Chapter – 10 : FOREIGN–EXCHANGE BUSINESS

10.1. Basics of Foreign Exchange

10.2. Non-Resident (External) Accounts
10.3. Non Resident (Ordinary) Accounts
10.4. Inco Terms
10.5. Fera vs. Fema
10.6. Forfaiting & other topics
10.7. Foreign Exchange – Glossary

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 10.1

BASIC OF FOREIGN EXCHANGE

Introduction :

Exchange Rate is defined as the rate at which one currency is exchanged for another currency.

Foreign exchange trading is sale and / or purchase of a currency – like any other trade.

In a foreign exchange transaction :

❏ The transaction is always talked of from the banks' point of view
❏ The item referred to is the foreign currency

When we say “Purchase” we mean (buying rate)

❏ The bank has purchased &
❏ It has purchased foreign currency

Similarly, “Sale” means (selling rate)

❏ The bank has sold &
❏ It has sold foreign currency

Direct Quotation : A given number of units of domestic currency per unit of foreign currency. E.g.
$ 1 = Rs. 49.00. With effect from 2nd August 1993 direct quotations are being used in India.

Indirect quotation : A given number of units of foreign currency per unit of local (domestic) currency.
E.g. Rs. 100 = $ 2.04

Two-Way Quotation

The foreign exchange quotation by the Bank has two rates-one at which the quoting Bank is willing
to buy and the other at which it is willing to sell. For example US $ 1 = Rs. 45.00 – 45.20

Here, the Bank will enter into purchase transaction at Rs. 45.00 and sell transaction at Rs. 45.20.
Hence the principle in case of direct quotation is BUY LOW & SELL HIGH. From the ADs point of view,
conversion of foreign currency on behalf of an exporter into Indian Rupees would be a purchase
transaction, and conversion of domestic currency into foreign currency on behalf of an importer would
be a sale transaction. Likewise outward remittance would involve sale of foreign currency while inward
remittance would involve purchase of foreign currency. In case of Indirect Rate Quotation the principle
is BUY HIGH & SELL LOW.

Types of Exchange Rates :

Ready of cash : Refers to transaction to be settled on the same day e.g. transaction done on 3rd
June to be settled on 3rd June.

Tom : Refers to transaction where delivery of foreign currency to be done on the next day (tomorrow)
e.g. transaction done on 3rd June to be settled on 4th June.

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 Spot : Refers to transaction where delivery of foreign currency to be done on the second working
day (day after tomorrow) from the date of contract e.g. transaction done on 3rd June to be settled on
5th June.
Forward : Refers to transaction where delivery of foreign currency to take place on a date farther
than the spot date e.g. transaction done on 3rd June to be settled on any date after 5th June, normally.
Cross rates : If the quotation for a particular currency is not available, we can obtain it through the
rate of that currency vis-a-vis another currency,of which the rate is available.
Value date : The date on which payment (delivery) of funds or an entry to an account becomes
effective.

COVER RATE AND BASE RATE :

The rate at which the banks can cover the merchant transactions in the inter-bank market without
any profit or loss is called the Cover Rate. That is, the rate at which the bank can buy the dollars to
cover import transactions in US$ and the rate at which it can sell the Dollars to cover an export transaction
in Dollars is called the Cover Rate.
The base rate is arrived from the cover rate after allowing for some cushion for adverse movement
of the rates. In practice there are instances where the cover rate and the base rate are the same.
Fixed & floating exchange rates
❏ In a fixed exchange rate regime, the rate of the domestic currency vis-a-vis a foreign currencyis
fixed. In Hong Kong the HK dollar rate is fixed i.e. $ 1 = HK$ 7.80. In case of higher demand of the
foreign currency viz. the dollar, the central bank of the country sells dollar from its reserve to
maintain the rate.
❏ In a floating exchange rate regime, the rate of the domestic currency vis-a-vis foreign currency
depends on supply anddemand and market forces. Most major currencies viz. US dollar, British
Pound, Euro Japanese Yen etc. are floating.

Principal Types of Merchant Rates

As mentioned above, in a purchase transaction the bank buys foreign currency from the customer
and pays him rupees. Some transactions result in the bank getting the foreign exchange
immediately,while some involve delay in getting the foreign exchange.
Depending upon the timeof realizationof foreign exchange by the bank, two types of buying /
selling rates are quoted in India.
❏ TT buying rate is applied when the transaction does not involve any delay in realization of the
foreign exchange by the bank i.e. the nostro a/c of the bank has already been credited. For example
purchase of drafts, MTs, TTs etc. & or cancellation of drafts sold earlier.
❏ Bills buying rate is applied when a bill is purchased. The proceeds will be realized by the bank
after the bill is presenteed to the drawee and he makes payment. The rate is loaded with transit/
usuance period interest.
❏ TT selling rate is applied when the correspondent bank's accountis credited immediately. For
example issue of Drafts, TTs drawn on a correspndent bank and / or cancellationof foreign exchange
purchased earlier.

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❏ Bills selling rate is used for all other transactions involving hanling of documents by the bank e.g.
payment against import bills etc.

SELLING RATES TRANSACTIONS

TT Selling Rate A. Outward remittance in foreign currency (TT, MT, PO, DD).
B. Cancellation of purchase e.g.
❏ Bill purchased returned unpaid.
❏ Bill purchased transferred to collection amount.
❏ Earlier inward remittance (converted into Rupees) is refunded to
the remitting bank.
C. A forward purchase contract is cancelled.
Bill Selling Rate Transaction involving transfer of proceeds of import bills.
{Even if proceeds of import bills are remitted in foreign currency by way of
DD, MT, TT, PO, the rate to be applied is the Bill Selling Rate (and not TT
Selling Rate)}
Foreign – TCs/ At the option of ADs
Currency Notes
Selling rates
BUYING RATES TRANSACTIONS
TT Buying Rate A. Clean inward remittances (PO, MT, TT, DD) for which cover has
already been credited to ADs account abroad.
B. Conversion of proceeds of instruments sent for collection.
C. Cancellation of outward TT, MT, PO etc.
D. Cancellation of a forward sale contract.
Bill Buying Rate A. Purchase / Discounting of Bills and other Instruments
B. Where banks has to claim cover after payment.
C. Where drawing bank at one centre remits cover for credit to a different
centre.
Foreign-TCs / At the option of ADs
Currency Notes
Selling rates

PERSON RESIDENT IN INDIA :

Section 2 of FEMA, 1999 defines the term resident in India as a person residing in India for more
than 182 days during the course of a financial year.

PERSON RESIDENT OUTSIDE INDIA :

Section 2 of FEMA defines person resident outside India as a person who is not resident in India
(NRI). Non-resident Indian generally fall under one of the following broad categories :

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(A) Non-Resident Indian (NRI)
An NRI is a person holding Indian Passport :
❏ Who has gone abroad for a gainful employment or business or vocation, or for any other
purpose indicating an idefinite period of stay outside India.
❏ Who are working abroad on foreign assignments – persons employed by IMF / IBRD / UNO /
UNESCO etc. or who are employed in Central / State Government and Public Sector
Undertakings and deputed abroad on temporary assignments or for temporary period.

(B) Person of Indian Origin (PIO)

For the purpose of being eligible for the facilities of opening and maintenance of various types of
bank accounts and making investments in shares and securities in India, a PIO means a citizen of any
country other than Bangladesh or Pakistan, if :
(a) He held Indian passport at any point of time, or
(b) Whose parent/s or grand parent/s was citizen of India (undivided India), or
(c) Spouse of a non-resident Indian.

OVERSEAS CORPORATE BODIES (OCB)

Overseas firms, trusts or companies, predominantly owned by non-resident Indians are called
Overseas Corporate Bodies. The level of ownership of NRIs in such bodies, should be minimum 60%,
by one or more NRI owners. The facilities for investment into India, grnated to OCBs were almost
similar to those granted to individual non-resident Indians.
However, with effect from 16.08.2003, OCBs have been completely derecognised as an investor
class by RBI. Now they are not allowed to make fresh investments in India.

Correspondent Banking
Nostro account A foreign currency account maintained by a bank in India with a bank abroad.
“Our account with you”. E.g. State Bank of India's US dollar account with Citibank New York.
Vostro account A rupee account of a foreign bank with an Indian bank. “Your account with us”.
E.g. Citibank's rupee account with State Bank of India, Kolkata.
Loro account A bank's account withanother bank. “Their account with you”. e.g. Citibank's HK $
account with Hong Kong Bank, Hong Kong.

MIRROR ACCOUNTS
These are dummy accounts maintained by banks to know actual position of their accounts with
the foreign correspondent banks. We may call it a pass-book of our accounts maintained with the
correspondents.

ESCROW ACCOUNTS
These accounts are maintained by citizens outside the country or by the citizens residing outside
the country but accounts maintained in the parent country. These accounts are being maintained
exclusively for business purpose and like current accounts, do not carry any benefit of interest, overdrafts
etc. Basically such accounts are opened to carry merchant trading activity with prior approval from RBI
and general transactions are not permited.

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 Society for Worldwide Inter-bank Financial Telecommunication (SWIFT) founded in 1977 in
Brussels (Belgium), is a reliable, safe, instantaneous (immediate) and economical means of
communication amongst its over 7650 member financial institutions covering over 1,25,000 users spread
over 200 counries.
Clearing House Inter-bank Payment System (CHIPS) a clearing house of New York (USA),
operating since 1970. Over 115 member banks are currently using the system.

Fedwire
This is another US payment system operated by Federal Reserve Bank, operated all over the US
states, since 1918, and handles majority of domestic payments. It is an automated computer based
messaging and payment system, working on gross settlement basis. All US banks maintain accounts
with Federal Reserve Bank, and are allotted an "ABA numbers" to identify the senders and receivers of
payments.
As compared to CHIPS, this is a large system, with over 9500 participants, and handles a large
number of payments across USA, covering Interbank transfers out of New York, local borrowings and
lending, commercial payments, as also some securities transaction related payments for domestic
banks.

Chaps
Clearing House Automated Payments System (CHAPS), is a British equivalent to CHIPS, handling
receipts and payments in London. This system works on the same principles as CHIPS, working on the
net payment settlement system. CHAPS is used by a large number of banks in UK, with about 20
member banks and over 400 indirect members, using the system through some large bank.

Target
Trans-European Automated Real-Time Gross Settlement Express Transfer system is an EURO
payment system comprising 15 national RTGS systems working in Europe. These are interconnected
by common procedures and uniform platform for processing high value payments by over 30,000
participating institutions across Europe. This facilitates receipts and payments of funds across the
Euro zone (all member countries).

RTGS-plus and EBA

These are other Euro clearing systems, with RTGS plus, being a German hybrid clearing system
and operating as an European oriented real time gross settlement and payment system. RTGS plus,
has over 60 participants.
The EBA-EURO 1, with a membership of over 70 banks, in all EU member countries, works as a
netting system with focus on cross border Euro payments. For retail payments, EBA has another system,
called STEP 1, with over 200 members across EU zone.
STEP 2 is also in use in EU zone, which facilitates straight through processing (STP) to member
banks, using industry standards.

Trade Finance
Letter of Credit (LC) is a written assurance by a bank on the instructions of the applicant (importer
or purchaser) to thebeneficiary (exporter or seller) to pay a specific amount in the agreed currency
provided thebeneficiary submits documents in conformity with the documentary credit, within the
prescribed time limit. Its terms and conditions are governed by the Uniform Customs & Practice for

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Docmentary Credit (UCPDC) published by International Chambers of Commerce Publication no.
ICC 500.

Parties to a Letter of Credit

❏ Applicant is the importer or the purchaser.
❏ Issuing bank is the importer's bank that issues the LC and guarantees payment to the
negotiating bank.
❏ Beneficiary is the exporter or the seller.
❏ Advising bank is the bank that advices or informs the beneficiary of the opening of the LC.
❏ Negotiating bank is the exporter's bank which receives the documents from the exporter and
releases the payment to him.
❏ Confirming Bank is the bank authorised by the Issuing bank to confirm the LC.
❏ Correspondent Bank maintains current account of the Negotiating bank.

Types of LCs
❏ Revocable An LC which canbe cancelled or amended by the issuing bank without prior notice
to beneficiary.
❏ Irrevocable An LC which cannot be cancelled or amended by the issuing bank without prior
notice to beneficiary.
❏ Confirmed An LC where a confirmation is given by the Confirming bank > a sort of a guarantee
for payment.
❏ Transferable An LC in which the beneficiary can be transferred.
❏ Back-to-back An LC exporter receiving an LC opens a domestic LC in favour of the supplier.
In this case the exporter is an intermediary.
❏ Standby An LC where a payment guarantee is given. It is like a bank guarantee.
❏ Revolving An LC whose limit is restored after a bill is presented and negotiated.
❏ Red clause An LC with this clause authorizes the negotiating bank to grant an advance to the
exporter.
❏ Green Clause An LC in which besides provision of allowing pre-shipment credit to beneficiary,
issuing bank undertakes to arrange for storage / warehouse facility prior to shipment on board.
❏ Circular An LC in which issuing bank authorises its branches / correspondent bank to pay to
beneficiary against clean sight drafts drawn by beneficiary on issuing bank.
❏ Deferred Payment An LC in which full payment to beneficiary is not made immediately upon
presentation of documents but only after a specified period of time.
❏ Restricted An LC in which negotiation is restricted to a particular bank.
❏ Open (clean) An LC in which documents are not required by the applicant.

International Organisation
International organizations like theWorld Bank were set up to maintain orderly international financial
conditions and to provide capital & advice for economic development, particularly of developing countries.

World Bank Group

❏ International Development Association

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 ❏ International Finance Corporation
❏ Multilateral Investment Guarantee Agency
Other international organisations
❏ International Monetary Fund
❏ Bank of International Settlements
❏ Asian Development Bank
❏ African Development Bank

Asian Clearing Union

❏ Established in 1974
❏ Members > central bank's of India, Iran, Bangladesh, Nepal Pakistan, Sri Lanka & Myanmar
(Burma).
❏ To provide facility to settle payments for current international transactions.
❏ Promote use of participant's currencies in current transactions.
❏ Promote monetary cooperation.
❏ Exempted categories
✐ Travel between India & other countries.
✐ Foreign trade financed b World Bank, ADB etc.
✐ Payments between India & Nepal and Pakistan & Iran.
❏ w.e.f. 1.1.96, 1 A.C.U. $ = 1 U.S. $.
❏ ACU accounts are settled at the end of every two months.
❏ The balance outstanding in ACU Vostro account with the Authorised Dealers is subject to
CRR & SLR.

