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Tuesday, November 11, 2008

[FEMA]StandbyLetterOfCredit/BankGuarantee-OverseasCommodityDerivativeContractUPTO 1 year

A.P. (DIR Series) Circular No.35

10th November 2008

Remittance related to Commodity Derivative Contract
Issuance of Standby Letter of Credit / Bank Guarantee

Attention of Authorised Dealer Category - I (AD Category-I) banks is invited to Regulation 8 of Notification No.FEMA.25/2000-RB dated May 3, 2000 viz. Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000, as amended from time to time, regarding remittance of foreign exchange related to commodity derivative contract undertaken in accordance with the regulations.

2. The Reserve Bank has been receiving requests from banks for issuance of bank guarantee / standby letter of credit, in lieu of making a direct remittance towards payment obligations arising out of commodity derivative transactions entered into by customers with overseas counterparties. With a view to providing greater flexibility to resident entities who have such payment obligations related to commodity derivative contracts, it has been decided that AD Category-I banks may issue guarantees / standby letters of credit to cover these specific payment obligations subject to the conditions / guidelines given in the Annex to this Circular.

3. AD Category-I banks may issue guarantees / standby letters of credit only where the remittance is covered under the delegated authority or under the specific approval granted for overseas commodity hedging by the Reserve Bank.

4. The issuing bank shall have a Board approved policy on the nature and extent of exposures that the bank can take for such transactions and should be part of the credit exposure on the customers. The exposure should also be assigned risk weights, for capital adequacy purposes as per the extant provisions.

As per the Guideline,
1. It is to be issued for the specific purpose of payment of margin money [not exceeding the margin payments made to the specific counterparty during the previous FY] in respect of approved commodity hedging activities of the company.

2. After marking a lien & for a period UPTO 1 year & compliance of guidelines for overseas commodity hedging.

3. Broker's month-end reports duly confirmed / countersigned by corporate's financial controller have to be submitted and verified by the bank to ensure that all off-shore positions are / were backed by physical exposures.


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