresultedinaccordancein risk and net receipt of premium.b)Offeringleveragedstructures,Leveragehasalso been used in manyderivativestructuresby thebanksand their customers.In sucha structure,thecustomerbuys and sellsoptionsto reducehis cost.The national principalamountof the said optionshasbeenobservedto be a multipleof the valueof theunderlyingwhich compoundedthe MTM losses of thecustomers ..

c)Notverifyingtheunderlyinginsufficientunderlyingexposures:

d)Not obtainingdeclarationregardingamountsbookedwith other Adson pastperformancebasis.Users are observedto have utilizedthe total eligible;,,;ttmitwithnot justonebank,but a numberof themwithouttheirdeclaringorapparentlygivingfalse

declarations,on each occasion,about the amount ofheadingfacilityalreadyutilizedwithotherbanksinthis regard.This led to large scale leveragingof thesame underlyingexposuresresultingin multiplyingoflosses.

e)Booking of contractsunder past performancebasisbeyond50% of eligiblelimit withoutobtainingCA Certificate.

f)Not ensuringadherenceto eligiblelimits underthe past performanceroute.

g)Notcarryingoutproperduediligenceregardinguser appropriatenessand suitabilityof theproduct offered to the customer.

h)Not obtainingwrittenacknowledgementfromthe clients for understandingthe risk disclosed.i)The periodicalreview reports and annual auditreportswerenotobtainedby thebanksfromtheconcernedusers.

j)Evenwhenthetransactionswerebasedonunderlyingexposure,the banks relied on photocopiesof documentstoascertainthesame.Thisledtomisuseby the clientswhousedphotocopiesof thesame underlyingto enter into differentcontractswithdifferentbanks, which resultedinto manifoldincreasein their losses.

xx)Specificcommentsof thebankswithregardtovarioussupervisoryissues/concernsarisingoutofderivativebusinessare being obtained.Furtheras recommendedbylOG,seriousirregularitiesarebeingfollowedupwithindividualbanks.

xxi)The total nationalprincipalamountoutstandingin respect ofderivativecontractsincludingforwardforeignexchangecontractswa~7tth~ thetuneofRs.71 ,71 ,570Crores(USD1646billions)asonMarch31 ,2007andRs.1, 17,94,707Crores(USO2435billions)asonDecember31,2008

respectively.ThecreditequivalentamountofthesecontractswasRs.1,44,545Crores(USD 34 billions)as on31.3.2007and Rs.4,70,304Crores(USD 98 billions)as on31.12.2008respectively.However,the totalunrealizedduesof the11 bankson accountof derivativecontractswithcustomers,asmentionedearlier,wasRS.755.45Crores(USD0.16billions)duringtheperiodapril,2007toDecember,2008xxii) Similarlyquestionnaireswere also sent to the Head Officesof following8 banks to elicit their responseson the currentissuesraisedby the petitionerin W.P(Crl.)NO.344/2009.

i)State Bank of India.

ii)HDFC Bank.

iii)HSBC Bank

iv)Standard CharteredBank.

v)Citi Bank.

vi)ICICI Bank.

vii)ABN Bank.

viii)Axis Bank.

4.10. Atthetimeofwritingthispreliminaryreport,responsesfromtheaforesaidbanksareawaited.Mostofthese banks have sought time to furnish the requisite data andinformation.

4.12. Duringthecourseof inquiry,it waslearntthatseveralexportersof Tirrupur,TamilNadu had incurredheavylosesintheforexderivativecontracts..Hisstatementisenclosedas Annexure-H.

4.14. Someexportershavealsoclaimed,in theircivilsuitsthattheyweremadetosignthecontractsthroughcoercion,misrepresentationoffactandtherefore,theI ,~.,contracts 'are void (Jnd.et~•provisionsof Section19 of the IndianContractAct. They have also maintainedthat the contractsarevoid under Section30 of the Indian ContractAct being wagersin nature.

