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Forex business Ooverview.pdf

  1. FOREIGN EXCHANGE MARKET Forex is the international market for free trade of currencies. Traders place orders to buy one currency with another currency.  Foreign exchange market is that market in which national currencies are traded for one another.  The major participants in this market are Commercial Banks, Forex Brokers, Authorised Dealers and the Monetary Authorities.  Besides, transfer of funds from one country to another, speculations is an important dimension of foreign exchange market.  Its where money in one currency is exchanged for another.
  2.  It’s already the world’s largest market and it’s still grooming quickly.  It makes extensive use of Information technology – making it available to everyone.  Traders can profit from both strong and weak economies.  Traders can place very short term orders which are prohibited in some other markets.  The market is not regulated.  Brokerage commissions are very low or nil.  The market is open 24 hours in a day during weekdays. ADVANTAGES OF FOREX MARKET
  3. FOREIGN EXCHANGE Foreign Exchange is the mechanism by which the currency of one country gets converted into the currency of another country. The conversion of currency is done by the banks who deal in foreign exchange. These banks maintain stocks of one currency in the form of balances with banks. The term foreign exchange implies two things, Foreign Currency and Exchange rate. (a) Foreign Currency: Foreign exchange generally refers to foreign currency e.g., For India it is Dollar, Euro, Yen etc. & (b) Exchange rate: The other part of foreign exchange is exchange rate which is the price of one currency in terms of other currency.
  4. VARIOUS AUTHORITIES SUPERVISING FOREX BUSINESS 1) Ministry of Commerce through DGFT a) FTP 2015-20 b) ITC (HS)Classification c) IEC No. d) License 2) Ministry of finance 3) RBI guidelines through A.P.(DIR)Circulars, Master Circulars.
  5. RBI has delegated powers to A.P. All transactions in Forex have to be routed through A.P. (Authorised Person). A.P. comprises of Authorized Dealers, Money Changers, Off shore Banking Units etc. Authorized dealer Banks are further classified into : A Category: Position Maintaining Branch B Category: All transactions (except Position Maintaining) C Category : Routing Business through A/B Category Branches VARIOUS AUTHORITIES SUPERVISING FOREX BUSINESS
  6. FOREIGN EXCHANGE RBI’s Role in Forex Market 1. To manage the exchange rate mechanism. 2. To regulate Inter-bank forex transactions and monitor the foreign exchange risk of the banks. 3. Keep the exchange rate stable. 4. Manage and maintain country’s foreign exchange reserves.
  7. WHICH ACT GOVERNS FOREIGN EXCHANGE TRANSACTIONS? FEMA 1999 has replaced FERA Effective 01-06-2000 Rules and regulations have been issued under the act to govern various Forex transactions and for orderly development of Forex Market.
  8. IMPORTANT ORGANISATIONS FEDAI (Foreign Exchange Dealer's Association of India ) ECGC (Export Credit Guarantee Corporation of India Ltd.) I.C.C. (International Chamber of Commerce) SWIFT (Society for Worldwide Interbank Financial Telecommunications)
  9. FOREIGN EXCHANGE MARKET Spot Market – (Current market) – Spot market is of daily nature. It does not trade in future deliveries. Spot rate of exchange is that rate which happens to prevail at the time when transactions are incurred. Forward Market – Forward market for foreign exchange is that market which handles such transactions of foreign exchange as are meant for future delivery. It only caters to forward transactions. It determines forward exchange rate at which forward transactions are to be honoured.
  10. FOREIGN EXCHANGE RATE Fixed Exchange Rate System – Fixed rates provide greater certainty for exporters and importers. Fixed rate is the official rate set by the monetary authorities of the governance for one or more currencies. Floating (Flexible)Exchange Rate System – Flexible exchange rate or floating exchange rates changes freely and are determined by trading in forex market. Under Floating rate, the value of the currency is decided by supply and demand factors.
  11. FOREIGN EXCHANGE RATE Direct and Indirect Exchange Rates Direct Rate : Under this, a given number of units of local currency per unit of foreign currency is quoted. They are designed as direct / certain rates because the Rupee cost of single foreign currency unit can be obtained directly. Direct quotation is also called Home Currency Quotation. (Rs. 100 = $ 1.34 / 40). Indirect Rate : Under this, a given number of unit of foreign currency per unit of local currency is quoted. Indirect quotation is also called Foreign Currency Quotation. ($1 = Rs. 67 /68 )
  12. Spot and Forward rates The delivery under a foreign exchange transaction can be settled in one of the following ways – Ready or cash – To be settled on the same day. TOM – The transaction to be settled on the next working day of transaction. Spot – To be settled on the second working day from the date of contract. Forward – To be settled at a date farther than the spot date. FOREIGN EXCHANGE RATE
  13. FOREIGN EXCHANGE ACCOUNTS NOSTRO, VOSTRO and LORO Accounts NOSTRO – Our account with banks abroad. RBI maintains various NOSTRO accounts in a number of countries. VOSTRO – Their accounts with us. Many multinational agencies (e.g. IMF, World Bank) maintains their NOSTRO accounts with RBI. LORO – Their account with you. E.g. Bank of India has an account in US dollars with Manhattan Bank in New York. When bank of Baroda wishes to refer the account of Bank Of India with Manhattan Bank, it would refer to it as LORO account.
