Description
This is a presentation describing foreign exchange in terms of Exchange Rates, letter of credit, commercial terms, FEMA, FDI, export finance, foreign trade policy
Foreign Exchange
BASICS OF FOREIGN EXCHANGE
Introduction Exchange Rate is defined as the rate at which one currency is exchanged for another currency. Foreign exchange trading is sale and/or purchase of a currency - like any other trade. In a foreign exchange transaction ? The transaction is always talked of from the banks' point of view ? The item referred to is the foreign currency. When we say "Purchase" we mean (buying rate): ? The bank has purchased and ? It has purchased foreign currency. Similarly, "Sale" means (selling rate) ? The bank has sold and ? It has sold foreign currency. Direct Quotation Cont…. Indirect quotation
? Direct quote – Foreign currency constant, home
currency varies.eg. USD 1 = Rs. 39.50
? Indirect quote – Home currency constant, foreign
currency varies. Eg. Rs. 100 = USD 2.53.
? Two-way quotes
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International Banking
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Types of Exchange Rates
Ready of cash: Refers to transaction to be settled on the same day e.g., transaction done on 3rd June to be settled on 3rd June. Tom: Refers to transaction where delivery of foreign currency to be done on the next day (tomorrow), e.g., transaction done on 3rd June to be settled on 4th June. Spot: Refers to transaction where delivery of foreign currency to be done on the second working day (day after tomorrow) from the date of contract e.g. transaction done on 3rd June to be settled on 5th June. Forward: Refers to transaction where delivery of foreign currency to take place on a date farther than the spot date e.g. transaction done on 3rd June to be settled on any date after 5th June, normally. Value date: The date on which payment (delivery) of funds or an entry to an account becomes effective.
Cont….
Cover Rate and Base Rate Fixed & Floating Exchange Rates ? In a fixed exchange rate regime, the rate of the domestic currency vis-a-vis a foreign currency is fixed. ? In a floating exchange rate regime, most major currencies viz. US Dollar, British Pound, Euro, Japanese Yen, etc., are floating ones. Principal Types of Merchant Rates
? TT (Telegraphic Transfer) Buying Rate is applied when the transaction does not involve any delay in realization of the foreign exchange by the bank i.e. the Nostro a/c of the bank has already been credited. Eg encashment of DD / TC.
? Bills Buying Rate is applied when an export bill is purchased. ? TT Selling Rate is applied when the correspondent bank's account is credited immediately. Eg., issue of a Foreign Demand Draft, Travellers Cheque, etc. ? Bills Selling Rate is used for all other transactions involving handling of documents by the bank e.g., payment against import bills, etc.
Cont….
Person Resident in India
Section 2 of FEMA, 1999 defines the term Resident in India as a person residing in India for more than 182 days during the course of a financial year. Person Resident Outside India Section 2 of FEMA defines person resident outside India as a person who is not resident in India (NRI). Non-Resident Indians generally fall under one of the following broad categories:
A. Non-Resident Indian (NRI)
B. Person of Indian Origin (PIO)
Cont….
Overseas Corporate Bodies (OCBs)
? Correspondent Banking - Nostro account - Vostro account - Loro account - Mirror Accounts - Escrow Accounts
? International Organisation
? World Bank Group ? Other international organisations ? Asian Clearing Union (ACU) ? Offshore Banking Unit (OBU) ? e-Money India
Cont….
LETTER OF CREDIT
Definition
In simple terms, a letter of credit is an undertaking by a bank to make a payment to a named beneficiary within a specified time, against the presentation of documents which comply strictly with the terms of the letter of credit. The following diagram shows those involved in a Letter of Credit transaction:
Issuing Bank
Advising/ Confirming Bank
Importer (Applicant)
Underlying contract
Exporter (Beneficiary)
Cont….
? LC is an arrangement whereby a bank acting at the
request of the customer undertakes to pay a third party by a given date according to agreed stipulations and against presentation of documents the counter-value of goods and services supplied ? Banks deal only in documents and not in goods.