5.2. Further,thereareinbuiltprovisionsinFEMA for initiatingactionagainstthe defaulters,in case theprovisionsofFEMAandregulationsmadethereunderareviolatedby an individualor concern.FEMAalso specificallyidentifiesthe EnforcementDirectorateand the ReserveBankof India as the authoritieswho have been entrustedwith theresponsibilityof making regulationsand enforcingthe law,5.3.ThepetitionerhascontendedthatofficialsofReserveBankofIndia,BanksandGovt.Officials,inconspiracywithunknownforeignentitles/personsmakeinternationaland willfulprojections/forecastswhichindicatedthat the Indian Rupee will strengthenagainst the US Dollar. Bysuch projections/forecasts,a hype was createdin the foreignexchangemarket.By such projectionsand forecasts,Bankstrappedgullibleinvestors/importers/exportersandsoldspeciallyengineeredproducts(foreignexchangederivatives)tofritterawaythepreciousforeignexchangeoutofthecountry.However,this apprehensionof the petitionerdoes notseemto be basedon any logicalconclusiondrawnon an indepthexaminationsofthefactspertainingtoderivativetransactions.The petitionerhas not evennamedany officialfrom RBI or the. concernedbanks, let alone cite any instancewhichindicatesaconspiracytodefraudthenationalexchequer.RBl's responsehas clarifiedthat the phenomenonis not restrictedto Indianaloneand losseshavealsobeensufferedby banks and clients in many other countriessuch asIndonesia,China,South Korea,Hong Kong etc.For this theReserveBank of India has alreadyinitiatedactionunder theinherentpowersavailablewiththem.Theangleof criminalconspiracy,however,does not seem even a distantpossibility'"<'.::."{.,.in the etf'ti{e- matter., ,J

5.4. However, .Jr-om the data receivedfrom the reserveBank of India, it is clearlyseen that the extendof unrealizedduestothebanks,duringtherelevantperiodwasonlyRS.755.45Crores,which is not such a huge amountso as to cause such a big negative impact on the national economy asapprehendedby the petitioner. The MTM position thoughindicates as major loss suffered by the banks/clients, but thefact remain that MTM position does not reflect the actualunrealizedloss and is merely a projection of the currentposition.

5.5. It is submitted that RBI has also reported thatsome of the products, especially the cross currency derivativeproducts violated the provisions of FEMA and regulationsmade thereunder.As regards the counter parties, for theclients,thecounterpartiesweretheconcernedbanks,whereasforthebanks,thecounterpartieswereotherIndian/foreign banks.

5.7. It is submitted thatReserve Bank of India (or theGovt.ofIndia) had issued clearcut guidelinesand theprovisions of such guidelines were applicable to both banksand the users (exporters) alike. Violations of the guidelineswerecommittedby banks/exporters,who, in many casesentered into derivative contracts far in excess of their genuineunderlying exposure and also tried to use the hedging tools asProfit making tools. In the end it was their greed that proved tobe their undoing and not the policy guidelines of RBI or theGovt. of India. If the guidelines had been adhered to, thelosseswouldhavebeencontained,especiallyinsuchinstances, where the cost reducing strategies led to increasedrisk profile or where contracts far in excess of the genuineunderlying exposures were made. It may be said that there isenough in this world for every one needs but not for anyone'sgreed.

5.8. The petitioner has contended that the Derivativecontracts are financi~t.sc.andalsand are wagers and hence notpermitted under la.is a question of law and does notneed any comment ?to be made by CBI, which has beenentrustedwith the task of conducting any inquiry into thematter and not to make comments on legal issues.

5.9. ItisapparentthatviolationsofFEMAandregulations made thereunder have taken place in the forexderivative contracts signed by various banks.It may beappreciated that no instance of criminal conspiracy or offencesof cheatingor other IPC Sections or the offences underPrevention of Corruption Act has been disclosed during thecourse of inquiry conducted into the matter.

Iffromsuchaction,theRBIand/ortheDirectorateofEnforcement draw a conclusion that any specific case requires investigation byCBI as it involves commission of offences under IPC or PC Act, 1988 or legalprovisions for which they are not empowered, they may make a reference to CBIfor taking up investigations of that specific instances of instances.

5. In para 6.1 of the report, it has been prayed that the derivativecontracts entered into by various banks may be looked into and examined byReserve Bank of India and/or Directorate of Enforcement on bank to bank basiswith theobjectivetoidentifyand pin point theviolationsofFEMAandrules/regulations made thereunder and take appropriate action. Further, if suchan exercise reveals commission of offences punishable under IPC, Prevention ofCorruption Act, 1988 and/or other legal provisions, for which the RBI or theDirectorate are not empowered to take cognizance, such specific instance orinstances may be referred to CBI for investigation.

6. During the course of enquiry, the CBI recorded the statement ofRaja M Shanmugam,President of the Forex Derivatives Consumers Forum,Tirupur,TamilNadu,whohasinteraliastatedthatan exporterhas acommitment to export goods worth one million dollar in dollar terms. The dollarrupee exchange rate is Rs.49 to a dollar. However, if the rupee appreciates andthe dollar depreciates, to say Rs.40 to a dollar, the exporter stands to looserupee 9 per dollar and his loss will be RS.9 millions on an export of USD1,000,000.00. To protect himself against this fluctuation in currency rates, theexporters hedges his exposure against the possible fall in dollar value whereashis income arises. Such protection is secured through a forward contract. In aforward contract, the exporter foresells US$ 1 million (receivable against theexport made) for delivery on an agreed future date at the present prevailingprices of Rs.49.00 per US$. By such contracts he has ensured himself againstthe fall in value of dollar and covered his risk for fluctuation in rates of currency.

