Progression of FERA to

FEMA and how it has

helped in the
development of Indian FX
markets

9/16/2015

Introduction
WhyFERAwasrequired
FeaturesandshortcomingsofFERA
ConditionsleadingtoandtheneedforFEMA
FeaturesofFEMA
Difference&SimilaritiesbetweenFERA&FEMA
Similarities
Differences

Alookahead

ProvisionsrelatedtoFDI
WhatisFDI
RoutesofFDI
Automaticroute
Government/FIPBRoute

ModesofInvestmentsunderForeignDirectInvestmentScheme
Typesofinstruments
Pricingguidelines
Modeofpayment
ProhibitedSectors

ProvisionsrelatedtoECB
IntroductiontoExternalCommercialBorrowings
ComparisonofAutomaticRoute&FIPBRoute
2

FCCBs
RedemptionofFCCBs

FCEBs
EligibleIssuer:
OfferedCompany:
EntitiesnoteligibletoissueFCEB:
Eligiblesubscriber:
EntitiesnoteligibletosubscribetoFCEB:
EnduseofFCEBproceeds:
Endusesnotpermitted:
Allincost:
PricingofFCEB:
AverageMaturity:
ParkingofFCEBproceedsabroad:
OperationalProcedure:

Structuredobligation
Takeoutfinance
ConversionofECBintoequity
ConditionsrequiredtoconvertECBintoEquity

CompliancewithECBguidelines

GuidelinesonImports&Exportsofgoods&services
Comparisontoothernationallaws
CapitalAccount
3

CaseStudy
Currentevents
India'sforexreservedipsfor2ndweekstraight11/9/2015
CurrentAccountDeficitnarrowsto1.2%ofGDP11/9/2015
th
DNAReports:January7
2015
rd
IndianExpressReportsJune3
2012
st
DeccanChronicleReportsJuly31
2013

DataAnalysis
Introductiontoeconomicindicators
USD/INR
Sensex
Nifty
Crude
Gold
FDI
FII
FXreserves

Data&Interpretation
USD/INR
Data
Analysis&Inference

Sensex
Data
Analysis&Inference

Nifty
Data
Analysis&Inference

Crude
Data
Analysis&Inference

Gold
Data
Analysis&Inference

FDI
Data
Analysis&Inference

FII
Data
Analysis&Inference

FXreserves
Data
Analysis&Inference

Currentscenario&Futureoutlook
USD/INR

Sensex
Nifty
Crude
Gold
FDI
FII
FXreserves

Conclusion

Progression of FERA to FEMA and how

it has helped in the development of
Indian FX markets
Introduction
The
ForeignExchangeRegulationAct
(FERA)waslegislationpassedbytheIndian
Parliamentin1973bythegovernmentofIndiraGandhiandcameintoforcewitheffectfrom
January1,1974.FERAimposedstringentregulationsoncertainkindsofpayments,the
dealingsinforeignexchangeandsecuritiesandthetransactionswhichhadanindirectimpact

ontheforeignexchangeandtheimportandexportofcurrency.
Thebillwasformulatedwith

theaimofregulatingpaymentsandforeignexchange.
FERAwasrepealedin1998bythegovernmentofAtalBihariVajpayeeandreplaced
bytheForeignExchangeManagementAct,whichliberalizedforeignexchangecontrolsand
restrictionsonforeigninvestment.

Tosumup,inFERA"anythingandeverything"thathastodosomethingwithForeign
Exchangewasregulated.TheExpertscalledita"DraconianAct"whichhinderedthegrowth
andmodernizationofIndianIndustries.TheImportantaspectofFEMA,incontrastwith
FERAisthatitfacilitatesTrade,whilethatofFERAwasthatit"prevented"misuse.The
focuswasshiftedfromControltoManagement.
FERA:
RegulatedinIndiabytheForeignExchangeRegulationAct(FERA),1973.
Consistedof81sections.
FERAEmphasizedstrictexchangecontrol.
Controleverythingthatwasspecified,relatingtoforeignexchange.
Lawviolatorsweretreatedascriminaloffenders.
Aimedatminimizingdealingsinforeignexchangeandforeignsecurities.
FERAwasintroducedatatimewhenforeignexchange(Forex)reservesofthecountry
werelow,Forexbeingascarcecommodity.FERAthereforeproceededonthepresumption
thatallforeignexchangeearnedbyIndianresidentsrightfullybelongedtotheGovernmentof
IndiaandhadtobecollectedandsurrenderedtotheReservebankofIndia(RBI).FERA
primarilyprohibitedalltransactions,exceptonespermittedbyRBI.
OBJECTIVES:
1. Toregulatecertainpayments.
2. Toregulatedealingsinforeignexchangeandsecurities.
3. Toregulatetransactions,indirectlyaffectingforeignexchange.
4. Toregulatetheimportandexportofcurrency.
5. Toconservepreciousforeignexchange.
6. Theproperutilizationofforeignexchangesoastopromotetheeconomic
developmentofthecountry.

Why FERA was required

TheForeignExchangeRegulationAct,1947,wasenactedasatemporarymeasure
andlaterplacedpermanentlyintheyear1957.AtthattimethelimitedobjectiveoftheAct
wastoregulatetheinflowofforeigncapitalintheformofbranchesandconcernswiththe
substantialnonresidentinterest,andtheemploymentofforeigners.Thecountryattained
freedomin1947,aftertwocenturiesofforeignruleandprotractedfreedomstrugglestretched
overdecades.Theprevailingmoodthenwasoneofpreservingandconsolidatingthefreedom
andnottopermitonceagainanytypeofforeigndomination,politicaloreconomic.Initial
approachonforeigncapitalwasnegativetoanotinterestedattitude.PrimeMinister
explainedthat"thestressontheneedtoregulate,inthenationalinterest,thescopeand
mannerofforeigncapitalandcontrol(aspertheIndustrialPolicyStatement48)arosefrom
thepastassociationofforeigncapitalandcontrolwithforeigndominationoftheeconomyof
thecountry."
Howeverafterinitiationofaprocessofrapidindustrializationofthecountry,theneed
toconserveforeignexchangewaskeenlyfelt.Exportswerenotpickingupandimportswere
surging,puttingthecountrytoseverebalanceoftradeandbalanceofpaymentcrisis.Thisin
turnledtotheneedtotapthedonorsorForeignAidGivers.
InthisbackgroundtherecommendationofthePublicAccountsCommittee(56th
Reportof1968tostudythequestionof"leakageofforeignexchangethroughinvoice
manipulationreceivedinJune1971)andtheReportoftheLawCommission(on"Trialand
PunishmentofSocialandEconomicOffences"receivedinApril1972)inducedthe
GovernmentofIndiatorefocustheFERAactwiththemainaimofconservationofforeign
exchangeratherthanregulationofentryofforeigncapital.TheForeignExchangeRegulation
Act,1973,(hereinafterreferredtoasFERA)wasdraftedwiththeobjectofintroducingthe
changesfeltnecessaryfortheeffectiveimplementationoftheGovernmentpolicyand
removingthedifficultiesfacedintheworkingofthepreviousenactment.FERAis
crisisdrivenregulationandnaturallyitcontainedseveraldraconianprovisions.Anyoffence
underFERAwasacriminaloffenceliableforimprisonment.

Features and shortcomings of FERA

1. RBIcanauthorizeaperson/companytodealinforeignexchange.
2. RBIcanauthorizethedealerstodotransacttheForeignCurrencies,subjecttoreview
andRBIwasgivenpowertorevoketheauthorizationincaseofnoncompliancy
3. RBIwouldauthorizethepersonsasMoneyChangerswhowillconvertthecurrency
ofonenationtocurrencyoftheirnationatrates"DeterminedbyRBI"
4. NOperson,otherthan"authorizeddealer"wouldenterinanytransactionofthe
foreigncurrency.
5. ForwhateverpurposeForeignexchangewasrequired,itwastobeusedonlyforthat
purpose.Ifhefeelsthathecannotusethecurrencyofthatparticularpurpose,he
wouldsellittoaauthorizeddealerwithin30days.
6. NopersoninIndia,without"permissionfromRBI"shallmakepaymentstoaperson
residentoutsideIndiaandreceiveanypaymentfromapersonfromoutsideIndia.
7. Nopersonshalldrawissueornegotiateanybillofexchangeinwhicharightto
receivepaymentoutsideIndiaiscreated.
8. NopersonshallmakeanycreditinanaccountofapersonresidentoutofIndia.
9. NopersonexceptauthorizedbyRBIshallsendforeigncurrencyoutofIndia.
10. Apersonwhohasrighttoreceivetheforeignexchangewouldhavenottodelaythe
receiptoftheforeignexchange.

Conditions leading to and the need for FEMA

ForeignExchangeRegulationAct,1973(FERA)initsexistingformbecame
ineffective,therefore,increasinglyincompatiblewiththechangeineconomicpolicyinthe
early1990s.Whiletheneedforsustainedhusbandryofforeignexchangewasrecognized,
therewasanoutcryforalessaggressiveandmellowerenactment,couchedinmilder
language.Thus,theForeignExchangeManagementAct,1999(FEMA)cameintobeing.
TheschemeofFERAprovidedforobtainingReserveBankspermissioneither
specialorgeneral,inrespectofmostoftheregulationsthereunder.Thegeneralpermissions
havebeengrantedbyReservebankundertheseprovisionsinrespectofvariousmattersby
issuingalargenumberofnotificationsfromtimetotimesincetheActcameintoforcefrom
9

st
1
January1974.Specialpermissionsweregrantedupontheapplicantssubmittingprescribed

applicationsforthepurpose.Thus,inordertounderstandtheoperativepartoftheregulations
onehadtorefertotheExchangeControlManualaswellasthevariousnotificationsissued
byRBIandtheCentralGovernment.
FEMAhasbroughtaboutaseachangeinthisregardandexceptforsection3,which
relatestodealingsinforeignexchange,etc.nootherprovisionsofFEMAstipulateobtaining
RBIpermission.Itappearsthatthisisatransitionfromtheeraofpermissionstoregulations.
TheemphasisofFEMAisonRBIlayingdowntheregulationsratherthangranting
permissionsoncasetocasebasis.Thistransitionhasalsotakenawaytheconceptof
exchangecontrolandbroughtintheeraofexchangemanagement.Inviewofthis
change,thetitleofthelegislationhasrightlybeenchangedtoFEMA.
ThepreambletoFEMAlaysdownthattheActistoconsolidateandamendthelaw
relatingtoforeignexchangewiththeobjectiveoffacilitatingexternaltradeandpaymentsand
forpromotingtheorderlydevelopmentandmaintenanceofforeignexchangemarketinIndia.
Asfarasfacilitatingexternaltradeisconcerned,section5oftheActremovesrestrictionson
drawlofforeignexchangeforthepurposeofcurrentaccounttransactions.Asexternaltrade
i.e.import/exportofgoods&servicesinvolvetransactionsoncurrentaccount,therewillbe
noneedforseekingRBIpermissionsinconnectionwithremittancesinvolvingexternaltrade.
Theneedtoremoverestrictionsoncurrentaccounttransactionswasnecessitatedasthe
countryhadgivennoticetotheIMFinAugust,1994thatithadattainedArticleVIIIstatus.
Thisnoticemeantthatnorestrictionswillbeimposedonremittancesofforeignexchangeon
accountofcurrentaccounttransactions.
Section5,however,containsaprovisothattheCentralGovernmentmay,inpublic
interestandinconsultationwiththeReserveBank,imposesuchreasonablerestrictionsfor
currentaccounttransactionsasmaybeprescribed.Itappearsthatthisisanenablingprovision
fortheCentralGovernmenttoimposerestrictionsoncurrentaccounttransactionsincasethe
situationwarrantssuchrestrictionsprobablyduetoforeignexchangecrisisinfuture.This
provisoseemstohavebeenaddedkeepinginviewthelessonslearntbycertainSouthEast

10

Asiancountriesduringthe199798crisiswhichrequiredstricterexchangecontrolstillthe
crisiswasover.
Similarly,section7retainscontrolsonexporters.
ThoughthepreambletoFEMAtalksaboutpromotingtheorderlydevelopmentand
maintenanceofforeignexchangemarketinIndia,therearenospecificprovisionsintheAct
toattainthisobjective.
FERAcontained81sections(someweredeletedinthe1993amendmentoftheAct)
ofwhich32sectionsrelatedtooperationalpartandtherestcoveredpenalprovisions,
authorityandpowersofEnforcementDirectorate,etc.FEMAcontains49sectionsofwhich
12sectionscoveroperationalpartandtherestcontravention,penalties,adjudication,appeals,
enforcementdirectorate,etc.WhatwasafullsectionunderFERAseemstohavebeen
reducedtoasubclauseunderFEMAinsomecases.
Forexample,
1. Section13ofFERAprovidedforrestrictionsonimportofforeigncurrency&foreign
securities.Nowthisrestrictionisprovidedthroughasubclause6(3)(g).
2. Section25ofFERAprovidedforrestrictionsonIndianresidentsholdingimmovable
propertiesoutsideIndia.Nowtherestrictionisundersubclause6(4).
Reductioninthenumberofsectionsmeansnothing.Realqualityofliberalizationwillbe
knownwhenallnotifications&circularsarefinalized&published.
Thedemandfornewlegislationwasbasicallyontwomaincounts.
1. TheFERAwasintroducedin1974whenIndiasforeignexchangereservesposition
wasnotsatisfactory.Itrequiredstringentcontrolstoconserveforeignexchangeandto
utilizeinthebestinterestofthecountry.Verystrictrestrictionshaveoutlivedtheir
utilityinthecurrentchangedscenario.
2. SecondlytherewasaneedtoremovethedraconianprovisionsofFERAandhavea
forwardlookinglegislationcoveringforeignexchangematters.

11

ThedraconianregulationsunderFERArelatedtounbridledpowersofEnforcement
Directorate.ThesepowersenabledEnforcementDirectoratetoarrestanyperson,searchany
premises,seizedocumentsandstartproceedingsagainstanypersonforcontraventionof
FERAorforpreparationsofcontraventionofFERA.ThecontraventionunderFERAwas
treatedascriminaloffenceandtheburdenofproofwasontheguilty.

Features of FEMA
SomeimportantprovisionsofFEMAareasfollows:
1. Prohibitsdealingsinforeignexchangeexceptthroughanauthorizedperson
2. MakeanypaymenttoorforthecreditofanypersonresidentoutsideIndiainany
manner
3. Receiveotherwisethroughanauthorizedperson,anypaymentbyorderoronbehalf
ofanypersonresidentoutsideIndiainanymanner
4. EnterintoanyfinancialtransactioninIndiaforacquisitionorcreationortransferofa
righttoacquire,anyassetoutsideIndiabyanyperson
5. RestrainsanypersonresidentinIndiafromacquiring,holding,owning,possessingor
transferringanyforeignexchange,foreignsecurityoranyimmovableproperty
situatedoutsideIndiaexceptasspecificallyprovidedintheAct.
6. Anypersonmaysellordrawforeignexchangetoorfromanauthorizedpersonifsuch
saleordrawlisacurrentaccounttransaction
7. Allowsapersontodraworsellforeignexchangefromortoanauthorizedpersonfor
acapitalaccounttransaction.
8. Transactionshavinginternationalfinancialimplicationsmattersareregulatedby
ExchangeControl:
a. Purchaseandsaleofandotherdealingsinforeignexchangeandmaintenance
ofbalancesatforeigncentres
b. Procedureforrealizationofproceedsofexports
c. PaymentstononresidentsortotheiraccountsinIndia
d. Transferofsecuritiesbetweenresidentsandnonresidentsandacquisitionand
holdingofforeignsecurities
12

e. Foreigntravelwithexchange
9. EveryexporterisrequiredtofurnishtotheRBIoranyotherauthority,adeclaration
etc.etc.regardingfullexportvalue.
10. CaststheresponsibilityonthepersonresidentinIndiawhohasanyamountofforeign
exchangedueoraccruedintheirfavourtogetsamerealizedandrepatriatedtoIndia
withinthespecificperiodandthemannerspecifiedbyRBI.

