New Role for the Offshore Parent MNC in the Indian Derivatives Market

Bar & Bench April 3 2017
By Nikita Chawla and Aashka Shah

One more step towards ease of doing business in India, is the Reserve Bank of India’s (“RBI”) circular of 21st March 2017 (“Circular”), whichallows multinational companies (“MNCs”) to access the Indian derivatives market on behalf of their Indian subsidiaries (“Subsidiaries”). The Circular provides operational flexibility to MNCs and their Subsidiaries in relation to the exposures of the Subsidiaries to currency risks arising out of current account transactions in the country.

In order to promote greater cohesion with their central treasuries, representations have been made in the past to the RBI to permit MNCs to hedge the exposure of the Subsidiaries at a global level.

While operational assistance was being sought at some level by the subsidiaries, the extent of involvement of the MNC parent in decision making or otherwise in terms of any action on the part of Subsidiaries in the Indian derivatives market was not clear.

The Circular to a significant extent, accedes to the request of the MNCs to directly undertake currency derivative transactions (including for their Subsidiaries) with certain banks (“AD Banks”) in India through such central treasury. MNCs are now permitted to enter into all currency transactions on behalf of their Subsidiary, over - the - counter ( “OTC”) as well as exchange - traded, that the Subsidiary is otherwise permitted to enter into.

A requirement under the Circular is the tripartite agreement between the MNC, the AD Bank and the Subsidiary, to document the rights and obligations of each of the parties and the transaction procedure, including settlement. It appears that the RBI wants this arrangement to set out the extent of involvement and liability and obligations of all the parties to the concerned derivative transactions.

This move of RBI will assist Subsidiaries not to necessarily invest in expertise and systems in a sub-optimal manner. In addition, this Circular will help offshore MNCs to monitor all the transactions closely on a global level.

The Circular with the experimental approach and noble intentions is in effect as of date. How effective will it be and how will it deepen the Indian derivative markets, is to be seen.

Nikita Chawla is a Principal Associate and Aashka Shah is an Associate the Mumbai office of Juris Corp.

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