The Formalities to be Complied with Particular Reference to Exchange Control Regulations

While booking forward contracts for customers, banks are required to observe that the exchange control regulations are complied with. The regulations relating to forward contracts are summarized below.

Exchange Control Regulations relating to Forward Contracts.

1. The bank may enter into forward contract for purchase and sale of permitted foreign currencies, with resident customers who are exposed to exchange risk in respect of genuine transactions permitted under current regulations.

2. The bank must ensure, before entering into forward contracts with customers, that the latter are, in fact, exposed to exchange risk in the currency in which forward cover is desired, in respect of the underlying transaction.

3. While booking forward contracts, the bank should verify suitable documents to ensure the authenticity and the amount of permitted currency of the underlying transaction. The amount, date and number of the forward contract should be marked on such documents under the stamp and signature of the bank in order to ensure that more than one forward contract is not booked in respect of the same underlying transaction. Copies of the documents so marked should be retained by the bank for its record.

4. The bank should satisfy itself that the underlying commitments are firm and should ensure that forward cover is not provided for anticipated transaction.

5. The bank may provide cross currency cover to customers who have such exposures. In case of exposures in rupees against currencies other than the dollar,  if the currency of the exposure is one that is usually covered through exposure may be split into two components, both against the dollar, and covered separately. There is no objection to one component being covered and the other being left exposed.

6. The bank may offer cover to resident corporate clients in respect of  dividend due to overseas investors on account of direct foreign investment in India. Cover may be offered only after the final accounts of the company have been drawn up and the Board of Management has decided on the rate of dividend payable. The cost of cover may he borne by the overseas investor or the Indian company.

7. The bank may cover a customer’s transaction in whole or part. The period and extent to which an exposure is to be covered may be left to the choice of the customer. Ordinarily, the maturity of the customer forward contract should match with that of the underlying transaction. Contracts may, however, be booked for shorter maturities with a view to reducing costs to the customer.

8. The bank may book forward cover on roll-over basis as necessitated by the maturity dates of the underlying transaction, market conditions and the need to reduce costs to the customer.

9. (a) The bank may cancel forward contracts booked if so desired by their customers. The exposure can be covered again by the customer with the same or another bank. The bank will have to ensure that a genuine exposure to the extent of the amount of the forward contract in respect of a permissible transaction continues to exist

(b) Full particulars of the cancellation of a forward contract for the equivalent of US $5,00,000 and above should be kept on record for verification by Reserve Bank.

10. In case shipment under a particular import or export order in respect of which forward cover has been booked does not take place, the customer may be permitted to substitute another order under the same forward contract provided the bank is satisfied, after verification of suitable documentary evidence, with the circumstances under which the contract could not be performed under the original order. This fact is to be reduced to writing and attached to the documents relating to the forward contract.

11. Where the foreign currency amount to be covered cannot be precisely quantified, as in the case of interest payable on loans contracted on floating rate basis, the bank may book forward contracts for an amount arrived at on the basis of a reasonable estimate. Small amounts of shortfalls or excesses may be pur-chased or sold on spot basis.

12. The bank, while booking forward contracts, should ensure that the underlying transactions are in accordance with all the other Exchange Control regulations and that the contracts are in accordance with the relevant FEDAI rules.