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FII Hedging for PN/ODI: Mandate Rules Clarified

Current · Source: Reserve Bank of India · RBI/2013-14/169 · issued 01 Aug 2013 · ~2 min read
Quick answerRBI clarifies that FIIs must obtain a mandate from PN/ODI holders before hedging rupee exposure on securities backing those instruments. AD banks can accept a declaration from FIIs if verifying individual mandates is impractical.
The rule, in the simplest words
How it plays out — a real example

Rohit, a foreign‑investment officer at an AD Category‑I bank in Mumbai, gets a request from an FII to hedge rupee risk on a PN. He first looks for the written permission from the PN holder; when the holder is overseas and cannot send the document quickly, Rohit accepts the FII’s signed declaration that a specific mandate is in place, records it, and proceeds with the hedge, feeling confident that the bank is following RBI guidance.

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

Who it affects

AD Category I banks handling FII hedging, FIIs issuing Participatory Notes or Overseas Derivative Instruments, Compliance and forex dealing teams

❓ Common questions

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.

📜 Read the original circular — full text as issued by RBI
RBI/2013-14/169 A.P. (DIR Series) Circular No. 18 August 1, 2013 To, All Category - I Authorised Dealer Banks Madam / Sir, Risk Management and Inter-bank Dealings Attention ofAuthorised 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 sub-account. 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. 3. AD category banks may bring the content of this circular to the notice of their constituents. 4. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions /approvals, if any, required under any other law. Yours faithfully, (Rudra Narayan Kar) Chief General Manager-in-Charge
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2013-14/169 · issued 01 Aug 2013. The plain-English explanation above is BankPulse’s own independent summary.
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Worked example & action-note template

Example: if you are a Compliance officer at a bank this circular applies to (AD Category I banks handling FII hedging, FIIs issuing Participatory Notes or Overseas Derivative Instruments, Compliance and forex dealing teams), your first concrete step on “FII Hedging for PN/ODI: Mandate Rules Clarified” is: “Update internal FEMA compliance checklists to include PN/ODI mandate requirements for hedge contracts.” (RBI issued this 01 Aug 2013).

  1. Circular: RBI/2013-14/169 -- FII Hedging for PN/ODI: Mandate Rules Clarified
  2. Issued: 01 Aug 2013
  3. Action required: Update internal FEMA compliance checklists to include PN/ODI mandate requirements for hedge contracts.
  4. Action required: Train forex dealing and compliance teams on the new declaration option for cases where mandate verification is difficult.
  5. Action required: Advise FII clients to maintain clear mandates from PN/ODI holders for all hedging transactions.
  6. Action required: Document all declarations obtained from FIIs regarding PN/ODI structure and hedge necessity.
  7. Owner: ____________ Target date: ____________
  8. Board/committee approval needed? Y / N
  9. Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.

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Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8284&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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