Post on 25-Dec-2015
Praveen Kumar DangiPraveen Kumar Dangi B.Com(H), CAIIB, AICWA, MBA (B&F)
Senior Manager / Faculty - IMAGE
Meaning – Financing of international trade and effecting transactions.
Cross border cross currency transactions
Export requires payment in the currency of the exporter’s country but importer can pay only in the currency of the importer’s country.
What is Foreign exchange?
mechanism by which the currency of one country is converted into the currency of another country
FEMA defines Fx =Fc includes
deposits, credits and balance payable in any foreign currency
DD, TC, LC, B/E expressed or drawn in Indian currency but payable in any foreign currency
DD, TC, LC, B/E expressed or drawn by banks, institutions or persons outside India payable in Indian currency
Protecting from the future uncertainty
Why textile industry is in trouble?
Why bollywood is using the hedging techniques?
Why TCS profits have come down?
Credit Risk Refuse to accept goodsCancellation of orderDelay paymentRaise unjustified objections laterDefault in paymentInsolvency of buyer Delay in execution of orderDespatch inferior goodsInability to ship goodsFails to execute – Lehman brothersAdvantage of time zone - Herstatt
Cargo Risk
Weather and climate
Natural calamities
Delay in transportation
Accidents
Mishandling
Theft, pilferage
Country Risk
Legal / regulatory – license cancel, restrictions
Political- war, change of regime
Economic- Chinese goods
Social- KFC
Commercial Risk
marketing the product in foreign land
$ Currency Risk
$ uncertainty in currency rates – exposure limits
Opinion on buyer – ECGC, D&B
ECGC policy for commercial and country risk
Individual buyer-wise policy
LC
Export production finance Gtee
Insurance cover for transit loss
Forward contract / option etc
HEDGING TOOLS - DERIVATIVESHEDGING TOOLS - DERIVATIVES
Defined – A financial instrument giving rise to right and obligation in
monetary terms.Executable on a future dateValue is dependent on the value of an underlying asset
OTC – forwards, options, swaps Exchange – future, options
Quotations : Direct – when FC is fixed Indirect – when local currency is fixed
Transaction based: Buying Rate – when bank takes FC in exchange of rupees
TT rate – bank gets credit without delay Bills rate – when transaction involves sometime
Selling Rate – When bank gives FC in exchange of rupees
Time based: Cash – Payment and receipt of currencies same day value today
TOM – Deal today at today’s rate settlement tomorrow Spot – Deal today at today’s rate settlement within 48 hours Forward – Deal today transaction on pre-determined future date
Types of rates:Interbank – Quoted in interbank marketsBid – where a bank quotes a rate to buy a currencyOffer – where a bank quotes a rate to sell a currencyCard – Bank loads its margin on exchange rates and
offered through its branchesTypes of account:
NOSTRO – Our account with youVOSTRO – Your account with usLORO – Their account with youMirror – account of foreign bank in books of bank in India
Value date: On which purchased currency gets credited to NOSTRO
account abroad
Quotations
1 kg Sugar – Rs.17/- 1 packet Good Day Biscuits – Rs.10/- 1 litre Milk – Rs.22/-
Rs.25/- per dozen Bananas Rs.20/- for 10 candles
Two way quotation: USD 1 =Rs. 48.8525/8650 Direct quotation : USD 1 = Rs. 48.8525/8650 rule buy low sell high
Indirect quotation : Rs.100/- = USD 2.0470/0490 rule buy high sell low
Spot : USD 1 = Rs. 48.8000/8200 which is buying and which is selling?
Spot / Nov 2000/2100 Spot /Dec 3500/3600 these are premiums. Remember buy high sell
low
Oct forward buying = 48.8000 Spot / Nov 2100/2000 Spot / Dec 3600/3500 these are discounts.
ADD least premium while buying & highest premium while selling.
DEDUCT highest discount while buying and lowest discount while selling
TT rate for : DD, MT, TT drawn on bank where nostro account is already credited
FBC payment to exporter only when importer pays and nostro account is credited
Cancellation of Fx sold earlier
Example: Spot USD 1 = Rs. 48.8500/8700 on 17th Oct
Spot / Nov 2200/2300
Exchange margin 0.08%
Solution: 48.8500 less 0.0391 = 48.8101 say 48.8100
Bill buying rate for : FBP Transit period and usance period
Round off to lower month- when premium
Example: Spot USD 1 = Rs. 48.8500/8700 on 17th Oct
Spot / Oct 200/300
Spot / Nov 500/550
Spot / Dec 750/800
Usance 30 days, transit 25 days
Solution: 48.8500 + 0.0200 = 48.8700 48.8500 + 0.0500 = 48.9000
Example: US$/Rupee Exchange rateExchange rate a year before US$ 1 = Rs. 47.65
Year-on-year inflation USA = 2%India= 5%
Inflation differential is (5-2) = 3%Therefore, the Rupee will depreciate by 3%Effect:
Now, US $ 1.02(2%) = Rs. 50.03 (5%)
Therefore US $ 1 = 50.03/1.02 = 49.05 (3%)Therefore, depreciation of rupee is Rs. 49.05-47.65 = Rs. 1.40
Forward Premia – Inflation differential
REFLECTION OF INTEREST DIFFERENTIAL IN FOREX FORWARD PREMIA
In the case of Forward exchange rate, it may be presumed that the forward currency required is purchased or sold in the Spot market and carrying the funds in the money markets.
