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Chapter – 10 : FOREIGN–EXCHANGE BUSINESS

10.1. Basics of Foreign Exchange

10.2. Non-Resident (External) Accounts

10.3. Non Resident (Ordinary) Accounts

10.4. Inco Terms

10.5. Fera vs. Fema

10.6. Forfaiting & other topics

10.7. Foreign Exchange – Glossary

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10.1

BASIC OF FOREIGN EXCHANGE

Introduction :

Exchange Rate is defined as the rate at which one currency is exchanged for another currency.

Foreign exchange trading is sale and / or purchase of a currency – like any other trade.

In a foreign exchange transaction :

❏ The transaction is always talked of from the banks' point of view

❏ The item referred to is the foreign currency

When we say “Purchase ” we mean (buying rate)

❏ The bank has purchased &

❏ It has purchased foreign currency

Similarly, “Sale” means (selling rate)

❏ The bank has sold &

❏ It has sold foreign currency

Direct Quotation : A given number of units of domestic currency per unit of foreign currency. E.g.

$ 1 = Rs. 49.00. With effect from 2nd August 1993 direct quotations are being used in India.

Indirect quotation : A given number of units of foreign currency per unit of local (domestic) currency.

E.g. Rs. 100 = $ 2.04

Two-Way Quotation

The foreign exchange quotation by the Bank has two rates-one at which the quoting Bank is willing

to buy and the other at which it is willing to sell. For example US $ 1 = Rs. 45.00 – 45.20

Here, the Bank will enter into purchase transaction at Rs. 45.00 and sell transaction at Rs. 45.20.

Hence the principle in case of direct quotation is BUY LOW & SELL HIGH. From the ADs point of view,

conversion of foreign currency on behalf of an exporter into Indian Rupees would be a purchase

transaction, and conversion of domestic currency into foreign currency on behalf of an importer would

be a sale transaction. Likewise outward remittance would involve sale of foreign currency while inward

remittance would involve purchase of foreign currency. In case of Indirect Rate Quotation the principle

is BUY HIGH & SELL LOW.

Types of Exchange Rates :

Ready of cash : Refers to transaction to be settled on the same day e.g. transaction done on 3rd

June to be settled on 3rd June.

Tom : Refers to transaction where delivery of foreign currency to be done on the next day (tomorrow)

e.g. transaction done on 3rd June to be settled on 4th June.

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Spot : Refers to transaction where delivery of foreign currency to be done on the second working

day (day after tomorrow) from the date of contract e.g. transaction done on 3rd June to be settled on

5th June.

Forward : Refers to transaction where delivery of foreign currency to take place on a date farther

than the spot date e.g. transaction done on 3rd June to be settled on any date after 5th June, normally.

Cross rates : If the quotation for a particular currency is not available, we can obtain it through the

rate of that currency vis-a-vis another currency,of which the rate is available.

Value date : The date on which payment (delivery) of funds or an entry to an account becomes

effective.

COVER RATE AND BASE RATE :

The rate at which the banks can cover the merchant transactions in the inter-bank market without

any profit or loss is called the Cover Rate. That is, the rate at which the bank can buy the dollars to

cover import transactions in US$ and the rate at which it can sell the Dollars to cover an export transaction

in Dollars is called the Cover Rate.

The base rate is arrived from the cover rate after allowing for some cushion for adverse movement

of the rates. In practice there are instances where the cover rate and the base rate are the same.

Fixed & floating exchange rates

❏ In a fixed exchange rate regime, the rate of the domestic currency vis-a-vis a foreign currencyis

fixed. In Hong Kong the HK dollar rate is fixed i.e. $ 1 = HK$ 7.80. In case of higher demand of the

foreign currency viz. the dollar, the central bank of the country sells dollar from its reserve to

maintain the rate.

❏ In a floating exchange rate regime, the rate of the domestic currency vis-a-vis foreign currency

depends on supply anddemand and market forces. Most major currencies viz. US dollar, British

Pound, Euro Japanese Yen etc. are floating.

Principal Types of Merchant Rates

As mentioned above, in a purchase transaction the bank buys foreign currency from the customer

and pays him rupees. Some transactions result in the bank getting the foreign exchange

immediately,while some involve delay in getting the foreign exchange.

Depending upon the timeof realizationof foreign exchange by the bank, two types of buying /

selling rates are quoted in India.

❏ TT buying rate is applied when the transaction does not involve any delay in realization of theforeign exchange by the bank i.e. the nostro a/c of the bank has already been credited. For example

purchase of drafts, MTs, TTs etc. & or cancellation of drafts sold earlier.

❏ Bills buying rate is applied when a bill is purchased. The proceeds will be realized by the bank

after the bill is presenteed to the drawee and he makes payment. The rate is loaded with transit/usuance period interest.

❏ TT selling rate is applied when the correspondent bank's accountis credited immediately. For

example issue of Drafts, TTs drawn on a correspndent bank and / or cancellationof foreign exchange

purchased earlier.

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❏ Bills selling rate is used for all other transactions involving hanling of documents by the bank e.g.

payment against import bills etc.

SELLING RATES TRANSACTIONS

TT Selling Rate A. Outward remittance in foreign currency (TT, MT, PO, DD).

B. Cancellation of purchase e.g.

❏ Bill purchased returned unpaid.

❏ Bill purchased transferred to collection amount.

❏ Earlier inward remittance (converted into Rupees) is refunded tothe remitting bank.

C. A forward purchase contract is cancelled.

Bill Selling Rate Transaction involving transfer of proceeds of import bills.

{Even if proceeds of import bills are remitted in foreign currency by way ofDD, MT, TT, PO, the rate to be applied is the Bill Selling Rate (and not TT

Selling Rate)}

Foreign – TCs/ At the option of ADs

Currency NotesSelling rates

BUYING RATES TRANSACTIONS

TT Buying Rate A. Clean inward remittances (PO, MT, TT, DD) for which cover has

already been credited to ADs account abroad.

B. Conversion of proceeds of instruments sent for collection.

C. Cancellation of outward TT, MT, PO etc.

D. Cancellation of a forward sale contract.

Bill Buying Rate A. Purchase / Discounting of Bills and other Instruments

B. Where banks has to claim cover after payment.

C. Where drawing bank at one centre remits cover for credit to a differentcentre.

Foreign-TCs / At the option of ADsCurrency NotesSelling rates

PERSON RESIDENT IN INDIA :

Section 2 of FEMA, 1999 defines the term resident in India as a person residing in India for more

than 182 days during the course of a financial year.

PERSON RESIDENT OUTSIDE INDIA :

Section 2 of FEMA defines person resident outside India as a person who is not resident in India

(NRI). Non-resident Indian generally fall under one of the following broad categories :

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(A) Non-Resident Indian (NRI)

An NRI is a person holding Indian Passport :

❏ Who has gone abroad for a gainful employment or business or vocation, or for any other

purpose indicating an idefinite period of stay outside India.

❏ Who are working abroad on foreign assignments – persons employed by IMF / IBRD / UNO /

UNESCO etc. or who are employed in Central / State Government and Public Sector

Undertakings and deputed abroad on temporary assignments or for temporary period.

(B) Person of Indian Origin (PIO)

For the purpose of being eligible for the facilities of opening and maintenance of various types ofbank accounts and making investments in shares and securities in India, a PIO means a citizen of any

country other than Bangladesh or Pakistan, if :

(a) He held Indian passport at any point of time, or

(b) Whose parent/s or grand parent/s was citizen of India (undivided India), or

(c) Spouse of a non-resident Indian.

OVERSEAS CORPORATE BODIES (OCB)

Overseas firms, trusts or companies, predominantly owned by non-resident Indians are called

Overseas Corporate Bodies. The level of ownership of NRIs in such bodies, should be minimum 60%,

by one or more NRI owners. The facilities for investment into India, grnated to OCBs were almost

similar to those granted to individual non-resident Indians.

However, with effect from 16.08.2003, OCBs have been completely derecognised as an investor

class by RBI. Now they are not allowed to make fresh investments in India.

Correspondent Banking

Nostro account A foreign currency account maintained by a bank in India with a bank abroad.“Our account with you”. E.g. State Bank of India's US dollar account with Citibank New York.

Vostro account A rupee account of a foreign bank with an Indian bank. “Your account with us”.E.g. Citibank's rupee account with State Bank of India, Kolkata.

Loro account A bank's account withanother bank. “Their account with you”. e.g. Citibank's HK $account with Hong Kong Bank, Hong Kong.

MIRROR ACCOUNTS

These are dummy accounts maintained by banks to know actual position of their accounts withthe foreign correspondent banks. We may call it a pass-book of our accounts maintained with thecorrespondents.

ESCROW ACCOUNTS

These accounts are maintained by citizens outside the country or by the citizens residing outsidethe country but accounts maintained in the parent country. These accounts are being maintainedexclusively for business purpose and like current accounts, do not carry any benefit of interest, overdraftsetc. Basically such accounts are opened to carry merchant trading activity with prior approval from RBIand general transactions are not permited.

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Society for Worldwide Inter-bank Financial Telecommunication (SWIFT) founded in 1977 inBrussels (Belgium), is a reliable, safe, instantaneous (immediate) and economical means ofcommunication amongst its over 7650 member financial institutions covering over 1,25,000 users spreadover 200 counries.

Clearing House Inter-bank Payment System (CHIPS) a clearing house of New York (USA),operating since 1970. Over 115 member banks are currently using the system.

Fedwire

This is another US payment system operated by Federal Reserve Bank, operated all over the USstates, since 1918, and handles majority of domestic payments. It is an automated computer basedmessaging and payment system, working on gross settlement basis. All US banks maintain accountswith Federal Reserve Bank, and are allotted an "ABA numbers" to identify the senders and receivers ofpayments.

As compared to CHIPS, this is a large system, with over 9500 participants, and handles a largenumber of payments across USA, covering Interbank transfers out of New York, local borrowings andlending, commercial payments, as also some securities transaction related payments for domesticbanks.

Chaps

Clearing House Automated Payments System (CHAPS), is a British equivalent to CHIPS, handlingreceipts and payments in London. This system works on the same principles as CHIPS, working on thenet payment settlement system. CHAPS is used by a large number of banks in UK, with about 20member banks and over 400 indirect members, using the system through some large bank.

Target

Trans-European Automated Real-Time Gross Settlement Express Transfer system is an EUROpayment system comprising 15 national RTGS systems working in Europe. These are interconnectedby common procedures and uniform platform for processing high value payments by over 30,000participating institutions across Europe. This facilitates receipts and payments of funds across theEuro zone (all member countries).

RTGS-plus and EBA

These are other Euro clearing systems, with RTGS plus, being a German hybrid clearing systemand operating as an European oriented real time gross settlement and payment system. RTGS plus,has over 60 participants.

The EBA-EURO 1, with a membership of over 70 banks, in all EU member countries, works as anetting system with focus on cross border Euro payments. For retail payments, EBA has another system,called STEP 1, with over 200 members across EU zone.

STEP 2 is also in use in EU zone, which facilitates straight through processing (STP) to memberbanks, using industry standards.

Trade Finance

Letter of Credit (LC) is a written assurance by a bank on the instructions of the applicant (importeror purchaser) to thebeneficiary (exporter or seller) to pay a specific amount in the agreed currencyprovided thebeneficiary submits documents in conformity with the documentary credit, within theprescribed time limit. Its terms and conditions are governed by the Uniform Customs & Practice for

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Docmentary Credit (UCPDC) published by International Chambers of Commerce Publication no.ICC 500.

Parties to a Letter of Credit

❏ Applicant is the importer or the purchaser.

❏ Issuing bank is the importer's bank that issues the LC and guarantees payment to thenegotiating bank.

❏ Beneficiary is the exporter or the seller.

❏ Advising bank is the bank that advices or informs the beneficiary of the opening of the LC.

❏ Negotiating bank is the exporter's bank which receives the documents from the exporter andreleases the payment to him.

❏ Confirming Bank is the bank authorised by the Issuing bank to confirm the LC.

❏ Correspondent Bank maintains current account of the Negotiating bank.

Types of LCs

❏ Revocable An LC which canbe cancelled or amended by the issuing bank without prior noticeto beneficiary.

❏ Irrevocable An LC which cannot be cancelled or amended by the issuing bank without priornotice to beneficiary.

❏ Confirmed An LC where a confirmation is given by the Confirming bank > a sort of a guaranteefor payment.

❏ Transferable An LC in which the beneficiary can be transferred.

❏ Back-to-back An LC exporter receiving an LC opens a domestic LC in favour of the supplier.In this case the exporter is an intermediary.

❏ Standby An LC where a payment guarantee is given. It is like a bank guarantee.

❏ Revolving An LC whose limit is restored after a bill is presented and negotiated.

❏ Red clause An LC with this clause authorizes the negotiating bank to grant an advance to theexporter.

❏ Green Clause An LC in which besides provision of allowing pre-shipment credit to beneficiary,issuing bank undertakes to arrange for storage / warehouse facility prior to shipment on board.

❏ Circular An LC in which issuing bank authorises its branches / correspondent bank to pay tobeneficiary against clean sight drafts drawn by beneficiary on issuing bank.

❏ Deferred Payment An LC in which full payment to beneficiary is not made immediately uponpresentation of documents but only after a specified period of time.

❏ Restricted An LC in which negotiation is restricted to a particular bank.

❏ Open (clean) An LC in which documents are not required by the applicant.

International Organisation

International organizations like theWorld Bank were set up to maintain orderly international financialconditions and to provide capital & advice for economic development, particularly of developing countries.

World Bank Group

❏ International Development Association

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❏ International Finance Corporation

❏ Multilateral Investment Guarantee Agency

Other international organisations

❏ International Monetary Fund

❏ Bank of International Settlements

❏ Asian Development Bank

❏ African Development Bank

Asian Clearing Union

❏ Established in 1974

❏ Members > central bank's of India, Iran, Bangladesh, Nepal Pakistan, Sri Lanka & Myanmar(Burma).

❏ To provide facility to settle payments for current international transactions.

❏ Promote use of participant's currencies in current transactions.

❏ Promote monetary cooperation.

