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

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

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?

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

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

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

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

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

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

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

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

Rate mechanism Two way quotation: USD 1 =Rs. 48.8525/8650 Direct quotation : USD 1 = Rs. 48.8525/8650 rule buy low sell high Indirect quotation : Rs.100/- = USD 2.0470/0490 rule buy high sell low Spot : USD 1 = Rs. 48.8000/8200 which is buying and which is selling? Spot / Nov 2000/2100 Spot /Dec 3500/3600 these are premiums. Remember buy high sell low Oct forward buying = 48.8000 Spot / Nov 2100/2000 Spot / Dec 3600/3500 these are discounts. ADD least premium while buying & highest premium while selling. DEDUCT highest discount while buying and lowest discount while selling

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. 48.8500/8700 on 17th Oct Spot / Nov 2200/2300 Exchange margin 0.08% Solution: 48.8500 less 0.0391 = 48.8101 say 48.8100

Rate mechanism Bill buying rate for : FBP Transit period and usance period Round off to lower month- when premium Example: Spot USD 1 = Rs. 48.8500/8700 on 17th Oct Spot / Oct 200/300 Spot / Nov 500/550 Spot / Dec 750/800 Usance 30 days, transit 25 days Solution: 48.8500 + 0.0200 = 48.8700 48.8500 + 0.0500 = 48.9000

Forward Premia – Inflation differential Example: US$/Rupee Exchange rate Exchange rate a year before US$ 1 = Rs. 47.65 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. 50.03 (5%) Therefore US $ 1 = 50.03/1.02 = 49.05 (3%) Therefore, depreciation of rupee is Rs. 49.05-47.65 = Rs. 1.40

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.

REFLECTION OF INTEREST DIFFERENTIAL IN FOREX FORWARD PREMIA UK USA INTEREST RATE 4.5% 4% Spot Rate GBP 1 $ 1.7815 Borrow US $ 17815 for one year at 4% and convert into Pounds 17815 /1.7815 = GBP 10000 Invest GBP 10000 in UK at 4.5% for one year After one year maturity = 10000 x 4.5 x 1 = 450+10000 100 = GBP 10450 Convert back GBP 10450 into dollar @ 1.7815 Dollar receivables = 10450 x 1.7815= 18616.70

FOREX FORWARD PREMIA Interest payable on the dollar borrowing = 17815 x 4% = $ 712.60 Principal + interest = 17815 + 712.60 =18527.60 Received on investment = $ 18616.70 Paid on borrowing = $ 18527.60 Arbitrage gain = $ 89.00 (rounded)

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 = 18527.60 = 1.7729 (one year forward exchange rate) 10450

FOREX FORWARD PREMIA Forward Premia= Spot Rate x (CCy.Int.- BCy. Int) x No. of days 360 x 100 = 1.7815 x (4 – 4.5) x 360 = (-)0.0086 GBP/USD Spot Rate = 1.7815 GBP/USD one year forward rate = 1.7729 One year forward differential = 0.0086 (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.

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.

Forward contracts Example: Spot USD 1 = Rs. 48.6000 /6075 One month 3500 / 3600 2 months 5500 / 5600 3 months 8500 / 8600 4 months 1.1500 / 1.1600 Forward rates are for fixed delivery Exchange margin 0.10% Calculate for 2 months buying rates for 60 day usance bill Spot buying rate = 48.6000 Add Forward premium = 1.1500 Less exchange margin 0.10% on 49.7500 = 0.04975 2month forward rate for 60 day bill = 49.70025 Or 49.7000

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 10000. prevailing rates are: Spot USD 1 = Rs. 48.5675 / 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 = 48.5675 Add premium for June = 0.2250 Less margin @ 0.10% = 0.04879 Rate to be quoted = 48.84129 or 48.8410

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 10000 at 49.2500 for cancellation. Prevailing rates are: Spot USD 1 = Rs. 49.3000 / 3500 1 month 1500 / 1700 2months 2250 / 2325 3 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 = 2,700

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.

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)

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

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

Option Terminology Similarly USD/INR Put Option on USD at Rs. 40.00 means Buyer of the option has the right to sell USD at Rs. 40.00 (irrespective of spot market price on that day) If the spot market price of USD is Rs. 39.50 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. 40.00, the buyer doesn’t exercise his right loss is restricted to the initial premium paid

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

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

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

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

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

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 - 29.04.2008 Start date - 29.07.2008 Settlement date - 29.07.2008 Maturity date - 29.10.2008 Fixed rate - 6.50% Floating rate - 6.75%

Cash flow for Wipro Interest payable 25 crore x 6.50 x 91 = Rs. 40,51,369.90 100 x 365 Interest receivable 25 crore x 6.75 x 91 = 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 – 155821 /(1+6.75%*91/365)

CURRENCY FUTURES

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

Why to trade in Currency Futures Speculation Hedging

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.

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.

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.

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

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.

Example on calculation of profit and loss Buy price – 43.8575, Lot size – 1000, Quantity – 1 lot, Sell price – 43.8600 Gain = (43.8600 – 43.8575) x 1 (quantity) x 1000 (lot size) = 0.0025 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.

Example on calculation of MTM Buy price – 46.8575, Quantity – 1 lot, DSP (Daily Settlement price) – 46.9575 Gain = (46.9575 – 46.8575) x 1 (quantity) x 1000 (lot size) = 0.100 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

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.

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.

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.

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

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

The beginning - 29.08.2008 NSE witnessed a reasonably good turn over on the very first day of currency futures trading in India. Total turnover of Rs. 291.05 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 44.0325, which was up by about 0.66% over the previous price of 43.74. Currency futures closed at a premium over RBI reference rate 43.79 (spot market rate). Total 12 monthly contracts introduced for the period ending 31.08.2009

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

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.

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

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

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

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

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

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

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

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

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

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.

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 - 400 001 within the first week of the following month. {A.P. (DIR Series) Circular No. 15 October 29, 2007}

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 1000000 X (40.46 – 40.00) / 40.00 = US$11,500.

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 = 40.0000 $ spot rate on repayment = 41.0000 Solution: Amount due = 100000 + 2500 = 102500 USD@ 41.00 = Rs. 42,02,500/- Realisation = 40,00,000+ 2,40,000 = 42,40,000 GAIN = 4240000 – 4202500 = 37500 = 40* (1.12)/(1.05) = 42.6700

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.

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

Any questions

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

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

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

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.

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

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

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

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

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

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

Foreign Investments in India

Any questions so far?

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.

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.

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

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

Frauds – some initiatives FCR Act, 1976 (amended) 16,187 groups in India have received foreign funds worth Rs 5,105.50 crore in 2003-04 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

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

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

iMPORT frauds FAKE IMPORTS (COLLECTION BILLS) OVERINVOICING OF IMPORTS

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.,

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.40000 (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 e-mail. 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.

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

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

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

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

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

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

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

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

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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.

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.

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.

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.

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)

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

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)

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.

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.

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.

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.

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.

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