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Progression of FERA to FEMA and its contribution in development of FOREX Market in India. MFM (2nd Year II SEM), Div B

Progression of FERA to FEMA and its contribution in development of FOREX Market in India Mumbai Education Trust MFM (SECOND YEAR), DIV: B Second Semester

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BUSINESS LAW - IISubmitted By:Sr. No. 1 2 3 4 5 6 7 8 9 10 Name Sharan Asrani Jatin Bhatt Amit Bidaye Sachin Desai Krutik Doshi Muzammil Fazal Nagendra Gawade Sachin Tawde Deven Halwalkar Sandeep Jadhav Roll No. 62 64 66 70 72 74 76 78 80 82

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Report submitted to the METs Institute of Management in partial fulfilment of the requirement for the award MFM degree.

CONTENTS

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Sr. No. 1 2 3 4 5 6 7 8 9 10 11

Topics INTRODUCTION SWITCH FROM FERA NEED FOR ITS MANAGEMENT MAIN FEATURES OBJECTIVES DEFINITION UNDER ACT TYPES OF FOREIGN EXCHANGE TRANSACTION SALIENT FEATURES OF FROM MASTER CIRCULR ON IMPORT OF GOODS AND SERVICES SALIENT FEATURES OF FROM MASTER CIRCULR ON EXPORT OF GOODS AND SERVICES IMPORT - EXPORT FLOW CHART IMPACT OF PROGRESSION FROM FERA TO FEMA ON ECONOMY & MARKETS i) Import, Export and Balance of Trade ii) Rupee Progress iii) FDI & FII iv) External Debt v) Trade Credit vi) Capital Account convertibility CASE STUDIES ANALYSIS CONCLUSION

Page no. 5-5 6-8 9-9 10 - 10 11 13 14 15 16 21 22 35 36 38 39 41

12 13 14

42 44 42 44 45 48 49 58 59 60 61 63 64 67 68 74 75 78

INTRODUCTION

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The Foreign Exchange Management Act (FEMA) was an act passed in the winter session of Parliament in 1999 which replaced Foreign Exchange Regulation Act. This act seeks to make offenses related to foreign exchange civil offenses. It extends to the whole of India. FEMA, which replaced Foreign Exchange Regulation Act (FERA), had become the need of the hour since FERA had become incompatible with the pro-liberalisation policies of the Government of India. FEMA has brought a new management regime of Foreign Exchange consistent with the emerging framework of the World Trade Organisation (WTO). Unlike other laws where everything is permitted unless specifically prohibited, under this act everything was prohibited unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It required imprisonment even for minor offences. Under FERA a person was presumed guilty unless he proved himself innocent, whereas under other laws a person is presumed innocent unless he is proven guilty.

SWITCH FROM FERA

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In India, all transactions that include foreign exchange were regulated by Foreign Exchange Regulations Act (FERA), 1973. The main objective of FERA was conservation and proper utilisation of the foreign exchange resources of the country. It also sought to control certain aspects of the conduct of business outside the country by Indian companies and in India by foreign companies. It was a criminal legislation which meant that its violation would lead to imprisonment and payment of heavy fine. It had many restrictive clauses which deterred foreign invest The introduction of Foreign Exchange Regulation Act was done in 1974, a period when Indias foreign exchange reserve position wasnt at its best. A new control in place to improve this position was the need of the hour. FERA did not succeed in restricting activities, especially the expansion of TNCs (Transnational Corporations). The concessions made to FERA in 1991-1993 showed that FERA was on the verge of becoming redundant. After the amendment of FERA in 1993, it was decided that the act would become the FEMA. This was done in order to relax the controls on foreign exchange in India, as a result of economic liberalization. FEMA served to make transactions for external trade (exports and imports) easier transactions involving current account for external trade no longer required RBIs permission. The deals in Foreign Exchange were to be managed instead of regulated. The switch to FEMA shows the change on the part of the government in terms of foreign capital. The Act applies to all branches, offices and agencies outside India, owned or controlled by a person resident in India. FEMA emerged as an investor friendly legislation which is purely a civil legislation in the sense that its violation implies only payment of monetary penalties and fines. However, under it, a person will be liable to civil imprisonment only if he does not pay the prescribed fine within 90 days from the date of notice but that too happens after formalities of show cause notice and personal hearing. FEMA also provides for a two year sunset clause for offences committed under FERA which may be taken as the transition period granted for moving from one 'harsh' law to the other 'industry friendly' legislation. From Foreign Exchange Control to Management (FERA to FEMA) In the 1990s, consistent with the general philosophy of economic reforms a sea change relating to the broad approach to reform in the external sector took place. The Report of the High Level Committee on Balance of Payments (Chairman: Dr. C. Rangarajan, 1993) set the broad agenda in this regard. The Committee recommended the following:

The introduction of a market-determined exchange rate regime within limits Liberalization of current account transactions leading to current account convertibility;

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Compositional shift in capital flows away from debt to non debt creating flows; Strict regulation of external commercial borrowings, especially short-term debt;

SN .1 2

DIFFERENCESProvisions Features

FERA

FEMA

Consist of 81 Sections and was more Much simple and consist 49 sections complex Presumption of negative intention Presumption of Mens Rea and (Mens Rea) and joining hands in Abatement have been excluded in offence (abatement) existed in FERA FEMA Terms Like Capital A/C Transaction, Terms Like Capital A/C Transaction, Current A/C Transaction , person, Current A/C Transaction , person, services etc. were not defined services etc. have been defined in FEMA Is Narrow one The definition is widened to include Banks, Money Changes, Offshore Banking unit etc.

3

New terms

4

Definition of authorised person Meaning of resident as compared to income tax Punishment

5

There was big difference in the A person who qualifies to be a definition under FERA and IT Act. Resident under IT Act 1961 will also be considered under FEMA but not necessary same in opposite case. Any offence is Criminal Offence and Offence to be considered as Civil punishable with imprisonment as per offence only, punishable with some code of criminal procedure 1973 amount of money as a penalty. The monetary penalty was around 5 The monetary penalty is reasonable and times of amount involved. nearly 3 times of amount involved. An appeal against the order of Adjudicating Office. Before Foreign Exchange Regulation Appellate board went before high court. The Appellate authority under FEMA is special director (Appeals) against the order of Adjudicating Authorities and special director (appeal) lies before Appellate Tribunal for FOREX. An appeal from an order of Appellate Tribunal would be lie to the High court.

6

7 8

Quantum of penalty Appeal

9

Right of assistance

Did not contain any express provisions Expressly recognise the right of on the right of on impleaded person to appellant to take assistance of legal take legal assistance practitioner or CA. Conferred wide powers on a police The scope of power of search and officer not below the rank of a Deputy seizure has been curtailed to great superintendant of police to make search extent.

10

Power of search and size

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Discouraging volatile elements of flows from non-resident Indians; full freedom for outflows associated with inflows (i.e., principal, interest, dividend, profit and sale proceeds) and gradual liberalization of other outflows;

Dissociation of Government in the intermediation of flow of external assistance, as in the 1980s, receipts on capital account and external financing were confined to external assistance through multilateral and bilateral sources.

The sequence of events in the subsequent years generally followed these recommendations. In 1993, exchange rate of rupee was made market determined; close on the heels of this important step, India accepted Article VIII of the Articles of Agreement of the International Monetary Fund in August 1994 and adopted the current account convertibility. In June 2000 a legal framework, with implementation of FEMA, was put into effect to ensure convertibility on the current account.

NEED FOR ITS MANAGEMENT

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The buying and selling of foreign currency and other debt instruments by businesses, individuals and governments happens in the foreign exchange market. Apart from being very competitive, this market is also the largest and most liquid market in the world as well as in India]. It constantly undergoes changes and innovations, which can either be beneficial to a country or expose them to greater risks. The management of foreign exchange market becomes necessary in order to mitigate and avoid the risks. Central banks would work towards an orderly functioning of the transactions which can also develop their foreign exchange market.

Whether under FERA or FEMAs control, the need for the management of foreign exchange is important. It is necessary to keep adequate amount of foreign exchange reserves, especially when India has to go in for imports of certain goods. By maintaining sufficient reserves, Indias foreign exchange policy marked a shift from Import Substitution to Export Promotion.

