FINANCIAL REGULATIONS

A Report On

“FEMA facilitates the development of FOREX

Markets and growth of FOREX Reserves in India”

Under the Guidance of:

Prof. Anant Amdekar

Master of Management Studies (MMS) – Finance

Semester – III
Batch 2017-19

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 Team
 Jatin Acharya – 001
 Zeba Ansari – 008
 Akil Babwani – 011
 Payal Bawankar – 014
 Jill Bheda – 022
 Gunjan Chedda – 033
 Divya Karun – 042
 Chirag Dwivedi – 045

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 Table of Content
Sr. No. Content Page No.
1. Need, Purpose and Learning Objectives 04
Brief on prevailing economic conditions (Before 1973) in the country
2. 06
because of which law like FERA was warranted
Brief on prevailing economic conditions (before 1999) in the country
3. 09
because of which law like FEMA was warranted
4. Key Terms 13
5. Foreign Exchange Regulation Act, 1973 15
6. Foreign Exchange Management Act, 1999 22
7. Sectoral Policy with respect to FDI 28
Regulatory provisions w.r.t. FDI including inward and outward –
8. 35
ADRs, GDRs, ADSs etc.
9. Regulatory provisions w.r.t. External Commercial Borrowings 49
10. Regulatory provisions w.r.t. Import and Export of Goods under FEMA 53
11. Currency crises in Turkey & Venezuela 60
12. South-east Asian Currency crises 64
13. Capital Account Convertibility 72
Statistical data on – SENSEX, NIFTY, $ - INR exchange and co-
14. 78
relation
15. Conclusion 80
16. Bibliography 82

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 Need, Purpose, and Learning Objective

Need for the Acts

The FERA was introduced in 1973 when India’s foreign exchange reserves position was not
satisfactory. It required stringent controls to conserve foreign exchange and to utilise in the best
interest of the country. Very strict restrictions have outlived their utility in the current changed
scenario and therefore there was a need to remove the draconian provisions of FERA and have a
forward-looking legislation covering foreign exchange matters which gave birth to FEMA.

Objective of the Act

The primary difference between FERA and FEMA is that FERA was enacted to facilitate all the
payments and other foreign exchange activities in India.

On the other hand, despite being an improvement of FERA, which means that it also covers
payments and facilitation of foreign exchange activities, FEMA has a specific role of ensuring
that external trade and payments are correctly executed.

FEMA has the responsibility of ensuring that there is the orderly management of foreign
exchange market in the country.

Purpose of the Act

The preamble to FEMA lays down the purpose of the Act is to consolidate and amend the law
relating to foreign exchange with the objective of facilitating external trade and payments and for
promoting the orderly development and maintenance of foreign exchange market in India.
Rationale for strict regulations under FERA 1973. After Independence India was left with little
forex reserves and during the oil Crisis of seventies ballooning oil import bills further drained
foreign exchange reserves.

Broadly, the objectives of FEMA are to facilitate external trade and payments and to promote the
orderly development and maintenance of foreign exchange market. The Act has assigned an
important role to the Reserve Bank of India (RBI) in the administration of FEMA. The rules,
regulations and norms pertaining to several sections of the Act are laid down by the Reserve
Bank of India, in consultation with the Central Government.

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Learning Objectives

This activity/presentation will help us to understand and answer the following keys aspects in
regards to FEMA, FDI and foreign exchanges:

 What is the history of FERA? What were the key controversial points under FERA that
led to the need of FEMA?
 How does Law Making bodies change or adapt with the time? FEMA presents itself as a
key and an historic example to such a question.
 What and who are the authorities and enforcement bodies under FEMA who would
regulate this act across domains?
 How does developing economy like India manage and regulate foreign exchange?
 What are the various types of transactions covered under FEMA? Are there any
restrictions on such transactions?
 What is FDI? Who can make an FDI?
 What is the industrial policy in regards to foreign investments?

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Brief on prevailing economic conditions (Before 1973) in the country because
of which law like FERA was warranted

The significant achievements during the first three Plans notwithstanding, the Indian economy
was in the grip of a massive crisis in many respects by the mid-1960s, which rapidly changed
India’s image from a model developing country to a ‘basket case’. Two successive monsoon
failures of 1965 and 1966, added to the burden on an agriculture which was beginning to show
signs of stagnation, and led to a fall in agricultural output by 17 per cent and food grain output by
20 per cent. The rate of inflation which was hitherto kept very low (till 1963 it did not exceed 2
per cent per annum) rose sharply to 12 per cent per annum between 1965 and 1968 and food
prices rose nearly at the rate of 20 per cent per annum. The inflation was partly due to the
droughts and partly due to the 2 wars of 1962 (with China) and 1965 (with Pakistan) which had
led to a massive increase in defence expenditure. The government consolidated (state and
Centre) fiscal deficit peaked in 1966–67 at 7.3 per cent of GDP.

The balance of payments situation, fragile since 1956–57, deteriorated further, with foreign
exchange reserves (excluding gold) averaging about $340 million between 1964–65 and 1966–
67, enough to cover less than two months of imports. The dependence on foreign aid, which had
been rising over the first three Plans, now increased sharply due to food shortages as well as the
weakness of balance of payments. Given the overall situation, long-term planning had to be
temporarily abandoned and there were three annual Plans between 1966 and 1969 before the
Fourth Five Year Plan could commence in April 1969.

It was at this most vulnerable time for the Indian economy— with high inflation, a very low
foreign exchange balance, food stocks so low as to threaten famine conditions in some areas,
calling for large imports, and nearly half the imports having to be met through foreign aid.

On June 6, 1966, in one fell swoop, the Indira Gandhi government devalued the Indian rupee by
57 percent, from Rs 4.76 to Rs 7.50 to a dollar, triggering bitter criticism in the Parliament and
media. The people, too, joined in claiming that this was the ultimate “sell-out to America and the
World Bank”.

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The move, however, was in the offing for some time. Since Independence, India had held the
dollar constant at Rs 4.76 in spite of increased trade deficits and a reliance on foreign aid to
maintain a constant valuation. The final straw was the wars India fought (with China and
Pakistan) and the shock of a major drought in 1965-1966. Each instance increased deficit
spending, further accelerating the already severe inflation. Besides, the World Bank, largely
funded by the US, fell short of its promised aid inflows to India.

The Indian government took the step to counter soaring inflation, but it turned out to be very
unpopular and laid the foundation for distrust between the people and the government. The
devaluation had its ramifications abroad as well; Oman, Qatar and the UAE, countries which
used the Gulf Rupee (issued by the RBI), were forced to come up with their own currencies.

The post-1967 period therefore saw the launching of a series of radical economic policies, which
were to have long-term effects on India’s developmental effort. Some of these policies
accentuated the shortcomings that had begun to emerge during the first phase of planning itself,
that is, in the 1950s and early 1960s, others created new distortions. The major private
commercial banks in India were nationalized in 1969. The same year the Monopolies and
Restrictive Trade Practices (MRTP) Act, severely restricting the activities of large business
houses, was passed. After the 1971 election victory, a series of further such measures increasing
government control and intervention were introduced with the active support of left radical
intellectuals like P.N. Haksar, D.P. Dhar and Mohan Kumaramangalam. Thus, insurance was
nationalized in 1972 and the coal industry was nationalized in 1973. A disastrous effort was
made to nationalize wholesale wheat trade the same year, which was abandoned after a few
months. The Foreign Exchange Regulation Act (FERA) was passed in 1973, putting numerous
restrictions on foreign investment and the functioning of foreign companies in India, making
India one of the most difficult destinations for foreign capital in the world. The government also
decided to take over and run ‘sick’ companies, such as a number of textile mills, rather than
allow such loss-making companies to close down.

One of the major reason because of which FERA was enacted was due to money laundering and
HAWALA taking place on a large scale. The foreign reserves were depleting, the government
expenditure was increasing due to various events happening and people were not paying tax,

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which resulted in huge current account deficit. Due to oil crisis 1973, the foreign exchange
reserve of the country started depleting more as India is majorly depended on Oil to meet their
demand. Even the dollar, which was earlier backed by Gold, closed the gold window,
conclusively and explicitly ending convertibility of US dollar and Gold. Dollar, which was
considered a safe reserve for every country, now started losing value, as Dollar can no more be
convertible into Gold.

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 Brief on prevailing economic conditions (before 1999) in the country because
of which law like FEMA was warranted.
The 1991 Indian economic crisis had its roots in 1985 when India began having balance of
payments problems as imports swelled, leaving the country in a twin deficit: the Indian trade
balance was in deficit at a time when the government was running on a large fiscal deficit. By
the end of 1990 in the run-up to the Gulf War, the situation became so serious that the
Indian foreign exchange reserves could barely finance three weeks’ worth of imports while the
government came close to defaulting on its financial obligations. By July that year, the low
reserves had led to a sharp devaluation of the rupee, which in turn exacerbated the twin deficit
problem. This led the government to airlift national gold reserves as a pledge to the International
Monetary Fund (IMF) in exchange for a loan to cover balance of payment debts.

The crisis later led to the liberalization of the Indian economy.

The crisis was caused by currency devaluation; the current account deficit, and investor
confidence played significant role in the sharp exchange rate depreciation.

The economic crisis was primarily due to the large and growing fiscal imbalances over the
1980s. During the mid-eighties, India started having balance of payments problems. Precipitated
by the Gulf War, India’s oil import bill swelled, exports slumped, credit dried up, and investors
took their money out. Large fiscal deficits, over time, had a spill over effect on the trade deficit
culminating in an external payments crisis. By the end of the 1980s, India was in serious
economic trouble.

The gross fiscal deficit of the government (centre and states) rose from 9.0 percent of GDP in
1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the centre alone, the
gross fiscal deficit rose from 6.1 percent of GDP in 1980-81 to 8.3 percent in 1985-86 and to 8.4
percent in 1990-91. Since these deficits had to be met by borrowings, the internal debt of the
government accumulated rapidly, rising from 35 percent of GDP at the end of 1980-81 to 53
percent of GDP at the end of 1990-91. The foreign exchange reserves had dried up to the point
that India could barely finance three weeks’ worth of imports.

In mid-1991, India's exchange rate was subjected to a severe adjustment. This event began with a
slide in the value of the Indian rupee leading up to mid-1991. The authorities at the Reserve

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Bank of India took partial action, defending the currency by expending international reserves and
slowing the decline in value. However, in mid-1991, with foreign reserves nearly depleted, the
Indian government permitted a sharp devaluation that took place in two steps within three days
(1 July and 3 July 1991) against major currencies.

With India’s foreign exchange reserves at $1.2 billion in January 1991 and depleted by half by
June, barely enough to last for roughly 3 weeks of essential imports, India was only weeks away
from defaulting on its external balance of payment obligations.

Government of India's immediate response was to secure an emergency loan of $2.2 billion from
the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral
security. The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England and 20
tons of gold to the Union Bank of Switzerland to raise $600 million. National sentiments were
outraged and there was public outcry when it was learned that the government had pledged the
country's entire gold reserves against the loan. It was later revealed that the van transporting the
gold to the airport broke down en route and panic followed. A chartered plane ferried the
precious cargo to London between 21 May and 31 May 1991, jolting the country out of an
economic slumber. The Chandra Shekhar government had collapsed a few months after having
authorized the airlift. The move helped tide over the balance of payment crisis and kick-
started P.V.Narasimha Rao’s economic reform process.