❏ Exempted categories

✐ Travel between India & other countries.

✐ Foreign trade financed b World Bank, ADB etc.

✐ Payments between India & Nepal and Pakistan & Iran.

❏ w.e.f. 1.1.96, 1 A.C.U. $ = 1 U.S. $.

❏ ACU accounts are settled at the end of every two months.

❏ The balance outstanding in ACU Vostro account with the Authorised Dealers is subject toCRR & SLR.

Offshore Banking Unit (OBU)

An Offshore Banking Unit (OBU) of a bank is a deemed foreign branch of the parent bank situated

within India, and shall undertake International Banking business involving foreign currency denominated

assets and liabilities. The Reserve Bank of India has given permission to certain select Banks in India,

fulfilling certain criteria, to set up OBUs in "Special Economic Zones" (SEZ), for facilitating exports from

India. The OBU of PNB is situated at Santacruz Electronics Export Promotion Zone (SEEPZ) in Mumbai

(Bombay) and is a Deemed Foreign Branch of PNB, although located within the country. It can accept

Multi Currency Deposits from NRIs and Eligible Resident Indians as per FEMA. Companies / Units

within the "SEZs" in India as well as Companies outside "SEZs" as per existing FEMA guidelines can

go for Multi Currency Borrowing from OBU.

e-Money India

This is a completely on-line mode of sending money from US to India. Any person / organization

who wishes to make a payment (in foreign currency) to an individual / organization in India (in Indian

Rupees) can use e-Money India. Customer needs follow three simple steps to send money to India :

❏ Register on e-Money India site by providing elementary details.

❏ Provide his bank details.

❏ Provide the receiver's details in India.

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Presently, a customer can make an inward remittance in U.S. Dollars only for family maintenance,purchase of property, investments, or transfers to NRE accounts.

Remittances from foreign tourists visiting India and Trade related remittances can also be sent.The remittance will be delivered to his / her beneficiary's doorstep as a locally payable demand draft ordeposited directly into the receiver's account in India in Indian Rupees only.

Punjab National Bank is the banking backbone for e-Money India and undertakes the moneytransfer activity for transactions. In short, the remittance is managed entirely by Punjab National Bank,converting funds to Indian Rupees to issuing a Demand Draft in favour of customer's beneficiary ordirectly depositing money into his / her Receiver's account. Times Online Money Ltd. provides thetechnology, operations and the service platform.

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10.2

NON RESIDENT (EXTERNAL) ACCOUNTS

NON RESIDENT (EXTERNAL) RUPEE ACCOUNT SCHEME :

The Non resident Indians and Overseas corporate bodies are permitted to open and maintaintheir accounts under this scheme for the purpose of carrying out bonafide transactions in rupee notinvolving any violation of provision of Foreign Exchange Management Act, 1999, with authorizeddealers and with banks including cooperative banks authorized by RBI to maintain such accounts.

Eligibility for opening Non Resident (External) Account

❏ Indian Nationals residing outside India and persons of Indian origin (except Nationals ofBangladesh and Pakistan) resident abroad are eligible to open account.

❏ OCB which are owned directly or indirectly to the extent of at least 60% by Non-resident of Indiannationality or origin.

❏ Overseas trust wherein beneficial interest to the extent of 60% and above is irrevocably held byIndian nationals or persons of Indian origin.

❏ Officials of Central Govt., State Govt. and Public Sector Undertakings serving abroad and personsdeputed abroad on assignments with international agencies like IMF,WHO,ESCAP etc.

❏ The Indian staff posted at Indian Embassy/High Commission in Pakistan/Bangladesh and theirNon-resident dependents may open Non Resident (External) Accounts.

❏ Indian Residents or persons of Indian origin in South Africa, South West Africa can open account.

❏ Crew members of Indian Shipping/ Airlines Companies are not eligible for opening Non Resident(External) Accounts irrespective of their period of stay/time spent on High/ voyages. However,staff member of such companies posted to foreign countries for duty there, on a short term/ longterm basis ,may open NRE Account.

NRE A/Cs essential features❏ Rupee accounts are opened with banks in India as per FEMA 99 section S (1) (i).

❏ Balance in the account with interest is freely repatriable.

❏ Operations in the account are subject to restrictions, as per FEMA 99.

❏ A/Cs may in the form of Saving, Current, Recurring or Fixed deposits. (Maximum period–10 years)

❏ Rate of interest as prescribed by the bank from time to time.

Opening and Maintenance of Accounts.

❏ NRE accounts can be opened in any branch of our bank

❏ The funds for opening of such accounts must be received in convertible currency in an approvedmanner from any country in the name(s) of eligible persons.

❏ Accounts may also be opened by proceeds of foreign currency Traveller Cheques, notes andcoins tendered by eligible persons during their temporary visits to India, provided the branch issatisfied that they have not ceased tobe Non-residents.

❏ In case foreign currency was initially converted into Indian rupees by some other bank or a sisterbranch, an inward remittance certificate should be obtained before crediting the amounts to Non-resident (external) accounts. Such certificate duly vouched should be filed with the relative creditvoucher.

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Prohibitions

❏ Funds of local origin cannot be credited to these accounts.

❏ Funds once drawn for local disbursements cannot be recredited to these accounts.

Joint Accounts

Joint account in the names of two or more Non-resident individuals may be opened provided all

the account holders are persons of Indian nationality or origin. The account holders may be residents

of the same country or in different country. When one of the joint holders becomes resident, the authorized

may either delete his name and allow the account to continue or redesignate the account as a

redesignate account at the option of the account holders. Opening of these accounts jointly with resident

is not permitted.

Opening of account during temporary visit

An account may be opened in the name of an eligible NRI during his temporary visit to India

against tender of T/Cs or foreign currency notes and coins. The banker must be satisfied that theperson has not ceased tobe Non-resident.

Operation of Power of Attorney

Banks may permit operation on the basis of Power of Attorney or other authority granted in favourof a resident by the Non-resident account holder, provided such operations are restricted to withdrawals

for local payments. The Power of Attorney holder shall not be allowed to repatriate outside India, funds

held in the account under any circumstances or make payment by way of gift to a resident on behalf of

account holder or transfer funds from the account to another NRE account.

Maturity and Renewal of Deposits

As per the instructions of the depositor, the deposits on maturity may be either renewed or refunded

together with accrued interest thereon.

The provisions for automatically renew the deposit on the due date for an identical period, unless

the instructions to the contrary from me/us is received by the bank before maturity.

I/we understand that the renewal will be in accordance with the provision of NRE Scheme in force

at the time of renewal.

I/We further understand that the interest applicable on renewal will be at the applicable ruling rates

on the date of maturity and that the renewal will be noted in the deposit receipt on my/our presentingthe same on maturity date of later for renewal/payment".

Repayment before maturity

No permission of RBI is necessary for repayment of deposits before maturity. Such payments willbe subject to reduction in the rate of interest payable by one percentage point less than rate of interest

applicable for the period for which the deposit remained with the bank.

Penalty for Pemature withdrawal

i) If NRE term deposit is sought to be withdrawn prematurely, interest will be allowed as applicablefor the period for which the deposit remained with the Bank minus 0.5% penalty.

ii) In case NRE term deposit remained with the Bank for a period of over 30 days but less than oneyear, Interest may be paid based on the interest applicable for the period of one year prevailingon the date of withdrawal of the deposit minus penalty of 0.5% or Interest applicable on savings

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account under NRE scheme prevailing on the date of withdrawal of deposit whichever is lower.

iii) If NRE Term Deposits is sought to be withdrawn prematurely for the purpose of converting intoFCNR (B) deposits, interest may be paid applicable for the period for which deposit remainedwith the Bank minus penalty of 0.5%.

iv) In case of premature withdrawal of NRE term deposit for conversion into RFC, no penalty is tobe levied. If such a deposit has not run for a minimum period of one year, interest applicable tosavings deposits held in RFC accounts of the relevant foreign currency may be paid providedsuch request for conversion is made by NRE account holder immediately on return to India. Incase the request is not received within 3 months of his return to India, no interest will be paid ifNRE deposit has not completed minimum period of one year.

Interest on Overdue Deposits

Due to reduction in interest rates on NRE deposits in the last few years, the guidelines regardinginterest payable on overdue NRE deposits (maturing on or after December 03,2003) have been revisedas under :-

(% per annum)

Overdue Period Existing Revisedw.e.f.17.07.2003 w.e.f.03.12.2003

15 days & above 3% 1%

The NRE terms deposits can be renewed from the date of maturity within a period of 14 days atinterest rates prevailing on the date of maturity or renewal whichever is lower.

Renewal of Overdue Deposits

In case of NRE deposits :

❏ Where overdue period from the date of maturity till the date of renewal (both days inclusive)does not exceed 14 days, the rate of interest payable on the amount of deposit so renewedshall be the appropriate rate of interest for the period of renewal as prevailing on the date ofmaturity.

❏ Where overdue period from date of maturity till date of renewal (both days inclusive) exceed14 days, branches shall allow interest on overdue term deposit from the date of maturity ofthe deposit provided : -

a. The total amount of the overdue deposit or a part thereof is renewed from the date of itsmaturity till some future date (at least 15 days beyond the actual date of renewal) providedthe deposit remains with the bank for minimum period of one year.

b. The interest allowed shall be at the appropriate rate operative on the date of maturity ofsuch overdue deposit or the rate as on the date of renewal of the deposit, whichever isless and shall be payable only on the amount of the deposit so renewed.

Interest Payable on Deposit Accounts of Deceased Depositors

a. In case of a term deposit standing in the name/s of a deceased individual depositor or two ormore joint depositors, where one of the depositor has died, interest will be paid in the followingmanner : -

i) At the contracted rate on the maturity of the deposit;

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ii) In the event of payment of the deposit being claimed before the maturity date, the brancheswill pay interest without charging the penalty applicable on premature withdrawal ofdeposits;

iii) In the event of death of the depositor before the date of maturity of the deposit and theamount of the deposit is claimed after the date of maturity , the bank will pay interest atthe contracted rate till the date of maturity. From the date of maturity to the date of payment,the bank will pay simple interest at applicable rate operative on the date of maturity, forthe period for which the deposit remained with the bank beyond the date of maturity. Incase this period is less than 1 year, interest will be paid at savings deposit rate applicableon date of maturity. However, in the case of death of the depositor after the date ofmaturity, the bank will pay interest at savings deposit rate operative on the date of maturityfrom the date of maturity till the date of payment;

iv) If, on request from claimant/s, the bank agrees to split the amount of term deposit andissues two or more receipts individually in the names of the claimant/s, it will not beconstrued as premature withdrawal of the term deposit. The period and aggregate amountof the deposit should not, however, undergo any change.

b. In the case of balances lying in current account standing in the name of a deceased individualdepositor/sole proprietorship concern, interest will be paid from the date of death of thedepositor till the date of payment to the claimant(s) at rate of interest applicable to savingsdeposit as on the date of payment.

c. In case the claimants are residents, the deposit on maturity will be treated as domestic rupeedeposit and interest will be paid for the subsequent period at a rate applicable to the domesticdeposits of similar maturity.

Taxes

Income from interest on balances standing to the credit of NRE accounts is exempt from incometax. Likewise balances held in such accounts are exempt from wealth tax. Gift to close relatives fromthe balance are free from gift tax. Balances held in these accounts, however, are not exempted fromestate duty. The tax exemptions are not available to OCB's.

Change of Status

❏ Non-resident accounts of persons mentioned above will be treated as Resident Account on returnto India.

❏ It is primarily the obligation of the account holder to advise the bank of the change in his/her statusfrom Non Resident to Resident. Undertaking in this regard is given in AOF FEX 64.

❏ NRE accounts should be redesignated as resident account or the funds held in these accountmay be transferred to the RFC account (if the account holder is eligible for maintaining RFC account)at the option of account holder immediately. Upon the return of the account holder to India fortaking up employment or for carrying on business or vocation or any other purpose indicatingintention to stay in India for uncertain period. Where account holder is on short visit to India, theaccount may continue tobe treated as NRE account even during his stay in India.

Operations in the account

i) Transactions not requiring report to RBI :

❏ Transfer from any other NR(E) Account including NR(E) Fixed Deposit of the same accountholder

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❏ Transfer from FCNR Account of the account holder

❏ Interest on balances in the NR(E) Account.

ii) Transactions subject to report to RBI

❏ Proceeds of remittances received inconvertible currencies from abroad from country ofresidence or other countries, in an approved manner.

❏ Proceeds of foreign currency/bank notes, traveler's Cheques , Cheques etc tendered bythe account holder, during his temporary visit to India.(Traveller Cheques and otherinstruments should be in the name of account holder, endorsed instruments are notacceptable).

❏ Interest/Dividend earned on Govt. securities, Units purchased from funds in NR(E)Accounts.) in case of Dividend on units, UTI should confirm that those were purchasedout of funds remitted from abroad in an approved manner or from NRE/FCNR A/Cs.

❏ Maturity proceeds of Govt. Securities/Units of UTI etc. In case of units verify UTI certificationas above also (suitable note tobe made in the ledger against the relevant transactions forverification by RBI)/Internal Auditors.

❏ Refund of share/debentures subscription to new issues of Indian companies or a portionthereof, if the original amount was paid by debit to NRE/FCNR account or remittancefrom abroad in an approved manner.

❏ Transfer of funds for any purpose from one NRE account to another of a different person.

❏ Dividend/Interest in respect of investment made in shares/debentures on repatriationbasis, provided investment were made under respective approval and Dividend/Interestpermitted tobe repatriated abroad.(Crediting branch should get proper certification formDrawee Bank/Branch to this effect before crediting).

NOTE :1. To be reported in Form A-4 only when the amount is Rs. 100000/- and above.2. Credit by way of foreign currency notes/travelers Cheques/drafts, personal Cheques drawn by

account holder abroad should be accepted only after satisfying that the account holder continuestobe Non Resident.

3. Purchase of currency notes more than USD 5000 travelers Cheques and currency notes exceedingUSD 10000 should be endorsed at the back of Currency Declaration Form (CDF).

