1. Presentation on Risk in International Finance
Praveen Kumar Dangi
B.Com(H), CAIIB, AICWA, MBA (B&F)
Senior Manager / Faculty - IMAGE

2. International finance
Meaning – Financing of international trade and effecting transactions. Cross border cross currency transactions Export requires payment in the currency of the exporter’s country but importer can pay only in the currency of the importer’s country. What is Foreign exchange? mechanism by which the currency of one country is converted into the currency of another country FEMA defines Fx =Fc includes deposits, credits and balance payable in any foreign currency DD, TC, LC, B/E expressed or drawn in Indian currency but payable in any foreign currency DD, TC, LC, B/E expressed or drawn by banks, institutions or persons outside India payable in Indian currency

3. RISKS Protecting from the future uncertainty
Why textile industry is in trouble?
Why bollywood is using the hedging techniques?
Why TCS profits have come down?

4. Types of risks in international business
Credit Risk
Refuse to accept goods
Cancellation of order
Delay payment
Raise unjustified objections later
Default in payment
Insolvency of buyer
Delay in execution of order
Despatch inferior goods
Inability to ship goods
Fails to execute – Lehman brothers
Advantage of time zone - Herstatt

5. Types of risks in international business
Cargo Risk
Weather and climate
Natural calamities
Delay in transportation
Accidents
Mishandling
Theft, pilferage

6. Types of risks in international business
Country Risk
Legal / regulatory – license cancel, restrictions
Political- war, change of regime
Economic- Chinese goods
Social- KFC
Commercial Risk
marketing the product in foreign land
Currency Risk
uncertainty in currency rates – exposure limits

7. risks mitigation Opinion on buyer – ECGC, D&B
ECGC policy for commercial and country risk
Individual buyer-wise policy LC
Export production finance Gtee
Insurance cover for transit loss
Forward contract / option etc

8. Hedging tools - Derivatives
Defined –
A financial instrument giving rise to right and obligation in monetary terms.
Executable on a future date
Value is dependent on the value of an underlying asset
OTC – forwards, options, swaps
Exchange – future, options

9. Rate mechanism Quotations : Transaction based: Time based:
Direct – when FC is fixed
Indirect – when local currency is fixed
Transaction based:
Buying Rate – when bank takes FC in exchange of rupees
TT rate – bank gets credit without delay
Bills rate – when transaction involves sometime
Selling Rate – When bank gives FC in exchange of rupees
Time based:
Cash – Payment and receipt of currencies same day value today
TOM – Deal today at today’s rate settlement tomorrow
Spot – Deal today at today’s rate settlement within 48 hours
Forward – Deal today transaction on pre-determined future date

10. Rate mechanism Types of rates: Types of account: Value date:
Interbank – Quoted in interbank markets
Bid – where a bank quotes a rate to buy a currency
Offer – where a bank quotes a rate to sell a currency
Card – Bank loads its margin on exchange rates and offered through its branches
Types of account:
NOSTRO – Our account with you
VOSTRO – Your account with us
LORO – Their account with you
Mirror – account of foreign bank in books of bank in India
Value date:
On which purchased currency gets credited to NOSTRO account abroad

11. Direct Buy Low Sell High Indirect Buy High Sell Low
Quotations
1 kg Sugar – Rs.17/-
1 packet Good Day Biscuits – Rs.10/-
1 litre Milk – Rs.22/-
Rs.25/- per dozen Bananas
Rs.20/- for 10 candles
Direct
Buy Low Sell High
Indirect
Buy High Sell Low

12. Rate mechanism Two way quotation: USD 1 =Rs. 48.8525/8650
Direct quotation : USD 1 = Rs /8650 rule buy low sell high
Indirect quotation : Rs.100/- = USD /0490 rule buy high sell low
Spot : USD 1 = Rs /8200 which is buying and which is selling?
Spot / Nov /2100
Spot /Dec / these are premiums. Remember buy high sell low
Oct forward buying =
Spot / Nov /2000
Spot / Dec / these are discounts.
ADD least premium while buying & highest premium while selling.
DEDUCT highest discount while buying and lowest discount while selling

13. Rate mechanism
TT rate for : DD, MT, TT drawn on bank where nostro account is already credited
FBC payment to exporter only when importer pays and nostro account is credited
Cancellation of Fx sold earlier
Example: Spot USD 1 = Rs /8700 on 17th Oct
Spot / Nov /2300
Exchange margin 0.08%
Solution: less = say

14. Rate mechanism
Bill buying rate for : FBP Transit period and usance period
Round off to lower month- when premium
Example: Spot USD 1 = Rs /8700 on 17th Oct
Spot / Oct /300
Spot / Nov /550
Spot / Dec /800
Usance 30 days, transit 25 days
Solution: = =

