CAPAC Recommendations for India

CAPAC Recommendations Economics and Social Sciences

Title: Recommendations on capital control policies for India

Advisor: Dr Vivek Moorthy

Name: Kaushik Rana
Email: kaushikr05@iimb.ernet.in
Roll No: 2005128

Post Graduate in Software Enterprise Management
INDIAN INSTITUTE OF MANAGEMENT BANGALORE,
Bannerghatta Road, Bangalore, India.

IIMB-PGSEM Page 1 of 51


Copyright © 2007 by Indian Institute of Management Bangalore & Kaushik Rana

Declaration:

As guided by my advisor Dr Vivek Moorthy I have investigated into various capital
account convertibility (CAPAC) policies of India in comparison with East Asian
Economies. Since the scope of CAPAC is very wide I have restricted the study to
understanding the regulations allowing outflows for resident individuals especially with
regard to real estate investment in foreign land.

Firstly I have critiqued the gaps in the Fuller Capital Account Convertibility report
(2006) prepared by honorable Economists and chaired by Dr Tarapore and argued the
need to increase the ceiling for capital outflow for resident individuals in India. I have
also investigated into the recommendations of Economic Outlook report (2007-08)
chaired by Dr Rangarajan. Next after extensive search on the various Central Bank
websites of Thailand, Malaysia, South Korea, Philippines and Taiwan, I have brought
out the relevant sections/circulars that mention about capital control policies for
residents. These have been referred extensively in the report and also provided sections
in the Appendix. Have analyzed these regulations with respect to the present economic
condition in that country like GDP growth, inflation, net increase in international
reserves and movement of currency in the last one year and compared that with India.
The Economic indicators for each country are detailed in the Exhibits. Further, I have
investigated into various rules and regulations in USA, Canada and UK on foreigners
(Indians) acquiring immovable property there.

I had read up many papers to understand the economic implications and also referred
many websites to get a full context. Based on my understanding have prepared the report
using Harvard style of referencing. I hereby declare that the work is an original
contribution and not a reproduction of any available papers or reports.

I would like to especially thank Dr Vivek Moorthy for his guidance and timely feedback.
Also grateful to Dr Shyamal Roy and Dr Rupa Chanda for providing helpful suggestions.



With Best Regards,

Table of Contents
Declaration:..........................................................................................................................2
Table of Contents.................................................................................................................3
Introduction:.........................................................................................................................4
Review of the FCAC:...........................................................................................................5
Allowing outflows for foreign real estate investment:........................................................7
CAPAC for Resident Individuals in East Asian Economies: .............................................9
Thailand:..........................................................................................................................9
Malaysia: .......................................................................................................................10
South Korea: .................................................................................................................11
Philippines:....................................................................................................................13
Taiwan:..........................................................................................................................14
Real estate investment in Developed Countries:...............................................................16
United States of America: .............................................................................................17
Canada:..........................................................................................................................19
United Kingdom:...........................................................................................................21
Conclusion:........................................................................................................................23
Appendices:........................................................................................................................25
Appendix 1: Circular issued by Bank of Thailand on 24th July, 2007......................25
Appendix 2: Circular issued by Central Bank of Malaysia (1-Apr-2007).................27
Appendix 3: Summary of Credit Facilities allowed in Malaysia ..............................29
Appendix 4: Forex Liberalization Plan in South Korea (19 May 2006) ...................31
Appendix 5: Foreign Exchange Regulations in Philippines (Mar-2007)...................32
Appendix 6: Excerpts from Foreign Exchange Control Act in Taiwan.....................34
Exhibits:.............................................................................................................................37
Exhibit 1: Key Economic Indicators in Thailand......................................................37
Exhibit 2: Key Economic Indicators in Malaysia......................................................38
Exhibit 3: Key Economic Indicators in South Korea.................................................40
Exhibit 4: Key Economic Indicators in Philippines...................................................42
Exhibit 5: Key Economic Indicators in Taiwan.........................................................44
Exhibit 6: Key Economic Indicators in India............................................................46
References:.........................................................................................................................48



Introduction:
Capital Account Convertibility (CAPAC) refers to the freedom to convert local financial
assets into foreign financial assets and vice versa. It is associated with changes of
ownership in foreign/domestic financial assets and liabilities and embodies the creation
and liquidation of claims on, or by, the rest of the world. CAPAC can be, and is,
coexistent with restrictions other than on external payments. (Tarapore et al. 2006, 5)

While the benefits of CAPAC are quite obvious like greater capital mobility allows
foreign fund inflows easier into the country increasing the availability of large capital
stock for long term investments. CAPAC allows residents to hold internationally
diversified portfolios thereby reducing the vulnerability of income streams to shocks in
the domestic market. Capital account liberalization also provides effective financial
intermediation allowing the domestic and foreign players more choice of financial
products, and raises the bar to international levels. In short move towards CAPAC is
regarded as a mark of a developing country graduating into a developed country.

In 1997, the RBI appointed a Committee on Capital Account Convertibility headed by Mr
S. S. Tarapore, the then Deputy Governor of RBI, to examine the issue in all its
ramifications and provide a road map for the economy to move towards full
convertibility. The Tarapore Committee recommended that the capital account
convertibility be done in a phase manner from 1997 to 2000 and only after certain
preconditions were satisfied. However, nothing much happened during the recommended
phase (1997-2000) mostly because of political pressures that did not allow Government
to take many drastic steps and the onset of financial crisis in Southeast Asia barely two
months after the report was published. But, after 2000, there was a phenomenal increase
in the foreign exchange reserves (there was a quantum jump of $21.3 billion in 2002/03
alone). This embarrassingly high level of reserves forced the policy makers to
compulsorily liberalize both the current and capital account exchange control regime.
Again at the behest of our PM Manmohan Singh on 18 th March, 2006 to come up with a
transparent framework to move towards fuller capital account convertibility, the RBI



constituted the Fuller Capital Account Convertibility (FCAC) committee in March 20,
2006.

For the purpose of this paper we shall be primarily reviewing the FCAC report in light of
the recent developments in India. We shall also be referring to the Economic Advisory
Council (EAC) recommendations for this year and recommendations of others over the
years on the path to be taken for CAPAC liberalization. A comparison of India's policies
with respect other East Asian Countries like Thailand, Malaysia, South Korea,
Philippines and Taiwan will hopefully support our arguments for India. As we may note,
the FCAC report which is built upon the 1997 Tarapore Committee report has different
policy regulations for various entities which are as segmented below:

● Corporate/Business Residents
● Corporates – Non Residents (including OCBs)
● Banks – Residents
● Banks – Non Residents
● Non-banks – Financial Residents
● Non-banks Non-residents – FIIs
● Individuals – Residents
● Individuals – Non-Residents

For the purpose of this paper we will consider the capital control measures primarily on
Resident Indian Individuals (RII) who we think has been successively left out (Moorthy
1997, Part 1).

Review of the FCAC:

The FCAC report had acknowledged the fact while there has been reasonable amount of
convertibility for non-resident corporate and NRI, there is near-zero convertibility for



non-resident individuals (Tarapore et al. 2006, 10). Again, resident individuals face a
virtual ban on capital outflow (Tarapore et al. 2006, 11). While the very definition of
CAPAC calls for freedom of converting local assets into foreign and vice-versa, the RBI
seems to have taken a step-motherly approach towards capital control measures for
resident Indians for fears of waves of outflows that requires to be calibrated (Tarapore et
al. 2006, 11). While the 1997 committee Report called for implementing a plan to allow
RIIs to remit upto USD 100,000 per annum by 2000, it was only in this fiscal (2007-08
to 2008-09) that this got implemented (Tarapore et al. 2006, 109). Ironically, RBI was
forced to hike the limit to USD 200,000 through Circular No. 9 dated 26-Sep-2007 to
ease the pressure on the rupee on account of the strong FII inflows. As per the FCAC
report, this hike would have come into effect only in the 2009-10 to 2010-11 time-frames.
Hence, one may be forced to raise the question of delay of the 1997 recommendations
and this ad hoc measure in 2007. To this point, we are in agreement to Mr S.S. Bhalla's
(Committee Member of FCAC report) dissent note stating that FCAC report has failed to
deliver the benefits of CAPAC to resident Indians and that he is being allowed to remit
about 30% less in real terms than he was recommended in 1999/00 (Tarapore et al. 2006,
151).

