Foreign Exchange
- Means Foreign Currency and includes Deposits, credits and balances payable in any Foreign currency. - The FOREX stock includes foreign currency assets, balance kept abroad, instruments payable in foreign currency and instruments drawn abroad but payable in Indian currency.

Exchange Control Regulations
‡ First introduced in India in 1939 ‡ Placed on statutory footing through FERA in 1947. ‡ FERA consolidated in 1973.

Exchange Control Regulations
Objective of ECR: i) Conservation of Foreign exchange. ii) Proper accounting of forex receipts and payments. iii) Stabilizing of external value of Rupee. iv) Control over remittances abroad to prevent flight of scarce capital v) Supervision of NRI accounts to prevent BOP deficit. vi) To check smuggling. vii) To fulfill IMF obligations.

Foreign Exchange Management Act (FEMA)
-Act passed on Dec.02,1999 replacing Foreign Exchange Regulation Act (FERA), 1973. -Act deals with entire Foreign Exchange Matters. -Came into effect from 01 June 2000. - Extends to entire Country, all branches, offices, agencies outside India (owned or controlled by a person in India) - Offence in case of FERA was Criminal and in FEMA it is Civil.

e.Forex Transactions ‡ No person can make any payment directly to or for the credit of any person residing outside India. ‡ No person can receive any payment directly from or on behalf of any person outside India. AD or FFMC) . ‡ All transactions to be routed through an authorized agent (i.

RRBs and others. State & Urban Co-op Banks.Specified non-trade related current account transactions undertaken by AD III and activities permitted to FFMCs . - .Any other activity decided by RBI. All current and capital account transactions as per RBI directions can be undertaken 2) AD category ± II . .Authorized Persons 1) AD category ± I: Comprises of Commercial. Co-op banks.Comprises of upgraded FFMCs.

Comprises department of posts.Authorized Persons 3) AD category ± III: Comprises of Select financial and other institutions. 4) Full Fledged Money Changers (FFMCs) - . Specified non-trade related current account transactions. urban co-op banks and other institutions authorized by RBI.

Handling of Inward and Outward Remittance v. Exchange of Foreign Currencies. Investment in Foreign Trade vii. . To make arrangement with Foreign Correspondent. Export Documents handling. Buying and Selling foreign Currencies iv.Functions of Authorized Dealers ‡ Authorized Dealer can handle all kinds of Foreign Exchange transaction. Following are the main function of an Authorized Dealer. Opening of L/C and Settlement of Payment vi. viii. Opening & maintenance of Accounts with Foreign Banks. i. iii. ii.

Type of Transactions (1) Current Account Transactions .Mainly relate to Import and Export of goods and services .The transactions which are not capital transactions.Current account transactions are of following categories: . .

Few cases require RBI permission.  RBI permission will be required for remittance exceeding the limits. b) Schedule II  Transactions requiring Govt. approval c) Schedule III  Transactions where ADs can freely allow remittances up to prescribed limits..categories Schedule I (prohibited category)  Transactions with Nepal & Bhutan. d) all other transactions:  for which ADs can allow remittances without monetary limits  The exporters and importers get most of their transactions through ADs.  Remittance of earnings from lottery/racing etc..Current Account Transactions«««. a) .

. ‡ Acquisition and transfer of immovable property. These include: ‡ Investment in foreign securities. ‡ Any other transaction which is of capital in nature.2) Capital Account Transactions The transactions that change the asset or liability position. ‡ Purchase/sale of assets.

Convertibility Means if the holder of any currency can convert it into gold or any other generally acceptable foreign currency. without any restrictions of Monetary authority. .

Current Account Convertibility ‡ Full convertibility on current account transactions was introduced by RBI in 1994. access foreign currency for travel. ‡ Current account convertibility allows free inflows and outflows for all purposes. studies abroad. medical treatment and gifts. . ‡ It allows residents to make and receive trade-related payments -receive dollars (or any other foreign currency) for export of goods and services and pay dollars for import of goods and services ‡ Make sundry remittances. etc.

‡ However. investments and borrowings are restricted. .Capital Account Convertibility ‡ Means freedom to convert local financial assets into foreign financial assets and vice versa at market determined exchange rates. ‡ Residents Indians can convert their rupee savings into foreign currency over the counter and sell assets held in India and remit the proceeds overseas to acquire assets in foreign country.

