PROGRESSION OF FERA TO FEMA AND HOW IT FACILITATES FOREIGN EXCHANGE MARKET IN INDIA

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1 2 3 4 5 6

GROUP MEMBERS
AJINKYA KHERATKAR CHERISHA GALA DHARA SHAH HIREN BADANI JAY RAMCHANDANI MANAN BHAYANI

ROLL.NO
12005 12015 12021 12032 120 12053

INDEX
SR. NO 1 2 3 4 5 6 7 8 9 TABLE OF CONTENTS FOREIGN EXCHANGE REGULATION ACT (FERA), 1973 FOREIGN EXCHANGE MANAGEMENT ACT, 1999 CONTRAVENTION AND PENALTIES OF FEMA FDI POLICY EXTERNAL COMMERCIAL BORROWINGS IMPORT EXPORT GUIDELINES CAPITAL ACCOUNT CONVERTIBILITY THE SOUTH-EAST ASIAN CRISIS IMPACT ON FOREIGN EXCHANGE MARKET TREND ANALYSIS 10 11 LONG TERM MEASURES TO CONTROL CAD BIBLIOGRAPHY 77 78 PG. NO 3 13 17 18 33 43 59 61 73

FOREIGN EXCHANGE REGULATION ACT, 1973

The Foreign Exchange Regulation Act (FERA) was legislation passed by the Indian Parliament in 1973 by the government of Indira Gandhi and came into force with effect from January 1, 1974. FERA imposed stringent regulations on certain kinds of payments, the dealings in foreign exchange and securities and the transactions which had an indirect impact on the foreign exchange and the import and export of currency. An Act to consolidate and amend the law regulating certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency for the conservation of the foreign exchange resources of the country and the proper utilization thereof in the interests of the economic development of the country. This Act may be called the Foreign Exchange Regulation Act; 1973. It extends to the whole of India. It applies also to all citizens of India outside India and to branches and agencies outside India of companies or bodies corporate, registered or incorporated in India. Coca-Cola was India's leading soft drink until 1977 when it left India after a new government ordered the company to turn over its secret formula for Coca-Cola and dilute its stake in its Indian unit as required by the Foreign Exchange Regulation Act (FERA). In 1993, the company (along with PepsiCo) returned after the introduction of India's Liberalization policy. FERA was repealed in 1998 by the government of Atal Bihari Vajpayee and replaced by the Foreign Exchange Management Act, which liberalised foreign exchange controls and restrictions on foreign investment.

FERA:

Regulated in India by the Foreign Exchange Regulation Act (FERA), 1973. Consisted of 81 sections. FERA Emphasized strict exchange control. Control everything that was specified, relating to foreign exchange. Law violators were treated as criminal offenders. Aimed at minimizing dealings in foreign exchange and foreign securities.

BACKGROUND
FERA was introduced in 1973 to regulate the foreign exchange reserves of the country. During that time there was a severe crunch on foreign reserves and strict laws were needed to curb the misuse of it. Besides, Indian economy was highly regulated and closed then. Forex being a scarce commodity, FERA primarily prohibited all transactions, except ones permitted by RBI i.e. it proceeded on the presumption that all foreign exchange earned by Indian residents rightfully belonged to the Government of India and had to be collected and surrendered to the Reserve bank of India (RBI). The country attained freedom in 1947, after two centuries of foreign rule and protracted freedom struggle stretched over decades. The prevailing mood then was one of preserving and consolidating the freedom and not to permit once again any type of foreign domination, political or economic. Initial approach on foreign capital was negative to a not-interested attitude. Prime Minister explained that "the stress on the need to regulate, in the national interest, the scope and manner of foreign capital and control (as per the Industrial Policy Statement 48) arose from the past association of foreign capital and control with foreign domination of the economy of the country." The Foreign Exchange Regulation Act, 1947, was enacted as a temporary measure and later placed permanently in the year 1957. At that time the limited objective of the Act was to regulate the inflow of foreign capital in the form of branches and concerns with the substantial non-resident interest, and the employment of foreigners. However after initiation of a process of rapid industrialisation of the country, the need to conserve foreign exchange was felt. Exports were not picking up and imports were surging, putting the country to severe balance of trade and balance of payment crisis. This in turn led to the need to tap the donors or Foreign Aid Givers. In this background the recommendation of the Public Accounts Committee (56th Report of 1968 to study the question of "leakage of foreign exchange through invoice manipulation received in June 1971) and the Report of the Law Commission (on "Trial and Punishment of Social and Economic Offences" received in April 1972) induced the Government of India to re-focus the FERA act with the main aim of conservation of foreign exchange rather than regulation of entry of foreign capital. The Foreign Exchange Regulation Act, 1973, (hereinafter referred to as FERA) was drafted with the object of introducing the changes felt necessary for the effective implementation of the Government policy and removing the difficulties faced in the working of the previous enactment. FERA is crisis-driven regulation and naturally it contained several draconian provisions. Any offence under FERA was a criminal offence liable for imprisonment. Thus the 1973 law was created with the goal of conserving India's foreign exchange resources. The country was facing a trade deficit, which was exacerbate by a devaluation of the currency and an increase in the price of imported oil. The act specified which foreign exchange transactions were permitted, including those between Indian residents and non-residents.

OBJECTIVES To regulate certain payments. To regulate dealings in foreign exchange and securities. To regulate transactions, indirectly affecting foreign exchange. To regulate the import and export of currency. To conserve precious foreign exchange. The proper utilization of foreign exchange so as to promote the economic development of the
country.

To regulate employment of foreign nationals. To regulate foreign companies. FEATURES

RBI can authorize a person / company to deal in foreign exchange. RBI can authorize the dealers to do transact the Foreign Currencies, subject to review and RBI was given power to revoke the authorization in case of non- compliancy RBI would authorize the persons as Money Changers who will convert the currency of one nation to currency of their nation at rates "Determined by RBI" NO person, other than "authorized dealer" would enter in any transaction of the foreign currency. For whatever purpose Foreign exchange was required, it was to be used only for that purpose. If he feels that he cannot use the currency of that particular purpose, he would sell it to a authorized dealer within 30 days. No person in India, without "permission from RBI" shall make payments to a person resident outside India and receive any payment from a person from outside India. No person shall draw issue or negotiate any bill of exchange in which a right to receive payment outside India is created. No person shall make any credit in an account of a person resident out of India. No person except authorized by RBI shall send foreign currency out of India. A person who has right to receive the foreign exchange would have not to delay the receipt of the foreign exchange.

PENALTIES
One of the main reasons to fear FERA was, the unbridled power the enforcement authorities had, to arrest any person almost at their whim and fancy. Under Sec. 35 of FERA, any officer authorised by the Central government can arrest any person on mere suspicion of his having committed an offence under the Act. This is one of the most obnoxious and most misused provisions of FERA. Any offence under FERA, was a criminal offence, punishable with imprisonment as per code of criminal procedure, 1973.The monetary penalty payable under FERA, was nearly the five times the amount involved.

CASE STUDY:- ITC

ABSTRACT:
The case examines the charges of FERA violations against tobacco major ITC in the 1990s. The case details the dubious international trading deals by ITC and its partners, the Chitalias, the Enforcement Directorate's investigations and the arrests of ITC executives. The case also looks at charges of excise duty evasion and share price manipulation against ITC. The case ends with a discussion on the measures taken by the company to restore its corporate image in the light of various charges.

BACKGROUND:
ITC was started by UK-based tobacco major BAT (British American Tobacco). It was called the Peninsular Tobacco Company, for cigarette manufacturing, tobacco procurement and processing activities. In 1910, it set up a full-fledged sales organization named the Imperial Tobacco Company of India Limited. To cope with the growing demand, BAT set up another cigarette manufacturing unit in Bangalore in 1912. To handle the raw material (tobacco leaf) requirements, a new company called Indian Leaf Tobacco Company (ILTC) was incorporated in July 1912. By 1919, BAT had transferred its holdings in Peninsular and ILTC to Imperial. Following this, Imperial replaced Peninsular as BAT's main subsidiary in India. By the late 1960s, the Indian government began putting pressure on multinational companies to reduce their holdings. Imperial divested its equity in 1969 through a public offer, which raised the shareholdings of Indian individual and institutional investors from 6.6% to 26%. After this, the holdings of Indian financial institutions were 38% and the foreign collaborator held 36%. Though Imperial clearly dominated the cigarette business, it soon realized that making only a single product, especially one that was considered injurious to health, could become a problem. In addition, regular increases in excise duty on cigarettes started having a negative impact on the company's profitability. To reduce its dependence on the cigarette and tobacco business, Imperial decided to diversify into new businesses. It set up a marine products export division in 1971. The company's name was changed to ITC Ltd. in 1974. In the same year, ITC reorganized itself and emerged as a new organization divided along product lines. In 1975, ITC set up its first hotel in Chennai. The same year, ITC set up Bhadrachalam Paperboards. In 1981, ITC diversified into the cement business and bought a 33% stake in India Cements from IDBI. This investment however did not generate the synergies that ITC had hoped for and two years later the company divested its stake. In 1986, ITC established ITC Hotels, to which its three hotels were sold. It also entered the financial services business by setting up its subsidiary, ITC Classic In 1994, ITC commissioned consultants McKinsey & Co. to study the businesses of the company and make suitable recommendations. McKinsey advised ITC to concentrate on its core strengths and withdraw from agri-business where it was incurring losses. During the late 1990s, ITC decided to retain its interests in tobacco, hospitality and paper and either sold off or gave up the controlling stake in several non-core businesses. ITC divested its 51% stake in ITC Agrotech to ConAgra of the US. Tribeni Tissues (which manufactured newsprint, bond paper, carbon and thermal paper) was merged with ITC.

By 2001, ITC had emerged as the undisputed leader, with over 70% share in the Indian cigarette market. ITC popular cigarette brands included Gold Flake, Scissors, Wills, India Kings and Classic

VIOLATIONS:
The ED found out that around $ 83 million was transferred into India as per ITCs instructions on the basis of the accounts maintained by the Chitalia group of companies. According to the ED officials, the ITC management gave daily instructions to manipulate the invoices related to exports in order to post artificial profits in its books. A sum of $ 6.5 million was transferred from ITC Global to the Chitalias companies and the same was remitted to ITC at a later date. Another instance cited of money laundering by ITC was regarding the over-invoicing of machinery imported by ITC Bhadrachalam Paperboards Ltd., from Italy. The difference in amount was retained abroad and then passed to the Chitalias, which was eventually remitted to ITC. The ED issued charge sheets to a few top executives of ITC and raided on nearly 40 ITC offices including the premises of its top executives in Kolkata, Delhi, Hyderabad, Guntur, Chennai and Mumbai. The charge sheets accused ITC and its functionaries of FERA violations that included over-invoicing and providing cash to the Chitalias for acquiring and retaining funds abroad, for bringing funds into India in a manner not conforming to the prescribed norms, for not realizing outstanding export proceeds and for acknowledging debt abroad TABLE II

Overview of FERA Violations by ITC: ILTD transferred $4 million to a Swiss bank account. The amount was later transferred to Lokman Establishment, which in turn transferred the amount to a Chitalia company in the US. ITC also made payments to non-resident shareholders in the case of certain settlements without the permission of the RBI. This was against Sections 8(1) and 9(1)(a) of FERA; ITC under-invoiced exports to the tune of $1.35 million, thereby violating the provisions of Sections 16(1)(b) and 18(2); ITC transferred funds in an unauthorized manner, to the tune of $0.5 million outside India by suppressing facts with regard to a tobacco deal. This was in contravention of Section a (1) read with Section 48; ITC acquired $0.2 million through counter trade premium amounting to between 3 and 4 per cent on a total business of 1.30 billion, contravening Section 8(1); The company had debts to the tune of 25 million due to over-invoicing in coffee and cashew exports during 1992- 93 to the Chitalias, contravening Section 9(1)(c) read with Section 26(6).

OUTCOME:
Alarmed by the growing criticism of its corporate governance practices and the legal problems, ITC took some drastic steps in its board meeting held on November 15, 1996. ITC inducted three independent, non-executive directors on the Board and repealed the executive powers of Saurabh Misra, ITC deputy chairman, Feroze Vevaina, finance chief and R.K. Kutty, director. ITC also suspended the powers of the Committee of Directors and appointed an interim management committee. This committee was headed by the Chairman and included chief executives of the main businesses to run the day-to-day affairs of the company until the company had a new corporate governance structure in place. ITC also appointed a chief vigilance officer (CVO) for the ITC group, who reported independently to the board. ITC restructured its management and corporate governance practices in early 1997. The new management structure comprised three tiers- the Board of Directors (BOD), the Core Management Committee (CMC) and the Divisional Management Committee (DMC), which were responsible for strategic supervision, strategic management, and executive management in the company respectively. Through this three-tiered interlinked governance process, ITC claimed to have struck a balance between the need for operational freedom, supervision, control and checks and balances. Each executive director was responsible for a group of businesses/corporate functions, apart from strategic management and overall supervision of the company However, the companys troubles seemed to be far from over. In June 1997, the ED issued show cause notices to all the persons who served on ITCs board during 1991-1994 in connection with alleged FERA violations. The ED also issued notices to the FIs and BAT nominees on the ITC board charging them with FERA contravention. In September 1997, the ED issued a second set of show-cause notices to the company, which did not name the nominees of BAT and FIs. These notices were related to the Bukhara restaurant deal and the irregularities in ITCs deals with ITC Global. In late 1997, a US court dismissed a large part of the claim, amounting to $ 41 million, sought by the Chitalias from ITC and ordered the Chitalias to pay back the $ 12.19 million claimed by ITC. The Chitalias contested the decision in a higher court, the New Jersey District court, which in July 1998 endorsed the lower courts order of awarding $ 12.19 million claim to ITC. It also dismissed the claim for $ 14 million made by the Chitalias against ITC. The judgment was in favor of ITC as the US courts felt that the Chitalias acted in bad faith in course of the legal proceedings, meddled with the factual evidence, abused information sources and concealed crucial documents from ITC. Following the court judgment, the Chitalias filed for bankruptcy petitions before the Bankruptcy Court in Florida, which was contested by ITC. In early 2001, the Chitalias proposed a settlement, which ITC accepted. Following the agreement, the Chitalias agreed to the judgement of the Bankruptcy Court, which disallowed their Bankruptcy Petitions. As a part of this settlement ITC also withdrew its objections to few of the claims of Chitalias, for exemption of their assets. However, ITCs efforts to recover its dues against the Chitalias continued even in early 2002. The company and its directors inspected documents relating to the notices, with the permission of the ED, to frame appropriate replies to the notices. It was reported that ITC extended complete cooperation to the ED in its investigations.

However, the ED issued yet another show-cause notice (the 22 notice so far) to ITC in June 2001, for violating section 16 of FERA, in relation to ITCs offer to pay $ 26 million to settle ITC Globals debts (under section 16 of FERA, a company should take prior permission from the RBI, before it can forgo any amount payable to it in foreign exchange). ITC replied to the showcase notice in July 2001, stating it did not accept any legal liabilities while offering financial support to ITC Global. On account of the provisions for appeals and counter-appeals, these cases stood unresolved even in early 2002. However, ITC had created a 1.9 million contingency fund for future liabilities. Although the company went through a tough phase during the late 1990s, it succeeded in retaining its leadership position in its core businesses through value additions to products and services and through attaining international competitiveness in quality and cost standards. Despite various hurdles, the company was a financial success, which analysts mainly attributed to the reformed corporate governance practices. What remains to be seen is whether the company would be able to come out unscathed from the various charges of unethical practices against it.

