Dear Students,

Forwarding the International Financial Management Syllabus.

1. Importance & significance of International Financial Management in the context of growing external sector of Indian economy.2. In what ways the IFM differs from doemstic financial management3. Non-rupee financing schemes such as Buyer's credit, PCFC, FCNR(B) Loans, ECB, EEFC acounts. I have discussed these in detalis in the class and have also shared a workbook which details the economics of each of these forms of non-rupee funding along with the attendant risks.4. Forex products and services made available by AD banks in India with more focus on regulatory aspects of derivatives sold by banks. I have shared a word document with the class in this regard.5. Structure of forex markets in India6. Forex risk and a typical corporate's approach to managing the same. We have also discussed a case in the class.

Importance of International Financial ManagementInternational financial management deals with the financial decisions taken in the area of international business. The growth in international business is, first of all, evident in the form of highly inflated size of international trade. In the immediate post-war years, the general agreement on the Trade and Tariffs was set up in order to boost trade. It axed the trade barriers significantly over the years, as a result of which international trade grew manifold. Naturally, the financial involvement of the trader's exporters and importers and the quantum of the cross country transactions surged significantly. All this required proper management of international flow of funds for which the study of International Financial Management came to be indispensable. Not unexpectedly, the second half of the twentieth century witnessed the emergence, and fast expansion, of multinational corporations. Normally, with the growth of international trade, the products of the exporter become mature in the importing countries. When the product becomes mature in the importing countries, the exporter starts manufacturing the product there so as to evade tariff and to supply it at the least cost. Thus it would not be wrong to say that the emergence of the multinational companies was the by-product of the expansion in world trade. There were some countries in the developing world too which were liberal in hosting the multinational companies. They imported technology on a big scale and built up their own manufacturing base. As a result, their own companies went international. Thus multinational company's emergent not only in developed countries but also in the developing world and because of their operation the cross country flow of funds increased substantially. The two way flow of funds, outward in the form of investment and inward in the form of repatriation divided, royalty, technical service fees, etc., required proper management and so the study of International Finance Management become a real necessity. With growing operation of Multinational companies, a number of complexities arose in the area of their financial decisions. Apart form the considerations of where, when and how much to invest, the decision concerning the management of working capital among their different subsidiaries and the parent units become more complex especially because the basic polices varied from one Multinational companies to the other. Those Multinational companies that were more interested in maximizing the value of global wealth adopted a centralized approach while those not interfering much with their subsidiaries believed in a decentralized approach.

The second half of the twentieth century has also experienced a vast magnitude of lending y international and regional development asks and different governmental and non-governmental agencies. The movement of funds mostly to the developing world and the reverse movement of funds in form of interest and amortization payments needed proper management. Besides, there were big changes in the character of the international financial market with the emergence of Euro banks and offshore banking center and of various instruments, such as Euro bonds, Euro notes and Euro commercial papers. The nature of the movement of funds become so complex that proper management become a necessity and the study of International Finance Management become highly relevant. In fact, International Finance Management suggests the most suitable technique to be applied at a particular moment and in a particular case in order to hedge the risk.

International Finance vs. Domestic Finance

International finance is different from domestic finance in many aspects and first and the most significant of them is foreign currency exposure. There are other aspects such as the different political, cultural, legal, economical, and taxation environment. International financial management involves into a lot of currency derivatives whereas such derivatives are very less used in domestic financial management.

The term ‘International Finance’ has not come from Mars. It is similar to the domestic finance in many of the aspects. If we talk on a macro level, the most important difference between international finance and domestic finance is of foreign currency or to be more precise the exchange rates.

In domestic financial management, we aim at minimizing the cost of capital while raising funds and try optimizing the returns from investments to create wealth for shareholders.

We do not do any different in international finance. So, the objective of financial management remains same for both domestic and international finance i.e. wealth maximization of shareholders. Still, the analytics of international finance is different from domestic finance. Following are the major differences:

Exposure to Foreign Exchange: The most significant difference is of foreign currency exposure. Currency exposure impacts almost all the areas of an international business starting from your purchase from suppliers, selling to customers, investing in plant and machinery, fund raising etc. Wherever you need money, currency exposure will come into play and as we know it well that there is no business transaction without money.

