RBI permits Oil companies to hedge in overseas markets

Mumbai, Jun 3 (UNI) Reserve Bank of India today issued notification to allow domestic refining companies to hedge their commodity price risk on domestic purchase of crude oil and sale of petroleum products on the basis of underlying contracts linked to international prices on overseas exchanges or markets.

The hedging would be allowed strictly on the basis of underlying contracts.

As per the prevailing trade practices, indigenously produced crude oil is purchased at international prices by the refineries.

However, hedging of price risk on domestic purchases of crude oil was not permitted. In November last year, domestic oil refining and marketing companies were permitted to hedge commodity price risk based on the inventory volumes, subject to conditions.

Companies engaged in crude oil refining and marketing have been representing to the Reserve Bank for further liberalisation of hedging facilities for petroleum and petro products in view of the volatile prices in the market.

The RBI to provide greater flexibility has also decided to permit domestic crude oil refining companies to hedge their commodity price risk on crude oil imports in overseas exchanges or markets, on the basis of their past performance up to 50 per cent of the volume of actual imports during the previous year or 50 per cent of the average volume of imports during the previous three financial years, whichever is higher. Contracts booked under this facility would have to be regularised by production of supporting import orders during the currency of hedge. An undertaking may be obtained from the companies to this effect.

The hedging has to be undertaken only through Authorised Dealer (Category-I) banks, who have been specifically authorised by Apex Bank. It said that while extending the hedging facilities, the Banks should ensure that the domestic crude oil refining companies hedging their exposures should have Board approved policies that define the overall framework within which derivatives activities are undertaken and the risks contained and have the Board sanction for the specific activity and also for dealing in OTC markets.

The Board approval must include explicitly the mark-to-market policy, the counterparties permitted for OTC derivatives and domestic crude oil companies should have put up the list of OTC transactions to the Board on a half yearly basis, which must be evidenced by the bank before permitting continuation of hedging facilities under this scheme.

UNI VK GR AG1941