Eg. 1. If you buy USD forward, bank borrows INR in Indian money market converts at spot rate and invests in US money market for you 2. If you sell USD forward, bank borrows the contracted amount in US money market converts at spot rate and kept invested in Indian money market for you Therefore, ‘the cost of carry’ or time value of money gets reflected in the forward premia loaded.
REFLECTION OF INTEREST DIFFERENTIAL IN FOREX FORWARD PREMIA
UK USAINTEREST RATE 4.5% 4%Spot Rate GBP 1 $ 1.7815
Borrow US $ 17815 for one year at 4% and convert into Pounds
17815 /1.7815 = GBP 10000Invest GBP 10000 in UK at 4.5% for one year
After one year maturity = 10000 x 4.5 x 1 = 450+10000
100 = GBP 10450
Convert back GBP 10450 into dollar @ 1.7815 Dollar receivables = 10450 x 1.7815=
18616.70
Interest payable on the dollarborrowing = 17815 x 4% = $ 712.60
Principal + interest = 17815 + 712.60 =18527.60
Received on investment = $ 18616.70Paid on borrowing = $ 18527.60
Arbitrage gain = $ 89.00 (rounded)
FOREX FORWARD PREMIA
In an integrated market, the arbitrage opportunity does Not exist.
The market adjusts the forward rate in such a way that no arbitrage gain exists on transfer of funds from Money Market to forex market
Forward rate = Dollar one year payables Pound sterling one year receivables
= 18527.60 = 1.7729 (one year forward exchange rate)
10450
ROLE OF INTEREST IN FORWARD PREMIA
IN INDIAN MARKET
FOREX FORWARD PREMIA
Forward Premia= Spot Rate x (CCy.Int.- BCy. Int) x No. of days
360 x 100= 1.7815 x (4 – 4.5) x 360 =
(-)0.0086 360 x 100
GBP/USD Spot Rate = 1.7815GBP/USD one year forward rate = 1.7729One year forward differential = 0.0086(ie. Spot rate to be adjusted by)
The money market interest differential reflectas a premium on the currency where interest rate is lower between the two.
Contract to buy or sell a fixed amount of foreign currency on a specified future date at a predetermined rate of exchange
Fixed forward contract: transit period / usance period / forward period.
Spot buying rate = 48.6000Add Forward premium = 1.1500Less exchange margin 0.10% on 49.7500 = 0.049752month forward rate for 60 day bill = 49.70025 Or 49.7000
Example:
Spot USD 1 = Rs. 48.6000 /6075
One month 3500 / 3600
2 months 5500 / 5600
3 months 8500 / 8600
4 months 1.1500 / 1.1600
Forward rates are for fixed delivery
Exchange margin 0.10%
Calculate for 2 months buying rates for 60 day usance bill
Option forward contract gives customer to deliver any day during option period. Hence if FC is at premium apply earliest delivery date rate for a buy contract
On 15th Oct Exporter requested the bank to book a Fx contract delivery Dec for a 30 day sight bill for USD 10000. prevailing rates are:
Spot USD 1 = Rs. 48.5675 / 5750
spot Oct 800 / 900 spot Nov 1700 / 1800
spot Dec 2250 / 2325 spot Jan 3200 / 3300
spot Feb 4100 / 4200 spot Mar 5150 / 5250
Exchange margin 0.10%. Transit period 25 days.
Spot buying rate = 48.5675 Add premium for June = 0.2250Less margin @ 0.10% = 0.04879 Rate to be quoted = 48.84129 or 48.8410
Forward contract when cancelled by the customer the reverse transaction at spot or remaining period forward. Customer may request for cancellation after maturity but before 15th day. If remains undelivered automatic cancellation on 7th working day
Exporter requested after 2 months of entering into a 3 month forward contract for USD 10000 at 49.2500 for cancellation. Prevailing rates are:
Spot USD 1 = Rs. 49.3000 / 3500
1 month 1500 / 1700
2months 2250 / 2325
3 months 3200 / 3300
Rs payable to exporter by bank as per contract = 4,92,500Customer will pay on cancellation (spot + 1 month selling) = 4,95,200Amount payable by exporter = 2,700
Buyer / Seller
Call – right to purchase
Put – right to sell
ONLY RIGHTS to purchaser of option
American option – option buyer can exercise the right any day during the currency of contract
European option – the buyer can exercise his right only on maturity date.
