External
Commercial
Borrowings
ADR/ GDR
FCCB
Hedging of Foreign
Exchange
Manish Tyagi
Ernst & Young
External
Commercial
Borrowings (ECB)
and Trade Credits
Agenda
Manish Tyagi
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
External Commercial
Borrowings

Structured obligations

Take out Finance

Trade credits

ADR/ GDRs/ FCCBs

Forex Hedging
Page 2
Concept
ECB refer to cross border commercial loans
(bank loans,
instruments)
buyers’
credit,
suppliers’
credit,
securitized
availed by permitted eligible borrowers from permitted nonresident lenders with minimum average maturity of 3 years.
Manish Tyagi
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Page 3
Route for availing ECB
Automatic Route i.e. no Reserve Bank of India (RBI) approval is
required (however registration is required)
Approval Route i.e. RBI approval is required.
ECB for investment in industrial sector, infrastructure sector
and specified service sectors such as Hotel, Hospital and
Software sector is included under Automatic Route.
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Ernst & Young
Page 4
Automatic
Route
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Ernst & Young
Page 5
Eligible Borrowers
Corporates including those in hotel, hospital, sofware,
Infrastructure Finance Companies registered under the
Companies Act.
SEZ units – for their own requirement. Cannot transfer or
onlend ECB funds to sister concerns or DTA units
NGO’s engaged in microfinance activity – subject to satisfying
the requirements specified by RBI
Manish Tyagi
Ernst & Young
Page 6
Eligible Borrowers
Entities that are excluded:
financial intermediaries such as banks, financial institutions
(FIs), housing finance companies and NBFCs.
Individual, Trusts and Non Profit making organizations
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Ernst & Young
Page 7
Eligible Lenders
International Recognized Sources:
International Banks
International Capital Markets
Multilateral Financial Institutions(such as IFC, ADB, CDC etc.)
Export Credit Agencies
Suppliers of Equipment
Foreign Collaborator
Foreign Equity Holder (other than OCB)
Manish Tyagi
Ernst & Young
Page 8
Eligible Lenders
Foreign Equity Holder require minimum paid up equity in the
borrower company:
ECB upto 5 Million – 25% held directly by the Lender
ECB more than 5 Million – 25% held directly by the lender and
debt equity ration not exceeding 4:1
Manish Tyagi
Ernst & Young
Page 9
Amount
Entity
Maximum amount of ECB per
financial year
Corporates
USD 500 Million
Corporates in hotel, hospital and
software service sector
USD 100 Million
NGO’s in Microfinance activity
Infrastructure Finance
Companies
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Ernst & Young
USD 5 Million
50% of their Owned funds
Page 10
Maturity
Amount
Minimum Average Maturity
USD 20 Million
3 year
> USD 20 Million up to USD 500
Million
5 years
ECB upto USD 20 million can have call/put option provided
minimum average maturity is complied with
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Ernst & Young
Page 11
Minimum Average Maturity
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Page 12
All-in-cost Ceilings
Average Maturity Period
All in Cost ceiling over 6
months LIBOR*
3 years upto 5 years
300 basis points
More than 5 years
500 basis points
* For the respective currency of borrowing or applicable
benchmark
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Ernst & Young
Page 13
All-in-cost Ceilings
Included
Rate of Interest, other fee and
expenses in foreign currency
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Excluded
Commitment fee, pre-payment
fee, fee payable in Indian
currency, withholding taxes
Page 14
Permitted End-use
 For investment such as import of capital goods, new projects,
modernization/ expansion of existing production units) in real
sector - industrial sector including small and medium enterprises
(SME) and infrastructure sector and specific service sector in
India.
 Infrastructure sector is defined as (i) power, (ii)
telecommunications, (iii) railways, (iv) road including bridges,
(v) sea port and airports, (vi) industrial parks and (vii) urban
infrastructure (water supply, sanitation and sewage projects).
 ODI in JV/WOS abroad
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Page 15
Permitted End-use
 First stage acquisition of shares in the disinvestment process and
also in the mandatory second stage offer under GOIs
disinvestment program
 Payment for spectrum Allocation.
