Introduction, Market and Market Participants Foreign Exchange Management in India FERA FEMA

1. FOREIGN EXCHANGE MARKET

2. • Introduction, Market and Market Participants,
• Foreign Exchange Management in India,
• Retail and Wholesale
• Component of Indian Foreign Exchange Market,
• Role of FEDAI, FEMA and Regulatory Framework,
• Dealing Room Operations.
• Foreign Exchange Arithmetic, Exchange Rate Quotations, Direct, Indirect
and Cross rate, Percentage Spread, Arbitrage, Geographical, Triangular
and Interest Rate (formula method only), Calculation of Forward Rates
using Schedule of Swap Points, AFM,
• Determinants of Exchange Rate – Purchasing Power and Interest Rate
Parity.

3. • The foreign exchange (FX or
FOREX) market is the market
where exchange rates are
determined.
• Exchange rates are the
mechanisms by which world
currencies are tied together in
the global marketplace,
providing the price of one
currency in terms of another.

4. The foreign exchange market is the
market where different currencies can
be bought and sold.
The economy determines the
exchange rate of the currency based
on trades in different currencies.
This is an institutional framework that
allows one national currency to be
exchanged for another.

5. Characteristics of
Foreign Exchange
Market
• Market Size
• Geographical Extent
• Market Participants
• Lower Trading Costs
• Transparency
• Market Hours
• Leverage
• High Liquidity
• Strong Market Trends

6. Participants of Forex Markets
Commercial
Banks
Foreign
Exchange
Dealers
Central Bank
Corporate
Speculators
& Arbitrage
Investment
Management
Firms

7. Types of Foreign Exchange Market
• Spot Market
• Transactions involving currency pairs take place on the spot market.
It happens quickly and smoothly.
• The transactions necessitate immediate payment at the current
exchange rate, also known as the spot rate.
• Traders in the spot market are not exposed to market uncertainty,
which can result in an increase or decrease in the price between the
agreement and trade.

8. • Futures Market
• The futures market transactions necessitate future payment and
distribution at a previously agreed-upon exchange rate known as
the future rate.
• The transaction or agreement is more formal in nature, ensuring that
the terms of the transaction are fixed and cannot be changed.
• Traders who handle most of the transactions benefit from a
consistent return on the assets.
• These contracts cannot be negotiated because they are
standardized in terms of date, features, and size.

9. • Forward Market
• The deals in forwarding market are similar to future market
transactions.
• In this case, the parties will negotiate the terms of the transaction,
and the agreed-upon terms can be negotiated and altered as
needed by the parties involved.
• When compared to the futures market, the forward market is more
flexible.

10. • Swap Market
• A swap transaction occurs when two investors borrow and lend two
different types of currencies at the same time.
• In this case, one investor borrows a currency and pays the second
investor in the form of a second currency.
• The transaction is carried out to pay off their obligations without
having to deal with foreign exchange risk.

11. • Option Market
• In the options market, the investor agrees on the currency of
exchange from one denomination to the other at a specific rate and
on a specific date.
• The investor has the option to convert the currency later, but he or
she is under no obligation to do so.
• There are two types of options: call option and put option. A put
option grants the right to sell, whereas a call option grants the right
to purchase.

12. FOREIGN EXCHANGE MANAGEMENT IN
INDIA
FEMA (FOREIGN EXCHANGE MANAGEMENT ACT
The main objective of FEMA is to facilitate external trade and payments and
for promoting the orderly development and maintenance of foreign
exchange market in India.
FEMA deals with provisions relating to procedures, formalities, dealings,
etc. of foreign exchange transactions in India.
The transactions relating to foreign exchange have been classified under
FEMA into two main categories, viz.,
(1) Current Account Transaction, (2) Capital Account Transaction.

13. What is capital account transaction?
• As defined in Section 2(e) of the FEMA, "capital account transaction"
means transactions, which alter the assets or liabilities, including
contingent liabilities outside India, of persons resident in India or
assets or liabilities, in India, of persons resident outside India, and
includes transactions referred to in section 6(3) of the FEMA.

14. Transactions covered in section 6(3) of FEMA
are as follows: -
• Transfer or issue of any foreign security by a person resident in India.
• Transfer or issue of any security by a person resident outside India.
• Transfer or issue of any security or foreign security by any branch, office
or agency in India of a person resident outside India.
• Any borrowing or lending in foreign exchange in whatever form by
whatever name called.
• Any borrowing or lending in rupees in whatever form or whatever name
called between a person resident in India and a person resident outside
India.

15. • Deposits between persons resident in India and persons resident outside India.
• Export, import or holding of currency or currency notes.
• Transfer of immovable property outside India, other than a lease not exceeding
five years by a person resident in India.
• Acquisition or transfer of immovable property in India, other than lease not
exceeding five years by a person resident outside India.
• Giving of a guarantee or surety in respect of any debt, obligation or other liability
incurred –
• by a person resident in India and owed to a person resident outside India or
• by a person resident outside India.
Section 6(3) has been omitted by Finance Act, 2015 w.e.f. a date yet to be
notified.

