this ppt is made on transition of indian forex market from era of fera regulations to fema regulations .This ppt does not have updated data on various sector fdi .
2. FOREIGN EXCHANGE AND FOREIGN
EXCHANGE MARKET
• Foreign exchange is the simultaneous exchange of two currencies
• The foreign exchange market (forex, FX, or currency market) is a global
decentralized market for the trading of currencies
• The major participants in this market are commercial banks, forex brokers,
and authorised dealers and the monetary authorities.
• For example: United States to import goods from the European Union
member states, especially Eurozone members, and pay euros, even though
its income is in United States dollars.
3. FOREIGN EXCHANGE
REGULATION ACT,1973
An Act to consolidate and amend the law regulating certain
payments
- dealings in foreign exchange and securities,
- transactions indirectly affecting foreign exchange and the import
and export of currency for the conservation of the foreign
exchange resources of the country
- proper utilization thereof in the interests of the economic
development of the country
3
4. REASONS AND OBJECTIVES FOR
ENACTMENT OF FEMA
Reasons for enactment of FEMA
Impediment in India to go global
FERA reviewed in 1993
Significant changes made
Objectives of FEMA
Facilitate trade
Introduction on capital account and current account transactions
Current account transaction allowed and RBI regulation
Simplified dealing in foreign Exchange transactions
Liberalisation in enforcement provision
5. BACKGROUND
• Goal of conserving India’s foreign exchange resources.
• Dominance of MNC’s
• Huge Trade Deficit
Devaluation of currency
Increase in oil price
• FERA was introduced when FOREX reserves were low
• Objective was to regulate the inflow of foreign capital
6. OBJECTIVES OF FERA
To regulate dealings in foreign exchange and securities.
To regulate transactions, indirectly affecting foreign exchange.
To regulate the import and export of currency.
To regulate acquisition, holding of immovable property in India
by non residents thereby reducing dominance of MNC’s
The proper utilization of foreign exchange so as to promote the
economic development of the country.
7. SALIENT FEATURES OF FEMA
• It will facilitate trade rather than prevent misuse of foreign exchange
• Definitions of capital account transaction and current account transaction
have been introduced
• All current account transactions shall be allowed (subject to reasonable
restrictions). Reserve Bank to classify those capital account transactions
that are to be permitted and to regulate transfer and issue of foreign
securities by a resident in/outside India as well as setting up of
branches/offices by foreign companies in India.
• All key sections relating to dealings, holding and payments in foreign
exchange and exports have been simplified.
• Liberalisation in enforcement provisions reflects that the attitude is of
putting trust in the persons covered.
8. Extend of FEMA
• The Act applies to whole of India and also to any person to
whom the act applies
• Emphasis on residential status
• Central government
9. SIMILARITIES AND DIFFERENCES
BETWEEN FERAAND FEMA
•DIFFERENCES:
1. Provisions
2. Features
3. New terms in FEMA
4. Definition of Authorized person
5. Punishment
6. Quantum of penalty
7. Appeal
8. Right of assistance during legal proceedings
9. Power of search and seize
10. Foreign Direct Investment
• It is a direct investment into production or business in a country
• By an individual or company in another country
• Either by buying a company in the target country or by
expanding operations of an existing business in that country.
11. FDI MONITORING AND REVIEWING
AGENCIES
• Ministry of Commerce and Industry, GOI
• RBI
• FIPB (Foreign Exchange Promotion Board)
• DIPP (Dept. of Industrial Policy and Promotion)
12. ENTRY ROUTES FOR FDI IN INDIA
1. Automatic route: This route is available for all sectors or
activities that where 100% foreign ownership is permitted
2. Government route: Foreign Investment Promotion
Board(FIPB) approves investment proposals:
Where the proposed shareholding is above the prescribed sector
caps, or
Where the activity belongs to that small list of sectors where FDI
is either not allowed or where it is mandatory that proposals be
routed through the FIPB (e.g. sectors that require industrial
licencing).
