fera to fema

Progression Of FERA To FEMA And Its Impact On Forex Market

GROUP 4

FOREIGN EXCHANGE AND FOREIGN EXCHANGE MARKET

• Foreign exchange is the simultaneous exchange of two currencies

• The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies

• The major participants in this market are commercial banks, forex brokers, and authorised dealers and the monetary authorities.

• For example: United States to import goods from the European Union member states, especially Eurozone members, and pay euros, even though its income is in United States dollars.

FOREIGN EXCHANGE REGULATION ACT,1973

An Act to consolidate and amend the law regulating certain payments

- dealings in foreign exchange and securities,

- transactions indirectly affecting foreign exchange and the import and

export of currency for the conservation of the foreign exchange

resources of the country

- proper utilization thereof in the interests of the economic development

of the country

3

REASONS AND OBJECTIVES FOR ENACTMENT OF FEMA

Reasons for enactment of FEMA

Impediment in India to go global

FERA reviewed in 1993

Significant changes made

Objectives of FEMA

Facilitate trade

Introduction on capital account and current account transactions

Current account transaction allowed and RBI regulation

Simplified dealing in foreign Exchange transactions

Liberalisation in enforcement provision

BACKGROUND

• Goal of conserving India’s foreign exchange resources.

• Dominance of MNC’s

• Huge Trade Deficit

Devaluation of currency

Increase in oil price

• FERA was introduced when FOREX reserves were low

• Objective was to regulate the inflow of foreign capital

OBJECTIVES OF FERA

To regulate dealings in foreign exchange and securities.

To regulate transactions, indirectly affecting foreign

exchange.

To regulate the import and export of currency.

To regulate acquisition, holding of immovable property in

India by non residents thereby reducing dominance of MNC’s

The proper utilization of foreign exchange so as to promote

the economic development of the country.

SALIENT FEATURES OF FEMA• It will facilitate trade rather than prevent misuse of foreign exchange

• Definitions of capital account transaction and current account transaction have been introduced

• All current account transactions shall be allowed (subject to reasonable restrictions). Reserve Bank to classify those capital account transactions that are to be permitted and to regulate transfer and issue of foreign securities by a resident in/outside India as well as setting up of branches/offices by foreign companies in India.

• All key sections relating to dealings, holding and payments in foreign exchange and exports have been simplified.

• Liberalisation in enforcement provisions reflects that the attitude is of putting trust in the persons covered.

Extend of FEMA• The Act applies to whole of India and also to any person to

whom the act applies• Emphasis on residential status• Central government

SIMILARITIES AND DIFFERENCES BETWEEN FERA AND FEMA

•DIFFERENCES:

1. Provisions2. Features3. New terms in FEMA4. Definition of Authorized person5. Punishment6. Quantum of penalty7. Appeal8. Right of assistance during legal proceedings9. Power of search and seize

Foreign Direct Investment

• It is a direct investment into production or business in a country• By an individual or company in another country• Either by buying a company in the target country or by

expanding operations of an existing business in that country.

FDI MONITORING AND REVIEWING AGENCIES

• Ministry of Commerce and Industry, GOI• RBI• FIPB (Foreign Exchange Promotion Board)• DIPP (Dept. of Industrial Policy and Promotion)

ENTRY ROUTES FOR FDI IN INDIA1. Automatic route: This route is available for all sectors or

activities that where 100% foreign ownership is permitted

2. Government route: Foreign Investment Promotion Board(FIPB) approves investment proposals:

Where the proposed shareholding is above the prescribed sector caps, or

Where the activity belongs to that small list of sectors where FDI is either not allowed or where it is mandatory that proposals be routed through the FIPB (e.g. sectors that require industrial licencing).

SECTORS PROHIBITED FOR FDI

• Retail Trading (except single brand product retailing)• Lottery Business including Government /private lottery, online lotteries, etc.• Gambling and Betting including casinos etc.• Business of Chit funds• Nidhi company• Trading in Transferable Development Rights (TDRs)• Real Estate Business or Construction of Farm Houses• Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or

of tobacco substitutes• Activities / sectors not open to private sector investment e.g. Atomic Energy

and Railway Transport (other than Mass Rapid Transport Systems).

