The Reserve Bank of India, through a recent notification, has opened up hedging opportunities for Indian companies in commodities by allowing them to use over-the-counter futures contract based on average prices on international commodity exchanges.
It has also allowed corporates to cancel an option contract by entering into an opposite transaction with the same broker.
When commodity hedging was opened to Indian corporates in the fourth quarter of 1998, companies were only permitted to trade in standard exchange-traded futures contracts/options (purchases only).
In standard contracts, the quality, quantity, delivery time for the commodity and location were fixed and price was the only variable. However, not many Indian corporates could utilise the facility as the base sums were very high and not suitable for Indian commodity companies for their exposures.
The over-the-counter (OTC) futures contract would be a customised contract where factors like quantity are variable. The commodity brokers would now customise contracts to suit specific buyer and seller needs.
"Allowing OTC contracts will
provide the much-needed flexibility for the larger players and also allow smaller trading or export houses to enter into different contracts,'' a source at a leading commodity brokerage house said.
The average price mechanism (monthly basis) is the most acceptable in leading commodity markets for copper and aluminium.
With RBI specifying that the OTC futures contract would be based on average price, it will be advantageous for several gold trading houses like MMTC and Intergold, and open up the markets further for non-ferrous metal players. Sources said the OTC futures contract is a huge market in several commodities including gold, metals, cotton, soya and palmolein, across the US and Asian markets. Smaller players, who import gold or purchase from import houses for export commitments will also now enter the business of hedging of commodity exposures.