COCA-COLA
When the FERA came into force on the January 1, 1974, the Government and the Reserve Bank of India were vested with powers to regulate foreign equity in companies operating in India. Companies in low-priority areas such as consumer goods could continue with 40 per cent equity. Coca-Cola came under this category. Dilution was brought about through divestitures, new issues or a mixture of both. More than a thousand companies complied with the FERA. Dilution under FERA triggered the stock market boom of the 1970s. Coca-Cola Corporation was operating as a branch since the early 1950s. PepsiCo was also operating in the country from around the same time, but decided to vacate India in the late 1950s, perhaps due to a cartel arrangement with Coca-Cola. With PepsiCo's exit, Coca-Cola had dominance in the Indian market. Its distributive network expanded with a large number of bottlers and franchisees. It is significant that in India, unlike in some other countries including China, Coca-Cola had to face stiff competition from local bottlers of aerated drinks. There were several regional brands, but the foremost was Parle, which had a good presence in the western and northern regions. Parle was able to lobby with the Government and Parliament to check the expansion of Coca-Cola. It brought to notice several irregularities committed by its rival. In one of its representations, Parle could muster the signatures of one hundred MPs. Though Coca-Cola was in operation since the early 1950s, it was seen that for over two decades it had not declared any profits from its branch in India. As one PAC Report revealed, the company sent annually large remittances to headquarters as share of administrative charges though the branch itself was making losses. Moreover, these remittances were tax deductible! It was also noted that the concentrate had to be imported from Atlanta. The price charged to the Indian unit bore no relationship to the cost of production or the prices charged to other affiliates. The company was obliged to earn import of concentrate through its exports. As Coca-Cola had no products of its own for export, it lifted traditional items such as cashew from third parties and obtained import entitlements in violation of import regulations. To all these squabbles was added a new row over equity. Coca-Cola was directed to continue its operations on condition that its branch would be converted into an Indian company with 40 per cent foreign equity. It had to put through dilution within two years. The company, apparently, accepted the FERA directive and submitted a scheme. On closer examination, it was clear that its scheme was a clever ploy. It had two parts. The first dealt with bottling and distribution. Coca-Cola was willing to hold 40 per cent equity in this unit. The second, more important, was the "technical" or "administrative unit.'' The company wanted to hold 100 per cent control over this unit and was unwilling to permit any local participation. As FERA required that the entire operations of a branch be brought under one company with 40 per cent foreign equity, the company was advised that its scheme was unacceptable. It was advised to submit a scheme conforming to the FERA guidelines. Instead of complying with FERA, Coca-Cola decided to wind up its operations in India. Though the decision flowed from its corporate policies, the company made wild allegations that it decided to exit as Indian authorities wanted full disclosure of the formula for making concentrate!

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ANDHRA EXCISE MINISTER GETS 2-MONTH JAIL FOR FERA VIOLATION

ABSTRACT:
An economic offences court in Hyderabad sentenced Andhra Pradesh excise and secondary education minister K Parthasarathy to two months' simple imprisonment and imposed a fine of Rs 10,000 on him apart from slapping a penalty of Rs 5 lakh on his firm KPR Tele Products for conducting certain monetary transactions in 1997 that went against the provisions of the Foreign Exchange Regulation Act (FERA).

VIOLATION OF FERA:
The case against Parthasarathy was that he had sent Rs 50 lakh to a Swiss firm for importing certain technology and equipment worth Rs 2.5 crore in 1997. Since the machinery never came to him, the Enforcement Directorate in Bangalore booked a case against him and his firm under FERA provisions. The way the money was sent out of Indian shores was seen as contrary to the provisions of FERA, later replaced by FEMA. In 2001, the ED imposed a penalty of Rs 3 lakh on Parthasarathy's firm but he failed to pay the same. This failure to pay the penalty resulted in another case.

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ECONOMIC CONDITION OF INDIA IN 1991

In 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had been reduced to such a point that India could barely finance three weeks worth of imports. The country had to airlift its gold reserves as a pledge with the International Monetary Fund (IMF) for a loan. While India has not been a frequent user of IMF resources, IMF credit has been instrumental in helping India respond to emerging balance of payments problems on two occasions. In 1981-82, India borrowed SDR 3.9 billion under an Extended Fund Facility, the largest arrangement in IMF history at the time. In 1991-93, India borrowed a total of SDR 2.2 billion under two stand by arrangements, and in 1991 it borrowed SDR 1.4 billion under the Compensatory Financing Facility. The crisis was caused by currency overvaluation; the current account deficit, and investor confidence played significant role in the sharp exchange rate depreciation. The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During the mid-eighties, India started having balance of payments problems. Precipitated by the Gulf War, Indias oil import bill swelled, exports slumped, credit dried up, and investors took their money out. Large fiscal deficits, over time, had a spillover effect on the trade deficit culminating in an external payments crisis. By the end of 1990, India was in serious economic trouble. The gross fiscal deficit of the government (centre and states) rose from 9.0 percent of GDP in 1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the centre alone, the gross fiscal deficit rose from 6.1 percent of GDP in 1980-81 to 8.3 percent in 1985-86 and to 8.4 percent in 1990-91. Since these deficits had to be met by borrowings, the internal debt of the government accumulated rapidly, rising from 35 percent of GDP at the end of 1980-81 to 53 percent of GDP at the end of 1990-91. The foreign exchange reserves had dried up to the point that India could barely finance three weeks worth of imports. In mid-1991, India's exchange rate was subjected to a severe adjustment. This event began with a slide in the value of the Indian rupee leading up to mid-1991. The authorities at the Reserve Bank of India took partial action, defending the currency by expending international reserves and slowing the decline in value. However, in mid-1991, with foreign reserves nearly depleted, the Indian government permitted a sharp depreciation that took place in two steps within three days (1 July and 3 July 1991) against major currencies. During the closing decade of the last century India adopted the new economic policy. The economy was opened and the government was liberalizing many of the earlier regulations. This made FERA redundant and amendments were needed to the existing law to make it more appropriate for the new age.

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FOREIGN EXCHANGE MANAGEMENT ACT 1999

FEMA, 1999 is an act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments for promoting the orderly development and maintenance of foreign exchange market in India. It extends to the whole of India. It shall also apply to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention there under committed outside India by any person to whom this Act applies. It came into effect on 1st June 2000.

OBJECTIVES:
The objective of the Act is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. FEMA extends to the whole of India. It applies to all branches, offices and agencies outside India owned or controlled by a person who is a resident of India and also to any contravention there under committed outside India by any person to whom this Act applies.

RBI PERMISSIONS AND REGULATION:

Except with the general or special permission of the Reserve Bank of India, no person can : Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person; Make any payment to or for the credit of any person resident outside India in any manner; Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner; Reasonable restrictions for current account transactions as may be prescribed. Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. The Reserve Bank may, in consultation with the Central Government, specify:Any class or classes of capital account transactions which are permissible; The limit up to which foreign exchange shall be admissible for such transactions However, the Reserve Bank cannot impose any restriction on the drawing of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.

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The Reserve Bank can, by regulations, prohibit, restrict or regulate the following: Transfer or issue of any foreign security by a person resident in India; Transfer or issue of any security by a person resident outside India; Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India; Any borrowing or lending in foreign exchange in whatever form or by whatever name called; Any borrowing or tending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India; Deposits between persons resident in India and persons resident outside India; Export, import or holding of currency or currency notes; Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India; Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India; Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred:1. By a person resident in India and owed to a person resident outside India or 2. By a person resident outside India.

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PROVISIONS:
Section 2 - The Act here provides clarity on several definitions and terms used in the context of
foreign exchange. Some of the key terms and definitions under this act are: 1. Authorized Person - "Authorized person" means an authorized dealer, moneychanger, offshore banking unit or any other person for the time being authorized under section 10(1) to deal in foreign exchange securities. 2. Capital Account Transaction - "Capital account transaction" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of person resident outside India, and includes transactions referred to in sub-section (3) of section 6 3. Current Account Transaction - "Current account transaction" means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,i. Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business. ii. Payments due as interest on loans and as net income from investments. iii. Remittances for living expenses of parents, spouse and children residing abroad, and iv. Expenses in connection with foreign travel, education and medical care of parents, spouse and children; 4. Foreign exchange reserves - A country's reserves of foreign currencies. Commonly known as "quick cash", they can be used immediately to finance imports and other foreign payables. 5. Foreign security - means any security, in the form of shares, stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency and includes securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency. 6. Foreign exchange- means foreign currency and includes,a. deposits, credits and balances payable in any foreign currency, b. drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency, c. drafts, travelers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency; 7. Authorized dealer - "authorized dealer" means a person for the time being authorized under section 6 to deal in foreign exchange; 8. Currency [including relevant notification] "Currency" includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank;
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Section 3 (Dealing in foreign exchange) prohibits dealings in foreign exchange except through
an authorised person. Similarly, without the prior approval of the RBI, no person can make any payment to any person resident outside India in any manner other than that prescribed by it. The Act restricts non-authorised persons from entering into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire any asset outside India.

Section 4 (Holding of foreign exchange) restrains any person resident in India from acquiring,
holding, owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India except as specifically provided in the Act.

Section 5 (Current account transactions) states that any person can sell or draw foreign
exchange to or from authorized persons if such sale or withdrawal is a current account transaction. Reasonable restrictions on current account transaction can be imposed by the Central government in public interest, in consultation with the RBI.

Section 6 (capital account transactions) this section allows a person to draw or sell foreign
exchange from or to an authorised person for a capital account transaction. RBI in consultation with the Central Government has issued various regulations on capital account transactions in terms of sub-sect ion (2) and (3) of section 6. The duties and liabilities of the Authorised Dealers have been dealt with in Sections 10, 11 and 12, while Sections 13 to 15 cover penalties and enforcement of the orders of the Adjudicating Authority as well as the power to compound contraventions under the Act.

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CONTRAVENTIONS AND PENALTIES

DIRECTORATE OF ENFORCEMENT: The Directorate of Enforcement has been formed to ensure that the provisions of the Act are adhered to. In the Directorate of Enforcement, an Additional Director, a special Director and Assistant Directors of Enforcement are appointed by the Central govt. under section 36.

PENALTIES UNDER THE ACT: An Adjudicating Authority appointed by the Central Government under FEMA can impose penalties for violating any provision of the Act or contravention of any rule, regulation, direction or order issued under the power conferred by the Act. If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues. Any Adjudicating Authority adjudging any contravention may, if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government and further direct that the foreign exchange holdings, if any, of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf.

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FOREIGN DIRECT INVESTMENT IN INDIA

Foreign Direct Investment (FDI) in India is undertaken in accordance with the FDI Policy which is formulated and announced by the Government of India. The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India issues a Consolidated FDI Policy Circular on an yearly basis on March 31 of each year (since 2010) elaborating the policy and the process in respect of FDI in India. The latest Consolidated FDI Policy Circular is governed by the provisions of the Foreign Exchange Management Act (FEMA), 1999. FEMA Regulations which prescribe amongst other things the mode of investments i.e. issue or acquisition of shares / convertible debentures and preference shares, manner of receipt of funds, pricing guidelines and reporting of the investments to the Reserve Bank. The Reserve Bank has issued Notification No. FEMA 20 /2000-RB dated May 3, 2000 which contains the Regulations in this regard. This Notification has been amended from time to time.

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ENTRY ROUTES FOR INVESTMENTS

Under the Foreign Direct Investments (FDI) Scheme, investments can be made in shares, mandatorily and fully convertible debentures and mandatorily and fully convertible preference shares of an Indian company by non-residents through two routes: 1. Automatic Route: Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. 2. Government Permission Route: Under the Government Route, the foreign investor or the Indian company should obtain prior approval of the Government of India(Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance or Department of Industrial Policy & Promotion, as the case may be) for the investment.

ELIGIBILITY FOR INVESTMENT

1. A person resident outside India or an entity incorporated outside India, can invest in India, subject to the FDI Policy of the Government of India. A person who is a citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Scheme, with the prior approval of the FIPB. Further, a person who is a citizen of Pakistan or an entity incorporated in Pakistan, may, with the prior approval of the FIPB, can invest in an Indian company under FDI Scheme, subject to the prohibitions applicable to all foreign investors and the Indian company, receiving such foreign direct investment, should not be engaged in sectors / activities pertaining to defence, space and atomic energy. 2. NRIs, resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in shares and convertible debentures of Indian companies under FDI Scheme on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels. 3. Overseas Corporate Bodies (OCBs) have been de-recognised as a class of investors in India with effect from September 16, 2003. Erstwhile OCBs which are incorporated outside India and are not under adverse notice of the Reserve Bank can make fresh investments under the FDI Scheme as incorporated non-resident entities, with the prior approval of the Government of India, if the investment is through the Government Route; and with the prior approval of the Reserve Bank, if the investment is through the Automatic Route. However, before making any fresh FDI under the FDI scheme, an erstwhile OCB should through their AD bank, take a onetime certification from RBI that it is not in the adverse list being maintained with the Reserve Bank of India.

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TYPE OF INSTRUMENTS

1. Indian companies can issue equity shares, fully and mandatorily convertible debentures and fully and mandatorily convertible preference shares subject to the pricing guidelines / valuation norms and reporting requirements amongst other requirements as prescribed under FEMA Regulations. 2. Issue of other types of preference shares such as non-convertible, optionally convertible or partially convertible, has to be in accordance with the guidelines applicable for External Commercial Borrowings (ECBs). 3. As far as debentures are concerned, only those which are fully and mandatorily convertible into equity, within a specified time, would be reckoned as part of equity under the FDI Policy.

PRICING GUIDELINES

1. Fresh issue of shares: Price of fresh shares issued to persons resident outside India under the FDI Scheme, shall be: a) On the basis of SEBI guidelines in case of listed companies. b) Not less than fair value of shares determined by a SEBI registered Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow Method (DCF) in case of unlisted companies. 2. The above pricing guidelines are also applicable for issue of shares against payment of lump sum technical knowhow fee / royalty due for payment/repayment or conversion of ECB into equity or capitalization of pre incorporation expenses/import payables (with prior approval of Government). 3. However, where non-residents (including NRIs) are making investments in an Indian company in compliance with the provisions of the Companies Act, 1956, by way of subscription to its Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme. 4. Preferential allotment: In case of issue of shares on preferential allotment, the issue price shall not be less that the price as applicable to transfer of shares from resident to non-resident. 5. Issue of shares by SEZs against import of capital goods: In this case, the share valuation has to be done by a Committee consisting of Development Commissioner and the appropriate Customs officials. 6. Right Shares: The price of shares offered on rights basis by the Indian company to non-resident shareholders shall be: a) In the case of shares of a company listed on a recognised stock exchange in India, at a price as determined by the company. b) In the case of shares of a company not listed on a recognised stock exchange in India, at a price which is not less than the price at which the offer on right basis is made to the resident shareholders.
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7. Acquisition / transfer of existing shares (private arrangement): The acquisition of existing shares from Resident to Non-resident (i.e. to incorporated non-resident entity other than erstwhile OCB, foreign national, NRI, FII) would be at a: a) Negotiated price for shares of companies listed on a recognized stock exchange in India which shall not be less than the price at which the preferential allotment of shares can be made under the SEBI guidelines, as applicable, provided the same is determined for such duration as specified therein, preceding the relevant date, which shall be the date of purchase or sale of shares. The price per share arrived at should be certified by a SEBI registered Merchant Banker or a Chartered Accountant. b) Negotiated price for shares of companies which are not listed on a recognized stock exchange in India which shall not be less than the fair value to be determined by a SEBI registered Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow (DCF) method.