Offshore Banking Unit (OBU)

An Offshore Banking Unit (OBU) of a bank is a deemed foreign branch of the parent bank situated
within India, and shall undertake International Banking business involving foreign currency denominated
assets and liabilities. The Reserve Bank of India has given permission to certain select Banks in India,
fulfilling certain criteria, to set up OBUs in "Special Economic Zones" (SEZ), for facilitating exports from
India. The OBU of PNB is situated at Santacruz Electronics Export Promotion Zone (SEEPZ) in Mumbai
(Bombay) and is a Deemed Foreign Branch of PNB, although located within the country. It can accept
Multi Currency Deposits from NRIs and Eligible Resident Indians as per FEMA. Companies / Units
within the "SEZs" in India as well as Companies outside "SEZs" as per existing FEMA guidelines can
go for Multi Currency Borrowing from OBU.

e-Money India
This is a completely on-line mode of sending money from US to India. Any person / organization
who wishes to make a payment (in foreign currency) to an individual / organization in India (in Indian
Rupees) can use e-Money India. Customer needs follow three simple steps to send money to India :
❏ Register on e-Money India site by providing elementary details.
❏ Provide his bank details.
❏ Provide the receiver's details in India.

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 Presently, a customer can make an inward remittance in U.S. Dollars only for family maintenance,
purchase of property, investments, or transfers to NRE accounts.
Remittances from foreign tourists visiting India and Trade related remittances can also be sent.
The remittance will be delivered to his / her beneficiary's doorstep as a locally payable demand draft or
deposited directly into the receiver's account in India in Indian Rupees only.
Punjab National Bank is the banking backbone for e-Money India and undertakes the money
transfer activity for transactions. In short, the remittance is managed entirely by Punjab National Bank,
converting funds to Indian Rupees to issuing a Demand Draft in favour of customer's beneficiary or
directly depositing money into his / her Receiver's account. Times Online Money Ltd. provides the
technology, operations and the service platform.

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 10.2

NON RESIDENT (EXTERNAL) ACCOUNTS

NON RESIDENT (EXTERNAL) RUPEE ACCOUNT SCHEME :

The Non resident Indians and Overseas corporate bodies are permitted to open and maintain
their accounts under this scheme for the purpose of carrying out bonafide transactions in rupee not
involving any violation of provision of Foreign Exchange Management Act, 1999, with authorized
dealers and with banks including cooperative banks authorized by RBI to maintain such accounts.
Eligibility for opening Non Resident (External) Account
❏ Indian Nationals residing outside India and persons of Indian origin (except Nationals of
Bangladesh and Pakistan) resident abroad are eligible to open account.
❏ OCB which are owned directly or indirectly to the extent of at least 60% by Non-resident of Indian
nationality or origin.
❏ Overseas trust wherein beneficial interest to the extent of 60% and above is irrevocably held by
Indian nationals or persons of Indian origin.
❏ Officials of Central Govt., State Govt. and Public Sector Undertakings serving abroad and persons
deputed abroad on assignments with international agencies like IMF,WHO,ESCAP etc.
❏ The Indian staff posted at Indian Embassy/High Commission in Pakistan/Bangladesh and their
Non-resident dependents may open Non Resident (External) Accounts.
❏ Indian Residents or persons of Indian origin in South Africa, South West Africa can open account.
❏ Crew members of Indian Shipping/ Airlines Companies are not eligible for opening Non Resident
(External) Accounts irrespective of their period of stay/time spent on High/ voyages. However,
staff member of such companies posted to foreign countries for duty there, on a short term/ long
term basis ,may open NRE Account.
NRE A/Cs essential features
❏ Rupee accounts are opened with banks in India as per FEMA 99 section S (1) (i).
❏ Balance in the account with interest is freely repatriable.
❏ Operations in the account are subject to restrictions, as per FEMA 99.
❏ A/Cs may in the form of Saving, Current, Recurring or Fixed deposits. (Maximum period–10 years)
❏ Rate of interest as prescribed by the bank from time to time.
Opening and Maintenance of Accounts.
❏ NRE accounts can be opened in any branch of our bank
❏ The funds for opening of such accounts must be received in convertible currency in an approved
manner from any country in the name(s) of eligible persons.
❏ Accounts may also be opened by proceeds of foreign currency Traveller Cheques, notes and
coins tendered by eligible persons during their temporary visits to India, provided the branch is
satisfied that they have not ceased tobe Non-residents.
❏ In case foreign currency was initially converted into Indian rupees by some other bank or a sister
branch, an inward remittance certificate should be obtained before crediting the amounts to Non-
resident (external) accounts. Such certificate duly vouched should be filed with the relative credit
voucher.

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Prohibitions
❏ Funds of local origin cannot be credited to these accounts.
❏ Funds once drawn for local disbursements cannot be recredited to these accounts.
Joint Accounts
Joint account in the names of two or more Non-resident individuals may be opened provided all
the account holders are persons of Indian nationality or origin. The account holders may be residents
of the same country or in different country. When one of the joint holders becomes resident, the authorized
may either delete his name and allow the account to continue or redesignate the account as a
redesignate account at the option of the account holders. Opening of these accounts jointly with resident
is not permitted.
Opening of account during temporary visit
An account may be opened in the name of an eligible NRI during his temporary visit to India
against tender of T/Cs or foreign currency notes and coins. The banker must be satisfied that the
person has not ceased tobe Non-resident.
Operation of Power of Attorney
Banks may permit operation on the basis of Power of Attorney or other authority granted in favour
of a resident by the Non-resident account holder, provided such operations are restricted to withdrawals
for local payments. The Power of Attorney holder shall not be allowed to repatriate outside India, funds
held in the account under any circumstances or make payment by way of gift to a resident on behalf of
account holder or transfer funds from the account to another NRE account.
Maturity and Renewal of Deposits
As per the instructions of the depositor, the deposits on maturity may be either renewed or refunded
together with accrued interest thereon.
The provisions for automatically renew the deposit on the due date for an identical period, unless
the instructions to the contrary from me/us is received by the bank before maturity.
I/we understand that the renewal will be in accordance with the provision of NRE Scheme in force
at the time of renewal.
I/We further understand that the interest applicable on renewal will be at the applicable ruling rates
on the date of maturity and that the renewal will be noted in the deposit receipt on my/our presenting
the same on maturity date of later for renewal/payment".
Repayment before maturity
No permission of RBI is necessary for repayment of deposits before maturity. Such payments will
be subject to reduction in the rate of interest payable by one percentage point less than rate of interest
applicable for the period for which the deposit remained with the bank.

Penalty for Pemature withdrawal

i) If NRE term deposit is sought to be withdrawn prematurely, interest will be allowed as applicable
for the period for which the deposit remained with the Bank minus 0.5% penalty.
ii) In case NRE term deposit remained with the Bank for a period of over 30 days but less than one
year, Interest may be paid based on the interest applicable for the period of one year prevailing
on the date of withdrawal of the deposit minus penalty of 0.5% or Interest applicable on savings

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 account under NRE scheme prevailing on the date of withdrawal of deposit whichever is lower.
iii) If NRE Term Deposits is sought to be withdrawn prematurely for the purpose of converting into
FCNR (B) deposits, interest may be paid applicable for the period for which deposit remained
with the Bank minus penalty of 0.5%.
iv) In case of premature withdrawal of NRE term deposit for conversion into RFC, no penalty is to
be levied. If such a deposit has not run for a minimum period of one year, interest applicable to
savings deposits held in RFC accounts of the relevant foreign currency may be paid provided
such request for conversion is made by NRE account holder immediately on return to India. In
case the request is not received within 3 months of his return to India, no interest will be paid if
NRE deposit has not completed minimum period of one year.

Interest on Overdue Deposits

Due to reduction in interest rates on NRE deposits in the last few years, the guidelines regarding
interest payable on overdue NRE deposits (maturing on or after December 03,2003) have been revised
as under :-
(% per annum)

Overdue Period Existing Revised

w.e.f.17.07.2003 w.e.f.03.12.2003
15 days & above 3% 1%

The NRE terms deposits can be renewed from the date of maturity within a period of 14 days at
interest rates prevailing on the date of maturity or renewal whichever is lower.

Renewal of Overdue Deposits

In case of NRE deposits :
❏ Where overdue period from the date of maturity till the date of renewal (both days inclusive)
does not exceed 14 days, the rate of interest payable on the amount of deposit so renewed
shall be the appropriate rate of interest for the period of renewal as prevailing on the date of
maturity.
❏ Where overdue period from date of maturity till date of renewal (both days inclusive) exceed
14 days, branches shall allow interest on overdue term deposit from the date of maturity of
the deposit provided : -
a. The total amount of the overdue deposit or a part thereof is renewed from the date of its
maturity till some future date (at least 15 days beyond the actual date of renewal) provided
the deposit remains with the bank for minimum period of one year.
b. The interest allowed shall be at the appropriate rate operative on the date of maturity of
such overdue deposit or the rate as on the date of renewal of the deposit, whichever is
less and shall be payable only on the amount of the deposit so renewed.
Interest Payable on Deposit Accounts of Deceased Depositors
a. In case of a term deposit standing in the name/s of a deceased individual depositor or two or
more joint depositors, where one of the depositor has died, interest will be paid in the following
manner : -
i) At the contracted rate on the maturity of the deposit;

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 ii) In the event of payment of the deposit being claimed before the maturity date, the branches
will pay interest without charging the penalty applicable on premature withdrawal of
deposits;
iii) In the event of death of the depositor before the date of maturity of the deposit and the
amount of the deposit is claimed after the date of maturity , the bank will pay interest at
the contracted rate till the date of maturity. From the date of maturity to the date of payment,
the bank will pay simple interest at applicable rate operative on the date of maturity, for
the period for which the deposit remained with the bank beyond the date of maturity. In
case this period is less than 1 year, interest will be paid at savings deposit rate applicable
on date of maturity. However, in the case of death of the depositor after the date of
maturity, the bank will pay interest at savings deposit rate operative on the date of maturity
from the date of maturity till the date of payment;
iv) If, on request from claimant/s, the bank agrees to split the amount of term deposit and
issues two or more receipts individually in the names of the claimant/s, it will not be
construed as premature withdrawal of the term deposit. The period and aggregate amount
of the deposit should not, however, undergo any change.
b. In the case of balances lying in current account standing in the name of a deceased individual
depositor/sole proprietorship concern, interest will be paid from the date of death of the
depositor till the date of payment to the claimant(s) at rate of interest applicable to savings
deposit as on the date of payment.
c. In case the claimants are residents, the deposit on maturity will be treated as domestic rupee
deposit and interest will be paid for the subsequent period at a rate applicable to the domestic
deposits of similar maturity.

Taxes
Income from interest on balances standing to the credit of NRE accounts is exempt from income
tax. Likewise balances held in such accounts are exempt from wealth tax. Gift to close relatives from
the balance are free from gift tax. Balances held in these accounts, however, are not exempted from
estate duty. The tax exemptions are not available to OCB's.
Change of Status
❏ Non-resident accounts of persons mentioned above will be treated as Resident Account on return
to India.
❏ It is primarily the obligation of the account holder to advise the bank of the change in his/her status
from Non Resident to Resident. Undertaking in this regard is given in AOF FEX 64.
❏ NRE accounts should be redesignated as resident account or the funds held in these account
may be transferred to the RFC account (if the account holder is eligible for maintaining RFC account)
at the option of account holder immediately. Upon the return of the account holder to India for
taking up employment or for carrying on business or vocation or any other purpose indicating
intention to stay in India for uncertain period. Where account holder is on short visit to India, the
account may continue tobe treated as NRE account even during his stay in India.
Operations in the account
i) Transactions not requiring report to RBI :
❏ Transfer from any other NR(E) Account including NR(E) Fixed Deposit of the same account
holder

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 ❏ Transfer from FCNR Account of the account holder
❏ Interest on balances in the NR(E) Account.
ii) Transactions subject to report to RBI
❏ Proceeds of remittances received inconvertible currencies from abroad from country of
residence or other countries, in an approved manner.
❏ Proceeds of foreign currency/bank notes, traveler's Cheques , Cheques etc tendered by
the account holder, during his temporary visit to India.(Traveller Cheques and other
instruments should be in the name of account holder, endorsed instruments are not
acceptable).
❏ Interest/Dividend earned on Govt. securities, Units purchased from funds in NR(E)
Accounts.) in case of Dividend on units, UTI should confirm that those were purchased
out of funds remitted from abroad in an approved manner or from NRE/FCNR A/Cs.
❏ Maturity proceeds of Govt. Securities/Units of UTI etc. In case of units verify UTI certification
as above also (suitable note tobe made in the ledger against the relevant transactions for
verification by RBI)/Internal Auditors.
❏ Refund of share/debentures subscription to new issues of Indian companies or a portion
thereof, if the original amount was paid by debit to NRE/FCNR account or remittance
from abroad in an approved manner.
❏ Transfer of funds for any purpose from one NRE account to another of a different person.
❏ Dividend/Interest in respect of investment made in shares/debentures on repatriation
basis, provided investment were made under respective approval and Dividend/Interest
permitted tobe repatriated abroad.(Crediting branch should get proper certification form
Drawee Bank/Branch to this effect before crediting).
NOTE :
1. To be reported in Form A-4 only when the amount is Rs. 100000/- and above.
2. Credit by way of foreign currency notes/travelers Cheques/drafts, personal Cheques drawn by
account holder abroad should be accepted only after satisfying that the account holder continues
tobe Non Resident.
3. Purchase of currency notes more than USD 5000 travelers Cheques and currency notes exceeding
USD 10000 should be endorsed at the back of Currency Declaration Form (CDF).
4. All other transactions require the prior approval of the Reserve Bank on Form A-4.
DEBITS :
i) Transactions not requiring report to RBI :
❏ Local disbursements (excluding investments in any manner).
❏ Payment of Insurance premium for self and dependents.
❏ Payment of passage fare for self and dependents/directors in case of OCBs.
❏ Transfer to any other NR(E) Account of the account holder. Other non-resident/other
resident.
❏ Transfer to FCNR'B' Account of the account holder/other non resident for bonafide personal
purpose.
ii) Transactions subject to report to RBI(FormA-4) (If amount exceed Rs. 100000/-)
❏ Permissible investments,. Provided specific approval of RBI has been obtained, where
necessary.
❏ Purchase of immovable property subject to specific approval of RBI, where applicable.

