1. What is Foreign Foreign exchang exchange? e? When trade takes place between the residents of two countries, the two countries being a sovereign state state have their own set of regulation regulationss and currency. currency. Due to this problem arises in the conduct of international trade and settlement of the transactions .While the exporter would like to get the payment in the currency of his own country, the importer can pay only in the currency of the importers country. This creates a need for the conversion of the currency of importer’s into that of the exporter’s country. country. Foreign exchange is the mechanism by which the currency of one country is gets converted into the currency of another country. The conversion is done by banks who deal in foreign exchange.
What is FOREX?
The Foreign xchange market, also referred to as the !F"#$! or !Forex! or !#etail forex! or !F$! or !%pot F$! or &ust !%pot! is the largest financial market in the world, with a volume of over '( trillion a day. )f you compare that to the '*+ billion a day volume that the ew -ork %tock xchange trades, you can easily see how enormous the Foreign xchange really is. )t actually euates to more than three times the total amount of the stocks and futures markets combined.
What is traded on the Foreign Exchange Market?
The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. /urrencies are traded through a broker a broker or or dealer, and are traded in pairs0 for example the euro and the 1% dollar 21#31%D4 or the 5ritish pound and the 6apanese -en 2758368-4. 5ecause you9re not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, say, 6apanese -en, -en, you are in effect buying a share in the 6apanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the 6apanese economy. :ccording to the 5ank for )nternational %ettlements, %ettlements, average daily turnover in global foreign exchange markets is estimated at ';. trillion in main foreign exchange market turnover was broken down as follows? 1
@+ trillion in spot spot transactions transactions ';A* billion in outright forwards '>.B>( trillion in foreign exchange swaps '>*< billion estimated gaps in reporting
What is the purpose of trading in Foreign Exchange Market?
The foreign exchange market 2currency, forex, or F$4 trades currencies. )t lets banks and other institutions easily buy and sell currencies. The purpose of the foreign exchange market is to help international trade and investment. : foreign exchange market helps businesses convert one currency to another. For example, it permits a 1.%. business to import uropean goods and pay uros, even though the business9s income is in 1.%. dollars. )n a typical foreign exchange transaction a party purchases a uantity of one currency by paying a uantity of another currency. The modern foreign exchange market started forming during the >(H of currency transfers3payments are made via Foreign xchange /ompanies. These companies9 selling point is usually that they will offer better exchange rates or chea cheape perr
pay payment mentss
than than the cus custom tomer9s er9s bank bank..
com compani panies es dif differ from Goney oney
Transfer3#emittance Transfer3#emittance /ompanies in that they generally offer highervalue services.
Money $ransferRemittance "ompanies
Goney Gon ey tra transf nsfer er com compan panies ies3re 3remit mittan tance ce compani companies es perfor perform m highv highvolu olume me lowva lowvalue lue transf transfers ers generally by economic migrants back to their home country. )n *@@B, the :ite 7roup estimated 7roup estimated that there were ';A< billion of remittances 2an increase of =H on the previous year4. The four largest markets 2)ndia 2)ndia,, /hina /hina,, Gexico Gexico and and the 8hilippines 8hilippines44 receive '.;+ million, thereby violating the provisions of %ections >A2>42b4 and >=2*40 15
)T/ transferred funds in an unauthoried manner, to the tune of '@.+ million outside )ndia
by suppressing facts with regard to a tobacco deal. This was in contravention of %ection a 2>4
read with %ection (=0 )T/ acuired '@.* million through counter trade premium amounting to between ; and (
per cent on a total business of >.;@ billion, contravening %ection =2>40 The company had debts to the tune of *+ million due to overinvoicing in coffee and
cashew exports during >=2*4 and *A2A4 read with %ection A= of F#:.