13. SECTORS PROHIBITED FOR FDI
• Retail Trading (except single brand product retailing)
• Lottery Business including Government /private lottery, online lotteries, etc.
• Gambling and Betting including casinos etc.
• Business of Chit funds
• Nidhi company
• Trading in Transferable Development Rights (TDRs)
• Real Estate Business or Construction of Farm Houses
• Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of
tobacco substitutes
• Activities / sectors not open to private sector investment e.g. Atomic Energy
and Railway Transport (other than Mass Rapid Transport Systems).
14. Recent changes in FDI policy
Insurance sector – 26% to 49%(Automatic Route)
Oil refineries, power exchanges, stock exchanges and
clearing corporations- 49% (Automatic Route)
Cellular services, FDI was raised to 100 per cent from74 per
cent. -- 49 % (Automatic Route)
Courier services – 100% (Automatic Route)
Asset Reconstruction Company-74% of paid up capital to
100% -49% (Automatic Route)
Credit Information Companies -49% to 74%- (Automatic
Route)
15.
16. POSSIBLE TYPES OF FOREIGN
INVESTMENTS
Investment
Long Term Borrowings Short term BorrowingsEquity
FDI FEM
Debentures Conv. Pref. Shares
Unfunded
Loans
Conv. Debentures
ECB
18. External Commercial Borrowing (ECB)
ECB is an instrument used in India to facilitate the
access to foreign money by Indian corporations and
PSUs (public sector undertakings)
It refers to commercial loans in the form of bank loans, buyers’
credit, suppliers’ credit, securitized instruments (e.g. floating
rate notes and fixed rate bonds, non-convertible, optionally
convertible or partially convertible preference shares) availed
of from non-resident lenders with a minimum average maturity
of 3 years.
18
21. BORROWERS
Corporate including hotel, hospital and software
sector
Infrastructure Finance companies (IFCs)
Units in SEZ zones
NGO involved in Micro finance
21
22. LIMITS FOR RAISING ECB
Category Amount (USD) per unit /per
financial year
Corporate other than those in
service sector (i.e. hotel, hospital
and software)
Up to 750 M or equivalent
Corporate in service sector (ECB
not applicable for Land acquisition)
Up to 200 M or equivalent
NGO engaged in Micro Finance Up to 10 M or equivalent (Forex
exposure to be fully hedged)
24. ELIGIBLE BORROWERS (1)
Foreign Investors dealing with Infrastructure and export finance such as
EXIM bank
Banks and financial institutions which had participated in the textile or steel
sector restructuring package as approved by the Government.
ECB with minimum average maturity of 5 years by NBFC to finance import
of infrastructure equipment for leasing to infrastructure projects.
Infrastructure Finance Companies (IFCs) i.e. NBFCs, categorized as IFCs, by
RBI (beyond 50% of their owned funds) for on-lending to the infrastructure
sector as defined under the ECB policy and subject to compliance of certain
stipulations.
24
25. BORROWE
RS (2)
Foreign Currency Convertible Bonds (FCCBs) by Housing Finance
Companies.
Special Purpose Vehicles (SPV) or any other entity notified by the RBI, set up
to finance infrastructure companies / projects exclusively.
Financially solvent Multi-State Co-operative Societies engaged in
manufacturing.
SEZ developers for providing infrastructure facilities within SEZ.
25
26. ELIGIBLE BORROWERS (3)
Eligible Corporate under automatic route other than in the services sector i.e.
hotels, hospitals and software sector can avail of ECB beyond USD 750
million per financial year.
Corporate in the service sector for availing ECB beyond USD 200 Mn. per
financial year.
Cases falling outside the purview of the automatic route limits and maturity
indicated, etc.
