RBI Circular – Dealing in Financial Products by Foreign/ GIFT branches of Indian banks – Parinam Law Associates

INTRODUCTION:

The Reserve Bank of India (“RBI”) on 1 December 2022 issued instructions to Indian Banks and All India Financial Institutions (“AIFI”) regulated by the RBI on dealing with financial products by their branches/ subsidiaries operating outside India (“Circular”) and thereafter repealed Circular Nos. DBOD.No.BP.BC.89/21.04.141/2008-09 dated 1 December 2008 and DBOD.No.BP.BC.111/21.04.157/2013-14 dated 12 March 2014.

With the growing demand of financial products, the RBI deemed it necessary to create a framework for foreign branches/ subsidiaries of Indian banks dealing in financial products. These norms have also been made applicable to International Financial Services Centres (“IFSC”) in India, which notably includes the Gujarat International Finance Tec-City (“GIFT City”).

DEALING IN FINANCIAL PRODUCTS:

Upon the fulfilment of the criteria listed by RBI and the host regulator, foreign branches/ subsidiaries and those established in GIFT City of such banking institutions shall be permitted to deal in financial products (including structured financial products) outside India which are not allowed in the domestic market without the prior approval of the RBI.

CONDITIONS LAID DOWN BY RBI FOR DEALING IN FINANCIAL PRODUCTS:

The parent banking institution shall comply with the following conditions set out by the RBI under this Circular:

• prior approval from its board of directors must be obtained;
• must have adequate knowledge of, understanding, and appropriate risk management capacity;
• they shall act as market makers for financial products only if they have the ability price/ value such products and the pricing of such products must be demonstrable by such branch/ subsidiary at all times;
• appropriate captures and reports shall be furnished to the RBI by way of filings returns in relation to the exposure on mark-to-market on such products. Such information shall be furnished to RBI in a manner and format as be prescribed by RBI from time to time;

It is pertinent to note that such foreign branch/ subsidiary/ GIFT City entity cannot:

• deal in products that are linked to the Indian Rupee without the prior approval of the RBI.
• accept structured deposits from any Indian residents.

In addition to the above, the circular requires compliance with prudential norms such as capital adequacy, exposure norms, periodical valuation, and all other applicable criteria’s which are intimated to banking institutions from time to time.

CONCLUSION:

This circular shall open up additional revenue streams for foreign and GIFT City branches of Indian banks and allow for a breadth of transactions that are not permitted within India. The circular is also indicative of the bent of mind of the regulator in how it perceives IFSC/ GIFT entities.