Recent changes in FDI policy Insurance sector – 26% to 49%(Automatic Route) Oil refineries, power exchanges, stock exchanges and clearing corporations- 49% (Automatic Route)Cellular services, FDI was raised to 100 per cent from74 per cent. -- 49 % (Automatic Route)Courier services – 100% (Automatic Route)Asset Reconstruction Company-74% of paid up capital to 100% -49% (Automatic Route)Credit Information Companies -49% to 74%- (Automatic Route)

POSSIBLE TYPES OF FOREIGN INVESTMENTS

Investment

Long Term Borrowings Short term BorrowingsEquity

FDI FEM

Debentures Conv. Pref. Shares

Unfunded Loans

Conv. Debentures

ECB

Borrowing Guidelines

Foreign Exchange Management Act (FEMA) Guidelines For Borrowing

External Commercial

Borrowing (ECB)

Foreign Currency Convertible Bonds

(FCCBs) Preference SharesForeign Currency

Exchangeable Bonds (FCEB)

External Commercial Borrowing (ECB)

ECB is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (public sector undertakings)

It refers to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years.

WAYS OF RAISING ECB

Automatic Route• Does not require

RBI approval

Approval Route• Approval required

from RBI

AUTOMATIC ROUTE

BORROWERS

Corporate including hotel, hospital and software sector

Infrastructure Finance companies (IFCs)

Units in SEZ zones

NGO involved in Micro finance

LIMITS FOR RAISING ECBCategory Amount (USD) per unit /per

financial year

Corporate other than those in service sector (i.e. hotel, hospital and software)

Up to 750 M or equivalent

Corporate in service sector (ECB not applicable for Land acquisition)

Up to 200 M or equivalent

NGO engaged in Micro Finance Up to 10 M or equivalent (Forex exposure to be fully hedged)

APPROVAL ROUTE

ELIGIBLE BORROWERS (1)

Foreign Investors dealing with Infrastructure and export finance such as EXIM bank

Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government.

ECB with minimum average maturity of 5 years by NBFC to finance import of infrastructure equipment for leasing to infrastructure projects.

Infrastructure Finance Companies (IFCs) i.e. NBFCs, categorized as IFCs, by RBI (beyond 50% of their owned funds) for on-lending to the infrastructure sector as defined under the ECB policy and subject to compliance of certain stipulations.


Foreign Currency Convertible Bonds (FCCBs) by Housing Finance Companies.

Special Purpose Vehicles (SPV) or any other entity notified by the RBI, set up to finance infrastructure companies / projects exclusively.

Financially solvent Multi-State Co-operative Societies engaged in manufacturing.

SEZ developers for providing infrastructure facilities within SEZ.


Eligible Corporate under automatic route other than in the services sector i.e. hotels, hospitals and software sector can avail of ECB beyond USD 750 million per financial year.

Corporate in the service sector for availing ECB beyond USD 200 Mn. per financial year.

Cases falling outside the purview of the automatic route limits and maturity indicated, etc.

Capital Account Transactions• “Capital account transaction" means a transaction which alters the

assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions like:

• Changes in Assets/ Liabilities• Transfer/ issue of security• Borrowing/ Lending• Export, import or holding of currency or currency notes• Giving guarantee

27

Current Account Transactions

The definition is inclusive and any expenditure which is not a capital account transaction will be current account transaction. It includes:

• payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business

• payments due as interest on loans and as net income from investments

• remittances for living expenses of parents, spouse and children residing abroad, and

• expenses in connection with foreign travel, education and medical care of parents, spouse and children

28

CURRENT ACCOUNT TRANSACTIONS FEW EXAMPLES

• Payment for imports of goods• Remittance of interest on investment made

and funds borrowed from abroad after tax deductions• Remittance of Dividend if the investment was

allowed without any condition• Booking with Airlines/Shipping• Salary/remuneration to Foreign Directors

subject to restrictions in any other law

29

AUTHORIZED PERSON

• Authorised person - means an authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under sub-section (1) of section 10 to deal in foreign exchange or foreign securities.• Not given a free hand to deal in foreign Exchange. He has to

furnish details and information, to Reserve Bank from time to time as may be required by it.

• AD CAT II (MUMBAI).• Thomas Cook (I) Ltd. (188 BRANCHES)• WALL STREET FINANCE LTD (38 BRANCHES)• COX & KINGS (INDIA) LTD (117 BRANCHES)

AUTHORIZED PERSON

MONEY CHANGERS

• (a) The Reserve Bank may, on an application made to it in this behalf, authorise any person to deal in foreign currency.

