A.D.(M.A. Series) Circular No.1-RB, January 19, 2000[Last Circulars in 1999:A.D.(M.A. Series) Circular No.35
A.M.(F.L. Series) Circular No.4 and
A.M.(R.L. Series) Circular No.1]
To,
All Authorised Dealers in Foreign Exchange
Dear Sirs,
Amendments to the Exchange Control Manual (ECM)It has been decided to bring out updated Exchange Control regulations relating to Forward Exchange Cover, Rupee Accounts of Non-Resident Banks and Inter-bank Dealings. The regulations have also been amended/modified to some extent. Authorised dealers may carefully note the changes.
2.The following consequential amendments may be carried out in the ECM.
Volume I (i) Chapter 3 - Part C may be replaced by Slip 1.
(ii) Existing Part D of Chapter 3 may be deleted.
(iii) Existing Part E of Chapter 3 may be renumbered as Part D.
(iv) Existing Annexure II to Chapter 3 may be replaced by Slip 2.
(v) Chapter 5 - Part A may be replaced by Slip 3.
(vi) Existing Part B of Chapter 5 may be replaced by Slip 4.
(vii) Paragraph 5C.4 may be deleted.
(viii) In the Annexure to Chapter 5 relating to “Guidelines for Foreign Exchange Exposure Limits of Authorised Dealers” paragraph 5 may be replaced by Slip 5.
Volume II(ix)Form FTD as per slip 6 may be inserted after form FNC 7 and its entry be made in the Index.
(x) Form GPB as per Slip 7 may be inserted before form GR and its entry be made in the Index.
3.Authorised dealers may bring the contents of this circular to the notice of their constituents concerned.
4.The directions contained in this circular have been issued under Section 73(3) of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and any contravention or non-observance thereof is subject to the penalties prescribed under the Act.
Yours faithfully,
B. MAHESHWARAN
Chief General Manger
Slip 1
[AD/MA/ 1 /2000]
PART C - RISK MANAGEMENT
Facilities for Residents
Forward Exchange Contracts: 3C.1(i)Authorised dealers may enter into contracts for forward purchase and sale of foreign currency with residents who have a crystallised exposure to exchange risk in respect of genuine transactions permitted under Exchange Control Regulations.
(ii)The choice of the currency and tenor are left to the customer. Where the exact amount is not ascertainable owing to the rates/costs being linked to variable factors, contracts may be booked on the basis of a reasonable estimate. However, the maturity of the cover should not exceed the maturity of the underlying transaction.
(iii)Foreign currency loans/bonds become eligible for cover only after final approval is accorded by the Reserve Bank for the arrangement. In respect of Global Depository Receipts (GDRs) the issue price should have been finalised to be eligible for cover.
(iv)Balances in the EEFC accounts may be allowed to be sold forward by the account holders provided they remain earmarked for delivery. Such contracts should not, however, be cancelled.
(v)While booking contracts, suitable documentary evidence should be verified to ensure that an exposure exists, to the extent of the amount of cover sought. Full particulars of contract should be marked on such documents under proper authentication and copies thereof retained on record for verification.
(vi)Contracts involving rupee as one of the currencies, once cancelled cannot be re-booked. They may, however, be rolled over at ongoing rates on or before maturity.
(vii)As an exception to (vi) above, contracts covering export transactions may be cancelled, re-booked and rolled over at ongoing rates.
(viii)Substitution of contracts covering trade transactions may be permitted, if the authorised dealer is satisfied after verification of suitable documentary evidence, with the circumstances under which such substitution has become necessary.
Foreign Currency - Rupee Swaps:3C.2 Authorised dealers may arrange foreign currency - rupee swaps between corporates who run long-term foreign currency exposures. Entities who do not have any forex exposure but are willing to assume a forex liability in lieu of their long term rupee liability may also become counter parties in the arrangement. As far as possible such transactions should be concluded on a matched basis. However, where this is not feasible authorised dealers may temporarily warehouse the swaps/absorb the mis-matches within their open position and gap limits.
