Sections 45-U and 45-V of RBI Act, 1934: Definitions and Transactions in Derivatives
Chapter IIID of the Reserve Bank of India Act, 1934 addresses derivatives, money market instruments and related securities transactions. Section 45-U defines key financial instruments, while Section 45-V deals with the statutory validity of specified derivative transactions involving RBI-regulated parties.
Section 45-U - Definitions
The following preserves the substantive definitions in Section 45-U.
For the purposes of this Chapter,-
(a) "derivative" means an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called "underlying"), or a combination of more than one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency-rupee options or such other instruments as may be specified by the Bank from time to time;
(b) "money market instruments" include call or notice money, term money, repo, reverse repo, certificate of deposit, commercial usance bill, commercial paper and such other debt instrument of original or initial maturity up to one year as the Bank may specify from time to time;
(c) "repo" means an instrument for borrowing funds by selling securities with an agreement to repurchase the securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed;
(d) "reverse repo" means an instrument for lending funds by purchasing securities with an agreement to resell the securities on a mutually agreed future date at an agreed price which includes interest for the funds lent;
(e) "securities" means securities of the Central Government or a State Government or such securities of a local authority as may be specified in this behalf by the Central Government and, for the purposes of "repo" or "reverse repo", include corporate bonds and debentures.
Explanation of the definitions
Derivative and underlying
A derivative derives its value from an identified variable such as an interest rate, exchange rate, credit index or securities price. An interest rate swap generally exchanges interest-payment streams; a forward rate agreement addresses a future interest-rate exposure; and currency swaps and options address specified currency exposures. Whether a particular instrument is covered depends on the statutory definition and RBI specifications.
Money market instruments
Money market instruments include short-term funding and debt instruments listed in Section 45-U(b). The one-year original or initial maturity qualification is relevant to the additional debt instruments RBI may specify. A certificate of deposit, commercial paper and call or notice money serve different funding purposes and are subject to their own RBI frameworks.
Repo and reverse repo
In a repo, the party raising funds sells securities and agrees to repurchase them later at an agreed price. In a reverse repo, the funding provider purchases securities and agrees to resell them. These are opposite perspectives on a securities-backed financing transaction; the contractual and regulatory requirements still govern.
Securities
The definition covers specified government and local-authority securities and, specifically for repo and reverse repo purposes, corporate bonds and debentures. This Chapter-specific definition should not automatically be substituted for the meaning of securities in other legislation.
Section 45-V - Transactions in derivatives
(1) Notwithstanding anything contained in the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or any other law for the time being in force, transactions in such derivatives, as may be specified by the Bank from time to time, shall be valid, if at least one of the parties to the transaction is the Bank, a scheduled bank, or such other agency falling under the regulatory purview of the Bank under the Act, the Banking Regulation Act, 1949 (10 of 1949), the Foreign Exchange Management Act, 1999 (42 of 1999), or any other Act or instrument having the force of law, as may be specified by the Bank from time to time.
(2) Transactions in such derivatives, as had been specified by the Bank from time to time, shall be deemed always to have been valid, as if the provisions of sub-section (1) were in force at all material times.
Legal effect of Section 45-V
Non-obstante clause: The words "notwithstanding anything" give Section 45-V an overriding effect in the sphere it expressly governs, including in relation to inconsistent provisions of the Securities Contracts (Regulation) Act, 1956. They do not dispense with all applicable regulatory directions, eligibility restrictions or conduct requirements.
Qualifying party: At least one party must be RBI, a scheduled bank or another agency within the specified RBI regulatory purview. The transaction must also concern a derivative specified by RBI. Both the instrument and party conditions matter.
Retrospective validation: Sub-section (2) deems RBI-specified derivative transactions covered by the provision to have been valid at relevant earlier times. It should be read with sub-section (1), not as blanket validation of transactions outside the prescribed category.
Related RBI powers and compliance
Section 45-W authorises RBI to regulate transactions in derivatives, money market instruments and related matters. Section 45-X addresses compliance with directions and furnishing of information. Parties should verify current RBI directions concerning product eligibility, authorised participants, documentation, reporting and risk management before entering into a transaction.
Official legislation and regulatory resources
Refer to India Code for the Reserve Bank of India Act, 1934 and related Acts; the Reserve Bank of India for master directions, notifications and circulars on derivatives and money markets; and the Gazette of India for official notifications and amendments. Consult the applicable current directions for the specific market and counterparty category.