8. Further, transfer of existing shares by Non-resident (i.e. by incorporated non-resident entity, erstwhile OCB, foreign national, NRI, FII) to Resident shall not be more than the minimum price at which the transfer of shares can be made from a resident to a non-resident as given above.

9. The pricing of shares / convertible debentures / preference shares should be decided / determined upfront at the time of issue of the instruments. The price for the convertible instruments can also be a determined based on the conversion formula which has to be determined / fixed upfront, however the price at the time of conversion should not be less than the fair value worked out, at the time of issuance of these instruments, in accordance with the extant FEMA regulations.

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WAL-MART RESUMES US LOBBYING ON FDI IN INDIA

WASHINGTON/NEW DELHI: Global retail giant Wal-Mart has resumed its lobbying with the US lawmakers on matters related to FDI in India and it spent $1.5 million on about 50 specific issues, including those related to Indian market during the last quarter. "Discussions regarding foreign direct investment in India" is one of the ten-odd specific issues in the area of trade that were carried out by registered lobbyists on behalf of Wal-Mart during third quarter of 2013, according to its latest Lobbying Disclosure Form submitted to the US Senate. Overall, Wal-Mart lobbyists discussed nearly 50 'specific issues' with the US lawmakers during the quarter, resulting into total expenses of $1.5 million relating to lobbying activities for the reporting period, shows the 19-page disclosure report. Wal-Mart's lobbying activities covered the Senate, House of Representatives, department of state, US trade representatives, US Agency for International Development and the department of labour, among others. As per Congressional records, Wal-Mart had halted its lobbying with the US lawmakers and federal agencies on India-specific issues in the preceding quarter, after seeking their support for about five years to facilitate its entry into the high-growth Indian retail market. However, such lobbying activities resumed during the last quarter a period which also saw hectic parleys in India with regard to Wal-Mart's business activities in the country. After months of discussions, Wal-Mart earlier this month announced buyout of Bharti group's 50 per cent stake in their wholesale retail business in India.

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Wal-Mart has also been requesting the Indian government to further relax norms for FDI in multi-brand retail business, where 51 per cent foreign equity was allowed last year despite opposition by various political parties. Incidentally, a probe report on Wal-Mart's lobbying for entering India may soon be discussed by the Union Cabinet. The probe is said to have remained inconclusive as Wal-Mart and others did not provide required information. The Indian government had ordered the probe on Wal-Mart's lobbying late last year after a huge political outcry over the American retail giant having spent millions of dollars on its lobbying activities in the US for years on various issues, including on access to the Indian market and the relevant FDI norms. Lobbying is legally permitted in the US, but the companies and their registered lobbyists are required to make detailed disclosures about their activities every quarter. Wal-Mart, on its part, has been maintaining that it has disclosed all its lobbying activities as per the US rules and it did not violate any Indian regulations in this regard. There are no clear regulations on lobbying in India, although companies here also indulge in activities promoting their cause with the government and other agencies, either directly or through industry bodies and other groups. As per the Congressional records, Wal-Mart began lobbying in the US on India-specific issues way back in 2008. Since then, the company has spent a total amount of $39.42 million (about Rs 242 crore) on numerous lobbying issues, including those related to India. Out of this, over $5 million have been spent so far in 2013. Wal-Mart's lobbying issues did not include India in the second quarter of this year, while the first quarter of 2012, as also all four quarters of 2009 also did not have any single lobbying issue related to India. Wal-Mart and many other overseas supermarket chains have been wanting to set shop for many years in India, which opened up this business for foreign players only last year. Still, there are many restrictions, such as those on sourcing of products, that are keeping foreign multi-brand retailers away from the country. Separately, Wal-Mart was also facing a probe by the enforcement directorate in Delhi for alleged violation of FEMA (Foreign Exchange Management Act) norms, but is said to have been given clean chit on that front.

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FOREIGN INVESTMENT LIMITS, PROHIBITED SECTORS AND INVESTMENT IN MSES

A) FOREIGN INVESTMENT LIMITS The details of the entry route applicable and the maximum permissible foreign investment / sectoral cap in an Indian Company are determined by the sector in which it is operating. B) INVESTMENTS IN MICRO AND SMALL ENTERPRISE (MSE) A company which is reckoned as Micro and Small Enterprise (MSE) (earlier Small Scale Industrial Unit) in terms of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, including an Export Oriented Unit or a Unit in Free Trade Zone or in Export Processing Zone or in a Software Technology Park or in an Electronic Hardware Technology Park, and which is not engaged in any activity/sector may issue shares or convertible debentures to a person resident outside India (other than a resident of Pakistan and to a resident of Bangladesh under approval route), subject to the prescribed limits as per FDI Policy, in accordance with the Entry Routes and the provision of Foreign Direct Investment Policy, as notified by the Ministry of Commerce & Industry, Government of India, from time to time. Any Industrial undertaking, with or without FDI, which is not an MSE, having an industrial license under the provisions of the Industries (Development & Regulation) Act, 1951 for manufacturing items reserved for the MSE sector may issue shares to persons resident outside India (other than a resident/entity of Pakistan and to a resident/entity of Bangladesh with prior approval FIPB), to the extent of 24 per cent of its paid-up capital or sectoral cap whichever is lower. Issue of shares in excess of 24 per cent of paid-up capital shall require prior approval of the FIPB of the Government of India and shall be in compliance with the terms and conditions of such approval. C) PROHIBITION ON FOREIGN INVESTMENT IN INDIA 1. Foreign investment in any form is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as, Trusts) which is engaged or proposes to engage in the following activities3: (a) Business of chit fund, or (b) Nidhi company, or (c) Agricultural or plantation activities, or (d) Real estate business, or construction of farm houses, or (e) Trading in Transferable Development Rights (TDRs).

2. It is clarified that real estate business means dealing in land and immovable property with a view to earning profit or earning income there from and does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.
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3. In addition to the above, Foreign investment in the form of FDI is also prohibited in certain sectors such as (Annex-2): a) Lottery Business including Government /private lottery, online lotteries, etc. b) Gambling and betting including casinos etc. c) Business of Chit funds d) Nidhi company e) Trading in Transferable Development Rights (TDRs) f) Real Estate Business or Construction of Farm Houses g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes h) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

Note: Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

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SECTOR-SPECIFIC POLICY FOR FOREIGN INVESTMENT

In the following sectors/activities, FDI up to the limit indicated against each sector/activity is allowed, subject to applicable laws/ regulations; security and other conditionalities. In sectors/activities not listed below, FDI is permitted up to 100% on the automatic route, subject to applicable laws/ regulations; security and other conditionalities. Wherever there is a requirement of minimum capitalization, it shall include share premium received along with the face value of the share, only when it is received by the company upon issue of the shares to the non-resident investor. Amount paid by the transferee during post-issue transfer of shares beyond the issue price of the share, cannot be taken into account while calculating minimum capitalization requirement.

1. BANKING PRIVATE SECTOR

Percent of Cap/Equity: - 74 % including investment by FIIs Entry Route:-

Automatic upto 49% Government Route beyond 49% and upto 74%

Other conditions:

1. This 74% limit will include investment under the Portfolio Investment Scheme (PIS) by FIIs, NRIs and shares acquired prior to September 16, 2003 by erstwhile OCBs, and continue to include IPOs, Private placements, GDR/ADRs and acquisition of shares from existing shareholders. 2. The aggregate foreign investment in a private bank from all sources will be allowed up to a maximum of 74 per cent of the paid up capital of the Bank. At all times, at least 26 per cent of the paid up capital will have to be held by residents, except in regard to a wholly-owned subsidiary of a foreign bank. 3. The stipulations as above will be applicable to all investments in existing private sector banks also. 4. The permissible limits under portfolio investment schemes through stock exchanges for FIIs and NRIs will be as follows:

i.

In the case of FIIs, as hitherto, individual FII holding is restricted to 10 per cent of the total paid-up capital, aggregate limit for all FIIs cannot exceed 24 per cent of the total paid-up capital, which can be raised to 49 per cent of the total paid-up capital by the bank concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body.

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(a)Thus, the FII investment limit will continue to be within 49 per cent of the total paid-up capital. (b)In the case of NRIs, as hitherto, individual holding is restricted to 5 per cent of the total paid-up capital both on repatriation and non- repatriation basis and aggregate limit cannot exceed 10 per cent of the total paid-up capital both on repatriation and non-repatriation basis. However, NRI holding can be allowed up to 24 per cent of the total paid-up capital both on repatriation and non-repatriation basis provided the banking company passes a special resolution to that effect in the General Body. (c) Applications for foreign direct investment in private banks having joint venture/subsidiary in insurance sector may be addressed to the Reserve Bank of India (RBI) for consideration in consultation with the Insurance Regulatory and Development Authority (IRDA) in order to ensure that the 26 per cent limit of foreign shareholding applicable for the insurance sector is not being breached. (d) Transfer of shares under FDI from residents to non-residents will continue to require approval of RBI and Government as per para 3.6.2 of DIPPs Circular 1 of 2012 as applicable. (e) The policies and procedures prescribed from time to time by RBI and other institutions such as SEBI, D/o Company Affairs and IRDA on these matters will continue to apply. (f) RBI guidelines relating to acquisition by purchase or otherwise of shares of a private bank, if such acquisition results in any person owning or controlling 5 per cent or more of the paid up capital of the private bank will apply to non-resident investors as well.

ii.

Setting up of a subsidiary by foreign banks: (a) Foreign banks will be permitted to either have branches or subsidiaries but not both. (b) Foreign banks regulated by banking supervisory authority in the home country and meeting Reserve Banks licensing criteria will be allowed to hold 100 per cent paid up capital to enable them to set up a wholly-owned subsidiary in India. (c) A foreign bank may operate in India through only one of the three channels Branches A wholly-owned subsidiary and A subsidiary with aggregate foreign investment up to a maximum of 74 per cent in a private bank.

(d) A foreign bank will be permitted to establish a wholly-owned subsidiary either through conversion of existing branches into a subsidiary or through a fresh banking license. A foreign bank will be permitted to establish a subsidiary through acquisition of shares of an existing private sector bank provided at least 26 per cent of the paid capital of the private sector bank is held by residents at all times consistent with Para (i) (b) above.

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(e) A subsidiary of a foreign bank will be subject to the licensing requirements and conditions broadly consistent with those for new private sector banks. (f) Guidelines for setting up a wholly-owned subsidiary of a foreign bank will be issued separately by RBI (g) All applications by a foreign bank for setting up a subsidiary or for conversion of their existing branches to subsidiary in India will have to be made to the RBI.

iii.

At present there is a limit of ten per cent on voting rights in respect of banking companies, and this should be noted by potential investor. Any change in the ceiling can be brought about only after final policy decisions and appropriate Parliamentary approvals.

BANKING PUBLIC SECTOR

Percent of Cap/Equity: - 20% (FDI and PIS) Entry Route: - Government Banking- Public Sector subject to Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80. This ceiling (20%) is also applicable to the State Bank of India and its associate Banks.

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 SINGLE BRAND PRODUCT RETAIL TRADING

Percent of Cap/Equity: - 100% Entry Route: - Government Conditions:1. Foreign Investment in Single Brand product retail trading is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. 2. FDI in Single Brand product retail trading would be subject to the following conditions: (a) Products to be sold should be of a Single Brand only. (b)Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India. (c) Single Brand product-retail trading would cover only products which are branded during manufacturing. (d) Only one non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner for undertaking single brand product retail trading in respect of specific brand for which approval is being sought. The onus for ensuring compliance with this condition shall rest with the Indian entity carrying out single-brand product retail trading in India. The investing entity shall provide evidence to this effect at the time of seeking approval, including a copy of the licensing/franchise/sub-licence agreement, specifically indicating compliance with the above condition. (e) In respect of proposals involving FDI beyond 51%, sourcing of 30% of the value of goods purchased will be done from India, preferably from MSMEs village and cottage industries, artisans and craftsmen in all sectors. The quantum of domestic sourcing will be self-certified by the company, to be subsequently checked, by statutory auditors from the duly certified accounts which the company will be required to maintain. This procurement requirement would have to be met, in the first instance, as an average of five years; total value of the goods purchased, beginning 1st April of the year during which the first tranche of FDI is received, Thereafter, it would have to be met on an annual basis. For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, incorporated in India, which is the recipient of FDI for the purpose of carrying out single-brand product retail trading. (f) Retail trading, in any form, by means of e-commerce, would not be permissible for companies with FDI, engaged in the activity of single brand retail trading. 3. Applications seeking permission of the Government for FDI in retail trade of Single Brand products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. The application would specifically indicate the product/ product categories which are proposed to be sold under a Single Brand. Any addition to the product/ product categories to be sold under Single Brand would require a fresh approval of the Government.
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 MULTI BRAND RETAIL TRADING

Percent of Cap/Equity :- 51% Entry Route :- Government Conditions : FDI in multi brand retail trading, in all products, will be permitted, subject to the following conditions: 1. Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded. 2. Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million. 3. At least 50% of total FDI brought in shall be invested in 'backend infrastructure' within three years of the first tranche of FDI, where 'back-end infrastructure' will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of back end infrastructure.

4. At least 30% of the value of procurement of manufactured/ processed products purchased shall be sourced from Indian 'small industries' which have a total investment in plant & machinery not exceeding US $1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. This procurement requirement would have to be met, in the first instance, as an average of five years' total value of the manufactured/processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis. 5. Self-certification by the company, to ensure compliance of the conditions at serial nos. (ii), (iii) and (iv) above, which could be cross-checked, as and when required. Accordingly, the investors shall maintain accounts, duly certified by statutory auditors. 6. Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 Census and may also cover an area of 10 kms. around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking; In States / Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities. The locations of such outlets will be restricted to conforming areas, as per the Master/ Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.
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7. Government will have the first right to procurement of agricultural products. 8. The above policy is an enabling policy only and the State Governments/ Union Territories would be free to take their own decisions in regard to implementation of the policy. Therefore, retail sales outlets may be set up in those States/Union Territories which have agreed, or agree in future, to allow FDI in MBRT under this policy. The States / Union Territories which have conveyed their concurrence are as under: a. b. c. d. e. f. g. h. i. j. Andhra Pradesh Assam Delhi Haryana Jammu & Kashmir Maharashtra Manipur Rajasthan Uttarkhand Daman & Diu and Dadra and Nagar Haveli (Union Territories)

9. The States/Union Territories, which are willing to permit establishment of retail outlets under this policy, would convey their concurrence to the Government of India through the Department of Industrial Policy & Promotion and additions would be made accordingly. The establishment of the retail sales outlets will be in compliance of applicable State / Union Territory laws/ regulations, such as the Shops and Establishments Act etc. 10. Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi brand retail trading. 11. Applications would be processed in the Department of Industrial Policy & Promotion, to determine whether the proposed investment satisfies the notified guidelines, before being considered by the FIPB for Government approval.

