Foreign Exchange Dealers Association of India (FEDAI) | FEM act 1999
Foreign Exchange Management Act (FEMA), 1999
Forex activities in India are governed by the Foreign Exchange Management Act (FEMA) 1999. FEMA came into force in June 2000, replacing the Foreign Exchange Regulation Act (FERA).
The objectives of FEMA are:
- Promotion of external trade through foreign exchange
- Systematic Development and Maintenance of Forex Market in India
Salient Features of FEMA
- FEMA is applicable to all foreign exchange transactions of residents of India and Indian operations of non-residents.
- Non-authorized persons are prohibited from foreign exchange transactions.
- If any person resident in India receives foreign exchange without making the corresponding inward remittance, the payment is deemed to be from an unauthorized person.
- Seven types of foreign accounts are strictly prohibited. These include transactions related to lotteries, football pools, banned magazines, etc.
- Resident of India (ROI) is entitled to possess or possess or transfer any foreign security or immovable property situated outside India subject to the rules.
- Similar freedoms are granted to a resident who receives foreign security or immovable property from an ROI.
- An ROI is allowed to hold shares, securities, and assets acquired by him when he was a resident or had such property inherited from a resident.
- Price limits have been revised over the years, broadening the transaction base.
Buyer’s Credit refers to credit settled by importers for payment of imports made by Indian buyers from a bank outside India for a maturity period of fewer than three years. Supplier credit refers to the credit given by a foreign supplier for import into India. Trade credit means credit for imports by foreign suppliers for less than 3 years from the date of shipment.
RBI has issued the following guidelines for business loans:
- Amount and Tenure – Authorized Dealers (ADs) are allowed trade credits up to USD 20 million per transaction with maturities of up to one year and maturities of up to 3 years for import of capital goods. No rollover should be extended beyond the permissible period. Business loans for more than 3 years come under External Commercial Borrowings (ECB) and they are governed by ECB guidelines.
- Overall cost ceiling – The ceiling on the overall cost i.e. the total cost of the business credit is as follows:
- Maturity up to 1 year: 6-month London Interbank Offered Rate (LIBOR) + 50 basis points.
- Maturities of greater than 1 year but less than 3 years: 6-month LIBOR +125 for related credit currencies such as Euro Interbank Offered Rate (EURIBOR), Singapore Interbank Offered Rate (SIBOR), and Tokyo Interbank Offered Rate (TIBOR) basis points).
- Issuance of a guarantee, letter of undertaking (LOU), or letter of comfort (LOC) in favor of the foreign lender. AD is permitted to issue a Letter of Guarantee/LoU/LOC in favor of a foreign supplier for import of all non-capital goods for a period of one year for USD 20 million per transaction. In the case of capital goods, the period is up to 3 years.
The request for trade credit will have to comply with the RBI conditions and the importer will need approval from RBI.
Effects of Liberalization
The liberalization of Indian investments in the global financial market has increased access to commercial lending by Indian corporates and increased the participation of foreign investors in the Indian stock market.
The objective of FEMA is to simplify, consolidate and amend the law relating to foreign exchange and to facilitate external trade and payments. FEMA seeks to establish a more liberal and systematic regulatory framework for economic development.
Some measures under FEMA are:
- Current account transactions such as foreign trade, current business, short-term banking services, remittances for living expenses of parents, spouse and children living abroad, education, foreign travel, and parent, spouse and children Expenditure on medical care was liberalized.
- The following cases are exempted from recovery and repatriation:
- Possession of foreign currencies or coins to the extent specified by the Reserve Bank of India.
- A foreign currency account is held and operated by an individual or group of persons to the extent specified by the Reserve Bank of India.
- Foreign exchange earned or received by any person in pursuance of general or special permission granted by the Reserve Bank of India, or any income kept outside India
Information Systems on Forex
The flow of information regarding foreign exchange is important for the Government of India and the Reserve Bank of India for policy decisions. Financial transactions take place through banks (authorized dealers or ADs) and are the source of information. ADs report the information in R-Return.
All exchange transactions are to be reported by companies and other entities involved in foreign exchange to banks. External borrowings by corporates should be reported to the RBI, which has an obligation to submit the quarterly balance of payments (BoP) to the IMF within three months from the end of the quarter.
BoP figures provide details about a country’s transactions relating to trade, services, assets, and liabilities with other countries during the quarter.
There are two major types of R-returns: Nostro Accounts returns, and Vostro Accounts returns.
Nostro accounts refer to accounts maintained by customers and other banks on their behalf. The balances in these belong to the other party and are therefore on the credit (liability) side of the bank’s balance sheet.
Vostro accounts refer to a bank’s own account held by someone else, usually another bank. These balances belong to the bank and hence they are on the debit (asset) side of the bank’s balance sheet.
R-Return should be submitted twice a month, on the 15th of the last day of each month. Returns should reach RBI within 7 days from the date of closure.
While the reporting requirements are to be met by the banks only, the corporates have to ensure that their reporting to the banks is accurate and timely again for foreign exchange transactions, so as to avoid default information being passed on them by the RBI.
What is Foreign Exchange Dealers Association of India (FEDAI)
Foreign Exchange Dealers Association of India (FEDAI) is a self-regulatory body incorporated under Section 25 of the Companies Act 1956. It was established as a consortium of banks dealing in foreign exchange in India.
The major activities of FEDAI are regulation-making, governing the conduct of inter-bank forex trading between banks, and liaising with RBI for the reform and development of the foreign exchange market.
What are the Functions of Foreign Exchange Dealers Association of India (FEDAI)
• Formulating FEDAI Guidelines and Rules for Forex Trading
• To recognize forex brokers
• Announcement of periodic rates to member banks
• To assist banks in settling issues of FEDAI members in their transactions
• To represent member banks in Government/RBI/other bodies
• Providing training to bank employees in Forex trading
The role of FEDAI has changed due to the ongoing integration of global financial markets. It plays a catalytic role for smooth functioning of markets with close coordination with RBI and other organizations such as Fixed Income Money Market and Derivatives Association of India (FIMMDA), Forex Association of India, and other market participants.
FEDAI enhances the benefits derived from collaboration with member banks through innovation in areas such as new customized products, maintaining international standards on accounting, market practices, and risk management systems.
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