ForeWord

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Foreign Exchange Operation - Volume 3

CHAPTER 7

Foreign Exchange OperationsFORWARD CONTRACTS

General

1.A Forward Contract (FC) is an instrument to hedge against exchange risk. The contract is between a Bank and its Customer to buy /sell a fixed amount of Foreign Currency at a pre-determined exchange rate at a specified duration of time in future.

1.1.A fixed contract is one where the foreign currency delivery as per the contract should take place on thepre-determined future date i.e. the delivery date is fixed.

1.2.Under the option forward contract the customer is given the facility of giving/taking delivery of foreign exchange during a given period of time. Such period is called option period and it can be a week, a fortnight or a month. The option period cannot exceed one month.

For Example: 18th January to 17th February, 31st January to 28th (29th) February.

2.In the context of Exports/Imports taking place in India, Forward Purchase Contracts (FPC) are booked for converting Foreign Currency into Indian Rupee and Forward Sales Contracts (FSC) are booked for converting Indian Rupee into required Foreign Currency.

3. While booking forward contracts, branches must inform the sanction details, present outstanding, details about the underlying contracts / exposures, and whether the present booking is based on documentary evidence or on declaration basis (past performance)

4. AD branches should inform Treasury (Foreign) the details of the deliveries made against the contracts on the same day.For sake of clarification, for currency delivery the value date of nostro credit is the reckoning date and for bills/cheques delivery the date of purchase/discount/negotiation is the reckoning date. At any cost, delivery should not be made after the due date.

5. In respect of forward purchase contracts booked against collection bills or inward remittances, AD branches should block the nostro id on the same day which will ensure that the same is not being shown as outstanding when the reconciliation statement is generated at the end of the month.

6.Seven days time is given to the customer only to take advantage of the fluctuation in the rates and to minimize the loss, if any. If for any reason, the delivery could not be made by the customer before the due date of contract, which will amount to cancellation, AD branches should inform Treasury (Foreign) about the same.

7. In case of cancellation or early delivery of the foreign currency, AD branches should ensure recovery of the swap charges without any delay and pass on the same to Treasury (Foreign). Cancellation charges should be recovered and credited to branch P&L account.

8. Cancellation of contracts, wherever done, should specify reasons therefor.

9. Payment of swap gain will be made on the original due date of the contract and not on the date of cancellation. Customers should be suitably advised in this regard.

10.. The branches should reconcile forward contract statements sent by Treasury- Foreign with their outstanding in GL and a confirmation to this effect should be sent. Wherever, unreconciled entries are available, it should be taken up with Treasury- Foreign immediately giving full details of booking / delivery.

11.. Branches should closely watch the exchange rate movement vis--vis the contracted rate so as to monitor the exchange rate impact and should take appropriate measures to protect bank's interest.

12. Branches must obtain specific sanction from credit sanctioning authorities for booking or waiver of forward contracts in the absence of natural hedge for any foreign currency loans. This shall be an integral part of terms and conditions of sanction

(FX PERM 106 DT.27.01.2011)

GENERAL GUIDELINES FOR CONTRACTS WITH UNDERLYING EXPOSURE AS WELL AS THOSE BOOKED ON THE BASIS OF PAST PERFORMANCE

Full particulars of the contracts should be marked on the original documents under proper authentication and retained for verification. In cases where the submission of original documents is not possible, a copy of the original documents, duly certified by an authorized official of the customer, may be obtained.

The corporates should provide an annual certificate to our Bank certifying that the Forward Foreign Exchange Contracts booked are authorized and that the Board (or by all the partners in case of partnership or by the proprietor in case of proprietary firms) is aware of the same. The notional amount should not exceed the actual underlying exposure at any point in time. The notional amount for the entire transaction over its complete tenor must be calculated and the underlying exposure being hedged must be commensurate with the notional amount of the Forward Foreign Exchange Contract. Only one hedge transaction can be booked against a particular exposure/ part thereof for a given time period. Where hedging of the same exposure is undertaken in parts, with more than one AD Category I bank, the details of amounts already booked with other AD Category I bank/s should be clearly indicated in the declaration. This undertaking can also be obtained as a part of the deal confirmation. Quarterly certificates from the statutory auditors of the customer, that the contracts outstanding at any point of time with all the Banks during the quarter did not exceed the value of the underlying exposures should also be obtained.

CONTRACTS WITH UNDERLYING EXPOSURE

3.ADs may enter into contracts for forward purchase and sale of Foreign Currency with residents who have crystallized exposure to exchange risk in respect of genuine transactions permitted under FEMA 1999 guidelines or in terms of the rules/regulations/directions/directions/orders made or issued thereunder. Apart from Exporter/Importer customers, Forward Contracts may be booked by the following: Provided the maturity of the hedge does not exceed the maturity of the underlying transaction

(a)NRIs for their NRE/FCNR Term Deposits

(b)Corporate in respect of dividend due to overseas investors on account of direct foreign investments in India.

(c)Resident borrowers in respect of Foreign Currency loans/Bonds (after obtaining final approval for loan arrangement from RBI (where such approval is necessary or Loan Registration number is allotted by the Reserve Bank)

(d)Resident Corporates in respect of GDR/ADR issue once the issue price is finalized.

(e)FIIs in respect of their investments in debt instruments in India and in equity and loan subject to certain conditions.Contracts covering overseas direct investment (ODI) can be cancelled or rolled over on due dates. However, AD Category I banks may permit rebooking only to the extent of 50 per cent of the cancelled contracts.If a hedge becomes naked in part or full owing to contraction ( due to price movement/impairment) of the market value of the ODI, the hedge may be allowed to continue until maturity, if the customer so desires. Rollovers on due date shall be permitted up to the extent of the market value as on that date.

(FX PERM 106 DT.27.01.2011)

(f)Foreign Shipping Companies in respect of net remittable freight collections.

(g)where the exact amount of the underlying transaction is not ascertainable, the contract is booked on the basis of a reasonable estimate. However there should be periodical review of the estimates.

(h)Branches have to verify the underlying contract (except in cases where booking is permitted against declaration/ past performance)

(i)Branches have to ensure that an exposure exists and the exposure should be at least to the extent of the cover sought. The underlying exposure can either be a capital account or a current account transaction

(j)Substitution of the contracts for hedging trade transactions are permitted where necessary by ADs on being satisfied with the circumstances under which such substitution has become necessary.

