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Click here to return to main page of Annual Policy Statement 2007-08
Part II. Annual Statement on Developmental and
Regulatory Policies for the Year 2007-08
II. Financial Markets
(d)Expansion of Hedging Facilities
138.The basic principle for accessing domestic foreign exchange markets is hedging of underlying foreign exchange exposures. In keeping with the evolution of the foreign exchange market and the increase in depth and volumes, a range of hedging instruments have been permitted to market participants including foreign exchange forwards, swaps and options, but mainly against crystallised foreign currency exposures. It is now proposed to expand the range of hedging tools available to the market participants as also facilitate dynamic hedging by the residents.
(i)Economic Exposure
139.The Reserve Bank has received representations from domestic producers and users of certain metals for permission to hedge the price risk on domestic purchase and sale in international exchanges, like London Metal Exchange (LME) in order to take advantage of greater depth and liquidity in such exchanges. It has, therefore, been proposed that authorised dealer Category-I banks, which have specifically been authorised by the Reserve Bank in this regard, may henceforth permit:
錨omestic producers/users to hedge their price risk on aluminium, copper, lead, nickel and zinc in international commodity exchanges, based on their underlying economic exposures.
病ctual users of aviation turbine fuel (ATF) to hedge their economic exposures in the international commodity exchanges based on their domestic purchases.
病uthorised dealer banks to approach the Reserve Bank for permission on behalf of customers who are exposed to systemic international price risk, not covered above.
(ii)Forward Contracts
Exporters and Importers
140.At present, importers and exporters of goods and services are permitted to book forward contracts on the basis of declaration of an exposure and based on past performance. Furthermore, contracts booked in excess of 50 per cent of the eligible limits have to be on deliverable basis and cannot be cancelled. In order to facilitate dynamic hedging of foreign exchange exposures of exporters and importers of goods and services, it is proposed:
付o enhance this limit to 75 per cent.
Corporates
141.Currently, residents with overseas direct investments in equity and debt are permitted to hedge their exchange risk arising out of such investments, provided the forward contracts are completed by delivery or rolled over on the due date and not cancelled. With a view to giving greater flexibility to residents with overseas direct investments, it is proposed that:
付he forward contracts entered into for hedging overseas direct investments may, henceforth, be allowed to be cancelled and rebooked.
Small and Medium Enterprises
142.In order to enable small and medium enterprises (SMEs) to hedge their foreign exchange exposures, it is proposed:
付o permit them to book forward contracts without underlying exposures or past records of exports and imports. Such contracts may be booked through authorised dealers with whom the SMEs have credit facilities. The SMEs are also permitted to freely cancel and rebook the contracts.
Individuals
143.In order to enable resident individuals to manage/hedge their foreign exchange exposures, including anticipated exposures, it is proposed:
付o permit resident individuals to book forward contracts without production of underlying documents up to an annual limit of US $ 100,000, which can be freely cancelled and rebooked.
(iii)Study on Currency Futures Market
144.As per the extant guidelines, residents in India are permitted to use forward foreign exchange contracts and options (cross-currency and foreign currency/rupee) contracts as hedging instruments. Market participants and the users have gained experience in using such instruments for proactively hedging their risks. The liquidity for such products has also increased and accounting systems are being put in place in line with international best practices. It is now proposed:
付o set up a Working Group on Currency Futures to study the international experience and suggest a suitable framework to operationalise the proposal, in line with the current legal and regulatory framework.
(e)Rationalisation and Simplification of Foreign Exchange Regulations: Recommendations of the Task Force
145.Consequent upon and pursuant to the recommendations of the CFCAC and as announced in the Mid-Term Review of October 2006, the Reserve Bank had constituted an Internal Task Force to identify anomalies in the present regulatory framework for current and capital account transactions and propose rectifications.
146.The Task Force reviewed the regulations and the suggestions/requests from the user groups (including EXIM Bank, Federation of Indian Export Organisations, Foreign Exchange Dealers Association of India and Chambers of Commerce). It also examined the issues marked for review by the CFCAC. Some of the issues recommended by the Task Force have been implemented and circulars have been issued by the Reserve Bank. It is now proposed to accept certain other recommendations made by the Task Force for further liberalisation and simplification of the procedures as set out below:
(i)Residents
Corporates
i)Authorised dealers may permit remittances on account of donations by corporates for specified purposes, subject to a limit of 1 per cent of their foreign exchange earnings during the previous three financial years or US $ 5 million, whichever is lower.
ii)Authorised dealers may permit Indian companies to remit up to US $ 10 million as against the current limit is US $ 1 million for consultancy services for executing infrastructure projects.
iii)Authorised dealers may allow remittance of foreign exchange towards reimbursement of pre-incorporation expenses incurred in India where the remittance does not exceed 5 per cent of the investment brought into India or US $ 100,000, whichever is higher, on the basis of certification from statutory auditors.
iv)Authorised dealers may permit remittances on account of cash calls for the purpose of oil exploration, provided the operator/consortium member in India submits documents to the satisfaction of the authorised dealer.
v)Authorised dealers may allow remittances on account of requests from Business Process Outsourcing (BPO) companies towards payment of the cost of equipment to be installed at overseas sites in connection with setting up of International Call Centres, subject to specified terms and conditions.
vi)Authorised dealers may henceforth open foreign currency accounts in India for ship manning/crew managing agencies that are rendering services to shipping companies incorporated outside India.
vii)Authorised dealers may remit winding up proceeds of companies under liquidation, subject to orders issued by the official liquidator or a court in India or under any scheme framed by the Government of India and also subject to tax compliance.
Individuals
viii)A uniform period of 6 months is proposed for surrender of received/ unspent/unused foreign exchange from the date of receipt/purchase/acquisition/date of return of the traveller, as the case may be.
(ii)Non-residents
Corporates
i)Authorised dealers may open escrow/special accounts on behalf of non-residents, subject to specific conditions where such accounts are required to be opened in terms of the SEBI regulations for open offers/delisting offers/exit offers and the like.
Individuals
ii)The facility of operation of accounts by power of attorney holder is extended to NRO account holders.
iii)At the request of the depositor, authorised dealers can permit remittance of the maturity proceeds of FCNR (B) deposits to third parties outside India, provided the authorised dealer is satisfied about the bonafides of the transaction.
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