Name: GUNDAYE KIRAN PRAMOD

Class: MMS Semester III

Roll No: 203

Subject: FR (ASSIGNMENT)

Specialization: FINANCE

SUBMTTED TO: SIRISH

MOHITE

Batch: 2020 – 2022

 1 Introduction to Financial Regulations
Financial regulation is a form of regulation or supervision, which subjects financial
institutions to certain
• Requirements, Restrictions and Guidelines
• Aiming to maintain the integrity of the financial system

This may be handled by either government or non-government organization.

A financial regulation has also influenced the structure of banking sectors, by

decreasing borrowing costs and increasing the variety of financial products
available.

Aims of regulation
The objectives of financial regulators are:
1. Market confidence: to maintain confidence in the financial system
2. Financial stability
3. Consumer Protection
4. Reduction of financial crime
5. Regulating financial transactions/foreign participation in the financial markets

Structure of supervision
Empowers government or non-government to monitors activities and enforces
actions.
There are various setups & combinations in place for the financial regulatory
structure around the globe.
Supervision of:
• Stock Exchange - SEBI
• Companies - Ministry of Corporate Affairs (MCA)/Companies Act
• Insurance Companies - IRDA
• Banks & FI - RBI

They get the authority from the Act which is passed by the Parliament:
• RBI Act
• SEBI Act
• IRDA Act
• Credit Rating Agencies
• FEMA
• Prevention of Money Laundering Act

Need and Significance of Indian Financial System Regulations

1. Regulations, is one of the 3 key levers of State Power (together with fiscal and
monetary policy) is of critical importance in shaping the welfare of economies
and society.
2. Ensures regulations are in public interest.
3. It addresses the permanent need to ensure that regulations and regulatory
framework are justified of good quality and fit for purpose.
4. Helps to shape the relationship between the State, Citizens and Businesses.
5. It supports economic development and the rule of law helping policy
makers to make informed decisions about what to regulate and how to
regulate.
6. Helps in evaluation of regulatory outcomes informs policy makers its
success, failure and whether there is a need for any change, to continue to be
effective in meeting public policy goals.
7. To serve the public by ensuring competent practice within an occupation.
The Board has powers which enable them to impact individual
practitioners, members of the public and the profession as a whole.
8. It helps the board members to know and understand their responsibilities
so that they do not violate the law, professional standards or principles of
fairness and propriety.

Goals of Regulation
1. Price Stability
2. Protecting small investors
3. Preventing market misconduct
4. Reduction of systematic risk. Systematic risk is a risk that an event will trigger
a loss of confidence in substantial portion.
Structure of financial regulations in India

Regulat Markets Playe

ors rs
RBI Commodities Brokers
SEBI Equity Firms
FMC Debt Banks
IRDA Foreign Financial Institutions
Exchange
PFRDA Foreign Institutional
Investors
MOF Market Fund
Managers
Investors
HLCC Exchanges
Depositories
Custodians
Registrars

Regulators: They regulate and supervise the financial system in India.

Markets: They are referred to as centers and arrangements which facilitate

buying and selling of financial assets, claim and services.

Players: Players are the persons, institutions, exchanges, etc. who play a major role
in financial sector.
Regulators:
1. RBI: RBI reserve Bank of India regulate and supervisors the major part of
financial system
2. SEBI: The capital market, mutual fund and other capital market
intermediaries are regulated by securities and exchange board of India.
3. FMC: Forward Market Commission regulates commodity based exchange traded
futures.
4. IRDA: Insurance regulatory and development authority regulate the insurance
sector.
5. PFRDA: Pension fund regulatory and development authority regulate the
pension fund.
6. MoF: Ministry of Finance controls of financial sector of India.
7. HLCC: High level coordination committee maintains coordination between
regulators

Markets:
1. Commodities: Commodities derivative markets are markets where raw or
primary products are exchanged.
2. Equity: Equity market is an organized market for the purchase and sale of
industrial and financial security.
3. Debt: Debt market refers to the financial market where investors buy and
sell debt securities, mostly in the form of bonds.
4. Foreign Exchange: The foreign exchange market refers to the market of
currencies. Transaction in the market typically involve one party purchasing a
quantity of one currency in exchange for paying a quantity of another.
Players:
1. Brokers: Brokers are mainly concerned about obtaining the
subscription to the issue from prospective investors.
2. Firms: The objective of the management of the firm is to maximize the market
value of the share.
3. Bank: A bank is a financial institution whose primary activity is to act as a
payment agent for customers and to borrow and lend money. It is an
institution for receiving, keeping and lending money.
4. Financial institutions include all kinds of organization which intermediates
and facilitates financial transactions of both individuals and corporate
customers.
5. Foreign institutional investors are those persons who only deposit or invest
their money in foreign institutions.
6. Mutual fund manager: mutual fund is an investment vehicle that gives the
opportunity to investor to invest in stocks and or bonds without doing own
research or having to have a large amount of money to buy into an
investment. The fund manager, also known as portfolio manager, trades the
fund, underlying securities, realizing capital gains or losses and collects the
dividend or interest income.
7. Investors are the persons who invest the money in the schemes, banks, institutions

for securities to gain interest.

8. Exchanges are the place where the currency of one country is been exchanged in

another country's currency.

9. Depositories are the places where people, Bank, institutions store their money.

10. Custodian: an agency that keeps custody of securities that are bought by the mutual

fund managers under various schemes is called a custodian. They ensure safe custody
ready availability of scripts.
11. Registrars to issue play an important role in post issue management. They

work in close collaboration with bankers to the issue.

