Executive Summary:
This circular issued by the Reserve Bank of India on February 2, 2017, permits Non-Resident Indians (NRIs) access to the Exchange Traded Currency Derivatives (ETCD) market to hedge their Rupee currency risk arising from investments in India under FEMA, 1999. It outlines the terms and conditions for NRIs accessing the ETCD market, including designating an AD Cat-I bank for monitoring and reporting. Amendments to existing regulations and directions are also notified.
Key Points / Main Content:
* **Eligibility and Purpose:**
* NRIs are now permitted to access the ETCD market to hedge currency risk on their investments in India under FEMA, 1999.
* This enables additional hedging products for NRIs to hedge their investments in India.
* **Terms and Conditions for NRIs:**
* NRIs must designate an AD Cat-I bank to monitor and report their combined positions in OTC and ETCD segments.
* Positions in currency futures and exchange-traded options are allowed to hedge currency risk on permissible Rupee investments in debt, equity, dividends, and NRE account balances.
* The exchange clearing corporation will provide transaction details of NRIs to the designated bank.
* **Responsibilities of Designated AD Cat-I Banks:**
* Banks must consolidate NRI positions on exchanges and OTC derivative contracts (booked with them and other AD banks).
* Banks are responsible for monitoring aggregate positions, ensuring the existence of underlying Rupee currency risk, and reporting transgressions to RBI and SEBI.
* **Compliance and Penalties:**
* NRIs are responsible for ensuring the existence of the underlying exposure.
* If hedging exceeds the underlying exposure, NRIs may face penal action by the Reserve Bank of India under FEMA, 1999.
* **Regulatory Amendments and Notifications:**
* Notification No. FEMA 378/2016-RB, dated October 25, 2016, amends the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000.
* Currency Futures Reserve Bank Amendment Directions, 2017 and Exchange Traded Currency Options Reserve Bank Amendment Directions, 2017 were issued on February 2, 2017.
Impact Analysis:
* **Non-Resident Indians (NRIs)**
* *Impact:* NRIs gain access to exchange-traded currency derivatives for hedging Rupee currency risk on their investments in India. They must ensure their hedging activities align with actual exposures to avoid penalties.
* *Action Required:* Designate an AD Cat-I bank for monitoring and reporting, and ensure hedging activities are proportionate to underlying Rupee currency risk.
* **Authorised Dealer Category-I (AD Cat-I) Banks**
* *Impact:* AD Cat-I banks take on the responsibility of monitoring and reporting NRIs' combined positions in OTC and ETCD segments.
* *Action Required:* Consolidate NRI positions, monitor aggregate positions, ensure the existence of underlying Rupee currency risk, and report transgressions to RBI and SEBI.
* **Reserve Bank of India (RBI)**
* *Impact:* The RBI implements and oversees the amended regulations, with the authority to take penal action for non-compliance.
* *Action Required:* Enforce the regulations, monitor compliance, and take appropriate action against NRIs exceeding their hedging limits.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the financial system.
Non Resident Indians: Individuals of Indian citizenship who reside outside of India.
Exchange Traded Currency Derivatives: Standardized currency derivative contracts traded on an exchange.
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.
Foreign Exchange Derivative Contracts Regulations, 2000: Regulations pertaining to foreign exchange derivative contracts, issued by the Reserve Bank of India.
Mumbai, Maharashtra: The city in Maharashtra where the Central Office of the Financial Markets Regulation Department of the Reserve Bank of India is located.
T Rabi Sankar: Chief General Manager at Reserve Bank of India.
Securities Contracts Regulations Act, 1956: An act to provide for the regulation of transactions in securities and to control stock exchanges.
RESERVE BANK OF INDIA
Financial Markets Regulation Department
Central Office
Mumbai
RBI/2016-17/221
A.P. (DIR Series) Circular No. 30 February 2, 2017
To
All Category – I Authorised Dealer Banks
Madam / Sir,
Risk Management and Inter-bank Dealings: Permitting Non Resident Indians (NRIs) access to
Exchange Traded Currency Derivatives (ETCD) market
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) issued under clause (h) of sub-
section (2) of Section 47 of FEMA, 1999 (Act 42 of 1999), as amended from time to time and
Master Direction on Risk Management and Inter-Bank Dealings dated July 5, 2016, as amended
from time to time.
2. Currently NRIs are permitted to hedge their Rupee currency risk through OTC transactions
with AD banks. With a view to enable additional hedging products for NRIs to hedge their
investments in India, it has been decided to allow them access to the exchange traded currency
derivatives market to hedge the currency risk arising out of their investments in India under
FEMA, 1999. An announcement to this effect was made in the Monetary Policy Statement on
April 5, 2016.
3. NRIs may access the ETCD market as per the following terms and conditions:
i. NRIs shall designate an AD Cat-I bank for the purpose of monitoring and reporting
their combined positions in the OTC and ETCD segments.