P. V. Narasimha Rao took over as Prime Minister in June, and roped in Manmohan
Singh as Finance Minister. The Narasimha Rao government ushered in several reforms that are
collectively termed as liberalization in the Indian media. There was significant opposition to such
reforms, suggesting they were an "interference with India's autonomy".

Transition from FERA to FEMA

FERA deals with laws related to foreign exchange in India. The law was basically made to
manage foreign investments in India. But there was a general dislike for it for a variety of
reasons. FERA consisted of 80 complex sections. Also under FERA any offence was a criminal
one which included imprisonment. FERA 1973 gave enormous powers to the Enforcement
Directorate which enforced the law strictly and rigidly. Several complaints of harassment and
misuse of powers were lodged. However, FERA was administered rigorously.

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The factors leading to dismantlement of FERA, besides economic developments mentioned
above, are:
 The conscious decision to move away from a controlled and regulated regime to a free
and market-driven economy

 Creation of an environment conducive to development of free and competitive market

forces by amendment of several statutes resulting in removal or reduction of procedural
and legal hurdles;

 Positive outlook towards forex reserve and market forces, shifting emphasis from
regulation to management

FERA (Foreign Exchange Regulation Act) which was passed in 1947 was amended in 1973. The
new FERA came into force from 1974. The main objective was the conservation of India’s
Foreign Exchange reserves, judicious use of foreign exchange. FERA was repealed in 1998 and
Foreign Exchange Management Act (FEMA) was enacted.

The need for FEMA was because of the two crucial factors. Primary among them were the
obligations under Article 8 of the IMF (International Monetary Fund), under which India must
move fast to make the rupee fully convertible on the capital account. That automatically made
FERA redundant. Secondly, FERA was relevant when there was an enormous flight of capital
from forex-scarce India but on 1997 the forex reserves were of $19 billion plus.

After the various reforms, FERA has become totally dysfunctional. FERA created a huge black
market in foreign exchange and capital inflows were perking up sufficiently to neutralize the
current account deficit. The rupee's hardening shows that there's a clear case for going for capital
account convertibility soon. The main aim of FEMA was to formulate a law consistent with full
rupee convertibility and progressive liberalization of capital account transaction.

Hon’ble Finance Minister then Shri Chidambaram’s Budget Speech announced the setting up of
a Reserve Bank of India committee to draft a Foreign Exchange Management Act (FEMA),
following guidelines laid down by the Sodhani Committee (an RBI Committee) in 1993. The
appointment of a 14-member Expert Group on Foreign Exchange (Sodhani Committee) in
November 1994 was a follow up step to the above measures, for the development of the foreign

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exchange market in India. The Group studied the market in great detail and in its Report of June
1995 came up with recommendations to develop, deepen and widen the forex market.

A crucial difference is that while FERA had strict rules against repatriation, the draft Act
authorizes the RBI to frame rules to ensure that exporters repatriate their earnings

The inception of FEMA has proved to be a booster for productive investments as any offences
under the Act is treated only as civil offences whereas it was criminal offences under FERA.

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 KEY TERMS

1. Current Account Transaction: Transaction which alter the assets or liabilities,

including contingent liabilities outside India, of persons resident in India or assets or
liabilities, in India, of person’s resident outside India. For example- payments due in
connection with foreign trade, interest on loans and Expenses in connection with foreign
travel and education are included in these transactions
2. Offshore banking unit: It is a bank branch in another country. For example, an offshore
banking unit operating in America may only accept deposits from foreign bank accounts
and give out loans to only foreign individuals and entities.
3. Foreign Security: It means any security in the form of shares, stocks, bonds, debentures
or any other instrumental denominated or expressed in foreign currency and includes
securities expressed in foreign currency but where redemption or any form of return such
as interest or dividends is payable in Indian currency.
4. Foreign Exchange: It means foreign currency and includes,-

i. Deposits, credits and balances payable in any foreign currency,

ii. Drafts, traveller’s cheques, letters of credit or bills of exchange, expressed or

drawn in Indian currency but payable in any foreign currency.

5. PDVSA: Petroleos de Venezuela is the Venezuelean state owned oil and Natural gas
Company. It has activities in exploration, production, refining and exporting oil, as well
as exploration and production of natural gas. Since its founding on 1 January 1976 with
the nationalization of the Venezuelan oil industry, PDVSA has dominated the oil industry
of Venezuela, the world's fifth largest oil exporter.

6. CADIVI: The National Centre for Foreign Commerce formerly the Commission for the
Administration of Currency Exchange is the Venezuelan government body, which
administers legal currency exchange in Venezuela.

7. Authorised Person: An authorized dealer, moneychanger, offshore banking unit or any

other person for the time being authorized by RBI to deal in foreign exchange or foreign
securities. For example AD Category-I includes Allahabad Bank, American Express
Bank Ltd, Andhra Bank, etc.

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8. Repatriate to India: Bringing into India the realized foreign exchange and the selling of
such foreign exchange to an authorized person in India in exchange for rupees, or the
holding of realized amount in an account with an authorized person in India to the extent
notified by the Reserve Bank, and includes use of the realized amount for discharge of a
debt or liability denominated in foreign exchange and the expression "repatriation" shall
be construed accordingly
9. Transferable Development Rights (TDRs): A method for controlling land use to
complement land-use planning and zoning for more effective urban growth management
and land conservation. The TDR process can be considered a tool for controlling urban
sprawl.
10. Real Estate Investment Trusts (REITs): A company that owns, and in most cases
operates, income-producing real estate. REITs own many types of commercial real estate,
ranging from office and apartment buildings to warehouses, hospitals, shopping centres,
hotels and timberlands. Some REITs engage in financing real estate.
11. Balance of Payment (BOP): The record of all economic transactions between the
residents of the country and the rest of world in a particular period of time.
12. Wholly Owned Subsidiaries (WOS): A company whose common stock is 100% owned
by another company, the parent company. Whereas a company can become a wholly
owned subsidiary through an acquisition by the parent company or having been spun off
from the parent company, a regular subsidiary is 51 to 99% owned by the parent
company.
13. Person resident in India (PRI): It means a person residing in India for more than one
hundred and eighty-two days during the course of the preceding financial year.
14. Person resident outside India (PROI): It means a person who is resident somewhere
other than India. They are also known as Non-Resident Indian (NRI).

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 FOREIGN EXCHANGE REGULATION ACT, 1973

Introduction

Foreign Exchange Regulation Act (FERA) was introduced in 1947 soon after independence.
Foreign trade is an exclusively central matter. The Imports and Exports (Control) Act, 1947,
provided a mechanism for regulation of imports and exports of commodities to or from India till
1992. FERA was passed by the Indian Parliament in 1973 by the government of Indira Gandhi
and came into force with effect from January 1, 1974. FERA was introduced at a time when
foreign exchange (Forex) reserves of the country were low, Forex being a scarce commodity.
FERA therefore proceeded on the presumption that all foreign exchange earned by Indian
residents rightfully belonged to the Government of India and had to be collected and surrendered
to the Reserve Bank of India (RBI). FERA primarily prohibited all transactions not permitted by
RBI.

Why Was FERA Required?

The Foreign Exchange Regulation Act, 1947, was enacted as a temporary measure and later
placed permanently in the year 1957. At that time the limited objective of the Act was to regulate
the inflow of foreign capital in the form of branches and concerns with the substantial non-
resident interest, and the employment of foreigners. The country attained freedom in 1947, after
two centuries of foreign rule and protracted freedom struggle stretched over decades. The
prevailing mood then was one of preserving and consolidating the freedom and not to permit
once again any type of foreign domination, political or economic. Initial approach on foreign
capital was negative to a not-interested attitude. Prime Minister explained that "the stress on the
need to regulate, in the national interest, the scope and manner of foreign capital and control (as
per the Industrial Policy Statement 48) arose from the past association of foreign capital and
control with foreign domination of the economy of the country."

However after initiation of a process of rapid industrialization of the country, the need to
conserve foreign exchange was keenly felt. Exports were not picking up and imports were
surging, putting the country to severe balance of trade and balance of payment crisis. This in turn
led to the need to tap the donors or Foreign Aid Givers.

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In this background the recommendation of the Public Accounts Committee ( 56th Report of 1968
to study the question of "leakage of foreign exchange through invoice manipulation received in
June 1971) and the Report of the Law Commission (on "Trial and Punishment of Social and
Economic Offences" received in April 1972) induced the Government of India to re-focus the
FERA act with the main aim of conservation of foreign exchange rather than regulation of entry
of foreign capital. The Foreign Exchange Regulation Act, 1973, (hereinafter referred to as
FERA) was drafted with the object of introducing the changes felt necessary for the effective
implementation of the Government policy and removing the difficulties faced in the working of
the previous enactment. FERA is crisis-driven regulation and naturally it contained several
draconian provisions. Also, any offence under FERA was a criminal offence liable for
imprisonment.

Basic Purpose
 To help RBI in maintaining exchange rate stability
 To converse precious foreign exchange
 To prevent/regulate foreign business in India
Objectives
FERA was enacted at the time when foreign exchange was scarce and was perceived to be a rare
commodity and hence required constant monitoring and regulation so the main objective was to
regulate the foreign payments, dealings in Foreign Exchange & securities, import and export of
currency.

The idea was to conserve precious foreign exchange and to optimize the proper utilization of
foreign exchange so as to promote the economic development of the country.

Example: Coca-Cola was India's leading soft drink until 1977 when it left India after a new
government ordered the company to turn over its secret formula for Coca-Cola and dilute its
stake in its Indian unit as required by the Foreign Exchange Regulation Act (FERA). In 1993, the
company (along with PepsiCo) returned after the introduction of India's Liberalization policy.
Before 1991, Govt. had put many types of controls on Indian economy.
These were as follows:
(a) Industrial Licensing System

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(b) Foreign exchange control
(c) Price control on goods
(d) Import License.
Due to all these controls, the economy became defective. The entrepreneurs were unwilling to
establish new industries. Corruption, undue delays and inefficiency rose due to these controls.
Rate of economic growth of the economy came down. Economic reforms were introduced to
reduce the restrictions imposed on the economy.
For the attainment of the above-mentioned objectives, the government of India has taken the
following major steps:
1. New Industrial Policy-
Under Industrial Policy, keeping in view the priorities of the country and its economic
development, the roles of the public and private sectors were decided. The industries have been
freed to a large extent from the licenses and other controls. Efforts have been made to encourage
foreign investment. Investment decision by companies has been facilitated by ending restrictions
imposed by the MRTP (Monopolies and Restrictive Trade Practices) Act. The FERA, 1973, was
designed to control foreign investment in India.
Important points that have been highlighted are:
Abolition of Licensing, Freedom to Import Technology, Contraction of Public Sector,
Free Entry of Foreign Investment.
2. New Trade Policy-
Trade policy means the policy through which the foreign trade is controlled and regulated. As a
result of liberalization, trade policy has undergone tremendous changes. Especially the foreign
trade has been freed from the unnecessary controls.
The New Trade Policy is as follows:
Reduction in Restrictions of Export-Import, Reduction in Export-Import Tax, Easy Procedure of
Export-Import, Establishment of Foreign Capital Market.
3. Monetary Policy-
Monetary policy is a sort of control policy through which the central bank controls the supply of
money with a view to achieving the objectives of the general economic policy. Reforms in this
policy are called monetary reforms. Monetary policy or credit policy concerns itself with the cost
i.e. ROI and the availability of credit to affect the overall supply of money. Market-oriented

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reforms (such as interest rate liberalization, entry of Private Indian and foreign banks,
development of alternative system of monetary controls, etc.), are being constantly made since
monetary policy measures are continuous.
4. Fiscal Policy-
Another arm of economic policy is the fiscal policy which is concerned with the policy of
taxation, expenditure and borrowing. Fiscal policy as evolved over time has resulted in a tax
structure with its great reliance on indirect taxation. In its new fiscal policy, the Government has
taken initiative to strengthen methods of expenditure control. The new fiscal policy aims at
improving allocation of resources in terms of market principles.
5. Dismantling Price Control-
The efforts to remove price control were mostly in respect of fertilizers, steel and iron and petro
products. Restrictions on the import of these products have also been removed.
Important Highlights of FERA
 It extended to the whole of India and it applied 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.
 All branches of foreign companies (except air lines and shipping companies) seeking
approval under FERA had to convert themselves into Indian companies.
 A minimum permissible foreign shareholding limit of 74 per cent was to be allowed to
companies engaged in manufacturing items which use sophisticated technology or tea
plantation or manufacturing companies engaged in trading provided trading constitutes
less than 25 per cent of ex-factory value of production or has a turnover of less than Rs. 5
crores.
 A permissible foreign shareholding of 40 per cent was allowed for companies engaged in
manufacturing items which don’t use sophisticated technology.
 If a company is 100 per cent export-oriented, a foreign shareholding exceeding 74 per
cent may be allowed.

