Unit 3.1 Regulatory Framework - Indian Perspective


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This presentation discusses regulatory framework of international finance from the Indian perspective-FEMA and FERA, foreign trade policy, role of RBI, rupee convertibility, EOU/STPI, SEZ, EPZ.

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Unit 3.1 Regulatory Framework - Indian Perspective

  1. 1. Unit 3.1: Regulatory Framework ofInternational Finance
  2. 2.  FEMA Foreign Trade Policy Role of RBI Rupee Convertibility EOU/STPI SEZ EPZ2Mrs. Charu Rastogi, Asst.Professor
  3. 3. 3Mrs. Charu Rastogi, Asst.Professor
  4. 4.  The Foreign Exchange Regulation Act (FERA) was legislationpassed by the Indian Parliament in 1973 by the governmentof Indira Gandhi It came into force with effect from January 1, 1974. FERA imposed stringent regulations on certain kinds ofpayments. It deals in foreign exchange and securities and the transactionswhich had an indirect impact on the foreign exchange and theimport and export of currency. The purpose of the act, was to "regulate certainpayments, dealings in foreign exchange andsecurities, transactions indirectly affecting foreign exchangeand the import and export of currency, for the conservation offoreign exchange resources of the country".4Mrs. Charu Rastogi, Asst.Professor
  5. 5.  In 1999, FERA was replaced by the Foreign Exchange Management Act, whichliberalised foreign exchange controls and restrictions on foreign investment. It had become the need of the hour since FERA had become incompatiblewith the pro-liberalisation policies of the Government of India. It was formulated to:◦ facilitate external trade and payments◦ promote the orderly development and maintenance of foreign exchange market inIndia FEMA is applicable to all parts of India. The act is also applicable to allbranches, offices and agencies outside India owned or controlled by a personwho is a resident of India. The FEMA head-office, also known as Enforcement Directorate is situated inNew Delhi and is headed by a Director. The Directorate is further divided into5 zonal offices in Delhi, Mumbai, Kolkata, Chennai and Jalandhar and eachoffice is headed by a Deputy Director.5Mrs. Charu Rastogi, Asst.Professor
  6. 6. Fera Fema Object to conserve andprevent misuse Violation was CriminalOffence and was noncompoundable It was a draconian policelaw To facilitate external tradeand payments Violation is a civil offenceand is compoundable It is a civil law6Mrs. Charu Rastogi, Asst.Professor
  7. 7.  Activities such as payments made to any person outside Indiaor receipts from them, along with the deals in foreignexchange and foreign security is restricted. It is FEMA thatgives the central government the power to impose therestrictions. Restrictions are imposed on people living in India who carryout transactions in foreign exchange, foreign security or whoown or hold immovable property abroad. Without general or specific permission of the Reserve Bank ofIndia, FEMA restricts the transactions involving foreignexchange or foreign security and payments from outside thecountry to India – the transactions should be made onlythrough an authorised person.7Mrs. Charu Rastogi, Asst.Professor
  8. 8.  Deals in foreign exchange under the current account by anauthorised person can be restricted by the CentralGovernment, based on public interest. Although selling or drawing of foreign exchange is done throughan authorised person, the RBI is empowered by this Act tosubject the capital account transactions to a number ofrestrictions. People living in India will be permitted to carry out transactionsin foreign exchange, foreign security or to own or holdimmovable property abroad if the currency, security or propertywas owned or acquired when he/she was living outside India, orwhen it was inherited to him/her by someone living outsideIndia. Exporters are needed to furnish their export details to RBI. Toensure that the transactions are carried out properly, RBI mayask the exporters to comply to its necessary requirements8Mrs. Charu Rastogi, Asst.Professor
  9. 9.  Under the FEMA, the emphasis is on the management of foreignexchange resources. FEMA has formally recognized the distinction between currentaccount and capital account transactions. Two golden rules or principles in FEMA are mentioned as follows:◦ all current account transactions are permitted unless otherwiseprohibited.◦ all capital account transactions are prohibited unless otherwisepermitted.More details at:(http://www.rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=155)9Mrs. Charu Rastogi, Asst.Professor