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International Banking
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DIAGRAMATIC EXPLANATION OF VARIOUS STEPS IN THE OPERATION OF A L/C
1
IMPORTER BUYER APPLICANT 11 2
CONTRACT SHIP GOODS 5 EXPORTER SELLER BENEFICIARY
TAKE DELIVERY OF GOODS
RELEASE DOCUMENTS AGAINST CASH OR T/R
6
APPLY L/C
NEGOTIATION OF EXPORT BILLS
PREPARE & PASS DOCUMENTS
ADVISE L/C
10 9 ISSUING BANK
1/31/2013
MAKE PAYMENT
7
4
ADVISING BANK / CONFIRMING BANK OR NEGOTIATING BANK 10
SEND DOCUMENTS
8
3
L/C International Banking
Types of Letter of Credit
? Revocable ? Irrevocable ? Unconfirmed ? Standby Letters of Credit ? Revolving Letter of Credit ? Transferable Letter of Credit ? Back-to-Back Letter of Credit ? Uniform Customs and Practice for Documentary Credits (UCP) ? Essential checks when the Letter of Credit is received
Cont….
Compiling Documents under a Letter of Credit a) b) ? ? ? ? ? ? ? ? Amount payable Shipment Individual Documents Draft Bills of Lading Insurance Documents Invoice Certificates of Origin Weight Note/List Other Documents which provide evidence of the movement of goods Parcel Post Receipt Forwarding Agent's Receipt
International commercial terms (Incoterms)
The Obligations of the Seller and Buyer
Incorporating Incoterms The Incoterms
Group E-Departure
EXW - Ex Works (named place) (Any mode of transport) Group F-Main Carriage Unpaid FCA - Free Carrier (named place) (Any mode of transport) FAS - Free Alongside Ship (named port of shipment) FOB - Free on Board (named port of shipment)
Cont….
Group C-Main Carriage Paid
CFR - Cost and Freight (named port of destination) CIF - Cost Insurance and Freight (named port of destination) CPT - Carriage Paid To (named place of destination) CIP - Carriage and Insurance Paid To (named place of destination) Group D-Arrival DAF - Delivered at Frontier (named place) DES - Delivered Ex Ship (named port of destination) DEQ - Delivered Ex Quay (named port of destination) DDU - Delivered Duty Unpaid (named place of destination)
DDP - Delivered Duty Paid (named place of destination)
Uniform Customs & Practices for Documentary Credits (UCPDC ICC (2007) - 600 - IMPORTANT PROVISION)
Background In May 2003, the International Chamber of Commerce (ICC) authorised the ICC Commission on Banking Techniques and Practices (Banking Commission) to bring out a revision of the Uniform Customs and Practice for Documentary Credits. Meaning The Uniform Customs and Practices for Documentary Credits (UCP) is a set of rules on the issuance and use of letters of credit. This is other wise known as “Laws of Letter of Credit”. Important Articles Article 2: Definitions of advising bank, applicant, confirmation, beneficiary etc. Article-3: Interpretations of various commonly used words in credit are given. Article-4: A credit by nature is a separate transaction from the sale or other contracts on which it may be based. Article-5: The bank deals in documents and not with goods. Article-6: A credit must state availability of the bank, expiry date and place of presentation.
EXCHANGE EARNER'S FOREIGN CURRENCY (EEFC) ACCOUNT
1. Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign currency with an Authorised Dealer, i.e., a bank dealing in foreign exchange.
2.
3. 4.
The account is a non-interest bearing current account.
A person resident in India may open the account. One can credit 100 percent of his foreign exchange earnings into this account subject to permissible credits and debits.
5.
Foreign exchange earnings received through an international credit card for which reimbursement are provided in foreign exchange may be regarded as a remittance through normal banking channels and can be credited to the EEFC account. There is no restriction on withdrawal in rupees of funds held in an EEFC account.
6.
