Metal firms on high over commodity hedging nod

The Reserve Bank of India (RBI), given the comfortable foreign exchange reserves, on Saturday allowed listed companies to hedge price risks in non-agri commodities, barring gold, silver, petroleum and petroleum products, in the international markets.

The apex bank's decision will improve local metal companies' competitiveness in handling foreign exchange and substantially curb unauthorised forex transactions.

All metal companies would utilise the opportunity by hedging their open positions in international markets, said an executive with a top metal firm.

The apex bank has allowed commercial banks having owned capital of Rs 300 crore, capital adequacy ratio of more than 9 per cent, net non-performing asset to advances ratio of less than 4 per cent and with a record of profit for the last three years to act as forex authorised dealers for companies.

Capital adequacy refers to the preparedness of banks to provide capital to a certain risk - be it for interest rate or credit. Non-performing assets comprise those which remain unrecovered even above the standard period of 90 days.

"We have been lobbying for this for many years. The RBI decision will make us at par with developed companies on forex management," said metal industry sources.

Metal companies involved in the businesses of steel, copper, aluminium and zinc would start utilising the opportunity as early as possible. The total forex exposure of the metal companies is quite big. For example, steel companies have a combined foreign exposure of Rs 15,000 crore.

An executive with a steel company said most domestic firms now minimise their foreign exchange risk by trading through their associate companies based in Dubai, Singapore, London and New York.

"We won't need to have associate companies in an overseas location to mitigate our foreign risk which will reduce hawala transaction," he added.

Now, companies are allowed to hedge commoditities, which are imported raw material for production. For example, a company is allowed to hedge copper concentration, an important raw material for copper, if it imports this commodity. But the company is not permitted to hedge another commodities, for example, zinc and bauxite.

With the new decision, the companies will be allowed to hedge any commodity, subject to physical back-up. "This provides a level playing field to Indian commodity players with their counterparts in the world market," sources said.