Ques:- what Instruments are borrower is available in corporate in

the International finance Market.

TOPIC:
Rising fund abroad :-
(a) Give the Brief discussion on current revolution governing
commercial by companies of india ADR/GDR Through.
(b) Investment by non-resident (FDI)
(c) Summerise the relation to FDI in india
Ans. Top 4 International Capital Market Instruments | Finance
The following points highlight the top four international capital market
instruments. They are: 1. Global Depository Receipts 2. Foreign
Currency Convertible Bonds 3. American Depository Receipts 4.
External Commercial Borrowing.

Instrument # 1. Global Depository Receipts:

Global Depository Receipt (GDR) is an instrument which allows Indian
Corporate, Banks, Non- banking Financial Companies etc. to raise funds
through equity issues abroad to augment their resources for domestic
operations.

As per the recent guidelines on issue of GDR, a corporate entity can

issue any number of GDR issues in a year and the corporate involved in
infrastructure projects need not have a past track record of financial
performance.

A GDR is a dollar denominated instrument of a company, traded in

stock exchanges outside the country of origin i.e., in European and
South Asian Markets. It represents a certain number of underlying equity
shares.
Though the GDR is quoted and traded in dollar terms, the underlying
equity shares are denominated in rupees only. Instead of issuing in the
names of individual shareholders, the shares are issued by the company
to an intermediary called the ‘depository’, usually in Overseas
Depository Bank, in whose name the shares are registered.

It is the depository, which subsequently issues the GDR to the

subscribing public. The physical possession of the equity shares will be
with another intermediary called the ‘custodian’, who is an agent of the
depository. Though the GDR represents the company’s shares, it has a
distinct identity and does not figure in the books of the company.

Instrument # 2. Foreign Currency Convertible Bonds:

Foreign Currency Convertible Bonds (FCCBs) are issued in accordance with
the scheme and subscribed by a non-resident in foreign currency and
convertible into ordinary share of the issuing company in any manner, either
in whole or in part on the basis of only equity related warrants attached to
debt instrument. The FCCB is almost like the convertible debentures issued
in India.

The Bond has a fixed interest or coupon rate and is convertible into certain
number of shares at a prefixed price. The bonds are listed and traded on one
or more stock exchanges abroad. Till conversion the company has to pay
interest on FCCBs in dollars (or in some other foreign currency) and if the
conversion option is not exercised, the redemption also has to be done in
foreign currency. The bonds are generally unsecured.

Instrument # 3. American Depository Receipts:

A foreign company might make issue in U.S. by issuing securities through
appointment of Bank as depository. By keeping the securities issued by the
foreign company, the U.S. Bank will issue receipts called American
Depository Receipts (ADRs) to the investors.

It is a negotiable instrument recognizing a claim on foreign security. The

holder of the ADRs can transfer the instrument as in the case of domestic
instrument and also entitled for dividends as and when declared.
The ADR holder can ask the bank for the original foreign security by
exchanging the ADR. The Bank will act as a custodian for the investors. An
ADR can be described as a negotiable instrument denominated in US dollars,
representing a non-US Company’s local currency equity shares or known as
depository receipts.

These are created when the local currency shares of an Indian Company are
delivered to an overseas depository bank’s domestic custodian bank, against
which depository receipts in US dollars are issued. Each depository receipt
may represent one or more underlying shares. These depository receipts can
be listed and traded as any other dollar denominated security.

The disclosures as required under the Securities Exchange Commission’s

(SEC) regulations are stringent and onerous. In order to protect the investor,
the SEC places the onus on the issuer company, its officers and directors to
ensure that the prospectus does not contain any misstatement or omissions
which are material in nature.

Benefits:
To Indian Company:
(a) Better corporate image both in India and abroad which is useful for
strengthening the business operations in the overseas market.

(b) Exposure to international markets and hence stock prices in line with
international trends.

(c) Means of raising capital abroad in foreign exchange.