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Activities such as payments made to any person outside India or receipts from them, along withthe deals in foreign exchange and foreign security is restricted. It is FEMA that gives the central government the power to impose the restrictions.

Restrictions are imposed on people living in India who carry out transactions in foreignexchange, foreign security or who own or hold immovable property abroad.

Without general or specific permission of the Reserve Bank of India, FEMA restricts thetransactions involving foreign exchange or foreign security and payments from outside the country to India the transactions should be made only through an authorised person.

Deals in foreign exchange under the current account by an authorised person can be restricted bythe Central Government, based on public interest.

Although selling or drawing of foreign exchange is done through an authorised person, the RBIis empowered by this Act to subject the capital account transactions to a number of restrictions.

People living in India will be permitted to carry out transactions in foreign exchange, foreignsecurity or to own or hold immovable property abroad if the currency, security or property was owned or acquired when he/she was living outside India, or when it was inherited to him/her by someone living outside India.

Exporters are needed to furnish their export details to RBI. To ensure that the transactions arecarried out properly, RBI may ask the exporters to comply to its necessary requirements.

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OBJECTIVES

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

Except with the general or special permission of the Reserve Bank of India, no person can :

deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;

make any payment to or for the credit of any person resident outside India in any manner; receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner;

Reasonable restrictions for current account transactions as may be prescribed.

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Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. The Reserve Bank may, in consultation with the Central Government, specify:

any class or classes of capital account transactions which are permissible; the limit up to which foreign exchange shall be admissible for such transactions

However, the Reserve Bank cannot impose any restriction on the drawing of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.

The Reserve Bank can, by regulations, prohibit, restrict or regulate the following:

Transfer or issue of any foreign security by a person resident in India; Transfer or issue of any security by a person resident outside India; Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;

Any borrowing or lending in foreign exchange in whatever form or by whatever name called; Any borrowing or tending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;

Deposits between persons resident in India and persons resident outside India; Export, import or holding of currency or currency notes; Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;

Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;

Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred o By a person resident in India and owed to a person resident outside India or o By a person resident outside India.

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A person, resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.

The Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business. Every exporter of goods and services must:

Furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India;

Furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realization of the export proceeds by such exporter.

The Reserve Bank may, for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the Reserve Bank determines, having regard to the prevailing marketconditions, is received without any delay, direct any exporter to comply with such requirements as it deems fit. Where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.

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DEFINITIONS UNDER ACT

FEMA Contains Definition of Certain Terms which have been used Throughout the ACT. These are: Authorized Person: It includes an authorized dealer, money changer, off-shore banking unit or any

other person for the time being authorized to deal in foreign exchange, Capital Account Transaction: It means a transaction which alters the assets or liabilities outside

India of persons resident in India. It also includes transactions that alter assets or liabilities in India of persons resident outside India. Currency: It is an assortment of currency notes, postal notes, postal orders, money orders, cheques,

drafts, travellers cheques, letter of credit, bills of exchange and promissory notes. Currency Notes: It includes cash in the form of coins and bank notes. Current Account Transactions : It means a transaction other than capital account transaction. Export : It simply means exporting of any goods or provision of services from India to any person

outside India. Financial Transaction : It means making any payment to, or for the credit of any person, or

receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt. Foreign Currency : It denotes any currency other than the Indian currency. Foreign Exchange :Money instruments used to make payments between countries. Foreign Security : Any security in the form of shares, stocks, bonds, debentures or any other

instrument denominated or expressed in foreign currency . It is only applicable where redemption or any form of return such as interest or dividends is payable in Indian currency. Import : It simply defines a process that facilitates bringing of goods or services into India. Indian Currency : Currency expressed in Indian rupee.

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Progression of FERA to FEMA and its contribution in development of FOREX Market in India. MFM (2nd Year II SEM), Div B Person : It includes an individual, a Hindu undivided family, a company, a firm, an association of

persons or a body of individuals, whether incorporated or not, every artificial juridical person and any agency, office or branch owned or controlled by such person. Person Resident in India : He is a person who lives a minimum of 182 days in India during the

preceding financial year. Repatriate to India : It means bringing into India the realized foreign exchange and selling of such

foreign exchange to an authorized person in India. Security : It means shares, stocks, bonds and debentures, Government securities, savings

certificates, deposit receipts in respect of deposits of securities and units of the Unit Trust of India or of any mutual fund and includes certificates of title to securities, but does not include bills of exchange or promissory notes other than Government promissory notes or any other instruments which may be notified by the Reserve Bank as security for the purposes of this Act . Service : It means service of any description which is made available to potential users and includes

the provision of facilities in all terms. Transfer : It includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of

transfer of right, title, possession or lien.

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TYPES OF FOREIGN EXCHANGE TRANSACTIONS

The Act deals with two types of foreign exchange transactions: A) Capital account transactions B) Current account transactions

A) Capital account transactions can be defined as:(1) Alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India. In other words, it includes those transactions which are undertaken by a resident of India such that his/her assets or liabilities outside India are altered (either increased or decreased). For example: (i) Vijay Mallya (resident of India) acquire an immovable property in UK (outside India) or acquire shares of a foreign company. It means the said transaction is known as Capital Account Transaction as he has increased his assets outside India. (ii) Tina Ambani (resident of India) borrows from a non-resident through External commercial Borrowings (ECBs). This way she has created a liability outside India.

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(2) Alters the assets or liabilities in India of person resident outside the India. In other words, it includes those transactions which are undertaken by a non-resident such that his/her assets or liabilities in India are altered (either increased or decreased). For example: (i) A non-resident acquires immovable property in India or acquires shares of an Indian company or invests in a Wholly Owned Subsidiary or a Joint Venture with a resident of India. This way his/her assets in India are increased; or (ii) a non-resident borrows from Indian housing finance institute for acquiring a house in India. This way he/she has created a liability in India.

The Act also contains a list of some of the most common capital account transactions:1. 2. 3. Transfer or issue of any foreign security by a person resident in India; Transfer or issue of any security by a person resident outside India; Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India; 4. 5. Any borrowing or lending in rupees in whatever form or by whatever name called; Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India; 6. 7. 8. Deposits between persons resident in India and persons resident outside India; Export, import or holding of currency or currency notes; Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India; 9. Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India; 10. Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred(i) By a person resident in India and owed to a person resident outside India; or (ii) By a person resident outside India.

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The Act has empowered the Reserve Bank of India (RBI) to specify, in consultation with the Central Government, the permissible capital account transactions and the limits up to which foreign exchange may be drawn for these such transactions. But it shall not impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.

Accordingly, the RBI has issued notifications governing capital account transaction. The FEMA Notification No. 1/2000 dated 3-5-2000 contains the list of permissible capital account transactions as well as list of prohibited capital account transactions. The permitted capital account transactions have been classified into two categories:-

(1) Capital account transactions by persons resident in India includes,1. Investment in foreign securities; e.g. An Indian Citizen can invest in Foreign Securities by way

of purchasing IDRs (Indian Depository Receipts).eg. IDR issued by the Standard Chartered bank. 2. Foreign currency loans raised in India and abroad;a. e.g. The foreign currency denominated loans in India are granted out of the pool of

foreign currency funds of the Bank in FCNR(B) Deposit etc. accounts as permitted by Reserve Bank of India. These loans are commonly known as FCNR(B) Loans. These loans are denominated in foreign currency such as US Dollars and are offered as short term loans. The interest is fixed with a reasonable spread over LIBOR.b. Tina Ambani (resident of India) borrows from a non-resident through External

commercial Borrowings (ECBs). 3. Maintenance of foreign currency accounts in India and outside India; a. e.g. A person who likes to deal in Foreign Currency can hold a Foreign Currency Accounts such as . NRI, NRO, FCNR, NRE and RFC. 4. Loans and overdrafts (borrowings) from a person resident outside India; 5. Acquisition and transfer of immovable property outside India; 6. Guarantees issued in favour of a person resident outside India; 7. Export, import and holding of currency or currency notes;

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8. Taking out the insurance policy from an insurance company outside India; 9. Remittance outside India of capital assets of a person resident in India 10. Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad.