 For lending to self help groups or for micro credit by NGO’s
 IFC’s can avail ECBs equivalent to 50 per cent of their owned funds
for on-lending to the infrastructure sector as defined under the ECB
policy,.
Manish Tyagi
Ernst & Young
Page 16
Prohibited End-use
 Working capital
 General corporate purpose
 Repayment of existing Rupee loans
 On lending
 Investment in capital market or acquiring a company in India(
including investment in SPV or Money Market Mutual Funds)
 Real Estate
Manish Tyagi
Ernst & Young
Page 17
Guarantees / Security
Guarantee
Issuance of guarantee, standby letter of credit, letter of undertaking
or letter of comfort by banks, Financial Institutions and Non-Banking
Financial Companies (NBFCs) from India relating to ECB is not
permitted.
Security
The choice of security to be provided to the lender is left to the
borrower. However, creation of charge over immoveable assets and
financial securities - can be done only after obtaining ‘no objection’
from Authorized Dealer bank. Incase of enforcement – property will
be transferred only to person resident in India.
Manish Tyagi
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Page 18
Guarantees / Security
Pledge of shares by promoters, domestic associate companies of the
borrower
Corporate Guarantee
Personal Guarantee
possible only after obtaining no objection from AD bank.
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Page 19
Prepayment & Refinancing
Prepayment
Up to USD 500 million - subject to compliance with the minimum
average maturity as applicable to the Loan.
Refinancing
Possible with the fresh ECB subject to the condition that the
fresh ECB is raised at a lower all-in-cost ceiling and outstanding
maturity of the original ECB is maintained.
Manish Tyagi
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Page 20
Parking of ECB Proceeds Overseas
Borrowers are permitted to either keep ECB proceeds either
overseas or to remit these funds to India, pending utilization for
permissible end-uses.
ECB proceeds parked overseas can be invested in the following
liquid assets
(a)
Deposits or Certificate of Deposit;
(b)
Treasury bills and other monetary instruments of one year
maturity ;
(c)
Deposits with overseas branches / subsidiaries of Indian
banks abroad.
Manish Tyagi
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Page 21
Parking of ECB Proceeds Overseas
The funds should be invested in such a manner that the investments
can be liquidated as and when funds are required in India.
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Page 22
Conversion of ECB into Equity
Conversion of ECB into equity is permitted subject to the following
conditions:
 The activity of the company is covered under the Automatic Route
for FDI or FIPB approval for foreign equity participation has been
obtained by the company, whichever applicable,
 The foreign equity holding after such conversion of debt into
equity is within the sectoral cap, if any,

Pricing of shares is as per the SEBI and RBI guidelines as may be
applicable for listed / unlisted companies.
Manish Tyagi
Ernst & Young
Page 23
Conversion of ECB into Equity
Full conversion
Form FC-GPR with the Regional Office concerned of the RBI along
and form ECB-2 submitted to DSIR RBI within seven working days
from the close of month to which it relates.
The words "ECB wholly converted to equity" should be clearly
indicated on top of the ECB-2 form. Once reported, filing of ECB-2
in the subsequent months is not necessary.
Manish Tyagi
Ernst & Young
Page 24
Conversion of ECB into Equity
Partial Conversion
Converted portion of ECB should be reported in form FC-GPR to the
Regional Office concerned and form ECB-2 clearly differentiating
the converted portion from the unconverted portion.
The words "ECB partially converted to equity" should be indicated
on top of the ECB-2 form. In subsequent months, the outstanding
portion of ECB should be reported in ECB-2 form to DSIM.
Manish Tyagi
Ernst & Young
Page 25
Approval Route
Manish Tyagi
Ernst & Young
Page 26
Eligible Borrowers
Financial institutions dealing exclusively with infrastructure or
export finance such as IDFC, IL&FS, Power Finance Corporation,
Power Trading Corporation, IRCON and EXIM Bank on case to
case basis.
Banks and financial institutions which had participated in the
textile or steel sector restructuring package as approved by the
Government are also permitted to the extent of their
investment in the package and assessment by Reserve Bank
based on prudential norms
Manish Tyagi
Ernst & Young
Page 27
Eligible Borrowers
NBFCs with minimum average maturity of 5 years from
multilateral financial institutions, reputable regional financial
institutions, official export credit agencies and international
banks to finance import of infrastructure equipment for leasing
to infrastructure projects.