NRI deposits etc. Banking capital.Balance of Payment Summary of the economic transactions of the residents of a country with the nonresidents outside India is BoP. Loans. 1) Export of goods 2) Import of goods 3) Balance of Trade (1-2) (surplus of deficit) 4) Export of services (invisibles) 5) Import of services (invisibles) 6) Net position of invisibles (4-5) (+ or -) 7) Current account (3+6) (+ or -) 8) Net position of Capital account (FDI in India and abroad.) 9) Balance of Payment (net of 7 and 8) (If +ve it is called surplus and if ±ve it is called deficit) .

Also called our account with you. issue of draft. All txns.Currency Accounts 1) Nostro Account: ‡ Account maintained by a bank in India (say PNB) with a bank abroad (say CitiBank) in US$. collection of bills abroad) are routed through Nostro account. ‡ ‡ . In foreign exchange (viz.

Debits in Vostro account mean inflow of foreign currency in-to India.Currency Accounts 2) Vostro Account: ‡ ‡ ‡ ‡ Account maintained by a Foreign bank (say CitiBank) with a bank in India (say PNB) in Indian Rupees. Also called your account with us. . Credits to Vostro account amounts to remittance of FOREX from India.

NY and another Indian bank (say Vijaya Bank) wants to refer to that Nostro account while corresponding with Citibank. ‡ . This account will be called LORO for Vijaya Bank Also called their account with them.Currency Accounts 3) Loro Account: ‡ If a bank in India (say PNB) has Nostro account with Citibank.

Currency Accounts 4) Mirror Account: ‡ ‡ ‡ The account of a foreign bank. While. credit entry is made on purchase of foreign currency and debit on sale. . in Nostro account . It is the exact copy of the entries in Nostro account. the reverse entries are made in Mirror account. as maintained in the books of a bank in India.

Category µB¶: Branches that do not maintain Nostro/Vostro accounts but could operate such accoutns maintained by category µA¶ branches Category µC¶: Branches that conduct their business through µA¶ or µB¶ category branches .Categorization of Branches Category µA¶: Branch that maintains Nostro & Vostro accounts.

‡ When bank acquires foreign currency. (issuance of Traveler cheque) ‡ Banks quote two different rates i.Exchange rate Quotations: ‡ Exchange rate is the rate at which one currency is converted into another currency. it is a sale transaction. it is a purchase transaction. ‡ Foreign currency in FOREX dealings is considered as commodity with varying prices. ‡ All debit or credit transactions in foreign currency are termed as sale or purchase. to keep margin between the rate for sale and purchase. . (encashment of FTC) ‡ When bank parts with foreign currency.e selling rate and buying rate.

100 = US $ 2. ‡ 1) . 2) Indirect Quotations:  fixed units of home currency and variable units of foreign currency. Appreciates it is beneficial to the importer and when it depreciates it is beneficial to the exporter. (Rs.49.Exchange quotations are of 2 categories: Direct Quotations: (prevalent in India)  Fixed units of foreign currency and variable units of home currency (1 US$ = Rs.10)  To earn profit µBuy low and sell high¶  When Rs.15)  To earn profit µbuy high and sell low¶.

Bid rate means buying rate for quoting bank. both buying and selling rates are quoted (viz.20/40 .Offer rate means selling rate for quoting bank . 43.43.Inter Bank Rates In the inter bank market.These are quoted as 1 US $ 43. This indicates that market buying rate for 1$ is Rs.20/40). .20 and selling rate for 1$ is 43.40 Bid and Offer Rate .

how much time is going to be taken to get foreign currency credited in NOSTRO account). two days later or a month later.Spot and Forward Transactions In a contract.e. . the actual payment in rupees and receipt in foreign currency may take place on the same day. Value Date .The date arrived at accordingly is known as Value Date. .The time factor is taken into consideration by the banks while quoting rates (i.There are following rates defined according to the time frames : .

if the deal is settled within 48 hours (T+2 days).It may be SPOT rate. if deal is settled on the immediately succeeding working day (T+1 day) . Tom Rate and Spot Rate .When the contract is deliverable after some time due to time involved in administration of transaction: .Cash/Ready Rate When payment in rupees and receipt in foreign currency takes place on same day.It may be TOM rate. .

