Foreign Exchange Management Act, 1999 was implemented w.e.f. 01st June, 2000 replacing the earlier Foreign Exchange Regulation Act, 1973. Broad difference between FEMA and FERA is as under:-

FERA  --   was  Disabling Banks.  It's Objective  was  conservation of foreign Exchange. During its life 

                 time, FERA dealt with  Problem of Scarcity of foreign exchange.The Offence under FERA was 

                 criminal  & punishable and the  Burden of proof was on the  accused.                

FEMA  --  is  Enabling Banks. It's Objective is to manage foreign Exchange. FEMA deals with the 

                 Problem of plenty of foreign exchange. The Offence under FEMA is  civil & compoundable

                 and the    Burden of proof is on the prosecution.

Authorized Dealer (AD) is an organization licensed by RBI to deal in foreign exchange.

With effect from  06.03.2006, RBI has modified the licenses to Authorized Persons as below:-

AD 1 -- 108 banks

AD 2 – Sophisticated money changers

AD 3 -- Institutional licenses eg to SIDBI, EXIM Bank etc

Offshore Banking Unit (OBU):-

-An SEZ is a zone within  political territory enjoying economic independence up to large extent. Branch of a bank working in SEZ is called off-shore banking unit.

Overview of Foreign Exchange

There are three dimensions to overseas trade:-

-Trade/ Non Trade aspects of Ministry of Commerce

-Exchange aspect of Reserve bank of India

-Bank specific guidelines.

Methods of payments in overseas trade:-

1. Advance Payment

2. Collection of Documents

3. Open Account

(In all these, banks are service agent

These are based on trust between buyer and seller.

These don’t form ALM. (Asset Liability Management))

4.       Letter of Credit

·         Here bank is a committed agent.

·         It is based on distrust.

·         It forms part of ALM.

FEMA 1999 stipulates:-

Nothing can be imported/exported without underlying contract.  It can be either:-

-Performa Invoice

-Confirmed order

-Indent order – foreign trade broker- indenting agent- middleman letter

-Letter of Credit

(Information Technology Act 2000  authorizes the banks to  rely on electronic generated letter signed by submitter)

Role of Institutions  in Forex Transactions

Ministry of Commerce:-

-Works under Foreign Trade Policy

-It operates through DGFT

-It ensures what come to/go from India, eg, Importability & Exportability

-Issues Importer- Exporter Code to person dealing in foreign trade.

-Publishes Handbook of Rules and Procedures for foreign trade

-Releases HS-ITC classification of items based upon – freely traded items, Restricted items & 

 Prohibited items for exports and imports.

Reserve Bank of India:-

-It controls all inward and outward foreign exchange remittances on account of exports, imports or 

  otherwise.

-It carries out all borrowings and lending in overseas market.

-It monitors all inbound and outbound investments like FDI, FII etc.

Customs Department:-

-Controls import entry & export exit of goods and services.

-Does valuation of consignment.

Enforcement Directorate:-

-Caretaker of law.

-Deals with miscreants.

Banks:-

Banks  to take care :-

-Exchange rate

-Interest rate

-Service charges

-Internal documentations

-Foreign Exchange Dealers’ Association of India (FEDAI)

-Framing rules on FX transactions

-Advisory body to RBI on FX market.

-Prescribing code of conduct for traders & bankers on FX.

-FX dispute settlement platform of member banks.

-Quoting LIBOR rate for interest on NRE deposits

-Weekly average rates of major currencies to revalue ALM

Export Credit Guarantee Corporation (ECGC):-

-It is a credit insurance company for export promotion.

-Provides policy to Exporters and guarantees to Banks.

-Policy protects Exporter for his risk overseas & guarantee protects bank for its finance to exporters.

-Policy is a shipment level transaction & guarantee can be both pre-shipment as well as post-shipment.

-Policy is en-cashable upon importer’s default to exporter & guarantee is en-cashable upon exporter’s

  default to bank in repayment of loan.

International Chamber of Commerce (ICC):-

-It’s headquarters is in Paris.

-A voluntary organization of member banks.

-Central banks represent the nation.

-ICC has brought entire world business & banking community at a common platform of understanding

  used in international trade through publications (50).