1ii. NRIs may take positions in the currency futures / exchange traded options market to
hedge the currency risk on the market value of their permissible (under FEMA, 1999)
Rupee investments in debt and equity and dividend due and balances held in NRE
accounts.
iii. The exchange/ clearing corporation will provide details of all transactions of the NRI
to the designated bank.
iv. The designated bank will consolidate the positions of the NRI on the exchanges as
well as the OTC derivative contracts booked with them and with other AD banks. The
designated bank shall monitor the aggregate positions and ensure the existence of
underlying Rupee currency risk and bring transgressions, if any, to the notice of RBI /
SEBI.
v. The onus of ensuring the existence of the underlying exposure shall rest with the NRI
concerned. If the magnitude of exposure through the hedge transactions exceeds
the magnitude of underlying exposure, the concerned NRI shall be liable to such
penal action as may be taken by Reserve Bank of India under the Foreign Exchange
Management Act (FEMA), 1999.
4. Necessary amendments (Notification No.FEMA 378/2016-RB dated October 25, 2016) to
Foreign Exchange Management (Foreign Exchange Derivatives Contracts) Regulations, 2000
(Notification No. FEMA.25/RB-2000 dated May 3, 2000) (Regulations) have been notified in the
Official Gazette vide G.S.R.No. 1005 (E) dated October 25, 2016 a copy of which is given in the
Annex I to this circular. These regulations have been issued under clause (h) of sub-section (2)
of Section 47 of FEMA, 1999 (42 of 1999).
5. The Notifications No. FMRD.13 / CGM (TRS) dated February 2, 2017 and No. FMRD. 14/CGM
(TRS) – 2017 dated February 2, 2017 viz., Currency Futures (Reserve Bank) (Amendment)
Directions, 2017 and Exchange Traded Currency Options (Reserve Bank) (Amendment)
Directions, 2017 amending the Directions notified vide Notifications No. FED.1 / DG (SG) – 2008
dated August 6, 2008 and Notifications No. FED. 1/ ED (HRK) – 2010 dated July 30, 2010
respectively have been issued. Copies of the Directions are enclosed (Annexes II & III). These
Directions have been issued under Section 45W of the Reserve Bank of India Act, 1934.
26. This circular has been issued under Sections 10(4) and 11(1) of the Foreign Exchange
Management Act, 1999 (42 of 1999) and is without prejudice to permission / approvals, if any,
required under any other law.
Yours faithfully,
(T Rabi Sankar)
Chief General Manager
3[Annex I to A. P. (DIR Series) No.30 dated February 2, 2017]
Notification No. FEMA.378/RB-2016 October 25, 2016
Foreign Exchange Management (Foreign Exchange Derivative Contracts)
(Amendment) Regulations, 2016
In exercise of the powers conferred by clause (h) of sub-section (2) of section 47 of the Foreign
Exchange Management Act, 1999 (42 of 1999), the Reserve Bank hereby makes the following
amendments in the Foreign Exchange Management (Foreign Exchange Derivative Contracts)
Regulations, 2000 (Notification No. FEMA 25/RB-2000 dated May 3, 2000), namely:-
1. Short Title and Commencement
(i) These regulations may be called the Foreign Exchange Management (Foreign
Exchange Derivative Contracts) (Amendment) Regulations, 2016.
(ii) They shall be deemed to have come in to force with effect from the date of their
publication in the Official Gazette.
2. Amendment of Regulation 5B: In the Foreign Exchange Management (Foreign Exchange
Derivative Contracts) Regulations, 2000 (Notification No. FEMA 25/RB-2000 dated May 3,
2000), under the principal regulations, for the existing Regulation 5B, the following shall be
substituted namely:
“5B Permission to a person resident outside India to enter into exchange traded
currency derivatives
A person resident outside India who is exposed to Rupee currency risk arising out of:
(i) a permitted current account transaction or
(ii) a Rupee denominated asset held by him or a Rupee denominated liability
incurred by him, as permitted under FEMA, 1999,
may transact currency derivatives contracts on a stock exchange recognised under
section 4 of Securities Contracts (Regulations) Act, 1956 to hedge such exposure, subject
to such terms and conditions as may be set forth in the directions issued by the Reserve
Bank of India from time to time.
