A non-bank, or a wholly-owned bank subsidiary, incorporated in India is technically a local entity that is outside the jurisdiction of the European financial services regulator. So, housing some of the activities in such a company may come across as a way to overcome the hurdles raised by the standoff between Esma and RBI.
But in the current form, it’s a suboptimal solution. It would mean dividing businesses between a bank and non-bank, which is especially tricky for European banks given the scale of their local banking and trading operations. The transition could take time, impact businesses, and raise cost and capital requirements. Also, a non-bank does not have a foreign exchange trading licence.
RBI and GoI should endeavour to find a middle ground and persuade Esma and Bank of England to see reason. What Esma is demanding are extraterritorial rights that RBI has good reason to object to. Around the time regulators in the EU and Britain were derecognising Indian clearing houses, RBI and the Financial Services Agency of Japan have come together to find a mutually acceptable solution.
But time is running out. By end-March, European banks, which have been in India for decades, would have to unwind some of their outstanding positions. Regulators, traditionally, have often sorted out issues among themselves without involving their respective governments. They should give it a last try.
An agreement between principals would offer a better solution than seeking workarounds like spinning off trading arms or setting up a nodal clearing house. These involve chopping up oversight and run counter to harmonised scrutiny of cross-border financial transactions. India has aired a relevant concern over extraterrestrial jurisdiction. It must seek answers among the rules, not in the market.