To sum up, in FERA “anything and everything” that has to do something with Foreign
Exchange was regulated. The Experts called it a “Draconian Act” which hindered the growth and
modernization of Indian Industries. The important aspect of FEMA, in contrast with FERA is

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that it facilitates Trade, while that of FERA was that it “prevented” misuse. The focus was
shifted from Control to Management.
What the Government could achieve and what were the shortfalls:

Forced by the law to move into priority areas if they wanted to avoid Indianisation, many
companies that were making crores as profits on items of, at best, peripheral importance to the
country had either reduced foreign shareholding or diversified into chemicals, marine fishing and
basic drugs.

The most important aim of FERA was to allow major foreign participation only when it is
accompanied by high technology, exports, import substitution or research. Before FERA, there
was no regulation of any kind on foreign company investments, and many were in areas of
business which Indian companies could handle just as well. So the foreign exchange outgo on
their operations was not very necessary and the foreign exchange was controlled.

The forced shift into priority industries and exports was a standing gain for the country. For
example, Lever moved from soaps and toiletries to a higher priority item like chemicals and
saved on the import of mutton tallow for soap-making by developing the use of domestically
available non-edible oils (otherwise going waste) as suitable raw material.

However, IBM left the country because of FERA; so did Coca-Cola and 12 lesser known entities
that chose not to give in to official demands asking them to Indianise and reduce foreign
shareholdings.

There was a sharp slowing down of fresh foreign investment into India, since the perception in
international business circles was that India was now hostile to foreign investment.

Under FERA any foreign company that brings its foreign shareholding down to 40 per cent were
treated on an equal footing with Indian companies, and were therefore free from the usual FERA
supervision. Many such companies have as a result achieved the paradoxical result of growing
faster after equity dilution. For example, Colgate-Palmolive had more than doubled sales in four
years after dilution, from ₹ 33 crore to ₹ 68 crore.

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So the irony was that many foreign controlled companies were beginning to view FERA not as
the initially perceived threat to their existence but as a blessing in disguise because that was the
way to get out of the usual FERA supervision and open the gates to grow substantially.

At the time of legislation of the law, India had shortage of foreign exchange (forex). The
government then tried to restrict the exchanges, or dealings of India with foreign countries. But
the rules and regulations had great impact on the import and export of currency.
There were several issues with this act those are
o Law violators were treated as criminal offenders.
o Wide power in the hand of Enforcement Directorate to arrest any person and seize any
document (Corporate world found themselves at the mercy of E.D)
o Control everything that was specified related to foreign exchange and aimed for
minimizing dealings in forex and foreign securities, etc.
With liberalization there has been a move to remove the measures of FERA and replace it with a
set of foreign exchange management regulations. A draft for the Foreign Exchange Management
Bill (FEMA) was prepared by the Government of India to replace FERA keeping in view of the
Indian economy. However until FEMA is enacted the provisions of FERA was applied.

According to the FERA guidelines, the principal rule was that all branches of foreign companies
operating in India should convert themselves into Indian companies with at least 60 per cent
local equity participation. Furthermore, all subsidiaries of foreign should bring down the foreign
equity share to 40% or less. The actual impact of this act was completely negative on the
economic development of the country, because it tied the hands of big corporate houses to
expand their business, so it was felt by the policy makers that there should be some relaxation in
the act so that the economic development through industrialization can be speed up in the
country.

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 FOREIGN EXCHANGE MANAGEMENT ACT, 1999

Introduction

The (Foreign Exchange Management Act, 1999) (FEMA) is an Act of the Parliament of India to
consolidate and amend the law relating to foreign exchange with the objective of facilitating
external trade and payments and for promoting the orderly development and maintenance of
foreign exchange market in India. The Foreign Exchange Management Act (1999) or in short
FEMA has been introduced as a replacement for earlier Foreign Exchange Regulation Act
(FERA). FEMA came into act on the 1st day of June 2000. FEMA is much simple, and consist of
only 49 sections. Terms like Capital Account Transaction, current account Transaction person,
service etc., have been defined in detail in FEMA under FEMA.

FEMA
Objectives To facilitate foreign trade and maintain forex
Provisions Consists only 49 sections and is much simpler
Introduced when? 1999
Violation Civil offence
Punishment for
Fine or imprisonment (if fine not paid in the stipulated time)
contravention
More than 6 month stay in India is the criteria to determine the
Residential status
residential status of a person

Key Objectives

The main objective behind the Foreign Exchange Management Act (1999) is to consolidate and
amend the law relating to foreign exchange with objective of facilitating external trade and
payments and for promoting the orderly development and maintenance of foreign exchange
market in India and also to regulate the foreign capital in India. Apart from this, it also aims at
removing the imbalances of payments and also to make strong and developed foreign exchange
market. Moreover, FEMA is applicable to the all parts of India. The act is also applicable to all

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branches, offices and agencies outside India owned or controlled by a person who is resident of
India.

History

The Indian government formulated the Foreign Exchange Management Act (FEMA) in 1999. On
the 1st of June 2000, FEMA came into existence replacing the Foreign Exchange Regulation Act
(FERA), which was formulated in 1973.In India, Extensive economic reforms were undertaken
in the early 1990s and this led to the deregulation and liberalization of the country's economy.
Therefore, Foreign Exchange Management Act (FEMA) was formulated in order to be
compatible with the policies of pro- liberalization of the Indian government.

FEMA was introduced by the Finance Minister in Lok Sabha on August 4, 1998. The Act aims
“to consolidate and amend the law relating to foreign exchange with the objective of facilitating
external trade and payments and for promoting the orderly development and maintenance of
foreign exchange market India. It was adopted by the parliament in 1999 and is known as the
Foreign Exchange Management Act, 1999.
Scope of FEMA:
FEMA provides:

1. Free transactions on current account subject to reasonable restrictions that may be imposed.

2. RBI controls over capital account transactions.

3. Control over realization of export proceeds.

4. Dealing in foreign exchange through authorized persons like authorized dealer/money

changer/off shore banking unit.

5. Adjudication of Offences.

6. Appeal provision including Special Director (Appeals) and Appellate Tribunal.

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Regulation and Management of Foreign Exchange
1. Dealing in foreign exchange etc.

2. Every person dealing in foreign exchange should follow rules and regulation under
FEMA act.
3. Save as otherwise provided in this Act no person should:
a. Make any payment to or for the credit of any person resident outside India in any
manner
b. Deal in or transfer any foreign exchange or foreign security to any person not
being an authorized person
c. Receive otherwise through an authorized person, any payment by order or on
behalf of any person resident outside India in any manner
4. No person resident in India shall acquire, hold, own, possess or transfer any foreign
exchange, foreign security or any immovable property situated outside India.

Authorized person under FEMA:

 RBI cannot do all transactions in foreign exchange itself. Hence RBI delegates its power
to authorized persons with suitable guidelines to deal in foreign exchange and foreign
securities.
 Section 2(c) of FEMA states that authorized person means authorized dealer, money
changer, off shore banking unit or any other person authorized under section 10(1) to deal
in foreign exchange and foreign securities.

Category Entities Permitted activities

 Commercial Banks All current and capital

 State Co-op Banks account transactions

Authorized dealer-category I
 Urban Co-op Banks according to RBI directions
issued from time-to-time.
Specified non-trade related
 Upgraded FFMCs
current account transactions.
Authorized dealer-category II  Co-op. Banks
All the activities permitted to
 Regional Rural
Full Fledged Money

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 Banks (RRBs) Changers. Any other activity
 Others as decided by the Reserve
Bank.
Transactions incidental to the
 Select Financial and
foreign exchange activities
Authorized dealer-category III other Institutions
undertaken by these
institutions.
 Dept. of Posts
Purchase of foreign exchange
Full-fledged money  Urban Co-op. Banks
and sale for private and
changers(FFMC)  Other FFMCs business visits abroad.

1. Authorized Dealers Category – I (ADs – I)

As per the latest circular Issued by the RBI, there are around 110 entities who are qualified under
the segment of Authorized Dealers category – I. It includes all type of Commercial Banks
irrespective of Nationalized Banks, Scheduled Banks, Private Banks and Foreign Commercial
Banks operating in India. These segments of banks allowed to deal in all type of foreign
exchange transaction related to current and capital account transaction according to the norms
and procedure laid down by RBI. Authorized Dealers Category – I are required to compile
returns and reports under foreign Exchange transactions electronic reporting system (FETERS).

2. Authorized Dealers Category – II (ADs –II)

The second category of authorized dealer operates under the restrictive environment for the
implementation of some specified purposes prescribed by RBI. It includes the Upgraded Full-
Fledged Money Changer and another new inclusion like Department of Post and various types of
NBFCs who are operated in open markets. As per RBI the detailed of dealers classified under
this category are considered as per region basis. At present, there are 11 regions in India which
are under this category.

3. Authorized Dealers Category -III (ADs –III)

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The third category of authorized dealer operates with the purpose to boost the international trade
by proving them adequate availability foreign currency for promotion of international trade as
per the norms lay down in section 10 of the FEMA Act 1999. It includes the major player of
financial institutions like IFCI (Industrial Finance Corporation of India), SIDBI (Small Industries
Development Bank of India), EXIM (Export-Import Bank of India) and various Factor Agencies.

4. Full-Fledged money Change (FFMCs)

It is the new aspect of regulation of Indian Foreign Exchange markets. It may be any financial
entity other than Commercial Banks who qualified the norms and criteria laid down by RBI.
FFMCs are authorized to purchase foreign exchange from resident and non-resident visiting
India and to sell Foreign Exchange for certain approved purposes. The main objective of the
enactment of FFMCs is to provide easy access to foreign exchange transaction to common
masses.