The D also investigated the use of funds retained abroad for personal use by )T/ executives. Though the D had documentary proof to indicate illegal transfer of funds by top )T/ executives, nothing was reported in the media. The top executives were soon arrested. )n addition, the D uestioned many executives including :shutosh 7arg, former chief of )T/ 7lobal, % Ihattar, the then chief of )T/ 7lobal, the /hitalias, officials at 5:T and F) nominees on )T/ board. Geanwhile, the /hitalias and )T/ continued their court battles against each other in the 1% and %ingapore. )T/ stated that the /hitalias acted as traders for )T/’s commodities including rice, coffee, soyabeans and shrimp. )T/ accused the /hitalias of nonpayment for (; contracts executed in >A of F#:, in relation to )T/’s offer to pay ' *A million to settle )T/ 7lobal’s debts 2under section >A of F#:, a company should take prior permission from the #5), before it can forgo any amount payable to it in foreign exchange4. )T/ replied to the showcase notice in 6uly *@@>, stating it did not accept any legal liabilities while offering financial support to )T/ 7lobal. "n account of the provisions for appeals and counterappeals, these cases stood unresolved even in early *@@*. Cowever, )T/ had created a >.< million contingency fund for future liabilities. :lthough the company went through a tough phase during the late >[email protected]
billion4. The )GF estimates the global volume of money laundering to be somewhere between '[email protected]
@ billion to '>.= trillion a year. With such statistics, in )ndia, there are absolutely no estimates regarding spending on anti money laundering measures by banks and financial institutions. Whereas, in 1%:, the collective spending by banking, insurance and fund management companies on anti money laundering measures is estimates to be ' >@.< billion between *@@; and *@@+. With 8GE: in force it is very crucial for the 5anks to find :GE software to check, identify and report suspicious transactions regularly. Failure to comply with this demand would result in losing business and fighting legal battles. Despite of all the afore stated problems, )nfrasoft "G) :GE software has found no takers. The ma&or part of the blame for not making use of the software is , however, shelved on the shoulders of strict and static #5) #ules. )t should be realied that 8GE: is not a onetime legislation. The :ct was amended to resolve the technicalities. )ndia has only made amendments in respect to >> out of *@ categories prescribed by F:TF. This clearly means that amendments are reuired to be made in other categories as well particularly enclosing within its scope terrorism financing, smuggling, piracy etc. to cope with the )nternational %tandards. Without which the )ndia banks would get paralyed in developed nations. :part from the banking and other financial institutions and intermediaries the :ct also extends upon the working of )nternational 8ayment gateways such as Lisa and Gaster card along with money transfer providers. Cowever, it is strongly felt that 8GE: should incorporate within its ambit the casinos, because a huge amount of money, in form of informal transactions, is being operated upon through such places. "onc!usion/-
The menace of money laundering is highly diabolical in nature. )t hits not only at the root of a country’s financial structure but also kills its social structure by financing antisocial activities. )t is as a matter of great grief that despite of having innumerable enactments and legislation, )ndia is still under the vigilance of the )nterpol because of her relaxed attitude towards the threat posed by 33
money laundering. Cence, it is extremely important to catch hold of the growing threat of money laundering by legislating and implementing amendments in the present law of :nti money Eaundering. MaharashtraCs first arrest under money !aundering act/
For the first time, a person has been arrested under the stringent 8revention of Goney Eaundering :ct after it was enacted on 6uly >, *@@+. :shok # /huggani allegedly duped &ewelers, diamond merchants and laundered money outside the country. The enforcement directorate 2D4 arrested /huggani, a [email protected]
yearold Dutch national of )ndian origin, on Wednesday. )ncidentally, this is also the first arrest made by the D in almost a decade. arlier, it was regulated by the Foreign xchange Gaintenance :ct 2FG:4 which did not allow the D to arrest an individual. /huggani was produced before the metropolitan magistrate9s court and has been remanded in &udicial custody for >( days. Ce had allegedly duped diamond merchants and &ewelers in *@@B, an D official said. Following this, two cheating cases involving amounts of #s++ lakhs and #s+B lakhs were registered with the economic offences wing 2"W4 of the Gumbai crime branch and the D5 Garg police station. :fter the charge sheets were filed, the D took over the investigations in the money laundering case.!Despite several summons, the suspect did not came to the D. Ce was never available in the past year,! the official said. !/huggani is a permanent resident of Colland and was staying in )ndia since *@@* on a residential permit visa,!
"ase Study under 4re)ention of Money Baundering 6ct Ex-Dharkhand "M Madhu oda ooked under 4MB6
: case was registered against former 6harkhand chief minister Gadhu Ioda and three of his erstwhile cabinet colleagues Iamlesh %ingh, 5hanu 8ratap %hahi and 5handu Tirkey by the nforcement Directorate on Friday < "ctober *@@< for alleged money laundering and diversion of
state funds besides making huge investments abroad without legal sanction. The ;=yearold Ioda, who may face arrest also, is the first chief minister and highprofile politician to have been booked under the 8revention of Goney Eaundering :ct.The D filed an 34
nforcement /ase )nformation #eport 2euivalent to a F)#4 before the 8revention of Goney Eaundering :ct court in #anchi against Ioda, Iamlesh %ingh, 5hanu 8ratap %hahi and 5handu Tirkey besides five others. The ministers including Ioda, who was the chief minister of 6harkhand between February *@@+ and :ugust *@@=, have been accused of amassing properties worth hundreds of crores abroad, in countries such as the 1:, Thailand, )ndonesia, %ingapore and Eiberia, besides several places in )ndia. Puoting from the /)#2 European Conference on Information Retrieval), sources said Ioda, who was the first independent candidate to become a chief minister, has been named for purchase of mines in Eiberia worth 1%D >B lakhs 2#s =.+ crores4. Gost of the assets by Ioda, ironically the first chief minister to be boo ked under 8GE:, were purchased in the name of a close confidant 5inod %inha, once a tractor mechanic. :s per the /)#, the properties in the name of %inha run into several hundred crores of rupees. :s per the declaration given by the three ministers individually, nobody had bank deposits more than #s >.< lakhs or immovable property worth over #s >.>+ lakhs. %ources said the agency is looking into details of real wealth of the accused ministers and it will also attach all the properties identified. They said under the 8GE:, the onus of proof is on the accused rather than the agency. Two other cabinet colleagues of Ioda have already been booked by the D for alleged money laundering, foreign exchange violations and forgery. The Directorate had swung into action after 6harkhand vigilance department lodged a complaint and recently searched the homes of Cari arayan #ai and nos kka, both cabinet ministers in the Ioda government besides that of Ioda. D officials claimed they had come across documents suggesting that the former ministers had amassed huge wealth including mines, real estate firms and properties in Cong Iong, Thailand and some other countries. : case was lodged against the two former ministers by the vigilance department on the directive of a vigilance court under various )8/ sections last year. fforts to get in touch with Ioda did not fructify as his mobile phone was switched off and no one answered the phone calls at his residence. The vigilance court had then directed the department to file the charges when it heard a petition by Linod Iumar, a resident of 6harkhand9s Deoghar district. 5oth #ai and kka were arrested following the /ourt9s directive recently after which the D came into the picture.
