1. What is Foreign Foreign exchang exchange? e? When trade takes place between the residents of two countries, the two countries being a sovereign state state have their own set of regulation regulationss and currency. currency. Due to this problem arises in the conduct of international trade and settlement of the transactions .While the exporter would like to get the payment in the currency of his own country, the importer can pay only in the currency of the importers country. This creates a need for the conversion of the currency of importer’s into that of the exporter’s country. country. Foreign exchange is the mechanism by which the currency of one country is gets converted into the currency of another country. The conversion is done by banks who deal in foreign exchange.
What is FOREX?
The Foreign xchange market, also referred to as the !F"#$! or !Forex! or !#etail forex! or !F$! or !%pot F$! or &ust !%pot! is the largest financial market in the world, with a volume of over '( trillion a day. )f you compare that to the '*+ billion a day volume that the ew -ork %tock xchange trades, you can easily see how enormous the Foreign xchange really is. )t actually euates to more than three times the total amount of the stocks and futures markets combined.
What is traded on the Foreign Exchange Market?
The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. /urrencies are traded through a broker a broker or or dealer, and are traded in pairs0 for example the euro and the 1% dollar 21#31%D4 or the 5ritish pound and the 6apanese -en 2758368-4. 5ecause you9re not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, say, 6apanese -en, -en, you are in effect buying a share in the 6apanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the 6apanese economy. :ccording to the 5ank for )nternational %ettlements, %ettlements, average daily turnover in global foreign exchange markets is estimated at ';.<= trillion. Trading in the world9s main financial markets accounted for ';.*> trillion of this. This approximately ';.*> trillion in main foreign exchange market turnover was broken down as follows? 1
'>.@@+ trillion in spot spot transactions transactions ';A* billion in outright forwards '>.B>( trillion in foreign exchange swaps '>*< billion estimated gaps in reporting
What is the purpose of trading in Foreign Exchange Market?
The foreign exchange market 2currency, forex, or F$4 trades currencies. )t lets banks and other institutions easily buy and sell currencies. The purpose of the foreign exchange market is to help international trade and investment. : foreign exchange market helps businesses convert one currency to another. For example, it permits a 1.%. business to import uropean goods and pay uros, even though the business9s income is in 1.%. dollars. )n a typical foreign exchange transaction a party purchases a uantity of one currency by paying a uantity of another currency. The modern foreign exchange market started forming during the >
Which currencies are traded? Symo! 1%D 1# 68758 /CF /:D :1D
"ountry 1nited %tates uro members 6apan 6ap an 7reat 5ritain %witerland /anada :ustralia
"urrency Dollar uro -en 8ound Franc Dollar Dollar
Forex currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.
When can currencies e traded?
2
'>.@@+ trillion in spot spot transactions transactions ';A* billion in outright forwards '>.B>( trillion in foreign exchange swaps '>*< billion estimated gaps in reporting
What is the purpose of trading in Foreign Exchange Market?
The foreign exchange market 2currency, forex, or F$4 trades currencies. )t lets banks and other institutions easily buy and sell currencies. The purpose of the foreign exchange market is to help international trade and investment. : foreign exchange market helps businesses convert one currency to another. For example, it permits a 1.%. business to import uropean goods and pay uros, even though the business9s income is in 1.%. dollars. )n a typical foreign exchange transaction a party purchases a uantity of one currency by paying a uantity of another currency. The modern foreign exchange market started forming during the >
Which currencies are traded? Symo! 1%D 1# 68758 /CF /:D :1D
"ountry 1nited %tates uro members 6apan 6ap an 7reat 5ritain %witerland /anada :ustralia
"urrency Dollar uro -en 8ound Franc Dollar Dollar
Forex currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.
When can currencies e traded?
2
The spot F$ market is uniue within the world markets. )t’s like a %uper WalGart where the market is open *(hours a day. :t any time, somewhere around the world a financial center is open for business, and banks and other institutions exchange currencies every hour of the day and night with generally only minor gaps on the weekend.
$he Forex market %O$"&
The Forex "T/ market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organiations. )n the "T/ market, participants determine who they want to trade with depending on trading conditions, attractiveness of prices and reputation of the trading counterpart. The chart below shows global foreign exchange activity. The dollar is the most traded currency, being on one side of =AH of all transactions. The euro’s share is second at ;BH, while that of the yen is third at >A.+H.