26
27. Capital Account Transactions
• “Capital account transaction" means a transaction which alters the
assets or liabilities, including contingent liabilities, outside India of
persons resident in India or assets or liabilities in India of persons
resident outside India, and includes transactions like:
• Changes in Assets/ Liabilities
• Transfer/ issue of security
• Borrowing/ Lending
• Export, import or holding of currency or currency notes
• Giving guarantee
27
28. Current Account Transactions
The definition is inclusive and any expenditure which is not a capital
account transaction will be current account transaction. It includes:
• payments due in connection with foreign trade, other current business,
services, and short-term banking and credit facilities in the ordinary course
of business
• payments due as interest on loans and as net income from investments
• remittances for living expenses of parents, spouse and children residing
abroad, and
• expenses in connection with foreign travel, education and medical care of
parents, spouse and children
28
29. CURRENT ACCOUNT
TRANSACTIONS
FEW EXAMPLES
• Payment for imports of goods
• Remittance of interest on investment made and
funds borrowed from abroad after tax
deductions
• Remittance of Dividend if the investment was
allowed without any condition
• Booking with Airlines/Shipping
• Salary/remuneration to Foreign Directors
subject to restrictions in any other law
29
30. AUTHORIZED PERSON
• Authorised person - means an authorised dealer, money
changer, off-shore banking unit or any other person for the time
being authorised under sub-section (1) of section 10 to deal in
foreign exchange or foreign securities.
• Not given a free hand to deal in foreign Exchange. He has to
furnish details and information, to Reserve Bank from time to
time as may be required by it.
31.
32. • AD CAT II (MUMBAI).
• Thomas Cook (I) Ltd. (188 BRANCHES)
• WALL STREET FINANCE LTD (38 BRANCHES)
• COX & KINGS (INDIA) LTD (117 BRANCHES)
AUTHORIZED PERSON
33.
34. MONEY CHANGERS
• (a) The Reserve Bank may, on an application made to it in this
behalf, authorise any person to deal in foreign currency.
• (b) An authorisation under this section shall be in writing and -
• may authorise dealings in all foreign currencies or may be
restricted to authorising dealings in specified foreign
currencies only;
• may authorise transactions of all descriptions in foreign
currencies or may be restricted to authorising specified
transactions only;
• may be granted with respect to a particular place where
alone the money changer shall carry on his business;
• may be granted to be effective for a specified period, or
within specified amounts;
• may be granted subject to such conditions as may be specified
therein
38. AVERAGE MATURITY ON
AMOUNT BORROWED
Limits Minimum Average
Maturity Period
Up to USD 20 M or its
equivalent
3 years
Above USD 20 M and up to
750 M or equivalent
5 years
39. WHY COMPANIES OPT FOR ECB’S
• Foreign currency funds: Companies need funds in foreign currencies for many purposes such
as, paying to suppliers in other countries etc that may not be available in India.
• Cheaper Funds: The cost of funds borrowed from external sources at times works out to be
cheaper as compared to the cost of Rupee funds.
• Diversification of investor’s base: Another advantage is the addition of more investors thus
diversifying the investor base
• Satisfying Large requirements: The international market is a better option in case of large
requirements, as the availability of the funds is huge when compared to domestic market.
The government through the ECB policies is trying to nourish 2 sectors:
• Infrastructure
• SME
41. JET AIRWAYS RAISED $300 MILLION
VIAAPPROVAL ROUTE
• Private carrier Jet Airways raise $300 million through the external
commercial borrowing (ECB).
• The proceeds from the ECB will help the airline pare its high cost debt.
• The airline has already received sanction from one of the West
Asian banks for $150 million ECB for which Jet had approached
the RBI for its approval.
• All necessary approvals have been taken from the Reserve Bank to raise
$ 150 million for which the documentation is complete.
• CFO said, adding, "we should be significantly in a better position at the
end of March 2015.”
42. CASE STUDY: SUZLON ENERGY- INDIA'S
BIGGEST FCCB DEFAULT
• Suzlon raised:
A) $200 million & $20.8 million through dollar convertible bonds in
2007 & 2009 with a conversion price of Rs97.26 & Rs76.68 per share
respectively with redemption after five years from the date of issue.