  10. 10.  The Penalty could be up to thrice the sum involvedwhere amount is quantifiable If the Amount is not quantifiable , penalty up to Rs2 lakhs can be imposed If contravention is of continuing nature, furtherpenalty up to Rs 5000 per day during which thecontravention continues can be imposed10Mrs. Charu Rastogi, Asst.Professor
  11. 11. 11Mrs. Charu Rastogi, Asst.Professor
  12. 12.  Exim policy is a set of guidelines andinstructions issued by Directorate General ofForeign Trade (DGFT) for matters related tothe import and export of goods in India. The policy is guided by Foreign TradeDevelopment and Regulation Act, 1992. Exim policy is issued for a period of 5 years.The current policy covers the period 2009-1412Mrs. Charu Rastogi, Asst.Professor
  13. 13.  Control import of non-essential items Export Promotion To accelerate the level of economic activities to derivemaximum benefits from expanding global marketopportunities To stimulate sustained economic growth by providing accessto essential raw materials, intermediates, components,consumables and capital goods required for augmentingproduction To enhance the techno local strength and efficiency of Indianagriculture, industry and services, thereby, improving theircompetitiveness To generate new employment opportunities and encouragethe attainment of internationally accepted standards ofquality To provide quality consumer products at reasonable prices13Mrs. Charu Rastogi, Asst.Professor
  14. 14.  The year 2009 witnessed one of the most severe globalrecessions in the post-war period. Exports suffered a decline in the last 10 months of 2009 To arrest and reverse the declining trend of exports and toprovide additional support especially to those sectors whichhave been hit badly by recession in the developed world Policy objective of achieving an annual export growth of 15%with an annual export target of US$ 200 billion by March2011. In the remaining three years of this Foreign Trade Policy i.e.upto 2014, the country should be able to come back on thehigh export growth path of around 25% per annum. By 2014, we expect to double India‟s exports of goods andservices. The long term policy objective for the Government isto double India‟s share in global trade by 2020.14Mrs. Charu Rastogi, Asst.Professor
  15. 15.  In order to meet these objectives, the Government wouldfollow a mix of policy measures including fiscalincentives, institutional changes, proceduralrationalization, enhanced market access across the world anddiversification of export markets. Improvement in infrastructure related to exports Bringing down transaction costs, and providing full refundof all indirect taxes and levies, would be the three pillars. Goods and Services Tax rebates all indirect taxes and levieson exports Technological up gradation of exports is sought to◦ be achieved by promoting imports of capital goods forcertain sectors under EPCG at zero percent duty.◦ encourage production and export of „green products‟through scheme and incentives for exports.15Mrs. Charu Rastogi, Asst.Professor
  16. 16.  In order to reduce the transaction cost and institutionalbottlenecks, the e-trade project would be implemented in atime bound manner to bring all stake holders on a commonplatform. Additional ports/locations would be enabled on the ElectronicData Interchange over the next few years. An Inter-Ministerial Committee has been established to serveas a single window mechanism for resolution of trade relatedgrievances. The industry and the Government, working in tandem, will beable to ensure that the Indian exports become globallycompetitive and that we are able to achieve the target, whichwe have set for ourselves.16Mrs. Charu Rastogi, Asst.Professor
  17. 17. 17Mrs. Charu Rastogi, Asst.Professor
  18. 18.  Monetary Authority:◦ Formulates, implements and monitors the monetary policy.◦ Objective: maintaining price stability and ensuringadequate flow of credit to productive sectors. Regulator and supervisor of the financial system:◦ Prescribes broad parameters of banking operations withinwhich the countrys banking and financial system functions.◦ Objective: maintain public confidence in the system, protectdepositors interest and provide cost-effective bankingservices to the public. Manager of Foreign Exchange◦ Manages the Foreign Exchange Management Act, 1999.◦ Objective: to facilitate external trade and payment andpromote orderly development and maintenance of foreignexchange market in India.18Mrs. Charu Rastogi, Asst.Professor
  19. 19.  Issuer of currency:◦ Issues and exchanges or destroys currency and coins notfit for circulation.◦ Objective: to give the public adequate quantity ofsupplies of currency notes and coins and in goodquality. Developmental role◦ Performs a wide range of promotional functions tosupport national objectives. Related Functions◦ Banker to the Government: performs merchant bankingfunction for the central and the state governments; alsoacts as their banker.◦ Banker to banks: maintains banking accounts of allscheduled banks19Mrs. Charu Rastogi, Asst.Professor