It may be at premium or at discount. Forward Premium Spot rate 1US $=Rs. is said to be at a Discount. When foreign currency is available at lower price on future date.00 . When foreign currency is available at higher price on future date.48.20 Forward 1 US $= Rs.20 Forward 1 US $=Rs.48.Forward Rate When the contract is deliverable on some pre-determined future date it is called forward contract and forward rates apply.50 Forward Discount Spot rate 1 US $= Rs.48. The forward rate is either costlier or cheaper than its spot rate. it is said to be on Premium.48.

. negotiation of foreign bills).when no delay is involved in realization of forex by correspondent bank. (e. purchase of draft issued by correspondent bank) Bills Buying rate . or Nostro account is already credited.When there is some delay in realization of foreign exchange in Nostro account. banks charge different rates for different transactions: TT Buying rate . discount. (e.g. purchase.Buying and Selling Rates Depending upon the time taken in realisation of FOREX by the bank to its NOSTRO account.g.

When forex is deemed to be parted with immediately.TT Selling rate . cancellation of inward remittances) Bills Selling rate .Handling of document by the banks is not involved. . clean outward remittances such as DD.g. this rate is applied. (e.. retirement of import bills even if proceeds are by way of DD or TT) . (e.When transaction involve the handling of documents by banks this rate apply.g. TC etc.

Forward Contracts in FOREX Under these contracts. a banker and a customer enter into agreement to: ‡ Buy or sell a fixed amount of foreign currency ‡ On a future specified date. Where delivery of forex should take place on specified future date (say February 10). These contracts afford adequate protection to an exporter or an importer against exchange risk. ‡ At a predetermined rate of exchange. it is called µFixed Forward Contract¶. - . Where customer can sell/buy forex on any day during given period (say between February 5 to February 15). is known as µOption Forward Contract.

The objective is to save the bank from exchange rate fluctuation. . .Unlike ordinary deals.Cover Deal .Simultaneous sale and purchase of a currency for identical amount but for different maturities.Purchase and sale of Forex done by bank to acquire or dispose off foreign currency as a result of sale of purchase made by a customer. . SWAPs .To keep the stock of FOREX near zero. . the difference between buying and selling rates is ignored and buying and selling is done at same rate.

00) .Arbitrage Simultaneous buying and selling of same currencies in different markets. (purchase of USD 25000 in Mumbai at prevailing rate of 48. for the purpose of profit booking.20 and simultaneous sale of USD 25000 in New York at 48.

Positions in foreign currency Where no balance is receivable of payable (sale = purchase) Where balance is either receivable or payable (sale = purchase) Sale > purchase Purchase > sale Short position is squared up by If rates increase while squaring short position If rates decline while squaring short position Oversold or Short position Overbought or Long position Purchase of Foreign currency Bank incurs loss Bank gains Closed position Open position .

Positions in foreign currency Long position is squared by If rates increase while squaring long position If rates decline while squaring long position Balance in hand during day time Balance in hand at close of the day Sale of foreign currency Bank gains Bank incurs loss Day light position Overnight position .

How the parties gain and loose in rate movement Party Exporter (who has forex Importer Forex becoming costlier Gains Loses Forex becoming cheaper Loses Gains Loses gains Bank with overbought Gains position Bank with oversold position Loses .

in such circumstances as would indicate to stay outside India for an uncertain period.Resident Indian In terms of FEMA 1999 a person resident in India means: means: ‡ A person residing in India for more than 182 days during the course of preceding financial year but does not include:A person who has gone out of India or who stays outside India. . in either casefor or an taking up employment outside India or for carrying on outside India a business or vocation outside India or for any other purpose.

any person or body Corporate registered or incorporated in office. branch or agency in India owned or controlled by a person resident outside India . branch or agency outside India owned or controlled by a person resident in India. .Resident Indian . .

who has gone abroad for: . . a person who is not a resident.Non Resident & Non.Indian students pursuing studies abroad.Any other purpose indicating and indefinite stay outside India or .Resident NonIndian As per FEMA. called Nonresident.Business or vocation or .Working abroad on temporary foreign assignment . NON RESIDENT INDIAN (NRI) A person holding Indian Passport.Gainful employment or .