Retai! foreign exchange rokers
There are two types of retail brokers offering the opportunity for speculative trading? retail foreign exchange brokers brokers an and market makers. makers. #etail traders 2individuals4 are a small fraction of this market and may only participate indirectly through brokers through brokers or or banks. #etail brokers, while largely controlled and regulated by the /FT/ and F: and F: might be sub&ect to forei foreign gn exchange scams. scams. :t present, the F: and /FT/ are imposing stricter reuirements, particularly in relation to the
$op 1' currency traders ( of o)era!! )o!ume* May +'', Rank
#ame
Market Share
>
Deutsche 5ank
*@.
*
15% :7
>(.+=H
;
5arclays /apital
>@.(+H
(
#oyal 5ank of %cotland
=.>
+
/iti
B.;*H
A
68Gorgan
+.(;H
B
C%5/
(.@
=
7oldman %achs
;.;+H
<
/redit %uisse
;.@+H
>@
58 8aribas
*.*AH
3
amount of et /apitaliation reuired of its members. :s a result many of the smaller, and perhaps uestionable brokers are now gone. )t is not widely understood that retail brokers and market makers typically trade against their clients and freuently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. : move toward DD 2o Dealing Desk4 and %T8 2%trai 2 %traight ght Throu Through gh 8rocessing44 has helped to resolve some of these concerns and restore trader confidence, but caution 8rocessing is still advised in ensuring that all is as it is presented. #on-ank Foreign Exchange "ompanies
onbank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. ).e., there is usually a physical delivery of currency to a bank account. %end Goney Come offer Come offer an in depth comparison into the services offered by all the ma&or nonbank foreign exchange companies. )t is estimated that in the 1I, >(H of currency transfers3payments are made via Foreign xchange /ompanies. These companies9 selling point is usually that they will offer better exchange rates or chea cheape perr
pay payment mentss
than than the cus custom tomer9s er9s bank bank..
Thes hese
com compani panies es dif differ from Goney oney
Transfer3#emittance Transfer3#emittance /ompanies in that they generally offer highervalue services.
Money $ransferRemittance "ompanies
Goney Gon ey tra transf nsfer er com compan panies ies3re 3remit mittan tance ce compani companies es perfor perform m highv highvolu olume me lowva lowvalue lue transf transfers ers generally by economic migrants back to their home country. )n *@@B, the :ite 7roup estimated 7roup estimated that there were ';A< billion of remittances 2an increase of =H on the previous year4. The four largest markets 2)ndia 2)ndia,, /hina /hina,, Gexico Gexico and and the 8hilippines 8hilippines44 receive '<+ billion. The largest and best known provider is Wester Western n 1nion with ;(+,@@@ agents globally.
Economic factors/
These include? 2a4 economic policy, policy, disseminated by government agencies and central banks, banks, 2b4 economic economic conditi conditions ons,, general generally ly reveal revealed ed throug through h econom economic ic report reports, s, and other other economic indicators.. indicators
4
conomic conomic policy comprises comprises government fiscal policy 2budget3sp 2budget3spending ending practices4 practices4 and monetary policy 2the means by which a government9s central bank influences the supply and !cost! of policy money, which is reflected by the level of interest rates4. rates4.
Economic conditions inc!ude/ 0o)ernment udget deficits or surp!uses
The market usually reacts negatively negatively to widening widening government budget government budget deficits deficits,, and positively to narrowing budget deficits. The impact is reflected in the value of a country9s currency. a!ance of trade !e)e!s and trends
The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country9s currency to conduct trade. %urpluses and deficits in trade of goods and services reflect reflect the competitiveness competitiveness of a nation9s nation9s economy. economy. For example, example, trade deficits may have a negative impact on a nation9s currency.
2nf!ation !e)e!s and trends
Typically a currency will lose value if there is a high level of inflation inflation in in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing erodes purchasing power , thus demand, for that particular currency. Cowever, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise shortterm interest rates to combat rising inflation.
Economic gro3th and hea!th
#eports such as 7D8, employment employment levels, levels, retail sales, sales, capacity utiliation and utiliation and others, detail the leve levels ls of a coun countr try9 y9ss econom economic ic growt growth h and health. 7enerally, the more healthy and robust a country9s economy, the better its currency will perform, and the more demand for it there will be.