As on June 30, 2012, Suzlon had gross debt of Rs 13,477 crore that
includes:
i) Rs 2,053 crore loan for acquisitions,
ii) Rs 3,641 crore FCCBs
iii) Rs 7,783 crore of working capital, capex and other loans.
Promoters held 52.76% of Suzlon Energy as on June 30, 2012.
43. • Markets were at their peak in 2006-2008, FCCBs were in cheaper
compared to domestic market.
• Companies believed their shares would rise.
• Stock plunged about 83% in the last three years, wiping out $2.5
billion from its market value.
• The share price fell down to Rs16.15 which made conversion of the
debt into equity meaningless, rendering repayment the only option.
• Suzlon was set to default on redemption of over $200 million foreign
currency convertible bonds (FCCBs).
• A consortium of banks including SBI, BOB and ICICI gave loan to
Suzlon in July, 2012 that saved it from default.
• The company had very little to offer
44. FOREIGN CURRENCY ACCOUNT
• Participants in international exhibition/trade fair
• permission for opening a temporary foreign currency account
abroad
• balance in the account is repatriated to India through normal
banking channels within a period of one month from the date
of closure of the exhibition/trade fair and full details are
submitted to the AD Category – I banks concerned.
• It would also be permissible to `gift’ unsold goods up to the
value of USD 5000 per exporter, per exhibition/trade fair.
45. Exchange Earners’ Foreign Currency
(EEFC) Account
• This account shall be maintained only in the form of non-interest
bearing current account
• the sum total of the accruals in the account during a calendar
month should be converted into Rupees on or before the last day
of the succeeding calendar month after adjusting for utilization of
the balances for approved purposes or forward commitments
• to enable exchange earners to save on conversion/transaction costs
while undertaking forex transactions.
46. SETTING UP OF OFFICES ABROAD AND ACQUISITION OF
IMMOVABLE PROPERTY FOR OVERSEAS OFFICES
• AD Category – I banks may allow remittances for initial expenses up to 15% of the
average annual sales/income or turnover during the last two financial years or up to
twenty-five per cent of the net worth, whichever is higher.
• For recurring expenses, remittances up to ten per cent of the average annual
sales/income or turnover during the last two financial years may be sent for the
purpose of normal business operations of the office
subject to the following terms and conditions:
• the overseas branch/office has been set up or representative is posted overseas for
conducting normal business activities of the Indian entity
• the overseas branch shall not enter into any contract or agreement in contravention of
the Act, Rules or Regulations
• the overseas office should not create any financial liabilities, contingent or
otherwise, for the head office in India
• not invest surplus funds abroad without prior approval of the Reserve Bank. Any
funds rendered surplus should be repatriated to India.
47. ADVANCE PAYMENTS AGAINST EXPORTS
Where an exporter receives advance payment (with or without interest), from
a buyer outside India, the exporter shall be under an obligation to ensure that
–
• the shipment of goods is made within one year from the date of receipt of
advance payment;
• the rate of interest, if any, payable on the advance payment does not exceed
London Inter-Bank Offered Rate (LIBOR) + 100 basis points; and
• the documents covering the shipment are routed through the AD Category
– I bank through whom the advance payment is received.
48. COUNTER-TRADE ARRANGEMENT
• Adjustment of value of goods imported into India
against value of goods exported from India
• Escrow Account opened in India in US Dollar
• Imports and exports under the arrangement should be
at international prices in conformity with the FTP and
FEMA, 1999 and the Rules and Regulations made
there under.
• No interest will be payable on balances standing to the
credit of the Escrow Account
• No fund based/or non-fund based facilities would be
permitted against the balances in the Escrow Account.
