Hedging Transaction - Indian Laws - General

'Hedging' is defined in Black's Law Dictionary as under: Hedging: A means by which traders and exporters of grain or other products, and manufacturers who make contracts in advance for the sale of their goods, secure themselves against the fluctuations of the market by counter-contracts for the purchase or sale of an equal quantity of the product or of the material of manufacture. Whorley v. Patton-Kjose Co., 90 Mont. 461, 5 P. 2d 210, 224.A means by which a party who deals in the purchase of commodities in large quantities for actual delivery at some future time insures itself against unfavourable changes in the price of such commodities by entering into compensatory arrangements or counterbalancing transactions on the other side. Ralston Purina Co. v. McFarland, C.A.N.C. 550 F. 2d 967, 970. A transaction where an identified forward exchange contract is locked into an identified agreement to purchase or sell goods in the future. Siegel v. Titan Indus. Corp. C.A.N.Y., 779 F. 2d. 891, 893. Scope of 'hedging transactions'- Keeping in view the Circular No.23 D, and the decision of the Gujarat High Court in the case of Pankaj Oil Mills- 1976 (5) TMI 3 - GUJARAT HIGH COURT , in the case of a trader, the following position emerges in regard to scope of hedging contracts:- * Hedging contracts can be both for purchase and sale; * In order to be genuine and valid hedging contract of sales, the total of such transactions should not exceed the total stock of the raw material or merchandise on hand; * In order to be genuine and valid hedging contract of purchase, there should be an existing forward contract of sale by actual delivery' * The hedging contracts need not necessarily be in the same variety of the commodity. They could be in connected commodities e.g. one type of cotton against another type of cotton .