What changed
Previously, FIIs could only hedge currency risk on their entire equity/debt investment using forwards and options. Now, for IPO flows under ASBA, RBI has specifically allowed foreign currency-rupee swaps, with a maximum tenor of 30 days and strict conditions on amount and rebooking.
What it means for you
Banks can now offer FIIs a new hedging tool for short-term IPO capital flows, reducing currency risk for these transient investments. However, the strict conditions (no rebooking, no rollover, 30-day cap) limit flexibility and require careful monitoring by AD Category-I banks.
What you must do
- Update internal policies to permit FIIs to enter foreign currency-rupee swaps for IPO flows under ASBA, subject to the 30-day tenor and amount limits.
- Ensure that swap contracts are not rebooked or rolled over, and that the amount does not exceed the proposed IPO investment.
- Communicate these guidelines to FII clients and relevant treasury teams, and maintain records for compliance.
- Monitor all such swap transactions to prevent misuse beyond IPO hedging under ASBA.
Who it affects
AD Category-I banks, Foreign Institutional Investors (FIIs), Treasury and forex dealing desks, Compliance and risk management teams
What is the maximum tenor allowed for these swaps?
The swap tenor cannot exceed 30 days.
Can an FII rebook or roll over a swap contract under this facility?
No, once cancelled, the contract cannot be rebooked, and rollovers are not permitted.
Does this circular replace the existing hedging guidelines for FIIs?
No, it only adds a specific facility for IPO flows under ASBA; existing guidelines for hedging overall investment remain unchanged.