15. Forward Premia – Inflation differential
Example: US$/Rupee Exchange rate
Exchange rate a year before US$ 1 = Rs
Year-on-year inflation USA = 2%
India= 5%
Inflation differential is (5-2) = 3%
Therefore, the Rupee will depreciate by 3%
Effect:
Now, US $ 1.02(2%) = Rs (5%)
Therefore US $ 1 = 50.03/1.02 = (3%)
Therefore, depreciation of rupee is Rs = Rs. 1.40

16. REFLECTION OF INTEREST DIFFERENTIAL IN FOREX FORWARD PREMIA
In the case of Forward exchange rate, it may be presumed that the forward currency required is purchased or sold in the Spot market and carrying the funds in the money markets.
Eg. 1. If you buy USD forward, bank borrows INR in Indian money market converts at spot rate and invests in US money market for you
2. If you sell USD forward, bank borrows the contracted amount in US money market converts at spot rate and kept invested in Indian money market for you
Therefore, ‘the cost of carry’ or time value of money gets reflected in the forward premia loaded.

17. REFLECTION OF INTEREST DIFFERENTIAL IN FOREX FORWARD PREMIA
UK USA
INTEREST RATE 4.5% 4%
Spot Rate GBP $
Borrow US $ for one year at 4% and convert into Pounds
17815 / = GBP 10000
Invest GBP in UK at 4.5% for one year
After one year maturity = x 4.5 x 1 =
100
= GBP 10450
Convert back GBP into
Dollar receivables = x =

18. FOREX FORWARD PREMIA Interest payable on the dollar
borrowing = x 4% = $
Principal + interest = =
Received on investment = $
Paid on borrowing = $
Arbitrage gain = $ (rounded)

19. ROLE OF INTEREST IN FORWARD PREMIA
IN INDIAN MARKET
In an integrated market, the arbitrage opportunity does Not exist.
The market adjusts the forward rate in such a way that
no arbitrage gain exists on transfer of funds from
Money Market to forex market
Forward rate = Dollar one year payables
Pound sterling one year receivables
= = (one year forward exchange rate)
10450

20. FOREX FORWARD PREMIA
Forward Premia= Spot Rate x (CCy.Int.- BCy. Int) x No. of days
360 x 100
= x (4 – 4.5) x 360 = (-)0.0086
GBP/USD Spot Rate =
GBP/USD one year forward rate =
One year forward differential =
(ie. Spot rate to be adjusted by)
The money market interest differential reflect
as a premium on the currency where interest
rate is lower between the two.

21. Forward contracts
Contract to buy or sell a fixed amount of foreign currency on a specified future date at a predetermined rate of exchange
Fixed forward contract: transit period / usance period / forward period.

22. Forward contracts
Example: Spot USD 1 = Rs /6075 One month 3500 / months 5500 / months 8500 / months / Forward rates are for fixed delivery Exchange margin 0.10% Calculate for 2 months buying rates for 60 day usance bill
Spot buying rate =
Add Forward premium =
Less exchange margin 0.10% on =
2month forward rate for 60 day bill = Or

23. Forward contracts
Option forward contract gives customer to deliver any day during option period. Hence if FC is at premium apply earliest delivery date rate for a buy contract
On 15th Oct Exporter requested the bank to book a Fx contract delivery Dec for a 30 day sight bill for USD prevailing rates are:
Spot USD 1 = Rs / 5750
spot Oct 800 / 900 spot Nov 1700 / 1800
spot Dec 2250 / 2325 spot Jan 3200 / 3300
spot Feb 4100 / 4200 spot Mar 5150 / 5250
Exchange margin 0.10%. Transit period 25 days.
Spot buying rate =
Add premium for June =
Less 0.10% =
Rate to be quoted = or

24. Forward contracts cancellation
Forward contract when cancelled by the customer the reverse transaction at spot or remaining period forward. Customer may request for cancellation after maturity but before 15th day. If remains undelivered automatic cancellation on 7th working day Exporter requested after 2 months of entering into a 3 month forward contract for USD at for cancellation. Prevailing rates are: Spot USD 1 = Rs / month 1500 / months 2250 / months 3200 / 3300
Rs payable to exporter by bank as per contract = 4,92,500
Customer will pay on cancellation (spot + 1 month selling) = 4,95,200
Amount payable by exporter = ,700

25. Options Buyer / Seller Call – right to purchase Put – right to sell
ONLY RIGHTS to purchaser of option
American option – option buyer can exercise the right any day during the currency of contract
European option – the buyer can exercise his right only on maturity date.