(k)The prior approval from RBI is necessary wherever RBI has given the final approval for foreign currency loan/ bonds and has given the loan identification number.

(l)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, however, be rolled-over contract should be booked under proper authentication of higher officials.

(m)It is the sole responsibility of the branches concerned that the Forward Contract booked by them is within the valid sanctioned limits as well as in compliance with FEMA guidelines(n)The details of the underlying have to be recorded at the time of booking the contract. In the view of logistic issues, RBI has permitted a maximum period of 15 days for production of the underlying documents. If the documents are not submitted by the customer within 15 days, the contract should be cancelled, and the exchange gain, if any, should not be passed on to the customer. In the event of non-submission of the documents by the customer within 15 days on more than three occasions in a financial year, booking of Forward Foreign Exchange Contract in future shall be allowed only against production of the underlying documents, at the time of booking the contract.

(o)The maturity of the hedge should not exceed the maturity of the underlying transaction. The currency of hedge and tenor, subject to the above restrictions, are left to the customer. Where the currency of hedge is different from the currency of the underlying exposure, the risk management policy of the corporate, approved by the Board of the Directors, should permit such type of hedging. In case of partnership firm a consent letter from all the partners and in case of proprietary firms a consent letter by the proprietor should be obtained.

(p) All non-INR forward contracts can be rebooked on cancellation subject to the corporate submitting the exposure information as prescribed in Appendix A. condition below. Forward contracts, involving the Rupee as one of the currencies, booked by residents to hedge current account transactions, regardless of the tenor, and to hedge capital account transactions, falling due within one year, may be allowed to be cancelled and rebooked subject to the foregoing condition.

(q) AD branches should submit a quarterly statement as given Appendix A to Risk Management Section, Treasury - Foreign within 15 days from the end of that quarter. Customer wise data where the total forex exposure or hedges undertaken are above USD 25 mio or equivalent should be reported in this return. Substitution of contracts for hedging trade transactions may be permitted by an AD Category branch on being satisfied with the circumstances under which such substitution has become necessary. The AD Category branch may also verify the amount and tenor of the underlying substituted.(FX PERM 106 DT.27.01.2011)

CONTRACTS WITHOUT UNDERLYING EXPOSURE

(Probable exposure based on past performance can be hedged only in respect of trades in merchandise goods as well as services.)

(FX PERM 106 DT.27.01.2011)

4.1.ADs may also allow importers and exporters to book forward contracts on the basis of a declaration of an exposure and based on past performance up to the average of the previous three financial years (April to March) actual import/export turnover or the previous years actual import/export turnover, whichever is higher, subject to the following conditions:

a)The forward contracts booked in the aggregate during the current financial year and outstanding at any point of time should not exceed the eligible limit i.e. the average of the previous three financial years (April to March) actual import/export turnover or the previous years actual import/export turnover, whichever is higher. Contracts booked in excess of 75 per cent of the eligible limit will be on deliverable basis and cannot be cancelled. These limits shall be computed separately for import/export transactions. Higher limits will be permitted on a case-by-case basis by Reserve Bank of India. Branches if requested by customers can send on application to the Foreign Exchange Department, Central Office, Reserve Bank of India. The additional limits, if sanctioned, shall be on a deliverable basis.

(FX PERM 106 DT.27.01.2011)

b)Any forward contract booked without producing documentary evidence will be marked off against this limit.

c)Importers and exporters should furnish a declaration to the ADs regarding amounts booked with other ADs under this facility.

d)An undertaking may be taken from the customer to produce supporting documentary evidence at the time of cancellation /before the maturity of the forward contract. These contracts once cancelled, are not eligible to be rebooked. Rollovers are also not permitted. Importers and exporters should furnish a quarterly declaration to the branches, duly certified by the Statutory Auditor, regarding amounts booked with other AD Category I banks under this facility, as per Appendix B.

(FX PERM 106 DT.27.01.2011)

e)Outstanding forward contracts higher than 50 per cent of the eligible limit may be permitted by the AD s only on being satisfied about the genuine requirements of their constituents after examination of the following documents:

A certificate to be obtained from the statutory Auditor of the customer that all guidelines have been adhered to while utilizing this facility. A certificate of import/export turnover of the customer during the past three years duly certified by their Statutory Auditor in the format given in Appendix C.

f)In the case of an exporter, the amount of overdue bills should not exceed 10 per cent of the turnover, to avail the above facility.

g) AD branches are required to submit a monthly report (as on the last Friday of every month) on the limits granted and utilised by their constituents under this facility as prescribed in Appendix D by 10th of the following month to Branch Support Services Section, Treasury Foreign without fail. Any delay in submission of statement will be viewed seriously.

h)The past performance limits once utilised are not to be reinstated either on cancellation or on maturity of the contracts.

i)AD branches must arrive at the past performance limits at the beginning of every financial year. The drawing up of the audited figures (previous year) may require some time at the commencement of the financial year. However, if the statements are not submitted within three months from the last date of the financial year, the facility should not be provided until submission of the audited figures. In addition to the customer declarations, Branches should also assess the past transactions with the customers, turnover, etc.

(FX PERM 106 DT.27.01.2011)

4.2.Limits specified as above pertain to forward contracts booked on the basis of declaration of an exposure. When forward contracts are booked by the ADs after verification of documentary evidence, these limits are not applicable and such contracts may be booked up to the extent of the underlying exposure only.

4.3.Forward Contracts may be booked on declaration basis for Small and Medium Enterprises (SMEs) to hedge their direct and / or indirect exposures to foreign exchange risk without production of underlying documents, subject to the following conditions:

4.4.SME as defined by the Rural Planning and Credit Department, Reserve Bank of India vide circular RPCD. PLNS.BC.No.63/06.02.031/ 2006-07 dated April 4, 2007.

4.5.Such contracts may be booked by branches with whom the SMEs have credit facilities and the total forward contracts booked should be in alignment with the credit facilities availed by them for their foreign exchange requirements or their working capital requirements or capital expenditure.