? All transactions in Foreign exchange are governed
by FEMA 1999. ? FEMA replaced FERA,1976. ? Important Provisions of FEMA related to exports, imports, exchange rates, currency of payments, NRIs, etc…
? Provisions for Foreign Travel. ? Other Remittances.
? Foreign Currency A/C in India ? Exchange Earners Foreign Currency (EEFC) A/Cs ? Resident Foreign Currency (RFC) Accounts ? Resident Foreign Currency (Domestic)
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FOREIGN INVESTMENTS IN INDIA
I. Foreign Direct Investment (FDI)
? ? ? ? A. B. ? A. Automatic Route Government Route General permission of RBI under Foreign Exchange Management Act Transfer from Non-Resident to Non-Resident Transfer by way of sale Transfer by way of gift Transfer from Resident to Non-Resident Transfer by way of sale-General Permission under Regulation 10 of Notification No. FEMA 20/2000-RB dated May 3, 2000
B.
Transfer by way of gift
Cont….
II. Foreign Technical Collaboration
? Payment for foreign technology collaboration by Indian companies are allowed under the automatic route subject to the following limits;
? Lump sum payments not exceeding US$2 million; ? Royalty payable being limited to 5% for domestic sales and 8% for exports, without any restriction on the duration of the royalty payments; ? The royalty limits are net of taxes and are calculated according to standard conditions; ? The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties; ? RBI has delegated the powers to Authorised Dealers (ADs) to make payment of royalty under such agreements. ? Proposals which do not satisfy the parameters prescribed for automatic route of RBI, require clearance from Ministry of Commerce. Cont….
III. Portfolio Investment ? Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000. FIIs include Asset Management Companies, Pension Funds, Mutual Funds, Investment Trusts as Nominee Companies etc. ? RBI has granted General Permission to SEBI Registered FIIs invest in India under the Portfolio Investment Scheme. ? All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. ? A Foreign Venture Capital Investor registered with SEBI may make investment in a Venture Capital Fund for an Indian Venture Capital Undertaking, in the manner. ? Non-Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme. ? An NRI or a PIO can purchase shares up to 5% of the paid up capital of an Indian company. ? The sale of shares will be subject to payment of applicable taxes.
EXPORT FINANCE
Types of Export Finance Pre-shipment Advance: Pre-shipment advance is allowed to exporters for procurement of raw materials, semi-finished goods and finished goods. Post-shipment Advance: This facility is allowed to the exporters after the shipment has been made and the exporters have submitted the documents to the bank. Types of Pre-shipment Finance Pre-shipment finance can be of two types: a) Packing Credit (PCL), and b) Advance against government receivables, i.e., Duty Drawback, etc. Types of Post-shipment finance: a) Export bills purchased/discounted/negotiated b) Advance against bills sent on collection c) Advance against exports on consignment basis Cont…. d) Advance against duty drawback
Export Credit in Foreign Currency
a) Pre-shipment Credit in Foreign Currency (PCFC) can be allowed to exporters as being allowed in Indian Rupee initially for maximum 180 days with provision for further extension.
b)
Export Bill Rediscounted Abroad (EBR) is given to finance export bills in foreign currency for maximum 180 days at LIBOR linked rate.
Foreign Trade Policy: 2004-09
Strategies: The strategies include:
?
? ?
unshackling of controls,
creating an atmosphere of trust and transparency, simplifying procedures and bringing down transaction costs,
?
adopting the fundamental principle that duties/levies should not be exported,
Special Focus Initiatives Vishesh Krishi Upaj Yojana
Cont….
Export Promotion Schemes ? ? ? ? ? ? ? ? ? Target Plus New Schemes Focus Market Scheme (FMS Focus Product Scheme (FPS) Served from India EPCG Status Holder Categorization Export Oriented Units Free Trade and Warehousing Zones (FTWHZ)
?
? ?
