MUMBAI, Sept 28: The Reserve Bank of India (RBI) has permitted Indian corporates, having genuine underlying foreign exchange exposure, to access international commodity exchanges for hedging of their commodity price risks. RBI today issued a detailed circular to all authorised dealers in foreign exchange providing the operative procedure which is aimed at ensuring hedging of genuine exposures and checking incidence of speculative transactions.The facility of hedging will, however, not be available for oil and petroleum products, RBI said. The decision to allow hedging for commodity price risks was taken after consultations with the union government on the recommendations of a committee on hedging through international commodity exchanges headed by former RBI deputy governor R V Gupta.RBI said corporates desirous of availing of this facility will have to submit their applications through authorised dealers for permission for hedging of commodity price exposures on off-shore commodity exchanges. Suchcorporates would have to furnish a brief description of hedging to be undertaken and a copy of risk management policy approved by the board of directors.RBI said it will consider grant of standing approval for hedging commodity price risks to a corporate. It will not relate to individual transactions. RBI said while forwarding a proposal for hedging, authorised dealer should ensure that it is supported by a copy of the memorandum placed before the board of directors on the risk management policy of the corporate concerned with specific reference to hedging of commodity price exposure.The memorandum should, inter alia, incorporate details relating to risk identification (mismatch between purchases & sales in respect of commodity concerned, producers' risk, etc.), estimate of maximum exposure in physical positions, estimate of maximum exposure to future positions and risk monitoring and reporting.RBI said the focus will be on risk containment and only off-set hedge will be permitted.It said allstandard exchange traded futures/options will be permitted, but as regards options, only purchases will be allowed. The tenure of exposure will be limited to six months and tenure beyond six months would require RBI's specific approval.Corporates will have to negotiate with off-shore exchange brokers, who must be clearing members of the exchanges with good financial track record and all transactions shall be confirmed to brokers by an authorised signatory of the corporate. Brokers shall be contractually obliged to confirm each and every deal on the same day.RBI said corporates should not undertake any arbitraging/ speculative transactions and monitoring in this regard will be the responsibility of authorised dealers.RBI said access will be restricted to off-shore recognised commodity exchanges which are regulated by the concerned regulatory authorities. Besides, corporates who want to hedge commodity price exposure shall have to ensure that there are no restrictions on import/export of the commodityhedged under the exim policy in force.Corporates would have to maintain a special commodity exchange account with the authorised dealer and the terms and conditions regulating the conduct of this account vis-a-vis remittances incidental to hedging to overseas brokerage firms will be advised by authorised dealer to the corporate.A copy of the broker's month-end report(s), duly confirmed/countersigned by the corporate's financial controller, should be submitted monthly to RBI through the authorised dealer together with confirmation that all off-shore exchange positions are/were backed by physical exposures within 15 days of the close of the month.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. Unreconciled items should be followed up with the broker and reconciliation completed within three months, RBI said.An annual compliance certificatefrom statutory auditors should also be submitted by the company at the time of renewal of permission with the recommendations of the authorised dealer, the central bank said.