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 INSURANCE
Percent of Cap/Equity: - 26% Entry Route: - Government Conditions: 1) FDI in the Insurance sector, as prescribed in the Insurance Act, 1938, is allowed under the automatic route. 2) This will be subject to the condition that Companies bringing in FDI shall obtain necessary license from the Insurance Regulatory & Development Authority for undertaking insurance activities.

Issues in FDI in Insurance Sector: 1) Efficiency of the companies with FDI 2) Credibility of foreign companies 3) Greater channelization of savings to insurance 4) Flow of funds to infrastructure

Advantages of FDI in insurance sector 1) Capital for expansion 2) Wider Scope for Growth 3) Moving towards Global Practices 4) Provide customers with competitive products, more options and better service levels.

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EXTERNAL COMMERCIAL BORROWINGS

In the Indian Context, an external commercial borrowing (ECB) is an instrument used to facilitate the access to foreign money by Indian corporations and PSUs. ECBs include commercial bank loans, buyers' credit, suppliers' credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies. ECBs can be accessed through either Automatic Route or Approval Rate. Source of funds for corporates from abroad with advantage of:

lower rates of interest prevailing in the international financial markets longer maturity period for financing expansion of existing capacity as well as for fresh investment Defined as to include commercial loans [in the form of bank loans, buyers credit, suppliers credit, and securitised instruments (e.g. floating rate notes and fixed rate bonds, CP)] availed from non-resident lenders with minimum average maturity of 3 years.

I. AUTOMATIC ROUTE
The following aspects are covered by the RBI circular updated in March 2013 as per the requirements of FEMA, 1999. The following can be considered as eligible borrowers for availing the ECB facility: 1. Corporate registered within the Companies Act,1956 and Infrastructure Finance Companies (IFCs) except financial intermediaries, such as banks, financial institutions (FIs), Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs). 2. Units in SEZs, NGOs, MFIs engaged in Micro financing activities are also eligible to avail the ECB facility subject to specified conditions of having satisfactory borrowing relationships with a scheduled commercial bank authorised to deal in FOREX. There is also a requirement of a certificate of due diligence on fit and proper status of the Board/ Committee of management of the borrowing entity from the designated AD bank. 3. SIDBI is also empowered the facility as defined under the MSMED Act, 2006. The below can be addressed as the recognised lenders for availing this facility. Borrowers mentioned above can raise ECB from internationally recognized sources, such as: (a) International banks, (b) International capital markets,
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(c) Multilateral financial institutions (such as IFC, ADB, CDC, etc.) / regional financial institutions and Government owned development financial institutions, (d) Export credit agencies, (e) Suppliers of equipments, (f) Foreign collaborators and (g) Foreign equity holders [other than erstwhile Overseas Corporate Bodies (OCBs)].

LENDERS
A "foreign equity holder" to be eligible as recognized lender under the automatic route would require minimum holding of paid-up equity in the borrower company as set out below: For ECB up to USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender, For ECB more than USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender and ECB liability-equity ratio not exceeding 4:1

AMOUNT & MATURITY

a. The maximum amount of ECB which can be raised by a corporate is USD 750 million or its equivalent during a financial year. They are allowed to avail of ECB up to USD 200 million or its equivalent in a financial year for meeting foreign currency and/ or Rupee capital expenditure for permissible end-uses. The proceeds of the ECBs should not be used for acquisition of land. b. NGOs engaged in micro finance activities and Micro Finance Institutions (MFIs) can raise ECB up to USD 10 million or its equivalent during a financial year. Designated AD bank has to ensure that at the time of drawdown the Forex exposure of the borrower is fully hedged. c. SIDBI can avail of ECB to the extent of 50 per cent of their owned funds including the outstanding ECB, subject to a ceiling of USD 500 million per financial year. ECB up to USD 20 million or its equivalent in a financial year with minimum average maturity of three years. ECB above USD 20 million or equivalent and up to USD 750 million or its equivalent with a minimum average maturity of five years. ECB up to USD 20 million or equivalent can have call/put option provided the minimum average maturity of three years is complied with before exercising call/put option. d. All eligible borrowers can avail of ECBs designated in INR from foreign equity holders as per the extant ECB guidelines.

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END USE

a. ECB can be raised for investment such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), new projects, modernization/expansion of existing production units in real sector - industrial sector including small and medium enterprises (SME). b. Overseas Direct Investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad. c. Utilization of ECB proceeds is permitted for first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Governments disinvestment programme of PSU shares. d. Interest During Construction (IDC) for Indian companies which are in the infrastructure sector, where infrastructure is defined as per the extant ECB guidelines, subject to IDC being capitalized and forming part of the project cost e. For lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building by NGOs engaged in micro finance activities. f. Infrastructure Finance Companies (IFCs) i.e. Non-Banking Financial Companies (NBFCs) categorized as IFCs by the Reserve Bank, are permitted to avail of ECBs, including the outstanding ECBs, up to 75 per cent of their owned funds, for on-lending to the infrastructure sector as defined under the ECB policy g. Hedging requirement for currency risk should be 75 per cent of the exposure. h. Maintenance and operations of toll systems for roads and highways for capital expenditure provided they form part of the original project. i. SIDBI can lend to the borrowers in the MSME sector for permissible end uses, having natural hedge by way of foreign exchange earnings. SIDBI may on-lend either in INR or in foreign currency (FCY). In case of on-lending in INR, the foreign currency risk shall be fully hedged by SIDBI. j. Refinancing of Bridge Finance (including buyers / suppliers credit) availed of for import of capital goods by companies in Infrastructure Sector. k. Payment for Spectrum Allocation.

GUARANTEES

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.
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SECURITY
The choice of security to be provided to the lender/supplier is left to the borrower. AD Category - I banks have been delegated powers to convey no objection under the Foreign Exchange Management Act (FEMA), 1999 for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrower. Once the AD- Category I banks are convinced they may convey their no objection, under FEMA, 1999 for creation of charge on immovable assets, financial securities and issue of personal or corporate guarantee.

PARKING OF ECB PROCEEDS

Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India, pending utilization for permissible end-uses. The proceeds of the ECB raised abroad meant for Rupee expenditure in India, such as, local sourcing of capital goods, on-lending to Self-Help Groups or for micro credit, payment for spectrum allocation, etc. should be repatriated immediately for credit to the borrowers Rupee accounts with AD Category I banks in India. In other words, ECB proceeds meant only for foreign currency expenditure can be retained abroad pending utilization. The rupee funds, however, will not be permitted to be used for investment in capital markets, real estate or for inter-corporate lending. ECB proceeds parked overseas can be invested in the following liquid assets (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moodys (b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above, and (c) deposits with overseas branches / subsidiaries of Indian banks abroad. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India. Any action in contravention to the provisions of this Act shall invite penal action under the FEMA, 1999.

PREPAYMENT
Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior approval of Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable to the loan.

PROCEDURE
Borrowers may enter into loan agreement complying with the ECB guidelines with recognised lender for raising ECB under Automatic Route without the prior approval of the Reserve Bank. The borrower must obtain a Loan Registration Number (LRN) from the Reserve Bank of India before drawing down the ECB.
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II. APPROVAL ROUTE

The following shall be considered as Eligible Borrowers for ECB under the Approval route: a. On lending by the EXIM Bank for specific purposes will be considered on a case by case basis. b. ECB with minimum average maturity of 5 years by Non-Banking Financial Companies (NBFCs) from multilateral financial institutions, reputable regional financial institutions, official export credit agencies and international banks to finance import of infrastructure equipment for leasing to infrastructure projects. c. Infrastructure Finance Companies (IFCs) i.e. Non-Banking Financial Companies (NBFCs), categorized as IFCs, by the Reserve Bank, are permitted to avail of ECBs, including the outstanding ECBs, beyond 50 per cent of their owned funds, for on-lending to the infrastructure sector as defined under the ECB policy. d. Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set up to finance infrastructure companies / projects exclusively, will be treated as Financial Institutions and ECB by such entities will be considered under the Approval Route. e. Multi-State Co-operative Societies engaged in manufacturing activity and satisfying the following criteria i) the Co-operative Society is financially solvent and ii) the Co-operative Society submits its up-to-date audited balance sheet. f. SEZ developers can avail of ECBs for providing infrastructure facilities within SEZ, as defined in the extant ECB policy like (i) power, (ii) telecommunication, (iii) railways, (iv) roads including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects), (viii) mining, exploration and refining and (ix) cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat. g. Developers of National Manufacturing Investment Zones (NMIZs) can avail of ECB for providing infrastructure facilities within SEZ. h. Eligible borrowers under the automatic route other than corporate in the services sector viz. hotel, hospital and software can avail of ECB beyond USD 750 million or equivalent per financial year. i. Corporate in the services sector viz. hotels, hospitals and software sector can avail of ECB beyond USD 200 million or equivalent per financial year. j. Small Industries Development Bank of India (SIDBI) is eligible to avail of ECB for on-lending to MSME sector, as defined under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, beyond 50 per cent of their owned funds, subject to a ceiling of USD 500 million per financial year. k. ECB facility can also be availed for low cost housing project facilities.

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l. All entities against which investigations / adjudications / appeals by the law enforcing agencies are pending, may avail of ECBs as per the current norms, if they are otherwise eligible, notwithstanding the pending investigations.

ELIGIBLE LENDERS
(a) Borrowers can raise ECB from internationally recognised sources, such as (i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC, ADB, CDC, etc.)/ regional financial institutions and Government owned development financial institutions, (iv) export credit agencies, (v) suppliers' of equipment, (vi) foreign collaborators and (vii) foreign equity holders (other than erstwhile OCBs). (b) A "foreign equity holder" to be eligible as recognized lender under the approval route would require minimum holding of paid-up equity in the borrower company as set out below: (i) For ECB up to USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender, (ii) For ECB more than USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender and ECB liability-equity ratio not exceeding 7:1 (c) ECB from indirect equity holders provided the indirect equity holding by the lender in the Indian company is at least 51 per cent. (d) ECB from a group company provided both the borrower and the foreign lender are subsidiaries of the same parent.

AMOUNT & MATURITY

Eligible borrowers under the automatic route other than corporate in the services sector viz. hotel, hospital and software can avail of ECB beyond USD 750 million or equivalent per financial year. Corporate in the services sector viz. hotels, hospitals and software sector are allowed to avail of ECB beyond USD 200 million or its equivalent in a financial year for meeting foreign currency and/ or Rupee capital expenditure for permissible end-uses. The proceeds of the ECBs should not be used for acquisition of land. Indian companies which are in the infrastructure sector, as defined under the extant ECB guidelines, can avail of ECBs in Renminbi (RMB), subject to an annual ceiling of USD one billion for the entire sector, pending further review.

END USE
1. ECB can be raised only for investment [such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), implementation of new projects, modernization/expansion of existing production units] in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India.

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2. Overseas Direct Investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad. 3. Interest during Construction (IDC) for Indian companies which are in the infrastructure sector, as defined under the extant ECB guidelines subject to IDC being capitalized and forming part of the project cost. 4. The payment by eligible borrowers in the Telecom sector, for spectrum allocation may, initially, be met out of Rupee resources by the successful bidders, to be refinanced with a long-term ECB, under the approval route, subject to the following conditions: (i) The ECB should be raised within 12 months from the date of payment of the final instalment to the Government; (ii) The designated AD - Category I bank should monitor the end-use of funds; (iii) Banks in India will not be permitted to provide any form of guarantees; and (iv) All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost, average maturity, etc. should be complied with. 5. The first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Governments disinvestment programme of PSU shares. 6. Repayment of Rupee loans availed of from domestic banking system: Indian companies which are in the infrastructure sector (except companies in the power sector), as defined under the extant ECB guidelines , are permitted to utilise 25 per cent of the fresh ECB raised by them towards refinancing of the Rupee loan/s availed by them from the domestic banking system, subject to the following conditions: (i) At least 75 per cent of the fresh ECB proposed to be raised should be utilised for capital expenditure towards a 'new infrastructure' project(s) (ii) in respect of remaining 25 per cent, the refinance shall only be utilized for repayment of the Rupee loan availed of for 'capital expenditure' of earlier completed infrastructure project(s); and (iii) The refinance shall be utilized only for the Rupee loans which are outstanding in the books of the financing bank concerned. Companies in the power sector are permitted to utilize up to 40 per cent of the fresh ECB raised by them towards refinancing of the Rupee loan/s availed by them from the domestic banking system subject to the condition that at least 60 per cent of the fresh ECB proposed to be raised should be utilized for fresh capital expenditure for infrastructure project(s).

7. Bridge Finance: Indian companies which are in the infrastructure sector, as defined under the extant ECB policy are permitted to import capital goods by availing of short term credit (including buyers / suppliers credit) in the nature of 'bridge finance', with RBIs prior approval provided the bridge finance shall be replaced with a long term ECB as per extant ECB guidelines. 8. ECB for working capital for civil aviation sector: Airline companies registered under the Companies Act, 1956 and possessing scheduled operator permit license from DGCA for passenger transportation are eligible to avail of ECB for working capital. Such ECBs will be allowed based on the cash flow, foreign exchange earnings and the capability to service the debt and the ECBs can be raised with a minimum average maturity period of three years.

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The overall ECB ceiling for the entire civil aviation sector would be USD one billion and the maximum permissible ECB that can be availed by an individual airline company will be USD 300 million. This limit can be utilized for working capital as well as refinancing of the outstanding working capital Rupee loan(s) availed of from the domestic banking system. ECB availed for working capital/refinancing of working capital as above will not be allowed to be rolled over. REPAYMENT OF RUPEE LOAN AND/OR FRESH RUPEE CAPITAL EXPENDITURE FOR COMPANIES WITH CONSISTENT FOREX EARNINGS Indian companies in the manufacturing, infrastructure sector and hotel sector (with a total project cost of INR 250 crore or more irrespective of geographical location), can avail of ECBs for repayment of outstanding Rupee loans availed of for capital expenditure from the domestic banking system and/or fresh Rupee capital expenditure provided they are consistent foreign exchange earners during the past three financial years and not in the default list/caution list of the Reserve Bank of India. The overall limit for such ECBs is USD 10 billion and the maximum ECB that can be availed by an individual company or group, as a whole, under this scheme will be restricted to USD 3 billion. Further, the maximum permissible ECB that can be availed of by an individual company will be limited to 75 per cent of the average annual export earnings realized during the past three financial years or 50 per cent of the highest foreign exchange earnings realized in any of the immediate past three financial years, whichever is higher. In case of Special Purpose Vehicles (SPVs), which have completed at least one year of existence from the date of incorporation and do not have sufficient track record/past performance for three financial years, the maximum permissible ECB that can be availed of will be limited to 50 per cent of the annual export earnings realized during the past financial year. The foreign exchange for repayment of ECB should not be accessed from Indian markets and the liability arising out of ECB should be extinguished only out of the foreign exchange earnings of the borrowing company.

