FOREIGN EXCHANGE MECHANISM Statutory Basis for Exchange Control The Foreign Exchange Regulation Act, 1973 (FERA

A 1973), as amended by the Foreign Exchange Management (Amendment) Act, 1999, forms the statutory basis for Exchange Control in India. came into force on the 1st day of June,2000. Transactions Regulated by Exchange Control Transactions having international financial implications matters are regulated by Exchange Control: (a) Purchase and sale of and other dealings in foreign exchange and maintenance of balances at foreign centres (b) Procedure for realisation of proceeds of exports (c) Payments to non-residents or to their accounts in India (d) Transfer of securities between residents and non-residents and acquisition and holding of foreign securities (e) Foreign travel with exchange (f) Export and import of currency, cheques, drafts, travellers cheques and other financial instruments, securities, etc. (g) Activities in India of branches of foreign firms and companies and foreign nationals Transactions Regulated by Exchange Control (h) Foreign direct investment and portfolio investment in India including investment by nonresident Indian nationals/persons of Indian origin and corporate bodies predominantly owned by such persons (i) Appointment of non-residents and foreign nationals and foreign companies as agents in India (j) Setting up of joint ventures/subsidiaries outside India by Indian companies (k) Acquisition, holding and disposal of immovable property in India by foreign nationals and foreign companies (l) Acquisition, holding and disposal of immovable property outside India by Indian nationals resident in India. Foreign Exchange Management Act, 1999 consolidate and amend the law relating to foreign exchange facilitating external trade and payments promoting the orderly development and maintenance of foreign exchange market in India 37 sections in the Act

Foreign Exchange Management Act, 1999 : Provisions in Section 3 Prohibits dealings in foreign exchange except through an authorised person No person with permission of RBI can deal in or transfer any foreign exchange or foreign securities Make any payment to or for the credit of any person resident outside India in any manner Receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner Enter into any financial transaction in India for acquisition or creation or transfer of a right to acquire, any asset outside India by any person SECTION 4 - restrains any person resident in India from acquiring, holding, owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India except as specifically provided in the Act. SECTION 5 current account transactions Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction SECTION 6 - deals with capital account transactions. This section allows a person to draw or sell foreign exchange from or to an authorised person for a capital account transaction. SECTION 7 - deals with export of goods and services. Every exporter is required to furnish to the RBI or any other authority, a declaration etc. etc. regarding full export value. SECTION 8 and 9- casts the responsibility on the persons resident in India who have any amount of foreign exchange due or accured in their favour to get same realised and repatriated to India within the specific period and the manner specified by RBI. SECTIONS 10 and 12 - deals with duties and liabilities of the Authorized persons authorised dealer, money changer, off shore banking unit or any other person for the time being authorized to deal in foreign exchange or foreign SECTIONS 13 and 15 - of the Act with penalties and enforcement of the orders of Adjudicating Authority SECTION 36 to 37 - pertains to the establishment of Directorate of Enforcement and the powers to investigate the violation of any provisions of Act, Authorised Dealers in Foreign Exchange Authorisations in the form of licences to deal in foreign exchange are granted to banks which are well equipped to undertake foreign exchange transactions in India. Authorisations have also been granted to certain financial institutions to undertake specific types of foreign exchange transactions incidental to their main business. Other Institutions Export-Import Bank of India Industrial Credit & Investment Corporation of India Ltd. Industrial Development Bank of India Industrial Finance Corporation of India SBI Factors and Commercial Services Pvt. Ltd. Small Industries Development Bank of India Authorised Co-operative/Commercial Banks Authorisations have also been issued to certain State Co-operative/Urban Co-operative banks

and Scheduled Commercial banks to open and maintain Ordinary Non-Resident Rupee Accounts (NRO Accounts) and Non-Resident (External) Rupee Accounts (NRE Accounts), on behalf of non-resident individuals of Indian nationality/origin Authorised Money-Changers In order to provide facilities for encashment of foreign currency to visitors from abroad, especially foreign tourists, Reserve Bank has granted licences to certain established firms, hotels and other organisations permitting them to deal in foreign currency notes, coins and travellers cheques subject to directions issued to them from time to time. These firms and organisations who are generally known as' authorised money-changers' fall into two categories, viz. 'Full-fledged money-changers' purchase and sale transactions with the public and 'Restricted money-changers' purchase foreign currency notes, coins and travellers cheques, subject to the condition that all such collections are surrendered by them in turn to an authorised dealer in foreign exchange/full-fledged money-changer.