Difference & Similarities between FERA & FEMA

Similarities
ThesimilaritiesbetweenFERAandFEMAareasfollows:
TheReserveBankofIndiaandcentralgovernmentwouldcontinuetobethe
regulatorybodies.
Presumptionofextraterritorialjurisdictionasenvisagedinsection(1)ofFERAhas
beenretained.
TheDirectorateofEnforcementcontinuestobetheagencyforenforcementofthe
provisionsofthelawsuchasconductingsearchandseizure
Differences

Sr
.
N
o
1

DIFFERENC
ES

FERA

FEMA

PROVISIONS

FEATURES

FEMAismuchsimple,and
consistofonly49sections.
Thesepresumptions
ofMensReaandabatement
havebeenexcludedinFEMA

NEWTERMS
INFEMA

FERAconsistedof81sections,
andwasmorecomplex
Presumptionofnegativeintention
(MensRea)andjoininghandsin
offence(abatement)existedin
FERA

TermslikeCapitalAccount
Transaction,currentAccount
Transaction,person,serviceetc.
werenotdefinedinFERA.

TermslikeCapitalAccount
Transaction,currentaccount
Transactionperson,service
etc.,havebeendefinedin
13

detailinFEMA

DEFINITION Definitionof"AuthorizedPerson" ThedefinitionofAuthorized

OF
inFERAwasanarrowone(2(b) personhasbeenwidenedto
AUTHORIZE
includebanks,money
DPERSON
changes,offshorebanking
Unitsetc.(2(c)
MEANINGOF Therewasabigdifferenceinthe TheprovisionofFEMA,are
"RESIDENT"
definitionof"Resident",under
inconsistentwithincomeTax
AS
FERA,andIncomeTaxAct
Act,inrespecttothe
COMPARED

definitionofterm"Resident".
WITH

Nowthecriteriaof"InIndia
INCOMETAX
for182days"tomakea
ACT.
personresidenthasbeen
broughtunderFEMA.
Thereforeapersonwho
qualifiestobeanonresident
undertheincomeTaxAct,
1961willalsobeconsidereda
nonresidentforthepurposes
ofapplicationofFEMA,buta
personwhoisconsideredto
benonresidentunderFEMA
maynotnecessarilybea
nonresidentundertheIncome
TaxAct,forinstancea
businessmangoingabroad
andstayingthereforeaperiod
of182daysormoreina
financialyearwillbecomea
nonresidentunderFEMA.
PUNISHMEN
AnyoffenceunderFERA,wasa
Here,theoffenceis
T
criminaloffence,punishablewith consideredtobeacivil
imprisonmentaspercodeof
offenceonlypunishablewith
criminalprocedure,1973
someamountofmoneyasa
penalty.Imprisonmentis
prescribedonlywhenonefails
topaythepenalty.
QUANTUM
Themonetarypenaltypayable
UnderFEMAthequantumof
OFPENALTY. underFERA,wasnearlythefive penaltyhasbeenconsiderably
timestheamountinvolved.
decreasedtothreetimesthe
amountinvolved.
APPEAL
Anappealagainsttheorderof
Theappellateauthorityunder
"Adjudicatingoffice",before"
FEMAisthespecial
ForeignExchangeRegulation
Director(Appeals)Appeal
14

AppellateBoardwentbefore
HighCourt

againsttheorderof
AdjudicatingAuthoritiesand
specialDirector(appeals)lies
before"AppellateTribunalfor
ForeignExchange."Anappeal
fromanorderofAppellate
TribunalwouldlietotheHigh
Court.(sec17,18,35)
FERAdidnotcontainanyexpress FEMA
provisionontherightof
expresslyrecognizestheright
onimpliedpersontotakelegal
ofappellanttotakeassistance
assistance
oflegalpractitioneror
charteredaccountant(32)

RIGHTOF
ASSISTANCE
DURING
LEGAL
PROCEEDING
S.
10 POWEROF
FERAconferredwidepowerson Thescopeandpowerof
SEARCHAND apoliceofficernotbelowtherank searchandseizurehasbeen
SEIZE
ofaDeputySuperintendentof
curtailedtoagreatextent
Policetomakeasearch

A look ahead
EnactmentofFEMAhasbroughtinmanychangesinthedealingsofForeignExchange,as
comparedtoFERA.Someofthemarerestrictive,andsomehaswidenedthescope.
Howeversomeoftherelevantprogressmade,fromFERAtoFEMA,isasfollows:
1. WithdrawalofForeignExchange
:Now,therestrictionsonwithdrawalofForeign
ExchangeforthepurposeofcurrentAccountTransactions,hasbeenremoved.
However,theCentralGovernmentmay,inpublicinterestinconsultationwiththe
ReserveBankimposesuchreasonablerestrictionsforcurrentaccounttransactionsas
maybeprescribed.
2. RemovaloftherestrictionsontransactionsinforeignExchange
onaccountof
tradeingoods,servicesexceptforretainingcertainenablingprovisionsforthe
CentralGovernmenttoimposereasonablerestrictioninpublicinterest.

15

Provisions related to FDI

What is FDI
Foreigndirectinvestment(FDI)isaninvestmentinabusinessbyaninvestorfrom
anothercountryforwhichtheforeigninvestorhascontroloverthecompanypurchased.The
OrganizationofEconomicCooperationandDevelopment(OECD)definecontrolasowning
10%ormoreofthebusiness.Businessesthatmakeforeigndirectinvestmentsareoftencalled
multinationalcorporations(MNCs)ormultinationalenterprises(MNEs).AMNEmaymake
adirectinvestmentbycreatinganewforeignenterprise,whichiscalledaGreenfield
investment,orbytheacquisitionofaforeignfirm,eithercalledanacquisitionorBrownfield
investment.

Routes of FDI
Therearemainly2routesofFDIinIndiannamely
1. TheautomaticRoute
16

2. TheApproval/FIPB/Governmentroute
Automatic route
FDIisallowedundertheautomaticroutewithoutpriorapprovaleitherofthe
GovernmentortheReserveBankofIndiainallactivities/sectorsasspecifiedinthe
consolidatedFDIPolicy,issuedbytheGovernmentofIndiafromtimetotime.

Government / FIPB Route

FDIinactivitiesnotcoveredundertheautomaticrouterequirespriorapprovalofthe
GovernmentwhichisconsideredbytheForeignInvestmentPromotionBoard(FIPB),
DepartmentofEconomicAffairs,andMinistryofFinance.
FIPBstandsforForeignInvestmentPromotionBoardwhichapprovesallothercases
wheretheparametersofautomaticapprovalarenotmet.Normalprocessingtimeis4to6
weeks.FIPBhasSecretary,DepartmentofEconomicAffairsasitschairman.Theother
membersoftheboardsareSecretary,DepartmentofIndustrialPolicy&Promotion,
CommerceSecretaryandForeignSecretary.
ThegovernmenthassetupForeignInvestmentImplementationAuthority(FIIA)to
facilitatequicktranslationofFDIapprovalsintoimplementationbyprovidingaproactive
onestopaftercareservicetoforeigninvestors,helpthemobtainnecessaryapprovalsandby
sortingtheiroperationalproblems.

Modes of Investments under Foreign Direct Investment Scheme

1. Issuanceoffreshsharesbythecompany
2. AcquisitionbywayoftransferofexistingsharesbypersonresidentinoroutsideIndia
a. TransferofsharesbyaPersonresidentoutsideIndia
b. Transferofshares/convertibledebenturesfromResidenttoPersonResident
outsideIndia
c. TransferofSharesbyResidentwhichrequiresGovernmentapproval

17

d. PriorpermissionoftheReserveBankincertaincasesforacquisition/transfer
ofsecurity
e. Escrowaccountfortransferofshares
3. IssueofRights/Bonusshares
4. IssueofsharesunderEmployeesStockOptionScheme(ESOPs)
5. ConversionofECB/LumpsumFee/Royalty/Importofcapitalgoodsbyunitsin
SEZsintoEquity/Importpayables/Preincorporationexpenses

Types of instruments
ThedifferenttypesofinstrumentsthroughwhichFDImayberaisedaresummarisedas
under.
1. Indiancompaniescanissueequityshares,fullyandmandatorilyconvertible
debenturesandfullyandmandatorilyconvertiblepreferencesharessubjecttothe
pricingguidelines.
2. Asfarasdebenturesareconcerned,onlythosewhicharefullyand
mandatorilyconvertibleintoequity,withinaspecifiedtime,wouldbereckonedas
partofequityundertheFDIPolicy.
3. Foreigninvestmentthroughpreferencesharesistreatedasforeigndirectinvestment.
However,thepreferencesharesshouldbefullyandmandatorilyconvertibleinto
equityshareswithinaspecifiedtimetobereckonedaspartofsharecapitalunder
FDI.InvestmentinotherformsofpreferencesharesrequirescomplyingwiththeECB
norms.

Pricing guidelines
1. Issueofshares
a. Freshissueofshares
Priceoffreshsharesissuedtopersonsresidentoutside
IndiaundertheFDIScheme,shallbe
i. OnthebasisofSEBIguidelinesincaseoflistedcompanies.

18

ii. NotlessthanfairvalueofsharesdeterminedbyaSEBI
registeredMerchantBankeroraCharteredAccountantasperthe
DiscountedFreeCashFlowMethod(DCF)incaseofunlisted
companies.
2. Preferentialallotment
Incaseofissueofsharesonpreferentialallotment,theissue
priceshallnotbelessthanthepriceasapplicabletotransferofsharesfromresidentto
nonresident.
3. IssueofsharesbySEZsagainstimportofcapitalgoods
Inthiscase,theshare
valuationhastobedonebyaCommitteeconsistingofDevelopmentCommissioner
andtheappropriateCustomsofficials.
4. RightShares
ThepriceofsharesofferedonrightsbasisbytheIndiancompanyto
nonresidentshareholdersshallbe:
5. InthecaseofsharesofacompanylistedonarecognizedstockexchangeinIndia
atapriceasdeterminedbythecompany.
6. Inthecaseofsharesofacompanynotlistedonarecognizedstockexchangein
India
atapricewhichisnotlessthanthepriceatwhichtheofferonrightbasisis
madetotheresidentshareholders.

Mode of payment
AnIndiancompanyissuingshares/convertibledebenturesunderFDISchemetoaperson
residentoutsideIndiashallreceivetheamountofconsiderationrequiredtobepaid
forsuchshares/convertibledebenturesby:
1. Inwardremittancethroughnormalbankingchannels.
2. DebittoNRE/FCNRaccountofapersonconcernedmaintainedwithanAD
categoryIbank.
3. Conversionofroyalty/lumpsum/technicalknowhowfeedueforpayment/import
ofcapitalgoodsbyunitsinSEZorconversionofECBshallbetreatedas
considerationforissueofshares.
4. Conversionofimportpayables/preincorporationexpenses/shareswapcan
betreatedasconsiderationforissueofshareswiththeapprovalofFIPB.
19

5. DebittononinterestbearingEscrowaccountinIndianRupeesinIndiawhich
isopenedwiththeapprovalfromADCategoryIbankandismaintainedwith
theADCategoryIbankonbehalfofresidentsandnonresidentstowards
paymentofsharepurchaseconsideration.

Prohibited Sectors
SomesectorsinwhichFDIisprohibitedarelistedbelow.
a. AtomicEnergy
b. LotteryBusiness
c. GamblingandBetting
d. BusinessofChitFund
e. NidhiCompany
f. Agricultural(excludingFloriculture,Horticulture,Developmentofseeds,Animal
Husbandry,Piscicultureandcultivationofvegetables,mushrooms,etc.under
controlledconditionsandservicesrelatedtoagroandalliedsectors)andPlantations
activities(otherthanTeaPlantations)
g. HousingandRealEstatebusiness
h. TradinginTransferableDevelopmentRights(TDRs).
i. Manufactureofcigars,cheroots,cigarillosandcigarettes,oftobaccooroftobacco
substitutes
.

Provisions related to ECB

Introduction to External Commercial Borrowings
Anexternalcommercialborrowing(ECB)isaninstrumentusedinIndiatofacilitate
theaccesstoforeignmoneybyIndiancorporationsandPSUs(publicsectorundertakings).
ECBsincludecommercialbankloans,buyers'credit,andsupplierscredit,securitised
instrumentssuchasfloatingratenotesandfixedratebondsetc.,creditfromofficialexport
creditagenciesandcommercialborrowingsfromtheprivatesectorwindowofmultilateral

20

financialInstitutionssuchasInternationalFinanceCorporation(Washington),ADB,AFIC,
CDC,etc.
ECBscannotbeusedforinvestmentinstockmarketorspeculationinrealestate.The
DEA(DepartmentofEconomicAffairs),MinistryofFinance,GovernmentofIndiaalong
withReserveBankofIndia,monitorsandregulatesECBguidelinesandpolicies.
ForinfrastructureandGreenfieldprojects,fundingupto50%(throughECB)is
allowed.Intelecomsectortoo,upto50%fundingthroughECBsisallowed.
RecentlyGovernmentofIndiaallowedborrowingsinChinesecurrencyYuan.
CorporatesectorscanmobilizeUSD750millionviaautomaticroute,whereasservicesectors
andNGO'sformicrofinancecanmobilizeUSD200millionand10millionrespectively.
Borrowerscanuse25percentoftheECBtorepayrupeedebtandtheremaining75
percentshouldbeusedfornewprojects.Aborrowercannotrefinanceitsentireexisting
rupeeloanthroughECB.ThemoneyraisedthroughECBischeapergivennearzerointerest
ratesintheUSandEurope,Indiancompaniescanrepaypartoftheirexistingexpensiveloans
fromthat.
AprospectiveborrowercanaccessECBundertworoutesi.e.
a. TheAutomaticroute
b. TheApprovalroute
Acorporate,whoisnotafinancialintermediary,canaccessECBundertheautomatic
routeuptoUSDollar$500millioninafinancialyearbothforrupeeexpenditureand/or
foreigncurrencyexpenditureforpermissibleenduses.
Theborrowersintheservicessectorviz.hotels,hospitalsandsoftwarecompaniescan
accessECBundertheautomaticrouteuptoUS$100millioninafinancialyearforimportof
capitalgoods,forrupeeand/orforeigncurrencycapitalexpenditureandNGOsengagedin
microfinanceactivitiesuptoUS$5millioninafinancialyear.