Usually, Indian exporters are familiar with forward contracts. All categories of riskmanagement instrument are known as derivatives and Forex Forward Contractsare also termed as derivatives in Foreign Exchange. He further stated that theguidelinesalso specify that before undertaking derivatives transactions, thebanks should ensure that the derivative instrument being applied are permittedto be used and further the suitability and appropriateness policies is required tobe applied by the banks in derivatives contracts and derivatives transactions.However, the banks never carried out any exercise to ascertain the suitabilityand appropriateness of the products to the concerned clients. The banks failedto apply the suitability and appropriateness principle to the products and inviolation of guidelines went for aggressive marketing. In his statement, he furtherstated as under:

"On perusal of the contracts presented before you inpaper book at flaq-D which shows that this contracts arepurely one sided. In case the exporters gains, the profit will belimited to a certain amount which would be determined by thecontract itself. For example, profit in the contract at Flag-DwouldberestrictedtoUS$ 8000.However,in caseofappreciation of Euro the loss, that would be suffered by theexporter is unlimited and depends on actual spot rate of Euroas on the date of maturity. Further more the contract stipulatesthat the client is to sell twice the number of Euro hedged withthe Bank and therefore, his loss is doubled. In the illustrationgiven on margin of Flag-B, the actual loss suffered by theexporter is Rs.2.38 crores.

The exportersin Tirupur were familiar with forwardcontract in rupee dollar terms ever since derivatives wereallowed. However, starting from April-May 2006 several banksnamely ICICI Bank, Axis Bank, SBI, HDFC, Abn Amro startingcampaign for Forex Derivatives Products. In the initial stagesthey offered products to the exporters for smaller amounts.The exporters entered into the contracts and gained smallamounts in these transactions. This encouraged them to enterinto freshForexDerivatives Contractsfor cross currencytransactionsotherthanRupee-Dollar).Thisbecameanongoing process and while the banks aggressively marketedthe said exotic products, almost all leading exporters signedvarious contractswith these banks, some of them far inexcess of their genuine underlying exposure.

The aforesaidexotic contracts were signedon theterms to minimize their losses on account of fall in value ofdollar vis-a-vis the Indian Rupee. Signing contracts in excessof the genuine underlying was also a strategy advised by thebank and adopted by the exporters. No one i.e. the exportersinTirupurorperhapseveninthecountrycouldfullyunderstand the products and none was fully conversant with thefinancialupheavalsandthelikelytrendsintheinternationalcurrencymarket.TheexportersofTirupur,therefore, based their decisions on "the advise of the bank andalso the statements and articles appearing in various sectionof the press and media, which projected a continued fall indollar vis-a-vis the Indian Rupee as also the other majorcurrencies. In this background the exporters of Tirupur enteredinto Forex Derivatives Contracts in excess of rupees 1000crores. However, these figures need to be verified.In allapproximately 150 contracts were signed by various exporterswho are the members of Tirupur Derivatives Forum.

These contracts were are due for maturity one year tothree years meaning thereby a contract signed in June-July2007wouldattainmaturityincorrespondingmonthof2008,2009or2010.However,despitetherosypicturepresented/pointed by the banks and the projections in media,the dollar started strengthening from January 2008 onwardsand its value vis-a-vis the Indian Rupee as well as majorcurrency of the world rose substantially. As a result the knockin options of the contracts meaning thereby the specified fixedvalue of the hedged currency vis-a-vis the dollars was touchedwhen the exporters was pledged to deliver outright the hedgedcurrency amount to the bank at the spot prevailing prices.Since the hedging was done at lower rates, the exporters wereobliged to pay the difference in spot rate vis-a-vis hedged ratespecified in the contracts and suffered heavy loss. In Tirupuralone, the members of our forum suffered losses to the tune ofover Rs.300 crores. It was in the aftermath of this that westudied the contracts carefully and found that the contractswere engineered in such a way that they were designed tobenefit bankers rather than the exporters and this aspects hasnot been clearly explained to the exporters at the stage ofsigning the contracts. The exporters were kept in dark aboutthe violation of RBI guidelines. In view of the enormity of thesituation, we approached the banaks to annul the contractsbut they advised us that in case we do so, we would berequired to pay MTM (Market to Market) loss amounts to thebanks. The MTM denotes the sport price of the hedgedcurrency as on the date of MTM. Since the knock in optionshad been triggered, this amount is also running into severalhundred crores of rupees. At this stage we founded the ForexDerivativesConsumersForum.Tirupurandcollectivelypresented our grievances to the GovernorRfsl Shri YV.ReddyandDy.GovernorMr.LeeladharanandalsobeforetheParliamentary Committee on finance. We also sought optionon the legality or enforceability of the contracts signed byvariousbanksFlag-F is copy of option given by JusticeMrV.N.Khare,former Chief Justice of India wherein he hasopinedthatthestructuredcurrencyoptionagreementpresented before him is an agreement by way of wager whichis void as per Sedtion 30 of the Indian Contract Act 1872. Theagreement is void under the Indian Law.