An Option gives the buyer the “right”, but not the “Obligation”, to buy or to sell an agreed amount of
Financial Instrument (Call/Put) on or before an Agreed Future Date
(expiry) at an Agreed Price (strike) in exchange for a Fee (Premium)
Mechanism
Exporter expecting Fx receipt 6 month hence
enters into a put option for 6 months getting the
right to sell the foreign currency on maturity at
predetermined rates
On maturity if rate is high he may choose not to
exercise his right under the option and sell in the
market at spot rates
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OPTION TERMINOLOGYOPTION TERMINOLOGY
USD/INR Call Option at Rs. 40.00
Buyer of the option has the right to purchase USD at Rs. 40.00 (irrespective of spot market price on that day)
If the SPOT market price of USD is Rs. 40.50 that day, he could then exercise his option and
buy USD at Rs. 40.00 immediately sell in the cash market at Rs.40.50 thus making a profit of Rs.0.50 per USD
If the SPOT market price is below Rs. 40.00, the buyer: doesn’t exercise his right loss is restricted to the initial premium paid
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OPTION TERMINOLOGYOPTION TERMINOLOGY
Similarly USD/INR Put Option on USD at Rs. 40.00 means Buyer of the option has the right to sell USD at Rs. 40.00 (irrespective of spot market price on that day)
If the spot market price of USD is Rs. 39.50 that day, he could then exercise his option and buys in the spot market at Rs.39.50
Exercises the put option to sell at Rs.40.00
thus making a profit of Rs.0.50 per USD
If the cash market price is above Rs. 40.00, the buyer doesn’t exercise his right loss is restricted to the initial premium paid
Currency Swaps – Both principal and interest is swapped
X co in US can borrow in USD @ 6% and in GBP @ 9%
Y co in London can borrow in USD @ 8% and in GBP @ 7%
Commission paid to financial intermediary =1% by both
WIN-WIN situation
Only interest outflows are swapped
X can borrow at fixed rates = 11% and floating rates +1% Y can borrow at fixed rates = 10% floating at +0.75%
X wants fixed interest rate loan Y wants floating rate loan
Y borrows fixed rate and gives to X at 10.25%. He swaps it with X’s floating rate which X gives him at +0.75%
Both are benefitted
Seller agrees to lend to the buyer a specified amount in a specified currency for a specified period starting at a specified future date at predetermined interest rates.
The rates on the settlement date (starting date) determines who gains
Minimum amount is 5M
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Tradedate
Fixingdate
Settlementdate
Term date
TIME
Fixing date = Settlement date – 2 working days
3/6 Forward Rate Agreement (5.15/40)
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FRAs are expressed in terms of giving or receiving the fixed rate vs short term interest rate index (reference rate) and are quoted numerically.
The 3 months rate starting in 3 months time is 3/6The 3 months rate starting in 6 months time 6/9The 6 months rate starting in 3 months time is 3/9The market maker gives two way quote (5.15/40)
The lower rate is the bid rate at which the bank is ready to pay fixed and the higher rate will be the offer rate at which the bank is ready to receive fixed
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Wipro wishes to enter into a 3 x 6 FRA with Bank A where Wipro would pay fixed against 3 month CP ratePrincipal - Rs. 25 croreCurrent date - 29.04.2008Start date - 29.07.2008Settlement date - 29.07.2008Maturity date - 29.10.2008Fixed rate - 6.50%Floating rate - 6.75%
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Interest payable 25 crore x 6.50 x 91 = Rs. 40,51,369.90
100 x 365Interest receivable
25 crore x 6.75 x 91 = Rs. 42,07,191.60 100 x 365
Net receivable = Rs. 1,55,821.90(on maturity date)
Net receivable = Rs. 1,53,243.00 (On settlement date – 155821 /(1+6.75%*91/365)
CURRENCY FUTURES
one currency against the other
Foreign Exchange Derivative
Contract
Buy Sell
Why to trade in Currency Futures
Advantages of exchange traded Currency Futures
Efficiency, reliable price discovery and transparency as the transactions are carried out through state of the art electronic trading infrastructure of the recognized exchanges.
Performance guarantees of recognized exchanges and hence elimination of counter party default risks.
Access to large variety of market participant that may include small traders, importers/ exporters, multinational corporations, banks and financial institutions.
Quick guide on currency futures trading on NSE
Exchange Timing: 9.00 am to 5.00 pm.
Currency Pairs: Initially only USD/INR currency pair would be available.
Contract Size: Size is set at $ 1000 per lot (contract).
Contract Maturity: period from one month to 12 months period. (total 12 monthly contracts)
Quote: in INR with a tick size (incremental value) of 0.25 Paisa.