609
 iii) Transactions subject to report to RBI (Form A-2)
❏ Remittances to the country of residence of account holder or any other country.
❏ Sale of foreign currency travellers Cheques, letters of credit etc. encashable outside India,
to the account holder or dependents on production of evidence of travel abroad within 60
days from the date of such sale.
NOTES :
1. In respect of Non convertible Rupee Account of residents of erstwhile Bilateral Group, remittances
can be made, only to that country from where the remittance was originally received.
2. Accounts can be operated by resident Power of Attorney holders but they are not permitted to
remit funds abroad.
3. Transfer of funds from one Non-Resident (External) account to another Non-resident (External)
Account of different person is now permissible without prior approval from RBI for any purposes.
4. Transfer of NR(E) Account from one bank/ branch to another may, however, be made provided
account is opened in the name of the same account holder and certificate issued by the bank/
branch transferring the funds confirming NR(E) status of the account from which transfer is being
made, accompanies the relative Draft/Pay order.
5. All other transactions require the approval of Reserve Bank.

Loans and overdrafts :

To account holder.
The banks maintaining such accounts are permitted to grant loan in India to the
account holder for:
❏ Loans can be granted for personal purposes or for carrying on business activities except
for the purpose of retending or carrying on agricultural/plantation activities or for investment
in real estate business. The banks should ensure that the advances are fully secured by
the fixed deposits and regulations relating to normal margin, interest rates etc. are complied
with. Repayment shall be made either by adjustment of the deposit or by fresh inward
remittances from outside India through normal banking channels. The loan can also be
repaid out of local rupee resources in the NRO account of the borrower.
❏ For the purpose of making direct investment in India on non repatriation basis by way of
contribution to the capital of Indian firms/companies subject to compli9ance of Provisions
of FEMA 1999.
❏ For the purpose of acquisition of flat/house in India for his own residential use subject to
the provisions of the relevant Regulations made under the Act.
Loans outside India
The banks may allow their branches /correspondents outside India to grant any type of funds
based and/or non fund based facilities to or in favour of non-resident depositors or to third parties at the
request of depositors for bonafide purpose against the security of funds held inner accounts in India
and also agree to remittance of the funds from India, if necessary, for liquidation of outstanding.
Temporary Overdrawing
Banks may at their discretion/commercial judgment allow for a period not more than two weeks
overdrawing in NRE savings bank account, upto a limit of Rs. 50000/- subject to the condition that such
overdrawing together with interest payable thereon are cleared/repaid within the said period of two
weeks out of inward remittances through normal banking channels or by transfer of funds from other
RE/FCNR accounts.

610
Special Series of Cheques book
For easy identification and quicker processing of Cheques drawn on NER A/c banks shall issue
Cheques book containing a special series of Cheques to their constituents holding NRE accounts.
Remittance/transfer of funds to Non-resident nominees :
The Banking companies (Nomination) Rules 1985 framed under Banking Regulation Act 1949
enables banks to pay the amount standing to the credit of deceased depositor to his nominee. The
banks maintaining the account may allow remittance of funds lying in the NRE/FCNR accounts of the
deceased account holders to the non resident nominees subject to the following conditions :
1. Application in form LEG is submitted by the nominee(s).
2. Nomination registered in the banks record is in favour of the nominee and is in conformity with the
provisions of Nominations rules.
3. The nominee continues tobe non-resident at the time of claim/remittance sought from India and
the deceased depositor was nor resident at the time of his death.
4. As the legal heirs are non-resident, a signed declaration to the effect duly witnessed may be
submitted by the nominee to the authorized dealer/bank maintaining the account. Application in
Form LEG together with the documents/particulars mentioned therein received from nominees
should be scrutinized And after satisfying about the legality of the claim as per the internal guidelines,
banks may settle the claim and allow transfer of funds to the nominee to the extent of balances
held in the deceased depositors NRE/FCNR accounts. A copy of the LEG form and other documents
should be kept on record for verification of inspecting officials of RBI. In all other cases which don't
fulfill the terms and conditions should be referred to the RBI for prior approval along with the all
relevant documents and LEG Form.
Remittance abroad by Resident Nominee
Application from a resident nominees for remittance of funds outside India for meeting the liabilities,
if any, of the deceased account holder or for similar other purposes, should be forwarded to RBI for
consideration.

611
 10.3

NON RESIDENT (ORDINARY) ACCOUNTS)

A. ELIGIBILITY
❏ Any person resident outside India may open NRO account with an authorized dealer or an
authorized bank for the purpose of bonafide transactions in rupees. The transactions in account
should not violate the provisions of FEMA 1999, rules and regulations made there under.
❏ The operations in the account should not be for the purpose of making available foreign
exchange to any person in India against the reimbursement in Rupees or in any other manner.
❏ At the time of account opening an undertaking will be obtained from the account holder that in
case of debits to the account for the purpose of investment in India and credits of representing
the sale proceeds of investments, the account holder will ensure that such transactions are in
accordance with the rules and regulations made by RBI in this regard. This undertaking is
tobe taken from existing account holders also.
❏ The account in the name of individuals/entities of Bangladesh/Pakistan nationality/ownership
requires approval of RBI./

B. OPENING AND MAINTENANCE OF ACCOUNTS

All branches of our bank can freely open NRO accounts in names of individual/entity resident
outside India without prior reference to RBI.
❏ The initial deposit for opening of account must has been received from abroad through banking
channels, in an approved manner, by way of telegraphic transfer, mail transfer demand draft
or Cheques.
❏ Funds are being transferred from an existing account of the same person.
❏ The account can also be opened with the foreign exchange brought in by the prospective
account holder, during his temporary visit to India; the foreign exchange will be sold to an
authorized dealer.
❏ The funds are legitimately due top the account holder in India.

C. JOINT ACCOUNTS
The joint accounts can be opened in the name of Non-residents with residents with reference to
RBI.

D. TYPES OF ACCOUNTS
The NRO accounts may be opened/maintained in the form of current, savings, recurring or fixed
deposit accounts. The requirement laid down in the directives issued by RFBNI in this regard shall
apply to NRO Accounts.

E. CHANGE OF RESIDENT STATUS OF ACCOUNT HOLDER

❏ Whenever an account holder, who is an Indian citizen, goes abroad, except Nepal or Bhutan
for taking up employment or to carry on profession or business indicating his intention to stay
outside India for an uncertain period, his existing account should be designed as a Non
Resident (Ordinary) account.

612
 ❏ NRO account may be redesignated as Resident Rupee account on return of the account
holder to India.
❏ A foreigner who normally resides in India, goes abroad for indefinite stay, the relative account
should be designated as Non resident and redesignated as Resident on his return to India.

F. OPERATIONS IN THE ACCOUNT

The credit and debits to these account are subject to some regulations.
CREDITS :
❏ Proceeds or remittance received in any permitted currency from outside India through normal
banking channels or any permitted currency tendered by the account holder during temporary
visit to India or transfers from Rupee account of Non resident banks
❏ Legitimate dues in India of the account holder.
DEBITS :
❏ All local payments in rupees including payments for investments subject to compliance with
the relevant regulations made by RBI.
❏ Remittance outside India of current income in India of the account holder net of applicable
taxed.
G. REMITTANCE OF FUNDS HELD IN NRO ACCOUNTS
Balances in NRO accounts are not repatriable without approval of RBI. Funds received by way of
remittances from outside India in Foreign Exchange which have not lost their identity as remittable
funds will only be considered by RBI for remittance outside India where as account Current or saving)
is opened by foreign tourist visiting India with funds remitted from outside India in a specified manner or
by sale of foreign exchange brought by him to India, authorized dealers may convert the balance in the
account at the time of departure of the tourist from India into foreign currency provided the account has
been maintained for a period not exceeding six months and account has not been credited with any
local funds other than interest accrued on them.

H. LOANS/OVERDRAFTS AGAINST NRO BALANCES

To Account Holder :
❏ Loans to Non resident account holder may be granted in rupees against the security of fixed
deposits subject to usual norms as are applicable to resident account, for personal purposes
or for carrying on business activities except for the purpose of retending or carrying on
agriculture/plantation activity or for investment in real estate.
To third parties :
Loans and advances to resident individuals/firms/companies in India may be granted against the
security of deposits held in NRO accounts subject to following terms and conditions:
❏ The loans shall be utilised only for meeting personal/ business requirements and not for
carrying on agriculture/plantation activities or real estate business or for retending.
❏ Norms relating to margin and rate of interest shall be complied with.
❏ The usual norms and consideration, as applicable in the case of advances to trade/industry
shall be applicable for such loans/facilities.
Temporary Over drawings :
Authorized dealers/ bank may permit overdraft in the account of the account holder subject to
his commercial judgment and compliance with interest should be adjusted within a period of

613
 two weeks either by way of remittance from abroad or out of the legitimate funds or the
account holder or by transfer from his NRE/FCNR accounts.
Continuation of Loans/Overdrafts in the event of change in the residential status of the borrower.
In case of person who had availed of loan or overdraft facilities which resident in India and
who subsequently become a person resident outside India, the authorized dealer may at their
discretion and commercial judgment allow continuance of the loans. In such cases, payment
of interest and remittance or out of the legitimate resources in India of the person concerned.

I. INVESTMENT OF BALANCES HELD IN NRO ACCOUNTS

Investment of NRO balance is freely permitted on non-repatriable basis in the areas other than
real estate, agriculture and plantation activities.

J. REPORTING OF TRANSACTION
❏ The transactions in the account which may appear to represent reimbursement in rupees
against foreign exchange made available to a person resident in India other than authorized
dealer, as well as any other transaction of suspicious nature, should be reported to RBI.
❏ All operations in the accounts involving amount of Rs. 1 lac or more will require completion of
form A-4
❏ Form A-4 can be completed by resident party to the transaction or if resented , it can be filled
up by the AD's also after obtaining requisite information from resident beneficiary or remitter.
❏ A-4 form need not tobe sent to Non resident constituent for completion.
❏ A-4 form should be preserved at branch and not tobe sent to RBI.

K. INCOME TAX
As per Income Tax Act, 1961 and as amended from time to time, the tax on income by way of
interest has tobe deducted at sources. The rates of such tax are advised by Finance and Taxation
Cell, Head Office, New Delhi.

L. LEASING LOCKERS
There is no objection to leasing out lockers to foreign nationals/ non-residents.

M. ACCOUNTING PROCEDURE
The same accounting procedure as applicable to other resident account as laid down in bank's
Book of Instructions will be applicable to these account.
N. FORMS, STATEMENTS,REGISTERS, LEDGERS
The same account opening from as in domestic resident account tobe procured for opening Non-
resident(Ordinary) account along with requisite undertakings. NRO accounts should be kept in a
separate ledger. No statements is required tobe submitted to RBI in respect of NRO account. A-4
form should be preserved for necessary inspection by internal inspectors/RBI Auditors.

O. NOMINATIONS;
Nomination facility is available in NRO accounts as in case of other resident accounts. However, in
case of nomination in favour of Non-resident nominee, the amount due/payable to Non-resident
nominee from the account of a deceased account holder shall be credited to NRO account if the
nominee will an authorized dealer/authorized bank in India and shall not be allowed tobe remitted
outside India. Procedure prescribed for registration of nomination is resident account may be
followed.

