India's central bank Tuesday said it penalized 19 banks including the country's top three lenders--State Bank of India (500112.BY), ICICI Bank Ltd. (532174.BY) and HDFC Bank Ltd. (500180.BY)--for failing to comply with its rules on derivatives.

The order may give a fresh twist to the ongoing legal dispute between the lenders and several small and mid-sized companies, which allege that the misselling of derivative products had caused them billions of rupees in losses. The matter is now in the Supreme Court which will hold its next hearing in the case in September.

"On a careful examination of the banks' written replies and the oral submissions made during the personal hearings, the Reserve Bank found that the violations were established and the penalties were thus imposed," the central bank said in a notification.

The list of penalized banks also includes the local units of Barclays PLC (BARC.LN), BNP Paribas S.A. (BNP.FR), Citigroup Inc. (C), Credit Agricole S.A. (ACA.FR), Royal Bank of Scotland Group PLC (RBS.LN), Standard Chartered PLC (STAN.LN), Bank of America Corp. (BAC), Deutsche Bank AG (DB), HSBC Ltd. and JPMorgan Chase & Co. (JPM).

Other domestic banks include Axis Bank Ltd. (532215.BY), Kotak Mahindra Bank Ltd. (500247.BY), Yes Bank Ltd. (532648.BY), ING Vysya Bank Ltd. (531807.BY) and Development Credit Bank Ltd. (532772.BY).

The Reserve Bank of India's penalty, ranging from 500,000 Indian rupees ($11,234) to INR1.5 million ($33,700), was imposed for violation of rules such as failure to carry out due diligence in regard to suitability of products and selling derivative products to users not having risk management policies, the central bank said in a notification.

"The central bank's decision has vindicated our stand that we have been missold derivative products and it will strengthen our case in the apex court," S Dhananjayan, advisor to Forex Derivatives Consumers' Forum, which has 40-odd companies as members, told Dow Jones Newswires over the phone. The forum is representing the companies which allegedly suffered losses due to these products.

The firms, including a large number of textile exporters, had bought derivative products from banks to hedge against currency volatilities in 2007-2008. However, the global meltdown affected them badly. With none of the parties ready to take the blame, the matter moved to the court of law.

"The foreign banks will have the highest exposure to these derivative losses followed by top Indian lenders," a senior banking analyst with a Mumbai-based brokerage firm, not wanting to be named, told Dow Jones Newswires over phone.

"Most lenders have already provided for it in the last couple of years. The smaller banks though could face some stress if the court decision goes in favour of the companies," he said, adding the RBI order has weakened the case for the banks.

The lenders were not immediately available for comments.

   -By Nupur Acharya and Sourav Mishra; Dow Jones Newswires; +91-22-61456117; nupur.acharya@dowjones.com