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FOREIGN EXCHANGE MANAGEMENT (FOREIGN EXCHANGE DERIVATIVE CONTRACTS)
REGULATIONS, 2000
Notification
No. 25 dated 3rd May 2000
G.S.R.411
(E), dated 3.5.200(As amended by FEMA Notification No. 28/ 2000-RB dated 5th
September 2000) - In exercise of the powers conferred by clause (h)
of sub- section (2) of section 47 of the Foreign Exchange Management Act, 1999
(42 of 1999), the Reserve Bank makes the following regulations, to promote
orderly development and maintenance of foreign exchange market in India, namely:
(i)
These Regulations may be called the Foreign Exchange Management (Foreign
Exchange Derivative Contracts ) Regulations ,2000.
(ii)
They shall come into force on the 1st day of June 2000.
In
these Regulations, unless the context requires otherwise, -
(i)
�Act � means the Foreign Exchange Management Act, 1999 (42 of 1999);
(ii)
�authorised dealer� means a person authorised as authorised dealer
under sub-section (1) of section 10 of the Act;
(iii)
�Cash delivery� means delivery of foreign exchange on the day of
transaction;
(iv)
�Forward contract� means a transaction involving delivery other than
Cash or Tom or Spot delivery, of foreign exchange;
(v)
�Foreign exchange derivative contract� means a financial transaction
or an arrangement in whatever form and by whatever name called, whose value is
derived from price movement in one or more underlying assets, and includes,
(a) a transaction which involves at
least one foreign currency other than currency of Nepal or Bhutan or
(b) a transaction which involves at
least one interest rate applicable to a foreign currency not being a currency of
Nepal or Bhutan , or
(a)
a forward contract,
but
does not include foreign exchange transaction for Cash or Tom or Spot
deliveries;
(vi)
�Registered Foreign Institutional Investor (FII)� means a foreign
institutional investor registered with Securities and Exchange Board of India;
(vii)
�Schedule� means a schedule annexed to these Regulations;
(viii)
�Spot delivery� means delivery of foreign exchange on the second
working day after the day of transaction;
(ix)
�Tom delivery� means delivery of foreign exchange on a working day
next to the day of transaction;
(x)
the words and expressions used but not defined in these Regulations shall
have the same meanings respectively assigned to them in the Act.
Save
as otherwise provided in these Regulations, no person in India shall enter into
a foreign exchange derivative contract without the prior permission of the
Reserve Bank.
4.
Permission to a person resident in India to enter into a Foreign
Exchange Derivative contract:
A
person resident in India may enter into a foreign exchange derivative contract
in accordance with provisions contained in Schedule I,
to hedge an exposure to risk in respect of a transaction permissible under the
Act, or rules or regulations or directions or orders made or issued thereunder.
5.
Permission to a person resident outside India to enter into a Foreign
Exchange Derivative contract:
A
person resident outside India may enter into a foreign exchange derivative
contract with a person resident in India in accordance with provisions contained
in Schedule II, to hedge an exposure to risk in
respect of a transaction permissible under the Act, or rules or regulations or
directions or orders made or issued thereunder.
Reserve
Bank may on an application made in accordance with the procedure specified in Schedule
III, permit subject to such terms and conditions as it may consider
necessary, a person resident in India to enter into a contract in a commodity
exchange or market outside India to hedge price risk in a commodity.
An
authorised dealer in India may remit outside India foreign exchange in respect
of a transaction, undertaken in accordance with these Regulations, in the
following cases, namely:
(a)
option premium payable by a person resident in India to a person resident
outside India;
(b)
remittance by a person resident in India of amount incidental to a
foreign exchange derivative contract entered into in accordance with Regulation
4,
(c)
remittance by a person resident outside India of amount incidental to a
foreign exchange derivative contract entered into in accordance with Regulation
5;
(d)
any other remittance related to a foreign exchange derivative contract
approved by Reserve Bank.
Foreign
exchange derivative contract permissible for a person resident in India
A.
Forward Contract
1.
A person resident in India may enter into a forward contract with an
authorised dealer in India to hedge an exposure to exchange risk in respect of a
transaction for which sale and / or purchase of foreign exchange is permitted
under Act, or rules or regulations or directions or orders made or issued
thereunder, subject to following terms and conditions �
(a)
the authorised dealer through certification of documentary evidence is
satisfied about the genuineness of the underlying exposure,
(b)
the maturity of the hedge does not exceed the maturity of the underlying
transaction,
(c)
the currency of hedge and tenor are left to the choice of the customer,
(d)
where the exact amount of the underlying transaction is not
ascertainable, the contract is booked on the basis of a reasonable estimate,
(e)
foreign currency loans / bonds will be eligible for hedge only after
final approval is accorded by the Reserve Bank where such approval is necessary,
(f)
in case of Global Depository Receipts (GDRs) the issue price has been
finalised,
(g)
balances in the Exchange Earner�s Foreign Currency (EEFC) accounts sold
forward by the accounts holders shall remain earmarked for delivery and such
contracts shall not be cancelled. They may be, however be rolled-over,
(h)
contracts involving rupee as one of the currencies, once cancelled shall
not be re-booked although they can be rolled over at ongoing rated on or before
maturity. This restriction shall not apply to contracts covering exports
transactions which may be cancelled, rebooked or rolled-over at on going rates,
(i)
substitution of contracts for hedging trade transactions may be permitted
by an authorised dealer on being satisfied with the circumstances under which
such substitution has become necessary.