NOTE : Authorised dealers should not allow the swap route to become a surrogate for forward contracts for those who do not qualify for forward cover under paragraph 3C.1.
Hedging of Loan Exposures 3C.3 (i)Authorised dealers may offer the undernoted products to corporates either on a back-to-back basis or by booking the transaction overseas with the branch of an authorised dealer in India.
(a) Interest rate swaps
(b) Currency swaps
(c) Coupon swaps
(d) Interest rate caps/collars (purchase)
(e) Forward Rate Agreements
(ii)Before entertaining any request for any of these facilities, the authorised dealer should ensure that
(a)The Reserve Bank has accorded final approval for the conclusion of the underlying loan transaction;
(b)The notional principal amount of the hedge does not exceed the outstanding amount of the foreign currency loan;
(c)The maturity of the hedge does not exceed the remaining life to maturity of the underlying loan;
(d)The Board of Directors of the corporate has drawn up a risk management policy, laid down clear guidelines for concluding transactions, and institutionalised arrangements for a quarterly review of operations and annual audit of transactions to verify compliance with the regulations.
(e)The hedge results in reduction of the risk of exposure and there is no net inflow of premium, direct or implied in cases where option components are built into the hedge strategy;
(iii)Corporates may be permitted to unwind a hedge transaction.
(iv) A report of the transaction (booked/cancelled), verified by the authorised dealer should be submitted to the concerned Regional Office of the Reserve Bank, within a week of its conclusion.
(v)Authorised dealers should obtain from the concerned corporates copies of the quarterly reviews and annual audit reports vide paragraph (ii) (d) above.
(vi)Payment of upfront premia, if any, as well as all other charges incidental to the hedge transaction may be effected without the prior approval of Reserve Bank.
Other Derivatives - Foreign Currency Options3C.4 (i)Authorised dealers may offer cross currency options to residents to cover their genuine exposures including contingent exposures like tender bids. Cost effective risk reduction strategies like range forwards, ratio-range forwards and such other variables may also be offered to customers provided there is no net inflow of premium. These products may be allowed to be freely booked and cancelled.
(ii)The option should be written on a fully covered back-to-back basis. The cover transaction may be undertaken with overseas banks/internationally recognised approved option exchanges/other authorised dealers in India.
Note:As an exception to this rule, options offered to clients to hedge loan exposures may be directly booked overseas with the branch of an authorised dealer in India.
(iii)Option premium may be remitted without the prior approval of Reserve Bank.
(iv)Authorised dealers who propose to write options, should apply to the Chief General Manager, Exchange Control Department, (Forex Markets Division), Reserve Bank of India, Central Office, Mumbai for permission.
Hedging of Commodity Price Exposures3C.5Indian corporates seeking to hedge commodity price exposures (excluding oil and petroleum products) should approach Reserve Bank through a bank. The guidelines to be followed in this regard are given in Annexure II. The proposal with the bank’s recommendation should be forwarded to the Chief General Manager, Exchange Control Department (Forex Markets Division), Reserve Bank of India, Central Office, Mumbai 400001.
Facilities for Non-Residents3C.6Authorised dealers may offer forward cover to:
(A)Foreign Institutional Investors (Fund-wise or FII-wise) for their investments in India as detailed below:(a) Debt instruments
To the entire extent of the current market value.
(b) Equity (Portfolio)
15% of the market value (reckoning pipeline transactions) as at the close of business on 31st March 1999 converted at the rate of US$ 1 = Rs.42.43 and the increase in market value/inflows subsequent to that date. Forward Cover once taken may be allowed to continue so long as it does not exceed the value of the underlying investment.
Note:Applications for need-based additional limit may be made to the Chief General Manager, Exchange Control Department (Forex Markets Division), Reserve Bank of India, Central Office, Mumbai 400 001.
(B)Non-Resident Indians (NRIs) and Overseas Corporate Bodies (OCBs):(a) Portfolio investments
On the same terms as applicable to equity investments of FIIs [cf. item (A)(b) above and the Note thereunder].
(b) Balances held in FCNR/Non-Resident (External) Rupee accounts and the interest payable thereon.