4. All other transactions require the prior approval of the Reserve Bank on Form A-4.

DEBITS :

i) Transactions not requiring report to RBI :❏ Local disbursements (excluding investments in any manner).❏ Payment of Insurance premium for self and dependents.❏ Payment of passage fare for self and dependents/directors in case of OCBs.

❏ Transfer to any other NR(E) Account of the account holder. Other non-resident/otherresident.

❏ Transfer to FCNR'B' Account of the account holder/other non resident for bonafide personalpurpose.

ii) Transactions subject to report to RBI(FormA-4) (If amount exceed Rs. 100000/-)❏ Permissible investments,. Provided specific approval of RBI has been obtained, where

necessary.

❏ Purchase of immovable property subject to specific approval of RBI, where applicable.

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iii) Transactions subject to report to RBI (Form A-2)❏ Remittances to the country of residence of account holder or any other country.❏ Sale of foreign currency travellers Cheques, letters of credit etc. encashable outside India,

to the account holder or dependents on production of evidence of travel abroad within 60days from the date of such sale.

NOTES :1. In respect of Non convertible Rupee Account of residents of erstwhile Bilateral Group, remittances

can be made, only to that country from where the remittance was originally received.

2. Accounts can be operated by resident Power of Attorney holders but they are not permitted toremit funds abroad.

3. Transfer of funds from one Non-Resident (External) account to another Non-resident (External)Account of different person is now permissible without prior approval from RBI for any purposes.

4. Transfer of NR(E) Account from one bank/ branch to another may, however, be made providedaccount is opened in the name of the same account holder and certificate issued by the bank/branch transferring the funds confirming NR(E) status of the account from which transfer is beingmade, accompanies the relative Draft/Pay order.

5. All other transactions require the approval of Reserve Bank.

Loans and overdrafts :

To account holder.

The banks maintaining such accounts are permitted to grant loan in India to theaccount holder for:

❏ Loans can be granted for personal purposes or for carrying on business activities exceptfor the purpose of retending or carrying on agricultural/plantation activities or for investmentin real estate business. The banks should ensure that the advances are fully secured bythe fixed deposits and regulations relating to normal margin, interest rates etc. are compliedwith. Repayment shall be made either by adjustment of the deposit or by fresh inwardremittances from outside India through normal banking channels. The loan can also berepaid out of local rupee resources in the NRO account of the borrower.

❏ For the purpose of making direct investment in India on non repatriation basis by way ofcontribution to the capital of Indian firms/companies subject to compli9ance of Provisionsof FEMA 1999.

❏ For the purpose of acquisition of flat/house in India for his own residential use subject tothe provisions of the relevant Regulations made under the Act.

Loans outside India

The banks may allow their branches /correspondents outside India to grant any type of fundsbased and/or non fund based facilities to or in favour of non-resident depositors or to third parties at therequest of depositors for bonafide purpose against the security of funds held inner accounts in Indiaand also agree to remittance of the funds from India, if necessary, for liquidation of outstanding.

Temporary Overdrawing

Banks may at their discretion/commercial judgment allow for a period not more than two weeksoverdrawing in NRE savings bank account, upto a limit of Rs. 50000/- subject to the condition that suchoverdrawing together with interest payable thereon are cleared/repaid within the said period of twoweeks out of inward remittances through normal banking channels or by transfer of funds from otherRE/FCNR accounts.

611

Special Series of Cheques book

For easy identification and quicker processing of Cheques drawn on NER A/c banks shall issueCheques book containing a special series of Cheques to their constituents holding NRE accounts.

Remittance/transfer of funds to Non-resident nominees :

The Banking companies (Nomination) Rules 1985 framed under Banking Regulation Act 1949enables banks to pay the amount standing to the credit of deceased depositor to his nominee. Thebanks maintaining the account may allow remittance of funds lying in the NRE/FCNR accounts of thedeceased account holders to the non resident nominees subject to the following conditions :

1. Application in form LEG is submitted by the nominee(s).

2. Nomination registered in the banks record is in favour of the nominee and is in conformity with theprovisions of Nominations rules.

3. The nominee continues tobe non-resident at the time of claim/remittance sought from India andthe deceased depositor was nor resident at the time of his death.

4. As the legal heirs are non-resident, a signed declaration to the effect duly witnessed may besubmitted by the nominee to the authorized dealer/bank maintaining the account. Application inForm LEG together with the documents/particulars mentioned therein received from nomineesshould be scrutinized And after satisfying about the legality of the claim as per the internal guidelines,banks may settle the claim and allow transfer of funds to the nominee to the extent of balancesheld in the deceased depositors NRE/FCNR accounts. A copy of the LEG form and other documentsshould be kept on record for verification of inspecting officials of RBI. In all other cases which don'tfulfill the terms and conditions should be referred to the RBI for prior approval along with the allrelevant documents and LEG Form.

Remittance abroad by Resident Nominee

Application from a resident nominees for remittance of funds outside India for meeting the liabilities,if any, of the deceased account holder or for similar other purposes, should be forwarded to RBI forconsideration.

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10.3

NON RESIDENT (ORDINARY) ACCOUNTS)

A. ELIGIBILITY

❏ Any person resident outside India may open NRO account with an authorized dealer or anauthorized bank for the purpose of bonafide transactions in rupees. The transactions in accountshould not violate the provisions of FEMA 1999, rules and regulations made there under.

❏ The operations in the account should not be for the purpose of making available foreignexchange to any person in India against the reimbursement in Rupees or in any other manner.

❏ At the time of account opening an undertaking will be obtained from the account holder that incase of debits to the account for the purpose of investment in India and credits of representingthe sale proceeds of investments, the account holder will ensure that such transactions are inaccordance with the rules and regulations made by RBI in this regard. This undertaking istobe taken from existing account holders also.

❏ The account in the name of individuals/entities of Bangladesh/Pakistan nationality/ownershiprequires approval of RBI./

B. OPENING AND MAINTENANCE OF ACCOUNTS

All branches of our bank can freely open NRO accounts in names of individual/entity residentoutside India without prior reference to RBI.

❏ The initial deposit for opening of account must has been received from abroad through bankingchannels, in an approved manner, by way of telegraphic transfer, mail transfer demand draftor Cheques.

❏ Funds are being transferred from an existing account of the same person.

❏ The account can also be opened with the foreign exchange brought in by the prospectiveaccount holder, during his temporary visit to India; the foreign exchange will be sold to anauthorized dealer.

❏ The funds are legitimately due top the account holder in India.

C. JOINT ACCOUNTS

The joint accounts can be opened in the name of Non-residents with residents with reference toRBI.

D. TYPES OF ACCOUNTS

The NRO accounts may be opened/maintained in the form of current, savings, recurring or fixeddeposit accounts. The requirement laid down in the directives issued by RFBNI in this regard shallapply to NRO Accounts.

E. CHANGE OF RESIDENT STATUS OF ACCOUNT HOLDER

❏ Whenever an account holder, who is an Indian citizen, goes abroad, except Nepal or Bhutanfor taking up employment or to carry on profession or business indicating his intention to stayoutside India for an uncertain period, his existing account should be designed as a NonResident (Ordinary) account.

613

❏ NRO account may be redesignated as Resident Rupee account on return of the accountholder to India.

❏ A foreigner who normally resides in India, goes abroad for indefinite stay, the relative accountshould be designated as Non resident and redesignated as Resident on his return to India.

F. OPERATIONS IN THE ACCOUNT

The credit and debits to these account are subject to some regulations.

CREDITS :

❏ Proceeds or remittance received in any permitted currency from outside India through normalbanking channels or any permitted currency tendered by the account holder during temporaryvisit to India or transfers from Rupee account of Non resident banks

❏ Legitimate dues in India of the account holder.

DEBITS :

❏ All local payments in rupees including payments for investments subject to compliance withthe relevant regulations made by RBI.

❏ Remittance outside India of current income in India of the account holder net of applicabletaxed.

G. REMITTANCE OF FUNDS HELD IN NRO ACCOUNTS

Balances in NRO accounts are not repatriable without approval of RBI. Funds received by way ofremittances from outside India in Foreign Exchange which have not lost their identity as remittablefunds will only be considered by RBI for remittance outside India where as account Current or saving)is opened by foreign tourist visiting India with funds remitted from outside India in a specified manner orby sale of foreign exchange brought by him to India, authorized dealers may convert the balance in theaccount at the time of departure of the tourist from India into foreign currency provided the account hasbeen maintained for a period not exceeding six months and account has not been credited with anylocal funds other than interest accrued on them.

H. LOANS/OVERDRAFTS AGAINST NRO BALANCES

To Account Holder :

❏ Loans to Non resident account holder may be granted in rupees against the security of fixeddeposits subject to usual norms as are applicable to resident account, for personal purposesor for carrying on business activities except for the purpose of retending or carrying onagriculture/plantation activity or for investment in real estate.

To third parties :

Loans and advances to resident individuals/firms/companies in India may be granted against thesecurity of deposits held in NRO accounts subject to following terms and conditions:

❏ The loans shall be utilised only for meeting personal/ business requirements and not forcarrying on agriculture/plantation activities or real estate business or for retending.

❏ Norms relating to margin and rate of interest shall be complied with.

❏ The usual norms and consideration, as applicable in the case of advances to trade/industryshall be applicable for such loans/facilities.

Temporary Over drawings :

Authorized dealers/ bank may permit overdraft in the account of the account holder subject tohis commercial judgment and compliance with interest should be adjusted within a period of

614

two weeks either by way of remittance from abroad or out of the legitimate funds or theaccount holder or by transfer from his NRE/FCNR accounts.

Continuation of Loans/Overdrafts in the event of change in the residential status of the borrower.

In case of person who had availed of loan or overdraft facilities which resident in India andwho subsequently become a person resident outside India, the authorized dealer may at theirdiscretion and commercial judgment allow continuance of the loans. In such cases, paymentof interest and remittance or out of the legitimate resources in India of the person concerned.

I. INVESTMENT OF BALANCES HELD IN NRO ACCOUNTS

Investment of NRO balance is freely permitted on non-repatriable basis in the areas other thanreal estate, agriculture and plantation activities.

J. REPORTING OF TRANSACTION

❏ The transactions in the account which may appear to represent reimbursement in rupeesagainst foreign exchange made available to a person resident in India other than authorizeddealer, as well as any other transaction of suspicious nature, should be reported to RBI.

❏ All operations in the accounts involving amount of Rs. 1 lac or more will require completion ofform A-4

❏ Form A-4 can be completed by resident party to the transaction or if resented , it can be filledup by the AD's also after obtaining requisite information from resident beneficiary or remitter.

❏ A-4 form need not tobe sent to Non resident constituent for completion.

❏ A-4 form should be preserved at branch and not tobe sent to RBI.

K. INCOME TAX

As per Income Tax Act, 1961 and as amended from time to time, the tax on income by way ofinterest has tobe deducted at sources. The rates of such tax are advised by Finance and TaxationCell, Head Office, New Delhi.

L. LEASING LOCKERS

There is no objection to leasing out lockers to foreign nationals/ non-residents.

M. ACCOUNTING PROCEDURE

The same accounting procedure as applicable to other resident account as laid down in bank'sBook of Instructions will be applicable to these account.

N. FORMS, STATEMENTS,REGISTERS, LEDGERS

The same account opening from as in domestic resident account tobe procured for opening Non-resident(Ordinary) account along with requisite undertakings. NRO accounts should be kept in aseparate ledger. No statements is required tobe submitted to RBI in respect of NRO account. A-4form should be preserved for necessary inspection by internal inspectors/RBI Auditors.

O. NOMINATIONS;

Nomination facility is available in NRO accounts as in case of other resident accounts. However, incase of nomination in favour of Non-resident nominee, the amount due/payable to Non-residentnominee from the account of a deceased account holder shall be credited to NRO account if thenominee will an authorized dealer/authorized bank in India and shall not be allowed tobe remittedoutside India. Procedure prescribed for registration of nomination is resident account may befollowed.

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10.4

INCO TERMS

Inco Terms Sellers Duty Buyer's Duty

EX WORKS (EXW) * Deliver the goods at his peremises * Take delivery of the goodsat the premises of the seller.Make all arrangements at hisown costand risk to bring thegoods to the destination.

FREE CARRIER (FAC) * Deliver the goods at the named * Nominate carrier... NAMED POINT point into the custody of the * Contract for the carriage

carrier named by the buyer and pay the freight.* Provide export licence and pay

export taxes and fees, if any.* Provide evidence of delivery

of the goods to the carrier.

FREE ON RAIL (FOR) / * Deliver the goods at the named * Nominate Railway Station /FREE ON TRUCK (FOT) station / into the custody fothe transport

transporter named b the buyer* Provide evidence of delivery of * Contract for the carriage

the goods to the railway and pay the freight.authorities / transporter.

* Pay the loading charges to theextent not included in freight.

FOB AIRPORT (FOA) * Deliver the goods to theair * Accept delivery of thecarrier at the airport of departure goods to the carrier at the

* Contract for carriage unless airport of departure.contrary notice has been given * Pay the freight.

* Notify thebuyer ifthe wishes * Notify seller if he doeshim to contract for carriage not wish him to contract

for carriage

FREE ALONGSIDE * Deliver goods alongside * Nominate carrierSHIP (FAS) the ship * Contract for the carriage

* Provide an alongside receipt and pay the freight* Obtain export licence and

pay export taxes, if necessary

FREE ON BOARD * Deliver the goods on board * Nominate carrier* Provide export licence and * Contract for the carriage

pay export taxes and fees, and pay the freightif required. * Pay loading costs to the

* Provide a clean on board receipt extent that they areincluded in the freight

* Pay loading costs according to * Pay unloading costs.the custom of the port to theextent that they are not includedin the freight.

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COST & FREIGHT * Contract for the carriage and pay * Accept delivery of thethefreight to the named destination goods upon shipment,

* Deliver the goods on board when the invoice andthe* Obtain export licence andpay bill of lading are tendered

export taxes and fees, if any. to him; the bill of lading* Furnish tot hebuyer the invoice is deemed to represent

and a clean on board bill of the goods.lading. * Pay unloading costs to

* Pay loading costs. the extent that they are* Pay unloading costs to the not included in the

extent that they are included freight.in the freight.