Conclusion

7. A preliminary counter affidavit has been filed by the RBI contendingthat the writ petition is not maintainable either in law or on facts and is liable tobe dismissed in limine. This writ petition being a PIL is not maintainable at thebehest of the petitioner who is no way related or affected by the allegedtransaction. It is submitted by the petitioner that the writ petition has been filedwithout any valid cause of action/any supporting documents and the petitionerdoes not have any locus standi to file the writ petition. Therefore, the petitioner isnot entitled to any relief. It has been inter alia averred in the preliminary counteraffidavit that the opposite party -RBI has advised banks through its guidelines,the basic principlesof a prudent system to control the risks in derivativeactivities.Bankshave been advised that they shouldundertake derivativetransactions with a sense of responsibility and circumspection that would void,among other things,mis-selling.Banks should offer derivativeproducts ingeneral,andstructuredproducts,in particular,only to thoseclients whounderstand the nature of the risks inherent in these transactions and further thatproducts being offered are consistent with clients' business, financial operations,skill and sophistication, internal policies as well as risk appetite. Banks shouldcarry out proper due diligence regarding 'clients appropriateness' and 'suitability'of products before offering derivative products to them. Each bank should adoptaBoard-approved'CustomerAppropriatenessandSuitabilityPolicy'forderivatives business. It has been further mentioned in the counter affidavit thatthe bankshave also been advised that while selling structuredderivativeproductstoa client,theyshoulddocument thepricing/valuationaspects,including a dissection of the product into its generic components to demonstrateits permissibility in terms of extant guidelines. Besides, they should share withthe client, (i) the analysis of expected impact of proposed derivatives transactionon the client; (li) the analysis of future scenarios. They may also, ascertainwhetherclientshavetheappropriateauthoritytoenterintoderivativetransactions and whether there are any limitations on the use of specific types ofderivatives in terms of the client's board memorandum/policy,level at whichderivative transactions are approved and the involvement of senior managementin decision-making and monitoring. It is further stated that the RBI is empoweredto conduct periodical on-site inspection of banks and also special scrutiny of theaffairs of the banks and its books and accounts under the provisions of Section

35 of the B.R.Act, 1949.RBI supervises the Authorized Dealer Category-I banksthrough combinationof on-site inspections (Annual Financial Inspections ofAFls), need-based scrutinizes, off-site surveillance and periodical meetings withthe banks. The conduct of derivatives portfolio of banks viz. compliance with theRBI guidelines, FEMA regulations, risk disclosures, derivatives policies, includingpolicy on customer appropriateness and suitability of the products etc. are beingcovered during the AFls of RBI. Various supervisory issues/concerns relating tothe derivative business that emerge during AFI are discussed with the CEOofthe individualbanks and specificcomments/commitmentare obtained andfollowed up. The matter is being given its due importance, as in the case of allregulatory and supervisory issues. In cases where transgressions of guidelinesby banks are noticed, the Reserve Bank takes appropriate regulatory andsupervisory action. The derivative products offered by banks are required to bein compliancewith the extantregulations on derivatives. The total notionalprincipal outstanding in respect of derivatives including forward foreign exchangecontracts wereto the tuneof Rs.71,71,570 crore (USD 1646 billion) andRs.1,17,94,707 crore (USD 2435 billion) as on March 31, 2007 and December31,2008 respectively.The Credit Equivalent amount of these contracts wasRs.1,44,545 crores (USD 34 billion) and Rs.4,70,304 crore (USD 98 billion) ason respective dates. Based on the information reported by the banks, it wasobserved that 11 banks had suffered losses to the tune of RS.755.45 crore (USD0.16 billion) during the specified period on account of derivative contracts withcustomers. In view of the above, the contention of the petitioner that there hasbeen a wrongful loss of 25 trillion rupees is misconceived. As the derivativecontract is meant for hedginga foreign exchangeexposure, the plea thatderivatives were intended for frittering away foreign exchange out of the countryis incorrect, baseless and arising out of figments of imagination. It has beensubmitted that the derivative transactions are undertaken by Authorised DealersCategory I banks acting as intermediaries by attending to the requirements oftheir customers (imports/exports) and cannot run open positions. Hence, in somecontracts the banks have to buy foreign currency while in other contracts theyhave to sell foreign currency at agreed rates. Therefore, the contention of thepetitioner that presently, bankers are earning RS.8-10 per USD is not correct.Thepositive/negativeMTMswiththecustomersareoffsetwiththenegative/positive MTM that the banks carry with their counterparties. The income