END-USES NOT PERMITTED

Other than the purposes specified hereinabove, the borrowings shall not be utilised for any other purpose including the following purposes, namely: (a) For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate except Infrastructure Finance Companies (IFCs), banks and financial institutions. (b) For real estate. (c) For working capital and general corporate purpose and repayment of existing Rupee loans.

GUARANTEE
Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not normally permitted. Applications for providing guarantee/standby letter of credit or letter of comfort by banks, financial institutions relating to ECB in the case of SME will be considered on merit subject to prudential norms.
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SECURITY
The choice of security to be provided to the lender / supplier is left to the borrower. Powers have been delegated to Authorised Dealer Category I banks to issue necessary NOCs under FEMA. Other necessary regulations shall be applicable in case of creation of charge over immovable assets and financial securities.

PARKING OF ECB PROCEEDS

The proceeds of the ECB raised abroad meant for Rupee expenditure in India, such as, local sourcing of capital goods, on-lending to Self-Help Groups or for micro credit, payment for spectrum allocation, repayment of rupee loan availed from domestic banks, etc. should be repatriated immediately for credit to their Rupee accounts with AD Category I banks in India. In other words, ECB proceeds meant only for foreign currency expenditure can be retained abroad pending utilization. The rupee funds, however, will not be permitted to be used for investment in capital markets, real estate or for inter-corporate lending. ECB proceeds parked overseas can be invested in the following liquid assets (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/ Fitch IBCA or Aa3 by Moodys; (b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above and (c) deposits with overseas branches / subsidiaries of Indian banks abroad. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India. Any action in contravention to the provisions of this Act shall invite penal action under the FEMA, 1999.

PREPAYMENT
(a) Prepayment of ECB up to USD 500 million may be allowed by the AD bank without prior approval of the Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable to the loan. (b) Pre-payment of ECB for amounts exceeding USD 500 million would be considered by the Reserve Bank under the Approval Route.

PROCEDURE
Applicants are required to submit an application in form ECB through designated AD bank to the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, Central Office, External Commercial Borrowings Division, Mumbai 400 001, along with necessary documents.

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CASE STUDY - BCCI

The BCCI was asked about the funding pattern of the IPL and the methods adopted for payment to foreign and Indian players. Under fire over allegations of foreign exchange violations in IPL, BCCIs top officials on Wednesday blamed sacked Commissioner Lalit Modi for mistakes as they told a Parliamentary panel that they had given approvals at his behest in good faith. BCCI president Shashank Manohar, secretary N. Srinivasan and IPL chairman Chirayu Amin were quizzed by the Parliamentary Standing Committee on Finance for about two-and-a-half hours about the alleged FEMA violations. The BCCI was asked about the funding pattern of the highly popular IPL and the methods adopted for payment to foreign and Indian players. The Committee also sought details of the expenses incurred on the conduct of the second edition of the Twenty20 tournament in South Africa in 2009. The IPL was held in the African nation in 2009 due to a clash of dates with the general elections in India. Making a case of FEMA violation against the BCCI, the Committee said the Board had not taken permission from RBI and Income Tax Department for opening and operating foreign current account in South Africa. It said opening and operating of the account through an explicit agreement with the Cricket South Africa (CSA) could be construed as FEMA violation as the operations of the account were controlled by BCCI. The Committee also asked the BCCI officials if they were aware about a government report that investments made by IPL franchisees such as Rajasthan Royals, Kolkata Knight Riders, Kings XI Punjab and Mumbai Indians were routed from outside India through entities, located in countries such as Mauritius, Bahamas, British Virgin Island. They asked why the BCCI did not take approval from RBI, SIPB and other agencies for the foreign exchange transactions. It also asked how the BCCI ensures that FDI received by the franchisees is not tainted money. The BCCI was also asked to explain the ownership and shareholding pattern of the IPL franchisees, saying that it has noticed that in certain cases the investment have been made by some person/entity but share for corresponding money have been issued in the name of some other persons/entities.

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IMPORT AND EXPORT GUIDELINES

EXPORT
Export trade is regulated by the Directorate General of Foreign Trade (DGFT) and its regional offices, functioning under the Ministry of Commerce and Industry, Department of Commerce, Government of India. AD Category I banks may conduct export transactions in conformity with the Foreign Trade Policy in vogue and the Rules framed by the Government of India and the Directions issued by Reserve Bank. AD Category I banks have been permitted to issue guarantees on behalf of exporter clients on account of exports out of India subject to specified conditions.

GENERAL GUIDELINES FOR EXPORTS

1. Realisation and Repatriation of export proceeds It is obligatory on the part of the exporter to realise and repatriate the full value of goods or software to India within a stipulated period from the date of export, as under : i. Units located in SEZs shall realize and repatriate full value of goods / software / services, to India within a period of twelve months from the date of export. Any extension of time beyond the above stipulated period may be granted by Reserve Bank of India, on case to case basis. ii. By Status Holder Exporters as defined in the Foreign Trade Policy : Within a period of twelve months from the date of export; iii. By 100 % Export Oriented Units (EOUs) and units set up under Electronic Hardware Technology Parks (EHTPs), Software Technology Parks (STPs) and Biotechnology Parks (BTPs) schemes : Within a period of twelve months from the date of export on or after September 1, 2004.

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iv. Goods exported to a warehouse established outside India : As soon as it is realised and in any case within fifteen months from the date of shipment of goods; and v. In all other cases: With effect from May 20, 2013 this period of realization and repatriation to India has been brought down to nine months from the date of export, till September 30, 2013. Analysis: 12 months because there is a possibility that the exporting company may have another company abroad and may divert these export proceeds in that company. Since the auditing of a Company is completed by end of September, there is a probability that your profits will be affected. Secondly on a broader basis it will have an impact on CAD. 2. Foreign Currency Account (i) Participants in international exhibition/trade fair have been granted general permission for opening a temporary foreign currency account abroad. Exporters may deposit the foreign exchange obtained by sale of goods at the international exhibition/trade fair and operate the account during their stay outside India provided that the balance in the account is repatriated to India through normal banking channels within a period of one month from the date of closure of the exhibition/trade fair and full details are submitted to the AD Category I banks concerned. (ii). An Indian entity can also open a foreign currency account with a bank outside India, in the name of its overseas office/branch, by making remittance for the purpose of normal business operations. Firms / Companies and other organizations participating in Trade Fair/Exhibition abroad can take/export goods for exhibition and sale outside India without the prior approval of the Reserve Bank. Unsold exhibit items may be sold outside the exhibition/trade fair in the same country or in a third country. Such sales at discounted value are also permissible. It would also be permissible to `gift unsold goods up to the value of USD 5000 per exporter, per exhibition/trade fair. Analysis: The reason is that it is a temporary account and is only meant for a particular purpose for eg. an exhibition or fair trade. The amount earned cannot be blocked for a longer period so as to have transactional accountability for a particular period. Also, the amount should not be left dormant in the account for future speculation of exchange rate.

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3. Exchange Earners Foreign Currency (EEFC) Account (i) A person resident in India may open with, an AD Category I bank in India, an account in foreign currency called the Exchange Earners Foreign Currency (EEFC) Account. (ii) This account shall be maintained only in the form of non-interest bearing current account. No credit facilities, either fund-based or non-fund based, shall be permitted against the security of balances held in EEFC accounts by the AD Category I banks. (iii) All categories of foreign exchange earners are allowed to credit 100% of their foreign exchange earnings to their EEFC Accounts subject to the condition that : a) the sum total of the accruals in the account during a calendar month should be converted into Rupees on or before the last day of the succeeding calendar month after adjusting for utilization of the balances for approved purposes or forward commitments. Further, in case of requirements, EEFC account holders are permitted to access the forex market for purchasing foreign exchange. b) The facility of EEFC scheme is intended to enable exchange earners to save on conversion/transaction costs while undertaking forex transactions. This facility is not intended to enable exchange earners to maintain assets in foreign currency, as India is still not fully convertible on Capital Account. 4. Setting up of Offices Abroad and Acquisition of Immovable Property for Overseas Offices (i) At the time of setting up of the office, AD Category I banks may allow remittances towards initial expenses up to fifteen per cent of the average annual sales/income or turnover during the last two financial years or up to twenty-five per cent of the net worth, whichever is higher. (ii) For recurring expenses, remittances up to ten per cent of the average annual sales/income or turnover during the last two financial years may be sent for the purpose of normal business operations of the office (trading / non-trading) / branch or representative office outside India subject to the following terms and conditions:

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a. the overseas branch/office has been set up or representative is posted overseas for conducting normal business activities of the Indian entity; b. the overseas branch/office/representative shall not enter into any contract or agreement in contravention of the Act, Rules or Regulations made there under; c. the overseas office (trading / non-trading) / branch / representative should not create any financial liabilities, contingent or otherwise, for the head office in India and also not invest surplus funds abroad without prior approval of the Reserve Bank. Any funds rendered surplus should be repatriated to India. (iii) The details of bank accounts opened in the overseas country should be promptly reported to the AD Bank. (iv) AD Category I banks may also allow remittances by a company incorporated in India having overseas offices, within the above limits for initial and recurring expenses, to acquire immovable property outside India for its business and for residential purpose of its staff. (v) The overseas office / branch of software exporter company/firm may repatriate to India 100 per cent of the contract value of each off-site contract. (vi) In case of companies taking up on site contracts, they should repatriate the profits of such on site contracts after the completion of the said contracts. (vii) An audited yearly statement showing receipts under off-site and on-site contracts undertaken by the overseas office, expenses and repatriation thereon may be sent to the AD Category I banks. The reason is that since the companys overseas branch is performing normal business, it ensures that the funds are not being misused. 5. Advance Payments against Exports (1) In terms of Regulation 16, where an exporter receives advance payment (with or without interest), from a buyer outside India, the exporter shall be under an obligation to ensure that I. the shipment of goods is made within one year from the date of receipt of advance payment;

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II.

the rate of interest, if any, payable on the advance payment does not exceed London Inter-Bank Offered Rate (LIBOR) + 100 basis points; and the documents covering the shipment are routed through the AD Category I bank through whom the advance payment is received.

III.

Provided that in the event of the exporters inability to make the shipment, partly or fully, within one year from the date of receipt of advance payment, no remittance towards refund of unutilized portion of advance payment or towards payment of interest, shall be made after the expiry of the said period of one year, without the prior approval of the Reserve Bank. (2) AD Category- I banks may allow exporters to receive advance payment for export of goods which would take more than one year to manufacture and ship and where the export agreement provides for shipment of goods extending beyond the period of one year from the date of receipt of advance payment subject to the following conditions:i. The KYC and due diligence exercise has been done by the AD Category I bank for the overseas buyer; ii. Compliance with the Anti Money Laundering standards has been ensured; iii. The AD Category-I bank should ensure that export advance received by the exporter should be utilized to execute export and not for any other purpose i.e., the transaction is a bona-fide transaction; iv. Progress payment, if any, should be received directly from the overseas buyer strictly in terms of the contract; v. The rate of interest, if any, payable on the advance payment shall not exceed London InterBank Offered Rate (LIBOR) + 100 basis points; vi. There should be no instance of refund exceeding 10% of the advance payment received in the last three years; vii. The documents covering the shipment should be routed through the same authorised dealer bank; and

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viii. in the event of the exporter's inability to make the shipment, partly or fully, no remittance towards refund of unutilized portion of advance payment or towards payment of interest should be made without the prior approval of the Reserve Bank. (3) AD Category I banks may allow the purchase of foreign exchange from the market for refunding advance payment credited to EEFC account only after utilizing the entire balances held in the exporters EEFC accounts maintained at different branches/banks. It is a trade facilitating measure, which will be helpful at a time when the global economy is witnessing a slowdown. The interest should not exceed Libor because it ensures that a standard rate is paid and no extra money is paid in the form of interest. It also ensures buyers commitment during price fluctuations. 6. Invoicing of Software Exports (i) For long duration contracts involving series of transmissions, the exporters should bill their overseas clients periodically, i.e., at least once a month or on reaching the milestone as provided in the contract entered into with the overseas client and the last invoice / bill should be raised not later than 15 days from the date of completion of the contract. It would be in order for the exporters to submit a combined SOFTEX form for all the invoices raised on a particular overseas client, including advance remittances received in a month. (ii) Contracts involving only one-shot operation, the invoice/bill should be raised within 15 days from the date of transmission. (iii) The exporter should submit declaration in Form SOFTEX in quadruplicate in respect of export of computer software and audio / video / television software to the designated official concerned of the Government of India at STPI / EPZ /FTZ /SEZ for valuation / certification not later than 30 days from the date of invoice / the date of last invoice raised in a month, as indicated above. The designated officials may also certify the SOFTEX Forms of EOUs, which are registered with them. (iv) The invoices raised on overseas clients as at (i) and (ii) above will be subject to valuation of export declared on SOFTEX form by the designated official concerned of the Government of India and consequent amendment made in the invoice value, if necessary.

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The reason for this is that the company may have a subsidiary/ office in the foreign country and may require money to operate it for this, the company would use the income earned there. Thus, the time given to them is 30 days max after the last bill has been raised. 7. Export of goods by Special Economic Zones (SEZs) (A) Units in SEZs are permitted to undertake job work abroad and export goods from that country itself subject to the conditions that: i. Processing / manufacturing charges are suitably loaded in the export price and are borne by the ultimate buyer. ii. The exporter has made satisfactory arrangements for realisation of full export proceeds subject to the usual GR procedure. AD Category I banks may permit units in DTAs to purchase foreign exchange for making payment for goods supplied to them by units in SEZs. (B) Export of Services by Special Economic Zones (SEZs) to DTA Unit Authorised Dealer Banks are permitted to sell foreign exchange to a unit in the DTA for making payment in foreign exchange to a unit in the SEZ for the services rendered by it (i.e. a unit in SEZ) to a DTA unit. It must be ensured that in the Letter of Approval (LoA) issued to the SEZ unit by the Development Commissioner(DC) of the SEZ, the provisions pertaining to the goods / services supplied by the SEZ unit to the DTA unit and for payment in foreign exchange for the same should be mentioned. 8. Project Exports and Service Exports Export of engineering goods on deferred payment terms and execution of turnkey projects and civil construction contracts abroad are collectively referred to as Project Exports. Indian exporters offering deferred payment terms to overseas buyers and those participating in global tenders for undertaking turnkey/civil construction contracts abroad are required to obtain the approval of the AD Category I banks/ EXIM Bank/ Working Group at post-award stage before undertaking execution of such contracts. Regulations relating to Project Exports and Service Exports are laid down in the revised Memorandum of Instructions on Project and Service Exports (PEM- October 2003 as amended from time to time).
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In order to provide greater flexibility to project exporters and exporters of services in conducting their overseas transactions, the guidelines stipulated vide paragraphs B.10 (i) (f),C 1(ii), D.1 (i), D.3 and D.4(iv) of the PEM have been modified as set out below. Project/Service exporters have also been extended the facility of deployment of temporary cash balance as set out here under; (i) Inter-Project Transfer of Machinery [B 10 (i) (f) & D 4 (iv)] The stipulation regarding recovery of market value (not less than book value) of the machinery, etc., from the transferee project has been withdrawn. Further, exporters may use the machinery / equipment for performing any other contract secured by them in any country subject to the satisfaction of the sponsoring AD Category I bank(s) / EXIM Bank / Working Group and also subject to the reporting requirement and would be monitored by the AD Category I bank(s) / EXIM Bank / Working Group. (ii) Inter-Project Transfer of Funds [D 1 (i) & D 3] AD Category I bank(s) / EXIM Bank / Working Group may permit exporters to open, maintain and operate one or more foreign currency account/s in a currency(ies) of their choice with interproject transferability of funds in any currency or country. The Inter-project transfer of funds will be monitored by the AD Category I bank(s) / EXIM Bank / Working Group. (iii) Deployment of Temporary Cash Surpluses Project / Service exporters may deploy their temporary cash surpluses, generated outside India, in the following instruments / products, subject to monitoring by the AD Category I bank(s) / EXIM Bank / Working Group : a. investments in short-term paper abroad including treasury bills and other monetary instruments with a maturity or remaining maturity of one year or less and the rating of which should be at least A-1/AAA by Standard & Poor or P-1/Aaa by Moodys or F1/AAA by Fitch IBCA etc. , b. deposits with branches / subsidiaries outside India of AD Category I banks in India. (iv) Repatriation of Funds in case of On-site Software Contracts [C 1 (ii)]

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The requirement of repatriation of 30 per cent of contract value in respect of on-site contracts by software Exporter Company / firm has been dispensed with. They should, however, repatriate the profits of on-site contracts after completion of the contracts as per para B.7 (vii), ibid. 9. Export of Currency In terms of Foreign Exchange Management (Export and Import of Currency) Regulations, 2000 notified vide Notification No. FEMA 6/ 2000-RB dated 3rd May 2000, as amended from time to time, any export of Indian currency of value exceeding Rs.7,500/- except to the extent permitted under any general permission granted under the Regulations, will require prior permission of the Reserve Bank.