21

TheECBwhichisnotcoveredbytheautomaticrouteisconsideredunderthe
approvalrouteonacasebycasebasisbyRBI.

Comparison of Automatic Route & FIPB Route

ThebroaddetailsofECBpolicyarepresentedbelow:

Criteria
AutomaticRoute
Procedure

Borrowerentersintoaloanagreement
withthelenderincompliancewithECB
GuidelinesandsubmitsthesametoRBI
forregistration.

ApprovalRoute
Prospectiveborrowersubmitsan
applicationintheprescribedform
throughauthorizeddealer(AD)to
RBI

22

Eligible
Borrowers

1. Corporateincludingthoseinhotel,
hospital,softwaresectorsregistered
underthecompaniesAct,1956.
2. UnitsinSpecialEconomicZones
fortheirownrequirement
3. NGOsengagedinmicrofinance
activities
4. InfrastructureFinanceCompanies
(IFCs)exceptfinancial
intermediaries,suchasbanks,
financialinstitutions(FIs),Housing
FinanceCompanies(HFCs)and
NonBankingFinancialCompanies
(NBFCs)exclusivelyinvolvedin
financingofinfrastructuresector
foronlendingtoborrowersinthe
infrastructuresector
upto50per
centoftheirownedfunds
under
theautomaticroute
5. Individuals,TrustsandNonProfit
makingorganizationsare
not
eligible
toraiseECB

1. FinancialInstitutions(FIs)
dealingexclusivelywith
infrastructureorexportfinance
2. BanksandFIswhohad
participatedinthetextileorsteel
sectorrestructuringpackage
3. NBFCsforECBswithminimum
averagematurityof5yearsto
financeimportofinfrastructure
equipmentforleasingtoinfra
projects.
4. NBFCsclassifiedas
InfrastructureFinance
Companies(
IFCs)
assuchby
RBIexclusivelyinvolvedin
financingofinfrastructuresector
foronlendingtoborrowersin
theinfrastructuresectorfor
ECBsbeyond50percentof
theirownedfunds.
5. HousingFinanceCompaniesfor
FCCBs
6. SPVsfinancinginfrastructure
companies/projectsexclusively
7. Multistatecooperative
Societiesengagedin
manufactureinrealsector
8. SEZdevelopersforproviding
infrastructurefacilitieswithin
SEZ.However,ECBwillnotbe
permissiblefordevelopmentof
integratedtownshipand
commercialrealestatewithin
SEZ.
9. Corporatewhichhaveviolated
theextantECBpolicyandare
underinvestigationbyReserve
Bankand/orDirectorateof
Enforcement,areallowedto
availECBonlyunderthe
Approvalroute.
10. CorporaterequiringmoreECB
beyondtheprescribedlimit
undertheautomaticrouteina
year
23

11. Anyothernotcoveredby
automaticroute

Recognized
Lenders

1.
2.
3.
4.
5.
6.
7.

InternationalBanks
InternationalCapitalMarkets
MultilateralFIs
ExportCreditAgencies
SuppliersofEquipment
ForeignCollaborators
ForeignEquityHolders

1.
2.
3.
4.
5.
6.
7.

InternationalBanks
InternationalCapitalMarkets
MultilateralFIs
ExportCreditAgencies
SuppliersofEquipment
ForeignCollaborators
ForeignEquityHolders

8. QualifiedOverseasOrganizations
andIndividualsforECBtoNGOs.
PermittedEnd
Use

1. Investments,suchasimportof
capitalgoods,newprojects,
modernization/expansionof
existingproductionunitsinreal
sectorindustrialsectorincluding
SMEandinfrastructureinIndia
2. Overseasdirectinvestmentin
jointventuresorwhollyowned
subsidiaries
3. Firststageacquisitionofsharesin
disinvestmentprocessandinthe
mandatorysecondstageofferto
thepublic
4. Lendingtoselfhelpgroupsby
NGOsengagedinmicrofinance
5. Onetimepaymentforspectrum
allocationbyeligibleborrowersin
thetelecommunicationsector
6. OnlendingbyIFCstoinfra
sector.

1. Investmentssuchasimportof
capitalgoods,newprojects,
modernization/expansionof
existingproductionunitsinreal
sectorindustrialsector
includingSMEand
infrastructureinIndia
2. Overseasdirectinvestmentin
jointventuresorwhollyowned
subsidiaries
3. Firststageacquisitionofshares
indisinvestmentprocessandin
themandatorysecondstage
offertothepublic
4. PaymentforSpectrum
allocationinthe
telecommunicationsector.
5. Tofacilitateaccesstofundsfor
thehousingsector,the
developmentofintegrated
townships(asdefinedbyPress
Note3(2002Series)dated
January04,2002issuedby
MinistryofCommerce&
Industry),hasbeenpermitted
asaneligibleenduseofthe
ECB,undertheapprovalroute
ofRBI(uptoDecember31,
2010)
6. PrematureBuybackofFCCBs
subjecttocomplianceof
24

certainconditions(facilitywas
availablefirstuptoDecember
31,2009andagainuptoJune
30,2010(NowGovt.has
approvedfurtherextensionup
toJune30,2011as
recommendedbyRBI).
7. TakeoutfinancethroughECB,
undertheapprovalroute,for
refinancingofRupeeloans
availedoffromthedomestic
banksbyeligibleborrowers
8. Intheseaport&airport,roads
includingbridgesandpower
sectorsforthedevelopmentof
newprojects.

Enduse
not
permitted

1. UtilizationofECBproceedsisnot
permittedforonlendingor
investmentincapitalmarketor
acquiringacompany(orapart
thereof)inIndiabyacorporate.
2. UtilizationofECBproceedsisnot
permittedinrealestate,
3. UtilizationofECBproceedsisnot
permittedforworkingcapital,
generalcorporatepurposeand
repaymentofexistingRupeeloans.

1. UtilizationofECBproceedsis
notpermittedforonlendingor
investmentincapitalmarketor
acquiringacompany(orapart
thereof)inIndiabyacorporate
exceptbanksandfinancial
institutionseligibleunder
approvalroute.
2. UtilizationofECBproceedsis
notpermittedinrealestate.
However,thecorporate,engaged
inthedevelopmentofintegrated
township,asdefinedbyMinistry
ofCommerceandIndustry,
DIPP,SIA(FCDivision),in
PressNote3(2002Series)dated
January04,2002,arepermitted
toavailofECB,underthe
approvalroute,untilDecember
31,2009.Onareviewofthe
prevailingconditions,ithasbeen
decidedtoextendthecurrent
policyuntilDecember31,2010,
undertheapprovalroute.
25

3. UtilizationofECBproceedsis
notpermittedforworking
capital,generalcorporate
purposeandrepaymentof
existingRupeeloans.
4. However,keepinginviewthe
specialfundingneedsofthe
infrastructuresector,ithasbeen
decidedtoputinplaceascheme
oftakeoutfinancearrangement
throughECB,undertheapproval
route,forrefinancingofRupee
loansavailedoffromthe
domesticbanksbyeligible
borrowersintheseaport&
airport,roadsincludingbridges
andpowersectorsforthe
developmentofnewprojects,
subjecttocertainconditions
5. StipulatedbyRBIinits
A.P.(DIRSeries)CircularNo.04
datedJuly22,2010.
Amount

Minimum
Average
Maturity

1. MaximumofUS$500millionper
yearforCompaniesotherthan
thoseinhotel,hospitaland
softwaresectorsforrupeeor
foreigncurrencyexpenditure
2. UptoUS$100millionfor
borrowersintheservicessectorviz
hotels,hospitalsandsoftware
companiesforimportofcapital
goods,forrupeeand/orforeign
currencycapitalexpenditure.
3. UptoUS$5millionforNGOs
engagedinmicrofinanceactivities
1. 3yearsforECBuptoUS$20
million
2. 5yearsforECBaboveUS$20
mil.

1. AnadditionalamountofUS$
250millionoverandaboveUS$
500millionundertheautomatic
routeforCorporateinrealsector
2. OverandaboveUS$100million
undertheautomaticrouteforthe
borrowersintheservicessector
viz.hotels,hospitalsand
softwarecompaniesforforeign
currencyand/orRupeecapital
expenditureforpermissible
enduses.
1. 3yearsforECBuptoUS$20
million
2. 5yearsforECBaboveUS$20
million
3. 10yearsforanadditional
amountofUS$250million
over&aboveUS$500million
undertheautomaticroute.

26

Allincost
Ceilings

1. 300basispointsoversixmonthLIBOR(orappropriatereferencerate)for
maturityof35years
2. 500basispointsoversixmonthLIBOR(orappropriatereferencerate)for
maturityabove5years
3. (Includesinterest,feesandexpensesinforeignexchangeandexcludes
commitmentfee,prepaymentfee,feespayableinIndianrupeesandexcludes
paymentofwithholdingtax)

Security

1. Any.However,creationofchargeoverimmovablepropertiesandsecurities
issubjecttoFEMARegulations/Notifications

Guarantees

1. Issuanceofguarantee,standbyletterofcredit,andletterofundertakingor
letterofcomfortbybanks,financialinstitutionsandNBFCsfromIndia
relatingtoECBisnotpermittedingeneral.However,applicationsfor
providingguarantee/standbyletterofcreditorletterofcomfortbybanks,
financialinstitutionsrelatingtoECBinthecaseofSMEwillbeconsidered
byRBIundertheapprovalrouteonmeritssubjecttoprudentialnorms.

ECB

1. ToeitherparkoverseasuntilactualrequirementinIndiaortokeepitwith
theoverseasbranches/subsidiariesofIndianbanksabroadortoremitthese
fundstoIndiaforcredittotheirRupeeaccountswithADCategoryIbanksin
India,pendingutilizationforpermissibleenduses.

Proceeds
Prepayment

Buybackof
FCCBs

Refinanceof

1. UptoUS$500millioncanbeallowedbyADwithoutpriorapprovalofRBI
subjecttocomplianceofminimumaveragematurityapplicabletotheloan
2. PrepaymentexceedingUS$500millionwouldbeconsideredbyRBIunder
theapprovalroute.
IntermsofA.P.(DIRSeries)CircularNo.3datedDecember8,2008,readwith
A.P.(DIRSeries)CircularNo.58datedMarch13,2009andA.P.(DIRSeries)
CircularNo.6datedApril28,2009,Indiancompanieswereallowedtobuyback
theirForeignCurrencyConvertibleBonds(FCCBs)bothundertheautomaticroute
andapprovalrouteatdiscountedvalueuntilDecember31,2009.Keepinginview
theprevailingmacroeconomicconditionsandglobaldevelopments,especiallythe
improvementsinthestockprices,itwasdecidedtodiscontinuethefacilitywith
effectfromJanuary1,2010.However,asrecommendedbyRBI,thisfacilitywas
extendeduptoJune30,2010.Onareviewofpolicyandinviewofthe
representationsreceivedfromtheissuersofFCCBs,ithasnowbeendecidedto
considerapplications,undertheapprovalroute,forbuybackofFCCBsuntilJune
30,2011,subjecttotheissuerscomplyingwithallthetermsandconditionsof
buyback/prepaymentofFCCBs
PermittediffreshECBisatlowercostandoutstandingmaturityisnotchanged

ExistingECBs

27

Procedurefor
changesinthe
termsand
conditionsof
existingECBs

Compliance

1. AspertheextantECBprocedures,anychangesinthetermsandconditionsof
theECBafterobtainingtheLoanRegistrationNumber(LRN)fromthe
DepartmentofStatisticsandInformationManagement(DSIM),ReserveBank,
requirethepriorapprovaloftheReserveBank.Accordingly,therequestsofthe
borrowersforchangesinthetermsandconditions,suchas,drawdown/
repaymentschedules,currencyofborrowingandchangesindesignatedAD
bank,nameoftheborrowingcompany,etc.arereferredtotheReserveBank
fornecessaryapproval.
2. Asameasureofsimplificationoftheexistingprocedures,ithasbeendecided
byRBItodelegatepowerstothedesignatedADcategoryIbankstoapprove
theaboverequestsfromtheECBborrowers,subjecttospecifiedconditions
1. TheprimaryresponsibilitytoensurethatECBraised/utilizedareinconformity
withtheECBguidelinesandtheReserveBankregulations/directions/circulars
isthatoftheconcernedborrowerandanycontraventionoftheECBguidelines
mayinvitepenalaction.ThedesignatedADisalsorequiredtoensurethat
raising/utilizationofECBisincompliancewithECBguidelinesatthetimeof
certification.BorrowersarerequiredtosubmitForm83,induplicate,certified
bytheCompanySecretary(CS)orCharteredAccountant(CA)tothe
designatedAD.Theborrowercandrawdowntheloanonlyafterobtainingthe
loanregistrationnumberfromRBI.BorrowersarerequiredtosubmitECB2
ReturncertifiedbythedesignatedADonamonthlybasistoRBIwithinseven
workingdaysfromthecloseofmonthtowhichitrelatesregardingutilization
oftheECB.
2. ViolationoftheprovisionsoftheregulationsisdealtwithbytheReserveBank
ofIndiathroughcompoundingofcontraventionsunderSection15ofFEMA
1999.

FCCBs
FCCBsaregovernedbytheIssueofForeignCurrencyConvertibleBondsandOrdinary
Shares(throughDepositaryReceiptMechanism)Scheme,1993asamendedfromtimeto
time..FCCBsarealsosubjecttoalltheregulationswhichareapplicabletoECBsinaddition
totherequirementsof
a) havingthematurityoftheFCCBnotlessthan5years
b) thecall&putoption,ifany,shallnotbeexercisablepriorto5years
c) issuanceofFCCBsonlywithoutanywarrantsattached
d) Theissuerelatedexpensesnotexceeding4%ofissuesizeandincaseofprivate
placement,shallnotexceed2%oftheissuesize.
28

Redemption of FCCBs
KeepinginviewtheneedtoprovideawindowtofacilitaterefinancingofFCCBsbythe
Indiancompanieswhichmaybefacingdifficultyinmeetingtheredemptionobligations,
designatedADCategoryIbankshavebeenpermittedtoallowIndiancompaniesto
refinancetheoutstandingFCCBs,undertheautomaticroute.