earned by the banks from such intermediation is limited to the margins quoted tothe customers, These rates are extremely fine (usually quoted in few paise) inview of the intense competition amongst the banks, It is further averred that thelosses incurred by the customers may not represent the gains by the banks.Banks are allowed to takeopenpositions in the forex markets includingderivative contracts within the limits pre-approved by the Reserve Bank. Further,banks are also not allowed to run open positions on cross-currency options.However, banks, which meet specific prudential criteria, are allowed to runforeign currency-Rupee options book within the overall Net Open Position andAggregate Gap limits approved by the Reserve Bank. All the other transactionshave to be covered by the banks, back-to-back, with another bank in India oroverseas. It is further stated that the losses, if any, suffered in the derivativecontract should not be seen in isolation but seen holistically and incorporategains made in the underlying exposure as well. As the structure is decided wellin advance, when the possible outcome is not certain, the allegation of one partycommitting fraud on another in such derivative contracts does not appear to besustainable. The stand of the RBI is that the global financial crisis caused thesubsequent depreciation of Indian Rupee. Therefore, the contention that theReserve Bank did not allow appreciation of Indian Rupee beyond INR 40-42levels against the US dollar is presumptuous and baseless. It is further statedthat during the period 2007-08, Reserve Bank carried out special scrutinizes inselect banks, which are active in derivative transactions. Further, a portfolio,approach was adopted towards the derivative business offered by some of thesebanks during the course of annual Financial Inspections of 2007 and 2008cycles. During the latter part of 2008 the RBI held discussions with the ChiefExecutives of 22 banks that were seen to be active in the business to assess thesystemic impact.The RBI came to the conclusion that this is not a systematicissue. Based on the information gathered during the discussions with the CEOsof 22 banks, further actions were taken by the RBI which included (i) monitoringof derivative exposures of all banks (ii) strengthening of prudential framework forderivatives and (iii) constitution of Inter Departmental Group ("IDG") on October17,2008toreviewthederivativetransactionsofbanksandrecommendappropriate supervisory action. The lOG examined the observations relating toviolations of regulatory guidelines in the annual Financial Inspection Reportsrelating to the years 2007 and 2008 in respect of 22 banks and special scrutiny report of banks. These violationsgenerally related to failure to verify theunderlying of the derivative transaction, offering structures resulting in increasingrisk and receipt of rent premium by the corporate, booking of contracts underpast performance route beyond the eligible limit, offering levered products etc.The lOG has identified certain violations of the extant regulations and they arebeing examined for further action against the banks concerned. Further, in thelight of the findings of the special scrutinizes, annual financial inspections andmeetingswithbanks,theregulationsframedunderFEMAandthecomprehensive guidelines on derivatives are being revisited by the ReserveBank and are being released for consultation in November 2009.

Someusers/customersalsoundertookhedge transactionsinexcess of their exposures (Genuine Underlying) in violation of FEMA provisionsby making a false declaration under the past performance route or the underlyingroute. This compounded their losses. The provisions of FEMA and rules madethereunder are applicable to banks and their customers alike.

Some customers tried to use the derivative contracts as a profitmanagement tool rather than using them as risk management tool. A furthercounter affidavit has been filed on behalf of Reserve Bank of India contendingthat no direction as stated in para 6.1)i) of the report of the CBI, mentionedabove, may be given. It is averred in the counter affidavit that the allegations offraud, conspiracy, financial seam, wrongful loss etc. made by the petitioner in thewrit petition, is devoid of any merit and needs to be rejected in view of the reportof the CBI that the petitioner has not named any official from Reserve Bank ofIndia or the concerned Banks, let alone cite any instance which indicates aconspiracy to defraud the national exchequer. The angle of conspiracy, however,does not seem even a distant possibility in the entire matter and that no instanceof criminal conspiracy or offences of cheating or other IPC. Sections or theoffences under Prevention of Corruption Act has been disclosed during thecourse of inquiry conducted into the matter. With regard to the prayer of the CBIin para 6.1 of the report, referred to above, the contention of the Bank is that theRBI is empowered to conduct periodical on-site inspection of banks and alsospecial scrutiny of the affairs of the banks and its books and accounts under theprovisions of Section 35 of the Banking Regulation Act, 1949 and at presentBanks are subjected to on-site inspection by the RBI on annual basis. Specialscrutinizes are also conducted as and when any situation warrants. It is further