General Guidelines for Imports of Goods and Services

1. Obligation of Purchaser of Foreign Exchange (i) In terms of Section 10(6) of the Foreign Exchange Management Act, 1999 (FEMA), any person acquiring foreign exchange is permitted to use it either for the purpose mentioned in the declaration made by him to an Authorised Dealer Category I bank under Section 10(5) of the Act or to use it for any other purpose for which acquisition of foreign exchange is permissible under the said Act or Rules or Regulations framed there under. (ii) Where foreign exchange acquired has been utilised for import of goods into India, the AD Category I bank should ensure that the importer furnishes evidence of import viz., Exchange Control copy of the Bill of Entry, Postal Appraisal Form or Customs Assessment Certificate, etc., and satisfy himself that goods equivalent to the value of remittance have been imported. (iii) In addition to the permitted methods of payment for imports, payment for import can also be made by way of credit to non-resident account of the overseas exporter maintained with a bank in India. In such cases also AD Category I banks should ensure compliance with the instructions contained in sub-paragraphs (i) and (ii) above.

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2. Time Limit for Settlement of Import Payments 2.1. Time limit for normal imports (i) In terms of the extant regulations, remittances against imports should be completed not later than six months from the date of shipment, except in cases where amounts are withheld towards guarantee of performance, etc. (ii) AD Category I banks may permit settlement of import dues delayed due to disputes, financial difficulties, etc. Interest in respect of delayed payments, usance bills or overdue interest for a period of less than three years from the date of shipment may be permitted subject to certain conditions. 2.2. Time limit for deferred payment arrangements Deferred payment arrangements, including suppliers and buyers credit, providing for payments beyond a period of six months from date of shipment up to a period of less than three years, are treated as trade credits for which the procedural guidelines laid down in the Master Circular for External Commercial Borrowings and Trade Credits may be followed. 2.3. Import of Foreign exchange / Indian Rupees (i) Except as otherwise provided in the Regulations, no person shall, without the general or special permission of the Reserve Bank, import or bring into India, any foreign currency. Import of foreign currency, including cheques, is governed by clause (g) of sub-section (3) of Section 6 of the Foreign Exchange Management Act, 1999, and the Foreign Exchange Management (Export and Import of Currency) Regulations 2000, made by Reserve Bank. (ii) Reserve Bank may allow a person to bring into India currency notes of Government of India and / or of Reserve Bank subject to such terms and conditions as the Reserve Bank may stipulate.

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2.4. Import of foreign exchange into India A person may (i) send into India without limit foreign exchange in any form other than currency notes, bank notes and travellers cheques; (ii) bring into India from any place outside India, without limit foreign exchange (other than unissued notes), which shall be subject to the condition that such person makes, on arrival in India, a declaration to the Custom Authorities at the Airport in the Currency Declaration Form (CDF) annexed to these Regulations; provided further that it shall not be necessary to make such declaration where the aggregate value of the foreign exchange in the form of currency notes, bank notes or travellers cheques brought in by such person at any one time does not exceed USD10,000 (US Dollars ten thousand) or its equivalent and/or the aggregate value of foreign currency notes (cash portion) alone brought in by such person at any one time does not exceed USD 5,000 (US Dollars five thousand) or its equivalent. 2.5. Import of Indian currency and currency notes (i) Any person resident in India who had gone out of India on a temporary visit, may bring into India at the time of his return from any place outside India (other than from Nepal and Bhutan), currency notes of Government of India and Reserve Bank notes up to an amount not exceeding Rs.7,500/- per person. (ii) A person may bring into India from Nepal or Bhutan, currency notes of Government of India and Reserve Bank notes other than notes of denominations of above Rs.100 in either case. 3. Advance Remittance for Import of Aircrafts/Helicopters and other Aviation Related purchases As a sector specific measure, airline companies which have been permitted by the Directorate General of Civil Aviation to operate as a schedule air transport service, can make advance remittance without bank guarantee, up to USD 50 million. Accordingly, AD Category I banks may allow advance remittance, without obtaining a bank guarantee or an unconditional, irrevocable Standby Letter of Credit, up to USD 50 million, for direct import of each aircraft, helicopter and other aviation related purchases.
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IMPORTS OF GOLD
Import of Gold by Nominated Banks /Agencies/Entities 1. Certain restrictions have been imposed on the import of various forms of gold by nominated banks/nominated agencies/ premier or star trading houses/SEZ units/EoUs which have been permitted to import gold for use in the domestic sector. a) Import of gold in the form of coins and medallions is now prohibited. b) It shall be incumbent on all nominated banks/nominated agencies and other entities to ensure that at least one fifth, i.e., 20%, of every lot of import of gold imported to the country is exclusively made available for the purpose of exports and the balance for domestic use. This shall be monitored by customs authorities, and will be implemented port-wise only. c) Further, nominated banks/ nominated agencies and other entities shall make available gold for domestic use only to the entities engaged in jewellery business/bullion dealers and to banks authorised to administer the Gold Deposit Scheme against full upfront payment. In other words, supply of gold in any form to the domestic users other than against full payment upfront shall not be permitted. Working example of the operations of 20/80 scheme for import of gold 1. A nominated bank/agency/ any other entity ABC imports say 100 kg of gold, which shall be routed through custom bonded warehouses only. If considered necessary, the lot can be procured through two invoices one for exporters (i.e.20%) and the other one for domestic users (80%). 2. Out of the above import of 100 kg, 20 kg gold held in the bonded warehouse can be got released in part or full to be made available to the exporters of gold against undertaking to customs authorities as is the practice now. 3. The balance 80 kg can be supplied in part or full to domestic entities engaged in jewellery business/bullion traders/banks operating the Gold Deposit Scheme against full upfront payment. In other words, no credit sale of gold in any form will be permitted for domestic use. In case, the nominated bank itself is operating the Gold Deposit Scheme, the bank is permitted to use out of

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80 kg, a portion for regularising own open position in gold arising out of operations of the Gold Deposit Scheme. 4. Next lot of import of gold by ABC shall be permitted by the customs authorities only after the quantity earmarked for exporter clients (i.e. 20 per cent of the imported lot) is released to the exporters against their undertaking to fulfill the export commitments within the stipulated time. 5. The quantum of gold permitted to be imported in the third lot will be restricted to 5 times the quantum for which proof of export is submitted. For import of gold in the subsequent lots, the cycle may be repeated following the 20/80 principle.

External Commercial Borrowings (ECB) Policy Import of Services, Technical know-how and License Fees As per the extant guidelines, eligible borrowers can raise ECB for investment such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), new projects, modernization / expansion of existing production units in the real sector industrial sector including small and medium enterprises (SME), infrastructure sector as defined under the ECB policy and entities in service sector viz. hotels, hospitals and software companies. On a review, it has been decided to include import of services, technical know-how and payment of license fees as part of import of capital goods by the companies for the use in the manufacturing and infrastructure sectors as permissible end uses of ECB under the automatic / approval route.

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RECENT MEASURES TAKEN BY RBI 2013 The Reserve Bank of India on Wednesday unveiled a slew of dramatic measures to reduce flows of foreign exchange out of the country. These included cutting the overseas direct investment limit for Indian companies from 400 per cent to 100 per cent of their net worth. The central bank also reduced the amount of money that Indian residents can send abroad to US$75,000 a year compared with the previous limit of $200,000. It also banned Indian residents from investing that money in property abroad "directly or indirectly". The rupee has plummeted to record lows against the US dollar and has gained little support so far from liquidity tightening steps taken by RBI last month and the finance ministry's announcement of several measures targeted at reducing the current account deficit on Monday. Imports of LCD/ LED: Beginning August 26, India has decided to levy a 35 per cent customs duty on LCD and LED television sets that passengers bring along with them as part of the duty-free baggage allowance of Rs 35,000.

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CASE STUDY ON RELIANCE INFRASTRUCTURE

The Reserve Bank of India (RBI) has asked the Anil Dhirubhai Ambani Group firm, Reliance Infrastructure (earlier, Reliance Energy), to pay just under Rs 125 crore as compounding fees for parking its foreign loan proceeds worth $300 million with its Mutual Fund in India for 315 days, and then repatriating the money abroad to a joint venture company. These actions, according to an RBI order, violated various provisions of the Foreign Exchange Management Act (FEMA). In its order, RBI said Reliance Energy raised a $360-million ECB on July 25, 2006, for investment in infrastructure projects in India. The ECB proceeds were drawn down on November 15, 2006, and temporarily parked overseas in liquid assets. On April 26, 2007, Reliance Energy repatriated the ECB proceeds worth $300 million to India while the balance remained abroad in liquid assets. It then invested these funds in Reliance Mutual Fund Growth Option and Reliance Floating Rate Fund Growth Option on April 26, 2007. On the following day, i.e., on April 27 2007, the entire money was withdrawn and invested in Reliance Fixed Horizon Fund III Annual Plan series V. On March 5, 2008, Reliance Energy repatriated $500 million (which included the ECB proceeds repatriated on April 26, 2007, and invested in capital market instruments) for investment in capital of an overseas joint venture called Gourock Ventures based in British Virgin Islands. RBI said, under FEMA guidelines issued in 2000, a borrower is required to keep ECB funds parked abroad till the actual requirement in India. Further, the central bank said a borrower cannot utilise the funds for any other purpose. During the personal hearing on June 16, 2008, Reliance Energy, represented by group managing director Gautam Doshi and Price water house Coopers executive director Sanjay Kapadia, admitted the contravention and sough compounding. The company said due to unforeseen circumstances, its Dadri power project was delayed. Therefore, the ECB proceeds of $300 million were bought to India and was parked in liquid debt mutual fund schemes, it added. Rejecting Reliance Energys contention, RBI said it took the company 315 days to realise that the ECB proceeds are not required for its intended purpose and to repatriate the same for alternate use of investment in an overseas joint venture on March 5, 2008. Reliance also contended that they invested the ECB proceeds in debt mutual fund schemes to ensure immediate availability of funds for utilisation in India. In its defence, the company said the exchange rate gain on account of remittance on March 5 2008, would be a notional interim rate gain as such exchange rate gain is not crystallised. But RBI stated that they have also stated that in terms of accounting standard 11 (AS 11), all foreign exchange loans have to be restated and the difference between current exchange rate and the rate at which the same were remitted to India, has to be shown as foreign exchange loss/gain in profit and loss accounts.

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However, in a scenario where the proceeds of the ECB are parked overseas, the exchange rate gains or losses are neutralized as the gains or losses restating of the liability side are offset with corresponding exchange losses or gains in the asset. In this case, the exchange gain had indeed been realised and that too the additional exchange gain had accrued to the company through an unlawful act under FEMA, the order said. It said as the company has made additional income of Rs 124 crore, it is liable to pay a fine of Rs 124.68 crore. On August this year, the company submitted another fresh application for compounding and requested for withdrawal of the present application dated April 17, 2008, to include contravention committed in respect of an another transaction of ECB worth $150 million. But RBI said the company will have to make separate application for every transaction and two transactions are different and independent and cannot be clubbed together.

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CAPITAL ACCOUNT CONVERTIBILITY

Capital account convertibility (CAC) refers to the freedom of converting local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It refers to the elimination of restraints on international flows on a country's capital account, facilitating full currency convertibility and opening of the financial system. Capital Account Convertibility is a monetary policy that centres around the ability to conduct transactions of local financial assets into foreign financial assets freely and at market determined exchange rates. It is sometimes referred to as Capital Asset Liberation. It is basically a policy that allows the easy exchange of local currency (cash) for foreign currency at low rates. This is so local merchants can easily conduct transnational business without needing foreign currency exchanges to handle small transactions. Capital Account Convertibility is mostly a guideline to changes of ownership in foreign or domestic financial assets and liabilities. Tangentially, it covers and extends the framework of the creation and liquidation of claims on, or by the rest of the world, on local asset and currency markets. Currency convertibility refers to the freedom to convert the domestic currency into other internationally accepted currencies and vice versa. Convertibility in that sense is the obverse of controls or restrictions on currency transactions. While current account convertibility refers to freedom in respect of payments and transfers for current international transactions, capital account convertibility (CAC) would mean freedom of currency conversion in relation to capital transactions in terms of inflows and outflows. Article VIII of the International Monetary Fund (IMF) puts an obligation on a member to avoid imposing restrictions on the making of payments and transfers for current international transactions. Members may cooperate for the purpose of making the exchange control regulations of members more effective. Article VI (3), however, allows members to exercise such controls as are necessary to regulate international capital movements, but not so as to restrict payments for current transactions or which would unduly delay transfers of funds in settlement of commitments. Practically, there is a mix and match of experiences with the countries those who have liberalised their capital account. All developed countries have adopted full convertibility, but the 2008crises of USA and current turmoil of European Union has raised several questions while China has written its success story without full capital account convertibility. It may be noted that full capital account convertibility doesnt inevitably lead to a financial catastrophe, but it makes the country further vulnerable to such crises. India has found itself fairly successful in the matter with its gradualist approach.

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IMFS ROLE
Convertibility is an IMF clause that all the member countries must adhere to in order to work towards the common goals of the organization. However CONVERTIBILITY per se can be looked into from various perspectives and incorporated accordingly by the member nations. An economy can choose to be: (a) Partially convertible on CURRENT ACCOUNT (b) Partially convertible on CAPITAL ACCOUNT (c) Fully convertible on current account and (d) Fully convertible on capital account. It is important to state here that The IMFs mandate is conspicuous on current account convertibility as current account liberalization is among the IMFs official purposes outlined in its Articles of Agreement, but it has no explicit mandate to promote capital account liberalization. Indeed, the Articles give the IMF only limited jurisdiction over the capital account however the IMF has given greater attention to capital account issues in recent decades, given the increasing importance of international capital flows for macroeconomic stability and exchange rate management in many countries. Thus there is no official binding over any member state to opt for FULL CAPITAL ACCOUNT CONVERTIBILTY but it has been a constant component of the IMFs advisory reports on member countries.

