What changed
RBI clarified that the June 2013 circular on FII sub-account hedging also applies to Participatory Notes (PN) and Overseas Derivative Instruments (ODI). FIIs now need a mandate from PN/ODI holders for hedge contracts, and AD banks may accept a declaration from the FII if direct mandate verification is difficult.
What it means for you
Banks must ensure FII clients have proper mandates from PN/ODI holders before executing hedges. This adds a compliance layer but allows a practical alternative—accepting a declaration—when verifying individual mandates is challenging. It tightens oversight on derivative-linked exposures.
What you must do
- Update internal FEMA compliance checklists to include PN/ODI mandate requirements for hedge contracts.
- Train forex dealing and compliance teams on the new declaration option for cases where mandate verification is difficult.
- Advise FII clients to maintain clear mandates from PN/ODI holders for all hedging transactions.
- Document all declarations obtained from FIIs regarding PN/ODI structure and hedge necessity.
Who it affects
AD Category I banks handling FII hedging, FIIs issuing Participatory Notes or Overseas Derivative Instruments, Compliance and forex dealing teams
What is the key change for FIIs with PN/ODI?
FIIs must now have a mandate from each PN/ODI holder before hedging rupee exposure on securities backing those instruments. If verifying each mandate is impractical, AD banks can accept a declaration from the FII.
Can AD banks skip mandate verification entirely?
No. Banks must verify mandates where possible. Only when verification is rendered difficult may they accept a declaration from the FII about the PN/ODI structure and hedge necessity.
Does this circular apply to all FII sub-accounts?
It specifically addresses PN/ODI issued by FIIs. The earlier June 2013 circular already covered sub-account hedging; this extends similar mandate requirements to PN/ODI holders.