  14. FOREIGN EXCHANGE DEALINGS IN INDIA The Reserve Bank of India (RBI) is the regulator of foreign exchange dealings in India. It prohibits, restricts, and regulates the opening, holding and maintaining of foreign currency accounts, and the limits up to which a person resident in India can hold the amount in such accounts. These regulations are known as Foreign Exchange Management (foreign currency accounts by a person resident in India) (FEMA) Regulations, 2015 and contain separate provisions for resident and non-residents.
  15. DEFINITION OF NRI AND PIO You are considered an Indian resident for a financial year if you satisfy any of the conditions below: 1) When you are in India for at least 6 months (182 days to be exact) during the financial year. 2) You have been in India for 2 months (60 days) in the previous year and have lived for one whole year (365 days) in the last four years. The following persons (other than individuals) are treated as person resident in India: • Person or body corporate which is registered or incorporated in India; • An office, branch or agency in India, even if it is owned or controlled by a person resident outside India; or • An office, branch or agency outside India, if it is owned or controlled by a person resident in India.
  16. WHO IS PERSON OF INDIAN ORIGIN A PIO refers to a citizen of any country (other than Bangladesh, Pakistan, Afghanistan, Bhutan, China, Nepal and Sri Lanka) if: A) He / She held an Indian passport OR B) He / She or either of his parents or any of his grandparents was a citizen of India OR C) The person is a spouse of an India citizen or a person referred to in (A) or (B)
  17. WHO IS OVERSEAS CITIZEN OF INDIA (OCI) A foreign national, - (i) who was a citizen of India at the time of, or at any time after 26th January, 1950; or (ii) who was eligible to become a citizen of India on 26th January, 1950; or (iii) who belonged to a territory that became part of India after 15th August, 1947; or (iv) who is a child or a grandchild or a great grandchild of such a citizen; or (v) who is a minor child of such persons mentioned above; or (vi) who is a minor child and whose both parents are citizens of India or one of the parents is a citizen of India – is eligible for registration as OCI cardholder.
  18. LIBERALIZED REMITTANCE SCHEME (LRS) The FEMA regulations allow a resident to remit an aggregate sum of US$ 250,000 per financial year (April 1 to March 31) for any permissible current account or capital account transaction under the Liberalized Remittance Scheme (LRS) without any approval from RBI. The LRS is a scheme established by the RBI to grant permission to citizens of India to transfer funds abroad for permitted current or capital account transactions or for both.
  19. NON-RESIDENT (EXTERNAL) RUPEE ACCOUNT NRE ACCOUNT  The Non-Resident (External) Rupee Account NR(E)RA scheme, also known as the NRE scheme, was introduced in 1970.  Any NRI/PIO can open an NRE account. It allows non-residents as well as Persons of Indian Origin (PIO) to transfer foreign earnings easily to India.  Joint accounts can be opened by two or more NRIs and/or PIOs or by an NRI/PIO with a resident relative(s) on ‘former or survivor’ basis. However, during the life time of the NRI/PIO account holder, the resident relative can operate the account only as a Power of Attorney holder.  Credits permitted to this account as inward remittance are interest accruing on the account, interest on investment, transfer from other NRE/ FCNR(B) accounts, maturity proceeds if such investments were made from this account or through inward remittance.
  20.  This is a repatriable account and transfer from another NRE account or FCNR(B) account is also permitted.  An NRE rupee account may be opened as current, savings or term deposit. Local payments can be freely made from NRE accounts. Since this account is maintained in Rupees, the depositor is exposed to exchange risk.  NRIs / PIOs have the option to credit the current income to their Non-Resident (External) Rupee accounts, provided the authorised dealer is satisfied that the credit represents current income of the non-resident account holders and income-tax thereon has been deducted / provided for.  Taxations: There is no tax on interest earned from NRE accounts, and no wealth tax. The tax exemptions are available only for an NRE Account held by an individual and not for those maintained by overseas corporate bodies. NON-RESIDENT (EXTERNAL) RUPEE ACCOUNT- NRE ACCOUNT
  21. NON-RESIDENT ORDINARY ACCOUNTS (NRO)  An NRO deposit account allows non-residents (including foreign nationals) for collecting their funds from local bonafide transactions.  The account can be credited with inward remittances from outside India, legitimate dues in India and rupee gift or loan made by a resident to an NRI or PIO relative subject to the limit prescribed under LRS.  NRO accounts being Rupee accounts, the exchange rate risk on such deposits is borne by the depositors themselves.  When a resident becomes an NRI, his existing Rupee accounts are designated as NRO.  Such accounts also serve the requirements of foreign nationals’ resident in India.  AD Category-I banks may permit foreign nationals who have come to India on employment and are eligible to open/hold a resident savings bank account to re-designate their resident account maintained in India as NRO account on leaving the country after their employment to enable them to receive their legitimate dues subject to certain conditions.  NRO accounts can be maintained as current, saving, recurring or term deposits.