Margins: (Presently 1%-) margins based on the daily volatility in the foreign exchange currency markets.
Quick guide on currency futures trading on NSE- (contd.)
MTM (Mark to Market): involve daily MTM (mark to market) margins.
Settlement of MTM would take place on T +1 basis. NSCCL (National Securities Clearing Corporation
Limited) would be responsible for the entire clearing, settlement and risk management functions.
Settlement Price: Final settlement price of the currency future contract would be decided as per the exchange rate fixed by RBI on the last trading day of the contract. Settlement would take place in cash in terms of INR.
Position Limits: capped at 25 mio. Permissibility: Initially only resident Indians are
allowed to trade in currency futures.
Getting Started Get in touch with your broker permitted to trade in
currency futures on NSE Price Limits : +/- 3% for the first six monthly
contracts and +/- 5% for the next six monthly contracts
No price band Base price - theoretically derived price on the first
day of the contract DSP (Daily Settlement Price) - based on last half
an hour weighted average price Final Settlement Day - Last working day of the
expiry month Settlement Mode - Cash
Costs
Brokerage Exchange transaction charges (waived by NSE
for one month) Stamp duty, STT Service tax Education tax on brokerage fees Many of the brokers have offered brokerage free
transaction as a promotional scheme for one month.
Example on calculation of profit and lossExample on calculation of profit and loss
Buy price – 43.8575, Lot size – 1000, Quantity – 1 lot, Sell price – 43.8600
Gain = (43.8600 – 43.8575) x 1 (quantity) x 1000 (lot size) = 0.0025 x 1000 = 2.5 INR
In short every tick move signifies gain/loss of 2.5 INR for each lot OR for every 1 Rupee rise/ fall, one will gain/lose 1000 INR.
Example on calculation of MTM
Buy price – 46.8575, Quantity – 1 lot, DSP (Daily Settlement price) – 46.9575
Gain = (46.9575 – 46.8575) x 1 (quantity) x 1000 (lot size) = 0.100 x 1000 = 100 INR
This is one’s net MTM gain for a particular day that would be credited to one’s ledger account by the broker. If your MTM position is in loss then the broker would debit that much amount from one’s ledger balance
Differences between a currency futures contract
and a forward contract
Futures contract has a performance guarantee of the exchange unlike forwards contract where the contracted parties may default on their commitments.
Currency futures are standardized contracts with a fixed maturity date and a fixed quantity or lot size or contract size. Forwards contract can have maturity date and size as per the mutual agreement between the concerned parties.
Advantages of currency futures trading over forex currency forwards contracts
Currency futures thru recognized exchanges guarantee of performance no chances of any defaults whatsoever
Foreign currency futures contracts traded on recognized exchanges are most suitable for small investors and businesses.
FX forwards contracts traded on OTC markets are suitable for banks, financial institutions and corporate customers due to large size of the contracts.
less flexible,
less liquid less transparent
Membership
€ Existing members, € Members of National Commodity &
Derivatives Exchange Ltd,€ New applicants should having a net
worth of at least Rs 1 crore. € The processing fee for NCDEX
members and new applicants is Rs 10,000.
FUTURES FORWARDS
Delivery INR- no FC involved Foreign Currency
Transaction Size US$1000 Any amount
Suitability Speculation Hedging
Counterparty Exchange Bank
Price Based onLast ½ hr prices
=> time lag w.r.t. current price
Current Inter bank Price
Settlement Each exchange has Clearing House
Bank’s relationships
MaturingOn last working day of Month-fixed date
Choice date as per Fwd Contract
FUTURE OF CURRENCY FUTURES
Currency pairs other than USD/INR to be introduced.
BSE and other exchanges to permit Currency Futures trading
Margins to undergo changes as the scheme stablises.
NRIs & FIIs to be permitted to trade in Currency futures
More brokers/members
The beginning - 29.08.2008 NSE witnessed a reasonably good turn over on the very first
day of currency futures trading in India. Total turnover of Rs. 291.05 Crore (about $65.8 million) 65,798 contracts traded on the exchange. Major trading activity witnessed in the near month contract of
September 2008 Near month contracts volume - 42,964. September month currency futures closed with a settlement
price of 44.0325, which was up by about 0.66% over the previous price of 43.74.
Currency futures closed at a premium over RBI reference rate 43.79 (spot market rate).
Total 12 monthly contracts introduced for the period ending 31.08.2009
Understand the Fx transactions Know about the International Finance facilities Appreciate the risk factors Awareness about the risk management tools in Fx Importance of countering the political risk in
overseas operations and Need of fraud risk policy statement for the co.