49. Guidelines for Imports of Goods and Services
Obligation of Purchaser of Foreign Exchange
• use it either for the purpose mentioned in the declaration
made by him to an Authorised Dealer Category – I bank
Or
• to use it for any other purpose for which acquisition of
foreign exchange is permissible under the said Act or Rules
or Regulations
the AD Category – I bank should ensure that the importer
furnishes evidence of import
payment for import can also be made by way of credit to non-
resident account of the overseas exporter maintained with a
bank in India
50. TIME LIMIT FOR SETTLEMENT OF IMPORT PAYMENTS
Time limit for normal imports
• remittances against imports should be completed not later than six
months from the date of shipment
• AD Category – I banks may permit settlement of import dues delayed
due to disputes, financial difficulties, etc.
• Interest in respect of delayed payments, usance bills or overdue
interest for a period of less than three years from the date of shipment
may be permitted subject to certain conditions.
51. • Freedom of converting local financial assets into foreign financial assets and vice versa
Some common CAC transaction:
• Transfer or issue of any foreign security by a person resident in India;
• Ttransfer or issue of any security by a person resident outside India;
• Transfer or issue of any security or foreign security by any branch, office or agency in India of a person
resident outside India;
• Any borrowing or lending in rupees in whatever form or by whatever name called;
• Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident
in India and a person resident outside India;
• Deposits between persons resident in India and persons resident outside India;
• Export, import or holding of currency or currency notes;
• Transfer of immovable property outside India, other than a lease not exceeding five years, by a person
resident in India;
• Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a
person resident outside India;
• Giving of a guarantee or surety in respect of any debt,obligation or other liability incurred-
52. Prohibitions on Capital account
transactions
• General Prohibition:- A person shall not undertake or sell or draw foreign
exchange to or from an authorized person for any capital account transaction.
-For example, Reserve Bank of India has issued a Circular wherein a resident
individual can draw from an authorized person foreign exchange up to US$
25,000 per calendar year for a capital account transaction specified in Schedule
I to the Notification.
• Special Prohibition:- A non resident person shall not make investment in India
in any form, in any company or partnership firm or proprietary concern or any
entity, whether incorporated or not, which is engaged or proposes to engage:-
(i) in the business of chit fund, or
(ii) as Nidhi Company, or
(iii) in agricultural or plantation activities or
(iv) in real estate business, or construction of farm houses or
(v) in trading in Transferable Development Rights (TDRs).
53. Convertibility
• Fully convertible Currency: USD
• Partially convertible currency: The Indian rupee is partially convertible due to the
Indian Central Bank’s control over international investments flowing in and out of
the country
• Nonconvertible currency: Cuba and North Korea
• Reasons for CAC in Indian economy:
- To ensure total financial mobility in the country
- Helps in the efficient appropriation or distribution of international capital in India
- Equalizing the capital return rates
- Escalates the production levels
- A fair allocation of the income level in India
54. CASE STUDY ON FEMA
RBI SLAPPED RS.125 CRORE ON RELIANCE
INFRASTRUCTURE:
RBI asked the Anil Dhirubhai Ambani Group firm, Reliance
Infrastructure to pay appox Rs 125 crore as compounding fees for
parking its foreign loan proceeds worth $300 million with its mutual
fund in India for 315 days, and then repatriating the money abroad to a
joint venture company.
55. • July 25, 2006 -Reliance Energy raised a $360-million ECB on for investment in
infrastructure projects in India
• November 15, 2006 the ECB proceeds were drawn down on and temporarily
parked overseas in liquid assets.
• On April 26, 2007, Reliance Energy repatriated the ECB proceeds worth $300
million to India, balance remained abroad in liquid assets.
• on April 26, 2007 invested these funds in Reliance Mutual Fund Growth Option
and Reliance Floating Rate Fund Growth Option
• on April 27 2007, the entire money was withdrawn and invested in Reliance
Fixed Horizon Fund III Annual Plan series V
• On March 5, 2008, Reliance Energy repatriated $500 million (which included the
ECB proceeds repatriated on April 26, 2007 for investment in capital of an
overseas joint venture called Gourock Ventures based in British Virgin Islands
56. According to RBI
• a borrower is required to keep ECB funds parked abroad till the actual requirement in
India.
