The Reserve Bank of India (RBI) has allowed foreign branches and subsidiaries of Indian banks and financial institutions (BFIs) as well as branches/subsidiaries of BFIs operating in IFSCs, including the GIFT City, to deal in financial products, including structured financial products, which are not available or not permitted by the apex bank in the domestic market without its prior approval.
This is subject to approval from the board of the parent bank and/or financial institution. Such branches and subsidiaries will act as market makers for products only if they have the ability to price/value such products, and the pricing of such products is demonstrable at all times. Their exposure and mark-to-market to these products have to be appropriately captured and reported in returns furnished to the RBI. They should not deal in products linked to the Indian rupee unless specifically permitted by the RBI, and should not accept structured deposits from any Indian resident.
In the erstwhile regime, foreign branches of Indian banks could freely offer only those products that were permitted by the RBI, despite these products being popular in their respective jurisdictions. For other products, prior approval of the RBI was required.
These restrictions for structured products were issued in the wake of the global financial crisis in 2008. The 2008 circular was further constricted in 2014, with the RBI restricting such products to be offered only at established financial centers outside India such as New York, London, Singapore, Hong Kong and Dubai.
“The decision to allow Indian financial institutions to offer complex financial products offered elsewhere without regulatory hurdles reflects the trust reposed by the RBI in the Indian financial system. It can be construed as coming of age for the domestic financial services fraternity which can now operate at par with global peers. The decision can unlock the true potential of IFSCs,” said Nischal S Arora, partner, Nangia Andersen.
“Now, these overseas branches of Indian BFIs and IFSCs, including GIFT IBU (IFSC Banking Unit), can deal in these structured products subject to certain compliances by the parent such as board approval, non-acceptance of structured deposits from Indian residents and capital adequacy requirements. With this, IBUs and foreign branches of BFIs can compete on a level playing field with their overseas counterparts by offering products such as structured notes, range accruals and structured deposits,” said Anshul Chandak, head – treasury, RBL Bank.
Financial products dealt with by foreign branches and subsidiaries as well as IFSCs shall attract the prudential norms such as capital adequacy, exposure norms (including large exposure framework), periodical valuation and all other applicable norms. The parent bank will adhere to more stringent among the host and home regulations in respect of prudential norms.
In case the current norms of the RBI do not specify prudential treatment of any financial product, the parent BFI shall seek specific guidance from the RBI. Activities of branches and subsidiaries in foreign jurisdictions and IFSCs shall be subject to the laws in India, unless specifically exempted by law.