 2 RBI

Deposits make banking possible Lending makes banking profitable NPA makes
banking perishable
Inflation means too much money chasing too few goods. So, prices of goods
increase. How to control prices? Reduce supply of money.
Deflation / recession mean too many goods chasing too few money. Show prices of
goods decreases. How to control this? Increase the supply of money or liquidity in
the market to create demand. As a result, demand will pick up and prices will
increase. Hence, more investment.

Structure of RBI
The reserve Bank of India is wholly owned by
government of India. Board of directors oversees the
reserve bank's business.
Central board of directors:
• 1 governor
• 4 deputy governors, at a maximum on official directors
• 4 directors - appointed by the central government to represent each local board
• 10 directors nominated by Central Government with expertise in various
segments of the economy.
The preamble of the reserve Bank of India describes the basic functions of the
reserve Bank as follows:
1. To regulate the issue of banknotes and keeping of reserves with a view to
securing monetary stability in India.
2. Generally, to operate the currency and credit system of the country to its
advantage.
3. To have a modern monetary policy framework to meet the challenge of an
increasingly complex economy.

Functions of RBI in detail

1. RBI is the regulator of financial system

The RBI regulates the Indian banking system and financial system by issuing
broad guidelines and instruction.
The objective of these regulations includes:
Controlling money supply in the system
Monitoring different key indicators like GDP and
inflation Maintaining people's confidence in the
banking and financial system
Providing different tools for customers help such as acting as 'banking
ombudsman' Ombudsman - an official appointed to investigate
individual’s complaints against a company or organisation, especially a
public authority. RBI is the issuer of monetary policy.
2. The RBI formulates monetary policy twice a year
It reviews the policy every quarter as well. The main objectives of monitoring
monetary policy are:
a. inflation control
b. Control on bank credit
c. Interest rate control

The tools used for implementation of the objective of monetary policy are:
• Cash reserve ratio (CRR) and statutory liquidity ratio (SLR)
• Open market operations
• Different rate such as repo rate, reverse repo rate and bank rate

3. RBI is the issuer of currency

Section 22 of the RBI act gives authority to the RBI to issue currency notes. The
RBI also takes action to control circulation of fake currency.

4. RBI is the comptroller and supervisor of Banking systems

The RBI has been assigned the role of controlling and supervising the banking
systems in India. The RBI is responsible for controlling the overall operation of all
banks in India.
These banks maybe public sector banks, private sector banks, foreign banks,
cooperative banks or regional rural banks. The control and supervisory roles
of RBI is done through the following:

a. Issue of license
Under the Banking regulation act 1949, the RBI has been given the powers to grant
license to commence new banking operations. The RBI also grants license to open
new branches for existing banks under the licensing policy. The RBI provides
banking services in areas that do not have this facility.

b. Prudential norms
The RBI issues guidelines for credit control and management. The RBI is
a member of banking committee on banking supervision (BCBS).
As such they are responsible for implementation of international standards of
capital adequacy norms and asset classification.

c. Corporate governance
The RBI has power to control the appointment of the chairman and directors of
banks in India. The RBI has powers to appoint additional directors in banks as
well.

d. KYC norms
To curb money laundering and prevent the use of banking system in India for
financial crimes, the RBI has 'know your customer' guidelines. Every bank has to
ensure KYC norms are applied before allowing someone to open an account.

e. Transparency norms
This means that every bank has to disclose their charges for providing services
and customers have the right to know the charges.
f. Risk management
The RBI provides guidelines to banks for taking the steps that are necessary to
mitigate risk. They do this through risk management in Basel norms.

g. Audit and inspection

The procedure of audit and inspection is controlled by RBI through off-site
and on-site monitoring system. On-site inspection is done by RBI based on
'CAMELS'
Capital
adequacy
Asset quality
Management
Earning
Liquidity
System and control
5. Foreign exchange control
The RBI plays a crucial role in foreign exchange transactions. It does due diligence
on every foreign transaction, including inflow and outflow of foreign exchange. It
takes steps to stop the fall in value of the Indian rupee. The RBI also text necessary
steps to control the current account deficit. They also give support to promote
export and the RBI provides a variety of options for NRIs.

6. Development
Being the banker of the Government of India, the RBI is responsible for
implementation of the government policies related to agriculture and rural
development. The RBI also ensure the flow of credit to other priority sectors as
well. Section 54 of the RBI gives stress on giving specialized support for rural
development.

7. Apart from the above, RBI publishes periodical review and data related to
banking. The RBI plays a very important role in every aspect related to Banking
and Finance. Finally, the control of NBFCs and the others in the financial world
is also assigned with RBI.
Credit control measures qualitative and quantitative

What is credit control?

Credit control is an important tool used by reserve Bank of India. A major weapon
of the monetary policy used to control the demand and the supply of money
(liquidity) in the economy.

Why is credit control required?

1. To increase the overall growth of the priority sector i.e. those sectors of
the economy which is recognized by the government as 'prioritized'
2. To keep a check over the channelization of credit so that credit is not
delivered for undesirable purposes
3. To achieve the objective of controlling inflation as well as deflation
4. To boost the economy by facilitating the flow of adequate volume of bank credit
to different sectors

Qualitative method

Qualitative method means the control or management of the use of bank credit or
manner of channelizing of cash and credit in the economy.
Tools used under this method are:

1. Marginal requirement

Marginal requirement of loan can be increased or decreased to control the flow of

credit. For example, a person mortgages his property worth 100,000 against loan.
The bank will give a loan of rupees 8,000 only. The marginal requirement here is
20%.
In case the flow of credit has been increased the marginal requirement will be
lowered
2. Rationing of credit

Under this method, there is a maximum limit to loans and advances that can be
made which the commercial banks cannot exceed.
3. Publicity

RBI uses media for the publicity of its views on the current market conditions and
its directions that will be required to be implemented by the commercial banks to
control the unrest.