2nd hand Machinery
Service Export Promotion Council Procedure simplification and rationalization
doc_639341439.ppt
This is a presentation describing foreign exchange in terms of Exchange Rates, letter of credit, commercial terms, FEMA, FDI, export finance, foreign trade policy
Foreign Exchange
BASICS OF FOREIGN EXCHANGE
Introduction Exchange Rate is defined as the rate at which one currency is exchanged for another currency. Foreign exchange trading is sale and/or purchase of a currency - like any other trade. In a foreign exchange transaction ? The transaction is always talked of from the banks' point of view ? The item referred to is the foreign currency. When we say "Purchase" we mean (buying rate): ? The bank has purchased and ? It has purchased foreign currency. Similarly, "Sale" means (selling rate) ? The bank has sold and ? It has sold foreign currency. Direct Quotation Cont…. Indirect quotation
? Direct quote – Foreign currency constant, home
currency varies.eg. USD 1 = Rs. 39.50
? Indirect quote – Home currency constant, foreign
currency varies. Eg. Rs. 100 = USD 2.53.
? Two-way quotes
1/31/2013
International Banking
3
Types of Exchange Rates
Ready of cash: Refers to transaction to be settled on the same day e.g., transaction done on 3rd June to be settled on 3rd June. Tom: Refers to transaction where delivery of foreign currency to be done on the next day (tomorrow), e.g., transaction done on 3rd June to be settled on 4th June. Spot: Refers to transaction where delivery of foreign currency to be done on the second working day (day after tomorrow) from the date of contract e.g. transaction done on 3rd June to be settled on 5th June. Forward: Refers to transaction where delivery of foreign currency to take place on a date farther than the spot date e.g. transaction done on 3rd June to be settled on any date after 5th June, normally. Value date: The date on which payment (delivery) of funds or an entry to an account becomes effective.
Cont….
Cover Rate and Base Rate Fixed & Floating Exchange Rates ? In a fixed exchange rate regime, the rate of the domestic currency vis-a-vis a foreign currency is fixed. ? In a floating exchange rate regime, most major currencies viz. US Dollar, British Pound, Euro, Japanese Yen, etc., are floating ones. Principal Types of Merchant Rates
? TT (Telegraphic Transfer) Buying Rate is applied when the transaction does not involve any delay in realization of the foreign exchange by the bank i.e. the Nostro a/c of the bank has already been credited. Eg encashment of DD / TC.
? Bills Buying Rate is applied when an export bill is purchased. ? TT Selling Rate is applied when the correspondent bank's account is credited immediately. Eg., issue of a Foreign Demand Draft, Travellers Cheque, etc. ? Bills Selling Rate is used for all other transactions involving handling of documents by the bank e.g., payment against import bills, etc.
Cont….
Person Resident in India
Section 2 of FEMA, 1999 defines the term Resident in India as a person residing in India for more than 182 days during the course of a financial year. Person Resident Outside India Section 2 of FEMA defines person resident outside India as a person who is not resident in India (NRI). Non-Resident Indians generally fall under one of the following broad categories:
A. Non-Resident Indian (NRI)
B. Person of Indian Origin (PIO)
Cont….
Overseas Corporate Bodies (OCBs)
? Correspondent Banking - Nostro account - Vostro account - Loro account - Mirror Accounts - Escrow Accounts
? International Organisation
? World Bank Group ? Other international organisations ? Asian Clearing Union (ACU) ? Offshore Banking Unit (OBU) ? e-Money India
Cont….
LETTER OF CREDIT
Definition
In simple terms, a letter of credit is an undertaking by a bank to make a payment to a named beneficiary within a specified time, against the presentation of documents which comply strictly with the terms of the letter of credit. The following diagram shows those involved in a Letter of Credit transaction:
Issuing Bank
Advising/ Confirming Bank
Importer (Applicant)
Underlying contract
Exporter (Beneficiary)
Cont….
? LC is an arrangement whereby a bank acting at the
request of the customer undertakes to pay a third party by a given date according to agreed stipulations and against presentation of documents the counter-value of goods and services supplied ? Banks deal only in documents and not in goods.