COST, INSURANCE * Contract for the carriage and * Accept delivery of theAND FREIGHT (CIF) pay the freight to the named goods upon shipment,

port of destination. when the invoice, the* Deliver the goods on board. cargo insurance policy* Obtain export licence and pay and bill of lading are

export taxes and fees, if any. tendered to him; the* Contract for insurance of the bill of lading is deemed

goods during the carriage and to represent the goods.pay the insurance premium. * Pay unloading costs to

* Furnish to the buyer the invoice the extent that they areand a clean on board bill of not included in thelading. freight.

* Pay loading costs.* Pay unloading costs to the

extent that they are includedin the freight.

FREIGHT / CARRIAGE * Contract for the carriage and * Accept delivery of thePAID TO OCP) pay the freight to the named goods when they are

port of destination. delivered tot eh first* Deliver the goods into the carrier and when the

custody of the first carrier. invoice and, if customary,* Obtain exportlicence andpay the usual transport docu-

export taxes and fees,if any ments are tendered to him* Furnish to the buyer the invoice

and the usual transport documents.

FREIGHT / CARRIAGE * Contract for the carriage and * Accept delivery fot ehAND INSURANCE pay the freight to the named goods when they arePAID TO (CIP) port of destination. delivered tothefirst

* Deliver the goods into the carrier and when thecustody of the first carrier. invoice and, if customary,

* Obtain export licence andpay the usual transport docu-export taxes and fees,if any ments, insurance policy or

Inco Terms Sellers Duty Buyer's Duty

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Inco Terms Sellers Duty Buyer's Duty

* Contract for insurance of the other evidence of insurancegoods during the carriage and cover are tedndered to him.pay the insurance premium.

* Furnish tot he buyer the invoice,the usual transport documents &a transport insurance policy orother evidence of insurance cover.

EX-SHIP (EXS) * Deliver the goods on board the * Take delivery of theship at theport of destination. goods at the port of

* Provide documents to enable destination.the buyer to take delivery from * Pay unloading costs.the ship (e.g. bill of lading or * Obtain import licencedelivery order). * Obtain import licence

and pay import duties,taxesand fees, if any.

EX QUAY (EXQ) * Deliver the goods on the quay * Take delivery of theat the port of destination. goods from the quay

* Provide documents to enable at the port ofthe buyer to take delivery from destination.the quay (e.g. delivery order).

* Pay unloading costs.* Obtain import licence and pay

import duties, taxes and fees ifany.

DELIVERED AT * Deliver the goods cleared for * Take delivery of theFRONTIER (DAF) export at the named frontier goods at the named

(or the named place at the frontier (or the namedfrontier). place at the frontier).

* Provide documents to enable * Pay for on-carriage.the buyer to take delivery at * Obtain import licencethe frontier (e.g. documents of and pay import duties,transport or warehouse warrant) taxes and fees, if any.

DELIVERED DUTY * Deliver the goods at the named * Take delivery ofthePAID (DDP) place of destination. goods at the named

* Obtain import licence andpay place ofdestination.import duties, taxes and fees, if any.

* Provide documents to enablethe buyer to take delivery at thenamed place (e.g. documentsoftransport or warehouse warrant)

618

10.5

FERA vs. FEMA

FERA was introduced in the year 1974. The legislation aimed at having stringent controls to conserve

foreign exchange and to utilise later in the best interest of country. Though FERA was amended in the

1993, the introduction of financial and economic reforms in our country necessitates promulgation of a

suitable Act to replace it, especially due to some draconian provisions of FERA. Therefore, FEMA

came into force on 01.06.2000. Let us find out the basic differences between the two Acts :

Preamble of FERA : 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

and the proper utilization there of in the interest of the economic development of the country.

Preamble of FEMA : An act to consolidate and amend the law relating to foreign exchange with

the objective of facilitating external trade and payments and for promoting the orderly development and

maintenance of foreign exchange market in India.

In other words, while FERA was a law that sought to 'control' foreign exchange transactions,

FEMA seeks to 'regulate' and 'manage'. However, the two Acts are similar in the sense that both

FERA as well as FEMA would be governed by the notifications to be issued by the central Government/

Reserve Bank of India for granting general permissions.

The fundamental difference is that FERA, in its substantive form, prohibited almost all foreign

exchange transactions unless there is a general or specific permission to do that. FEMA, on the other

hand, allows all current account transactions. Therefore, FEMA is a positive law to this extent.

Another noticeable difference between the two is that an offence under FERA is of a criminal

nature, whereas that under FEMA is of civil nature. Under FERA there is a presumption of existence of

a guilty mind, unless the accused proves otherwise. Under FEMA, however, the prosecution will have

to prove that a person has committed an offence.

While section 35 of FERA empowers the Enforcement Officers to arrest a person, if they had

reasons to believe that the person was guilty of FERA violations, FEMA provides such power of arrest

only if the person does not pay the penalty levied under section 13 of FEMA, within the given time.

INTRODUCTION OF FEMA

FEMA has stipulated a transition period of two years for replacing FERA by FEMA. After the expiry

of two years from the date of enforcement of FEMA, i.e., w.e.f. 01.06.2002, any Court or Adjudicating

Authority would not try any offence under FEMA.

Section 49(3), FEMA holds that notwithstanding anything contained in any other law for the time

being in force, no court shall take notice of any contravention under section 51 of the repealed Act after

the expiry of a period of two years from the date of the commencement of this Act.

FERA contained 81 sections (some were deleted by 1993 amendment), out of which 32 sections

were relating to the operational part and the rest were rating to Penalties , Enforcement Directorate etc.

619

FEMA with 49 sections has been divided into seven chapters. First three chapters (Chapters i, ii and iii

with 12 sections) relate to operational part and the balance four chapters (Chapters iv to vii with sections

13 to 49) deal with penalties, adjudication, appeals, Enforcement Directorate etc.

RESIDENTAL STATUS

Sections 2(v) of FEMA provide : "person resident in India" means :

1. A person residing in India for more than one hundred and eighty two days during the course of

the preceding financial year but does not include –

❏ A persons who was gone out of India, or who stays outside India, in either case

(a) for or on taking up employment outside India, or

(b) for carrying on outside India a business or vocation outside India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay outside

India for an uncertain period.

❏ A person who has come to or stays in India, in either case, otherwise than

(a) for or on taking up employment in India, or

(b) for carrying on in India a business or vocation in India, or

❏ for any other purpose, in such circumstances as would indicate his intention to stay in India for

an uncertain period.

2. Any person or body corporate registered or incorporate in India.

3. An office, branch or agency in India owned or controlled by a person resident in India.

Section 2(iv), FEMA holds that a person for the purpose of the act means :

1. An individual

2. An H.U.F.

3. A company

4. A firm

5. An association of persons or a body of individuals, whether incorporate or not

6. Every judicial person, not failing within any of the preceding sub-clauses, and

7. Any agency, officer or branch owned or controlled by person.

The financial year has not been defined under FEMA, but for this, reference may be taken of the

Income Tax Act. Later holds a financial year to commence from 1st April to 31st March.

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Forfaiting means purchase, at a fixed rate, of medium term claims of an exporter on the foreign

buyer without recourse to the former. Promissory notes or bills of exchange payable generally represent

the claims by the importer on maturity. It serves as a source of funds for exports.

Operating Mechanism

(1) The Indian exporter initiates negotiations with prospective overseas buyer for undertaking a project

execution/delivery of capital goods with regard to order quantity, price, currency of payment delivery

period, credit terms etc.

(2) The exporter approaches Exim Bank for obtaining quotes from a foreign forfaiting agency with

details of the order terms and the name of the guarantor bank, if known.

(3) Exim bank obtains indicative quotes of discount, commitment fee and documentation charge and

communicates to the exporter.

(4) The exporter finalises the terms of the contract with the buyer and enters into the contract, with the

overseas forfaiting agency through Exim bank.

(5) Delivery of goods takes place.

(6) Forfaiting charges need not be shown separately but included in the FOB value on the invoice.

(7) On delivery of the availised bills of exchanges/ promissory notes, payment to the full extent less

discount changes is made by the forfaitor to the exporter.

(8) On maturity, the bills/notes are presented by the forfaitor to the availising/guaranteeing bank.

(9) The availising bank, whether receiving the payment or not from the importer, reimburses the bill

amount to the forfaitor.

Advantages of Forfaiting

1. The claim of the exporter on the buyer is purchased by the forfaiting bank without recourse to him.

Therefore, as far a he is concerned, a transaction which is a credit sale has now become a cash

sale.

2. Immediate payment upto full value (less forfaiting charges) of the bills/notes without recourse, thus

totally freeing from all credit risks and uncertainty.

3. Improvements in cash flow.

4. Exporter relieved form spending time and money in administering and collecting debt.

5. It does not reduce the borrowing limit of the exporter.

6. Elimination of export credit risks.

In spite to the advantages, one has to compare the cost of pre and post shipment credit with

forfaiting costs. Risk of non payment does not matter when transaction are through irrevocable letter of

credit.

10.6

FORFAITING AND OTHER TOPICS

621

Though factoring is also a form of finance, the basic differences between factoring and forfaiting

are as given in the table below : -

Basis International Factoring International Forfaiting

Meaning It is a method whereby the factor It is a method whereby the

undertakes to collect the debts exporter sells the export bills to

assigned by exporters. the forfaitor and obtains cash.

Nature of facility Money comes to exporters only Money comes to exporter even before

after collection of bills by the the collection of exporter's debts.

factor.

Position of agent Factor acts as an agent of exporters Forfaitor, after having made payment

to whom the accounts receivables to exporter, become sole owner

are assigned by exporters. to collect debts.

Risk The factor does not undertake the The forfaitor, after buying the

risk which lies with exporter. exporter's debts, assumes the

full risk.

Relationship Relationship between the exporter After the sale of debts on discount by

and the factor continues even after exporter, the relationship between

assignment of debts by exporters. the exporter and the forfaitor is

severed as far as that particular

transaction is concerned.

Nature of credit Factoring covers the export of Forfaiting covers export of capital

Covered consumer goods for relatively goods/project execution.

short period.

Exim bank plays the role of a facilitator between the Indian exporter and the overseas forfaiting

agency. The scheme has been introduced in India for an initial period of three years. Authorized dealers

(including commercial banks) have been permitted by Reserve Bank of India to introduce the scheme

without its permission.

American Depository Receipts vs. Global Depository Receipts

Global Depository Receipts and American Depository Receipts' are the two major sources of external

funds. These two can be compared as under:

ADRS v/s GDRS

ADR GDR

CENTRE

The New York Stock Exchange is the largest The London Stock Exchange (LSE) is not as

stock exchange in the world by both value & large as the NYSE overall, but is the global

turnover.Foreign equities play a minor role centre for international equities which dominate

in turnover

622

INSTRUMENT

No legal or technical difference between an Unlike the NYSE, the LSE makes no demands

ADR and a GDR. The US has three levels of requiring companies to give holders the right

ADR programme. Level III is suitable for fund to vote. The NYSE insists upon this point.

raising.

DISCLOSURE

Comprehensive disclosure required for F - 1, the Detailed information required on the company

US prospectus, which must accompany a public but less onerous for GDR listing than fully

offering. equity.

GAAP

Foreign companies listing in the US must LSE satisfied with a statement of the difference

reconcile their accounts to US GAAP. between the UK and Indian accounting

standards.

COST

US listing could be expensive. Total initial cost GDR listing on the LSE is comparatively

range of $1 million to 2 million. inexpensive. Initial cost likely to be in the

region of $ 2 lakhs to 4 lakhs.

TRADING

On NYSE. On London Stock Exchange/Luxembourg.

RETAIL

A public offering in the US allows an issuer to Over 5000 US institutions accessed, but

access the US retail market. This provide extra ordinary investors cannot participate. US

source of demand. demand therefore not maximized.

BANK ACCOUNTS FOR NON-RESIDENT INDIANS (NRIS)

Sr. Operational Non-Resident Ordinary Non-Resident External Foreign Currency

No. Parameters A/c (NRO) A/C (NRE) Non-Resident A/c (FCNR)

1. Who can open NRI-Indian Passport holder NRI-Indian Passport holder NRI–Indian Passport holder

/ Foreign Passport holder of / Foreign Passport holder of / Foreign Passport holder

Indian Origin. Indian Origin. Indian Origin.

(Individuals of Bangladesh/ (Individuals of Bangladesh/ (Individuals of Bangladesh /

Pakistan nationality require Pakistan nationality require Pakistan nationality require

approval of RBI). approval of RBI). approval of RBI).

2. Currency of the A/c Indian Rupee Indian Rupee Foreign Currency – Dollar,

Pond, Sterling, Yen & Euro

3. Source of Funds Local Funds/Foreign Inward Foreign Inward Remittance Foreign Inward Remittance

Remittance (FIR) (FIR) (FIR)

ADR GDR

623

4. Types of Accounts SB / CA / Term Deposits SB / CA / Term Deposits Only Term Deposits

5. Min. / Max. period (in As applicable to domestic Minimum–12 months Minimum – 12 monthscase of term deposit) term deposit Maximum–3 years Maximum–3 years

6. Joint Accountwith(a) Residents Permitted Not Permitted Not Permitted(b) Non-Residents Permitted Permitted Permitted

7. Nomination (Non- Permitted Permitted Permittedresident / residentnominee)

8. Repatriation of : Not repatriable (Except FIR Freely Repatriable Freely Repatriable(a) Principal with RBI approval)*(b) Interest Repatriable (with RBI's Freely Repatriable Freely Repatriable

approval)

9. Loan Against Deposits Permitted Permitted Permitted

10. Tax Benefits No exemptions (Tax @ 30% Exempted from all taxes Exempted from all taxesat source on interest to bededucted)

11. Investment Eligible for Non-repatriable Eligible for repatriable Eligible for repatriableinvestment investment investment

12. Interest Rate Savings – 3.5% Savings@ Term Deposit – Fixed orTerm Deposit – Banks are Term Deposit – Fixed or Floating within ceiling rate offree to fix the interest rate. floating rate of interest within Libor / Swap rates(As applicable for domestic the ceiling rate announced by announced by RBI from timedeposits) RBI from time to time. ## to time.#

Rupee loans in India againstSecurity of NRI Deposit

1. A/c holders Permitted Permitted Permitted

2. Third Party Permitted Permitted Permitted

Foreign Currency LoansOutside India

1. A/c holder Not Permitted Permitted Permitted

2. Third Party Not Permitted Permitted Permitted

* Authorised Dealers can allow remittance/s upto US$ 1 million, per calendar year, from balances inNRO accounts subject to payment of applicable taxes. The limit of US $ 1 million per year includessale proceeds of immovable properties held by NRIs / PIOs for a period of 10 years. In case, aproperty is sold after being held for less than 10 years, remittance can be made after the saleproceeds have been held in the accounts for the balance period.

