Mumbai: The Reserve Bank Wednesday asked banks to seek approval from company boards before selling derivative products to them. "Before offering any derivative product to clients, banks should obtain board resolution from the corporate which explicitly mentions the limit assigned by the corporate to the bank," the Reserve Bank said in a notification modifying the 'Comprehensive Guidelines of Derivatives'. The direction assumes significance in the light of allegations from certain quarters of mis-selling of derivative products by banks resulting losses to investors during the 2008-09 global economic crisis. The board resolution has to mention the names and designation of officials of the company authorised to undertake particular derivative transactions on behalf of the company and specify the names of the people to whom transactions should be reported by the bank. Banks sell derivatives to help companies to hedge risks against fluctuations in foreign exchange value and interest rates, and earn a fee. Banks have also been directed to ensure that there is mention of the names and designation of persons authorised to sign the International Swaps and Derivatives Association (ISDA) and similar agreements and also of specific products that can be transacted by the designated officials. "It should be ensured that the Board resolution submitted by the company is signed by a person other than the persons authorised to undertake the transactions," the notification said. RBI had in April this year imposed a fine of Rs 1.95 crore on 19 banks, including leading lenders like SBI, HDFC Bank, ICICI Bank and Citibank, for violating regulations concerning derivatives. The lenders had been charged with failure to carry out due diligence with regard to suitability of products and sold derivative products to companies not having risk management policies. They also failed to verify the adequacy of eligible limits before selling derivatives.
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