India is perhaps the only country where government policies are flagrantly violated with impunity and inappropriate policies are egregiously formulated to the obvious detriment of the country.
RBI has issued a circular on 1st August as follows:
Risk Management and Inter-bank Dealings
"Attention of Authorised Dealers Category – I (AD Category I) banks is invited to
AP (DIR) Circular No. 121 dated June 26, 2013 wherein it was clarified that if an
FII wishes to hedge the Rupee exposure of one of its sub-account holders, it
should be done on the basis of a mandate from the sub-account holder for the
purpose and that the AD bank should verify the same along with the eligibility of
the contract vis-a-vis the market value of the securities held in the concerned subaccount.
2. In this context, the Reserve Bank has been receiving enquiries as to the
applicability of the clarifications issued in the aforesaid circular to Participatory
Notes(PN) /Overseas Derivative Instruments(ODI) issued by the FIIs. It is
therefore clarified that if an FII wishes to enter into a hedge contract for the
exposure relating to that part of the securities held by it against which it has
issued any PN/ODI, it must have a mandate from the PN/ODI holder for the
purpose. Further, while AD Category bank is expected to verify such mandates, in
cases where this is rendered difficult, they may obtain a declaration from the FII
regarding the nature/structure of the PN/ODI establishing the need for a hedge
operation and that such operations are being undertaken against specific
mandates obtained from their clients."
RBI has issued a circular on 1st August as follows:
Risk Management and Inter-bank Dealings
"Attention of Authorised Dealers Category – I (AD Category I) banks is invited to
AP (DIR) Circular No. 121 dated June 26, 2013 wherein it was clarified that if an
FII wishes to hedge the Rupee exposure of one of its sub-account holders, it
should be done on the basis of a mandate from the sub-account holder for the
purpose and that the AD bank should verify the same along with the eligibility of
the contract vis-a-vis the market value of the securities held in the concerned subaccount.
2. In this context, the Reserve Bank has been receiving enquiries as to the
applicability of the clarifications issued in the aforesaid circular to Participatory
Notes(PN) /Overseas Derivative Instruments(ODI) issued by the FIIs. It is
therefore clarified that if an FII wishes to enter into a hedge contract for the
exposure relating to that part of the securities held by it against which it has
issued any PN/ODI, it must have a mandate from the PN/ODI holder for the
purpose. Further, while AD Category bank is expected to verify such mandates, in
cases where this is rendered difficult, they may obtain a declaration from the FII
regarding the nature/structure of the PN/ODI establishing the need for a hedge
operation and that such operations are being undertaken against specific
mandates obtained from their clients."
It was earlier stipulated with justification by RBI that FIIs be
not allowed to take positions on the rupee, ostensibly on behalf of subaccounts
including PNs where the beneficiary remains anonymous, and thus create more
pressure on the rupee. A self-declaration by the FIIs would obviously be
self-defeating and therefore the banks were advised to verify the
need for 'hedging' by FIIs. The amendment dated 1st August dilutes the
guideline to a substantial extent. This amendment only serves to continue to
protect the anonymity of PN beneficiaries aka round trippers of funds. Needless
to say, the Finance Ministry is a votary of PNs. Poor RBI, they are unable to
resist the pressure from the ministry beyond a certain level. Learned prime minister continues to be blissfully inattentive to what is happening.
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