Praveen Kumar DangiPraveen Kumar Dangi B.Com(H), CAIIB, AICWA, MBA (B&F)

Senior Manager / Faculty - IMAGE

Meaning – Financing of international trade and effecting transactions.

Cross border cross currency transactions

Export requires payment in the currency of the exporter’s country but importer can pay only in the currency of the importer’s country.

What is Foreign exchange?

mechanism by which the currency of one country is converted into the currency of another country

FEMA defines Fx =Fc includes

deposits, credits and balance payable in any foreign currency

DD, TC, LC, B/E expressed or drawn in Indian currency but payable in any foreign currency

DD, TC, LC, B/E expressed or drawn by banks, institutions or persons outside India payable in Indian currency

Protecting from the future uncertainty

Why textile industry is in trouble?

Why bollywood is using the hedging techniques?

Why TCS profits have come down?

Credit Risk Refuse to accept goodsCancellation of orderDelay paymentRaise unjustified objections laterDefault in paymentInsolvency of buyer Delay in execution of orderDespatch inferior goodsInability to ship goodsFails to execute – Lehman brothersAdvantage of time zone - Herstatt

Cargo Risk

Weather and climate

Natural calamities

Delay in transportation

Accidents

Mishandling

Theft, pilferage

Country Risk

Legal / regulatory – license cancel, restrictions

Political- war, change of regime

Economic- Chinese goods

Social- KFC

Commercial Risk

marketing the product in foreign land

$ Currency Risk

$ uncertainty in currency rates – exposure limits

Opinion on buyer – ECGC, D&B

ECGC policy for commercial and country risk

Individual buyer-wise policy

LC

Export production finance Gtee

Insurance cover for transit loss

Forward contract / option etc

HEDGING TOOLS - DERIVATIVESHEDGING TOOLS - DERIVATIVES

Defined – A financial instrument giving rise to right and obligation in

monetary terms.Executable on a future dateValue is dependent on the value of an underlying asset

OTC – forwards, options, swaps Exchange – future, options

Quotations : Direct – when FC is fixed Indirect – when local currency is fixed

Transaction based: Buying Rate – when bank takes FC in exchange of rupees

TT rate – bank gets credit without delay Bills rate – when transaction involves sometime

Selling Rate – When bank gives FC in exchange of rupees

Time based: Cash – Payment and receipt of currencies same day value today

TOM – Deal today at today’s rate settlement tomorrow Spot – Deal today at today’s rate settlement within 48 hours Forward – Deal today transaction on pre-determined future date

Types of rates:Interbank – Quoted in interbank marketsBid – where a bank quotes a rate to buy a currencyOffer – where a bank quotes a rate to sell a currencyCard – Bank loads its margin on exchange rates and

offered through its branchesTypes of account:

NOSTRO – Our account with youVOSTRO – Your account with usLORO – Their account with youMirror – account of foreign bank in books of bank in India

Value date: On which purchased currency gets credited to NOSTRO

account abroad

Quotations

1 kg Sugar – Rs.17/- 1 packet Good Day Biscuits – Rs.10/- 1 litre Milk – Rs.22/-

Rs.25/- per dozen Bananas Rs.20/- for 10 candles

Two way quotation: USD 1 =Rs. 48.8525/8650 Direct quotation : USD 1 = Rs. 48.8525/8650 rule buy low sell high

Indirect quotation : Rs.100/- = USD 2.0470/0490 rule buy high sell low

Spot : USD 1 = Rs. 48.8000/8200 which is buying and which is selling?

Spot / Nov 2000/2100 Spot /Dec 3500/3600 these are premiums. Remember buy high sell

low

Oct forward buying = 48.8000 Spot / Nov 2100/2000 Spot / Dec 3600/3500 these are discounts.

ADD least premium while buying & highest premium while selling.

DEDUCT highest discount while buying and lowest discount while selling

TT rate for : DD, MT, TT drawn on bank where nostro account is already credited

FBC payment to exporter only when importer pays and nostro account is credited

Cancellation of Fx sold earlier

Example: Spot USD 1 = Rs. 48.8500/8700 on 17th Oct

Spot / Nov 2200/2300

Exchange margin 0.08%

Solution: 48.8500 less 0.0391 = 48.8101 say 48.8100

Bill buying rate for : FBP Transit period and usance period

Round off to lower month- when premium

Example: Spot USD 1 = Rs. 48.8500/8700 on 17th Oct

Spot / Oct 200/300

Spot / Nov 500/550

Spot / Dec 750/800

Usance 30 days, transit 25 days

Solution: 48.8500 + 0.0200 = 48.8700 48.8500 + 0.0500 = 48.9000

Example: US$/Rupee Exchange rateExchange rate a year before US$ 1 = Rs. 47.65

Year-on-year inflation USA = 2%India= 5%

Inflation differential is (5-2) = 3%Therefore, the Rupee will depreciate by 3%Effect:

Now, US $ 1.02(2%) = Rs. 50.03 (5%)

Therefore US $ 1 = 50.03/1.02 = 49.05 (3%)Therefore, depreciation of rupee is Rs. 49.05-47.65 = Rs. 1.40

Forward Premia – Inflation differential

REFLECTION OF INTEREST DIFFERENTIAL IN FOREX FORWARD PREMIA

In the case of Forward exchange rate, it may be presumed that the forward currency required is purchased or sold in the Spot market and carrying the funds in the money markets.

