Hedging disclosure norms

A listed company can be exposed to a commodity without ever trading one. A soap maker lives on palm oil. A refiner lives on crude. If the price moves, the profit moves.

Shareholders could not see any of that. So SEBI made companies say it out loud.

SEBI's circular of 15 November 2018 follows the recommendations of the Uday Kotak Governance Committee. It asks listed companies for two things.

First, their risk management policies for commodities, including hedging.

Second, for each physical commodity, the exposure and how much of it is hedged.

The second part is where the work is. The company must split its hedges into domestic and international. Inside each of those it must split again, into over-the-counter and exchange.

The same duty turns up again in SEBI's listing regulations and once more in the accounting chapter. That is why a candidate meets it three times in this paper.

The annexure, in two halves. The annexure to the circular sets out the disclosure requirements. Part of it is descriptive and part is quantitative, in a tabular format. It provides for disclosure of:

1. Risk Management Policies in relation to Commodities including Hedging; and
2. for each physical commodity — the exposure in Rupees, the exposure in quantities, and the extent of it that is hedged in domestic markets (with OTC markets and Exchanges disclosed separately) and in international markets (again with OTC and Exchanges separately).

So there are four hedging buckets per commodity, not two: domestic OTC, domestic exchange, international OTC, international exchange.

The same rule, from two other angles. Chapter 8 names the source of authority: under SEBI's Listing Obligations and Disclosure Regulations, SEBI mandated listed companies to provide details about commodity risk management and policies, commodity risk exposures, and the extent to which these are hedged in domestic and international markets. Chapter 9 restates it as a financial statement disclosure — the listed entity should disclose its commodity risk management policies, total commodity price risk exposure, the extent hedged in domestic versus international markets, a further break-down into OTC markets and exchanges, and the hedging strategies used to mitigate financial risks.

What real annual reports actually showed, as the workbook reports them:

HUL's hedging was done in international OTC markets; Reliance's and Hindustan Zinc's in international markets with separate OTC and exchange figures. Hindustan Zinc's report also noted that hedging was done on a monthly average basis.

The workbook draws one inference twice — that the extent of hedging was higher in FY2020-21 for Reliance Industries and for Hindustan Zinc. Read it narrowly. HUL's Brent hedge fell from 72% to 49% over the same two years, and Reliance's light distillates fell from 52% to 43%, in the same section.

Separately, the disclosure a company makes to shareholders is not the disclosure an exchange makes to the market. Chapter 6 lists sanctioned hedge limits details among exchange disclosures, and those are published anonymously.

Vindhya Consumer Products Ltd files the quantitative table for FY2025-26. The format is the circular's; the figures are illustrative.

Now read what a shareholder can do with it. Palm oil exposure is Rs 1,200 crore, of which 55%, or Rs 660 crore, is hedged and Rs 540 crore is not.

Suppose palm oil rises 10%. The gross hit to input cost is Rs 120 crore. The hedged portion recovers Rs 66 crore, so Rs 54 crore lands in the profit and loss account. That single sum is what the disclosure exists to make visible, and it is invisible in a company that discloses only a policy paragraph.

Caustic soda is the more revealing row. A Rs 180 crore exposure hedged only 12% leaves Rs 158.4 crore open, and every rupee of it hedged in the domestic OTC market rather than on an exchange — so the counterparty risk is bilateral, not novated to a clearing corporation. The four-way split is what shows that.

Compare the real numbers the workbook prints. Reliance Industries disclosed 41% of crude exposure hedged in FY2019-20 rising to 65% in FY2020-21. Vindhya's 50% on Brent-linked inputs sits between those two, which is exactly the kind of peer comparison the Uday Kotak Committee wanted to make possible.

Chapter 5 (Uses of Commodity Derivatives), section 5.9 (Hedging Strategies Disclosure Norms), the chapter's closing section and one of its stated learning objectives. Chapter 8, section 8.4, supplies the LODR anchor, and Chapter 9, section 9.2.3, restates the same break-down as a financial statement disclosure. This page carries what the curated list separately calls LODR commodity disclosure, because Chapters 5, 8 and 9 describe one obligation from three sides.

Expect the date — 15 November 2018 — the committee — Uday Kotak's Governance Committee — and the four-way split of domestic and international, each into OTC and exchange. A figure question drawn from the HUL, Reliance or Hindustan Zinc percentages is fair, because the workbook prints them all.

• 15 November 2018, and the Uday Kotak Governance Committee. Not 2017, not the Kotak Committee on something else. Both facts sit in the section's first sentence.
• Four buckets, not two. Domestic and international, each split into OTC and exchange. Candidates stop after domestic versus international and lose the mark.
• Exposure is disclosed in rupees AND in quantities. Both, per commodity.
• Part of the annexure is descriptive. It is not a pure numbers return; the risk management policy narrative is a required half.
• Do not over-generalise the trend. The workbook says hedging rose in FY2020-21 for Reliance and Hindustan Zinc. In the same section, HUL's Brent hedge fell from 72% to 49% and Reliance's light distillates fell from 52% to 43%.
• This is a company's disclosure to shareholders, not the exchange's disclosure of sanctioned hedge limits, which is anonymous and belongs to Chapter 6.
• Disclosure is not a hedging mandate. SEBI requires a listed company to say what it hedges, not to hedge. The only nudge in that direction is the separate RBI hedging directive telling banks to advise borrowers to hedge where lending is against commodity collateral.