Onus On Corporates To Prove Genuineness Of Foreign Exchange

The Reserve Bank of India (RBI) has shifted the onus of proof on the genuiness of an underlying transaction from the commercial banks to the corporates opting for foreign currency hedge products.

This will do away with a lot of procedural delays, bankers point out.

Corporates seeking to hedge their foreign currency loan exposures will now have to provide the bank with a report, prepared by the companys auditors, which will indicate whether or not a corporate does have a genuine risk exposure.

The bank will be able to sell the product to the corporate on the basis of this document, without having to verify the genuineness of the risk exposure.

 

Hence, in case of a stand alone transaction, it will be the corporate who will be answerable to the regulatory authority and not the bank.

Market analysts see this move as yet another step by the apex bank to ask corporates to shore up their forex risk management systems in view of the intended deepening of forex markets.

Following the credit policy, the central bank had sent a clear instruction to corporates that they would have to brush up their forex risk management systems by asking them to fix for themselves, the limits for their bankers to book/cancel/rebook contracts or to manage exchange risk to be submitted to the bank.

This was before they sought to book the forward cover based on their business projections.

Corporates opting for foreign currency loans can safeguard or hedge against any exchange rate or interest rate risk by opting for products such as interest rate swaps, currency swaps, coupon swaps, among others.

Earlier, companies had to submit various documents, including original loan agreement and repayment schedule,

which had to be vetted and verified by the banker. This, apart from being a cumbersome procedure, also made banks answerable in case of a `stand alone deal. Now, the corporate has to submit, among other prescribed reports, an annual certificate from the statutory auditors that the company has complied with all the prescribed terms and conditions of the bank.

Besides, the bank can simply book such a contract based on the chartered accountants certificate.

Hence, the bank does not have to worry about the genuineness of the case and can concentrate on booking the deal.

Other prescribed documents which the corporate will have to submit include:

(a) A report showing the details of the transactions concluded (booked as well as cancelled), duly countersigned by the authorised dealer, to theReserve Bank of India within a week from the date of conclusion of the transaction;

(b) A quarterly report to the corporates board furnishing details of all such transactions and a copy thereof alongwith a copy of the boards resolution to the bank.