1. What Counts as Mis-Selling in Derivatives?

Regulatory test in India is not English suitability - it is hedge vs speculation.

Under RBI and FEMA:

A person resident in India may enter into a foreign currency derivative contract only to hedge an exposure to foreign exchange risk and not for speculating - Reg 4, FEM (Foreign Exchange Derivative Contracts) Regulations + RBI Master Directions.

If contract is sold as hedge but has no underlying, or is leveraged, or is profit-seeking, it is:

• Wagering contract - void under Sec 30 Indian Contract Act
• Opposed to public policy - void under Sec 23
• Violation of FEMA - unenforceable
• Seller beware - caveat venditor - bank has higher duty to explain because product is horrendously complex

English test is different: Was there advice? Was there negligence? Is there contractual estoppel?

2. Anatomy of a Mis-Selling Claim - India

To succeed, you must plead 4 limbs:

A. Advisory Relationship Exists
You were not execution-only. Salesmen chauffeured you to hotel and bombarded with charts showing profit with zero investment, as alleged by Sundaram Multi Pap Ltd CFO against ICICI Bank. No mention of losses. That is advice, not execution.

B. No Underlying Exposure / Over-hedging
You must show on date of trade, your USD receivables / ECB / import exposure was less than notional, or product was leveraged 2x/3x accrual, knock-out, binary. RBI bans OTC speculative hedges if not traded on exchange.

C. Failure to Explain Risk - Suitability & Appropriateness
RBI Circular DBOD No. BP.BC. 51 /21.04.124/2006-07 - banks must do due diligence, classify customer as user, do risk assessment, explain worst-case loss, MTM, break cost.

D. Loss due to that Failure

3. Case Laws - Indian

1. Rajshree Sugars & Chemicals Ltd vs Axis Bank - Madras High Court 2008
First major Indian case. Rajshree took forex derivatives from Axis, alleged mis-selling of exotic products. Pleaded ISDA Master Agreement was speculative contract with no underlying, hence wagering contract void under Sec 30, violated RBI declarations, void under Sec 23. Single Judge dismissed injunction, but Supreme Court order of 2008 accepted principle: if underlying not proved, bank cannot enforce. Later settled. This case created the template.

2. Sundaram Multi Pap Ltd vs ICICI Bank - Bombay High Court 2008
Facts: CFO told salesmen he didn't understand derivatives. Bank showed zero-investment profit. Two contracts turned sour, Rs 60 mn loss. Bank served bankruptcy notice.
Ratio: Court acknowledged caveat venditor - for complex derivatives, buyer beware shifts to seller beware. But because ICICI had signed contract + phone recording "Yes, yes, yes I agree", winding up petition failed. Still, authority for mis-selling plea.

3. Radnik Exports vs Standard Chartered Bank - Delhi High Court CS(OS) 2296/2009 - 1 July 2014
Leveraged Derivative Transactions under ISDA 2002 dated 8 Jan 2008 to hedge USD receivables. Plaintiff alleged bank misleading and inducing GM Finance into agreements, that transactions were in nature of wagering contracts .
Held: Bank contested but court allowed trial - bank must prove it was hedge, not speculation. Termination of ISDA by bank in Nov 2009 not automatic if underlying purpose fails.

4. Nahar Industrial Enterprises Ltd vs Axis Bank - Ludhiana District Court 2012 - Derivatives case: court rules in favour of Axis Bank 
Yarn-to-steel company alleged mis-selling of exotic derivatives. District Court authorized Axis Bank to enforce contract. Reason: Nahar was repeat user, had prior profitable trades. Same logic as Deutsche Bank AG vs Finolex Industries - Bombay HC 28 March 2014 - If you had several previous undisputed derivative transactions, you cannot claim lack of understanding for loss-making one. Estoppel by conduct.

5. Orissa High Court Order Dec 2009 - CBI Probe - The Macro Case
Forex Derivative Consumers Forum filed PIL alleging mis-selling by banks. HC ordered CBI to probe alleged mis-selling of derivatives in 2007-08, violation of FEMA, offences of cheating, criminal conspiracy and fraud . RBI and CBI confirmed serious irregularities and violation of FEMA . Supreme Court stayed CBI investigation in 2010 but directed RBI to frame stronger guidelines. This led to RBI Circular 2011 on suitability.

6. Kotak Securities Ltd vs C K Pradeep - NCDRC 9 Feb 2024
OPs have done derivative trade in account without written authority and without instruction . Even if ISDA signed, each transaction needs explicit consent and margin. Relevant for corporate finance teams where dealer did trades on phone.

4. Case Laws - English - Governs most ISDA 2002

Indian syndicated ISDA is usually English law. These are binding:

7. JP Morgan Chase Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm) + [2010] EWCA Civ 1221
Leading mis-selling defence case. Springwell, investment company of Polemis Greek shipping family, claimed $700 mn compensation against JP Morgan for allegedly mis-selling exotic emerging market instruments.
Held - High Court and Court of Appeal: Bank can escape mis-selling claims by relying on contractual provisions that state it is not providing advice, and customer cannot rely on representations. This is contractual estoppel. Bank's exclusion clause under ISDA Schedule overrides Misrepresentation Act 1967 claim. If you signed Non-Reliance - "made own independent decision", you are estopped.

This is what every bank now pleads in India.

8. Green and Rowley v RBS plc EWHC 3661 (QB)
Claimants claimed they were mis-sold interest rate swap in May 2005 by negligent mis-statement.
HHJ Waksman QC dismissed claim entirely: Discussion of pros/cons or incentivisation of saleswoman not sufficient to constitute advice. Even if relationship manager later said "to me it's quite black and white you were mis-sold", that adds little - matter for court based on facts at time of sale. FSA Notice highlighting serious failings amongst banks added nothing. Crucial for Indian corporates - regulatory findings alone don't prove mis-selling.[2012]

9. BNP Paribas SA v Trattamento Rifiuti Metropolitani SpA EWHC 2436 (Comm)
SYNDICATED + HEDGE case. TRM had EURO 375 mn syndicated facility, obliged to hedge. Alleged bank negligently advised hedging mismatched with requirements. Court granted negative declaratory relief to bank:

• Non-reliance clause Part 5(d)(i) creates contractual estoppel.[2020]
• Entire Agreement clause in ISDA is clear and unambiguous - cannot rely on Facility terms to override ISDA.
• Important: Even if bank is arranger of loan, that does not create advisory duty for swap.

10. Shine Grace Investment Ltd v Citibank NA - Hong Kong CFI
Relationship between bank and customer does not of itself give rise to duty of care to advise. Mis-selling claim dismissed if contracts say no advice.

5. How to Win / Defend Today

If you are claimant corporate:

1. Don't rely only on "I didn't understand". Prove NO underlying on trade date - produce ECB, export documents.
2. Get RBI expert opinion - leveraged KIKO, accumulator, snowball = speculative by nature.
3. Show contemporaneous records - emails, no risk disclosure, no scenario analysis - Green and Rowley says contemporaneous records invaluable.
4. Plead FEMA violation + Sec 23 void, not just negligence - Indian courts more sympathetic to illegality than English estoppel.
5. File within 3 years of knowledge of MTM loss - limitation defence kills many claims.

If you are bank:

1. Produce signed Risk Disclosure, suitability letter, non-reliance, and proof of prior trades - Finolex / Nahar logic.
2. Rely on contractual estoppel - Springwell + BNP Paribas - borrower's independent decision.
3. Show RBI reporting - you reported as hedge, corporate didn't object when profitable - "no complaints when they were making profits".
4. After Netting of Financial Contracts Act 2020 - close-out netting is statutory, not contractual.