26. An Option gives the buyer
Options
An Option gives the buyer
the “right”, but not the “Obligation”,
to buy or to sell an agreed amount of Financial Instrument (Call/Put)
on or before an Agreed Future Date (expiry)
at an Agreed Price (strike)
in exchange for a Fee (Premium)

27. Options
Mechanism
Exporter expecting Fx receipt 6 month hence enters into a put option for 6 months getting the right to sell the foreign currency on maturity at predetermined rates
On maturity if rate is high he may choose not to exercise his right under the option and sell in the market at spot rates

28. Option Terminology USD/INR Call Option at Rs. 40.00
Buyer of the option has the right to purchase USD at Rs (irrespective of spot market price on that day)
If the SPOT market price of USD is Rs that day, he could then exercise his option and
buy USD at Rs
immediately sell in the cash market at Rs.40.50
thus making a profit of Rs.0.50 per USD
If the SPOT market price is below Rs , the buyer:
doesn’t exercise his right
loss is restricted to the initial premium paid

29. Option Terminology
Similarly USD/INR Put Option on USD at Rs means Buyer of the option has the right to sell USD at Rs (irrespective of spot market price on that day)
If the spot market price of USD is Rs that day, he could then exercise his option and buys in the spot market at Rs.39.50
Exercises the put option to sell at Rs.40.00
thus making a profit of Rs.0.50 per USD
If the cash market price is above Rs , the buyer doesn’t exercise his right loss is restricted to the initial premium paid

30. SWAPS Currency Swaps – Both principal and interest is swapped
X co in US can borrow in 6% and in 9%
Y co in London can borrow in 8% and in 7%
Commission paid to financial intermediary =1% by both
WIN-WIN situation

31. Interest rate swaps Only interest outflows are swapped
X can borrow at fixed rates = 11% and floating rates +1%
Y can borrow at fixed rates = 10% floating at +0.75%
X wants fixed interest rate loan
Y wants floating rate loan
Y borrows fixed rate and gives to X at 10.25%. He swaps it with X’s floating rate which X gives him at +0.75%
Both are benefitted

32. Forward Rate Agreement
Seller agrees to lend to the buyer a specified amount in a specified currency for a specified period starting at a specified future date at predetermined interest rates.
The rates on the settlement date (starting date) determines who gains
Minimum amount is 5M

33. FRA structure 3/6 Forward Rate Agreement (5.15/40) Term date Fixing
Trade
date
TIME
Settlement
date
Fixing date = Settlement date – 2 working days

34. How FRAs are expressed ?
FRAs are expressed in terms of giving or receiving the fixed rate vs short term interest rate index (reference rate) and are quoted numerically.
The 3 months rate starting in 3 months time is 3/6
The 3 months rate starting in 6 months time 6/9
The 6 months rate starting in 3 months time is 3/9
The market maker gives two way quote (5.15/40)
The lower rate is the bid rate at which the bank is ready to pay fixed and the higher rate will be the offer rate at which the bank is ready to receive fixed

35. Cash flows in FRA
Wipro wishes to enter into a 3 x 6 FRA with Bank A where Wipro would pay fixed against 3 month CP rate
Principal - Rs. 25 crore
Current date
Start date
Settlement date
Maturity date
Fixed rate %
Floating rate %

36. Cash flow for Wipro Interest payable
25 crore x 6.50 x = Rs. 40,51,369.90
100 x 365
Interest receivable
25 crore x 6.75 x = Rs. 42,07,191.60
Net receivable = Rs. 1,55,821.90
(on maturity date)
Net receivable = Rs. 1,53,243.00
(On settlement date – /(1+6.75%*91/365)

37. CURRENCY FUTURES

40. Foreign Exchange Derivative
Contract
one currency against the other
Buy
Sell
Specified price
Specified date
Only for Resident Indians

41. Why to trade in Currency Futures
Speculation
Hedging

42. Advantages of exchange traded Currency Futures
Efficiency, reliable price discovery and transparency as the transactions are carried out through state of the art electronic trading infrastructure of the recognized exchanges.
Performance guarantees of recognized exchanges and hence elimination of counter party default risks.
Access to large variety of market participant that may include small traders, importers/ exporters, multinational corporations, banks and financial institutions.

43. Quick guide on currency futures trading on NSE
Exchange Timing: 9.00 am to 5.00 pm.
Currency Pairs: Initially only USD/INR currency pair would be available.
Contract Size: Size is set at $ 1000 per lot (contract).
Contract Maturity: period from one month to 12 months period. (total 12 monthly contracts)
Quote: in INR with a tick size (incremental value) of 0.25 Paisa.
Margins: (Presently 1%-) margins based on the daily volatility in the foreign exchange currency markets.

44. Quick guide on currency futures trading on NSE- (contd.)
MTM (Mark to Market): involve daily MTM (mark to market) margins.
Settlement of MTM would take place on T +1 basis.
NSCCL (National Securities Clearing Corporation Limited) would be responsible for the entire clearing, settlement and risk management functions.
Settlement Price: Final settlement price of the currency future contract would be decided as per the exchange rate fixed by RBI on the last trading day of the contract. Settlement would take place in cash in terms of INR.
Position Limits: capped at 25 mio.
Permissibility: Initially only resident Indians are allowed to trade in currency futures.