4roducti)ity of an economy
5
)ncreasing productivity in an economy should positively influence the value of its currency. )ts effects are more prominent if the increase is in the traded sector
+. What is #ostro and 5ostro account? #ostro 6ccount
ostro is derived from the Eatin term !oursJ. )nternational accounting procedures between Eocal banks and overseas banks often involve the use of nostro and vostro accounts. : nostro 2means !ours! in Eatin4 account is an account maintained by a Eocal bank with a foreign bank that allows the Eocal bank to buy foreign currency. )n short a Knostro7 is our account of Kour7 money, held by you 5ostro 6ccount Lostro is derived from the Eatin term KyoursJ.
: vostro 2means !yours! in Eatin4 account is an account maintained by an overseas bank with a Eocal bank that allows the overseas bank to purchase Eocal currency. The system of nostro and vostro accounts facilitates foreign exchange dealings and settlements and allows the settlement of currency transactions between the /ountry9s 2Eocal4 5ank and foreign banks. )n short a K)ostro7 is your account of Kyour7 money, held by us Examp!e/
When $ 25uyer4 a trader in 5ase /ountry wants to purchase '+@@@ worth of goods by paying cash. Gr. $ deposits the cash in his local bank in the country9s currency for the corresponding amount 2'+@@@4 then a swift message is sent to the corresponding bank in the foreign country where the local bank holds a "%T#" account reuesting the bank to make the payment to - 2%eller4 in his local currency i.e. 1% Dollars. Thus facilitating the trade between $ M -. )F - wanted to buy 6
something from $ then the foreign bank would complete the deal using their L"%T#" account in $9s country.
8. Foreign Exchange 9eri)ati)es "ontracts Foreign exchange derivative contract means a financial transaction or an arrangement in whatever form and by whatever name called, whose value is derived from price movement in one or more underlying assets and includes? •
a transaction which involves at least one foreign currency other than currency of epal or 5hutan0 or
•
a transaction which involves at least one interest rate applicable to a foreign currency not being a currency of epal or 5hutan0 or
•
a forward contract, but does not include foreign exchange transaction for cash or Tom or %pot deliveries.
9Tom delivery! means delivery of foreign exchange on a working day next to the day of transaction. 9%pot delivery! means delivery of foreign exchange on the second working day after the day of transaction. The xchange /ontrol Department, #eserve 5ank of )ndia to regulate matters relating to Foreign xchange Derivative /ontracts under the new. Eegislation issued Foreign xchange Ganagement 2Foreign xchange Derivative /ontracts4 #egulations, *@@@> on ;rd Gay, *@@@. xcept to the extent permitted in the #egulations any person resident in )ndia or outside )ndia purposing to enter into a foreign exchange derivative contract would reuire prior permission of #eserve 5ank. The person’s resident in )ndia may enter into forward contracts with an authorised dealer for the transactions and sub&ect to the terms and. conditions mentioned in 8art : of %chedule )). 7
•
: person resident in )ndia may enter into a foreign exchange derivative contract other than forward contract for the transactions and sub&ect to the terms and conditions mentioned in 8art 5 of %chedule )). .
/ategories of persons resident outside )ndia mentioned in %chedule )) are permitted to enter into forward contracts with an authorised dealer in )ndia to hedge the transactions specified in that %chedule sub&ect to the terms and conditions mentioned therein. The applications for hedging of commodity price risks are reuired to be made to #eserve 5ank for prior approval through the )nternational Divisions of an authorised dealer. The procedure to be followed by the applicant and the authorised dealer and the documents to be furnished with the applications has been explained in %chedule ))). There is no change in the existing regulations relating to the forward contracts, other derivative products or hedging of commodity price risk .