c& Regu!atory 4ro)isions 3ith Respect to "urrent 6ccount "apita! 6ccount/
"urrent 6ccount $ransactions /urrent :ccount Transactions as defined in %ection * 2&4 of FG:, means a transaction other than a capital account transaction and without pre&udice to the generality of the other provisions shall include?
• • •
payments due in connection with foreign trade, other account current business, services and short term banking and credit facilities in tire ordinary course of business0 payments due as interest on loans and as net income from the investments0 remittances for living expenses of parents, spouse and children residing abroad0 expenses in connection with foreign travel, education and medical care of parents, spouse and children.
8rovisions to %ection + of FG: empowers the /entral 7overnment in public interest and in consultation with the #eserve 5ank to impose such reasonable restrictions for current account transactions in exercise of the powers conferred and in consultation with the #eserve 5ank the /entral 7overnment issued Foreign xchange Ganagement 2/urrent :ccount Transactions4 #ules *@@@ on ;rd Gay, *@@@ in this regard. )n terms of provisions of %ection + of FG:, any person may sell or draw foreign exchange to or from an authorised dealer if such sale or withdrawal is a current account transaction.
The proviso to %ection + empowers 7overnment of )ndia, in public interest and in consultation with the #eserve 5ank to impose reasonable restrictions on certain current account transactions. )n terms of the rules ;, drawal of exchange for the following transactions is prohibited. •
Travel to epal or 5hutan
Transactions with a person resident in epal or 5hutan 2unless specifically exempted by #eserve 5ank by general or special order4.
#emittance out of lottery winnings 36
#emittance of income from racing3riding etc. or any other hobby.
#emittance for purchase of lottery tickets, banned3proscribed magaines, football pools, sweepstakes, etc.
euity investment in
Lentures3Wholly "wned %ubsidiaries abroad of )ndian companies. •
#emittance of dividend by any company to which the reuirement of dividend balancing is applicable.
8ayment of commission on exports under #upee %tate /redit #oute. 8ayment related to !/all 5ack %ervices! of telephones.
#emittance of interest income on funds held in on#esident %pecial #upee 2#%#4 :ccount scheme.
4rohiition on dra3a! of foreign exchange.
#ule ; of Foreign xchange Ganagement 2/urrent :ccount Transactions4 #ules, *@@@ provides that the drawal of foreign exchange by a person is prohibited for the following purposes, namely? •
transactions specified in %chedule ))) of the notification0
travel to epal and3or 5hutan0
a transactions to the person resident in epal3or 5hutan.
The prohibition on the transaction with a person resident in epal or 5hutan may be exempted by the #eserve 5ank of lndia sub&ect to such terms and conditions as it may considered necessary to stipulate by general or special order. The transactions which are specified in %chedule8 and thereby absolutely prohibited are? •
remittance out of lottery winnings0
remittance of income from racing3riding etc. or any other hobby0
remittance for purchase of lottery tickets, banned3prescribed magaines, football pools, sweepstakes ete. 0
payment of commission on exports made towards euity investment in &oint ventures3wholly owned subsidiaries abroad of )ndian companies0
remittance of dividend by any company to which the reuirement of dividend 37
balancing is applicable0 •
payment of commission on exports under #upee %tate /redit #oute0 . payment related to !/all 5ack %ervices! of telephone0
remittance of interest income on funds held in on#esident %pecial #upee %cheme :ccount0
4rior appro)a! of the 0o)ernment of 2ndia .
