European banks operating in India may soon find it difficult to operate viably unless the Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) are able to negotiate fresh terms with the European Securities and Markets Authority (ESMA) on oversight of counter-party institutions.
Earlier this week ESMA, the EU’s financial markets regulator and supervisor, said six of India’s central counterparties (CCPs) would be de-recognised in accordance with the European Market Infrastructure Regulation, following an assessment conducted by it. However, to mitigate the adverse impact on EU market participants, it has deferred implementing the decisions until April 30, 2023. Should the discussions fail, European banks may need to operate with levels of capital that are 40-50 times higher than what is required today.
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The six institutions on ESMA’s list are The Clearing Corporation of India (CCIL), supervised by RBI, Indian Clearing Corporation (ICCL), Multi Commodity Exchange Clearing (MCXCCL), and NSE Clearing (NSCCL), supervised by Sebi; India International Clearing Corporation (IFSC) (IICC) and the NSE IFSC Clearing Corporation (NICCL), supervised by the International Financial Services Centre Authority (IFSCA).
Regulatory experts believe RBI and Sebi are unhappy with overseas regulators wanting oversight of Indian counter-party institutions, but the matter is unlikely to snowball to levels where business is altogether disrupted. “They view this as over-stepping the line and will try to convince ESMA to soften its stance,” said a financial services expert.
Another expert said RBI and Sebi view this as a jurisdiction issue and might seek reciprocal powers. A legal expert observed that some kind of partial reporting structure may be introduced whereby ESMA would not have complete oversight.
“There would be some discussions at the government level because India would want the European banks to continue to operate in India,” the expert said.
Custodial services offered by the European banks could be hit as could trading in some products in the currency markets.