RBI/2010-11/526
A.P. (DIR Series) Circular No. 60
May 16 , 2011
To
All Authorized Dealer - Category I banks
Madam / Sir
Comprehensive Guidelines on Over the Counter (OTC)
Foreign Exchange Derivatives and Overseas Hedging
of Commodity Price and Freight Risks
Attention of the Authorized Dealer Category - I (AD Category - I) banks is
invited to
Notification No. FEMA 25/2000-RB dated May 3, 2000, as amended from
time to time, on the regulations governing foreign exchange derivative
contracts. Further, attention is also invited to the comprehensive guidelines on
Over-the-Counter (OTC) Foreign Exchange Derivatives and Overseas Hedging of
Commodity Price and Freight Risks issued vide
A.P. (DIR Series) Circular No. 32
dated December 28, 2010.
- In view of the representation received from the industry associations and as
AS 30/32 standards are yet to be notified by the Ministry of Corporate Affairs,
it has been decided to amend the eligibility criteria for the users of cost
reduction structures as contained under para B I (1)(v) of
A.P. (DIR Series)
Circular No. 32 dated December 28, 2010 as indicated below:
A. Existing Provisions
“Users – Listed companies or unlisted companies with a minimum net worth of Rs.
100 crore ( subsidiaries or affiliates of listed companies which follow AS
30/32, having common treasuries and consolidate the accounts with parent
companies are exempted from the minimum net worth criteria), which are complying
with the following:
- Adoption of Accounting Standards 30 and 32. Companies which are not complying
fully with AS 30 and 32 should follow the accounting treatment and disclosure
standards on derivative contracts, as envisaged under AS 30/32.
- Having a risk management policy and a specific clause in the policy that allows
using the type/s of cost reduction structures. ”
B. Amended Provisions
“Users - Listed companies and their subsidiaries/joint ventures/associates
having common treasury and consolidated balance sheet
or
Unlisted companies with a minimum net worth of Rs. 200 crore
provided
- All such products are fair valued on each reporting date;
- The companies follow the Accounting Standards notified under section 211 of the
Companies Act, 1956 and other applicable Guidance of the Institute of Chartered
Accountants of India (ICAI) for such products/ contracts as also the principle
of prudence which requires recognition of expected losses and non-recognition of
unrealized gains;
- Disclosures are made in the financial statements as prescribed in ICAI press
release dated 2nd December 2005; and
- The companies have a risk management policy with a specific clause in the policy
that allows using the type/s of cost reduction structures.
(Note: The above accounting treatment is a transitional arrangement till AS 30 /
32 or equivalent standards are notified.)”
Other provisions of the circular shall remain unchanged.
- It may also be noted that the above eligibility criteria would also be
applicable to the users of OTC option strategies involving a simultaneous
purchase and sale of options for overseas commodity hedging.
- The necessary amendments to
Notification No. FEMA.25/RB-2000 dated May 3,
2000 [Foreign Exchange Management (Foreign Exchange Derivatives Contracts)
Regulations, 2000] are being notified separately.
- AD Category - I banks may bring the contents of this circular to the notice
of their constituents and customers concerned.
- The directions contained in this circular have been 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,
(Meena Hemchandra)
Chief General Manager-in-Charge