(2) Capital account transactions by non- residents includes, 1. Investment in India such as (i) Issue of security by a body corporate or an entity in India and investment therein by a non-resident and (ii) Investment by way of contribution to the capital of a firm or a proprietary concern or an association of persons in India; 2. Acquisition and transfer of immovable property in India; 3. Guarantee in favour of, or on behalf of, a person resident in India; 4. Import and export of currency/currency notes into/from India; 5. Deposits between a person resident in India and a person resident outside India; 6. Foreign currency accounts in India of a non-resident; 7. Remittance of the assets in India held by a non-resident

There are generally two types of prohibitions on capital account transactions:1. General Prohibition:- A person shall not undertake or sell or draw foreign exchange to or from

an authorized person for any capital account transaction. This prohibition is subjected to the conditions specified by Reserve Bank in its circulars and notifications. For example, Reserve Bank of India has issued an AP (DIR) Circular, wherein a resident individual can draw from an authorized person foreign exchange up to US$ 25,000 per calendar year for a capital account transaction specified in Schedule I to the Notification.2. Special Prohibition:- A non resident person shall not make investment in India in any form, in

any company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage:-

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(i) (ii) (iii) (iv) (v)

in the business of chit fund, or as Nidhi Company, or in agricultural or plantation activities or in real estate business, or construction of farm houses or in trading in Transferable Development Rights (TDRs).

B) Current account transactions:The Act defines the term 'current account transaction' as a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes: (i) Payments due in connection with

Foreign trade, e.g. India Imports IT goods from USA, Defence products from Israel. Other current business Services, and Short-term banking and credit facilities in the ordinary course of business;

(ii) Payments due as

Interest on loans and e.g. Interest paid to world bank on loan taken for various infrastructure project in India.

Net income from investments,

(iii) Remittances for living expenses of parents, spouse and children residing abroad, and

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(iv) Expenses in connection with

Foreign travel, e.g. Amount spent by Bipasha Basu during her visit to Dubai. Education and e.g. Amount spent on children education based in other countries. Medical care of parents, spouse and children.

In the above definition, the words without prejudice to the generality of the foregoing such transaction includes imply that even if the transactions listed above may fit into the definition of capital account transactions, such transactions shall be treated current account transactions. For example, resident of India imports goods from outside India on a short term credit (for a period of less than 6 months), he is creating a liability outside India and thus, it can be treated a capital account transaction but, it is specifically included in the above definition as a current account transaction. As a general rule, any person may sell or draw foreign exchange if such sale or drawal is a current account transaction. Under the Act, Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed. Accordingly, the Central Government has issued the Foreign Exchange Management (Current Account Transaction) Rules, 2000.It contains the list of current account transactions for which drawal of foreign exchange is:1. 2.3.

Totally prohibited; Permitted, subject to the prior approval of concerned Ministry, Central Government; Permitted, subject to prior approval of the Reserve Bank of India;

No restrictions or limits are applicable for undertaking the transactions that are not covered by the above rules and the authorized dealers are free to release foreign exchange upon the satisfaction that the transactions will not involve and is not designed for the purpose of, violation of the Act, or any rules, regulations made there under.

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SALIENT FEATURES OF FROM MASTER CIRCULAR ON IMPORT OF GOODS AND SERVICES

Import of Goods and Services into India is being allowed in terms of section 5 of the Foreign Exchange Management Act, 1999 (42 of 1999), read with Notification No. G.S.R. 381(E), dated May 3, 2000 viz. Foreign Exchange Management (Current Account Transactions) Rules, 2000 as amended from time to time. This Master Circular consolidates the existing instructions on the subject of Import of Goods and Services at one place. The list of underlying circulars consolidated in this Master Circular is also furnished.

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This Master Circular is being issued with a sunset clause of one year. This circular will stand withdrawn on July 1, 2012 and be replaced by an updated Master Circular on the subject. Section A Introduction (i) Import trade is regulated by the Directorate General of Foreign Trade (DGFT) under the Ministry of Commerce & Industry, Department of Commerce, Government of India. Authorised Dealer Category-I (AD Category-I) banks should ensure that the imports into India are in conformity with the Foreign Trade Policy in force and Foreign Exchange Management (Current Account Transactions) Rules, 2000 framed by the Government of India vide Notification No. G.S.R. 381(E), dated May 3, 2000 and the Directions issued by Reserve Bank under Foreign Exchange Management Act, 1999 from time to time. (ii) AD Category-I banks should follow normal banking procedures and adhere to the provisions of Uniform Customs and Practices for Documentary Credits (UCPDC), etc. while opening letters of credit for import into India on behalf of their constituents. (iii) Compliance with the provisions of Research & Development Cess Act, 1986 may be ensured for import of drawings and designs. (iv) AD Category-I banks may also advise importers to ensure compliance with the provisions of Income Tax Act, wherever applicable. Section B- General Guidelines for imports B.1. General Guidelines Rules and regulations to be followed by the AD Category-I banks from the foreign exchange angle while undertaking import payment transactions on behalf of their clients are set out in the following paragraphs. Where specific regulations do not exist, AD Category-I banks may be governed by normal trade practices. AD Category-I banks may particularly note to adhere to Know Your Customer (KYC) guidelines issued by Reserve Bank (Department of Banking Operations & Development) in all their dealings. B.2. Form A-1 Applications by persons, firms and companies for making payments, exceeding USD 500 or its equivalent, towards imports into India must be made in Form A-1 (Annex 4). B.3. Import Licenses

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Except for goods included in the negative list which require licence under the Foreign Trade Policy in force, AD Category-I banks may freely open letters of credit and allow remittances for import. While opening letters of credit, the For Exchange Control purposes copy of the licence should be called for and special conditions, if any, attached to such licences should be adhered to. After effecting remittances under the licence, AD Category-I banks may preserve the copies of utilised licence/s till they are verified by the internal auditors or inspectors. B.4. Obligation of Purchaser of Foreign Exchange (i) In terms of section 10(6) of the Foreign Exchange Management Act, 1999 (FEMA), any person acquiring foreign exchange is permitted to use it either for the purpose mentioned in the declaration made by him to an Authorized Dealer Category-I bank under section 10(5) of the Act or to use it for any other purpose for which acquisition of foreign exchange is permissible under the said Act or Rules or Regulations framed there under. (ii) Where foreign exchange acquired has been utilized for import of goods into India, the AD Category-I bank should ensure that the importer furnishes evidence of import viz., Exchange Control copy of the Bill of Entry, Postal Appraisal Form or Customs Assessment Certificate, etc., and satisfy himself that goods equivalent to the value of remittance have been imported. (iii) In addition to the permitted methods of payment for imports laid down in Notification No. FEMA14/2000-RB, dated 3rd May 2000, payment for import can also be made by way of credit to non-resident account of the overseas exporter maintained with a bank in India. In such cases also AD Category-I banks should ensure compliance with the instructions contained in subparagraphs (i) and (ii) above. B.5. Time Limit for Settlement of Import Payments B.5.1. Time limit for normal imports (i) In terms of the extant regulations, remittances against imports should be completed not later than six months from the date of shipment, except in cases where amounts are withheld towards guarantee of performance, etc. (ii) AD Category-I banks may permit settlement of import dues delayed due to disputes, financial difficulties, etc. Interest in respect of delayed payments, usance bills or overdue interest for a period of less than three years from the date of shipment may be permitted in terms of the directions in para C-2 of Part III below. B.5.2. Time limit for deferred payment arrangements Deferred payment arrangements, including suppliers and buyers credit, providing for payments beyond a period of six months from date of shipment up to a period of less than three years, are treated as trade

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credits for which the procedural guidelines laid down in the Master Circular for External Commercial Borrowings and Trade Credits may be followed. B.5.3. Time limit for import of books Remittances against import of books may be allowed without restriction as to the time limit, provided, interest payment, if any, is as per the instructions in para C.2 of Part III of this Circular. B.6. Import of Foreign exchange/Indian Rupees (i) Except as otherwise provided in the Regulations, no person shall, without the general or special permission of the Reserve Bank, import or bring into India, any foreign currency. Import of foreign currency, including cheques, is governed by clause (g) of sub-section (3) of section 6 of the Foreign Exchange Management Act, 1999, and the Foreign Exchange Management (Export and Import of Currency) Regulations, 2000, made by Reserve Bank vide Notification No. FEMA 6/2000-RB dated May 3, 2000, as amended from time to time. (ii) Reserve Bank may allow a person to bring into India currency notes of Government of India and/or of Reserve Bank subject to such terms and conditions as the Reserve Bank may stipulate.