@ w.e.f. 17.11.2005 interest rates on NRE Savings deposits should not exceed the maximum 75basis points over LIBOR / SWAP rates for 6 months maturity on US $ deposits.

# At present, it is within ceiling rate of Libor / swap rate for the respective currency / correspondingterm plus 25 basis points.

## For 1 to 3 years, contract rate, w.e.f. 18.04.2006, should not exceed the maximum 100 basispoints over LIBOR/SWAP rates for US $ of corresponding maturity.

Sr. Operational Non-Residet Ordinary Non-Resident External Foreign Currency

No. Parameters A/c (NRO) A/C (NRE) Non-Resident A/c (FCNR)

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OTHERS IMPORTANT ASPECTS :

(a) Reserve Bank of India has discontinued Non-Residential Non Repatriable (NRNR) Account andNon-Resident Special Rupee (NSRS) account schemes w.e.f. April 1, 2002.

(b) Power of attorney holders in NRE a/c are not permitted to credit foreign currency notes and foreigntravelers cheques in NRE a/c.

(c) Any resident Indian can appoint Non-Resident Indian as a nominee in his deposit account.

(d) All existing NRE (savings, current) accounts of OCBs have to be closed and balance repatriatedas originally authorised. The existing NRE deposits (recurring or fixed), FCRN (B) accounts andNRO deposit (recurring or fixed) accounts are permitted to continue till original maturity. The maturityproceeds of NRE deposits and FCNR (B) accounts should be repatriated.

(e) As per RBI, no new NRE / FCNR / NRO a/cs in the name of OCBs should be opened and norenewal of deposits should be made.

FOREIGN EXCHANGE FACILITIES FOR RESIDENTS

As per Section 5 of Foreign Exchange Management Act (FEMA), resident Indians are permitted tobuy or sell foreign exchange from any Authorities Dealers (ADs) and full-fledged money-changer (FFMC)for any current account transactions (except for those transactions where restrictions have been imposedby Central Govt.) as per details given below. Release of foreign exchange beyond the limits mentionedbelow will require prior approval from RBI.

Sr. Purpose Amount DetailsNo.

1. Tourism / Private Visit out US $ 10,000 ❏ Per calendar year per family member for one ormore visits.

❏ Except Nepal and Bhutan.

❏ Utilisation of foreign exchange throughinternational credit cards permitted.

2. Gift / donations to a US $ 5,000 ❏ Per year basis.

Person outside India ❏ Beneficiaries can be individual, charitable,educational, religious, cultural organisation etc.

3. Employment Abroad US $ 1 lac ❏ To Indian resident going abroad for gainfulemployment.

4. Immigration Abroad US $ 1 lac ❏ To meet the incidental expenses in the country ofmigration on production of evidence that thetraveller has already obtained immigration visa.

5. Education Abroad US $ 1 lac ❏ It is per academic year.

6. Medical TreatmentAbroad US $ 1 lac ❏ On the basis of declaration by the patient.

7. Maintenance of close US $ 1 lacrelative abroad

8. Business Trip US $ 25,000 ❏ Except Nepal and Bhutan

❏ Will cover visits for attending international tradeconferences, seminars specialised training, studytours etc.

9. Small Value Remittances US $ 5000 ❏ For any permissible transaction on the basis ofsimple letter from the applicant without insistingon submission of Form A2.

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OTHER IMPORTANT APSECTS :

1. The foreign exchange can be purchased within 60 days ahead of the date of journey. In case, theforeign exchange is not used, it has to be surrendered to an Authorised Dealer (AD).

2. The resident Indian while purchasing foreign currency can give upto Rs. 50,000 in cash. If therupee equivalent exceeds Rs. 50,000, the foreign currency has to be purchased by making thepayment by way of crossed cheque / pay order / demand draft etc.

3. Indian Resident going abroad can carry Indian currency notes upto Rs. 5,000 to any countryexcept Nepal and Bhutan. For these two countries, he can take any amount in denomination notexceeding Rs.100.

4. Currency notes / coins upto US $ 2000 can be taken in cash and the balance amount will be givenby authorised dealers in form of traveller cheques or bank drafts. For Iraq and Libya, the currencynotes and coins not exceeding US $ 5000 or its equivalent are permitted.

5. Unspent foreign exchange has to be surrendered to authorised dealer within 90 days in case ofcurrency notes and 180 in case of traveller cheques. Exchange so brought back can be utilised bythe traveller for his subsequent visit abroad during the specified period. The resident Indian hasthe option to retain foreign exchange upto US $ 2000 in form of foreign currency notes or TCs. Healso has an option to park these foreign currency funds in his Resident Foreign Currency (Domestic)Account (RFC-Domestic).

6. Indian coming from abroad can bring with him Indian currency notes upto Rs. 5000 from anycountry except Nepal or Bhutan. For these two countries, the resident Indian can bring any amountin denomination not exceeding Rs. 100.

7. The resident can bring any amount of foreign exchange from abroad, which may be in the form ofcurrency notes or traveller cheques. However, if the amount exceeds US $ 10,000 or its equivalentin any other foreign currency and /or the value of foreign currency notes exceeds US $ 5,000 or itsequivalent in other foreign currency, the resident has to declare on his arrival at the airport, to thecustom authority in Currency Declaration Form (CDF).

8. An Individual resident may borrow a sum not exceeding US $ 2,50,000 or its equivalent from closerelative residing outside India subject to following conditions :

(a) Minimum maturity period of loan is 1 year.

(b) The loan is free of Interest

(c) The amount of loan is received by way of inward remittances in free foreign exchange throughnormal banking channels or by debit to the NRE/FCNR(B) account of the non-residentlenders.

DEPOSIT ACCOUNTS OF RESIDENTS IN FOREIGN CURRENCY

Resident Foreign Currency Domestic Account

This account can be opened by a person resident in India out of foreign exchange acquired in theform of currency notes, bank notes and travellers cheques from the sources mentioned below :–

It was acquired by him while on a visit to any place outside India by way of payment for servicesnot arising from any business in or anything done in India; or was acquired by him, from any person notresident in India and who is on a visit to India, as honorarium or gift or for services rendered or insettlement of any lawful obligation; or was acquired by him by way of honorarium or gift while on a visitto any place outside India; or represents the unspent amount of foreign exchange acquired by him froman authorised person for travel abroad.

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Foreign exchange earned and/or gifts received from close relatives (as defined in the CompaniesAct) and repatriated to India through normal banking channels by resident individuals. Foreign exchangeearnings could be though export of goods and/or services, royalty, honorarium, etc.

Type of Accounts

The account will be maintained in the form of Current account only and no interest will be payableon balances in these accounts.

Permitted Currencies

US Dollar, Pound Sterling and Euro Currencies. In case, any resident desiring to open RFCDaccount surrenders currency other than USD, GBP & EURO, the same will be converted to any ofpermitted currencies of his choice and charges for conversion will be borne by him.

Branches Authorised to Maintain RFCD Accounts

All branches authorised to handle foreign exchange business independently.

Minimum Balance

USD 1000 or its equivalent. There will be no celling on balances held in these accounts.

Chequebook Facility

Branches may issue chequebook to RFCD Account holders for making payments for permittedpurposes in terms of existing provisions of Foreign Exchange Management Act 1999. Chequebookfacility may be permitted subject to maintenance of minimum balance of USD 1000 or its equivalent inthese accounts. Branches may issue rupee chequebook to RFCD account holders by affixing a stampon top of the cheques "RFCD Accounts".

Permissible Debits

Branches must ensure that debits are allowed towards payment for current/capital accounttransactions in accordance with existing foreign exchange regulations applicable to residents. In caseof remittances made in foreign currency where Bank does not earn any exchange income, charges areapplicable in case of EEFC accounts may be recovered from the customer.

Loans / Overdrafts

No loan / overdraft shall be permissible against balances held in RFCD Accounts.

RESIDENT FOREIGN CURRENCY (RFC) ACCOUNTS SCHEME

What is the Resident Foreign Currency (RFC) Accounts Scheme ?

Applicable for persons of Indian nationality or origin, who have returned to India on or after 18thApril 1992 for permanent settlement (Returning Indians), after being resident outside India for acontinuous period of not less than one year to open foreign currency accounts with banks in India forholding funds brought by them to India. Persons who have returned to India before 18th April 1992 canalso open RFC account if they are holding foreign currency assets abroad with Reserve Bank'spermission or are in receipt of pension or other monetary benefits from their erstwhile employers abroad.

Is any permission from Reserve Bank required for opening such accounts with authoriseddealers ?

No.

In which currencies can RFC accounts be maintained ?

RFC accounts can be maintained in any convertible currency. However, in PNB, accounts can be

opened in US $, £ and ε only.

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What funds can be credited to RFC accounts of Returning Indians ?

The entire amount of foreign exchange brought to India at the time of their return to India for

permanent settlement as well as the balances standing to the credit of their NRE and FCNR accounts

at the time of return can be credited to RFC account. However, the foreign exchange brought to India

in the form of foreign currency notes/bank notes/travellers cheques should have been declared to

Customs at the time of arrival on the Currency Declaration Form (CDF) if it exceeded U.S. $ 10,000 or

its equivalent. In the case of foreign currency / bank notes, such a declaration on form CDF is compulsory

if the amount exceeds U.S. $ 5,000 or its equivalent.

Can income received from their overseas assets in the form of dividends etc., or sale preceedsof such assets be credited to RFC accounts ?

Yes. The entire income from such assets or sale proceeds of such assets repatriated to India can be

credited to RFC Accounts.

Can pension received by the account holder from abroad be credited to his RFC account ?

Yes. The entire amount of pension received from abroad can be credited to his RFC account.

Can funds in RFC accounts be remitted abroad ?

Yes, Funds in RFC accounts can be remitted abroad for any bonafide purpose of the account holder or

his dependents including exchange required for travel and other personal purposes and investments.

Can funds in RFC accounts be utilised for local payments ?

Yes, Funds in RFC accounts can be withdrawn freely for local payments.

Can a Returning Indian desiring to go abroad again for employment, business or vocation transferhis funds in RFC account to NRE/FCNR account ?

Yes.

EXCHANGE EARNERS FOREIGN CURRENCY (EEFC) ACCOUNT

What is EEFC Account ? An account expressed in foreign currency and maintained withan Authorized Dealer, a bank dealing in foreign exchange, in Indiato credit prescribed percentage of earnings in convertible foreigncurrency.

Who can open an account ? A person resident in India which includes individuals firms,companies, etc.

What is the limit prescribed ? (i) "Status Holder" Exporter 100% of earnings

(ii) Individual professionals

(iii) 100% Export Oriented Units/Units in

Export Processing Zones/SoftwareTechnology Parks/ElectronicHardware Technology Parks

(iv) Others

50% of earnings

Types of Accounts Non-interest bearing current / savings / term deposit account.

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Permissible Credits Earning in foreign exchange as per prescribed limits.

Re credit of unutilised foreign exchange earlier withdrawn fromsuch accounts.

Payments received in foreign exchange by a 100 per cent ExportOriented Unit or a unit in (a) Export Processing Zone or (b)Software Technology Park or (c) Electronic Hardware TechnologyPark are allowed to be credited to Exchange Earner's ForeignCurrency (EEFC) Account.

Payments received in foreign exchange by a unit in DomesticTariff Area (DTA) for supply of goods to a unit in Special EconomicZone (SEZ) out of its foreign currency account are to be treatedas eligible foreign exchange earnings for the purpose of credit tothe EEFC Account.

However inward remittances received through normal bankingchannels for meeting specific obligations by the account holderswill not be eligible for credit to their EEFC accounts. (vide AP DIRcircular 11 dt. 14/08/2002).

Permissible Debits Payments towards all current account transactions such as travel,medical, studies abroad, permissible imports, commission,customs duty, etc. However, remittances towards gifts anddonations exceeding USD 5000 per remitter/donor per annum isnot permissible.

Payments towards permissible capital account transactions.

Payment in India to 100% Export Oriented Units/Units in ExportProcessing Zones / Software Technology Parks / ElectronicHardware Technology Parks towards cost of goods and servicesprovided by them.

Payment towards trade related loans and advances.

Payment in foreign exchange to a person resident in India forsupply of goods and services including payment for air fare andhotel expenditure.

Authorised dealer may also permit exporters to repay packingcredit advances, whether availed of in Rupee or in foreigncurrency, from balances in their EEFC account to the extentexports have actually taken place. (vide AP DIR circular 34 dt.31/10/2002)

Cheque Facility Available.

Nomination Facility Permitted like in case of any other resident accounts.

Exporters are presently permitted to grant trade related loans/advances not exceeding USD 3 millionfrom their EEFC Account to their overseas importer customer subject to compliance with NotificationNo. FEMA 3/2000-RB dated 3rd May 2000 viz. the Foreign Exchange Management (Borrowing onLending in Foreign Exchange) Regulations, 2000. As a measure of relaxation to the EEFC AccountScheme, it has been decided to remove the ceiling of USD 3 million. Accordingly, it will be in order forauthorised dealers to permit their exporter constituents to extend trade related loans/advances tooverseas importers out of their EEFC balances without any ceiling.This relaxation shall be effectiveupto June 30, 2003, subject to review. (A.P. (DIR Series) Circular No.78 dt. february 14, 2003).

