Short title & commencement
Definitions
Prohibition
Permission to a person resident in India to enter into a Foreign Exchange
Derivative contract
Permission to a person resident outside India to enter into a Foreign Exchange
Derivative contract
Commodity Hedge
Remittance related to a Foreign Exchange Derivative contract
Schedule I
Forward Contract
Contract other than Forward
Contract
Schedule II
Schedule III
Foreign Exchange Management (Foreign exchange derivative
contracts) Regulations, 2000
Notification No. FEMA 25/2000-RB, dated 3rd May 2000 - 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
makes the following regulations, to promote orderly development and maintenance
of foreign exchange market in India, namely:
- Short title & commencement :-
- These Regulations may be called the Foreign Exchange Management
(Foreign Exchange Derivative Contracts) (Amendment) Regulations, 2005.
- They shall come into force from July 7, 2003.*
(Note. * It is clarified that no person will be
adversely affected as a result of retrospective effect being given to
such regulation.)
(Above Regulation 1 has been vide Notification No. FEMA 143/2005-RB, DT.
19/12/2005)
"Pre-Revised
1. (i) These Regulations may be called the Foreign Exchange Management
(Foreign Exchange Derivative Contracts; (Fourth Amendment) Regulations,
2003.
(ii) They shall come into force from the date of their publication in
the Official Gazette.
(Above Regulation 1 has been vide Notification No. FEMA 105/2003*-RB,
DT. 21/10/2003)
"Pre-Revised
1. (i) These Regulations may be called the Foreign Exchange Management
(Foreign Exchange Derivative Contracts) (Third Amendment) Regulations,
2003.
(ii) They shall come into force from the date of their publication in
the Official Gazette.
(Above Regulation 1 has been vide Notification No. FEMA 104/2003*-RB,
DT. 21/10/2003)
- These Regulations may be called the Foreign Exchange Management
(Foreign Exchange Derivative Contracts) (Amendment) Regulations, 2003.
- They shall come into force from the date of their publication in
the Official Gazette.
(Above Regulation 1 has been vide Notification No. FEMA 81/2003-RB, DT.
08/01/2003)
These Regulations may be called the Foreign Exchange Management (Foreign
exchange derivative contracts) (Third Amendment) Regulations, 2002 and
these shall come into force from the date of publishing in the Official
Gazette.
(Above Regulation 1. has been vide Notification No. FEMA 70/2002-RB, Dt.
26/08/2002)
(i) These Regulations shall be called the Foreign Exchange Management
(Foreign exchange derivative contracts) (Second Amendment) Regulations,
2002.
(ii) They shall come into force from with effect from their publication
in the Official Gazette.
(Above (i) & (ii) has been amended vide Notification No. FEMA
66/2002-03-RB, Dt. 27/07/2002)
i. These Regulations may be called the Foreign Exchange Management
(Foreign exchange derivative contracts) (Amendment) Regulations, 2002.
ii. They shall come into force from the date of their publication in the
Official Gazette.
(Above sub-regulations i. & ii. has been amended vide FEMA Notification
No. 54/2002-RB, Dt. 05/03/2002)
i. These Regulations may be called the Foreign Exchange Management
(Foreign exchange derivative contracts) (Amendment) Regulations, 2000.
ii. They shall come into force with immediate effect.
(Above sub-regulations i. & ii. has been amended vide Notification . No.
28/2000-RB, dated 05/09/2000)
- These Regulations may be called the Foreign Exchange Management
(Foreign exchange derivative contracts) Regulations, 2000.
- They shall come in force on the 1st day of June,2000. "
- Definitions :-
In these Regulations, unless the context requires otherwise, -
- `Act' means the Foreign Exchange Management Act,1999 (42 of 1999);
- ‘authorised dealer’ means a person authorised as authorised dealer
under sub-section (1) of section 10 of the Act;
- ‘Cash delivery ’ means delivery of foreign exchange on the day of
transaction ;
- ‘Forward contract’ means a transaction involving delivery, other
than Cash or Tom or Spot delivery, of foreign exchange;
- ‘Foreign exchange derivative contract’ means a financial transaction
or an arrangement in whatever form and by whatever name called, whose
value is derived from price movement in one or more underlying assets,
and includes,
- a transaction which involves at least one foreign currency other than
currency of Nepal or Bhutan, or
- a transaction which involves at least one interest rate applicable to
a foreign currency not being a currency of Nepal or Bhutan , or
- a forward contract, but does not include foreign exchange transaction
for Cash or Tom or Spot deliveries;
- ‘Registered Foreign Institutional Investor (FII) ’ means a foreign
institutional investor registered with Securities and Exchange board of
India;
- ‘Schedule’ means a schedule annexed to these Regulations;
- ‘Spot delivery’ means delivery of foreign exchange on the second
working day after the day of transaction;
- ‘Tom delivery’ means delivery of foreign exchange on a working day
next to the day of transaction;
- the words and expressions used but not defined in these Regulations
shall have the same meanings respectively assigned to them in the Act.