Macro Business Environment: An international business is exposed to altogether a different economic and political environment. All trade policies are different in different countries. Financial manager has to critically analyze the policies to make out the feasibility and profitability of their business propositions. One country may have business friendly policies and other may not.

Legal and Tax Environment: The other important aspect to look at is the legal and tax front of a country. Tax impacts directly to your product costs or net profits i.e. ‘the bottom line’ for which the

whole story is written. International finance manager will look at the taxation structure to find out whether the business which is feasible in his home country is workable in the foreign country or not.

Different group of Stakeholders: It is not only the money which along matters, there are other things which carry greater importance viz. the group of suppliers, customers, lenders, shareholders etc. Why these group of people matter? It is because they carry altogether a different culture, a different set of values and most importantly the language also may be different. When you are dealing with those stakeholders, you have no clue about their likes and dislikes. A business is driven by these stakeholders and keeping them happy is all you need.

Foreign Exchange Derivatives: Since, it is inevitable to expose to the risk of foreign exchange in a multinational business. Knowledge of forwards, futures, options and swaps is invariably required. A financial manager has to be strong enough to calculate the cost impact of hedging the risk with the help of different derivative instruments while taking any financial decisions.

Different Standards of Reporting: If the business has presence in say US and India, the books of accounts need to be maintained in US GAAP and IGAAP.

It is not surprising to know that the booking of assets has a different treatment in one country compared to other. Managing the reporting task is another big difference. The financial manager or his team needs to be familiar with accounting standards of different countries.

Capital Management: In an MNC, the financial managers have ample options of raising the capital. More number of options creates more challenge with respect to selection of right source of capital to ensure the lowest possible cost of capital.

There may be such more points of difference between international and domestic financial management. Mentioned above are list of major differences. We need to consider each of them before taking any decision involving multinational financial environment.

Buyer’s Credit

IntroductionExim Bank has, in conjunction with ECGC, introduced a new product/initiative viz. Buyer’s Credit under GOI’s National Export Insurance Account (NEIA), under which the Bank finances and facilitates project exports from India by way of extending credit facility to overseas sovereign governments and government owned entities for import of goods and services from India on deferred credit terms. Indian exporters can obtain payment of eligible value from Exim Bank, without recourse to them, against negotiation of shipping documents. Buyer’s credit is a financing mechanism that provides a safe mode of non-recourse financing option to Indian exporters and serves as an effective market entry tool.

About National Export Insurance Account (NEIA)

and the insurance premium will be borne by the project exporter. Interest differential on the credit, if interest rate is below market rate, will also need to be borne by Indian project exporter. Indian project exporter may suitably adjust its price.

Amount of LoanGenerally not more than 85% of the contract value.

Rate of InterestLinked to Exim Bank’s cost of funds plus a spread.

RepaymentCredit period would normally be 5 to 8 years. Longer credit period could be considered in deserving cases.

Security

NEIA is a Trust, set up by Ministry of Commerce and Industry (MOCI), Government of India, for providing export credit insurance cover for promoting project exports from India, administered by ECGC. Buyer’s Credit under NEIA is a unique mechanism for promoting India's project exports to traditional as well as new markets in developing countries, which need deferred credit on medium or long term basis.

Eligible buyersSovereign governments and government owned entities overseas for finance of eligible import of goods and services from India on deferred payment terms.

Eligible goodsProject exports from India.

FeaturesBuyer’s credit (NEIA) is available for project exports requiring medium or long term deferred credit. Exim Bank extends the credit directly to overseas buyer of projects from India without recourse to Indian exporter. Exim Bank will obtain credit insurance cover under NEIA through ECGC

Sovereign guarantee where the borrower is other than the foreign government. Guarantee from Central Bank of borrower, as applicable. Any other security as may be stipulated on a case-to-case basis.

Loan Appraisal Eligibility of the project for covering under Buyer’s credit, inter alia, will focus on country risk perception, track record of the Indian project exporter, sound financials of project exporter, conformity with RBI’s Memorandum PEM.

GeneralIndian companies are advised to contact Project Finance Group of the Bank at Head office in India before finalizing the contract.

A flow chart covering Approval and Disbursement processes under the Buyer’s Credit is Annexed.

