|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.
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.
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
- 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
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.