Summary Of RBI HEDGING REGULATIONS for OTC Hedging Last updated on February 8, 2014. Includes Notifications up to February 4, 2014. OVERALL FRAMEWORK OF OVER-THE-COUNTER HEDGING PARTICULARS HEDGE TO BE TAKEN WITH CONTRACTED EXPOSURE AD Category – I Banks PAST PERFORMANCE FACILITY SPECIAL DISPENSATION - SMEs SPECIAL DISPENSATION – INDIVIDUALS AD Category – I Banks AD Category-1 Banks (with whom they have credit facilities) AD Category-1 Banks (with the Bank in which Indv. has banking relationship) SMEs Individuals Direct & Indirect exposures Actual or anticipated remittances Depends on credit facility provided by the Bank USD 1,00,000 Upto 1 year Upto 1 year Not needed Not needed Quarterly Quarterly Importers & Exporters WHO CAN HEDGE WHAT KIND OF EXPOSURE Residents in India (For Exporters O/s Bill should be < 10% of turnover) All types of exposure that is under a contract 100% Exposure of the contract HEDGING QUANTITY LIMIT TENOR OF HEDGE PRODUCTION OF DOCUMENT OF UNDERLYING EXPOSURE CERTIFICATE FROM STATUTORY AUDITOR See chart and tables in XLS file Trades in merchandise goods & services Higher of: a) Avg. of 3 yr turnover b) Last yr turnover [100% of above for Exporters & 25% for Importers] See chart and tables in XLS file Maturity of Hedge < Balance Maturity of Exposure Less than the maturity of underlying exposure to be produced* At the time of booking hedge Before maturity/ cancellation of hedge See “Certain Specific Conditions” for details Annual See “Certain Specific Conditions” for details Quarterly Summary Of RBI HEDGING REGULATIONS for OTC Hedging CANCELLATION/ REBOOKING STIPULATIONS + OTHER FACILITIES: PRODUCTS FORWARD FOREIGN EXCHANGE CONTRACTS CONTRACTED EXPOSURE PAST PERFORMANCE FACILITY 100% Cancellation, Rollover, Rebooking allowed. Fully deliverable. If Cancelled, No Rollover, No Rebooking See chart and tables in XLS file See chart and tables in XLS file SPECIAL DISPENSATION – SMEs SPECIAL DISPENSATION – INDIVIDUALS Cancellation, Rollover, Rebooking allowed Deliverable. Under special circumstances cancellation and rebooking allowed. Any currency can be chosen to hedge provided the Board approves of the same. CROSS CURRENCY OPTIONS (NOT INVOLVING INR) FOREIGN CURRENCY – INR OPTIONS FOREIGN CURRENCY – INR SWAPS COST REDUCTION STRUCTURES (Cross-currency option & Foreign currency INR option) HEDGING OF BORROWINGS IN FOREIGN EXCHANGE Buy Plain Vanilla Call or Put Options. Buy Plain Vanilla Call or Put Options 100% Cancellation, Rollover, Rebooking allowed. If Cancelled, No Rollover, No Rebooking. Buy Plain Vanilla Call or Put Options Buy Plain Vanilla Call or Put Options Delivery on spot basis or Net Cash settlement in INR on spot basis as per contract If Cancelled, No Rebooking Listed Companies [Cos. with Net Worth > 200 Cr.] Plain Vanilla Options w/o receipt of premium Interest rate risk & Currency risk on loan exposures (Cancellation & Rebooking allowed where INR is not involved) No No Delivery on spot basis or Net Cash settlement in INR on spot basis as per contract No No No No No No No No No Corporates [Cos. with Net Worth > 200 Cr. & Annual turnover > 1000 Cr.] Plain Vanilla Options w/o receipt of premium) No Summary Of RBI HEDGING REGULATIONS for OTC Hedging GENERAL TERMS & CONDITIONS: CERTAIN SPECIFIC CONDITIONS: Exposure, whether capital or current, should be genuine. Notional amount of derivative contract should not exceed actual underlying exposure. Similarly, the tenor of derivative contract should not exceed tenor of underlying exposure. Declaration to be given to bank that exposure is no hedged with another bank. Corporate should provide annual certificate to Bank that derivative transactions are authorized and that the Board is aware of the same. Derived foreign exchange exposures are not permitted to be hedged. Other than for forwards, the term sheet should contain: a) purpose of transaction, b) spot rate at the time of transaction & c) Quantified maximum loss/ worst downside in various scenarios. Forward contracts booked with one Bank can be cancelled