averred in the counter affidavit that the inspection findings are furnished to thebank concerned for their compliance. Serious violations of Acts/Reserve Bank ofIndia directions/guidelinesobserved during the course of such inspection andscrutinizes are advised to the Banks for their comments and if the commons ofthe banks are not found satisfactory, appropriate action as envisaged under theBanking Regulation Act,1949/FEMAare taken against the Bank concerned.Though during the course of on-site inspection, RBI verifies, inter alia, whetherthe banks have formulated policies, as prescribed by the RBI for undertakingvarious activities including derivative transactions and whether the banks arecomplying with such policies/guidelines issued by it. It also looks into derivativetransactions undertaken by a bank to identify violations, if any, committed by thebanks. But it is their further case that they do not conduct audit of the bank andtherefore verifying each and every transaction entered into by a bank on a day today basisaspart of theirnormalbusinessactivityis not envisagedorundertaken. The further case of the RBI is that the petitioner having notspecifically pointed out about any particular derivative contract or a particularbank in the writ petition, utilization of the resources of the RBI for a long period oftime for undertaking a laborious exercise of examination of each and everyderivative contract entered into by banks merely on the basis of some vague andomnibus allegations made by the petitioner is not only uncalled for but also notin consonance with the Reserve Bank of India's role of a prudential supervisor ofbanks. RBI is in the process of initiating action against the banks which havebeen identified to have committed violations under the extant guidelines issuedin this regard. Therefore, no direction as sought in para 6.1 of the report of theCBI may be given. It is the further case of the RBI that foreign exchangereserves of the country comprise of foreign currency assets held by the ReserveBank of India outside India, in the form of foreign currency balances, investmentsin securities issued by foreign governments, supranational, foreign central banksetc., gold and Special Drawing Rights (SDR) of the International Monetary Fund(IMF) held by the Government of India etc. Movements in the foreign currencyassets occur mainly on account of purchases and sales of foreign exchange byRBI in the foreign exchange market in India. In addition, income arising out of thedeployment of foreign exchange reserves is also held in the portfolio of thereserves. External aid receipts of the Central Government also flow into the r reserves. Therefore, the apprehension of the petitioner regarding frittering offoreign exchange reserve is completely misplaced,8.The learned Assistant Solicitor General has produced before us acopy of the letter dated 20,10.2009 of the Director of Enforcement addressed totheDirector,CBIwithreferencetothequestionnaireoftheCBI.TheEnforcement Directorate with reference to question nos.1, 2 and 5 of the CBI hasreplied that those are policy matters which relate to the Foreign ExchangeManagement (Foreign Exchange Derivative Contracts) Regulations, 2000, RBI isthe appropriate authority to provide necessary advice/inputs. In the said letter ithas been suggested that it would be more appropriate for CBI to obtain furthernecessary details/inputs from RBI in the matter. The learned Assistant SolicitorGeneral has also produced the letter dated 15.12.2009 of the EnforcementDirectorate addressed to him in which it has been intimated that intelligence wasreceived from reliable source and press report that several banks have indulgedin illegal forex derivatives resulting in huge losses. It was also gathered that RBIhad taken inspection of some banks in this regard and therefore RBI wasrequested to furnish copies of the reports of inspection vide Directorate letterdated 13.8.2008 but till date no such data has been received from CBI.Therefore, the enquiry is at preliminary stage and no further progress has beenmade.