FCAC has argued that remittance from resident individuals is but a trickle – US$ 28.3
million for portfolio investments and additional US$ 1.9 million for immovable property
in 2004 and 2005 (Tarapore et al. 2006, 19). While one may not be very sure whether its
an issue with data collection or procedural impediments, the report mentions that RBI has
liberalized CAPAC on an ad hoc basis and the basic framework of control system has
remain unchanged (Tarapore et al. 2006, 20). Mr A.V. Rajwade (Committee member of
FCAC report) is however against liberalizing capital account for individuals for fear of
large capital outflows from resident individuals through herd mentality that happened
during the Asian crisis (Tarapore et al. 2006, 148). Consider this, since March 2007, the
increase in foreign currency assets in India is USD 62.7 billion (an increase of 32%)
while it has increased by about 58.79.84% since October 2006 while the rupee has
appreciated by about 15.075% against the dollar in the last one year (See Exhibit 6).
Hence, most of the above currency asset is because of RBI's intervention in the foreign



exchange market to prevent the rupee from appreciating quickly. As Dr Vivek Moorthy
had argued in response to the 1997 report that the goal of RBI is to get the rupee to
gradually fall in line with India's higher inflation, so that the competitiveness of the
external sector is not adversely affected (Moorthy 1997, Part-3). He recommends that
allowing RIIs to hold some foreign currency assets is likely to facilitate this goal as the
ongoing demand by Indians to invest overseas is likely to continue to put downward
pressure on the absolute value of the rupee. Hence, we respectfully disagree with Mr.
Rajwade's views.

The Economic Outlook report 2007-08 chaired by Dr C. Rangarajan mentions that
accumulation of foreign currency assets with the RBI has the direct monetary
consequence of increasing the stock of reserve money which in turn may fuel inflation in
the economy. Further, it mentions that the order of magnitude of capital inflows can have
serious repercussions for domestic businesses in both the domestic and export markets
(Rangarajan et al. 2007, 58). So, the report suggests various channels for 'orderly
conditions' through RBI intervention – one by neutralizing through issue of MSBs,
increasing the CRR and by limiting the conversion of ECB proceeds into rupees
(Rangarajan et al. 2007, 59). As restrictions on capital inflows may be seen as a
regressive step, the report suggests liberalizing outflows by removing administrative and
procedural impediments. However, it does not specify how or anything specifically
related to RII. This is where we think there is a gap and an opportunity for RBI to bridge.

Allowing outflows for foreign real estate investment:

We also think that the FCAC report has probably missed the point regarding short term
outflows versus long term outflows. While outflow controls are used to limit the
downward pressure on their currencies. Such controls should mainly be applied to short-
term capital transactions to counter speculative outflows that threaten to undermine the
stability of the exchange rate and deplete foreign exchange reserves. But the same cannot
be said for long term outflows like investment in real estate in a foreign country by RIIs.
A foreign investment in real estate by a RII can be a good way to help one diversify one's


portfolio, help one make a provision of better living conditions in developed countries
and also most importantly make a progressive move towards fuller CAPAC. However, as
Dr Vivek Moorthy rightly points out that such a scheme should not be allowed to be used
to convert black money into white (Moorthy 1997, Part 3). Guidelines can be given to
allow buy of foreign assets only by selling of well-documented financial assets and
ensuring record through PAN and annual tax returns. We would hence focus our analysis
on the possibility of allowing real estate investments abroad referring to countries like
Thailand, Malaysia, South Korea, Philippines and Taiwan. We would also consider some
other measures being taken by the Central Banks in these economies to enable fuller
capital account convertibility for residents and ease the pressure of an appreciating
currency. We would also touch upon some other measures taken by the Central banks in
these economies for Resident individuals.

Interestingly, the FCAC report has recommended remittance up to US$ 1 million, per
calendar year, for NRIs out of balances held in NRO accounts or sale proceeds of assets
in India acquired by way of inheritance or sale proceeds of house bought 10 years ago
(Tarapore et al. 2006, 108). However, the same law does not apply for resident
individuals. Today, in spite of the increase of allowed capital outflow to US$ 200,000 per
calendar year for resident individual, it is not much to acquire an immovable property in a
foreign land. While the RBI has been continuously taking different measures to ease the
pressure on rupee through controls in the ECB route, allowing increased portfolio
investments abroad by corporate, exchange earner's foreign currency account
liberalization, market stabilization schemes, it is yet to consider allowing individual
residents to invest in real estate abroad. While short term capital outflow can lead to
exchange rate volatility, allowing RIIs to invest in long term foreign assets like real estate
can surely be beneficial.

According to Dr Moorthy (1997, Part-3), there is opportunity cost of keeping huge
reserves of dollars idle or in low yielding assets. Cultural affinity of Indians makes then
invest in gold which is in general a poor investment with no cash dividends. Instead they
can invest in high yielding foreign assets to enhance their returns and have better quality



of life.

CAPAC for Resident Individuals in East Asian
Economies:

Thailand:

Consider the case of Thailand – the economy has grown at around 4.4% in the last one
year while inflation has been falling steadily and stood at 1.9% in May'07 (See Exhibit
1). On the other hand, international reserves increased by 32.5% to USD 80.2 billion
(Oct'07) since Oct'06 while the baht appreciated by 6.43% in the same period (See
Exhibit 1). However, to prevent this rapid appreciation of the baht hurting the exporters,
the Central bank introduced some capital controls on Dec 18, 2006 which read as
follows:
“Anyone selling more than $20,000-worth of foreign currency, other than for the
purposes of trade, would have had to deposit 30% of it with the central bank—at zero
interest—for one year, or forfeit one-third of the deposit.” (Bizasia.com 2007)

On December 19, 2006, Thailand’s stock market plunged 15%, a degree greater than
anything experienced during the 1997 Asian Financial Crisis in response to the above
regulation!! (WSJ.com 2007)

Thus, recently on 24th July, 2007 the Ministry of Finance issued notification allowing
relaxation of Exchange Control Regulations to benefit Thai business and individuals in
their investments abroad (see Appendix 1). For a Thai resident the limit to which he may
remit abroad has been raised to USD 1 million or its equivalent per person per year. This
remittance can be for a family or relative who is a permanent resident abroad, remittance
for donation to public, remittance to purchase immovable properties abroad and
remittance to purchase securities of an affiliated business abroad according to an



employee's benefits plan. The remittance limit is same for inheritance to a person who is
a Thai emigrant resident abroad. One may argue that Thailand has a fairly comprehensive
liberalized capital account as permanent Thai residents can buy, exchange or borrow
foreign currencies from authorized person and deposit that with obligation up to USD
500,000 or its equivalent for a natural person and USD 50 million or its equivalent for a
juristic person.

Compare this with India where foreign reserves have increased by 58% and rupee
appreciated by about 15% compared to 32% and 6.5 for Thailand. So, while India has
similar policy with Thailand related to remittance for non-resident individuals, the
policies differ grossly when it comes to resident individuals. Hence, to prevent any
further misbalance to economy, RBI may do good to relax the capital controls for RIIs as
Thailand has done.

Malaysia:

Another East Asian economy is Malaysia which has achieved remarkable growth with
the GDP above 4% in the last 5 years and grew by 5.5% in the last 6 months of this year
(See Exhibit 2). This growth has been achieved amidst low inflation - Headline inflation,
as measured by the annual change in the Consumer Price Index (CPI), increased to 1.9%
in August 2007 (See Exhibit 2). The ringgit appreciated against the dollar by 3.3%
between Dec'06 to Sep'07 while net international reserves stood at USD 97 billion
(approximately 21.25% increase since Dec'06).

The Central Bank of Malaysia (Bank Negara Malaysia) in the circular dated 1st April,
2007 overhauled the investment abroad policies in Malaysia (See Appendix 2).
Accordingly, a resident Malay individual with domestic ringgit credit facilities is allowed
to convert ringgit into foreign currency up to RM 1 million (equivalent to approximately
USD 30,000) per calendar year for investment in foreign currency assets while there is no
restriction on the amount for a resident without domestic ringgit credit facilities. While
this amount may be small and also they have not specified if FCA can include real estate,



they have made separate provisions for resident individuals to invest in offshore and
onshore foreign currency assets. Resident Malays wishing to invest more than RM 50
million (apprx USD 1.5 million) per year in offshore foreign currency accounts without
domestic ringgit facility may need to register (See Appendix 2) while no registration is
required for placement in onshore FCA or foreign currency financial products marketed
by licensed onshore banks or any residents permitted by the Controller. This is again a
step forward in liberalizing current account convertibility and helps the central bank
manage capital flows.