and rebooked with another Bank provided such switch is warranted by better rates offered by the other Bank and the cancellation and rebooking are done simultaneously on the maturity date of contract. Contracted Exposure: a. 15 days period is allowed for submission of underlying documents from the date of booking. If this facility is misused thrice in a FY, then this facility will be withdrawn. b. An undertaking has to be given to the Bank initially. c. Provided Maturity of Hedge < Maturity of Underlying exposure, any currency for any tenor can be chosen for hedging. Past Performance Facility: a. An undertaking has to be given by customer that supporting documentary evidence would be produced before maturity of contracts. b. Any contract booked without documentary evidence shall be marked off against this limit. c. Past performance limits once utilized cannot be reinstated. d. Cover > 50% of limit needs CA certificate stating all guidelines have been adhered to, certified of last 3 export/ import turnover details. e. Higher limits can be sanctioned on application to RBI which shall be on deliverable basis. Special Dispensation – SMEs: Must produce a declaration to bank regarding forwards booked with other banks. Hedging of Borrowings in Foreign Exchange: Products that can be used without involving INR are: Interest rate swap, Cross currency swap, Coupon swap, Cross currency option, Interest rate cap or collar (purchases), Forward rate agreement (FRA). Summary Of RBI HEDGING REGULATIONS for OTC Hedging PRODUCTS TO BE USED FOR OTHER PURPOSES PURPOSE FORWARD FOREIGN EXCHANGE CONRACTS OVERSEAS DIRECT INVESTMENT (ODI) Yes (100% Cancellation, Rollover allowed) ECONOMIC EXPOSURE OF IMPORTERS IN RESPECT OF CUSTOMS DUTY ON IMPORTS Yes FOREIGN CURRENCY LOANS/ BONDS Global Depository Receipts & American Depository Receipts Balance in EEFC a/c sold forward NON-INR FORWARD CONTRACTS Exposure due to submission of tender bid in Foreign Exchange CROSS CURRENCY OPTION (W/O INR) FOREIGN CURRENCY – INR OPTIONS After final approval of RBI and allotment of Loan Registration Number Yes. After issue price has been finalized Earmarked for delivery. Cannot be cancelled. But can be rolled over on maturity. Can be rebooked on cancellation provided exposure information is submitted. No COST REDUCTION STRUCTURES No If hedge becomes naked in part or full due to contraction of market value of ODI, hedge can continue until maturity. Rollover shall be permitted up to market value on maturity date. No Cash settled on maturity No rebooking on cancellation Yes. FOREIGN CURRENCY – INR SWAPS If custom duty changes due to Govt. notification after date of forward contracts can cancel and/ or rebook before maturity. No No Yes Yes No No No No No No No No N/A N/A N/A N/A Yes Yes No No Summary Of RBI HEDGING REGULATIONS for OTC Hedging ECBs & FC loans domestically against FCNR(B) deposits FOREIGN CURRENCY LIABILITY TO INR LIABILITY AND VICEVERSA Yes Yes No No No No Yes No Yes (No upfront payment of rupees shall be undertaken) No _________________________________________________________________________________________________________________ Copyright, Kshitij Consultancy Services, Suite 2G, 2nd Floor, Tower “C”, Hastings Court, 96 Garden Reach Road, Kolkata - 700 023, IND Phone: 00-91-33-24892010 / 12 E-mail: [email protected] Website: http://www.kshitij.com Research & Analysis: Rukmani (Sadhna) Shankar, [email protected] Disclaimer: This document is our understanding and summarization of the cited regulation. It is offered merely to allow for quicker and easier understanding of the regulation. It does not purport to be legal advise, nor is intended to replace the original regulation. No guarantee of any kind is made as to the correctness or accuracy of the information contained herein. This document is offered without acceptance of any liability whatsoever on the part Kshitij Consultancy Services, it employees or associates. It is subject to change without notice.
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