45. Getting Started
Get in touch with your broker permitted to trade in currency futures on NSE
Price Limits : +/- 3% for the first six monthly contracts and +/- 5% for the next six monthly contracts
No price band
Base price - theoretically derived price on the first day of the contract
DSP (Daily Settlement Price) - based on last half an hour weighted average price
Final Settlement Day - Last working day of the expiry month
Settlement Mode - Cash

46. Costs
Brokerage
Exchange transaction charges (waived by NSE for one month)
Stamp duty,
STT
Service tax
Education tax on brokerage fees
Many of the brokers have offered brokerage free transaction as a promotional scheme for one month.

47. Example on calculation of profit and loss
Buy price – ,
Lot size – 1000,
Quantity – 1 lot,
Sell price –
Gain = ( – ) x 1 (quantity) x 1000 (lot size) = x 1000 = 2.5 INR
In short every tick move signifies gain/loss of 2.5 INR for each lot OR for every 1 Rupee rise/ fall, one will gain/lose 1000 INR.

48. Example on calculation of MTM
Buy price – ,
Quantity – 1 lot,
DSP (Daily Settlement price) –
Gain = ( – ) x 1 (quantity) x 1000 (lot size) = x 1000 = 100 INR
This is one’s net MTM gain for a particular day that would be credited to one’s ledger account by the broker. If your MTM position is in loss then the broker would debit that much amount from one’s ledger balance

49. Differences between a currency futures contract and a forward contract
Futures contract has a performance guarantee of the exchange unlike forwards contract where the contracted parties may default on their commitments.
Currency futures are standardized contracts with a fixed maturity date and a fixed quantity or lot size or contract size. Forwards contract can have maturity date and size as per the mutual agreement between the concerned parties.

50. Advantages of currency futures trading over forex currency forwards contracts
FX forwards contracts traded on OTC markets are suitable for banks, financial institutions and corporate customers due to large size of the contracts.
less flexible,
less liquid
less transparent
Currency futures thru recognized exchanges  guarantee of performance no chances of any defaults whatsoever
Foreign currency futures contracts traded on recognized exchanges are most suitable for small investors and businesses.

51. Members of National Commodity & Derivatives Exchange Ltd,
Membership
Existing members,
Members of National Commodity & Derivatives Exchange Ltd,
New applicants should having a net worth of at least Rs 1 crore.
The processing fee for NCDEX members and new applicants is Rs 10,000.

52. FUTURES FORWARDS Delivery INR- no FC involved Foreign Currency
Transaction Size
US$1000
Any amount
Suitability
Speculation
Hedging
Counterparty
Exchange
Bank
Last ½ hr prices => time lag w.r.t. current price
Current Inter bank Price
Price Based on
Each exchange has Clearing House
Settlement
Bank’s relationships
On last working day of Month-fixed date
Choice date as per Fwd Contract
Maturing

54. FUTURE OF CURRENCY FUTURES
Currency pairs other than USD/INR to be introduced.
BSE and other exchanges to permit Currency Futures trading
Margins to undergo changes as the scheme stablises.
NRIs & FIIs to be permitted to trade in Currency futures
More brokers/members

55. The beginning
NSE witnessed a reasonably good turn over on the very first day of currency futures trading in India.
Total turnover of Rs Crore (about $65.8 million)
65,798 contracts traded on the exchange.
Major trading activity witnessed in the near month contract of September 2008
Near month contracts volume - 42,964.
September month currency futures closed with a settlement price of , which was up by about 0.66% over the previous price of
Currency futures closed at a premium over RBI reference rate (spot market rate).
Total 12 monthly contracts introduced for the period ending

56. Methodology: Presentation with examples and exercises, case studies
Topical coverage
Basics of Fx Transactions
Regulatory provisions
Customs
Parties
Rate mechanism
Risks in Fx
Hedging
Derivatives
Political Risk
Risk of Fraud
Methodology: Presentation with examples and exercises, case studies

57. Objectives Understand the Fx transactions
Know about the International Finance facilities
Appreciate the risk factors
Awareness about the risk management tools in Fx
Importance of countering the political risk in overseas operations and
Need of fraud risk policy statement for the co.