4. Direct action

Under the Banking regulation act, the central bank has authority to take strict
action against any of the commercial bank that refuses to obey the directions
given by RBI

5. Moral suasion

This method is known as moral persuasion, as the method that the RBI being apex
Bank uses here, is that of persuading the commercial banks to follow its directions
or orders on the flow of credit.
 
Quantitative method

By quantitative credit control, we mean, the control of the total

quantity of credit. Different tools used under this method are:

1. Bank rate

Bank rate, also known as discount rate, is the official minimum rate at which
the central bank of the country is ready to rediscount approved bills of
exchange or lend on approved securities.
When commercial banks, for instance, have lent or invested all its available
funds and have little or no cash over and above the prescribed minimum, it may
ask the central bank for funds.
It may either rediscount some of its bills with the central bank or it may borrow
from the central bank against the collateral of its own promissory notes.
In other cases, the central bank accommodates the commercial bank and
increases the latter's cash reserves.
This rate is increased during the times of inflation when the money supply in
the economy must be controlled.

2. Open market operations

Open market operations indicate the buying or selling of government securities

in the open market to balance the money supply and economy.
During inflation, RBI sells government securities to commercial banks and
other financial institutions. This reduces their cash lending and credit creation
capacities. Thus, inflation can be controlled.
During recessions, RBI purchase government securities from commercial banks
and other financial institutions. This leaves them with more cash balances for
lending and increasing their liquidity credit creation capacities. Thus recession
can be overcome.

3. Repo rate and reverse repo rates

Repo is a swap deal involving immediate sale of securities under

simultaneous repurchase of those securities at a future date at a
predetermined price.
Commercial banks and financial institution also park their funds with RBI at a
certain rate this rate is called as reverse repo rate.
Repo rates and reverse repo rates are used by RBI to make liquidity adjustments at
the market.
4. Cash reserve ratio

The money supply in the economy is influenced by the cash reserve ratio. It is
the ratio of a bank's time and demand liabilities to be kept in reserve with the
RBI. High CRR reduces the flow of money in the economy and is used to control
inflation. A low CRR increases the flow of money and is used to overcome
recession.

5. Statutory liquidity ratio

Under SLR, banks have to invest certain percentage of its time and demand
liabilities in government approved securities.
Reduction in SLR enhances the liquidity of commercial banks.

6. Deployment of credit

The RBI has taken various measures to deploy credit in different sectors of the
economy. The percentage of bank credit has been fixed for various sectors like
agriculture, export, etc.
 
Regulatory measures taken by RBI to facilitate financial inclusion
The above has become a mission of RBI.
Combination of following strategies is made to achieve sustainable and scalable
financial inclusion:
• Provision of new products
• Relaxation of regulatory guidelines
• Other supportive measures - no frills account and GCCs for small deposits and
credits.

 
10 steps:
1. Opening of no-frills account
2. Relaxation of KYC norms
3. Engage in business correspondents BCS
4. Use of technology
5. Adoption of electronic benefit transfer (EBT)
6. General credit card (GCC)
7. Simplified branch authorization
8. Opening of branches in unbanked rural centers
9. Providing banking services - unbanked villages - population more than 2000
10. Financial inclusion plans of banks
 3 Money Laundering Act

What is money laundering?

Money laundering is a process of transforming the profits of crime and

corruption into ostensibly legitimate assets.
In a number of legal and regulatory systems, however, the term money laundering
has become conflated with other forms of financial and business crime and is
sometimes used more generally to include misuse of financial system (involving
things such as securities, digital currencies, credit cards and traditional currency)
including terrorism financing and evasion of international sanctions.

Most anti money laundering laws openly conflate money laundering

(which is concerned with destination of funds) with regulator in the
financial system.
Other countries define money laundering in such a way as to include money
from activity that would have been a crime in that country even if the activity
was legal where the actual conduct occurred.

Placing dirty money in a service company, where it is layered with

legitimate income and then integrated into the flow of money is a common
form of money laundering.

Money obtained from certain crimes such as extortion, insider trading, drug
trafficking and illegal gambling is dirty and needs to be cleaned to appear to
have been derived from legal activities so that banks and other financial
institutions will deal with it without suspicion.
Money can be laundered by many methods which vary in complexity
and sophistication. Money laundering involves three steps:
1. The first step involves introducing the cash into the financial system by some
means (placement)
2. Second involves carrying out complex financial transactions to camouflage
the illegal source of the cash (layering)
3. And finally acquiring wealth generated from the transaction of the illicit
funds (integration) Some of these steps may be omitted depending upon the
circumstances.
For example non-cash proceeds that are already in the financial system would not
need to be placed.

According to the United States treasury department:

Money laundering is a process of making illegally gained proceeds (i.e. dirty
money) appear legal (i.e clean)
Typically, it involves three steps:
1. Placement
2. Layering
3. Integration

Placement
The illegitimate fonts are furtively introduced into the legitimate financial system.
This means introduction of the illegal money into an economy with the intention
of converting it into legal money.
This is done by breaking it up into smaller amounts to avoid suspicion.
Cash intensive businesses:
In this method, a business typically expected to receive a large proportion of its
revenue as cash, uses its accounts to deposit criminally derived cash.
Such enterprises often operator openly and in doing so generate cash
revenue from incidental legitimate business in addition to illicit cash- in
such cases the business will usually claim all cash received as legitimate
earnings.
Service businesses are best suited to this method, as such businesses have little or
no variable cost, and/or a large ratio between revenue and variable cost, which
makes it difficult to detect discrepancies between revenues and costs.
Examples are parking buildings, tanning beds, car washes and casinos.