Annexure

Flow chart for Approval of Buyer’s credit

(3) Seeks in-principle approval for cover and premium rates

Exim Bank

Indian Exporter (7) BC Approval Overseas Buyer

(1) Approaches for Buyer’s Credit & Terms (2) Due Diligence

(5)For proposals exceeding USD 20 mn approval is sought

Working GroupExim Bank, RBI, ECGC, Sponsoring Bank

(6) Approval accorded

(4) Conveys In-principle approval and premium

ECGC -NEIA

(8) Signing of commercial contract

(1) Indian exporter approaches Exim Bank to seek Buyer’s Credit & terms thereof.

(2) Exim Bank undertakes due diligence on overseas buyer.

(3) Exim Bank approaches ECGC for in principle approval for cover and premium rates.

(4) ECGC, upon approval under National Insurance Export Account (NEIA), conveys in-principle approval and rate of premium.

(5) For cases where credit requirement exceeds USD 20 mn, Exim Bank approaches Working Group to seek approval.

(6) Upon due consideration, Working Group accords approval.

(7) Exim Bank accords approval of Buyer’s credit to overseas buyer.

(8) Indian exporter executes commercial contract with overseas buyer.

(9) Exim Bank and ECGC sign Buyer’s Credit policy agreement.

Flow chart for Execution of contract and Disbursement under Buyer’s credit

(1) Indian exporter ships the goods/ provides the services to overseas buyer as per the terms of the commercial contract.

(2) Indian exporter submits original export documents and claims disbursements.

Indian Exporter

(1) Supplies goods/ provides services

Overseas Buyer

(2) Submits shipping documents and Claims disbursement

(3) Exim Bank will negotiate documents under Letter of Credit or payments will be made to exporter against payment authorisations

(4) Funds Transfer

(5) Advises buyer about disbursement and debit to his buyer’s credit a/c with Exim Bank

Exim Bank

(3) Exim Bank will negotiate documents under Letter of Credit or payments will be made to exporter against payment authorizations.

(4) Exim Bank remits the eligible amount of disbursement to Indian exporter.

(5) Exim Bank advises details of disbursement to overseas buyer.

1. What is an EEFC Account and what are its benefits?

Ans. Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign currency with an Authorised Dealer i.e. a bank dealing in foreign exchange. It is a facility provided to the foreign exchange earners, including exporters, to credit 100 per cent of their foreign exchange earnings to the account, so that the account holders do not have to convert foreign exchange into Rupees and vice versa, thereby minimizing the transaction costs.

Q 2. Who can open an EEFC account?

Ans. All categories of foreign exchange earners, such as individuals, companies, etc. who are resident in India, may open EEFC accounts.

Q 3. What are the different types of EEFC accounts? Can interest be paid on these accounts?

Ans. An EEFC account can be held only in the form of a current account. No interest is payable on EEFC accounts.

Q 4. How much of one’s foreign exchange earnings can be credited into an EEFC account?

Ans. One can credit up to 100 per cent of his/ her foreign exchange earnings into the EEFC account, subject to permissible credits and debits.

Q 5. Whether EEFC Account can be opened by Special Economic Zone (SEZ) Units?

Ans. No, SEZ Units cannot open EEFC Accounts.

However, a unit located in a Special Economic Zone can open a Foreign Currency Account with an authorised dealer in India subject to certain conditions. SEZ Developers can open EEFC Accounts.

Q 6. Is there any Cheque facility available?

Ans. Yes; Cheque facility is available for operation of the EEFC account.

Q 7. What are the permissible credits into this account?

Ans.i) Inward remittance through normal banking channels, other than remittances received on account of foreign currency loan or investment received from abroad or received for meeting specific obligations by the account holder;

ii) Payments received in foreign exchange by a 100 per cent Export Oriented Unit or a unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park

for supply of goods to similar such units or to a unit in Domestic Tariff Area;

iii) Payments received in foreign exchange by a unit in the Domestic Tariff Area for supply of goods to a unit in the Special Economic Zone (SEZ);

iv) Payment received by an exporter from an account maintained with an authorised dealer for the purpose of counter trade. (Counter trade is an arrangement involving adjustment of value of goods imported into India against value of goods exported from India in terms of the Reserve Bank guidelines);