614

INCO TERMS
Inco Terms Sellers Duty
EX WORKS (EXW) * Deliver the goods at his peremises
FREE CARRIER (FAC) * Deliver the goods at the named
... NAMED POINT point into the custody of the
carrier named by the buyer
* Provide export licence and pay
export taxes and fees, if any.
* Provide evidence of delivery
of the goods to the carrier.
FREE ON RAIL (FOR) / * Deliver the goods at the named
FREE ON TRUCK (FOT) station / into the custody fothe
transporter named b the buyer
* Provide evidence of delivery of
the goods to the railway
authorities / transporter.
* Pay the loading charges to the
extent not included in freight.
FOB AIRPORT (FOA) * Deliver the goods to theair
carrier at the airport of departure
* Contract for carriage unless
contrary notice has been given
* Notify thebuyer ifthe wishes
him to contract for carriage
FREE ALONGSIDE * Deliver goods alongside
SHIP (FAS) the ship
* Provide an alongside receipt
* Obtain export licence and
pay export taxes, if necessary
FREE ON BOARD * Deliver the goods on board
* Provide export licence and
pay export taxes and fees,
if required.
* Provide a clean on board receipt
* Pay loading costs according to
the custom of the port to the
extent that they are not included
in the freight.
615
10.4
Buyer's Duty
* Take delivery of the goods
at the premises of the seller.
Make all arrangements at his
own costand risk to bring the
goods to the destination.
* Nominate carrier
* Contract for the carriage
and pay the freight.
* Nominate Railway Station /
transport
* Contract for the carriage
and pay the freight.
* Accept delivery of the
goods to the carrier at the
airport of departure.
* Pay the freight.
* Notify seller if he does
not wish him to contract
for carriage
* Nominate carrier
* Contract for the carriage
and pay the freight
* Nominate carrier
* Contract for the carriage
and pay the freight
* Pay loading costs to the
extent that they are
included in the freight
* Pay unloading costs.
 Inco Terms Sellers Duty
COST & FREIGHT * Contract for the carriage and pay
thefreight to the named destination
* Deliver the goods on board
* Obtain export licence andpay
export taxes and fees, if any.
* Furnish tot hebuyer the invoice
and a clean on board bill of
lading.
* Pay loading costs.
* Pay unloading costs to the
extent that they are included
COST, INSURANCE * Contract for the carriage and
AND FREIGHT (CIF) pay the freight to the named
port of destination.
* Deliver the goods on board.
* Obtain export licence and pay
export taxes and fees, if any.
* Contract for insurance of the
goods during the carriage and
pay the insurance premium.
* Furnish to the buyer the invoice
and a clean on board bill of
lading.
* Pay loading costs.
* Pay unloading costs to the
extent that they are included
in the freight.
FREIGHT / CARRIAGE * Contract for the carriage and
PAID TO OCP) pay the freight to the named
port of destination.
* Deliver the goods into the
custody of the first carrier.
* Obtain exportlicence andpay
export taxes and fees,if any
* Furnish to the buyer the invoice
and the usual transport documents.
FREIGHT / CARRIAGE * Contract for the carriage and
AND INSURANCE pay the freight to the named
PAID TO (CIP) port of destination.
* Deliver the goods into the
custody of the first carrier.
* Obtain export licence andpay
export taxes and fees,if any
616
Buyer's Duty
* Accept delivery of the
goods upon shipment,
when the invoice andthe
bill of lading are tendered
to him; the bill of lading
is deemed to represent
the goods.
* Pay unloading costs to
the extent that they are
not included in the
freight.
in the freight.
* Accept delivery of the
goods upon shipment,
when the invoice, the
cargo insurance policy
and bill of lading are
tendered to him; the
bill of lading is deemed
to represent the goods.
* Pay unloading costs to
the extent that they are
not included in the
freight.
* Accept delivery of the
goods when they are
delivered tot eh first
carrier and when the
invoice and, if customary,
the usual transport docu-
ments are tendered to him
* Accept delivery fot eh
goods when they are
delivered tothefirst
carrier and when the
invoice and, if customary,
the usual transport docu-
ments, insurance policy or
 Inco Terms Sellers Duty
* Contract for insurance of the
goods during the carriage and
pay the insurance premium.
* Furnish tot he buyer the invoice,
the usual transport documents &
a transport insurance policy or
other evidence of insurance cover.
EX-SHIP (EXS) * Deliver the goods on board the
ship at theport of destination.
* Provide documents to enable
the buyer to take delivery from
the ship (e.g. bill of lading or
delivery order).
EX QUAY (EXQ) * Deliver the goods on the quay
at the port of destination.
* Provide documents to enable
the buyer to take delivery from
the quay (e.g. delivery order).
* Pay unloading costs.
* Obtain import licence and pay
import duties, taxes and fees ifany.
DELIVERED AT * Deliver the goods cleared for
FRONTIER (DAF) export at the named frontier
(or the named place at the
frontier).
* Provide documents to enable
the buyer to take delivery at
the frontier (e.g. documents of
transport or warehouse warrant)
DELIVERED DUTY * Deliver the goods at the named
PAID (DDP) place of destination.
* Obtain import licence andpay
import duties, taxes and fees, if any.
* Provide documents to enable
the buyer to take delivery at the
named place (e.g. documentsof
transport or warehouse warrant)
617
Buyer's Duty
other evidence of insurance
cover are tedndered to him.
* Take delivery of the
goods at the port of
destination.
* Pay unloading costs.
* Obtain import licence
* Obtain import licence
and pay import duties,
taxesand fees, if any.
* Take delivery of the
goods from the quay
at the port of
destination.
* Take delivery of the
goods at the named
frontier (or the named
place at the frontier).
* Pay for on-carriage.
* Obtain import licence
and pay import duties,
taxes and fees, if any.
* Take delivery ofthe
goods at the named
place ofdestination.
 10.5

FERA vs. FEMA

FERA was introduced in the year 1974. The legislation aimed at having stringent controls to conserve
foreign exchange and to utilise later in the best interest of country. Though FERA was amended in the
1993, the introduction of financial and economic reforms in our country necessitates promulgation of a
suitable Act to replace it, especially due to some draconian provisions of FERA. Therefore, FEMA
came into force on 01.06.2000. Let us find out the basic differences between the two Acts :
Preamble of FERA : 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 there of in the interest of the economic development of the country.
Preamble of FEMA : An act 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.
In other words, while FERA was a law that sought to 'control' foreign exchange transactions,
FEMA seeks to 'regulate' and 'manage'. However, the two Acts are similar in the sense that both
FERA as well as FEMA would be governed by the notifications to be issued by the central Government/
Reserve Bank of India for granting general permissions.
The fundamental difference is that FERA, in its substantive form, prohibited almost all foreign
exchange transactions unless there is a general or specific permission to do that. FEMA, on the other
hand, allows all current account transactions. Therefore, FEMA is a positive law to this extent.
Another noticeable difference between the two is that an offence under FERA is of a criminal
nature, whereas that under FEMA is of civil nature. Under FERA there is a presumption of existence of
a guilty mind, unless the accused proves otherwise. Under FEMA, however, the prosecution will have
to prove that a person has committed an offence.
While section 35 of FERA empowers the Enforcement Officers to arrest a person, if they had
reasons to believe that the person was guilty of FERA violations, FEMA provides such power of arrest
only if the person does not pay the penalty levied under section 13 of FEMA, within the given time.

INTRODUCTION OF FEMA
FEMA has stipulated a transition period of two years for replacing FERA by FEMA. After the expiry
of two years from the date of enforcement of FEMA, i.e., w.e.f. 01.06.2002, any Court or Adjudicating
Authority would not try any offence under FEMA.
Section 49(3), FEMA holds that notwithstanding anything contained in any other law for the time
being in force, no court shall take notice of any contravention under section 51 of the repealed Act after
the expiry of a period of two years from the date of the commencement of this Act.
FERA contained 81 sections (some were deleted by 1993 amendment), out of which 32 sections
were relating to the operational part and the rest were rating to Penalties , Enforcement Directorate etc.

618
FEMA with 49 sections has been divided into seven chapters. First three chapters (Chapters i, ii and iii
with 12 sections) relate to operational part and the balance four chapters (Chapters iv to vii with sections
13 to 49) deal with penalties, adjudication, appeals, Enforcement Directorate etc.

RESIDENTAL STATUS
Sections 2(v) of FEMA provide : "person resident in India" means :
1. A person residing in India for more than one hundred and eighty two days during the course of
the preceding financial year but does not include –
❏ A persons who was gone out of India, or who stays outside India, in either case
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside
India for an uncertain period.
❏ A person who has come to or stays in India, in either case, otherwise than
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
❏ for any other purpose, in such circumstances as would indicate his intention to stay in India for
an uncertain period.
2. Any person or body corporate registered or incorporate in India.
3. An office, branch or agency in India owned or controlled by a person resident in India.

Section 2(iv), FEMA holds that a person for the purpose of the act means :
1. An individual
2. An H.U.F.
3. A company
4. A firm
5. An association of persons or a body of individuals, whether incorporate or not
6. Every judicial person, not failing within any of the preceding sub-clauses, and
7. Any agency, officer or branch owned or controlled by person.
The financial year has not been defined under FEMA, but for this, reference may be taken of the
Income Tax Act. Later holds a financial year to commence from 1st April to 31st March.

619
 10.6

FORFAITING AND OTHER TOPICS

Forfaiting means purchase, at a fixed rate, of medium term claims of an exporter on the foreign
buyer without recourse to the former. Promissory notes or bills of exchange payable generally represent
the claims by the importer on maturity. It serves as a source of funds for exports.

Operating Mechanism
(1) The Indian exporter initiates negotiations with prospective overseas buyer for undertaking a project
execution/delivery of capital goods with regard to order quantity, price, currency of payment delivery
period, credit terms etc.
(2) The exporter approaches Exim Bank for obtaining quotes from a foreign forfaiting agency with
details of the order terms and the name of the guarantor bank, if known.
(3) Exim bank obtains indicative quotes of discount, commitment fee and documentation charge and
communicates to the exporter.
(4) The exporter finalises the terms of the contract with the buyer and enters into the contract, with the
overseas forfaiting agency through Exim bank.
(5) Delivery of goods takes place.
(6) Forfaiting charges need not be shown separately but included in the FOB value on the invoice.
(7) On delivery of the availised bills of exchanges/ promissory notes, payment to the full extent less
discount changes is made by the forfaitor to the exporter.
(8) On maturity, the bills/notes are presented by the forfaitor to the availising/guaranteeing bank.
(9) The availising bank, whether receiving the payment or not from the importer, reimburses the bill
amount to the forfaitor.

Advantages of Forfaiting
1. The claim of the exporter on the buyer is purchased by the forfaiting bank without recourse to him.
Therefore, as far a he is concerned, a transaction which is a credit sale has now become a cash
sale.
2. Immediate payment upto full value (less forfaiting charges) of the bills/notes without recourse, thus
totally freeing from all credit risks and uncertainty.
3. Improvements in cash flow.
4. Exporter relieved form spending time and money in administering and collecting debt.
5. It does not reduce the borrowing limit of the exporter.
6. Elimination of export credit risks.

In spite to the advantages, one has to compare the cost of pre and post shipment credit with
forfaiting costs. Risk of non payment does not matter when transaction are through irrevocable letter of
credit.

620
Though factoring is also a form of finance, the basic differences between factoring and forfaiting
are as given in the table below : -
Basis International Factoring
Meaning It is a method whereby the factor
undertakes to collect the debts
assigned by exporters.
Nature of facility Money comes to exporters only
after collection of bills by the
factor.
Position of agent Factor acts as an agent of exporters
to whom the accounts receivables
are assigned by exporters.
Risk The factor does not undertake the
risk which lies with exporter.
Relationship Relationship between the exporter
and the factor continues even after
assignment of debts by exporters.
Nature of credit Factoring covers the export of
Covered consumer goods for relatively
short period.
International Forfaiting
It is a method whereby the
exporter sells the export bills to
the forfaitor and obtains cash.
Money comes to exporter even before
the collection of exporter's debts.
Forfaitor, after having made payment
to exporter, become sole owner
to collect debts.
The forfaitor, after buying the
exporter's debts, assumes the
full risk.
After the sale of debts on discount by
exporter, the relationship between
the exporter and the forfaitor is
severed as far as that particular
transaction is concerned.
Forfaiting covers export of capital
goods/project execution.

Exim bank plays the role of a facilitator between the Indian exporter and the overseas forfaiting
agency. The scheme has been introduced in India for an initial period of three years. Authorized dealers
(including commercial banks) have been permitted by Reserve Bank of India to introduce the scheme
without its permission.

American Depository Receipts vs. Global Depository Receipts

Global Depository Receipts and American Depository Receipts' are the two major sources of external
funds. These two can be compared as under:
ADRS v/s GDRS
ADR GDR
CENTRE
The New York Stock Exchange is the largest The London Stock Exchange (LSE) is not as
stock exchange in the world by both value & large as the NYSE overall, but is the global
turnover.Foreign equities play a minor role centre for international equities which dominate
in turnover

621
 ADR GDR

INSTRUMENT
No legal or technical difference between an
ADR and a GDR. The US has three levels of
ADR programme. Level III is suitable for fund
raising.
DISCLOSURE
Comprehensive disclosure required for F - 1, the
US prospectus, which must accompany a public
offering.
GAAP
Foreign companies listing in the US must
reconcile their accounts to US GAAP.
COST
US listing could be expensive. Total initial cost
range of $1 million to 2 million.
TRADING
On NYSE.
RETAIL
A public offering in the US allows an issuer to
access the US retail market. This provide extra
source of demand.
Unlike the NYSE, the LSE makes no demands
requiring companies to give holders the right
to vote. The NYSE insists upon this point.
Detailed information required on the company
but less onerous for GDR listing than fully
equity.
LSE satisfied with a statement of the difference
between the UK and Indian accounting
standards.
GDR listing on the LSE is comparatively
inexpensive. Initial cost likely to be in the
region of $ 2 lakhs to 4 lakhs.
On London Stock Exchange/Luxembourg.
Over 5000 US institutions accessed, but
ordinary investors cannot participate. US
demand therefore not maximized.

BANK ACCOUNTS FOR NON-RESIDENT INDIANS (NRIS)

Sr. Operational Non-Resident Ordinary Non-Resident External Foreign Currency

No. Parameters A/c (NRO) A/C (NRE) Non-Resident A/c (FCNR)

1. Who can open NRI-Indian Passport holder
/ Foreign Passport holder of
Indian Origin.
(Individuals of Bangladesh/
Pakistan nationality require
approval of RBI).
2. Currency of the A/c Indian Rupee
3. Source of Funds Local Funds/Foreign Inward
Remittance (FIR)
NRI-Indian Passport holder
/ Foreign Passport holder of
Indian Origin.
(Individuals of Bangladesh/
Pakistan nationality require
approval of RBI).
Indian Rupee
Foreign Inward Remittance
(FIR)
NRI–Indian Passport holder
/ Foreign Passport holder
Indian Origin.
(Individuals of Bangladesh /
Pakistan nationality require
approval of RBI).
Foreign Currency – Dollar,
Pond, Sterling, Yen & Euro
Foreign Inward Remittance
(FIR)

622
Sr. Operational Non-Residet Ordinary Non-Resident External Foreign Currency
No. Parameters A/c (NRO) A/C (NRE) Non-Resident A/c (FCNR)
4. Types of Accounts SB / CA / Term Deposits SB / CA / Term Deposits Only Term Deposits
5. Min. / Max. period (in As applicable to domestic Minimum–12 months Minimum – 12 months
case of term deposit) term deposit Maximum–3 years Maximum–3 years
6. Joint Accountwith
(a) Residents Permitted Not Permitted Not Permitted
(b) Non-Residents Permitted Permitted Permitted
7. Nomination (Non- Permitted Permitted Permitted
resident / resident
nominee)
8. Repatriation of : Not repatriable (Except FIR Freely Repatriable Freely Repatriable
(a) Principal with RBI approval)*
(b) Interest Repatriable (with RBI's Freely Repatriable Freely Repatriable
approval)
9. Loan Against Deposits Permitted Permitted Permitted
10. Tax Benefits No exemptions (Tax @ 30% Exempted from all taxes Exempted from all taxes
at source on interest to be
deducted)
11. Investment Eligible for Non-repatriable Eligible for repatriable Eligible for repatriable
investment investment investment
12. Interest Rate Savings – 3.5% Savings@ Term Deposit – Fixed or
Term Deposit – Banks are Term Deposit – Fixed or Floating within ceiling rate of
free to fix the interest rate. floating rate of interest within Libor / Swap rates
(As applicable for domestic the ceiling rate announced by announced by RBI from time
deposits) RBI from time to time. ## to time.#
Rupee loans in India against
Security of NRI Deposit
1. A/c holders Permitted Permitted Permitted
2. Third Party Permitted Permitted Permitted
Foreign Currency Loans
Outside India
1. A/c holder Not Permitted Permitted Permitted
2. Third Party Not Permitted Permitted Permitted
* Authorised Dealers can allow remittance/s upto US$ 1 million, per calendar year, from balances in
NRO accounts subject to payment of applicable taxes. The limit of US $ 1 million per year includes
sale proceeds of immovable properties held by NRIs / PIOs for a period of 10 years. In case, a
property is sold after being held for less than 10 years, remittance can be made after the sale
proceeds have been held in the accounts for the balance period.
@ w.e.f. 17.11.2005 interest rates on NRE Savings deposits should not exceed the maximum 75
basis points over LIBOR / SWAP rates for 6 months maturity on US $ deposits.
# At present, it is within ceiling rate of Libor / swap rate for the respective currency / corresponding
term plus 25 basis points.
## For 1 to 3 years, contract rate, w.e.f. 18.04.2006, should not exceed the maximum 100 basis
points over LIBOR/SWAP rates for US $ of corresponding maturity.

