FOREIGN EXCHANGE REGIME

FOREIGN EXCHANGE REGIME

General The Reserve Bank of India administers exchange controls in accordance with the Government's policy designed to maintain general control over the foreign exchange situation, particularly outgoing financial flows. The Foreign Exchange Regulation Act (FERA), 1973 confers powers to the Reserve Bank of India concerning foreign exchange control. General or specific permission is required from the Reserve Bank of India for all foreign exchange transactions.

Foreign companies operating in India are governed by the 1973 Foreign Exchange Regulation Act (FERA), which sets guidelines for bank accounts, loans, foreign exchange trading and the remittance of dividends and profits.

In March 1993, the government ended certain FERA restrictions on domestic borrowing, trading and acquisition of immovable property by companies with more than 40% foreign equity. Residents may use up to 25% of foreign exchange earnings to maintain a foreign currency bank account in India. Foreign employees, liaison offices, project offices and branches of foreign companies may open and use a resident bank account in Indian currency provided that they have approval by the Reserve Bank for operations in India.

Exporters who have net foreign exchange earnings of a certain level can maintain a foreign currency account outside of India. The sale of foreign exchange or rupee transfers to non-resident accounts in payment for imports may be made by authorized dealers. Persons, firms and banks (other than authorized banks) must apply to an authorized dealer on form A1 "Application for remittance in foreign currency" to pay for imported goods. In certain cases, additional questionnaire forms or supporting letters may be required along with form A1.

Currency :
convertibility In August 1994, the rupee was made fully convertible on the current account. Rupee convertibility on the trade account is restricted by the negative list of imports and exports and limited to those involved in trade. All export and import transactions are conducted at the market rate of exchange. This applies as well to other transactions, such as inflow of foreign equity for investment, outflows in the case of disinvestment, payments in respect of repatriation of dividends, fees and royalties for technical know-how and for foreign travel.

Banking :
The financial sector in India is controlled by the state. As a result of past nationalizations, the government controls some 90% of the assets of the banking and finance sectors. The Reserve Bank, India's central banking institution, supervises all banking operations in the country. Its tasks involve the following:

• regulation of the availability of funds to the banking sector by adjusting bank rates, imposing reserve requirements and engaging in open-market securities operation;
  
• credit control through bank lending to the commercial sector;
  
• approval for short-term loans and overdrafts secured by guarantees from parent or affiliate companies.
  
  However, the Indian government is expected to continue liberalization of the financial sector. The Reserve Bank has permitted the establishment of new domestic banks, and foreign banks are being encouraged to open new branches.
  
  The Asian Clearing Union (ACU) was established in 1974 under the auspices of the Economic and Social Commission for Asia and the Pacific as a mechanism for settlement of payments among participating countries' central banks. The Reserve Bank of India is one of the original participants. The other participants are Bangladesh, the Islamic Republic of Iran, Nepal, Pakistan, Sri Lanka and Myanmar.
  
  All authorized banks in India can handle transactions cleared through the Asian Clearing Union, and there is a specific A1 form to cover remittances for imports through the Asian Clearing Union. It is compulsory that all eligible payments among participants be settled through the Asian Clearing Union.