IFC’s beyond 50% of their owned funds.
FCCBs by housing finance companies satisfying the criteria
prescribed – minimum net worth of Rs. 500 Crore, listing on BSE
/ NSE, Minimum size of FCCB – 100 Million.
Manish Tyagi
Ernst & Young
Page 28
Eligible Borrowers
SPV – set up to finance infrastructure companies / projects
exclusively.
Multi-State Co-operative Societies engaged in manufacturing
activity
SEZ developers can avail of ECBs for providing infrastructure
facilities within SEZ.
Corporates which have violated the extant ECB policy and are
under investigation by Reserve Bank and / or Directorate of
Enforcement.
Cases falling outside the purview of the automatic route limits
and maturity period
Manish Tyagi
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Page 29
Amount and Maturity
Corporates can avail additional amount of USD 250 million with
average maturity of more than 10 years under the approval
route, over and above the existing limit of USD 500 million
under the automatic route, during a financial year.
Prepayment and call/put options, however, would not be
permissible for such ECB up to a period of 10 years.
Manish Tyagi
Ernst & Young
Page 30
Eligible Lenders
International Recognized Sources:
International Banks
International Capital Markets
Multilateral Financial Institutions(such as IFC, ADB, CDC etc.)
Export Credit Agencies
Suppliers of Equipment
Foreign Collaborator
Foreign Equity Holder (other than OCB)
Manish Tyagi
Ernst & Young
Page 31
Guarantees
Applications considered:
Applications for providing guarantee/standby letter of credit or
letter of comfort by banks, financial institutions relating to ECB
in the case of SME.
ECB by textile companies for modernization or expansion of
textile units.
Manish Tyagi
Ernst & Young
Page 32
Procedure and
Compliance
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Ernst & Young
Page 33
Procedure
Execute a Loan Agreement with the overseas lender. However,
Loan agreement is not required to be filed
Prepare and file form 83 for obtaining Loan Registration Number
(LRN) in duplicate, certified by the Company Secretary or
Chartered Accountant to the Authorized Dealer.
AD will process the application and forward the one copy to
Department of statistics and information system, RBI for
generating LRN.
First draw down should be only after obtaining LRN.
Manish Tyagi
Ernst & Young
Page 34
Compliance
ECB-2 Return certified by the designated AD bank needs to be
submitted on monthly basis so that it can reach RBI within seven
working days from the close of month to which it relates
Primary responsibility to ensure that ECB raised / utilized is in
conformity with the ECB guidelines is of the borrower concerned
and any contravention of the ECB guidelines invite penal action
under FEMA 1999
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Ernst & Young
Page 35
Structured
Obligations
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Page 36
Structured Obligation
Indian Company
Loan
Manish Tyagi
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Indian
Bank
Page 37
Structured Obligation
Outside India
FCo1
India
Advisory
Services
Advisory
Fees
Indian Company
Loan
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Indian
Bank
Page 38
Structured Obligation
Require RBI
approval
FCo1
Guarantee to repay
Loan
Advisory
Services
India
Advisory
Fees
Indian Company
Loan
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Outside India
Indian
Bank
Page 39
Structured Obligation
RBI approval
??????
FCo1
Counter Guarantee to
repay the amount on
behalf of ICO
Advisory
Services
Outside India
Indian
Bank
Advisory
Fees
India
Guarantee to pay the
amount on behalf of ICO
Supply of goods
Indian Company
Indian Supplier
Payment
Manish Tyagi
Ernst & Young
Page 40
Other Instruments that require
Compliance with ECB norms
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Page 41
Preference Shares / Debentures
Non convertible, optionally convertible or partially convertible
preference shares.
Foreign Currency Convertible Bonds (FCCB) issued in
accordance with the “Issue of FCCB and ordinary shares (through
Depositary mechanism scheme, 1993”.
Foreign Currency Exchangeable Bond (FCEB) issued in
accordance with “Issue of FCEB Scheme 2008”
Manish Tyagi
Ernst & Young
Page 42
Practical
Questions
Manish Tyagi
Ernst & Young
Page 43
???????
