INR Non-deliverable Derivatives barred; Added Bar for Related Parties

– RBI’s 1st April circular bars Banks from INR-derivatives, with “related parties”, giving an Ind AS meaning to the term

In a move to maintain the integrity of INR in the evolving market conditions and avoid a potential misuse of intra-group structures to bypass regulatory constraints, the RBI has issued revised instructions on Risk Management and Inter-Bank Dealings. 

Bar on non-deliverable INR derivatives:

Considering the prevailing situation in the currency market, RBI has prohibited banks from entering into derivatives involving INR on non-deliverable basis.

The bar extends to rebooking of any derivative contract, whether deliverable or non deliverable, entered before 1st April, maturing after this date.

Fx-Derivatives contracts involving INR: not permitted with related parties 

The instructions prohibit any form of foreign exchange derivative contract involving INR with their related parties. Note that, the bar is not limited to “non-deliverable” contracts, rather, extends to all forex derivative contracts involving INR. This complete bar is likely to impact the financial markets where it is quite common to undertake such derivative transactions with related parties, more particularly, in banking groups constituting one or more financial sector entities (including NBFCs, insurance entities etc.). 

What is even more interesting is that the meaning of “related party” for this purpose is drawn from Ind AS. Banks in India are currently not following Ind AS, and therefore, they maintain a list of related parties as per IGAAP, viz., AS 18. However, the Circular explicitly refers to Ind AS 24 or equivalent international standards. This, therefore, requires immediate action on the part of banks to draw a list of related parties, not on the basis of the accounting standards applicable to them (AS-18), but, on the basis of the widely recognised IAS-24 (Ind AS 24 in the Indian context). 

The instructions refer to Indian Accounting Standard (Ind AS) 24 – Related Party Disclosures or International Accounting Standard (IAS) 24 – Related Party Disclosures or any other equivalent accounting standards. The reference thus, is not of “applicable accounting standards”, but of “equivalent accounting standards”, meaning thereby, that banks would be required to draw their list of related parties based on Ind AS 24 or its equivalent based on the country whose accounting standards are being followed by the bank in question. For instance, a foreign bank incorporated in the US will draw its definition of related party from US GAAP (ASC 850) being the equivalent of IAS 24.