In the same circular (1st April, 2007), the Central Bank has made extensive provisions for
providing credit facilities for non-residents. So, a resident corporation without domestic
ringgit credit facility is allowed to convert any amount of ringgit into foreign currency for
the lending to non-residents but for resident corporations with domestic credit facilities
the amount can not exceed RM 50 million equivalents per calendar year. This facility is
even extended to Resident Malay Individuals (See Exhibit 3). Accordingly, resident
individuals can grant foreign credit facility of any amount funded by own foreign
currency funds placed onshore and offshore or through conversion of ringgit (without any
domestic credit facilities).

These are surely innovative ways of allowing capital outflow which RBI may consider
for India to ease the pressure of an appreciating rupee without having to resort to
increasing foreign currency reserves.

South Korea:

South Korea which has transformed itself into a modern industrialized nation and also a
member of OECD is again a very interesting point in case. The Korean economy has
grown above 5% in 2006 (see Exhibit 3) and currently clocking a growth above 4%
(2007) has been able to keep inflation low between 2.5% to 3.5% since mid-2005. The
exchange rate has risen 9% relative to the dollar since the end of 2005 (and 4.19% in the
last 1 year reaching its lowest of 909.9 to dollar on 26th October, 2007) and foreign



reserves of USD 247 billion (47% of GDP in 2007) driven by foreign exchange market
intervention intended to smooth the upward trend in won.

Korea is one country which has very systematically undertaken capital account
liberalization since 1997. After the currency crisis broke out in November 21, 1997,
Korea shifted to free-floating exchange rate system in December (BoK.kr 2007). By
January, 2001 it completely removed ceiling on overseas travel expenses, emigration
expenses, and withdrawals of domestic assets by nonresident nationals and deposits and
trusts abroad (BoK.kr 2007). In June 2005, the government announced the Overseas
Investment Activation Plan in which limits on real estate acquisition abroad and overseas
direct investment by individuals were expanded (BoK.kr 2007). The limits on real estate
acquisition abroad by residents, on overseas direct investment by individuals, on the
overall net open positions of foreign exchange banks and on the obligation for
repatriation of overseas claims were further expanded in 2006 (BoK.kr 2007). Currently
Bank of Korea allows purchase of real estate for business and investment activities of
corporation’s purchase of real estate of up to US$ 0.3 million for residence abroad by
residents intending to sojourn abroad for more than two years, purchases to establish
schools, hospitals or religious institutions, etc (BoK.kr 2007).

The credit policy in Korea is also highly developed. Accordingly, Foreign Exchange
Bank, general trading companies, institutional investors can provide foreign currency or
domestic currency loans to non-residents. Corporations can grant up to USD 10 million to
non-residents or up to 1 billion won per non-resident borrower upon declaration to the
Bank of Korea (BoKLoan.kr 2007). With regard to the credit facilities to non-residents
both South Korea and Malaysia is much in advance which allows for some capital
outflows from the economy reducing some pressure on the Central Banks.

Again Korea allows for residents to hold deposits abroad for asset diversification
purposes without any quantitative ceiling (BoKDeposit.kr 2007). Residents except
institutional investors who intend to deposit abroad by remitting more than US$ 50,000
per case from Korea must declare this to the Bank of Korea (BoKDeposit.kr 2007).



As of May 19, 2006, the Korean government announced its decision to advance the
implementation schedule of the on-going foreign exchange liberalization from the initial
time line of previous 2011 to 2009 in a phase wise manner (Appendix 4). Accordingly,
Koreans will be allowed to acquire overseas real estate for investment purpose up to USD
1 million or less (the limit to be raised in a step by step manner). Meantime, Korean
residents’ acquisition of overseas real estate for residential purpose does not entail any
restrictions with respect to the intended investment amount.

Thus we may note that South Korea has been far ahead of all its neighbors with regards
to CAPAC of residents. It has clearly distinguished between acquiring foreign real-estate
for investment purpose and for residing there. The amount of USD 1 million for
acquiring foreign real estate is same as Thailand. RBI can surely take some cues from
Korea with regards to implementing CAPAC for RIIs and make a proactive step towards
raising the ceiling of outward remittance to USD 1 million.

Philippines:
Philippines economy has been growing on average 5% in the last 5 years clocking a
growth rate of 7.27% in 2007 while inflation has been on the higher side (above 6% in
2004-2006), but it has been able to contain inflation to just 2.9% in 2007(See Exhibit 4).
On the other hand, net international reserves have grown by 47% (since Oct'06) and the
Philippine Peso has appreciated by 11% in the same period (See Exhibit 4).

So, on 3rd August, 2007, the Governor of Bangko Sentral ng Philipinas (BSP) modified
the Foreign Exchange Rules and Regulations of 1992 & 1993 (Circular No. 1327 and
1389). Accordingly, a Philippine Resident can purchase FX from AAB (Authorized
Agent Banks) or NBBSE (Non-Bank Bangko Sentral ng Pilipinas-Supervised Entities)
for outward investment in amount/s not exceeding USD 12 million per investor per year
without prior BSP approval from USD 1 million earlier (See Appendix 5). Equity
investments of BSP-supervised entities require prior BSP approval, regardless of amount.
Outward investments by residents exceeding USD 12 million per investor per year shall



require prior approval by and subsequent registration with the BSP. So while the amount
of outward investment is quite large, the BSP has made it mandatory for resident to
purchase the amount from Government backed AABs and NBBSEs and have also
specified that such outward investment can only be done in foreign currency denominated
bonds/notes of the Republic of the Philippines (ROP) or other Philippine entities(See
Appendix 5). So, no foreign real estate investment is allowed by resident Philippine.

The growth in forex reserves and appreciation of the peso in Philippines seems to be
much like the case of India and while BSP has at one step increased the limit on outward
remittance to USD 12 million (not for foreign real estate acquisition), one may have to
wait and see if this will have much effect on the foreign currency reserves and
appreciating peso.

Taiwan:

Republic of China (Taiwan) has been growing at the rate of 4% and above in the last 2
years while inflation has been hovering around 1%. Interestingly, we find from Exhibit 5
that the New Taiwan Dollar has appreciated by just 1.96% (since Oct 06) and in fact con-
tinuously depreciating against the dollar in the first half of 2007. Net forex reserves stood
at USD 262 billion – a mere 0.4% increase (since Oct 06). An analysis of the BoP data
reveals that Taiwan’s financial account consist of portfolio investment assets, including
equity securities and debt securities, which saw an outflow of USD 10.96 billion in
Q1(07-08) and USD 17.26 billion in Q2(07-08).

Table: Showing Financial Account details of Taiwan in last 1 year
2006 2007
1
C. Financial Account .. Q1r Q2r Q3r Q4r Q1r Q2p
Direct investment
abroad -1,960 -1,684 -2,072 -1,683 -1,941 -2,071
Direct investment in
R.O.C. (Taiwan)… 1,655 965 1,943 2,861 1,933 1,787
Portfolio investment
assets… -10,613 -10,820 -9,932 -9,418 -10,961 -17,206
Equity securities… -3,465 -4,511 -4,338 -6,167 -7,336 -14,255
Debt securities.... -7,148 -6,309 -5,594 -3,251 -3,625 -2,951



Portfolio investment li-
abilities..... 3,588 4,868 2,647 10,711 -771 10,148
Equity securities… 4,480 5,291 2,524 10,367 -11 10,575
Debt securities… -892 -423 123 344 -760 -427

Source : http://www.cbc.gov.tw/EngHome/eeconomic/statistics/BOP/new/eAQ.xls

Taiwan Headlines (2007) mentions that CBC officials indicate that Taiwanese enterprises
and individual investors have become more interested in purchasing overseas financial
products to diversify the risk of their financial investments. Since the real interest rate in
Taiwan is quite low, domestic investors prefer to launch investments in financial items
based on the U.S. dollar or in other foreign currencies. They have hence purchased main-
ly overseas funds, bonds, and securities. This was the reason for the forex reserves re-
maining almost same and not affecting the exchange rate of New Taiwan dollar. The
Central Bank of China (CBC) has been targeting capital outflow and defending the TWD
which have followed from the use of the TWD as a funding currency for carry trades. So,
Taiwan has gone largely unscathed in the current economic scenario where other East
Asian Economies has more or less met with the same fate of an appreciating currency.

