UNIT-II

Foreign Exchange Regulations and

Formalities
FERA
• FERA - the four-letter acronym for Foreign Exchange Regulation Act
is a legislation that came into existence in 1973 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.
 Features of FERA:
1.Authorization by RBI to any person/company to deal in foreign exchange
2.Authorization to the dealers by the Reserve Bank of India for transacting foreign currencies,
subject to review and revocation of the authorization in the case of non-compliance
3.Authorization to the money changers for conversion of currencies as per the rates determined by
RBI
4.Restrictions on import/export of currencies
5.Restriction on persons other than the authorized dealers to enter into transactions involving the
financial currency
6.Restrictions on issue of bearer securities
7.Restrictions on holding or acquiring immovable properties outside India
8.Restrictions on making/receiving payment to/from a resident outside India
9.The Power of RBI to call for information and seize documents, wherever or whenever required
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, liberalized the foreign exchange
controls and restrictions on foreign investments to a significant extent.
• 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.
The Foreign Exchange Regulation Act,
1973
• This Act may be called the Foreign Exchange Regulation Act, 1973.
•  It extends to the whole of India.
•  It applies also to all citizens of India outside India and to branches and
agencies outside India of companies or bodies corporate, registered or
incorporated in India.
•  It shall come into force on such date1 as the Central Government may, by
notification in the Official Gazette, appoint in this behalf: Provided that
different dates may be appointed for different provisions of this Act and
any reference in any such provision to the commencement of this Act shall
be construed as a reference to the coming into force of that provision.
Definitions.—In this Act, unless the context
otherwise requires,—
• “Appellate Board” means the Foreign Exchange Regulation Appellate
Board constituted by the Central Government under sub-section (1) of
section 52;
• “authorized dealer” means a person for the time being authorized
under section 6 to deal in foreign exchange;
•  “bearer certificate” means a certificate of title to securi­ties by the
delivery of which (with or without endorsement) the title to the
securities is transferable;
• “certificate of title to a security” means any document used in the ordinary
course of business as proof of the possession or control of the security, or
authorizing or purporting to authorize, either by an endorsement or by
delivery, the possessor of the document to transfer or receive the security
thereby repre­sented;
•  “coupon” means a coupon representing dividends or interest on a security;
•  “currency” includes all coins, currency notes, bank notes, postal notes,
postal orders, money orders, cheques, drafts, traveller’s cheques, letters of
credit, bills of exchange and promissory notes;
•  “foreign currency” means any currency other than Indian currency;
• “foreign exchange” means foreign currency and includes—
• (i) all deposits, credits and balances payable in any foreign currency and
any drafts, traveller’s cheques, letters of credit and bills of exchange,
expressed or drawn in Indian currency but payable in any foreign currency;
• (ii) any instrument payable, at the option of the drawee or holder thereof or
any other party thereto, either in Indian currency or in foreign currency or
partly in one and partly in the other;
•  “foreign security” means any security created or issued elsewhere than in
India, and any security the principal of or interest on which is payable in
any foreign currency or elsewhere than in India; 1[***]
• “Indian currency” means currency which is expressed or drawn in Indian
rupees but does not include special bank notes and special one rupee notes
issued under section 28A of the Reserve Bank of India Act, 1934 (2 of 1934);
•  “Indian customs waters” means the waters extending into the sea to a
distance of twelve nautical miles measured from the appropriate base line on
the coast of India and includes any bay, gulf, harbour, creek or tidal river;
•  “money-changer” means a person for the time being authorised under
section 7 to deal in foreign currency;
•  “overseas market”, in relation to any goods, means the market in the country
outside India and in which such goods are intended to be sold;
•  “owner”, in relation to any security, includes any person who has
power to sell or transfer the security, or who has the custody thereof or
who receives, whether on his own behalf or on behalf of any other
person, dividends or interest thereon, and who has any interest therein
and in a case where any security is held on any trust or dividends or
interest thereon are paid into a trust fund, also includes any trustee or
any person entitled to enforce the performance of the trust or to revoke
or vary, with or without the consent of any other person, the trust or
any terms thereof, or to control the investment of the trust moneys;
 “person resident in India” means—
(i) a citizen of India, who has, at any time after the 25th day of March, 1947, been staying in India, but
does not include a citizen of India who has gone out of, or stays outside, India, in either case—
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would in­dicate his intention to stay outside India for
an uncertain period;
(ii) a citizen of India, who having ceased by virtue of paragraph (a) or paragraph (b) or paragraph (c) of
sub-clause (i) to be resident in India, returns to, or stays in, India, in either case—
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would in­dicate his intention to stay in India for an
uncertain period;
FUNCTIONS

1. Correcting Balance of Payments:

The main purpose of exchange control is to restore the balance of payments equilibrium, by allowing the
imports only when they are necessary in the interest of the country and thus limiting the demands for foreign
exchange up to the available resources.

