Globalisationand

Foreign Exchange Issues

CA Rajeev Bhargav

ACA, ACS, LLB, M.Com

Contents

CA Rajeev Bhargav

Forex Risk Management

Globalization – Opportunities in International Business

Cross Border Investments/ Joint Ventures

International Finance

Recent Government Initiatives (Make in India, Digital India etc.)

Foreign Trade Policy (2015-2020)

FEMA Compliances for International Transactions

Globalisation–Opportunities in International Business

CA Rajeev Bhargav

• Economic Globalisation is increasing at fast pace across all economies in the globe.• Today different economies and people across the globe are connected together and getting

closer with the distances and barriers decreasing rapidly by the change in technology, legalframework and improvements in transportation.

• Economic Liberalisation and free trade agreements have opened the economy to the world.

• Indian Entities have tremendous opportunities in Global Trade and in fact Indian Companies are increasingly doing Business abroad.

• Access to better technologies, cheaper raw materials, financial inflows, access to large marketsthrough exports.

• Advancement of communication and technology enabled provision of services without anyphysical presence.

• Tough Competition from Multinational Organisations.• New risks introduced in business like – currency risks, International Disputes management,

political risks, regulatory risks etc.• Doing business becomes more challenging in poorer countries and thereby gap may keep on

increasing.• Increased challenges for Small & Medium Enterprises (SME) to compete with big multinational

organisations across the globe.

Cross Border Investments/Joint Ventures (Important Points)

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JV Agreement

Due Diligence

Business Structure

Identifying JV Partner

Market Research

Regulatory Approvals

Management

Financial Committment

Dispute Settlement

Closure of Business

Understanding Different Cultures

Planning

Taxation

International Finance

CA Rajeev Bhargav

• External Commercial Borrowings from commercial Banks/JV Partner (ECB).

• International Agencies and Development Banks – IFC, ADB etc.

• Domestic Borrowing from Bank against Stand By Letter of Credit (SBLC).

• Foreign Direct Investment (FDI) from JV Partners/Holding Company Abroad

• Private Equity (PE)

• Venture Capital Funding (VCF)

• International Capital Markets

• Foreign Currency Convertible Bonds (FCCB)

• Global Depository Receipts / American Depository Receipts (GDR/ADR)

External Commercial Borrowings (ECB)

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FEMA Compliances

ECB includes:Bank Loan, Buyers’, Suppliers’ credit

Preference Shares, Loan from Foreign Promoters etc.

Cheaper source of Funds

Availability of funds for Big Size Projects

Forex Exposure / Additional

Cost of Hedging

Not available for Working Capital /

Repayment of Domestic Loan

Foreign Direct Investment (FDI)

FDI includes:Investment in Equity Shares by Foreign PartyCompulsory Convertible Preference Shares

Most sectors covered under

Automatic Route

Availability of funds for Big Size Projects

Suitable for risky projects/

permanent capital

Can be used for Working Capital

Suitable for Import of Capital Goods / Setting up of subsidiary abroad

Not Available for certain sectors like: Real Estate, Retail

etc.

Equity gives some control & Voting rights to

the investor

Can not be repaid easily

Identify the nature of FX

Exposure

Develop a simple Risk

Management Policy

Fix Up your Goals

Select the Products/ Tools

Execute your strategy with

Selected Tools

Adjust for changing Market

Conditions

Maintain Documentation

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Forex Hedging Process

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Future / Options

Forward Contracts

Non-deliverableForward (NDF)

Currency Swaps

Flexible Sourcing

Diversifying ExportMarkets

Other Forex Derivatives/Forwards

Treasury Bills

Bill of Exchange

Commercial Paper

Money Markets

Products/ Tools in Forex Risk Management

Currency Futures

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A currency future, also known as FX future, is a futures contract to exchange one currency for

another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date.

Reduced Cost No Restrictions / Easy to operate

Daily Mark to Market

Requirement to deposit Margin

Money

Forward Contracts

Forward contract can be entered with Bank to buy/sell a currency, at a predetermined future

exchange rate.

No need for Margin Money, Limits can

be set up with Bank

Rates can be negotiated with

Bank

Simple to manage

Transparent System

Banks give more favourable rate to

big clients

Non-Transparent

Costlier than Futures

Suitable for MSME

Recent Government Initiatives –Make in India

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The Make in India program includes major new initiatives designed to facilitate investment, foster innovation, protect intellectual property, and build best-in-class manufacturing infrastructure.

Doing business in India will be made easier – new de-licensing and deregulation measures are reducingcomplexity, and significantly increasing speed and transparency.

India’s manufacturing infrastructure and capacity for innovation is poised for phenomenal growth: new smartcities and industrial clusters, being developed in identified industrial corridors having connectivity, new youth-focused programs and institutions dedicated to developing specialized skills.