623
OTHERS IMPORTANT ASPECTS :
(a) Reserve Bank of India has discontinued Non-Residential Non Repatriable (NRNR) Account and
Non-Resident Special Rupee (NSRS) account schemes w.e.f. April 1, 2002.
(b) Power of attorney holders in NRE a/c are not permitted to credit foreign currency notes and foreign
travelers cheques in NRE a/c.
(c) Any resident Indian can appoint Non-Resident Indian as a nominee in his deposit account.
(d) All existing NRE (savings, current) accounts of OCBs have to be closed and balance repatriated
as originally authorised. The existing NRE deposits (recurring or fixed), FCRN (B) accounts and
NRO deposit (recurring or fixed) accounts are permitted to continue till original maturity. The maturity
proceeds of NRE deposits and FCNR (B) accounts should be repatriated.
(e) As per RBI, no new NRE / FCNR / NRO a/cs in the name of OCBs should be opened and no
renewal of deposits should be made.

FOREIGN EXCHANGE FACILITIES FOR RESIDENTS

As per Section 5 of Foreign Exchange Management Act (FEMA), resident Indians are permitted to
buy or sell foreign exchange from any Authorities Dealers (ADs) and full-fledged money-changer (FFMC)
for any current account transactions (except for those transactions where restrictions have been imposed
by Central Govt.) as per details given below. Release of foreign exchange beyond the limits mentioned
below will require prior approval from RBI.

Sr. Purpose Amount Details

No.
1. Tourism / Private Visit out US $ 10,000 ❏ Per calendar year per family member for one or
more visits.
❏ Except Nepal and Bhutan.
❏ Utilisation of foreign exchange through
international credit cards permitted.
2. Gift / donations to a US $ 5,000 ❏ Per year basis.
Person outside India ❏ Beneficiaries can be individual, charitable,
educational, religious, cultural organisation etc.
3. Employment Abroad US $ 1 lac ❏ To Indian resident going abroad for gainful
employment.
4. Immigration Abroad US $ 1 lac ❏ To meet the incidental expenses in the country of
migration on production of evidence that the
traveller has already obtained immigration visa.
5. Education Abroad US $ 1 lac ❏ It is per academic year.
6. Medical TreatmentAbroad US $ 1 lac ❏ On the basis of declaration by the patient.
7. Maintenance of close US $ 1 lac
relative abroad
8. Business Trip US $ 25,000 ❏ Except Nepal and Bhutan
❏ Will cover visits for attending international trade
conferences, seminars specialised training, study
tours etc.
9. Small Value Remittances US $ 5000 ❏ For any permissible transaction on the basis of
simple letter from the applicant without insisting
on submission of Form A2.

624
OTHER IMPORTANT APSECTS :
1. The foreign exchange can be purchased within 60 days ahead of the date of journey. In case, the
foreign exchange is not used, it has to be surrendered to an Authorised Dealer (AD).
2. The resident Indian while purchasing foreign currency can give upto Rs. 50,000 in cash. If the
rupee equivalent exceeds Rs. 50,000, the foreign currency has to be purchased by making the
payment by way of crossed cheque / pay order / demand draft etc.
3. Indian Resident going abroad can carry Indian currency notes upto Rs. 5,000 to any country
except Nepal and Bhutan. For these two countries, he can take any amount in denomination not
exceeding Rs.100.
4. Currency notes / coins upto US $ 2000 can be taken in cash and the balance amount will be given
by authorised dealers in form of traveller cheques or bank drafts. For Iraq and Libya, the currency
notes and coins not exceeding US $ 5000 or its equivalent are permitted.
5. Unspent foreign exchange has to be surrendered to authorised dealer within 90 days in case of
currency notes and 180 in case of traveller cheques. Exchange so brought back can be utilised by
the traveller for his subsequent visit abroad during the specified period. The resident Indian has
the option to retain foreign exchange upto US $ 2000 in form of foreign currency notes or TCs. He
also has an option to park these foreign currency funds in his Resident Foreign Currency (Domestic)
Account (RFC-Domestic).
6. Indian coming from abroad can bring with him Indian currency notes upto Rs. 5000 from any
country except Nepal or Bhutan. For these two countries, the resident Indian can bring any amount
in denomination not exceeding Rs. 100.
7. The resident can bring any amount of foreign exchange from abroad, which may be in the form of
currency notes or traveller cheques. However, if the amount exceeds US $ 10,000 or its equivalent
in any other foreign currency and /or the value of foreign currency notes exceeds US $ 5,000 or its
equivalent in other foreign currency, the resident has to declare on his arrival at the airport, to the
custom authority in Currency Declaration Form (CDF).
8. An Individual resident may borrow a sum not exceeding US $ 2,50,000 or its equivalent from close
relative residing outside India subject to following conditions :
(a) Minimum maturity period of loan is 1 year.
(b) The loan is free of Interest
(c) The amount of loan is received by way of inward remittances in free foreign exchange through
normal banking channels or by debit to the NRE/FCNR(B) account of the non-residentlenders.

DEPOSIT ACCOUNTS OF RESIDENTS IN FOREIGN CURRENCY

Resident Foreign Currency Domestic Account

This account can be opened by a person resident in India out of foreign exchange acquired in the
form of currency notes, bank notes and travellers cheques from the sources mentioned below :–
It was acquired by him while on a visit to any place outside India by way of payment for services
not arising from any business in or anything done in India; or was acquired by him, from any person not
resident in India and who is on a visit to India, as honorarium or gift or for services rendered or in
settlement of any lawful obligation; or was acquired by him by way of honorarium or gift while on a visit
to any place outside India; or represents the unspent amount of foreign exchange acquired by him from
an authorised person for travel abroad.

625
 Foreign exchange earned and/or gifts received from close relatives (as defined in the Companies
Act) and repatriated to India through normal banking channels by resident individuals. Foreign exchange
earnings could be though export of goods and/or services, royalty, honorarium, etc.

Type of Accounts
The account will be maintained in the form of Current account only and no interest will be payable
on balances in these accounts.

Permitted Currencies
US Dollar, Pound Sterling and Euro Currencies. In case, any resident desiring to open RFCD
account surrenders currency other than USD, GBP & EURO, the same will be converted to any of
permitted currencies of his choice and charges for conversion will be borne by him.

Branches Authorised to Maintain RFCD Accounts

All branches authorised to handle foreign exchange business independently.

Minimum Balance
USD 1000 or its equivalent. There will be no celling on balances held in these accounts.

Chequebook Facility
Branches may issue chequebook to RFCD Account holders for making payments for permitted
purposes in terms of existing provisions of Foreign Exchange Management Act 1999. Chequebook
facility may be permitted subject to maintenance of minimum balance of USD 1000 or its equivalent in
these accounts. Branches may issue rupee chequebook to RFCD account holders by affixing a stamp
on top of the cheques "RFCD Accounts".

Permissible Debits
Branches must ensure that debits are allowed towards payment for current/capital account
transactions in accordance with existing foreign exchange regulations applicable to residents. In case
of remittances made in foreign currency where Bank does not earn any exchange income, charges are
applicable in case of EEFC accounts may be recovered from the customer.

Loans / Overdrafts
No loan / overdraft shall be permissible against balances held in RFCD Accounts.

RESIDENT FOREIGN CURRENCY (RFC) ACCOUNTS SCHEME

What is the Resident Foreign Currency (RFC) Accounts Scheme ?

Applicable for persons of Indian nationality or origin, who have returned to India on or after 18th
April 1992 for permanent settlement (Returning Indians), after being resident outside India for a
continuous period of not less than one year to open foreign currency accounts with banks in India for
holding funds brought by them to India. Persons who have returned to India before 18th April 1992 can
also open RFC account if they are holding foreign currency assets abroad with Reserve Bank's
permission or are in receipt of pension or other monetary benefits from their erstwhile employers abroad.
Is any permission from Reserve Bank required for opening such accounts with authorised
dealers ?
No.
In which currencies can RFC accounts be maintained ?
RFC accounts can be maintained in any convertible currency. However, in PNB, accounts can be
opened in US $, £ and ε only.

626
What funds can be credited to RFC accounts of Returning Indians ?
The entire amount of foreign exchange brought to India at the time of their return to India for
permanent settlement as well as the balances standing to the credit of their NRE and FCNR accounts
at the time of return can be credited to RFC account. However, the foreign exchange brought to India
in the form of foreign currency notes/bank notes/travellers cheques should have been declared to
Customs at the time of arrival on the Currency Declaration Form (CDF) if it exceeded U.S. $ 10,000 or
its equivalent. In the case of foreign currency / bank notes, such a declaration on form CDF is compulsory
if the amount exceeds U.S. $ 5,000 or its equivalent.

Can income received from their overseas assets in the form of dividends etc., or sale preceeds
of such assets be credited to RFC accounts ?
Yes. The entire income from such assets or sale proceeds of such assets repatriated to India can be
credited to RFC Accounts.

Can pension received by the account holder from abroad be credited to his RFC account ?
Yes. The entire amount of pension received from abroad can be credited to his RFC account.

Can funds in RFC accounts be remitted abroad ?

Yes, Funds in RFC accounts can be remitted abroad for any bonafide purpose of the account holder or
his dependents including exchange required for travel and other personal purposes and investments.

Can funds in RFC accounts be utilised for local payments ?

Yes, Funds in RFC accounts can be withdrawn freely for local payments.

Can a Returning Indian desiring to go abroad again for employment, business or vocation transfer
his funds in RFC account to NRE/FCNR account ?
Yes.

EXCHANGE EARNERS FOREIGN CURRENCY (EEFC) ACCOUNT

What is EEFC Account ?
Who can open an account ?
What is the limit prescribed ?
Types of Accounts
An account expressed in foreign currency and maintained with
an Authorized Dealer, a bank dealing in foreign exchange, in India
to credit prescribed percentage of earnings in convertible foreign
currency.
A person resident in India which includes individuals firms,
companies, etc.
(i) "Status Holder" Exporter 100% of earnings
(ii) Individual professionals
(iii) 100% Export Oriented Units/Units in
Export Processing Zones/Software
Technology Parks/Electronic
Hardware Technology Parks
(iv) Others
50% of earnings
Non-interest bearing current / savings / term deposit account.

627
Permissible Credits Earning in foreign exchange as per prescribed limits.
Re credit of unutilised foreign exchange earlier withdrawn from
such accounts.
Payments received in foreign exchange by a 100 per cent Export
Oriented Unit or a unit in (a) Export Processing Zone or (b)
Software Technology Park or (c) Electronic Hardware Technology
Park are allowed to be credited to Exchange Earner's Foreign
Currency (EEFC) Account.
Payments received in foreign exchange by a unit in Domestic
Tariff Area (DTA) for supply of goods to a unit in Special Economic
Zone (SEZ) out of its foreign currency account are to be treated
as eligible foreign exchange earnings for the purpose of credit to
the EEFC Account.
However inward remittances received through normal banking
channels for meeting specific obligations by the account holders
will not be eligible for credit to their EEFC accounts. (vide AP DIR
circular 11 dt. 14/08/2002).
Permissible Debits Payments towards all current account transactions such as travel,
medical, studies abroad, permissible imports, commission,
customs duty, etc. However, remittances towards gifts and
donations exceeding USD 5000 per remitter/donor per annum is
not permissible.
Payments towards permissible capital account transactions.
Payment in India to 100% Export Oriented Units/Units in Export
Processing Zones / Software Technology Parks / Electronic
Hardware Technology Parks towards cost of goods and services
provided by them.
Payment towards trade related loans and advances.
Payment in foreign exchange to a person resident in India for
supply of goods and services including payment for air fare and
hotel expenditure.
Authorised dealer may also permit exporters to repay packing
credit advances, whether availed of in Rupee or in foreign
currency, from balances in their EEFC account to the extent
exports have actually taken place. (vide AP DIR circular 34 dt.
31/10/2002)
Cheque Facility Available.
Nomination Facility Permitted like in case of any other resident accounts.
Exporters are presently permitted to grant trade related loans/advances not exceeding USD 3 million
from their EEFC Account to their overseas importer customer subject to compliance with Notification
No. FEMA 3/2000-RB dated 3rd May 2000 viz. the Foreign Exchange Management (Borrowing on
Lending in Foreign Exchange) Regulations, 2000. As a measure of relaxation to the EEFC Account
Scheme, it has been decided to remove the ceiling of USD 3 million. Accordingly, it will be in order for
authorised dealers to permit their exporter constituents to extend trade related loans/advances to
overseas importers out of their EEFC balances without any ceiling.This relaxation shall be effective
upto June 30, 2003, subject to review. (A.P. (DIR Series) Circular No.78 dt. february 14, 2003).