• (b) An authorisation under this section shall be in writing and -• may authorise dealings in all foreign currencies or may be

restricted to authorising dealings in specified foreign currencies only;• may authorise transactions of all descriptions in foreign

currencies or may be restricted to authorising specified transactions only;• may be granted with respect to a particular place where alone

the money changer shall carry on his business;• may be granted to be effective for a specified period, or within

specified amounts;• may be granted subject to such conditions as may be specified

therein

MONEY CHANGERS

• Full fledged• Restricted

AVERAGE MATURITY ON AMOUNT BORROWED

Limits Minimum Average Maturity Period

Up to USD 20 M or its equivalent

3 years

Above USD 20 M and up to 750 M or equivalent

5 years

WHY COMPANIES OPT FOR ECB’S

• Foreign currency funds: Companies need funds in foreign currencies for many purposes such

as, paying to suppliers in other countries etc that may not be available in India.• Cheaper Funds: The cost of funds borrowed from external sources at times works out to be

cheaper as compared to the cost of Rupee funds.• Diversification of investor’s base: Another advantage is the addition of more investors thus

diversifying the investor base• Satisfying Large requirements: The international market is a better option in case of large

requirements, as the availability of the funds is huge when compared to domestic market.

The government through the ECB policies is trying to nourish 2 sectors:• Infrastructure• SME

NESTLE INDIA LTD - ECB

JET AIRWAYS RAISED $300 MILLION VIA APPROVAL ROUTE

• Private carrier Jet Airways raise $300 million through the external commercial borrowing (ECB). • The proceeds from the ECB will help the airline pare its high cost debt.• The airline has already received sanction from one of the West

Asian banks for $150 million ECB for which Jet had approached the RBI for its approval.• All necessary approvals have been taken from the Reserve Bank to

raise $ 150 million for which the documentation is complete.• CFO said, adding, "we should be significantly in a better position at the

end of March 2015.”

CASE STUDY: SUZLON ENERGY- INDIA'S BIGGEST FCCB DEFAULT

• Suzlon raised:A) $200 million & $20.8 million through dollar convertible bonds in 2007 & 2009 with a conversion price of Rs97.26 & Rs76.68 per share respectively with redemption after five years from the date of issue.As on June 30, 2012, Suzlon had gross debt of Rs 13,477 crore that includes:

i) Rs 2,053 crore loan for acquisitions, ii) Rs 3,641 crore FCCBsiii) Rs 7,783 crore of working capital, capex and other loans.

Promoters held 52.76% of Suzlon Energy as on June 30, 2012.

• Markets were at their peak in 2006-2008, FCCBs were in cheaper compared to domestic market.• Companies believed their shares would rise.• Stock plunged about 83% in the last three years, wiping out $2.5

billion from its market value. • The share price fell down to Rs16.15 which made conversion of the

debt into equity meaningless, rendering repayment the only option. • Suzlon was set to default on redemption of over $200 million foreign

currency convertible bonds (FCCBs). • A consortium of banks including SBI, BOB and ICICI gave loan to

Suzlon in July, 2012 that saved it from default. • The company had very little to offer

FOREIGN CURRENCY ACCOUNT

• Participants in international exhibition/trade fair

• permission for opening a temporary foreign currency account

abroad

• balance in the account is repatriated to India through normal

banking channels within a period of one month from the date

of closure of the exhibition/trade fair and full details are

submitted to the AD Category – I banks concerned.

• It would also be permissible to `gift’ unsold goods up to the

value of USD 5000 per exporter, per exhibition/trade fair.

Exchange Earners’ Foreign Currency (EEFC) Account

• This account shall be maintained only in the form of non-interest

bearing current account

• the sum total of the accruals in the account during a calendar

month should be converted into Rupees on or before the last day

of the succeeding calendar month after adjusting for utilization of

the balances for approved purposes or forward commitments

• to enable exchange earners to save on conversion/transaction

costs while undertaking forex transactions.

SETTING UP OF OFFICES ABROAD AND ACQUISITION OF IMMOVABLE PROPERTY FOR OVERSEAS OFFICES

• AD Category – I banks may allow remittances for initial expenses up to 15% of the average annual sales/income or turnover during the last two financial years or up to twenty-five per cent of the net worth, whichever is higher.

• For recurring expenses, remittances up to ten per cent of the average annual sales/income or turnover during the last two financial years may be sent for the purpose of normal business operations of the office

subject to the following terms and conditions:

• the overseas branch/office has been set up or representative is posted overseas for

conducting normal business activities of the Indian entity

• the overseas branch shall not enter into any contract or agreement in contravention

of the Act, Rules or Regulations

• the overseas office should not create any financial liabilities, contingent or

otherwise, for the head office in India

• not invest surplus funds abroad without prior approval of the Reserve Bank. Any

funds rendered surplus should be repatriated to India.

ADVANCE PAYMENTS AGAINST EXPORTS

Where an exporter receives advance payment (with or without interest), from

a buyer outside India, the exporter shall be under an obligation to ensure that

–

• the shipment of goods is made within one year from the date of receipt of

advance payment;

• the rate of interest, if any, payable on the advance payment does not

exceed London Inter-Bank Offered Rate (LIBOR) + 100 basis points; and

• the documents covering the shipment are routed through the AD Category

– I bank through whom the advance payment is received.