• a borrower cannot utilise the funds for any other purpose.
Companies claim
• The company said due to unforeseen circumstances, its Dadri power project was
delayed.
• the ECB proceeds of $300 million were bought to India and was parked in liquid
debt mutual fund schemes
• the company said the exchange rate gain on account of remittance on March 5
2008, would be a notional interim rate gain as such exchange rate gain is not
crystallised
57. Penalties by RBI
• when the proceeds of the ECB are parked overseas, the exchange rate gains or losses are
neutralized
• the company has made additional income of Rs 124 crore, it is liable to pay a fine of Rs
124.68 crore.
• the company submitted another fresh application for compounding and requested for
withdrawal of the present application dated April 17, 2008, to include contravention
committed in respect of an another transaction of ECB worth $150 million.
• RBI said the company will have to make separate application for every transaction, it
cannot be clubbed.
59. USD / INR Ex Rate
• It is normally expressed as number of INR’s that make up one
USD & denoted as USD/INR
• Greatly affects the imports & exports of the country
• Higher the ratio better for exporters, lower the ratio better for
importers.
61. Sensex
• The BSE Sensex is a free-float market-weighted stock
market index of 30 well-established and financially
sound companies listed on Bombay Stock Exchange.
• These 30 companies are the most actively traded
stocks in the market
• The S&P BSE Doll-Ex 30 is the USD version of the S&P
BSE SENSEX
• Affected by FII’s which are affected by FX rate
63. Nifty
• The CNX Nifty, also called the Nifty 50 or simply the Nifty,
is National Stock Exchange of India's benchmark stock
market index for Indian equity market.
• Nifty related to the For-Ex regulation in a similar manner
as Sensex is related.
• Direct & Indirect effect of FX
68. Gold
• Safest alternative to the USD
• Gold is one of the most imported commodities in India.
Indian’s are the largest consumers of this precious metal
in the world.
• Higher the FX rate more expensive is gold & hence more
difficult to Import.
71. FDI
• An investment transaction in which an investor from one
country (home country) seeks to obtain managerial
interest in an entity in another country (host country) for
controlling and operating physical assets created through
such investments.
• Automatic & Govt. Routes
73. FPI (Previously known as FII)
• FIIs do not invest in unlisted entities. They participate
only through stock exchanges.
• FIIs cannot invest at the time of initial allotment.
Foreign investors investing in initial allotment of shares
(say IPOs or when a group of entities come together to
float a company) are categorized as FDIs.
• Of late FII have also taken to buying direct stakes in
technologies, management etc. similar to the FDI
regime. However, unlike FDI’s they are in such positions
only for a short period of time and with the sole motive
of capital gains.
75. FX reserves
• Foreign-exchange reserves (also called For-Ex reserves
or FX reserves) are assets held by a central bank or
other monetary authority, usually in various reserve
currencies, mostly the United States dollar, and to a
lesser extent the euro, the pound sterling, and the
Japanese yen, and used to back its liabilities
• In India FX reserves are Managed by the RBI
FEMA
The Foreign Exchange Management Act(FEMA) was an act passed in the winter session of Parliament in 1999 which replaced Foreign Exchange Regulation Act. This act seeks to make offenses related to foreign exchange civil offenses. It extends to the whole of India.
FEMA, which replaced Foreign Exchange Regulation Act(FERA), had become the need of the hour since FERA had become incompatible with the pro-liberalisation policies of the Government of India. FEMA has brought a new management regime of Foreign Exchange consistent with the emerging framework of the World Trade Organization (WTO). It is another matter that the enactment of FEMA also brought with it the Prevention of Money Laundering Act 2002, which came into effect from 1 July 2005.