(d) Use of the foreign exchange proceeds for activities like overseas
acquisitions, setting up offices abroad and other capital expenditure.

(e) Increased recognition internationally by bankers, customers, suppliers etc.

(f) No risk of foreign exchange fluctuations as the company will be paying

the interest and dividends in Indian rupees to the domestic depository bank.
To Overseas Investors:
(a) Assured liquidity due to presence of market makers.

(b) Convenience to investors as ADRs are quoted and pay dividends in U.S.
dollars, and they trade exactly like other U.S. securities.

(c) Cost-effectiveness due to elimination of the need to customize underlying

securities in India.

(d) Overseas investors will not be taxed in India in respect of capital gains on
transfer of ADRs to another non-resident outside India.

Instrument # 4. External Commercial Borrowing:

External Commercial Borrowings (ECBs) is a borrowing of over 180 days.
ECB is the borrowing by corporate and financial institutions from
international markets. ECBs include commercial bank loans, buyers credit,
suppliers credit, security instruments such as floating rate notes and fixed rate
bonds, credit from export-credit agencies, borrowings from international
financial institutions such as IFC etc.

The incentive available for such loans is the relative lower financing cost.
ECB’s can be taken in any major currency and for various maturities. ECBs
are being permitted by the Government for providing an additional source of
funds to Indian corporate and PSU’s for financing expansion of existing
capacity as well as for fresh investment to augment the resources available
domestically.

ECBs are approved with an overall annual ceiling. Consistent with prudent
debt-management keeping in view the balance of payments position and level
of foreign exchange reserves.

5 things NRIs must keep in mind while investing in

India
 Financial Planning for Non Resident Indians can be much the same as Financial
Planning for Resident Indians – there are only a few things which NRIs need to keep
in mind when executing the Financial Plan i.e. when investing.

In this article we will cover India as an investment destination, how to figure out if
you are an NRI, things to keep in mind when investing in India as an NRI, NRI
taxation and which are the different bank accounts to invest from.
1. First, let’s consider how to know whether you classify as an NRI or not. The
classification is actually very simple.
The Income Tax Act classifies residential status of a person into ‘Resident’ and ‘Non-
Resident’ (NR). It further classifies ‘Resident’ into ‘Ordinarily Resident’ (ROR) and
‘Not Ordinarily Resident’ (RNOR), which is applicable only to Individuals.

An individual is 'Resident in India' if he/she fulfils any one of the condition (basic
conditions) given below with reference to his/her stay in India during the previous
year (i.e. April to March).

1. If he/she is in India in that year for a period or periods amounting in all to 182 days or
more or
2. If he/she is in India in that year for a period or periods amounting in all to 60 days or
more and if he/she has within the 4 years preceding that year been in India for a
period or periods amounting in all to 365 days or more.
There are a couple of exceptions to the above stated conditions.

Exceptions:
The period of 60 days in (2) above is to be read as 182 days in case of a Citizen of
India:
1. who leaves India in any previous year as a member of the crew of an Indian ship or
2. for the purpose of employment outside India or
3. a Citizen of India, or a person of Indian origin, who being outside India, comes on a
visit to India in any previous year.
 Thus, to be resident in India, a person has to satisfy any one of the above two basic
conditions. If a person does not satisfy any of the above conditions he/she is
determined as ‘Non Resident’ in India.

Once a person is determined to be resident in India, he may further be ‘ordinarily’ or

‘not ordinarily resident’ in India.