v) Advance remittance received by an exporter towards export of goods or services;

vi) Payment received for export of goods and services from India, out of funds representing repayment of State Credit in U.S. Dollar held in the account of Bank for Foreign Economic Affairs, Moscow, with an authorised dealer in India;

vii) Professional earnings including directors fees, consultancy fees, lecture fees, honorarium and similar other earnings received by a professional by rendering services in his individual capacity;

viii) Re-credit of unutilised foreign currency earlier withdrawn from the account;

ix) Amount representing repayment by the account holder's importer customer, of loan/advances granted, to the exporter holding such account; and

x) The disinvestment proceeds received by the resident account holder on conversion of shares held by him to ADRs/GDRs under the Sponsored ADR/GDR Scheme approved by the Foreign Investment Promotion Board of the Government of India.

Q 8. Can foreign exchange earnings received through an international credit card be credited to the EEFC account?

Ans. Yes, foreign exchange earnings received through an international credit card for which reimbursement has been made in foreign exchange may be regarded as a remittance through normal banking channel and the same can be credited to the EEFC account.

Q 9. What are the permissible debits into this account?

Ans. i) Payment outside India towards a permissible current account transaction [in accordance to the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000] and permissible capital account transaction [in accordance to the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000].

ii) Payment in foreign exchange towards cost of goods purchased from a 100 percent Export Oriented Unit or a Unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park

iii) payment of customs duty in accordance with the provisions of the Foreign Trade Policy of the Central Government for the time being in force.

iv) Trade related loans/advances, extended by an exporter holding such account to his importer customer outside India, subject to compliance with the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000.

v) Payment in foreign exchange to a person resident in India for supply of goods/services including payments for airfare and hotel expenditure.

Q 10. Is there any restriction on withdrawal in rupees of funds held in an EEFC account?

Ans. No, there is no restriction on withdrawal in Rupees of funds held in an EEFC account. However, the amount withdrawn in Rupees shall not be eligible for conversion into foreign currency and for re-credit to the account.

Q. 11. Whether the EEFC balances can be covered against exchange risk?

Ans. Yes, the EEFC account balances can be hedged. The balances in the account sold forward by the account holders has to remain earmarked for delivery. However, the contracts can be rolled over.

PRE-SHIPMENT CREDIT IN FOREIGN CURRENCY(PCFC) The Reserve Bank of India (RBI) has allowed authorised dealers to extend pre-shipment credit in foreign currency (PCFC) to exporters for domestic and imported inputs of exported goods at libor, euro libor or euribor-related rates of interest.

The scheme is an additional window for providing pre-shipment credit to exporters at internationally competitive rates of interest. It will be applicable to only cash exports, an RBI notification, dated September 6, said.

The facility may be extended in one of the convertible currencies that is US dollars, pound sterling, yen, and euro among others.

To enable exporters to have operational flexibility, it will be in order for banks to extend PCFC in one convertible currency in respect of an export order invoiced in another convertible currency. For example, an exporter can avail of PCFC in US dollar against an export order invoiced in euro. The risk and cost of cross currency transaction will be that of the exporter.

The foreign currency balances available with the bank in exchange earners foreign currency (EEFC) accounts, resident foreign currency accounts (RFC) and foreign currency (non-resident) accounts

(banks) scheme could be utilised for financing the pre-shipment credit in foreign currency.

Banks are also permitted to utilise the foreign currency balances available under escrow accounts and exporters foreign currency accounts for the purpose, subject to ensuring that the requirements of funds by the account holders for permissible transactions are met and the limit prescribed for maintaining maximum balance in the account under broad based facility is not exceeded.

In addition, banks may arrange for lines of credit from abroad. Banks may negotiate lines of credit with overseas banks for granting PCFC to exporters without the prior approval of the RBI, provided the rate of interest on the line of credit does not exceed 0.75 percent over six months libor, euro libor or euribor.

Banks may avail of lines of credit from other banks in India if they are not in a position to raise loans from abroad on their own, subject to the condition that ultimate cost to the exporter should not exceed 0.75 percent above Libor, provided the bank does not have a branch abroad. The spread between the borrowing and lending bank is left to the discretion of the banks concerned.