(FX PERM 106 DT.27.01.2011)

4.6.These forward contracts can be freely cancelled and rebooked.Branches should carry out due diligence regarding user appropriateness and suitability of the forward contracts to the SME customers as per Para 8.3 of 'Comprehensive Guidelines on Derivatives' issued vide DBOD.No.BP.BC. 86/21.04.157/2006-07 dated April 20, 2007. which is given in appendix EThe SMEs availing this facility should furnish a declaration to the AD Branch regarding the amounts of forward contracts already booked, if any, with other AD banks under this facility.

AD branches are required to submit a quarterly report on the forward contracts booked & cancelled by SMEs and Resident Individuals within the first week of the following month, as per format given in Appendix G to Branch support Services Section, Treasury Foreign.

(FX PERM 106 DT.27.01.2011)

PERSONS RESIDENT OUTSIDE INDIA

FII related Purpose - To hedge currency risk on the market value of entire investment in equity and/or debt in India as on a particular date.

Product Forward foreign exchange contracts with rupee as one of the currencies

Operational Guidelines The eligibility for cover may be determined on the basis of the declaration of the FII. AD branches should undertake periodic reviews, at least at quarterly intervals, on the basis of market price movements, fresh inflows, amounts repatriated and other relevant parameters to ensure that the forward cover outstanding is supported by underlying exposures. If a hedge becomes naked in part or in full owing to contraction of the market value of the portfolio, for reasons other than sale of securities, the hedge may be allowed to continue till the original maturity, if so desired. The contracts, once cancelled cannot be rebooked except to the extent of 2 per cent of the market value of the portfolio as at the beginning of the financial year. The forward contracts may, however, be rolled over on or before maturity.

The cost of hedge should be met out of repatriable funds and /or inward remittance through normal banking channel. All outward remittances incidental to the hedge are net of applicable taxes. A monthly statement should be furnished to Branch Support Services, Treasury Foreign before the 10th of the succeeding month, in respect of cover taken by FIIs, indicating the name of the FII / fund, the eligible amount of cover, the actual cover taken, etc. as per the format in Appendix H.

FDI related Purpose

a. To hedge exchange rate risk on the market value of investments made in India since January 1, 1993, subject to verification of the exposure in India

b. To hedge exchange rate risk on dividend receivable on the investments in Indian companies

c. To hedge exchange rate risk on proposed investment in India

Product Forward foreign exchange contracts with rupee as one of the currencies

Operational Guidelines In respect of contracts to hedge exchange rate risk on the market value of investments made in India, contracts once cancelled are not eligible to be rebooked. The contracts may, however, be rolled over.

In respect of proposed foreign direct investments, following conditions would apply:

a. Contracts to hedge exchange rate risk arising out of proposed investment in Indian companies may be allowed to be booked only after ensuring that the overseas entities have completed all the necessary formalities and obtained necessary approvals (wherever applicable) for the investment.

b. The tenor of the contracts should not exceed six months at a time beyond which permission of the Reserve Bank would be required to continue with the contract.

c. These contracts, if cancelled, shall not be eligible to be rebooked for the same inflows.

d. Exchange gains, if any, on cancellation shall not be passed on to the overseas investor.

NRI related Purpose a. To hedge the exchange rate risk on the market value of investment made under the portfolio scheme in accordance with provisions of FERA, 1973 or under notifications issued there under or in accordance with provisions of FEMA, 1999

b. To hedge the exchange rate risk on the amount of dividend due on shares held in Indian companies.

c. To hedge the exchange rate risk on the amounts held in FCNR (B) deposits.

d. To hedge the exchange rate risk on balances held in NRE account.

Product a. Forward foreign exchange contracts with rupee as one of the currencies b. Additionally, for balances in FCNR (B) accounts Cross currency (not involving the rupee) forward contracts to convert the balances in one foreign currency to other foreign currencies in which FCNR (B) deposits are permitted to be maintained.

Operational Guidelines The operational guidelines as outlined for FIIs would be applicable, with the exception of the provision relating to rebooking of cancelled contracts. All Forward Foreign Exchange Contracts permissible for a resident outside India other than a FII, once cancelled, are not eligible to be rebooked.(FX PERM 106 DT.27.01.2011)

4.7.Resident Individuals are allowed to book forward contracts, to hedge their foreign exchange exposures arising out of actual or anticipated remittances, both inward and outward, without production of underlying documents, based on self-declaration and subject to the following conditions:

a)The contracts booked under this facility would normally be on a deliverable basis. However, in case of mismatches in cash flows or other exigencies, the contracts booked under this facility are allowed to cancel and re-book.

b)The notional value of the outstanding contracts should not exceed USD 100,000 at any time.

c)The contracts are normally permitted to book up to tenors of one year only.

d)Such contracts may be booked through branches with whom the resident individual has banking relationship, on the basis of an application-cum-declaration in the format given in Appendix F

e)A forward contract cancelled with one AD Category - I bank can be rebooked with another AD Category - I bank subject to the following conditions:

f)The switch is warranted by competitive rates on offer, termination of banking relationship with the AD Category - I bank with whom the contract was originally booked, etc;

i)The cancellation and rebooking are done simultaneously on the maturity date of the contract;ii) The responsibility of ensuring that the original contract has been cancelled rests with the AD Category - I bank who undertakes rebooking of the contract.

g).The facility of cancellation and rebooking is not permitted for forward contracts, involving Rupee as one of the currencies, booked by residents to hedge capital account transactions for tenor greater than one year.

h)AD branches are required to submit a quarterly report on the forward contracts booked & cancelled by Resident Individuals within the first week of the following month, as per format given in Appendix G to Branch support Services Section, Treasury Foreign.

(FX PERM 106 DT.27.01.2011)

4.8.a)Residents having overseas direct investments (in equity and loan) are permitted to hedge the exchange risk arising out of such investments. Branches may enter into forward contracts with residents for hedging such investments subject to verification of exposure. Contracts covering overseas direct investments can be cancelled or rolled over on the due dates. However, Branches are permitted to rebook only to the extent of 50 per cent of the cancelled contracts.

b)If a hedge becomes naked in part or full owing to shrinking of the market value of the overseas direct investment, the hedge may continue to the original maturity. Roll over on due date shall be permitted up to the extent of the market value as on that date.

4.9.ADs may also enter into forward contracts with residents in respect of transactions denominated in foreign currency but settled in Indian Rupees including hedging the economic (currency indexed) exposure of importers in respect of customs duty payable on imports. These contracts shall be held till maturity and cash settlement would be made on the maturity date by cancellation of the contracts.