Directorate of Enforcement enforcement of the provisions of the Foreign Exchange Management Act prevent leakage of foreign exchange 1) Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments. 2) Acquisition of foreign currency illegally by person in India. 3) Non-repatriation of the proceeds of the exported goods. 4) Unauthorised maintenance of accounts in foreign countries. 5) Under-invoicing of exports and over-invoicing of imports and any other type of invoice manipulation. 6) Siphoning off of foreign exchange against fictitious and bogus imports land by. 7) Illegal acquisition of foreign exchange through Hawala. Organisation of Exchange Control Department Powers conferred upon Reserve Bank by FERA 1973 and Central Government Notifications issued under the Act are exercised by the Exchange Control Department of Reserve Bank. The Department has its Central Office at Mumbai and Offices at other centres in India Methods of Payment payment must be received through the medium of an authorised dealer export proceeds - in the form of bank draft, pay order, banker's cheque, personal cheque, foreign currency notes, foreign currency travellers' cheques, etc - handle documents Payment made by Credit card decleration for receipt of foreign exchange

Provisions under Exchange Control Act Protection against Transit Risks under f.o.b., c.&f., etc. Contracts Bid Bonds and Other Guarantees against Commodity Exports Foreign Currency Accounts Reserve Bank may consider selectively applications from exporters having good track record for opening foreign currency accounts with banks abroad for crediting the proceeds of export shipments made subject to certain terms and conditions Counter Trade involving adjustment of value of goods imported into India against value of goods exported from India - through an Escrow Account opened in India in U.S. dollar will be considered by the Reserve Bank Export of goods on lease, hire, etc. through an authorised dealer, the office of the Reserve Bank Provisions under Exchange Control Act Participation in Trade Fairs Abroad render proper account of the expenditure incurred for the above purpose. opening temporary foreign currency account abroad the foreign exchange obtained by sale of goods sent closed immediately after close of exhibition/ trade fair balances therein is repatriated to India through normal banking channel Project Exports and Service Exports on deferred payment terms Export Declaration Forms The Foreign Exchange Regulation Rules, 1974 prescribe export declaration forms called Exchange Control Declaration (GR) form, hereafter referred to as GR form, PP and VP/COD forms. (a)Exchange Control Declaration Exports to all countries (GR)Form made otherwise than by post (b) PP Form Exports to all countries by parcel post (c) VP/COD Form Exports to all countries by parcel post, under arrangements to realise proceeds through postal channels on 'value payable' or 'cash on delivery' basis. Time limit for Realisation of Export Proceeds Amount representing the full export value of goods exported must be realised by an exporter on the due date for payment or within six months from the date of shipment, whichever is earlier. . Disposal of Copies of Export Declaration Forms At Port of Shipment Step 1 : GR forms (2 copies) + SB to Customs at Port of Shipment Step 2 Customs certifies the value declared by the exporter on both the copies of the GR form

Step 3 return the duplicate copy of the form to the exporter and retain the original for transmission to Reserve Bank Step 4 Exporters submits the duplicate copy of the GR form again to Customs along with the cargo to be shipped Step 5 After examination of the goods and certifying the quantity passed for shipment on the duplicate copy, Customs will return it to the exporter for submission to the authorised dealer for negotiation or collection of export bills. With the Authorised Bank Within twenty one days from shipment of goods - exporter lodge the duplicate copy + shipping documents + with the authorised dealer named on the GR form Negotiation of documents Reporting of transaction to RBI The duplicate copy retained by the authorised dealer Realisation of Export Proceed The duplicate copy submitted to RBI Export Bills Register Payment Due Date along with all necessary details watch closely realisation of bills to ensure that they have reported all transactions to Reserve Bank closely watch realisation of bills through Bills Register bills remain outstanding beyond the due date for payment follow up with the exporter export proceeds not realised on the due date - the matter should be reported to Reserve Bank (unless exporter has sought permission for extension of time) Write off of unrealised Export Bills (i) In cases where the exporter has not been able to realise the outstanding export dues despite his best efforts, he may approach the authorised dealer, who had handled the relevant shipping documents, with appropriate supporting documentary evidence with a request for write off of the unrealised portion. Authorised dealers may accede to such requests (the branch concerned should obtain the approval of its controlling office) subject to the undernoted conditions: (a) The relevant amount has remained outstanding for 360 days or more. (b) The aggregate amount of write off allowed by the authorised dealer (at all branches put together) during a calendar year should not exceed 10% of the total export proceeds realised by the exporter through the concerned authorised dealer during the previous calendar year. (c) The case is not the subject matter of any civil or criminal suit which is pending. (d) Satisfactory documentary evidence has been furnished in support of the exporter having made all efforts to realise the dues but has been unsuccessful due to reasons beyond his control. f) The exporter has not come to the adverse notice of the Enforcement Directorate or the Central Bureau of Investigation or such other law enforcement agency. (g) The exporter has surrendered proportionate export incentives, if any, availed in respect of the relative shipments.