Entire amount (i)The cover may be provided only by the designated account-maintaining banks.
(ii)Eligibility for cover may be determined on the basis of the declaration of the FII. A quarterly review may be undertaken on the basis of market price movements, fresh inflows, amounts repatriated and other relevant parameters to ensure that the forward cover outstanding is supported by underlying exposure.
(iii)The cost of roll-overs should be met out of repatriable funds/inward remittance.
(iv)All outward remittances incidental to the hedge may be allowed subject to the payment of tax, if any.
(v)In these cases, the contracts once cancelled cannot be re-booked. They may, however, be rolled over on or before the maturity.
(vi)In respect of forward cover to FIIs, a monthly statement should be furnished to the Chief General Manager, Reserve Bank of India, Exchange Control Department (Forex Markets Division), Central Office, Mumbai 400001 before the 10th of the succeeding month indicating the name of the FII/Fund, the eligibility, amount of cover and the actual amount of cover.
(C)To non-resident shareholders for the amount of dividend due to them on shares held in Indian companies on repatriation basis For the actual amount of dividend due.
3C.7 Reserve Bank will consider on case to case basis applications for forward cover in respect of foreign direct investments made in India since 1st January 1993. Applications with full particulars may be submitted for consideration to the Chief General Manager, Exchange Control Department (Forex Markets Division), Reserve Bank of India, Central Office, Mumbai 400001.
Facilities for Authorised Dealers3C.8
Management of Bank's Assets-Liabilities:Authorised dealers may use the following instruments to hedge their assets-liability portfolio after an appropriate policy in this regard is approved by their Top Management -
1.Interest rate swaps;
2.Currency swaps; and
3.Forward rate agreements.
The use of these instruments is subject to the following conditions:
a)The value and maturity of the hedge do not exceed that of the underlying.
b)No 'stand alone' transactions are initiated. If a hedge becomes naked in part or full owing to shrinking of the portfolio, it may be allowed to continue till maturity and marked to market at regular intervals.
c)The net cash flows arising out of these transactions are booked as income and expenditure. This will form part of the exchange position.
Hedging of Gold Prices 3C.9Banks authorised to operate the Gold Deposit Scheme may use Exchange-traded and over-the-counter hedging products available overseas to manage price risk. However, while using products involving options, it may be ensured that there is no net receipt of premium, either direct or implied. Banks, which are allowed to enter into forward Gold contracts in India in terms of the guidelines issued by the Department of Banking Operations and Development, are also allowed to cover their price risk by hedging abroad in the manner indicated above.
Slip 2
[AD/MA/1/2000]
Annexure II
Guidelines for hedging of
commodity price exposuresThese guidelines cover Indian entities who are exposed to commodity price risk. The operative procedure is aimed at ensuring hedging of genuine exposures. Indian corporates who seek to hedge commodity price exposures (excluding oil and petroleum products) should submit their applications to the International Banking Division of an authorised dealer giving the following details.
i)Name and address of the organisation.
ii)A brief description of the hedging strategy proposed:
a)description of business activity and nature of risk.
b)instruments proposed to be used for hedging.
c)exchanges and brokers through whom the risk is proposed to be hedged and credit lines proposed to be availed. The name and address of the regulatory authority in the country concerned may also be given.
d)Size/average tenure of exposure/total turnover in a year expected with peak positions thereof and the basis of calculation.
iii)Copy of the Risk Management Policy approved by the Board of Directors covering:
a)risk identification
b)risk measurements
c)guidelines and procedures to be followed with respect to revaluation/monitoring of positions
d)names and designations of the officials authorised to undertake transactions and limits.
iv)Any other relevant information
2. The authorised dealer will forward the application to Reserve Bank together with its recommendations for consideration. While forwarding the proposal, the authorised dealer should ensure that it is supported by a copy of the Memorandum on the Risk Management Policy placed before the Board of Directors with specific reference to hedging of commodity price exposure. The Memorandum should, inter alia, incorporate details relating to
i)Risk identification i.e. mis-match between purchases and sales in respect of the commodity concerned, producers' risk etc.
ii)Estimate of maximum exposure in physical positions.
iii)Estimate of maximum exposure to future positions.
iv)Risk monitoring and reporting.
