A. P. (DIR Series) Circular No.68
January 17, 2012
All Category-I Authorised Dealer Banks
Madam / Sir,
Risk Management and Inter-Bank Dealings – Commodity Hedging
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], as amended from time to time and A.P. (DIR Series) Circular No. 32 dated December 28, 2010. Currently, resident entities in India, engaged in import and export trade or as otherwise approved by the Reserve Bank from time to time, are permitted to hedge the price risk of permitted commodities in the international commodity exchanges / markets. Further, AD Category – I banks satisfying certain minimum norms are specifically authorised by the Reserve Bank (please refer to Section E para I of the above mentioned Circular) to grant permission to
(iii) domestic crude oil refining companies to hedge commodity price risk on domestic purchases of crude oil and domestic sales of petroleum products, which are linked to international prices; and
2. It has now been decided to permit all AD Category-I banks to grant permission to companies to hedge the price risk in respect of any commodity (except gold, silver, platinum) in the international commodity exchanges/ markets as specified under the delegated route.
3. Further, AD Category-I banks can also grant permission to unlisted companies to hedge price risk on import/ export in respect of any commodity (except gold, silver, platinum) in the international commodity exchanges/ markets subject to guidelines as specified in the Annex.
4. AD Category-I banks may submit an annual report to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Central Office, Forex Markets Division, Amar Building, 5th Floor, Mumbai – 400 001 as on March 31 every year, within one month (before April 30th), giving the names of the corporates to whom they have granted permission for commodity hedging and the name of the commodity hedged.
5. Applications from customers to undertake hedge transactions not covered under the delegated route may continue to be forwarded to the Reserve Bank by the Authorised Dealers for approval, as hitherto.
6. Necessary amendments to Notification No. FEMA.25/RB-2000 dated May 3, 2000 [Foreign Exchange Management (Foreign Exchange Derivatives Contracts) Regulations, 2000] are being notified separately.
7. AD Category – I banks may bring the contents of this circular to the notice of their constituents and customers.
8. The directions contained in this circular have been issued under sections 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.
Chief General Manager-in-Charge
[Annex to A.P. (DIR Series) Circular No. 68
dated January 17, 2012]
Before permitting the corporates to undertake hedge transactions, Authorized Dealer would require them to submit a brief description of the hedging strategy proposed, namely:
along with a copy of the Board Risk Management Policy approved by its Management covering;
Authorised Dealer may refuse to undertake any hedge transaction if it has a doubt about the bonafides of the transaction or the corporate is not exposed to price risk. The conditions subject to which ADs would grant permission to hedge and the guidelines for monitoring of the transactions are given below. It is clarified that hedging the price risk on domestic sale/purchase transactions in the international exchanges/markets, even if the domestic price is linked to the international price of the commodity, is not permitted, except certain specified transactions as approved/may be approved by the Reserve Bank. Necessary advice may be given to the customers before they start their hedging activity.
A. Conditions/ Guidelines for undertaking hedging transactions in the international commodity exchanges/ markets
B. Conditions for allowing users to enter into a combination of OTC option strategies involving a simultaneous purchase and sale of options for overseas Commodity hedging :
1. Users – Listed companies or unlisted companies with a minimum networth of Rs. 100 crore, which comply with the following:
2. Operational Guidelines, Terms and Conditions