The Foreign Exchange Control Act of Taiwan (see Appendix 6) specifies that single any
settlement of foreign exchange transaction (inward or outward) by a Taiwanese resident
above NT$ 500,000 (apprx USD 15,000) requires to be declared to the CBC. The limit
for non-residents is USD 100,000 but Article 6 also specifies that total accumulated
foreign exchange purchased or sold not exceeding USD 5 million by an association or
individual need not be declared to CBC. The Act has detailed the expenses and activities
for which outward remittance is allowed in Article 13 which allows Government
approved foreign investment or loan extended to foreign buyer. It does not specify if
foreign investment can include real estate. In Article 19 it has mentioned that the CBC
can suspend or restrict foreign exchange settlements any time in case of domestic
instability or balance of payments deficit. Any violation in declaration of foreign
exchange transaction limit will lead to heft fines as mentioned in articles 19-2 and 20 (see
Appendix 6).

Thus we may note that CBC has very well managed the CAPAC in Taiwan. It has set the



upper limit of remittances abroad to USD 5 million (without requiring to declare to CBC)
per year but at the same time kept per settlement limit to NTD 500,000 (USD 15,000
apprx) which ensures that a resident cannot transact in large amount of foreign currency
in a single transaction but overall outflow is ensured. Thus this does not affect the
exchange rate.

So for the case of India too, RBI can consider raising the upper limit of outward
remittance to USD 1 million as in the case of Malaysia and South Korea. However, it can
limit per settlement amount to avoid high volatility of fund flows during crisis as CBC
has done in Taiwan. According to the second Asia-Pacific Wealth Report published by
Merrill Lynch and Capgemini, India has the second fastest growing High Networth
Individuals (HNI) in India which stood at 100,000 in 2006 and grew by 20% (Business
Standard 2007, 3). As per the same Business Standard article HNIs are people with net
financial assets of at least USD 1 million, excluding their primary residence and
consumables while Ultra-HNIs are people with more than USD 30 million in financial
assets. The number of Ultra-HNI is an estimated 858 and Indian HNIs hold a combined
financial asset of USD 350 billion at the end of 2006 (Business Standard 2007, 3). With
the economic expansion and strong financial markets, this number is growing by day.
Hence many such resident Indians can afford to buy a home in a developed country or
location of their choice - the attractiveness in terms of an investment decision and better
quality of life and opportunity should be encouraged. And only liberalizing the CAPAC
for RIIs can make such a dream true. We will hence study the feasibility (whether laws
and regulations allows that) of RIIs acquiring homes in foreign locations like United
States of America, Canada and United Kingdom.

Real estate investment in Developed Countries:

As Economywatch.com (2007) rightly points out Real Estate Investment also follows a
business cycle and like any investment business-it has its peaks and troughs. Property
investment can lead to diversification of ones investment portfolio, as real estate
investments can be profitable and provide financial freedom in the long run. Real estate
investment can be attractive if viewed as a business opportunity; it can generate rental



income, using it as collateral to secure a loan for a business venture, to offset otherwise
taxable income through cash savings on tax-deductible interest rate losses, or simply
from the profits garnered from its resale (Economywatch.com 2007).

However, purchase of real estate in a foreign location requires careful planning starting
from choice of country, location, future value, living conditions, immigration laws and
tax considerations. With regard to tax the following require to be considered as
mentioned in website of Henleyglobal.com (2007)
1. Real-estate transfer taxes – Most countries levy this tax and hence real estate is
at times transferred indirectly by transferring the shares of a real estate holding
company in order to avoid paying real estate transfer taxes.
2. Annual real estate taxes – Most countries collect annual taxes on immovable
property which may not be very high.
3. Local inheritance and gift taxes – This is one of the main issues which relate to
taxes to be paid based on the value of real estate in case of an inheritance situation
or gifts which in many case is quite high.
4. Local inheritance laws and forced heirship rules – This is a big issue again.
5. Capital gains and other taxes upon the re-sale – This is an important
consideration when choosing a particular location on the re-sale value of foreign
real estate. Capital gains tax requires to be paid.
6. Immigration restrictions – Acquiring real estate in a particular country need not
necessarily guarantee immigration
7. Personal tax liability and tax residence - There might be case of double taxation
based on the location where foreign holiday home is situated.
We shall hence evaluate options of RIIs buying real estate in some of developed countries
of the West.

United States of America:

US real estate has traditionally been an attractive destination for foreign investors as it is
less volatile than other investments, interest rates are low compared to those in most other



countries, and U.S. real estate is seen as a “safe” investment (Yun and Fears 2005,
19-23). The U.S. market contains a large supply of real estate. US real estate has high
turnover rate and an easy exit option. Many international buyers also appreciate the equal
opportunity that U.S. real estate affords. There are few barriers to homeownership,
purchase or transfer of real estates in the U.S. except to the extent that may be necessary
to enforce U.S. Criminal laws or national security provisions (Yun and Fears 2005,
19-23). As per the same report, United States also does not restrict or scrutinize most
property purchases by foreigners, as do other countries. Foreign investors have the same
rights as those of American property owners. Real estates are also less exposed to the
effects of inflation than many other investments.

NATIONAL ASSOCIATION OF REALTORS® (NAR) established in 1908 helps
buyers and sellers of real estate properties in US. NAR conducted a survey of
REALTORS® in Florida in 2005 in order to better understand the extent of non-U.S.
resident homebuyers, why those buyers purchased homes in the U.S. The results are as
given below.

Source: Yun and Fears 2005, 22

US homes are generally considered more affordable compared to Europe and US is often
seen as a politically stable, economically strong country having good living conditions.
The top few countries investing in US real estate is as below.



Source: Yun and Fears 2005, 21

However, there are a number of issues which may hinder foreign real estate purchase in
the USA as described in web-site HenleyglobalUSA.com (2007) mentioned below:
1). Foreign investors/sellers have numerous reporting requirements - failure of which
may be punished with severe penalties (ranging from up to 25% of the fair market value o
the real estate).
2). Foreigner holding real estate in US may be required to pay up to 55% of inheritance
or gift taxes.
3). Even if one owns a house in US, he/she is not necessarily guaranteed entry and could
be denied entry for reason that one had immigration intent.
4). Foreigners are subject to estate tax with depending on the location of the property
situated in US while US citizens tax exposure is based on the personal status and not on
the location of assets.
5). Transferee of US real estate from foreign person is required to deduct and withhold
10% of the amount realized by the foreign person in the disposition.

Canada:

Canada is again a popular destination for immigration and foreign settlement because of
social and political stability, economic development, living conditions and spectacular
scenery. Residential property in Canada is generally cheaper than UK, USA and along



with healthy appreciation provides good investment opportunities (Buyassociation.com
2007). Canada's economy has been growing above 2.5% (Ontario.com 2007) for the last
3 years and with its wealth of natural resources makes it a self-sufficient economy with
focus on manufacturing, mining, energy and services sector.

Buying real estate property in Canada is very easy. As per Assignmentscanada.ca (2007)
if anyone stays in Canada for 6 months or less per year, the government considers them
as non-residents who are entitled to open a bank account and buy property. If staying for
more than 6 months, one must apply for immigration status. Majority of the provinces in
Canada have no restrictions on foreign ownership of real estate but some do limit the
amount of property/land that a non-resident can purchase. Purchase and sale of property
in Canada is usually done through realtors – the seller's agent and buyer's agent.