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THE SOUTH EAST ASIAN FINANCIAL CRISIS

ASIAN CONTAGION
Between June 1997 and January 1998 a financial crisis swept like a brush fire through the "tiger economies" of South East Asian. Over the previous decade the South East Asian states of Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea, had registered some of the most impressive economic growth rates in the world. Their economies had expanded by 6% to 9% per annum compounded, as measured by Gross Domestic Product. This Asian miracle, however, appeared to come to an abrupt end in late 1997 when in one country after another, local stock markets and currency markets imploded. When the dust started to settle in January 1998 the stock markets in many of these states had lost over 70% of their value, their currencies had depreciated against the US dollar by a similar amount, and the once proud leaders of these nations had been forced to go cap in hand to the International Monetary Fund (IMF) to beg for a massive financial assistance.

BACKGROUND
The seeds of the 1997-98 Asian financial crisis were sown during the previous decade when these countries were experiencing unprecedented economic growth. Although there were and remain important differences between the individual countries, a number of elements were common too most. Exports had long been the engine of economic growth in these countries. A combination of inexpensive and relatively well educated labour, export oriented economies, falling barriers to international trade, and in some cases such as Malaysia, heavy inward investment by foreign companies, had combined during the previous quarter of a century to transform many Asian states into export powerhouses. Over the 1990-1996 period, for example, the value of exports from Malaysia had grown by 18% per year, Thai exports had grown by 16% per year, Singapores by 15% per year, Hong Kongs by 14% per year, and those of South Korea and Indonesia by 12% per year. The nature of these exports had also shifted in recent years from basic materials and products such as textiles to complex and increasingly high technology products, such as automobiles, semiconductors, and consumer electronics.

AN INVESTMENT BOOM
The wealth created by export led growth helped to fuel an investment boom in commercial and residential property, industrial assets, and infra-structure. The value of commercial and residential real estate in cities such as Hong Kong and Bangkok started to soar. In turn, this fed a building boom the likes of which had never been seen before in Asia. Heavy borrowing from banks financed much of this construction, but so long as the value of property continued to rise, the banks were more than happy to lend. As for industrial assets, the continued success of Asian exporters encouraged them to make ever bolder investments in industrial capacity. An added factor behind the investment boom in most SE Asian economies was the government. In many cases the
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government had embarked upon huge infra-structure projects. Throughout the region governments also encouraged private businesses to invest in certain sectors of the economy in accordance with "national goals" and "industrialization strategy". In sum, by the mid 1990s SE Asia was in the grips of an unprecedented investment boom, much of it financed with borrowed money.

EXCESS CAPACITY
As might be expected, as the volume of investments ballooned during the 1990s, often at the bequest of national governments, so the quality of many of these investments declined significantly. All too often, the investments were made on the basis of projections about future demand conditions that were unrealistic. The result was the emergence of significant excess capacity.

THE DEBT BOMB

By early 1997, Massive investments in industrial assets and property had created a situation of excess capacity and plunging prices, while leaving the companies that had made the investments groaning under huge debt burdens that they were now finding difficult to service. To make matters worse, much of the borrowing to fund these investments had been in US dollars, as opposed to local currencies. At the time this had seemed like a smart move. In this regard, a final complicating factor was that by the mid 1990s although exports were still expanding across the region, so were imports. The investments in infrastructure, industrial capacity, and commercial real estate were sucking in foreign goods at unprecedented rates. Reflecting growing imports, many SE Asian states saw the current account of their Balance of Payments shift strongly into the red during the mid 1990s. With deficits starting to pile up, it was becoming increasingly difficult for the governments of these countries to maintain the peg of their currencies against the US dollar. If that peg could not be held, the local currency value of dollar dominated debt would increase, raising the specter of large scale default on debt service payments. The scene was now set for a potentially rapid economic meltdown.

MELTDOWN IN THAILAND
The Asian meltdown began on February 5th, 1997 in Thailand when Somprasong Land, a Thai property developer, announced that it had failed to make a scheduled $3.1 million interest payment on an $80 billion eurobond loan, effectively entering into defaulting. In the aftermath of Somprasongs default it became clear that not only were several other property developers teetering on the brink on default; so where many of the countrys financial institutions including Finance One, the countrys largest financial institution. Finance One had pioneered a practice that had become widespread among Thai institutions --- issuing eurobonds denominated in US dollars and using the proceeds to finance lending to the countrys booming property developers. It made sense because Finance One was able to exploit the interest rate differential between dollar denominated debt and Thai debt (i.e. Finance One borrowed in US dollars at a low interest rate, and leant in Thai Bhat at high interest rates). The problem began when the property developers
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could no longer payback the cash that they had borrowed from Finance One. In turn, this made it difficult for Finance One to pay back its creditors. As the effects of over-building became evident in 1996, Finance Ones non-performing loans doubled, then doubled again in the first quarter of 1997. Finance one was bankrupt and it was feared that others would follow. It was at this point that currency traders began a concerted attack on the Thai currency, the baht. They started short selling of Thai Baht which led to further devaluation of the currency while the traders made a profit. In an attempt to defend the peg, the Thai government used its foreign exchange reserves (which were denominated in US dollars) to purchase Thai baht. It cost the Thai government $5 billion to defend the baht, which reduced its "officially reported" foreign exchange reserves to a two-year low of $33 billion. In addition, the Thai government raised key interest rates from 10% to 12.5% to make holding Baht more attractive, but since this also raised corporate borrowing costs it only served to exacerbate the debt crisis. The Thai government bowed to the inevitable and announced that they would allow the baht to float freely against the dollar. On July 28th the Thai government took the next logical step, and called in the International Monetary Fund (IMF). Without IMF loans, it was likely that the baht would increase its free-fall against the US dollar, and the whole country might go into default.

THE DOMINO EFFECT

Following the devaluation of the Thai baht, wave after wave of speculation hit other Asian currencies. One after another in a period of weeks the Malaysian ringgit, Indonesian rupiah and the Singapore dollar were all marked sharply lower. With the exception of Singapore, whose economy is probably the most stable in the region, the devaluations were driven by a combination of excess investment, high borrowings, much of it in dollar denominated debt, and a deteriorating balance of payments position. The leaders of these countries, however, were not always quick to acknowledge the home grown nature of their problems.

MALAYSIA
As the ringgit declined against the US dollar, the Malaysias Prime Minister said that foreign fund managers were selling Malaysian shares because they were racists; currency traders were ignoring Malaysias sound economic fundamentals; the West was gloating over the crisis in SE Asia; rumor mongers who "should be shot" were spreading lies and a "Jewish" agenda was at work against the country. In early September the government deferred spending on several high profile infrastructure projects including its prestigious Bakun dam project. This was followed in December 1997 by the release of plans to cut state spending by 18%. The government also stated that it will not bail out any corporations that become insolvent as a result of excess borrowing.

INDONESIA
Indonesia authorities also initially respond with something less than full commitment to that countrys financial crisis. Following speculative selling, the Indonesia currency, the rupiah, was uncoupled from its dollar peg and allowed to float on August 14th, 1997. The rupiah immediately started to decline. At this point the now desperate Indonesian government turned to the IMF for financial assistance. After several weeks of intense negotiations, on October 31st the IMF announced that in conjunction with the World Bank and the Asian Development Bank it had put
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together a $37 billion rescue deal for Indonesia. In return, the Indonesian government agreed to close a number of troubled banks, to reduce public spending, balance the budget, and unravel the crony capitalism that was so widespread in Indonesia. The initial response to the IMF deal was favorable, however in response to growing skepticism about President Suhartos willingness to take the tough steps required by the IMF. With both the economy and exchange rate collapsing, there was clearly no way that private sector enterprises would be able to generate the rupiah required to purchase the dollars needed to service the debt, and so the decline feed on itself. The government however came out with a optimistic budget which was criticised which led to re negotiation which committed Indonesia to a tough budget. Among other things, this pledged budget cuts, including cuts in sensitive energy subsidies, trade deregulation that would wipe out many of the business privileges enjoyed b y Suhartos family and friends, and accelerated structural reform of the banking sector.

SOUTH KOREA
Initially South Korea seemed to be isolated from the currency turmoil sweeping through the region however, underneath the surface Korea too had serious problems During much of the 1990s foreign banks had been eager to lend US dollars to Korean Banks and the chaebol. A significant proportion of this was short term debt that had to be paid back within a year. This money was used to fund investments in industrial capacity, which as suggested earlier, was often undertaken at the encouragement of the government. By late 1996 it was clear that the debt financed expansion was beginning to unravel. Economic growth had slowed, excess capacity was emerging in a number of industries, prices for critical industrial products such as semiconductors were falling, and imports were on the rise The Korean debt problem started to deteriorate in January 1997 when one of the chaebol, Hanbo collapsed under a $6 billion debt load. Following Hanbos collapse there were widespread allegations in Korea that the project had been funded only because of the government pressured Korean banks to lend to Hanbo. The series of bankruptcies and downgrading by foreign rating agencies raised the borrowing costs of the banks, and led them to tighten credit, making it even more difficult for debt heavy chaebol to borrow additional funds. In an attempt to protect the won, the Korean central bank raised short term interest rates to over 12%, more than double the inflation rate. The bank also intervened in the currency exchange markets, selling dollars and purchasing won in an attempt to keep the dollar/won exchange rate above $1=Krw1,000. The main effect of this action, however, was to rapidly deplete its foreign exchange reserves. These stood at $30 billion on November 1st, but fell to only $15 billion two weeks later. International lenders, fearing that Korea was about to become a financial black whole, refused to roll over short-term loans to the country, an action made all the more serious by revelations that Korea had about $100 billion in short term debt obligations that had to be paid within 12 months. The agreement with the IMF called for the Koreans to open up their economy and banking system to foreign investors. Prior to the deal foreigners could only own 7% of a Korean company's shares. This was lifted to 50%. South Korea also pledged to restrain the chaebol by reducing their share of bank financing and requiring them to publish consolidated financial statements and undergo annual independent external audits. On trade liberalization, the IMF said South Korea will comply with its
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commitments to the World Trade Organization to eliminate trade-related subsidies and restrictive import licensing, and streamline its import- certification procedures, all of which should open up the Korean economy to greater foreign competition. In the event, a second agreement was reached between Korea, the IMF, and a number of major American and British banks with large exposure to Korea. Singed on Christmas Eve, the agreement called for the IMF and eight major banks to accelerate a loan of $10 billion to Korea to prevent a debt default. Korea agreed to an accelerated timetable for opening up its financial markets to foreign investors, permitting foreign takeovers, and allowing foreign companies to establish subsidiaries in Korea. The government also agreed to raise interest rates in order to attract foreign capital, force the chaebol to restructure their operations, selling-off loss making units and demanding clearer accounting. The situation in South Korea improved still further on January 28th, 1998 when a consortium of 13 international banks with exposure to Korea agreed to reschedule their short term debt to Korea. According to the Bank for International Settlements, South Korean banks will exchange short term debt valued at $24 billion for new loans with maturities of one, two, and three years, bearing interest rates of 2.23, 2.50, and 2.75 percentage points higher than the six month London Interbank rate. By effectively rescheduling so much of its short term debt, the deal gave South Korea some breathing room in which it could begin to rebuild confidence in its shattered economy.

JAPAN
As the crisis unfolded, most Japanese felt that it had little to do with them. At worst, there was some concerns that the turmoil might harm some of the nations exporters. Indeed, the main issue for debate was whether Japan should take a leadership role in handling the crisis. The confidence of the Japanese was finally shaken on November the 3rd 1997, when Sanyo Securities, the nations seventh largest stock brokerage firm, announced that it would file for bankruptcy. The closure of three institutions dated back to events almost a decade earlier. In the late 1980s when Japans stock market and property bubble was at its peak, Japans financial institutions went on a lending binge. Following the collapse of stock and property prices in Japan, many of the loans made in the bubble years became non-performing. They were, however, kept on the books for years as performing loans, often with the tacit support of the Bank of Japan, in hopes that the companies involved would work their way out of financial difficulties. In the years that followed Yamaichi and its kin had to absorb losses associated with business taken on at the height of the boom and brokerages temporarily shift investment losses from one client to another to prevent a favored customer from having to report losses. They had survived this long was a testament to the willingness of Japans powerful Ministry of Finance (MOF) to guarantee support for the countrys shaky financial institutions. That all three collapsed in late 1997 signaled a clear change of course by the Ministry of Finance. Exactly why the MOF decided to change course is not completely clear. The Fuji bank decided to withdraw its support the index fell. Financial institutions hold assets in the form of stock. If the Nikki falls many financial institutions will not have enough assets on their books to cover their liabilities, and they will have to sell stock to reduce the ratio. Once this happens, the Japanese market could implode, transforming the countrys long running recession into a full blown economic depression. A depression in the worlds second largest economy would have disastrous implications for the health of the global economic system. This was followed by a commitment to
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use public finds to recapitalize Japans troubled financial institutions.. This commitment helped to stabilize Japans stock market, and the country pulled back from the brink of financial meltdown. Although Japan did not suffer the fate of other Asian countries, the problems in Japan did have an impact on the situation. The credibility of Japan both as a source of stability within the region, and as the de-facto economic leader of the Asia Pacific economies, has been severely and perhaps permanently damaged by its inability to take a leadership role in solving the crisis.

AFTERMATH: IMPLICATIONS OF THE CRISIS.

Although the economic storm that swept through Asian in 1997 has now abated, the wreckage left in its wake will undoubtedly take years to repair. By indulging in a debt binge that ultimately bought its high flying economies crashing to the ground, Asia may have lost a decade of economic progress.

THE ASIAN ECONOMIC MODEL

The Asian Model of state directed capitalism seemed to combine the dynamism of a market economy with the advantages of centralized government planning. It was argued that close cooperation between government and business to formulate industrial policy led to the kind of long-term planning and investment that was not possible in the West. However, economists have argued for some time that the Asian economic miracle had nothing to do with cooperation between government and business. Instead, it was the result of high savings rates, good education systems, and rapid growth in the labour force. Many warned that the Asian proclivity for government directed investment and poorly regulated financial systems was a dangerous mix that could lead to over investment, excessive debt, and financial crises. Asias troubled economies seem to be embarking on a long overdue restructuring. As a consequence, it seems reasonable predict that many Asian economies will come to resemble, more closely, the free market system championed by the United States than the Asian model exemplified by the Japan of the 1980s.

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THE INTERNATIONAL MONETARY FUND

The Asian financial crisis has been the biggest test for the IMF. The original charge of the IMF was to lend money to member countries that were experiencing balance of payments problems, and could not maintain the value of their currencies. The idea was that the IMF would provide short term financial loans to troubled countries, giving them time to put their economies in order. IMF loans have always come with strings attached. As a result of the Asian crisis, in late 1997 the IMF found itself committing over $110 billion in short term loans to three countries; South Korea, Indonesia, and Thailand. One criticism for IMF is that tight macro-economic policies are inappropriate for countries that are suffering not from excessive government spending and inflation, but from a private sector debt crisis with deflationary undertones. A second criticism of the IMF is that its rescue efforts are exacerbating a problem know to economists as moral hazard. Moral hazard arises when people behave recklessly because they know they will be saved if things go wrong. By providing support to these countries, the IMF is reducing the probability of debt default, and in effect bailing out the very banks whose loans gave rise to this situation in the first place. The final criticism of the IMF is that is has become too powerful for an institution that lacks any real mechanism for accountability.