Eg. 1. If you buy USD forward, bank borrows INR in Indian money market converts at spot rate and invests in US money market for you 2. If you sell USD forward, bank borrows the contracted amount in US money market converts at spot rate and kept invested in Indian money market for you Therefore, ‘the cost of carry’ or time value of money gets reflected in the forward premia loaded.

REFLECTION OF INTEREST DIFFERENTIAL IN FOREX FORWARD PREMIA

UK USAINTEREST RATE 4.5% 4%Spot Rate GBP 1 $ 1.7815

Borrow US $ 17815 for one year at 4% and convert into Pounds

17815 /1.7815 = GBP 10000Invest GBP 10000 in UK at 4.5% for one year

After one year maturity = 10000 x 4.5 x 1 = 450+10000

100 = GBP 10450

Convert back GBP 10450 into dollar @ 1.7815 Dollar receivables = 10450 x 1.7815=

18616.70

Interest payable on the dollarborrowing = 17815 x 4% = $ 712.60

Principal + interest = 17815 + 712.60 =18527.60

Received on investment = $ 18616.70Paid on borrowing = $ 18527.60

Arbitrage gain = $ 89.00 (rounded)

FOREX FORWARD PREMIA

In an integrated market, the arbitrage opportunity does Not exist.

The market adjusts the forward rate in such a way that no arbitrage gain exists on transfer of funds from Money Market to forex market

Forward rate = Dollar one year payables Pound sterling one year receivables

= 18527.60 = 1.7729 (one year forward exchange rate)

10450

ROLE OF INTEREST IN FORWARD PREMIA

IN INDIAN MARKET

FOREX FORWARD PREMIA

Forward Premia= Spot Rate x (CCy.Int.- BCy. Int) x No. of days

360 x 100= 1.7815 x (4 – 4.5) x 360 =

(-)0.0086 360 x 100

GBP/USD Spot Rate = 1.7815GBP/USD one year forward rate = 1.7729One year forward differential = 0.0086(ie. Spot rate to be adjusted by)

The money market interest differential reflectas a premium on the currency where interest rate is lower between the two.

Contract to buy or sell a fixed amount of foreign currency on a specified future date at a predetermined rate of exchange

Fixed forward contract: transit period / usance period / forward period.

Spot buying rate = 48.6000Add Forward premium = 1.1500Less exchange margin 0.10% on 49.7500 = 0.049752month forward rate for 60 day bill = 49.70025 Or 49.7000

Example:

Spot USD 1 = Rs. 48.6000 /6075

One month 3500 / 3600

2 months 5500 / 5600

3 months 8500 / 8600

4 months 1.1500 / 1.1600

Forward rates are for fixed delivery

Exchange margin 0.10%

Calculate for 2 months buying rates for 60 day usance bill

Option forward contract gives customer to deliver any day during option period. Hence if FC is at premium apply earliest delivery date rate for a buy contract

On 15th Oct Exporter requested the bank to book a Fx contract delivery Dec for a 30 day sight bill for USD 10000. prevailing rates are:

Spot USD 1 = Rs. 48.5675 / 5750

spot Oct 800 / 900 spot Nov 1700 / 1800

spot Dec 2250 / 2325 spot Jan 3200 / 3300

spot Feb 4100 / 4200 spot Mar 5150 / 5250

Exchange margin 0.10%. Transit period 25 days.

Spot buying rate = 48.5675 Add premium for June = 0.2250Less margin @ 0.10% = 0.04879 Rate to be quoted = 48.84129 or 48.8410

Forward contract when cancelled by the customer the reverse transaction at spot or remaining period forward. Customer may request for cancellation after maturity but before 15th day. If remains undelivered automatic cancellation on 7th working day

Exporter requested after 2 months of entering into a 3 month forward contract for USD 10000 at 49.2500 for cancellation. Prevailing rates are:

Spot USD 1 = Rs. 49.3000 / 3500

1 month 1500 / 1700

2months 2250 / 2325

3 months 3200 / 3300

Rs payable to exporter by bank as per contract = 4,92,500Customer will pay on cancellation (spot + 1 month selling) = 4,95,200Amount payable by exporter = 2,700

Buyer / Seller

Call – right to purchase

Put – right to sell

ONLY RIGHTS to purchaser of option

American option – option buyer can exercise the right any day during the currency of contract

European option – the buyer can exercise his right only on maturity date.