8rovides that no person shall draw foreign exchange for the transaction included in .Table: without prior approval of the 7overnment of )ndia. The provisions to this rule states that this rule shall not apply where the payment is made out of funds held in #esident Foreign /urrency 2#F/4 :ccount or xchange arners Foreign /urrency 2F/4 :ccount of the remitter. T:5E: 4urpose of Remittance
Whose appro)a! is reuired
Ministry of Human Resources Developments (Department of Education and Culture) Ministry of Finance, (Department of Economic Affairs) Advertisement abroad by any !"#!tate And Ministry of Finance, (Department of Economic Central $overnment Department Affairs)% Remittance of frei&'t of vessel c'arted by a !" Ministry of !urface Transport (C'arterin& in&) ayment of import by a $overnment Department Ministry of !urface Transport (C'arterin& in&) or a !" on C.I.F basis (i.e. ot'er t'an F.O.B and F.A.S basis) Multimodal transport operators ma*in& remittance Re&istration Certificate from t'e Director to t'eir a&ents abroad $eneral of !'ippin&% Remittance of 'irin& c'ar&es of transponders Ministry of Finance, (Department of Economic Affairs) Remittance of container detention c'ar&es Ministry of !urface Transport (Director $eneral e+ceedin& t'e rate prescribed by Director $eneral of !'ippin&) of !'ippin& Remittances under tec'nical collaboration Ministry of 2ndustry and Commerce% a&reements 'ere payment of royalty e+ceeds -.on local sales and /. on e+ports and lumpsum payment e+ceeds "!0 1 million Remittance of pri3e money# sponsors'ip of sports activity abroad by person ot'er t'an 2nternational# 4ational#!tate level sports bodies, if t'e amount involved e+ceeds "! 0566666 ayment for securin& 2nsurance for 'ealt' from a company abroad Remittance for members'ip of 8 2 Club
Ministry of Human Resource Development (Department of 7out' Affairs and !ports) Ministry of Finance, (2nsurance Division) Ministry of Finance, (2nsurance Division)
4rior appro)a! of the Reser)e ank. 38
There are certain transactions listed in below which cannot be undertaken without the prior approval of the #eserve 5ank, these provisions shall not apply where the payment is made out of funds held in #esident Foreign /urrency 2#F/4 :ccount or xchange arners Foreign /urrency 2F/4 :ccount of the remitter. The transactions for which prior approval of the #eserve 5ank is needed are as follows? #emittance by artiste e.g. wrestler, dancer, entertainer etc. 2This restriction is not applicable to artistes engaged by tourism related organiations in )ndia like )TD/, %tate Tourism Development /orporations etc. during special festivals or those artistes engaged by hotels in five star categories, provided the expenditure is met out of F/ account4 0 #elease of exchange exceeding 1%' +,@@@ or its euivalent in one calendar year, for one or more private visits to any country 2except epal and 5hutan4 7ift, remittance exceeding 1%' +,@@@ per beneficiary per annum0 Donation exceeding 1%' +,@@@ per annum per beneficiary 0 xchange Facilities exceeding 1%' [email protected]
@@ for persons going abroad for employment0 xchange Facilities for emigration exceeding 1%' +,@@@ or amount prescribed by country of emigration0 #emittance for maintenance of close relatives abroad exceeding 1%' +,@@@ per year per recipient0 #elease of foreign exchange, exceeding 1%' *+,@@@ to a person, irrespective of period of stay, for business travel, or attending a /onference or specialied training or for maintenance expenses of a patient going abroad for medical treatment or checkup abroad, or for accompanying as attended to a patient going abroad for medical treatment3/heckup0 #elease of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in )ndia or hospital3doctor abroad0 #elease of exchange for studies abroad exceeding the estimates from the institution abroad or 1%' ;@,@@@, whichever is higher0 /ommission to agents abroad for sale of resident flats3commercial plots in )ndia, exceeding +Hof the inward remittance0 %hort term credit to overseas offices of )ndian companies0 #emittance for advertisement on foreign television by a person whose export earnings are less than #s. >@ lakhs during each of the preceding two years0 #emittances of royalty and payment of lumpsum fee under the technical. collaboration agreement which has not been registered with #eserve 5ank0 #emittance exceeding 1%' >@@,@@@ for architectural3consultancy services procured from abroad0 #emittances for use and3or purchase of trade mark3franchises in )ndia. xchange facilities for transactions.