Trade based laundering:

This involves under or over valuing invoices the disguise the movement of money.

Shell companies and trusts:

Trust and shell companies disguise the true owner of money. Trust and corporate
vehicles, depending on the jurisdiction, need not disclose their true beneficial
owner.
Sometimes referred to by the slang term rathole; though that term usually refers
to a person acting as the fictitious owner rather than a business entity.
Round tripping:
Your money is deposited in a controlled foreign corporation offshore, preferably
in a tax haven, very minimal records are kept and then shifted back as a foreign
direct investment, exempt from taxation. A variant on this is to transfer money to
a law firm or similar organization as funds on account of fees, then to cancel the
retainer, and when the money is remitted, represents the sum received from the
lawyers as a legacy under will or proceeds of litigation.

Bank capture:
In this case, money launderers or criminals buy a controlling interest in a bank,
preferably in a jurisdiction with weak money laundering controls and then
move money through the bank without scrutiny.

Casinos:
In this method, an individual walks into a casino and buys chips with cash. The
individual will then play for a relatively short time.
When the person catches in the chips, they will be expected to make payment in a
cheque or at least get a receipt so they can claim the proceeds as gambling
winnings.

Other gambling:
Money is spent on gambling, preferably, on higher orders. One way to minimize
risk with this method is to bet on every possible outcome. On some event, where
there are many possible outcomes and no outcomes have short odds, the bettor
will use only the vigorish and will have 'winning' bets that can be shown as the
source of money should this be requested. The 'losing' bets will remain hidden.
Real estate:
Someone purchases real estate with illegal proceeds and then sell the property to
outsider. The proceeds from the sale looks like legitimate income. Alternatively,
the price of the property is manipulated. The seller agrees to a contract that
underrepresents the value of the property and receives criminal proceeds to make
up the difference

Prevention of money laundering act 2002 is an act of the parliament of India

• Enacted to prevent money laundering and
• To provide for confiscation of property derived from money-laundering
PMLA and the rules notified there under came into force with effect
from July 1, 2005. The act and the rules notified there under impose
obligation
• On banking companies
• Financial institutions and
intermediaries To
• verify identity of clients
• Maintain records and furnish information in prescribed form to financial
intelligence unit India (FIU- IND)

The act was amended in the year 2005, 2009 and 2012
Objectives
The PMLA seeks to combat money laundering in India and has three main
objectives:
1. To prevent and control money laundering
2. To confiscate and seize the property obtained from laundered money
3. To deal with any other issue connected with money laundering in India

Punishment for money laundering

The act prescribed that any person found guilty of money laundering shall be
punishable with rigorous imprisonment from three years to seven years
And
Where the proceeds of crime involved related to any offence under
Paragraph 2 of Part A of the Schedule (Offences under Narcotics Drugs and
Psychotropic Substance Act 1985) the maximum punishment be extended to
10 years instead of 7 years.

Powers of attachment of tainted property

Appropriate authorities, appointed by the government of India, can
professionally attached property believed to be proceeds of crime for 180 days.
Such an order is required to be confirmed by an independent adjudicating
authority.
Key definitions and concepts

Attachment: Prohibition of transfer, conversion, disposition or movement of

property by an appropriate legal order.
Proceeds of crime: Any property derived obtained, directly or indirectly, by
any person as a result of criminal activity relating to a scheduled offence.
Money laundering: Who so ever directly or indirectly attempts to indulge or
assist and other person or actually involved in any activity connected with the
proceeds of crime and projecting it as untainted property.
Payment system: System that enables payment to be effected between a pair and
a beneficiary, involving clearing, payment or settlement services or all of them. It
includes the systems enabling credit card, debit card, smart cards, money transfer
or similar operations.
Interconnected transactions section 20 of this act describes that when two or
more transactions appear to be part of the same transaction and it seems as if the
transaction has been split up to avoid suspicion, then they will be assumed to be
part of the same transaction.
Adjudicating authority AA: The adjudicating authority is the authority
appointed by the central government notification to exercise jurisdiction,
powers and authority conferred under PMLA.
FIU-IND
Financial intelligence unit- India was set up by the government of India on
18th November 2004 as Central National Agency responsible for
1. Receiving
2. processing
3. analyzing and
4. disseminating information
Relating to suspect financial transaction

FIU-IND is also responsible for coordinating and strengthening efforts of

national and international intelligence investigation and enforcement agencies
in pursuing the global efforts against money laundering and related crimes.
FIU-IND is an independent body reporting directly to the economic intelligence
Council (EIC) headed by the finance minister.
 4 Foreign Exchange Management and
Regulations

The central government of India has formulated the foreign exchange

management act (FEMA) to uplift outward payments on the border trade. In the
year 1999, this act was introduced and it replaced the previous foreign exchange
regulation act (FERA).
There were certain drawbacks and loopholes in FERA which got failed with
FEMA. Moreover, different economic reforms got introduced under this act.
Basically, this act came with the purpose of deregulation and to have a wide
ranging in economy in India.

What are the objectives of foreign exchange management act?