4ermission of a person residing in 2ndia to enter in a deri)ati)e "ontract/
: person resident in )ndia may enter into a foreign exchange derivative contract in accordance with provision contained in %chedule ))) of the regulations to hedge an exposure to risk in respect of a transaction permissible under the FG: or rules or regulations or directions on orders made or issued there under. 4ermission to a person resident outside 2ndia to enter into a Foreign Exchange 9eri)ati)e "ontract
: person resident outside )ndia may enter into a foreign exchange derivative. /ontract with a person resident in )ndia in accordance with provisions contained in %chedule ))) of the regulations. Remittance re!ated to a foreign exchange 9eri)ati)e "ontract
:n authorised dealer in )ndia may remit outside )ndia foreign exchange in respect of a transaction undertaken in the following cases, namely option premium payable by a person resident in )ndia to a person resident outside )ndia0
•
•
remittance by a person resident in )ndia of amount incidental to a foreign exchange derivative contract entered into in accordance with regulation ( 0 8
remittance by a person resident outside )ndia of amount incidental to a foreign exchange
•
derivate contract entered into in accordance with regulation + 0
any other remittance related to a foreign exchange ,derivative contract approved by #eserve
•
5ank
:. What is FER6? The Foreign xchange Ganagement :ct, ><<<, 2FG:4 is an :ct to consolidate and amend the law relating to Foreign xchange, with the ob&ective of facilitating external trade and, payments and for promoting the orderly development and maintenance of the foreign exchange market in )ndia. (1) This :ct may be called the Foreign xchange #egulation :ct, >
2*4 )t extends to the whole of )ndia. 2;4 )t applies also to all citiens of )ndia outside )ndia and to branches and agencies outside )ndia of companies or bodies corporate, registered or incorporated in )ndia. 2(4
)t shall came into force on such date as the /entral 7overnment may, by notification in the "fficial 7aette, appoint in this behalf? 4ro)ided that different dates may be appointed for different provisions of this :ct and any
reference in any such provision to the commencement of this :ct shall be construed as a reference to the coming into force of that provision.
Why FER6? a4 F#: was introduced at a time when foreign exchange 2Forex4 reserves of the country were low, Forex being a scarce commodity.
9
b4 F#: therefore proceeded on the presumption that all foreign exchange earned by )ndian residents rightfully belonged to the 7overnment of )ndia and had to be collected and surrendered to the #eserve bank of )ndia 2#5)4. c4 )t regulated not only transactions in Forex, but also all financial transactions with nonresidents. F#: primarily prohibited all transactions, except to the extent permitted by general or specific permission by #5).
O;ecti)e of FER6 The main ob&ective of the F#: >
certain payments0
the import and export of currency, for the conservation of the foreign exchange resources of the country0
the proper utiliation of this foreign exchange so as to promote the economic development of the country
The basic purpose of F#: was? a4 To help #5) in maintaining exchange rate stability. b4 To conserve precious foreign exchange. c4 To prevent3regulate foreign business in )ndia
10
a& "ase Study for FER6 5io!ations on 2$" )T/ was started by 1Ibased tobacco ma&or 5:T 25ritish :merican Tobacco4. )t was called the 8eninsular Tobacco /ompany, for cigarette manufacturing, tobacco procurement and processing activities. )n ><>@, it set up a fullfledged sales organiation named the )mperial Tobacco /ompany of )ndia Eimited. To cope with the growing demand, 5:T set up another cigarette manufacturing unit in 5angalore in ><>*. To handle the raw material 2tobacco leaf4 reuirements, a new company called )ndian Eeaf Tobacco /ompany 2)ET/4 was incorporated in 6uly ><>*. 5y ><><, 5:T had transferred its holdings in 8eninsular and )ET/ to )mperial. Following this, )mperial replaced 8eninsular as 5:T9s main subsidiary in )ndia. 5y the late >. The company9s name was changed to )T/ Etd. in ><=>, )T/ diversified into the 11
$he 6ftermath < Setting $hings Right :larmed by the growing criticism of its corporate governance practices and the legal problems, )T/ took some drastic steps in its board meeting held on ovember >+, ><<<<<>><<( in connection with alleged F#: violations. The D also issued notices to the F)s and 5:T nominees on the )T/ board charging them with F#: contravention. )n %eptember ><
notices were related to the 5ukhara restaurant deal and the irregularities in )T/’s deals with )T/ 7lobal. )n late >< million, sought by the /hitalias from )T/ and ordered the /hitalias to pay back the ' >*.>< million claimed by )T/. The /hitalias contested the decision in a higher court, the ew 6ersey District court, which in 6uly ><<= endorsed the lower court’s order of awarding ' >*.