The PCFC will be available as in the case of rupee credit initially for a maximum 180 days, any extension of credit will be subject to the same terms and conditions as applicable for extension of rupee packing credit and it will also have additional interest cost of 2 per cent above the rate for the initial period of 180 days prevailing at the time of extension.

For extension of PCFC within 180 days, banks are permitted to extend on a fixed roll-over basis of the principal amount at the applicable libor rate for extended period plus permitted margin (0.75 per cent over Libor).

Getting Started - Opening a PCFC

Make sure you have firm export orders or confirmed letters of credit, and you'll find that obtaining the PCFC facility from SBI is a cakewalk. Of course, you also need to satisfy other credit norms.

Now for the icing on the cake - we let you have a running account facility with us for PCFC if you are an exporter with a good track record. The specified eligibility factor is that your over dues should not exceed 5 per cent of the average annual export realisations during the preceding three calendar years. In cases where a running account facility has been extended, you must produce a letter of credit or a firm export order within a reasonable amount of time.

More good news for existing clients - there is no need for a separate sub-limit for PCFC for you! The PCFC can be made available within the export packing credit available to you provided the

outstanding amounts under both rupee and foreign currency facilities do not exceed the sanctioned limits.

Operating PCFC

PCFC is to be repaid only with the proceeds of the export bill tendered, under the export bill-rediscounting scheme.

In case of cancellation of export order, the PCFC line may be closed by selling equivalent amount of foreign exchange at TT selling rate prevalent on the date of liquidation.

How do the schemes operate?

PCFC & EBR schemes go hand in hand. The operation of these schemes is in three stages, viz. i) Disbursement of PCFC ii) Disbursement of EBR and simultaneous repayment of PCFC and iii) Repayment of EBR.

When the exporter has sufficient drawing power available within his overall limit to accommodate the proposed PCFC advance, PCFC is made available to him either in foreign currency for payment of his import bills or in Indian rupees for purchase of domestic raw material by converting the foreign currency of PCFC at T.T. Buying rate.

PCFC is operated like cash credit account with balances in foreign currency. The liability of the exporter to the Bank on account of PCFC is in foreign currency. The rupee equivalent will be shown in the account only at notional rates which really doesn't concern the exporter.Interest on PCFC will be arrived in foreign currency and the rupee equivalent thereof will be recovered at quarterly intervals from the exporter's CC or Current account.

Guidelines for grant of foreign currency loans in India to holders of FCNR (B) Deposits

(a) Loans should be against own FCNR (B) deposits and not against the deposits of third parties.

(b) Loans should be granted only to the deposit holder and not to any third party/ ies.The documents should be executed by the deposit holders themselves and not by their Power of Attorney holders.

(c) The maturity of the loan shall not exceed the maturity of the deposit under any circumstances.

(d) Loans shall be sanctioned to the account holders for purposes other than investments in India.

(e) Advances shall be fully secured by the deposit and regulations, if any, relating to margin shall be complied with.

(f) Repayment is to be effected by fresh remittances in foreign exchange or by adjustment of the deposit.

(g) The bank should put in place adequate monitoring system for the purpose.

(h) Extension of this facility should have the approval of the Board of the bank

FCNR (B) Loans

Corporates can avail loans from Bank of Baroda. The Indian corporates/ firms are allowed to raise the funds through foreign currency loans at select Indian branches within the prevailing policy guidelines of the Bank/ RBI.

Key Benefits

FCNR (B) loans are beneficial to the corporates on account of following:

At times, it may entail lesser interest cost vis-à-vis Rupee borrowings.

The borrower is not required to go to the International market for raising the funds as foreign currency funds are made available in India reducing the cost of raising such funds.

Broad purpose of loans

Corporates are allowed to obtain foreign currency denominated loans in India under the above scheme for the following purposes:

1. For meeting working capital requirements in Indian Rupees.

2. By way of pre-shipment advances/ post shipment advances to the exporters.

3. Import of raw materials.

4. Import of capital goods.

5. Purchase of indigenous machinery.

6. Repayment of the existing Rupee Term Loan.

7. Repayment of any existing ECB's with the permission from RBI, Govt. of India.

The present guidelines for the different purposes of the loans are as under:

For meeting working capital requirements in Indian Rupees.