FEMA gives power to Govt and RBI Transactions through AD , FFMC Remittance facilities –
Norms about Quantity Purpose Period
Current Account transactions – Prohibited transactions – purpose, countryTransactions with govt approvalMonetary ceilings for ADs beyond which RBI
permissionWithout monetary ceilings and without RBI permission
Capital account transactions – 14 type of transactions
Prohibitions on receiving the contributionPurpose
Election
PersonsCorrespondent, columnist, cartoonist, editor,
owner printer publisher of newspaper
Judges, govt officers, employees of corporations
Members of legislature, political party and office-bearer thereof
Permitted to receive foreign contribution-Non-political organisations in the field of:
Cultural, economic, educational, religious, social activities
Registered with Ministry of Home AffairsThrough designated bank branchFrom Foreign sources - NRFC
Relating to – Hours of business$Export transactions – Bills, transit period, interest,
overdue
$ Import transactions Clean instruments – payment procedures Fx ContractsDelivery – Early, delayed, cancellationInvolvement of Exchange brokers§ Inter-bank transaction settlement
ApplicabilityBinding onRole of issuing bank, advising bank, confirming
bank, nominated bankProcedures for amendmentsPeriodRe-imbursementTransportation of documents – timeVarious clauses and insurance amount
C – C&F, CIFD – DAF, DDPE – EXW, EXS, EXQF – FOB, FOR, FOA, FAS,
AD-I commercial banks, state and urban co-operative banks
AD-II For non-trade related current account transactions -
FFMC
AD-III Select financial and other institutions for their own Fx
transactions
FFMC
Participants in Fx MarketsCorporates, Commercial banks, Central bank, Exchange
brokers
SWIFT - society for world wide interbank financial telecommunications-Brussels
CHIPS - clearing house interbank payment system New York, Net position Fedwire
CHAPS - clearing house automated payment system, London
Resident Individuals are permitted to book forward contracts, without production of underlying documents, up to a limit of USD 100,000, based on self declaration.
Normally be on a deliverable basis. In case of mismatches in cash flows or other exigencies, the
contracts booked under this facility may be allowed to be cancelled and re-booked.
Notional value of the outstanding contracts not to exceed USD 100,000 at any time.
The contracts may be permitted to be booked up to tenors of one year only.
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To be booked through AD Category I banks with whom the resident individual has banking relationship, on the basis of an application-cum declaration .
The AD Category – I banks should satisfy themselves that the resident individuals understand the nature of risk inherent in booking of forward contracts and should carry out due diligence regarding “user appropriateness” and “suitability” of the forward contracts to such customer.
AD Category – I banks to submit a quarterly report to the CGM,RBI,FED CO, Forex Markets Division, Mumbai - 400 001 within the first week of the following month.
{A.P. (DIR Series) Circular No. 15 October 29, 2007}
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The formula: Settlement amount in US dollar = Notional amount
in US dollar * ((NDF rate – Reference rate on Settlement date) / Reference rate).
If settlement amount < zero, contract seller pays the difference to the contract buyer.
If settlement amount > zero, contract seller receives the difference from the contract buyer.
Thus, if one has sold an NDF contract for notional US$1mio 12-month forward at Rs.40.46, and the reference rate for that 12-month forward date turns out to be Rs.40.00, then the contract seller receives 1000000 X (40.46 – 40.00) / 40.00 = US$11,500.
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Forward rate = spot rate * (1+domestic intt rate)/ (1+ Foreign intt rate)
USD 100,000 borrowed from US invested in India for 6 months
US intt rate = 5%
India rate of intt = 12%
$ spot rate on contract = 40.0000
$ spot rate on repayment = 41.0000
Solution:
Amount due = 100000 + 2500 = 102500 USD@ 41.00 = Rs. 42,02,500/-
Realisation = 40,00,000+ 2,40,000 = 42,40,000
GAIN = 4240000 – 4202500 = 37500
Forward rate = spot rate * (1+domestic intt rate)/ (1+ Foreign intt rate)
= 40* (1.12)/(1.05) = 42.6700
Entered into with specified futures exchange to buy / sell specified amount of FC at specified price for delivery on a specified future date.
International Monetary Market, London International Financial Futures Exchange
Size standardised
Due dates fall on specified months specified days
Trading by members / brokers
Margins for guaranteeing counter party risk
Marking to market – differences in rates are adjusted on a daily basis difference becomes payable.
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Commodity futures-Underlying is a commodity
Financial futures: Underlying is a financial instrument
Currency futures: Underlying is a currency
Index futures: Underlying is an index-NSE index, Tokyo’s Nikkei index
What is international finance? Why international finance is needed? What if you borrow from Japan? What are different finance facilities available? Trade related finance? Investment related finance? Inward / outward Recap of different risks in international finance? Focus on risk of fraud and country risk
Packing credit RBI refinance upto 180 days PC No concessional rate ab-initio if PC o/s
beyond 360 days Quantum FOB or domestic cost of production Repayment out of the proceeds of foreign
B/E, duty-draw back PCFC at 0.75% over 6 months LIBOR +
withholding tax PCFC for 180 days
Post shipment B/E under LC / without LC, invoice, Bill of
Lading, insurance
Factoring
Advance against bookdebts, Factor assumes the credit and collection
function
Forfaiting is for medium term to cover exports on deferred basis. Provides liquidity and faster turn over. Avoids credit risk and eliminates exchange risk.