GUIDELINES ON BORROWINGS
FEMA guidelines provide Indian companies to access funds from abroad by following methods
External Commercial Borrowings (ECB)
It refers to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years.
Foreign Currency Convertible Bonds (FCCBs)
It refers to a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency.
Preference shares (i.e. non-convertible, optionally convertible or partially convertible)
These instruments are considered as debt and denominated in Rupees and rupee interest rate will be based on the swap equivalent of LIBOR plus spread.
Foreign Currency Exchangeable Bond (FCEB)
FCEB is a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India, in foreign currency and exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. The FCEB may be denominated in any freely convertible foreign currency.
Department of Statistics and Information Management (DSIM).
All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.
Fully convertible Currency:The U.S. dollar is an example of a fully convertible currency. There are no restrictions or limitations on the amount of dollars that can be traded on the international market, and the U.S. Government does not artificially impose a fixed value or minimum value on the dollar in international trade. For this reason, dollars are one of the major currencies traded in the FOREXmarket.
Partially convertible currency
The Indian rupee is only partially convertible due to the Indian Central Bank’s control over international investments flowing in and out of the country. While most domestic trade transactions are handled without any special requirements, there are still significant restrictions on international investing and special approval is often required in order to convert rupees into other currencies. Due to India’s strong financial position in the international community, there is discussion of allowing the Indian rupee to float freely on the market, altering it from a partially convertible currency to a fully convertible one.
Nonconvertible currency
Almost all nations allow for some method of currency conversion; Cuba and North Korea are the exceptions. They neither participate in the international FOREX market nor allow conversion of their currencies by individuals or companies. As a result, these currencies are known as blocked currencies; the North Korean won and the Cuban national peso cannot be accurately valued against other currencies and are only used for domestic purposes and debts. Such nonconvertible currencies present a major obstruction to international trade for companies who reside in these countries.
Fully convertible Currency:The U.S. dollar is an example of a fully convertible currency. There are no restrictions or limitations on the amount of dollars that can be traded on the international market, and the U.S. Government does not artificially impose a fixed value or minimum value on the dollar in international trade. For this reason, dollars are one of the major currencies traded in the FOREXmarket.
Partially convertible currency
The Indian rupee is only partially convertible due to the Indian Central Bank’s control over international investments flowing in and out of the country. While most domestic trade transactions are handled without any special requirements, there are still significant restrictions on international investing and special approval is often required in order to convert rupees into other currencies. Due to India’s strong financial position in the international community, there is discussion of allowing the Indian rupee to float freely on the market, altering it from a partially convertible currency to a fully convertible one.
Nonconvertible currency
Almost all nations allow for some method of currency conversion; Cuba and North Korea are the exceptions. They neither participate in the international FOREX market nor allow conversion of their currencies by individuals or companies. As a result, these currencies are known as blocked currencies; the North Korean won and the Cuban national peso cannot be accurately valued against other currencies and are only used for domestic purposes and debts. Such nonconvertible currencies present a major obstruction to international trade for companies who reside in these countries.
Benefits and drawbacks of CAC:
To sum up, CAC is concerned about the ownership changes in domestic or foreign FINANCIAL assets and liabilities. It also represents the formation and liquidation of financial claims on or by the remaining world. It enables relaxation of the Capital Account, which is under tremendous pressure from the commercial sectors of India. Along with the financial capitalists, the reputed commercial firms in India jointly derive and enjoy the benefits of the CAC policy, which speculate the stock markets through investments. In fact, the CAC policy in India is pursued primarily to gain the speculator's and the punter's confidences in the stock markets.
However, CAC does not serve the purposes of the real sectors of Indian economy, like eradication of poverty, escalation of the employment rates and other inequalities.In spite of CAC being present in Indian economy, there will be a co-existence of financial crises. Despite several benefits, CAC has proved to be insufficient in solving the Indian financial crises, the complete solution of which lies in having a regulated inflow of capital into the economy.