Salient Features of FEMA Act

Following are some of the important features of Foreign Exchange Management Act:

1. It classifies the foreign exchange transactions in two categories, viz. capital account and
current account transactions. It is consistent with full current account convertibility and
contains provisions for progressive liberalization of capital account transactions. All
current account transactions shall be allowed (subject to reasonable restrictions), Reserve
Bank to classify those capital account transactions that are to be permitted and to regulate
transfer and issue of foreign securities by a resident in/outside India as well as setting up
of branches/offices by foreign companies in India. Also definitions of capital account
transaction and current account transaction have been introduced keeping in mind the
possibility of introduction of capital account convertibility in the near future.
2. It provides power to the Reserve Bank for specifying in consultation with the central
government, the classes of capital account transactions and limits to which exchange is
admissible for such transactions and is more transparent in its application as it lays down
the areas requiring specific permissions of the Reserve Bank/Government of India on
acquisition/holding of foreign exchange.

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3. FEMA permits only authorized person to deal in foreign exchange or foreign security.
Such an authorized person, under the Act, means authorized dealer, money changer, off-
shore banking unit or any other person for the time being authorized by Reserve Bank.
The Act thus prohibits any person who deal in or transfer any foreign exchange or foreign
security to any person not being an authorized person. Make any payment to or for the
credit of any person resident outside India in any manner. Receive otherwise through an
authorized person, any payment by order or on behalf of any person resident outside
India in any manner.
4. It will facilitate trade rather than prevent misuse of foreign exchange. Since the main
objective of FERA was conservation and proper utilization of the foreign exchange
reserves of the country and also to facilitate external trade and payments and to promote
the orderly developments and maintenance of foreign exchanges.
5. It gives full freedom to a person resident in India, who was earlier resident outside India,
to hold/own/transfer any foreign security/immovable property situated outside India and
acquired when she/he was resident.

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 Sectoral Policy with respect to FDI

Prohibited Sectors

FDI is prohibited in:

a) Lottery Business including Government/private lottery, online lotteries, etc.

b) Gambling and Betting including casinos etc.
c) Chit funds
d) Nidhi company
e) Trading in Transferable Development Rights (TDRs)
f) Real Estate Business or Construction of Farm Houses ‘Real estate business’ shall not
include development of townships, construction of residential /commercial premises,
roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated
under the SEBI (REITs) Regulations 2014.
g) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes
h) Activities/sectors not open to private sector investment e.g.
a. Atomic Energy
b. Railway operations

Foreign technology collaboration in any form including licensing for franchise, trademark, brand
name, management contract is also prohibited for Lottery Business and Gambling and Betting
activities.

Permitted Sectors

a) In the following sectors/activities, FDI up to the limit indicated against each

sector/activity is allowed, subject to applicable laws/regulations security and other
conditionalities. In sectors/activities not listed below, FDI is permitted up to 100% on the
automatic route, subject to applicable laws/regulations; security and other
conditionalities. Wherever there is a requirement of minimum capitalization, it shall
include share premium received along with the face value of the share, only when it is
received by the company upon issue of the shares to the non-resident investor. Amount

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 paid by the transferee during post-issue transfer of shares beyond the issue price of the
share, cannot be taken into account while calculating minimum capitalization
requirement.
b) Sectoral cap i.e. the maximum amount which can be invested by foreign investors in an
entity unless provided otherwise, is composite and includes all types of foreign
investments, direct and indirect, regardless of whether the said investments have been
made under FDI, FII, FPI, NRI, FVCI, LLPs, DRs and Investment Vehicle of FEMA
(Transfer or Issue of Security by Persons Resident Outside India) Regulations. FCCBs
and DRs having underlying of instruments which can be issued, being in the nature of
debt, shall not be treated as foreign investment. However, any equity holding by a person
resident outside India resulting from conversion of any debt instrument under any
arrangement shall be reckoned as foreign investment under the composite cap.
c) Foreign investment in sectors under Government approval route resulting in transfer of
ownership and/or control of Indian entities from resident Indian citizens to non-resident
entities will be subject to Government approval. Foreign investment in sectors under
automatic route but with conditionalities, resulting in transfer of ownership and/or control
of Indian entities from resident Indian citizens to non-resident entities, will be subject to
compliance of such conditionalities.
d) The sectors which are already under 100% automatic route and are without
conditionalities would not be affected.
e) Notwithstanding anything contained in paragraphs a) and c) above, portfolio investment,
up to aggregate foreign investment level of 49% or sectoral/statutory cap, whichever is
lower, will not be subject to either Government approval or compliance of sectoral
conditions, as the case may be, if such investment does not result in transfer of ownership
and/or control of Indian entities from resident Indian citizens to non-resident entities.
Other foreign investments will be subject to conditions of Government approval and
compliance of sectoral conditions as laid down in the FDI policy.
f) Total foreign investment, direct and indirect, in an entity will not exceed the
sectoral/statutory cap.
g) Any existing foreign investment already made in accordance with the policy in existence
would not require any modification to conform to amendments introduced.

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 h) The onus of compliance of above provisions will be on the investee company

Sector/Activity % of Entry Route

Equity/
FDI Cap
Agriculture
Agriculture & Animal Husbandry
(a) Floriculture, Horticulture, Apiculture and Cultivation of Vegetables & 100% Automatic
Mushrooms under controlled conditions;
(b) Development and Production of seeds and planting material;
(c) Animal Husbandry (including breeding of dogs), Pisciculture,
Aquaculture, under controlled conditions; and
(d) Services related to agro and allied sectors

The term “under controlled conditions” covers the following:

(i) ‘Cultivation under controlled conditions’ for the categories of
floriculture, horticulture, cultivation of vegetables and mushrooms is the
practice of cultivation wherein rainfall, temperature, solar radiation, air
humidity and culture medium are controlled artificially. Control in these
parameters may be effected through protected cultivation under green
houses, net houses, poly houses or any other improved infrastructure
facilities where micro-climatic conditions are regulated
anthropogenically.
Note: Besides the above, FDI is not allowed in any other agricultural
sector/activity
Plantation Sector
(i) Tea sector including tea plantations 100% Automatic
(ii) Coffee plantations
(iii) Rubber plantations
(iv) Cardamom plantations
(v) Palm oil tree plantations

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(vi) Olive oil tree plantations
Other Condition
Prior approval of the State Government concerned is required in case of
any future land use change.
Note: Besides the above, FDI is not allowed in any other plantation
sector/activity
Mining and Petroleum & Natural Gas 100% Automatic
Mining and Exploration of metal and non-metal ores including diamond,
gold, silver and precious ores but excluding titanium bearing minerals
and its ores; subject to the Mines and Minerals (Development &
Regulation) Act, 1957.
Coal & Lignite 100% Automatic
(1) Coal & Lignite mining for captive consumption by power projects,
iron & steel and cement units and other eligible activities permitted under
and subject to the provisions of Coal Mines (Nationalization) Act, 1973.
(2) Setting up coal processing plants like washeries subject to the
condition that the company shall not do coal mining and shall not sell
washed coal or sized coal from its coal processing plants in the open
market and shall supply the washed or sized coal to those parties who are
supplying raw coal to coal processing plants for washing or sizing.
Mining and mineral separation of titanium bearing minerals & ores, its 100% Government
value addition and integrated activities subject to sectoral regulations and
the Mines and Minerals (Development and Regulation Act 1957).
Other Conditions
(i) FDI for separation of titanium bearing minerals & ores will be subject to the following additional
conditions viz.:
(A) value addition facilities are set up within India along with transfer of technology;
(B) disposal of tailings during the mineral separation shall be carried out in accordance with
regulations framed by the Atomic Energy Regulatory Board such as Atomic Energy (Radiation
Protection) Rules, 2004 and the Atomic Energy (Safe Disposal of Radioactive Wastes) Rules, 1987.
Clarification:

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(1) For titanium bearing ores such as Ilmenite, Leucoxene and Rutile, manufacture of titanium
dioxide pigment and titanium sponge constitutes value addition. Ilmenite can be processed to
‘produce 'Synthetic Rutile or Titanium Slag as an intermediate value added product.
(2) The objective is to ensure that the raw material available in the country is utilized for setting up
downstream industries and the technology available internationally is also made available for setting
up such industries within the country. Thus, if with the technology transfer, the objective of the FDI
Policy can be achieved, the conditions prescribed at (i) (A) above shall be deemed to be fulfilled.
Defence 49% Automatic
Defence Industry subject to Industrial license under the Industries
Above 49% under Government route on case to case basis, wherever it is
likely to result in access to modern and 'state-of-art' technology in the
country.
Print Media
Publishing of newspaper and periodicals dealing with news and current 26% Government
Affairs
Publication of Indian editions of foreign magazines dealing with news and 26% Government
current affairs
Publishing/printing of scientific and technical magazines/specialty 100% Government
journals/ periodicals, subject to compliance with the legal framework as
applicable and guidelines issued in this regard from time to time by
Ministry of Information and Broadcasting.
Air Transport Services
(1)(a) Scheduled Air Transport Service/ Domestic Scheduled Passenger 49% FDI Automatic
Airline
(b) Regional Air Transport Service 100% for
NRIs
(2)Non-scheduled Air Transport Service 100% Automatic
(3)Helicopter services/seaplane services requiring DGCA approval 100% Automatic
Industrial Parks - new and existing 100% Government
Single Brand product retail trading 100% Automatic

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 up to 49%
Government r
oute
beyond 49%
Multi Brand Retail Trading 51% Government
Railway Infrastructure 100% Automatic
Asset Reconstruction Companies 100% Automatic
Banking- Private Sector 74% Automatic
up to 49%
Government r
oute
beyond 49%
and up to
74%.
Banking- Public Sector 20% Government
Nonbanking Finance Companies (NBFC) 100% Automatic
Pharmaceuticals
Greenfield 100% Automatic
Brownfield 100% Automatic

Procedures for Government Approval

Filling Application

Proposal for foreign investment, along with supporting documents to be filed online, on the
Foreign Investment Facilitation Portal, at the following url: www.fifp.gov.in/

Internal Procedure

DIPP to circulate proposal to RBI within 2 days, for comments from a FEMA perspective.
Proposed investments from Pakistan and Bangladesh would also require clearance from the
Ministry of Home Affairs. Investment Policy & Promotion (IPP) would be required to provide its

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comments within 4 weeks from receipt of online application, & Ministry of Home Affairs (if
applicable) to provide comments within 6 weeks.

Pursuant to the above, additional information/ clarifications may be asked from the applicant
which is to be provided within 1 week.

Proposals involving FDI exceeding INR 50bn (approx. US$ 775m) shall be placed before the
Cabinet Committee of Economic Affairs.

Final Approval

Once the proposal is complete in all aspects (which should be within 6-8 weeks from receipt of
the online application), the same shall be processed and approval/ rejection shall be conveyed to
the applicant within 2 weeks (such approval/ rejection letters shall be sent online)

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 Regulatory provisions w.r.t. FDI including inward and outward – ADRs,
GDRs, ADSs etc.
Foreign Investment
Foreign Investment means any investment made by a person resident outside India on a
repatriable basis in capital instruments of an Indian company or to the capital of an LLP; A
person resident outside India may hold foreign investment either as Foreign Direct Investment or
as Foreign Portfolio Investment in any particular Indian company.