An Option gives the buyer the “right”, but not the “Obligation”, to buy or to sell an agreed amount of

Financial Instrument (Call/Put) on or before an Agreed Future Date

(expiry) at an Agreed Price (strike) in exchange for a Fee (Premium)

Mechanism

Exporter expecting Fx receipt 6 month hence

enters into a put option for 6 months getting the

right to sell the foreign currency on maturity at

predetermined rates

On maturity if rate is high he may choose not to

exercise his right under the option and sell in the

market at spot rates

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OPTION TERMINOLOGYOPTION TERMINOLOGY

USD/INR Call Option at Rs. 40.00

Buyer of the option has the right to purchase USD at Rs. 40.00 (irrespective of spot market price on that day)

If the SPOT market price of USD is Rs. 40.50 that day, he could then exercise his option and

buy USD at Rs. 40.00 immediately sell in the cash market at Rs.40.50 thus making a profit of Rs.0.50 per USD

If the SPOT market price is below Rs. 40.00, the buyer: doesn’t exercise his right loss is restricted to the initial premium paid

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OPTION TERMINOLOGYOPTION TERMINOLOGY

Similarly USD/INR Put Option on USD at Rs. 40.00 means Buyer of the option has the right to sell USD at Rs. 40.00 (irrespective of spot market price on that day)

If the spot market price of USD is Rs. 39.50 that day, he could then exercise his option and buys in the spot market at Rs.39.50

Exercises the put option to sell at Rs.40.00

thus making a profit of Rs.0.50 per USD

If the cash market price is above Rs. 40.00, the buyer doesn’t exercise his right loss is restricted to the initial premium paid

Currency Swaps – Both principal and interest is swapped

X co in US can borrow in USD @ 6% and in GBP @ 9%

Y co in London can borrow in USD @ 8% and in GBP @ 7%

Commission paid to financial intermediary =1% by both

WIN-WIN situation

Only interest outflows are swapped

X can borrow at fixed rates = 11% and floating rates +1% Y can borrow at fixed rates = 10% floating at +0.75%

X wants fixed interest rate loan Y wants floating rate loan

Y borrows fixed rate and gives to X at 10.25%. He swaps it with X’s floating rate which X gives him at +0.75%

Both are benefitted

Seller agrees to lend to the buyer a specified amount in a specified currency for a specified period starting at a specified future date at predetermined interest rates.

The rates on the settlement date (starting date) determines who gains

Minimum amount is 5M

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Tradedate

Fixingdate

Settlementdate

Term date

TIME

Fixing date = Settlement date – 2 working days

3/6 Forward Rate Agreement (5.15/40)

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FRAs are expressed in terms of giving or receiving the fixed rate vs short term interest rate index (reference rate) and are quoted numerically.

The 3 months rate starting in 3 months time is 3/6The 3 months rate starting in 6 months time 6/9The 6 months rate starting in 3 months time is 3/9The market maker gives two way quote (5.15/40)

The lower rate is the bid rate at which the bank is ready to pay fixed and the higher rate will be the offer rate at which the bank is ready to receive fixed

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Wipro wishes to enter into a 3 x 6 FRA with Bank A where Wipro would pay fixed against 3 month CP ratePrincipal - Rs. 25 croreCurrent date - 29.04.2008Start date - 29.07.2008Settlement date - 29.07.2008Maturity date - 29.10.2008Fixed rate - 6.50%Floating rate - 6.75%

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Interest payable 25 crore x 6.50 x 91 = Rs. 40,51,369.90

100 x 365Interest receivable

25 crore x 6.75 x 91 = Rs. 42,07,191.60 100 x 365

Net receivable = Rs. 1,55,821.90(on maturity date)

Net receivable = Rs. 1,53,243.00 (On settlement date – 155821 /(1+6.75%*91/365)

CURRENCY FUTURES

one currency against the other

Foreign Exchange Derivative

Contract

Buy Sell

Why to trade in Currency Futures

Advantages of exchange traded Currency Futures

Efficiency, reliable price discovery and transparency as the transactions are carried out through state of the art electronic trading infrastructure of the recognized exchanges.

Performance guarantees of recognized exchanges and hence elimination of counter party default risks.

Access to large variety of market participant that may include small traders, importers/ exporters, multinational corporations, banks and financial institutions.

Quick guide on currency futures trading on NSE

Exchange Timing: 9.00 am to 5.00 pm.

Currency Pairs: Initially only USD/INR currency pair would be available.

Contract Size: Size is set at $ 1000 per lot (contract).

Contract Maturity: period from one month to 12 months period. (total 12 monthly contracts)

Quote: in INR with a tick size (incremental value) of 0.25 Paisa.

Margins: (Presently 1%-) margins based on the daily volatility in the foreign exchange currency markets.