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PNB Global Rupee Deposit Scheme (Incentive linked NRE scheme)

All guidelines relating to NRE deposits will be applicable to deposits under PNB Global RupeeDeposit Scheme. In addition, all account holders maintaining minimum deposit of Rs.2,50,000 will beoffered following concessions in various facilities being offered by the bank :–

a. Rebate in interest rates on housing loan for the account holder or for one person nominatedby NRI in India.

Period of Housing Loan Existing Floating Special OfferInterest Rates Floating Interest Rates

(w.e.f. January 15, 2004)

Upto 5 years 7.75% p.a. 7.50% p.a.

Above 5 & upto 10 years 8.00% p.a. 7.75% p.a.

Above 10 & upto 20 years 8.25% p.a. 8.00% p.a.

b. Waiver of Upfront & Documentation fees on all retail loan products for the account holder

or for any one nominated person in India.

c. Free remittance up to Rs.1 lac per annum from his account to anywhere in India, subject

to recovery of out of pocket expenses.

d. No collection charges on any instrument collected in account holder's account, up to Rs.1

lac per annum, from anywhere in India subject to recovery of out of pocket expenses.

e. Depository services: 50% concessions on service charges of our bank till the deposits

remain with our bank.

f. Free multicity chequebook for CBS branch customers.

g. Free Lockers facility for the customers maintaining a minimum balance of Rs.5,00,000.

h. No Inter-branch (Intersol) transaction charges for banking transactions, by the account

holders, in the CBS branches.

i. Free Internet Banking facility.

j. Foreign currency funds will be converted into Rupees with exchange margin of only 2 paise

per unit of foreign currency in case remittance is received through SWIFT. Bank will bear

foreign bank charges on transfer of funds subject to minimum deposit equivalent to USD

10000.

k. Facility of automatic renewal of Fixed Deposits on maturity.

l. Linkage with saving account for family at home by allowing overdraft by marking lien in

their NRE Term Deposit account.

PNB Global Foreign Currency Deposit Scheme (Incentive linked FCNR (B) scheme)

All guidelines relating to FCNR deposits will be applicable to deposits under PNB Global Foreign

Currency Deposit Scheme. In addition, all account holders maintaining minimum deposit of USD 5000

or its equivalent will be eligible for following concessions in various facilities being offered by the

bank :

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a. Rebate in interest rates on housing loan for the account holder or for one person nominatedby NRI in India.

Period of Housing Loan Existing Floating Special OfferInterest Rates Floating Interest Rates

(w.e.f. January 15, 2004)

Upto 5 years 7.75% p.a. 7.50% p.a.

Above 5 & upto 10 years 8.00% p.a. 7.75% p.a.

Above 10 & upto 20 years 8.25% p.a. 8.00% p.a.

b. Waiver of Upfront & Documentation fees on all retail loan products for the account holderor for any one nominated person in India.

c. Free remittance up to Rs.1 lac per annum from his account to anywhere in India, subjectto recovery of out of pocket expenses.

d. No collection charges on any instrument collected in account holder's account, up to Rs.1lac per annum, from anywhere in India subject to recovery of out of pocket expenses.

e. Depository services : 50% concessions on service charges of our bank till the depositsremain with the bank.

f. Free multicity chequebook for CBS branch customers.

g. Free Lockers facility for the customers maintaining a minimum balance of $ 10000 or itsequivalent.

h. No Inter-branch (Intersol) transaction charges for banking transactions, by the accountholders, in the CBS branches.

i. Free Internet Banking facility.

j. Bank will bear foreign bank charges on transfer of funds to our Nostro Accounts subject tominimum deposit of USD 10000 or its equivalent.

k. Facility of automatic renewal of Fixed Deposits on maturity.

I. Linkage with saving account for family at home by allowing overdraft by marking lien intheir FCNR account.

SCHEME FOR UNDERTAKING FOREIGN CURRENCY–RUPEE OPTIONS

Definition of an Option :

An option is a contract which gives its buyer/holder/owner the right but not obligation to buy orsell a specified quantity of underlying assets at specific price called strike price or exercise price fromthe seller (writer of the option) on or before the given date called expiry date. This right to buy or sella predetermined value of a currency at a specified rate on a specified date is in consideration for apremium.

Types of Option :

There are two types of options. Put option gives the buyer the option without the obligation tosell the underlying asset on a certain date in future at a certain price. Call option gives the buyer theoption, without obligation, to buy the underlying asset on a certain date in future at a certain price.

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The face value of currency, the rate at which the transaction would take place and the date for thetransaction is to be determined at the time of the contract initiation.

Difference between an Option and a Forward Contract :

The difference between an Option and a forward contract is that an Option is a RIGHT and notan obligation, while a forward contract is both. Forward contracts are price-fixing instruments, whileoptions are pricing insurance instruments. Simple options provide a worst-case rate to the optionsbuyer, while leaving the upside potential open. The Option buyer pays a price for this right to theseller (also called writer), which is called the premium. The Writer of the option has a limited upsidein the form of premium received, and the obligation to buy / sell at the agreed price should the optionbuyer exercise his option.

Eligible Customer/User

Customers who have genuine foreign currency exposures in accordance with Schedule I & II ofNotification No. 25/2000-RB dated May 3, 2000 issued by RBI and as amended from time to time areeligible to enter into option contracts.

Parties to the Option

i) The buyer (or holder) of the option pays a fee and holds the right.

ii) The seller (or writer) of the option receives the fee and has an obligation.

Operational Guidelines

i) Initially, option transactions will be conducted by Treasury Division, HO and ForeignExchange Office, Mumbai.

ii) On being approached by the Customer for conducting an option transaction, the branchwill immediately get in touch with Treasury Division, HO/FEO Mumbai for working out details.Treasury Division, HO/FEO Mumbai will quote suitable rates to the branch after arrangingcover in the market. On finalization of rate and amount, the branch will obtain the applicableApplication Form in Duplicate from the customer and forward one copy of the same to FEO.One copy will be retained at Branch for their record.

iii) On receipt of application form from the branch Treasury Division, HO/FEO Mumbai willforward other documentation to the branch for execution, as under :

❏ ISDA Agreement (To be taken only once for all transactions)

❏ Schedule to the Agreement

❏ Confirmation of the deal

❏ Risk Disclosure statement

The branch will get these documents executed by the customer and forward the originalcopies to FEO Mumbai. However, a clear photocopy of all the documents be kept at thebranch for records.

iv) To begin with only plain vanilla European options may be offered on back-to-back basis inUS Dollar only. European option is a type of option contract that may be exercised onlyduring a specified period of time just prior to its expiration.

v) The customer can purchase call or put options. However, writing of options is not permittedto the customer.

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vi) Customers may enter into packaged products involving cost reduction structures providedstructure does not increase the underlying risk and does not involve customer-receivingpremIum.

vii) The Option premium may be quoted in Rupee or as a percentage of the Rupee/foreigncurrency notional.

viii) All conditions and sanctioning powers applicable to booking and cancellation of forwardcontract will be applicable to option contracts also. Presently, Importers/Exporters arepermitted to book forward contracts on the basis of the declaration of an exposure basedon past performance. This facility would be average of the past three years, export/importturnover or the previous years turnover; whichever is higher. The forward contract so bookedand outstanding at any point of time shall not exceed 50% of the eligible limit without anycap, provided that any amount in excess of 25% of the eligible limit shall be only on adeliverable basis. These limits shall be computed separately for import/export transactions.Higher limits will be permitted on case- by-case basis on application to the Reserve Bankof India as in the case of Forward Contracts. Clubbing outstanding Forward Contracts andOption transactions will adjudge the exposure towards forward contract and optiontransactions for a particular customer -

ix) Only one hedge transaction can be booked against a particular exposure/part thereof for agiven time period.

x) Option contracts cannot be used to hedge contingent or derived exposures (exceptexposures arising out of submission of tender bids in foreign exchange).

xi) The customers can undertake Option Contracts for US$ One Lakh and above in the multiplesof US$ ten thousand initially, for which back to back cover shall be arranged by the TreasuryDivision, H/O/FEO Mumbai.

xii) Customers are not permitted writing of Option, however, to reduce the cost of transactions,customer may be permitted Zero Cost Structures wherein a customer who pays premiumto the Bank for buying Option transaction is permitted to write options so that the premiumreceived by him by writing Option neutralizes the premium paid by him for buying options.While allowing such structures, it should be ensured that the customer is conducting theoption transactions based on actual exposures only. The following margin required to bekept on such transactions at branch level, are as detailed below :

Type of Option Period of % of Margin to beTransaction Transaction maintained on the total,

amount of the transaction

Option bought by Any NilCustomer

Option written by Upto one year 10%Customer

For subsequent Additional 5% for eachyears year

Margins may be kept in cash or collateral. The Corporate Customer enjoying credit limits withthe Bank are exempted from maintaining margins for conducting option transactions. However, theamount of option transaction may be marked against limits sanctioned to such customer for forwardcontract.

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Settlement :

Option contracts will be settled on maturity either by delivery on spot basis or by net cashsettlement in Rupee on spot basis as specified in the contract. However, in case of unwinding of thecontract prior to maturity, the settlement will be done in cash, based on market value.

Accounting & Charges :

The branches will charge Rs.1,000/- (Rs.One Thousand only) per transaction from the Customerwhich shall be shared bv branch and Foreign Exchange Office equally. The amount so shared will becredited to the revenue head "Misc. Income" at branch and FEO. No other accounting vouchers areto be passed at the branch level. The accounting procedure at FEO has been advised separately.

Record Maintenance :

The branches will maintain Option Register on the line of forward contract register wherein optiontransactions conducted by their clients will be entered serially. On maturity, date will be marked againstthe concerned transaction. Party–wise Register will also be maintained by the branches to monitorthe exposure towards individual parties. Outstanding in Option Register and Party-wise Option Registerwill be taken down at the end of each month. Total of outstanding of all party-wise register shouldtally with outstanding of main Option Register. At the end of each month Treasury Division, H/O/FEOMumbai will send details of outstanding transactions to the related branches. The branches shouldtally the same within one week and inform Treasury Division, H/O/FEO Mumbai accordingly.

FOREIGN CURRENCY TRAVELLERS CHEQUES

PNB is having arrangement for sale of foreign currency Travellers Cheques (TCs) of ThomasCook & American Express (Amex) through our designated/authorised branches. The settlement forsale thereof is made through drafts/ debit authority.

The operations of 'Thomas Cook' have been taken over by Travelex world-wide and TCs bearthe name of Travelex as issuer. Travelex is issuing Master Card TCs in the name of Thomas CookMaster Card and Visa TCs are issued as Interpayment. In India, the operations of Travelex aremanaged by its subsidiary namely Travelex India Pvt. Ltd.

Opening of Accounts by Foreign Tourists

'Any person resident outside India' referred in clause 1 of Schedule 3 to Notification No.FEMA5/2000–RB dated May 3, 2000 includes foreign tourists on short visit to India on tourist visa. Thesetourists can open Non-Resident (Ordinary) Rupee account (NRO) with any authorised dealer in Indiawith the funds remitted from outside India in a specified manner or by sale of foreign exchange broughtby them.

EXPORT FINANCE

Export finance is the finance extended to the exporters / deemed exporters on easy terms &conditions for both pre-shipment and post shipment purposes.

Types of Export Finance :

Export Finance is of two types :

(a) Pre-shipment Advance

(b) Post-shipment Advance

(a) Pre-shipment Advance : Pre-shipment advance is allowed to exporters for procurementof raw materials, semi-finished goods and finished goods.

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(b) Post-shipment Advance : This facility is allowed to the exporters after the shipment hasbeen made and the exporters have submitted the documents to the bank. In fact, bank purchases,negotiates or discounts the documents and credit the proceeds to the exporter's accounts. Pre-Shipment Advance, if any already allowed by the bank, is adjusted from Post-shipment Advance.

Types of Pre-shipment Finance :

Pre-shipment finance can be of two types : –

(a) Packing Credit (PCL) and

(b) Advance against government receivables, i.e. Duty Drawback, etc.

Types of Post-shipment finance :

(a) Export bills purchased / discounted / negotiated

(b) Advance against bills sent on collection

(c) Advance against expors on consignment basis

(d) Advance against duty drawback

Export Credit in Foreign Currency

Banks in India are permitted to extend export credit in foreign currency to exporters at LIBORlinked rates : –

(a) Pre-shipment credit in Foreign Currency (PCFC) can be allowed to exporters as beingallowed in Indian Rupee initially for maximum 180 days with provision for further extension.This is utilised for domestic inputs for imports.

(b) Export bill Rediscounted Abroad (EBR) is given to finance export bills in foreign currencyfor maximum 180 days at LIBOR linked rate.

Sl.No. Particulars Packing Credit-EPC (Rupees) Packing Credit-PCFC (Foreign Currency)

Any loan, advance or any other credit granted to anexporter for financing the purchase, processing,manufacturing of packing of goods prior to shipment.

LC or Confirmed order in favour of exporter or someother person by an overseas buyer, unless itslodgment has been waived.

Export of goods/services, Construction contracts,Consultancy, Floriculture, Agro products, Processorsin agrizones, and units in SEZ, EPZ, APZ, EQU etc.

Order to order basis, or Running a/c facility in genuinecases to exporters having very good past record.

❏ For FOB Value

❏ Only for exportable portion in case of agriproducts

Stage to stage or in lump sum, depending upon theneeds and circumstances.

Indian Rupees

1. Definition

2. Basis for grant ofcredit

3. Types of exports forwhich allowed

4. Type of Account

5. Extent

6 Dsbursement

7 Choice of Currency

Any loan, advance or any other creditgranted to an exporter for financing thepurchase, processing, manufacturing orpacking of goods prior to shipment.

LC or conformed order in favour ofexporter or some other person by anoverseas buyer unless its lodgment hasbeen waived.

Only against cash exports of goodsservices Construction contracts,Consultancy, Floriculture, Agroproducts and units in SEZ, EPZ, APZ,EOU etc.

Order to order basis or Running accountfacility in genuine cases to exportershaving very good past record.

