How hedging is regulated under External Commercial Borrowing framework ?

The entities raising External Commercial Borrowing (ECB) are required to follow the guidelines for hedging issued, if any, by the sectoral or prudential regulator in respect of foreign currency exposure. Infrastructure space companies shall have a Board approved risk management policy. Further, such companies are required to mandate 70 per cent of their ECB exposure in case the average maturity of the ECB is less than 5 years. The designated Authorised Dealer (AD) Category-I bank shall verify that 70 per cent hedging requirement is complied with during the currency of ECB and report the position to RBI through Form ECB 2. The following operational aspects with respect to hedging should be ensured: Coverage: The ECB borrower will be required to cover the principal as well as the coupon financial hedges. The financial hedge for all exposures on account of ECB should start from each such exposure (i.e., the day the liability is created in the books of the borrower). Tenor and Rollover: A minimum tenor of one year for the financial hedge would be required with rollover, duly ensuring that the exposure on account of ECB is not unhedged at any point currency of the 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 a natural hedge. Overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products Category I banks in India. The investors can also access the domestic market through branches / subsidiaries of Indian banks abroad or branches of foreign banks with Indian presence on a back-to-back basis.