Sometimes the country devalues its currency so that it may export more to get more foreign currency.
2. To Protect Domestic Industries:
The Government in order to protect the domestic trade and industries from foreign competitions,
resort to exchange control.
It induces the domestic industries to produce and export more with a view to restrict imports of
goods.
3. To Maintain an Overvalued Rate of Exchange:
This is the principal object of exchange control.
When the Government feels that the rate of exchange is not at a particular level, it intervenes in
maintaining the rate of exchange at that level.
For this purpose the Government maintains a fund, may be called Exchange Equalization Fund to
peg the rate of exchange when the rate of particular currency goes up, the Government start selling
that particular currency in the open market and thus the rate of that currency falls because of
increased supply.
4. To Prevent Flight of Capital:
When the domestic capital starts flying out of the country, the Government may check its exports
through exchange control.
5. Policy of Differentiation:
The Government may adopt the policy of differentiation by exercising exchange control.
If the Government may allow international trade with some countries by releasing the required
foreign currency the Government may restrict the trade import and exports with some other
countries by not releasing the foreign currency.
 KINDS OF FERA:

Spot transactions:
A foreign exchange spot transaction is the quickest foreign exchange transaction, normally settled within two
days. Two parties agree to exchange currency at the foreign exchange rate at the time of trade, or ‘on the
spot’.
Typically businesses will either use a bank or a non-bank foreign exchange provider for a spot transaction. To
do this, they will either telephone their provider or go online.
A forward transactions:
A forward transactions is the agreement to exchange one currency for another at an agreed point in the
future, known as the value date.
Instead of using a forward contract, exchange one currency for another using a spot transaction then hold the
currency on deposit in the corresponding currency account until needed.
 PRE-SHIPMENT INSPECTION

The practice of employing private companies of check shipment details such as

price, quantity and quality of goods ordered overseas.
The agreement on PSI recognizes that principles of the GATT Agreement apply to
such activities.
The purpose is to safeguard national financial interests(prevention of capital flight
and commercial fraud as well as customs duty evasion, for instance) and to
compensate for inadequacies in administrative infrastructures.
 IMPORTANT OF PRE-SHIPMENT INSPECTION

• Pre-shipment inspection is important in two ways.

• Firstly, it is used by governments of developing countries to compensate for any
inadequacies in the administrative infrastructures.
• Pre-shipment inspection is a way to prevent commercial fraud as well as customs
duty evasion.
• Secondly pre-shipment inspection provides exporters and importers with extra
confidence that the goods match what is specified in the sales contract.
• This is turn inspires greater confidence in trading with developing countries.
 THE AGREEMENT ON PRE-SHIPMENT INSPECTION

•The Agreement on pre-shipment Inspection [ external link to text on the WTO

website] recognizes the need, of developing countries in particular, to verify the
quality and quantity or price of imported goods.
•Pre-shipment activities are defined as activities relating to the verification of
the quality, quantity, price(including currency exchange rate and financial terms)
or the customs classification of goods to be exported to the territory to the user
member.
•The agreement applies to ‘activities carried out on the territory of members,
whether such activities are contracted or mandated by the government or any
government body of a member’.
 PRE-SHIPMENT PROCEDURE

a) Approaching Foreign Buyers: 

In order to secure an export order, a new exporter can make use of one or more of the techniques, such
as, advertising in international media, sales promotion, public relation, personal selling, publicity and
participation in trade fairs and exhibitions.
b) Inquiry and Offer: 
An inquiry is a request from a prospective importer about description of goods, their standard or grade,
size, weight or quantity, terms of payments, etc.
On getting an inquiry, the exporter must process it App immediately by making an offer in the form of a
proforma invoice.
c) Confirmation of Order: Once the negotiations are completed and the terms and conditions are
finalized, the exporter sends three copies of proforma pre invoice to the importer for the confirmation of
order.
The importer signs these copies and sends back two copies to the exporter.
(d) Opening Letter of Credit: 
The documentary credit or letter of credit is the most appropriate and secured method of payment
adopted to settle international transactions.
On finalization of the export contract, the importer opens a letter of credit in favor of the exporter, if
agreed upon in the contract.
 