g,Shri ManojKumar Mishra, learned counsel for the petitioner,submitted that in para xii of the report of the CBI it has been mentioned thatsome users/customersalso undertook hedge transactions in excess of theirexposures (genuine underlying) in violation of FEMA provisions by making afalse declaration under past performance route or underlying route. The reportitself also reveals that FEMA provisions and Rules and Regulations wereviolated with active involvement of Public servants and this cannot be donewithout previous meeting of minds of the offenders. Report of the CBI also statesthat false declarations were taken into consideration obviously with the intentionto cause wrongfulgain to some one and wrongfulloss to the customersconsequentiallypublicexchequer.Thereforeconnivanceisapparentandingredients of Section 420 IPC are made outHe also submitted that section120-A clearly says that when two or more persons agree to do or cause to bedone an illegal act such act is termed as criminal conspiracy. In the instant case,element of criminal conspiracy is apparent from the fact that public servants performed/acted in deviation of extant regulation and defrauded the FOREXcausing wrongful gain to the Counterparties. Referring to the paras x and xiv ofthe report of the CBI that customers suffered loss which may not be gains forconcerned Banks, Shri Mishra submitted that third party is the gainer andtherefore clear case of wrongful loss to the customers and wrongful gain to thirdparties who are counterparties and authorized dealers has been made out. It is acomplete criminal act because unless there is criminal conspiracy such act ofwrongful gain and wrongful loss would not have occurred and hence offencespunishable under sections 120-B, 409 IPC and Section 13 of the Prevention ofCorruption Act is clearly made out. Referring to para xx of the report of the CBI,Mr.Mishra submitted that the report itself suggests blatant violation of FEMA andRegulations and notifications issued thereunder. His contention is that violationscannot be done alone by the customers. It presupposes active involvement andtacit consent of public servants in the helm of affairs. In other words the act ofthe public servants was unbecoming of a public servant and exhibited highdegree of criminal misconduct as a result of which wrongful loss was caused andwrongfulgainwasmadebycertaincounterparties.Suchanoffenceispunishable under section 13 of the Prevention of Corruption Act. The furthersubmission of Mr.Mishra is that CBI report says that the offering structures werein violation of extant regulation. According to Mr.Mishra the Ads or their officialsdeliberatelylured the gullible customers to enter into a particular productwhereby culprits gain and wrongful loss is caused to the customers. This isnothing but cheating making out a prima facie case under section 420 IPCcoupled with criminal misconduct punishable under Section 13 of the P.C.Act.Mr. Mishra submits that it was the bounden duty of the public servants to lookinto the genuinenessof the exposure which would be involved in FOREXmarket. But the erring officials with intent to make wrongful gain to themselves orto the counterparties with tacit involvement of public servants and members ofcounterparties did not verify the underlying/insufficient underlying exposures. Nodeclaration regarding amounts booked with other Ads on past performance basiswas obtained. Users were observed to have utilized the total eligible limits notjust with one bank but a number of them without their declaring or apparentlygiving false declarations on each occasion about the amount of hedging facilityalready utilized with other Banks in this regard. Even when the transactions werebased on underlying exposure the Banks relied upon photocopies of documents

to ascertainthe same. This led to misuse by the clients who used photocopiesofthe same underlyingto enter into differentcontractswith differentbanks whichresultedin manifoldincreasein theirlosses.By this processfraudhas beenplayed on the Banks by customersin connivancewith Bank officials which is acriminal offence requiringinvestigation.Therefore,Mr.Mishrahas prayed that thereport of the CBI makesout commissionof prima facie case punishableundersections120-B, 409, 465, 467, 468, 415, 420 IPC read with section13 of thePreventionof CorruptionAct,1988 and, therefore,the CBI may be directedtoconduct the investigationinto the complaintof the petitioner.10.Mr.AshokMohanty,learnedSeniorCounselappearingfortheReserveBankof India,hasreferredto the decisiondated14.10.2008of thelearnedSingleJudgeoftheMadrasHighCourtinRajashreeSugarsandChemicalsLimitedv. AXISBank, OA Nos.251and 252 of 2008arisingout ofCivil Suit NO.240 of 2008 and connectedmatters.In the said matter, the plaintiffhad come up with the followingreliefs:

(i) to declarethatthedealconfirmationofU.S.Dollarv.Swiss France structuredated 22.6.2007in OPT contractNO.727withtheschedulethereonpurportedlymadeby the CFOonbehalf of the plaintiff with the defendantis void ab initio, illegal,violativeofRBIGuidelines,opposedtopublicpolicyandunenforceableand not binding on the plaintiff company.(ii)to declarethatthedealconfirmationofU.S. Dollarv.SwissFranc contractdated 22.6.2007in OPT contractNO.727withtheschedulethereonpurportedlymadeby the CFOonbehalf of the plaintiff with the defendantBank is voidableat theinstanceof the plaintiffand the plaintiffhas thereforeavoidedthecontractandthereforethecontractisnotbindingorenforceableagainst the plaintiff.

(iiito declarethat in the alternativeto the prayers(a) & (b)the Courtbe pleasedto declarethat the contractis ultra virestheobjectclauseof thememorandumof associationof theplaintiffand is, therefore,not bindingupon the plaintiff and/or isnot enforceableagainst the plaintiff.

