European banks operating in India are in limbo as negotiations to resolve jurisdictional issues related to India’s clearing houses are continuing, despite the April 30 deadline having passed.

European Securities and Markets Authority (ESMA) had on October 31 announced de-recognising six Indian clearing houses, including Clearing Corporation of India (CCIL), effective May 2023, due to “no co-operation arrangements”.

While European banks can continue conducting business with Indian clearing houses, a penal capital charge will be applicable on all transactions, significantly increasing their capital requirements, prompting these banks to reconsider acting as custodians in India, according to market participants.

European banks such as Deutsche Bank, BNP Paribas, Credit Suisse, and Societe Generale run custodian businesses in India for clearing FPI, and have over one-fifth share in the Indian market.

Over 9,000 funds are registered as FPIs in India and nearly 3,000 of them come from Europe. Bank of New York Mellon, State Street Bank and Trust Company, JPMorgan Chase, Citi, HSBC and Standard Chartered are some of the US and Asian banks that act as custodians in India.

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In February, Germany’s Federal Financial Supervisory Authority BaFin and France’s Autorite des Marches Financiers (AMF) extended the deadline to October 2024 for their country’s banks acting as custodians.

Indian regulators had refused to sign a revised agreement which gave the overseas regulatory body the right to audit, scrutinise and inspect the activities or operations of Indian clearing houses. Later, UK regulators also took a similar stance.

Led by the Reserve Bank of India (RBI), the regulators have been engaging with relevant stakeholders, including ESMA and the European Commission to arrive at a mutually acceptable arrangement, which recognises the territorial independence of the host regulator.

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RBI in its Financial Stability Report has said that it is exploring alternative arrangements and is ready to take remedial measures in case of market disruptions.

The central bank has said that it is essential for foreign regulators to trust the credibility and strength of India’s robust regulations as “extra-territorial reach” can create a parallel maze of laws and poses data access risks.

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