Relaxations in cancelling/re-booking of foreign contracts – Sept. 2013
September 11, 2013
Members of the Council
Sub : Relaxations in cancelling/re-booking of foreign contracts
As far as exports/imports are concerned, a forward exchange contract—also called a forward currency contract—is an agreement between the exporter/importer and the bank in which the bank agrees to buy or sell a certain amount in a foreign currency at a fixed rate of exchange on, or during a period up to, a particular date. As an exporter entering an export contract in a foreign currency, a forward exchange contract allows the exporter to determine at the time the exporter sign the contract the exchange rate which will apply to future payments from the buyer.
According to RBI Notification No. FEMA 25 /RB-2000, dated 3rd May 2000, a person resident in India may enter into a forward contract with an authorised dealer (bank) in India to hedge an exposure to exchange risk in respect of a transaction for which sale and/or purchase of foreign exchange is permitted under the Act, or rules or regulations or directions or orders made or issued thereunder, subject to following terms and conditions-
the authorised dealer through verification of documentary evidence is satisfied about the genuineness of the underlying exposure,
the maturity of the hedge does not exceed the maturity of the underlying transaction,
the currency of hedge and tenor are left to the choice of the customer,
where the exact amount of the underlying transaction is not ascertainable, the contract is booked on the basis of a reasonable estimate,
foreign currency loans/bonds will be eligible for hedge only after final approval is accorded by the Reserve Bank where such approval is necessary,
in case of Global Depository Receipts (GDRs) the issue price has been finalised,
balances in the Exchange Earner’s Foreign Currency(EEFC) accounts sold forward by the account holders shall remain earmarked for delivery and such contracts shall not be cancelled. They may be ,however, be rolled-over,
contracts involving rupee as one of the currencies, once cancelled shall not be re-booked although they can be rolled over at ongoing rates on or before maturity. This restriction shall not apply to contracts covering export transactions which may be cancelled, rebooked or rolled over at on-going rates,
substitution of contracts for hedging trade transactions may be permitted by an authorised dealer on being satisfied with the circumstances under which such substitution has become necessary.
The Reserve Bank of India (RBI) has now issued a Circular No. Circular no. 36, dated 4-9-2013 stating the following.
With a view to providing operational flexibility to exporters and importers to hedge their foreign exchange risk, it has now been decided to:
- allow exporters to cancel and rebook forward contracts to the extent of 50 percent of the contracts booked in a financial year for hedging their contracted export exposures, and
- allow importers to cancel and rebook forward contracts to the extent of 25 percent of the contracts booked in a financial year for hedging their contracted import exposures.
Members may approach their respective banks for more details.
Thanks and regards
R. Ramesh Kumar
COUNCIL FOR LEATHER EXPORTS