(iv) for a permanent injunction restraining the defendants,theirmen,agents,servantsfrominanywayactinginfurtherance of contract in OPT No.727 dated 22.6.2007 with theschedule thereon by initiating any proceedings for recovery anyamount from the plaintiff or seeking recovery or any amountfromtheplaintiffsunder thecontractand/or initiatinganymeasuresor proceedings to recover any amount from theplaintiffs under the contract.

(v) for a permanent injunction directing the defendants todeposit with theRegistry of the Court all the papers andproceedings relating to the contract including transcripts of anytape-recorded conversation.

Along with the suit, two applications, registered as O.A.Nos.251and 252 of 2008 were filed seeking interim orders. The defendants had also filedseveral applications therein. The Court, inter alia, considered the question ofmaintainability of the suit in which it was held that notwithstanding anythingcontained in any other law for the time being in force, contracts in derivative shallbe legal and valid if such contracts are· (a) traded on a recognized stockexchange; (b) settled on the clearing house of the recognized stock exchange inaccordance with the rules and bylaws of such stock exchange. The definition ofthe word 'derivative' was also incorporated in Section 2(ac) of the SecuritiesContracts (Regulation) Act, 1956, by the aforeseaid amendment. The definitionin section 2 (ac) is as follows:

'Derivatives' includes (a) a security derived from a debt instrument,share, loan whethersecuredor unsecured, risk instrument or contract fordifferences or any other form of security, (b) a contract which derives its valuefrom the prices, or index of prices, of underlying securities. For the reasonsmentioned in that judgment, it was held that there was no merit, prima facie, inany of the grounds on which the plaintiff assailed the deal as illegal and opposedto public policy.

11. Since the instant matter is quite different from the matter dealt withby the learned Single Judge of the Madras High Court, referred to above, whichwas purely a civil dispute, cannot be of any help to the instant matter whereallegations as mentioned in the body of this judgment have been indicated.

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12. The Enforcement Directorate has also sent intimation to the CBI fortaking further enquiry videits letter F.No.T-3/26-B/2009dated16.10.2009.Further reply to the questionnaire given to the Banks is awaited.13.Upon perusal of the report of CBI, as mentioned above, andconsidering the facts and circumstances of the case, prima facie we are of theopinion that commission of offences of cheating, criminal conspiracy and fraudcannotbe ruled out. ThisCourthas not formedany opinionabout theinvolvement of the officers of RBI. Therefore, the apprehension of the learnedcounsel for the RBI that this Court may not take the submission of the learnedcounsel for the petitioner for granted that there is involvement of the officials ofthe RBI has no relevance.

14. From the above mentioned facts and circumstances, it appearsthat besides serious irregularities as admitted in the report of the CBI, asindicated above, the following criminal actions cannot be ruled out (i) makingfalse declaration deliberately by users/customers in making hedge transactionsin excess of their exposures, (ii) lOG has identified violations which are seriousin nature and appear to be intentional and deliberate which also forms mensereain commission of offence, (iii) booking of contracts under past performance basisbeyond 50% of eligible limit without obtaining CA Certificate, (iv) misuse oftransactions by using photocopies of the same underlying to enter into differentcontracts with different banks. The CBI has specifically observed in its report thatthere was clear cut violations of the guidelines of RBI and "it may be said thatthere is enough in this world for every one needs but not for anyone'sgreed.There are apparent violations of FEMA and if investigation is done by the CBI,the violation of FEMA can also be seen and on that basis criminal offences canalso be found out.

15. From the fact that false declarations were made as also from theabove mentioned actions, the commission of offences of cheating, fraud andcriminal conspiracy cannot be ruled out. The CBI has conducted a thoroughenquiry. The action of the CBI is appreciable. CBI is a reputed independentinvestigating agency and there is no other investigating agency of national levelin the country. The instantmatter is a matter of nationalinterest.If theallegations are found to be true, then the CBI would be busting a large financialscam affecting the economy of the country. The culprits should not, therefore, beallowed to go free.ConSidering the factsand circumstanceswe thinkit •

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appropriate that the matter should be investigated by the CBI and action inaccordance with law should be taken.16.In the result, we allow this writ petition and direct the CBI toinvestigate into the offences on the basis of the above observations. Copy of thisr-iorder shall be handed over to Mr.S.K.Padhi, learned counsel appearing for theCBI for the needful.

There would be no order as to costs.

I.M.Quddusi, AC.J.

Sanju Panda, J.I agree.

Sanju Panda, J.

Orissa High Court, Cuttack,December 24, 2009/Dash .