4.10.Forward contracts covering such transactions once cancelled are not eligible to be rebooked. However, in the event of change in the rate of customs duties due to government notifications, subsequent to the date of the forward contracts importers may be allowed to cancel and / or rebook the forward contracts before maturity.Branches should satisfy themselves that the resident individuals understand the nature of risk inherent in booking of forward contracts and should carry out due diligence regarding user appropriateness and suitability of the forward contracts to such customer.

5.Only AD Branches of our Bank are authorized to book and handle Forward Contracts. When customers of NAD Branches approach them for booking ForwardContracts, the NAD branch concerned should take up with the AD Branches designated to them with all relevant details and documents and arrange to obtain the forward cover for their customers.

5.1.Branches booking/handling Forward Contracts should ensure that the underlying Export/Import transaction for which the forward cover is sought for is in accordance with the FEMA1999 guidelines and the amendments issued from time to time.

6.Branches should note that the forward cover facility is to be offered only to their customers for genuine Export/Import/Other transactions in any of the permitted currencies in which bank is maintaining the exchange position after satisfying themselves that customer is exposed to an exchange risk in respect of the underlying export/import transaction.

6.1.Branches should advise their customers particularly corporates to frame broad risk management policy and also help in designing the same. Branches may also insist on their customers submitting the policy to the Bank along with other audited papers at the time of renewal of limits.

6.2.Branches should judiciously assess the needs of the customer requesting for forward cover and fix appropriate limits for them duly sanctioned by appropriate layer of authority. Branches should be guided by Annexure II regarding fixing of customer limit for booking Forward Contracts.

7.Branches should obtain a declaration from the customer that the same underlying exposure or transaction has not been covered with any other authorised dealer.

8.Branches can enter in to contracts covering trade transactions which may be freely booked, cancelled, rebooked, rolled over at ongoing rates as well as substituted.

8.1.All forward contracts with rupee as one of the currencies, booked to cover foreign exchange exposures falling due within one year can be freely cancelled and rebooked. All forward contracts, involving the rupee as one of the currencies, booked by residents to hedge current account transactions, regardless of tenor, may be allowed to be cancelled and rebooked freely. This relaxation will not be applicable to forward contracts booked on past performance basis without documents as also forward contracts booked to hedge transactions denominated in foreign currency but settled in INR, where the current restrictions will continue. The revised format in which corporate exposures are required to be reported is given in Annex-v of the RBI Master circular on Risk Management dated 01st July every year to enable Treasury to submit a consolidated report to RBI. . . The details of exposures of all corporate clients have to be included in the report. Further, the facility of cancellation and rebooking should not be permitted unless the corporate has submitted the required exposure information as prescribed. All non- INR forward contracts can be freely re-booked or cancelled. ADs should ensure that while booking contracts for import transactions that the underlying exposure had not been hedged earlier and cancelled.

8.3.Contracts in respect of non-trade transactions like FCNR, NRE, EEFC, Dividends, Remittances towards surplus freight collections; Foreign Currency debt service etc., once cancelled should not be rebooked again. They, may, however, be rolled over on or before the maturity. Branches are required to take a declaration from the customer, while booking contacts for all non-trade transactions that the underlying exposure had not been hedged earlier and cancelled with our Bank or with any other Bank.

9.Branches booking forward covers and handling transactions under forward contracts booked by them should ensure compliance of the guidelines contained in Rule No.8 (Exchange Contracts) and Rule No.6 (Early Delivery, Extension and cancellation of Forward Contracts) of the FEDAI Rule booklet. Branches should also observe procedural guidelines issued by FEDAI or Treasury Foreign, Chennai from time to time.

10.1.AD Branches entering into Forward Contracts with their customers (and customers of NAD Branches) should ensure that the contract is for a definite amount with no provision for excess or shortfall and that the expiry date of the contract is not later than six months from the date of shipment. The option period of delivery under the forward contracts booked by the branches should not exceed one calendar month and the option period (i.e. date of commencement and expiry date) should be clearly indicated in the contract form and the books/registers maintained by Branches.

10.2.The choice of currency and tenor are left to the customer. It should be ensured that the maturity of the cover should not exceed maturity of underlying transaction.

11. Branches booking forward contracts on account of their customers should obtain an undertaking and retain the same along with the application for Forward Contracts and other enclosures.

12.Branches should note that the application for a booking Forward Contracts, the undertaking letter and the contracts should be duly signed/executed by the clients/authorised officials/persons of the Exporter/Importer customers. To ensure compliance of this stipulation, Branches should note to obtain necessary Board Resolution in respect of Corporate Customers and letter of authority signed by all the partners in respect of Partnership Firms and retain the same with Forward Contracts.

13.On booking the Forward Purchase Contract (FPC) or Forward Sale Contract (FSC),AD Branches should record on the underlying export/import orders/LCs with remarks indication the date and amount of the contract booked with their stamp and initials.

14.All Forward Contracts booked by the Branches should be serially numbered (e.g. Branch Code No./ FPC/ SI.No or Branch Code NO.FSC/SI.No.) and this number should be indicated in the contract/copies of the contract, the registers and reports made to Treasury (Foreign), Central Office .

14.1.Branches should furnish the following to Merchant Contract section Treasury Foreign, Chennai while booking Forward Contracts:

(a)Exchange Report No.(b)Name of the party.(c)Contract NO. (FPC/FSC).(d)Date or period of delivery(e)Purpose (whether for export bills/imports or for FCNR/NRE/EEFC etc.)(f)Limit and the outstanding including the contract that is sought to be booked.(g)Proper Alpha Code as per Chapter1 Annexure-IIB of this volume of Book of instructions.

15.AD Branches should recover from the customers a commission amount as prescribed by Treasury Foreign, Central Office on each forward sale or purchase contract booked. If booked on account of NAD branches, the commission should be shared between AD & NAD Branches in the ratio prescribed.

16.AD branches should diarise, alert customers about the maturity of contracts an ensure delivery (sale or purchase) during/within the period. For this purpose, AD/NAD Branches should maintain party wise liability register and promptly record the deliveries made.

17.Whenever FPC/FSC is sought to be cancelled (i.e. before due date), the AD branch concerned should obtain specific written request (from the exporter/importer) for cancellation and undertaking to bear charges for cancellation. On being satisfied with the reasons adduced by the customers, the AD branch should take up with Treasury Foreign, Central Office and ascertain the swap gain/loss to be paid/recovered to /from the customer and act accordingly.