• • • •
Exchange faci!ities for transactions xchange facilitate for transaction in schedule )) to the rules may be permitted by authorised dealers provided the applicant has secured the approval from the Ginistry Department of 39
7overnment of )ndia indicated against the transactions. )n respect of transactions included in %chedule ))) where the remittance applied for exceeds the limit, if any, indicated in the schedule or other transactions included in %chedule ))) for which no limit have been stipulated would reuire prior approval of #eserve 5ank. Remittances for other current 6ccount transactions #emittances for all other current transactions which are not specifically prohibited under the rules or which are not included in %chedule )) or ))) may be permitted by authorised dealers without any monetary3percentage ceilings sub&ect to compliance with the provisions of %ubsection 2+4 of %ection >@ of FG:. #emittances for transactions included in %chedule )))9 may be permitted by authorised dealers up to the ceilings prescribed therein. For removal of doubts, it is clarified that The existing procedure to be followed by )ndian companies for entering into collaboration arrangements with overseas collaborators would continue. There would be 9no restriction regarding receipt of advance payment or back to back letter of credit for merchanting trade transactions. )n terms of Foreign xchange Ganagement 25orrowing or Eending in Foreign xchange4 #egulations, *@@@ approval of #eserve 5ank would be reuired for importers availing of %upplier9s /redit beyond >[email protected]
days and 5uyer9s /redit irrespective of the period of credit. Transactions relating to import of ship stores into bond for supply to )ndian3foreign flag vessels, )ndian aval ships, and foreign diplomatic personnel will no more be regulated by #eserve 5ank. #emittance of surplus freight3passage collections by shipping3airline companies or their agents, remittances by break bulk agents, multimodal transport operators, remittance of freight prepaid on inward consolidation of cargo, operating expenses of )ndian airline3shipping companies etc. may be permitted by authorised dealers after verification of documentary evidence in support of the remittance.
The #eserve 5ank will not prescribe the documentation which should be verified by the authorised dealers while permitting remittances for various transactions, particularly of current account. )n this connection attention of authorised dealers is drawn to %ubsection 2+4 of %ection >@ of FG: which provides that an authorised person shall before undertaking any transaction in foreign exchange on behalf of any person reuire that person to make such a declaration and to give such information as will reasonably satisfy him that the transaction will not involve and is not designed for the purpose of any contravention or evasion of the provisions of FG: or of any rule, regulation, notification, direction or order issued there under. :uthorised dealers are advised to keep on record any information3documentation on the basis of which the transaction was undertaken for verification by the #eserve 5ank. The said clause further provides that where the said person 2applicant4 refuses to comply with any such reuirement or makes unsatisfactory compliance therewith, the authorised person shall refuse in writing to undertake the transaction and shall if he has reason to believe that any contravention3 evasion is contemplated by the person, report the matter to #eserve 5ank
"apita! 6ccount $ransactions
: capital account transaction as defined in %ection *2e4 of FG: means a transaction which alters the assets or liabilities, including contingent liabilities, outside )ndia of persons resident in )ndia or assets or liabilities in )ndia of persons resident outside )ndia, and includes transactions referred to in %ubsection 2;4 of %ection A. The new legislation vide %ection A deals with capital accounts transactions. %ubsection 2>4 of the %ection A gives a general liberty providing that any person may sell or draw foreign exchange to or from an authoried person for a capital account transaction. The application of this clause is however sub&ect to the provisions of %ubsection 2*4 of the %ection A which states that the #eserve 5ank may in consultation with the /entral 7overnment specify any class or classes of capital account transactions which are permissible and the limit up to which foreign exchange shall be admissible for such transactions. :ccording to the regulations made under %ection A 2*4 of FG:, investment in )ndia by a person resident outside )ndia in any company or partnership firm or proprietary concern which is engaged in the business of /hit Fund or as a idhi /ompany or in :gricultural or 8lantation activities or in #eal state business 2other than development of townships, construction of residential commercial premises, roads or bridges4 or construction of farm houses or trading in Transferable Development #ights 2TD#s4 is prohibited. %chedule ) to the regulations specifies the permissible classes of /apital account transactions of a person resident in )ndia and %chedule )) specifies the permissible classes of such transactions by a person resident outside )ndia. "!assification of capita! account transactions/
The capital account transactions have been classified into two categories? /apital :ccount Transactions of the following types made by persons resident in )ndia? • • • • • •
)nvestment by a person resident in )ndia in foreign securities. Foreign currency loans raised in )ndia and abroad by a person resident in )ndia. Transfer of immovable property outside )ndia by a person resident in )ndia. 7uarantees issued by a person resident in )ndia in favor of a person resident outside )ndia. xport, import and holding of currency3currency notes. Eoans and overdrafts 2borrowings4 by a person resident in )ndia from a person resident outside )ndia. 41
Gaintenance of foreign currency accounts in )ndia and outside )ndia by a person resident in
)ndia. Taking out of insurance policy by a person resident in )ndia from an insurance company
• • •
outside )ndia. Eoans and overdrafts by a person resident in )ndia to a person resident outside )ndia. #emittance outside )ndia of capital assets of a person resident in )ndia. %ale and purchase of foreign exchange derivatives in )ndia and abroad and commodity derivatives abroad by a person resident in )ndia.