$ Import loan
$ Overseas suppliers
$ ECB
$ Who can lend?$ Int’l bank, capita market, Multi-lateral finance
institution, export credit agency, IFC,ADB, supplier of, foreign collaborators
Import loan For Capital equipment For Raw material Trust Receipt from importer
Overseas supplier’s creditSupplier extends credit to importerBuyer’s credit – exporter’s bank directly
finances importer or importer’s bank. Importer opens red clause LC authorising exporter’s banker to finance the exporter. Importer’s bank guarantee the loan
ECB – Bonds issued by Indian co expressed in FC, payabe in FC
Automatic route
Approval route
Automatic route: real sector- industrial, infrastructure Cannot borrow - Banks, FI, NBFC, HFC, trust non-profit
organisation.
Eligible – corporates, NGO for Micro-finance,
Int’l bank, capital market, Multi-lateral finance institution, export credit agency, IFC,ADB, supplier of , foreign collaborators,
USD 500m /yr, USD20m upto 3 yrs, rest upto 5 yrs, NGO $5M
Prohibited clause- onlending, investment, acquisition of co, repayment of Rs loan, real estate, working capital
Cost of borrowing should not exceed LIBOR+50/125 for 1/3yrs
Guarantee, standby LC, Letter of comfort etc not permitted
Approval route: IDFC,IL&FS, PFC, PTC, IRCON, Exim bank
Banks & financial institutions participated in textile or steel restructuring
GDR – Is a negotiable instrument denominated in USD representing shares issued in local currency in the name of an international bank called DEPOSITORY.
Custody of shares in issuing country with custodian FCCB – Companies with good track record allowed,
treated as FDI requiring clearance from FIPB, used for restructuring external debt
Any questions so far?
Use of deception with intention of gaining an advantage, avoiding an obligation or causing loss to another party.
All acts of bribery, forgery, theft, collusion, misappropriation, falsifying, extortions etc.
The impact of irregularities in forex transactions can have greater consequences affecting initially the bank’s financial position and later on country’s reserve and economic growth.
An efficient audit system Bank will be in a position to take corrective measures at an appropriate time and also will be able to contribute to establish a robust economy.
Underlying cause can be
- Frauds
- Hawala
- Circumventing Exchange Control
- Money Laundering
After FEMA all transactions are categorised either as current account transaction or capital account transaction
Extensive delegation for current account transactions to ADs
RBI will not be prescribing documents for current account transaction
FCR Act, 1976 (amended)
16,187 groups in India have received foreign funds worth Rs 5,105.50 crore in 2003-04
Report of the Group of Ministers on National Security:The prevention of money laundering is essential for
safeguarding internal security.
MHA has mooted a proposal to replace the FCRA with a new Act FCMC
Amendment in FEMA to include voluntary organisation
Types - Exports related
- Imports related
- Remittances related
- DGFT concessions related
- LC related
Under invoicing (stash it abroad)
Over invoicing (bring the money back to the country)
Exporting waste / scrap
May be accompanied by fraud in duty draw back
Fake export LCs (fraud by foreign buyer)
Non-resident account operations
Hawala
FAKE IMPORTS (COLLECTION BILLS)
OVERINVOICING OF IMPORTS
CAPITAL ACCOUNT TRANSACTION IN GUISE OF CURRENT ACCOUNT TRANSACTION e.g., BTQ, BUSINESS VISIT, SERVICE PAYMENTS ETC.,
LAUNDERED MONEY COMING IN THE FORM OF INVESTMENT, LOAN, FOREIGN CONTRIBUTION, GIFTS ETC.,
Jacob – a computer engineer aged 25, from Chennai.Applied for foreign job seeing an AD in Internet. Interview concluded over Net.Few days later a person contacted Jacob introducing himself as the Managing
Director of the company in Germany.Terms of appointment were provided as Rs.40000 (Euro equal) plus House rent and
Car allowances etc.He also stated that Jacob can proceed to apply for Visa in another few days.He requested Jacob to furnish his bank account detail in Chennai to open his salary
account in Germany with cross reference to his Banker.Jacob furnished his account number and branch details by e-mail.Next two days there was a credit of Rs.3.00 lakhs in his account from GermanyThe MD of the company contacted Jacob and requested Jacob to issue cheques to two
parties in Ukraine, at Rs.1.5 lakh each after which his appointment order will be dispatched.
Jacob started receiving phone calls almost every half an hour enquiring whether he had dispatched the cheques as instructed by the MD.
