Commodity Hedging by Entities in Special Economic Zones
Attention
of authorised dealers is invited to paragraph 6 of Notification No.FEMA25/RB-2000
dated 3rd May, 2000 and paragraph A.6(i) Part A of the enclosure to AP
DIR(Series) Circular No.19 dated January 24, 2002.
2. The
Notification referred to above has since been partially modified vide
Notification No.FEMA-66/2002-RB dated 27th July, 2002 and accordingly, it has
been decided to grant general permission to entities in the Special Economic
Zones (SEZs) for undertaking hedging transactions in the international
commodity exchanges/markets to hedge their commodity price risk on import/export,
provided, such transactions are undertaken on “stand-alone” basis. By
“stand-alone” it is meant that units in the SEZs would be completely isolated
from financial contacts with their parent or subsidiaries in the mainland or
within the SEZs as far as their import/export transactions are concerned.
3. Authorised
Dealers may bring the contents of this circular to the notice of their
concerned constituents in the SEZs and allow such transactions to be undertaken
under the terms and conditions set out in the Annexure.
4. 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).
ANNEXURE
Guidelines/Terms &
Conditions for undertaking hedging transactions
1. The focus
will be on risk containment. Only off-set hedge will be permitted.
2. All
standard exchange traded futures and options (purchases only) are permitted. If
the risk profile warrants, the corporate/firm may also use OTC contracts. It is
also open to the Corporate/firm to use combinations of option strategies
involving a simultaneous purchase and sale of options as long as there is net
inflow of premium direct or implied. Corporates/firms are allowed to cancel an
option position with an opposite transaction with the same broker.
3. The
corporate/firm should open a Special Account with the authorised dealer. All
payments/receipts incidental to hedging may be effected by the authorised
dealer through this account without further reference to the Reserve Bank.
4. A copy
of the Broker’s Month-end Report(s), duly confirmed/countersigned by the
corporate’s Financial Controller should be verified by the bank to ensure that
all off-shore positions are/were backed by physical exposures. These month-end
reports may be kept on record for internal audit/inspection purpose.
5. The
periodic statements submitted by Brokers, particularly those furnishing details
of transactions booked and contracts closed out and the amount due/payable in
settlement, should be checked by the corporate/firm. Unreconciled items should
be followed up with the Broker and reconciliation completed within three
months.
6. The
corporate/firm should not undertake any arbitraging/speculative transactions.
The responsibility of monitoring transactions in this regard will be that of
the authorised dealer.
7. An
annual certificate from Statutory Auditors should be submitted by the
company/firm to the authorised dealer. The certificate should confirm that the
prescribed terms and conditions have been complied with and that the
corporate/firm’s internal contracts are satisfactory. These certificates may be
kept on record for internal audit/inspection.