FCEBs
ForeignCurrencyExchangeableBond(FCEB)meansabondexpressedinforeign
currency,theprincipalandinterestinrespectofwhichispayableinforeigncurrency,issued
byanIssuingCompanyandsubscribedtobyapersonwhoisaresidentoutsideIndia,in
foreigncurrencyandexchangeableintoequityshareofanothercompany,tobecalledthe
OfferedCompany,inanymanner,eitherwholly,orpartlyoronthebasisofanyequity
relatedwarrantsattachedtodebtinstruments.The
FCEBmaybedenominatedinanyfreelyconvertibleforeigncurrency.
Eligible Issuer:
TheIssuingCompanyshallbepartofthepromotergroupoftheOfferedCompanyandshall
holdtheequityshare/sbeingofferedatthetimeofissuanceofFCEB.
Offered Company:
TheOfferedCompanyshallbealistedcompany,whichisengagedinasectoreligibleto
receiveForeignDirectInvestmentandeligibletoissueoravailofForeignCurrency
ConvertibleBond(FCCB)orExternalCommercialBorrowings(ECB).
Entities not eligible to issue FCEB:
AnIndiancompany,whichisnoteligibletoraisefundsfromtheIndiansecuritiesmarket,
includingacompanywhichhasbeenrestrainedfromaccessingthesecuritiesmarketbythe
SEBIshallnotbeeligibletoissueFCEB.
Eligible subscriber:
EntitiescomplyingwiththeForeignDirectInvestmentpolicyandadheringtothesectoral
capsatthetimeofissueofFCEBcansubscribetoFCEB.PriorapprovaloftheForeign
29

InvestmentPromotionBoard,whereverrequiredundertheForeignDirectInvestmentpolicy,
shouldbeobtained.
Entities not eligible to subscribe to FCEB:
Entitiesprohibitedtobuy,sellordealinsecuritiesbytheSEBIwillnotbeeligibleto
subscribetoFCEB.
End-use of FCEB proceeds:
1. IssuingCompany:
a. TheproceedsofFCEBmaybeinvestedbytheissuingcompanyoverseasby
wayofdirectinvestmentincludinginJointVenturesorWhollyOwned
Subsidiariesabroad,subjecttotheexistingguidelinesonoverseasinvestment
inJointVentures/WhollyOwnedSubsidiaries.
b. TheproceedsofFCEBmaybeinvestedbytheissuingcompanyinthe
promotergroupcompanies.
2. PromoterGroupCompanies:
a. PromotergroupcompaniesreceivinginvestmentsoutoftheFCEBproceeds
mayutilizetheamountinaccordancewithendusesprescribedundertheECB
policy.
End-uses not permitted:
Thepromotergroupcompanyreceivingsuchinvestmentswillnotbepermittedtoutilizethe
proceedsforinvestmentsinthecapitalmarketorinrealestateinIndia.
All-in-cost:
TherateofinterestpayableonFCEBandtheissueexpensesincurredinforeigncurrency
shallbewithintheallincostceilingasspecifiedbyReserveBankundertheECBpolicy.
Pricing of FCEB:
AtthetimeofissuanceofFCEBtheexchangepriceoftheofferedlistedequitysharesshall
notbelessthanthehigherofthefollowingtwo:

30

1. Theaverageoftheweeklyhighandlowoftheclosingpricesofthesharesof
theofferedcompanyquotedonthestockexchangeduringthesixmonths
precedingtherelevantdate
2. Theaverageoftheweeklyhighandlowoftheclosingpricesofthesharesof
theofferedcompanyquotedonastockexchangeduringthetwoweek
precedingtherelevantdate.

Average Maturity:
MinimummaturityofFCEBshallbefiveyears.Theexchangeoptioncanbeexercisedatany
timebeforeredemption.Whileexercisingtheexchangeoption,theholderoftheFCEBshall
takedeliveryoftheofferedshares.CashsettlementofFCEBshallnotbepermissible.
Parking of FCEB proceeds abroad:
TheproceedsofFCEBmayberetainedand/ordeployedoverseasbytheissuing/promoter
groupcompaniesinaccordancewiththepolicyfortheECBorrepatriatedtoIndiaforcredit
totheborrowersRupeeaccountswithADCategoryIbanksinIndiapendingutilizationfor
permissibleenduses.Itshallbetheresponsibilityoftheissuingcompanytoensurethatthe
proceedsofFCEBareusedbythepromotergroupcompanyonlyforthepermittedenduses
prescribedundertheECBpolicy.Theissuingcompanyshouldalsosubmitaudittrailofthe
enduseoftheproceedsbytheissuingcompany/promotergroupcompaniestotheReserve
BankdulycertifiedbythedesignatedADbank.
Operational Procedure:
IssuanceofFCEBshallrequirepriorapprovaloftheReserveBankundertheApproval
Route.TheReportingarrangementforFCEBshallbeaspertheextantECBpolicy.

Structured obligation
BorrowingandlendinginIndianRupeesbetweentworesidentsdoesnotattractany
provisionsoftheForeignExchangeManagementAct,1999.IncaseswhereaRupeeloanis
grantedagainsttheguaranteeprovidedbyanonresident,thereisnotransactioninvolving

31

foreignexchangeuntiltheguaranteeisinvokedandthenonresidentguarantorisrequiredto
meettheliabilityundertheguarantee.Thenonresidentguarantormaydischargetheliability
by
i)

PaymentoutofrupeebalancesheldinIndiaor

ii)

ByremittingthefundstoIndiaor

iii)

BydebittohisFCNR(B)/NREaccountmaintainedwithanADbankinIndia.
Insuchcases,thenonresidentguarantormayenforcehisclaimagainstthe
residentborrowertorecovertheamountandonrecoveryhemayseek
repatriationoftheamountiftheliabilityisdischargedeitherbyinward
remittanceorbydebittoFCNR(B)/NREaccount.

However,incasetheliabilityisdischargedbypaymentoutofRupeebalances,theamount
recoveredcanbecreditedtotheNROaccountofthenonresidentguarantor.

Takeout finance
Keepinginviewthespecialfundingneedsoftheinfrastructuresector,aschemeof
takeoutfinancehasbeenputinplace.Accordingly,takeoutfinancingarrangementthrough
ECB,undertheapprovalroute,hasbeenpermittedforrefinancingofRupeeloansavailedof
fromthedomesticbanksbyeligibleborrowersintheseaportandairport,roadsincluding
bridgesandpowersectorsforthedevelopmentofnewprojects,subjecttothefollowing
conditions:
a. Thecorporatedevelopingtheinfrastructureprojectshouldhaveatripartiteagreement
withdomesticbanksandoverseasrecognizedlendersforeitheraconditionalor
unconditionaltakeoutoftheloanwithinthreeyearsofthescheduledCommercial
OperationDate(COD).Thescheduleddateofoccurrenceofthetakeoutshouldbe
clearlymentionedintheagreement.
b. Theloanshouldhaveaminimumaveragematurityperiodofsevenyears.
c. Thedomesticbankfinancingtheinfrastructureprojectshouldcomplywiththe
prudentialnormsrelatingtotakeoutfinancing.

32

d. Thefeepayable,ifany,totheoverseaslenderuntilthetakeoutshallnotexceed100
bpsperannum.
e. Ontakeout,theresidualloanagreedtobetakenoutbytheoverseaslenderwouldbe
consideredasECBandtheloanshouldbedesignatedinaconvertibleforeign
currencyandalltheextantnormsrelatingtoECBshouldbecompliedwith.
f. Domesticbanks/FinancialInstitutionswillnotbepermittedtoguaranteethetakeout
finance.
g. Thedomesticbankwillnotbeallowedtocarryanyobligationonitsbalancesheet
aftertheoccurrenceofthetakeoutevent.
h. ReportingarrangementasprescribedundertheECBpolicyshouldbeadhered.
SuchECBshouldnotberaisedfromoverseasbranches/subsidiariesofIndianbanks.

Conversion of ECB into equity

Conditions required to convert ECB into Equity
TheactivityofthecompanyiscoveredundertheAutomaticRouteforForeignDirect
InvestmentorGovernment(FIPB)approvalforforeignequityparticipationhasbeen
obtainedbythecompany
Theforeignequityholdingaftersuchconversionofdebtintoequityiswithinthe
sectorcap
PricingofsharesisasperthepricingguidelinesissuedunderFEMA,1999inthecase
oflisted/unlistedcompanies.
ConversionofECBandLumpsumFee/RoyaltyintoEquity:IncasetheECB
liability,denominatedinforeigncurrencyand/orimportofcapitalgoods,etc.is
soughttobeconvertedbythecompany,itwillbeinordertoapplytheexchangerate
prevailingonthedateoftheagreementbetweenthepartiesconcernedforsuch
conversion.
ConversionofECBmaybereportedtotheReserveBankasfollows:
Incaseofpartial
conversionofoutstandingECBintoequity,borrowersarerequiredtoreporttheconverted

33

portiontotheRegionalOfficeconcernedclearlydifferentiatingtheconvertedportionfrom
theunconvertedportion.

Compliance with ECB guidelines

TheprimaryresponsibilitytoensurethatECBraised/utilizedareinconformitywith
theECBguidelinesandtheReserveBankregulations/directionsisthatoftheborrower
concernedandanycontraventionoftheECBguidelineswillbeviewedseriouslyandwill
invitepenalactionunderFEMA1999.ThedesignatedADbankisalsorequiredtoensure
thatraising/utilizationofECBisincompliancewithECBguidelinesatthetimeof
certification.

Guidelines on Imports & Exports of goods & services

Realization and Repartition of Export Proceeds
Itisobligatoryonthepartoftheexportertorealizeandrepatriatefullvalueofgoodsor
softwaretoIndiawithinastipulatedperiodasunder:

34


Foreign Currency Account
1. Participantsininternationalexhibition/tradefailhavebeenpermittedtoopen
temporaryforeigncurrencyaccountabroadforcreditofforeignexchangeobtainedby
saleofgoodsatthefairandoperatetheaccountduringtheirstayoutsideIndia.The
balanceintheaccountisrequiredtoberepatriatedtoIndiawithinonemonthfromthe
dateofclosureoftheexhibition/tradefair.
2. AnIndianentitycanalsoopen,holdandmaintainaforeigncurrencyaccountwitha
bankoutsideIndiaforthenormalbusinessoperationsofitsoverseasoffice/branch.
3. AunitlocatedinaSpecialEconomicZone(SEZ)mayopen,holdandmaintaina
ForeignCurrencyAccountwithbank(AD)inIndiasubjecttocertainconditions.
4. ApersonresidentinIndiabeingaproject/serviceexportermayopen,holdand
maintainforeigncurrencyaccountwithabankoutsideorinIndia,subjecttothe
standardtermsandconditions.

35

Diamond Dollar Account

Firms/companiesengagedinpurchaseandsaleofroughorcutandpolished
diamonds/preciousmetaljewellery,etc.andhavinganaverageannualturnoverofRs.3crore
oraboveduringtheprecedingthreelicensingyears(ApriltoMarch)arepermittedto
open/transacttheirbusinessthroughDiamondDollarAccount.Thenumberofsuchaccounts
isrestrictedtonotmorethan5accountstoasingleentity.
Exchange Earners Foreign Currency (EEFC) Account
AnIndianresidentispermittedtoopenwithbank(AD)ExchangeEarnersForeign
Currency(EEFC)Accountforcreditofhisforeignexchangeearningstotheextentof
100%.EEFCisallowedintheformofnoninterestbearingcurrentaccount.No
creditfacilities(fundornonfund)arepermittedagainstthesecurityheldinthe
account.
EligiblecreditinEEFCaccountincludeinwardremittancethroughnormalbanking
channelotherthanreceivedpursuanttoanyundertakinggiventoRBIorwhich
representforeigncurrencyloanraisedorinvestmentreceivedfromoutsideIndiaor
thosereceivedformeetingspecificobligationsbytheaccountholderandpayments
receivedinforeignexchangebyaunitinDomesticTariffArea(DTA)forsupplying
goodstoaunitinSEZoutofitsforeigncurrencyaccount.
Banksmaypermittheirexporterconstituentstoextendtraderelatedloans/advances
tooverseasimportersoutoftheirEEFCbalanceswithoutanyceiling.
Banksmaypermitexporterstorepaypackingcreditadvanceswhetheravailedin
RupeeorinforeigncurrencyfrombalancesintheirEEFCaccountand/orRupee
resourcestotheextentexportshaveactuallytakenplace.
Setting up of offices abroad and acquisition of immovable property for the purpose
Banksmaypermitremittancetowardsinitialexpensesforsettingupoftheofficeto
theextentoffifteenpercentoftheaverageannualsales/incomeorturnoverduring
thelasttwofinancialyearsoruptotwentyfivepercentofthenetworth,whichever
ishigher.
36

 Forrecurringexpenses,remittancesuptotenpercentoftheaverageannual
sales/incomeorturnoverduringthelasttwofinancialyearsispermittedfornormal
businessoperationsoftheoffice(trading/nontrading)/branchorrepresentative
officeoutsideIndiasubjecttosometermsandconditions.
Remittanceswithintheabovelimitsforinitialandrecurringexpensescanbe
permittedtoacquireimmovablepropertyoutsideIndiaforitsbusinessandfor
residentialpurposeofitsstaff.
Theoverseasoffice/branchofsoftwareexportercompany/firmmayrepatriateto
India100%ofthecontractvalueofeachoffsitecontract.

Advance Payments against Exports

Foradvancepaymentagainstexportreceived,theexporterissupposedtoeffectthe
shipmentofgoodswithinoneyearfromthedateofreceiptoftheadvance.Therateof
interest,ifany,payableontheadvanceshouldnotexceedLIBOR+100bps.Incase
oftheexportersinabilitytomaketheshipmentpartlyorfullywithinoneyearfrom
thedateofreceiptofadvancepayment,noremittancetowardsrefundofunutilized
portionofadvancepaymentortowardspaymentofinterestshallbemadeafterthe
expiryofthesaidperiodofoneyear,withoutthepriorapprovaloftheRBI.Incase
theexportorderprovidesforshipmentofgoodsextendingbeyondoneyearfromthe
dateofreceiptoftheadvancepayment,priorapprovaloftheRBIisrequiredtobe
obtainedbytheexporter.Refundmaybemadebythebankbyutilizingthebalance
availableinEEFCaccountwheretheadvancepaymentiscreditedorpurchaseof
foreignexchangefromthemarket.
GR Approval for Trade Fair/Exhibitions abroad
BanksarepermittedtoapproveGRformsofexportitemsfordisplayordisplaycum
saleintradefairs/exhibitionsoutsideIndiasubjecttocertainconditionsincluding

37

productionofrelativeBillofEntryforimportoftheunsolditemsorrepatriationof
thesaleproceedstoIndiainaccordancewiththeFEMAguidelines,etc.
GR approval for Export of Goods for re-imports
BankscangrantGRapprovalforgoodsbeingexportedforreimportafterrepairs/
maintenance/testing/calibration,etc.,subjecttotheconditionthattheexportershall
producerelativeBillofEntrywithinonemonthofreimportoftheexporteditem
fromIndia.
Wherethegoodsbeingexportedfortestingaredestroyedduringtesting,banksmay
obtainacertificateissuedbythetestingagencythatthegoodshavebeendestroyed
duringtesting,inlieuofBillofEntryforimport.
Consignment Exports
Whileforwardingshippingdocumentstooverseasbranch/correspondentinrespectof
exportofgoodsonconsignmentbasis,theymaybedirectedtodeliver
thedocumentsagainsttrustreceipt/undertakingtodeliverthesaleproceedsbya
specifieddatewithintheperiodprescribedforrealizationofthesaleproceedsofthe
export.
Theagents/consigneesmaydeductfromsaleproceedsofthegoodsexpenses
normallyincurredtowardsreceipt,storageandsaleofthegoods,suchaslanding
charges,warehouserent,handlingcharges,etc.andremitthenetproceedstothe
exporter.
Opening / Hiring of Ware houses abroad
Banksmaygrantpermissiontoexportersforopening/hiringwarehousesabroad
subjecttothecomplianceofcertainconditionsincludingtheapplicantsexport
outstandingdoesnotexceed5%ofexportsmadeduringthepreviousyear,minimum
exportturnoverofUSD0.10Mn.,etc.Thepermissionmaybegrantedinitiallyfora
periodofoneyearandthesamemaybeextendedsubjecttocomplianceofthe
conditionssetthereagainst.
38

Direct dispatch of documents by the exporter

Banksmaydispatchshippingdocumentsdirecttotheconsigneesortheiragents
residentinthecountryoffinaldestinationofgoodsincaseswhereadvancepayment
oranirrevocableletterofcredithasbeenreceivedforfullvalueoftheexportandthe
exporterbeingaregularcustomerhavingsatisfactorybusinessdealingwiththebank,
etc.
Banksmayalsopermit`StatusHolderExportersandunitsinSEZtodispatchthe
exportdocumentstotheconsigneesoutsideIndiasubjecttotheconditionthatthe
exportproceedsarerepatriatedthroughtheADbanksnamedintheGRFormandthe
duplicatecopyoftheGRformissubmittedtothebanksformonitoringpurposesby
theexporterswithin21daysfromthedateofshipmentofexport.
Banksmayregularizecasesofdispatchofshippingdocumentsbytheexporterdirect
totheconsigneeorhisagentresidentinthecountryofthefinaldestinationofgoods,
uptoUSD1Mn.oritsequivalent,perexportshipmentprovidedtheexportproceeds
havebeenrealizedinfull,theexporterisaregularcustomerofthebankforaperiod
ofatleastsixmonths,theaccountisafullycompliantwithKYC/AMLguidelines,
etc.
Incaseofdoubt,bankmayconsiderfilingSuspiciousTransactionReport(STR)with
FIU_IND(FinancialIntelligenceUnitinIndia).
Short shipment and shut out shipments
ShortshipmentinrespectofshipmentcoveredinGRformalreadyfiledwith
Customs,theexporterisrequiredtogivenoticetoCustomsaboutthesameandin
caseofanydelayinobtainingthecertifiedshortshipmentfromtheCustoms,an
undertakingisrequiredtobefurnishedtothebank.
Incasetheshipmentisentirelyshutoutandthereisdelayinreship,theexporteris
requiredtogivenoticeinduplicatetoCustomsandforwardtheduplicatecopytoRBI
togetherwithunusedduplicatecopyoftheGRform.