Foreign
Investments

Foreign Foreign
Direct Portfolio
Investment Investment

Company LLP NRIs/PIO FIIs/QFIs

Automatic Govt.
Route Route

LLP – Limited Liability Partnerships

NRIs – Non-resident Indians
PIOs – Persons of Indian Origin
FIIs – Foreign Institute Investors
QFIs – Qualified Foreign Investors
Foreign Direct Investment
FDI means investment through capital instruments by a person resident outside India in an
unlisted Indian company or in 10 percent or more of the post issue paid-up equity capital on a
fully diluted basis of a listed Indian company; In case an existing investment by a person resident
outside India in capital instruments of a listed Indian company falls to a level below 10 percent
of the post issue paid-up equity capital on a fully diluted basis, the investment shall continue to

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be treated as FDI. Foreign direct investment (FDI) is an investment made by a firm or individual
in one country into business interests located in another country. Generally, FDI
takes place when an investor establishes foreign business operations or acquires foreign business
assets, including establishing ownership or controlling interest in a foreign company. Foreign
direct investments are distinguished from portfolio investments in which an investor merely
purchases equities of foreign-based companies. Foreign direct investments are commonly made
in open economies that offer a skilled workforce and above-average growth prospects for the
investor, as opposed to tightly regulated economies. Foreign direct investment frequently
involves more than just a capital investment. It may include provisions of management or
technology as well. The key feature of foreign direct investment is that it establishes either
effective control of, or at least substantial influence over, the decision-making of a foreign
business.
Example: India emerged as the top recipient of Greenfield FDI Inflows from the
Commonwealth, as per a trade review released by The Commonwealth in 2018.
Some of the recent significant FDI announcements are as follows:
 In June 2018, Idea’s appeal for 100 per cent FDI was approved by Department of
Telecommunication (DoT) followed by its Indian merger with Vodafone making
Vodafone Idea the largest telecom operator in India
 Retail giant Walmart acquired approximately 77 per cent stake in e-commerce major
Flipkart while the remainder of the business is held by other shareholders, including
Flipkart co-founder Binny Bansal, Tencent, Tiger Global, and Microsoft Corp.
 In February 2018, Ikea announced its plans to invest up to Rs 4,000 crore (US$ 612
million) in the state of Maharashtra to set up multi-format stores and experience centres.

Case Study: Foreign Airlines can invest up to 49% in Air India

Currently foreign airlines are allowed to invest in the capital instruments of Indian companies,
operating scheduled and non-scheduled air transport services, up to the limit of 49% of their
paid-up capital, except in Air India, a Government owned scheduled air transport service.
However, in the wake of ongoing divestment process, the Government has decided to relax the
norms by allowing foreign airlines to invest up to 49% under approval route, subject to the

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condition that total FDI in Air India shall not exceed 49% either directly or indirectly and its
substantial ownership and effective control shall continue to be vested in Indian national.
Analysis: Allowing FDI up to 49% in Air India subject to abovementioned conditions shall bring
the national airline at par with other carriers in which foreign investment was already permitted.
In the time when the Government is working on the modalities for strategic divestment of Air
India, the proposed change is expected to ease the process of divestment and attract more bidders
for the airline. Further, it will not only allow other domestic carriers, jointly with foreign
partners, to participate in the bidding process but, will help Air India to strengthen its financial
and technical capabilities.
Foreign Portfolio Investment
FPI means any investment made by a person resident outside India through capital instruments
where such investment is less than 10 percent of the post issue paid-up share capital on a fully
diluted basis of a listed Indian company or less than 10 percent of the paid up value of each
series of capital instruments of a listed Indian company; Foreign portfolio investment (FPI)
consists of securities and other financial assets passively held by foreign investors. It does not
provide the investor with direct ownership of financial assets and is relatively liquid depending
on the volatility of the market. Foreign portfolio investment differs from foreign direct
investment (FDI), in which a domestic company runs a foreign firm, because although FDI
allows a company to maintain better control over the firm held abroad, it may face more
difficulty selling the firm at a premium price in the future. Foreign portfolio investment is part of
a country’s capital account and shown on its balance of payments (BOP). The BOP measures the
amount of money flowing from one country to other countries over one monetary year. It
includes the country’s capital investments, monetary transfers, and the number of exports and
imports of goods and services.
Difference between FDI and FPI
 FPI lets an investor purchase stocks, bonds or other financial assets in a foreign country.
Because the investor does not actively manage the investments or the companies that
issue the investments, he does not have control over the securities or the business.
However, since the investor’s goal is to create a quick return on his money, FPI is more
liquid and less risky than FDI.

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  In contrast, FDI lets an investor purchase a direct business interest in a foreign country.
For example, an investor living in New York purchases a business in India so that the
company can expand its operations. The investor’s goal is to create a long-term income
stream while helping the company increase its profits.
 The investor controls his monetary investments and actively manages the company into
which he puts money. He helps build the business and waits to see his return on
investment (ROI). However, because the investor’s money is tied up in a company, he
faces less liquidity and more risk when trying to sell his interest.
 The investor also faces currency exchange risk, which may decrease the value of his
investment when converted from the country’s currency to U.S. dollars, and political risk,
which may make the foreign economy and his investment amount volatile.
FDI Inwards
An inward investment (the opposite of an outward investment) involves an external or foreign
entity either investing in or purchasing the goods of a local economy. A common type of inward
investment is a foreign direct investment (FDI). This occurs when one company purchases
another business or establishes new operations for an existing business in a country different than
the one of its origin. Inward investments or foreign direct investments often result in a significant
number of mergers and acquisitions. Rather than creating new businesses, inward investments
often occur when a foreign company acquires or merges with an existing company. Inward
investments tend to help companies grow and can open borders for international integration.
Example: Direct investments made by foreign firms such as Suzuki, Honda, LG, Samsung, etc.
in India are examples of Inward FDI.
FDI Outwards
An outward direct investment (ODI) is a business strategy in which a domestic firm expands its
operations to a foreign country. This can take the form of a green field investment, a
merger/acquisition or expansion of an existing foreign facility. Employing outward direct
investment is a natural progression for firms if their domestic markets become saturated and
better business opportunities are available abroad. The extent of a nation's outward direct
investment can be seen as an indication that its economy is mature.
Example: Investments overseas by Indian Firms such as Tata Motors, Infosys, Videocon, ONGC,
etc. are illustrations of Outward FDI

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Approval Process
FDI proposals are processed following a standard operating plan devised by DIPP. The process
includes
1. Submission of proposal and uploading documents on Foreign Investment Facilitation
Portal.
2. Department of Industrial Policy and Promotion (DIPP) assign the case to the concerned
Ministry within 2 working days.
a. Submission of physical copies to concerned department is not required in case of
digitally signed documents.
b. For applications not digitally signed, online communication to applicant will be
made to submit one signed physical copy of the proposal to the Competent
Authority. Applicants are required to submit required documents within 5 days of
such intimation
3. The proposal is circulated online within 2 days to Reserve Bank of India for review from
FEMA perspective. All proposals are shared with Ministry of External Affairs (MEA)
and Department of Revenue (DoR) for record. Any advice/comments from above
mentioned departments are directly shared with concerned Administrative Ministry or
Department assigned to decide on the proposal.
4. Proposals are scrutinized within 1 week and additional information/clarifications, if
required, are asked for.
5. On getting all required information, the Competent Authority is required to give out its
decision in next two weeks. Approval/rejection letters are sent online to the applicant,
consulted Ministries/Departments and DIPP.
a. Where total foreign equity inflow is more than Rs. 5000 crore, the Competent
Authority is required to place the same to Cabinet Committee on Economic
Affairs for consideration within timelines.
Depository Receipt
DR means a foreign currency denominated instrument, whether listed on an international
exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of
eligible securities issued or transferred to that foreign depository and deposited with a domestic
custodian and includes ‘global depository receipt’ as defined in the Companies Act, 2013;

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It also means a negotiable security issued outside India by a Depository bank, on behalf of an
Indian company, which represent the local Rupee denominated equity shares of the company
held as deposit by a Custodian bank in India. DRs are traded on Stock Exchanges in the US,
Singapore, Luxembourg, etc.
American Depository Receipt (ADR)
An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank
representing a specified number of shares (or one share) in a foreign stock traded on a U.S.
exchange.
ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial
institution overseas. Holders of ADRs realize any dividends and capital gains in U.S. dollars, but
dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign
taxes. ADRs are listed on the NYSE, AMEX or NASDAQ, but they are also sold over-the-
counter (OTC).
American depositary receipts were introduced in 1927 as an easier way for U.S. investors to
purchase stock in foreign companies. Non-U.S. companies also benefit from ADRs, as they
make it easier to attract American investors. Before ADRs existed, if American investors wanted
to purchase shares of a non-U.S. listed company, they had to buy the shares on international
exchanges. Purchasing shares on international exchanges has potential drawbacks, particularly
currency-exchange issues and regulatory differences. Publicly traded companies have to answer
to regulatory bodies with jurisdiction over their country. In the United States, the regulatory body
is the Securities Exchange Commission (SEC), which works to protect investors. The regulatory
bodies implement and enforce rules on companies, including how companies should present
pertinent financial information. Before investing in an internationally traded company, U.S.
investors had to familiarize themselves with the different rules, or they could risk
misunderstanding important information, such as the company's financials.
ADR holders do not have to transact in foreign currencies, because ADRs trade in U.S. dollars
and clear through U.S. settlement systems. The U.S. banks require that the foreign companies
provide them with detailed financial information, making it easier for investors to assess the
company's financial health compared to a foreign company that only transacts on international
exchanges.

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To offer ADRs, U.S. banks simply purchase shares from the international company and reissue
them, typically on U.S. exchanges. An ADR may represent the underlying shares on a one-for-
one basis, or it may represent a fraction of a share or multiple shares. The depositary bank sets
the ratio of U.S. ADRs per home-country share at a value those appeals to investors. If an ADR’s
value is too high, it could deter some investors, but if it is too low, investors may think the
underlying securities resemble riskier penny stocks.
Global Depository Receipt (GDR)
A global depositary receipt or GDR is a bank certificate issued in more than one country for
shares in a foreign company.
A GDR is very similar to an American depositary receipt or an ADR. It is a type of bank
certificate that represents shares in a foreign company, such that a foreign branch of an
international bank then holds the shares. The shares themselves trade as domestic shares, but
globally, various bank branches offer the shares for sale. Private markets use GDRs to raise
capital denominated in either U.S. dollars or euros. When private markets attempt to obtain euros
instead of U.S. dollars we call GDRs EDRs.
Investors trade GDRs in multiple markets, which they generally refer to as capital markets as
they are considered to be negotiable certificates. Investors use capital markets to facilitate the
trade of long-term debt instruments, and for the purpose of generating capital. GDR transactions
in the international market tend to have lower associated costs than some other mechanisms that
investors use to trade in foreign securities.
Companies issue GDRs to attract interest by foreign investors. GDRs provide a lower-cost
mechanism in which these investors can participate. These shares trade as though they are
domestic shares, but investors can purchase the shares in an international marketplace. A
custodian bank often takes possession of the shares while the transaction processes, ensuring
both parties a level of protection while facilitating participation.
Brokers who represent the buyer manage the purchase and sale of GDRs. Generally, the brokers
are from the home country and are sellers within the foreign market. The actual purchase of the
assets is multi-staged, involving a broker in the investor's homeland, a broker located within the
market associated with the company that has issued the shares, a bank representing the buyer and
the custodian bank.

