MUMBAI (TIP): Banks operating out of India will now be able to fund takeovers in dollars. They will also be able to allow customers to place bets on exchange and interest rate movements in addition to trading in dollar-denominated securities. RBI’s recognition for bank branches in an international financial services centre (IFSC) as ‘foreign branches’ is expected to open new doors for Indian banks and corporates who had limited access to international banking.
The new regulation will pave the way for the Gujarat International Finance Tec-City (GIFT) in Gandhinagar to set up its International Financial Services Centre within its premises, considering that it is the only recognized IFSC till date. Many banks are expected to rush in, given that the capital requirement is only $20 million (around Rs 125 crore) and funds raised there will not be subject to reserve requirements and banks will also not be subject to priority sector lending requirement.
The new avenue to engage in international banking comes at a time when Indian banks are finding rules made by global regulators very strenuous and many are scaling back on foreign operations. ICICI Bank this week brought back Canadian $80 million that it had invested in its operations in that country and $75 million that it had invested in its UK arm as it saw better opportunities to deploy the funds at home.
In its guidelines for banks opening an IFSC banking unit (IBU), the RBI said that only those banks with a foreign exchange dealer’s licence will be allowed to apply. A majority of the commercial banks (excluding most cooperative banks) have a foreign exchange licence. Each bank will be allowed only one IBU in the IFSC. “It can set up an IBU which will be licensed as a branch in a foreign geography and will have to maintain minimum capital of $20 million in the GIFT IBU. IBUs can deal with the wholly owned subsidiaries /joint ventures of Indian companies registered abroad,” RBI said in its guidelines.
“IBUs are permitted to undertake transactions in all types of derivatives and structured products with the prior approval of their board of directors. IBUs dealing with such products should have adequate knowledge, understanding, and risk management capability for handling such products,” the RBI guidelines said.
The guidelines form the last leg of clearance that was needed to kick-start GIFT city near Gandhinagar, Gujarat. In March, the Sebi board had cleared operations by securities firms in an IFSC. Now with the RBI licence opening the doors of international banking within the IFSC, many financial institutions are expected to respond.
The new norms will pave the way for the Gujarat International Finance Tec-City (GIFT) in Gandhinagar to set up its International Financial Services Centre in its premises.