3.i)The focus will be on risk containment. Only off-set hedge will be permitted.
ii)All standard exchange traded futures will be permitted. If the risk profile warrants, Corporates may also use futures contracts based on average prices.
iii)As regards options, only purchases will be allowed. However, it is open to the corporates to use combinations of option strategies involving a simultaneous purchase and sale of options as long as there is no net inflow of premium, direct or implied. Corporates are also allowed to cancel an option position with an opposite transaction with the same broker.
iv)Tenure of exposure shall be limited to 6 months. Tenure beyond 6 months would require Reserve Bank's specific approval.
v)Corporates who wish to hedge commodity price exposure shall have to ensure that there are no restrictions on import/export of the commodity hedged under the Exim Policy in force.
4. In respect of gold, corporates may hedge the exposures arising from export commitments on the international exchanges as also through London Bullion Market Association (LBMA) approved brokers in the London market.
5. After grant of approval by Reserve Bank, the corporate concerned should negotiate with off-shore Exchange brokers subject, inter alia, to the following:-
i)Brokers must be clearing members of the Exchanges, with good financial track record.
ii)Brokers should be furnished with a list of the corporate's authorised traders/officers along with copies of their specimen signatures.
iii)Trading will only be in standard Exchange-traded futures contracts/options (purchases only).
iv)Brokers shall be contractually obliged to confirm each and every deal on the same day.
6. The corporate should open a Special Account with the authorised dealer. All payments/receipts incidental to hedging may be effected by the authorised dealer through this account without further reference to the Reserve Bank.
7. A copy of the Broker's Month-end Report(s), duly confirmed/ countersigned by the corporate's Financial Controller along with confirmation that all off-shore positions are/were backed by physical exposures should be submitted monthly, to Reserve Bank through the authorised dealer within 15 days of the close of the month.
8. The periodic statements submitted by Brokers, particularly those furnishing details of transactions booked and contracts closed out and the amount due/payable in settlement, should be checked by the corporate. Unreconciled items should be followed up with the Broker and reconciliation completed within three months.
9. The corporates should not undertake any arbitraging/speculative transactions. The responsibility of monitoring transactions in this regard will be that of the authorised dealer.
10. An annual certificate from Statutory Auditors should be submitted by the company to the authorised dealer. The certificate should confirm that the prescribed terms and conditions have been complied with and that the corporate's internal controls are satisfactory. Authorised dealers may forward a copy thereof to the Reserve Bank.
Slip 3
[AD/MA/1/2000]
ACCOUNTS OF NON-RESIDENT BANKS AND INTER-BANK DEALINGS
PART A-RUPEE ACOUNTS OF NON-RESIDENT BANKSGeneral5A.1Rules and regulations governing the opening of and operations on rupee accounts of overseas branches and correspondents, other than those in Nepal and Bhutan, are laid down in this section.
Opening and Closing Accounts5A.2(i)Banks may open/close rupee accounts (non-interest bearing) in the names of their overseas branches and correspondents without prior reference to Reserve Bank.
NOTES:(i)Opening of rupee accounts in the names of branches of Pakistani banks operating outside Pakistan requires specific approval of Reserve Bank
(ii)The Head/Principal Office of each bank should furnish an up to date list (in triplicate) of all its offices/branches which are maintaining rupee accounts of non-resident banks as at the end of December every year giving their code numbers allotted by Reserve Bank. The list should be submitted before 15th January of the following year to the Central Office of Reserve Bank (Central Statistical Division). The offices/branches should be classified according to area of jurisdiction of Reserve Bank Offices within which they are situated.
Implications of Rupee Credits/Debits to Accounts of Non-Resident Banks5A.3 (i)Credit to the accounts is a permitted method of payment to non-residents and is, therefore, subject to the regulations applicable to transfers in foreign currency.
(ii)Debit to the accounts is in effect an inward remittance in foreign currency.