17.1.In the absence of any instructions from the customer i.e. where the customer has defaulted, branches should cancel the contract on the 7th working day(For the limited purpose of FEDAI Rule 6A.4 Saturday is not considered as a working day) after maturity automatically. Treasury Foreign, Central Office, should be duly informed and swap cost should be recovered from the customer. In such cases, exchange difference against the customer should be recovered from him but exchange difference and swap cost in favour of the customer should not be paid to him.

18.Proper records for booking, deliveries made, cancelled, rebooked etc,. should be maintained in Forward Contract Register.

19.Branches should furnish the following particulars to treasury Foreign, Chennai while reporting the deliveries under forward contract.

(a)The original Telex s\Serial Report number, Merchant Contract number and Merchant Contract year.(b)Amount of delivery(c)Balance amount of contract (in case of partial delivery)Branches are to be guided by para 18 chapter 1 of this volume of Book of instructions on Reporting of Foreign Exchange Transactions by branches.

20.While booking forward purchase/sale contracts contra entries are to be passed. Similarly at the time of delivery/cancellation, reversal entries to be passed. Following GL heads of a/c are involved.

(a)Foreign Currency Balance A/c.(b)Forward purchase Contract A/c.(c)Forward Sale Contract A/c.

21. Branches should balance the outstanding under the FPC/FSC booked by them on the last day of every month and ensure that the out standings under the contracts tally with GL balance. Branches should submit a Monthly statement of Forward Contracts booked and outstanding in the prescribed format to Regional Office with a copy to Merchant Contract (MC) Section, Treasury Foreign, Central Office, Chennai on or before the 5th of the succeeding month.

FORWARD PURCHASE CONTRACTS (FPC):

22. Branches should book FPCs only on the basis of a written request of the exporter-customer accompanied by anyone of the following documents:

(a)Original Sale Contract(b)Cable/Telex order routed through the Overseas Communication service.(c)Irrevocable LC established by our Overseas Branch/correspondent In respect of FPCs to be booked based on cable/telex messages, branches should obtain an undertaking from the exporter to tender the original order within one month from date of booking forward purchase contract.

23.Branches can also book forward purchase contracts in report of shipments already made and documents tendered to them by the exporters. In such case, branches may waive verification of the sales contract.

24.Whether the contract is booked before shipment or after shipment, branches booking FPCs at the request of their customers should ensure that the expiry date of the contract shall not fall beyond six months from date of shipment as per underlying LC/order and that the option period of delivery for that exporter shall not exceed a duration of one calendar month.

25. After ensuring that the order/LC based on which the FPC is to be booked is in conformity with the Trade/FEMA Regulations, authorized official of the branch should obtain forward rates from Dealing Room Treasury Foreign, Central Office, Chennai only for such customers for whom limits for forward contracts have already been sanctioned furnishing details such as:

(a)Name of exporter(b)Nature of exporter (i.e. 100% EOU or unit in FTZ/EPZ or other categories of exporters)(c)Currency and Amount(d)Tenor of Bill of Exchange (Sight, Usance, fixed date)(e)Option Period(f)Place at which bill is payable and(g)Particulars of LC/Order

26.AD Branches should record the details of the FPCs in a Forward Purchase Contract Register (with columns as appearing on the reverse of the Forward Purchase Contract) and prepare the Forward Purchase Contract (in Form 258 - revised) in a set of three copies. All the three copies must be signed by exporter as well as authorized officials of the branch. (FX PERM 102 DT.14.12.2010) The second copy should be affixed with stamp of appropriate value and it shall serve as the Forward Purchase Contract. The first copy should be delivered to the exporter, against his acknowledgment in the FPC register. The branch along with original LC/Order in a separate FPC Folder should retain the second and third copies. (FX PERM 102 DT.14.12.2010)

27.In respect of FPCs booked on account of customers of NAD Branches, FPCs should be prepared in a set of four copies. The first copy (exporters copy) should be sent to the NAD branch, along with the fourth copy of the contract. NAD branches should retain the first copy and deliver the fourth copy to the customer against acknowledgement. The second copy (viz. the forward purchase contract) and the third copy shall be retained by the AD branch AD branches need not forward one copy of the forward agreements (F 258) to Treasury (foreign). Instead AD branches should send a confirmation as per the format given in FX permanent circular 102 dated 14.12.2010 to Control Section, Treasury, Central Office, every month before 10th. (FX PERM 102 DT.14.12.2010)

28.The accounting entry to be passed, while booking forward purchase contracts, is

Debit: Foreign Currency Balance A/c Credit: Forward Purchase Contract A/c. The AD branch in respect of FPCs booked by them on account of their customers should pass the above contra. NAD Branches will pass contra vouchers in their books but the rupee value will be shown only as Re.1/- and in the books of AD branch, the actual rupee value will be shown. Simultaneously, appropriate entries are also be passed for recovery of commission to the debit of the customers account with the branch. In respect of the FPCs booked on account of the customers of NAD Branches, AD branches should maintain a proper record of such contracts and the deliveries there under, as also the charges recovered.

29. Branches should maintain a separate account for each currency and party-wise liability register.

30. Before handing over the underlying export order/LC based on which the FPC is booked; branches should brand the order/LC with the stamp FORWARD PURCHASE CONTRACT BOOKED quoting the reference number of the FPC prominently under the initials of the authorised official of the branch.

31.Branches should diarise the delivery dates, follow up with the exporter-customers and ensure submission of the export documents before expiry of delivery period. Delivery under FPC

32.When the exporter delivers the export documents, AD branches should examine and ensure that they conform to the terms of LC/Order and put through the transaction at the FPC rate, after making entries in the FPC register.In respect of FPCs booked on account of customers of NAD branches, the NAD branches on being satisfied that the bill is in tune with the LC/order, can lodge the bill in their DBPF/UBDF portfolio and vouch for the transaction at the FPC rate and forward the delivery report as well as export documents to the designated a AD branch.

33.AD branches should note to mark the deliveries in the remaining copes of the FPC with them and send the fourth copy of FPC to Treasury Foreign if the entire amount for which FPC was booked has been delivered by the exporter or if the exporter or if the exporter has delivered a part amount and indicated that balance amount under the contract shall not be utilised by him.