B.6.1. Import of foreign exchange into India A person may (i) send into India without limit foreign exchange in any form other than currency notes, bank notes and travelers cheques; (ii) bring into India from any place outside India, without limit foreign exchange (other than unissued notes), which shall be subject to the condition that such person makes, on arrival in India, a declaration to the Custom Authorities at the Airport in the Currency Declaration Form (CDF) annexed to these Regulations; provided further that it shall not be necessary to make such declaration where the aggregate value of the foreign exchange in the form of currency notes, bank notes or travellers cheques brought in by such person at any one time does not exceed USD10,000 (US Dollars ten thousand) or its equivalent and/or the aggregate value of foreign currency notes (cash portion) alone brought in by such person at any one time does not exceed USD 5,000 (US Dollars five thousand) or its equivalent. B.6.2. Import of Indian currency and currency notes (i) Any person resident in India who had gone out of India on a temporary visit, may bring into India at the time of his return from any place outside India (other than from Nepal and Bhutan),

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currency notes of Government of India and Reserve Bank notes up to an amount not exceeding Rs. 7,500 per person. (ii) A person may bring into India from Nepal or Bhutan, currency notes of Government of India and Reserve Bank notes other than notes of denominations of above Rs.100 in either case. Section C Operational Guidelines for Imports C.1. Advance Remittance C.1.1. Advance Remittance for import of goods (i) AD Category-I bank may allow advance remittance for import of goods without any ceiling subject to the following conditions: (a) If the amount of advance remittance exceeds USD 200,000 or its equivalent, an unconditional, irrevocable standby Letter of Credit or a guarantee from an international bank of repute situated outside India or a guarantee of an AD Category-I bank in India, if such a guarantee is issued against the counter-guarantee of an international bank of repute situated outside India, is obtained. (b) In cases where the importer (other than a Public Sector Company or a Department/Undertaking of the Government of India/State Government/s) is unable to obtain bank guarantee from overseas suppliers and the AD Category-I bank is satisfied about the track record and bona fides of the importer, the requirement of the bank guarantee/standby Letter of Credit may not be insisted upon for advance remittances up to USD 5,000,000 (US Dollar five million). AD Category-I banks may frame their own internal guidelines to deal with such cases as per a suitable policy framed by the banks Board of Directors. (c) A Public Sector Company or a Department/Undertaking of the Government of India/State Government which is not in a position to obtain a guarantee from an international bank of repute against an advance payment, is required to obtain a specific waiver for the bank guarantee from the Ministry of Finance, Government of India before making advance remittance exceeding USD 100, 000. (ii) All payments towards advance remittance for imports shall be subject to the specified conditions. C.1.2. Advance Remittance for Import of Rough Diamonds (i) AD Category-I bank are permitted to allow advance remittance without any limit and without bank guarantee or standby Letter of Credit, by an importer (other than a Public Sector Company or a Department/Undertaking of the Government of India/State Government/s), for import of rough diamonds into India from the under noted mining companies, viz. (a) De Beers UK Ltd.,

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(b) RIO TINTO, UK, (c) BHP Billiton, Australia, (d) ENDIAMA, E. P. Angola, (e) ALROSA, Russia, (f) GOKHARAN, Russia, (g) Rio Tinto, Belgium, (h) BHP Billiton, Belgium and (i) Namibia Diamond Trading Company (PTY) Ltd. (NDTC). (ii) While allowing the advance remittance, AD bank may ensure the following: (a) The importer should be a recognized processor of rough diamonds as per the list to be approved by Gems and Jewellery Export Promotion Council (GJEPC) in this regard and should have a good track record of export realisation; (b) AD Category-I bank should undertake the transaction based on their commercial judgment and after being satisfied about the bona fides of the transaction; (c) Advance payments should be made strictly as per the terms of the sale contract and should be made directly to the account of the company concerned, that is, to the ultimate beneficiary and not through numbered accounts or otherwise. Further, due caution may be exercised to ensure that remittance is not permitted for import of conflict diamonds; (d) KYC and due diligence exercise should be done by the AD Category-I bank for the Indian importer entity and the overseas company; and (e) AD Category-I bank should follow up submission of the Bill of Entry/documents evidencing import of rough diamonds into the country by the importer, in terms of FEMA/Rules/Regulations/Directions issued in this regard. (iii) In case of an importer entity in the Public Sector or a Department/Undertaking of the Government of India/State Government/s, AD Category-I bank may permit advance remittance subject to the above conditions and a specific waiver of bank guarantee from the Ministry of Finance, Government of India where the advance payments is equivalent to or exceeds USD 100,000. (iv) AD Category-I banks are required to submit a report in the format annexed (Annex 2) of all such advance remittances made without a bank guarantee or Standby Letter of Credit, where the amount of advance payment is equivalent to or exceeds USD 5,000,000, to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Trade Division, Central Office, Amar Building, Sir. P. M. Road, Fort, Mumbai 400 001, on a half-yearly basis as at the end of September and March every year. The report should be submitted within 15 days from the close of the respective half year. C.1.3. Advance Remittance for Import of Aircrafts/Helicopters and other Aviation Related purchases

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As a sector specific measure, airline companies which have been permitted by the Directorate General of Civil Aviation to operate as a schedule air transport service, can make advance remittance without bank guarantee, up to USD 50 million. Accordingly, AD Category-I banks may allow advance remittance, without obtaining a bank guarantee or an unconditional, irrevocable Standby Letter of Credit, up to USD 50 million, for direct import of each aircraft, helicopter and other aviation related purchases. The remittances for the above transactions shall be subject to the following conditions: (i) The AD Category-I banks should undertake the transactions based on their commercial judgment and after being satisfied about the bona fide of the transactions. KYC and due diligence exercise should be done by the AD Category-I banks for the Indian importer entity and the overseas manufacturer company as well. (ii) Advance payments should be made strictly as per the terms of the sale contract and are made directly to the account of the manufacturer (supplier) concerned. (iii) AD Category-I bank may frame their own internal guidelines to deal with such cases, with the approval of their Board of Directors. (iv) In the case of a Public Sector Company or a Department/Undertaking of Central/State Governments, the AD Category-I bank shall ensure that the requirement of bank guarantee has been specifically waived by the Ministry of Finance, Government of India for advance remittances exceeding USD 100,000. (v) Physical import of goods into India is made within six months (three years in case of capital goods) from the date of remittance and the importer gives an undertaking to furnish documentary evidence of import within fifteen days from the close of the relevant period. It is clarified that where advance is paid as milestone payments, the date of last remittance made in terms of the contract will be reckoned for the purpose of submission of documentary evidence of import. (vi) Prior to making the remittance, the AD Category-I bank may ensure that the requisite approval of the Ministry of Civil Aviation/DGCA/other agencies in terms of the extant Foreign Trade Policy has been obtained by the company, for import. (vii) In the event of non-import of aircraft and aviation sector related products, AD Category-I bank should ensure that the amount of advance remittance is immediately repatriated to India. Prior approval of the Regional Office concerned of the Reserve Bank will be required in case of any deviation from the above stipulations. C.1.4. Advance Remittance for the import of services AD Category-I bank may allow advance remittance for import of services without any ceiling subject to the following conditions : (a) Where the amount of advance exceeds USD 500,000 or its equivalent, a guarantee from a bank of international repute situated outside India, or a guarantee from an AD Category-I bank in

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India, if such a guarantee is issued against the counter-guarantee of a bank of international repute situated outside India, should be obtained from the overseas beneficiary. (b) In the case of a Public Sector Company or a Department/Undertaking of the Government of India/State Governments, approval from the Ministry of Finance, Government of India for advance remittance for import of services without bank guarantee for an amount exceeding USD 100,000 (USD One hundred thousand) or its equivalent would be required. (c) AD Category-I banks should also follow-up to ensure that the beneficiary of the advance remittance fulfils his obligation under the contract or agreement with the remitter in India, failing which, the amount should be repatriated to India. C.2. Interest on Import Bills (i) AD Category-I bank may allow payment of interest on usance bills or overdue interest for a period of less than three years from the date of shipment at the rate prescribed for trade credit from time to time. (ii) In case of pre-payment of usance import bills, remittances may be made only after reducing the proportionate interest for the unexpired portion of usance at the rate at which interest has been claimed or LIBOR of the currency in which the goods have been invoiced, whichever is applicable. Where interest is not separately claimed or expressly indicated, remittances may be allowed after deducting the proportionate interest for the unexpired portion of usance at the prevailing LIBOR of the currency of invoice.