58. Regulatory aspects - FEMA
FEMA gives power to Govt and RBI
Transactions through AD , FFMC
Remittance facilities –
Norms about
Quantity
Purpose
Period

59. Regulatory aspects - FEMA
Current Account transactions –
Prohibited transactions – purpose, country
Transactions with govt approval
Monetary ceilings for ADs beyond which RBI permission
Without monetary ceilings and without RBI permission
Capital account transactions –
14 type of transactions

60. Regulatory Aspects – FCRA-1976
Prohibitions on receiving the contribution
Purpose
Election
Persons
Correspondent, columnist, cartoonist, editor, owner printer publisher of newspaper
Judges, govt officers, employees of corporations
Members of legislature, political party and office-bearer thereof

61. Regulatory Aspects – FCRA-1976
Permitted to receive foreign contribution-
Non-political organisations in the field of:
Cultural, economic, educational, religious, social activities
Registered with Ministry of Home Affairs
Through designated bank branch
From Foreign sources - NRFC

62. Customs – FEDAI Rules Relating to – Hours of business
Export transactions – Bills, transit period, interest, overdue
Import transactions
Clean instruments – payment procedures
Fx Contracts
Delivery – Early, delayed, cancellation
Involvement of Exchange brokers
Inter-bank transaction settlement

63. Customs – UCP-600 Applicability Binding on
Role of issuing bank, advising bank, confirming bank, nominated bank
Procedures for amendments
Period
Re-imbursement
Transportation of documents – time
Various clauses and insurance amount

64. Customs - INCOTERMS-522 C – C&F, CIF D – DAF, DDP E – EXW, EXS, EXQ
F – FOB, FOR, FOA, FAS,

65. Authorised persons AD-I AD-II AD-III FFMC Participants in Fx Markets
commercial banks, state and urban co-operative banks
AD-II
For non-trade related current account transactions - FFMC
AD-III
Select financial and other institutions for their own Fx transactions
FFMC
Participants in Fx Markets
Corporates, Commercial banks, Central bank, Exchange brokers

66. Settlement of transactions
SWIFT - society for world wide interbank financial telecommunications-Brussels
CHIPS - clearing house interbank payment system New York, Net position Fedwire
CHAPS - clearing house automated payment system, London

67. FCs for Resident Individuals
Resident Individuals are permitted to book forward contracts, without production of underlying documents, up to a limit of USD 100,000, based on self declaration.
Normally be on a deliverable basis.
In case of mismatches in cash flows or other exigencies, the contracts booked under this facility may be allowed to be cancelled and re-booked.
Notional value of the outstanding contracts not to exceed USD 100,000 at any time.
The contracts may be permitted to be booked up to tenors of one year only.

68. FCs for Resident Individuals
To be booked through AD Category I banks with whom the resident individual has banking relationship, on the basis of an application-cum declaration .
The AD Category – I banks should satisfy themselves that the resident individuals understand the nature of risk inherent in booking of forward contracts and should carry out due diligence regarding “user appropriateness” and “suitability” of the forward contracts to such customer.
AD Category – I banks to submit a quarterly report to the CGM,RBI,FED CO, Forex Markets Division, Mumbai within the first week of the following month.
{A.P. (DIR Series) Circular No. 15 October 29, 2007}

69. Settlement of an NDF Transaction
The formula:
Settlement amount in US dollar = Notional amount in US dollar * ((NDF rate – Reference rate on Settlement date) / Reference rate).
If settlement amount < zero, contract seller pays the difference to the contract buyer.
If settlement amount > zero, contract seller receives the difference from the contract buyer.
Thus, if one has sold an NDF contract for notional US$1mio 12-month forward at Rs.40.46, and the reference rate for that 12-month forward date turns out to be Rs.40.00, then the contract seller receives X (40.46 – 40.00) / = US$11,500.

70. Interest arbitrage
Forward rate = spot rate * (1+domestic intt rate)/ (1+ Foreign intt rate) USD 100,000 borrowed from US invested in India for 6 months US intt rate = 5% India rate of intt = 12% $ spot rate on contract = $ spot rate on repayment = Solution: Amount due = = = Rs. 42,02,500/- Realisation = 40,00,000+ 2,40,000 = 42,40,000 GAIN = – = = 40* (1.12)/(1.05) =

71. FUTURES
Entered into with specified futures exchange to buy / sell specified amount of FC at specified price for delivery on a specified future date.
International Monetary Market, London International Financial Futures Exchange
Size standardised
Due dates fall on specified months specified days
Trading by members / brokers
Margins for guaranteeing counter party risk
Marking to market – differences in rates are adjusted on a daily basis difference becomes payable.

72. Types Commodity futures-Underlying is a commodity
Financial futures: Underlying is a financial instrument
Currency futures: Underlying is a currency
Index futures: Underlying is an index-NSE index, Tokyo’s Nikkei index

73. Any questions

74. International Finance
What is international finance?
Why international finance is needed?
What if you borrow from Japan?
What are different finance facilities available?
Trade related finance?
Investment related finance?
Inward / outward
Recap of different risks in international finance?
Focus on risk of fraud and country risk

75. Export finance Packing credit RBI refinance upto 180 days PC
No concessional rate ab-initio if PC o/s
beyond 360 days
Quantum FOB or domestic cost of production
Repayment out of the proceeds of foreign
B/E, duty-draw back
PCFC at 0.75% over 6 months LIBOR +
withholding tax
PCFC for 180 days

76. Export finance Post shipment Factoring Advance against bookdebts,
B/E under LC / without LC, invoice, Bill of
Lading, insurance
Factoring
Advance against bookdebts,
Factor assumes the credit and collection
function

77. Export finance
Forfaiting is for medium term to cover exports on deferred basis. Provides liquidity and faster turn over. Avoids credit risk and eliminates exchange risk.

