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External Commercial Borrowings ADR/ GDR FCCB Hedging of Foreign Exchange . Manish Tyagi Ernst & Young . External Commercial Borrowings (ECB ) and Trade Credits. Agenda. External Commercial Borrowings Structured obligations Take out Finance Trade credits ADR/ GDRs/ FCCBs
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Hedging of Foreign Exchange
Ernst & Young
ECB refer to cross border commercial loans
(bank loans, buyers’ credit, suppliers’ credit, securitized instruments)
availed by permitted eligible borrowers from permitted non-resident lenderswith minimum average maturity of 3 years.
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.
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.
Pledge of shares by promoters, domestic associate companies of the borrower
possible only after obtaining no objection from AD bank.
Require RBI approval
Guarantee to repay Loan
RBI approval ??????
Counter Guarantee to repay the amount on behalf of ICO
Guarantee to pay the amount on behalf of ICO
Supply of goods
Specific inclusions under the Approval route:
Amount and Maturity
(at the time of issue)
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.
Derivatives in India
Powers delegated to SEBI for regulation of financial derivatives market
Derivatives enable transfer of risk between two parties having different risk / future perceptions
Derivatives – A dynamic financial tool
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.
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.
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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