C.3. Remittances against Replacement Imports Where goods are short-supplied, damaged, short-landed or lost in transit and the Exchange Control copy of the import license has already been utilised to cover the opening of a letter of credit against the original goods which have been lost, the original endorsement to the extent of the value of the lost goods may be cancelled by the AD Category-I bank and fresh remittance for replacement imports may be permitted without reference to Reserve Bank, provided the insurance claim relating to the lost goods has been settled in favour of the importer. It may be ensured that the consignment being replaced is shipped within the validity period of the license. C.4. Guarantee for Replacement Import

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In case replacement goods for defective import are being sent by the overseas supplier before the defective goods imported earlier are reshipped out of India, AD Category-I banks may issue guarantees at the request of importer client for dispatch/return of the defective goods, according to their commercial judgment. C.5. Import of Equipment by Business Process Outsourcing (BPO) Companies for their overseas sites AD Category-I bank may allow BPO companies in India to make remittances towards the cost of equipment to be imported and installed at their overseas sites in connection with the setting up of their International Call Centres (ICCs) subject to the following conditions : (i) The BPO company should have obtained necessary approval from the Ministry of Communications and Information Technology, Government of India and other authorities concerned for setting up of the ICC. (ii) The remittance should be allowed based on the AD Category-I banks commercial judgment, the bona fides of the transactions and strictly in terms of the contract. (iii) The remittance is made directly to the account of the overseas supplier. (iv) The AD Category-I banks should also obtain a certificate as evidence of import from the Chief Executive Officer (CEO) or auditor of the importer company that the goods for which remittance was made have actually been imported and installed at overseas sites.

C.6. Receipt of Import Bills/Documents C.6.1. Receipt of import documents by the importer directly from overseas suppliers Import bills and documents should be received from the banker of the supplier by the banker of the importer in India. AD Category-I bank should not, therefore, make remittances where import bills have been received directly by the importers from the overseas supplier, except in the following cases: (i) Where the value of import bill does not exceed USD 300,000. (ii) Import bills received by wholly-owned Indian subsidiaries of foreign companies from their principals.

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(iii) Import bills received by Status Holder Exporters as defined in the Foreign Trade Policy, 100% Export Oriented Units/Units in Special Economic Zones, Public Sector Undertakings and Limited Companies. (iv) Import bills received by all limited companies viz. public limited, deemed public limited and private limited companies. C.6.2. Receipt of import documents by the importer directly from overseas suppliers in case of specified sectors As a sector specific measure, AD Category-I banks are permitted to allow remittance for imports up to USD 300,000 where the importer of rough diamonds, rough precious and semi-precious stones has received the import bills/documents directly from the overseas supplier and the documentary evidence for import is submitted by the importer at the time of remittance. AD Category-I banks may undertake such transactions subject to the following conditions: (i) The import would be subject to the prevailing Foreign Trade Policy. (ii) The transactions are based on their commercial judgment and they are satisfied about the bona fides of the transactions. (iii) AD Category-I banks should do the KYC and due diligence exercise and should be fully satisfied about the financial standing/status and track record of the importer customer. Before extending the facility, they should also obtain a report on each individual overseas supplier from the overseas banker or reputed overseas credit rating agency. C.6.3. Receipt of import documents by the AD Category-I bank directly from overseas suppliers (i) At the request of importer clients, AD Category-I bank may receive bills directly from the overseas supplier as above, provided the AD Category-I bank is fully satisfied about the financial standing/status and track record of the importer customer. (ii) Before extending the facility, the AD Category-I bank should obtain a report on each individual overseas supplier from the overseas banker or a reputed overseas credit agency. However, such credit report on the overseas supplier need not be obtained in cases where the invoice value does not exceed USD 300,000 provided the AD Category-I bank is satisfied about the bona fides of the transaction and track record of the importer constituent. C.7. Evidence of Import C.7.1. Physical Imports (i) In case of all imports, where value of foreign exchange remitted/paid for import into India exceeds USD 100,000 or its equivalent, it is obligatory on the part of the AD Category-I bank through whom the relative remittance was made, to ensure that the importer submits :(a) The Exchange Control copy of the Bill of Entry for home consumption, or (b) The Exchange Control copy of the Bill of Entry for warehousing, in case of 100% Export Oriented Units, or

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(c) Customs Assessment Certificate or Postal Appraisal Form, as declared by the importer to the Customs Authorities, where import has been made by post, as evidence that the goods for which the payment was made have actually been imported into India. (ii) In respect of imports on D/A basis, AD Category-I bank should insist on production of evidence of import at the time of effecting remittance of import bill. However, if importers fail to produce documentary evidence due to genuine reasons such as non-arrival of consignment, delay in delivery/customs clearance of consignment, etc., AD bank may, if satisfied with the genuineness of request, allow reasonable time, not exceeding three months from the date of remittance, to the importer to submit the evidence of import. C.7.2. Evidence of import in lieu of Bill of Entry (i) AD Category-I bank may accept, in lieu of Exchange Control copy of Bill of Entry for home consumption, a certificate from the CEO or auditor of the company that the goods for which remittance was made have actually been imported into India provided :(a) the amount of foreign exchange remitted is less than USD 1,000,000 or its equivalent, (b) the importer is a company listed on a stock exchange in India and whose net worth is not less than Rs.100 crore as on the date of its last audited balance sheet, or, the importer is a public sector company or an undertaking of the Government of India or its departments. (ii) The above facility may also be extended to autonomous bodies, including scientific bodies/academic institutions, such as Indian Institute of Science/Indian Institute of Technology, etc. whose accounts are audited by the Comptroller and Auditor General of India (CAG). AD Category-I bank may insist on a declaration from the auditor/CEO of such institutions that their accounts are audited by CAG. C.7.3. Non Physical Imports (i) Where imports are made in non-physical form, i.e., software or data through internet/datacom channels and drawings and designs through e-mail/fax, a certificate from a Chartered Accountant that the software/data/drawing/design has been received by the importer, may be obtained. (ii) AD Category-I bank should advise importers to keep Customs Authorities informed of the imports made by them under this clause. C.8. Issue of acknowledgement AD Category-I bank should acknowledge receipt of evidence of import e.g. Exchange Control copy of the Bill of Entry, Postal Appraisal Form or Customs Assessment Certificate, etc., from importers by issuing acknowledgement slips containing all relevant particulars relating to the import transactions. C.9. Verification and Preservation

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(i) Internal inspectors or auditors (including external auditors appointed by AD Category-I bank) should carry out verification of the documents evidencing import, e.g. Exchange Control copies of Bills of Entry or Postal Appraisal Forms or Customs Assessment Certificates, etc. (ii) Documents evidencing import into India should be preserved by AD Category-I bank for a period of one year from the date of its verification. However, in respect of cases which are under investigation by investigating agencies, the documents may be destroyed only after obtaining clearance from the investigating agency concerned. C.10. Follow up for Import Evidence (i) In case an importer does not furnish any documentary evidence of import, as required under paragraph C.7. of Part III, within 3 months from the date of remittance involving foreign exchange exceeding USD 100,000, the AD Category-I bank should rigorously follow-up for the next 3 months, including issuing registered letters to the importer. (ii) AD Category-I bank should forward a statement on half-yearly basis as at the end of June & December of every year, in form BEF (Annex 1) furnishing details of import transactions, exceeding USD 100,000 in respect of which importers have defaulted in submission of appropriate document evidencing import within 6 months from the date of remittance, to the Regional Office of Reserve Bank under whose jurisdiction the AD Category-I bank is functioning, within 15 days from the close of the half-year to which the statement relates. (iii) AD Category-I bank need not follow up submission of evidence of import involving amount of USD 100,000 or less provided they are satisfied about the genuineness of the transaction and the bona fides of the remitter. A suitable policy may be framed by the banks Board of Directors and AD Category-I bank may set their own internal guidelines to deal with such cases. C.11. Issue of Bank Guarantee AD Category-I banks are permitted to issue guarantee on behalf of their importer customers in terms of Notification No. FEMA 8/2000-RB, dated May 3, 2000, as amended from time to time.