78. Import Finance Import loan Overseas suppliers ECB Who can lend?
Int’l bank, capita market, Multi-lateral finance institution, export credit agency, IFC,ADB, supplier of, foreign collaborators

79. Import loan Import Finance For Capital equipment For Raw material
Trust Receipt from importer

80. Overseas supplier’s credit
Import Finance
Overseas supplier’s credit
Supplier extends credit to importer
Buyer’s credit – exporter’s bank directly finances importer or importer’s bank. Importer opens red clause LC authorising exporter’s banker to finance the exporter. Importer’s bank guarantee the loan

81. Import Finance
ECB – Bonds issued by Indian co expressed in FC, payabe in FC
Automatic route
Approval route

82. Import Finance
Automatic route: real sector- industrial, infrastructure
Cannot borrow - Banks, FI, NBFC, HFC, trust non-profit organisation.
Eligible – corporates, NGO for Micro-finance,
Int’l bank, capital market, Multi-lateral finance institution, export credit agency, IFC,ADB, supplier of , foreign collaborators,
USD 500m /yr, USD20m upto 3 yrs, rest upto 5 yrs, NGO $5M
Prohibited clause- onlending, investment, acquisition of co, repayment of Rs loan, real estate, working capital
Cost of borrowing should not exceed LIBOR+50/125 for 1/3yrs
Guarantee, standby LC, Letter of comfort etc not permitted

83. Approval route: IDFC,IL&FS, PFC, PTC, IRCON, Exim bank
Import Finance
Approval route: IDFC,IL&FS, PFC, PTC, IRCON, Exim bank
Banks & financial institutions participated in textile or steel restructuring
GDR – Is a negotiable instrument denominated in USD representing shares issued in local currency in the name of an international bank called DEPOSITORY.
Custody of shares in issuing country with custodian
FCCB – Companies with good track record allowed, treated as FDI requiring clearance from FIPB, used for restructuring external debt

84. Foreign Investments in India

85. Any questions so far?

86. Frauds
Use of deception with intention of gaining an advantage, avoiding an obligation or causing loss to another party. All acts of bribery, forgery, theft, collusion, misappropriation, falsifying, extortions etc.

87. Forex frauds
The impact of irregularities in forex transactions can have greater consequences affecting initially the bank’s financial position and later on country’s reserve and economic growth. An efficient audit system Bank will be in a position to take corrective measures at an appropriate time and also will be able to contribute to establish a robust economy.

88. Forex frauds
Underlying cause can be - Frauds - Hawala - Circumventing Exchange Control - Money Laundering

89. Forex frauds
After FEMA all transactions are categorised either as current account transaction or capital account transaction
Extensive delegation for current account transactions to ADs
RBI will not be prescribing documents for current account transaction

90. Frauds – some initiatives
FCR Act, 1976 (amended)
16,187 groups in India have received foreign funds worth
Rs 5, crore in
Report of the Group of Ministers on National Security:
The prevention of money laundering is essential for safeguarding internal security.
MHA has mooted a proposal to replace the FCRA with a new Act FCMC
Amendment in FEMA to include voluntary organisation

91. Forex frauds
Types - Exports related - Imports related - Remittances related - DGFT concessions related - LC related

92. Export frauds Under invoicing (stash it abroad)
Over invoicing (bring the money back to the country)
Exporting waste / scrap
May be accompanied by fraud in duty draw back
Fake export LCs (fraud by foreign buyer)
Non-resident account operations
Hawala

93. iMPORT frauds
FAKE IMPORTS
(COLLECTION BILLS)
OVERINVOICING OF IMPORTS

94. rEMITTANCE frauds
CAPITAL ACCOUNT TRANSACTION IN GUISE OF CURRENT ACCOUNT TRANSACTION e.g., BTQ, BUSINESS VISIT, SERVICE PAYMENTS ETC.,
LAUNDERED MONEY COMING IN THE FORM OF INVESTMENT, LOAN, FOREIGN CONTRIBUTION, GIFTS ETC.,

95. Forex frauds Jacob – a computer engineer aged 25, from Chennai.
Applied for foreign job seeing an AD in Internet. Interview concluded over Net.
Few days later a person contacted Jacob introducing himself as the Managing Director of the company in Germany.
Terms of appointment were provided as Rs (Euro equal) plus House rent and Car allowances etc.
He also stated that Jacob can proceed to apply for Visa in another few days.
He requested Jacob to furnish his bank account detail in Chennai to open his salary account in Germany with cross reference to his Banker.
Jacob furnished his account number and branch details by .
Next two days there was a credit of Rs.3.00 lakhs in his account from Germany
The MD of the company contacted Jacob and requested Jacob to issue cheques to two parties in Ukraine, at Rs.1.5 lakh each after which his appointment order will be dispatched.
Jacob started receiving phone calls almost every half an hour enquiring whether he had dispatched the cheques as instructed by the MD.
Jacob got suspicious and informed Police.
On verification, it is found out that Germany Hawala agents, in order to avoid remittance tax employed such tactics.

