Foreign
Currency Loans from Financial
Institutions and Banks
In the case of large projects involving heavy capital equipments,
foreign currency loans are emerging as an important source of project finance.
The Department of Economic Affairs, Government of India, specifically permits
borrowings in foreign currencies in respect of specific projects. While
submitting the application to the committee approving capital goods imports,
the entrepreneur is required to specifically mention foreign currency loans a,
source of finance. It is therefore, important that the foreign currency loans
source of project finance are identified well in time.
While identifying the foreign currency loans as a possible source of
project finance, the entrepreneur should take into account : (a) the options
available the international market; and (b) the cost effective financing
alternatives a foreign currency exposure management.
There are two types of external sources available for raising foreign
currency borrowings:
(i) funds that can be raised on fixed rates of interest (i.e. fixed borrowings); and.
(ii) funds that can be raised on floating rates of interest (i.e.
floating-rate borrowings).
Fixed-rate borrowings insulate the borrower against movements in the
interest rates. Floating-rate borrowings, on the other hand, enable the borrow
to take advantage of downward movements in the interest rates.
The most commonly used methods of raising fixed-rate funds for financing
capital goods imports are : (a) Buyer's credit; (b) Supplier's credit and (c)
Fixed-rate loans.
(a) Buyer's
credit
Under a buyer's credit arrangement, a specific long-term loan is granted
by a designated lending agency in the exporter's country to the buyer in the
import, country against a guarantee by an acceptable bank or financial
institution. The supplier receives payment for the exports on his delivering to
the lending agency the requisite documents specified in the loan agreement and
the relative commercial contract. The lending agency realises the payment from
the buy (importer) in instalments as and when they fall due. Ordinarily, the
supplier of his obligation reckons the period credit as the duration from the
date of completion
.
(b) Supplier's
credit
Suppliers credit, on the other hand, is extended to the supplier
(exporter) by the financial institutions (in the exporter-country) to finance
his deferred receivables. The buyer is required to provide the requisite
guarantee from an acceptable bank or financial institution in the importer
country.
Credit may also be extended by the supplier (exporter) directly to his
buyer (importer) on the deferred payment terms against his providing a
guarantee as above. In this case, the supplier will realise the proceeds of his
exports by discounting the bills of exchange (drawn on and accepted by the
buyer) with his banker or the designated Government agency in his country. Such
credits however, are not really supplier's credit in the technical sense. These
are in the nature of trade credit.
Technically both supplier's credit and buyer's credit are extended by
the lending agency in the exporter's country; when it is granted to the
supplier (exporter), it is a supplier's credit; and when it is granted to the
buyer (importer) it is a buyer's credit.
(c) Fixed-rate
loans
In addition to the above two methods, fixed-rate loans can also be raise
through commercial banks. Such loans are normally arranged for a period upto 8
years and are priced at a specific spread above the going rate in the concerned
country of the chosen currency.
Of the above three types of credit, supplier's credit may, in many
cases, prove to be more expensive as the supplier is likely to add a premium in
the price quoted for the goods or in the rate of interest so as to compensate
him for the additional cost incurred by him in the process. As against this
buyer's credit may be relatively cheaper as the supplier under this arrangement
is paid off immediately and the lender realises die payment from the buyer as
per agreed terms. The interest rate quoted on the fixed-rate loans by the
commercial banks will depend upon the competitive edge of the concerned bank in
the particular Euro-currency market
There are two methods of raising foreign currency loans; (i) through
Financial Institutions under Lines of credit & (ii) directly from abroad.
In this Chapter we shall discuss foreign currency loans through financial
institution only. Raising foreign currency loans abroad directly i.e. external
commercial borrowings will be discussed in the next Chapter.
The all India financial institutions have arranged various lines of
credit in different foreign currencies from various international development
agencies and banks including World Bank and foreign currency loans are
sanctioned as apart of project finance out of these lines of credit. The
salient features of foreign currency loans sanctioned by all India financial
institution are as under:
§
The rates of interest on foreign currency loans
are either fixed or floating depending upon the terms and conditions applicable
on the line of credit out of which a particular foreign currency loan is
sanctioned.
§
Other terms and conditions including repayment
period are also dependent on the original line of credit and entire repayment
has to be within the terminal date of original credit to the financial
institution.
§
All foreign currency loan attract a uniform up
front fee of 1 %p.a. from the date of issuance of letter of intent by the
financial institution.
§
Convertibility clause is not applicable in case
of foreign currency loans.
The various steps involved for availing of foreign currency loan are as
follows:
q
The lending institution will issue letter of
intent for foreign currency loans.
q
Take steps to get capital goods clearance from
Secretariat of Industrial Assistance and for obtaining import licence from the
Director General of Foreign Trade, where applicable.
q
Convene Board meeting to accept the letters of
intent issued by the lending institution and convey acceptance to the
institution by sending copy of Board Resolution passed in this regard.
q
Obtain copy of foreign loan agreement and
guarantee agreement etc. as required in terms of sanction from the lending
institution and arrange proper execution of same by authorised persons to the
satisfaction of the institution.
q
Obtain necessary application forms for issuance
of import letters of credit.
q
Payment in respect of imported machinery will
be directly made by the institutions to the overseas suppliers against letters
of credit opened by them by disbursing the loan.