/apital account transactions of the following types made by persons resident outside )ndia? •
)nvestment in )ndia by a person resident outside )ndia, that is to say, )ssue of security by a body corporate or an entity in )ndia and investment therein by
a person resident outside )ndia0 and )nvestment by way of contribution by a person resident outside )ndia to the capital
of a firm or a proprietorship concern or an association of persons in )ndia. :cuisition and transfer of immovable property in )ndia by a person resident outside )ndia. 7uarantee by a person resident outside )ndia in favour of, or on behalf of, a person resident
in )ndia. )mport and export of currency3currency notes into3from )ndia by a person resident outside
• • •
)ndia. Deposits between a person resident in )ndia and a person resident outside )ndia. . Foreign currency accounts in )ndia of a person resident outside )ndia. #emittance outside )ndia of capital assets in )ndia of a person resident outside )ndia.
/apital account transactions on which restrictions cannot be imposed. There are two types of drawing foreign exchange, they are?
for amortiation of loan0 and for depreciation of direct investments in ordinary course of business.
#estrictions cannot be imposed when drawal is for the purpose of repayments of loan installments.
Ear!ier permission re!ating to capita! account transaction ?
1nder the provisions of F#: no person could make any capital account transactions except with the previous general or special permission of the #eserve 5ank. 8rohibitions on capital account transactions in the new legislation. 42
: person resident outside )ndia is prohibited from making investment in )ndia in any form in any company or partnership firm or proprietary concern or any entity, whether in corporate or not, which is engaged or proposes to engage in ?
in the business of chit fund0 a idhi /ompany0 agricultural or plantation activities0 real estate business 2the term shall not include development of townships, construction of
residential or commercial premises, roads or bridges4 or construction of farm houses0 or trading in Transferable Development #ights 2TD#s4.The term Transferable Development
• • •
#ights has been explained under the head 9Geaning of terms9.
d& "ase Study on FEM6 R2 s!apped Rs.1+= crore on Re!iance 2nfrastructure/
The #eserve 5ank of )ndia 2#5)4 has asked the :nil Dhirubhai :mbani 7roup firm, #eliance )nfrastructure 2earlier, #eliance nergy4, to pay &ust under #s >*+ crore as compounding fees for parking its foreign loan proceeds worth ';@@ million with its mutual fund in )ndia for ;>+ days, and then repatriating the money abroad to a &oint venture company. These actions, according to an #5) order, violated various provisions of the Foreign xchange Ganagement :ct 2FG:4. )n its order, #5) said #eliance nergy raised a ';[email protected]
million /5 on 6uly *+, *@@A, for investment in infrastructure pro&ects in )ndia. The /5 proceeds were drawn down on ovember >+, *@@A, and temporarily parked overseas in liuid assets. "n :pril *A, *@@B, #eliance nergy repatriated the /5 proceeds worth ';@@ million to )ndia while the balance remained abroad in liuid assets. )t then invested these funds in #eliance Gutual Fund 7rowth "ption and #eliance Floating #ate Fund 7rowth "ption on :pril *A, *@@B. "n the following day, i.e., on :pril *B *@@B, the entire money was withdrawn and invested in #eliance Fixed Corion Fund ))) :nnual 8lan series L. "n Garch +, *@@=, #eliance nergy repatriated '[email protected]
@ million 2which included the /5 proceeds repatriated on :pril *A, *@@B, and invested in capital market instruments4 for investment in capital of an overseas &oint venture called 7ourock Lentures based in 5ritish Lirgin )slands. #5) said, under FG: guidelines issued in *@@@, a borrower is reuired to keep /5 funds parked abroad till the actual reuirement in )ndia. Further, the central bank said a borrower cannot utilise the funds for any other purpose. KThe conduct of the applicant was in contravention of the /5 guidelines and the same are sought to be compounded,J the #5) order signed by its chief general manager %alim 7angadharan said. During the personal hearing on 6une >A, *@@=, #eliance nergy, represented by group managing 43
director 7autam Doshi and 8rice waterhouse /oopers executive director %an&ay Iapadia, admitted the contravention and sough compounding. The company said due to unforeseen circumstances, its Dadri power pro&ect was delayed. Therefore, the /5 proceeds of ';@@ million were bought to )ndia and was parked in liuid debt mutual fund schemes, it added. #e&ecting #eliance nergy’s contention, #5) said it took the company ;>+ days to realise that the /5 proceeds are not reuired for its intended purpose and to repatriate the same for alternate use of investment in an overseas &oint venture on Garch +, *@@=. #eliance also contended that they invested the /5 proceeds in debt mutual fund schemes to ensure immediate availability of funds for utilisation in )ndia. K) do not find any merit in this contention also as the applicant has not approached #5) either for utilising the proceeds not provided for in the /5 guidelines, or its repatriation abroad for investment in the capital of the 6L,J the #5) official said in the order. )n its defence, the company said the exchange rate gain on account of remittance on Garch + *@@=, would be a notional interim rate gain as such exchange rate gain is not crystallised. 5ut #5) does not think so. KThey have also stated that in terms of accounting standard >> 2:% >>4, all foreign exchange loans have to be restated and the difference between current exchange rate and the rate at which the same were remitted to )ndia, has to be shown as foreign exchange loss3gain in profit and loss accounts. Cowever, in a scenario where the proceeds of the /5 are parked overseas, the exchange rate gains or losses are neutralied as the gains or losses restating of the liability side are offset with corresponding exchange losses or gains in the asset. )n this case, the exchange gain had indeed been realised and that too the additional exchange gain had accrued to the company through an unlawful act under FG:,J the order said. )t said as the company has made additional income of #s >*( crore, it is liable to pay a fine of #s >*(.A= crore. "n :ugust this year, the company submitted another fresh application for compounding and reuested for withdrawal of the present application dated :pril >B, *@@=, to include contravention committed in respect of an another transaction of /5 worth '>[email protected]
million. 5ut #5) said the company will have to make separate application for every transaction and two transactions are different and independent and cannot be clubbed together.