>< million claim to )T/. )t also dismissed the claim for ' >( million made by the /hitalias against )T/. The &udgment was in favor of )T/ as the 1% courts felt that the /hitalias acted in bad faith in course of the legal proceedings, meddled with the factual evidence, abused information sources and concealed crucial documents from )T/. Following the court &udgment, the /hitalias filed for bankruptcy petitions before the 5ankruptcy /ourt in Florida, which was contested by )T/. )n early *@@>, the /hitalias proposed a settlement, which )T/ accepted. Following the agreement, the /hitalias agreed to the &udgement of the 5ankruptcy /ourt, which disallowed their 5ankruptcy 8etitions. :s a part of this settlement )T/ also withdrew its ob&ections to few of the claims of /hitalias, for exemption of their assets. Cowever, )T/’s efforts to recover its dues against the /hitalias continued even in early *@@*. The company and its directors inspected documents relating to the notices, with the permission of the D, to frame appropriate replies to the notices. )t was reported that )T/ extended complete cooperation to the D in its investigations. Cowever, the D issued yet another showcause notice 2the ** notice so far4 to )T/ in 6une *@@>, for violating section >A of F#:, in relation to )T/’s offer to pay ' *A million to settle )T/ 7lobal’s debts 2under section >A of F#:, a company should take prior permission from the #5), before it can forgo any amount payable to it in foreign exchange4. )T/ replied to the showcase notice in 6uly *@@>, stating it did not accept any legal liabilities while offering financial support to )T/ 7lobal. "n account of the provisions for appeals and counterappeals, these cases stood unresolved even in early *@@*. Cowever, )T/ had created a >.< million contingency fund for future liabilities. :lthough the company went through a tough phase during the late ><<@s, it succeeded in retaining its leadership position in its core businesses through value additions to products and services and through attaining international competitiveness in uality and cost standards. Despite various 19
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.
& "ontra)entions and 4ena!ties under FER6 "ne of the main reasons to fear F#: was, the unbridled power the enforcement authorities had, to arrest any person almost at their whim and fancy. 1nder %ec. ;+ of F#:, any officer authorised by the /entral government can arrest any person on mere suspicion of his having committed an offence under the :ct. This is one of the most obnoxious and most misused provisions of F#:. :ny offence under F#:, was a criminal offence, punishable with imprisonment as per code of criminal procedure, >
=. 4rogression$ransfer of FER6 to FEM6
20
F#: in its existing form became ineffective, therefore, increasingly incompatible with the change in economic policy in the early ><<@s. While the need for sustained husbandry of foreign exchange was recognied, there was an outcry for a less aggressive and mellower enactment, couched in milder language. Thus, the Foreign xchange Ganagement :ct, ><<< 2FG:4 came into being. The scheme of F#: provided for obtaining #eserve 5ank’s permission either special or general, in respect of most of the regulations there under. The general permissions have been granted by #eserve bank under these provisions in respect of various matters by issuing a large number of notifications from time to time since the :ct came into force from > st 6anuary >
FG: has brought about a sea change in this regard and except for section ;, which relates to dealing in foreign exchange, etc. no other provisions of FG: stipulate obtaining #5) permission. )t appears that this is a transition from the era of permissions to regulations. The emphasis of FG: is on #5) laying down the regulations rather than granting permissions on case to case basis. This transition has also taken away the concept of Kexchange controlJ and brought in the era of Kexchange managementJ. )n view of this change, the title of the legislation has rightly been changed to FG:.
The preamble to FG: lays down that the :ct is to consolidate and amend the law relating to foreign exchange with the ob&ective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in )ndia. :s far as facilitating external trade is concerned, section + of the :ct removes restrictions on drawal of foreign exchange for the purpose of current account transactions. :s external trade i.e. import 3 export of goods M services involve transactions on current account, there will be no need for seeking #5) permissions in connection with remittances involving external trade. The need to remove restrictions on current account transactions was necessitated as the country had given notice to the )GF in :ugust, ><<( that it had attained :rticle L))) 21
status. This notice meant that no restrictions will be imposed on remittances of foreign exchange on account of current account transactions. %ection +, however, contains a proviso that the /entral 7overnment may, in public interest and in consultation with the #eserve 5ank, impose such reasonable restrictions for current account transactions as may be prescribed. )t appears that this is an enabling provision for the /entral 7overnment to impose restrictions on current account transactions in case the situation warrants such restrictions probably due to foreign exchange crisis in future. This proviso seems to have been added keeping in view the lessons learnt by certain %outhast :sian countries during the >< sections 2some were deleted in the ><<; amendment of the :ct4 of which ;* sections related to operational part and the rest covered penal provisions, authority and powers of nforcement Directorate, etc. FG: contains (< sections of which >* sections cover operational part and the rest contravention, penalties, ad&udication, appeals, enforcement directorate, etc. What was a full section under F#: seems to have been reduced to a subclause under FG: in some cases. For examp!e*
2i4
%ection >; of F#: provided for restrictions on import of foreign currency M foreign securities. ow this restriction is provided through a subclause A2;42g4.