- Prohibition :-
Save as otherwise provided in these Regulations, no person in India
shall enter into a foreign exchange derivative contract without the
prior permission of the Reserve Bank.
-
Permission to a person resident in India to enter into a Foreign
Exchange Derivative contract :-
A person resident in India may enter into a foreign exchange derivative
contract in accordance with provisions contained in Schedule I, to hedge
an exposure to risk in respect of a transaction permissible under the
Act, or rules or regulations or directions or orders made or issued
thereunder.
-
Permission to a person resident outside India to enter into a Foreign
Exchange Derivative contract :-
A person resident outside India may enter into a foreign exchange
derivative contract with a person resident in India in accordance with
provisions contained in Schedule II, to hedge an exposure to risk in
respect of a transaction permissible under the Act, or rules or
regulations or directions or orders made or issued thereunder.
- Commodity Hedge :-
Reserve Bank may, on an application made in accordance with the
procedure specified in Schedule III, permit subject to such terms and
conditions as it may consider necessary, a person resident in India to
enter into a contract in a commodity exchange or market outside India to
hedge price risk in a commodity.
Provided that a unit in the Special Economic Zone (SEZ) may, without
prior approval of the Reserve Bank, enter into a contract in a commodity
exchange or market outside India to hedge the price risk in the
commodity on export/import, subject to the condition that such contract
is entered into on a "stand-alone" basis.
Explanation : - The term "stand-alone" means that the unit in the SEZ is
completely isolated from financial contracts with its parent or
subsidiary in the mainland or within the SEZ(s) as far as its
import/export transactions are concerned.
(In paragraph 6 Proviso & Explanation has been added vide Notification
No. FEMA 66/2002-03-RB, Dt. 27/07/2002)
-
Remittance related to a Foreign Exchange Derivative contract :-
An authorised dealer in India may remit outside India foreign exchange
in respect of a transaction, undertaken in accordance with these
Regulations, in the following cases, namely;
- option premium payable by a person resident in India to a person
resident outside India ,
- remittance by a person resident in India of amount incidental to a
foreign exchange derivative contract entered into in accordance with
Regulation 4,
- remittance by a person resident outside India of amount incidental to
a foreign exchange derivative contract entered into in accordance with
Regulation 5,
- any other remittance related to a foreign exchange derivative
contract approved by Reserve Bank.
(P.R. GOPALA RAO)
Executive Director
Schedule I
(See regulation 4)
Foreign exchange derivative contract permissible for a person
resident in India
- Forward Contract
1. A person resident in India may enter into a forward contract with an
authorised dealer in India to hedge an exposure to exchange risk in respect
of a transaction for which sale and/or purchase of foreign exchange is
permitted under the Act, or rules or regulations or directions or orders
made or issued thereunder, subject to following terms and conditions-
- the authorised dealer through verification of documentary evidence is
satisfied about the genuineness of the underlying exposure or as otherwise
permitted by the Reserve Bank from time to time.
(Item (a) of Paragraph A.1 of the Schedule 1 has been substituted vide FEMA
Notification No. 54/2002-RB, Dt. 05/03/2002)
"Pre-Revised
(a) the authorised dealer through verification of documentary evidence is
satisfied about the genuineness of the underlying exposure, "
- the maturity of the hedge does not exceed the maturity of the underlying
transaction,
- the currency of hedge and tenor are left to the choice of the customer,
- where the exact amount of the underlying transaction is not
ascertainable, the contract is booked on the basis of a reasonable estimate,
- foreign currency loans/bonds will be eligible for hedge only after final
approval is accorded by the Reserve Bank where such approval is necessary,
- in case of Global Depository Receipts (GDRs) the issue price has been
finalised,
- balances in the Exchange Earner’s Foreign Currency(EEFC) accounts sold
forward by the account holders shall remain earmarked for delivery and such
contracts shall not be cancelled. They may be ,however, be rolled-over,
- contracts involving the rupee as one of the currencies, once cancelled,
shall not be re-booked except as otherwise permitted by the Reserve Bank
from time to time although they can be rolled over at on-going rates on or
before maturity. Contracts covering export transactions may be cancelled,
re-booked or rolled over at on-going rates without any restrictions.