  20. 20.  The RBI is the custodian of the country‟s foreignexchange reserves, and it is vested with theresponsibility of managing the investment andutilization of the reserves in the mostadvantageous manner. The RBI achieves this through buying and selling offoreign exchange from and to scheduledbanks, which are the authorized dealers in theIndian foreign exchange market. The bank also manages the investment of reservesin gold accounts aboard and the shares andsecurities issued by foreign governments andinternational banks or financial institutions.20Mrs. Charu Rastogi, Asst.Professor
  21. 21. 21Mrs. Charu Rastogi, Asst.Professor
  22. 22.  Currency convertibility refers to the freedom to convert the domesticcurrency into other internationally accepted currencies and vice versa It is defined as “The freedom to convert local financial assets into foreignfinancial assets and vice versa.” A currency is said to be convertible if residents and non-residents are free touse and exchange the domestic currency for any purpose The need to convert domestic currency into foreign currency or to convertforeign currency into domestic currency arises due to:◦ Current Account Transactions (trade, tourism, factor and transfer receipts andpayments)◦ Capital Account Transactions (FDI, FII, private or govt. lending or borrowing) Article VIII of the IMF defines convertibility on the current account and statesthat a member cannot impose restrictions on making of payments andtransfers on currency transactions. Article VI (3) of IMF allows members to exercise such controls as arenecessary to regulate international capital movements.22Mrs. Charu Rastogi, Asst.Professor
  23. 23.  Capital account convertibility or CAC is said toexist when domestic currency can be freelyconverted into foreign currency (and vice versa) forcapital account transactions When the domestic currency is convertible only onthe current account, it is known as partialconvertibility. When the domestic currency is convertible on thecurrent account as well as the capital account, it isknown as full convertibility.23Mrs. Charu Rastogi, Asst.Professor
  24. 24.  Rupee is Partially Convertibility because therupee is◦ Fully convertible on the current account all current account transactions are permitted unless otherwiseprohibited.◦ Moving towards progressively liberalizing capitalaccount transactions all capital account transactions are prohibited unlessotherwise permitted.24Mrs. Charu Rastogi, Asst.Professor
  25. 25.  Convertibility of the rupee was recommended bythree reports, namely the: Report of The High Level Committee on Balance Ofpayments, 1993 (referred to as the Rangarajan CommitteeReport, after its Chairman), Report on Capital Account Convertibility, 1997 (referred toas the Tarapore Committee Report after its Chairman), and Report on Fuller Capital Account Convertibility, 2006 (or theFCAC Report, whose Chairman was SS Tarapore).25Mrs. Charu Rastogi, Asst.Professor
  26. 26. 26Mrs. Charu Rastogi, Asst.Professor
  27. 27.  The Export Oriented Units (EOUs)scheme, introduced in early 1981, iscomplementary to the SEZ scheme. It adopts the same production regime but offers awide option in locations with reference to factorslike source of raw materials, ports of export, landfacilities, availability of technologicalskills, existence of an industrial base and the needfor a larger area of land for the project.27Mrs. Charu Rastogi, Asst.Professor
  28. 28.  To increase exports Earn foreign exchange to the country, Transfer of latest technologies, Stimulate direct foreign investment To generate aditional employment.28Mrs. Charu Rastogi, Asst.Professor
  29. 29.  Granite Textiles / Garments Food Processing Chemicals Computer Software Coffee Pharmaceuticals Gem & Jewellery Engineering Goods Electrical & Electronics29Mrs. Charu Rastogi, Asst.Professor
  30. 30.  The EOUs are required to achieve the minimum NFEP(Net Foreign Exchange Earning as a Percentage ofExports) and the minimum EP (Export Performance) asper the provisions of EXIM Policy which vary from sectorto sector. For instance, the units with investment in plant andmachinery of Rs.5 crore and above are required toachieve positive NFEP and export US$ 3.5 million or 3times the Cost Insurance and Freight (CIF) value ofimported capital goods, whichever is higher, for 5 years For electronics hardware sector, minimum NFEP has tobe „positive‟ and minimum EP for 5 years is US$ 1million or 3 times the CIF value of imported capitalgoods, whichever is higher.30Mrs. Charu Rastogi, Asst.Professor