(e) Arrangement of Pre-shipment Finance: 
On securing the letter of credit, the exporter' Procures a pro-shipment finance from his bank for
procuring raw materials and other components, processing and packing of goods an transfer of goods to
the port of shipment
 
(f) Production or Procurement of Goods:
 On securing the pre-shipment finance from the bank, the exporter either arranges for the production of
the required goods or procures thorn from the domestic market as per the specifications of the importer.
(g) Packing and Marking: 
Then the goods should be properly packed and marked with necessary details such as port of shipment and
destination, country of origin, gross and net weight, etc.
If required, assistance can be taken from the Indian Institute of Packing (IIP).
 
(h)Pre-shipment Inspection:
If the goods to be exported are subject to compulsory quality control and pre-shipment inspection then the exporter
should contact the concerned Export Inspection Agency (EIA) for obtaining an inspection certificate.
 
(i) Central Excise Clearance: 
Exportable goods are completely exempted from the central excise duty. Such exemption can be sought in one of the
following ways:
Export under Rebate.
Export under Bond.
 
(j) Obtaining Insurance Cover: The exporter must take appropriate
policies in order to insure risks:
ECGE policy in order to cover credit risks.
Marine policy, if the price quotation agreed upon is CIF.
 
(k) Appointment of C&F Agent: Since exporting is a complex and time-
Consuming process, the exporter should appoint a Clearing and
Forwarding (C&F) agent for the smooth clearance of goods from the
customs and preparation and submission of various export documents.
 FACTORS THAT INFLUENCE THE SETTING OF AN EXPORT PRICING

Social & Political factors:

1) Costs:
• Costs are often a major factor in price determination and there are a number of reasons to have
detailed information on costs.
• Costs are useful in setting a price floor.
• Costs are also helpful in estimating how rivals will react to setting a specific price, assuming
that knowledge of one’s own cost helps to assess the reactions of one’s competitors. Costs may
help in estimating a price that will keep-out or discourage new competitors from entering an
industry.
• Internationally, however, costs are often somewhat less helpful for this purpose than in the
domestic market, since they may vary over a wider range from country to country.
 
 
2) Market Conditions (Demand):
The basic factors that determine how the market will evaluate a product in foreign markets include
demographic factors, customs and traditions, and economic considerations, all of which are related to
customer acceptance and use of a product.
3) Competition:
Under conditions of monopolistic or imperfect competition, the seller has some discretion to vary the
product quality, promotional efforts, and channel policies in order to adapt the price of the ‘total
product’ to serve pre-selected market segments.
For most branded products and even for some commodities (when the export marketer and its
reputation for service, dependability, and delivery are known) exporters have some range of discretion
over price.
 
4) Legal/Political Influence:
Sometimes foreign officials use pricing guidelines as a criterion for granting
foreign exchange to the buyer of foreign merchandise.
In some countries, the government is concerned with the relationship between the
amount paid and the social benefits of the purchase.
Even though the customer may be willing to pay a high price, the government
may refuse to grant adequate foreign exchange for what it considers to be. Non-
essential imports.
5) Company Policies and Marketing Mix:
• Export pricing is influenced by past and current corporate philosophy, organisation, and
managerial policies.
• Ideally, all long-run and short-run decisions should be recognized as interrelated and
interdependent, Pricing cannot be divorced from product considerations.
• Management must take the customer’s point of view and evaluate a product in terms of its
quality and other characteristics relative to its price.
• Decisions on the nature of the product, package, quality, varieties or styles available and so
forth influence not only the cost, but what customers are willing to pay, as well as the degree to
which competitors’ products are considered acceptable substitutes.
Trade agreements 

•Trade agreements are when two or more nations agree on the terms of trade between them.

• They determine the tariffs and duties that countries impose on imports and exports.

•All trade agreements affect international trade.

•Imports are goods and services produced in a foreign country and bought by domestic
residents.