COUNTER-TRADE ARRANGEMENT• Adjustment of value of goods imported into India

against value of goods exported from India • Escrow Account opened in India in US Dollar

• Imports and exports under the arrangement should be

at international prices in conformity with the FTP and

FEMA, 1999 and the Rules and Regulations made

there under.• No interest will be payable on balances standing to the

credit of the Escrow Account • No fund based/or non-fund based facilities would be

permitted against the balances in the Escrow Account.

Guidelines for Imports of Goods and ServicesObligation of Purchaser of Foreign Exchange• use it either for the purpose mentioned in the declaration

made by him to an Authorised Dealer Category – I bank

Or• to use it for any other purpose for which acquisition of

foreign exchange is permissible under the said Act or Rules or Regulations

the AD Category – I bank should ensure that the importer furnishes evidence of import

payment for import can also be made by way of credit to non-resident account of the overseas exporter maintained with a bank in India

TIME LIMIT FOR SETTLEMENT OF IMPORT PAYMENTS

Time limit for normal imports• remittances against imports should be completed not later than six

months from the date of shipment• AD Category – I banks may permit settlement of import dues delayed

due to disputes, financial difficulties, etc. • Interest in respect of delayed payments, usance bills or overdue

interest for a period of less than three years from the date of shipment may be permitted subject to certain conditions.

CAPITAL ACCOUNT CONVERTIBILITY

• Freedom of converting local financial assets into foreign financial assets and vice versa

Some common CAC transaction:• Transfer or issue of any foreign security by a person resident in India;

• Ttransfer or issue of any security by a person resident outside India;

• Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;

• Any borrowing or lending in rupees in whatever form or by whatever name called;

• Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;

• Deposits between persons resident in India and persons resident outside India;

• Export, import or holding of currency or currency notes;

• Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;

• Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;

• Giving of a guarantee or surety in respect of any debt,obligation or other liability incurred-

Prohibitions on Capital account transactions

• General Prohibition:- A person shall not undertake or sell or draw foreign exchange to or from an authorized person for any capital account transaction.

-For example, Reserve Bank of India has issued a Circular wherein a resident individual can draw from an authorized person foreign exchange up to US$ 25,000 per calendar year for a capital account transaction specified in Schedule I to the Notification.

• Special Prohibition:- A non resident person shall not make investment in India in any form, in any company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage:-

(i) in the business of chit fund, or (ii) as Nidhi Company, or (iii) in agricultural or plantation activities or (iv) in real estate business, or construction of farm houses or (v) in trading in Transferable Development Rights (TDRs).

Convertibility

• Fully convertible Currency: USD

• Partially convertible currency: The Indian rupee is partially convertible due to the Indian Central Bank’s control over international investments flowing in and out of the country

• Nonconvertible currency: Cuba and North Korea

• Reasons for CAC in Indian economy:- To ensure total financial mobility in the country- Helps in the efficient appropriation or distribution of international capital in India- Equalizing the capital return rates - Escalates the production levels - A fair allocation of the income level in India

CASE STUDY ON FEMARBI SLAPPED RS.125 CRORE ON RELIANCE

INFRASTRUCTURE:

RBI asked the Anil Dhirubhai Ambani Group firm, Reliance

Infrastructure to pay appox Rs 125 crore as compounding fees for

parking its foreign loan proceeds worth $300 million with its mutual

fund in India for 315 days, and then repatriating the money abroad to a

joint venture company.

• July 25, 2006 -Reliance Energy raised a $360-million ECB on for investment in

infrastructure projects in India

• November 15, 2006 the ECB proceeds were drawn down on and temporarily

parked overseas in liquid assets.

• On April 26, 2007, Reliance Energy repatriated the ECB proceeds worth $300

million to India, balance remained abroad in liquid assets.

• on April 26, 2007 invested these funds in Reliance Mutual Fund Growth Option

and Reliance Floating Rate Fund Growth Option

• on April 27 2007, the entire money was withdrawn and invested in Reliance

Fixed Horizon Fund III Annual Plan series V

• On March 5, 2008, Reliance Energy repatriated $500 million (which included the

ECB proceeds repatriated on April 26, 2007 for investment in capital of an

overseas joint venture called Gourock Ventures based in British Virgin Islands

According to RBI

• a borrower is required to keep ECB funds parked abroad till the actual requirement

in India.

• a borrower cannot utilise the funds for any other purpose.

Companies claim

• The company said due to unforeseen circumstances, its Dadri power project was

delayed.