"ontra)entions and 4ena!ties under FEM6
)f any person contravenes any provision of this :ct, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers un der this :ct, or contravenes any condition sub&ect to which an authoriation is issued by the #eserve 5ank, he shall, upon ad&udication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is uantifiable, or up to two lakh rupees where the amount is not uantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues. :ny :d&udicating :uthority ad&udging any contravention may, if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the /entral 7overnment and further direct that the foreign exchange holdings, if any, of the persons committing the contraventions or any part thereof, shall be brought ba ck into )ndia or shall be retained outside )ndia in accordance with the directions made in this behalf.
G4ropertyG in respect of which contravention has taken place, shall include deposits in a bank,
where the said property is converted into such deposits, )ndian currency, where the said property is converted into that currency0 and any other property which has resulted out of the conversion of that property. )f any person fails to make full payment of the penalty imposed on him within a period of ninety days from the date on which the notice for payment of such penalty is served on him, he shall be liable to civil imprisonment. 45
A. FER6 FEM6 a& Simi!arities 9ifferences et3een FER6 FEM6 Simi!arities/
The similarities between F#: and FG: are as follows? •
The #eserve 5ank of )ndia and central government would continue to be the regulatory bodies.
8resumption of extra territorial &urisdiction as envisaged in section 2>4 of F#: has been retained.
The Directorate of nforcement continues to be the agency for enforcement of the provisions of the law such as conducting search and seiure
F#: consisted of => sections, and wasFG: is much simple, and consist of more complex
only (< sections.
8resumption of negative intention 2Gens These presumptions of Gens #ea and #ea 4 and &oining hands in offenceabatement have been excluded in 2abatement4 existed in FG:
W T#G% )Terms like /apital :ccount Transaction, Terms FG:
service etc. were not defined in F#:.
Transaction person, service etc., have been defined in detail in FG:.
"FDefinition of !:uthoried 8erson! in The definition of :uthoried person
F#: was a narrow one 2 *2b4
has been widened to include banks, money changes, off shore banking 1nits etc. 2* 2 c 4
"FThere was a big difference in the The provision of FG:, are in
:%definition of !#esident!, under F#:, and consistent with income Tax :ct, in
:ctrespect to the definition of term ! #esident!. ow the criteria of !)n
)ndia for >=* days! to make a person resident has been brought FG:.
ualifies to be a nonresident under the income Tax :ct, > will also be considered a nonresident for the +
purposes of application of FG:, but a person who is considered to be non resident
necessarily be a nonresident under the )ncome business
Tax :ct, man
for instance a
staying therefore a period of >=* days or more in a financial year will become a nonresident under FG:.
:ny offence under F#:, was a criminalCere, the offence is considered to be a offence , punishable with imprisonment as civil offence only punishable with per code of criminal procedure, >@
expressFG: expressly recognies the right
provision on the right of on impleaded of appellant to take assistance of legal
E7:E person to take legal assistance
practitioner or chartered accountant 2;*4
"FF#: conferred wide powers on a police The scope and power of search and :Dofficer not below the rank of a Deputyseiure has been curtailed to a great %uperintendent of 8olice to make a search extent
c& ey $erms0!ossary 3ith respect to FER6 FEM6 1. 6uthorised 4erson - !:uthorised person! means an authorised dealer, moneychanger, offshore
banking unit or any other person for the time being authorised under section >@2>4 to deal in foreign exchange securities. +. "apita! 6ccount $ransaction - !/apital account transaction! means a transaction which alters
the assets or liabilities, including contingent liabilities, outside )ndia of persons resident in )ndia or
assets or liabilities in )ndia of person resident outside )ndia, and includes transactions referred to in subsection 2;4 of section A 8. "urrent 6ccount $ransaction - !/urrent account transaction! means a transaction other than a
capital account transaction and without pre&udice to the generality of the foregoing such transaction includes,
8ayments due in connection with foreign trade, other current business, services, and shortterm banking and credit facilities in the ordinary course of b usiness.