Iran) whose parents or grand parents were the citizen of India. Bangladesh. Bhutan. Afghanistan. China.A foreigner (except citizen of Pakistan. . Nepal.Who at any time held an Indian Passport .Foreigner spouse of Indian citizen. Sri Lanka. .Person of Indian Origin (PIO) Is a person: .

partnership firm.Company.Overseas Corporate Body (OCB) . society and other corporate body owned directly of indirectly to the extent of at least 60% by NRIs .

No holding period for repatriation of sale proceeds of IP (earlier 10 years) . Within ceiling rate of LIBOR/SWAP+100 BP. RD INR Current Income and Interest Repatriable. Principal Notrepatriable Local funds or Foreign inward remittance As applicable in domestic TD ± Banks are free to determine. CA. FD. *Individuals/entities of Bangladesh/Pakistan Nationality/ownership require permission from RBI. USD. For floating interest reset at 6 months 1-3 years Period of FD Rate of Interest Others TD-Within ceiling of LIBOR/SWAP + 175 BPfor USD of corresponding maturity SF-as applicable to domestic deposit Interest is payable HY basis on Funds of local origin cannot be 360 days a year basis. SF ± As fixed for domestic deposit. CA. Euro. Permitted with Non Residents Permitted with Non residents Term Deposits only SB. RD GBP. Yen. credited in these accounts No interest paid is deposit withdrawn within one year Repatriation up to USD 1 million/FY allowed subject to payment of taxes. Aus & INR Can dollar Repatriable Repatriable Source of Funds Foreign Inward Remittance & Foreign Inward Remittance & Transfer from NRE account Transfer from FCNR account 1 -5 years Fixed/Floating.Deposit Accounts of Non Resident Indians Particulars Who Can Open Joint Account Type of Accounts Currency Repatriability FCNR (Foreign currency Non resident A/c) NRIs* NRE (Non resident external NRO (Non resident ordinary account rupee A/c NRIs* Any person resident outside India* Permitted with Residents SB. FD.

.Facility of operation of accounts by power of attorney holder extended to NRO accounts . .Banks may accept FD for more than 3 yrs in NRE account but should not offer higher rate for this period.No new NRE/FCNR/NRO account in the name of OCBs should be opened and no renewals be made. (previously Rs.Nomination facility available in all the accounts.100 lac.20lac) . period of 6 months. . .Ceiling of loan against FCNR/NRE deposit is Rs.Loan can be given against security of Term Deposit for personal/business purpose except for agriculture/plantation/real estate/relending purpose .Foreign tourists can open NRO account up to a max.Other Features of NRI deposit accounts .

Forex received as pension/ superannuation/ other benefits from employer abroad 2. SB. Forex acquired: All categories of foreign exchange earners are now allowed to credit 1. End Use FD-USD 5000 Linked to LIBOR. CA. acquired during travel abroad obligations Resident Foreign CurrencyDomestic (RFC-D) A/c Resident Individuals 4. Euro USD-1000 CA Any convertible currency Nil Rate of Intt. became Resident on of after 18/04/92 1. 3.Funds received for meeting specific From FCNR/NRE A/c.While on visit abroad by way upto 100% of their Forex earnings of honorarium/gift. Type of Accounts Currency Minimum Amt. TD Any Convertible currency SB/CA-No min. was NRI 3. GBP.DEPOSIT SCHEMES FOR RESIDENT INDIANS Particulars Who Can Open Source of Fund Resident Foreign Currency (RFC) A/c Earlier NRI.From any person on visit to Realisation of assets abroad Ineligible Credits: India or honorarium/gift/for Forex acquired as gift or services/settlement of any -Foreign currency loans or inheritance from person who lawful obligation investments received from outside. in line with No interest payable FCNR deposits. Exchange Earner¶s Foreign Currency (EEFC) A/c Resident individuals including firms companies etc. No restrictions including investment overseas For permissible current and capital account transactions No interest payable For bonafide purposes . Maturity 1-5 yrs. to EEFC A/c 2.Representing unspent forex . CA USD.

Cheque book facility allowed in RFC-D and EEFC account but not in RFC account.Loans and overdrafts in India and abroad not allowed. .Bonafied remittance in RFC account is freely permissible.Other features of Resident Accounts .Joint accounts with residents/non-residents not permitted in above types. . . .Balance in RFC accounts is exempted from SLR/CRR .