To determine whether a person is ‘Ordinarily Resident’ he/she has to satisfy any one
of the condition in the relevant previous year:-

1. he/she has been ‘resident in India’ in 2 out of 10 years preceding that year, or
2. he/she has been in India for a period or periods amounting in all to 730 days or more
during 7 years preceding that year.
2. Now that we know how to classify oneself, lets move forward to assess India as
an Investment Destination – compared to the other emerging nations.
The recent economic down-turn has made a number of Indians working in a foreign
country become concerned about their job security and investment options. This has
made them think about managing their finances in a better way by taking professional
advice and by investing more money in India – their home country. The India Shining
story is something we have all heard in the past, but is it really true when compared to
other developing nations such as Brazil, China and Russia?
Source: ACEMF; Personal FN Research

As is shown in the chart above depicting India, Brazil, Russia and China, over the past
1 year, even with all negatives, India has managed to slowly and steadily outperform
the rest of the emerging nations, proving that as an investment destination, we need to
look no further than our own home country to help us plan for and achieve our life’s
financial goals.

However, deciding which country to invest in is only the beginning. It is important to

also know where to invest your money, which account to invest from, how much to
invest and the tax applicable to your investments. Each of these is dealt with ahead.

3. Let us proceed on to Where to Invest.

The investment avenues for NRIs are broadly the same as investment avenues for
Resident Indians, with a few small points to keep in mind:
i. Direct Equity: NRI’s can invest their funds in equity markets. But, before investing
in equity one should take into account the time horizon of investment, risk and return
expected on the investment and the long term goals. There is no limit or cap for NRI’s
investing in direct equity.
ii. Mutual Funds: A Mutual Fund would be a safer bet compared to direct equity for
a foreign investor who has limited expertise. For an NRI, no specific approval for
investing or redeeming from mutual fund is required. However, certain mutual funds
may not accept deposits from NRIs based in the USA or Canada. If you are a USA /
Canada NRI, it is especially important to first check the fund house rules before
investing, so that money is not locked away for a few days before simply being
returned to you rather than being invested.
iii. Real Estate in India is another favourite with NRIs. The clear benefit here is that
while you are residing in a foreign country, the apartment / house can be given out on
rent, thereby providing additional income. It is also a common myth that as an NRI it
is not possible to get a home loan – an NRI can certainly avail a home loan to
purchase a property in India.

You must also keep in mind the taxation on your investments.

4. Taxation for NRIs

*Indian Income means income which is received in India or accrues or arises in India.

**Foreign Income means income which is neither received in India and does not
accrues or arises in India.

In the case of a Non Resident, only the income earned or received in India is taxed in
India. Accordingly, income earned outside India would not be taxable in India.

Tax on Dividends:
Dividends declared by equity-oriented funds (i.e. mutual funds with more than 65% of
assets in equities) are tax-free in the hands of NRI investor.

Dividends declared by debt-oriented mutual funds (i.e. mutual funds with less than
65% of assets in equities), are tax-free in the hands of the NRI investor. However, a
dividend distribution tax (which varies for individual and corporate investors) is to be
paid by the mutual fund on the dividends declared by them.
Dividends received from foreign companies are taxable in the hands of shareholder as
the foreign companies are not liable to DDT

Taxation of capital gains on mutual fund

A unit of a mutual fund is treated as short-term capital asset if it is held for less than
12 months.
Short Term Capital Gain:
When the units in Equity Oriented Mutual Fund are sold (redeemed) within one year
of being held by the investor, it becomes short term gains or loss. The Short term
gains are taxed at 15% on gain. When the units in Debt Oriented Mutual Fund are sold
(redeemed) within one year of being held by the investor, it is taxed under slab rates
applicable to Individual.
Long Term Capital Gain:
When the units in Equity Oriented Mutual Fund are sold after holding for more than a
year, gains on such units redemption is tax free
When the units in Debt Oriented Mutual Fund are sold after holding for more than a
year, gains on such units redemption is taxable as Long term Capital Gains. Long-
term capital gains on debt-oriented funds are subject to tax @20% of capital gains
after allowing indexation benefit, or at 10% flat without indexation benefit, whichever
is less.

Indexation benefit is when the cost of the investment is raised to account for inflation
for the period the investment is held. This is done by using a cost inflation index
number released by the tax authorities every year.

