Since we are getting questions on what Contracted Exposure means, here is a short note:
RBI defines contracted exposure in the following way:
‘Contracted exposure’ means currency risk arising on account of current or capital account transactions permissible under the FEMA, 1999 or any rules or regulations made thereunder, that have been entered into.
Explanation for the purpose of the above:
(i) The term ‘exposure’ shall also include exposures arising out of transactions between residents that are denominated in a foreign currency or are linked to a foreign currency or are linked to a benchmark denominated in foreign currency, but settled in INR; and
(ii) The term ‘exposure’ shall not include exposures arising from foreign exchange derivative and foreign currency interest rate derivative transactions undertaken for purposes other than hedging.
Here is the list of permissible capital account transactions under FEMA -
a) Investment by a person resident in India in foreign securities.
b) Foreign currency loans raised in India and abroad by a person resident in India.
c) Transfer of immovable property outside India by a person resident in India.
d) Guarantees issued by a person resident in India in favour of a person resident outside India.
e) Export, import and holding of currency / currency notes.
f) Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India.
g) Maintenance of foreign currency accounts in India and outside India by a person resident in India.
h) Taking out of insurance policy by a person resident in India from an insurance company outside India.
i) Loans and overdrafts by a person resident in India to a person resident outside India.
j) Remittance outside India of capital assets of a person resident in India.
k) Undertake derivative contracts
In simple words, you can trade currencies if you are directly undertaking any currency risk from contracts that foreign currency regulations allow you to undertake.
This includes ESOPs? Also there are RSUs (Restrictive stock units). Most IT folks have them. Amazon issues these for example to employees. Are they considered as securities?
Even though ESOPs and RSUs are not securities, they are contracts one enters into that FEMA does not restrict. Since currency risk is present, unless a specific definition is separately issued by the stock exchanges or RBI, it seems fair to include them as contracts that can be hedged.
Having said this, I am not an expert on FEMA rules, but this is how I am reading the definition.
No other leading brokers are squaring off the positions on their own and it is at the discretion of the clients. As usual Zerodha is overzealous and taken it upon themselves- which will expose them lawsuits
Exactly
All other brokers are on “square-off” mode - which they have very clearly mentioned as a time period when old positions can be closed and new ones can’t be taken.
IT IS ONLY ZERODHA WHICH IS THREATNING TO SQUARE OFF THE POSITIONS IN ABSENCE OF A DECLARATION.
There is no NSE / BSE/ SEBI / RBI mandate to square off the positions by the “Brokers”. All other leading brokers are giving the responsibilty to the clients. This is applicable only for the fresh positions as per para 3 of the RBI circular and NOT on existing positions.
It’s ever evolving We may not square off positions tomorrow ourselves, and let users square it off on their own since the onus of complying is on the client.
It’s ever evolving We may not square off positions tomorrow ourselves, and let users square it off on their own since the onus of complying is on the client.
Again, the confusion is because RBI has maintained that this has always been the rule and the recent circular is just a reiteration of the earlier circular. Again, we will keep everyone updated on Bulletin.
We have cautioned users through a nudge. From tomorrow, we will also put clients on square off mode. New positions will be allowed only if the clients have provided the declaration.
But your alert does not say that ! Why don’t Zerodha clarify that the clients will be allowed to square off on their own rather than assuming the responsiblity to themselves. Your Alert has caused the market to dry up completely as everybody wants go come out fearing Zerodha action.
Let us not forget that Zerodha is the largest broker and what they do impacts the market and they have to act responsibly
Ah no. I don’t think you should declare exposure on that logic. FEMA violation is not a light problem. If I were you I would have exposure only under two circumstances
I own US stocks or bonds denominated in US Dollar
I have ESOPs in US Dollar
Even then there are open questions like what will happen if these stocks fluctuate, how often will you adjust the hedge etc
Does this applies to USDINR FUTURES . As a retail traders with average holding of 500 lots. What I am suppose to do ? What is exposure means here in terms of retail trader not able to understand it
If the circular applies only to new positions, then good sense should prevail.
Existing positions must be allowed till expiry , otherwise it doesnt make any sense
I am also having big Currency position and am tracking what other brokers are doing, even Dhan is saying they will square off. It will be wise if Zerodha allows us to square off positions on our own.
We may not square off positions tomorrow ourselves, and let users square it off on their own since the onus of complying is on the client.