  22. Only current income such as rent, pension, and interest, can be remitted from an NRO account outside India. In addition to this, balances in the NRO account may be repatriated abroad or to an NRE account only up to US$1 million in a financial year (April to March). Repatriation of an amount in excess of US$1 million may be permitted by the RBI under the approval route in exceptional circumstances. NRO accounts can be maintained in the form of savings account, fixed deposit, or recurring deposit account. Taxation: Interest earned in this account is taxable. NON-RESIDENT ORDINARY ACCOUNTS (NRO)
  23. FOREIGN CURRENCY (NON-RESIDENT) ACCOUNT (BANKS) SCHEME (FCNR (B) ACCOUNT) Foreign Currency Non-Resident Account Bank or FCNR (B) was first introduced in 1993. It replaced the existing FCNR (A) scheme. FCNR (B) accounts are maintained only in the form of term deposits of one to five years. FCNR is a fixed deposit foreign currency account that allows non-residents to keep their deposits in foreign currency. Earlier this account is opened by the NRIs in 6 designated currencies US Dollars, Pounds Sterling, Euro, Japanese Yen, Australian Dollars, and Canadian Dollars. only, but Based on the recommendations of the Committee to Review the Facilities for Individuals under FEMA, 1999, Foreign Exchange Department (FED) has permitted banks to accept FCNR (B) deposits in any permitted currency with effect from October 19, 2011.
  24. FCNR (B) ACCOUNT  Repatriation of funds in foreign currencies is permitted.  If the account holder so wishes these accounts can also be transferred to other NRE/FCNR accounts before the maturity period.  Such transfers are subjected to penalties that are charged for premature withdrawals of the deposit.  Transfer of funds from existing NRE accounts to FCNR (B) accounts and vice versa of the same account holder is permissible without prior approval of RBI.  Other conditions such as credits/debits, joint accounts, loans / overdrafts, operation by power of attorney etc., as applicable to an NRE account will be applicable to FCNR (B) account as well.  The entire deposit (principal and interest) is exempt from tax.
  25. Foreign currency accounts by a person resident in India
  26. EXCHANGE EARNERS’ FOREIGN CURRENCY ACCOUNT (EEFC) A person resident in India may open, hold and maintain with an authorised dealer in India, a Foreign Currency Account to be known as Exchange Earners’ Foreign Currency (EEFC) Account.
  27. RESIDENT FOREIGN CURRENCY ACCOUNT A person resident in India may open, hold and maintain with an authorised dealer in India a Foreign Currency Account, to be known as a Resident Foreign Currency (RFC) Account, out of foreign exchange – received as pension or any other superannuation or other monetary benefits from his employer outside India; or realised on conversion of the assets referred to in sub-section (4) of section 6 of the Act, and repatriated to India; or received or acquired as gift or inheritance from a person referred to in sub-section (4) of section 6 of the Act; or referred to in clause (c) of section 9 of the Act, or acquired as gift or inheritance there from; or received as the proceeds of life insurance policy claims/ maturity/ surrender values settled in foreign currency from an insurance company in India permitted to undertake life insurance business by the Insurance Regulatory and Development Authority.
  28. FOREIGN EXCHANGE FINANCE Pre-shipment Credit Pre-shipment credit refers to the credit extended to exporters prior to the shipment of goods for the execution of export order. It refers to any loan granted to an exporter for financing the purchase, processing, manufacturing or packing of goods as defined by RBI. Pre-shipment finance is issued by a financial institution when the seller wants the payment of the goods before shipment. It is also known as “Packing Credit”. Eligibility – 1. Exporter, 2. Confirm Orders 3. An irrevocable Letter of Credit opened in favour of exporter.
  29. FOREIGN EXCHANGE FINANCE Post-shipment Finance Credit extended to the exporters after shipment of goods for meeting working capital requirements. Purpose : Meeting Working capital needs, Custom duties, Insurance, ECGC premium etc.