Quick guide on currency futures trading on NSE- (contd.)

MTM (Mark to Market): involve daily MTM (mark to market) margins.

Settlement of MTM would take place on T +1 basis. NSCCL (National Securities Clearing Corporation

Limited) would be responsible for the entire clearing, settlement and risk management functions.

Settlement Price: Final settlement price of the currency future contract would be decided as per the exchange rate fixed by RBI on the last trading day of the contract. Settlement would take place in cash in terms of INR.

Position Limits: capped at 25 mio. Permissibility: Initially only resident Indians are

allowed to trade in currency futures.

Getting Started Get in touch with your broker permitted to trade in

currency futures on NSE Price Limits : +/- 3% for the first six monthly

contracts and +/- 5% for the next six monthly contracts

No price band Base price - theoretically derived price on the first

day of the contract DSP (Daily Settlement Price) - based on last half

an hour weighted average price Final Settlement Day - Last working day of the

expiry month Settlement Mode - Cash

Costs

Brokerage Exchange transaction charges (waived by NSE

for one month) Stamp duty, STT Service tax Education tax on brokerage fees Many of the brokers have offered brokerage free

transaction as a promotional scheme for one month.

Example on calculation of profit and lossExample on calculation of profit and loss

Buy price – 43.8575, Lot size – 1000, Quantity – 1 lot, Sell price – 43.8600

Gain = (43.8600 – 43.8575) x 1 (quantity) x 1000 (lot size) = 0.0025 x 1000 = 2.5 INR

In short every tick move signifies gain/loss of 2.5 INR for each lot OR for every 1 Rupee rise/ fall, one will gain/lose 1000 INR.

Example on calculation of MTM

Buy price – 46.8575, Quantity – 1 lot, DSP (Daily Settlement price) – 46.9575

Gain = (46.9575 – 46.8575) x 1 (quantity) x 1000 (lot size) = 0.100 x 1000 = 100 INR

This is one’s net MTM gain for a particular day that would be credited to one’s ledger account by the broker. If your MTM position is in loss then the broker would debit that much amount from one’s ledger balance

Differences between a currency futures contract

and a forward contract

Futures contract has a performance guarantee of the exchange unlike forwards contract where the contracted parties may default on their commitments.

Currency futures are standardized contracts with a fixed maturity date and a fixed quantity or lot size or contract size. Forwards contract can have maturity date and size as per the mutual agreement between the concerned parties.

Advantages of currency futures trading over forex currency forwards contracts

Currency futures thru recognized exchanges guarantee of performance no chances of any defaults whatsoever

Foreign currency futures contracts traded on recognized exchanges are most suitable for small investors and businesses.

FX forwards contracts traded on OTC markets are suitable for banks, financial institutions and corporate customers due to large size of the contracts.

less flexible,

less liquid less transparent

Membership

€ Existing members, € Members of National Commodity &

Derivatives Exchange Ltd,€ New applicants should having a net

worth of at least Rs 1 crore. € The processing fee for NCDEX

members and new applicants is Rs 10,000.

FUTURES FORWARDS

Delivery INR- no FC involved Foreign Currency

Transaction Size US$1000 Any amount

Suitability Speculation Hedging

Counterparty Exchange Bank

Price Based onLast ½ hr prices

=> time lag w.r.t. current price

Current Inter bank Price

Settlement Each exchange has Clearing House

Bank’s relationships

MaturingOn last working day of Month-fixed date

Choice date as per Fwd Contract

FUTURE OF CURRENCY FUTURES

Currency pairs other than USD/INR to be introduced.

BSE and other exchanges to permit Currency Futures trading

Margins to undergo changes as the scheme stablises.

NRIs & FIIs to be permitted to trade in Currency futures

More brokers/members

The beginning - 29.08.2008 NSE witnessed a reasonably good turn over on the very first

day of currency futures trading in India. Total turnover of Rs. 291.05 Crore (about $65.8 million) 65,798 contracts traded on the exchange. Major trading activity witnessed in the near month contract of

September 2008 Near month contracts volume - 42,964. September month currency futures closed with a settlement

price of 44.0325, which was up by about 0.66% over the previous price of 43.74.

Currency futures closed at a premium over RBI reference rate 43.79 (spot market rate).

Total 12 monthly contracts introduced for the period ending 31.08.2009

Understand the Fx transactions Know about the International Finance facilities Appreciate the risk factors Awareness about the risk management tools in Fx Importance of countering the political risk in

overseas operations and Need of fraud risk policy statement for the co.