8ayments due as interest on loans and as net income from investments.
#emittances for living expenses of parents, spouse and children residing abroad, and
xpenses in connection with foreign travel, education and medical care of parents, spouse and children0
Foreign exchange reser)es : country9s reserves of foreign currencies. /ommonly known
as !uick cash!, they can be used immediately to finance imports and other foreign payables.
Foreign portfo!io in)estment )nvestment into financial instruments such as stocks and
bonds in which the ob&ective is not to engage in business but to merely generate dividend income and capital gains. The larger portion of international investment flows in the world today is F8)s.
For3ard contract :n arrangement between two parties to trade specified amounts of two
/urrencies at some designated future due date at an agreed price. Gore than a formal hedge against unforeseen changes in currency prices, it guarantees certainty in the foreign exchange rate at the contract9s delivery date.
For3ard s3ap The most common type of forward transaction, forward swaps comprise
per cent of all foreign exchange transactions. )n a swap transaction, two companies immediately exchange currency for an agreedupon length of time at an agreed exchange rate. 49
:t the end of the time period, each company returns the currency to the former owner at the original exchange rate with an ad&ustment for interest rate differences.
>. 6uthorised dea!er
!authorised dealer! means a person for the time being authorised under
section A to deal in foreign exchange0
Franchising Franchising is similar to licensing, although it tends to involve much longer
term commitments than licensing. Whereas licensing is pursued primarily by manufacturing firms, franchising is employed primarily by service firms. : franchising agreement invol cRes a franchise or selling limited rights for the use of its brand name to a franchisee in return for a lump sum payment and a share of the franchise9s profits.
A. Free f!oat
: process in international monetary markets in which foreign currency prices
change relative to one another, free of central bank intervention and sub&ect only to the global supply of and demand for specific currencies. ot many countries have their currencies on a free float. The currencies of most industrial countries are on a !managed float!.
9ra3a! !Drawal9 means drawal of foreign exchange from an authoried person and
includes opening of Eetter of /redit or use of )nternational Debit /ard or : TG card or any other thing by whatever name called which has the effect of creating foreign exchange liability.
6uthoriHed person #eaders to note that the term 9authoried person9 has been defined in
clause (c) of %ection * of FG:. )t provides that an 9authoried person9 means an authoried dealer, money changer, off shore banking unit or any other person for the time being authoried under the provisions of %ubsection 2>4 of %ection >@ to deal in foreign exchange or foreign securities.
$ransfera!e 9e)e!opment Rights
9Transferable Development #ights9 means
certificates issued in respect of category of land acuired for public purpose either by /entral or %tate 7overnment in consideration of surrender of land by the owner without monetary compensation, which is transferable in part or whole.
"urrency Iinc!uding re!e)ant notificationJ
!/urrency! includes all currency notes, postal notes, postal orders, money orders, cheues, drafts, travellers cheues, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the #eserve 5ank0
,. "apita! account con)ertii!ity :ccording to the Tarapore /ommittee provided a succinct and subtle definition? /apital :ccount /onvertibility refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. )t is associated with changes of ownership in foreign3domestic financial assets and liabilities and embodies the creation and liuidation of claims on, or by, the rest of the world. 2MFKs ROBE 2# ".6." •
/onvertibility is an )GF clause that all the member countries must adhere to in order to work towards the common goals of the organiation. Cowever /"L#T)5)E)T- per se can be looked into from various perspectives and incorporated accordingly by the member nations. :n economy can choose to be 2a4 partially convertible on /1##T ://"1T 2b4 partially convertible on /:8)T:E ://"1T 2c4 fully convertible on current account and 2d4 fully convertible on capital account.
)t is important to state here that KThe )GF’s mandate is conspicuous on current account convertibility as current account liberaliation is among the )GF’s official purposes outlined in its :rticles of :greement, but it has no explicit mandate to promote capital account liberaliation. )ndeed, the :rticles give the )GF only limited &urisdiction over the capital account however the )GF has given greater attention to capital account issues in recent decades, given the increasing importance of international capital flows for macroeconomic stability and exchange rate management in many countries. Thus there is no official binding over any member state to opt for F1EE /:8)T:E ://"1T /"L#T)5)ET- but it has been a constant component of the )GF’s advisory reports on member countries. 2#926 6#9 "6" 51
Though the rupee had become fully convertible on current account as early as >