Efforts are, however, being made to rationalise the procedure and bring
uniformity by adopting a common approach to foreign currency loans and a
beginning in this regard has already been made. Full details of the procedure
are given in the later part of this chapter.
Foreign currency loans availed from financial institutions are repayable
in Foreign currency itself and the borrower in such cases is exposed to
exchange fluctuation risks. Selection of foreign currency thus gains
importance. Long-term prospects as regard to stability in the value of foreign
currency vis-a-vis the interest rates applicable on the loan must be analysed
before selecting the foreign currency.
Another important factor in this regard which needs careful examination
the currency of loan and currency of payment at the time of import of machinery
etc. i.e. against a loan in US $, the payment of the foreign supplier of
machinery can be made in Japanese Yen. This is a very difficult situation for
the importer as total rupee outlay will not only be effected by a change in
exchange rates of dollar vis-a-vis Indian rupees but will also be effected by a
change in Japanese Yen-US $ rate. For example, if Japanese Yen appreciates by
about 30% a US $, the liability in US $ will increase by 30% without any
corresponding increase in Japanese Yen liability.
Import of capital goods may generally involve a long time and letters
credit are opened with relatively longer commitment period and change in rate
between the currency of invoicing and currency of loan may play a with the
financial planning of a project. In situations as quoted in the example, the
very successful completion of the project may be endangered to extra load of 30% required to meet the
import commitment. It is, therefore absolutely necessary to foresee such
situations. The ideal solution to the above problem is to ensure that the
currency of invoice and currency of loan are or the same.
From the discussions in the preceding paragraphs we can identify
following risks for the promoter while availing foreign currency loans.
q
Fluctuation in the parity rate between the
currency of invoicing currency of loan,
(The risk is carried from the date of purchase contract of machine the
date of settlement of payment.)
q
Exchange rate fluctuation in the currency of
loan in term of Indian rupees.
(The risk is carried from the date of availing of loan till the
instalment is repaid on reducing scale.)
Covering the foreign exchange risk is termed as hedging the risk.
company does not want to hedge, it means it is taking a view that the future
movements of exchange rates will move in its favour. If the company adopts
policy of hedging everything, and the spot rates move in favour of the company,
the company will lose out or incur the opportunity cost by hedging the exposure
if the rates move against.
There may be partial hedging where a view is taken that only those
exposures where it is anticipated that risk of losses could exceed the
opportunity to gain need to be hedged. However, it is prudent going by the past
experience to fix a limit which could be left unhedged. While the cost of
hedging is quite relevant in the context, the risk factor might take a heavy
toll and hence basically it is undeniable that exchange risks have to be hedged
in the current scenario.
There are many techniques provided by banks and financial institutions
which offer hedges in many forms as under
This is a usual hedge extended to customers. Banks offer forward
exchange contracts both for sale and purchase transactions to customers with a
maturity date for a fixed amount at a determined rate of exchange at the outset.
Normally contracts are entered in India for a period where the maturity period
of the hedge does not exceed the maturity of the underlying transaction. The
customer has the option to choose the currency of the tenor.
Roll over forward contract is one where forward exchange contract is
initially booked for the total amount of loan etc. to be re-paid. As and when
instalment falls due, the same is paid by the customer in foreign currency at
the exchange rate fixed in forward exchange contract. The balance amount of the
contract is rolled over (extended) till the due date for the next instalment.
The process of extension continues till loan amount has been re-paid. But the
extension is available subject to the cost being paid by the customer, thus
under the mechanism of roll over contract the exchange rate protection is
provided for the entire period of the contract and the customer has to bear the
roll overcharges, if any. The cost of extension (roll over) is dependent upon
the forward differentials prevailing on the date of extension. Thus, the
customer effectively protects himself against the adverse spot exchange rates
but he takes a risk on the forward differentials (i.e. premium/discount).
Although spot exchange rates and forward differentials are prone to
fluctuations, yet the spot exchange
rates being more volatile, the customer gets protection against the adverse
movement of exchange rates.
We can appreciate that there is not much difference between rolling over
of the forward exchange contract and extension of forward exchange contract,
except that in the case of former the exchange contract is extended for the
balance amount left after the instalment has been remitted while in the case of
latter the exchange contract for the entire amount is extended. The cash
inflows and outflows are quite large and so also interest on the same.
Therefore, sometimes if the foreign currency appreciates continuously the
extension of forward sale contract turns out to be a costly affair.
As per exchange control regulations, the forward contracts can be rolled
over for periods less than six months also. The interest, as in the case of
extension, on inflows has to be paid to the customer. Similarly, on cash
outflows bank is entitled to recover, interest.
A future contract is an agreement to buy or sell a standard quantity of
specific financial instrument at a future date and at an agreed price. A
corporate can take up a future contract which is opposite to his foreign
currency transaction exposure. However, the futures are reviewed on a daily
basis based on spot rate Therefore, the values of the futures contract varies
depending on the agreed price. Hence, the resultant spot rate will determine
the loss or gain on the transaction exposure and can be counteracted by the
resultant loss or gain, on futures contract.