IMPLICATIONS FOR EXCHANGE RATE POLICY

Most Asian countries tried to peg the value of their currency against the US dollar, intervening selectively in the foreign exchange markets to support the value of their currency. This practice, know as a managed float, is an attempt to achieve some of the benefits associated with a fixed exchange rate regime in a world of that lacks such a regime. Critics argue that such a policy is vulnerable to speculative pressure. The events that unfolded in the fall of 1997 have given the critics additional ammunition. The value of the Korean, Indonesia, Thai, and Malaysian currencies did not just decline against the dollar, they collapsed in spectacular fashion, illustrating the sometimes extreme results of speculative attacks on a currency in a world of floating exchange rates.

IMPLICATIONS FOR BUSINESS

The Asian financial crisis throws the risks associated with doing business in developing countries into sharp focus. For most of the 1990s, multinational companies have viewed Asia as a future economic powerhouse, and invested accordingly. This view was not without foundation. The region is home to 60% of the worlds people and a number of dynamic economies that have been growing by nearly 10% per year for most of the past decade. This euphoric view was rudely shattered by the events of late 1997. The Asian crisis will undoubtedly have some painful effects on companies with major activities and investments in the regions troubled economies. To make matters worse, many Asian companies will now be looking to export their way out of recessionary conditions in their home markets. This may lead to a flood of low priced exports from troubled Asia economies to other countries.

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Furthermore, several firms are reportedly taking advantage of the changing circumstances in Asia to increase their rate of investment in the region. Finally, it is worth emphasizing that despite its dramatic impact, the long run effects of the crisis may be good not bad. To the extent that the crisis gives Asian countries an incentive to reform their economic systems, and to initiate some much need restructuring, they may emerge from the experience not weaker, but stronger institutions and a greater ability to attain sustainable economic growth.

TARAPORE COMMITTEE
The Committee on Capital Account Convertibility (CAC) or Tarapore Committee was constituted by the Reserve Bank of India for suggesting a roadmap on full convertibility of Rupee on Capital Account. The committee submitted its report in May 1997. The committee observed that there is no clear definition of CAC. The CAC as per the standards refers to the freedom to convert the local financial assets into foreign financial assets or vice versa at the market determined rates of exchange. The Tarapore committee observed that the Capital controls can be useful in insulating the economy of the country from the volatile capital flows during the transitional periods and also in providing time to the authorities, so that they can pursue discretionary domestic policies to strengthen the initial conditions. Though the rupee had become fully convertible on current account as early as 1991, the RBI has been adopting a cautious approach towards full float of the rupee, particularly after the 1997 southeast Asian currency crisis. While there has been a substantial relaxation of foreign exchange controls during the last 10 years, the current account convertibility since 1994 means that both resident Indians and corporate have easy access to foreign exchange for a variety of reasons like education, health and travel. They are allowed to receive and make payments in foreign currencies on trade account. The next logical step in the same direction would be full convertibility, which would remove restrictions on capital account. India to be achieved over a time frame of 3 years. In 1997, the Tarapore committee took on the convertibility question. And suggested a logical framework to attain C.A.C. However the conventional wisdom is that the report was buried after the East Asian Crisis. In 2006 with Prime Ministers allegiance to CAC shown at the CII summit in Mumbai the RBI reappointed the TARAPORE committee to submit a report on C.A.C in India. In their report on C.A.C in 2006 the committee has listed certain pre conditions for C.A.C in

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PRECONDITIONS
Fiscal Consolidation a. Reduction in gross fiscal deficit (GFD) to GDP ratio to 3.5%. b. A consolidated sinking fund (CSF) to be set up to meet government's debt repayment needs to be financed by increase in RBI's profit transfer to the government and disinvestment proceeds. Mandated Inflation Rate c. The mandated inflation rate should remain at an average 3-5% for the three-year period. Consolidation in the Financial Sector d. Gross non-performing assets (NPAs) of the banking sector (as a percentage of total advances) to be brought down to 5%. e. A reduction in the average effective Cash Reserve Ratio (CRR) for the banking system to 3%. Exchange Rate Policy f. RBI should have a Monitoring Exchange Rate Band of plus minus 5% around a neutral Real Effective Exchange Rate (REER). RBI should be transparent about the changes in REER. Balance of Payments Indicators g. Reduction in Debt Servicing Ratio to 20%. h. i. j. Adequacy of Foreign Exchange Reserves Reserves should not be less than six months of imports. The short -term debt and portfolio stock should be lowered to 60% of level of reserves. The net foreign exchange assets to currency ratio (NFA/Currency) should be prescribed by law at not less than 40%. The above committee's report was not translated into any actions. India is still a country with partial convertibility. However, some important measures in "that direction" were taken and they are summarized as below: 1. The Indian Corporate was allowed full convertibility in an automatic route up to the $ 500 million overseas ventures. This means that the limited companies were allowed to invest in foreign countries. 2. Indian corporate was allowed to prepay their external commercial borrowings via automatic route if the loan is above $ 500 million. 3. Individuals were allowed to invest in foreign assets, shares up to $2, 00,000 per year. 4. Unlimited amount of Gold was allowed to be imported. "The last measure, i.e. allowing unlimited amount of Gold is equal to allowing the full convertibility in capital account via current account route"

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The Second Tarapore Committee on Capital Account Convertibility Reserve Bank of India appointed the second Tarapore committee to set out the framework for fuller Capital Account Convertibility. The committee was established by RBI in consultation with the Government to revisit the subject of fuller capital account convertibility in the context of the progress in economic reforms, the stability of the external and financial sectors, accelerated growth and global integration. The report of this committee was made public by RBI on 1st September 2006. In this report, the committee suggested 3 phases of adopting the full convertibility of rupee in capital account. 1. First Phase in 2006-7 2. Second phase in 2007-09 3. Third Phase by 2011. Following were some important recommendations of this committee: 1. The ceiling for External Commercial Borrowings (ECB) should be raised for automatic approval. 2. NRI should be allowed to invest in capital markets. 3. NRI deposits should be given tax benefits. 4. Improvement of the Banking regulation. 5. FII (Foreign Institutional Investors) should be prohibited from investing fresh money raised to participatory notes. 6. Existing PN holders should be given an exit route to phase out completely the PN notes.

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BENEFITS
It allows domestic residents to invest abroad and have a globally diversified investment portfolio, this reduces risk and stabilizes the economy. A globally diversified equity portfolio has roughly half the risk of an Indian equity portfolio. So, even when conditions are bad in India, globally diversified households will be buoyed by offshore assets; will be able to spend more, thus propping up the Indian economy. Our NRI Diaspora will benefit tremendously if and when CAC becomes a reality. The reason is on account of current restrictions imposed on movement of their funds. As the remittances made by NRIs are subject to numerous restrictions which will be eased considerably once CAC is incorporated. It also opens the gate for international savings to be invested in India. It is good for India if foreigners invest in Indian assets this makes more capital available for Indias development. That is, it reduces the cost of capital. When steel imports are made easier, steel becomes cheaper in India. Similarly, when inflows of capital into India are made easier, capital becomes cheaper in India. Controls on the capital account are rather easy to evade through unscrupulous means. Huge amounts of capital are moving across the border anyway. It is better for India if these transactions happen in white money. Convertibility would reduce the size of the black economy, and improve law and order, tax compliance and corporate governance. Most importantly convertibility induces competition against Indian finance. Currently, finance is a monopoly in mobilizing the savings of Indian households for the investment plans of Indian firms. No matter how inefficient Indian finance is, households and firms do not have an alternative, thanks to capital controls. Exactly as we saw with trade liberalization, which consequently led to lower prices and superior quality of goods produced in India, capital account liberalization will improve the quality and drop the price of financial intermediation in India. This will have repercussions for GDP growth, since finance is the brain of the economy.

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DRAWBACKS
During the good years of the economy, it might experience huge inflows of foreign capital, but during the bad times there will be an enormous outflow of capital under herd behavior (refers to a phenomenon where investors acts as herds, i.e. if one moves out, others follow immediately). For example, the South East Asian countries received US$ 94 billion in 1996 and another US$ 70 billion in the first half of 1997. However, under the threat of the crisis, US$ 102 billion flowed out from the region in the second half of 1997, thereby accentuating the crisis. This has serious impact on the economy as a whole, and can even lead to an economic crisis as in South-East Asia. There arises the possibility of misallocation of capital inflows. Such capital inflows may fund lowquality domestic investments, like investments in the stock markets or real estates, and desist from investing in building up industries and factories, which leads to more capacity creation and utilization, and increased level of employment. This also reduces the potential of the country to increase exports and thus creates external imbalances. An open capital account can lead to the export of domestic savings (the rich can convert their savings into dollars or pounds in foreign banks or even assets in foreign countries), which for capital scarce developing countries would curb domestic investment. Moreover, under the threat of a crisis, the domestic savings too might leave the country along with the foreign investments, thereby rendering the government helpless to counter the threat. Entry of foreign banks can create an unequal playing field, whereby foreign banks cherry-pick the most creditworthy borrowers and depositors. This aggravates the problem of the farmers and the small-scale industrialists, who are not considered to be credit-worthy by these banks. In order to remain competitive, the domestic banks too refuse to lend to these sectors, or demand to raise interest rates to more competitive levels from the subsidised rates usually followed. International finance capital today is highly volatile, i.e. it shifts from country to country in search of higher speculative returns. In this process, it has led to economic crisis in numerous developing countries. Such finance capital is referred to as hot money in todays context. Full capital account convertibility exposes an economy to extreme volatility on account of hot money flows. It does seem that the Indian economy has the competence of bearing the strains of free capital mobility given its fantastic growth rate and investor confidence. Most of the pre-conditions stated by the TARAPORE committee have been well complied to through robust year on year performance in the last five years especially. The forex reserves provide enough buffer to bear the immediate flight of capital which although seems unlikely given the macroeconomic variables of the economy alongside the confidence that international investors have leveraged on India. However it must not be forgotten that C.A.C is a big step and integrates the economy with the global economy completely thereby subjecting it to international fluctuations and business cycles. Thus due caution must be incorporated while taking this decision in order to avoid any situation that was faced by Argentina in the early 80s or by the Asian economies in 1997-98.
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IMPACT ON EXCHANGE RATE AND FOREIGN EXCHANGE MARKET

The foreign exchange market in India is regulated by the RBI through the Exchange Control Department. The Forex market in India consists of buyers, sellers, market intermediaries & the monetary authority of India. Mumbai [the commercial capital of India] is the main centre for foreign exchange transactions in India. There are many other centres for foreign exchange transactions in the country such as Chennai, Bangalore, Kolkata, New Delhi, Pondicherry and Cochin. 1. FII

FII
200,000.00 150,000.00

IINR Crore

100,000.00 50,000.00 0.00 - 50,000.00 - 100,000.00 FII 2000 6,510.90 2005 41,663.50 2008 - 41,215.50 2012 163,350.10 2013 68,366.20

2. FDI

FDI
35 30 25 US Dollar Billion 20 15 10 5 0 FDI 2000 2.335 2005 4.716 2008 33.027 2012 17.554 2013 13.891

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3. Inflation Rate

INFLATION RATE
10 8 6 4 2 0 RATE 1 4.35 2 3.655 3 8.425 4 7.55 5 5.72

4. Balance of Trade

RATE

BALANCE of TRADE
0.00 - 2,000.00

INR Billion

- 4,000.00 - 6,000.00 - 8,000.00 - 10,000.00 - 12,000.00 BALANCE OF TRADE 2000 - 410.04 2005 - 1,906.73 2008 - 3,970.21 2012 - 10,557.41 2013 - 5,973.70

5. Export

20,000.00 15,000.00

EXPORT

INR Billion

10,000.00 5,000.00 0.00 EXPORT

2000 1,906.52

2005 4,393.47

2008 8,114.75

2012 15,519.78

2013 9,984.77

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6. Import

IMPORT
30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00 IMPORT 2000 2,316.56 2005 6,300.16 2008 13,483.42 2012 26,377.04 2013 16,049.25

7. Sensex

INR Billion

SENSEX
25,000.00 20,000.00 SENSEX CLOSE 15,000.00 10,000.00 5,000.00 0.00 Sensex Close 2000 3,972.12 2005 9,397.93 2008 9,328.92 2012 19,417.46 2013 18,598.18

8. Nifty

NIFTY
7000 6000 NIFTY CLOSE 5000 4000 3000 2000 1000 0 NIFTY CLOSE 2000 1263.55 2005 2836.55 2008 2979.5 2012 5905.6 2013 5507.85

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9. Foreign Exchange

FOREX RESERVE
350 300 US Dollar Billion 250 200 150 100 50 0 (US Dollar Billion) 2000 39.807 2005 137.206 2008 254.613 2012 296.5784 2013 278.8075

10. Dollar- Rupee equation

Dollar Rupee Equation

65.0000 60.0000

Rupee

55.0000 50.0000 45.0000 40.0000 Rupee

2000 46.7500

2005 45.0700

2008 47.8900

2012 54.9635

2013 61.8195

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LONG TERM MEASURES TO CONTROL CAD

Removing diesel subsidy - Part of the reason why demand for oil is inelastic is because prices do not, or are not allowed to, adjust. Greater pass-through of oil prices will bring down the artificial demand which has been created. Cutting down on non oil imports - Non-oil imports include gold, capital goods, coal, fertilisers and other metals, and comprises 70 percent of total imports. Introduction of new financial instruments - Efforts should also be made to introduce attractive financial instruments to divert household savings in non-productive assets like gold. Financial inclusion - 36,000 of India's 650,000 villages have a bank branch. And minimum balances and other requirements mean that house maids, security guards and construction workers hold much of their assets in gold coins and jewellery as a hedge against bad times, when they can be sold or used as collateral with the local moneylender. Financial inclusion which help them to park their money in bank. Shale gas excavations, new oil field explorations - Investments in this sector should be encouraged to bring down dependence on imported oil. Public awareness programme - Against gold consumption to make them aware of the damaged caused by gold consumption to Indias economy.

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BIBLIOGRAPHY
http://www.mbaknol.com/management-case-studies/case-study-on-fema-rbi-slapped-rs125-crore-on-reliance-infrastructure/ http://www.mbaknol.com/management-case-studies/case-study-fera-violations-by-itc/ http://en.wikipedia.org/wiki/Foreign_Exchange_Regulation_Act http://finmin.nic.in/the_ministry/dept_eco_affairs/capital_market_div/FEMA_act_1999.pdf http://fdiindia.in/ http://en.wikipedia.org/wiki/External_commercial_borrowing_%28India%29 http://www.thehindu.com/sport/cricket/bcci-blames-modi-for-fema-violations-inipl/article1083412.ece http://en.wikipedia.org/wiki/1997_Asian_financial_crisis http://www.wright.edu/~tdung/asiancrisis-hill.htm

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