39

Counter-Trade Arrangement
CountertradeinvolvesadjustmentofvalueofgoodsimportedintoIndiaagainst
valueofgoodsexportedfromIndiaintermsofanarrangementvoluntarilyentered
intobetweentheIndianpartyandtheoverseaspartythroughanEscrowAccount
openedinIndiainUSDprovided:
a)Allimportsandexportsunderthearrangementshouldbeatinternationalpricesin
conformitywiththeFTPandFEMAandtheRulesandRegulationsmadethere
under.
b)NointerestwillbepayableonbalancesstandingtothecreditoftheEscrow
Accountbutthefundstemporarilyrenderedsurplusmaybeheldinashortterm
deposituptoatotalperiodofthreemonthsinayear(i.e.,inablockof12months)
andthebanksmaypayinterestattheapplicablerate.
c)Nofundbased/ornonfundbasedfacilitieswouldbepermittedagainstthe
balancesintheEscrowAccount.
d)ApplicationforpermissionforopeninganEscrowAccountmaybemadebythe
overseasexporter/organizationthroughhis/theirbanktotheRegionalOffice
concernedoftheReserveBank.
Export of Goods on Lease, Hire, etc
PriorapprovalofRBIisrequiredforexportofmachinery,equipment,etc.,onlease,
hirebasisunderagreementwiththeoverseaslesseeagainstcollectionoflease
rentals/hirechargesandultimatereimport.
Export of goods by Special Economic Zones (SEZs)
UnitsinSEZsarepermittedtoundertakejobworkabroadandexportgoodsfromthat
countryitselfsubjecttotheconditionsthatprocessing/manufacturingchargesare
suitablyloadedintheexportpriceandarebornebytheultimatebuyerandthe

40

exporterhasmadesatisfactoryarrangementsforrealizationoffullexportproceeds
subjecttotheusualGRprocedure.
Project Exports and Service Exports
Exportofengineeringgoodsondeferredpaymenttermsandexecutionofturnkey
projectsandcivilconstructioncontractsabroadarecollectivelyreferredtoasProject
Exports.

Inordertoprovidegreaterflexibilitytoprojectexportersandexportersofservicesin
conductingtheiroverseastransactions,certainguidelinesintheMemorandumof
InstructionsonProjectandServiceExports(PEM)havebeenmodified.
Project/Serviceexportershavealsobeenextendedthefacilityofdeploymentof
temporarycashbalanceassetouthereunder
InterProjectTransferofMachinery
Exportersarepermittedtousethe
machinery/equipmentforperforminganyothercontractsecuredbythemin
anycountrysubjecttothesatisfactionofthesponsoringbank(s)/EXIMBank
/WorkingGroup.
InterProjectTransferofFunds
Bank(s)/EXIMBank/WorkingGroupmay
permitexporterstoopen,maintainandoperateoneormoreforeigncurrency
account/sinacurrency/iesoftheirchoicewithinterprojecttransferabilityof
fundsinanycurrencyorcountry.
DeploymentofTemporaryCashSurpluses
Project/Serviceexportersmay
deploytheirtemporarycashsurpluses,generatedoutsideIndia,inthe
permissible/approvedinstruments/products,subjecttomonitoringbythe
bank(s)/EXIMBank/WorkingGroup.Theyshould,however,repatriatethe
profitsofonsitecontractsaftercompletionofthecontracts.

41

Export of Currency
ExportofIndiancurrencyofvalueexceedingRs.7,500/,excepttotheextent
permittedunderanygeneralpermissiongrantedundertheRegulations,willrequire
priorpermissionofRBI.
Forfeiting
EXIMBankandbankshavebeenpermittedtoundertakeforfeitingforfinancingof
exportreceivables.
Exports to neighboring countries by Road, Rail or River
TheprocedureforexporttoneighboringcountriesbyRoad,RailorRiverinvolves
productionoftheformofexportpresentedbytheexportertotheCustomsatthe
borderthroughwhichthevesselorvehiclehastopassbeforecrossingovertothe
foreignterritory.
Forexportsbyrail,Customstaffisposted/availableatcertainrailwaystationto
collecttheGR/SDFformsforgoodsloadedatthesestationssothatthegoodsmay
movestraightontotheforeigncountrywithoutfurtherformalitiesattheborder.
Border Trade with Myanmar
TradewithMyanmarcanbecarriedouteitheronbartertradearrangementorinfreely
convertiblecurrencyaspertheAgreementonBorderTradebetweenIndiaand
Myanmar.
Operational guidelines for banks
Detailedprocedurefordisposalofexportdeclarationformsviz.GRForms,SDF,PP
Forms,&SOFTEXformsalongwithchecklistforscrutinyoftheformsaregivenin
theRBIMasterCircular.Presentationofexportdocumentsbytheexportersafterthe
prescribedperiodof21daysfromthedateofexport,bankscanhandlethemwithout
priorapprovalofRBIprovidedtheyaresatisfiedwiththereasonsforthedelay.Other
guidelines
42

 BanksneednotreturntheduplicatecopiesofGR/SDF/PPformsandshipping
documentsoncesubmittedfornegotiation,collection,etc.byexporters,exceptfor
rectificationoferrorsandresubmission.
BanksmaydeliveronenegotiablecopyoftheBillofLadingtotheMasterofthe
carryingvesselortraderepresentativeforexportstocertainlandlockedcountriesif
theshipmentiscoveredbyanirrevocableletterofcreditandthedocumentsconform
strictlytothetermsoftheLetterofCreditwhich,interalia,providesforsuch
delivery.
BanksarerequiredtomaintainExportBillsRegister,inphysicalorelectronicform
withdetailsofGR/SDF/PP/SOFTEXformnumber,duedateofpayment,the
fortnightlyperiodofRSupplementaryReturnwithwhichtheENCstatement
coveringthetransactionsenttoRBI,etc.
Banksaresupposedtocloselymonitortherealizationofbillsandincaseswherebills
remainoutstanding,beyondtheduedateforpaymentor12monthsfromthedateof
export,themattershouldbepromptlytakenupwiththeconcernedexporter.Incaseof
failuretodelivertheproceedswith12monthsorseekextensionoftimebeyond12
months,thematterneedstobereportedtotheRBI.
Banksarerequiredtofollowupexportoutstandingwithexporterssystematicallyand
vigorouslysothatactionagainstdefaultingexportersdoesnotgetdelayed.Anylaxity
inthefollowupofrealizationofexportproceedsbybankswillbeviewedseriously
bytheReserveBank,leadingtotheinvocationofthepenalprovisionunderFEMA,
1999.
RBIpriorapprovalisnotrequiredif,aftergoodshavebeenshipped,theyaretobe
transferredtoabuyerotherthantheoriginalbuyerintheeventofdefaultbythelatter
providedthereductioninvalue,ifany,involveddoesnotexceed25%oftheinvoice
valueandtherealizationofexportproceedsisnotdelayedbeyondtheperiodof12
monthsfromthedateofexport.
Allexporters(otherthanStatusHolderexporters)havebeenallowedtowriteoff
(includingreductionininvoicevalue)outstandingexportduesandextendthe
prescribedperiodofrealizationbeyond12monthsorfurtherperiodasapplicable,
43

providedtheaggregatevalueofsuchexportbillswrittenoffandbillsextendedfor
realizationdoesnotexceed10%oftheexportproceedsdueduringthefinancialyear
andsuchexportbillsarenotasubjecttoinvestigationbyanyInvestigatingAgencies.
RBIhaspermittedthebankstoextendtheperiodofrealizationofexportproceeds
beyond12monthsfromthedateofexportuptosixmonths,atatimeirrespectiveof
theinvoicevalueoftheexportsubjecttocomplianceofcertainconditions.
WhenshipmentsfromIndiaforwhichpaymenthasnotbeenreceivedeitherby
negotiationofbillsunderlettersofcreditorotherwisearelostintransit,banksmust
ensurethatinsuranceclaimismadeassoonasthelossisknown.Incaseswherethe
claimispayableabroad,thebanksarerequiredtoarrangetocollectthefullamountof
claimdueonthelostshipment,throughthemediumoftheiroverseas
branch/correspondentandreleasetheduplicatecopyofGR/SDF/PPformonlyafter
theamounthasbeencollected.
Banksmayallowpaymentofcommission,eitherbyremittanceorbydeductionfrom
invoicevalue,onapplicationsubmittedbytheexportersubjecttocomplianceof
certainconditions.
Banks,throughwhomtheexportproceedswereoriginallyrealizedmayconsider
requestsforrefundofexportproceedsofgoodsexportedfromIndiaandbeing
reimportedintoIndiaonaccountofpoorqualityuponexercisingduediligence
regardingthetrackrecordoftheexporteranduponsatisfyingthebonafideofthe
transaction,etc.
BanksmayapproveGR/SDF/PPformsofexporterswhohavebeenplacedoncaution
listiftheyproduceevidenceofhavingreceivedanadvancepaymentoranirrevocable
letterofcreditintheirfavourcoveringthefullvalueoftheproposedexports.
BanksarerequiredtoobtainpriorapprovalofRBIforissuingguaranteesfor
cautionlistedexporters.
TransactionswhichareprohibitedforremittanceislistedoutintheRBICircularby
wayofannexure.

44

Comparison to other national laws

BrazilAsthebiggesteconomyinSouthAmerica,itisonecountrywhoseglobal
economicsignificancecannotbeoverlooked.Itisamajorexporterofenergyaswell
asagriculturalproductsintheworldmarket.Also,drivingthiscountrieseconomic
surgeforwardisitsvibrantmanufacturingandtourismsectorthatisexpectedto
continuegrowing.
RussiaItisamajorexporterofoilcommoditiesandhasmadegiantstridesin
establishingafreemarketsystem.Inthepastdecade,theGDPofRussiaincreased
significantlymakingitamongtheworldstopteneconomiestoday.
IndiaIndiaseconomyismainlydrivenbythebilliondollarmanufacturingsector
andtheservicesindustriesinrecenttime.ThehugeworkforceinIndiaishighly
educated,makingitanattractivemarketforinvestors.
ChinaThisisthemanufacturingcapitaloftheworld.ItisthelargestBRICSmember
notonlybyGDPbutalsobypopulation.Thishasmadeitanattractivedestinationfor
westernmultinationalsseekinghighlyskilled,cheapandlargelaborforce.
SouthAfricaAfricasbiggesteconomyisalsopoisedtobeamajorglobaleconomic
powerhouseinthecomingdecades.Withvibrantmining,agriculturalandtourism
industriesitisamajorplayeringlobaltrade

CHINA
PBOCandState
Administrationof
ForeignExchange's
(
SAFE
)asregulatory
authorities

RUSSIA
CentralBankofthe
RussianFederation
(CBR).

BRAZIL
BancoCentraldo
Brasil(BCB)and
NationalMonetary
Council(CMN).

SOUTH
ARICA
SouthAfrican
ReserveBank
(SARB)and
financialsector
conducting
authority
45

Itisamanagedfloating
(flexibleexchange
rate)currencyregime.

Itisamanaged
floating(flexible
exchange
rate)currencyregime.
TotalFDIinflowasof TotalFDIinflowas
2014
of2014
347,848,740,397
20,957,656,036

Itisafreefloating
(fixedexchange
rate)currencyregime.
TotalFDIinflowas
of2014
96,851,173,598

Itisafree
floating(fixed
exchangerate)
Currencyregime.
TotalFDIinflow
asof2014
5,740,650,679

Capital Account
Anationalaccountthatshowsthenetchangeinassetownershipofanation.Thecapitalaccount
isthenetresultofpublicandprivateinternationalinvestmentsflowinginandoutofacountry

Capitalaccountconvertibilitymeansthefreedomtoconvertrupeesintoforeigncurrencyand
backforcapitaltransactions.Indiahascurrentaccountconvertibilitybutnotcapitalaccount
convertibility.
Whatscapitala/cconvertibility

Freedomtoconvertlocalfinancialassetsinto
foreignonesatmarketdeterminedexchange
rates

Leadstofreeexchangeofcurrencyatlower
ratesandanunrestrictedmobilityofcapital

Beneficialforacountrybecauseinflowof
foreigninvestmentincreases

Theflipside,though,isthatitcould
destabiliseaneconomyduetomassive
capitalflowsinandoutofthecountry

Indiasexternalsectorwasvulnerabletillrecently,withthecurrentaccountdeficitabovethe
comfortlevelof2.5percentofthegrossdomesticproduct.Itwas4.2percentofgross
domesticproduct(GDP)in201112androseto4.7percentin201213.Afterseverecurbs,

46

includingrestrictionsonimportofpreciousmetals,thedeficitfellto1.7percentin201314.
In201415,itcontinuedtostaylow,withthethirdquartershowingadeficitof1.6percent.
Thefiscalsituationremainsfragile.Theturningpointwasin2007,theyearoftheglobal
financialcrisis.Thefiscaldeficitofthecentralgovernmenthasbeen4.66.5percentinthe
pastsixyears,beforefallingto4.1percentin201314.Thegovernmentiscommittedto
keepingthefiscaldeficitlowandthetargetof3.9percenthasbeenretainedforthisyear.
Thedeficittargetwillbeprogressivelyreducedto3.5andthreepercentin201617and
201718,respectively.