(Above item (h) has been substituted vide Ntotification No. FEMA 70/2002-RB,
Dt. 26/08/2002)
"PRe-Revised
(h) contracts involving rupee as one of the currencies, once cancelled shall
not be re-booked although they can be rolled over at ongoing rates on or
before maturity. This restriction shall not apply to contracts covering
export transactions which may be cancelled, rebooked or rolled over at
on-going rates, "
- substitution of contracts for hedging trade transactions may be
permitted by an authorised dealer on being satisfied with the circumstances
under which such substitution has become necessary.
- a person resident in India may, subject to the terms and conditions
prescribed by Reserve Bank of India, enter into a forward contract with an authorised dealer in India to hedge an exposure to exchange risk in respect
of transactions denominated in foreign currency but settled in Indian
rupees.
(Above paragraph (j) has been added vide Notification No. FEMA 104/2003*-RB,
DT. 21/10/2003)
- Contract other than Forward Contract.
- .
- A person resident in India who has borrowed foreign exchange in
accordance with the provisions of Foreign Exchange Management (Borrowing and
Lending in Foreign Exchange) Regulations, 2000 , may enter into an Interest
rate swap or Currency swap or Coupon Swap or Foreign Currency Option or
Interest rate cap or collar (purchases) or Forward Rate Agreement (FRA)
contract with an authorised dealer in India or with a branch outside India
of an authorised dealer for hedging his loan exposure and unwinding from
such hedges,
Provided that –
- the contract does not involve rupee,
- the Reserve Bank has accorded final approval for borrowing in foreign
currency,
- the notional principal amount of the hedge does not exceed the
outstanding amount of the foreign currency loan, and
- the maturity of the hedge does not exceed the un-expired maturity of the
underlying loan,
- A person resident in India, who owes a foreign exchange or rupee
liability, may enter into a contract for foreign currency-rupee swap with an authorised dealer in India to hedge long term exposure,
- The contract entered into under sub-paragraph 2, if cancelled shall not
be rebooked or re-entered, by whatever name called.
-
- A person resident in India may enter into a foreign currency option
contract not involving the rupee as one of the currencies with an authorised
dealer in India to hedge foreign exchange exposure of such person arising
out of his trade :
(Bold words at above (1) has been inserted vide Notification No. FEMA
143/2005-RB, DT. 19/12/2005)
Provided that in respect of cost effective risk reduction strategies like
range forwards, ratio-range forwards or any other variable by whatever name
called there shall not be any net inflow of premium.
Explanation :The contingent foreign exchange exposure arising out of
submission of a tender bid in foreign exchange is also eligible for hedging
under this sub-paragraph.
- A Transactions undertaken under sub-paragraph (1) may be freely booked
and/or cancelled.
- A person resident in India may enter into a foreign currency–rupee
option contract with an authorised dealer to hedge an exposure to exchange
risk in respect of a transaction for which sale and / or purchase of foreign
currency is permitted under the Act or the rules or regulations or
directions or orders made or issued there under on the same terms and
conditions applicable to forward contracts.
(Above sub-paragraph (3) has been inserted vide Notification No. FEMA
143/2005-RB, DT. 19/12/2005)
Schedule II
(See regulation 5)
Foreign exchange derivative contracts permissible for a person
resident outside India
- A Registered Foreign Institutional Investor (FII) may enter into a
forward contract with rupee as one of the currencies with an authorised
dealer in India to hedge its exposure in India,
Provided that -
- the value of the hedge does not exceed the market value of the
underlying debt or equity instruments, provided forwards contracts once
booked shall be allowed to continue to the original maturity even if the
value of the underlying portfolio shrinks, for reasons other than sale
of securities.
"Pre-Revised - the value of the hedge does not exceed
the current market value in respect of investments in debt instruments,
"
[DELETED -
b. the value of the hedge does not exceed 15% of the market
value of the equity as at the close of business on 31st March 1999,
converted at the rate of US $ 1= Rs.42.43 plus the increase in market
value/inflows after 31st March 1999 provided that the forward cover once
taken shall be allowed to continue as long as it does not exceed the
value of the underlying investment,]
- forward contracts once cancelled shall not be rebooked but may be
rolled over on or before the maturity,
- the cost of hedge is met out of repatriable funds and/or inward
remittance through normal banking channel,
- all outward remittances incidental to hedge are net of applicable
Indian taxes.
