FOREX MANAGEMENTPankaj Jain FacultyLovely Professional University

-An expression to denote foreign currency

-Also covers the method by which a currency of one country is exchanged for that of another.What is foreign exchange?

1.An Over The Counter market-No physical presence in the same sense as a stock exchange or commodity market

-The participants deal among themselves and settle their transactions directly

-There is no exchange or clearing houseCharacteristics of foreign exchange market

2.Only market open 24 hours-FX Market is a 24 hour market

- FX Market operates seven days a week (Middle East Markets function on Saturdays and Sundays)

-Effectively it is a 24 hour a day / seven days a week / 365 days a year Market!

3. No single location no barriers- FX market is not located in a single building- No specific market place exists- FX market has few restrictions in this modern world- FX market is global in nature / character- While the market does not exist at each and every center in the world, it is accessible from any part of the world

4.Exchange rates fluctuate every four second

5.Settlement of transactions normally does not take place simultaneously

6.Highly liquid market

7.Money / capital / debt markets also impact FX market

Exchange rate is the rate at which one currency is exchanged for another currency. That is, the number of units of one currency which exchange for given number of units of another currency is the rate of exchangeTherefore an exchange rate is a simple arithmetical statement which gives value of one currency in terms of another currencyForeign Exchange Rates

1. Fixed and Floating Exchange RatesFixed exchange rate is the official rate set by the monetary authorities for one or more currencies.Under floating exchange rate, the value of the currency is decided by supply and demand factors Types of Exchange Rates

2.Direct and Indirect Exchange RatesDirect method - Under this, a given number of units of local currency per unit of foreign currency is quoted. They are designated as direct/certain rates because the rupee cost of single foreign currency unit can be obtained directly. Direct quotation is also called home currency quotation.Indirect method Under this, a given number of units of foreign currency per unit of local currency is quoted. Indirect quotation is also called foreign currency quotationTypes of Exchange Rates

3. Buying & SellingExchange rates are quoted as two way quotes for purchase and sale transactions

4. Spot & ForwardThe delivery under a foreign exchange transaction can be settled in one of the following ways

Ready or cash To be settled on the same dayTom To be settled on the day next to the date of transaction

Spot To be settled on the second working day from the date of contract

Forward To be settled at a date farther than the spot date

Short term factors- commercial- financialLong term factors- currency and economic conditions- political and industrial conditionsFactors Influencing Exchange Rates

A risk is an unplanned event with financial consequences resulting in loss or reduced earnings. When we analyze risks in foreign exchange market, we should start with international trade as with out international trade no foreign exchange can be generated. Risks in Foreign Exchange Market

It is a three tier set up in India the participants being the individuals / corporate (who have or need foreign exchange), the authorized dealer banks and the FEDAI / RBI at the apex level.

*Foreign Exchange Dealer Association of India*Academy of Professional Excellence Foreign Exchange Management in India

All foreign exchange transactions are to be routed through Authorized Dealers for whom guidelines are issued by RBI under the provisions of Foreign Exchange Management Act, 1999 Guidelines Relating to Foreign Exchange Management

1.FERA came into force on January 1, 19742.It laid emphasis on exchange regulation and exchange control3.It was necessary to obtain Reserve Banks Permission, either special or general, in respect of most regulations thereunder4.A contravention under FERA was treated as a criminal offence. It gave unbridled power to the Enforcement Directorate to arrest any person, search any premise, seize documents and start proceedings against any person for contravention of FERAForeign Exchange Regulation Act, 1973

The Foreign Exchange Regulation Act of 1973 (FERA) in India was repealed on 1st June, 2000. It was replaced by the Foreign Exchange Management Act (FEMA), which was passed in the winter session of Parliament in 1999. Enacted in 1973, in the backdrop of acute shortage of Foreign Exchange in the country.

FEMA, which has replaced FERA, had become the need of the hour since FERA had become incompatible with the pro-liberalization policies of the Government of India. FEMA has brought a new management regime of Foreign Exchange consistent with the emerging frame work of the World Trade Organization (WTO).