Case Study

FlipkartGuiltyOfFEMAViolations,EvidenceFound,1000Cr
ShowcauseNoticeIssued

Finally,EnforcementDirectorateseemstohavehituponhardevidenceshowingthatIndias
posterboyEcommercecompany,Flipkart,beingguiltyofviolatingFEMA(Foreign
ExchangeManagementAct).
AccordingtoET,whohavequotedunidentifiedsources,theviolationsareinregardsto
FlipkartsholdingcompanyWSRetail,whohadinvestmentsfromforeignfirms.
ThecurrentFDInormsdonotallowmultibrandretailecommercecompaniestosellproducts
onlinedirectlytoconsumers.While,Flipkartcurrentlyhasamarketplacemodel,whichis
legitimate,theviolationsbeingslappedonthemareforpre2013timeline,whentheyhadnot
pivotedtoamarketplacemodel.

EThasquotedthesourcesassaying,Weareawareofthechangeintheirbusinessmodel.
ButwewillchargeFlipkartforviolationstill2013.AsperFEMA,ifanypartyhasbeen
foundguiltyofbreakingtheFDInorms,theycanslapapenaltyupto3timesthe
contraventionorforforeigninvestmentsreceivedbythecompany(Flipkartinthiscase).
However,maximumfinesarerarelyimposedandtheyarecalculatedoncasebycasebasis
andlargelydependsontheinvestigator.
47

IfyouseethechartbelowwhichdetailsoutFlipkarts8roundsoffunding,theyhadreceived
approximately180millionfromTigerGlobal,NaspersandICONIQcapital.Thelatter2
investmentfirmscouldbetermedasforeigninvestors.
Thisisnotthefirsttime,suchareporthascomeout.InMay,EThad
reportedsimilarnews
,
wheretheyhadsaidthatRs.1400croremaybeslappedasFineonFlipkart.Flipkart
investigationsfirststartedin2012whenAnandSharma,thethencommerce&industry
minister,informedtheParliamentaboutEDsscanneronFlipkart.
FlipkartisnottheonlycompanywhoareunderEDscanner,
evenMyntra
(andfewothertop
Indianecommercesites)havebeenundertheirlensforsimilarFEMAviolations.
Readersshouldkeepinmindthatthisnewsisstillinrumorstageandthereisnoofficial
confirmation.Everycoupleofmonthssuchreportscomeout,howevernothingconcreteand
officialhasbeenreportedasyet.
Round

WhoFunded

Date

Amount

FirstRound

AccelIndia

2009

USD1Million

SecondRound

TigerGlobal

2010

USD10Million

ThirdRound

TigerGlobal

June2011

USD20Million

FourthRound

Naspers/ICONIQCapital

August2012

USD150Million

FifthRound

Naspers,AccelPartners,Tiger

July2013

USD200Million

Oct2013

USD160Million

May2014

USD210Million

Global,andICONIQCapital
SixthRound

DragoneerInvestmentGroup,
MorganStanleyInvestment
Management,Sofinaand
VulcanCapital,TigerGlobal

SeventhRound

DSTGlobal

48

EighthRound

TigerGlobal,DSTGlobal,Accel July2014

USD1000Million

Partners(plusothernew
investors)

Total

USD1751Million

Current events
India's forex reserve dips for 2nd week straight - 11/9/2015
India'sforeignexchangereserve(forex)dippedby$2.9billionintheweekto$349billion,as
ReserveBankofIndia(RBI)wassellingdollarstopreventrupee'ssharpdevaluation.RBI
hassold$6.3billionintheprevioustwoweeks.ThedevaluationofYuanraisedthedollar
demandglobally,includingIndia,whichweakenedtherupee.OneUSDpresentlyequalsRs
66.39.

Current Account Deficit narrows to 1.2% of GDP 11/9/2015

India'sCurrentAccountDeficitnarrowedto1.2%ofitsGrossDomesticProduct($6.2
billion)inQuarter1ofthecurrentfiscalyear,comparedto1.6%inthesamequarterayear
ago.However,theCADrosesubstantiallyquarteronquarter,whencomparedtotheprevious
quarter's$1.3billion(0.2%ofGDP).AnalystsatratingsagencyCRISILpredictedtheCAD
wouldnarrowfurther.

DNA Reports: January 7th

2015
TheEnforcementDirectorate(ED)hasunearthedamegascamoffraudulentforeign
remittancesworthRs15,000crore,involvinganumberofdubiousimporters.Thescam
involvesimportersdepositingfakebillsofentries(ofimports)inbanksandremittancesare
madetounknownpeopleoutsideIndia."WeareinvestigatingthecaseundertheForeign
ExchangeManagementAct(FEMA),"atopEDofficialtolddna.SixleadingbanksICICI
Bank,IndusIndBank,INGVysya,YESBank,KotakMahindraBankandBankofIndia
werehitbythescam."OutoftheRs15,000croreoffakebillentries,wehavesofar
establishedaroundRs4,000crore.WehaveaskedbankstolodgeFIRsagainstallthese
49

importersandthebankshaveagreed.Thetransactionhappenedfrom2011tillMay2014,"a
seniorEDofficial,whoisinvestigatingthecasetolddna.Mostbankschosenottorespondto
dna'srepeatedqueries.
Whatwasthemodusoperandi?
AsperEDsources,dubiousimporterssubmittedforgedbillsofentryandotherimport
documentstobankswiththeintenttofraudulentlyremitforeignexchange."Multiple
duplicatesofeachbillofentryweremadeandsubmittedtodifferentbankstoshow
legitimateimportsandtoillegitimatelyremithugeforeignexchangeoutsideIndia,"said
sourcesclosetoED.
WhoaretheimportersunderED'snet?
KanikaGems,CharbhujaDiamonds,SambhavExports,KeshavImpex,PulkitImpexand
YogeshwarDiamonds,amongothers."Weareprobingtheimporters'backgroundand
checkingwithbanksifduediligenceandKYCweredoneproperly.Thesefakebillsofimport
mighthavebeenusedforgoldsmuggling,"aseniorofficialtolddna.
Isblackmoneyinvolvedhere?
"Byusingthesedubiousentities,blackmoneyinthecountryissentabroad,especiallytotax
havenslikeMauritius,BritishVirginIslandsandCaymanIslandswithoutpayinganytax,an
IncomeTaxofficialtolddna.Acoupleofdaysback,aspecialteamofEDofficialssearched
aregionalbranchofficeofUcoBankinMumbaiandChandigarhandrecordedthestatements
oftopofficials.Sofar,ithasbeenfoundthatnoduediligenceorKYChasbeencarriedoutin
theadvanceremittanceprocessofexports,saidoneEDofficial.
What'sthetotalworthoffakebills?
INGVysyaBankhasmade735fakeimportremittancesworth$264.3millionwhileKotak
MahindraBankmade734fakeremittancesworth$187.9million.dnahascopiesoffake
entriesmadeinbanks.IndusIndBankmade275fakeentriesworth$88.2million,andICICI
Bankreported91wortharound$36.4million.

50

Arebankofficialsalsoinvolvedinthefraud?
BankofficialsarealreadyunderEDscanner."Banksaresupposedtosharedetailsof
suspicioustransactiontoFIU(FinancialIntelligenceUnit).Butthey(banks)havenotdone
so.Weareinvestigatingifitisjustnegligenceorpartofconspiracybybankofficials,"said
ED.
WhatdoesEDsuspect?
"Primafacie,thereisclearnegligencebysomebankofficialswhiledealingwiththese
suspiciousimporters.Wesuspectcollusion.Oncewegetstrongevidencesagainstthese
officials,thecasedetailswillbehandedovertotheCentralBureauofInvestigation(CBI)for
furtheraction,"thesourcesaid.
What'stheEDadvicetobanks?
Facedwithasurgeintradebasedmoneylaunderingandhawalascams,especiallyin
Mumbai,DelhiandGujarat,theEDhadalertedbanksandaskedthemtobemorevigilant
whiletransferringlargefunds,asreportedbydnaonNovember20,2014.Thedirectoratehad
askedbankstoplugloopholesandcheckthegrowingmenaceinameetingattendedbytop
complianceofficersandMoneyLaunderingReportingOfficersofbanks.

51

Indian Express Reports June 3rd

2012
InUPAssummerofdiscontent,itcontinuestorainscams.TheCentralBureauof
Investigation(CBI)hadunearthedahugeforexderivativesscam,peggedatRs32,000crore
whichhasbeenconvenientlybrushedunderthecarpetbythegovernmentforthreeyears.On
January4,2012,ParliamentsPublicAccountsCommittee(PAC)hadsentaremindertothe
MinistryofFinance,seekinganexplanationontheallegedscaminsellingforexderivatives
toIndiancompanies.Theministryhasfailedtorespondsofar.InaletterdatedSeptember29,
2011,theDepartmentofFinancialServices,MinistryofFinance,whileforwardingtheviews
ofReserveBankofIndiaandIndianBanksAssociation,hadrespondedtoaPACquestionon
actiontakentorecoverthehugelossesbysaying:Thespecificactiondoesnotcomeunder
thepurviewoftheReserveBankofIndia.SourcessaythePAC,whichadmittedaprivate
complaintinpublicinteresttoinvestigatethemassivescam,wasnotsatisfiedwiththe
responseandaskedMinistryofFinancetofileanactiontakenreport.
Thestorybeginsin2008,when19banksviolatedRBIandForeignExchangeManagement
Act(FEMA)guidelinesandsoldengineeredforexderivativestoIndiancorporates,which
resultedinhugelossestoIndianinvestorsandallegedgainstoforeignbasedbanks.After
almostthreeyears,theRBIimposedameagretotalpenaltyofRs1.9croreonthebanks.
DocumentsaccessedbyExpressrevealadeliberatedelaybythegovernmentinlaunchinga
probeintothisscam.
TheinvestigatingagenciesallegethatRBIofficials,workingintandemwithunknown
foreignentitiesandIndianbanks,madeintentionalprojectionsindicatingthattherupee
wouldstrengthenagainstthedollar.

Deccan Chronicle Reports July 31st

2013

TheCBIislookingintothebiggestforeignexchangescaminrecenttime,involving
outflowofUS$7.7billion,manipulatedbyforeignfinancialinstitutionsthroughgree
dy
Indiandealers(ba
nksauthorisedtodealinforeignexch
ange).Thedollardrainhascausedthe
presentru
p
eetumblewhileredu
cingseveralhighperformingbusinesshou
s
esintonear
paupers.
52

Around400500exporters/importershavebeenhitacrossthecountry.Theaftershocksof
these200708operationsarestillbeingfeltinoureconomyasthishasbeenoneofthe
reasonsforthesteepslideoftheIndianrupee.ThehugedrainoutoftheUSdollarfromIndia
hadpushedupthedemandforthedollarandtheconsequentfalloftherupee,saida
financialexpertrequestinganonymity.
Over20bankshavebeenidentifiedasculprits,sellingforexderivates(toprotectthe
importer/exporterfromtheriskofforeigncurrencyratefluctuations)toIndiancompanies
afterengineeringthemtobringgainstoforeignbankswhilecausinghugelossestothe
greedyIndianbanks,whichinturnpassedthemontothecustomers.
Interestingly,theStateBankofIndia,whichshouldbearolemodelforallIndianbanks,
figuresinthelistof19banksfinedbytheRBIinApril2011formissellingderivatesin
contraventionofRBIguidelines.SBIpaiduptheRs10lakhpenaltywithoutmurmur.
Thefateofhundredsofhighperformingimporters/exportersacrossthecountryhangsonthe
outcomeofcasecomingupbeforetheSupremeCourtonSeptember24regardingtheCBI
investigatingthemultibilliondollarforexscamrelatingto200708,whoserepercussionsare
stillbeingfeltintheIndianeconomy.
TheApexcourtistodecideonanappealfiledbyFIMMDA(FixedIncomeMoneyMarket
andDerivativesAssociationofIndia),whichisanassociationofbanksandauthoriseddealers
handlingforexderivates.
FIMMDAhasappealedagainsttheorderoftheOdishahighcourtonaPILfrom
economistactivistPravanjanPatraseekingCBIprobeintothescam.ThecourtaskedtheCBI
forapreliminaryinvestigationreport.
Initsreport,theagencyacknowledgedthatthebanksandexportershadcommittedviolations
ofRBIguidelinesbyenteringintoderivatescontractforexcessoftheirgenuineunderlying
exposureandalsotriedtousehedgingtoolsasprofitmakingtools.

53

Intheend,itwastheirgreedthatprovedtobetheirundoingandnotthepolicyguidelinesof
RBIortheGovernmentofIndia,saidtheCBIreportofNovember2009.
Basedonthisreport,thehighcourtorderedadetailedCBIinvestigationandFIMMDA
opposedthatintheSupremeCourt.
ACBIinvestigation,saythevictimcompanies,wouldbringoutthetruthabouthowforeign
bankshadenteredtheIndianmarketthroughtheIndianbanks,suchasSBIandaseveral
otherprivatebanks,toselltheirloottransactionscamouflagedasgenuinederivatesto
Indianbusinesshousesandtakeawaythepreciousforeignexchangereserves.
Bythis,goodfirmsgottrappedbytheIndianbanksthatforcedtheirlosses(fromtheseloot
transactions)ontheirclientsbyconvertingthem(losses)intocorporateloanstocoverup
theirmisdeeds.
MygarmentexportcompanywithanannualturnoverofaroundUS$25millionhasbeen
forcedbyourbanker,StateBankofIndia,toacceptthebankslossofoverRs30croreasa
corporateloantothecompany.
Now,howdoIrepaythatkindofloan?Iamdesperateasthefateofmyprofitearning,
foreignexchangegeneratingcompanyandits1500employeesisatstake,saidaprominent
exporterofgarmentstotheUSandEurope,whoisbasedinTirupur.Hesaidtherewere
severalunitslikehisinTirupurandneighbouringareaswhohavesufferedthecalamityand
arevirtuallyonthestreets.

Data Analysis
Letusnowlookatafewkeyeconomicindicatorsthatreflecttheeffectofthelawsofthe
countryontheeconomy.

54

Introduction to economic indicators

Aneconomicindicatorisastatisticaboutaneconomicactivity.Economicindicatorsallow
analysisofeconomicperformanceandpredictionsoffutureperformance.Economic
indicatorsincludevariousindices,earningsreports,andeconomicsummaries.

USD/INR
TheUSDtoINRexchangerateisthatindicatoroftheeconomythatismostaffected
bytheForExregulationsoftheland.
ItisnormallyexpressedasnumberofINRsthatmakeuponeUSD&denotedas
USD/INR.
TheUSD/INRexchangerate(henceforthreferredtoasexchangerate)greatlyaffects
theimportandexportofthecountry.ItalsoaffectstheForExreservesofthecountry.A
decreasingexchangerateisbeneficialforimportersastheywouldneedtopaylessRs.fora
$.Theconverseistrueforexportersi.e.anincreaseintheexchangeratewouldbebeneficial
tothemastheycanselltheirUS$formorelocalcurrency.
Tosimplifythings,thinkoftheUS$asanasset.Thisassetcanbeboughtbypaying
therightprice(inRs.ofcourseasweareinIndiapresently).
IfyouareimportingsomethingintoIndiafromtheU.S.thenyouhavetopayyour
supplierinUS$.OfcourseyoullhavetobuytheseUS$intheIndianmarket.Thus,
youllbeelatedifyouhavetopaylessforeachUS$thatyoubuy.
IfontheotherhandyouresellingsomethingtotheUSthenyouwillreceiveyour
paymentinUS$.So,thehigherthepriceforwhichyoucansellyourUS$thehappier
youllbe.
ForExregulationsheavilyaffecttheexchangerates.