Maturity period – Does it really mean the formula that you are
providing where it is written under ECB guidelines.
RBI has not granted the LRN even after 2 months – Can I
drawdown the first tranche.
Can I convert ECB into equity including Interest – what about
interest on Interest.
What do you mean by swap equivalent of LIBOR?
Manish Tyagi
Ernst & Young
Page 44
Take out Finance
Permitted for refinancing of existing Rupee loans availed from the
domestic banks by eligible borrowers in the sea port and airport,
roads including bridges and power sectors for the development
of new projects under approval route, subject to the following
conditions:
 Execution of tripartite agreement with domestic banks and
overseas recognized lenders
 Minimum average maturity period of seven years.
 Fee payable to the overseas lender should not exceed 100 bps
per annum.
Manish Tyagi
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Page 45
Take out Finance
 Fee payable to the overseas lender should not exceed 100 bps
per annum.
 On take-out, the residual loan would be considered as ECB and
would be designated in a convertible foreign currency.
 Domestic banks / Financial Institutions are not permitted to
guarantee the take-out finance.
 Domestic bank not permitted to carry any obligation on its
balance sheet after the occurrence of the take-out event.
 Compliance with the ECB Policy.
Manish Tyagi
Ernst & Young
Page 46
Trade Credits
Definition
Credits extended for imports directly by the overseas supplier, bank
and financial institution for maturity of less than three years. Trade
credits include suppliers’ credit or buyers’ credit.
Buyers’ credit and suppliers’ credit for three years and above come
under the category of External Commercial Borrowings (ECB)
which are governed by ECB guidelines.
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Ernst & Young
Page 47
Amount and Maturity
Transaction
Amount
permitted per
import
transaction
Maturity Period
Import transaction for
imports permissible under
the current Foreign Trade
Policy of the DGFT
USD 20 Million
One year or less
Import of capital goods as
classified by DGFT
USD 20 Million
More than one
year and less
than three years
Manish Tyagi
Ernst & Young
Page 48
All-in-cost Ceilings
Average Maturity Period
Upto One year
All in Cost ceiling over 6
months LIBOR*
200 basis points
More than one year but less
than three years
The all-in-cost ceilings include arranger fee, upfront fee,
management fee, handling/ processing charges, out of pocket and
legal expenses, if any
Manish Tyagi
Ernst & Young
Page 49
Guarantees
AD banks permitted to issue Letters of Credit/guarantees/Letter of
Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas
supplier, bank and financial institution up to USD 20 million for
 Up to one year for import of all non-capital goods permissible
under FTP (except gold, palladium, platinum, Rodium, silver etc.)
and
 Up to three years for import of capital goods.
The period of guarantees has to be co-terminus with the period of
credit, reckoned from the date of shipment.
Manish Tyagi
Ernst & Young
Page 50
ADR / GDR / Foreign
Currency Convertible
Bonds (FCCB)
Regulatory framework
Indian companies can raise foreign currency resources abroad
through the issue of FCCB/DR (ADRs/GDRs), in accordance with
the :
Scheme for issue of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt Mechanism)
Scheme, 1993 and guidelines issued by the Government of India
there under from time to time.
Manish Tyagi
Ernst & Young
Page 52
ADR / GDR
A company can issue ADRs / GDRs if it is eligible to issue shares to
persons resident outside India under the FDI Policy.
However, an Indian listed company, which is not eligible to raise
funds from the Indian Capital Market including a company which has
been restrained from accessing the securities market by the
Securities and Exchange Board of India (SEBI) will not be eligible to
issue ADRs/GDRs.
Manish Tyagi
Ernst & Young
Page 53
ADR / GDR
Unlisted companies, which have not yet accessed the ADR/GDR
route for raising capital in the international market require prior or
simultaneous listing in the domestic market.
The proceeds raised through ADR / GDRs have to be kept abroad till
actually required in India.
Pending repatriation or utilization of the proceeds, the Indian
company can invest the funds in: Deposits, Certificate of Deposits or other instruments offered by
banks
 Deposits with branch/es of Indian Authorized Dealers outside
India; and
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Page 54
ADR / GDR
 Treasury bills and other monetary instruments with a maturity or
unexpired maturity of one year or less.