(T Rabi Sankar)
Chief General Manager
4Footnote:-
The principal regulations were published in the Official Gazette vide GSR No. 411(E) dated May
8, 2000 in Part II, Section 3, sub-section (i) and subsequently amended vide–
GSR No. 756(E) dt. 28.09.2000,
GSR No. 264(E) dt. 09.04.2002,
GSR No. 579(E) dt. 19.08.2002,
GSR No. 222(E) dt. 18.03.2003,
GSR No. 532(E) dt. 09.07.2003,
GSR No. 880(E) dt. 11.11.2003,
GSR No. 881(E) dt. 11.11.2003,
GSR No. 750(E) dt. 28.12.2005,
GSR No. 222(E) dt. 19.04.2006,
GSR No. 223(E) dt. 19.04.2006,
GSR No. 760(E) dt. 07.12.2007,
GSR No. 577(E) dt. 05.08.2008,
GSR No. 440(E) dt. 23.06.2009,
GSR No. 895(E) dt. 14.12.2009,
GSR No. 635(E) dt. 27.07.2010,
GSR No. 608(E) dt. 03.08.2012,
GSR No. 799(E) dt. 30.10.2012,
G.S.R.No. 330(E) dated 23.05.2013,
G.S.R.No. 374(E) dated 02.06.2014 and
G.S.R.No. 365(E) dated 01.06.2016.
Published in the Official Gazette of Government of India – Extraordinary – Part-II, Section 3,
Sub-Section (i) dated October 25, 2016- G.S.R.No. 1005 (E)
5[Annex II to A. P. (DIR Series) No.30 dated February 2, 2017]
Currency Futures (Reserve Bank) (Amendment) Directions, 2017
Notification No. FMRD. 13 / CGM (TRS)-2017 dated February 2, 2017
The Reserve Bank of India having considered necessary in public interest and to regulate the
financial system of the country to its advantage, in exercise of its powers conferred by section
45W of the Reserve Bank of India Act, 1934 and of all the powers enabling it in this behalf,
hereby gives the following directions to all the persons dealing in currency futures.
1. Short title and commencement of the directions
These directions may be called the Currency Futures (Reserve Bank) Amendment Directions
2017 and they shall come into force with effect from February 2, 2017.
2. Amendment to Currency Futures (Reserve Bank) Directions 2008 (as amended vide
Currency Futures (Reserve Bank) (Amendment) Directions, 2014 as per Notification No. FED.
1/ED (GP)-2014 dated June 10, 2014 and Currency Futures (Reserve Bank) (Amendment)
directions, 2015 as per Notification No. FMRD. 1/ED(CS)-2015 dated December 10, 2015).
In para. 3, for sub-para. (iii), the following shall be substituted:
“(iii) Persons resident outside India, as defined in section 2(w) of Foreign Exchange
Management Act, 1999 (Act 42 of 1999), who are exposed to Rupee currency risk arising
out of:
(I) a permitted current account transaction or
(II) a Rupee denominated asset held by him or a Rupee denominated liability
incurred by him, as permitted under FEMA, 1999,
may transact currency futures on a stock exchange recognised under section 4 of
Securities Contracts (Regulations) Act, 1956 to hedge such exposure, subject to such
terms and conditions as may be set forth in the directions issued by the Reserve Bank of
India from time to time.
(T Rabi Sankar)
Chief General Manager
6[Annex III to A. P. (DIR Series) No.30 dated February 2, 2017]
Exchange Traded Currency Options (Reserve Bank) (Amendment) Directions, 2017
Notification No. FMRD. 14 / CGM (TRS)-2017 dated February 2, 2017
The Reserve Bank of India having considered necessary in public interest and to regulate the
financial system of the country to its advantage, in exercise of its powers conferred by section
45W of the Reserve Bank of India Act, 1934 and of all the powers enabling it in this behalf,
hereby gives the following directions to all the persons dealing in exchange traded currency
options.
1. Short title and commencement of the directions
These directions may be called the Exchange Traded Currency Options (Reserve Bank)
Amendment Directions, 2017 and they shall come into force with effect from February 2, 2017.
2. Amendment to Exchange Traded Currency Options (Reserve Bank) Directions 2010 (as
amended vide Exchange Traded Currency Options (Reserve Bank) (Amendment) Directions,
2014 as per Notification No. FED. 2/ED (GP)-2014 dated June 10, 2014 and Exchange Traded
Currency Options (Reserve Bank) (Amendment) Directions, 2015 as per Notification No. FMRD.
2/ED(CS)-2015 dated December 10, 2015).
In para. 3, for sub-para. (iii), the following shall be substituted:
“(iii) Persons resident outside India, as defined in section 2(w) of Foreign Exchange
Management Act, 1999 (Act 42 of 1999), who are exposed to Rupee currency risk arising
out of:
(I) a permitted current account transaction or
(II) a Rupee denominated asset held by him or a Rupee denominated liability
incurred by him, as permitted under FEMA, 1999,
7may transact exchange traded currency options on a stock exchange recognised under
section 4 of Securities Contracts (Regulations) Act, 1956 to hedge such exposure, subject
to such terms and conditions as may be set forth in the directions issued by the Reserve
Bank of India from time to time.
(T Rabi Sankar)
Chief General Manager
8