34.NAD branches purchasing/discounting/negotiating bills covered by FPCs should not make any report directly to Treasury Foreign and should submit their reports (in a manner appropriate to the amount involved) to the AD branch designated to them and also expeditiously dispatch the documents to the designated AD branch for realization. While reporting the deliveries under FPC to the designated AD branch, NAD branches should also follow the procedures in the preceding paras.

35.AD Branches should reverse the contra passed at the time of booking the forward contract to the extent of deliveries made. On complete delivery, contra entries made at AD/NAD Branches should be reversed.

36.Branches should note that in respect of a transaction for which FPC has been already booked, the same cannot be delivered as ready/spot transaction unless the FPC is cancelled by the exporter and the cancellation charge borne by him.

Early/late delivery Extension/Cancellation of FPC:

37.Whenever exporter constituents approach branches with a request to extend the FPCs, branches should call for and verify the relative amendments to the LC/Sales contract and take up with Treasury Foreign, Central office, Chennai and do the needful. Extension is nothing but cancellation and rebooking of the contract at the ongoing rates. The swap gain/loss advised by Treasury Foreign, Central Office, Chennai should be paid to/recovered from the exporter.

38. When the contracts cancelled, AD branches should reverse the contra passed at the time of booking the contract and collect the charges, as advised by Treasury Foreign, Chennai and credit the same to Treasury Foreign, Chennai. In respect of cancellation of FPCs booked on account of customers of NAD branches, the NAD branch should ascertain the charges to be collected from the designated AD branch, recover and credit the same to Treasury Foreign, Chennai under advice to the designated AD branch and reverse contra entry passed.

FORWARD SALE CONTRACTS

39. Branches should book FSCs only on the basis of written request of the importer-customer accompanied by the following documents:

(a)Order placed by the importer together with confirmation of overseas supplier or proforma invoice of the overseas supplier duly counter signed by importer or indent/offer from overseas supplier or his authorized agent or irrevocable letter of credit established by the branch on account of the customer.

(b)Exchange control copy of import license, in case the item is in the Negative List as per the current Export-Import Policy.

40.Branches booking FSCs on account of their customers should verify and ensure that the description, quantity, value, last date of shipment and expiry date for presentation of documents, Currency of payment, etc. as per the underlying documents conform to the current Trade/Exchange control Regulations in force. NAD branches should also ensure compliance of the above stipulations before forwarding the requests of their importer-customers to book FSCs to the designated AD branch.

41. While taking up with Treasury Foreign, Chennai for obtaining forward sale rates as well as reporting the transaction, branches should furnish following details:

(a)Name of Importer.(b)Nature of activity-whether 100% EOU or a unit in FTZ/EPZ or unit engaged in export of gem and jewellery or whether the item of import is and essential item approved by Ministry of Finance, etc.(c)Currency and amount.(d)Tenor of Bill Of Exchange(e)Particulars of underlying import LC/Order(f)Option period, with from and to dates.(g)FSC serial number.

42.Branches should record the details of the FSC booked in a Forward Sales Contract Register (with columns as appearing on the reverse of the Forward Sales Contract) and prepare Forward Sales Contract (in Form 258-A revised) in a set of three copies. All the three copies must be signed by the importer as well as authorized officials of the AD branch. The second copy should be affixed with stamp of appropriate value and it shall serve as the Forward Sale Contract. The first copy should be delivered to the importer, against his acknowledgment in the FSC register. The AD branch along with the underlying import LC/order in a separate FSC folder should retain the second and third copies. (FX PERM 102 DT.14.12.2010)

43.In respect of FSCs booked on account of customers of NAD branches, FSCs should be prepared in a set of four copies; the first copy (importers copy) should be sent to the NAD branch, along with the fourth copy for their files. The AD branch. should retain the second copy (viz. the Forward Sales Contract) and the third copy. AD branches need not forward one copy of the forward agreements (F 258 B) to Treasury (foreign). Instead AD branches should send a confirmation as per the format given in FX permanent circular 102 dated 14.12.2010 to Control Section, Treasury (foreign), Central Office, every month before 10th. (FX PERM 102 DT.14.12.2010)

44.The accounting entry to be passed, while booking forward sale contracts, is

Debit: Forward Sale Contract A/cCredit: Foreign Currency Balance A/cThe AD branch in respect of FSCs booked by them on account of their customers should pass the above contra. NAD branches will pass contra vouchers booked by their AD branches in their books but the rupee value will be shown only as Re 1/- and in the books of AD branch, the actual rupee value will be shown.Simultaneously, appropriate entries are also to be passed for recovery of commission to the debit of the customers account with the branch. In respect of the FSCs booked on account of the customers of NAD Branches AD branches should maintain a proper record of such contracts and the deliveries there under, along with details of charges recovered.

45.Branches should maintain a separate account for each currency and party-wise liability register.

46.Before handing over the underlying import LC/order based on which FSC is booked branches should brand the order/LC with the stamp FORWARD SALES CONTRACT BOOKED quoting the reference number of FSC prominently under the initials of the authorised official of the branch.

47.If the item of import is subject to import license, and the FSC is booked based simply on the purchase order/indent, etc., and no import letter of credit is established by the branch, an appropriate remark about the booking of the contract should be made on the import license over initials and stamp of the branch.

47.1.If the import is subject to import license and an import letter of credit has been established by the branch based on the license, branches should ensure that column No.3 of the import license is endorsed for the rupee equivalent at the forward sale contract rate under the initials of the authorized official of the branch.

48.Branches should diarise the delivery dates, follow up with the importer-customers and ensure remittance of foreign exchange and retirement of import documents before expiry of the delivery period.

Delivery under FSC

49.When the import documents are received, branches should examine and ensure that they conform to the terms of import LC/Order and put through the transaction at the FSC rate, after making entries in the FSC register.

50.AD branches should note to mark the deliveries in the remaining copies of FSC with them. They should also report to Treasury Foreign, Chennai when part deliveries are made.

51.In respect of exchange to be sold under FSCs booked on account of customers of NAD branches, the designated AD branches should arrange to sell exchange only on receipt of the relative IBSA instrument for the rupee equivalent of exchange to be sold from the NAD branch concerned.