Currency option gives the right but no obligation to the buyer of the
option to sell (put option) or buy (call option) a specific amount of foreign
currency a pre-determined price called strike price. There are tailor-made
options which can be picked up over the counters of the banks. The buyer of an
option has pay a price-premium for conferring the above right by the option
writer i.e. banks.
A swap is a financial transaction in which two counterparts agree
exchange streams of payments or cash flows over a period of time with a view to
achieving overall cost reduction for both parties.
Authorised dealers may arrange foreign currency-rupee swaps between
corporates who run exposures arising out of their long-term foreign currency
commitments.
Authorised dealers can offer hedging products to Indian corporates
without the Government's or the Reserve Bank's prior approval. Such approval is
a not required to unwind hedge transactions, the authorised dealers having be
allowed to remit upfront premia as well as other charges incidental to the
hedge transaction without prior approval of the Reserve Bank.
According to FEM (Foreign Exchange Derivative Contracts) Regulation
2000, authorised dealers can offer interest rate swaps, currency swaps, coup
swaps, foreign currency option, purchase of interest rate caps/collars a
forward rate agreements (FRA) to corporates. The products will have to offered
by way of booking the transaction overseas or in a back-to-back basis
Authorised dealers should ensure, before entertaining the corporate's request that :
(i)
the contract does not involve rupee,
(ii) the
Reserve Bank has accorded the final approval for borrowing in foreign currency;
(iii) the
notional principal amount of the hedge does not exceed the outstanding amount
of the foreign currency loan;
(iv) the
maturity of the hedge does not exceed the remaining life to maturity of the
underlying loan; and
(v)
the Board of Directors of the corporate has
approved the financial limits and authorised designated officials to conclude
the hedge transactions.
Interest rate swaps allow companies to move from a fixed interest rate
to a floating rate, or vice versa, in the same currency. In a currency swap,
when corporates find the ruling interest rate of a particular currency lower
than the interest rate of a currency in which they require a loan, they can
take a loan in the favourable currency and protect themselves against adverse
movements.
Coupon Swaps allow moving from fixed interest rate in a particular
currency to a floating rate in another currency.
With a forward rate agreement, a company can protect itself against
adverse interest rate movements. Interest rate swaps do the same but they have
to be bought from a bank at a price. For protection on the asset side, the
interest rate floor is available to banks.
Foreign Currency Option Contract is an agreement wherein the holder has
the right to acquire or sell, specified amount of foreign currency; at a
specified price (also known as exercise price or strike rate) at which the
option can be bought or sold and within the specified time frame (also referred
to as expiration date or maturity date).
Procedure for Forward Exchange Contracts and Derivative Contracts have
been laid down under RBI directions, issued vide AP (DIR Series) Circular No.
19, dt. 24.1.2002 and No. 32, dt. 21.10.2002, consolidated under Master
Circular No. 1/2003-04, dt. 1.7.2003, relevant extracts given later.
(i) Spot rate: The effect of this variable
on the option price is quite evident. In case of call option, higher the spot
rate higher will be the option price (premia) and vice versa. A put option
becomes less valuable with the rise in spot price and vice versa.
(ii) Strike price: A call option tends to vary
immensely with the strike rate. With the rise in strike rate, the call option
tends to lose value. This is because the holder stands to lose when he
exercises the call option. A put option moves in direct relation with the
strike rate and with the rise in strike rate, the holder tends to gain on
exercising the option.
(iii)
Time of expiration : With the increase in the time of expiration,
both call and put option gain value. This is because the option with larger
time to expiration other things being held constant will have higher
Major international banks agree to reimburse to the borrower the cost of
LIBOR exceeding a particular level during the currency of the loan. This le is
referred to as the 'Cap'.
The fee (or insurance premium) to be paid by the borrower would depend
upon the difference between the cap and the current rate, the period for which
the contract is to run, the anticipated interest volatility, etc. The higher
the cap the lower the fee; on the contrary, the longer the period of the
contract, the higher will be the fee payable.
The cost can be reduced if the borrower simultaneously agrees to a floor
the LIBOR. In that case, if the actual LIBOR is less, the difference will have
be paid to the insurer. When a contract specifies both the cap and the floor
referred to as a 'collar' or a 'band'. This could be considered as the
simultaneous purchase of a series of call options and sale of a series of put
options on LIBOR. The two strike prices -namely, the cap and the floor , - can
be so chosen that the cost of the collar is zero.
The Reserve Bank has issued Foreign Exchange Management (Foreign
Exchange Derivative Contracts) Regulations, 2000, text given in Appendix 10.1
A.1 A person resident in India may enter into a forward contract with
authorised dealer in India to hedge an exposure to exchange risk in respect
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
(a)
the authorised dealer through verification of
documentary evidence satisfied about the genuineness of the underlying
exposure, irrespective of the transaction being a current or a capital account
transaction Full particulars of contract should be marked on such documents u
proper authentication and copies thereof retained for verification. However,
authorised dealers may allow importers and exporters book forward contracts on
the basis of a declaration of exposure subject to the conditions mentioned in
paragraph A.2 of this circular.
