Exchange Control - Forward Cover for Foreign Institutional Investors
[As covered by Section 5 & Schedule II of "Foreign Exchange Management (Foreign exchange
derivative contracts) Regulations, 2000" vide RBI Notification
No.FEMA 25 /RB-2000, dated 3rd May 2000

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 Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000, 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.
(Regulation 5).

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. (Regulation 3)

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; remittance by a person resident outside India of amount incidental to a foreign exchange derivative contract entered into in accordance with Regulation 5 (Regulation 7)

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,, subject to conditions as below.

1. the value of the hedge does not exceed the current market value in respect of investments in debt instruments,

2. 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,

3. forward contracts once cancelled shall not be rebooked but may be rolled over on or before the maturity,

4. the cost of hedge is met out of repatriable funds and/or inward remittance through normal banking channel,

5. all outward remittances incidental to hedge are net of applicable Indian taxes

RBI with a view to further liberalise and simplify the facility, has decided to permit the FIIs to hedge the market value of their entire investment in equity as on a particular date without any reference to a cut-off date. If a hedge becomes naked in part or full owing to shrinking of the portfolio, it may be allowed to continue to the original maturity, if so desired, as amended in terms of A.P. (DIR Series) Circular No.50 November 16, 2002

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;

1. the amount of dividend due to him/it on shares held in an Indian company.

2. the balances held in Foreign Currency Non-Resident (FCNR) account or Non Resident External Rupee (NRE) account,

3. 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 this Schedule.

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.