There are no end-use restrictions except for a ban on deployment /
investment of such funds in real estate or the stock market.
There is no monetary limit up to which an Indian company can raise
ADRs / GDRs.
The proceeds can be utilized for first stage acquisition of shares in
the disinvestment process of Public Sector Undertakings /
Enterprises and also in the mandatory second stage offer to the
public in view of their strategic importance.
Manish Tyagi
Ernst & Young
Page 55
ADR / GDR
Two-way Fungibility Scheme:
The SEBI registered stock broker in India can purchase shares of an
Indian company from the market for conversion into ADRs/GDRs
based on instructions received from overseas investors.
Reissuance of ADRs / GDRs would be permitted to the extent of
ADRs / GDRs which have been redeemed into underlying shares
and sold in the Indian market.
Manish Tyagi
Ernst & Young
Page 56
ADR / GDR
Sponsored ADR/GDR issue
An Indian company can also sponsor an issue of ADR / GDR.
The company offers its resident shareholders a choice to submit their
shares back to the company so that on the basis of such shares,
ADRs / GDRs can be issued abroad.
The proceeds of the ADR / GDR issue are remitted back to India and
distributed among the resident investors who had offered their Rupee
denominated shares for conversion. These proceeds can be kept in
Resident Foreign Currency (Domestic) accounts in India by the
resident shareholders who have tendered such shares for conversion
into ADRs / GDRs.
Manish Tyagi
Ernst & Young
Page 57
FCCB - Meaning
External Commercial Borrowing (ECB) Guidelines:
FCCB means a bond issued by an Indian company expressed in
foreign currency and the principal and interest in respect of which is
payable in foreign currency.
Manish Tyagi
Ernst & Young
Page 58
FCCB - Meaning
Issue of Foreign Currency Convertible Bonds and Ordinary Shares
(Through Depository Receipt Mechanism) Scheme, 1993:
FCCB means a bond issued in accordance with this scheme &
subscribed by a non-resident in foreign currency & convertible into
ordinary shares of the issuing company in any manner either in
whole or in part, on the basis of any equity related warrants
attached to the debt instrument.
Manish Tyagi
Ernst & Young
Page 59
FCCB - Salient features
 Quasi debt instrument
 Issued by an Indian Company
 Denominated in Foreign currency
 Generally unsecured & carry a fixed rate of interest
 Option for either conversion into equity shares at a predetermined
price or redemption
 Carry call & put options
Manish Tyagi
Ernst & Young
Page 60
Why FCCBs?

Safety of guaranteed interest payments (if involved) for Bond holder

Bondholder can take advantage of the price appreciation of
company’s stock

Savings to issuer in terms of lesser debt financing costs since
interests costs are lower than other debts

Enable issuer to defer equity and voting rights dilution
Manish Tyagi
Ernst & Young
Page 61
Applicable Regulations
Legislative
Framework
Private Placement
Public Issue
 FEMA Regulations (ECB
 FEMA Regulations (ECB Guidelines
+ Overseas Direct Investment
Regulations)
Guidelines + Overseas Direct
Investment Regulations)
 Issue of FCCB & Ordinary Shares
 FDI Policy
(Through Depository Receipt
 Companies Act, 1956
Mechanism) Scheme, 1993 (‘Issue
 Income Tax Act, 1961
Scheme’)
 FDI Policy
 Companies Act, 1956
 Income Tax Act, 1961
Manish Tyagi
Ernst & Young
Page 62
Regulatory Framework
Eligible Borrowers
Specific inclusions under the
Approval route:
 Housing finance companies
 min. net worth not less than Rs
500 crore during previous
three years
 listing on BSE and NSE
 min. size of FCCBs USD 100
million
 Banks and Financial
intermediaries
 participating in Textile or Steel
sector restructuring package of
the Govt. or RBI (to the extent
of their investment)
Manish Tyagi
Ernst & Young
Page 63
Regulatory Framework
Eligible Lenders
All-in-cost
ceilings
Amount and
Maturity
Manish Tyagi
Ernst & Young
 Foreign equity holder ( holding
minimum 5% equity of borrower)
 Issue related expenses not to
exceed 2% of issue size
No exception
Page 64
Regulatory Framework
Conversion Pricing
(at the time of issue)
 Listed companies
Price not less than higher of the two
averages:
 average of weekly high and low of
preceding two weeks
 average of the weekly high and
low of preceding 6 months
Relevant date – date thirty days prior
to the date on which the meeting of
the body of shareholders is held to
consider the proposed issue
 Unlisted companies
 CCI valuation guidelines
applicable
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Ernst & Young
Page 65
Regulatory Framework
End uses
Approvals
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Ernst & Young
No exception




RBI approval
Filings (LRN, Form 83)
ECB Guidelines
Compliance with FDI policy
Page 66
Refinance / Restructuring
Refinance
Very recently RBI has permitted Indian companies to refinance the
outstanding FCCBs subject to compliance with the following
conditions:
 Fresh ECBs/ FCCBs shall be raised with the stipulated average
maturity period and applicable all-in-cost being as per the extant
ECB guidelines.