C.12. Import of Gold/Platinum/Silver by Nominated Banks/Agencies C.12.1. Import on consignment basis Gold may be imported by the nominated agencies/banks on consignment basis where the ownership will remain with the supplier and the importer (consignee) will be acting as an agent of the supplier (consignor). Remittances towards the cost of import shall be made as and when sales take place and in

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terms of the provisions of agreement entered into between the overseas supplier and nominated agency/bank. These instructions would also apply to import of platinum and silver. C.12.2. Import on unfixed price basis The nominated agency/bank may import gold on outright purchase basis subject to the condition that although ownership of the gold shall be passed on to the importer at the time of import itself, the price of gold shall be fixed later, as and when the importer sells the gold to the users. These instructions would also apply to import of platinum and silver. C.13. Direct Import of Gold AD Category-I bank can open Letters of Credit and allow remittances on behalf of EOUs, units in SEZs in the Gem & Jewellery sector and the nominated agencies/banks, for direct import of gold, subject to the following : (i) The import of gold should be strictly in accordance with the Foreign Trade Policy. (ii) Suppliers and Buyers Credit, including the usance period of LCs opened for direct import of gold, should not exceed 90 days. (iii) Bankers prudence should be strictly exercised for all transactions pertaining to import of gold. AD Category-I bank should ensure that due diligence is undertaken and all Know Your Customer (KYC) norms and the Anti-Money-Laundering guidelines, issued by Reserve Bank from time to time are adhered to while undertaking such transactions. AD Category-I bank should closely monitor such transactions. Any large or abnormal increase in the volume of business of the importer should be closely examined to ensure that the transactions are bona fide trade transactions. (iv) In addition to carrying out the normal due diligence exercise, the credentials of the supplier should also be ascertained before opening the LCs. The financial standing, line of business and the net worth of the importer customer should be commensurate with the volume of business turnover. Apart from the above, in case of such transactions banks should also make discreet enquiries from other banks to assess the actual position. Further, in order to establish audit trail of import/export transactions, all documents pertaining to such transactions must be preserved for at least five years. (v) AD Category-I bank should follow up submission of the Bill of Entry by the importers as stipulated. (vi) Head Offices/International Banking Divisions of AD Category-I banks undertaking gold import transactions are required to submit as per the format enclosed at Annex 3, a monthly statement thereof, to the Chief General Manager, Trade Division, Foreign Exchange Department, Amar Building, Central Office, Reserve Bank of India, Sir P.M. Road, Fort, Mumbai 400001.

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C.14. Gold Loans (i) Nominated agencies/authorised banks can import gold on loan basis for on lending to exporters of jewellery under this scheme. (ii) EOUs and units in SEZ who are in the Gem and Jewellery sector can import gold on loan basis for manufacturing and export of jewellery on their own account only. (iii) The maximum tenor of gold loan would be as per the Foreign Trade Policy 2009-2014, or as notified by the Government of India from time to time in this regard. (iv) AD bank may open Standby Letters of Credit (SBLC), for import of gold on loan basis, where ever required, as per FEDAI guidelines dated April 1, 2003. The tenor of the SBLC should be in line with the tenor of the gold loan. (v) SBLC can be opened only on behalf of entities permitted to import gold on loan basis, viz. nominated agencies and 100% EOUs/units in SEZ, which are in the Gem and Jewellery sector. (vi) SBLC should be in favour of internationally renowned bullion banks only. AD Category-I bank can obtain a detailed list of internationally renowned bullion banks from the Gem & Jewellery Export Promotion Council. (vii) All other existing instructions on import of gold and opening of Letters of Credit, with usance period not exceeding 90 days, will continue to be applicable. (viii)AD Category-I banks must maintain adequate documentation with them to uniquely link all imports with the SBLC issued for the import of gold on loan basis. C.15. Import of Platinum, Palladium, Rhodium, Silver and rough, cut & polished diamonds (a) Suppliers and Buyers credit, including the usance period of Letters of Credit opened for import of Platinum, Palladium, Rhodium and Silver and rough, cut and polished diamonds should not exceed 90 days from the date of shipment. (b) AD Category-I banks should ensure that due diligence is undertaken and Know Your Customer (KYC) norms and Anti-Money Laundering (AML) guidelines, issued by the Reserve Bank are adhered to while undertaking import of the metals and rough, cut and polished diamonds. Further, any large or abnormal increase in the volume of business should be closely examined to ensure that the transactions are bona fide and are not intended for interest/currency arbitrage. All other instructions relating to import of these metals and rough, cut and polished diamonds shall continue.

C.16. Import factoring (i) AD Category-I bank may enter into arrangements with international factoring companies of repute, preferably members of Factors Chain International, without the approval of Reserve Bank.

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(ii) They will have to ensure compliance with the extant foreign exchange directions relating to imports, Foreign Trade Policy in force and any other guidelines/directives issued by Reserve Bank in this regard. C.17. Merchanting Trade AD Category-I bank may take necessary precautions in handling bona fides merchanting trade transactions or intermediary trade transactions to ensure that : (a) Goods involved in the transactions are permitted to be imported into India and all the rules, regulations and directions applicable to export (except Export Declaration Form) and import (except Bill of Entry) are complied with for the export leg and import leg, respectively. (b) The entire merchant trade transaction is completed within a period of 6 months. (c) The transactions do not involve foreign exchange outlay for a period exceeding three months. (d) Payment is received in time for the export leg. (e) Where the payment for export leg of the transaction precedes the payment for import leg, AD Category-I banks should ensure that the terms of payment are such that the liability for the import leg of the transaction is extinguished by the payment received for the export leg of the transaction, without any delay. AD Category-I banks may note that short-term credit either by way of suppliers credit or buyers credit is not available for merchanting trade or intermediary trade transactions.

SALIENT FEATURES OF FROM MASTER CIRCULAR ON EXPORT OF GOODS AND SERVICES1. The Directorate General of Foreign Trade (DGFT) regulates export trade.

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2. AD Banks may conduct export transactions in conformity with the Foreign Trade Policy in vogue and the Rules framed by the Government of India and the Directions issued by Reserve Bank from time to time. 3. Rules notified by the Government of India, Ministry of Finance. 4. Regulation 4 of the Foreign Exchange Management (Guarantees) Regulations, 2000 5. There is no restriction on invoicing of export contracts in Indian Rupees in terms of the Rules, Regulations, Notifications and Directions framed under the Foreign Exchange Management Act 1999. 6. Full export value of the goods exported shall be received through an AD Banks in the manner specified in the Foreign Exchange Management (Manner of Receipt & Payment) Regulations, 2000. 7. GR Exemption: Grant of GR waiver export of goods free of cost, for export promotion up to 2 per cent of the annual average Max 5 lakhs (Rs 10 lac for status holders ).Export of goods not involving any foreign exchange transaction directly or indirectly requires the waiver of GR/PP procedure from the Reserve Bank. 8. Participants in international exhibition/trade fair have been granted general permission vide Regulation 7(7) of the Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2000 for opening a temporary foreign currency account abroad. 9. Reserve Bank may consider applications in Form EFC from exporters having good track record for opening a foreign currency account with banks in India and outside India. 10. An Indian entity can also open, hold and maintain a foreign currency account with a bank outside India, in the name of its overseas office/branch, by making remittance for the purpose of normal business operations of the said office / branch or representative subject to conditions stipulated in Regulation 7 of Notification No. FEMA 10/2000-RB dated May 3rd, 2000. 11. A unit located in a Special Economic Zone (SEZ) may open, hold and maintain a Foreign Currency Account with an AD Banks in India subject to conditions stipulated in Regulation 6 (A) of Notification No. FEMA 10/2000. 12. A person resident in India may open with, an AD Banks in India, an account in foreign currency called the Exchange Earners Foreign Currency (EEFC) Account, in terms of Regulation 4 of the

