Globalisation
and
Foreign Exchange Issues
CA Rajeev Bhargav
Contents
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)
Globalisation – Opportunities in International Business
• 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, legal framework 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 markets through exports.
• Advancement of communication and technology enabled provision of services without any physical 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)
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 TaxationInternational Finance
•
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)
External Commercial
Borrowings (ECB)
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 Party Compulsory 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
Future / Options
Forward Contracts
Non-deliverable
Forward (NDF)
Currency Swaps
Flexible Sourcing
Diversifying
Export
Markets
Other
Forex Derivatives/Forwards
Treasury Bills
Bill of Exchange
Commercial Paper
Money Markets
Currency Futures
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
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 reducing complexity, and significantly increasing speed and transparency.
India’s manufacturing infrastructure and capacity for innovation is poised for phenomenal growth: new smart cities 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, monitor and 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.
Recent Government Initiatives – Digital India
The Digital India programme is a flagship programme of the Government of India with a vision to transform India into a digitally empowered society and knowledge economy.
Recent Government Initiatives – Ease of Doing Business
• 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
• 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.
Foreign Trade Policy (2015-2020)
Market categorized into
three categories – Traditional Markets, Emerging & Focus Markets, Other Markets.
Goods originated / manufactured in India are only eligible.
Export obligation under
EPCG reduced to 75% in case of domestic procurement of capital goods.
Inter unit transfer of goods and services allowed to EOUs, EHTPs, STPs.
Other Incentives
Merchandise Exports (MEIS)
SEIS provides for reward to
Service providers located in India and providing export of services.
Present rate of reward between 3 to 5%.
Foreign Trade Policy (2015-2020) : Incentives
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 FY MEIS- 12 months of LEO date
or 3 months from date of uploading of EDI Shipping bill,
whichever is later Minimum Forex Earning:
Individual : USD 10,000
Other : USD 15,000
Declaration on Shipping Bill is
mandatory to claim the benefit under MEIS
Scheme.
Commercial Presence or presence of natural person
FEMA Compliances for International Transactions
►
Import of Goods & Services
►Export of Goods & Services
►
Setting up of Branch Office Abroad
Current AccountTransactions
►
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
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 against import allowed upto USD 2,00,000 for goods and upto USD 5,00,000 for services
LC/Guarantee required for exceeding the limit
Merchanting Trade:
AD – 1 category Bank may handle bonafide merchanting trade transaction
Export of Goods & Services
The full export value of goods exported should be received through AD Bank in convertible foreign 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 be
made 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 export proceeds during the previous calendar year.
Setting up of Branch Office Abroad
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 conduct normal 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 opened overseas should be promptly reported to RBI through AD
• Audited Yearly statement to be filed with RBI through AD
To give intimation to Authorised Dealer (Bank) in form FC-GPR/FCTRS
Mandatory valuation of Shares
Sectoral caps are applicable on certain sectors
FDI in Sole Proprietary/ Partnership is not permitted.
Certain Sectors are
prohibited: Real Estate, Lottery, Gambling and Batting, Atomic Energy, Cigars, Cigratees, tobacco or tobacco substitutes.
Prohibited Sectors
Automatic Route
Foreign Direct Investment in India
Prior Approval of DIPP required for certain sectors or if not complying with the conditions under Automatic Route.
Investment in LLP is only
under Approval Route
Approval Route
Company Partnership/ Proprietorship Limited Liability Partnership (LLP) Foreign Entity To give intimation to Authorised Dealer (Bank) in form ODI
Total Financial Commitment permitted upto 400% of Net Worth
Mandatory valuation of
Shares
Real Estate and Banking
Activities
Investment in
unincorporated entities
Specifically Prohibited Activities
Automatic Route
Overseas Direct Investment from India (ODI)
Prior Approval of RBI required, if not complying with the conditions under Automatic Route
Only Debt without equity will be under Approval Route
Approval Route
Equity Shares
Preference Shares DebenturesDebt Financial/PerformanceGuarantee Indian Party – Company, LLP and Registered Firm
External Commercial Borrowings (ECB)
Manufacturing Software, Hotels, Hospitals Training, 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 CompaniesEligible Borrowers
Recognised Lenders
Non-Service Sector – USD 750 Mn. Per FY Service 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)
Liberalized Remittance Scheme
USD 2.50 Lacs P.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
Example - 1
Foreign Company Indian Company
Indian Company
Round Tripping Issues
Funds Infusion Funds Infusion
Example - 2
Foreign Company Indian Company Indian Company Equit y Private Equity Foreign BankDisclaimer
This Presentation is intended to serve as a guide to the Member Participants of the
Seminar/Conference and for information purposes only; and the contents are not to be construed in
any manner whatsoever as a substitute for professional advice or legal opinion. No one should act on
such information without appropriate professional advice after a thorough examination of particular
situation. Information contained herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity. While due care has been taken to ensure that the
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Thank You
Presentor’s
Contact Details:
Rajeev Bhargav
R Bhargav & Associates,
703-A, Devika Towers, Nehru Place,
New Delhi - 110019
Phone: +91 11 41306064, +91-9810586704, E-mail: [email protected]
Website: www.rbhargav.com
Participants can mail your queries to IICA or to the following email id: [email protected]