2ii4
%ection *+ of F#: provided for restrictions on )ndian residents holding immovable properties outside )ndia. ow the restriction is under subclause A2(4. #eduction in the number of sections means nothing. #eal uality of liberaliation will be known when all notifications M circulars are finalied M published.
#eed for FEM6
The demand for new legislation was basically on two main counts. The F#: was introduced in >
best interest of the country. Lery strict restrictions have outlived their utility in the current changed scenario. %econdly there was a need to remove the draconian provisions of F#: and have a forwardlooking legislation covering foreign exchange matters.
Repea! of draconian pro)isions under FER6
The draconian regulations under F#: related to unbridled powers of nforcement Directorate. These powers enabled nforcement Directorate to arrest any person, search any premises, seie documents and start proceedings against any person for contravention of F#: or for preparations of contravention of F#:. The contravention under F#: was treated as criminal offence and the burden of proof was on the guilty.
Why there 3as a need to scrap FER6? a4 The Foreign xchange #egulation :ct was replaced by the Foreign xchange Ganagement :ct as it was an impediment in )ndia9s to go global.
b4 )ndia9s foreign exchange transactions were governed under the Foreign xchange #egulation 23
:ct until 6une *@@@. This law had been enacted in >
c4 Thus, there was a need to scrap F#: and the Foreign xchange Ganagement :ct, ><<< came into effect on 6une >, *@@@. Cowever some of the relevant progresses made, from F#: to FG:, are as follows? Withdra3a! of Foreign Exchange
ow, the restrictions on withdrawal of Foreign xchange for the purpose of current :ccount Transactions, has been removed. Cowever, the /entral 7overnment may, in public interest in consultation with the #eserve 5ank impose such reasonable restrictions for current account transactions as may be prescribed. FG: has also by and large removed the restrictions on transactions in foreign xchange on account of trade in goods, services except for retaining certain enabling provisions for the /entral 7overnment to impose reasonable restriction in public interest.
>. What is FEM6? The Foreign xchange #egulation :ct of >st 6une, *@@@. )t was replaced by the Foreign Exchange Management 6ct 2FG:4, which was passed in the winter session of 8arliament in ><<<. nacted in >
Directorate 2.D.4. :ny offense under F#: was a criminal offense liable to imprisonment, whereas FG: seeks to make offenses relating to foreign exchange civil offenses. FG:, which has replaced F#:, had become the need of the hour since F#: had become incompatible with the proliberaliation policies of the 7overnment of )ndia. FG: has brought a new management regime of Foreign xchange consistent with the emerging frame work of the World Trade "rganiation 2WT"4. )t is another matter that enactment of FG: also brought with it 8revention of Goney Eaundering :ct, *@@* which came into effect recently from >st 6uly, *@@+ and the heat of which is yet to be felt as Knforcement DirectorateJ would be investigating the cases under 8GE: too.
1nlike other laws where everything is permitted unless specifically prohibited, under F#: nothing was permitted unless specifically permitted. Cence the tenor and tone of the :ct was very drastic. )t provided for imprisonment of even a very minor offence. 1nder F#:, a person was presumed guilty unless he proved himself innocent whereas under other laws, a person is presumed innocent unless he is proven guilty.