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Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2000. 13. Account maintained only in the form of non-interest bearing current account and no credit facilities, either fund-based or non-fund based, shall be permitted against the security of balances held. 14. Eligible credits represent inward remittance received through normal banking channel, other than the remittance received pursuant to any undertaking given to the Reserve Bank or which represents foreign currency loan raised or investment received from outside India or those received for meeting specific obligations by the account holder, Payments received in foreign exchange by a unit in Domestic Tariff Area (DTA) for supplying goods to a unit in Special Economic Zone out of its foreign currency account. 15. Setting up Offices Abroad and Acquisition of Immovable Property for Overseas Offices. 16. AD Banks may allow remittances towards initial expenses up to fifteen per cent of the average annual sales/income or turnover during the last two financial years or up to twenty-five per cent of the net worth, whichever is higher and For recurring expenses, remittances up to ten per cent of the average annual sales/income, subject to certain terms conditions and obligations. Remittances also allowed to acquire immovable property outside India for its business and for residential purpose of its staff.17. Advance Payments against Exports Regulation 16 of FEMA 23 dated May 3, 2000, where an

exporter receives advance payment (with or without interest), from a buyer outside India, the exporter shall ensure that, shipment of goods is made within one year from the date of receipt, interest, if any, payable on the advance payment does not exceed LIBOR+ 100 basis points, documents covering the shipment are routed through the AD Bank through whom the advance payment is received; 18. In the event of the exporter's inability to make the shipment, partly or fully, within one year from the date of receipt of advance payment, no remittance towards refund of unutilised portion of advance payment or towards payment of interest, shall be made after the expiry of the said period of one year, without the prior approval of the Reserve Bank. Where the export agreement provides for shipment of goods extending beyond the period of one year from the date of receipt of advance payment, the exporter shall require the prior approval of the Reserve Bank.

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19. Allowed to purchase of foreign exchange from the market for refunding advance payment credited to EEFC account only after utilising the entire balances held in the exporters EEFC accounts maintained at different branches/banks.20. GR Approval for Trade Fair: Organisations participating in Trade Fair/Exhibition abroad can

take/export goods for exhibition and sale outside India without the prior approval of the Reserve Bank of India. Permissible to `gift' unsold goods up to the value of USD 5000 per exporter, per exhibition/trade fair. 21. Exporter shall produce relative Bill of Entry within one month of re-import into India of the unsold items. Sale proceeds of the items sold arerepatriated to India in accordance with the Foreign Exchange Management (Realisation, Repatriation, and Surrender of Foreign Exchange) Regulations, 2000.

IMPORT-EXPORT FLOW CHART:

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Progression of FERA to FEMA and its contribution in development of FOREX Market in India. MFM (2nd Year II SEM), Div BApproval Documents Required in Customs Declaration for Imports of Special Commodities

Commodity Endangered wild animals and plants

Item

Approving Authorities Application should be made by the importer to the provincial wild animals and plants administration department, which should prepare a recommendation within 10 working days of the application and submit it together with all application materials to the State Council's wild animals and plants administration department for approval.

Approval Documents Import and Export Approval Certificate

Food products

Labeling

Application should be made prior to imports by the Imported Food distributor or agent of imported food products for food Labeling Examination labelling examination to the designated inspection and Certificate quarantine authorities, which should submit application materials together with preliminary examination results to the General Administration of Quality Supervision, Inspection and Quarantine for approval. Application for cosmetics labeling examination should be made by the distributor or agent of imported cosmetics to the General Administration of Quality Supervision, Inspection and Quarantine 90 working days before submitting the goods for inspection. Imported Cosmetics Examination Certificate

Cosmetics

Labeling

Drugs

Anabolic agents Application should be made by the importer to the and peptide State Food and Drug Administration, which should hormones decide within five days on whether the application is accepted and decide within 10 days of the acceptance of application whether imports are allowed. Narcotic drugs and psychotropic drugs Application should be made to the State Food and Drug Administration.

Special Drugs Import License

Narcotic Drugs Import License or Psychotropic Drugs Import License

EXPORT PROCESS FLOW, PROCEDURE & DOCUMENTATION:

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Impact of PROGRESSION FROM FERA TO FEMA on Economy & markets We shall discuss the impact of conversion on the following Import, Export and Balance of Trade. Rupee progress FDI External debt Trade Credit Capital Account convertibility

Import, Export and Balance of Trade.

Values in Rs '00 Crore Export Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-2012(Apr2,090.1 8 2,551.3 7 2,933.6 7 3,753.4 0 4,564.1 8 5,717.7 9 6,558.6 4 8,407.5 5 8,455.3 4 11,426.4 9 3,252.5 2,452.0 0 2,972.0 6 3,591.0 8 4,813.7 2 5,741.9 1 8,405.0 6 10,123.1 2 13,744.3 5 13,637.3 6 16,834.6 7 5,410.2 Import Total Trade 4,538.7 0 5,519.0 2 6,519.7 3 8,566.0 3 10,304.1 9 14,122.4 6 16,680.3 4 22,151.4 6 22,091.4 6 28,261.0 2 8,659.0 Trade Balance (361.8 2) (420.6 9) (657.4 1) (1,060.3 2) (1,177.7 3) (2,687.2 7) (3,564.4 8) (5,336.8 0) (5,182.0 2) (5,408.1 8) (2,157.7

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Jun)

0

1

8

0)

The global slowdown had its impact on the economy of almost all the countries, including India. The trade deficit in 2008-09 was much more (49.72 %) compare to the previous two years. As such Indias trade deficit stood at Rs. 533680 crores during 2008-09 with values of exports and imports at Rs. 840755 crores and Rs. 1374436 crores respectively. However, as may be seen from above Table below that the position was better in 2009-10 as the trade deficit had decreased (2.90 %) compare to last year. This happened due to the negative growth of import during 2009-10 ( 0.78 %). The trade deficit in 2009-10 was Rs. 518202 crores with values of exports and imports as Rs. 845534 crores and Rs. 1363736 crores respectively. The trade deficit in 2010-11 was Rs. 5480818 crores with values of exports and imports as Rs. 1142649 crores and Rs. 1683467 crores respectively.

INR in 00 Crores Year Import Export BOP

01-02 2,452 2,090 33%

02-03 2,972 2,551 16%

03-04 3,591 2,934 56%

04-05 05-06 06-07 07-08 08-09 4,814 5,742 8,405 10,123 13,744 3,753 4,564 5,718 6,559 8,408 61% 11% 128% 33% 50%

09-10 10-11 11-12(Apr-Jun) 13,637 16,835 5,410 8,455 11,426 3,253 -3% 4% -60%

Page45 of 85


Import, Export and BOT18,000 16,000 14,000 100% 150%

Inr 00' Crores

12,000 10,000 8,000 6,000 4,000 2,000 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 1112(AprJun)

0%

-50%

-100%

Import

Export Years

BOP

Top 5 commodities contributing to the Export Figures of India.INR in CroresS.No. 1 Commodity MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES. NATURAL OR CULTURED PEARLS,PRECIOUS OR SEMIPRECIOUS STONES,PRE.METALS,CLAD WITH PRE.METAL AND ARTCLS THEREOF;IMIT.JEWLRY;COIN. SHIPS, BOATS AND FLOATING STRUCTURES. ORGANIC CHEMICALS 2007-08 2008-09 2009-10 2010-11 2011-12

116,8 78

127, 324

136, 854

193, 386

% Change

50%

69, 225

2

79,7 63 7,0 87 28,8 70

3 4 5

128, 827 16, 818 34, 058

138, 148 12, 392 35, 241

182, 335 24, 152 41, 569

52, 847 15, 281 11, 986

ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS THEREOF; SOUND RECORDERS AND REPRODUCERS, TELEVISION IMAGE AND SOUND RECORDERS AND REPRODUCERS,AND PARTS.

21,5 19

43, 723

34, 325

49, 310

11, 755

% of Share in total Export of IndiaS.No. Commodity 2007-08 2008-09 2009-10 2010-11 2011-12

Page46 of 85

Progression of FERA to FEMA and its contribution in development of FOREX Market in India. MFM (2nd Year II SEM), Div B1 MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES. NATURAL OR CULTURED PEARLS,PRECIOUS OR SEMIPRECIOUS STONES,PRE.METALS,CLAD WITH PRE.METAL AND ARTCLS THEREOF;IMIT.JEWLRY;COIN. SHIPS, BOATS AND FLOATING STRUCTURES. ORGANIC CHEMICALS ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS THEREOF; SOUND RECORDERS AND REPRODUCERS, TELEVISION IMAGE AND SOUND RECORDERS AND REPRODUCERS,AND PARTS.

