Indian companies rush for cover as rupee falls

A large number of Indian corporations with exposure to dollar debt are now caught in a bind with the rupee's fall against the dollar. Bankers say companies, without an export or forward cover, can buy a derivative product called "common strike seagull" to ring-fence their dollar exposure in case the rupee falls further.

This product is suitable for companies that do not have a natural hedge like exports or dollar-denominated revenues ,such as shipping companies or offshore rig suppliers. Some of the top Indian companies like Idea (with $1 billion exposure), Adani group, and Tata Steel have significant foreign debt exposure.

The common strike seagull, which will be ideal in today's scenario, is to leave behind all gains that may accrue to the rupee in the event of appreciation, say chief financial officers of leading companies. Since the rupee is expected to depreciate in future, it is a no-brainer that the option of rupee appreciating will be marginal.

No matter how marginal it is, Indian companies can actually sacrifice that and use that as a subsidy to fund its future high-end cover cost. "In effect, part of the future cover cost will be taken care of by the savings that could be made through possible rupee appreciation anticipated," says Prabal Banerjee, president-international finance of Essar group. "Once this structure is adopted, all future rupee depreciation will be partly offset by the gain from possible rupee strength and the actual cost of coverage will be reduced to that extent as determined well in advance," he says.

In this structure, a company can have a call at the current spot or even at lower level and can sell a put at, say, Rs 68 or Rs 70. Take for example, if rupee appreciation is expected to be around Rs 3 a dollar and rupee depreciation should be around Rs 10, then corporates would get a relief to the extent of three and his cost will come down to Rs 7 a dollar. "With the rupee touching 66 and a clear trend to depreciate down to 69/70 a dollar, corporate India now cannot hold back its forex coverage strategy any more and need to adopt one and most importantly, implement now before it becomes too late. This is applicable for both category of companies - certainly for corporates who do not have a natural hedge - but also for corporates who have a natural hedge - since there will be big time opportunity loss, as it were," Banerjee added.

What is common strike seagull?
A company can book a call at the current spot or even at lower level and can sell a put at say a ~68 or 70 to a dollar. This way, by sacrificing the part or entire quantum of the gain, they can subsidise the cost of forwards accordingly, and can help in reducing the effective cost of hedging.