52.AD branches should reverse the contra passed at the time of booking the forward contract to the extent of deliveries made. On complete delivery, contra entries made at AD/NAD Branches should be reversed.

Early/Late delivery Extension/Cancellation of FSC

53.In respect of an import transaction covered by an FSC, if the importer solicits sale of foreign exchange before commencement of option period of after expiry of option period, branches should put through the sale at the contracted rate and take up with Treasury Foreign, Chennai or the designated AD branch, ascertain the charges to be collected from the customer and collect and credit the same to Treasury Foreign, Chennai, as the case may be.

54.Whenever importer constituents approach branches with a request to extend FSCs, they should call for amendments to the underlying import order LC and if satisfied with the request, immediately take up with Treasury Foreign, Chennai and do the needful, recovering the charges indicated by the dealer in the dealing room and crediting the same to Treasury Foreign, Chennai.

55. Forward Contracts booked for the following cannot be cancelled with out permission of RBI.

(a)Remittances of surplus freight by Shipping Co./Agents(b)Remittance of dividends(c)Conversion of EEFC Account balances.

56. The NRI customers now have the option of hedging their FCNR/NRE (Rupee) accounts. Branches are permitted to book forward contracts on behalf of NRI customers.The norms/guidelines for booking the forward contracts for NRI customers are furnished in Annexure I.

Books, Registers and Forms:

1)Application for Forward Contracts2)Undertaking to be obtained from customer applying for Forward Contract3) Business Referred register for Forward Contracts4) Forward Purchase Contract Register5) Forward Sale Contract Register6) Forward Purchase Contract (F.258 revised)7) Forward Sale Contract (F.258-A revised)

APPENDICES A TO H GIVEN IN FX PERM 106 DATED 27.01.2011 TO BE ATTACHED WITH THIS CHAPTER OF BOOK OF INSTRUCTIONS AND MAY BE MADE AVAILABLE IN FED ONLINE.

ANNEXURE 1

Forward cover to NRI customers against FCNR/NRE (Rupee) Deposits:

AD branches are permitted to extend forward cover to holders of FCNR (B)/NRE (Rupee) accounts subject to the following conditions:

1. The value and maturity of the contract should not exceed the value/maturity of underlying deposits. Interest payable on such deposits is also eligible for cover.

2. The cost of covering the exchange risk (Hedging) should be met out of repatriable funds or through an inward remittance.

3. All outward remittances incidental to the hedge may be allowed by ADs without reference to RBI, after payment of tax, if any.

Other Conditions

1. Forward cover is available for FCNR (B)/NRE (Rupee) term deposits. No forward cover is available for balances lying in NRE(SB) accounts. If any customer desires to have a cover against the balance in his/her NRE SB accounts. He/she should be advised to transfer the balance to NRE term deposit account and then forward cover is to be provided.

2. NRI customers should be having NRE (SB)/CD Account for recovery of charges of forward cover or for crediting the gains/recovery of loss incidental to hedge. A letter (as per Annexure III) should be obtained from the customer.

3. Irrespective of the unexpired period of deposit, the forward cover will be available for a maximum period of six months only. For deposits of unexpired maturities of above six months, the customer may exercise the option of rebooking the contract after every six months after cancellation of the earlier contract.If a forward contract is booked for a deposit with unexpired maturity of more than six months and at the expiry of the contract, if there is any loss, party should provide enough funds in his NRE Account. Otherwise, authorisation letter should be taken from the depositor authorizing the Bank to prematurely close the deposit and from the proceeds to recover the loss if he does not provide funds for recovery on demand.

4. The gains incidental to hedge can be repatriated after crediting NRE SB/CD account and subject to payment of tax, as applicable The tax so recovered should be remitted to IT authorities under whose jurisdiction, the branches situated. The customer should be given necessary TDS certificate

5. If any FCNR (B)/NRE term deposit against which forward contract has been booked is sought to be prematurely closed, then the attendant forward contract is to be treated as a case of early delivery and dealt in the same manner as in case of exports. As swap charges are to be recovered, such requests for premature closures must be considered only after ascertaining the swap cost to be recovered by contacting Central Office, Treasury Foreign Department.

6. A separate register for forward contracts booked against FCNR (B)/NRE (Rupee) term deposit should be maintained giving all particulars of the contract and the charges recovered etc.

7. The charges prescribed by treasury Foreign, Chennai for booking of contracts should be recovered form NRI customer to the debit of his NRE (SB) account.

8. When forward contracts are booked, branches should mention in the respective term deposit ledger folios, a legend in the following manner:

Forward Contract No.

Forward Purchase/Sale Contract booked on

For a period of

Contract expiring on

Contract cancelled on

Delivery given or taken on

Assistant Manager Chief/Senior/Manager In the deposit receipt also, a notation should be made about the existing forward contract and at the time of cancellation forward contract and at the time of cancellation or delivery, this notation should be cancelled.

9. If a customer is having many deposits and has booked forward contract against some of the deposits and later seeks to substitute the deposits against which he has booked forward contracts with deposits (against which no contract has been booked), such requests may be considered by the branch. This is subject to the unexpired maturities of the substitute deposit being equal or more than the substitute deposits.

10. Except the deposit holding branch, no other branch can grant advance against deposit receipt for which forward contract has been booked. However, loan should be considered only on the residual portion of the deposit after cushioning for the portion for which contract is booked.If any FPC is outstanding against the deposit which is being renewed, branch should cancel/rebook FSC and inform Treasury (Foreign) of the same. The customer should also be informed about the resultant loss which has to be borne by them.

11. Where a deposit against which, forward contract has been booked is closed, and the forward contract is subsisting, the mention of forward contract with number and date should be made in the IBSA instrument through which closure proceeds are credit to Central Office and also in the closure report. Likewise, if such deposits are renewed, the mention of forward contract with number and date should be made in the renewal report.

12. NAD branches can also book forward contracts for their NRI customers through AD branches subject to conditions as above. NAD branches will retain the charges recorded incidental to booking of forward Contracts and credit the same to their P&L Account and such revenue need not be share with their AD branch. NAD branches will pass contra vouchers for forward contracts booked by AD branches in their books but the rupee value will be shown only as Re.1/- and in the books of AD branch, the actual rupee value will be shown.

13. The accounting procedure, passing of contra vouchers and reporting the forward contract and delivery under forward contract etc. are the same as in the case of any other forward contract.

