- 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.
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