628
 PNB Global Rupee Deposit Scheme (Incentive linked NRE scheme)
All guidelines relating to NRE deposits will be applicable to deposits under PNB Global Rupee
Deposit Scheme. In addition, all account holders maintaining minimum deposit of Rs.2,50,000 will be
offered following concessions in various facilities being offered by the bank :–
a. Rebate in interest rates on housing loan for the account holder or for one person nominated
by NRI in India.

Period of Housing Loan Existing Floating Special Offer

Interest Rates Floating Interest Rates
(w.e.f. January 15, 2004)
Upto 5 years 7.75% p.a. 7.50% p.a.
Above 5 & upto 10 years 8.00% p.a. 7.75% p.a.
Above 10 & upto 20 years 8.25% p.a. 8.00% p.a.

b. Waiver of Upfront & Documentation fees on all retail loan products for the account holder
or for any one nominated person in India.
c. Free remittance up to Rs.1 lac per annum from his account to anywhere in India, subject
to recovery of out of pocket expenses.
d. No collection charges on any instrument collected in account holder's account, up to Rs.1
lac per annum, from anywhere in India subject to recovery of out of pocket expenses.
e. Depository services: 50% concessions on service charges of our bank till the deposits
remain with our bank.
f. Free multicity chequebook for CBS branch customers.
g. Free Lockers facility for the customers maintaining a minimum balance of Rs.5,00,000.
h. No Inter-branch (Intersol) transaction charges for banking transactions, by the account
holders, in the CBS branches.
i. Free Internet Banking facility.
j. Foreign currency funds will be converted into Rupees with exchange margin of only 2 paise
per unit of foreign currency in case remittance is received through SWIFT. Bank will bear
foreign bank charges on transfer of funds subject to minimum deposit equivalent to USD
10000.
k. Facility of automatic renewal of Fixed Deposits on maturity.
l. Linkage with saving account for family at home by allowing overdraft by marking lien in
their NRE Term Deposit account.

PNB Global Foreign Currency Deposit Scheme (Incentive linked FCNR (B) scheme)

All guidelines relating to FCNR deposits will be applicable to deposits under PNB Global Foreign
Currency Deposit Scheme. In addition, all account holders maintaining minimum deposit of USD 5000
or its equivalent will be eligible for following concessions in various facilities being offered by the
bank :

629
 a. Rebate in interest rates on housing loan for the account holder or for one person nominated
by NRI in India.

Period of Housing Loan Existing Floating Special Offer

Interest Rates Floating Interest Rates
(w.e.f. January 15, 2004)

Upto 5 years 7.75% p.a. 7.50% p.a.

Above 5 & upto 10 years 8.00% p.a. 7.75% p.a.
Above 10 & upto 20 years 8.25% p.a. 8.00% p.a.

b. Waiver of Upfront & Documentation fees on all retail loan products for the account holder
or for any one nominated person in India.
c. Free remittance up to Rs.1 lac per annum from his account to anywhere in India, subject
to recovery of out of pocket expenses.
d. No collection charges on any instrument collected in account holder's account, up to Rs.1
lac per annum, from anywhere in India subject to recovery of out of pocket expenses.
e. Depository services : 50% concessions on service charges of our bank till the deposits
remain with the bank.
f. Free multicity chequebook for CBS branch customers.
g. Free Lockers facility for the customers maintaining a minimum balance of $ 10000 or its
equivalent.
h. No Inter-branch (Intersol) transaction charges for banking transactions, by the account
holders, in the CBS branches.
i. Free Internet Banking facility.
j. Bank will bear foreign bank charges on transfer of funds to our Nostro Accounts subject to
minimum deposit of USD 10000 or its equivalent.
k. Facility of automatic renewal of Fixed Deposits on maturity.
I. Linkage with saving account for family at home by allowing overdraft by marking lien in
their FCNR account.

SCHEME FOR UNDERTAKING FOREIGN CURRENCY–RUPEE OPTIONS

Definition of an Option :
An option is a contract which gives its buyer/holder/owner the right but not obligation to buy or
sell a specified quantity of underlying assets at specific price called strike price or exercise price from
the seller (writer of the option) on or before the given date called expiry date. This right to buy or sell
a predetermined value of a currency at a specified rate on a specified date is in consideration for a
premium.
Types of Option :
There are two types of options. Put option gives the buyer the option without the obligation to
sell the underlying asset on a certain date in future at a certain price. Call option gives the buyer the
option, without obligation, to buy the underlying asset on a certain date in future at a certain price.

630
The face value of currency, the rate at which the transaction would take place and the date for the
transaction is to be determined at the time of the contract initiation.

Difference between an Option and a Forward Contract :

The difference between an Option and a forward contract is that an Option is a RIGHT and not
an obligation, while a forward contract is both. Forward contracts are price-fixing instruments, while
options are pricing insurance instruments. Simple options provide a worst-case rate to the options
buyer, while leaving the upside potential open. The Option buyer pays a price for this right to the
seller (also called writer), which is called the premium. The Writer of the option has a limited upside
in the form of premium received, and the obligation to buy / sell at the agreed price should the option
buyer exercise his option.

Eligible Customer/User
Customers who have genuine foreign currency exposures in accordance with Schedule I & II of
Notification No. 25/2000-RB dated May 3, 2000 issued by RBI and as amended from time to time are
eligible to enter into option contracts.

Parties to the Option

i) The buyer (or holder) of the option pays a fee and holds the right.
ii) The seller (or writer) of the option receives the fee and has an obligation.

Operational Guidelines
i) Initially, option transactions will be conducted by Treasury Division, HO and Foreign
Exchange Office, Mumbai.
ii) On being approached by the Customer for conducting an option transaction, the branch
will immediately get in touch with Treasury Division, HO/FEO Mumbai for working out details.
Treasury Division, HO/FEO Mumbai will quote suitable rates to the branch after arranging
cover in the market. On finalization of rate and amount, the branch will obtain the applicable
Application Form in Duplicate from the customer and forward one copy of the same to FEO.
One copy will be retained at Branch for their record.
iii) On receipt of application form from the branch Treasury Division, HO/FEO Mumbai will
forward other documentation to the branch for execution, as under :
❏ ISDA Agreement (To be taken only once for all transactions)
❏ Schedule to the Agreement
❏ Confirmation of the deal
❏ Risk Disclosure statement
The branch will get these documents executed by the customer and forward the original
copies to FEO Mumbai. However, a clear photocopy of all the documents be kept at the
branch for records.
iv) To begin with only plain vanilla European options may be offered on back-to-back basis in
US Dollar only. European option is a type of option contract that may be exercised only
during a specified period of time just prior to its expiration.
v) The customer can purchase call or put options. However, writing of options is not permitted
to the customer.

631
 vi) Customers may enter into packaged products involving cost reduction structures provided
structure does not increase the underlying risk and does not involve customer-receiving
premIum.
vii) The Option premium may be quoted in Rupee or as a percentage of the Rupee/foreign
currency notional.
viii) All conditions and sanctioning powers applicable to booking and cancellation of forward
contract will be applicable to option contracts also. Presently, Importers/Exporters are
permitted to book forward contracts on the basis of the declaration of an exposure based
on past performance. This facility would be average of the past three years, export/import
turnover or the previous years turnover; whichever is higher. The forward contract so booked
and outstanding at any point of time shall not exceed 50% of the eligible limit without any
cap, provided that any amount in excess of 25% of the eligible limit shall be only on a
deliverable basis. These limits shall be computed separately for import/export transactions.
Higher limits will be permitted on case- by-case basis on application to the Reserve Bank
of India as in the case of Forward Contracts. Clubbing outstanding Forward Contracts and
Option transactions will adjudge the exposure towards forward contract and option
transactions for a particular customer -
ix) Only one hedge transaction can be booked against a particular exposure/part thereof for a
given time period.
x) Option contracts cannot be used to hedge contingent or derived exposures (except
exposures arising out of submission of tender bids in foreign exchange).
xi) The customers can undertake Option Contracts for US$ One Lakh and above in the multiples
of US$ ten thousand initially, for which back to back cover shall be arranged by the Treasury
Division, H/O/FEO Mumbai.
xii) Customers are not permitted writing of Option, however, to reduce the cost of transactions,
customer may be permitted Zero Cost Structures wherein a customer who pays premium
to the Bank for buying Option transaction is permitted to write options so that the premium
received by him by writing Option neutralizes the premium paid by him for buying options.
While allowing such structures, it should be ensured that the customer is conducting the
option transactions based on actual exposures only. The following margin required to be
kept on such transactions at branch level, are as detailed below :

Type of Option Period of % of Margin to be

Transaction Transaction maintained on the total,
amount of the transaction
Option bought by Any Nil
Customer
Option written by Upto one year 10%
Customer
For subsequent Additional 5% for each
years year

Margins may be kept in cash or collateral. The Corporate Customer enjoying credit limits with
the Bank are exempted from maintaining margins for conducting option transactions. However, the
amount of option transaction may be marked against limits sanctioned to such customer for forward
contract.

632
Settlement :
Option contracts will be settled on maturity either by delivery on spot basis or by net cash
settlement in Rupee on spot basis as specified in the contract. However, in case of unwinding of the
contract prior to maturity, the settlement will be done in cash, based on market value.

Accounting & Charges :

The branches will charge Rs.1,000/- (Rs.One Thousand only) per transaction from the Customer
which shall be shared bv branch and Foreign Exchange Office equally. The amount so shared will be
credited to the revenue head "Misc. Income" at branch and FEO. No other accounting vouchers are
to be passed at the branch level. The accounting procedure at FEO has been advised separately.

Record Maintenance :
The branches will maintain Option Register on the line of forward contract register wherein option
transactions conducted by their clients will be entered serially. On maturity, date will be marked against
the concerned transaction. Party–wise Register will also be maintained by the branches to monitor
the exposure towards individual parties. Outstanding in Option Register and Party-wise Option Register
will be taken down at the end of each month. Total of outstanding of all party-wise register should
tally with outstanding of main Option Register. At the end of each month Treasury Division, H/O/FEO
Mumbai will send details of outstanding transactions to the related branches. The branches should
tally the same within one week and inform Treasury Division, H/O/FEO Mumbai accordingly.

FOREIGN CURRENCY TRAVELLERS CHEQUES

PNB is having arrangement for sale of foreign currency Travellers Cheques (TCs) of Thomas
Cook & American Express (Amex) through our designated/authorised branches. The settlement for
sale thereof is made through drafts/ debit authority.
The operations of 'Thomas Cook' have been taken over by Travelex world-wide and TCs bear
the name of Travelex as issuer. Travelex is issuing Master Card TCs in the name of Thomas Cook
Master Card and Visa TCs are issued as Interpayment. In India, the operations of Travelex are
managed by its subsidiary namely Travelex India Pvt. Ltd.

Opening of Accounts by Foreign Tourists

'Any person resident outside India' referred in clause 1 of Schedule 3 to Notification No.FEMA
5/2000–RB dated May 3, 2000 includes foreign tourists on short visit to India on tourist visa. These
tourists can open Non-Resident (Ordinary) Rupee account (NRO) with any authorised dealer in India
with the funds remitted from outside India in a specified manner or by sale of foreign exchange brought
by them.

EXPORT FINANCE
Export finance is the finance extended to the exporters / deemed exporters on easy terms &
conditions for both pre-shipment and post shipment purposes.
Types of Export Finance :
Export Finance is of two types :
(a) Pre-shipment Advance
(b) Post-shipment Advance
(a) Pre-shipment Advance : Pre-shipment advance is allowed to exporters for procurement
of raw materials, semi-finished goods and finished goods.

633
 (b) Post-shipment Advance : This facility is allowed to the exporters after the shipment has
been made and the exporters have submitted the documents to the bank. In fact, bank purchases,
negotiates or discounts the documents and credit the proceeds to the exporter's accounts. Pre-
Shipment Advance, if any already allowed by the bank, is adjusted from Post-shipment Advance.

Types of Pre-shipment Finance :

Pre-shipment finance can be of two types : –
(a) Packing Credit (PCL) and
(b) Advance against government receivables, i.e. Duty Drawback, etc.

Types of Post-shipment finance :

(a) Export bills purchased / discounted / negotiated
(b) Advance against bills sent on collection
(c) Advance against expors on consignment basis
(d) Advance against duty drawback

Export Credit in Foreign Currency

Banks in India are permitted to extend export credit in foreign currency to exporters at LIBOR
linked rates : –
(a) Pre-shipment credit in Foreign Currency (PCFC) can be allowed to exporters as being
allowed in Indian Rupee initially for maximum 180 days with provision for further extension.
This is utilised for domestic inputs for imports.
(b) Export bill Rediscounted Abroad (EBR) is given to finance export bills in foreign currency
for maximum 180 days at LIBOR linked rate.

PRE-SHIPMENT ADVANCE (PACKING CREDIT)

Sl.No. Particulars Packing Credit-EPC (Rupees) Packing Credit-PCFC (Foreign Currency)
1. Definition Any loan, advance or any other credit granted to an Any loan, advance or any other credit
exporter for financing the purchase, processing, granted to an exporter for financing the
manufacturing of packing of goods prior to shipment. purchase, processing, manufacturing or
packing of goods prior to shipment.
2. Basis for grant of LC or Confirmed order in favour of exporter or some LC or conformed order in favour of
credit other person by an overseas buyer, unless its exporter or some other person by an
lodgment has been waived. overseas buyer unless its lodgment has
been waived.