Let's say that you had invested Rs 1 lakh in a mutual fund on March 30, 2005 and
redeemed these units at Rs 1.5 lakh on April 1, 2010.
 As per indexation benefit, according to the Cost Inflation Index levels announced by
the government every year the cost of acquisition would be deemed to be Rs 148,125
lakh. Your long-term capital gain on this transaction with indexation benefit is just Rs
1,875. The tax liability thus would be Rs 375.
Without indexation benefit, long term capital gain will be Rs. 50,000 and tax liability
would be Rs. 5,000.
5. Types of Bank Accounts:
An NRI must also consider which account he should be investing from. But before
doing so, it is important to take into account some points:
 Are the funds in the bank account from which you will be investing, obtained from
Indian sources or are they repatriated (brought back home) from the country in which
you are working? E.g. Are they your salary funds?
 In which currency do you want to hold the bank account?
 Do you plan to repatriate the funds in the account back into the foreign currency, in
order to take it back to your country of work?
Based on the answers to these questions, you can decide whether you need to invest
from your NRE (Non Resident External) account or your NRO (Non Resident
Ordinary) account.

NRE Account: In an NRE account, your funds in foreign currency are converted into
Indian rupees, at the rate prevailing at the time of transferring the funds from the
account. The principal as well as the interest is freely repatriable or can be transferred
to the foreign country. Funds in the NRE account can be freely repatriated.
NRO Account: If you want an account to transfer Indian earnings, an NRO account is
suitable for you. Foreign funds can also be deposited into this account. The interest
income earned on in this account is subject to tax in India. The interest is subject to
income tax deduction at source @ 30% plus applicable surcharge plus education cess.
Funds in the NRO account cannot be repatriated abroad.
Ques:- Financing Import:- (FEMA) ? Give the general Provisions import/export
in Foreign trade Policy?
 Letter Of Credit& Documentations?
 Forward Exchange Rate?
 Currency Future, Currency option Information Risk, Exchange Risk
 IMF,IBRD,IFC
 Balance of Payment: Current A/c Capital A/c
 Introduction Of Foreign Exchange :

Foreign Exchange Management Act

Foreign Exchange Management Act or in short (FEMA) is an act that provides
guidelines for the free flow of foreign exchange in India. It has brought a new
management regime of foreign exchange consistent with the emerging frame work
of the World Trade Organisation (WTO). Foreign Exchange Management Act was
earlier known as FERA (Foreign Exchange Regulation Act), which has been found
to be unsuccessful with the proliberalisation policies of the Government of India.

Provisions of Foreign Exchange Management Act!

Provisions of Foreign Exchange Management Act (FEMA) provides
free transaction on current account subject to the guidelines by the
RBI. Enforcement of Foreign Exchange Management Act (FEMA) is
entrusted to a separate directorate, which undertakes investigations
on contraventions of the Act.

Provisions of FEMA are grouped under four heads. Important

provisions under each of the four heads, having a bearing on
promoting economic development through foreign investment with
enabling provisions to ensure the curtailing of inflationary trends from
such transactions, are outlined below.
Regulation for Current Account Transaction:
Any person can sell or draw foreign exchange to or from an authorised
dealer (if such sale or withdrawal is a current account transaction)
except for certain prohibited transactions like remittance of lottery
winnings, remittance of interest income on funds held in Non-
Resident Special Rupee (NRSR) account scheme, etc.

Besides these cases, there are certain other transactions, for which
specific RBI approval will be required. For instance, Reserve Bank
approval is required for importers availing of Supplier’s Credit beyond
180 days and Buyer’s Credit irrespective of the period of credit.

Authorised dealers are permitted remittance of surplus

freight/passage collections by shipping/airline companies or their
agents, multimodal transport operators, etc. after verification of
documentary evidence in support of the remittance.