❏ For FOB value❏ Only for exportable peortion in

case of agri products.Stage to stage or in lump sum,depending upon the needs andcircumstancesUS $, Pound Sterling, Yen, Euro

PRE-SHIPMENT ADVANCE (PACKING CREDIT)

635

Sl.No. Particulars Packing Credit-EPC (Rupees) Packing Credit-PCFC (Foreign Currency)

Depending upon the period required for procuring,manufacturing, processing or packing of goods, EPCallowed by banks initally for 180 days. Concessionalrate of Intt. allowed upto 360 days only.

Allowed

❏ From the proceeds of export bills of main itemand by products

❏ EPC advance to be conver ted into Postshipment advance.

❏ Excess EPC involving non-exportable goods tobe recovered otherwise.

❏ In case of exporters having good past recordfrom proceeds of other export bills where noEPC has been allowed.

❏ first in first out basis in case of running account

Concessional ROI : A ceiling rate has beenprescribed for rupee export credit linked to BPLR ofindividual banks available to their domesticborrowers. Banks have, therefore, freedom to decidethe actual rates to be charged within the specifiedceilings. Further, the ceiling interest rates for differenttime buckets under any category of export creditshould be on the basis of the BPLR relevant for theentire tenor of export credit. Commercial rate ofinterest is charged on excess EPC on non exportablegoods and for EPC beyond 360 days.

EPC an be shared between an Export Order Holder(EOH) and Suppliers on order to order basis only(No running account facility)

❏ Suppliers to open inland LC in favour of exporter

❏ Not allowed to the suppliers of raw material orcomponents.

❏ Units located in SEZ, EPZ or EOU etc.

❏ All such advances to be coverted by ECGC

To parties against orders for supplies in respect ofprojects aided/financed by bilateral or multilateralagencies/funds (including World Bank, IBRD, IDA)

Allowed in unavoidable and commercially necessarycases

Amount to be recovered by charging commercial rateof interest from the date EPC was allowed.

Available to banks against EPC for 180 days only

Allowed

8 Period of credit

9 Forward Conracts

10 Liquidation of credit

11 Interest

12 Sharing withmanufacturers

13 Deemed Exports

14 Substitution oforder or commodity

15 Non Execution ofExport Order

16 Refinance

17 EEFC Facility

Initially for 180 days to be extended uptoa maximum of 360 days for genuinereasons

Allowed in any of the four convertiblecurrencies❏ Self liquidation from expor t

proceeds❏ Export Bills to be discounted,

negotiated or to be purchased.❏ Export Bills cannot be sent on

collection basis❏ Cannot be liquidated from forex

acquired from other sources.❏ First in, first out basis in case of

running account facility.

a) For 180 days Internationalreference rate such as 6 monthsLibor, Euro-Libor, Euribor

❏ Not over 100 basis point over Libor,Eurolibor, Euribor

❏ Quarterly interest basisb) 180–360 days, above a + 2%

❏ PCFC to manufacturer allowed onobtaining disclaimer through itsbank

❏ In case of consor tium loans,allowed where banker or leader issame for expor ter andmanufacturer or where the otherbanks agree.

PCFC is allowed only for 'deemedexports' for supplies to projects financedby multilateral/bilateral agencies / funds,PCFC released for 'deemed exports'should be liquidated by grant of foreigncurrency loan at post-supply stage, fora maximum period of 30 days or up tothe date of payment by the projectauthorities, whichever is earlier.Allowed in unavoidable andcommercially necessary cases

❏ Exporter to buy foreign currency forloan amount plus interest throughthe bank for adjustment of PCFC

❏ Intt. to be charged on amount inRupee equivalent to Foreigncurrency loan availed.

❏ Banks to remit amount to Foreignbanks, if line of credit obtained.

Not availablePermitted after the export bill has beenrealized.

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POST-SHIPMENT ADVANCE-DIFFERENT TYPESSN Type of Allowed Amount Maximum Other information

Advance Against Limit Period

❏ Bills drawn underirrevocable Letter ofCredit

❏ Shipping documentsevidencing that actualshipment has beenmade.

Shipping documentsevidencing export againstconfirmed order/expiredLC/discrepant documentsunder LC

Bills, which have alreadybeen sent on collectionbasis, drawn either underLC/discrepant documentsor under confirmed order.

Shipments already madeon consignment basis.

Instructions should begiven for delivery ofdocuments against TrustReceipt or undetaking.

Outstanding Duty DrawBack entitlementssupported by certificatefrom C.A.Balance of un-raisedinvoices and RetentionMoney

By way of rediscounting ofReceivables (EBR)

By way of rediscounting ofReceivables (EBR)

No Limit-100% ofInvoice Value orvalue declared inGR/PP/Softex forms

No Limit-100% ofInvoice Value orvalue declared inGR/PP/Softex forms

No Limit-100% ofInvoice Value orvalue declared inGR/PP/Softex forms

Within the marketvalue of the goodsbecause actual saleamount or amount tobe realised is notcertain.

100%

100%. Becausethere are chances ofdeductions by thebuyers, a marginshould bemaintained

Minimum amount isUSD 1,00,000

100%

❏ Initially allowed for 6months from the date ofshipment.

❏ Period to be extendedupto 1 yr. for genuinereasons.

❏ Initially allowed for 6months from the date ofshipment.

❏ Period to be extendedupto 1 year for genuinereasons

❏ Initially for 6 monthsfrom the date ofshipment.

❏ Period to be extendedupto 1 yr for genuinereasons

❏ Normally upto a periodof 180 days.

❏ In deserving cases, forexports in CIS and EastEuropean countries,upto a maximum of oneyear.

Normally Upto period of 90days under concessionalrate of interest.

Maximum upto 6 monthsfrom the date of shipmentfor undrawn amt. and 1 yr.for retention money.

6 months and priorpermission of RBI or EXIMBank required for deferredpayment bills.

6 months and priorpermission of RBI requiredfor deferred payment bills.

1 Negotiation ofBills

2 Purchase /Discounting ofBills

3 Advance againstbills sent oncollection

4 Advance againstc o n s i g n m e n texports

5 Advance againstGovt.Receivables

6 Advance againstUndrawnBalances

7 Forefaiting

8 Factoring

❏ Short Term Finance

❏ Pre-shipment advance, ifany, to be liquidated by wayof negotiation of bills.

❏ Allowed in Rupees, as wellas in foreign currencies,USD, Euro, Yen & GBP

❏ Short Term Finance

❏ Pre-shipment advance, ifany, to be liquidated fromthe bills purchased ordiscounted

❏ Allowed in Rupees, as wellas in foreign currencies.

❏ If bills are not payable atsight, ECGC cover shouldbe preferred.

❏ Short Term Finance.

❏ Pre-shipment advance, ifany, to be liquidated fromthe bills purchased.

❏ If bills are not payable atsight, ECGC cover issuedprior to shipment should bepreferred.

In case of Advance againstConsignment Exports againstGems / precious stones,packing credit advances beadjusted as soon as exporttakes place, by transfer of theoutstanding balance to aspecial (post-shipment)account which in turn, shouldbe adjusted as soon as therelative proceeds are receivedfrom abroad but not later than180 days.

ECGC cover should bepreferred.

Export proceeds must bereceived within the period ofUsance under order/contractas permitted by RBI/EXIMBank.

Forefaiting allowed throughEXIM Bank only. Priorinvolvement of EXIM bankrequired for each bill.

Can be 'With or WithoutRecourse'.

Only without recourse bills.

Bill to Bill rediscounting onongoing arrangements.

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REPO & REVERSE REPO

In India repo and reverse repo are the recognized short-term money market instruments.

Under the repo contracts, funds are raised in the money market with a view to meet temporary liquidityrequirements by selling a security on the condition that the same be repurchased at the end of the repo period.

Repo can be undertaken for any period of time. However, in practice, the period is short, i.e. from 1 day to

few months.

Under reverse repo, on the other hand, the counter-party who is entering into this transaction is

essentially making a short-term collateralised loan to the bank or any other organisation like a Primary Dealer

by providing funds in return for holding securities. When the reverse repo transaction matures, the counter-

party returns the securities to the bank and receives its cash along with the profit spread.

Repurchase Option (REPO)

❏ REPO transactions are short-term transactions wherein the participant acquires immediate funds throughthe sale of marketable securities under the agreement that the same/similar securities will be repurchased

by him at a future date at a predetermined price.

❏ This instrument is particularly popular with banks, which have surplus SLR securities and CRR deficit.

❏ Although no fixed tenure has been prescribed, generally repo transactions are for a minimum 3 to 14

days. RBI does not prescribe either maximum or minimum (3 days withdrawn since 31.10.1998) period

of time for a Repo transaction.

❏ Repo rates have been acting as a floor rate to call money rates and prescribed by RBI in its Monetary

Policy announcements.

❏ The repo rate/interest rate is market determined. Presently it is 6 per cent w.e.f. 29.04.2004 (fixed LAF

Repo rate).

Reverse Repo Rate

❏ Both repo & reverse repo transactions can take place in all Govt. securities and Treasury Bills of all

maturities. Since Oct. 1997, repo transactions in PSU bonds & Private corporate securities (held indemat form) have also been allowed by RBI.

❏ Besides Scheduled Commercial Banks & Primary Dealers, FI's & Mutual Funds can also participate inrepo market.

❏ Reverse Repo Rate changed to 5% w.e.f. 29.4.2005.

❏ Revised Liquidity Adjustment Facility to operate with overnight fixed rate repo and reverse repo.

NATIONAL SECURITIES DEPOSITORY LIMITED

What is a depository?

A depository can be compared to a bank. A depository holds securities like shares, debentures,

bonds, Government securities and units of investors in electronic form. Besides holding securities,

a depository also provides service related to transactions in securities. A depository interfaces with

the investors through its agents called Depository Participants (DPs). If an investor wants to avail

of the services offered by the depository, the investor has to open an account with a DP known asDemat Account.

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What is dematerialisation?

Dematerialisation is the process by which physical certificates of an investor are converted toan equivalent number of securities in electronic form and credited in the investor's account with its

DP. In order to dematerialise certificates an investor will have to first open an account with a DP and

then request for the dematerialisation of certificates by filing up a dematerialisation request form

(DRF), which is available with the DP and submitting the same along with the physical certificates,

duly defaced by marking "Surrendered for Dematerialisation" on the face of the certificates.

What does transmission in relation to demat accounts?

Transmission is the process by which securities of a deceased account holder are transferred

to the account of the surviving joint holders(s) / legal heirs / nominee of the deceased accountholder.

What is the procedure for selling dematerialised securities?

The procedure for selling dematerialise securities is very simple. After you have sold the

securities, you would instruct your DP to debit your account with the number of securities sold by

you and credit your broker's clearing account. This delivery instruction has to be given to your DP

using the delivery instruction slips given to you by your DP at the time of opening the account.

What is T + 2 rolling settlement cycle and when delivery is to be the given to a broker?

In case of T + 2 rolling settlements the trades taking place on each training day are required

to be settled on the second working day following the date of trade. For example, trades of Mondaywill be settled on Wednesday morning.

How to pledge electronic securities?

First of all, both you (the one who pledges) as well the lender must have depository accounts

with the same depository. Then you have to initiate the pledge by submitting to your DP the details

of the securities to be pledged in a standard format. Finally, the pledgee has to confirm the request

through its DP.

Can the securities lying in demat account be lent?

Yes. You can lend your securities through Intermediaries approved by SEBI in this regard.

How to lend the demat securities?

First, you should enter into an agreement with an approved intermediary to act as a lender.Then, you may lend securities any time by submitting lending instruction to your DP.

DRAFT GUIDELINES FOR BANKS FOR UNDERTAKING PD BUSINESS

Primary Dealers

The primary dealer system has been introduced in a number of countries with the objective

of strengthening the securities market infrastructure and bringing about improvement in the secondary

market trading, liquidity and turnover in Government securities as also for encouraging voluntaryholding amongst a wider investor base. The primary dealer system has been in operation in India

for the last eight years. There were 18 primary dealers (PDs) in operation in India at the end of

March 2004.

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Primary Dealership

As announced in the Annual Policy Statement for the year 2005-06, it has now been decided

that permitted structure of PD business will be expanded to include banks, which fulfil certainminimum criteria subject to safeguards. Accordingly, banks are eligible to apply for Primary Dealership,

subject to the following guidelines : –

1. The following categories of banks would be eligible to apply for PD license. (RBI's approval

would be subject to compliance with all other relevant laws).

(i) Banks which do not at present have a partly or wholly owned subsidiary and fulfil the

following criteria :

(a) Minimum net owned funds (NOF) of Rs. 1,000 crore.

(b) Minimum CRAR of 9 per cent.

(c) The net NPA of the bank should be less than 3 per cent and should have a profit

making record for the last three years.

(ii) Indian banks which are undertaking PD business through a partly or wholly owned

subsidiary and wish to undertake PD business departmentally by merging / taking over

PD business from their partly / wholly owned subsidiary subject to fulfilling the criteria at

2(i) (a) to (c).

(iii) Foreign banks operating in India who wish to undertake PD business departmentally by

merging the PD business being undertaken by group companies subject to fulfilment ofcriteria as above at (i) (a) to (c).

2. The authorization granted by RBI will be for one year (July-June) and thereafter, RBI will

review the authorization on a yearly basis based on the performance criteria, such as underwriting

in auctions of primary issuance of Government Dated Securities and Treasury Bills or fulfilment of

bidding commitment and success ratio in the primary market and achieving the turnover ratio in the

secondary market, etc.

Obligation for Bank-PDs

The Bank-PDs will be subject to underwriting and all other obligations as applicable to stand

alone PDs and as may be prescribed from time to time. The bank may maintain, at any point of time,

a minimum size of Rs. 100 crore in its separate SGL account for PD business.

Prudential norms

(i) No separate capital adequacy is prescribed for PD business, and the capital adequacy

requirement for a bank will also apply to the PD business.

(ii) The Government Dated Securities and Treasury Bills under PD business will count for

SLR.