NOTES:A. In the case of individual payments of Rupees one lakh or more, the purpose of remittance should be reported in the statement annexed to R Return.
B. Banks may issue encashment certificates in accordance with the procedure laid down in paragraph 3A.6
Form A35A.4 All debits/credits to the accounts of non-resident banks should be reported in form A3.
Funding of Accounts of Non-resident Banks5A.5(i)Banks may freely purchase foreign currency at ongoing market rates to lay down funds in the accounts of their correspondents for meeting their bonafide needs in India.
(ii)Transactions in the accounts should be closely monitored to ensure that overseas banks do not take a speculative view on the rupee. Any such instances should be brought to the notice of Reserve Bank.
NOTE:Forward purchase or sale of foreign currencies against rupees and offer of two-way quotes to non-resident banks are prohibited.
Transfers from other Accounts:5A.6Transfer of funds between the accounts of the same bank or different banks is freely permitted.
Conversion of Rupees into Foreign Currencies 5A.7 Balances may be freely converted into foreign currency. All such transactions should be reported on Form A2 for the foreign currency leg and on form A3 for the rupee leg under the relevant R Returns.
Responsibilities of Paying and Receiving Banks 5A.8In the case of credit to accounts the paying banker should ensure that all Control requirements are met and are correctly furnished in form A1/A2 as the case may be. The receiving banker after ensuring that the funds are eligible for credit should submit form A1/A2 under cover of the R Return.
Refund of Rupee Remittances5A.9Requests for cancellation of inward remittances may be complied with subject to the regulations laid down in paragraph 3A.7.
Overdrafts/Loans to Overseas Branches/Correspondents5A.10(i)Banks may permit their overseas branches/correspondents temporary overdrawals not exceeding Rs.500 lakhs in the aggregate, for meeting normal business requirements. This limit applies to the amount outstanding against all overseas branches and correspondents in the books of all the branches of the bank in India. This facility should not be used to postpone funding of accounts. If overdrafts in excess of the above limit are not adjusted within five days a report should be submitted to the Central Office of Reserve Bank (Forex Markets Division) within 15 days from the close of the month, stating the reasons therefor. Such a report is not necessary if arrangements exist for value dating.
(ii)Banks wishing to extend any other credit facility in excess of (i) above to overseas banks should seek prior approval from the Central Office of Reserve Bank (Forex Markets Division).
Rupee Accounts of Exchange Houses5A.11Opening of rupee accounts in the names of exchange houses for facilitating private remittances into India requires approval of Reserve Bank. Remittances through exchange houses for financing trade transactions are permitted upto Rs.2,00,000 per transaction. [See Paragraph 6A.6 (iii)].
Slip 4
[AD/MA/1/2000]
PART B - INTER-BANK DEALINGS General5B.1The Board of Directors of banks should frame an appropriate policy and fix suitable limits for various Treasury functions.
Position and Gaps5B.2The overnight open exchange position (vide Annexure I) and the aggregate gap limits are required to be approved by the Reserve Bank.
Inter-bank transactions 5B.3Subject to compliance with the provisions of paragraphs 5B.1 and 5B.2, banks may freely undertake foreign exchange transactions as under:
a)With banks in India:
(i)Buying/Selling/Swapping foreign currency against rupees or another foreign currency
(ii)Placing/Accepting deposits in foreign currency
b)With banks overseas :
(i)Buying/Selling/Swapping foreign currency against another foreign currency to cover client transactions or for adjustment of own position
(ii)Initiating trading positions in the overseas markets subject to Reserve Bank approval. Applications in this regard should be made to the Chief General Manager, Exchange Control Department (Forex Markets Division), Reserve Bank of India, Central Office, Mumbai 400001.
NOTES:A.Funding of accounts of Non-resident banks - Refer to paragraph 5A.5.
B.Form A2 need not be completed for sales in the inter-bank market but all such transactions should be reported to Reserve Bank in R Returns.
Foreign currency accounts5B.4(i)Inflows into foreign currency accounts arise primarily from client-related transactions, swap deals, deposits, borrowings etc. Banks may maintain balances in foreign currencies upto the levels approved by the Top Management. They are free to manage the surplus in these accounts through overnight placement or investments with their overseas branches/correspondents subject to adherence to the gap limits approved by Reserve Bank.