1/31/2013
International Banking
9
DIAGRAMATIC EXPLANATION OF VARIOUS STEPS IN THE OPERATION OF A L/C
1
IMPORTER BUYER APPLICANT 11 2
CONTRACT SHIP GOODS 5 EXPORTER SELLER BENEFICIARY
TAKE DELIVERY OF GOODS
RELEASE DOCUMENTS AGAINST CASH OR T/R
6
APPLY L/C
NEGOTIATION OF EXPORT BILLS
PREPARE & PASS DOCUMENTS
ADVISE L/C
10 9 ISSUING BANK
1/31/2013
MAKE PAYMENT
7
4
ADVISING BANK / CONFIRMING BANK OR NEGOTIATING BANK 10
SEND DOCUMENTS
8
3
L/C International Banking
Types of Letter of Credit
? Revocable ? Irrevocable ? Unconfirmed ? Standby Letters of Credit ? Revolving Letter of Credit ? Transferable Letter of Credit ? Back-to-Back Letter of Credit ? Uniform Customs and Practice for Documentary Credits (UCP) ? Essential checks when the Letter of Credit is received
Cont….
Compiling Documents under a Letter of Credit a) b) ? ? ? ? ? ? ? ? Amount payable Shipment Individual Documents Draft Bills of Lading Insurance Documents Invoice Certificates of Origin Weight Note/List Other Documents which provide evidence of the movement of goods Parcel Post Receipt Forwarding Agent's Receipt
International commercial terms (Incoterms)
The Obligations of the Seller and Buyer
Incorporating Incoterms The Incoterms
Group E-Departure
EXW - Ex Works (named place) (Any mode of transport) Group F-Main Carriage Unpaid FCA - Free Carrier (named place) (Any mode of transport) FAS - Free Alongside Ship (named port of shipment) FOB - Free on Board (named port of shipment)
Cont….
Group C-Main Carriage Paid
CFR - Cost and Freight (named port of destination) CIF - Cost Insurance and Freight (named port of destination) CPT - Carriage Paid To (named place of destination) CIP - Carriage and Insurance Paid To (named place of destination) Group D-Arrival DAF - Delivered at Frontier (named place) DES - Delivered Ex Ship (named port of destination) DEQ - Delivered Ex Quay (named port of destination) DDU - Delivered Duty Unpaid (named place of destination)
DDP - Delivered Duty Paid (named place of destination)
Uniform Customs & Practices for Documentary Credits (UCPDC ICC (2007) - 600 - IMPORTANT PROVISION)
Background In May 2003, the International Chamber of Commerce (ICC) authorised the ICC Commission on Banking Techniques and Practices (Banking Commission) to bring out a revision of the Uniform Customs and Practice for Documentary Credits. Meaning The Uniform Customs and Practices for Documentary Credits (UCP) is a set of rules on the issuance and use of letters of credit. This is other wise known as “Laws of Letter of Credit”. Important Articles Article 2: Definitions of advising bank, applicant, confirmation, beneficiary etc. Article-3: Interpretations of various commonly used words in credit are given. Article-4: A credit by nature is a separate transaction from the sale or other contracts on which it may be based. Article-5: The bank deals in documents and not with goods. Article-6: A credit must state availability of the bank, expiry date and place of presentation.
EXCHANGE EARNER'S FOREIGN CURRENCY (EEFC) ACCOUNT
1. Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign currency with an Authorised Dealer, i.e., a bank dealing in foreign exchange.
2.
3. 4.
The account is a non-interest bearing current account.
A person resident in India may open the account. One can credit 100 percent of his foreign exchange earnings into this account subject to permissible credits and debits.
5.
Foreign exchange earnings received through an international credit card for which reimbursement are provided in foreign exchange may be regarded as a remittance through normal banking channels and can be credited to the EEFC account. There is no restriction on withdrawal in rupees of funds held in an EEFC account.
6.