FEMA gives power to Govt and RBI Transactions through AD , FFMC Remittance facilities –

Norms about Quantity Purpose Period

Current Account transactions – Prohibited transactions – purpose, countryTransactions with govt approvalMonetary ceilings for ADs beyond which RBI

permissionWithout monetary ceilings and without RBI permission

Capital account transactions – 14 type of transactions

Prohibitions on receiving the contributionPurpose

Election

PersonsCorrespondent, columnist, cartoonist, editor,

owner printer publisher of newspaper

Judges, govt officers, employees of corporations

Members of legislature, political party and office-bearer thereof

Permitted to receive foreign contribution-Non-political organisations in the field of:

Cultural, economic, educational, religious, social activities

Registered with Ministry of Home AffairsThrough designated bank branchFrom Foreign sources - NRFC

Relating to – Hours of business$Export transactions – Bills, transit period, interest,

overdue

$ Import transactions Clean instruments – payment procedures Fx ContractsDelivery – Early, delayed, cancellationInvolvement of Exchange brokers§ Inter-bank transaction settlement

ApplicabilityBinding onRole of issuing bank, advising bank, confirming

bank, nominated bankProcedures for amendmentsPeriodRe-imbursementTransportation of documents – timeVarious clauses and insurance amount

C – C&F, CIFD – DAF, DDPE – EXW, EXS, EXQF – FOB, FOR, FOA, FAS,

AD-I commercial banks, state and urban co-operative banks

AD-II For non-trade related current account transactions -

FFMC

AD-III Select financial and other institutions for their own Fx

transactions

FFMC

Participants in Fx MarketsCorporates, Commercial banks, Central bank, Exchange

brokers

SWIFT - society for world wide interbank financial telecommunications-Brussels

CHIPS - clearing house interbank payment system New York, Net position Fedwire

CHAPS - clearing house automated payment system, London

Resident Individuals are permitted to book forward contracts, without production of underlying documents, up to a limit of USD 100,000, based on self declaration.

Normally be on a deliverable basis. In case of mismatches in cash flows or other exigencies, the

contracts booked under this facility may be allowed to be cancelled and re-booked.

Notional value of the outstanding contracts not to exceed USD 100,000 at any time.

The contracts may be permitted to be booked up to tenors of one year only.

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To be booked through AD Category I banks with whom the resident individual has banking relationship, on the basis of an application-cum declaration .

The AD Category – I banks should satisfy themselves that the resident individuals understand the nature of risk inherent in booking of forward contracts and should carry out due diligence regarding “user appropriateness” and “suitability” of the forward contracts to such customer.

AD Category – I banks to submit a quarterly report to the CGM,RBI,FED CO, Forex Markets Division, Mumbai - 400 001 within the first week of the following month.

{A.P. (DIR Series) Circular No. 15 October 29, 2007}

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The formula: Settlement amount in US dollar = Notional amount

in US dollar * ((NDF rate – Reference rate on Settlement date) / Reference rate).

If settlement amount < zero, contract seller pays the difference to the contract buyer.

If settlement amount > zero, contract seller receives the difference from the contract buyer.

Thus, if one has sold an NDF contract for notional US$1mio 12-month forward at Rs.40.46, and the reference rate for that 12-month forward date turns out to be Rs.40.00, then the contract seller receives 1000000 X (40.46 – 40.00) / 40.00 = US$11,500.

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Forward rate = spot rate * (1+domestic intt rate)/ (1+ Foreign intt rate)

USD 100,000 borrowed from US invested in India for 6 months

US intt rate = 5%

India rate of intt = 12%

$ spot rate on contract = 40.0000

$ spot rate on repayment = 41.0000

Solution:

Amount due = 100000 + 2500 = 102500 USD@ 41.00 = Rs. 42,02,500/-

Realisation = 40,00,000+ 2,40,000 = 42,40,000

GAIN = 4240000 – 4202500 = 37500

Forward rate = spot rate * (1+domestic intt rate)/ (1+ Foreign intt rate)

= 40* (1.12)/(1.05) = 42.6700

Entered into with specified futures exchange to buy / sell specified amount of FC at specified price for delivery on a specified future date.

International Monetary Market, London International Financial Futures Exchange

Size standardised

Due dates fall on specified months specified days

Trading by members / brokers

Margins for guaranteeing counter party risk

Marking to market – differences in rates are adjusted on a daily basis difference becomes payable.

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Commodity futures-Underlying is a commodity

Financial futures: Underlying is a financial instrument

Currency futures: Underlying is a currency

Index futures: Underlying is an index-NSE index, Tokyo’s Nikkei index

What is international finance? Why international finance is needed? What if you borrow from Japan? What are different finance facilities available? Trade related finance? Investment related finance? Inward / outward Recap of different risks in international finance? Focus on risk of fraud and country risk

Packing credit RBI refinance upto 180 days PC No concessional rate ab-initio if PC o/s

beyond 360 days Quantum FOB or domestic cost of production Repayment out of the proceeds of foreign

B/E, duty-draw back PCFC at 0.75% over 6 months LIBOR +

withholding tax PCFC for 180 days

Post shipment B/E under LC / without LC, invoice, Bill of

Lading, insurance

Factoring

Advance against bookdebts, Factor assumes the credit and collection

function

Forfaiting is for medium term to cover exports on deferred basis. Provides liquidity and faster turn over. Avoids credit risk and eliminates exchange risk.

