Un hedged foreign currency exposure certificate-Group Companies

Hi Jayanta,

Your question relates to unhedged foreign currency exposure (FCE) and the practice of group companies — specifically an LLP and a parent unlisted public company — handling hedging at the group level rather than individually.

Key points and guidance:

1. Unhedged Foreign Currency Exposure Certificate:

   • The Reserve Bank of India (RBI) requires entities to obtain a certificate from their statutory auditor or cost auditor confirming the status of unhedged foreign currency exposure (FCE).

   • This certificate is often required for regulatory or compliance purposes, e.g., for loans, ECBs, or FEMA compliance.

2. Hedging by Group Companies:

   • Typically, each legal entity is expected to manage its own foreign currency risk and obtain the auditor’s certificate individually.

   • However, some group companies do hedge their foreign currency risk at the consolidated/group level, especially when entities are closely held or effectively integrated financially.

   • This can allow one entity (e.g., the parent company) to hedge the combined exposure of the group.

3. Can LLP and Company hedge jointly if partners/members overlap only ~60%?

   • The LLP and the parent company are separate legal entities.

   • Common ownership of 60% may indicate control or significant influence, but they are still independent.

   • RBI/FEMA guidelines do not explicitly permit an LLP to rely on the parent company’s hedge for its own unhedged exposure certificate.

   • Generally, the auditor’s certificate for unhedged exposure must pertain to the entity’s own exposure and hedging.

   • The fact that partners and members overlap partially (~60%) does not automatically merge their exposures.

4. Legal and compliance risks:

   • Relying on the parent company’s hedge to claim “no unhedged exposure” for the LLP may not be accepted by RBI or other regulatory authorities.

   • Each entity should maintain its own risk management and get a certificate accordingly.

   • In case of an audit or regulatory scrutiny, this approach might be challenged.

5. What to do practically?

   • The LLP should maintain its own foreign currency exposure records.

   • If the LLP does not hedge its exposure, it must report that as unhedged in its certificate.

   • If the group wants to hedge exposure at the group level, inter-company arrangements (like loans or forward contracts between entities) need to be structured properly.

   • Consider getting a legal/regulatory opinion if you want to pursue group-level hedging formally.

Summary:

• The unhedged FCE certificate must reflect the individual entity’s exposure and hedging.

• Partial common ownership is not sufficient to allow LLP to rely on parent company’s hedge.

• For compliance and audit, treat LLP and company exposures separately.