  31. 31.  Software Technology Parks of India was establishedand registered as an Autonomous Society under theSocieties Registration Act 1860, under theDepartment of Information Technology, Ministry ofCommunications and InformationTechnology, Government of India on 5th June 1991. Its objective was to set-up and manageinfrastructure facilities and provide other serviceslike technology assessment and professionaltraining.31Mrs. Charu Rastogi, Asst.Professor
  32. 32.  A Special Economic Zone (SEZ) is a geographicalregion that has economic and other laws that aremore free-market-oriented than a countrys typicalor national laws. "Nationwide" laws may besuspended inside a special economic zone. The category SEZ covers , including Free TradeZones (FTZ), Export Processing Zones (EPZ), FreeZones (FZ), Industrial parks or Industrial Estates(IE), Free Ports, Urban Enterprise Zones and others. Usually the goal of a structure is to increase foreigndirect investment by foreign investors, typically aninternational business or a multinationalcorporation (MNC).32Mrs. Charu Rastogi, Asst.Professor
  33. 33.  India was one of the first in Asia to recognize theeffectiveness of the Export Processing Zone (EPZ)model in promoting exports, with Asias first EPZset up in Kandla in 1965. In order to overcome the shortcomingsexperienced on account of the multiplicity ofcontrols and clearances; absence of world-classinfrastructure, and an unstable fiscal regime andwith a view to attract larger foreign investments inIndia, the Special Economic Zones (SEZs) Policy wasannounced in April 200033Mrs. Charu Rastogi, Asst.Professor
  34. 34.  The objectives of SEZs can be clearly explained asthe following:◦ generation of additional economic activity◦ promotion of exports of goods and services;◦ promotion of investment from domestic and foreignsources;◦ creation of employment opportunities;◦ development of infrastructure facilities.34Mrs. Charu Rastogi, Asst.Professor
  35. 35.  Exemption from customs/excise duties for developmentof SEZs for authorized operations approved by theBoard of Approval (BOA). Income Tax exemption on income derived from thebusiness of development of the SEZ in a block of 10years in 15 years under Section 80-IAB of the IncomeTax Act. Exemption from minimum alternate tax under Section115 JB of the Income Tax Act. Exemption from dividend distribution tax under Section115O of the Income Tax Act. Exemption from Central Sales Tax (CST). Exemption from Service Tax (Section 7, 26 and SecondSchedule of the SEZ Act)35Mrs. Charu Rastogi, Asst.Professor
  36. 36. 3628201813765431111167762119532935241149217100 50 100 150 200Andhra PradeshTamil NaduKarnatakaMaharashtraGujaratKeralaUttar PradeshWest BengalRajasthanHaryanaChandigarhMadhya PradeshOrissaOperational Approved36Mrs. Charu Rastogi, Asst.Professor
  37. 37.  Resource transfer from the domestic sector toSEZs with no net addition to economicactivities ( relocation and substitution effect) Land Acquisition without adequatecompensation Impoverishment of farmers Loss of agricultural land Misuse of land for real estate Regional disparities Unequal treatment37Mrs. Charu Rastogi, Asst.Professor
  38. 38.  Export Processing Zones (EPZs) can be defined as aunit bearing clusters of specially designed zones ofaggressive economic activity for the promotion ofexport. The main concept of export processing zones wasconceived in the early 1970s to promote thegrowth of the sickening export business of India Further, the meaning of Export Processing Zones(EPZs) can be broadly defined as an area enjoyingspecial Government of India support with respectto fiscal incentives, tax rebates and other exclusivebenefits for growth of export38Mrs. Charu Rastogi, Asst.Professor
  39. 39.  Encourage and generate the economic development. Encourage Foreign Direct Investments (FDI). To channel the sources of foreign exchange within the system in aphased manner. Foster the establishment and development of industrial enterpriseswithin the said zones. Encourage and generate wider economic activities by encouragingforeign investments for the development of the zones To channel the foreign exchange earnings for the further developmentof these zones and explore new areas for the development of Indiaexports. Encourage establishment and development of India industries andbusiness enterprises and facilitate with proper infrastructure generateemployment opportunity. Upgrade labor and management skills. Acquire advanced technology for increased productivity. Ensure world class quality of products39Mrs. Charu Rastogi, Asst.Professor
  40. 40. 40Mrs. Charu Rastogi, Asst.Professor