The loan can be granted after proper assessment and sanction of working capital requirements/ Maximum Permissible Bank Finance (MPBF). The borrowers should have natural hedge to cover themselves from exchange risk, which they will have to bear. The borrowers who do not have natural hedge are required to take forward cover to avoid the exchange risk. The borrowers with a sound financial strength, higher ratings say A+/A and do not have natural hedge may also be considered.

The loan can be disbursed up to 90% of the MPBF limit.

Wherever borrowers are covered under the Loan system for delivery of Bank credit, bifurcation of MPBF limit into foreign currency loan, loan component in rupees, cash credit component and bill limit should conform to RBI guidelines.

The foreign currency loan amount is to be taken as a part of loan component provided minimum period of the loan is -6- months.

Foreign currency loan can be disbursed in -4- currencies viz US$, Sterling, Euro and Japanese Yen.

Minimum amount of the loanUS$, GBP, Euro: 100,000Japanese Yen: 10 million.

Loan to exporters by way of Pre Shipment Credit in Foreign Currency (PCFC)/ Post Shipment Credit in Foreign Currency (PSFC)

The exporters can avail this facility by way of pre-shipment credit as well as post shipment credit in foreign currency. All other terms applicable to such type of Rupee advances shall also be applicable to foreign currency advances.

Import of raw materials.

The importers can take benefit of foreign currency loans for import of raw materials in lieu of rupee MPBF sanctioned to them. The rupee equivalent of the foreign currency loan amount is to be earmarked in the overall sanctioned MPBF limit. This loan can also be repaid in foreign currency.

Import of capital goods.

The importers of capital goods can avail the foreign currency loan for a period not exceeding -3- years including moratorium period. Normally, the import of capital goods should be arranged on 180 days Usance basis.

Purchase of indigenous machinery.

The corporates can raise the foreign currency loans for their capital expenditure/ project expansion plans etc for the purchase of indigenous machinery.

Repayment of existing Rupee Term Loan

The Foreign Currency Loans can be utilised for the repayment of the existing Rupee Term Loan provided the duration of the foreign currency loan does not exceed the portion of the existing rupee loan which has not yet expired or 3 years whichever is less.

Repayment of ECB's

The repayment of the ECB's requires permission from the Government of India / RBI as per the applicable guidelines. Corporates can raise the FCNR (B) Loans after obtaining requisite permission from RBI/ Govt. of India and completing other formalities.

Foreign Exchange• Foreign Exchange is a methods and instruments used to adjust the payment of debts

between two nations that employ different currency systems. A nation’s balance of payments has an important effect on the exchange rate of its currency.

• Bills of Exchange, Drafts, Checks and Telegraphic orders are the principal means of payment in International transactions.

• The rate of exchange is the price in local currency of one unit of foreign currency and it is determined by the relative supply and demand of the currencies in the foreign exchange market.

• Arbitrage : Buying or selling foreign currency in order to profit from sudden changes in the rate of exchange is known as Arbitrages.

• The chief demand for foreign exchange within a country comes from importers from foreign goods, purchasers of foreign securities, government, agencies purchasing goods and services abroad and travelers.

Definition of Foreign Exchange market

• A market for converting the currency of one country into that of another country.

• An over the country market where buyers and sellers conduct foreign exchange business by telephone, internet and other means of communications. Also referred to as a “Forex Market”.

• A computerized communications network embracing all the major financial centres in the globe, where sellers and buyers of any national money can quickly and efficiently carry out any desired currency exchange.

Structure of Foreign Exchange market

• The world wide Forex Market is a 24-hours market, it is open virtually all the 24-hours of a day in at least one of the financial markets of the world.

• London, Zurich, Frankfurt, Bahrain, New York, Los Angles, Singapore, Hongkong, Tokyo, Sidney, etc.

The Foreign Exchange market in Indian Context

• The Indian Rupee has been convertible on the trade account since August, 1994.

• Capital inflow on one side and the RBI on the other side have kept it sandwiched at 31.37 INR to the US$ since around August, 1992.

• But now the scenario has been changed. Now it is fairly easy to buy US$ 100 millions or so during the day.

