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RBI/2008-09/277 dated 10.11.2008


A.P. (DIR Series) Circular No.35

November 10, 2008


All Category - I Authorised Dealer Banks

Madam / Sir,

Remittance related to Commodity Derivative Contract

Issuance of Standby Letter of Credit / Bank Guarantee

Attention of Authorised Dealer Category - I (AD Category-I) banks is invited to

Regulation 8 of Notification No.FEMA.25/2000-RB dated May 3, 2000 viz. Foreign

Exchange Management (Foreign exchange derivative contracts) Regulations, 2000, as

amended from time to time, regarding remittance of foreign exchange related to

commodity derivative contract undertaken in accordance with the regulations.

2. The Reserve Bank has been receiving requests from banks for issuance of bank

guarantee / standby letter of credit, in lieu of making a direct remittance towards

payment obligations arising out of commodity derivative transactions entered into by

customers with overseas counterparties. With a view to providing greater flexibility to

resident entities who have such payment obligations related to commodity derivative

contracts, it has been decided that AD Category-I banks may issue guarantees /

standby letters of credit to cover these specific payment obligations subject to the

conditions / guidelines given in the Annex to this Circular.

3. AD Category-I banks may issue guarantees / standby letters of credit only where the

remittance is covered under the delegated authority or under the specific approval

granted for overseas commodity hedging by the Reserve Bank.

4. The issuing bank shall have a Board approved policy on the nature and extent of

exposures that the bank can take for such transactions and should be part of the credit

exposure on the customers. The exposure should also be assigned risk weights, for

capital adequacy purposes as per the extant provisions.

5. AD Category-I banks may bring the contents of this circular to the notice of their

constituents concerned.

6. Necessary amendments to the Notification No.FEMA.8/2000-RB dated May 3, 2000

viz. Foreign Exchange Management (Guarantees) Regulations, 2000, is being issued


7. The directions contained in this circular have been issued under Section 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,

Salim Gangadharan

Chief General Manager-in-Charge


[Annex to A.P.(DIR Series) Circular No.35

dated November 10, 2008]

Conditions / Guidelines for issuance of standby letter of credit /

bank guarantee - commodity hedging transactions

1. The standby letter of credit / bank guarantee may be issued for the specific

purpose of payment of margin money in respect of approved commodity

hedging activities of the company.

2. The standby letter of credit / bank guarantee may be issued for an amount not

exceeding the margin payments made to the specific counterparty during the

previous financial year.

3. The standby letter of credit / bank guarantee may be issued for a maximum

period of one year, after marking a lien on the non-funded facility available to

the customer (letter of credit / bank guarantee limit).

4. The bank shall ensure that the guidelines for overseas commodity hedging

have been duly complied with.

5. The bank shall ensure that broker's month-end reports duly confirmed /

countersigned by corporate's financial controller have been submitted.

6. Brokers' month end reports shall be regularly verified by the bank to ensure

that all off-shore positions are / were backed by physical exposures.


CA. Shikha
on 11 November 2008
Published in Others
Source : ,

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