RBI expands scope of currency risk hedging by MNCs

The Reserve Bank of India (RBI) has expanded the scope of currency hedging by Indian subsidiaries of multinational companies (MNCs) to help them reduce their currency exposure risk in the country.

In draft guidelines issued on Friday, RBI said such MNC subsidiaries looking to hedge their exposure outside of exports and imports could do so through all foreign currency-rupee derivatives, over-the-counter, and exchange-traded products.

RBI said this is being done to provide greater flexibility for hedging the currency risk arising out of current account transactions of Indian subsidiaries of multinational companies by the parent or any non-resident group entity.

Hedging can be done by non-resident parent or its centralised treasury or any other related entity hedging on behalf of the Indian subsidiary.

It can be in all foreign currency-rupee derivatives, OTC as well exchange traded that the Indian subsidiary is eligible to undertake.

For operating currency hedging, the non-resident entity should be incorporated in a country that is member of the Financial Action Task Force (FATF) or member of a FATF-Style Regional body.

The Indian subsidiary of the MNC should be responsible for compliance with the rules, regulations and directions issued under FEMA 1999 and any other laws / rules / regulations applicable to these transactions in India.

Any rupee account if required for undertaking the hedging transactions be permitted to be opened by the authorised dealer bank in the name of the related non-resident entity.

Such bank will also be responsible for monitoring all hedge transactions (OTC as well as exchange traded) booked by the non-resident entity and ensuring that the Indian subsidiary has the necessary underlying exposure for the hedge transactions.

Dealer banks should report hedge contracts booked under this facility by the non-resident related entity to CCIL's trade repository with a special identification tag.

It also said profits and losses arising from hedging transactions in India must be reflected in the books of the domestic subsidiaries of multinational companies, among other guidelines.

Previously, multinational companies could only hedge currency risk arising out of transactions involving imports and exports.

The RBI had said last month that it would widen the scope of activities where hedging was allowed.

Market participants and banks can submit their comments about the proposed guidelines by 11 November, RBI said.