What changed
Previously, only select AD banks could approve commodity hedging; now all AD Category-I banks with RBI permission can approve freight hedging for oil-refining and shipping companies. The circular sets specific conditions: one-year maximum tenor, plain vanilla products, and underlying exposure based on actual contracts or past performance (50% of imports for oil firms, owned ships for shipping firms).
What it means for you
Banks gain greater autonomy to approve freight hedging, reducing the need for case-by-case RBI approval. This streamlines risk management for oil-refining and shipping companies, but banks must enforce strict compliance: Board-approved risk policies, documentation of underlying exposure, and half-yearly reporting. Non-compliance could expose banks to regulatory action.
What you must do
- Verify that your bank has RBI permission to approve commodity hedging before offering freight hedging.
- Ensure oil-refining and shipping companies have Board-approved risk management policies covering derivatives, mark-to-market, and counterparties.
- Obtain and review underlying documents (import/export orders, ship employment) and past performance data for oil firms (50% of previous year's imports or 3-year average).
- Require shipping companies to provide a Chartered Accountant certificate for owned/controlled ships and ensure hedges reflect underlying business.
- Monitor compliance: collect half-yearly transaction reports from companies and ensure contracts are regularized during hedge currency.
Who it affects
AD Category-I banks with RBI permission for commodity hedging, Domestic oil-refining companies, Domestic shipping companies, Other companies exposed to freight risk (must approach RBI separately)
What is the maximum tenor allowed for freight hedging under this circular?
The maximum tenor permissible is one year forward.
Can oil-refining companies hedge freight on anticipated imports?
Yes, up to 50% of the volume of actual imports in the previous year or 50% of the average volume over the previous three financial years, whichever is higher, based on past performance.
What documentation must shipping companies provide to the bank?
A Chartered Accountant certificate for owned/controlled ships, and underlying documents (e.g., ship employment) during the hedge currency. An undertaking to produce these documents is also required.