FAQs on ECB (External Commercial Borrowings) hedge regulation
Forex Hedging |
Updated on: 1st November 2021
Q. Is hedging of FCY (foreign currency) denominated ECB, mandatory for a manufacturing company?
A. No
Q. Is hedging of FCY denominated ECB, mandatory for an infrastructure space company?
A. If the average maturity is less than 5 years, 70% of the ECB exposure is to be hedged mandatorily.
Q. What constitutes an infrastructure space company?
A. Companies in the infrastructure sector, non-banking finance companies undertaking infrastructure financing, holding companies/ core investment companies undertaking infrastructure financing, housing finance companies regulated by National Housing Bank, and Port Trusts.
Q. Is the forex exposure on interest also to be taken into account when calculating the mandatory amount for hedging?
A. Yes
Q. Is there any regulation on the tenor of the hedging?
A. Yes. A minimum tenor of one year is required with rollover so that at any point in time the mandatory part is hedged for infrastructure space companies. For other companies, there is no restriction on hedging tenors.
Q. Is the interest rate hedging mandatory in case of ECB hedging?
A. No. But if someone wants to calculate the exact exposure, then the floating rate needs to be fixed.
Q. Can INR ECB be converted into FC liability?
A. No, it is not permitted.
Q. What are the permitted products to hedge ECB?
A. For retail users – swaps (Principal Only Swap, Coupon Only Swap, Cross Currency Swap, Interest Rate Swap), forwards, plain vanilla call option and call spreads. For non-retail users – all the products that retail users can use plus other cost reduction structures and exotic options allowed by RBI.
Q. Can any product be used for mandatory hedging requirements (70% minimum)?
A. The intent of the regulation is a full hedge and hence products which have a cap on protection, such as call spreads, might not be permitted.
Q. Can one try to achieve cost reduction in hedging ECBs through dynamic management and option structures within the regulatory framework?
A. For non-infrastructure space companies, the 100% of the ECB amount can be kept unhedged and hence they have the flexibility to manage the same through partial hedging/full hedging with option instruments. By dynamic management with a target cost, one can aim at achieving lower effective INR cost. For infrastructure space companies, the same flexibility is available for 30% of the notional. Even within 70% portion, strategies such as forward/option rollover switching can help reduce costs.