$ Import loan

$ Overseas suppliers

$ ECB

$ Who can lend?$ Int’l bank, capita market, Multi-lateral finance

institution, export credit agency, IFC,ADB, supplier of, foreign collaborators

Import loan For Capital equipment For Raw material Trust Receipt from importer

Overseas supplier’s creditSupplier extends credit to importerBuyer’s credit – exporter’s bank directly

finances importer or importer’s bank. Importer opens red clause LC authorising exporter’s banker to finance the exporter. Importer’s bank guarantee the loan

ECB – Bonds issued by Indian co expressed in FC, payabe in FC

Automatic route

Approval route

Automatic route: real sector- industrial, infrastructure Cannot borrow - Banks, FI, NBFC, HFC, trust non-profit

organisation.

Eligible – corporates, NGO for Micro-finance,

Int’l bank, capital market, Multi-lateral finance institution, export credit agency, IFC,ADB, supplier of , foreign collaborators,

USD 500m /yr, USD20m upto 3 yrs, rest upto 5 yrs, NGO $5M

Prohibited clause- onlending, investment, acquisition of co, repayment of Rs loan, real estate, working capital

Cost of borrowing should not exceed LIBOR+50/125 for 1/3yrs

Guarantee, standby LC, Letter of comfort etc not permitted

Approval route: IDFC,IL&FS, PFC, PTC, IRCON, Exim bank

Banks & financial institutions participated in textile or steel restructuring

GDR – Is a negotiable instrument denominated in USD representing shares issued in local currency in the name of an international bank called DEPOSITORY.

Custody of shares in issuing country with custodian FCCB – Companies with good track record allowed,

treated as FDI requiring clearance from FIPB, used for restructuring external debt

Any questions so far?

Use of deception with intention of gaining an advantage, avoiding an obligation or causing loss to another party.

All acts of bribery, forgery, theft, collusion, misappropriation, falsifying, extortions etc.

The impact of irregularities in forex transactions can have greater consequences affecting initially the bank’s financial position and later on country’s reserve and economic growth.

An efficient audit system Bank will be in a position to take corrective measures at an appropriate time and also will be able to contribute to establish a robust economy.

Underlying cause can be

- Frauds

- Hawala

- Circumventing Exchange Control

- Money Laundering

After FEMA all transactions are categorised either as current account transaction or capital account transaction

Extensive delegation for current account transactions to ADs

RBI will not be prescribing documents for current account transaction

FCR Act, 1976 (amended)

16,187 groups in India have received foreign funds worth Rs 5,105.50 crore in 2003-04

Report of the Group of Ministers on National Security:The prevention of money laundering is essential for

safeguarding internal security.

MHA has mooted a proposal to replace the FCRA with a new Act FCMC

Amendment in FEMA to include voluntary organisation

Types - Exports related

- Imports related

- Remittances related

- DGFT concessions related

- LC related

Under invoicing (stash it abroad)

Over invoicing (bring the money back to the country)

Exporting waste / scrap

May be accompanied by fraud in duty draw back

Fake export LCs (fraud by foreign buyer)

Non-resident account operations

Hawala

FAKE IMPORTS (COLLECTION BILLS)

OVERINVOICING OF IMPORTS

CAPITAL ACCOUNT TRANSACTION IN GUISE OF CURRENT ACCOUNT TRANSACTION e.g., BTQ, BUSINESS VISIT, SERVICE PAYMENTS ETC.,

LAUNDERED MONEY COMING IN THE FORM OF INVESTMENT, LOAN, FOREIGN CONTRIBUTION, GIFTS ETC.,

Jacob – a computer engineer aged 25, from Chennai.Applied for foreign job seeing an AD in Internet. Interview concluded over Net.Few days later a person contacted Jacob introducing himself as the Managing

Director of the company in Germany.Terms of appointment were provided as Rs.40000 (Euro equal) plus House rent and

Car allowances etc.He also stated that Jacob can proceed to apply for Visa in another few days.He requested Jacob to furnish his bank account detail in Chennai to open his salary

account in Germany with cross reference to his Banker.Jacob furnished his account number and branch details by e-mail.Next two days there was a credit of Rs.3.00 lakhs in his account from GermanyThe MD of the company contacted Jacob and requested Jacob to issue cheques to two

parties in Ukraine, at Rs.1.5 lakh each after which his appointment order will be dispatched.

Jacob started receiving phone calls almost every half an hour enquiring whether he had dispatched the cheques as instructed by the MD.

Jacob got suspicious and informed Police.On verification, it is found out that Germany Hawala agents, in order to avoid

remittance tax employed such tactics.