3. Types of exports for Export of goods/services, Construction contracts, Only against cash exports of goods
which allowed Consultancy, Floriculture, Agro products, Processors services Construction contracts,
in agrizones, and units in SEZ, EPZ, APZ, EQU etc. Consultancy, Floriculture, Agro
products and units in SEZ, EPZ, APZ,
EOU etc.
4. Type of Account Order to order basis, or Running a/c facility in genuine Order to order basis or Running account
cases to exporters having very good past record. facility in genuine cases to exporters
having very good past record.
5. Extent ❏ For FOB Value ❏ For FOB value
❏ Only for exportable portion in case of agri ❏ Only for exportable peortion in
products case of agri products.
6 Dsbursement Stage to stage or in lump sum, depending upon the Stage to stage or in lump sum,
needs and circumstances. depending upon the needs and
circumstances
7 Choice of Currency Indian Rupees US $, Pound Sterling, Yen, Euro

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Sl.No. Particulars Packing Credit-EPC (Rupees) Packing Credit-PCFC (Foreign Currency)
8 Period of credit Depending upon the period required for procuring, Initially for 180 days to be extended upto
manufacturing, processing or packing of goods, EPC a maximum of 360 days for genuine
reasons
allowed by banks initally for 180 days. Concessional
rate of Intt. allowed upto 360 days only.
9 Forward Conracts Allowed Allowed in any of the four convertible
currencies
10 Liquidation of credit ❏ From the proceeds of export bills of main item ❏ Self liquidation from expor t
and by products proceeds
❏ EPC advance to be conver ted into Post ❏ Export Bills to be discounted,
negotiated or to be purchased.
shipment advance.
❏ Export Bills cannot be sent on
❏ Excess EPC involving non-exportable goods to collection basis
be recovered otherwise. ❏ Cannot be liquidated from forex
❏ In case of exporters having good past record acquired from other sources.
from proceeds of other export bills where no ❏ First in, first out basis in case of
EPC has been allowed. running account facility.

❏ first in first out basis in case of running account

11 Interest Concessional ROI : A ceiling rate has been a) For 180 days International
prescribed for rupee export credit linked to BPLR of reference rate such as 6 months
Libor, Euro-Libor, Euribor
individual banks available to their domestic
borrowers. Banks have, therefore, freedom to decide ❏ Not over 100 basis point over Libor,
Eurolibor, Euribor
the actual rates to be charged within the specified
❏ Quarterly interest basis
ceilings. Further, the ceiling interest rates for different
b) 180–360 days, above a + 2%
time buckets under any category of export credit
should be on the basis of the BPLR relevant for the
entire tenor of export credit. Commercial rate of
interest is charged on excess EPC on non exportable
goods and for EPC beyond 360 days.
12 Sharing with EPC an be shared between an Export Order Holder ❏ PCFC to manufacturer allowed on
manufacturers (EOH) and Suppliers on order to order basis only obtaining disclaimer through its
(No running account facility) bank
❏ In case of consor tium loans,
❏ Suppliers to open inland LC in favour of exporter allowed where banker or leader is
❏ Not allowed to the suppliers of raw material or same for expor ter and
components. manufacturer or where the other
banks agree.
❏ Units located in SEZ, EPZ or EOU etc.
❏ All such advances to be coverted by ECGC
13 Deemed Exports To parties against orders for supplies in respect of PCFC is allowed only for 'deemed
projects aided/financed by bilateral or multilateral exports' for supplies to projects financed
agencies/funds (including World Bank, IBRD, IDA) by multilateral/bilateral agencies / funds,
PCFC released for 'deemed exports'
should be liquidated by grant of foreign
currency loan at post-supply stage, for
a maximum period of 30 days or up to
the date of payment by the project
authorities, whichever is earlier.
14 Substitution of Allowed in unavoidable and commercially necessary Allowed in unavoidable and
order or commodity cases commercially necessary cases
15 Non Execution of Amount to be recovered by charging commercial rate ❏ Exporter to buy foreign currency for
Export Order of interest from the date EPC was allowed. loan amount plus interest through
the bank for adjustment of PCFC
❏ Intt. to be charged on amount in
Rupee equivalent to Foreign
currency loan availed.
❏ Banks to remit amount to Foreign
banks, if line of credit obtained.
16 Refinance Available to banks against EPC for 180 days only Not available
17 EEFC Facility Allowed Permitted after the export bill has been
realized.

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 POST-SHIPMENT ADVANCE-DIFFERENT TYPES
SN Type of Allowed
Advance Against
1 Negotiation of ❏ Bills drawn under No Limit-100% of ❏ Initially allowed for 6 ❏ Short Term Finance
Bills irrevocable Letter of Invoice Value or
Credit value declared in
GR/PP/Softex forms
❏ Shipping documents
evidencing that actual
shipment has been
made.
2 Purchase / Shipping documents
Discounting of evidencing export against
Bills confirmed order/expired
LC/discrepant documents
under LC
3 Advance against Bills, which have already
bills sent on been sent on collection
collection
basis, drawn either under
LC/discrepant documents
or under confirmed order.
4 Advance against Shipments already made
c o n s i g n m e n t on consignment basis.
exports Instructions should be
given for deliver y of
documents against Trust
Receipt or undetaking.
5 Advance against Outstanding Duty Draw
Govt. Back entitlements
Receivables supported by certificate
from C.A.
6 Advance against Balance of un-raised
Undrawn invoices and Retention
Balances
Money
7 Forefaiting By way of rediscounting of Minimum amount is 6 months and prior
Receivables (EBR)
8 Factoring By way of rediscounting of 100%
Receivables (EBR)
Amount Maximum Other information
Limit Period
months from the date of
❏ Pre-shipment advance, if
shipment.
any, to be liquidated by way
❏ Period to be extended of negotiation of bills.
upto 1 yr. for genuine
❏ Allowed in Rupees, as well
reasons.
as in foreign currencies,
USD, Euro, Yen & GBP
No Limit-100% of ❏ Initially allowed for 6 ❏ Short Term Finance
Invoice Value or months from the date of
❏ Pre-shipment advance, if
value declared in shipment.
any, to be liquidated from
GR/PP/Softex forms
❏ Period to be extended the bills purchased or
upto 1 year for genuine discounted
reasons
❏ Allowed in Rupees, as well
as in foreign currencies.
❏ If bills are not payable at
sight, ECGC cover should
be preferred.
No Limit-100% of ❏ Initially for 6 months ❏ Short Term Finance.
Invoice Value or from the date of
❏ Pre-shipment advance, if
value declared in shipment.
any, to be liquidated from
GR/PP/Softex forms
❏ Period to be extended the bills purchased.
upto 1 yr for genuine
❏ If bills are not payable at
reasons
sight, ECGC cover issued
prior to shipment should be
preferred.
Within the market ❏ Normally upto a period In case of Advance against
value of the goods of 180 days. Consignment Exports against
because actual sale Gems / precious stones,
amount or amount to ❏ In deserving cases, for packing credit advances be
be realised is not exports in CIS and East
adjusted as soon as export
certain. European countries,
takes place, by transfer of the
upto a maximum of one
outstanding balance to a
year.
special (post-shipment)
account which in turn, should
be adjusted as soon as the
relative proceeds are received
from abroad but not later than
180 days.
100% Normally Upto period of 90 ECGC cover should be
days under concessional preferred.
rate of interest.
100%. Because Maximum upto 6 months Export proceeds must be
there are chances of from the date of shipment received within the period of
deductions by the for undrawn amt. and 1 yr.
buyers, a margin Usance under order/contract
should be for retention money. as permitted by RBI/EXIM
maintained Bank.
Forefaiting allowed through
USD 1,00,000 permission of RBI or EXIM EXIM Bank only. Prior
Bank required for deferred involvement of EXIM bank
payment bills. required for each bill.
Can be 'With or Without
Recourse'.
6 months and prior Only without recourse bills.
permission of RBI required
Bill to Bill rediscounting on
for deferred payment bills.
ongoing arrangements.
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REPO & REVERSE REPO

In India repo and reverse repo are the recognized short-term money market instruments.
Under the repo contracts, funds are raised in the money market with a view to meet temporary liquidity
requirements by selling a security on the condition that the same be repurchased at the end of the repo period.
Repo can be undertaken for any period of time. However, in practice, the period is short, i.e. from 1 day to
few months.
Under reverse repo, on the other hand, the counter-party who is entering into this transaction is
essentially making a short-term collateralised loan to the bank or any other organisation like a Primary Dealer
by providing funds in return for holding securities. When the reverse repo transaction matures, the counter-
party returns the securities to the bank and receives its cash along with the profit spread.

Repurchase Option (REPO)

❏ REPO transactions are short-term transactions wherein the participant acquires immediate funds through
the sale of marketable securities under the agreement that the same/similar securities will be repurchased
by him at a future date at a predetermined price.
❏ This instrument is particularly popular with banks, which have surplus SLR securities and CRR deficit.
❏ Although no fixed tenure has been prescribed, generally repo transactions are for a minimum 3 to 14
days. RBI does not prescribe either maximum or minimum (3 days withdrawn since 31.10.1998) period
of time for a Repo transaction.
❏ Repo rates have been acting as a floor rate to call money rates and prescribed by RBI in its Monetary
Policy announcements.
❏ The repo rate/interest rate is market determined. Presently it is 6 per cent w.e.f. 29.04.2004 (fixed LAF
Repo rate).

Reverse Repo Rate

❏ Both repo & reverse repo transactions can take place in all Govt. securities and Treasury Bills of all
maturities. Since Oct. 1997, repo transactions in PSU bonds & Private corporate securities (held in
demat form) have also been allowed by RBI.
❏ Besides Scheduled Commercial Banks & Primary Dealers, FI's & Mutual Funds can also participate in
repo market.
❏ Reverse Repo Rate changed to 5% w.e.f. 29.4.2005.
❏ Revised Liquidity Adjustment Facility to operate with overnight fixed rate repo and reverse repo.

NATIONAL SECURITIES DEPOSITORY LIMITED

What is a depository?
A depository can be compared to a bank. A depository holds securities like shares, debentures,
bonds, Government securities and units of investors in electronic form. Besides holding securities,
a depository also provides service related to transactions in securities. A depository interfaces with
the investors through its agents called Depository Participants (DPs). If an investor wants to avail
of the services offered by the depository, the investor has to open an account with a DP known as
Demat Account.

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What is dematerialisation?
Dematerialisation is the process by which physical certificates of an investor are converted to
an equivalent number of securities in electronic form and credited in the investor's account with its
DP. In order to dematerialise certificates an investor will have to first open an account with a DP and
then request for the dematerialisation of certificates by filing up a dematerialisation request form
(DRF), which is available with the DP and submitting the same along with the physical certificates,
duly defaced by marking "Surrendered for Dematerialisation" on the face of the certificates.

What does transmission in relation to demat accounts?

Transmission is the process by which securities of a deceased account holder are transferred
to the account of the surviving joint holders(s) / legal heirs / nominee of the deceased account
holder.

What is the procedure for selling dematerialised securities?

The procedure for selling dematerialise securities is very simple. After you have sold the
securities, you would instruct your DP to debit your account with the number of securities sold by
you and credit your broker's clearing account. This delivery instruction has to be given to your DP
using the delivery instruction slips given to you by your DP at the time of opening the account.

What is T + 2 rolling settlement cycle and when delivery is to be the given to a broker?
In case of T + 2 rolling settlements the trades taking place on each training day are required
to be settled on the second working day following the date of trade. For example, trades of Monday
will be settled on Wednesday morning.

How to pledge electronic securities?

First of all, both you (the one who pledges) as well the lender must have depository accounts
with the same depository. Then you have to initiate the pledge by submitting to your DP the details
of the securities to be pledged in a standard format. Finally, the pledgee has to confirm the request
through its DP.

Can the securities lying in demat account be lent?

Yes. You can lend your securities through Intermediaries approved by SEBI in this regard.

How to lend the demat securities?

First, you should enter into an agreement with an approved intermediary to act as a lender.
Then, you may lend securities any time by submitting lending instruction to your DP.

DRAFT GUIDELINES FOR BANKS FOR UNDERTAKING PD BUSINESS

Primary Dealers
The primary dealer system has been introduced in a number of countries with the objective
of strengthening the securities market infrastructure and bringing about improvement in the secondary
market trading, liquidity and turnover in Government securities as also for encouraging voluntary
holding amongst a wider investor base. The primary dealer system has been in operation in India
for the last eight years. There were 18 primary dealers (PDs) in operation in India at the end of
March 2004.

638
Primary Dealership
As announced in the Annual Policy Statement for the year 2005-06, it has now been decided
that permitted structure of PD business will be expanded to include banks, which fulfil certain
minimum criteria subject to safeguards. Accordingly, banks are eligible to apply for Primary Dealership,
subject to the following guidelines : –
1. The following categories of banks would be eligible to apply for PD license. (RBI's approval
would be subject to compliance with all other relevant laws).
(i) Banks which do not at present have a partly or wholly owned subsidiary and fulfil the
following criteria :
(a) Minimum net owned funds (NOF) of Rs. 1,000 crore.
(b) Minimum CRAR of 9 per cent.
(c) The net NPA of the bank should be less than 3 per cent and should have a profit
making record for the last three years.
(ii) Indian banks which are undertaking PD business through a partly or wholly owned
subsidiary and wish to undertake PD business departmentally by merging / taking over
PD business from their partly / wholly owned subsidiary subject to fulfilling the criteria at
2(i) (a) to (c).
(iii) Foreign banks operating in India who wish to undertake PD business departmentally by
merging the PD business being undertaken by group companies subject to fulfilment of
criteria as above at (i) (a) to (c).
2. The authorization granted by RBI will be for one year (July-June) and thereafter, RBI will
review the authorization on a yearly basis based on the performance criteria, such as underwriting
in auctions of primary issuance of Government Dated Securities and Treasury Bills or fulfilment of
bidding commitment and success ratio in the primary market and achieving the turnover ratio in the
secondary market, etc.

Obligation for Bank-PDs

The Bank-PDs will be subject to underwriting and all other obligations as applicable to stand
alone PDs and as may be prescribed from time to time. The bank may maintain, at any point of time,
a minimum size of Rs. 100 crore in its separate SGL account for PD business.

Prudential norms
(i) No separate capital adequacy is prescribed for PD business, and the capital adequacy
requirement for a bank will also apply to the PD business.
(ii) The Government Dated Securities and Treasury Bills under PD business will count for
SLR.
(iii) The investment valuation guidelines applicable to banks in regard to 'Held for Trading' will
apply to the portfolio of Government Dated Securities and Treasury Bills earmarked for
PD business.
(iv) The bank shall have to maintain a separate SGL account for its subsidiaries. The bank
must also develop proper MIS in this regard.

