RBI/2018-19/136
A .P. (DIR Series) Circular No. 22
March
01, 2019
To
All Category - I Authorised Dealer banks
Madam / Sir,
Hedging
of exchange rate risk by Foreign Portfolio Investors (FPIs) under Voluntary
Retention Route
Attention of Authorised Dealers
Category – I (AD Category – I) banks is invited to the Foreign Exchange
Management (Foreign Exchange Derivative Contracts) Regulations, 2000 dated
May 3, 2000 (Notification No. FEMA. 25/RB-2000
dated May 3, 2000), as amended from time to time and Master Direction - Risk Management and Inter-Bank
Dealings dated July 5, 2016, as amended from time to time.
2. A reference is also invited
to A.P. (DIR Series) Circular No. 21 dated
March 01, 2019 on Voluntary Retention Route (VRR) for Foreign
Portfolio Investors (FPIs) investment in debt. The operational guidelines,
terms and conditions for hedging the exposure to exchange rate risk on
account of investments made under this route are provided in the Annex to this circular.
3. Necessary amendments
(Notification No. FEMA 390/2019-RB dated February 26, 2019) to Foreign
Exchange Management (Foreign Exchange Derivatives Contracts) Regulations,
2000 (Notification No. FEMA.25/RB-2000 dated May
3, 2000) have been notified in the Official
Gazette vide G.S.R. No. 161 (E) dated February 26, 2019. These are
issued under clause (h) of sub-section (2) of Section 47 of FEMA, 1999 (42
of 1999).
4. The directions contained in
this circular are issued under Sections 10(4) and 11(1) of the Foreign
Exchange Management Act, 1999 (42 of 1999) and are without prejudice to
permissions/ approvals, if any, required under any other law.
Yours
faithfully,
(T
Rabi Sankar)
Chief General Manager
Annex
Hedging
of exchange rate risk by Foreign Portfolio Investors (FPIs) under Voluntary
Retention Route
Purpose: To hedge the exposure to exchange rate risk on
account of investments made under the Voluntary Retention Route (VRR)
Products: Forwards, options, cost reduction structures and
swaps with Rupee as one of the currencies
Operational Guidelines, Terms
and Conditions:
i. Authorised dealers may offer
derivative contracts using any of the aforementioned products to eligible
users under VRR or to its central treasury (of the group and being a group
entity). Authorised dealers shall ensure that:
a.
The
FPI has an exposure to exchange rate risk on account of investments made
under VRR.
b.
The
notional and tenor of the contract does not exceed the value and tenor of
the exposure.
c.
The
same exposure has not been hedged with any other authorised dealer or on
the exchange.
d.
In
cases where the value of the exposure falls below the notional of the
derivative, the derivative should be suitably adjusted unless such
divergence has occurred on account of change in market value of the
exposure, in which case the FPI may, at its discretion, continue with the
derivative contract till its original maturity.
ii. Authorised dealers shall
allow FPIs to freely cancel and rebook the derivative contracts.
iii. Authorised Dealer shall
ensure that all payables incidental to the hedge are met by the FPI out of
repatriable funds and/or inward remittance through normal banking channels.
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