(b)
the maturity of the hedge does not exceed the
maturity of the underlying transaction,
(c)
the currency of hedge and tenor are left to the
choice of the customer,
(d)
where the exact amount of the underlying
transaction is not ascertainable the contract is booked on the basis of a
reasonable estimate,
(e)
foreign currency loans/bonds will be eligible
for hedge only after 1 approval is accorded by the Reserve Bank where such
approved, necessary or loan identification number is given by the Regional
Office of the Reserve Bank,
(f)
Global Depository Receipts (GDRs) will be
eligible for hedge after issue price has been finalised,
(g)
balances in the Exchange Earner's Foreign
Currency(EEFC) accounts sold forward by the account holders shall remain
earmarked delivery and such contracts shall not be cancelled. They may, however
be rolled-over,
(h) forward contracts booked in respect of foreign currency exposures residents failing due within one year may be cancelled and rebooked. This facility may be made available only to customers who submit details exposure to authorised dealers in the prescribed format. Forward cont booked to cover exposures falling due beyond one year once cancelled cannot be rebooked. Authorised dealers may continue to offer this facility without any restrictions in respect of export transactions. All for contracts may be rolled over at on-going market rates.
(i) Substitution of contracts for hedging trade transactions may be permitted by an authorised dealer on being satisfied with the circumstance, under which such substitution has become necessary.
A.2 Authorised dealers may also
allow importers and exporters to book for contracts on the basis of a
declaration of an exposure and based on performance subject to the following
conditions: '
(a) The
forward contracts booked in the aggregate should not exceed limits worked out
on the basis of the average of the previous financial years' (April to March)
actual import/export turnover. This is subject to the condition that at any
point of time forward contracts so booked shall not exceed 50% 1of the limit within a cap of US 100 million.2 These eligible limits are to be computed separately for export and
import transactions.
(b) Any forward contract booked without producing documentary evidence will be marked off against this limit.
(c) Importers
and exporters should furnish a declaration to the authorised dealer regarding
amounts booked with other banks under this facility.
(d) An
undertaking may be taken from the customer to produce supporting documentary
evidence before the maturity of the forward contract.
(e) Importers/exporters
desirous of availing limits higher than US $ 100 million may forward their
applications to the Chief General Manager Reserve Bank of India, Exchange Control Department, Forex Markets
Division, Central Office, Mumbai-400 001 (Fax No. 22611427, e-mail
ecdcofmd@rbi.org.in) justifying the need for higher limits. Forward contracts
booked under the enhanced limits will be on a deliverable basis. Details of the
import/export turnover of the past three years delayed realisations/ payments
during these years and existing limits duly authenticated by the authorised
dealer, may also be furnished the prescribed format.
A.3 A forward contract cancelled with one authorised dealer can be rebooked
with another authorised dealer subject to the following conditions:
(a) the
switch is warranted by competitive rates on offer, termination banking
relationship with the authorised dealer with whom the contract was originally
booked, etc.
(b) the
cancellation and rebooking are done simultaneously on the rity date of the
contract ,
(c) the
responsibility of ensuring that the original contract has been cancelled rests
with the authorised dealer who undertakes rebooking the contract.
A.4 Authorised Dealers may also enter into forward contracts with residents
respect of transactions denominated in foreign currency but settled in Indian
Rupees. These contracts shall be held till maturity and cash settlement would
made on the maturity date by cancellation of the contracts. Forward co covering
such transactions once cancelled, are not eligible to be rebook
A.5Authorised dealers in India may enter into contracts, other than forward
contracts with residents in India in accordance with the following provision
(i) A
person resident in India who, has borrowed foreign exchange 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 contract with an authorised dealer in
India or with a branch outside Indian authorised dealer for hedging his loan
exposure and unwinding from such hedges:
Provided that
(a) the contract does not
involve the rupee
(b) final
approval has been accorded or loan identification number by the Reserve Bank
for borrowing in foreign currency.
(c) the notional
principal amount of the hedge does not exceed outstanding amount of the foreign
currency loan.
(d) The
maturity of the hedges does not exceed the unexpired maturity of the underlying
loan.
(ii) 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 under the
following and conditions:
1 . No
swap transactions involving upfront payment of rupees or its equivalent, in any
form shall be undertaken.
2. Swap
transactions may be undertaken by banks as intermediaries by matching the
requirements of corporate counter-parties
3. While no limits arc placed on the authorised dealers for undertaking, to facilitate customers to hedge their foreign exchange exposure limits have been put in place for swap transactions facilitating customers to assume a foreign exchange liability, thereby resulting in supply in the market. While matched transactions may be undertaken, a limit of US $ 50 million is placed for net supply in the market on account of these swaps. Positions arising out of cancellation of swaps by customers need reckoned within the cap.
4. With
reference to the specified limits for swap transactions facilitating customers
to assume a foreign exchange liability, the limit will be reinstated on account
of cancellation/ maturity of the swap and on amortization the amounts
amortized.