 The amount of fresh ECB/FCCB shall not exceed the
outstanding redemption value at maturity of the outstanding
FCCBs;
Manish Tyagi
Ernst & Young
Page 67
Refinance / Restructuring
 The fresh ECB/FCCB shall not be raised six months prior to the
maturity date of the outstanding FCCBs.
 The purpose of ECB/FCCB shall be clearly mentioned as
‘Redemption of outstanding FCCBs’ in Form 83 at the time of
obtaining Loan Registration Number from the Reserve Bank.
 ECB / FCCB beyond USD 500 million for the purpose of
redemption of the existing FCCB will be considered under the
approval route; and
 ECB / FCCB availed of for the purpose of refinancing the
existing outstanding FCCB will be reckoned as part of the limit of
USD 500 million available under the automatic route as per the
extant norms.
Manish Tyagi
Ernst & Young
Page 68
Refinance / Restructuring
Restructuring
Restructuring of FCCBs involving change in the existing conversion
price is not permissible. Proposals for restructuring of FCCBs not
involving change in conversion price are considered by RBI under
the approval route.
Manish Tyagi
Ernst & Young
Page 69
Heading of Foreign
Exchange
Regulatory Framework
FOREIGN EXCHANGE MANAGEMENT (FOREIGN EXCHANGE
DERIVATIVE (CONTRACTS) REGULATIONS, 2000
Foreign exchange derivative contract defined as 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.es
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Ernst & Young
Page 71
Derivatives in India
Derivatives in
India
Financial
Futures
Manish Tyagi
Ernst & Young
Commodity
Options
- Call
- Put
Futures
Page 72
Concepts
Forward
Futures
• Concept same as Forward
• Agreement to buy /
contract, except:
sell at a future date at
o Standardized
an agreed price
contracts
• Not standardized
• Risk Prone
• Un regulated
• Illiquid
o Exchange takes the
risk of any default
o Regulated
o Reversal possible
o Currently, delivery not
permitted
• Index Futures and Stock
Futures
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Ernst & Young
• Exposure is unlimited for
both parties
Options
• Right but not an obligation
to buy/sell at a future date
at an agreed price
• Call Option / Put Option
• Initial cost in form of
premium to option writer
• Exposure is limited for
buyer / Exposure unlimited
for Option writer
• Complex pricing
methodology of Options
Page 73
Evolution of products
Traditionally, long history of derivatives in OTC
Market
Options of various kinds (called Teji, Mandi,
Fatak) in unorganized markets traded in
early 1900’s in Mumbai
• SC(R)A banned all kinds of options in 1956
• Prohibition removed on options in 1995
• “Derivatives” treated as “securities” pursuant to SC(R)A amendment in 1999
Powers delegated to SEBI for regulation of financial derivatives market
Manish Tyagi
Ernst & Young
Page 74
Features
Instrument which derives its value from one or more than
one underlying assets
• Commodities, currency, securities, index, interest rate,
etc.