A non-resident can also try to qualify for mortgage financing in which case generally
35% down payment is required and 65% through mortgage (Assignmentscanada.ca
2007). A non-resident can also engage in sale of Canadian real estate held subject to
payment of Canadian tax of 50% of the gain (Assignmentscanada.ca 2007). This again is
quite high. If the property has been used for rental purpose, then 25% non-resident tax
must be paid on the gross rent a tenant pays(Assignmentscanada.ca 2007). However, non-
residents may be required to pay additional costs like various taxes - Property Transfer
(or Purchase) Tax/Land Transfer Fees, Clearance Certificate of CAD 300-1000, Good
and Services Tax on newly constructed homes, Provincial Sales Tax and Property Tax
which is to be paid annually(Assignmentscanada.ca 2007). A non-resident may have to
shell out additional expenses like Realtor's fees (3-7% of home's market value), Appraisal
fee, Survey fee, Lawyer's fees, Home Inspection fees, Property insurance, Service
Charges, and Condominium Fees (Assignmentscanada.ca 2007).

Canada is however less crowded, has easy availability of homes, high quality, less
expensive overall (land is less expensive, the cost of living is lower, the standard of living
is high). Purchasing a second home in Canada as an investment decision is attractive



considering the fact that the buying process a relatively easy and hassle free affair which
can only add even more value (Ezinearticles.com 2007).

United Kingdom:

There are again no restrictions on foreigners for purchasing real estate in the United
Kingdom. Investment in UK property has been very popular both because of the stability
of the UK property market and because of its tax friendly investment regime (compared
to other European countries) especially for those non-domiciled in the country
(Scfgroup.com 2007).

A foreign investor in UK can avoid paying real estate transfer tax by purchasing a
property through an offshore vehicle and transferring the shares in the real-estate owning
company, thus leaving the title to the UK real estate unchanged(Scfgroup.com 2007).
One can thus avoid inheritance tax, capital gains tax and stamp duty land tax (which is
1% - 4% of the real estate value and much less compared to other European countries)
through this offshore company vehicle (Scfgroup.com 2007).

Where a non-resident individual owns property a withholding tax of 22% or 40% will be
levied on rental income paid to the overseas landlord (Scfgroup.com 2007). A non-
resident of the UK is not subject to Capital Gains Tax in respect of gains made from the
sale of investment property with a UK sites provided a permanent establishment has not
been created in the UK. From the website Scfgroup.com (2007) the purchase of the
property is deemed to be an investment if gains may be realized tax-free and the
following points will indicate that the acquisition is an investment:

- the property should be held for as long as possible

- income is derived from rental of the property

- only a small amount of development should be carried out

- if the property is to be sold then it should be sold as a whole rather than sub
divided



Other expenses include local property tax, value added tax, solicitor's fees, estate agent
fees.

It has been estimated recently that as much as 70% of all property in prime areas of
London (such as Kensington, Chelsea and Belgravia) are owned via offshore tax efficient
structures (Scfgroup.com 2007).

A comparison of the appreciation in property prices in some industrialized nations is
shown in the below table. Property prices have shown to have risen by 14.8 percentage
changes in UK, 10% in Canada and 7% in US.

Nominal growth in house prices (Four quarter percentage changes, in national currency
units; period averages)

Source: Egert, B. and Mihaljek, D. Sep 2007, BIS Working Papers No 236:
Determinants of house prices in central and Eastern Europe



Conclusion:
Before we analyze, the effect of liberalizing capital outflow for resident individuals, one
may stop to ponder if the present situation of sustained capital inflows into emerging
markets is really sustainable (Watanagase 2007). Does the investor community consider
investment in India less risky or has their risk appetite changed? There are some
permanent factors to ponder like – changing demographics (aging population of west
holding large pension funds), low cost of IT and telecommunication, opening up of the
economy and strong growth has led to investors money finding its place in developing
countries of Asia (Watanagase 2007). Moreover, the depreciation of the dollar to other
currencies and low interest rates worldwide has led to search for high yield riskier funds.
So, one may be accurate to say that inflow of funds will continue in the short-term and
may be in the long term if conditions prevail. And central banks in emerging markets of
Asia are left with a challenge to deal domestic inflation, transmission mechanism of
monetary policy and financial stability (Watanagase 2007).
Table: Comparison of Economic Indicators and CAPAC outflow policy for residents

GDP Inflation Net Currency Outflow policy for resident
growth (06-07) Foreign appreciation individuals
(06-07) currency (Oct-06 to
reserves Oct-07)
(Oct-06 to
Oct-07)
Thailand 4.4% 1.9% 32.5% 6.43%  Can remit up to $1 mil
abroad for real estate
purchase and $100 mil
for aliens
 Can hold foreign
currency accounts
balance of $ 0.5 mil and
$50 mil for aliens
Malaysia 6% 1.9% 21.25% 3.3%  Can remit up to $30000
(apprx) for real estate
purchase and no limit for
resident without
domestic ringgit credit
 Can invest up to $1.5 mil
(apprx) in foreign
currency assets without
domestic ringgit credit
South 4.02% 2.3% 4.19%  Can remit up to $1 mil
Korea abroad for real estate
 Residents can hold
deposits abroad without



any ceiling. Per
transaction limit $50,000
Philippines 7.27% 2.9% 47% 11%  Can remit up to $ 12 mil
in Philippine instruments
abroad
 Funds to be from Govt.
backed entities and
invested in FCDU of
 Philippine institutions
Taiwan 4.45% 0.5% 0.4% 1.96%  Can remit up to $ 5 mil
per year
 No declaration required
for remittance up to $
15000 (apprx) per
transaction
India 9% 5% 58.79% 15.07%  Can remit up to $
200,000 per year

A comparison of the capital controls for resident individuals in various East Asian
economies as summarized in table below shows that in spite of having the highest
increase in foreign currency assets and maximum appreciation of the currency, India’s
outward remittance policies for RIIs is lowest among other developing countries. All
countries like Thailand, Malaysia and South Korea revised their outward remittance
policies appropriately in the last 6 months in wake of the high dollar inflow. Taiwan is
the only Asian country much less affected by this as the Taiwanese residents invest in
overseas portfolio markets as they have upward limit of up to USD 5 million.

We however do not have adequate data to validate how much Indians have been remitting
abroad since RBI had revised the upward limit to USD 200,000 or for that matter what
has been the increase in outflows successive to every increase in ceiling by RBI.
However, it is imperative that RBI acts fast to remove barriers for foreign outflow for
resident individuals. As the number of HNIs and Ultra-HNIs increase in India, people
would like to hold diversified assets and be given the option of better quality of life. RBI
holds the key to that.
Block and Forbes (2004, 3) rightly argues it is a myth that
 lifting capital controls increases a country’s vulnerability to financial crises and
 capital controls should only be lifted after strengthening other financial, institutional
and macroeconomic capabilities.



Appendices:

Appendix 1: Circular issued by Bank of Thailand on 24th July, 2007

The Ministry of Finance and the Bank of Thailand deem it appropriate to relax regulations on
capital flows to promote more balanced capital movements, and to increase flexibility for Thai
businesses in managing their foreign currencies in order to enhance their competitiveness in the
world market. The key details are summarized as follows.

1. Allow companies registered in the Stock Exchange of Thailand, most of which are high-
performance businesses and subject to supervision by government agencies, to purchase foreign
currencies to invest abroad in an amount up to USD 100 million per year. Such registered
companies must have positive shareholder equity as shown in their latest financial statement, and
do not belong to the group of companies under business rehabilitation category.

2. Provide Thai residents, both juristic persons and individuals, with greater flexibility in depositing
foreign currencies with financial institutions in Thailand as follows.
2.1. Residents with funds originated abroad regardless of sources, such as export earnings or
foreign borrowing, may deposit foreign currencies with financial institutions in Thailand under the
following conditions:
a) Foreign currency accounts with future foreign exchange obligations. The total outstanding
balance for all foreign currency accounts can be up to the obligations within the next 12 months
but not exceeding USD 1 million for an individual or USD 100 million for a juristic person.
b) Foreign currency accounts with no future foreign exchange obligations. The total outstanding
balance for all foreign currency accounts can be up to USD 100,000 for an individual or USD 5
million for a juristic person.

2.2. Residents with foreign currency funds originated within the country, obtained either by
converting baht into foreign currencies, or by borrowing foreign currencies from financial
institutions in Thailand, can deposit such foreign currencies with financial institutions in Thailand
under the following conditions:
a) Foreign currency accounts with future foreign exchange obligations. The total outstanding
balance can be up to the obligations within the next 12 months but not exceeding USD 500,000
for a natural person or USD 50 million for a juristic person.
b) Foreign currency accounts with no future foreign exchange obligations. The total outstanding
balance may be up to USD 50,000 for an individual, or USD 200,000 for a juristic person.