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If an investor desires, brokers can also sell GDRs on their behalf. An investor can sell them as-is
on the proper exchanges, or the investor can convert them into regular stock for the company.
Additionally, they can be cancelled and returned to the issuing company.
Numerous companies trade in the United States as ADRs. For example, Volkswagen trades OTC
under the ticker VLKAY. BP Plc. trades on the NYSE under the ticker BP.
DRs listed and traded in the US markets are known as American Depository Receipts (ADRs)
and those listed and traded anywhere/elsewhere are known as Global Depository Receipts
(GDRs). An Indian corporate can raise foreign currency resources abroad through the issue of
American Depository Receipts (ADRs) or Global Depository Receipts (GDRs) by issuing its
Rupee denominated shares to a person resident outside India being a depository for the purpose
of issuing Global Depository Receipts (GDRs) and or American Depository Receipts (ADRs),
subject to the conditions that:
a) The ADRs/ GDRs are issued in accordance with the scheme for issue of Foreign
Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt
Mechanism) Scheme, 1993 and guidelines issued by the Central Government there under
from time to time.
b) The Indian company issuing such shares has an approved from the Ministry of Finance,
Government of India to issue such ADRs and or GDRs or is eligible to issue ADRs/
GDRs in terms of the relevant scheme in force or notification issued by the Ministry of
Finance,
And
c) Is not otherwise ineligible to issue shares to person's resident outside India in terms of
these Regulations.
There is no limit up to which an Indian company can raise ADRs/ GDRs. However, the Indian
company has to be otherwise eligible to raise foreign equity under the extant FDI policy. There
are no end-use restrictions on GDR/ ADR issue proceeds, except for an express ban on
investment in real estate and stock markets. A company engaged in the manufacture of items
covered under Automatic route, whose direct foreign investment after a proposed GDRs/ ADRs/
FCCBs issue is likely to exceed the equity limits under the automatic route, or which is
implementing a project falling under Government approval route, would need to obtain prior
Government clearance through DIPP before seeking final approval from the Ministry of Finance.

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American Depository Shares (ADS)
An American depositary share (ADS) is a U.S. dollar-denominated equity share of a foreign-
based company available for purchase on an American stock exchange. American Depositary
Shares (ADSs) are issued by depository banks in the U.S. under agreement with the issuing
foreign company. The entire issuance is called an American Depositary Receipt (ADR), and the
individual shares are referred to as ADSs. It is the actual underlying share that the ADR
represents. In other words, the ADS are the actual share trading, while the ADR represents a
bundle of ADSs.
For example, if a U.S. investor wanted to invest in CanCorp, the investor would need to go to
their broker and purchase a number of ADRs that are equal to the amount of CanCorp shares that
they want. In this case, the ADRs are the receipts that the investor has to purchase, whereas the
ADSs represent the underlying shares (CanCorp) that were invested in.
Advantage of ADS
Foreign companies that choose to offer shares on U.S. exchanges gain the advantage of a wider
investor base, which can also lower costs of future capital. For U.S. investors, ADSs offer the
opportunity to invest in foreign companies without dealing with currency conversions and other
cross-border administrative hoops.
Disadvantage of ADS
Even though ADSs represent real claims to foreign shares and can be converted if an investor
wished to do so, there is currency risk involved in holding them. Fluctuations in the currency
exchange rate between the USD and the foreign currency will affect the price of shares as well as
any income payments, which must be converted into U.S. dollars.
Indian Depository Receipts (IDRs)
As per the RBI Notification, ‘Indian Depository Receipts (IDRs)’ means any instrument in the
form of a depository receipt created by a Domestic Depository in India and authorised by a
company incorporated outside India making an issue of such depository receipts. A Foreign
Portfolio Investor or Non- Resident Indian or an Overseas Citizen of India may purchase, hold or
sell Indian Depository Receipts (IDRs) of companies’ resident outside India and issued in the
Indian capital market.
Two-way Fungibility Scheme: The Government of India has put a limited two-way Fungibility
scheme in place for ADRs/GDRs. Under this Scheme, a stockbroker in India, registered with

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SEBI, can purchase shares of an Indian company from the market for conversion into
ADRs/GDRs based on instructions received from overseas investors. Reissuance of ADRs/GDRs
would be permitted to the extent of ADRs/GDRs, which have been redeemed into underlying
shares and sold in the Indian market.
Two-way fungibility means investors can freely convert ADRs (American Depository Receipts)
/GDRs (Global Depository Receipts) into underlying domestic shares and vice versa. Previously
only one-way fungibility was allowed. The ADRs/GDRs could be converted into local shares but
could not be converted back into ADRs/GDRs. This effectively meant that once a conversion
was done the number of ADRs/GDRs would decrease and could only be replenished by fresh
issue of ADRs/GDRs. In effect, this would lead to lower liquidity in the ADR/GDR markets.
The benefits of two-way fungibility would be twofold:
 Better liquidity in the ADR/GDR market.
 Reduction of price differential between the domestic and ADR/GDR markets
The primary reason for low-liquidity in the Indian ADRs/GDRs is due to the fact that the
companies have had very small ADR/GDR issue sizes. For example Wipro listed on the NYSE
with 2.3 m shares, which accounts for less than 2% of its equity capital. The small number of
shares leads to lower volumes. Ideally, by allowing two-way fungibility, the trading volumes
would improve. However, the fungibility is limited to local shares that arise due to ADR/GDR
conversions. This implies that a share issued in the domestic market cannot be converted into
ADR/GDR (unless it arises due to a previous ADR/GDR conversion).
Given that most Indian ADRs have historically traded at a premium to the underlying local
stocks, converting into domestic shares would not have made sense. Thus, the current impact
may be negligible. The impact could be more on the GDR market, which has a longer history
and has seen conversions into local stocks in the past. There might be a few takers who would
like to re-convert for various reasons. Forex fluctuations could be one of the reasons to convert
back to GDR.
Infosys has always traded at a premium on the NASDAQ compared to the price at the local
exchanges. However, once the ADR was converted to domestic shares it was not allowed to
reconvert. Now with the two-way fungibility being allowed, players will be able take positions
according to their convenience. This would probably help in removing the price differential
between the local and the ADR/GDR markets.

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Case Study of Bharti Airtel
In the last two years, Indian telecommunications giant Bharti Airtel has twice attempted to
acquire South African telecommunications service provider MTN. However, Bharti failed on
both accounts - each time for a different reason. Had the deal gone through, it would have
resulted in the third-largest telecommunications company in the world, with combined annual
revenues of over $20 billion and a subscriber base of over 200 million.
Merger attempts
In 2008, Bharti proposed to acquire an approximate 40% stake in MTN. The companies reached
an in-principle agreement and executed a term sheet. Thereafter, MTN proposed an alternate
structure which contemplated the acquisition of the majority of Bharti's shares, thereby making
Bharti a subsidiary of MTN. The modified deal structure was unacceptable to Bharti, as it was
not in favour of compromising the interests of its shareholders. As a result, the deal was aborted.
In 2009, against the backdrop of a completely different global economic market, the two
companies recommenced their merger talks. According to media reports, the complex transaction
structure envisaged that Bharti would acquire a 49% stake in MTN and, in turn, MTN and its
shareholders would respectively acquire a 25% and 11% economic interest in Bharti, amounting
to a total of 36%. The term 'economic interest' implies that the shareholders have no voting
rights, but are entitled to receive dividends and enjoy pecuniary benefits. The MTN shareholders
would have acquired the stake through the issue of global depositary receipts by Bharti. A global
depositary receipt is effectively a depositary receipt which represents the underlying equity
shares of a company, which in this case would have been Bharti. MTN shares would have traded
on the Johannesburg Stock Exchange.
Alleged deal breakers
The closure of the deal was greatly anticipated and the overall perception was tilted in favour of
its completion. However, it fell through, allegedly due to regulatory issues. According to
speculation, the principal reasons were the prohibitions on dual listing and capital account
convertibility. MTN was keen to retain its independent identity and insisted on dual listing.
However, in India, dual listing is not permitted. Dual listing is the process by which a company
can be listed and traded on the stock exchanges of two countries. Thus, it allows companies to
retain their separate legal identities. Shareholders can buy and sell the companies' shares on the

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stock exchanges of the countries in which their shares are listed. Consequently, there is no legal
merger.
In the Bharti-MTN case, dual listing would have meant the existence of two separate entities
under a common management. However, despite talks at the highest level to introduce the dual
listing concept, the Indian government did not rush to take any action in this respect. In order to
allow dual listing, numerous existing laws would require major amendments, including the
Companies Act 1956, the Foreign Exchange Management Act 1999, the Securities Contracts
(Regulation) Act 1956, the Listing Agreement and the Takeover Code. Dual listing would also
require capital account convertibility, which at present is not permitted in India. The Indian
regulatory regime allows current account convertibility, but is not yet completely open to capital
account convertibility. Once permitted, it will allow the easy exchange of local currency for
foreign currency for the acquisition of capital assets abroad. Therefore, the prerequisite for dual
listing (ie, capital account convertibility) will enable investors to buy shares of a dual-listed
company in one country and sell them in an overseas market. It will give investors the ability to
move freely from local currency to foreign currency and vice versa.
These two regulatory hurdles turned out to be the eventual deal breakers.
Comment
The Bharti-MTN deal would have been one of India's largest cross-border transactions. Bharti
would have had a tremendous opportunity to tap into MTN's market presence and increase its
network base in the African continent. However, regulatory hurdles and nationalistic pride came
in the way of the mega-deal. The only positive fallout is that the Indian legislature is now
working towards removing the legal stumbling blocks to make way for future transactions which
tow a similar line to that of Bharti-MTN.
Bharti nonetheless continued with its African safari and eventually MTN's loss turned out to be
Zain's gain. Bharti has now directly acquired 100% shares in Zain Africa. The transaction
structure was different from the Bharti-MTN arrangement: Bharti established two special
purpose vehicles in Singapore and the Netherlands and acquired Zain for $10.7 billion by way of
a leveraged buy-out. In the end, Bharti did manage to connect with the African continent, albeit
with a different caller.

