**Summary:**
This circular, RBI/2016-17/110 A.P. (DIR Series) Circular No. 15, issued by the Reserve Bank of India (RBI) on November 07, 2016, addresses clarifications regarding hedging requirements for External Commercial Borrowings (ECB). It is directed to all Category-I Authorized Dealer (AD) banks. The circular aims to provide clarity and uniformity in hedging practices to manage currency risk effectively.
Key clarifications include:
* **Coverage:** ECB borrowers are required to hedge both the principal and coupon components of their ECB exposure through financial hedges. Hedging must commence from the date the liability is created.
* **Tenor and Rollover:** Financial hedges must have a minimum tenor of one year, with periodic rollover to ensure continuous hedging throughout the ECB's duration.
* **Natural Hedge:** Natural hedges are permissible only to the extent of offsetting projected revenues in the matching currency, net of all other projected outflows, within the same accounting year. Revenue indexed to foreign currency does not qualify as a natural hedge.
* **Compliance:** The designated AD Category-I bank is responsible for verifying 100% compliance with the hedging requirements.
The circular amends and clarifies provisions outlined in A.P. (DIR Series) Circular No. 56 dated March 30, 2016, and paragraph 2.5 of Master Direction No. 5 dated January 1, 2016, on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers. All other aspects of the existing ECB policy remain unchanged. The Master Direction No. 5 dated January 01, 2016 is being updated to reflect these changes.
The directions are issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999.
Shekhar Bhatnagar, Chief General Manager-in-Charge, is the contact person.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the banking system.
Mumbai, Maharashtra: The city in India where the Reserve Bank of India is located.
External Commercial Borrowings (ECB): Commercial loans raised by eligible resident entities from recognized non-resident entities.
Authorised Dealer Category-I: Banks authorized by the Reserve Bank of India to deal in foreign exchange.
A.P. DIR Series Circular No.56: A circular issued by the Reserve Bank of India related to External Commercial Borrowings.
Master Direction No.5: A master direction issued by the Reserve Bank of India concerning External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency.
Foreign Exchange Management Act, 1999: An Act of the Parliament of India to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
Shekhar Bhatnagar: Chief General Manager-in-charge at Reserve Bank of India.
RESERVE BANK OF INDIA
Mumbai - 400 001
RBI/2016-17/ 110
A.P. (DIR Series) Circular No. 15 November 07, 2016
To
All Category-I Authorised Dealer Banks
Madam / Dear Sir
External Commercial Borrowings (ECB) – Clarifications on hedging
Attention of Authorized Dealer Category-I (AD Category-I) banks is invited to
paragraphs 2.i and 3 of A.P. (DIR Series) Circular No.56 dated March 30,
2016 and paragraph no. 2.5 of Master Direction No.5 dated January 1, 2016
on ‘External Commercial Borrowings, Trade Credit, Borrowing and Lending in
Foreign Currency by Authorised Dealers and Persons other than Authorised
Dealers’ as amended from time to time, on the provisions of hedging in the
ECB framework.
2. With a view to provide clarity on the aforesaid directions and bring
uniformity in hedging practices in the market so as to effectively address
currency risk at a systemic level, the following clarifications are issued:
i. Coverage: Wherever hedging has been mandated by the RBI, the
ECB borrower will be required to cover principal as well as coupon
through financial hedges. The financial hedge for all exposures on
account of ECB should start from the time of each such exposure (i.e.
the day liability is created in the books of the borrower).
ii. Tenor and rollover: A minimum tenor of one year of financial hedge
would be required with periodic rollover duly ensuring that the exposure
on account of ECB is not unhedged at any point during the currency
of ECB.
iii. Natural Hedge: Natural hedge, in lieu of financial hedge, will be
considered only to the extent of offsetting projected cash flows /
revenues in matching currency, net of all other projected outflows. For
this purpose, an ECB may be considered naturally hedged if theoffsetting exposure has the maturity/cash flow within the same
accounting year. Any other arrangements/ structures, where revenues
are indexed to foreign currency will not be considered as natural
hedge.
3. The designated AD Category-I bank will have the responsibility of verifying
that 100 per cent hedging requirement is complied with. All other aspects of
the ECB policy shall remain unchanged.
4. AD Category-I banks may bring the contents of this circular to the notice of
their constituents and customers.
5. Relevant paragraph of the Master Direction No. 5 dated January 01, 2016
is being updated to reflect the changes.
6. The directions contained in this circular have been issued under section
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
(Shekhar Bhatnagar)
Chief General Manager-in- charge