B.
Contract other than Forward Contract
2(i).
A person resident in India who has borrowed foreign exchange in
accordance with the provisions of Foreign Exchange Management (Borrowing and
Lending in Foreign Exchange) Regulations, 2000, may enter into an Interest rate
swap or Currency swap or Coupon Swap or Foreign Currency Option or Interest rate
cap or collar (purchase) or Forward Rate Agreement (FRA) contract with an
authorised dealer in India or with a branch outside India of an authorised
dealer for hedging his loan exposure and unwinding from such hedges:
Provided
that �
(a) the contract does not involve
rupee,
(b) the Reserve Bank has accorded
final approval for borrowing in foreign currency,
(c) the national principal amount of
the hedge does not exceed the outstanding amount of the foreign currency loan,
and
(d)
the maturity of the hedge does not exceed the unexpired maturity of the
underlying loan,
(ii)
a person resident in India, who owes a foreign exchange or rupee
liability, may enter into a contract for foreign currency -rupee swap with an
authorised dealer in India to hedge long-term exposure,
(iii)
the contract entered into under sub-paragraph (2) if cancelled not be
rebooked or re-entered by whatever name called.
3.
(i) A
person resident in India may enter into a foreign currency option contract with
an authorised dealer in India to hedge foreign exchange exposure of such person
arising out of his trade:
Provided
that in respect of cost effective risk reduction strategies like range forwards,
ratio range forwards or any other variable by whatever name called there shall
not be any net inflow of premium.
Explanation
�The contingent foreign exchange exposure arising out of submission
of a tender bid in foreign exchange is also eligible for hedging under this
sub-paragraph.
(ii)
A transaction undertaken under sub-paragraph (1) may be freely booked
and/ or cancelled.
Foreign
exchange derivative contracts permissible for a person resident outside India
1.
A registered Foreign Institutional Investor (FII) may enter into a
forward contract with rupee as one of the currencies with an authorised dealer
in India to hedge its exposure in India.
Provided
that �
(a)
the value of the hedge does not exceed the current market value in
respect of investments in debt instrument,
(b)
the value of the hedge does not exceed 15% of the market value of the
equity as at the close of business on 31st March 1999, converted at the rate of
US$ 1=Rs.42.43 plus the increase in market value/ inflows after 31st March 1999
provided that the forward cover once taken shall be allowed to continue as long
as it does not exceed the value of the underlying investment,
(c)
forward contracts once cancelled shall not be rebooked but may be
rolled-over on or before the maturity,
(d)
the cost of hedge is met out of repatriable funds and/ or inward
remittance through normal banking channel,
(e)
all outward remittances incidental to hedge are net of applicable Indian
taxes.
2.
A non-resident Indian or Overseas Corporate Body may enter into forward
contract with rupee as one of the currencies, with an authorised dealer in India
to hedge:
(a)
the amount of dividend due to him/it on shares held in an Indian company;
(b)
the balances held in Foreign Currency Non-Resident (FCNR) account or
Non-Resident External Rupee (NRE) account;
(c)
the amount of investment made under portfolio scheme in accordance with
the provisions of the Foreign Exchange Regulation Act, 1973 or under
notifications issued thereunder or is made in accordance with the provisions of
the Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident Outside India) Regulations,2000 and in both cases subject to the terms
and conditions specified in the proviso to paragraph 1 of this Schedule .
3.
Reserve Bank may, on application, allow a person resident outside India
to purchase a forward contract to hedge his investment made since 1st January
1993.
Procedure
for application for approval for hedging of commodity price risk
1.
A person resident in India, engaged in export-import trade, who seeks to
hedge price risk in respect of any commodity including Gold may submit an
application to the International Banking Division of an authorised dealer giving
the following details .
(i)
A brief description of the hedging strategy proposed; namely: -
(a) description of business activity
and nature of risk;
(b) instruments proposed to be used
for hedging;
(c)
names of commodity exchange and brokers through whom the risk is proposed to be
hedged and credit lines proposed to be availed. The name and address of the
regulatory authority in the country concerned may also be given:
(d)
size/ average tenure of exposure and / or total turnover in a year together with
expected peak positions there of and the basis of calculation:
(ii)
copy of the Risk Management Policy approved by the Management covering:
(a)
risk identification,
(b)
risk measurements,
(c)
guidelines and procedures to be followed with respect to revaluation and/ or
monitoring of positions,
(d)
names and designations of the officials authorised to undertake transactions and
limits;
(e) any other relevant information.
2.
Authorised dealer after ensuring that the application is supported by
documents indicated in paragraph 1 may forward the application with its
recommendations to Reserve Bank for consideration.
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