• the ECB proceeds of $300 million were bought to India and was parked in liquid

debt mutual fund schemes

• the company said the exchange rate gain on account of remittance on March 5

2008, would be a notional interim rate gain as such exchange rate gain is not

crystallised

Penalties by RBI

• when the proceeds of the ECB are parked overseas, the exchange rate gains or losses are

neutralized

• the company has made additional income of Rs 124 crore, it is liable to pay a fine of Rs

124.68 crore.

• the company submitted another fresh application for compounding and requested for

withdrawal of the present application dated April 17, 2008, to include contravention

committed in respect of an another transaction of ECB worth $150 million.

• RBI said the company will have to make separate application for every transaction, it

cannot be clubbed.

DATA ANALYSISAn analysis of the Economic Indicators and their

relationship to FX

USD / INR Ex Rate

• It is normally expressed as number of INR’s that make up one USD & denoted as USD/INR• Greatly affects the imports & exports of the country• Higher the ratio better for exporters, lower the ratio

better for importers.

2005 2010 42005 42095 42186 422170

10

20

30

40

50

60

70

USD/INRIN

R's

per

$

Sensex

• The BSE Sensex is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange.• These 30 companies are the most actively

traded stocks in the market• The S&P BSE Doll-Ex 30 is the USD version of the

S&P BSE SENSEX• Affected by FII’s which are affected by FX rate

2005 2010 42005 42095 42186 42217

7498.63

18207.56

29182.95

27011.3128114.56

28223.08

SensexSensex

Nifty

• The CNX Nifty, also called the Nifty 50 or simply the Nifty, is National Stock Exchange of India's benchmark stock market index for Indian equity market.• Nifty related to the For-Ex regulation in a similar

manner as Sensex is related.• Direct & Indirect effect of FX

2005 2010 42005 42095 42186 422170

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Nifty

Nifty

Apr/0

0Oct/

00Ap

r/01Oct/

01Ap

r/02Oct/

02Ap

r/03Oct/

03Ap

r/04Oct/

04Ap

r/05Oct/

05Ap

r/06Oct/

06Ap

r/07Oct/

07Ap

r/08Oct/

08Ap

r/09Oct/

09Ap

r/10Oct/

10Ap

r/11Oct/

11Ap

r/12Oct/

12Ap

r/13Oct/

13Ap

r/14Oct/

14Ap

r/15

0

5000

10000

15000

20000

25000

30000

35000

SensexNifty

Crude

• 3 Main varieties• WTI• Brent• Dubai

• Main exchange: NYMEX• Main import of India. Hence majorly affected by FX rates

2005 2010 42005 42095 42186 422170

500

1000

1500

2000

2500

3000

3500

4000

Crude

Crude

Gold

• Safest alternative to the USD• Gold is one of the most imported commodities in

India. Indian’s are the largest consumers of this precious metal in the world. • Higher the FX rate more expensive is gold &

hence more difficult to Import.

2005 2010 42005 42095 42186 422170

5000

10000

15000

20000

25000

30000

Gold

Feb 2005 Jan 2006 Dec 2006 Nov 2007 Oct 2008 Sep 2009 Aug 2010 Jul 2011 Jun 2012 May 2013 Apr 2014 Mar 2015 -

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

CrudeGold

FDI• An investment transaction in which an investor

from one country (home country) seeks to obtain managerial interest in an entity in another country (host country) for controlling and operating physical assets created through such investments.• Automatic & Govt. Routes

2005 2010 42005 42095 42186 422170

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

FDI (Rs. Cr)

Period

Rs. C

r.

FPI (Previously known as FII)• FIIs do not invest in unlisted entities. They

participate only through stock exchanges.• FIIs cannot invest at the time of initial allotment.

Foreign investors investing in initial allotment of shares (say IPOs or when a group of entities come together to float a company) are categorized as FDIs.• Of late FII have also taken to buying direct stakes

in technologies, management etc. similar to the FDI regime. However, unlike FDI’s they are in such positions only for a short period of time and with the sole motive of capital gains.

2005 2010 20150

50000

100000

150000

200000

250000

300000

350000

FII (Rs. Cr.)

FII (Rs. Cr.)

FX reserves

• Foreign-exchange reserves (also called For-Ex reserves or FX reserves) are assets held by a central bank or other monetary authority, usually in various reserve currencies, mostly the United States dollar, and to a lesser extent the euro, the pound sterling, and the Japanese yen, and used to back its liabilities• In India FX reserves are Managed by the RBI

2005 2010 42005 42095 42186 422170

5

10

15

20

25

30

35

40FX Reserves (USD Bn)

fera to fema

Law