Retail Foreign Exchange Transaction...
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The Reserve Bank of India, on 12th December 2022, released Master Directions on Foreign Exchange Management (Hedging of Commodity Price Risk and Freight Risk in Overseas Markets) for all the Authorised Dealers Category-I (AD Cat –I). Also within the contours of these regulations, the apex bank also directs the Authorised Persons as defined under Section 11 of the FEMA Act 1999. These Directions are issued under the relevant sections FEMA Act to lay down the modalities for AD Cat-I banks to facilitate hedging of commodity price and freight risks in the overseas market. The AD (cat I) and the authorised persons may bring the constituents of these notices to the knowledge of their concerned constituents and customers. This blog aims to jot down the key definitions and other important details that are updated in the latest Foreign Exchange Management Regulations 2022.
Reserve Bank of India, exercising the powers conferred to it under Foreign Exchange Management Act, sections 10(4) and 11(1) , has issued the following directions. All the contents and guidelines mentioned in these Master directions shall come into effect from 12th December 2022.
Following are the key definitions as defined by the regulations
Hedging has been defined as making any derivative transaction to reduce measurable and identifiable risks by the entities. For the purpose of these regulations, risks include commodity price risks and freight risks.
For the purpose of these guidelines, eligible entities refer to residents other than individuals.
Any eligible entity will be directly exposed to commodity price risk if
Any eligible entity that will have indirect exposure to commodity price risk if its sells/purchases a product in India or abroad which has the commodity and price is not linked to the international benchmark of the commodity.
For the purpose of these guidelines, Banks refers to the Authorised Dealers Category I (AD Cat –I) under section 10 of the Foreign Exchange Management Act, 1999.
The commodities whose prices might be needed to be hedged are as follows;
This list of items is to be reviewed annually for revisions and additions by the authority.
For the purpose of this act, permitted products to include the following:
Structured products can be defined in the following manner
Using the permitted products, the Eligible Entities with any exposure to Freight Risks may hedge those risks.
The banks are allowed to use the standby letter of credit/guarantee for a period of one year o behalf of their clients for creating a remittance of the margin money for commodity hedging transactions made by their customers.
The realisation and repatriation of foreign exchange due or accruing on an eligible entity resulting from a permitted transaction is to be done according to procedure set in Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015
The banks are obligated to submit a quarterly report to the Reserve Bank India in the new age Extensive Business Reporting Language (XBRL). The reports are to be prepared according to the format attached with the notification and to be provided to the office of the General Manager, Financial Marker Regulation Department, Government of India. It is pertinent to mention here in case the reporting entity does not have any transaction to show in their records, in that case, the Bank shall submit a Nil report.
The Reserve Bank of India, through the latest Master Directions Foreign Exchange Management (Hedging of Commodity Price Risk and Freight Risk in Overseas Markets) Directions, 2022, as issued on 12/12/2022, have made significant regulatory changes in the hedging of Commodity Price Risk and Freight Risks. The modalities laid down in the directions aim to establish a guiding principle for hedging commodity and freight risks and remittances for the eligible entities subject to those risks.
Read Our Article: Analysis of the Foreign Exchange Management (Overseas Investment) Rules, 2022