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Difference between ADR and GDR
 American Depository Receipt (ADR) is a depository receipt which is issued by a US
depository bank against a certain number of shares of non-US company stock. Whereas
Global Depository Receipt (GDR) is a depository receipt which is issued by the
international depository bank, representing foreign company’s stock.
 Foreign companies can trade in US stock market, through various bank branches with the
help of ADR. Whereas GDR helps foreign companies to trade in any country’s stock
market other than the US stock market.
 ADR is issued in America while GDR is issued in Europe.
 ADR is listed in American Stock Exchange i.e. New York Stock Exchange (NYSE)
whereas GDR is listed in non-US stock exchanges like London Stock Exchange or
Luxembourg Stock Exchange.
 ADR can be traded in America only while GDR can be traded in all around the world.
 ADR Market is more liquid as compared to GDR market
 Investor’s participation is more in ADR as compared to GDR
 ADR market is a retail investor market whereas GDR’s market is institutional one.
 ADR’s disclosure agreements are more onerous as compared to GDR.
ADR Prices (Updated On Sep 05, 2018 Day End)

Company Close (USD) Change (%)

Tata Motors Ltd. 18.42 -0.38%
Vedanta Ltd. 12.79 0.87%
Wipro Ltd. 5.31 -0.19%
HDFC Bank Ltd. 98.39 -0.52%
ICICI Bank Ltd. 9.20 0.66%
Infosys Ltd. 20.71 1.62%
Dr. Reddy's Laboratories Ltd. 35.87 0.65%

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GDR Prices
Company Close (USD)
Reliance Infrastructure Ltd. 18.90
GAIL (India) Ltd. 31.50
Larsen & Toubro Ltd. 18.58
Mahindra & Mahindra Ltd. 13.05
Reliance Industries Ltd. 33.90
Axis Bank Ltd. 44.20

ED finds FEMA violation against Flipkart, penalty likely to be around Rs. 1,000 crore
After over two years of probe Enforcement Directorate is ready to slap a showcause notice to
Flipkart.
Top sources in the Directorate told ET Now that, "Our investigation is over and our Bangalore
team has found evidence of FEMA violation against Flipkart." Adding that a showcause notice
will be issued soon. The source who refused to be identified explained that India's top e-
commerce company had violated provisions of FEMA as WS Retail, the holding company had
investments from companies overseas. FDI norms in India do not allow FDI in e-commerce
especially in business to consumer models. In 2013, a year after ED's probe began; Flipkart
changed its business model allowing buyers and sellers to deal independently on their platform.
Sources in ED say that, "We are aware of the change in their business model. But we will charge
Flipkart for violations till 2013." In fact, as per the FEMA norms, ED can slap a penalty up to
three times of the contravention or foreign investment received in this case. ED is likely to
showcause the e-tailer over Rs 1000cr as penalty. "The case has been made out by our
investigating team and now the Adjudicating Officer is analyzing the case to take a finally call
on the penalty amount" explained a top source in the Directorate. An Adjudicating Officer is a
senior official in ED, generally belonging to the rank of a special director. The Adjudicating
Officer analyses the investigation report to ensure the case stands the test of law. Officials in ED
explain that once a showcause is issued the company is given the opportunity to contest before
the Directorate. In fact, the company could also compound the offences by appearing before the
RBI and pleading guilty of the contravention. But in most cases of FEMA violations the matter
ends up in long protracted litigation. “FEMA cases are civil cases to there is no question of

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criminal proceedings or attachments” explains an official in the Directorate. But Flipkart is not
the only e-tailer on ED’s radar, the Directorate is also probing Myntra. But sources tell ET Now
that this probe is only in its initial stages.
This probe came to light when in 2012 Anand Sharma the then commerce & industry ministry
informed the Parliament about ED's scanner on Flipkart.

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 Regulatory provisions w.r.t. External Commercial Borrowings
External Commercial Borrowings
ECB is basically a loan availed by an Indian entity from a non-resident lender. Most of these
loans are provided by foreign commercial banks and other institutions. It is a loan availed of
from non-resident lenders with a minimum average maturity of 3 years. ECB can be availed by
either automatic route or by approval route. Under automatic route, the government has
permitted some eligibility norms with respect to industry, amounts, end-use etc. If a company
passes all the prescribed norms, it can raise money without any prior approval.
External Commercial Borrowings are commercial loans raised by 'eligible resident borrower'
from 'recognised non-resident entities' AND should confirm to parameters specified in ECB
guidelines such as minimum maturity period, permitted end-use of funds, maximum all-in-cost
ceilings etc.
The framework for raising ECB is divided into following THREE Tracks:
TRACK 1 – Foreign currency denominated ECB with minimum average maturity period of 3/5
years
TRACK 2 - Foreign currency denominated ECB with minimum average maturity period of 10
years
TRACK 3 – Indian Rupee denominated ECB with minimum average maturity period of 3/5
years
Minimum Average Maturity period:
Indian borrower can accept ECB from non-resident recognised lender with minimum maturity
period as below:
 For ECBs up to USD 50 million or its equivalent-3 years
 For ECBs beyond USD 50 million or its equivalent-5 years
 Companies in infrastructure sector-5 years, regardless of amount of borrowing
 Certain categories of NBFCs-5 years, regardless of amount of borrowing
 FCCBs or FCEBs -5 years regardless of amount of borrowings
Forms of ECB
ECBs can be raised in any of the following forms:
 Loans

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  Issue of non-convertible, optionally convertible or partially convertible preference
shares/debentures
 Buyers' credit
 Suppliers' credit
 Foreign Currency Convertible Bonds (FCCBs) or
 Foreign Currency Exchangeable Bonds (FCEBs)
Eligible Borrowers:
Any Indian Company, body corporate or firm can raise money through ECB. Following
categories of entities can raise ECB under track 1:
 Companies in manufacturing sector
 Software development sector
 Shipping and Airlines Companies
 Units in Special Economic Zones (SEZs)
 Companies in infrastructure sector
 Certain categories of NBFCs.
Recognised Lenders:
Following non-resident lenders are recognised lenders under ECB:
 International Banks
 International Capital Markets
 Multilateral Financial institutions
 Export Credit Agencies
 Suppliers' of Equipment
 Foreign Equity Holder-Foreign Equity Holder would mean direct equity holding of
minimum 25% in borrowing Company OR indirect equity holder with minimum indirect
equity holding of 51% OR group Company with common parent Company.
 Overseas branch or subsidiary of Indian bank-However, they are not permitted to
participate in refinancing of existing ECB.
For specific pre-specified sectors, the borrowers have to take explicit permission of the
government/The Reserve bank of India (RBI) before borrowing through ECB. RBI has issued
formal guidelines and circulars specifying these rules for borrowing.

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The significance of ECBs their size in India’s balance of payment account. In the post reform
period, ECBs have emerged a major form of foreign capital like FDI and FII.
During several years, contribution of ECBs was between 20 to 35 percent of the total capital
flows into the country. Large number of Indian corporate and PSUs has used the ECBs as
sources of investment.
Bulks of the overseas loans or ECBs into the country are obtained by private sector corporates.
For the corporate, ECB is a dependable and easy to obtain fund and helps them to make
business/investment expansion.
External Commercial Borrowings (ECBs) includes commercial bank loans, buyers’ credit,
suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc.,
credit from official export credit agencies and commercial borrowings from Multilateral
Financial Institutions. ECBs are being permitted by the Government as a source of finance for
Indian Corporate for expansion of existing capacity as well as for fresh investment. Following
are the advantages of ECBs.
Advantages of ECBs
 ECBs provide opportunity to borrow large volume of funds
 The funds are available for relatively long term
 Interest rate are also lower compared to domestic funds
 ECBs are in the form of foreign currencies. Hence, they enable the corporate to have
foreign currency to meet the import of machineries etc.
 Corporate can raise ECBs from internationally recognised sources such as banks, export
credit agencies, international capital markets etc.
End Use Regulations
End Use Regulations as clarified under the Foreign Exchange Management Act. They include:
 For the purpose of raising investment in new projects, for the purpose of modernization/
expansion of existing units in industrial and service sectors including the infrastructure
sector; ECB’s can be raised for investment.
 According to the guidelines issued on Indian Direct Investment in Joint Venture or
Wholly Owned Subsidiaries (WOS), Overseas Direct Investment in Joint Ventures or
Wholly Owned Subsidiaries can be made but subjected to such guidelines.

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  In the two-stage process: first stage acquisition of shares in the disinvestment procedure
and in the mandatory second stage offer which is done to the public under the
Government’s disinvestment programme of Public Sector Unit shares.
 NBFCs categorized as Infrastructure Financing Companies (IFC) are permitted to avail
ECBs including outstanding in existing ECBs up to 50% of their owned funds under the
Approval Route.
 The lending that is done to the good faith micro finance activity including capacity
building by NGOs, self-help groups or for micro-credit, micro finance activities, etc.
Restrictions
Restrictions that are imposed on External Commercial Borrowings (ECB) regulations are as
follows:
 The utilization which can be done for on-lending or investment in capital market or
acquiring a company (or a part thereof) in India by an investment in real estate sector, by
a corporate, general corporate purpose, repayment of existing Rupee loans.
 The issue of standby letter credit, FIs, and NBFCs from India relating to ECB, guarantee,
letter of undertaking or letter of comfort by banks,
 The borrower can create security against the ECB. Creation of charge over financial
securities and immoveable assets such as shares in favour of the overseas lender is
subjected to FEMA regulations under the ECB guidelines.
Other Provisions
Other relevant regulations in relation to the external commercial borrowings are as follows:
 Borrowers are permitted to remit the funds to India or to either park the ECB proceeds
abroad.
 ECB proceeds which are parked in various liquid assets can be invested in Treasury Bills
and other monetary instruments of one-year maturity and having minimum rating etc.
Whenever the funds are required by the Borrower in India, the funds are invested in such
a way that they can be liquidated
 Whenever the ECB funds are pending utilization for permissible end-uses, ECB funds
can be repatriated to India for credit to the Borrowers’ Rupee Accounts with banks (AD)
in India.

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  Prepayment of ECB up to USD 500 million can be made by the AD banks without prior
approval of RBI upon compliance of minimum maturity period which applies to the loan.
 A fresh ECB can be raised and can be used for refinancing an existing ECB subjected to
the fact that the fresh one is raised at a lower all-in-cost, and the outstanding maturity of
the original ECB is maintained.
 For the purpose of making remittances of instalments of principal, interest and other
charges in conformity with the ECB guidelines, the designated AD bank has the general
permission.
 In compliance and consonance with the ECB guidelines, the Borrowers enter into an
agreement with the recognized Lender without the RBI approval and obtain a LOAN
REGISTER NUMBER (LRN) from RBI before drawing the ECB as per the procedure
laid down in the policy.
Case Study
The Indian government said three companies of the Anil Dhirubhai Ambani group- Reliance
Infrastructure Ltd (RInfra), Reliance Natural Resources Ltd (RNRL) and Reliance
Communications Ltd (RCom) have violated overseas debt norms.
The matter pertaining to RInfra has been referred to the Enforcement Directorate (ED) over non-
payment of penalty, the RNRL case has also been handed over to the ED for further
investigation.
Namo Narain Meena said end-use violations have been detected by the Reserve Bank of India
(RBI) in respect of two external commercial borrowing (ECB) transactions of $360 million and
$150 million by RInfra.
The company brought the proceeds raised through the ECBs to India and kept these invested in
debt mutual funds, pending utilisation for the declared end-use, in gross violation of the existing
guidelines.
A penalty of Rs124.7 crore was imposed on RInfra. Since it did not pay the penalty in
accordance with the rules and provisions of the Foreign Exchange Management Act (FEMA), the
violations were referred to the ED in December 2008 for adjudication.
RNRL had issued foreign currency convertible bonds worth $300 million for a project under the
automatic route. As much as $275 million (about Rs1,127 crore) was brought to India in May
2007 and parked in debt mutual funds pending utilisation.

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Subsequently, in August 2008, Rs1,160 crore ($275 million) was invested in a wholly-owned
subsidiary in Singapore.
Since the alleged transactions have a cross-border angle and since the RBI does not have
privileges of investigation, the issue was referred to the ED for further investigation.
RCom’s audited annual report for 2007 revealed that Rs5,142 crore of unutilised funds raised
through foreign currency convertible bonds (FCCBs) had been deposited interest-free with a
wholly-owned subsidiary, which in turn has parked the money in bank deposits.
After ascertaining the facts, the company was advised to apply for ‘compounding’. In its
response, RCom denied any contravention of the regulations and maintained that the FCCB
proceeds were utilised for telecom capital expenditure, taking into account the business
exigencies.