The basic objective of introducing the FERA in India was providing facilities for
external payments and trades. Additionally, this act was meant to assist the
maintenance and orderly development of the forex market of India. FEMA
streamlines the procedures and formalities for dealing with all the foreign
exchange transactions within India.
However foreign exchange transactions are classified into two categories:
1. Current account transactions
2. Capital account transactions

As per to the act, the actual payment balance keeps the record of business, assets,
goods and services. Moreover, these dealings take place between the citizens of
various countries and India. It is also divided into two types:
1. Current account, which comprises trade of merchandise
2. Capital account, which includes all capital transactions
Current account transactions
The current account transactions include inflow and outflow of the money during a
year, to and from the different countries. This transaction happens because of
trading or rendering service, commodity and income between the countries.
Moreover, the current account is a parameter to see the economic status of a
nation. Accordingly, FEMA defines current account transactions under
section 2 (gg) of the FEMA act as a transaction other than a capital account
transaction and includes:
• Payment related to foreign trade other current business service and short-term
banking and credit facilities in ordinary course of business
• Payments for interest on loans
• Remittances for living expenses of parent’s spouse and children residing abroad
• Expenses in connection with foreign travel education and medical care of
parent’s spouse and children

Current account transactions are for the categorised into three parts according to the
FEMA, namely:
1. Transaction requires Central government's permission
2. Transactions prohibited by FEMA
3. Transactions requires RBI approva
Foreign Exchange Management and Regulations

1. Objectives and definitions under FEMA, 1999

2. Current account transactions and Capital account transactions,

3. Establishment of branch, office etc. in India,

4. Realization and Repatriation of foreign exchange,

5. Authorized person, penalties and enforcement, 6. Foreign contribution

(Regulation) Act, 2010.

The Central Government of India has formulated the Foreign Exchange

Management Act (FEMA) to uplift outward payments and the border trades. In
the year 1999, this act, FEMA was introduced, and it replaced the previous one
Foreign Exchange Regulation Act (FERA).

There were certain drawbacks and loopholes in FERA which got filled with the
FEMA. Moreover, different economic reforms got introduced under this act.
Basically, this act came with the purpose of deregulation and to have a wide-
ranging economy in India.

1. What are the objectives of the Foreign Exchange Management Act (FEMA)?

The basic objective to introduce the FEMA in India was for providing facilities
for external payments and trades. Additionally, this act was meant to assist the
maintenance and orderly development of the Forex market of India.
FEMA streamlines the procedures and formalities for dealing with all the
foreign exchange transactions within India.
However, foreign exchange transactions categories

1. Current Account Transactions

2. Capital Account Transactions

As per to the act, the actual payment balance keeps the record of the business of
assets, goods, and services. Moreover, these dealings take place between the
citizens of various countries and India. It is also divided into two types

1. Current Account, which comprises trade of merchandise

2. Capital Account, which includes all capital transactions

Meaning of Capital Account Transaction

A Current Account Transaction has been defined as a Transaction other

than Capital Account Transactions, means all transaction which do not alter
assets or liability outside India of resident or assets or liability in India of Non
Resident treated as Current Account Transactions and without prejudice to the
generality of the foregoing such transaction includes,

1. Payments due in connection with foreign trade, other current business,

services, and short-term banking and credit facilities in the ordinary course
of business.
2. Payments due as interest on loans and as net income from investments.

3. Remittances for living expenses of parents, children, and spouse residing

abroad,
4. Expenses in connection with foreign travel, education and medical care of
Parents, Spouse and children.
Provided that Central Government may impose such reasonable restrictions as
may be prescribed in case of public interest and in consultation with Reserve
Bank of India.

Route for Drawal of Foreign Exchange

According to RBI foreign Exchange can be drawn from any authorized dealer by
the General Permission Route or Prior Approval Route.

Release of foreign exchange under General Permission by Authorised

Dealers

S.No. Particulars Limitations

1. Private visit to any country USD 10,000 or its equivalents in

(except Nepal and Bhutan) one year for one or more private
visit.

2 Gift/donations per remitter/donor Gift/Donations are comes under

liberalized Remittance Schemes
of USD 1,25,000 for resident
individuals. Remittance should
not exceed USD 1,25,000 during a
particular FY

3 Donations by Corporate 1% of the foreign exchange

earnings during the previous three
FY or USD 5 million, whichever
is less, for a specified purpose

4 Going abroad for employment USD 1,00,000 one time only

5 Remittance facility for
emigrations
6 Remittance for maintenance of
close relatives abroad
7 Business Travel Abroad
8 Attending conference or
specialized training
9 Meeting expenses of Medical
treatment
10 Maintenance expenses of a patient
going for medical treatment of
medical checkup abroad
11 Studies abroad
USD 1,00,000 or the amount
prescribed by country of
emigration not exceeding USD
1,00,000 one time only.
Net salary (after deduction of tax,
PF and other deduction) of a
person who is resident but not
permanent resident in india and
citizen of foreign state other than
Pakistan.
Or
USD 1,00,000 per year per
recipient in all other cases
USD 25000 per trip respective of
stay
USD 25000
USD 1,00,000
USD 25000
USD 1,00,000 per academic Year
or estimation from the Institution
abroad whichever is higher.
12 Meeting expenses of USD 25000
accompanying as attendance to a
patient going abroad for medical
treatment or medical checkup

13 Commission to agent abroad for USD 25000 or 5 % of inward

selling of residential flats or remittance per transactions
commercial plot in India whichever is higher

14 Consultancy services from outside USD 1 million per project to USD

India 10 million per project (in case of
infrastructure project)
In all other case USD 1 million will
be continuing.

