External Commercial Borrowings (ECB) – Clarifications on hedging

Further to its earlier circulars, Reserve Bank of India has clarified on the provisions of hedging in the ECB framework vide its circular (A.P. (DIR Series) Circular No. 15) dated 07.11.2016.  The circular provides clarity on hedging ‘External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency to bring uniformity in hedging practice in the market.

With a view to effectively address currency risk at a systemic level, the following clarifications are issued by RBI.

Coverage: Wherever hedging has been mandated by the RBI, the ECB borrower will be required to cover principal as well as coupon through financial hedges. The financial hedge for all exposures on account of ECB should start from the time of each such exposure (i.e. the day liability is created in the books of the borrower).

Tenor and rollover: A minimum tenor of one year of financial hedge would be required with periodic rollover duly ensuring that the exposure on account of ECB is not unhedged at any point during the currency of ECB.

Natural Hedge: Natural hedge, in lieu of financial hedge, will be considered only to the extent of offsetting projected cash flows / revenues in matching currency, net of all other projected outflows. For this purpose, an ECB may be considered naturally hedged if the offsetting exposure has the maturity/cash flow within the same accounting year. Any other arrangements/ structures, where revenues are indexed to foreign currency will not be considered as natural hedge.

AD banks will have the responsibility of verifying that 100 per cent hedging requirement is complied with. All other aspects of the ECB policy shall remain unchanged.

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