5. In the case of swap structures where the premium is inbuilt into the cost, authorised dealers should ensure that such structures do not result increase in risk in any manner. Further, such structures should not result in net receipt of premium by the customer.
6. The
above transactions if cancelled, shall not be rebooked or re-entered, by
whatever name called.
NOTE :
(i) Authorised dealers
should not offer leveraged swap structures clients.
(ii) Authorised
dealers should not allow the swap route to be surrogate for forward contracts
for those who do not qualify for
forward cover.
(iii) A
person resident in India may enter into a foreign currency contract with an
authorised dealer in India to hedge foreign exchange exposure arising out of
his trade :
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. These transactions
may be freely booked and/or cancelled.
Explanation : The contingent foreign exchange exposure arising out of submission of
a tender bid in foreign exchange is also eligible for hedging un sub-paragraph.
A.6 (i) Authorised dealers should ensure that the Board of Directors of the
corporate has drawn up a risk management policy, laid down clear guidelines for
concluding the transactions and institutionalised the arrangements for a period
cal review of operations and annual audit of transactions to verify compliance
with the regulations. The periodical review reports and annual audit report
should be obtained from the concerned Corporate by the authorised dealers.
(ii) Cross currency options should be written on a fully covered back-to
back basis. The cover transaction may be undertaken with a bank outside India,
an off-shore banking unit situated in a Special Economic Zone or an
internationally recognized option exchange or another authorised dealer in
India.
(ii)
Authorised dealers desirous of writing options,
should obtain one time approval, before undertaking the business, from the
Chief General Manager Exchange Control Department, (Forex Markets Division),
Reserve Bank of India, Central Office, Mumbai 400 0011
A.7 (i) Residents in India, engaged in import and export trade, may hedge
the price risk of all commodities in the international commodity
exchanges/market. Applications for commodity hedging may be forwarded to
Reserve Bank for consideration through the International Banking Division of an
authorise dealer along with its recommendation giving the following details:
1. A brief description of the
hedging strategy proposed; namely:
(a) Description of business
activity and nature of risk
(b) instruments proposed to
be used for hedging
(c) names
of commodity exchanges and brokers through whom risk is proposed to be hedged
and credit lines proposed to be availed. The name and address of the regulatory
authority in the country concern may also be given
(d) size/average
tenure of exposure and/or total turnover in a year, together with expected peak positions thereof and the
basis of calculation.
2. copy of the Risk Management Policy approved by the Management
covering;
(a) risk identification
(b) risk measurements
(c) guidelines
and procedures to be followed with respect to revaluation and/or monitoring of
positions
(d) names
and designations of officials authorised to undertake transactions and limits
3. any other relevant information.
A one-time approval will be given by Reserve Bank along with the
guidelines for undertaking this activity.
(ii) General permission has been granted to entities in 'Special
Economic Zones' to undertake hedging transactions in the overseas commodity
exchanges/markets to hedge their commodity prices on export/import, subject
condition that such contract is entered into on a stand-alone basis.1
NOTE: The term
"stand alone" means the unit in SEZ is completely isolated from financial contacts with its parent or
subsidiary in the mainland within the SEZs as far as its import/export
transactions are concerned.
The salient features of FEDAI Guidelines are as under:
1. The
International Currency Option Market (ICOM) Agreement 28th August, 1992 of
British Bankers' Association London with modifications in wording in regard to
the applicability of law and
jurisdiction should be used in preparing documentation for currency
option contract between the bankers and customers in India.
2. The
banks should obtain request letter from the customer as per specimen provided
by FEDAI which inter-alia contains a declaration that there is already no
forward exchange cover or foreign option in place against the exposure.
3. The
customers should be required to confirm all transaction banks as per standard
ICOM confirmation format. Confirmation be exchanged between the originating
bank and the counterpart bank.
4. The customers should communicate notice of exercise contract two working days in advance before the delivery provided in the ICOM document and such exercise and options should be upto 4 p.m. IST on the date of exercise. Notice of exercise given by facsimile transmission.
5. Foreign Currency Options can be concluded as per the present regulation only over the counter (OTC).
6. The
bank may write European or American Options (put and call Options only) in
respect of customers transactions and cover themselves with the overseas
branches/correspondent banks accordingly.
7. Option
premium may be paid and received in foreign exchange. In the case of premiums
on options bought by Authorised Dealers charge the premium to the customer by
keeping a spread.
8. The
factors that should be reckoned for determining the amount are strike price,
maturity period of the contract, currency volatility, interest rate
differentials and market condition.
9. The
premium amount once collected is not refundable, not withstanding the fact that
the option contract between customer and the bank and/or between the bank and
the counterpart bank abroad becomes impossible of performance for what ever
reason, including Government prohibitory order.
10.
Option premium may be remitted without the
prior approval of Reserve Bank.
11. Appropriate
accounting entries should be passed for options bough and sold and premium
amounts received and paid. Option exposure should appear in the accounts as a
contingent item.
12. The
accounting procedure should deal with the entire processing cycle. It should
necessarily involve the maintenance of the following accounts:
(a) Contingents (Options
purchased/sold);
(b)
Premium (Receivable/payable accounts);
(c)
Revaluation Accounts; and
(d) Profit/Loss Accounts.