15 Reimbursement of pre- 5% of the investment brought into

incorporation expenses India or USD 100,000 whichever
is higher,

16 Remittance for use and/or Freely allow without approval of

Purchase of Trade mark RBI

17 Remittance for securing Insurance Freely allow

for Health from a company abroad

18 Remittance of royalty and Freely allow without any prior

payment of lump sum fee under approval of RBI
the technical collaboration
agreement
 19 Release of exchange for medical Extent of USD 1,00,000 without
treatment outside India when a any hassles and any loss of time
person has fallen sick after on the basis of self declarations
proceeding abroad

20 Small Value Remittance Up to USD 25000 (form A2)

Prohibition on Drawal of Foreign Exchange

1. Remittance out of lottery winning

2. Remittance of income from racing/riding etc, or any other hobby

3. Remittance for purchase of lottery ticket, banned/prescribed magazines,

football pools, sweepstakes etc.,
4. Payments of commission on exports made towards equity investment in
Joint ventures/wholly owned subsidiaries abroad of Indian companies.
5. Remittance of dividend by any company to which the requirement of
dividend balancing is applicable.
6. Payments of commission on exports under Rupees State Credit Routes
except commission up to 10% of invoice value of export of tea and tobacco,
7. Payment related to “ Call back Services” of telephones

8. Remittance of interest income on funds held in non-resident Special

Rupees Scheme a/c. (NRSR Account)
9. A travel to Nepal and/or Bhutan

10.A transaction with a person resident in Nepal or Bhutan.

Release of Foreign Exchange for Haj/Umrah Pilgrimage

Authorized dealers and full-fledged money Changer may release the full amount
of BTQ entitlement in cash or up to the cash limit specified by the Haj Committee
of India, to the Haj/Umrah pilgrims.

Prior Approval of Government of India for Drawl of foreign exchange

1. Cultural tours.

2. Advertisement in foreign print media for the purpose other than promotion of
tourism, foreign investments and international bidding (exceeding USD 10000)
by a SG and its PSU.

3. Remittance of freight of vessels chartered.

4. Payment of import by a government department or a PSU on c.i.f. basis only

for imports through ocean transport.

5. multi-model transport operators making remittance to their agents abroad

6. Remittance of hiring charges of transponders

a. TV channels

b. Internet Service Providers

7. Remittance of Container detention charges exceeding the rate prescribed by

Director General of Shipping.

8. Remittance of Prize money/sponsorship of sport activity abroad by a person

other than international/ national/street level sports bodies, if the amount involved
exceeds USD 1,00,000.

9. Remittance for membership of P&I Club ministry.

A Current Account Transaction has been defined as a Transaction other
than Capital Account Transactions, means all transaction which do not alter
assets or liability outside India of resident or assets or liability in India of
Non-Resident treated as Current Account Transactions and without
prejudice to the generality of the foregoing such transaction includes.

Capital Account Transactions

It’s classified into two classes:

(i). Capital Account Transactions of person resident in India.

• Investment in foreign securities

• Foreign Currency loans raised in India and abroad

• Transfer of Immovable properties outside India

• Guarantees issued by a person resident in India in favour of a person

resident outside India.
• Export, Import and holding of currency/currency notes.

• Loans and overdrafts (borrowings) by a person resident in India from a

person resident outside India
• Maintenance of foreign currency account in India and outside India by a
person Resident in India.
• Taking out a insurance policy form an insurance company outside India.

• Loan and overdraft to a person resident outside India

• Remittance outside India of capital assets of a person resident in India.

• Sale and purchase of foreign exchange derivatives in India and abroad and
commodity derivatives abroad
(ii). Capital Account Transactions of person resident outside India.

(a) Investment in India by way of

• Issue of securities by a body corporate or an entity in India and investment

therein by a person resident outside India; and
• Investment by way of contributions by a person resident outside India to
the capital of a firm or proprietorship concern or an association of person
in India.
(b) acquisition and transfer of immovable property in India in favour of, on behalf
of a person resident in India.

(c) Guarantee by a person resident outside India in favour of, or on behalf of a

person resident in India,

(d) Import / Export of Currency/Currency Notes/ into/from India by a person

resident outside India

(e) Deposit between a person resident in India and person resident outside India.

(f) Foreign Currency Accounts in India of a person resident outside India

(g) Remittance outside India of a capital assets in India of a person resident

outside India.

Accordingly, FEMA defines "Capital Account Transactions" as means a

transaction which alters the assets or liabilities outside India of persons resident
in India Or assets or liabilities in India of persons resident outside India.
 4. Relevancy of FEMA

The Foreign Exchange Management Act (FEMA) is applicable for the

whole of India along with organizations based outside India but owned or
maintained by an Indian citizen. Hence, the FEMA is relevant to

The applications from such entities in Form FNC (Annex-1) will be considered
by Reserve Bank under two routes:

1. Reserve Bank Route Where principal business of the foreign entity falls
under sectors where 100 per cent Foreign Direct Investment (FDI) is
permissible under the automatic route.

2. Government Route Where principal business of the foreign entity falls under
the sectors where 100 per cent FDI is not permissible under the automatic route.
Applications from entities falling under this category and those from Non-
Government Organisations/Non-Profit Organisations / Government Bodies
/Departments are considered by the Reserve Bank in consultation with the
Ministry of Finance, Government of India.
The following additional criteria are also considered by the Reserve Bank while
sanctioning Liaison/Branch Offices of foreign entities:

Track Record for Branch Office-a profit making track record during the
immediately preceding five financial years in the home country.