A new ‘National Industrial Corridor Development Authority’ is being created to coordinate, integrate, monitorand supervise development of all Industrial Corridors.

With the easing of investment caps and controls, India’s high- value industrial sectors – defense, construction and railways – are now open to global participation.

Policy in Defence sector liberalised and FDI cap raised from 26% to 49%.

Recent Government Initiatives –Digital India

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The Digital India programme is a flagship programme of the Government of India with a vision to transformIndia into a digitally empowered society and knowledge economy.

Recent Government Initiatives –Ease of Doing Business

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• Process of applying for Industrial License & Industrial Entrepreneur Memorandum made online on 24×7 basis through eBiz portal.

• Validity of Industrial license extended to three years.

• Major components of Defense products’ list excluded from industrial licensing.

• Dual use items having military as well as civilian applications deregulated.

• Process of obtaining environmental clearances made online.

• An electronic procedure has been created for Import Export Code (IEC Code), in which the documents can be uploaded online. There would be no need to file the physical documents.

• The online facility is also being created for Authorisation /License by exporter.

• Consignment of items meant for exports shall not be withheld/delayed for any reason by any agency of Central/State Government. In case of doubt, the authorities can release the consignment on the basis of undertaking.

Recent Government Initiatives –Ease of Doing Business

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• 24*7 Customs clearance has been made available at 18 sea ports.

• Prior filing facility of shipping bill has been provided by Customs – 7 days for air shipment and 14 days for sea.

• Following advisories sent to all Departments/ State Governments to simplify and rationalize regulatory environment.

• All returns should be filed on-line through a unified form.

• A check-list of required compliances should be placed on Ministry’s/Department’s web portal.

• All registers required to be maintained by the business should be replaced with a single electronic register.

• No inspection should be undertaken without the approval of the Head of the Department.

• For all non-risk, non-hazardous businesses a system of self-certification to be introduced.

Foreign Trade Policy (2015-2020)

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Market categorized intothree categories –Traditional Markets,Emerging & Focus Markets,Other Markets.

Goods originated /manufactured in India areonly eligible.

Export obligation underEPCG reduced to 75% incase of domesticprocurement of capitalgoods.

Inter unit transfer of goodsand services allowed toEOUs, EHTPs, STPs.

Other IncentivesMerchandise Exports (MEIS)

SEIS provides for reward toService providers located inIndia and providing exportof services.

Present rate of rewardbetween 3 to 5%.

Service Exports (SEIS)

Foreign Trade Policy (2015-2020) : Incentives

CA Rajeev Bhargav

Duty Credit Scrips are freely

transferable with no conditionality

attached.

Scrips can be used for payment of

Import Duty, Excise, Service Tax etc.

Debited Value is eligible for

Cenvat/Duty Drawback

Incentive now also available to SEZ

units

Validity of MEIS Scrips – 18 months

Only Notified Services are

covered under SEIS

SEIS – 12 months of end of FYMEIS- 12 months of LEO date

or 3 months from date of uploading of EDI Shipping bill,

whichever is later

Minimum Forex Earning:Individual : USD 10,000Other : USD 15,000

Declaration on Shipping Bill is

mandatory to claim the benefit under MEIS

Scheme.

Commercial Presence or presence of natural person

not eligible for SEIS

FEMA Compliances for International Transactions

► Import of Goods & Services

► Export of Goods & Services

► Setting up of Branch Office Abroad

Current Account Transactions

► Foreign Direct Investment in India

► Overseas Direct Investment from India

► External Commercial Borrowings

Capital Account Transactions

► Liberalized Remittance Scheme for Indian Citizens

► Round Tripping Issues

Others

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Import of Goods & Services

Importer to submit Evidence of Import ex.Bill of Entry to AD

For non-physical Imports – CA Certificate

Remittance should be generally made within six months from the date of shipment.

Importer can also make payment to Third Party subject to certain conditions.

Advance remittance againstimport allowed upto USD2,00,000 for goods and uptoUSD 5,00,000 for services

LC/Guarantee required forexceeding the limit

Merchanting Trade:

AD – 1 category Bank mayhandle bonafide merchantingtrade transaction

Export of Goods & Services

The full export value of goods exported should be received through AD Bank in convertibleforeign exchange through Banking channel.

Exporter to fully realize and repatriate the export proceeds within nine months of export.

Exporters may open Exchange Earner’s Foreign Currency Account (EEFC Account).

Advance against exports should not carry interest higher than LIBOR + 100 BP, Export to bemade within one year.

Prior Approval required for export of machinery, equipment etc. on lease/hire basis.

Write off of export bills allowed upto 5% by exporter and upto 10% by AD, of total exportproceeds during the previous calendar year.