.Forex Remittance Facility to Residents AD banks can release FOREX to residents in India as per rules framed under section 5 of FEMA. . or for any kind of txn.For Iran. Balance as traveller¶s cheques or drafts.Currency notes/coins only up to US$3000. .Forex to be used within 180 days of purchase. With the persons of Nepal and Bhutan. . . .For Iraq and Libia currency notes and coins not exceeding US$5000 or its equivalent. . Russian fedration no ceiling.Unused Currency notes and TCs to be surrendered within 180 days of return.No release of FOREX for any kind of travel to.

.5000 from/to any country. .Foreign currency/traveler cash and above that through DD/Cheque etc.Any person can bring/send Indian Currency upto Rs. but denomination not exceeding Rs.AD may release up-to USD5000 on the basis of simple request letter (without form A2). . . Upto US$2000 and foreign coins without any ceiling can be retained by the traveller for his subsequent visits abroad.Forex Remittance Facility to Residents . AND any amount from Nepal or Bhutan.Forex can be purchased up to Rs.Form A2 to be preserved by banks for 1 year for verification by auditors. .100/-. other than Nepal or Bhutan.50000/.

and/or the value of foreign currency notes exceeds USD5000. it is required to be declared to the Indian Customs authorities on a Currency Declaration Form (CDF). . However.Forex Remittance Facility to Residents .There are no restrictions on the amount of foreign currency to be brought to India. This declaration is essential for the foreign traveler as it facilitates easy conversion of foreign currency into Indian currency and also reconversion of the unspent balance of Indian rupees into foreign currency at the time of departure from India. if the total amount of foreign currency notes/coins or travelers¶ checks exceeds USD 10000 or its equivalent. .A certified copy of the CDF handed over to the traveler.

Studies abroad (per acedimic session) .Employment .Remittance without specific purpose .Business Trip abroad .Medical treatment without any proof (beyond 100000 as per cost estimates of doctor/hospital) .Remittance under liberalized remittance scheme Amount US $ ‡ 25000 ‡ 100000 ‡ ‡ ‡ ‡ ‡ ‡ ‡ 100000 10000 100000 100000 100000 100000 200000 .Maintenance of relative abroad .Immigration .Tour/Visit abroad (per FY) .Release of Foreign Exchange Purpose .

LETTER OF CREDIT .Provisions of Letter of Credit transactions in the World Trade are governed by ³Uniform Customs and Practice for Documentary Credit (UCPDC) issued by ICC Paris.It is an instrument by which a Bank undertakes to make payment to a seller on production of documents stipulated in the credit. . . . .Latest edition is UCPDC 600.Letter of Credit is an instrument facilitating trade wherein all parties deal in documents and not in goods.

e. The Bank adding confirmation to the credit. in addition to issuing bank. if all conditions of LC are complied. who opens LC and undertakes to pay seller or his banker. the seller or exporter. who requests to open LC to his banker. Buyers/Importer¶s bank. Issuing bank¶s branch (or correspondent in exporter¶s country) to whom the LC is sent for onward transmission to the seller/seller¶s bank. undertakes to make payment provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and the terms of LC are complied with. Advising bank dose not assume any responsibility but to check apparent authenticity of the LC.DIFFERENT PARTIES TO A LETTER OF CREDIT Applicant Issuing Bank Advising Bank The buyer or importer of goods. The party to whom the credit is addressed i. negotiation or acceptance under the credit. Article 9(b) of UCPDC provided that Confirming bank. It undertakes the responsibility of payment by issuing bank and on his failure. Beneficiary Negotiating Bank Reimbursing Bank Confirming Bank . to pay. The third bank which pays seller or funds the negotiating bank on behalf of issuing bank. Seller¶s bank to whom the seller presents his documents for payment.