639
Regulations and Supervision
(i) RBI's instructions to primary Dealers will apply to Bank-PDs, to the extent applicable.
(ii) As banks have access to the call money market and the Liquidity Adjustment Facility
(LAF) of RBI, Bank-PDs will not have separate access to these facilities.
(iii) RBI will conduct on-site inspection of Bank-PD business.
(iv) Bank-PDs will be required to submit prescribed returns, as advised by RBI from time to
time.
(v) Bank-PDs should bring to the RBI's attention any major complaint against it or action
initiated / taken against it by authorities such as the Stock Exchanges, SEBI, CBI,
Enforcement Directorate, Income Tax, etc.
(vi) Reserve Bank of India reserves the right to cancel the Bank-PD authorization if, in its
view, the concerned bank has not fulfilled any of the prescribed eligibility and performance
criteria.
Reserve Bank of India reserves its right to amend or modify these guidelines from time to time,
as may be considered necessary.

Understanding Accounting Standard 11

Accounting Standard 11 was introduced by the Institute of Chartered Accountants of India
(ICAI) in 1989 and was revised in 1994.
AS 11 has since been revised in 2003 to be effective from April 1, 2004.

Objective
While finalising the profite and loss (P & L) account and balance sheet of the enterprise, the
transactions in foreign currency are required to be translated into Indian rupees. The AS 11 prescribes
the rate at which the foreign currency transactions are required to be translated into rupees.

Scope
The Following transactions will attract AS 11 :
❏ Payment in foreign currency in respect of goods imported and exported.
❏ Borrowings and lending in foreign currency, including the payment of interest in foreign
currency;
❏ Any amount deposited or lying in foreign currency with any bank in India or abroad;
❏ Forward exchange contracts, if any, by the constituent in respect of payment of value of
the goods or instalment of loans or interest on loan.
❏ Any derivative product bought or sold by the constituent to hedge the exchange risk,
including options FRA (forward rate agreements), interest rates and currency swap.
❏ Assigned capital, if any, sent to the foreign branch of an entity in foreign currency.
❏ Any fixed asset purchased abroad either as an investment or for the use of the branch
office abroad, and
❏ Funds retained abroad out of profit, such as retained profit, statutory reserves, and so on.

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 Business enterprises may have branches abroad and may be preparing P & L accounts and
balance sheets, as per local regulation in foreign currency. However, while consolidating the accounts
to be translated in Indian rupees. As 11 prescribes the rate at which they are to be translated into
rupees.
The exporters are allowed to maintain exchange earner's foreign currency (EEFC) accounts
and the residents are permitted to have resident foreign currency (RFC) accounts. As 11 prescribes
the rate at which such transactions are required to be translated while finalising the P & L account
and balance-sheet of the entities concerned.

Significant aspects
Paras 11 and 12 : Reporting of foreign currency transactions is dealt with in these paragraphs.
Paras 13, 14, 15 and 16 : The method to be adopted for recognising the exchange differences
arising in foreign currency transactions is dealt with in these paragraphs.
Paras 36 and 37 : The treatment to be given in respect of forward exchange contracts entered
into for hedging purposes is dealt with in these paragraphs.
Paras 38 and 39 : The treatment to be given in respect of forward exchange contracts entered
for trading / speculation purposes is dealt with in these paragraphs.
Paras 40 to 44 : Disclosures in respect of exchange differences included in the financial
accounts are dealt with in these paragraphs.
The Reserve Bank of India, as per its circular DBOD No. BP. BC. 68/21, 04.018/96 dated June
5, 1996, has advised all commercial banks, thus : "We have examined the matter and we observe
that the revised Accounting Standard 11 on accounting for effects of changes in foreign exchange
rates has come into effect for accounting periods commencing on or after April 1, 1995. On examining
the Revised AS 11 we find that the standards are not in accordance with FEDAI guidelines or
prudential practices to be followed by the banks. We have accordingly taken up the matter with the
Institute of Chartered Accountants of India. Meanwhile the banks may adopt the following guidelines
for finalising the accounts for 1995-96".
"All foreign exchange transactions in India should be valued as per the guidelines issued by
the Foreign Exchange Dealers Association of India. This will apply to all commercial banks that are
authorised to deal in foreign exchange".
Indian banks having foreign branches are required to translate the financial statements of their
branches abroad for incorporation in the financial statements. These banks should adopt the following
procedures :
❏ All assets and liabilities, both monetary and non-monetary, of the foreign entity should be
translated at the closing rate;
❏ Income and expense items of the foreign branches should also be translated at the
closing rates;
❏ Resulting exchange profit on consolidation should not be taken to P & L account but kept
in a separate account on the liabilities side under Schedule 5, "Other liabilities".

641
 However, any exchange loss on consolidation should be debited to the profit and loss account."
Unfortunately, the matter was not resolved for almost a decade and the RBI was compelled
to repeat the same instructions year after year. The last such instructions was given on March 31,
2004 (Circular DBOD. No. BP. BC. 71/72.04.018/2003-2004) to all commercial banks to follow the
guidelines prescribed in Circular DBOD. No. BP. BC. 93/21.04.018/2002-03 dated April 8, 2003, only
for finalising the accounts for the year ended March 31, 2004. On March 15, 2005, the RBI came
about with Circular No. RBI / 2004-05/395 DBOD No. BP. BC. 76/21.04.018/2004-05 wherein guidelines
have been given to banks, which are summaries below :
1. For the purpose of Paragraph 17, foreign branches of Indian banks and offshore banking
units (OBUs) set up in India would be classified as "non-integral operation."
2. Representative offices are to be classified as "integral foreign operations"
3. The RBI has envisaged the difficulties faced by banks in implementing clauses 9 and 21.
In order to mitigate them, option has been given to banks to follow the guidelines outlined
in paragraph 4.2 of their circular. In effect, in respect of the same transactions, corporate
will follow the guidelines of AS 11 and banks, the RBI guidelines.
4. Closing rate has been defined by AS 11 as the exchange rate at the balance-sheet date,
however, the last closing spot rate of exchange accounting period."
It will thus be seen that AS 11 is not required to be implemented in full, particularly if banks
face difficulty in implementing it.

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 10.7

FOREIGN EXCHANGE

GLOSSARY
Advance Licence It is granted to exporters for imports of inputs, which are required for export
production without payment of basic custom duty, subject to export obligation.
American Options These can be exercised at any date before and including the expiry date.
Appreciation A gradual increase in the value of the currency in terms of another.
Arbitrage Arbitrage is a process of simultaneous buying and selling of foreign currency for
the sake of realizing profits from discrepancies between exchange rate prevailing
at the same time in different centers, or between interest rates prevailing at the
same time in different centers or in different currencies.
Authorised dealers Banks/Institutions, authorised to deal in foreign exchange.
Authorised Persons Persons authorised to deal in or handle transactions related to foreign exchange.
Balance of Payments It is a record of all economic transactions between domestic residents and
residents of other countries and relfects the net result of such transactions.
Balance of trade The difference between export receipts and import payment.
Basis point 1/100th of 1% yield.
Bid rate Rate at which the Bank is ready to buy foreign exchange or accept deposits.
Bond A negotiable paper with a fixed interest rate and fixed maturity date.
Certificate of Deposit A negotiable instrument issued by Bank payable to bearer.
Commercial Paper A short term negotiable instrument comprising usance promissory note with a
fixed maturity.
Cross rate Price of one foreign currency in terms of another foreign currency and it excludes
the currency of the country where the rate is offered.
Crystallisation Conversion of the foreign currency bill in to home currency liability.
Country risk It is associated with problem countries.
Direct Rate Variable units of domestic currency and fixed unit of foreign currency.
Depreciation A gradual decrease in the value of one currency against another.
DGFT Director General of Foreign Trade is responsible for formulating and executing
the EXIM policy & licensing.
Deemed export It refers to those transactions, which are considered as exports but where goods
supplied do not leave the country. The buyers make payment for such goods in
India.
Diamond Dollar Account Firms dealing in purchase/sale (export/import) of rough/cut & polished diamonds
for at least three years with an average annual turnover of Rs. 5 crore or above
during preceding three years are permitted to transact their business through
maximum five Diamond Dollar accounts with their banks.
Duty Exemption Scheme This enables duty-free imports of inputs for export production and includes
advance licence, duty entitlement passbook and replenishment licence.

643
Duty entitlement passbook This scheme neutralizes the incidence of basic and special custom duty on the
import content of export product. Exporters are given DEPB certificates of
specified value based on the exported value of goods. The certificates can be
used to imports inputs duty-free., Exporters can also sell these certificates to
other importers who can use it for duty-free imports from the same port.
Duty drawback scheme It aims at neutralizing the duties on imports paid by the exporters. The amount
Reimbursed, which is based on exported value, is credited to the bank account
of exporter.
ECB External commercial borrowings include commercial bank loans, buyer's credit,
supplier's credit, bonds, and loans from ODAs, multilateral agenices.
EPCG Scheme Export Promotion Capital Goods enables capital goods to the imported for export
production at concessional duty.
European Option It can be exercised only at maturity.
Forfaiting It is the non-recourse discounting of export receivables. In a forfeiting transaction,
the exporter surrenders, without recourse to him, his rights to claim for payment
of goods delivered an importer, in return for immediate cash payment from the
forfaiter.
GR Form It is used when export is made otherwise than by post.
Hard Currency Is a strong, freely convetible currency of a country with large exchange reserves
and a surplus in its balance of payments.
Hedging Means the protection of a foreign exchange exposure either by a forward
exchange contract or by borrowing in the local currency.
IEC Number Every individual/body corporate engaged in export-import trade has to apply for
and obtain an import-export code number from DGFT.
Indirect Rate Fixed unit of domestic currency and variable unit of foreign currency.
Inflation It is a monetary phenomenon, which is characterized by an excessive money
supply with a rise in prices.
IDR IDR is an instrument in the form of a Depository Receipt created by the Indian
Depository in India against the underlying equity shares of the issuing company.
U/S 605A of the Companies (Issue of IDR) Rules, 2004, the foreign companies
can raise funds in India by way of issuing Depository Receipts, against underlying
equity shares. The actual shares underlying the IDRs would be held by an
overseas custodian, which shall authorise Indian Depository to issue the IDRs.
Input-Output norms It deinfes the amount of inputs required to manufacture a unit of output.
Line of Credit It is a facility of credit provided by EXIM Bank and other commercial banks in
India, to foreign governments, banks & institutions.
Lead To prepay a debt, if a currency is expected to appreciate in value.
Lag To defer payment of a debt if a currency is under pressure.
LIBOR It stands for London Inter Bank Offered Rate. It is the interest rate at which the
prime banks offer to lend foreign currency to other prime banks in London on a
given date.

644
Loro accounts It means "their account with you." If PNB, Mumbai remits US $ to Standard
Charatered Bank, New York for the credit to the account of Hongkong and
Shanghai Bank, Tokyo, maintained with them.
Maturity factoring A guarantee scheme, under which, the factor pays only on the due date of the
export receivables, and not at the time of drawing of the export bills. Another
financer, on its strength, does financing of bill.
MISS Market Stabilisation Scheme was introduced following the recommendations of
Working Group of RBI on Instruments of Sterilisation (December 2003), the
Government of India confirmed its intention to strengthen the RBI in its ability to
conduct exchange rate and monetary management operations to maintain
stability in the foreign exchange market and enable RBI to conduct monetary
policy in accordance with its stated objectives.
Nostro account It means "our account with you." PNB's account in US $ in New York with Standard
Chartered Bank is our nostro account with you.
Nominal Exchange Rates It is the price of one currency in terms of number of units of some other currency.
It takes into account the numerical exchange value and ignores such as the
purchasing power of the currency.
NTP Notional Transit Period allowed to each bill, for collection of notional due date.
Offer rate Rate at which the Bank is ready to sell foreign exchange or lend money.
Premium/Discount If the quoted currency is more expensive in the future it is now in terms of the
base currency, it is said to be at a premium in the forward market.
Packing credit Packing credit is an advance to exporters for procurement of raw materials,
processing, packing and its final shipment to the importer. It can be granted
either in Indian rupees or foreign currency.
Post shipment finance Any credit granted to the exporter after shipment of goods to the date of realization
of export proceeds.
PP Form It is used when export is made by post parcel.
Replenishment license It refers to replenishment of such imports, as the input-output norms require for
the export purpose.
Real Exchange Rate It is the nominal exchange rate multiplied by price indices of two countries.
SDF Forms It is used in place of GR form in custom offices where EDI system has been
activated.
Spread The difference between buying (bid) and selling (offer) rate. It alternatively means
the yield rate minus cost of fund.
Sterlisation There are two approaches to offset the impact of forex inflows i.e. market based
or non-market based. The market-based approach involves financial transactions
between the central bank and the market, which leads to withdrawal or injection
of liquidity. The non-market based approach involves the use of quantitative
barriers, rules or restrictions in market activity, which attempts to keep the
potential injection of liquidity outside the domestic financial system. The market-
based approach aimed at neutralising part or whole of the monetary impact of
foreign inflows is termed as sterilisation.

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Swap Purchase of one currency against another currency for one date of delivery and
the simultaneous reversal of that exchange contract for a different date of delivery.
Soft currency Is a weak currency of a country with low exchange reserves and a deficit in the
balance of payments.
Softex form An export declaration form used for export of software in non-physical form.
Sovereign risk It is a sub category of country risk and arises on account of sovereign entities.
Transferable L/C It is one, which can be transferred by the first beneficiary to one or more second
beneficiaries.
Target A payment system of European Union.
Unsponsored ADR One way to create ADR is by an arrangement, which is not initiated by the
company concerned, but is generally set up by one or more US brokers, when
it is observed that a large number of American investors are interested in dealing
in the shares of a non-US company.
Vostro accounts It means "your account with us." If Standard Chartered Bank, London opens a
rupee account at Mumbai with PNB, it is your vostro account with us.

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