Banks authorised to deal in foreign exchange can grant permission to unlisted companies to hedge price risk on import/export in respect of any commodity (except gold, silver, platinum) in the international commodity exchanges/markets, according to the Reserve Bank of India.
Hitherto, the abovementioned mechanism was available only to companies — domestic producers/ users of aluminium, copper, lead, nickel and zinc; actual domestic users of Aviation Turbine Fuel; domestic crude oil refining companies; domestic oil marketing and refining companies — listed on a recognised stock exchange to hedge price risk.
Describe strategy
Before permitting the unlisted corporates to undertake hedge transactions, banks should ensure that they submit a brief description of the hedging strategy proposed, the RBI said in a notification.
The corporates have to submit to banks description of business activity and nature of risk; instruments proposed to be used for hedging; names of the commodity exchanges and brokers through whom the risk is proposed to be hedged and the credit lines proposed to be availed; and size/average tenure of exposure and/or total turnover in a year.
Further, they also have to give banks a copy of the Board Risk Management Policy approved covering risk identification, risk measurements, guidelines and procedures to be followed with respect to revaluation and/or monitoring of positions, and names and designations of officials authorised to undertake transactions and limits.
The RBI said hedging the price risk on domestic sale/purchase transactions in the international exchanges/markets, even if the domestic price is linked to the international price of the commodity, is not permitted, except certain specified transactions as approved by it.
The focus of the hedge transactions — only off-set hedge is permitted — will be on risk containment.
The central bank has also permitted banks to grant permission to companies to hedge the price risk in respect of any commodity (except gold, silver, platinum) in the international commodity exchanges/markets as specified under the delegated route.