Restricted LC Where a specified bank is designated to pay. adds confirmation that the payment will be made. The term of such credit would be identical except that the prices may be lower and validity earlier.23 January 2003. . With or Without Where the beneficiary holds himself liable to the holder of the bill if recourse dishonoured. Where he does not. banks should not open LCs and purchase/discount/negotiate bills bearing µwithout recourse¶ clause. If it cannot be. is With recourse. This could be done only Once. DP Letter of Credit Where the payment is made against documents on presentation. Transferable LC Benefit be made available to one or more other parties in whole or in part. is without recourse. it is Irrevocable Credit called irrevocable LC. Back to Back LC When the exporter gets another LC issued in favor of his local suppliers on the strength of the LC issued in his favor. In terms of UCP-600 only Irrevocable LCs can be issued. of Credit The documents of title to goods are delivered to the applicant merely on acceptance for payment. if specifically provided in LC. Confirmed LCs A credit to which the advising bank or other bank. accept or negotiate. at the request of the issuing bank. As per RBI directives dt.TYPES OF LETTERS OF CREDIT Revocable & The LC can be modified without consent of beneficiary. DA (usance) Letter Where the payment is to be made on the maturity date in terms of the credit. Transferable LC can be retransferred in the name of 1st beneficiary. By such additions the confirming bank steps into the shoes of issuing bank.

unless LC permits the same Where full or part amount is payable at some future date Green Clause Revolving LC Installment Credit Deferred Credit . after drawings are made. LC permits the advance for storage of goods in a warehouse in addition to pre-shipment advance. the credit reverts to its original position and made available to the beneficiary again and again during the currency of LC. Provides that.Types of LCs Contd««. RBI prohibits revolving LCs for import into India. In case any installment is not shipped the entire credit extinguishes.. These advances are adjusted from proceeds of the bills negotiated. The LC is for full value but allows for part shipment. Red Clause Is a clause printed in RED in LC to provide pre-shipment advance to the seller on issuing bank¶s responsibility.

strike of lockout or caused beyond its control. war. services of performance to which the documents may relate (Article 5) A presentation of documents on behalf of beneficiary must be made not later than 21 calendar days after shipment (but before expiry date of LC). the expiry /presentation day shall be extended to next Banking day.Important provisions of UCP600 Banks deal in documents and not in goods. But the last day of shipment shall not be extended as a result of this (Article 29) Force Majeure: A bank assumes no responsibility for consequences arising out of the interruption of its business by act of God. (Article 36) - - . the amount of insurance coverage must be at least 110% of CIF or CIP value. riots. civil commotions . A nominated bank and issuing bank shall each have a 5 banking days following the day of presentation to determine if the documents are in order. (Article 28) If the expiry date of a Credit or the last day for presentation falls on a day when bank is closed (for reasons other than Force Majeure). If there is no indication of insurance coverage requirement in the LC.

. banks are often required to furnish guarantees on behalf of their own customers in lieu of their obligations. 1872. performance or other requirements . defines guarantees as a contract to perform the promise or discharge the liability of a third person in case of his default.During the course of business.BANK GUARANTEES .Section 126 of Indian Contract Act.

Under the contracts entered into by the customers of the bank. This construes Financial Guarantee. in lieu of cash/earnest money. furnish bank guarantee for the same amount. cash deposit or earnest money is required to be deposited for due performance of contract.The customer may. . .Type of Guarantees Financial Guarantee: .

The bank agrees and undertake that his customer shall duly and effectively observe and perform the conditions of the contract. . .The guarantee meant for performance of contract entered into by the customers.The bank further declares that in the event of default by the customer in performing the contract. it will make payment for such default as agreed in the Performance Guarantee. .Performance Guarantee: .

.This is a guarantee for a payment which has been deferred or postponed.Normally advance payment of 10-15% and payment of another 10-15% of capital goods on receipt of goods is made. Balance amount with interest is paid in installments in 1-7 years which is secured by DPG . .Unlike other LGs here the payment has to be made by banks on accepted due dates and thereafter installment is recovered from the customer. . .The bank undertakes to pay the installments due under the DPG.Deferred Payment: .Issued in case of purchase of capital goods like machineries.

30 Yrs.If no reply received by the bank within reasonable period. . whichever is earlier.On expiry of validity period of LG.Expiry of Guarantee . Where beneficiary is government & 3 years for others. Invocation of Guarantee . Limitation Period .The amount claimed under the guarantee should be paid immediately if invocation is in accordance with terms of guarantee.The beneficiary can enforce his remedies till limitation period is alive from the stipulated expiry date/invocation. . . Bank sends letter to beneficiary advising that liability of bank under LG has been discharged. the entry is reversed by the bank.

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