Regulations Relating to Capital Account Transactions:

i. Foreign nationals are not allowed to invest in any company or
partnership firm or proprietary concern, which is engaged in the
business of Chit Fund or in Agricultural or Plantation activates or in
Real Estate business (other than development of township,
construction of residential/commercial premises, roads or bridges) or
construction of farm houses or trading in Transferable Development
Rights (TDRs). Listing of permissible classes of Capital account
transaction for a person resident in India and also by a person resident
outside India has been provided in the regulations.
ii. Detailed rules and regulations are provided on borrowing and
lending in Foreign Currency as well as India Rupee by a person
resident in India form/to a person resident outside India either on
non-repatriation or repatriation basis.

iii. Authorised dealers are now permitted to grant rupee loans to NRIs
against security of shares or immovable property in India, subject to
certain terms and conditions. Authorised dealers or housing finance
institutions approved by National Housing Bank can also grant rupee
loans to NRIs for acquisition of residential accommodations subject to
certain terms and conditions.

iv. General permission has been granted to Indian company (including

Non-Banking Finance Company) registered with Reserve Bank to
accept deposits from NRIs on repatriation basis subject to the terms
and conditions specified in the schedule.

Indian proprietorship concern/firm or a company (including Non-

Banking Finance Company) registered with Reserve Bank can also
accept deposits from NRIs on non-repatriation basis subject to the
terms and conditions specified in the schedule.

Regulations relating to export of goods and services:

Export proceeds are required to be realised within a period of 6
months from the date of shipment. In the case of exports to a
warehouse established abroad with the approval of Reserve Bank, the
proceeds have to be realised within 15 months from the date of
shipment.
An enabling provision has been made in this regulation to delegate
powers to authorised dealers to allow extension of time. Export of
goods on elongated credit terms beyond six months requires prior
approval of Reserve Bank.

Letter Of Credit:
A letter of credit (LC), also known as a documentarycredit, is a written
commitment by a bank on behalf of a buyer that payment be made to a seller
provided that the terms and conditions stated therein have been met. A letter
of credit is an important payment method in international trade.

LETTER OF CREDIT
Required Documents
BILL OF LADING
A Bill of Lading is considered the most important document involved in a shipment of
merchandise. An exporter receives a Bill of Lading when delivering the merchandise
to the shipping company for transport to an importer.

ORDER BILL OF LADING

An Order Bill of Lading is a title document. Steamship companies issue one or more
original Order Bills of Lading per shipment, which allows an importer to claim
merchandise when it arrives. An exporter normally endorses the Bills of Lading "in
blank," which means that they are not endorsed to a specific person or institution. The
party possessing any one of the original Bills of Lading can take possession of the
goods.

AIRWAY BILL OF LADING (STRAIGHT BILL OF LADING)

This instrument does not convey title. Airline companies issue Straight Bills of
Lading called Airway Bills. Since an Airway Bill is issued only in non-negotiable
form, an exporter consigns it to a specific person or institution. A copy of the Airway
Bill accompanies a shipment, and an exporter is given the original to present along
with other required shipping documents. To take possession of the merchandise, a
party to which the merchandise is consigned needs to present proper identification.
Therefore, if the air shipment is consigned to a buyer, the seller might lose control of
the merchandise before payment is made. To help prevent this, an Airway Bill should
be consigned to Zions Bank.

COMMERCIAL INVOICE
A Commercial Invoice is a document that describes merchandise, as stated in the
Letter of Credit, and lists the costs. An importer may agree to pay, in addition to the
cost of the merchandise, charges involved in shipping the merchandise. The
description of the merchandise in the Commercial Invoice and the description of the
merchandise in the Letter of Credit must be identical in every way.

INSURANCE POLICY
Issued by an underwriting institution, the Insurance Policy states that a specified party
will be reimbursed an amount in the event merchandise is damaged or destroyed. An
Insurance Policy generally covers accidental losses and covers voluntary losses when
a cargo must be sacrificed to save a ship. For additional cost, losses caused by
spoilage, war, civil disturbance, riots and other risks can be included in the coverage.
Because commercial banks are not included in the shipping business per se, questions
regarding types of coverage should be referred to a freight forwarder or a customs
broker.