18%

15%

16%

17%

0%

2

3 4 5

12% 1% 4%

15% 2% 4%

16% 1% 4%

16% 2% 4%

0% 0% 0%

3%

5%

4%

4%

0%

YOY Growth In %S.No. 1 Commodity MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES. NATURAL OR CULTURED PEARLS,PRECIOUS OR SEMIPRECIOUS STONES,PRE.METALS,CLAD WITH PRE.METAL AND ARTCLS THEREOF;IMIT.JEWLRY;COIN. SHIPS, BOATS AND FLOATING STRUCTURES. ORGANIC CHEMICALS ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS THEREOF; SOUND RECORDERS AND REPRODUCERS, TELEVISION IMAGE AND SOUND RECORDERS AND REPRODUCERS,AND PARTS. 2007-08 2008-09 2009-10 2010-11 2011-12

37%

9%

7%

41%

0%

2

10% 52% 11%

62% 137% 18%

7% -26% 3%

32% 95% 18%

0% 0% 0%

3 4 5

16%

103%

-21%

44%

0%

Page47 of 85


Top 5 commodities contributing to the Export Figures of India.INR in CroresS.No. 1 2 Commodity MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES. NATURAL OR CULTURED PEARLS,PRECIOUS OR SEMIPRECIOUS STONES,PRE.METALS,CLAD WITH PRE.METAL AND ARTCLS THEREOF;IMIT.JEWLRY;COIN. NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL APPLIANCES; PARTS THEREOF. ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS THEREOF; SOUND RECORDERS AND REPRODUCERS, TELEVISION IMAGE AND SOUND RECORDERS AND REPRODUCERS,AND PARTS. ORGANIC CHEMICALS 2007-08 2008-09 2009-10 2010-11 2011-12

116, 878 79, 763 7 ,087 28, 870 21, 519

466, 747 197, 015 121, 154 115, 062 38, 853

455, 179 218, 248 113, 683 104, 766 44, 505

527, 788 350, 396 132, 162 123, 859 57, 550

194, 782 117, 397 41, 561 36, 691 16, 235

3 4

5

% of Share in total Export of IndiaS.No. 1 2 Commodity MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES. NATURAL OR CULTURED PEARLS,PRECIOUS OR SEMIPRECIOUS STONES,PRE.METALS,CLAD WITH PRE.METAL AND ARTCLS THEREOF;IMIT.JEWLRY;COIN. NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL APPLIANCES; PARTS THEREOF. ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS THEREOF; SOUND RECORDERS AND REPRODUCERS, TELEVISION IMAGE AND SOUND RECORDERS AND REPRODUCERS,AND PARTS. 2007-08 2008-09 2009-10 2010-11 2011-12

34%

34%

33%

31%

11% 10%

14% 9%

16% 8%

21% 8%

3 4

8%

8%

8%

7%

Page48 of 85

Progression of FERA to FEMA and its contribution in development of FOREX Market in India. MFM (2nd Year II SEM), Div B5 ORGANIC CHEMICALS

3%

3%

3%

3%

YOY Growth In %S.No. 1 2 Commodity MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES. NATURAL OR CULTURED PEARLS,PRECIOUS OR SEMIPRECIOUS STONES,PRE.METALS,CLAD WITH PRE.METAL AND ARTCLS THEREOF;IMIT.JEWLRY;COIN. NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL APPLIANCES; PARTS THEREOF. ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS THEREOF; SOUND RECORDERS AND REPRODUCERS, TELEVISION IMAGE AND SOUND RECORDERS AND REPRODUCERS,AND PARTS. ORGANIC CHEMICALS 2007-08 2008-09 2009-10 2010-11 2011-12

24%

34%

-2%

16%

4% 21%

85% 19%

11% -6%

61% 16%

3 4

5

23% 19%

42% 19%

-9% 15%

18% 29%

Progress in Rupee:

Page49 of 85

Progression of FERA to FEMA and its contribution in development of FOREX Market in India. MFM (2nd Year II SEM), Div Bc r ny u re c Ya er 19 96 20 00 20 04 U.S . dolla r US D 3 .4 5 4 4 .9 4 5 4 .3 5 4 C anadia n dolla r C AD 2 .0 6 0 3 .2 0 8 3 .9 4 1 E uro* E UR 4 .4 4 0 4 .5 1 3 5 .3 6 9 Pound sterling G P B 5 .3 5 9 6 .1 8 2 8 .0 3 8 S wiss fra nc CF H 2 .7 8 1 2 .6 6 5 3 .5 6 4 Austra lia n dollar AUD 2 .7 7 6 2 .1 6 6 3 .4 3 1 Japanese yen JPY 0 6 .5 0 2 .4 0 2 .4 S apor ing e dollar S D G 2 .1 5 6 2 .0 6 8 2 .8 6 3 *before Ja 1 1 9 , E n , 9 9 uropean C urrencyUnit, c ode X U E 20 06 4 .9 3 5 4 .1 1 0 6 .1 4 3 8 .6 0 3 4 .4 0 5 3 .9 6 7 0 3 .4 3 .9 0 3 20 09 4 .7 8 6 4 .9 2 2 6 .0 8 3 7 .3 6 8 4 .0 5 6 3 .5 8 8 0 2 .5 3 .6 3 0 21 00 4 .3 5 4 4 .5 4 9 6 .6 0 0 7 .3 1 3 4 .0 6 0 4 .9 3 9 0 5 .5 3 .5 4 1 21 01 5 .5 3 5 5 .1 2 7 6 .7 5 0 8 .6 3 3 5 .3 7 5 5 .9 3 8 0 9 .6 4 .2 1 7

The rupee has not been too volatile over the years. But that doesnt mean it hasnt depreciated to the dollar. It has fallen from Rs 35.44 in 1996 to Rs 50.015 on 10 March 2012.

Correlation of Sensex and Rupee:

Page50 of 85


After a recent break-out, the US dollar INR pair is quoting at a 30-month high of 50.17 levels. The prevailing uncertainty in the financial markets worldwide following the Euro zone debt crisis has fueled a surge in theUS dollar, which remains the ultimate safe haven play during times of ambiguity, regardless of the nations own problems. Further weakening of the Indian rupee could see the US dollar INR pair head towards the 2009 peak of 52 plus levels in the near term. This could spell trouble for Indian equities, which are inversely correlated to the greenback. A spiraling US dollar would derail the pullback in equities, which could go into a tailspin and re-test the recent lows in the near term.

Historical correlation between Sensex and US$/INR pair Over the last decade, the growing clout of overseas investors is clearly visible as India has emerged as a force to reckon with in the global arena. If one wishes to use just one indicator to gauge how the Sensex is expected to move, the US dollar vs. INR could be a good measure to track. The movement of the greenback against the INR demonstrates the demand/supply equation between the two currencies. As the accompanying chart shows, there is an amazingly close relationship between the US dollar and the Sensex. In the above chart, the green line represents the Sensex movement since 2006 while the US$ INR movement in the same period is represented by the orange line. The above chart plots the Sensex against the dollar because when the dollar falls against the Indian rupee, the Sensex rises. That is hardly surprising because the dollar weakens when the Indian rupee is in demand and that indicates growing inflows of foreign money, which also gets channeled to the Indian equity markets.The chart clearly highlights the inverse correlation as the major peaks and bottoms of the Sensex and the US dollar have occurred simultaneously. An ensuing rally in the greenback has had negative implications on the domestic benchmark.

Page51 of 85


Foreign Direct Investment (FDI)The entire foreign exchange market in India is regulated by Foreign Exchange Management Act, 1999 [FEMA]. Before this act was introduced, the market was regulated by FERA or the Foreign Exchange Regulation Act, 1947. After independence, FERA was introduced only as a temporary measure for the purpose of regulating the inflow of foreign capital. But with the industrial and economic development, the requirement for conservation of the foreign currency was felt and on recommendation of Public

Page52 of 85


Accounts Committee, the Indian government passed the Foreign E

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