FX Hedging: Uniform Directions for Residents & Non Residents

Read this if you are concerned in any manner with foreign exchange hedging with Residents and Non-Residents………
The Reserve Bank of India (“RBI”) has issued directions that merge the hedging facilities with respect to foreign exchange risks, for residents and non-residents (“Directions”).

1) What’s new under the Directions?
a) Introduction of Anticipated Exposure:
(i) Transactions can now be undertaken on the basis of ‘anticipated exposure’.
(ii) Anticipated exposure has been defined as ‘exposure to the exchange rate of INR against the foreign currency on account of the capital and current account transactions that is permissible under FEMA 1999 or any rules or regulations thereunder which are expected to be entered in the future;

(b) Cancellation and Rebooking of contracts:
i) In case of Contracted Exposure
Gains (or losses) on cancellation will be passed on to the user as and when they accrue.
(ii) In case of Anticipated Exposure
Net gains in absence of underlying cash flow: Market makers have discretion to pass on the net gains if the same is due to external factors which are beyond the control of the user on cancelling or rebooking of the contracts.

(c) Enablers:
(i) Users may now trade Indian Rupees (“INR”) derivatives up to USD 10 million of the notional value without establishing the existence of underlying exposure.
(ii) Domestic non-retail corporates having an INR liability may convert it into a foreign currency liability through a currency swap.

(d) Compliance by Authorised Dealers Banks (“AD”):
i) AD is required to classify the users into ‘retail users and non-retail user’ and can offer the foreign exchange (“FX”) derivative products only on the basis of user classification.
(ii) Certain specific directions are required to be ensured by the AD in respect of payables and authorizations (Please see Direction No. 2.B.).

(e) NDF
Non- Deliverable Forwards contracts to non-residents by AD Category-1 license market makers who are operating as the International Financial Services Centre (IFSC) Banking Units (IBUs) in the Gift City.

2) When shall it be effective from?
These Directions shall be effective from 1st June 2020, and once effective, will replace the existing directions contained under Part A – Section I (Facilities for Persons Resident in India other than Authorised Dealers Category-I) and Section II (Facilities for Persons resident outside India) of the Master Direction – Risk Management and Inter-Bank Dealings.

3) Takeaways:
(a) Lesser paperwork required while offering the FX products;
(b) Procedures eased for ADs to offer FX products;
(c) Ease of access to the domestic foreign exchange derivatives market by both residents and non-residents;
(d) The Small and Medium enterprises may also find itself classified as ‘retail-users’, in addition to the platform offered by stock exchanges;
(e) Non-Retail users can undertake FX hedging with products in the nature of forwards, purchase of call and put options (Only European options), purchase of call and put spreads, swaps;
(f) These Directions are a means of ease of access to the domestic foreign exchange market; and
(g) This move will make the Indian derivatives market more business friendly and shall also provide incentives to the market participants for increased participation in the over-the- derivatives market in the coming future.

4) History of the Directions
These Directions have been issued by the RBI on 7th April 2020. Earlier, RBI had in the year 2019 released the draft directions for the same for public comments. Juris Corp had made submission on the said draft directions and some of them have been accepted by RBI.
The relevant corresponding modifications to the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 have been notified by the RBI under vide notification issued on 3rd March 2020.
For any further information, please contact Ms. Smrithi Nair (smrithi.nair@jclex.com) or Ms. Aashka Shah (aashka.shah@jclex.com).

About Juris Corp
Founded in 2000, Juris Corp is a law firm which aims to provide unbiased and unmatched legal services in our practice areas. The Firm has represented clients in various courts, tribunals and other forums across India covering a wide gamut of areas such as corporate laws, corporate debt restructuring, derivatives, private equity, structured finance, real estate, IPR, testamentary, trusts, bankruptcy/ insolvency, structured finance and challenged the validity of legislations.

Accolades And Recognition
Juris Corp has been consistently ranked in the top tiers over the years in Banking & Finance, Capital Markets, Corporate M&A, Dispute Resolution, Foreign Direct Investment, Real Estate, Private Equity, Securitisation & Structured Finance and Taxation by several institutions.
Contact us:

Corporate Office Dispute Resolution Office
307, Century Bhavan, 3rd Floor Dr Annie Besant Road, Worli,
Tel: +91 22 6720 5555 / +91 22 4057 5555 Tel.: 
Fax: +91 22 2204 3579
148, Jolly Maker Chamber II,14th Floor, Nariman Point,

Mumbai – 400 030, India Mumbai – 400 021, India
Tel +91 22 4920 5555 
Fax: +91 22 2421 2547

809, Ansal Bhawan, 8th Floor, 16 Kasturba Gandhi Marg,
New Delhi – 110 001,
Tel: +91 11 4175 1889 Fax: +91 11 4014 4122
Kheny Chambers, Upper Ground Floor,4/2 Cunningham Road,
India Bengaluru – 560 052, India

Tel: +91 80 4669 8200 Fax: +91 80 2226 699Follow us on
Visit us at: http://www.jclex.com for more information.

This material and its contents are intended to provide general information on the topic covered herein and it shall, in no way, be treated as an exhaustive or comprehensive treatment of the subject scoped herein or as an advertisement about Juris Corp or any of its lawyers. Any graphics, images etc. used in this material is for informational purposes only and not as advertisement, promotions etc. of any organisations or institution. Further, this article and its contents in any of its form including facts specified, opinions expressed, views given etc. shall not be construed as a legal opinion of the author or that of Juris Corp (“the firm”) directly or indirectly. The reader of this article must exercise due caution while using the contents of this article for any of their personal purposes such as, business implication, personal finances, investment decisions, reproduction of this article in any of the forum(s), circulating this article within the user group(s), publication of this article in any form or manner etc. It is strongly asserted herein that, if this article creates any financial / legal implication to the reader or user of this article, a formal opinion from a qualified professional be sought. The author(s) and the firm hereby expressly disclaims any and all claims, losses, damages, adversity in any of its form whether financial or otherwise arising to the reader or user of this article.

Similar Articles

Subscribe to our Newsletter



The Bar Council of India prohibits advocates from soliciting work or advertising. By clicking ‘AGREE’ below, the user acknowledges that no solicitation has been made, and this website serves as a resource for general information about Juris Corp at the user’s own risk. The information provided here neither constitutes legal advice nor creates a lawyer-client relationship. The links provided are not endorsements by Juris Corp, and Juris Corp is not responsible for any linked content. Users are advised to seek independent legal advice for any legal issues.