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[Source: RBI Website]
Exchange Control - Foreign Exchange
Derivative Contract Permissible for a Person
Resident in India
"Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000" made by RBI under clause (h) of sub-section (2) of Section 47 of the Foreign Exchange Management Act, 1999 ( 42 of 1999), to promote orderly development and maintenance of foreign exchange market in India. The aforesaid regulation was notified by RBI on 3rd May, 2000 and came into force on 1st June, 2000. The regulations defines -
forward contract: means a transaction involving delivery, other than Cash or Tom or Spot delivery, of foreign exchange; '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 transaction which involves at least one foreign currency other than currency of Nepal or Bhutan, or a transaction which involves at least one interest rate applicable to a foreign currency not being a currency of Nepal or Bhutan , or a forward contract, but does not include foreign exchange transaction for Cash or Tom or Spot deliveries; 'Spot delivery' means delivery of foreign exchange on the second working day after the day of transaction; 'Tom delivery' means delivery of foreign exchange on a working day next to the day of transaction;
Regulation 3 prohibits any person in India enter into a foreign exchange derivative contract without the prior permission of the Reserve Bank, except such of those cases specifically permitted by the Regulations.
As per Section 4 of the Regulations, which deal with derivative contracts by Resident Indians- "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.". Schedule No.1 to the Regulations describes the procedure and conditions applicable for entering into Forward Contracts by Resident Indians. This is covered in this article. Forward Contracts by Foreign Institutional Investors covered by Section 5 of the Regulations is discussed in the next article.
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Forward Contract
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 the Act, or rules or regulations or directions or orders made or issued thereunder, subject to following terms and condition
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the authorised dealer through verification of documentary evidence is satisfied about the genuineness of the underlying exposure, the maturity of the hedge does not exceed the maturity of the underlying transaction the currency of hedge and tenor are left to the choice of the customer where the exact amount of the underlying transaction is not ascertainable, the contract is booked on the basis of a reasonable estimate foreign currency loans/bonds will be eligible for hedge only after final approval is accorded by the Reserve Bank where such approval is necessary, in case of Global Depository Receipts (GDRs) the issue price has been finalised, balances in the Exchange Earner's Foreign Currency(EEFC) accounts sold forward by the account holders shall remain earmarked for delivery and such contracts shall not be cancelled. They may be ,however, be rolled-over, contracts involving rupee as one of the currencies, once cancelled shall not be re-booked although they can be rolled over at ongoing rates on or before maturity. This restriction shall not apply to contracts covering export transactions which may be cancelled, rebooked or rolled over at on-going rates, 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
Contract other than Forward Contract
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 (purchases) 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 subject to following conditions,
the contract does not involve rupee, the Reserve Bank has accorded final approval for borrowing in foreign currency, the notional principal amount of the hedge does not exceed the outstanding amount of the foreign currency loan, and the maturity of the hedge does not exceed the un-expired maturity of the underlying loan, 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, The contract entered into under sub-paragraph 2, if cancelled shall not be rebooked or re-entered, by whatever name called.
Foreign Currency Option Contracts
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, subject to condition 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.
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. A Transactions undertaken under this provision) may be freely booked and/or cancelled
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.
Remittance related to a Foreign Exchange Derivative contract
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;
option premium payable by a person resident in India to a person resident outside India , remittance by a person resident in India of amount incidental to a foreign exchange derivative contract entered into in accordance with Regulation 4, any other remittance related to a foreign exchange derivative contract approved by Reserve Bank.
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