RBI releases draft guidelines on centralized hedging for Indian subsidiaries of non-resident companies

Mumbai, Nov 5 (KNN) The Reserve Bank of India (RBI) has come out with the draft guidelines for centralised hedging for Indian subsidiaries of non-resident companies.

It would allow the overseas parent or its central treasury to hedge the currency risk arising out of genuine current account exposures of the Indian subsidiary in order to better manage the latter’s currency risk.

RBI said the guidelines would provide greater flexibility for hedging the currency risk arising out of current account transactions of Indian subsidiaries of Multi-National Companies (MNCs) by the parent or any non-resident group entity.

It would be for non-resident parent or its centralised treasury or any other related entity hedging on behalf of the Indian subsidiary.

The products that would be covered under the guidelines include all FCY-INR derivatives, OTC as well exchange traded that the Indian subsidiary is eligible to undertake.

According to the Operational Guidelines, Terms and Conditions for hedging, the non-resident entity should be incorporated in a country that is member of the Financial Action Task Force (FATF) or member of a FATF-Style Regional body.

The non-resident entity may approach an AD Cat-I bank which handles the foreign exchange transactions of its subsidiary for hedging the currency risk of and on the latter’s behalf, the draft guidelines proposes.

It says the non-resident may approach the AD Cat-I bank either directly or through its banker overseas.

The Indian subsidiary shall be responsible for compliance with the rules, regulations and directions issued under FEMA 1999 and any other laws/rules/regulations applicable to these transactions in India.

The transactions under this facility will be covered under a multiple party agreement involving the Indian subsidiary, the non-resident entity and the Indian AD Cat – I bank.

The profit/ loss of the hedge transactions shall be reflected in the books of accounts of the Indian subsidiary. This requirement shall be included in the multiple party agreement.

Any rupee account if required for undertaking the hedging transactions be permitted to be opened by the AD Bank in the name of the related non-resident entity.

The concerned AD Bank shall be responsible for monitoring all hedge transactions (OTC as well as exchange traded) booked by the non-resident entity and ensuring that the Indian subsidiary has the necessary underlying exposure for the hedge transactions.

Transactions booked on the exchanges may be reported to the concerned AD Bank for monitoring underlying exposure.

AD banks shall report hedge contracts booked under this facility by the non-resident related entity to CCIL’s trade repository with a special identification tag, the draft guideline adds.