3. Adjust the limit of fund remittances by Thai residents for various purposes. From now, the limit
of remittances for each purpose -for example, remittances to a family or a relative who is a
permanent resident abroad, donation to public, and remittances for purchase of real estates
abroad-will be raised to USD 1 million or equivalent per per year.

4. Relax the repatriation requirement for Thai residents with foreign currency receipts by
extending the period in which such receipts must be brought into Thailand from within 120 days (if
exceeding 120 days but not exceeding 360 days, a financial institution may provide approval on
behalf of the Competent Officer), to within 360 days. Further extension is possible only with
permissions by the Competent Officer. This relaxation will provide greater flexibility to the Thai
businesses in their granting of trade credits to their foreign customers.

5. Abolish the surrender requirement for Thai residents with foreign exchange receipts from
abroad to sell or deposit such receipts within the period of 15 days. This rule change not only will
provide more flexibility to Thai businesses and individuals in managing their foreign exchange
receipts, but will also allow financial institutions to set the procedural guidelines that best suit their



operations. However, financial institutions must announce such procedural guidelines to the
public so that customers can make an informed decision in choosing services from financial
institutions appropriately.

6. Relax the regulation on foreign portfolio investment by the institutional investors by allowing
institutional investors to invest in the form of deposits with financial institutions abroad without
seeking approval from the Competent Officer. Nevertheless, the deposited amount shall be
counted as part of the total amount allowable for investing abroad according to the foreign
exchange regulations. The relaxation is aimed at providing greater flexibility for institutional
investors in managing their investment funds. The Notifications and related information can be
viewed from the Bank of Thailand's website at www.bot.or.th under the "Highlight" topic. Further
information can also be obtained from the BOT Hotline center at 0-2283-6000 The above-
mentioned relaxation takes effect from 24 July 2007 except the relaxation on repatriation
requirement in No.4 which will come into force on the following day after the publication of related
Ministerial Regulations in the Government Gazette. The Bank of Thailand will notify financial
institutions of the effective date of the regulations.

Source: http://www.bot.or.th/bothomepage/General/PressReleasesAndSpeeches/PressReleases/
news2550/Eng/n3350e.htm



Appendix 2: Circular issued by Central Bank of Malaysia (1-Apr-2007)

Source:http://www.bnm.gov.my/view.php?
ch=190&pg=595&ac=7&fname=file&dbIndex=0&ex=1178566008&md=ju2-%C0a%9Db
%04.%D8u_8%BE%C7



Appendix 3: Summary of Credit Facilities allowed in Malaysia
Source:http://www.bnm.gov.my/view.php?
ch=190&pg=595&ac=5&fname=file&dbIndex=0&ex=1184992510&md=y%2B%91%BCc%2F
%C9VWWU.A%FBO%F9



Appendix 4: Forex Liberalization Plan in South Korea (19 May 2006)

The gist of medium and long term forex liberalization plan is summarized as below.
(Table 3)
Phase 1 (2006~2007) Phase 2 (2008~2009)
Won's a. Expand won-holdings by non- a. Expand scope of the won transactions
internationalizati residents exempted from reporting compliance
on b. Pursue listing of KRW/US$ futures in
overseas exchange house
c. Lower tax rates applied to non-
residents’ interest earnings from
investments in won-denominated local
bonds
d. Consolidate won accounts of similar
nature held by non-residents
e. Completely scrap limits on
export/import of the won
Liberalization of a. Allow acquisition of overseas real a. Liberalize acquisition of overseas real
overseas estate up to US$1 million or less estate by residents with complete lift of
investment by (‘ceiling’) for investment intent by investment ceiling
Korean individuals and companies
nationals * Ceiling to be upwardly adjusted in
phases

Abolishment of a. Mark up the threshold principal a. Put an end to the mandatory
the mandatory amount subject to the mandatory collection obligation
collection of collection obligation b. Instead, institutionalize ‘a reporting’
external credit b. Convert current ‘approval’ regime to system for the purpose of sound
‘reporting’ system with respect to ‘monitoring’ on overseas lending and/or
exemption from collection obligation capital transactions of such nature
exceeding certain amount
Appeasement of a. Soften procedural restrictions on a. Most capital transactions shall be
procedural capital transaction executed with simple reporting to
restrictions on (i.e, reporting to MOFE and/or BOK  ‘foreign exchange banks’ with a few
the capital reporting to any foreign exchange exceptions including won-denominated
transactions banks in Korea) fund raising by non-residents and some
credit derivatives.
Permission of a. Expand permitted scope of foreign a. Allow all kinds of won-denominated
foreign exchange business by non-bank financial businesses stipulated under
exchange financial institutions each law and ordinance in foreign
business currencies
Advancement of a. Extend foreign exchange position in a. Completely lift foreign exchange
foreign phases position while include such purport in the
exchange b. Allow margin trading in foreign prudential regulations under each law
market currency and ordinance
c. Improve transaction structure in/of
the foreign exchange market with full
consultation with the Committee

Source:http://english.mofe.go.kr/news/pressrelease_view.php?sect=news_press&sn=4408



Appendix 5: Foreign Exchange Regulations in Philippines (Mar-2007)

Date Issued: 03.08.2007

Number: 0561

CIRCULAR NO. 561
Series of 2007

Subject: Amendments to Circular Nos. 1327 and 1389 dated 30 January 1992 and 13 April 1993,
respectively

Pursuant to Monetary Board Resolution No. 230 dated 22 February 2007, approving certain
reforms to liberalize foreign exchange rules and regulations, the following provisions of Circular
Nos. 1327 and 1389 dated 30 January 1992 and 13 April 1993, respectively, as amended, are
hereby further amended, as follows:

Section 1. Item 2 of Circular No.1327, as amended, shall now read as follows:

"2. Allowable open FX position - Banks' allowable open FX position (either overbought or
oversold) shall be the lower of 20 percent (20%) of their unimpaired capital or US$50 million.

For purposes of this section, unimpaired capital of foreign banks that are universal banks shall be
defined as permanently assigned capital plus the Net Due To Head Office account; Provided That
the amount of Net Due To Head Office that may be added to the permanently assigned capital
shall not exceed the equivalent of six (6) times the permanently assigned capital. For foreign
banks that are commercial banks, unimpaired capital shall be defined as permanently assigned
capital plus the Net Due To Head Office account; Provided That the amount of Net Due To Head
Office that may be added to the permanently assigned capital shall not exceed the equivalent of
eight (8) times the permanently assigned capital.

Any excess beyond the allowable limit shall be settled on a daily basis.

Penalties on excess overbought and oversold positions of banks when PDS trading is suspended
shall be waived.”

Section 2. The following sections of Circular No. 1389, as amended, are hereby further
amended, as follows:

1. Section 2 shall now read as follows:

“Section 2. Sales of Foreign Exchange by AABs, NBBSEs and Forex Corporations for Non-Trade
Transactions. AABs, Non-Bank Bangko Sentral ng Pilipinas-Supervised Entities (NBBSEs), and
their subsidiary/affiliate forex corporations may sell foreign exchange to residents to cover
payments to foreign beneficiaries for non-trade current account purposes (e.g., educational
expenses, medical expenses, travel expenses and salaries of foreign expatriates) without need
for prior Bangko Sentral ng Pilipinas approval, subject to the following documentary requirements
and guidelines:

a. For sales not exceeding US$10,000

-Application to purchase foreign exchange using the prescribed format;



b. For sales exceeding US$10,000

-Application to purchase foreign exchange using the prescribed format and supported by
documents specified under existing rules.

For sale of foreign exchange, regardless of amount, for payment of non-trade obligations that are
foreign currency loan- or foreign investment-related, the documents prescribed under existing
rules shall apply.

NBBSEs, including Forex Corporations, shall not sell foreign exchange to:

a. Non-residents; and

b. Residents for –

1) Investment purposes (whether domestic or abroad) including capital repatriation and
remittance of profits and dividends thereon;

2) Payment of foreign exchange obligations to residents other than AABs;

3) Payment of unregistered foreign currency loans/ obligations to non-resident financial
institutions.

