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The commencement of Derivative trading in India dates back to the year 2000 when it first obtained the final approval of SEBI. Though initially the permission was granted for index futures contracts only. Later it was allowed for options and individual securities as well.
In this blog, we would be discussing the role of offshore parent MNC in the Indian Derivative Market. So let’s begin our journey.
Since its commencement, the Indian Derivative Market has witnessed tremendous growth in terms of trading value and contracts. Despite witnessing such encouraging growth, many analysts believe that the Derivative Market was not able to realize its full potential in terms of growth & trading. There were various reasons for this phenomenon. One of such reasons is the lack of participation and flexibility for Offshore MNCs, which indulge in derivative trading through their Indian subsidiaries.
Offshore Parent MNC can be defined as an entity incorporated in a foreign country having one or more subsidiary companies in India through which they enter into trading transactions in the Derivative Market.
These offshore MNCs and their Indian subsidiaries engaged in current account transactions in India are exposed to a number of currency risks. Due to numerous restrictions and prohibitions imposed by RBI on foreign investment transactions and cross-currency transactions, the options to involve in hedge transactions by the Parent MNCs were very limited.
Due to these reasons, the Derivative Market was suffering greatly. It was high time the offshore MNCs were allowed to play their role in the development of the Indian Derivative Market. Keeping this in view, the foreign entities and their subsidiaries have been requesting RBI from a long time to relax these conditions and allow greater flexibility.
Finally, after many deliberations, the Reserve Bank of India through a circular dated 21st March 2017 allowed the participation of offshore Parent MNC in the Indian Derivative Market through their Indian subsidiaries.
Greater operational flexibility was allowed to Offshore MNCs and their Indian subsidiaries, which are exposed to currency risk arising out of current account transactions carried on in India.
The circular further allowed the following role/advantages to the Offshore Parent MNCs:
a) Right to entry into Indian Derivative
Offshore Parent MNCs or their central treasury or regional treasury, which are located outside India can now directly enter into the Indian Derivative Market through their subsidiaries without any restrictions.
b) Permission for carrying on hedge activities by the Parent MNC
With this circular, the offshore Parent MNC of the Indian Subsidiary is allowed to carry on hedging activities on behalf of the transaction risks that the Indian subsidiary is exposed to for dealing in derivative transactions.
c) Permission to take on other activities on behalf of its subsidiary
On behalf of their Indian subsidiaries, the Offshore Parent MNCs are allowed to undertake all those activities which are allowed to be undertaken by the subsidiary itself.
d) Other permissions:
Other permissions include the following:
As a result of the relaxation of norms by RBI, the performance of the Subsidiaries in the Derivative Market has considerably improved. They enjoy greater support from their Parent MNCs. Also, the Parent MNCs can perform various transactions on behalf of their subsidiaries and can also keep a close eye on the derivative transactions of its subsidiaries. As a result, the Indian Companies are able to involve in hedging transactions with the help of their MNCs. Consequently, trading is becoming more professional thus contributing towards the growth and development of the Indian Derivative Market.
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