With a depreciating rupee and a volatile forex market, the Reserve Bank of India has allowed the qualified foreign investors (QFIs) to protect their investment through the hedging mechanism.

QFIs can be either foreign individuals, trusts or associations which meet certain SEBI-specified criteria. In January this year, the Government allowed such investors to invest directly in shares, debts and mutual funds. However, till date, they have invested a mere Rs 37 crore in equities, highlighting need for protection.

The RBI has issued a circular providing hedging facility to QFIs. This has twin purposes. First, for hedging the currency risk on the market value of entire investment in equity and debt on a particular date. And, second, to hedge Initial Public Offer-related transient capital flows under the ASBA (Application Supported by Blocked Amount) mechanism. (ASBA ensures that investors’ funds leave their bank accounts only upon allocation of shares in public issues.)

The central bank has provided forward foreign exchange contracts with rupee as one of the currencies and foreign currency-Indian rupee options for hedging. For IPO-related flows, QFIs can use foreign currency-Indian rupee swaps. The eligibility for hedging may be determined on the basis of a declaration provided by QFIs on the investment value.

Other criteria include market price movement, fresh inflows and amount repatriated. All these will ensure that the forward cover outstanding is supported by underlying exposures.

If market conditions bring down the value of portfolio and, subsequently, the hedge proves futile, then it may be allowed to continue till it was originally scheduled to expire. The RBI has clarified that the contracts cannot be rebooked after cancellation. However, there will be facility for rollover before maturity. For QFI investment coming through IPO, the amount of swap should not be more than the amount proposed to be invested in the IPO. Maximum tenor of the swap will be 30 days. Contracts under such an arrangement can neither be rebooked after cancellation nor rolled over.

According to Jyoti Rai, Head (Business Development) of SBISG Global Securities Services, “The RBI has appropriately raised the comfort of QFIs by enabling them to hedge currency risk for the inflows which they may bring to Indian capital markets.”

Shishir.sinha@thehindu.co.in

(This article was published on September 2, 2012)
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