(Above sub-clause a. amended, b. delete & c. to e. has been re-number as
b. to d. vide Notification No. FEMA 81/2003-RB, DT. 08/01/2003)
- A non-resident Indian or Overseas Corporate Body may enter into forward
contract with rupee as one of the currencies, with an authorised dealer in
India to hedge;
- the amount of dividend due to him/it on shares held in an Indian
company;
- the balances held in Foreign Currency Non-Resident (FCNR) account or
Non-Resident External Rupee (NRE) account,
- the amount of investment made under portfolio scheme in accordance
with the provisions of the Foreign Exchange Regulation Act, 1973 or
under notifications issued thereunder or is made in accordance with the
provisions of the Foreign Exchange Management (Transfer or issue of
Security by a Person Resident outside India) Regulations, 2000 and in
both cases subject to the terms and conditions specified in the proviso
to paragraph 1 of this Schedule.
2A. A non-resident Indians may, subject to conditions
prescribed by the Reserve Bank of India from time to time, enter into cross
currency (not involving the rupee) forward contracts to convert the balances
held in FCNR (B) accounts in one foreign currency to another foreign currency in
which FCNR (B) deposits are permitted to be maintained.
(Above paragraph 2A. has been added vide Notification No. FEMA 104/2003*-RB, DT.
21/10/2003
- Authorised dealers may offer forward contracts to persons resident
outside India to hedge the investments made in India since January 1, 1993,
subject to verification of the exposure in India. These forward contracts
once cancelled are not eligible to be rebooked.
"Pre-Revised - Reserve Bank may, on application, allow a
person resident outside India to purchase a forward contract to hedge his
investment made since 1st January 1993. "
(Above Clause (3) has been substituted vide Notification No. FEMA
81/2003-RB, DT. 08/01/2003)
3A. A person resident outside India may, subject to
conditions prescribed by the Reserve Bank of India from time to time, enter into
a forward sale contract with an authorized dealer in India to hedge the currency
risk arising out of his proposed foreign direct investment in India.
3B. A person resident onside India having Foreign Direct
Investments in India may, subject to the condition that forward cover shall be
taken only after the rate has been approved by the Board, enter into forward
contracts with rupee as one of the currencies to hedge the curency risk on
dividend receivable by him from the Indian company.
(Above paragraph 3A. & 3B. has been added vide Notification No. FEMA
104/2003*-RB, DT. 21/10/2003)
- A Foreign Institutional Investor, a Non-Resident Indian or a Person
Resident outside India having Foreign Direct Investment in India, may enter
into a foreign currency-rupee option contract with an authorised dealer in
India, under the same terms and conditions applicable to forward contracts.
(Above paragraph 4. has been inserted vide Notification No. . FEMA
143/2005-RB, DT. 19/12/2005)
Schedule III
(See Regulation 6)
Procedure for application for approval for hedging of commodity
price risk
- A person resident in India , engaged in export-import trade or as
permitted by the Reserve Bank, who seeks to hedge price risk in respect of
any commodity including Gold, [OMITTED -but excluding oil and petroleum
products, ] may submit an application to the International Banking Division
of an authorised dealer giving the following details.
(In above para 1. words 'or as permitted by the Reserve Bank' has been added
vide Notification No . FEMA 105/2003*-RB, DT. 21/10/2003)
(In above para 1. words 'but excluding oil and petroleum products,' has been
omitted vide Notification No. 28/2000-RB, dated 05/09/2000)
- A brief description of the hedging strategy proposed ; namely :-
- description of business activity and nature of risk;
- instruments proposed to be used for hedging ;
- names of commodity exchange and brokers through whom the risk is
proposed to be hedged and credit lines proposed to be availed. The name
and address of the regulatory authority in the country concerned may
also be given ;
- size/average tenure of exposure and/or total turnover in a year ,
together with expected peak positions thereof and the basis of
calculation.
- copy of the Risk Management Policy approved by the Management
covering:
- risk identification,
- risk measurements,
- guidelines and procedures to be followed with respect to revaluation
and/or monitoring of positions,
- names and designations of the officials authorised to undertake
transactions and limits.
- Any other relevant information.
- Authorised dealer after ensuring that the application is supported by
documents indicated in paragraph 1, may forward the application with its
recommendations to Reserve Bank for consideration.