Forward Exchange Rate:-

The forward exchange rate is the rate at which a commercial bank is willing to
commit to exchange one currency for another at some specified future date.[1] The
forward exchange rate is a type of forward price. It is the exchange rate negotiated
today between a bank and a client upon entering into a forward contract agreeing to
buy or sell some amount of foreign currency in the future.[2][3] Multinational
corporations and financial institutions often use the forward market to hedge
future payables or receivables denominated in a foreign currency against foreign
exchange risk by using a forward contract to lock in a forward exchange rate.

Currency Futures:-
Currency futures are a transferable futures contract that specifies the price at which a
currency can be bought or sold at a future date. Currency futures contracts are legally
binding and counterparties that are still holding the contracts on the expiration date
must trade the currency pair at a specified price on the specified delivery date.
Currency future contracts allow investors to hedge against foreign exchange risk.
Currency Option Information Risk:-
A currency option is a contract that gives the buyer the right, but not the obligation, to
buy or sell a certain currency at a specified exchange rate on or before a specified
date. For this right, a premium is paid to the seller, the amount of which varies
depending on the number of contracts if the option is bought on an exchange, or on
the nominal amount of the option if it is done on the over-the-counter market.
Currency options are one of the most common ways for corporations, individuals or
financial institutions to hedge against adverse movements in exchange rates.

'Foreign Exchange Risk'

Foreign exchange risk - also called FX risk, currency risk, or exchange rate risk - is
the financial risk of an investment's value changing due to the changes in currency
exchange rates. This also refers to the risk an investor faces when he needs to close
out a long or short position in a foreign currency at a loss, due to an adverse movement
in exchange rates.

International Financial Institutions

International Monetary Fund:-

The International Monetary Fund (IMF) is based in Washington, D.C. and currently
consists of 189 member countries, each of which has representation on the IMF's
executive board in proportion to its financial importance, so that the most powerful
countries in the global economy have the most voting power.
The IMF's website describes its mission as "to foster global monetary cooperation,
secure financial stability, facilitate international trade, promote high employment and
sustainable economic growth, and reduce poverty around the world."

IBRD
The International Bank for Reconstruction and Development (IBRD) is
an international financial institution that offers loans to middle-income developing
countries. The IBRD is the first of five member institutions that compose the World
Bank Group and is headquartered in Washington, D.C., United States. It was
established in 1944 with the mission of financing the reconstruction of European
nations devastated by World War II. The IBRD and its concessional lending arm,
the International Development Association, are collectively known as the World
Bank as they share the same leadership and staff.
IFC

The International Finance Corporation (IFC) is an organization dedicated to helping

the private sector within developing countries. It provides investment and asset
management services to encourage the development of private enterprise in nations
that might be lacking the the necessary infrastructure or liquidity for businesses to
secure financing.
The International Finance Corporation (IFC) is an international financial
institution that offers investment, advisory, and asset-management services to
encourage private-sector development in developing countries. The IFC is a member
of the World Bank Groupand is headquartered in Washington, D.C.. It was established
in 1956, as the private-sector arm of the World Bank Group, to advance economic
development by investing in for-profit and commercial projects for poverty
reduction and promoting development.

Balance of Payment :-

The balance of payments (BOP), also known as balance of international payments,

summarizes all transactions that a country's individuals, companies and government
bodies complete with individuals, companies and government bodies outside the
country. These transactions consist of imports and exports of goods, services and
capital, as well as transfer payments such as foreign aid and remittances.

A country's balance of payments and its net international investment position together
constitute its international accounts.

The balance of payments divides transactions in two accounts: the current account and
the capital account (sometimes the capital account is called the financial account, with
a separate, usually very small, capital account listed separately). The current account
includes transactions in goods, services, investment income and current transfers. The
capital account, broadly defined, includes transactions in financial instruments and
central bank reserves.

