What Are The Financial Derivatives That Are Available To Corporates In India

Financial derivatives have been made available to Indian corporates only in August 1996. The exchange control regulations in this regard are as follows:

(i) Indian corporates may approach banks for hedging of their foreign currency loan liabilities. Banks may offer the undernoted products to corporates either by booking the transaction overseas or on a back-to-back basis.

(a) Interest rate swaps

(b) Currency swaps

(c) Coupon swaps

(d) Interest rate caps/collars (purchase)

(e) Forward Rate Agreements.

(ii) Before entertaining the corporate’s request, banks should ensure that:

(a) the Reserve Bank has accorded final approval for the conclusion of the underlying loan transaction;

(b) the notional principal amount of the hedge does not exceed the outstanding amount of the foreign currency loan;

(c) the maturity of the hedge does not exceed the remaining life to maturity of the underlying loan;

(d) the Board of directors of the corporate has approved (one-time) the financial limits and authorised designated officials to conclude the hedge transactions.

(iii) Corporate shall also be permitted to unwind from a hedge transaction.

(iv) Banks should also ensure that the corporates submit the following reports/certificates:

(a) A report showing complete details of the transactions concluded (booked as well as cancelled) duly countersigned by the authorised dealer to the Regional Office of the Reserve Bank under whose jurisdiction they are situated, within a week from the date ctf conclusion of the transaction.

(b) A quarterly report to the corporate’s Board furnishing details of all such transactions and a copy thereof along with a copy of the Board’s resolution.

(c) An annual certificate from the statutory auditors that the company has complied with all the prescribed terms and conditions.

(v) Payment of up-front premia, if any, as well as other charges incidental to the hedge transaction may be effected by banks without prior approval of Reserve Bank.

(vi) Banks should ensure that the hedge transactions are allowed to be put through solely for the purpose of liability management and on no account should `stand alone’ deals be permitted.

Note: Other derivatives available are options and range forwards.

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