With Mukesh Ambani on board, Bank of America wants RBI nod for loans to Reliance Industries

Bank of America is trying to figure out the regulatory barriers in doing business with India's largest private company Reliance Industries (RIL) whose chairman Mukesh Ambani has joined the board of the parent, Bank of America Corporation .

According to Indian regulations, a bank in India is not permitted to lend to any of its directors and companies where directors have board presence.

BankAm India officials have discussed the matter once with the Reserve Bank of India and are likely to seek further clarifications soon. A bank spokesperson declined to comment on the matter.

A few legal and compliance heads of other banks that ET spoke to felt that going strictly by the law, BankAm India should have no problems in taking fund as well as non-fund exposure to RIL or any of Reliance's group companies. "In India, BankAm functions through branch offices, and Mr Ambani has been appointed as a director on the board of the bank's global holding company. So, technically, there is no problem, but RBI has to spell this out," said the legal head of a large local bank.

However, in the past, the Indian banking regulator has often favoured stern interpretations of the law. Under the circumstances, the MNC bank does not want regulatory issues to crop up at a later point.

Foreign banks, including BankAm, have business relationships at different levels with large Indian companies. Besides rupee loans from Indian branches, offshore offices of foreign banks give loans that are considered as external commercial borrowings by a company in India. Also, these banks, through their offices in other jurisdictions, fund cross-border acquisitions by Indian business groups. For some of the MNC banks, derivative transactions with Indian companies constitute a slice of their treasury operations.

A master circular of the Reserve Bank of India gives a list of the dos and don'ts. Apart from loans and guarantees, banks are also restricted from cutting complex derivatives deals with a company having a common director. Except forwards and other plain vanilla currency and money market transactions which are cash-settled, derivatives involving an extended credit period are not allowed.

"It depends on how RBI chooses to interpret the regulations. Currently, foreign banks have advisory boards in India which don't have the status of a statutory board. So, the board of a foreign bank refers to the board of the parent which is beyond RBI's jurisdiction," said a senior official of an European bank. Many foreign banks use their offices outside India to lend to Indian corporates and the central bank's rules on exposure to single company or a group doesn't apply.

In India, BankAm and Merrill Lynch (which BankAm acquired) carry out various businesses: banking through BankAm branches, investment banking and equity broking through DSP Merrill Lynch, and a non-banking finance company through DSP ML Capital . For RIL, which every bank wants as a corporate client, it makes little difference if it can't borrow from the US bank. But BankAm India will not like losing the RIL account to other lenders.