16. What is current account transaction?
• As defined in Section 2(j) of the FEMA, "current account transaction"
means a transaction other than a capital account transaction and
without prejudice to the generality of the foregoing such transaction
includes:–

17. • Payments due in connection with foreign trade, other current business, services
and short-term banking and credit facilities in the ordinary course of business,
• Payments due as interest on loans and as net income from investments,
• Remittances for living expenses of parents, spouse and children residing
abroad, and
• Expenses in connection with foreign travel, education and medical care of
parents, spouse and children.
• In terms of section 5 of the FEMA, Any person may sell or draw foreign
exchange to or from an authorized person if such sale or drawl is a current
account transaction provided that Central Government may, in public interest
and in consultation with the Reserve Bank, impose such reasonable restrictions
for current account transactions as may be prescribed. .

18. What are the major provisions covered in
FEMA, 1999?
• The major provisions of FEMA, 1999 relate to following matters:
• Dealing in foreign exchange, etc.
• Holding of foreign exchange, etc.
• Current account transactions
• Capital account transactions
• Export of goods and services
• Realization and repatriation of foreign exchange

19. • Exemption from realization and repatriation in certain cases.
• Provisions relating to authorised persons. i.e. authorised by RBI to
deal with foreign exchange or in foreign securities
• Power of RBI to inspect authorized person
• Contravention and penalties
• Adjudication and appeal
• Directorate of enforcement
• Miscellaneous provisions

20. Foreign Exchange Regulation Act
• FERA - the four-letter acronym for Foreign Exchange Regulation Act
is a legislation that came into existence in 1973. The Act aims to
regulate certain dealings in foreign exchange, impose restrictions on
certain kinds of payments and to monitor the transactions impinging
the foreign exchange and the import and export of currency.

21. • FERA (Foreign Exchange Regulation Act) is a legislation that was
enacted with the purpose to regulate certain dealings in foreign
exchange, impose restrictions on certain kinds of payments and to
monitor the transactions impinging the foreign exchange and the
import and export of currency.

22. Salient features of FERA
• Authorisation by RBI to any person/company to deal in foreign
exchange
• Authorisation to the dealers by the Reserve Bank of India for
transacting foreign currencies, subject to review and revocation of
the authorisation in the case of non-compliance
• Authorisation to the money changers for conversion of currencies as
per the rates determined by RBI
• Restrictions on import/export of currencies

23. • Restriction on persons other than the authorized dealers
to enter transactions involving the financial currency
• Restrictions on issue of bearer securities
• Restrictions on holding or acquiring immovable properties outside
India
• Restrictions on making/receiving payment to/from a resident outside
India
• The Power of RBI to call for information and seize documents,
wherever or whenever required

24. FERA Vs FEMA: A comparison
• While FERA is an Act of the Parliament introduced in the year 1973, with
an intent to manage and conserve India’s foreign reserves, the Foreign
Exchange Management Act (FEMA) is an extension to the already
existing law.
• The purpose behind the enactment of FEMA was not only to regulate and
facilitate foreign exchange but also for promoting foreign trade and
payments along with escalating the size of foreign exchange reserves in
India.
• Promulgated in the year 1999, FEMA, unlike the erstwhile law, liberalised
the foreign exchange controls and restrictions on foreign investments to a
significant extent.

25. • Not only this, but the latter also laid stress on systematic
development and proper management of the forex market in the
country.
• Unlike FERA, the violation of FEMA is a compoundable offence, the
charges of which can be removed.
• Besides this, there are different retributions for contravening the
provisions of FERA and FEMA.

26. • To conclude, anything and everything that was associated with
Foreign Exchange was regulated under the Foreign Exchange
Regulation Act.
• And though, the same was enacted with the best of intentions it
hindered the growth of Indian Industries owing to its excessively
stringent restrictions.
• However, with the introduction of FEMA, the scenario soon changed
from control to management along with facilitating the development
and orderly management of the foreign exchange market in India.

27. Key Differences Between FERA and
FEMA
• https://keydifferences.com/difference-between-fera-and-fema.html
• https://byjus.com/free-ias-prep/difference-between-fera-and-
fema/#:~:text=FERA%20was%20an%20act%20promulgated,the%2
0foreign%20exchange%20in%20India.
• https://www.yourarticlelibrary.com/economics/foreign-
exchange/foreign-exchange-market-nature-participants-and-
segments/72308

28. References
• https://prepp.in/news/e-492-foreign-exchange-market-indian-economy-
notes
• https://www.indianembassyusa.gov.in/taxdata?id=7
• https://www.99acres.com/articles/what-is-foreign-exchange-regulation-
act.html
• https://backup.pondiuni.edu.in/storage/dde/downloads/ibiv_forex.pdf
• http://elearning.nokomis.in/uploaddocuments/International%20Finance(Ne
w)/Foreign%20Exchange%20Management%20in%20India/Summary/Cha
pter%2004.pdf