Attention
of Authorised Dealer Category - I (AD Category - I) banks is invited to A. P.
(DIR Series) Circular
No.50 dated November 16, 2002 read with A. P. (DIR Series) Circular
No. 63 dated December 21, 2002 and Regulation 5 of Notification No.FEMA.25/RB-2000
dated May 3, 2000, as amended from time to time. In terms of para 1(b) of Schedule
II to the Notification, a registered Foreign Institutional Investor (FII) has
been permitted to enter into forward contracts with rupee as one of the currencies,
with an AD Category – I bank in India to hedge its exposure in India subject
to the condition that forward contracts once cancelled shall not be rebooked
but may be rolled over on or before maturity.
2. As
announced in the Mid-Term
Review of Annual Policy for the Year 2006-07 (para 104), FIIs would be allowed
to rebook a part, say, 25 per cent of the cancelled forward contracts, provided
such contracts are supported by underlying exposure. The modalities were to
be finalised in consultation with the market participants. In view of the concerns
expressed by the market participants in monitoring cancellations and rebooking
within 25 per cent of the cancelled contracts, it has been decided to link the
rebooking of cancelled contracts to the portfolio value. Further, keeping in
view the size of the market in India and the large positions held by FIIs, it
has been decided to implement the flexibility for rebooking cancelled contracts
in a gradual and phased manner.
3. Accordingly,
AD Category – I banks may allow FIIs to cancel and rebook forward contracts
up to a limit of 2 per cent of the market value of their entire investment in
equity and / or debt in India. The limit for calculating the eligibility for
rebookings shall be based upon market value of the portfolio as at the beginning
of the financial year (April – March). The outstanding contracts must be duly
supported by underlying exposure at all times.
4. The AD
Category - I bank has to ensure that (i) total forward contracts outstanding
should not exceed the market value of portfolio and, (ii) forward contracts
permitted to be rebooked should not exceed 2 per cent of the market value as
determined at the beginning of the financial year. The monitoring of forward
cover must be done on a fortnightly basis. All other instructions contained
in Schedule II of the Notification ibid, remain unchanged. The scheme will be
reviewed on an ongoing basis.
5. In order
to reflect these changes a revised reporting format is being introduced. The
AD Category - I banks are advised to report the outstanding forward covers taken
by their FII clients in the revised format annexed.
6. AD Category
– I banks may bring the contents of this circular to the notice of their constituents
concerned.
7. Necessary
amendments to Notification No.FEMA.25/RB-2000 dated May 3, 2000 [Foreign Exchange
Management (Foreign Exchange Derivatives Contracts) Regulations, 2000] are being
notified separately.
8. The directions
contained in this circular have been issued under sections 10(4) and 11(1) of
the Foreign Exchange Management Act 1999 (42 of 1999) and is without prejudice
to permissions / approvals, if any, required under any other law.
Yours faithfully,
(Salim Gangadharan)
Chief General Manager-In-Charge
Annex
[A. P. (DIR
Series) Circular No. 32 dated February 08, 2007]