a& O;ecti)es and Extent of FEM6 The ob&ective of the :ct is to consolidate and amend the law relating to foreign exchange with the ob&ective of facilitating external trade and pa yments and for promoting the orderly development and maintenance of foreign exchange market in )ndia. FG: extends to the whole of )ndia. )t applies to all branches, offices and agencies outside )ndia owned or controlled by a person who is a resident of )ndia and also to any contravention there under committed outside )ndia by any person to whom this :ct applies. xcept with the general or special permission of the #eserve 5ank of )ndia, no person can ? •
deal in or transfer any foreign exchange or foreign security to any person not being an authoried person0
•
make any payment to or for the credit of any person resident outside )ndia in any manner0
•
receive otherwise through an authoried person, any payment by order or on behalf of any person resident outside )ndia in any manner0
•
reasonable restrictions for current account transactions as may be prescribed. 25
:ny person may sell or draw foreign exchange to or from an authoried person for a capital account transaction. The #eserve 5ank may, in consultation with the /entral 7overnment, specify ? •
any class or classes of capital account transactions which are permissible0
•
the limit up to which foreign exchange shall be admissible for such transactions
Cowever, the #eserve 5ank cannot impose any restriction on the drawing of foreign exchange for payments due on account of amortiation of loans or for depreciation of direct investments in the ordinary course of business. The #eserve 5ank can, by regulations, prohibit, restrict or regulate the following ? •
Transfer or issue of any foreign security by a person resident in )ndia0
•
Transfer or issue of any security by a person resident outside )ndia0
•
Transfer or issue of any security or foreign security by any branch, office or agency in )ndia of a person resident outside )ndia0
•
:ny borrowing or lending in foreign exchange in whatever form or by whatever name called0
•
:ny borrowing or tending in rupees in whatever form or by whatever name called between a person resident in )ndia and a person resident outside )ndia0
•
Deposits between persons resident in )ndia and persons resident outside )ndia0
•
xport, import or holding of currency or currency notes0
•
Transfer of immovable property outside )ndia, other than a lease not exceed ing five years, by a person resident in )ndia0
•
:cuisition or transfer of immovable property in )ndia, other than a lease not exceeding five years, by a person resident outside )ndia0
•
7iving of a guarantee or surety in respect of any debt, obligation or other liability incurred
2i4 by a person resident in )ndia and owed to a person resident outside )ndia or 2ii4 by a person resident outside )ndia. : person, resident in )ndia may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside )ndia if such currency, security or property was 26
acuired, held or owned by such person when he was resident outside )ndia or inherited from a person who was resident outside )ndia. : person resident outside )ndia may hold, own, transfer or invest in )ndian currency, security or any immovable property situated in )ndia if such currency, security or property was acuired, held or owned by such person when he was resident in )ndia or inherited from a person who was resident in )ndia. The #eserve 5ank may, by regulation, prohibit, restrict, or regulate establishment in )ndia of a branch, office or other place of business by a person resident outside )ndia, for carrying on any activity relating to such branch, office or other place of business. very exporter of goods and services must ? •
Furnish to the #eserve 5ank or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside )ndia0
•
Furnish to the #eserve 5ank such other information as may be reuired by the #eserve 5ank for the purpose of ensuring the realiation of the export proceeds by such exporter. The #eserve 5ank may, for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the #eserve 5ank determines, having regard to the prevailing marketconditions, is received without any delay, direct any exporter to comply with such reuirements as it deems fit. Where any amount of foreign exchange is due or has accrued to any person resident in )ndia, such person shall take all reasonable steps to realie and repatriate to )ndia such foreign exchange within such period and in such manner as may be specified by the #eserve 5ank.
FEM6 Ru!es 4o!icies The Foreign xchange Ganagement :ct, ><<< 2FG:4 came into force with effect from 6une >, *@@@. With the introduction of the new :ct in place of F#:, certain structural changes were brought in. The :ct consolidates and amends the law relating to foreign exchange to facilitate 27
external trade and payments, and to promote the orderly development and maintenance of foreign exchange in )ndia. From the #R2 perspecti)e , FG: broadly covers all matters related to foreign exchange, investment avenues for #)s such as immovable property, bank deposits, government bonds, investment in shares, units and other securities, and foreign direct investment in )ndia. FG: vests with the #eserve 5ank of )ndia, the sole authority to grant general or special permission for all foreign exchange related activities mentioned above. Section + - The :ct here provides clarity on several definitions and terms used in the context of
foreign exchange. %tarting with the identification of the onresident )ndian and 8ersons of )ndian origin, it defines !foreign exchange! and !foreign security! in sections *2n4 and *2o4 respectively of the :ct. )t describes at length the foreign exchange facilities and where one can buy foreign exchange in )ndia. FG: defines an authorised dealer, and addresses the permissible exchange allowed for a business trip, for studies and medical treatment abroad, forex for foreign travel, the use of an international credit card, and remittance facility Section 8 prohibits dealings in foreign exchange except through an authorised person. %imilarly,
without the prior approval of the #5), no person can make any payment to any person resident outside )ndia in any manner other than that prescribed by it. The :ct restricts nonauthorised persons from entering into any financial transaction in )ndia as consideration for or in association with acuisition or creation or transfer of a right to acuire an y asset outside )ndia. Section : restrains any person resident in )ndia from acuiring, holding, owning, possessing or
transferring any foreign exchange, foreign security or any immovable property situated outside )ndia except as specifically provided in the :ct. Section > deals with 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. #5) in consultation with the /entral 7overnment has issued various regulations on capital account transactions in terms of subsect ion 2*4 and 2;4 of section A. Section @ covers the export of goods and services. :ll exporters are reuired to furnish to the #5)
or any other authority, a declaration regarding full export value. 28
Section A puts the responsibility of repatriation on the persons resident in )ndia who have any
amount of foreign exchange due or accrued in their favour to get the same realised and repatriated to )ndia within the specific period and in the manner specified by the #5). The duties and liabilities of the :uthorised Dealers have been dealt with in Sections 1'* 11 and 1+ , while Sections 18 to 1= cover penalties and enforcement of the orders of the :d&udicating :uthority as well as the power to compound contraventions under the :ct.