(iii) The investment valuation guidelines applicable to banks in regard to 'Held for Trading' willapply to the portfolio of Government Dated Securities and Treasury Bills earmarked for

PD business.

(iv) The bank shall have to maintain a separate SGL account for its subsidiaries. The bank

must also develop proper MIS in this regard.

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Regulations and Supervision

(i) RBI's instructions to primary Dealers will apply to Bank-PDs, to the extent applicable.

(ii) As banks have access to the call money market and the Liquidity Adjustment Facility(LAF) of RBI, Bank-PDs will not have separate access to these facilities.

(iii) RBI will conduct on-site inspection of Bank-PD business.

(iv) Bank-PDs will be required to submit prescribed returns, as advised by RBI from time totime.

(v) Bank-PDs should bring to the RBI's attention any major complaint against it or actioninitiated / taken against it by authorities such as the Stock Exchanges, SEBI, CBI,Enforcement Directorate, Income Tax, etc.

(vi) Reserve Bank of India reserves the right to cancel the Bank-PD authorization if, in itsview, the concerned bank has not fulfilled any of the prescribed eligibility and performancecriteria.

Reserve Bank of India reserves its right to amend or modify these guidelines from time to time,as may be considered necessary.

Understanding Accounting Standard 11

Accounting Standard 11 was introduced by the Institute of Chartered Accountants of India(ICAI) in 1989 and was revised in 1994.

AS 11 has since been revised in 2003 to be effective from April 1, 2004.

Objective

While finalising the profite and loss (P & L) account and balance sheet of the enterprise, thetransactions in foreign currency are required to be translated into Indian rupees. The AS 11 prescribesthe rate at which the foreign currency transactions are required to be translated into rupees.

Scope

The Following transactions will attract AS 11 :

❏ Payment in foreign currency in respect of goods imported and exported.

❏ Borrowings and lending in foreign currency, including the payment of interest in foreigncurrency;

❏ Any amount deposited or lying in foreign currency with any bank in India or abroad;

❏ Forward exchange contracts, if any, by the constituent in respect of payment of value ofthe goods or instalment of loans or interest on loan.

❏ Any derivative product bought or sold by the constituent to hedge the exchange risk,including options FRA (forward rate agreements), interest rates and currency swap.

❏ Assigned capital, if any, sent to the foreign branch of an entity in foreign currency.

❏ Any fixed asset purchased abroad either as an investment or for the use of the branchoffice abroad, and

❏ Funds retained abroad out of profit, such as retained profit, statutory reserves, and so on.

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Business enterprises may have branches abroad and may be preparing P & L accounts and

balance sheets, as per local regulation in foreign currency. However, while consolidating the accounts

to be translated in Indian rupees. As 11 prescribes the rate at which they are to be translated into

rupees.

The exporters are allowed to maintain exchange earner's foreign currency (EEFC) accounts

and the residents are permitted to have resident foreign currency (RFC) accounts. As 11 prescribes

the rate at which such transactions are required to be translated while finalising the P & L account

and balance-sheet of the entities concerned.

Significant aspects

Paras 11 and 12 : Reporting of foreign currency transactions is dealt with in these paragraphs.

Paras 13, 14, 15 and 16 : The method to be adopted for recognising the exchange differences

arising in foreign currency transactions is dealt with in these paragraphs.

Paras 36 and 37 : The treatment to be given in respect of forward exchange contracts entered

into for hedging purposes is dealt with in these paragraphs.

Paras 38 and 39 : The treatment to be given in respect of forward exchange contracts entered

for trading / speculation purposes is dealt with in these paragraphs.

Paras 40 to 44 : Disclosures in respect of exchange differences included in the financial

accounts are dealt with in these paragraphs.

The Reserve Bank of India, as per its circular DBOD No. BP. BC. 68/21, 04.018/96 dated June

5, 1996, has advised all commercial banks, thus : "We have examined the matter and we observe

that the revised Accounting Standard 11 on accounting for effects of changes in foreign exchange

rates has come into effect for accounting periods commencing on or after April 1, 1995. On examining

the Revised AS 11 we find that the standards are not in accordance with FEDAI guidelines or

prudential practices to be followed by the banks. We have accordingly taken up the matter with the

Institute of Chartered Accountants of India. Meanwhile the banks may adopt the following guidelines

for finalising the accounts for 1995-96".

"All foreign exchange transactions in India should be valued as per the guidelines issued by

the Foreign Exchange Dealers Association of India. This will apply to all commercial banks that are

authorised to deal in foreign exchange".

Indian banks having foreign branches are required to translate the financial statements of their

branches abroad for incorporation in the financial statements. These banks should adopt the following

procedures :

❏ All assets and liabilities, both monetary and non-monetary, of the foreign entity should be

translated at the closing rate;

❏ Income and expense items of the foreign branches should also be translated at the

closing rates;

❏ Resulting exchange profit on consolidation should not be taken to P & L account but kept

in a separate account on the liabilities side under Schedule 5, "Other liabilities".

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However, any exchange loss on consolidation should be debited to the profit and loss account."

Unfortunately, the matter was not resolved for almost a decade and the RBI was compelled

to repeat the same instructions year after year. The last such instructions was given on March 31,

2004 (Circular DBOD. No. BP. BC. 71/72.04.018/2003-2004) to all commercial banks to follow the

guidelines prescribed in Circular DBOD. No. BP. BC. 93/21.04.018/2002-03 dated April 8, 2003, only

for finalising the accounts for the year ended March 31, 2004. On March 15, 2005, the RBI came

about with Circular No. RBI / 2004-05/395 DBOD No. BP. BC. 76/21.04.018/2004-05 wherein guidelines

have been given to banks, which are summaries below :

1. For the purpose of Paragraph 17, foreign branches of Indian banks and offshore banking

units (OBUs) set up in India would be classified as "non-integral operation."

2. Representative offices are to be classified as "integral foreign operations"

3. The RBI has envisaged the difficulties faced by banks in implementing clauses 9 and 21.

In order to mitigate them, option has been given to banks to follow the guidelines outlined

in paragraph 4.2 of their circular. In effect, in respect of the same transactions, corporate

will follow the guidelines of AS 11 and banks, the RBI guidelines.

4. Closing rate has been defined by AS 11 as the exchange rate at the balance-sheet date,

however, the last closing spot rate of exchange accounting period."

It will thus be seen that AS 11 is not required to be implemented in full, particularly if banks

face difficulty in implementing it.

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GLOSSARY

Advance Licence It is granted to exporters for imports of inputs, which are required for exportproduction without payment of basic custom duty, subject to export obligation.

American Options These can be exercised at any date before and including the expiry date.

Appreciation A gradual increase in the value of the currency in terms of another.

Arbitrage Arbitrage is a process of simultaneous buying and selling of foreign currency forthe sake of realizing profits from discrepancies between exchange rate prevailingat the same time in different centers, or between interest rates prevailing at thesame time in different centers or in different currencies.

Authorised dealers Banks/Institutions, authorised to deal in foreign exchange.

Authorised Persons Persons authorised to deal in or handle transactions related to foreign exchange.

Balance of Payments It is a record of all economic transactions between domestic residents andresidents of other countries and relfects the net result of such transactions.

Balance of trade The difference between export receipts and import payment.

Basis point 1/100th of 1% yield.

Bid rate Rate at which the Bank is ready to buy foreign exchange or accept deposits.

Bond A negotiable paper with a fixed interest rate and fixed maturity date.

Certificate of Deposit A negotiable instrument issued by Bank payable to bearer.

Commercial Paper A short term negotiable instrument comprising usance promissory note with afixed maturity.

Cross rate Price of one foreign currency in terms of another foreign currency and it excludesthe currency of the country where the rate is offered.

Crystallisation Conversion of the foreign currency bill in to home currency liability.

Country risk It is associated with problem countries.

Direct Rate Variable units of domestic currency and fixed unit of foreign currency.

Depreciation A gradual decrease in the value of one currency against another.

DGFT Director General of Foreign Trade is responsible for formulating and executingthe EXIM policy & licensing.

Deemed export It refers to those transactions, which are considered as exports but where goodssupplied do not leave the country. The buyers make payment for such goods inIndia.

Diamond Dollar Account Firms dealing in purchase/sale (export/import) of rough/cut & polished diamondsfor at least three years with an average annual turnover of Rs. 5 crore or aboveduring preceding three years are permitted to transact their business throughmaximum five Diamond Dollar accounts with their banks.

Duty Exemption Scheme This enables duty-free imports of inputs for export production and includesadvance licence, duty entitlement passbook and replenishment licence.

10.7

FOREIGN EXCHANGE

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Duty entitlement passbook This scheme neutralizes the incidence of basic and special custom duty on theimport content of export product. Exporters are given DEPB certificates ofspecified value based on the exported value of goods. The certificates can beused to imports inputs duty-free., Exporters can also sell these certificates toother importers who can use it for duty-free imports from the same port.

Duty drawback scheme It aims at neutralizing the duties on imports paid by the exporters. The amountReimbursed, which is based on exported value, is credited to the bank accountof exporter.

ECB External commercial borrowings include commercial bank loans, buyer's credit,supplier's credit, bonds, and loans from ODAs, multilateral agenices.

EPCG Scheme Export Promotion Capital Goods enables capital goods to the imported for exportproduction at concessional duty.

European Option It can be exercised only at maturity.

Forfaiting It is the non-recourse discounting of export receivables. In a forfeiting transaction,the exporter surrenders, without recourse to him, his rights to claim for paymentof goods delivered an importer, in return for immediate cash payment from theforfaiter.

GR Form It is used when export is made otherwise than by post.

Hard Currency Is a strong, freely convetible currency of a country with large exchange reservesand a surplus in its balance of payments.

Hedging Means the protection of a foreign exchange exposure either by a forwardexchange contract or by borrowing in the local currency.

IEC Number Every individual/body corporate engaged in export-import trade has to apply forand obtain an import-export code number from DGFT.

Indirect Rate Fixed unit of domestic currency and variable unit of foreign currency.

Inflation It is a monetary phenomenon, which is characterized by an excessive moneysupply with a rise in prices.

IDR IDR is an instrument in the form of a Depository Receipt created by the IndianDepository in India against the underlying equity shares of the issuing company.U/S 605A of the Companies (Issue of IDR) Rules, 2004, the foreign companiescan raise funds in India by way of issuing Depository Receipts, against underlyingequity shares. The actual shares underlying the IDRs would be held by anoverseas custodian, which shall authorise Indian Depository to issue the IDRs.

Input-Output norms It deinfes the amount of inputs required to manufacture a unit of output.

Line of Credit It is a facility of credit provided by EXIM Bank and other commercial banks inIndia, to foreign governments, banks & institutions.

Lead To prepay a debt, if a currency is expected to appreciate in value.

Lag To defer payment of a debt if a currency is under pressure.

LIBOR It stands for London Inter Bank Offered Rate. It is the interest rate at which theprime banks offer to lend foreign currency to other prime banks in London on agiven date.

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Loro accounts It means "their account with you." If PNB, Mumbai remits US $ to StandardCharatered Bank, New York for the credit to the account of Hongkong andShanghai Bank, Tokyo, maintained with them.

Maturity factoring A guarantee scheme, under which, the factor pays only on the due date of theexport receivables, and not at the time of drawing of the export bills. Anotherfinancer, on its strength, does financing of bill.

MISS Market Stabilisation Scheme was introduced following the recommendations ofWorking Group of RBI on Instruments of Sterilisation (December 2003), theGovernment of India confirmed its intention to strengthen the RBI in its ability toconduct exchange rate and monetary management operations to maintainstability in the foreign exchange market and enable RBI to conduct monetarypolicy in accordance with its stated objectives.

Nostro account It means "our account with you." PNB's account in US $ in New York with StandardChartered Bank is our nostro account with you.

Nominal Exchange Rates It is the price of one currency in terms of number of units of some other currency.It takes into account the numerical exchange value and ignores such as thepurchasing power of the currency.

NTP Notional Transit Period allowed to each bill, for collection of notional due date.

Offer rate Rate at which the Bank is ready to sell foreign exchange or lend money.

Premium/Discount If the quoted currency is more expensive in the future it is now in terms of thebase currency, it is said to be at a premium in the forward market.

Packing credit Packing credit is an advance to exporters for procurement of raw materials,processing, packing and its final shipment to the importer. It can be grantedeither in Indian rupees or foreign currency.

Post shipment finance Any credit granted to the exporter after shipment of goods to the date of realizationof export proceeds.

PP Form It is used when export is made by post parcel.

Replenishment license It refers to replenishment of such imports, as the input-output norms require forthe export purpose.

Real Exchange Rate It is the nominal exchange rate multiplied by price indices of two countries.

SDF Forms It is used in place of GR form in custom offices where EDI system has beenactivated.

Spread The difference between buying (bid) and selling (offer) rate. It alternatively meansthe yield rate minus cost of fund.

Sterlisation There are two approaches to offset the impact of forex inflows i.e. market basedor non-market based. The market-based approach involves financial transactionsbetween the central bank and the market, which leads to withdrawal or injectionof liquidity. The non-market based approach involves the use of quantitativebarriers, rules or restrictions in market activity, which attempts to keep thepotential injection of liquidity outside the domestic financial system. The market-based approach aimed at neutralising part or whole of the monetary impact offoreign inflows is termed as sterilisation.

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Swap Purchase of one currency against another currency for one date of delivery andthe simultaneous reversal of that exchange contract for a different date of delivery.

Soft currency Is a weak currency of a country with low exchange reserves and a deficit in thebalance of payments.

Softex form An export declaration form used for export of software in non-physical form.

Sovereign risk It is a sub category of country risk and arises on account of sovereign entities.

Transferable L/C It is one, which can be transferred by the first beneficiary to one or more secondbeneficiaries.

Target A payment system of European Union.

Unsponsored ADR One way to create ADR is by an arrangement, which is not initiated by thecompany concerned, but is generally set up by one or more US brokers, whenit is observed that a large number of American investors are interested in dealingin the shares of a non-US company.

Vostro accounts It means "your account with us." If Standard Chartered Bank, London opens arupee account at Mumbai with PNB, it is your vostro account with us.

❏