What changed
RBI observed that Indian parties were using the ODI automatic route to set up overseas structures that trade currencies, securities, and commodities. Some of these structures began offering products linked to the Indian rupee, such as non-deliverable forex trades and Indian stock index derivatives. RBI has now clarified that such products require specific approval, and any violation will be treated as a contravention of FEMA.
What it means for you
Banks must ensure that their customers' ODI structures do not offer INR-linked products without RBI approval. This circular reinforces that the rupee's partial convertibility restricts offshore derivative activity tied to Indian markets. Non-compliance could lead to FEMA penalties for both the Indian party and the AD bank facilitating the transaction.
What you must do
- Review existing ODI proposals and structures of your customers to identify any INR-linked product offerings.
- Advise customers that any overseas entity with Indian equity participation must obtain specific RBI approval before offering INR-linked financial products.
- Report any suspected contraventions to RBI immediately to avoid regulatory action.
- Update internal compliance checklists for ODI automatic route applications to flag INR-linked product risks.
Who it affects
Category-I Authorised Dealer Banks, Indian parties making overseas direct investments, Overseas entities with Indian equity participation
What types of products are prohibited under this circular?
Products linked to the Indian rupee, such as non-deliverable trades involving foreign currency/rupee exchange rates and stock indices linked to the Indian market, are prohibited without specific RBI approval.
Does this apply to all overseas entities with Indian equity?
Yes, any overseas entity with direct or indirect equity participation from Indian parties is covered. They cannot offer INR-linked products without RBI's specific approval.
What are the consequences of non-compliance?
Any incidence of offering such products without approval will be treated as a contravention of FEMA regulations and will attract action under the relevant provisions of FEMA, 1999.