For Liaison Office a profit-making track record during the

immediately preceding three financial years in the home country.

Net Worth [total of paid-up capital and free reserves, less intangible assets as
per the latest Audited Balance Sheet or Account Statement certified by a
Certified Public Accountant or any Registered Accounts Practitioner by
whatever name].

For branch office – not less than USD 100000 or its equivalent.
For liaison office – not less than USD 50000 or its equivalent.
The application for establishing BO LO in India should be forwarded by the
foreign entity through a designated AD Category-I bank to the General
Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of
India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001.
India, along with the prescribed documents including.

• English version of the Certificate of Incorporation / Registration or

Memorandum & Articles of Association attested by Indian
Embassy/Notary Public in the Country of Registration.
• Latest Audited Balance Sheet of the applicant entity.
Applicants who do not satisfy the eligibility criteria and are subsidiaries ofother
companies can submit a Letter of Comfort from their parent company, subject
to the condition that the parent company satisfies the eligibility criteria as
prescribed above.

The designated AD Category-1 bank should exercise due diligence in Oespect

of the applicant's background, antecedents of the promoter, nature and location
of activity, sources of funds, etc. and ensure compliance with the KYC norms
before forwarding the application together with their comment
recommendations to the Reserve Bank. The Branch Liaison offices established
with the Reserve Bank's approval will be allotted a Unique Identification
Number (UIN).

(B) LIAISON OFFICE

b.1 Permissible Activities for a Liaison Office:

A Liaison Office (also known as Representative Office) can undertake only

liaison activities, i.e. it can act as a channel of communication between Head
Office abroad and parties in India.

It is not allowed to undertake any business activity in India and cannot earn any
income in India. Expenses of such offices are to be met entirely through inward
remittances of foreign exchange from the Head Office outside India. The role of
such offices is, therefore, limited to collecting infor ation about possible market
opportunities and providing information about the company and its products to
the prospective Indian customers. Permission to set up such offices is initially
granted for a period of 3 years, and this may be extended from time to time by
an AD Category I bank.
A Liaison Office can undertake the following activities in India:

i. Representing in India the parent company/ group companies.

ii. Promoting export/import from/to India.

iii. Promoting technical/financial collaborations between parent/group

companies and companies in India.

iv. Acting as a communication channel between the parent company and Indian
companies.

C) BRANCH OFFICES

c.1 Permissible Activities

a). Companies incorporated outside India and engaged in manufacturing or

trading activities are allowed to set up Branch Offices in India with specific
approval of the Reserve Bank. Such Branch Offices are permitted to represent
the parent / group companies and undertake the following activities in India:

i. Export / Import of goods: Procurement of goods for export and sale of goods
after import are allowed only on wholesale basis.

ii. Rendering professional or consultancy services.

iii. Carrying out research work, in areas in which the parent company is
engaged.

iv. Promoting technical or financial collaborations between Indian companies

and parent or overseas group company.

v. Representing the parent company in India and acting as buying/ selling agent
in India.
vi. Rendering services in information technology and development of software
in India.

vii. Rendering technical support to the products supplied by parent/group

companies.

viii. Foreign airline / shipping company.

Normally, the Branch Office should be engaged in the activity in which the
parent company is engaged.

Not Allowed:

b) Retail trading activities of any nature is not allowed for a Branch Office in
India.

c) A Branch Office is not allowed to carry out manufacturing or processing

activities in India, directly or indirectly.

d) Profits earned by the Branch Offices are freely remittable from India, subject
to payment of applicable taxes.

Authorized person, penalties and enforcement

Activities by Authorised Dealer - Category II:

Authorised Dealers Category II can undertake the following transactions -

a) Private visits and business visits

b) Remittances of tour operators

c) Participation in international events, global conferences and specialised

training

d) Medical treatment abroad

e) Overseas education
f) Remittance of examination fees for GRE, TOEFL, etc.

g) Employment and overseas job applications

h) Emigration and Emigration Consultancy fees

i) Visa fees

j) Fees for registration of documents

k) k) Fees for International Organizations

Authorized Dealers Category I:

Generally, all nationalised banks, leading non-nationalised banks and foreign

banks are appointed as 'Authorised Dealers Category I' to deal in foreign
exchange. They can deal in all other transactions in foreign exchange like bill of
exchange, cheques, letter of credit, deposits etc. They can freely purchase from
public in India TTs, MTS, drafts, bills etc. drawn in any foreign currency
against rupees.

1. Branches of Authorised Dealers Category I Banks dealing in Foreign

Exchange:

Information about authorized branches of AD category I banks is available on

dbie.org.in.
Penalties under section 13 of the Foreign Exchange Management Act, 1999

• If any person contravenes any provision of this Act,or contravenes any

rule, regulation, notification, direction or order issued in exercise of the
powers under this Act, or contravenes any condition subject to whichan
authorization is issued by the Reserve Bank of India.
he shall, upon adjudication, be liable to a penalty up to thrice the sum
involved in such contravention which has quantifiable amount.

• Any Adjudicating Authority adjudging any contravention under sub-

section (1), may, if he thinks fit in addition to any penalty which he may
impose for such contravention

direct that any money, safety or any other money or property in respect of
which the contravention has taken place shall be confiscated to the
Central Government and further direct that the foreign exchange
holdings, if any, of the persons committing the contraventions or any part
thereof, shall be brought back into India or shall be retained outside India
in accordance with the directions made in this behalf.
 The explanation for this subsection, "property" in respect of which
contravention has taken place, shall include

1. Deposits in a bank, where the said property is converted into such

deposits.