? All transactions in Foreign exchange are governed
by FEMA 1999. ? FEMA replaced FERA,1976. ? Important Provisions of FEMA related to exports, imports, exchange rates, currency of payments, NRIs, etc…
? Provisions for Foreign Travel. ? Other Remittances.
? Foreign Currency A/C in India ? Exchange Earners Foreign Currency (EEFC) A/Cs ? Resident Foreign Currency (RFC) Accounts ? Resident Foreign Currency (Domestic)
1/31/2013 International Banking
17
FOREIGN INVESTMENTS IN INDIA
I. Foreign Direct Investment (FDI)
? ? ? ? A. B. ? A. Automatic Route Government Route General permission of RBI under Foreign Exchange Management Act Transfer from Non-Resident to Non-Resident Transfer by way of sale Transfer by way of gift Transfer from Resident to Non-Resident Transfer by way of sale-General Permission under Regulation 10 of Notification No. FEMA 20/2000-RB dated May 3, 2000
B.
Transfer by way of gift
Cont….
II. Foreign Technical Collaboration
? Payment for foreign technology collaboration by Indian companies are allowed under the automatic route subject to the following limits;
? Lump sum payments not exceeding US$2 million; ? Royalty payable being limited to 5% for domestic sales and 8% for exports, without any restriction on the duration of the royalty payments; ? The royalty limits are net of taxes and are calculated according to standard conditions; ? The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties; ? RBI has delegated the powers to Authorised Dealers (ADs) to make payment of royalty under such agreements. ? Proposals which do not satisfy the parameters prescribed for automatic route of RBI, require clearance from Ministry of Commerce. Cont….
III. Portfolio Investment ? Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000. FIIs include Asset Management Companies, Pension Funds, Mutual Funds, Investment Trusts as Nominee Companies etc. ? RBI has granted General Permission to SEBI Registered FIIs invest in India under the Portfolio Investment Scheme. ? All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. ? A Foreign Venture Capital Investor registered with SEBI may make investment in a Venture Capital Fund for an Indian Venture Capital Undertaking, in the manner. ? Non-Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme. ? An NRI or a PIO can purchase shares up to 5% of the paid up capital of an Indian company. ? The sale of shares will be subject to payment of applicable taxes.
EXPORT FINANCE
Types of Export Finance Pre-shipment Advance: Pre-shipment advance is allowed to exporters for procurement of raw materials, semi-finished goods and finished goods. Post-shipment Advance: This facility is allowed to the exporters after the shipment has been made and the exporters have submitted the documents to the bank. Types of Pre-shipment Finance Pre-shipment finance can be of two types: a) Packing Credit (PCL), and b) Advance against government receivables, i.e., Duty Drawback, etc. Types of Post-shipment finance: a) Export bills purchased/discounted/negotiated b) Advance against bills sent on collection c) Advance against exports on consignment basis Cont…. d) Advance against duty drawback
Export Credit in Foreign Currency
a) Pre-shipment Credit in Foreign Currency (PCFC) can be allowed to exporters as being allowed in Indian Rupee initially for maximum 180 days with provision for further extension.
b)
Export Bill Rediscounted Abroad (EBR) is given to finance export bills in foreign currency for maximum 180 days at LIBOR linked rate.
Foreign Trade Policy: 2004-09
Strategies: The strategies include:
?
? ?
unshackling of controls,
creating an atmosphere of trust and transparency, simplifying procedures and bringing down transaction costs,
?
adopting the fundamental principle that duties/levies should not be exported,
Special Focus Initiatives Vishesh Krishi Upaj Yojana
Cont….
Export Promotion Schemes ? ? ? ? ? ? ? ? ? Target Plus New Schemes Focus Market Scheme (FMS Focus Product Scheme (FPS) Served from India EPCG Status Holder Categorization Export Oriented Units Free Trade and Warehousing Zones (FTWHZ)
?
? ?
2nd hand Machinery
Service Export Promotion Council Procedure simplification and rationalization
doc_639341439.ppt