55

ItshouldbenotedthatalthoughitisNOTthemainobjectiveofForExregulationsto
keeptheexchangerateatafixedleveltheystilldoaffectthedirectionoftheExRate
movement.
OfcoursetheRBIdoeshavethepowertodevaluatethecurrencyatanypointintime
ifitfeelstheneedtodoso.Thus,itresetstheleveloftheExRateataspecifiedvalue.
However,thedaytodaymovementsoftheexchangeratesarecompletelyfloatedand
deregulated,determinedonlybythemarketdemandandsupplyforces.Thisiswherethe
ForExregulationscomeintoplay.GoodregulationincreasemarketconfidenceintheRupee
thusincreasingitsvalueanddecreasingtheexchangespread.Theconverseistrueincaseof
badregulations.

Sensex
TheBSESensexisafreefloatmarketweightedstockmarketindexof30
wellestablishedandfinanciallysoundcompanieslistedonBombayStockExchange.
The30componentcompanieswhicharesomeofthelargestandmostactivelytraded
stocksarerepresentativeofvariousindustrialsectorsoftheIndianeconomy.Publishedsince
1January1986,theS&PBSESENSEXisregardedasthepulseofthedomesticstock
marketsinIndia.
TheS&PBSEDollEx30istheUSDversionoftheS&PBSESENSEX,India'smost
trackedbellwetherindex.Itisdesignedtomeasuretheperformanceofthe30largest,most
liquidandfinanciallysoundcompaniesacrosskeysectorsoftheIndianeconomythatare
listedatBSELtd.
TheBSESensexmayalsoberegardedasahubforForeignInstitutionalInvestors
(FIIs).TheFIIsareinvestorsfromforeignmarketswhoinvestintheIndianFinancial
Marketsforshortspansoftimetobooktheirprofits.WeshallunderstandFIIsaswego
further.
FornowletustakealookathowForExregulationsaffecttheBSESensex.

56

ForExregulationsaffectthestockmarkettoagreatextent.
Alargepartoftheinvestmentthatoccursinthestockmarketisthroughtheforeign
institutionalinvestors.TheseinvestorsfromothercountriesinvestintheIndianstockmarket
forshorttermgains&favourquickexitsoverlongterminvestments.
Sometimesafewcompaniesalsoenterthestockmarketwiththeintentionoftaking
overaspecificcompanythatmaybeinasimilarindustryasthatoftheinvestingcompany.
Thisleadstoexchangeofcurrencies.ToinvestintheIndianstockmarketacompany
requiresIndianRupees.However,thevehiclecurrencyofmostinternationalcompaniesisthe
US$.Thus,toinvestinthestockmarkettheyneedtoexchangethesedollarsforIndian
rupees.TheprocessofconversionofthecurrencylieswiththeForExregulationsofIndia.
Thus,iftheForExregulationsareeasytounderstandandimplement,beneficialto
theinvestingcompanyandtothegovernmentandregulatoryauthoritiesthereshallbean
inflowofFIIleadingtoariseinthestockmarketduetothehigherdemandofshares.
Also,theSensexdependsontheperformanceofthe30companiesthatarelistedinit.
MostofthesecompaniessuchasInfosys,Reliance,TATA,thataremarketleadersintheir
industries,havealargeportionoftheirrevenuegeneratedfromexportsoftheirproducts.If
theirrevenuegoesdown(duetopoorForExregulationsthatmakeitdifficulttohandleand
tradeinforeigncurrency)itdirectlyaffectstheSensex.
AnotherrelationshipbetweentheForExregulationsofacountryandthestock
marketisthederivativestradingmarket.Today,currencies,justasothercommoditiesare
tradedinthederivativesmarket.Thus,fluctuationsduetopolicychangecanalsogreatly
affectthemarketsentiment.

Nifty
TheCNXNifty,alsocalledtheNifty50orsimplytheNifty,isNationalStock
ExchangeofIndia'sbenchmarkstockmarketindexforIndianequitymarket.Niftyisowned
andmanagedbyIndiaIndexServicesandProducts(IISL),whichisawhollyowned
subsidiaryoftheNSEStrategicInvestmentCorporationLimited.IISLhadmarketingand
57

licensingagreementswithStandard&Poor'sforcobrandingequityindicesuntil2013.The
'CNX'inthenamestandsfor'CRISILNSEIndex'.
CNXNiftyhasshapedupasalargestsinglefinancialproductinIndia,withan
ecosystemcomprising:exchangetradedfunds(onshoreandoffshore),exchangetraded
futuresandoptions(atNSEinIndiaandatSGXandCMEabroad),otherindexfundsand
OTCderivatives(mostlyoffshore).
TheCNXNiftycovers22sectorsoftheIndianeconomyandoffersinvestment
managersexposuretotheIndianmarketinoneportfolio.During200812,CNXNifty50
IndexshareofNSEmarketcapitalisationfellfrom65%to29%duetotheriseofsector
indiceslikeCNXBank,CNXIT,CNXMidCap,etc.TheCNXNifty50Indexgives29.70%
weighttofinancialservices,0.73%weighttoindustrialmanufacturingandnilweightto
agriculturalsector.
TheCNXNiftyindexisafreefloatmarketcapitalisationweightedindex.Theindex
wasinitiallycalculatedonfullmarketcapitalisationmethodology.FromJune26,2009,the
computationwaschangedtofreefloatmethodology.ThebaseperiodfortheCNXNifty
indexisNovember3,1995,whichmarkedthecompletionofoneyearofoperationsof
NationalStockExchangeEquityMarketSegment.Thebasevalueoftheindexhasbeensetat
1000,andabasecapitalofRs2.06trillion.
NiftyrelatedtotheForExregulationinasimilarmannerasSensexisrelated.
TherearetwomainwaysinwhichtheForExregulationsaffecttheperformanceof
theNiftyindex.Thefirstisthedirecteffectandthesecondistheindirecteffect
Thedirecteffectiscausedduetofluctuationsoftheforeigninstitutionalinvestment
duetothepolicyregulationschanges.Betterpolicybecomesmoreappealingtoforeign
investorstoconverttheircurrencyinRs.andinvestinIndianinstitutions.Thisleadstohigher
FIIsfiguredwhichthenleadtoariseinthestockmarket.
Theindirecteffectisthatonewhichtakesplacesduetoanincreaseintherevenuesof
thecompaniesthatarelistedintheCNXNifty.MostofthecompaniesintheNiftyearna
58

largepartoftheirrevenuesthroughexports.AgoodForExmanagementpolicypromotes
exportsandhelpsbusinessesincreaserevenue.Thisinturnincreasesthevalueofitsshares
leadingtoariseintheIndex.
ThusaretheNiftyandotherstockmarketindicesaffectedbyForExregulations.

Crude
The3mostpopularbenchmarksofcrudeoilthataretradedare:
1. WestTexasIntermediateCrude
2. BrentCrude
3. DubaiCrude
OntheIndianstockmarketDubaicrudearetradedmostcommonly.Weshalltakea
furtherlookatthemalittleahead.
Indianasadevelopingeconomydefinitelyrequiresalotoffueltokeepupitsgrowth.
Themajorfuelusedinthisdevelopingeconomyiscrudeoil.However,thisimportantfuelis
notoneamongIndiasabundantresourcesandisrequiredtobeimported.
ThemajorcountriesforwhichthisprecioussubstanceisimportedistheMiddleEast
andIran.Asweknowthatallimportsareregulatedbyforeignexchange,ifForEx
regulationsaresimpleandefficientthecountryshallhaveaconstantsupplyofthefuelit
requires.However,complexandinefficientpolicyshallhinderthesupplyofthemultipurpose
fuel.

Gold
FromthetimeoftheEgyptianPharaohstothevoyageofColumbustotheNewWorld
andbeyond,goldhasbeenreveredasasymbolofwealthandprosperity.Goldhasalsobeen
usedascurrencyandasawaytopropupthefiatmoneyofvariouscountries.Oneofthemost
significantmovestogoldandsilverbackedcurrencyoccurredin1792,whichwastheyear
thattheU.S.putthedollaronthegoldandsilverstandard.

59

Onehundredandseventynineyearslater,in1971,theU.S.wasremovedfromthe
goldstandardbyPresidentRichardNixon.Thisfundamentaleconomicshifthada
tremendousimpactonthepriceofgoldaroundtheglobe.Approximatelyeightyearslater,on
January21,1980,goldpricescatapultedfromalowof$35/ouncetoarecordhighof
$850/ounce,or$2,398.21whenadjustedforinflation.OnMarch19,2008,goldhitahighof
$1,022.40.(Findsomegoldenopportunitiesbyinvestingingoldcommoditiesorfutures
contracts,inTheMidasTouchforGoldInvestors.)
Currently,goldisusedasaninvestment,incomputersandinjewellery.China,South
Africa,theU.S.,Australia,Canada,IndonesiaandRussiacollectivelyrepresentthebackbone
ofglobalgoldproduction.
GoldisoneofthemostimportedcommoditiesinIndia.Indiansarethelargest
consumersofthispreciousmetalintheworld.Frommarriagetocoronationsgoldplaysan
essentialroleineveryIndianslife.ItmayevenbesaidthatanIndiafamilyswealthis
measuredbytheamountofgoldithas.
Thus,itisironicthatIndiaisnotamongthetopproducersofgoldintheworld.So
muchso,thatagreatpartofitsgoldconsumptionhastobeimportedfromcountriessuchas
SouthAfrica.
Hence,iftheForExregulationsofthecountrymakeitdifficulttopurchaseUS$this
wouldgreatlyaffecttheconsumptionofgoldinIndiaasitwouldleadtotheriseindomestic
prices.
Letusnowtakealookatsomehistoricaldatawithrespecttogold.

FDI
ForeignDirectInvestmentcanbedescribedasinvestmentmadebyaforeignentityinthe
equityofadomesticcompany(TargetCompany)withtheintentionofparticipatinginthe
managementoftheenterprise.Alternativelyitcanbedescribedasaninvestmenttransaction
inwhichaninvestorfromonecountry(homecountry)seekstoobtainmanagerialinterestin

60

anentityinanothercountry(hostcountry)forcontrollingandoperatingphysicalassets
createdthroughsuchinvestments.
CharacteristicsofFDI:
1. Inallsuchtransactionsthereisabasicintentiontoparticipateinthemanagementof
thetargetcompany.
2. Inmostcasesitinvolvesalongtermcommitment,thatis,thereisnointentiontoseek
quickcapitalgains.
3. ByconventionaninvestmentisconsideredasFDIwhenitinvolvesacquisitionofa
minimumof10%ofthepaidupequityofthetargetcompany.
4. Generallyallsuchinvestmentsareaccompaniedbytechnologytransfersandaccessto
newermarketsthereforethepartnershipinvolvesaccesstorawmaterialsforthe
foreignentityandaccesstotechnologyforthetargetcompany.
5. Suchinvestmentsinvolvecreationofphysicalassetswhichgenerallyincreasethe
productivecapacityofthetargetcompany.Thisgeneratesemploymentand
consequentlyeconomicgrowthinthehostcountry.
6. Investmentbytheforeignentitymayinvolvefreshissueofcapitalorsaleofshares
heldbypromotersinthetargetcompany.Thereforesuchtransactionsareessentially
primarymarketoperations.Inmostcasestherewouldbeaneffectonthebalance
sheetofthecompany.
FDIinIndiaiscloselyrelatedtoForExregulations.
Accordingtothelawthereare2waysinwhichFDIcanenterIndia.
AnIndiancompanymayreceiveForeignDirectInvestmentunderthetworoutesas
givenunder:
i.

AutomaticRoute

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FDIisallowedundertheautomaticroutewithoutpriorapprovaleitherofthe
GovernmentortheReserveBankofIndiainallactivities/sectorsasspecifiedinthe
consolidatedFDIPolicy,issuedbytheGovernmentofIndiafromtimetotime.
ii.

GovernmentRoute

FDIinactivitiesnotcoveredundertheautomaticrouterequirespriorapprovalofthe
GovernmentwhichareconsideredbytheForeignInvestmentPromotionBoard(FIPB),
DepartmentofEconomicAffairs,andMinistryofFinance.ApplicationcanbemadeinForm
FCIL,whichcanbedownloadedfromhttp://www.dipp.gov.in.Plainpaperapplications
carryingallrelevantdetailsarealsoaccepted.Nofeeispayable.
TheIndiancompanyhavingreceivedFDIeitherundertheAutomaticrouteorthe
GovernmentrouteisrequiredtocomplywithprovisionsoftheFDIpolicyincluding
reportingtheFDItotheReserveBankasstatedinQ4.
InvestmentsthroughbothoftheseroutesarecloselyregulatedbytheFEMAactand
theRBI.
LetusnowtakealookatsomestatisticsregardingtheFDI.

FII
ForeignInstitutionalInvestor(FII)meansaninstitutionestablishedor
incorporatedoutsideIndiawhichproposestomakeinvestmentinsecuritiesinIndia.
However,FIIasacategorydoesnotexistnow.Itwasdecidedtocreateanewinvestorclass
called"ForeignPortfolioInvestor"(FPI)witheffectfromJune1,2014sothattherequisites
systemsandproceduresareinplacebeforemigrationtothenewFPIregime.
Thereareacoupleofmyths/beliefsaboutFIIswhicharenotnecessarilytrue.
i.

FIIsdonotinvestinunlistedentities.Theyparticipateonlythroughstock
exchanges.

62

ii.

FIIscannotinvestatthetimeofinitialallotment.Foreigninvestorsinvesting
ininitialallotmentofshares(sayIPOsorwhenagroupofentitiescome
togethertofloatacompany)arecategorizedasFDIs.

ItshouldalsobenotedthatrecentlyoflateFIIhavealsotakentobuyingdirectstakes
intechnologies,managementetc.similartotheFDIregime.However,unlikeFDIstheyare
insuchpositionsonlyforashortperiodoftimeandwiththesolemotiveofcapitalgains.
TheFIIinvestmentsareregulatedbytheSEBIinIndia.
TherulesforFIIinvestmentarelistedintheSEBIcircularsthatareissuedfromtime
totime.
ThebasicconceptisthatIndianstockmarketsshallaccepttheirpaymentonlyinINR.
ThismeansthatanyotherforeigncurrencymustbeconvertedtoIndiancurrencybeforeit
canbeinvestedinstock.Thus,efficientForExregulationsarealsonecessaryforFIIs.