Jacob got suspicious and informed Police.On verification, it is found out that Germany Hawala agents, in order to avoid
remittance tax employed such tactics.
Is fraud a risk?
Fraud risk policy:Objectives:
Promote anti-fraud cultureEncourage fraud preventionPromote fraud detectionSupport fraud investigation
How:Lead by examples, ensure adherence to legal requirement rules procedures and practiceexpectation from counter party to act with integrity, without fraud and corruption, Contracts to include clauses about consequences of fraud.Any allegation will be investigated without regards to position, length of service, past records
Responsibilities of management committee
Adopt the policy
Prepare fraud response plan
Compliance
Appoint fraud liaison officer
Ensure timely and effective action taken
Develop and implement fraud risk process to
Identify areas in all the organisation’s activities
Undertake review at regular intervals
Create awareness about FRP
Channels open to them for reporting suspicions of fraud
Disclosure policy
Whistle blower policy
Responsibility of each department head
Fraud awareness program
When how it can occur
What to be alert of
What to do if suspect a fraud
Internal frauds:
stealing school meals money
Manipulation in bill –lost job for Rs 10/-
Charging for goods not supplied
False travel claims
Misappropriation of funds from customer accounts
External frauds:
Home loan – fake documents, impersonation, deviations, inflated price
Technology products – credit card, ATM card, Debit card
Forgery, impersonation, remittance frauds
Political decision or event in any country affect the business climate of that country resulting in investor loosing money or not making expected money.
Relating to :
• Governance system of the country
• Nature of authority
• legitimacy – response of population to govt
• cultural social aspect of society
To do with :
• Behaviour of people governing the country
• Rules, laws, reaction of the governed
• Ability of the political system to respond to the demand
• Events in domestic and International environment
Examples – past – Nigeria, Uganda and other African countries - expropriation
- Recent past – Nepal, Afgan, Iraq, India – coalition governments, religious fundamentalism – Islamic terrorism, political fundamentalism – UP, Corruption – US – Foreign corrupt practices ActKidnap, ransom by guerilla or other political groupTermination of contract by govt unilaterallyPayment defaults, license cancellation, embargoes,War, civil war, Govt laws or Acts, decrees, regulations
resulting in Breach or alteration of agreement Confiscation of property (other than expropriation)
Damage to the property in politically motivated strike - Nandigram,
Interference of Govt in terms and conditions of contractRemittance restrictionsDiscriminatory taxationNo protection to trade mark, patent, copyright
Political risk Analysis:
Based on trend – past available records
Current societal attributes and circumstances
Outside the scope of analysis –
Heavy rain leading to food theft, fall of govt, installation of authoritarian govt, imposing strict control on foreign business dealing in food products
Mitigation:
Insurance – US govt – Overseas Private Investment Corporation (OPIC), World Bank - Multilateral Investment Guarantee Agency (MIGA), Private – American International Corporation (AIG), Johnson, Higgins
Risk Appetite – invest or ignore based upon analysis – One part of the country affected – Kashmir, North SriLanka – choose to operate in less disturbed parts of that country
Negotiate a better deal with govt – restrictions, remittance limits, control regime
Direct action – Ransom, kidnapping – hire security guards for protection
Section 41- Central Govt may from time to time give to RBI such general or specific directions which RBI shall comply with.
Section 46- Central Govt is empowered to make rules to carry out the provisions of the Act
Section 47- RBI is empowered to make regulations to carry out the provisions of the Act and the rules made there under.
Payments due in connection with foreign trade, other current
business, services, and short-term banking and credit facilities in the ordinary course of business.
Payments due as interest on loans and as net income from investments
Remittances for living expenses of parents, spouse and children residing abroad, Expenses in connection with foreign travel, education and medical care of parents, spouse and children.
Remittance out of lottery winnings. Remittance of income from racing/riding etc. or any other
hobby.Remittance for purchase of lottery tickets, banned/proscribed
magazines, football pools, sweepstakes, etc. Payment of commission on exports made towards equity
investment in Joint Ventures/ Wholly Owned Subsidiaries abroad of Indian companies.
Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
Payment of commission on exports under Rupee State Credit Route, except commission upto 10% of invoice value of exports of tea and tobacco.
Payment related to "Call Back Services" of telephones.Remittance of interest income on funds held in Non-Resident
Special Rupee (Account) Scheme.
Gift - US$ 5,000 Donation- US$ 5,000 Private visits - US$ 10,000Business travel - US$ 25,000 Maintenance expenses of a patient - US$ 25,000 Attendant to a patient - US$ 25,000 Property commission - US$ 25,000Employment - US$ 100,000 Emigration - US$ 100,000 Maintenance of close relatives abroad - US$ 100,000 Studies abroad - US$ 100,000 Pre-incorporation expenses - exceeding US$ 100,000 Consultancy service - US$ 1,000,000
Medical treatment - estimate from the doctor in India or hospital/doctor abroad.
