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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