FX reserves
Foreignexchangereserves(alsocalledForExreservesorFXreserves)areassets
heldbyacentralbankorothermonetaryauthority,usuallyinvariousreservecurrencies,
mostlytheUnitedStatesdollar,andtoalesserextenttheeuro,thepoundsterling,andthe
Japaneseyen,andusedtobackitsliabilitiese.g.,thelocalcurrencyissued,andthevarious
bankreservesdepositedwiththecentralbankbythegovernmentorbyfinancialinstitutions.
InIndia,ForeignExchangeReservesaretheforeignassetsheldorcontrolledbythe
countryscentralbank(ReserveBankofIndia).Thereservesaremadeofgoldoraspecific
currency.Theycanalsobespecialdrawingrightsandmarketablesecuritiesdenominatedin
foreigncurrenciesliketreasurybills,governmentbonds,corporatebondsandequitiesand
foreigncurrencyloans.
ItshouldbenotedthatForExreservesinIndiaareregulatedbytheFEMAactin
tandemwiththeR.B.I.

63

Indiasmajorimportisoil.Tobuyoilweneedforeigncurrency.Someofthis
currencyiskeptinreservebytheR.B.I.accordingtoFEMA.Questionsregardinghowmuch
??,forhowlong??EtcareallansweredbytheR.B.I.
TheFEMAsimplystatesthatallforeigncurrencyinpossessionofanypersonmustbe
repatriated(handedover)totheRBIwithinastipulatedperiodof180days.
NoIndianpersoncanretainmorethanUS$2000.00oritsaggregateif
ItwasacquiredbyhimwhileonavisittoanyplaceoutsideIndiabywayof
paymentforservices
Itwasacquiredbyhim,fromanypersonnotresidentinIndiaandwhoisona
visittoIndia,ashonorariumorgiftorforservicesrenderedorinsettlementof
anylawfulobligation
Itrepresentsunspentamountofforeignexchangeacquiredbyhimfroman
authorisedpersonfortravelabroad
Aforeigner,however,whoisinIndia,canholdasmuchForExashedesires,
providedhedoesnotplanonresidinginIndiapermanently.

64

Data & Interpretation

USD/INR
Data

Analysis & Inference

ThechartclearlyindicatesthattheexchangeratejumpedsharplyfromaroundRs.
46.21/$toRs.62.02/$inJanuary2015.Oneofthemajorcauseswastheslideoftherupee
in2013.
DuetothederegulationofthecurrencybytheFEMAactin2000themarketforces
begantodeterminetheexchangerate.Themainreasonsfortherupeefallin2013were.
1. CurrentAccountDeficit(CAD)causingsteepvolatilityandimportsbeing
higherthanexports.
2. StrengtheningoftheUSDonthebasisofarecoveringeconomy.
3. InsufficientFDIinflowsandexcessFIIoutflowscausedadeclineinthestock
markets.
4. GDPfelltoitslowestinrecenttimesto4.8%.
65

5. Risingimportbillsforcrude&gold.

Sensex
Data

Analysis & Inference

Majorcausesofthesteepriseinthebenchmarksensexcanbeattributedtothe2014
electionsbeingwonbytheBJPandMr.NarendraModibecomingprimeminister.
ThemarketsentimentsthatwerehopelessduetothecorruptUPAgovernancewere
rekindledbythelaunchingofinvestmentschemessuchasmakeinIndia.Thegenericoutlook
thataprobusinessgovernmentwoulddowondersforthelostconfidenceofforeigninvestors
alsocontributedtotheimprovedmarketsentiment.
Thus,thereweremoreFIIinflows&increaseinmarketconfidencethatledtothe
upshotinthestockmarket.
Otherreasonsmayinclude:
1. RecoveryoftheUSfromthe2008crisis

66

2. QuantitativeeasingmeasuresundertakenbytheFed
3. StabilityoftheRupeeincomparisontootherAsiancurrencies.
4. HopeonEuropeanrecoveryandbailoutofeconomiesbytheECB.

Nifty
Data

Analysis & Inference

Thereasonsfortheriseinthesensexasmentionedabovearethesamereasonsforthe
Niftysbehaviour.
Thereasonforthisisthatthesensexandtheniftyhavea,perfectlypositive
correlationcoefficientof0.999626.Thismeansthattheniftyandsensexmatcheachothers
moves.Ifthesensexmovesupbyonepointsodoestheniftyandviceversa.Thisisduetoa
simplereasonthatthefactorsthataffectboththeindicesarethesame.

67

Thechartbelowclearlyshowstheperfectpositivecorrelationbetweenthesensexand
theNifty.HencethereasonsfortheriseoftheSensexmentionedabovearethesamefor
Nifty.

Crude
Data

68

Analysis & Inference

TheabovechartdepictsthecrudepricesinUSD/barrel.
Aswecanseethecrudeoilpriceisquitevolatileandhasbeenespeciallysoin2015
duetoglobaloversupplyascomparedtothedemand.
AddtothisthecurrencyfluctuationsoftheUSD/INRandwebringinevenmore
instabilitytotheentiregame.
Thus,forexregulationsplayanimportantroleindeterminingthecrudeoilpriceas
morerelaxedlawswillbringinmorevolatilityandthushigherprofitmakingopportunities.

Gold
Data

Analysis & Inference

Thegraphbelowrepresentstherelationshipbetweencrude&goldprice.

69


Ascanbeclearlyseenfromthechartthecrudeandgoldpricesshareahighlypositive
correlation.TheKarlPearsonConstantworksoutto0.761621whichcanbedefinedasa
highlypositivecorrelation.
Coupledwiththederegulatedcurrenciesandthecurbongoldimportsthevolatilityof
goldhasseenadecentdecline.

70

FDI
Data

Analysis & Inference

AsseenfromtheabovechartFDIshaveseenasteprisefrom2005to2010of
approximately140,000.00crores.Again,duetotherelaxedmeasuresoftheforexlawsinthe
countryithasbecomeeasierforforeigncountriestoinvestinIndia.
ThedepreciationoftheRupeeandhighinterestrateshavemadeIndiaa
mouthwateringoptiontoforeigncompaniesformdevelopednations,wherethecurrent
interestsratesareclosetozero.
In2015alonethecountryhasalreadyseenaninfluxofapproximately60,000.00
croresinFDIonayeartodatebasis.Thisshowsgreateconomicscopeforthecountry.

71

FII
Data

Analysis & Inference

TheFIIinvestmentshavealsorisenexponentiallyasseenfromtheabovegraph.
Againthisisbecauseofpoliticalstabilityandamorepositiveeconomicoutlookthatthe
worldingeneralhastowardsIndia.
Thefalloftherupeein2015to66.xxlevelshasensuredthatforeigninvestors,
especiallynonresidentialIndiansbenefitfromtheinvestmentstheymakeintheIndianstock
markets.
Notonlyhasthisbenefittedthegovernmentingainingmorepositiveforeigninflows
intothecountrybuthasalsobenefittedthecountryingeneralgivingaboosttoeconomic
growth.

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SinceFIIsareashorttermliquidinvestmentnodefinedsetoffactorscanbe
attributedtotheirriseorfall.However,animportantfactorthatshouldbementionedandthat
doesaffecttheFIIflowintheIndianstockmarketistheImagethattheIndianmarkethason
foreigninvestors.

FX reserves
Data

Analysis & Inference

FXreservesweverystrictlyregulatedundertheFERA.Thismadeitdifficultfor
peopletocarryforeigncurrencyonthem,whichinturndiscouragedthemfromtravelling
abroad.
TheadventofFEMAchangestherules,somuchsothattravellingabroadbecame
almostaneverydayincident.
Morethepeopletravelabroad,moreforeigncurrencytheyhandle,morebusiness
opportunitiestheybring,moreforeignexchangetheybring,moreforeigncurrencythe
governmentcanbuy,greateraretheforexreserves.

73

In2010weseetheFXreservesofIndiadropfromtheirlevelin2005duetoinexcess
ofthecurrentaccountdeficit.
Becauseimportsweregreaterthanexportsin2010Indiahadtodrawuponitsforex
reservestofillinthedeficitofitscurrentaccount.Thisisthemainreasonforadeclineinthe
reserves.

Current scenario & Future outlook

USD/INR
TheRupeeisnotveryvolatilepresentlyandisdecliningatafairlyconstantrate.
Thecausesforthissteadydeclinemaybe:
1. Ahighinflationrate(currentlystanding@6.10%)
2. Moderateinterestrates(forecastedtobecutinthenearfuture),Government
debt(highinIndiascase)
3. Politics(currentlyastableModigovernmentbutpolicyparalysisstillpulling
on)
4. Speculation(Markethopesareuppresently,butuncertaintosayforhow
long).
However,itisimpossibletoaccuratelypredicttheriseorfalloftheexchangeratesin
aderegulatedfreemarketscenariosuchasIndia.
IfthepolicyparalysisisremovedandmeasuressuchastheGSTandMakeinIndia
aresuccessfultheexchangeratecouldseeanappreciationinthevalueoftheRupeedueto
moredemandoflocalcurrencybyforeigninvestors.Elsethesteadydeclinemaybeexpected
tocontinue.

74

Sensex
Currentlyweareinastablegovernmentandourgovernmentisdoingeverythingit
cantopromotebusiness.ThisincludespromotingprogramssuchasmakeinIndiaalongwith
betterandmoreliberalisedforeignexchangemanagementregulations.
Weareslowlymovingtowardsfinancialinclusionandwithabetterinvestment
environmentitwouldbesafetoforecastindustrialoutlookforthefuturelooksprettybright.
Ifforeignexchangeregulationsarefurtherrelaxedthiswilldefinitelypromoteexports
resultingtoagrowthinthetop30businessesalongwithothercompaniesaswell.
Withthegrowthinthetop30Sensexcompanieswecansafelyassumetheforecastoutlookto
bethatofahighgrowth.InmypersonalopiniontheSensexshouldcross50thousandpoints
bytheyear2020.

Nifty
TheoutlookontheNiftyingeneralseemstobebright.Marketsentimentsseemtobe
goingstrongandtheexpectationsofthepeoplefromthecurrentgovernmentarestillgood.
Betterandefficientpoliciesarealreadyunderwayandwecansafelyforecastthat,likethe
Sensex,theNiftywillnotbelosingitssheenanytimesoon.

Crude
ThecurrentpriceofCrudeoilis2696.
CrudeoilhasalwaysbeenavolatilecommodityinIndianmarkets.Itisthus,quite
difficulttoaccuratelypredicttheforecastoffutureoilpricesinIndia.However,itmaybe
easytoforecastfactorsthatcloselycorrelatewiththeoilpricesuchasUSD/INRexchange
rate,worldoilpricesetc.

Gold
Currentlygoldhascrossedthe20,000.00markonstrongdemandduetothewedding
seasonsapproachaidedbyafirmtrendintheglobalmarket.Bullionmerchantsaidbesides
firmingglobaltrendwheregoldadvancedtooversixweekhighonsignstheUSFederal
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Reservemaydelayaninterestratehikeasinflationremainslowandtheselloffinemerging
marketsspreads,boostedthesentimenthere.
Anotherveryimportantfactthathasraisedthepriceisthedemandthathasbeen
derivedfromthefallingvalueoftherupee.Afallinthedomesticcurrencysvaluereducesits
buyingpowerthusmakingimportsexpensive.Thishasledtomostmerchantsbookingtheir
ordersonthefearthattherupeeshalldepreciatefurther.
UnlesstheinflationintheUSdoesnotrisethatleadstothehikeinUSfedratedwe
cansafelyexpectthepricesofgoldtobeonariseduetofearsonadepreciatingcurrencyand
greedonweddingdemands.Thus,inmyopinionthepricesofgoldareexpectedtorise
further.

FDI
ThecurrentoutlookontheFDIisapositiveone.Withthegovernmentpromoting
foreigninvestmentslikeneverbeforeandlaunchingprogramssuchasmakeinIndiaitcanbe
saidwithpromisethatthegovernmentactuallywantstomakethemostofforeigninvestment
inIndia.
th
Onthe5
ofAugust2015
businesstodayreportedthatFDIworth$19.78bnhas

beenreceivedfromnationsvisitedbyModiinFY15.
th
Onthe9
ofAugust2015
thedatawasreleasedthatIndiareceived$24bninFDI

fromEUin3years.Accordingtoofficialfigures,Indiahadreceivedatotalof$24.91billion
inforeigndirectinvestmentequityinflowsfromtheEuropeanUnion(EU)betweenApril
2012andMay2015.TheEUhasbeenIndia'slargesttradingpartnerandthetwowaytradeis
expectedtofurtherswellifthecountriescouldcometoaconsensusregardingthe
longpendingFreeTradeAgreement.
Ontheotherhandforeigncompaniesalsoseemtothinkitanextremelygood
opportunitythatisthesecondlargestAsianeconomywithexcellentgrowthfigures.The
worldslargestdemocracywithamaximumconsumerbaseof1.25billionissimplya

76

mouthwateringofferformostbusinesses.Notonlyarethedisposableincomesofthepeople
increasingbutsoaretheyrestandardsoflivingandexpectationsasconsumers.
Thus,theoutlookonFDIinIndianinthecomingyearscanbedescribedashighly
positive.

FII
CurrentlytheoutlookseemspositiveduetosimilarfactorsasapplicableinFDI
namely,abettergovernment,developinginfrastructure,moredisposableincomesetc.

FX reserves
ForeignExchangeReservesinIndiadecreasedto351920USDMillioninAugust28
from355350USDMillioninthepreviousweek.ForeignExchangeReservesinIndia
averaged187290.64USDMillionfrom1998until2015,reachinganalltimehighof383643
USDMillioninDecemberof2009andarecordlowof29048USDMillioninSeptemberof
1998.ForeignExchangeReservesinIndiaisreportedbytheReserveBankofIndia.

AscanbeclearlyseenfromtheabovetablethetotalfxreservesofIndiaalongwith
itsbreakuphavebeenprovided.
ThefutureoutlookonthefxreservesinIndialookspositivealthoughitcannotbe
accuratelypredictedasfxreservesaresubjecttofluctuationsduetochangesinthemonetary
policyandgovernmentregulations.

77

Conclusion
Thus,toconcludewemayinferthattheFEMAhasbeenaboonoverthedraconian
FERA.Theshiftofthegovernmentsstancefromcontroltoregulationhasgreatlyimproves
theeconomicsituationinIndiaasdenotedbytheaforementionedeconomicindicators.
FERAhadconstrictedprogressasitlookedatthecitizenswithaneyeofsuspicion
anddistrustthinkingthateverycitizenisirresponsibleandthemorefreedomthatisgivento
peoplethemoreitshallbemisused.Thiscausedgreatconstraintsoninnovationand
developmentoftheeconomy.
However,theadventoftheFEMArelaxedtherulesconvertingthegovernments
controlintoregulation.Ittooktheviewthatpeopleareresponsibleandthatinnovationand
freedomtotransactinforeigncurrenciesareessentialforthedevelopmentoftheeconomy.
But,everystepofprogresshasitsdrawbacks.Relaxationofthelawsandthe
deregulationofthecurrencycausedtheexchangeratestobesetbymarketdemandand
supplyforces.Thishasgreatlyincreasedthevolatilityinthemarket.Ofcoursethishasgiven
risetogreatprofitsbuthasalsogreatlyincreasedtherisks.
Thus,althoughtheprogressionfromFERAtoFEMAhasbeenagreatstepforward,a
lotmoreneedstobedonetoensureabatter,profitableandsaferbusinessenvironmentfor
bothIndianandforeignbusinesses.

Annexure
Bibliography

78