RBI allows IFSC banking units to undertake derivative transactions

Reserve Bank on Friday allowed IFSC banking units (IBUs) to undertake derivative transactions, including those involving structured products.

"With the prior approval of their board of directors, the IBUs may undertake derivative transactions including structured products that the banks operating in India have been allowed to undertake as per the extant RBI directions,"the central bank said in a notification. However, it said IBUs shall obtain RBI's prior approval for offering other derivatives or structured products.

"Before seeking RBI's approval, banks shall ensure that the IBUs have necessary expertise to price, value and compute the capital charge and manage the risks associated with the products/transactions intended to be offered and should also obtain their board's approval for undertaking such transactions," he said.

An IFSC banking unit (IBU) allows an Indian bank to deliver a complete range of products to its clients with foreign currency funding requirements. IBUs can offer products such as external commercial borrowings to their customers. IBUs are allowed to open foreign currency escrow account of Indian resident entities to temporarily hold subscriptions to GDR/ADR issues until issuance of the receipts, it said.

After GDRs/ADRs are issued, the funds should immediately be transferred to the client's account outside the IBU and cannot be retained by the bank in any form including in long term deposits, it added. Besides, RBI allowed IBUs to act as underwriter of rupee denominated overseas bonds issued by Indian entities inoverseas markets.