14. As booking of forward contracts is fraught with risk, branches should be thoroughly aware of the procedures and should proceed carefully and systematically, NAD branches should consult their AD branches before booking any forward contract for their NRI customers.

ANNEXURE-II

Fixing of customer limit for booking Forward Contracts

1.Limits to book forward contracts should be fixed separately for forward purchase and forward sale contracts.

2.Limits should be assessed in the same manner as LC limits (for forward sale contract) and post shipment credit limits (for forward purchase contracts). The limit should not exceed the average of actual export/import figures for the preceding two years.

3.Branches should ensure that a firm exposure exists in the underlying transaction to book contracts to customers.

4. The limit to be fixed is neither treated as Fund Based nor Non-Fund Based. Forward contracts will not from part of the total indebtedness of the borrower and should not be aggregated for reckoning the single borrower exposure.

5. When an existing customer who enjoys regular fund based and non fund based limits from the Bank, but does not have forward contract limit, approaches the branch with firm exposure in underlying order to book forward contract, Branch Manager (first line) may permit booking of forward contracts after suitable appraisal, ascertaining the customers capability take up contract recovering appropriate margin, satisfying about the genuineness and nature of underlying transaction etc, subject to ceiling limit prescribed and getting confirmation from the competent authority who is authorized to sanction such limits.

6. Branch should get a certificate from the clients that the contracts booked have not been covered with any other AD and periodical declaration (say once a year) that the outstanding forward contracts are within the eligible level. The Companys Annual Auditors certificate required should include a clause certifying the above. If it appears from the Auditors certificate that the client had overbooked forward contracts, the same should be brought to the notice of RBI through Central Office.

7. Clients should be advised to indicate the extent of forward contract limits (separately for forward purchase and forward sale) required while submitting their proposal for renewal of other credit facility periodically.

8. Branches while entering into forward contracts should look into the credit worthiness of the party by taking into account:

(a)Whether the party has any underlying orders to the extent of contracts to be booked by him.(b)Whether the party commands enough market to replace the contract with fresh contract if the underlying contract is frustrated due to reasons beyond the control of the party.(c)Whether the party has enough resources to withstand the adverse movements of exchange rates in case the underlying contract is frustrated due to reasons beyond the control of party.

9.A minimum cash margin of 10% of the forward contract amount should be stipulated or collateral security for value not less than 10% of the forward contract amount should be generally obtained. If it is not feasible to take separate collateral for forward contracts done, residual value of collateral security already offered for other FB/NFB limits sanctioned can be taken. In deserving cases, depending on the standing of customer, the margin/security can either reduced or waived and this reduction/waiver has to be referred to next layer of authority.

10. For borrowers who are enjoying credit facilities with us, the layer of authority who is sanctioning the regular FB/NFB credit limits for export/import to the borrower may sanction the need-based limit to book forward contracts. For customers who are not enjoying credit facilities with us, discretionary power is vested with various layers of authority to fix forward contract limits.

11. Branch should continuously and closely watch the forward contracts by marking them to market on a daily basis (by watching daily exchange rates compared to the forward contract rates booked by the customers) and assess the extent to which the Bank stands exposed. If the exchange rates move against the customer and erode into the margin held by the Bank, the branch should immediately appraise the position to the customer and seek replenishment of margin should he desire to hold on to the contract. First of such margin call should be made by the branch when the margin is eroded by about 50%. A second margin call should be made on the party when the margin is eroded by about 75%.

12.If payment of exchange difference/swap cost is not received from the customer as and when due, then interest as applicable to overdue advances should be charged for such receivable from its due date. Waiver of such interest in case of necessity can only be sanctioned from the level of GM and above on case-to-case basis. If swap cost(s) are not paid within a month from the due date of the contract/cancellation of the contract, further forward contracts should not be booked/entertained unless authorized by next layer of authority.

13.Branches should send a monthly statement of Forward Purchase Contract/Forward Sale Contract outstanding as on last day of each month to their respective Regional Office under copy to Territorial Office concerned and Treasury Foreign, Chennai (Merchant Contracts Section). Regional Offices should ensure timely submission of the statement by branches. ROs should monitor the performance /cancellation of the forward contracts effectively. Treasury Foreign, Chennai will assess the risk exposures with the month end rate vis--vis contract rate and alert branches/ROs concerned where warranted.

14. The forward contract limits will be monitored by branch and credit departments at RO/CO. Treasury Foreign Department will maintain details of party wise exposures and reconcile its books with branches monthly statement of outstanding contracts as per their books. If on any day, the exchange rates move by more than 10% of the previous days close, Treasury Foreign Department will advise such change to all Major Regional Offices by telex/telephone/fax. The Regional Office concerned should alert the major branches in their Region and make a review of all outstanding contracts.

ANNEXURE III

FORMAT OF LETTER TO BE OBTAINED FROM THE CUSTOMERS

From:(Name and address of the customer) Place: . Date :

To The Chief/Senior/Manager,Indian Overseas Bank, Branch Dear Sir.

BOOKING OF FORWARD PURCHASE/SALE CONTRACT

With reference to my/our request for booking forward contract to hedge the exchange risk attendant to my outstanding FCNR (B) deposits/NRE (Rupees) term deposits (details as given below), I/We am/are fully aware that this forward contract may also result in a loss, which will be determined by the Bank.In such an eventuality, I/We undertake to provide sufficient funds immediately on demand from the Bank in my/our NRE (Rupees) SB account/Current account for effecting the necessary recovery of such loss and any other charges incidental to the forward contract.If, I/We am/ are unable to fund this loss, I/We hereby authorise the Bank to prematurely close the deposit and recover their dues with commercial rate of interest.I/We also undertake that I/we, seek premature closure of the deposit when there is an outstanding forward contract against the deposit, the outstanding forward contract will be deemed to have been cancelled before the expiry and bank will be in order to recovery the swap charges on account of such cancellation either from my/our NRE (Rupee) SB/CA account or from the proceeds of the prematurely closed deposit.

DETAILS OF THE DEPOSIT AGAINST WHICH FORWARD CONTRACT IS SOUGHT.Types of Deposit Deposit Number Date of Deposit

Amount of Deposit

Due Date

Name(s) of The Depositor(s)

Yours faithfully,

(Signature (s) of the depositor (s)