13. Limits
should be set for customer exposures; counterpart limits for options purchased
should also be laid down.
14. Options
may be bought from overseas and sold to other authorised dealers in India.
15. Member
banks should obtain the revaluation rates from the counterparty banks abroad
i.e. the foreign branch of the bank of the overseas correspondent bank with
whom authorised dealer has arrangement.
16. Options
written and options purchased should be mailed at suitable periods so as to
coincide with the dates on which evaluation of foreign exchange position is
done.
IDBI grants direct foreign currency loans to industrial concerns under
its Project Finance Scheme as also under its Equipment Finance Scheme. While
the loans under the former Scheme form part of assistance related to projects,
loans under the latter scheme are intended for financing import of capital
goods and equipment (not related to any specific project/scheme as such)
through a simplified procedure. IDBI also considers foreign currency loans
under its Corporate Loan Scheme, for meeting capital expenditure and long-term
working capital. In respect of units/companies already assisted by IDBI,
foreign currency loan may be provided for meeting loan component of working
capital finance under assisted by IDBI's Working Capital Loan Scheme. The
salient, features of the scheme are spelt out here in after.
Any industrial concern which qualifies for IDBI's assistance under
statute and envisages import of capital goods for a project is eligible for
availing of foreign currency loan from IDBI provided the proposed import is
approved by the Import Licensing Authority and allocated to Will or covered
under Open General Licence. The project should also satisfy the usual appraisal
norms of IDBI. The foreign currency loans are sanctioned on the basis of the
requirements of assisted projects and there is no ceiling on the quantum of
loans. Foreign currency loans are exempt from the preview of convertibility
clause.
IDBI raises foreign currency borrowings from various sources, such
as Euro market, international
institutions, domestic bond markets of foreign countries and export credit
agencies. The source to be allocated to a particular foreign currency loan
sanctioned by IDBI depends on the country from where the goods are to be
imported and the availability of foreign currency funds from a particular
source at the time when the borrower desires to open letters of credit
The terms and conditions of a foreign currency loan depend upon source
of foreign currency funds to be allocated to it. Normally, at the time of
sanction only a tentative indication is given by IDBI regarding the specific
source that may be allocated. Nevertheless, as IDBI would like to utilise its
resources, on a first-come-first-served basis, the allocation is normally
firmed up to specific line of credit at the time of execution of loan
agreement. The term and conditions are finalised at that stage. It is, however,
possible that even after the loan agreement is signed and letter of credit is
issued, the source of the funds may change. Such situation could arise when
there is a large time lag between the time of opening of letter of credit and
the payment against shipping documents during which period the particular
source of funds could have been exhausted. In case of projects where the amounts
of foreign currency loans large, IDBI may like to offer a mix of currencies
depending on availability of funds under its credit lines. For this purpose,
IDBI reserves the right to change the source of foreign currency financing and
alter the terms and condition accordance with such source.
IDBI grants loans in various foreign currencies out of its Euro-Dollar,
Japanese Yen, Deutsche Mark, etc. borrowings.
Amount of Loan
: The
loan amount will be normally available up extent of foreign exchange cost
(C.I.F. value) of the capital goods/equipment be imported.
Rate of
Interest: Floating
rate based on LIBOR depending upon the source of the currency plus a fixed
spread according to the risk perception and maturity of loan.
Upfront Fee : Upfront fee will be, levied
at the rate of 1% p.a. from the date of Letter of Intent issued by IDBI.
Repayment: The repayment period will
normally be synchronised with the relative repayment commitments of IDBI in
respect of the foreign currency funds utilised for grant of loan. The period of
repayment will range upto 10 years
(including moratorium) as appropriate lo each case.
Security : The loans will be generally secured
by a first charge on the assets of the borrowing company including
hypothecation of capital goods to be imported.
General: Applications for foreign
currency loans should be submitted IDBI's Project Finance Department in Mumbai
(or to Regional Offices at New Delhi/Calcutta/Chennai/Guwahati/Mumbai for
projects with a total cost up Rs.7 crores) in the prescribed form. The foreign
currency loans will be considered on the basis of the usual appraisal norms.
The company is thereafter required to execute a Loan Agreement in the
prescribed form, for availing of the foreign currency loan.
Opening of
Letters of Credit.. IDBI opens letters of
credit against its c sanctions of foreign currency loans without seeking margin
or bank guarantee. After execution of the Loan Agreement, applications for
opening of letters of credit in the prescribed form should be submitted to the
General Manager, Project Finance Department, Mumbai. The applications should be
signed by borrower's officials authorised in this behalf and should be duly
supported the following documents:
(a) Resolution authorising
the signatories for the purpose;
(b) Exchange control copy of
import licence;
(c) Purchase order;
(d) Supplier's confirmation;
(e) Approval
from IDBI on behalf of RBI for Foreign Currency Borrowings from the Exchange
Control angle.