Is fraud a risk?

Fraud risk policy:Objectives:

Promote anti-fraud cultureEncourage fraud preventionPromote fraud detectionSupport fraud investigation

How:Lead by examples, ensure adherence to legal requirement rules procedures and practiceexpectation from counter party to act with integrity, without fraud and corruption, Contracts to include clauses about consequences of fraud.Any allegation will be investigated without regards to position, length of service, past records

Responsibilities of management committee

Adopt the policy

Prepare fraud response plan

Compliance

Appoint fraud liaison officer

Ensure timely and effective action taken

Develop and implement fraud risk process to

Identify areas in all the organisation’s activities

Undertake review at regular intervals

Create awareness about FRP

Channels open to them for reporting suspicions of fraud

Disclosure policy

Whistle blower policy

Responsibility of each department head

Fraud awareness program

When how it can occur

What to be alert of

What to do if suspect a fraud

Internal frauds:

stealing school meals money

Manipulation in bill –lost job for Rs 10/-

Charging for goods not supplied

False travel claims

Misappropriation of funds from customer accounts

External frauds:

Home loan – fake documents, impersonation, deviations, inflated price

Technology products – credit card, ATM card, Debit card

Forgery, impersonation, remittance frauds

Political decision or event in any country affect the business climate of that country resulting in investor loosing money or not making expected money.

Relating to :

• Governance system of the country

• Nature of authority

• legitimacy – response of population to govt

• cultural social aspect of society

To do with :

• Behaviour of people governing the country

• Rules, laws, reaction of the governed

• Ability of the political system to respond to the demand

• Events in domestic and International environment

Examples – past – Nigeria, Uganda and other African countries - expropriation

- Recent past – Nepal, Afgan, Iraq, India – coalition governments, religious fundamentalism – Islamic terrorism, political fundamentalism – UP, Corruption – US – Foreign corrupt practices ActKidnap, ransom by guerilla or other political groupTermination of contract by govt unilaterallyPayment defaults, license cancellation, embargoes,War, civil war, Govt laws or Acts, decrees, regulations

resulting in Breach or alteration of agreement Confiscation of property (other than expropriation)

Damage to the property in politically motivated strike - Nandigram,

Interference of Govt in terms and conditions of contractRemittance restrictionsDiscriminatory taxationNo protection to trade mark, patent, copyright

Political risk Analysis:

Based on trend – past available records

Current societal attributes and circumstances

Outside the scope of analysis –

Heavy rain leading to food theft, fall of govt, installation of authoritarian govt, imposing strict control on foreign business dealing in food products

Mitigation:

Insurance – US govt – Overseas Private Investment Corporation (OPIC), World Bank - Multilateral Investment Guarantee Agency (MIGA), Private – American International Corporation (AIG), Johnson, Higgins

Risk Appetite – invest or ignore based upon analysis – One part of the country affected – Kashmir, North SriLanka – choose to operate in less disturbed parts of that country

Negotiate a better deal with govt – restrictions, remittance limits, control regime

Direct action – Ransom, kidnapping – hire security guards for protection

Section 41- Central Govt may from time to time give to RBI such general or specific directions which RBI shall comply with.

Section 46- Central Govt is empowered to make rules to carry out the provisions of the Act

Section 47- RBI is empowered to make regulations to carry out the provisions of the Act and the rules made there under.

Payments due in connection with foreign trade, other current

business, services, and short-term banking and credit facilities in the ordinary course of business.

Payments due as interest on loans and as net income from investments

Remittances for living expenses of parents, spouse and children residing abroad, Expenses in connection with foreign travel, education and medical care of parents, spouse and children.

Remittance out of lottery winnings. Remittance of income from racing/riding etc. or any other

hobby.Remittance for purchase of lottery tickets, banned/proscribed

magazines, football pools, sweepstakes, etc. Payment of commission on exports made towards equity

investment in Joint Ventures/ Wholly Owned Subsidiaries abroad of Indian companies.

Remittance of dividend by any company to which the requirement of dividend balancing is applicable.

Payment of commission on exports under Rupee State Credit Route, except commission upto 10% of invoice value of exports of tea and tobacco.

Payment related to "Call Back Services" of telephones.Remittance of interest income on funds held in Non-Resident

Special Rupee (Account) Scheme.

Gift - US$ 5,000 Donation- US$ 5,000 Private visits - US$ 10,000Business travel - US$ 25,000 Maintenance expenses of a patient - US$ 25,000 Attendant to a patient - US$ 25,000 Property commission - US$ 25,000Employment - US$ 100,000 Emigration - US$ 100,000 Maintenance of close relatives abroad - US$ 100,000 Studies abroad - US$ 100,000 Pre-incorporation expenses - exceeding US$ 100,000 Consultancy service - US$ 1,000,000

Medical treatment - estimate from the doctor in India or hospital/doctor abroad.