96. Fraud risk policy Fraud risk policy: Is fraud a risk? Objectives:
Promote anti-fraud culture
Encourage fraud prevention
Promote fraud detection
Support fraud investigation
How:
Lead by examples, ensure adherence to legal requirement
rules procedures and practice
expectation from counter party to act with integrity, without fraud and corruption,
Contracts to include clauses about consequences of fraud.
Any allegation will be investigated without regards to position, length of service, past records

97. Managing risk of fraud Responsibilities of management committee
Adopt the policy
Prepare fraud response plan
Compliance
Appoint fraud liaison officer
Ensure timely and effective action taken
Develop and implement fraud risk process to
Identify areas in all the organisation’s activities
Undertake review at regular intervals

98. Managing risk of fraud Create awareness about FRP
Channels open to them for reporting suspicions of fraud
Disclosure policy
Whistle blower policy
Responsibility of each department head
Fraud awareness program
When how it can occur
What to be alert of
What to do if suspect a fraud

99. Managing risk of fraud Internal frauds: stealing school meals money
Manipulation in bill –lost job for Rs 10/-
Charging for goods not supplied
False travel claims
Misappropriation of funds from customer accounts
External frauds:
Home loan – fake documents, impersonation, deviations, inflated price
Technology products – credit card, ATM card, Debit card
Forgery, impersonation, remittance frauds

100. Political risk
Political decision or event in any country affect the business climate of that country resulting in investor loosing money or not making expected money.
Relating to :
Governance system of the country
Nature of authority
legitimacy – response of population to govt
cultural social aspect of society
To do with :
Behaviour of people governing the country
Rules, laws, reaction of the governed
Ability of the political system to respond to the demand
Events in domestic and International environment

101. Political risk
Examples – past – Nigeria, Uganda and other African countries expropriation
- Recent past – Nepal, Afgan, Iraq,
India – coalition governments, religious fundamentalism – Islamic terrorism, political fundamentalism – UP,
Corruption – US – Foreign corrupt practices Act
Kidnap, ransom by guerilla or other political group
Termination of contract by govt unilaterally
Payment defaults, license cancellation, embargoes,
War, civil war, Govt laws or Acts, decrees, regulations resulting in Breach or alteration of agreement
Confiscation of property (other than expropriation)
Damage to the property in politically motivated strike - Nandigram,
Interference of Govt in terms and conditions of contract
Remittance restrictions
Discriminatory taxation
No protection to trade mark, patent, copyright

102. Political risk Political risk Analysis:
Based on trend – past available records
Current societal attributes and circumstances
Outside the scope of analysis –
Heavy rain leading to food theft, fall of govt, installation of authoritarian govt, imposing strict control on foreign business dealing in food products

103. Political risk Mitigation:
Insurance – US govt – Overseas Private Investment Corporation (OPIC),
World Bank - Multilateral Investment Guarantee Agency (MIGA),
Private – American International Corporation (AIG), Johnson, Higgins
Risk Appetite – invest or ignore based upon analysis – One part of the country affected – Kashmir, North SriLanka – choose to operate in less disturbed parts of that country
Negotiate a better deal with govt – restrictions, remittance limits, control regime
Direct action – Ransom, kidnapping – hire security guards for protection

104. Thank you

105. FEMA powers
Section 41- Central Govt may from time to time give to RBI such general or specific directions which RBI shall comply with.
Section 46- Central Govt is empowered to make rules to carry out the provisions of the Act
Section 47- RBI is empowered to make regulations to carry out the provisions of the Act and the rules made there under.

106. Current Account transactions
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, Expenses in connection with foreign travel, education and medical care of parents, spouse and children.

107. Prohibited transactions
Remittance out of lottery winnings.
Remittance of income from racing/riding etc. or any other hobby.
Remittance for purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes, etc.
Payment of commission on exports made towards equity investment in Joint Ventures/ Wholly Owned Subsidiaries abroad of Indian companies.
Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
Payment of commission on exports under Rupee State Credit Route, except commission upto 10% of invoice value of exports of tea and tobacco.
Payment related to "Call Back Services" of telephones.
Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme.