However, outstanding unregistered loans/obligations as of 27 October 2000 may continue to be
serviced by forex corporations.

4) Payment of FCDU loans not eligible to be serviced with foreign exchange purchased from the
banking system. However, FCDU loans outstanding as of 27 October 2000 may continue to be
serviced by forex corporations.

AABs shall not sell foreign exchange to residents for payment of foreign exchange obligations to
residents other than AABs.

2. Section 44 shall now read as follows:

“Section 44. Outward Investments by Philippine Residents.

A resident may invest provided that:

1. the investments are funded by withdrawals from FCDUs; or

2. the funds to be invested are not among those required to be sold to AABs for pesos; or

3. the funds to be invested are sourced from AABs but in amounts not exceeding US$12 million
per investor per year.

An application to purchase foreign exchange for outward investments, whether or not prior
Bangko Sentral ng Pilipinas approval is required, shall be accompanied by the documents
specified under existing rules.

For purposes of this section, investments in foreign currency denominated bonds/notes of the
Republic of the Philippines (ROP) or other Philippine entities are considered outward
investments.

Outward investments by residents (excluding BSP-supervised entities) funded with foreign
exchange purchased from AABs in amounts exceeding US$12 million per investor per year shall



require prior approval and registration by the Bangko Sentral ng Pilipinas. Existing rules on
outward investments of BSP-supervised entities shall continue to apply.

Foreign exchange acquired or received by residents as dividends/earnings or divestment
proceeds from outward investments funded by foreign exchange purchased from AABs shall be
inwardly-remitted within 15 banking days from date of receipt and sold for pesos thru AABs within
three (3) banking days from receipt in the Philippines.”

Section 3. Repealing Clause. All provisions of existing BSP issuances that are inconsistent
herewith are deemed modified accordingly.

Notwithstanding the liberalization of foreign exchange rules and regulations, banks are reminded
to adopt and adhere to sound policies in undertaking their foreign exchange transactions.

This Circular shall take effect on 2 April 2007.

FOR THE MONETARY BOARD

AMANDO M. TETANGCO, JR.
Governor

Clarifications (issued 13 April 2007)

Source: http://www.bsp.gov.ph/downloads/Publications/FAQs/fxregulations.pdf

Appendix 6: Excerpts from Foreign Exchange Control Act in Taiwan

Article 5: The settlement of foreign exchange against the New Taiwan dollar involving the
following foreign exchange receipts and disbursements or transactions may not be
processed until the banking enterprise has confirmed that the Declaration Statement is consistent
with relevant contracts and letters of approval that evidence the foreign exchange receipts and
disbursements or transactions in question :
1. A single remittance by a company or a firm with an amount over United States dollars 1
million;
2. A single remittance by an association or an individual with an amount over United States
dollars 500,000;
3. Remittances approved by the competent authorities for direct investment or portfolio
investment;
4. Outward remittances to Mainland China, except for remittances that do not require evidencing
documents pursuant to other regulations of the Bank ;
5. Remittances for transactions conducted within the territory of the Republic of China involving
goods or services located outside the territory of the Republic of China; and
6. Remittances that require evidencing documents for verification by banking enterprises
pursuant to other regulations of the Bank.

Article 6 The settlement of foreign exchange against the New Taiwan dollar involving the
following foreign exchange receipts and disbursements or transactions may not be
processed until the declarant has received approval from the Bank by submitting the Declaration
Statement along with evidencing documents through banking enterprises :
1. Essential remittances by a company or a firm whose accumulated amount of foreign
exchange purchased or sold within one year has exceeded United States dollars 50 million; or



essential remittances by an association or an individual whose accumulated amount of foreign
exchange purchased or sold within one year has exceeded United States dollars 5 million;
2. The following remittances where a single remittance by a non-resident exceeds United
States dollars 100,000 in foreign exchange purchased or sold:
(1) Funds for engaging in construction projects within the territory of the Republic of
China;
(2) Guarantees and arbitration fees due for deposit as a result of pending legal cases within the
territory of the Republic of China;
(3) Funds relevant to real estate for self use within the territory of the Republic of China that
has been legally acquired or approved by the competent authorities; and
(4) Inheritance, insurance claims, and pensions legally acquired within the territory of the
Republic of China.
3. Other essential remittances.

Article 13
Foreign exchange needed to pay for the following expenses or activities may be drawn by the
payer from his/her foreign exchange deposit account as set forth in Article 7 or bought in the
foreign exchange market through an authorized bank, or bought from the Central Bank of China
or one of its authorized banks; related measures shall be stipulated by the Ministry of Finance
jointly with the Central Bank of China.
1. Costs and expenses of merchandise approved for import;
2. Expenses and obligations to be paid by the shipping business, insurance business or people of
other trades as a result of trade or service received;
3.Expenses for attending school, taking a business tour, traveling, seeking medical treatment,
visiting relatives, employment, or doing business abroad;
4. Money sent to support families abroad by citizens or foreign individual who work for a local
business within the territory of the Republic of China;
5. Principal, interests and net profits relating to investments of foreign individual and overseas
Chinese in the Republic of China;
6. Payment for principal interests and guarantee expenses of government-approved foreign
loans;
7. Remuneration for foreign individual and overseas Chinese for technical cooperation with local
enterprises;
8. Government-approved foreign investment or loan extended to foreign borrower; and
9. Other necessary payments and obligations.

Article 19-1
In case of any of the following situations, the Executive Yuan may decide and announce with a
public notification to close the foreign exchange market, suspend or restrict all or some foreign
exchange settlements, order the selling or deposit of all or some types of foreign exchange into
an authorized bank, or take other necessary measure for a specific time period:
1. When the domestic or foreign economic disorder might endanger the stability of the domestic
economy.
2. When this country suffers a severe balance of payments deficit.
The items and targets of aforesaid action shall be specified in Regulations Governing Foreign
Exchange Control stipulated by the Executive Yuan.
The aforesaid decision shall be submitted to the Legislative Yuan for acceptance within ten days
after it is announced and shall become invalid once the Legislative Yuan rejects it.
The specified time period stipulated in Paragraph 1 shall not be longer than 20 days, provided the
Legislative Yuan is not in session.

Article 19-2



Intentional violation of the measures taken by the Executive Yuan pursuant to Article 19-1 herein
shall be subject to a fine under NT$3,000,000. Notwithstanding of the foregoing provision, the
violator shall be exempt from the penalty provided the Legislative Yuan rejects the measures
taken by the Executive Yuan subsequently.

Article 20
Violation of Article 6-1 herein involving intentional omission of declaration or making untruthful
declaration shall be subjected to a fine of more than NT$30,000 and less than NT$600,000; the
same provision applies to failure to provide explanation within a specified time period or providing
false explanation.
Violation of Article 7 herein involving not selling or depositing foreign exchange to or with the
Central Bank of China or one of its authorized banks shall be subjected to a fine that amounts to
twice the sum not deposited or not sold converted into New Taiwan Dollar at the then prevailing
exchange rate, and the Central Bank of China will pursue the return of foreign exchange.

Article 22
People who engage in foreign exchange transactions illegally as a regular profession shall be
subjected to a prison term or detention of less than three years, and/or a fine that amounts to
their total business turnover; the foreign exchange and the payment or proceeds thereof shall be
confiscated as well.
In case the representative of a juristic person, the agent of a juristic person or a natural person,
the employee or business associate of a juristic person in other capacity violates the provision
stipulated in the preceding paragraph while conducting business, the juristic person or natural
person shall be fined the same amount as imposed on the offender.