1. Cultural Tours Ministry of Human Resources
Development, (Department of
Education and Culture)
2. Advertisement in foreign print media , for the
purposes other than promotion of tourism, foreign
investments and international bidding (exceeding
US$ 10,000) by a State Government and its Public
Sector Undertakings
Ministry of Finance,
(Department of Economic
Affairs)
3. Remittance of freight of vessel charted by a
PSU
Ministry of Surface Transport,
(Chartering Wing)
4. Payment of import by a Govt. Department or a
PSU on c.i.f. basis (i.e. other than f.o.b. and f.a.s.
basis)
Ministry of Surface Transport,
(Chartering Wing)
5. Multi-modal transport operators making
remittance to their agents abroad
Registration Certificate from the
Director General of Shipping
6. Hiring of transponders by
(a)TV Channels
(b) Internet Service Providers
Ministry of Information
&Broadcasting
Ministry of Communication and
Information Technology
7. Remittance of container detention charges
exceeding the rate prescribed by Director General
of Shipping
Ministry of Surface Transport
(Director General of Shipping)
8. Remittances under technical collaboration
agreements where payment of royalty exceeds 5%
on local sales and 8% on exports and lump-sum
payment exceeds US$ 2 million
Ministry of Industry and
Commerce
9. Remittance of prize money/sponsorship of
sports activity abroad by a person other than
International/National/State Level sports bodies,if
the amount exceeds US$ 100,000
Ministry of Human Resources
Development (Department of
Youth Affairs and Sports)
10. Deleted
11. Remittance for membership of P & I Club Ministry of Finance, (Insurance
Division)
“Capital account transactions" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India and includes transactions referred in sub section (3) of section 6:
Transfer or issue of any foreign security by a person resident in India A person resident outside India 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 lending 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 / resident outside India/
Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred by a person resident in India and owed to a person resident outside
India person resident outside India.
CAPITAL ACCOUNT TRANSACTIONS OF CAPITAL ACCOUNT TRANSACTIONS OF PERSONS RESIDENT IN INDIAPERSONS RESIDENT IN INDIA a. Investment by a person resident in India in foreign securities. b. Foreign currency loans raised in India and abroad by a person resident
in India c. Transfer of immovable property outside India by a person resident in
India d. Guarantees issued by a person resident in India in favour of a person
resident outside India e. Export, import and holding of currency/currency notes f. Loans and overdrafts ( borrowings) by a person resident in India from a
person resident outside India g. Maintenance of foreign currency accounts in India and outside India by a
person resident in India h. Taking out of insurance policy by a person resident in India from an
insurance company outside India i. Loans and overdrafts by a person resident in India to a person resident
outside India j. Remittance outside India of capital assets of a person resident in India k. Sale and purchase of foreign exchange derivatives in India and abroad
and commodity derivatives abroad by a person resident in India.
CAPITAL ACCOUNT TRANSACTIONS OF CAPITAL ACCOUNT TRANSACTIONS OF PERSONS RESIDENT OUTSIDE INDIAPERSONS RESIDENT OUTSIDE INDIA a. Investment in India by a person resident outside India, that is to say, (i) Issue of security by a body corporate or an entity in India and investment
therein by a person resident outside India; and (ii) Investment by way of contribution by a person resident outside India to
the capital of a firm or a proprietorship concern or an association of persons in India.
b. Acquisition and transfer of immovable property in India by a person resident outside India.
c. Guarantee by a person resident outside India in favour of, or on behalf of, a person resident in India.
d. Import and export of currency/currency notes into / from India by a person resident outside India.
e. Deposits between a person resident in India and person resident outside India.
f. Foreign currency accounts in India of a person resident outside India. g. Remittance outside India of capital assets in India of a person
resident outside India.
To ensure that no person accepts foreign contribution for anti-national activities, funds are used properly.
Any article whose value does not exceed Rs10,000/- shall not be treated as foreign contribution
Interest earned on Foreign contribution to be treated as foreign contribution
It now excludes receipts on account of earnings in lieu of rendering professional services, fees for attending seminar, tuition fees subscription for journal etc.
Shall not spend more than 30% on administrative expenses.
Renewal of registration every two years, validity for five years.
GROUP E
Departure
EXW Ex-Works
GROUP F
Main Carriage unpaid
FCA Free Carrier
FAS Free Alongside Ship
FOB Free on Board
GROUP C
Main Carriage Paid
CFR Cost and Freight
CIF Cost, Insurance and Freight
CPT Carriage Paid To
CIP Carriage & Insurance Paid to
GROUP D
Arrival
DAF Delivered At Frontier
DES Delivered Ex-Ship
DEQ Delivered Ex-Quay
DDU Delivered Duty Unpaid
DDP Delivered Duty Paid