108. Transactions - RBI permission
Gift - US$ 5,000 Donation- US$ 5,000 Private visits - US$ 10,000 Business travel - US$ 25,000 Maintenance expenses of a patient - US$ 25,000 Attendant to a patient - US$ 25,000 Property commission - US$ 25,000 Employment - US$ 100,000 Emigration - US$ 100,000 Maintenance of close relatives abroad - US$ 100,000 Studies abroad - US$ 100,000 Pre-incorporation expenses - exceeding US$ 100,000 Consultancy service - US$ 1,000,000 Medical treatment - estimate from the doctor in India or hospital/doctor abroad.

109. Transactions – prior approval
1. Cultural Tours
Ministry of Human Resources Development, (Department of Education and Culture)
2. Advertisement in foreign print media , for the purposes other than promotion of tourism, foreign investments and international bidding (exceeding US$ 10,000) by a State Government and its Public Sector Undertakings
Ministry of Finance, (Department of Economic Affairs)
3. Remittance of freight of vessel charted by a PSU
Ministry of Surface Transport, (Chartering Wing)
4. Payment of import by a Govt. Department or a PSU on c.i.f. basis (i.e. other than f.o.b. and f.a.s. basis)

110. Transactions – prior approval
5. Multi-modal transport operators making remittance to their agents abroad
Registration Certificate from the Director General of Shipping
6. Hiring of transponders by
(a)TV Channels
(b) Internet Service Providers
Ministry of Information &Broadcasting
Ministry of Communication and Information Technology
7. Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping
Ministry of Surface Transport (Director General of Shipping)
8. Remittances under technical collaboration agreements where payment of royalty exceeds 5% on local sales and 8% on exports and lump-sum payment exceeds US$ 2 million
Ministry of Industry and Commerce

111. Transactions – prior approval
9. Remittance of prize money/sponsorship of sports activity abroad by a person other than International/National/State Level sports bodies,if the amount exceeds US$ 100,000
Ministry of Human Resources Development (Department of Youth Affairs and Sports)
10. Deleted
11. Remittance for membership of P & I Club
Ministry of Finance, (Insurance Division)

112. capital Account transactions
“Capital account transactions" 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 referred in sub section (3) of section 6:
Transfer or issue of any foreign security by
a person resident in India
A person resident outside India
any branch, office or agency in India of a person resident outside India.

113. capital Account transactions
Any borrowing or lending in foreign exchange 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 / resident outside India/
Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred
by a person resident in India and owed to a person resident outside India
person resident outside India.

114. capital account transactions of Persons resident in India
a. Investment by a person resident in India in foreign securities.
b. Foreign currency loans raised in India and abroad by a person resident in India
c. Transfer of immovable property outside India by a person resident in India
d. Guarantees issued by a person resident in India in favour of a person resident outside India
e. Export, import and holding of currency/currency notes
f. Loans and overdrafts ( borrowings) by a person resident in India from a person resident outside India
g. Maintenance of foreign currency accounts in India and outside India by a person resident in India
h. Taking out of insurance policy by a person resident in India from an insurance company outside India
i. Loans and overdrafts by a person resident in India to a person resident outside India
j. Remittance outside India of capital assets of a person resident in India
k. Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India.

115. capital account transactions of Persons resident outside India
a. Investment in India by a person resident outside India, that is to say,
(i) Issue of security by a body corporate or an entity in India and investment therein by a person resident outside India; and
(ii) Investment by way of contribution by a person resident outside India to the capital of a firm or a proprietorship concern or an association of persons in India.
b. Acquisition and transfer of immovable property in India by a person resident outside India.
c. Guarantee by a person resident outside India in favour of, or on behalf of, a person resident in India.
d. Import and export of currency/currency notes into / from India by a person resident outside India.
e. Deposits between a person resident in India and person resident outside India.
f. Foreign currency accounts in India of a person resident outside India.
g. Remittance outside India of capital assets in India of a person
resident outside India.

116. FCMC BILL
To ensure that no person accepts foreign contribution for anti-national activities, funds are used properly.
Any article whose value does not exceed Rs10,000/- shall not be treated as foreign contribution
Interest earned on Foreign contribution to be treated as foreign contribution
It now excludes receipts on account of earnings in lieu of rendering professional services, fees for attending seminar, tuition fees subscription for journal etc.
Shall not spend more than 30% on administrative expenses.
Renewal of registration every two years, validity for five years.

117. INCOTERMS GROUP E Departure EXW Ex-Works GROUP F Main Carriage unpaid
FCA
Free Carrier
FAS
Free Alongside Ship
FOB
Free on Board
GROUP C
Main Carriage Paid
CFR
Cost and Freight
CIF
Cost, Insurance and Freight
CPT
Carriage Paid To
CIP
Carriage & Insurance Paid to
GROUP D
Arrival
DAF
Delivered At Frontier
DES
Delivered Ex-Ship
DEQ
Delivered Ex-Quay
DDU
Delivered Duty Unpaid
DDP
Delivered Duty Paid