Source: http://www.cbc.gov.tw/enghome/Elegal/Related/RLR-1.htm



Exhibits:
Exhibit 1: Key Economic Indicators in Thailand

Source: Bank of Thailand (2007)

Thai Foreign Reserves in Billions of Dollars

100
80
60
40
20
0
Oct- Nov- Dec- Jan- Feb- Mar- Apr- M Jun- Jul- Aug- Sep- Oct-
06 06 06 07 07 07 07 ay- 07 07 07 07 07
07

Series1

Source:http://www.bot.or.th/bothomepage/databank/EconData/EconFinance/Download/T
ab49.xls



Baht vs USD

37
36
35
34
33
32
Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct-
06 06 07 07 07 07 07 07 07 07 07 07

Baht vs USD

Source:
http://www.bot.or.th/bothomepage/databank/FinMarkets/ExchangeRate/exchange_e.asp

Exhibit 2: Key Economic Indicators in Malaysia

Malaysia's GDP growth

8
6
4
2
0
Ap 2

De 3

Ap 3

De 5

Ap 5
De 4

Ap 4

De 6

Ap 6

07
Au 4

Au 5

Au 6
Au 3

Au 7
0

0

0

0
r- 0

r- 0

r- 0

r- 0

r- 0
0

0

0
0

0
c-

g-

c-

g-

c-
g-

c-

g-

c-

g-
De

Series1

Source: Central Bank of Malaysia (2007)



Source: Central Bank of Malaysia (2007)



Exhibit 3: Key Economic Indicators in South Korea

South Korea GDP growth

7
6
5
4
3
2
1
0
Ap 2

De 3

Ap 3

De 5

Ap 5
De 4

Ap 4

De 6

Ap 6

07
Au 4

Au 5

Au 6
Au 3

Au 7
0

0

0

0
r- 0

r- 0

r- 0

r- 0

r- 0
0

0

0
0

0
c-

g-

c-

g-

c-
g-

c-

g-

c-

g-
De

Series1

Source: The Korean Economy 2006 (Published by Bank of Korea)



Exchange rate trend in South Korea



Exhibit 4: Key Economic Indicators in Philippines

Philippines GDP growth

8
6
4
2
0
Ap 2

De 3

Ap 3

De 5

Ap 5
De 4

Ap 4

De 6

Ap 6

07
Au 4

Au 5

Au 6
Au 3

Au 7
0

0

0

0
r- 0

r- 0

r- 0

r- 0

r- 0
0

0

0
0

0
c-

g-

c-

g-

c-
g-

c-

g-

c-

g-
De

Series1

Source : http://www.bsp.gov.ph/statistics/spei/tab46a.htm

Inflation rate in Phillipines
2002 3
2003 3.5
2004 6
2005 7.6
2006 6.2
2007 2.6
Source: http://www.bsp.gov.ph/statistics/spei/tab46a.htm

Peso vs USD

54
52
50
48
46
44
42
40
38
06
06

07
6

7
06
6

7

07
6

7
-0

-0
l-0

l-0
-0

-0
v-
n-

n-
p-

p-
ar

ar
ay

ay

Ju
Ju

No
Ja

Ja
Se

Se
M

M
M

M

Series1

Source: http://bsp.gov.ph/statistics/spei/tab12.htm



Net Foreign Reserves(Philippines)

35000
30000
25000
20000
15000
10000
5000
0

06
06

07
6

7
6

06

7

07
6

7
-0

-0
l-0

l-0
-0

-0
v-
n-

n-
p-

p-
ar

ar
ay

ay
Ju

Ju
No
Ja

Ja
Se

Se
M

M
M

M
Series1

Source : http://www.bsp.gov.ph/statistics/spei/tab5.htm



Exhibit 5: Key Economic Indicators in Taiwan

Taiwan's GDP

10
8
6
4
2
0
Ap 2

De 3

Ap 3

De 5

Ap 5
De 4

Ap 4

De 6

Ap 6

07
Au 4

Au 5

Au 6
Au 3

Au 7
0

0

0

0
r- 0

r- 0

r- 0

r- 0

r- 0
0

0

0
0

0
c-

g-

c-

g-

c-
g-

c-

g-

c-

g-
De

Series1


Inflation Rate in Taiwan

2.5
2
1.5
1
0.5
0
-0.5
Ap 2

De 3

Ap 3

De 5

Ap 5
De 4

Ap 4

De 6

Ap 6

07
Au 4

Au 5

Au 6
Au 3

Au 7
0

0

0

0
r- 0

r- 0

r- 0

r- 0

r- 0
0

0

0
0

0
c-

g-

c-

g-

c-
g-

c-

g-

c-

g-

-1
De

Series1




Taiwan dollar to USD

33.5
33
32.5
32
31.5
31

06
06

07
6

7
06
6

7

07
6

7
-0

-0
l-0

l-0
-0

-0
v-
n-

n-
p-

p-
ar

ar
ay

ay

Ju
Ju

No
Ja

Ja
Se

Se
M

M
M

M
Taiwan dollar to USD

Source : http://www.cbc.gov.tw/EngHome/statistics.asp

Net Forex Reserve in Taiwan

270,000

265,000

260,000

255,000

250,000
6
6

07
6

7

7
6
6

7
6

7
-0

-0

-0
-0

-0
-0

-0
0

l-0

l-0
n-

n-
ov
ar

ar
ay

ep

ep
ay
Ju

Ju
Ja

Ja
M

M
N
M

M
S

S

Net Forex Reserve in Taiwan



Exhibit 6: Key Economic Indicators in India

Rupee Vs USD Exchange Rate

46
44
42
40
38
36
Oct- Nov- Dec- Jan- Feb- Mar- Apr- M Jun- Jul- Aug- Sep- Oct-
06 06 06 07 07 07 07 ay- 07 07 07 07 07
07

USD

Source: http://www.rbi.org.in/home.aspx

Forex Reserves in India

300,000
250,000
200,000
150,000
100,000
50,000
-
11/6/2006
10/6/2006

12/6/2006

1/6/2007

2/6/2007

3/6/2007

4/6/2007

5/6/2007

6/6/2007

7/6/2007

8/6/2007

10/6/2007
9/6/2007

Foreign Exchange

Source: http://www.rbi.org.in/scripts/Statistics.aspx



India's Inflation

7
6
5
4
3
2
1
0

A 3

A 4

D 5

D 6
A 2

A 5

A 6
D 3

D 4

7
A 3

A 4

A 6

A 7
A 5
-0

-0
-0

-0

-0
-0

-0

-0

-0
-0
-0

-0

-0
-0

-0
ec

ec

ec
ec

ec
ug

ug

ug

ug
pr

pr

pr

pr

pr
ug
D

Series1



References:
Tarapore, S.S., Bhide, M.G., Rajwade, A.V., Bhalla, S.S., Patil, R.H., Ranade, A. (2006)
Report of the Committee on Fuller Capital Account Convertibility. Reserve Bank of India
– Department of External Investments & Operations

Rangarajan, C., Chadha G.K., Chaudhuri, S., Jha, S., Rao, G., Tendulkar, S., Sheel, A.,
(2007), Economic Outlook for 2007-08. Economic Advisory Council to the Prime
Minister, Vigyan Bhavan, New Delhi.

Moorthy, V. (24-26 Feb, 1997) Capital Account Convertibility 3-part series. Business
Line, The Hindu publications.

Business Standard (18 Oct, 2007) Indian HNI club swells 20% to 1 lakh in 2006. ABP
publications.

Block, B. and Forbes, K. (2004) Capital Flows to Emerging Markets: The Myths and
Realities: Paper prepared for the Conference “Myths and Realities of Globalization” at
the Federal Reserve Bank of Dallas

Yun, L., Fears, K. (2005) FOREIGN INVESTMENT IN U.S. REAL ESTATE - Current
Trends and Historical Perspective. Realtor Research

Watanagase, T. (2007) Panel Discussion on Financial Globalisation, Capital Flows,
and Challenges for Central Banks: 77th BIS AGM, 24 June 2007, Basel, Switzerland

Rbi.org: Reserve Bank of India website http://www.rbi.org.in/home.aspx (accessed 16th
Nov, 2007)

Central Bank of Malaysia: http://www.bnm.gov.my/ (accessed 16th Nov, 2007)

Bank of Thailand: Central bank of Thailand website.
http://www.bot.or.th/bothomepage/index/index_e.asp (accessed 18th Oct, 2007)

Bank of Korea: Central bank of Korea website http://www.bok.or.kr/eng/index.jsp
(Accessed 16th Nov, 2007)

Central Bank of China: Taiwan central bank website
http://www.cbc.gov.tw/EngHome/default.asp (Accessed 10th Nov, 2007)

Central Bank of Philippines: http://www.bsp.gov.ph/ (Accessed 10th Nov, 2007)

Central Bank of Malaysia: http://www.bnm.gov.my/ (Accessed 10th Nov, 2007)

EAC.in: Economic Advisory Council in India http://eac.gov.in/ (accessed 10th Oct,


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