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Setting up of Branch Office Abroad

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Initial Expense: • upto 15% of Average Turnover

of last 2 years, or • 25% of Net Worth

(Whichever is higher)

• Not to create additional liabilities for HO.

• Not to invest surplus funds abroad

The overseas Branch to conductnormal business Activities

Recurring Expense: • upto 10% of Average Turnover

of last 2 years, or • 25% of Net Worth

(Whichever is higher)

• Details of Bank Account openedoverseas should be promptlyreported to RBI through AD

• Audited Yearly statement to be filedwith RBI through AD

To give intimation toAuthorised Dealer (Bank) inform FC-GPR/FCTRS

Mandatory valuation ofShares

Sectoral caps are applicableon certain sectors

FDI in Sole Proprietary/Partnership is not permitted.

Certain Sectors areprohibited: Real Estate,Lottery, Gambling andBatting, Atomic Energy,Cigars, Cigratees, tobacco ortobacco substitutes.

Prohibited SectorsAutomatic Route

Foreign Direct Investment in India

Prior Approval of DIPPrequired for certain sectorsor if not complying with theconditions under AutomaticRoute.

Investment in LLP is onlyunder Approval Route

Approval Route

Company Partnership/Proprietorship

Limited Liability Partnership (LLP)

Foreign Entity

NRI/PIO can make investment on Non-Repatriable basis without any limit.CA Rajeev Bhargav

To give intimation toAuthorised Dealer (Bank) inform ODI

Total Financial Commitmentpermitted upto 400% of NetWorth

Mandatory valuation ofShares

Real Estate and Banking Activities

Investment inunincorporated entities

Specifically Prohibited ActivitiesAutomatic Route

Overseas Direct Investment from India (ODI)

Prior Approval of RBIrequired, if not complyingwith the conditions underAutomatic Route

Only Debt without equitywill be under ApprovalRoute

Approval Route

Equity SharesPreference Shares

GuaranteeFinancial/Performance

DebtDebentures

Indian Party – Company, LLP and Registered Firm

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External Commercial Borrowings (ECB)

ManufacturingSoftware, Hotels,

HospitalsTraining, R&D,

Supporting Infra, Specified NBFC,

NGOs etc.

International Banks/FIs,

International Capital Markets, Export Credit Agencies,

Suppliers of Equipment, Foreign

Collaborators holding >25% equity, Ultimate Holding, Group

Companies

Eligible Borrowers Recognised Lenders

Non-Service Sector – USD 750 Mn. Per FYService Sector – USD 200 Mn. Per FY

Up to USD 20 Million – 3 Years

Above USD 20 Million – 5 Years

End Use: Capital Expansion, Outbound Investment, Import of Services, Technical Knowhow, payment of license fees

3-5 Years : LIBOR + 350 Basis Points>5 Years : LIBOR + 500 Basis Points

(Expense in INR not included)

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Liberalized Remittance Scheme

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USD 2.50 LacsP.A. Per Person

Can buy Property Abroad

Pooling with family possible

Investment in Unlisted Companies without Compliances of ODI

Individuals Residents in

India

All purposes other than specifically prohibited

Remittances to Bhutan, Nepal, Mauritius &

Pakistan

Gift/Loan is also allowed to PIO/NRI who is close

relative

Example - 1

Foreign Company

Indian Company

Indian Company

Round Tripping Issues

Fun

ds

Infu

sio

nFu

nd

s In

fusi

on

Example - 2

Foreign Company

Indian Company

Indian Company

Equ

ity

Private Equity

Foreign Bank

CA Rajeev Bhargav

Disclaimer

CA Rajeev Bhargav

This Presentation is intended to serve as a guide to the Member Participants of theSeminar/Conference and for information purposes only; and the contents are not to be construed inany manner whatsoever as a substitute for professional advice or legal opinion. No one should act onsuch information without appropriate professional advice after a thorough examination of particularsituation. Information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. While due care has been taken to ensure that theinformation is current and accurate to the best of our knowledge and belief, there can be noguarantee that such information is accurate as of the date it is received or that it will continue to beaccurate in the future. These PPTs contain information that is privileged and confidential.Unauthorized reading, dissemination, distribution or copying of this document is prohibited. We shallnot be responsible for any loss or damage resulting from any action or decision taken on the basis ofcontents of this material.

Thank You

CA Rajeev Bhargav

Presentor’s Contact Details:

Rajeev BhargavR Bhargav & Associates, 703-A, Devika Towers, Nehru Place, New Delhi - 110019Phone: +91 11 41306064, +91-9810586704, E-mail: info@rbhargav.comWebsite: www.rbhargav.com

Participants can mail your queries to IICA or to the following email id: research@rbhargav.com