On 12-12-2022, the Reserve Bank of India (‘RBI’) has issued Master Directions on Foreign Exchange Management (Hedging of Commodity Price Risk and Freight Risk in Overseas Markets) Directions, 2022 laying down the modalities for Authorised Dealer Category- I (‘AD Cat- I’) banks. These Directions came into force from 12-12-2022.
Operational guidelines:
1. The AD Cat- I banks, along with hedging the commodity price risk and freight risk overseas can also allow using permitted products and can also remit foreign exchange in respect of such transactions.
Requirements to be fulfilled:
• The entity has exposure to the risks.
• Quantity proposed and tenor to be hedged are in line with the exposure.
• For Over the Counter (‘OTC’) derivatives and hedging using a benchmark price-the requirement to undertake such hedges should be justified.
2. In case of OTC contracts, the Foreign Exchange Dealer’s Association of India has to formulate a list of the banks/ non- banks entities which are permitted to offer such derivatives by their regulators.
3. The entities of recognised domestic stock exchange, fully owned subsidiary, and unlisted entities with net worth higher than 200 crores are permitted to structured products.
4. A special account has to be made with the bank for the purpose of payments/ receipts and hedging and for freight risk.
5. An annual certificate from the statutory auditors of the entity confirming that the hedge transactions and the margin remittances are in line with the exposure of the entity has to be submitted to the bank.
6. In case of any default in compliance with the directions, the bank has to report to the Chief General Manager (‘CGM’), Financial Markets Regulation Department, RBI.
7. The banks can issue Standby Letters of Credit/ Guarantees for maximum period of 1 year and also keep a check that such issues are used by the clients for the intended purpose.
8. Banks have to submit a quarterly report to the CGM.
The circulars dated 19-3-2018 and 16-1-2020 on Hedging of Commodity Price Risk and Freight Risk in Overseas Markets are repealed by Master Directions on Foreign Exchange Management (Hedging of Commodity Price Risk and Freight Risk in Overseas Markets) Directions, 2022.
*Kriti Kumar, Editorial Assistant has reported this brief.