Currency of
Payment.. The risk arising out of exchange fluctuation
is to borne by the borrower. All dues will, therefore, be calculated with
reference the currency in question and converted into rupees at the exchange
rate prevailing on due dates and recovered in equivalent rupees. Thus, up front
,will be calculated on the amount of relevant foreign currency agreed to be
made available by IDBI for financing import and the amount of interest and
repayment of instalments due will be calculated in terms of currency in which
the loan is made and converted into rupees at the exchange rate prevailing on
due dates
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 maintenance of
foreign exchange market in India, namely,
(1) These Regulations may be called the Foreign Exchange Management
reign Exchange Derivative Contracts) Regulations, 2000.
(2) They shall come into force on the 1st day of June, 2000.
2.Definations.
In these Regulations, unless the context requires otherwise,
(i) ‘Act' means the Foreign Exchange Management Act, 1999 (42 of 1999);
(ii) ‘authorised dealer' means a person authorised as authorised dealer under sub-section (1) of section 10 of the Act;
(iii) 'Cash delivery' means
delivery of foreign exchange on the day of
transaction;
(iv) 'Forward
contract' means a transaction involving delivery, other than Cash or Tom or
Spot delivery, of foreign exchange;
(v) '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) a
transaction which involves at least one foreign currency other than currency of
Nepal or Bhutan, or
(b) a
transaction which involves at least one interest rate applicable to a foreign
currency not being a currency of Nepal or Bhutan, or
(c) a forward contract,
but does not include foreign exchange transaction for Cash or Tom or
Spot deliveries;
(vi) 'Registered
Foreign Institutional Investor (FII)' means a foreign institutional investor
registered with Securities and Exchange Board of India;
(vii) 'Schedule' means a
schedule annexed to these Regulations;
(viii) 'Spot
delivery' means delivery of foreign exchange on the second working day after
the day of transaction;
(ix) 'Tom
delivery' means delivery of foreign exchange on a working day next to the day
of transaction;
(x) the
words and expressions used but not defined in these Regulations shall have the
same meanings respectively assigned to them in the Act.
3. 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 he Reserve Bank.
4. 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.1
5. 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.,
6. Commodity
hedge.
Reserve Bank may, on an application made in accordance with the
procedure specified in Schedule Ill, 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.1
2Provided 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 above” basis.
Explanation : The term "stand-above" means that the unit in
the SEZ is completely isolated from financial contacts with its parent or
subsidiary in the mainland or within the SEZ(s) as far as its import/export
transactions are concerned.
7. 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
(a) option
premium payable by a person resident in India to a person resident outside
India;
(b) remittance
by a person resident in India of amount incidental foreign exchange derivative
contract entered into in accordance Regulation 4,
(c) remittance
by a person resident outside India of amount incident foreign exchange
derivative contract entered into in accordance Regulation 5;
(d) any
other remittance related to a foreign exchange derivative cost approved by
Reserve Bank.
SCHEDULE I
(See regulation 4)
Foreign exchange
derivative contract permissible for a person resident in India1
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
(a) 2[the authorised dealer through verification of documentary em is
satisfied about the genuineness of the underlying exposure otherwise permitted
by the Reserve Bank from the time to time
(b) the maturity of the
hedge does not exceed the maturity underlying transaction,
(c) the currency of hedge
and tenor are left to the choice customer,
(d) where
the exact amount of the underlying transaction ascertainable, the contract is
booked on the basis of a reasonable estimate,
(e) foreign
currency loans/bonds will be eligible for hedge only after final approval is
accorded by the Reserve Bank where such approval is necessary,
(f) in case of Global
Depository Receipts (GDRs) the issue price been finalised,
(g) balances
in the Exchange Earner's Foreign Currency (EEFC) accounts sold forward by the
account holders shall remain marked for
delivery and such contracts shall not be cancelled. They may, however, be rolled-over,
1[(h) contracts involving the
rupee as one of the currencies, cancelled shall not be re-booked except as
otherwise permitted 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 o on-going rates without any
restrictions,]
(i) substitution
of contracts for hedging trade transactions may be pen by an authorised dealer
on being satisfied with the circumstances which such substitution has become
necessary.
2[(j) 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 exchange risk in respect of transactions denominated in
foreign currency but settled in Indian rupees.]
2. (1) A person resident in India who has borrowed foreign exchange 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 -
(a) the contract does not
involve rupee.
(b) the
Reserve Bank has accorded final approval for borrowing in foreign currency,
(c) the
notional principal amount of the hedge does not exceed outstanding amount of
the foreign currency loan, and
(d) the
maturity of the hedge does not exceed the unexpired maturity of the underlying
loan.
(2) 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
(3) The contract entered into under sub-paragraph (2), if cancelled shall not be rebooked or re-entered, by whatever name called.
3. (1) A person resident in India may enter into a
foreign currency option contract with an authorised dealer in India to hedge foreign
exchange exposure of such person arising out of his trade :
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.
(2) A
transaction undertaken under sub-paragraph (1) may be freely booked and/or
cancelled.
(See regulation 5)
Foreign exchange
derivative contracts permissible for a person resident outside India1
1 . 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
2 [(a) the value of the hedge does
not exceed the market value of the underlying debt or equity instruments,
provided forward 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.]