& 4re)ention of Money !aundering 6ct 2ntroduction/-
Goney laundering involves disguising financial assets so that they can be used without detection of the illegal activity that let to its production. Through the process of Kmoney launderingJ a person converts illegal money into a legal entity. Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and pro&ecting it as untainted property shall be held guilty of the offence of money laundering. The %chedule to the 8revention of Goney Eaundering :ct 2henceforth, 8GE:4, *@@*, lists some of the offences under the following Eegislations? "ffences under the )ndia 8enal /ode 2part :4 eg. Waging or attempting to wage war, or abetting waging of war against the 7overnment of )ndia, /onspiring to commit offences punishable by s.>*> against the state >. "ffences under the #arcotic 9rugs and 4sychotropic Sustances :ct, ><=+ eg. /ontravention in relation to opium poppy and opium. *. "ffences under )ndia 4ena! "ode 2part 54 eg. Gurder, kidnapping for ransom, counterfeiting currency notes or bank notes. ;. "ffences under the 6rms 6ct, ><+< eg. Inowingly purchasing arms from unlicensed person not entitled to purchase the same. (. "ffences under the Wi!d!ife %4rotection& 6ct , ><+A eg. %educing or soliciting for purpose of prostitution. 29
A. "ffences under the 4re)ention of "orruption 6ct , ><== eg. Taking gratification for exercise of personal influence, with public servant The innumerate under therefore stated :cts generate huge sums. The launderer converts these sums into untainted money by investing them into shares or banks and thereby converts the essential character of the money. 0enesis/-
The 1 7eneral :ssembly, in its %pecial %ession 2><<<4, came up with a political declaration that reuired the Gember%tates to adopt money laundering legislation and programme. Goreover with the changed economic scenario and the dynamic process of liberaliation laws like Foreign xchange Ganagement 5ill in place of earlier F#: was felt to be much static and harsh. :s is said in Eatin %ummum 6us %uma )n&uria 2too much legislation, too much of regulations create problems for a man4 hence it was felt that a new law was reuired to curtail the powers of launderers. :ccordingly on the #ecommendations of the %tanding /ommittee on Finance on (th Garch, ><<< the 5ill was presented in the Eok %abha and the :ct was incorporated and enacted on >Bth 6anuary, *@@;.
Significance/-
The 8GE: was a very peculiar legislation. The /ivil 8rocedure /ode, ><@= and the /riminal 8rocedure /ode, >
With the 8GE: coming into force, banks, financial institutions and financial intermediaries will have to mandatorily report to 7overnment all suspicious transactions and those over #s.>@ Eakh. :s per the provisions of the :ct, every banking company, financial institution and intermediary needs to maintain a record of all transactions, the nature and value of which is being prescribed in the rules. Financial institutions, including chit funds, cooperative banks and intermediaries like stock brokers, share transfer agents, underwriters and investment advisers were to be registered 30
with %5). The Financial )ntelligence 1nit 2F)1)D4 was set up as a multidisciplinary unit for establishing links between suspicious or unusual financial transactions and criminal activities. Begis!ations in consonance 3ith 4MB6/-