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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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slide1

External Commercial Borrowings

ADR/ GDR

FCCB

Hedging of Foreign Exchange

Manish Tyagi

Ernst & Young

agenda
Agenda
  • External Commercial Borrowings
  • Structured obligations
  • Take out Finance
  • Trade credits
  • ADR/ GDRs/ FCCBs
  • Forex Hedging
concept
Concept

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.

route for availing ecb
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.
slide6
Automatic
  • Route
eligible borrowers
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
eligible borrowers8
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
eligible lenders
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)
eligible lenders10
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
permitted end use
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
permitted end use17
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,.
prohibited end use
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
guarantees security
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.

guarantees security20
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.

prepayment refinancing
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.
parking of ecb proceeds overseas
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.
parking of ecb proceeds overseas23
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.
conversion of ecb into equity
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.
conversion of ecb into equity25
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.
conversion of ecb into equity26
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.
eligible borrowers28
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
eligible borrowers29
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.
eligible borrowers30
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
amount and maturity
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.
eligible lenders32
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)
guarantees
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.
procedure
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.
compliance
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
slide37
Structured
  • Obligations
structured obligation
Structured Obligation

Indian Bank

Indian Company

Loan

structured obligation39
Structured Obligation

FCo1

Outside India

India

Advisory Services

Advisory Fees

Indian Bank

Indian Company

Loan

structured obligation40
Structured Obligation

Require RBI approval

FCo1

Outside India

Guarantee to repay Loan

India

Advisory Services

Advisory Fees

Indian Bank

Indian Company

Loan

structured obligation41
Structured Obligation

RBI approval ??????

FCo1

Counter Guarantee to repay the amount on behalf of ICO

Outside India

Indian Bank

India

Advisory Services

Advisory Fees

Guarantee to pay the amount on behalf of ICO

Supply of goods

Indian Supplier

Indian Company

Payment

preference shares debentures
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”
slide45
???????
  • 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?
take out finance
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.
take out finance47
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.
trade credits
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.
guarantees51
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.
regulatory framework
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.
adr gdr
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.
adr gdr55
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
adr gdr56
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.
adr gdr57
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.
adr gdr58
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.
fccb meaning
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.
fccb meaning60
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.
fccb salient features
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
why fccbs
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
applicable regulations
Applicable Regulations

Legislative Framework

Public Issue

Private Placement

  • FEMA Regulations (ECB Guidelines + Overseas Direct Investment Regulations)
  • Issue of FCCB & Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 (‘Issue Scheme’)
  • FDI Policy
  • Companies Act, 1956
  • Income Tax Act, 1961
  • FEMA Regulations (ECB Guidelines + Overseas Direct Investment Regulations)
  • FDI Policy
  • Companies Act, 1956
  • Income Tax Act, 1961
regulatory framework64
Regulatory Framework

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)

Eligible Borrowers

regulatory framework65
Regulatory Framework

Eligible Lenders

  • Foreign equity holder ( holding minimum 5% equity of borrower)

All-in-cost ceilings

  • Issue related expenses not to exceed 2% of issue size

Amount and Maturity

No exception

regulatory framework66
Regulatory Framework
  • 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

Conversion Pricing

(at the time of issue)

regulatory framework67
Regulatory Framework

End uses

No exception

  • RBI approval
  • Filings (LRN, Form 83)
  • ECB Guidelines
  • Compliance with FDI policy

Approvals

refinance restructuring
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;
refinance restructuring69
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.
refinance restructuring70
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.

regulatory framework72
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
derivatives in india
Derivatives in India

Derivatives in India

Financial

Commodity

Futures

Futures

Options

- Call

- Put

concepts
Concepts

Forward

Futures

Options

  • Agreement to buy / sell at a future date at an agreed price
  • Not standardized
  • Risk Prone
  • Un regulated
  • Illiquid
  • Concept same as Forward contract, except:
    • Standardized contracts
    • Exchange takes the risk of any default
    • Regulated
    • Reversal possible
    • Currently, delivery not permitted
  • Index Futures and Stock Futures
  • Exposure is unlimited for both parties
  • 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
slide75

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

features
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

benefits
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

facilities to residents
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.
facilities to residents79
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,
facilities to residents80
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.
facilities to residents81
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.
facilities to residents82
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
facilities to residents83
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.

facilities to non residents
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.
facilities to non residents85
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.
facilities to non residents86
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.
facilities to non residents87
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.

facilities to non residents88
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.

slide90

Thank you

Manish Tyagi

Ernst & Young India

manish.tyagi@in.ey.com

manishty@gmail.com

+91. 98101 87833 (M)