The Foreign Exchange Transactions

• The foreign exchange market in India is growing in both volume and depth. Various kinds of transactions are facilitated by the Banks, both on a spot and on a forward tasks.

The Foreign Exchange Management Act, 1999 (FEMA)

* The Parliament has enacted the Foreign Exchange Management Act (FEMA), 1999 to replace the foreign exchange regulation act (FERA), 1973. This Act come into force on 1st day of June, 2000.

* To investigate provisions of the Act, the Centre Govt. has established the Directorate of enforcement with Directors and other officers as officers of the enforcement.

The Foreign Exchange Management Act, 1999 (FEMA), Regulation & Management Dealing in Foreign Exchange, etc.

• Save as otherwise provided in this Act, Rules or regulations made there under or with the general or special permission of the RBI, no person shall

• Deal in or transfer any foreign exchange, or foreign securities to any person not being an authorized person.

• Make any payment to or for the credit of any person resident outside India in any manner.

• Holding of foreign exchange, etc.

• Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

Current Account Transaction and Capital Account Transaction

• Any person may shall or draw foreign exchange to or from an authorized person if such sale or drawl in a current or capital account transaction.

• Provided that the Central Govt. may, in public interest and in consultation with RBI impose such reasonable restriction.

Enforcement Directorate

• Pertains to the establishment of Directorate of Enforcement and the powers to investigate the violation of any provisions of Act, rule, regulation, notifications, directions or order issued in exercise of the powers under this Act. The Director have been empowered to take up investigations.

• The Directorate of Enforcement is mainly concerned with the enforcement of the provisions of the FEMA to prevent leakage of foreign exchange which generally occurs through the following malpractices.

1. Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments.

2. Acquisition of foreign currency illegally by person in India.

3. Unauthorized maintenance of accounts in foreign countries.

4. Illegal acquisition of foreign exchange through Hawala.

5. Secreting of commission abroad.

Organizational Set-Up

* The Enforcement directorate, with its HQs at New Delhi has seven zonal offices at Bombay, Calcutta, Delhi, Jalandhar, Madras, Ahmedabad and Bangalore. The zonal offices are headed by the Dy. Directors

* The Directorate has 9 sub zonal offices at Agra, Srinagar, Jaipur, Varanasi, Trivendrum, Calicut, Hyderabad, Guwahati and Goa, which are headed by the Asstt. Directors.

FOREX RISKS

Exchange Rate Risks: This is the most important element of international trade and finance as even small fluctuations in exchange rate risks can result in significant gains or loss for companies involved in foreign trade.

Some of the tools to mitigate these risks are the various financial instruments available in the market such as Derivatives instruments including futures, options (Calls/Puts), forward contracts and interest rate swaps.

For example, If Dell exports products to India and is expected to receive payments after six months, it can hedge against adverse fluctuations between the US dollar and Indian Rupee by entering into a forward contract for six month period, which would lock in the exchange rate price for the amount to be received by Dell.

Credit Risks: Another important risk which you can mention is the credit risk arising in international finance and trade due to lack of knowledge and credit knowledge about the other party in foreign country. Since it is difficult to obtain information about firms located in foreign countries due to lack of knowledge about credit bureaus in those countries, significant credit risks arise.

In order to mitigate this risk, Companies involved in international transactions should try to obtain as much information as possible via various independent agencies available to secure their money in international transactions.

Risks arising due to political instability or change in government: Such changes could adversely affect the laws with respect to foreign investment, import-export and repatriation, leading to delayed payments or even non payment. Further, lack of knowledge about complex international trade laws, paperwork, etc. can also cause significant delays in payments.

Such issues can be reduced by keeping a close track on the economic and political developments in

the country and region. Further, one should also be careful during changes in governments which might adversely affect the prevalent laws. Further, one should also keep a close track of the introductions of new bills. laws or amendments related to the international trade in the other countries in which business is being conducted.

Another financial management issue in conducting business internationally is existence of a well established banking infrastructure in the country of operation. One must ensure that the primary bank of the company should have an extensive branch network in all the countries in which the company conducts operation and should have efficient and cost effective international cash management facilities for smooth movement of funds between different nations. It is advisable to conduct business with large international banks such as Citibank, HSBC, etc. which have branch network in almost all countries around the world.