It is another matter that enactment of FEMA also brought with it Prevention of Money Laundering Act, 2002 which came into effect recently from 1st July, 2005 and the heat of which is yet to be felt as Enforcement Directorate would be investigating the cases under PMLA too. Foreign Exchange Management ACT (FEMA), 1999

1.FEMA was introduced by the Govt. of India in Parliament on August 4, 1998.2.It lays emphasis on exchange management, facilitates external trade payments.3.With the exception of Section 3, which relates to dealing in foreign exchange and so on, no other provision of FEMA stipulates obtaining Reserve Banks permission.4.Unlike FERA, violation of FEMA will not attract criminal proceedings. The contravention will be treated as civil offence.Foreign Exchange Management ACT (FEMA), 1999

The objective of the Act is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.

FEMA extends to the whole of India. It applies to all branches, offices and agencies outside India owned or controlled by a person who is a resident of India and also to any contravention there under committed outside India by any person to whom this Act applies.Objectives and Extent of FEMA

If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.Contraventions and Penalties

"Property" in respect of which contravention has taken place, shall include deposits in a bank, where the said property is converted into such deposits, Indian currency, where the said property is converted into that currency; and any other property which has resulted out of the conversion of that property.If any person fails to make full payment of the penalty imposed on him within a period of ninety days from the date on which the notice for payment of such penalty is served on him, he shall be liable to civil imprisonment.Contraventions and Penalties

The Directorate of Enforcement investigate to prevent leakage of foreign exchange which generally occurs through the following malpractices:Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments. Acquisition of foreign currency illegally by person in India. Unauthorized maintenance of accounts in foreign countries. Under-invoicing of exports and over-invoicing of imports and any other type of invoice manipulation. Illegal acquisition of foreign exchange through Hawala. Secreting of commission abroad. Investigation

Directorate of Enforcement has to detect cases of violation and also perform substantially adjudicatory functions to curb above malpractices. The Enforcement Directorate, with its Headquarters at New Delhi has seven zonal offices at Bombay, Calcutta, Delhi, Jalandhar, Madras, Ahmedabad and Bangalore. The zonal offices are headed by the Deputy Directors. The Directorate has nine sub-zonal offices at Agra, Srinagar, Jaipur, Varanasi, Trivandrum, Calicut, Hyderabad, Guwahati and Goa, which are headed by the Assistant Directors. The Directorate has also a Unit at Madurai, which is headed by a Chief Enforcement Officer. Besides, there are three Special Directors of Enforcement and one Additional Director of Enforcement.Organizational Set Up and Functions Of Enforcement Directorate

The main functions of the Directorate are as under:To collect and develop intelligence relating to violation of the provisions of Foreign Exchange Regulation Act and while working out the same, depending upon the circumstances of the case: To conduct searches of suspected persons, conveyances and premises for seizing incriminating materials (including Indian and foreign currencies involved) and/or. To enquire into and investigate suspected violations of provisions of the Foreign Exchange Management Act. To adjudicate cases of violations of Foreign Exchange Management Act for levying penalties departmentally and also for confiscating the amounts involved in contraventions; To realise the penalties imposed in departmental adjudication. Organizational Set Up and Functions Of Enforcement Directorate

For enforcing the provisions of various sections of FEMA, 1999, the officers of Enforcement Directorate of the level of Assistant Director and above will have to undertake the following functions:Collection and development of intelligence/information. Keeping surveillance over suspects. Searches of persons/vehicles by provisions of Income-tax Act, 1961. Searches of premises as per provisions of Income-tax Act, 1961. Summoning of persons for giving evidence and producing of documents as per provisions of Income-tax Act, l96l. Power to examine persons as per provisions of Income-tax Act,1961. Power to call for any information/document as per provisions of Income-tax Act, 1961. Power to seize documents etc. as per provisions of Income-tax Act, 1961. Custody of documents as per Income-tax Act, 1961. Procedural Provisions

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