2. Indian currency, where the said property is converted into that

currency; and

3. Any other property which has resulted out of the conversion of that
property.

Any contravention, under FEMA, may invite following kinds of penalties:

1. If, the amount against which offence is quantities, then penalty will be
"THRICE" the sum involved in contravention.

2. Where the amount cannot be quantified the penalty may be imposed uptotwo
lakh rupees.

3. If, the contravention is continuing every day, then Rs. Five Thousand for
every day after the first day during which the...
Enforcement of FEMA:

Though RBI exercises overall control over foreign exchange

transactions,

Enforcement of FEMA has been entrusted to a separate

Directorate of Enforcement formed for this purpose.

Foreign Contribution (Regulation) Act, 2010

FCRA, 2010 has been enacted by the Parliament to consolidate the law to
regulate the acceptance and utilization of foreign contribution or foreign
hospitality by certain individuals or associations or companies and to prohibit
acceptance and utilization of foreign contribution or foreign.
Applicability

As per Section 1(2) of FCRA, 2010, the provisions of the act applies to:

Whole of India

Citizens of India outside India; and

Associate Branches or subsidiaries, outside India, of companies or

bodies corporate, registered or incorporated in India Acts/rules/guidelines which

regulate the flow of foreign contribution to India

The flow of foreign contribution to India is regulated under

• Foreign Contribution (Regulation) Act, 2010

• Foreign Contribution (Regulation) Rules, 2011

• And other notification / orders etc., issued there under from time to time.

• FCRA, 1976 repealed after coming of FCRA, 2010

What is foreign contribution?

As per Section 2(1)(h) of FCRA, 2010,

"Foreign contribution" means the donation, delivery or transfer made by any

foreign source, -

(i) of any article, not being an article given to a person* as a gift for his personal
use, if the market value, in India, of such article, on the date of such gift is not
more than such sum as may be specified from time to time by the Central
Government by rules made by it in this behalf. (This sum has been specified as
Rs. 25,000/- currently)

(ii) of any currency, whether Indian or foreign.

(iii) of any security as defined in clause (h) of section 2 of the securities

Contracts (Regulation) Act, 1956 and includes any foreign security as defined in
clause (0) of Section 2 of the Foreign Exchange Management Act, 1999
5

5.SECURITIES AND EXCHANGE BOARD OF INDIA

The Securities and Exchange Board of India (SEBI) is the regulator for the
securities market in India.

It was established in the year 1988 and given statutory powers on 30 January
1992 After 4 Years.

SEBI History

Securities and exchange board of Indian established in the year 1988 as a non-
statutory body for regulating the securities market.

It became an autonomous body by The Government of India on 12 April 1992

and given statutory powers in 1992 with SEBI Act 1992 being passed by the
Indian Parliament.
SEBI has its headquarters at the business district

Functions and Responsibilities Exchange Board of India as

1. to protect the interests of investors in securities and

2. to promote the development of, and

3. to regulate the securities market and

4. for matters connected there with or incidental there to.

SEBI must be responsive to the needs of three groups. which constitute the
market:

• the issuers of securities

• the investors
• the market intermediaries.

SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial
and quasi-executive.

It drafts regulations in its legislative capacity, it conducts investigation and

enforcement action in its executive function, and it passes rulings and orders in
its judicial capacity.

Though this makes it very powerful, there is an appeal process to create

accountability.
There is a Securities Appellate Tribunal (SAT) which is a three-member
tribunal and is headed by Mr. Justice J P A Devadhar, a former judge of the
Bombay High Court.

A second appeal lies directly to the Supreme Court. SEBI has taken a very
proactive role in streamlining disclosure requirements to international standards.

Powers

For the discharge of its functions efficiently, SEBI has been vested with the
following powers:

1. to approve by-laws of Securities exchanges.

2. to require the Securities exchange to amend their by-laws.

3. inspect the books of accounts and call for periodical returns from recognized
Securities exchanges.

4. inspect the books of accounts of financial intermediaries.

5. compel certain companies to list their shares in one or more Securities

exchanges.

6. Registration of brokers.
Functions -Twelve

1. To register and regulate the working of Stock Brokers.

2. To register and regulate the working of Bankers to an issue.

3. To control and regulate securities market.

4. To exercise the powers under Securities Contracts (Regulation) Act.

5. To regulate the working of Mutual Funds

6. To perform such other functions as may be prescribed.

7. To control fraudulent and unfair trade practices relating to securities market

8. To conduct research for the above purposes

9. To control Investment business.

10. To regulate issue of securities.

SEBI committees

1. Technical Advisory Committee

2.Committee for review of structure of market infrastructure institutions.

3. Advisory Committee for the SEBI Investor Protection and Education Fund

4. Takeover Regulations Advisory Committee

5. Primary Market Advisory Committee (PMAC)

Major achievements

SEBI has enjoyed success as a regulator by pushing systematic reforms

aggressively and successively.

SEBI is credited for quick movement towards making the markets electronic
and paperless by introducing T+5 rolling cycle from July 2001 and T+3 in April
2002 and further to T+2 in April 2003.

The rolling cycle of T+2 means, Settlement is done in 2 days after Trade date.

SEBI has been active in setting up the regulations as required under law. SEBI
did away with physical certificates that were prone to postal delays, theft and
forgery, apart from making the settlement process slow and cumbersome by-
passing Depositories Act, 1996.