New Hedge Regulation: FAQs

Forex Hedging 

Published on: 05th November 2020

Libor Transition– Impact on Indian corporates

This new hedge regulation is very much relevant for Indian importers, exporters, and foreign currency borrowers who need hedging for their forex exposures. We have gone through it in detail and are putting together an easy guide

1.  If a listed company has a net worth of fewer than 500 crores, will it be treated as a retail user or a non-retail user?

A.  Companies that have less than 500 crores of net worth will be treated as retail users. (EXIM Bank, NABARD, NHB and SIDBI will be treated as a non-retail user.)

2. Can a user choose its classification?

A. A non-retail user can choose to be classified as a retail user with some banks and different from others. However, banks can ask for disclosure.

3. Can a group level net worth be considered for classification for an entity?

A. No. Stand-alone net worth will be considered.

4. Does user classification apply to NDCC and derivatives not involving INR?

A. Yes, as per Fedai clarification, user classification is applicable in both cases.

5. Can a retail user buy interest rate caps and floor?

A.Yes, caps, floors, spreads are permitted products for a retail user.

6. What are the permitted products for retail users to hedge their currency exposures?

A. Forwards, Plain vanilla call and put options, call spreads and put spreads are the permitted products apart from the spot, cash, and tom booking.

7. Can a retail user enter into Par Forward contracts?

A. No, since it is a structured derivative product.

8. For non-retail users, can swaps or any other permitted products be undertaken where the upfront payment of money is involved?

A. Apart from the option premium, all permitted derivative transactions including rollovers, restructuring, novation shall be contracted only at prevailing market rates.

9. Can a hedge contract booked on contracted exposure be shifted to anticipated exposure or vice versa?

A. No

10. Is there any timeline when a user can produce the cash flow in case a contract is booked to hedge an anticipated exposure?

A. There is no such timeline provided. The bank is satisfied with the genuinity of the exposure.

11. How many times a hedge contract booked under Anticipated Exposure can be rolled over?

A. There is no such limitation. 

12. Net gains in Anticipated Exposure applies at a contract level or at a portfolio level?

A. It is applied at a contract level.

13. Can a user simultaneously use the USD 10 million facility and Contracted Exposure/Anticipated Exposure route?

A. The 10 million facility is not a separate facility. Upto 10 million users are given relaxation in producing underlying documents..

14. Is the 10 million facilities per bank limit or across all banks?

A. Total 10 million limits is across all banks.

14. What happens when outstanding hedges exceed USD 10 million?

A. The user will be required to furnish the underlying documents for all the outstanding hedges. And for the rest of the FY, the user needs to hedge under Contracted Exposure or Anticipated Exposure.

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