RBI raises ceiling for derivatives

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The Reserve Bank of India (RBI) issued a circular on 26 February permitting persons resident in India and foreign portfolio investors (FPIs), under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014, to take long and short positions without having to establish the existence of underlying exposure. The RBI set a single limit of a US$100 million equivalent across all currency pairs involving Indian rupees, put together and combined across all exchanges.

Under the former framework, persons resident in India and FPIs were allowed to take a long or short position in rupees-US dollars up to US$15 million per exchange without having to establish existence of underlying exposure, and take long or short positions in rupees-euros, rupees-British pounds and rupees-Japanese yen pairs, all put together up to US$5 million equivalent per exchange without having to establish existence of an underlying exposure.

The onus of complying with the above-mentioned limits rests with the concerned participant in the exchange-traded currency derivative market as per the circular, and an obligation to monitor the limits was placed upon the exchanges, along with an obligation to report any breach of limits to the RBI.

As per the revised limits, the Securities and Exchange Board of India issued a circular on 15 March prescribing certain conditions on the same subject, modifying the former conditions prescribed in 2015 based on revised limits introduced in February 2018.

The key conditions are as follows: (1) FPIs must ensure that their short positions at all stock exchanges across all contracts in foreign currency and rupee pairs do not exceed US$100 million; (2) in the event an FPI breaches the short position limit, stock exchanges must restrict the FPI from increasing its existing short positions or creating new short positions in the currency pair until such time the FPI complies with the requirement; (3) FPIs wanting to take long positions in excess of US$100 million in all contracts in foreign currency and rupee pairs are required to have an underlying exposure in Indian debt or equity securities, including units of equity/debt mutual funds; and (4) domestic clients may take positions in excess of US$100 million in all contracts in foreign currency and rupee pairs, subject to other existing conditions prescribed by the RBI.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.