Independent existence
Requires no / minimal initial investment
Tool for transfer of risk at a cost
Settled at a future date
Standardised contracts
• Traded on Stock Exchange / OTCs
Derivatives enable transfer of risk between two parties having different
risk / future perceptions
Manish Tyagi
Ernst & Young
Page 75
Benefits
• Market efficiency
• Risk sharing and transfer
• Low transaction costs
• Capital intermediation
• Liquidity enhancement
• Price discovery
• Cash market development
• Hedging tools
Derivatives – A dynamic financial tool
Manish Tyagi
Ernst & Young
Page 76
Facilities to residents
Forward contract
A person resident in India is permitted to enter into a forward
contract with an AD Bank to hedge an exposure to exchange risk in
respect of a transaction for which sale and/or purchase of foreign
exchange is permitted subject to compliance with the following
conditions:
 AD Bank is satisfied about the genuineness of the underlying
exposure through verification of documentary evidence.
 The maturity of the hedge does not exceed the maturity of the
underlying transaction.
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Ernst & Young
Page 77
Facilities to residents
 If 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 can be hedge only after final
approval is accorded by the RBI, if required.
 In case of GDRs issue price must be finalized.
 Balances in the 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,
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Facilities to residents
 Contracts involving the rupee as one of the currencies, once
cancelled, shall not be rebooked except that they can be rolled
over at on-going rates on or before maturity.
 Such contracts booked by residents to hedge current account
transactions, regardless of tenor, not being those booked on past
performance basis without documents or booked to hedge
transactions denominated in foreign currency but settled in Indian
Rupee, may be cancelled and rebooked freely at on-going rates.
 Contracts covering export transactions may also be cancelled,
rebooked or rolled over at on-going rates without any restriction.
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Ernst & Young
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Facilities to residents
Loan Contracts
Resident Indians who have borrowed ECB 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 AD bank in India
or with a branch outside India of an AD Bank for hedging his loan
exposure and unwinding from such hedges subject to the following
conditions:
 The contract does not involve rupee transactions
 The Reserve Bank has accorded final approval for borrowing in
foreign currency.
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Ernst & Young
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Facilities to residents
 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 unexpired maturity
of the underlying loan.
A person resident in India, who owes a foreign exchange or rupee
liability can enter into a contract for foreign currency-rupee swap
with an AD Bank in India to hedge long-term exposure. However, if
such contract is cancelled it shall not be rebooked or re-entered, by
whatever name called
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Ernst & Young
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Facilities to residents
Foreign currency options
Foreign currency option contract not involving the rupee as one of
the currencies can be hedged with an AD Bank for mitigating
foreign exchange exposure arising out of trade subject to the
condition 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.
The transactions are freely booked and/or cancelled.
Foreign currency-rupee option contract can be hedged with an AD
Bank to hedge an exposure to exchange risk in respect of a
transaction for which sale and/or purchase of foreign currency is
permitted on the same terms and conditions applicable to forward
contracts.
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Ernst & Young
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Facilities to Non Residents
Foreign Institutional Investor (FII)
Registered FII can execute a forward contract with rupee as one of
the currencies with an AD Bank to hedge its exposure in India:
subject to the following conditions:
 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,
 Forward contracts may be cancelled and rebooked or may be
rolled over on or before maturity.
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Facilities to Non Residents
 The cost of hedging 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.
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Ernst & Young
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Facilities to Non Residents
Non Resident Indian (NRI)
An NRI can enter into forward contract with rupee as one of the
currencies, with an AD Bank 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 PIS or under FDI.
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Ernst & Young
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Facilities to Non Residents
Person Resident Outside India
A person resident outside India is permitted to 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.
A person resident outside 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
currency risk on dividend receivable by him from the Indian
company.
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Ernst & Young
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Facilities to Non Residents
FIIs, NRIs or a Person Resident outside India having FDI in India,
may enter into a foreign currency-rupee option contract with the AD
Bank in India, under the same terms and conditions applicable to
forward contracts.
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Ernst & Young
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Ernst & Young
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Thank you
Manish Tyagi
Ernst & Young India
manish.tyagi@in.ey.com
manishty@gmail.com
+91. 98101 87833 (M)
Manish Tyagi
Ernst & Young
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