(ii)Banks may invest upto 15% of their unimpaired Tier I capital or US$ 10 million whichever is higher, and the entire amount representing foreign currency deposit liabilities in overseas money market instruments rated at least A1 + by Standard and Poor or P1 by Moody's.
(iii)Foreign currency funds representing deposit liabilities may be utilised for:
(a)Making loans to resident constituents for meeting their foreign exchange requirements or for the rupee working capital/capital expenditure needs subject to the prudential/interest-rate norms, credit discipline and credit monitoring guidelines in force.
(b)Extending credit facilities to Indian wholly owned subsidiaries/ joint ventures in which at least 51% equity is held by a resident company, subject to the guidelines issued by Reserve Bank (Department of Banking Operations & Development).
(iv)Banks should regularly reconcile the balances in the foreign currency accounts as appearing in their books with the balances advised by the correspondents and maintain records to show that such reconciliation has been made.
(v)Banks may write off/transfer to unclaimed balances account, unreconciled debit/credit entries up to the value of US.$.1,000 or its equivalent provided:
(a)The entry has been outstanding in the books for two or more years and
(b)Approval from the Competent Authority has been obtained,
(c)A separate record of all such entries is maintained and the transactions reported in the respective R Return.
Applications for adjustment of an entry in excess of US$ 1,000 or its equivalent should be referred to the concerned Regional Office of Reserve Bank.
Loans/Overdrafts 5B.5(i)Banks may avail of loans/overdrafts from their overseas branches and correspondents up to 15% of their unimpaired Tier-I capital or US$ 10 million or its equivalent, whichever is higher. The funds may be used for purposes other than lending in foreign currencies and repaid without reference to Reserve Bank. The aforesaid limit applies to the aggregate amount availed by all the offices and branches in India from all their branches/correspondents abroad.
(ii)If drawals in excess of the above limit are not adjusted within five days, a report should be submitted to the Forex Markets Division in the Central Office of Reserve Bank within 15 days from the close of the month in which the limit was exceeded. Such a report is not necessary if arrangements exist for value dating.
(iii)Banks may avail of loans in excess of the limits prescribed in sub-paragraph (i) above solely for replenishing their rupee resources in India without prior approval of Reserve Bank. Such rupee funds may be used only for financing the banks' normal business operations and should not be deployed in the call money etc. markets. A report on each borrowing should be immediately forwarded to the Forex Markets Division, in the Central Office of Reserve Bank whose prior permission will be required for repayment of such loans. Such permission will be given only if the bank has no borrowings outstanding either from Reserve Bank or other bank/financial institution in India and is clear of all money market borrowings for a period of at least four weeks before the repayment.
(iv)Interest on loans/overdrafts may be remitted (net of taxes) without the prior approval of Reserve Bank.
Reports to Reserve Bank5B.6(i)The Head/Principal Office of each bank should submit to the Chief General Manager, Exchange Control Department (Forex Markets Division), Reserve Bank of India, Central Office, Mumbai 400 001 the following:
(1) Daily statements of foreign exchange turnover in Form FTD and Gaps position and cash balances in Form GPB. These statements should be transmitted online through wide area network.
(2) Monthly statement (in USD million) indicating:
a)Aggregate Gap Limit (AGL) approved
b)Maximum AGL on any day in the month
c)Value at Risk (VaR) limit approved and
d)Maximum VaR on any day in the month
(ii)The Head/Principal Office of each bank should submit a statement in duplicate in form BAL giving details of their holdings of all foreign currencies on fortnightly basis so as to reach the Regional Office of Reserve Bank under whose jurisdiction the Head/Principal Office is situated within seven calendar days from the close of the reporting period to which it relates. If the 15th or the last day of the month is a holiday the statement should be submitted as at the close of business on the preceding working day.
Slip 5
[AD/MA/1/2000]
5.Capital RequirementAs prescribed by Reserve Bank from time to time.
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