(1) Current Account:

Current account refers to an account which records all the transactions relating to
export and import of goods and services and unilateral transfers during a given period
of time.
Current account contains the receipts and payments relating to all the transactions of
visible items, invisible items and unilateral transfers.

Components of Current Account:

The main components of Current Account are:
1. Export and Import of Goods (Merchandise Transactions or Visible Trade):
A major part of transactions in foreign trade is in the form of export and import of
goods (visible items). Payment for import of goods is written on the negative side
(debit items) and receipt from exports is shown on the positive side (credit items).
Balance of these visible exports and imports is known as balance of trade (or trade
balance).

2. Export and Import of Services (Invisible Trade):

It includes a large variety of non- factor services (known as invisible items) sold and
purchased by the residents of a country, to and from the rest of the world. Payments
are either received or made to the other countries for use of these services.

Services are generally of three kinds:

(a) Shipping,

(b) Banking, and

(c) Insurance.

Payments for these services are recorded on the negative side and receipts on the
positive side.

3. Unilateral or Unrequited Transfers to and from abroad (One sided

Transactions):
Unilateral transfers include gifts, donations, personal remittances and other ‘one-way’
transactions. These refer to those receipts and payments, which take place without any
service in return. Receipt of unilateral transfers from rest of the world is shown on the
credit side and unilateral transfers to rest of the world on the debit side.

4. Income receipts and payments to and from abroad:

It includes investment income in the form of interest, rent and profits.

(2) Capital Account:

Capital account of BOP records all those transactions, between the residents of a
country and the rest of the world, which cause a change in the assets or liabilities of
the residents of the country or its government. It is related to claims and liabilities of
financial nature.

Capital Account is used to:

(i) Finance deficit in current account; or

(ii) Absorb surplus of current account.

Capital account is concerned with financial transfers. So, it does not have direct effect
on income, output and employment of the country.

Components of Capital Account:

The main components of capital account are:
1. Borrowings and landings to and from abroad: It includes:
A. All transactions relating to borrowings from abroad by private sector, government,
etc. Receipts of such loans and repayment of loans by foreigners are recorded on the
positive (credit) side.
B. All transactions of lending to abroad by private sector and government. Lending
abroad and repayment of loans to abroad is recorded as negative or debit item.

2. Investments to and from abroad: It includes:

A. Investments by rest of the world in shares of Indian companies, real estate in India,
etc. Such investments from abroad are recorded on the positive (credit) side as they
bring in foreign exchange.

B. Investments by Indian residents in shares of foreign companies, real estate abroad,

etc. Such investments to abroad be recorded on the negative (debit) side as they lead
to outflow of foreign exchange.

3. Change in Foreign Exchange Reserves:

The foreign exchange reserves are the financial assets of the government held in the
central bank. A change in reserves serves as the financing item in India’s BOP. So,
any withdrawal from the reserves is recorded on the positive (credit) side and any
addition to these reserves is recorded on the negative (debit) side. It must be noted that
‘change in reserves’ is recorded in the BOP account and not ‘reserves’.

Balance on Capital Account:

The transactions, which lead to inflow of foreign exchange (like receipt of loan from
abroad, sale of assets or shares in foreign countries, etc.), are recorded on the credit or
positive side of capital account. Similarly, transactions, which lead to outflow of
foreign exchange (like repayment of loans, purchase of assets or shares in foreign
countries, etc.), are recorded on the debit or negative side. The net value of credit and
debit balances is the balance on capital account.

A. Surplus in capital account arises when credit items are more than debit items. It
indicates net inflow of capital.
B. Deficit in capital account arises when debit items are more than credit items. It
indicates net outflow of capital.

Introduction Of Foreign Exchange:-

The foreign exchange markets (FOREX) have evolved from the humblest of
beginnings to the world’s largest market by dollar volume. With several different
entry points, speculators and hedgers can both find what they are looking for. Whether
they simply want to hedge their everyday currency risk, or pursue a more complex
strategy, the FOREX markets provide the liquidity and instruments for trading in
currencies.