(b) forward
contracts once cancelled shall not he rebooked but may be rolled-over on or
before the maturity,
(c) the
cost of hedge is met out of repatriable funds and/or inward remittance through
normal banking channel,
(d) all
outward remittances incidental to hedge are net of applicable Indian taxes.
2. A
non-resident Indian may enter into forward contract with rupee as one of the
currencies, with an authorised dealer in India to hedge;
(a) the amount of dividend due
to him/it on shares held in an Indian company;
(b) the
balances held in Foreign Currency Non-Resident (FCNR) account or non-resident
External Rupee (NRE) account;
(c) 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 accordance with the provisions of the Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations,20001 and in both cases subject to the terms
a conditions specified in the proviso to paragraph 1 of this Schedule
2[2.A A non-resident
Indian 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.
3[3. 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.]
2[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
authorised dealer in India to hedge the currency risk arising out of his
proposed foreign direct investment in Indian.
3B. A person resident outside India having
Foreign Direct Investment 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
currency risk on dividend receivable by him from the Indian company.]
(See Regulation 6)
Procedure for
application for approval for hedging of commodity price risk4
1 . A
person resident in India, engaged in export-import trade, 5[or as permitted by the Reserve Bank] who seeks to hedge price risk in
respect of any commodity including gold, 6 [but excluding oil and petroleum products], may submit an application
to the International Banking Division of an authorised dealer giving the
following details.
(i) A brief description of
the hedging strategy proposed; namely:
(a) description
of business activity and nature of risk;
(b) instruments
proposed to be used for hedging;
(c) names
of commodity exchange and brokers through whom the risk is proposed to be
hedged and credit lines propose( be availed. The name and address of the
regulatory authority in the country concerned may also be given;
(d) size/average tenure of
exposure and/or total turnover in a year together with expected peak position thereof and the basis of calculation;
(ii) copy of the Risk Management Policy
approved by the Management covering:
(a) risk
identification,
(b) risk
measurements,
(c) guidelines
and procedures to be followed with respect revaluation and/ or monitoring of
positions,
(d) names
and designations of the officials authorised to undertake transactions and
limits;
(e) any
other relevant information.
2. Authorised
dealer after ensuring that the application is supported documents indicated in
paragraph 1 may forward the application its recommendations to Reserve Bank for
consideration.
[V1]* vide RBI master circular no 1/2003-04, dt. 1.7.2003
[M2]Raised from 25% vide AP (Dir Series) Circular no.46 dt 9.12.2003.
[M3]This limit has
been removed vide AP (DIR Series) Circular no.46 dt. 9.12.2003
[M4]Half-yearly reports of cross-currency derivatives are required to be furnished in the prescribed format, vide AP (DIR Series) Circular No. 32, dt. 21.10.2002.
[M5]For guidelines/terms and conditions for undertaking hedging transactions by SEZ to AP (DIR Series) Circular No. 44 dt. 12.11.2002.
[M6]Vide RBI Notification No. FEMA 2512000-RB, dated 3.5.2000.
[M7]Also refer to RBI Directions issued in this behalf, vide AP (DIR Series) Circular No. 19, dt. 24.1.2002.
[M8]Also refer to RBI Directions issued in this behalf, vide AP (DIR Series) Circular No. 19, dt. 24.1.2002.
[M9]Inserted vide Notfn . No. FEMA 66/2002-RB, dt. 27.6.2002. Also refer to RBI Directions issued in this regard, Vide AP DIR (Series) Circular No. 44. dt. 12.11.2002.
[M10]Also refer to RBI Directions issued in this behalf, vide AP (DIR Series) Circular No. 24.1.2002.
[M11]Subs. for "the authorised dealer through certification of documentary evidence is satisfied about the genuineness of the underlying exposure" vide Notfin. No. FEMA 54/2002-RB, dt. 5.3.2002
[M12]Substituted for "(h) contracts involving rupee as one of the currencies, once cancelled 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" vide Notification No. FEMA 70/RB-2002,dt.26.8.2002.
[M13]Inserted vide Notification No. FEMA 10412003-RB, dt. 21.10.2003 published in the Gazette of India on 11.11.2003
[M14]Also refer to RBI Directions issued in this behalf, vide AP (DIR Series) Circular No. 19, dt. 24.1.2002
[M15]Subs vide Notification No. FEMA 81/2003-RB, dt 8-1-2003 published in the Gazatte of India on 9.7.2003
[M16]Inserted vide Notification No. FEMA 104/2003-RB, dt. 21.10.2003 published in the Gazette of India on 11.11.2003.
[M17]Subs. vide Notification No. FEMA 8112003-RB, dt. 8.1.2003, published in the Gazette India on 9.7.2003.
[M18]Inserted vide Notification No. FEMA 104/2003-RB, dt. 21.10.2003 published in the Gazette of India on 11.11.2003.
[M19]Also refer to RBI Directions issued in this behalf, vide AP (DIR Series) Circular No. 19, dt. 24.1.2002 and Circular No. 44, dt. 12.11.2002.
[M20]Vide Notification No. FEMA 105/203-RB dt. 21.10.2003
[M21]Omitted vide Notification No. FEMA 28/2000- RB dt. 5.9.2000.