| Date: |
04-02-2009
|
| Notification No: |
RBI A P D (Series)Circular No 50/2008
|
| Issuing Authority: |
RBI
|
| Type: |
A.P.D.(Series) Circulars
|
| File No: |
RBI/2008-09/373 |
| Subject: |
Hedging of Freight Risk by domestic oil-refining, shipping companies and other companies
|
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commodity hedging, to allow hedging of freight risk by domestic oil-refining
companies and shipping companies on the following terms and conditions:
i) The hedging can be undertaken as plain vanilla Over the Counter (OTC) or
exchange traded products in the international market / exchange.
ii) The exchanges on which the products are purchased must be a regulated
entity.
iii) The maximum tenor permissible will be one year forward.
iv) The basis of underlying exposure is as follows:
(a) In the case of oil refining companies –
(i)The freight hedging will be on the basis of underlying contracts i.e.,
import/export orders for crude oil/petroleum products. Additionally, AD Category
- I banks may permit domestic oil refining companies to hedge their freight risk
on anticipated imports of crude oil on the basis of their past performance up to
50 per cent of the volume of actual imports of crude oil during the previous
year or 50 per cent of the average volume of imports during the previous three
financial years, whichever is higher.
(ii) Contracts booked under the past performance facility will have to be
regularized by production of underlying documents during the currency of the
hedge. An undertaking may be obtained from the company to this effect.
(b) In the case of shipping companies :-
(i)The hedging will be on the basis of owned / controlled ships of the shipping
company which have no committed employment. The quantum of hedge will be
determined by the number and capacity of these ships. The same may be certified
by a Chartered Accountant to the AD Category - I bank.
(ii) Contracts booked will have to be regularized by production of underlying
documents i.e. employment of the ship during the currency of the hedge. An
undertaking may be obtained from the company to this effect.
(iii) AD Category - I banks may also ensure that the freight derivatives being
entered into by the shipping companies are reflective of the underlying business
of the shipping companies.
v). AD Category – I banks should ensure that the entities hedging their freight
exposures should have Board approved Risk Management policies which define the
overall framework within which derivative transactions should be undertaken and
the risks contained. AD Category - I banks should approve this facility only
after ensuring that the sanction of the company's Board has been obtained for
the specific activity and also for dealing in overseas exchanges / markets. The
Board approval must include explicitly the authority/ies permitted to undertake
the transactions, the mark-to-market policy, the counterparties permitted for
OTC derivatives, etc. and a list of transactions undertaken should be put up to
the Board on a half-yearly basis. The AD Category - I bank must obtain a copy of
Risk Management Policy from the company incorporating the above details at the
time of permitting the transaction itself and as and when changes made therein.
In the case of other companies which are exposed to freight risk, AD Category
- I banks may approach the Reserve Bank for permission on behalf of their
customers. Applications may be forwarded to the Chief General Manager, Reserve
Bank of India, Foreign Exchange Department, Forex Markets Division, Amar
Building, 5th floor, Mumbai 400 001.
Necessary amendments to Notification No.FEMA.25/RB-2000 dated May 3, 2000
[Foreign Exchange Management (Foreign Exchange Derivative Contracts)
Regulations, 2000] are being issued separately.
AD Category – I banks may bring the contents of the 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,
(Salim Gangadharan)
Chief General Manager-in-Charge
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