1. Cultural Tours Ministry of Human Resources

Development, (Department of

Education and Culture)

2. Advertisement in foreign print media , for the

purposes other than promotion of tourism, foreign

investments and international bidding (exceeding

US$ 10,000) by a State Government and its Public

Sector Undertakings

Ministry of Finance,

(Department of Economic

Affairs)

3. Remittance of freight of vessel charted by a

PSU

Ministry of Surface Transport,

(Chartering Wing)

4. Payment of import by a Govt. Department or a

PSU on c.i.f. basis (i.e. other than f.o.b. and f.a.s.

basis)

Ministry of Surface Transport,

(Chartering Wing)

5. Multi-modal transport operators making

remittance to their agents abroad

Registration Certificate from the

Director General of Shipping

6. Hiring of transponders by

(a)TV Channels

(b) Internet Service Providers

Ministry of Information

&Broadcasting

Ministry of Communication and

Information Technology

7. Remittance of container detention charges

exceeding the rate prescribed by Director General

of Shipping

Ministry of Surface Transport

(Director General of Shipping)

8. Remittances under technical collaboration

agreements where payment of royalty exceeds 5%

on local sales and 8% on exports and lump-sum

payment exceeds US$ 2 million

Ministry of Industry and

Commerce

9. Remittance of prize money/sponsorship of

sports activity abroad by a person other than

International/National/State Level sports bodies,if

the amount exceeds US$ 100,000

Ministry of Human Resources

Development (Department of

Youth Affairs and Sports)

10. Deleted

11. Remittance for membership of P & I Club Ministry of Finance, (Insurance

Division)

“Capital account transactions" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India and includes transactions referred in sub section (3) of section 6:

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

outside India.

Any borrowing or lending in foreign exchange in whatever form or by whatever name called

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

Deposits between persons resident in India and persons resident outside India

Export, import or holding of currency or currency notes Transfer of immovable property outside India, other than a lease not

exceeding five years, by a person - resident in India / resident outside India/

Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred by a person resident in India and owed to a person resident outside

India person resident outside India.

CAPITAL ACCOUNT TRANSACTIONS OF CAPITAL ACCOUNT TRANSACTIONS OF PERSONS RESIDENT IN INDIAPERSONS RESIDENT IN INDIA a. Investment by a person resident in India in foreign securities. b. Foreign currency loans raised in India and abroad by a person resident

in India c. Transfer of immovable property outside India by a person resident in

India d. Guarantees issued by a person resident in India in favour of a person

resident outside India e. Export, import and holding of currency/currency notes f. Loans and overdrafts ( borrowings) by a person resident in India from a

person resident outside India g. Maintenance of foreign currency accounts in India and outside India by a

person resident in India h. Taking out of insurance policy by a person resident in India from an

insurance company outside India i. Loans and overdrafts by a person resident in India to a person resident

outside India j. Remittance outside India of capital assets of a person resident in India k. Sale and purchase of foreign exchange derivatives in India and abroad

and commodity derivatives abroad by a person resident in India.

CAPITAL ACCOUNT TRANSACTIONS OF CAPITAL ACCOUNT TRANSACTIONS OF PERSONS RESIDENT OUTSIDE INDIAPERSONS RESIDENT OUTSIDE INDIA a. Investment in India by a person resident outside India, that is to say, (i) Issue of security by a body corporate or an entity in India and investment

therein by a person resident outside India; and (ii) Investment by way of contribution by a person resident outside India to

the capital of a firm or a proprietorship concern or an association of persons in India.

b. Acquisition and transfer of immovable property in India by a person resident outside India.

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

d. Import and export of currency/currency notes into / from India by a person resident outside India.

e. Deposits between a person resident in India and person resident outside India.

f. Foreign currency accounts in India of a person resident outside India. g. Remittance outside India of capital assets in India of a person

resident outside India.

To ensure that no person accepts foreign contribution for anti-national activities, funds are used properly.

Any article whose value does not exceed Rs10,000/- shall not be treated as foreign contribution

Interest earned on Foreign contribution to be treated as foreign contribution

It now excludes receipts on account of earnings in lieu of rendering professional services, fees for attending seminar, tuition fees subscription for journal etc.

Shall not spend more than 30% on administrative expenses.

Renewal of registration every two years, validity for five years.

GROUP E

Departure

EXW Ex-Works

GROUP F

Main Carriage unpaid

FCA Free Carrier

FAS Free Alongside Ship

FOB Free on Board

GROUP C

Main Carriage Paid

CFR Cost and Freight

CIF Cost, Insurance and Freight

CPT Carriage Paid To

CIP Carriage & Insurance Paid to

GROUP D

Arrival

DAF Delivered At Frontier

DES Delivered Ex-Ship

DEQ Delivered Ex-Quay

DDU Delivered Duty Unpaid

DDP Delivered Duty Paid