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 Regulatory provisions w.r.t. Import and Export of Goods under FEMA

Declaration of exports

(1) In case of exports taking place through Customs manual ports, every exporter of goods or
software in physical form or through any other form, either directly or indirectly, to any place
outside India, other than Nepal and Bhutan, shall furnish to the specified authority, a declaration
in one of the forms set out in the Schedule and supported by such evidence as may be specified,
containing true and correct material particulars including the amount representing –

(i) The full export value of the goods or software; or

(ii) if the full export value is not ascertainable at the time of export, the value which the exporter,
having regard to the prevailing market conditions expects to receive on the sale of the goods or
the software in overseas market, and affirms in the said declaration that the full export value of
goods (whether ascertainable at the time of export or not) or the software has been or will within
the specified period be, paid in the specified manner.

(2) In respect of export of services to which none of the Forms specified in these Regulations
apply, the exporter may export such services without furnishing any declaration, but shall be
liable to realise the amount of foreign exchange which becomes due or accrues on account of
such export, and to repatriate the same to India in accordance with the provisions of the Act, and
these Regulations, as also other rules and regulations made under the Act.

(4) Realization of export proceeds in respect of export of goods / software from third party
should be duly declared by the exporter in the appropriate declaration form

Realization and Repartition of Export Proceeds

CATEGORY OF EXPORTER TIME FRAME

Units in Special Economic Zones (SEZs) Not Applicable
Status Holder Exporter Within 12 months from the date of export
Goods exported to Warehouse established As soon as it is realized and in any case within

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outside India 15 months from the date of shipment of goods
Cent percent EOUs set up under Electronic
Hardware Technology Parks (EHTPs) and Within 12 months from date of export
Biotechnology Parks (BTPs) Schemes
All other cases of Export 12 months from the date of export

Export on Elongated Credit Terms No person shall enter into any contract to export goods on
the terms which provide for a period longer than six months for payment of the value of the
goods to be exported: Provided that the Reserve Bank may, for reasonable and sufficient cause
shown, grant approval to enter into a contract on such terms.

Certain Exports requiring prior approval

A. Export of goods on lease, hire, etc. No person shall, except with the prior permission of
the Reserve Bank, take or send out by land, sea or air any goods from India to any place
outside India on lease or hire or under any arrangement or in any other manner other than
sale or disposal of such goods.
B. Exports under trade agreement/rupee credit etc.
i. Export of goods under special arrangement between the Central Government and
Government of a foreign state, or under rupee credits extended by the Central
Government to Govt. of a foreign state shall be governed by the terms and
conditions set out in the relative public notices issued by the Trade Control
Authority in India and the instructions issued from time to time by the Reserve
Bank.
ii. An export under the line of credit extended to a bank or a financial institution
operating in a foreign state by the Exim Bank for financing exports from India,
shall be governed by the terms and conditions advised by the Reserve Bank to the
authorised dealers from time to time.
C. Counter Trade Any arrangement involving adjustment of value of goods imported into
India against value of goods exported from India shall require prior approval of the
Reserve Bank.

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Advance payment against exports

1. Where an exporter receives advance payment (with or without interest), from a buyer
outside India, the exporter shall be under an obligation to ensure that

i. the shipment of goods is made within one year from the date of receipt of advance
payment;
ii. the rate of interest, if any, payable on the advance payment does not exceed
London Inter-Bank Offered Rate (LIBOR) + 100 basis points, and
iii. the documents covering the shipment are routed through the authorised dealer
through whom the advance payment is received;

Provided that in the event of the exporter’s inability to make the shipment, partly or fully, within
one year from the date of receipt of advance payment, no remittance towards refund of unutilised
portion of advance payment or towards payment of interest, shall be made after the expiry of the
said period of one year, without the prior approval of the Reserve Bank.

2. Notwithstanding anything contained in clause (i) of sub-regulation (1), where the export
agreement provides for shipment of goods extending beyond the period of one year from
the date of receipt of advance payment, the exporter shall require the prior approval of the
Reserve Bank.

Foreign Currency Account

 Participants in international exhibition/trade fail have been permitted to open temporary

foreign currency account abroad for credit of foreign exchange obtained by sale of goods
at the fair and operate the account during their stay outside India. The balance in the
account is required to be repatriated to India within one month from the date of closure of
the exhibition/trade fair.
 An Indian entity can also open, hold and maintain a foreign currency account with a bank
outside India for the normal business operations of its overseas office/ branch.
 A unit located in a Special Economic Zone (SEZ) may open, hold and maintain a Foreign
Currency Account with bank (AD) in India subject to certain conditions.

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  A person resident in India being a project / service exporter may open, hold and maintain
foreign currency account with a bank outside or in India, subject to the standard terms
and conditions.

Diamond Dollar Account

Firms/companies engaged in purchase and sale of rough or cut and polished diamonds/precious
metal jewellery, etc. and having an average annual turnover of Rs. 3 crore or above during the
preceding three licensing years (April to March) are permitted to open/transact their business
through Diamond Dollar Account. The number of such accounts is restricted to not more than 5
accounts to a single entity.

Consignment Exports

 While forwarding shipping documents to overseas branch/correspondent in respect of

export of goods on consignment basis, they may be directed to deliver the documents
against trust receipt/undertaking to deliver the sale proceeds by a specified date within
the period prescribed for realization of the sale proceeds of the export.
 The agents/consignees may deduct from sale proceeds of the goods expenses normally
incurred towards receipt, storage and sale of the goods, such as landing charges,
warehouse rent, handling charges, etc. and remit the net proceeds to the exporter.

Export and import of currency

1. As otherwise provided in these regulations, any person resident in India,

a. may take outside India (other than to Nepal and Bhutan) currency notes of Government
of India and Reserve Bank of India notes up to an amount not exceeding Rs.5,000/- per
person;
b. May take or send outside India (other than to Nepal and Bhutan) commemorative coins
not exceeding two coins each.
c. who had gone out of India on a temporary visit, may bring into India at the time of his
return from any place outside India (other than from Nepal and Bhutan), currency notes

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 of Government of India and Reserve Bank of India notes upto an amount not exceeding
Rs.5,000/- per person.
2. Prohibition on Export of Indian coins: No person shall take or send out of India the
Indian coins which are covered by the Antique and Art Treasure Act, 1972.
3. Prohibition on export and import of foreign currency: Except as otherwise provided
in these regulations, no person shall, without the general or special permission of the
Reserve Bank, export or send out of India, or import or bring into India, any foreign
currency.
4. Import of foreign exchange into India: A person may -

a. send into India without limit foreign exchange in any form other than currency
notes, bank notes and travellers cheques ;
b. Export and Import of Currency bring into India from any place outside India
without limit foreign exchange (other than unissued notes), provided that bringing
of foreign exchange into India under clause (b) shall be subject to the condition
that such person makes, on arrival in India, a declaration to the Custom authorities
in Currency Declaration Form (CDF) annexed to these Regulations; provided
further that it shall not be necessary to make such declaration where the aggregate
value of the foreign exchange in the form of currency notes, bank notes or
traveller’s cheques brought in by such person at any one time does not exceed
US$10,000 ( US Dollars ten thousands) or its equivalent and/or the aggregate
value of foreign currency notes brought in by such person at any one time does
not exceed US$ 5,000 ( US Dollars five thousands) or its equivalent.

5. Export of foreign exchange and currency notes:-

a. An authorized person may send out of India foreign currency acquired in normal course
of business,
b. any person may take or send out of India, -
i. Cheques drawn on foreign currency account maintained in accordance with Foreign
Exchange Management (Foreign Currency Accounts by a person resident in India)
Regulations, 2000;

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 ii. foreign exchange obtained by him by drawal from an authorised person in accordance
with the provisions of the Act or the rules or regulations or directions made or issued
thereunder ;
iii. currency in the safes of vessels or aircrafts which has been brought into India or
which has been taken on board a vessel or aircraft with the permission of the Reserve
Bank ;
c. any person may take out of India, -
i. foreign exchange possessed by him in accordance with the Foreign Exchange
Management (Possession and Retention of Foreign Currency) Regulations, 2000 ;
ii. unspent foreign exchange brought back by him to India while returning from travel
abroad and retained in accordance with the Foreign Exchange Management
(Possession and Retention of Foreign Currency) Regulations, 2000 ;
iii. Any person resident outside India may take out of India unspent foreign exchange not
exceeding the amount brought in by him and declared in accordance with the proviso
to clause (b) of Regulation 6, on his arrival in India.
6. Export and import of currency to or from Nepal and Bhutan:- Notwithstanding
anything contained in these regulations, a person may –

a. take or send out of India to Nepal or Bhutan, currency notes of Government of

India and Reserve Bank of India notes (other than notes of denominations of
above Rs.100 in either case) ;
b. bring into India from Nepal or Bhutan, currency notes of Government of India
and Reserve Bank of India notes (other than notes of denominations of above
Rs.100 in either case) ;
c. Take out of India to Nepal or Bhutan, or bring into India from Nepal or Bhutan,
currency notes being the currency of Nepal or Bhutan.

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 Currency crises in Turkey and Venezuela

The Turkish currency and debt crisis of 2018 is an ongoing financial and economic crisis in
Turkey. It is characterized by the Turkish lira (TRY) plunging in value, high inflation, rising
borrowing costs, and correspondingly rising loan defaults. The crisis was caused by the Turkish
economy's excessive current account deficit and foreign-currency debt. With the inflation rate
stuck in the double digits, stagflation ensued. The crisis ended a period of economic growth
under Erdogan-led governments, built largely on a construction boom fuelled by easy credit and
government spending.

Current account Deficit and foreign currency debt

Turkey has been running huge and growing current account deficits, $33.1 billion in 2016 and
$47.3 billion in 2017, climbing to US$7.1 billion in the month of January 2018 with the rolling
12-month deficit rising to $51.6 billion, one of the largest current account deficits in the
world. The economy has relied on capital inflows to fund private-sector excess, with Turkey’s
banks and big firms borrowing heavily, often in foreign currencies. Under these conditions,
Turkey must find approximately $200 billion a year to fund its wide current account deficit and
maturing debt, while being always at risk of inflows drying up; the state has gross foreign
currency reserves of just $85 billion.

The economic policy underlying these trends had increasingly been micro-managed by Erdogan
with a focus on the construction industry, state-awarded contracts and stimulus measures, while
neglecting education and research and development. The motive for these policies have been
described as Erdogan losing faith in Western-style capitalism since the 2008 financial crisis by
the secretary general of the main Turkish business association.

Investment inflows had already been declining in the period leading up to the crisis, owing to
Erdogan instigating political disagreements with countries that were major sources of such
inflows (such as Germany, France, and the Netherlands). Erdogan has not taken seriously
concerns that foreign companies investing in Turkey might be deterred by the country's political
instability. Other factors include worries about the decreasing value of lira (TRY) which
threatens to eat into investors' profit margins. Investment inflows have also declined because
Erdogan's increasing authoritarianism has quelled free and factual reporting by financial

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analysts in Turkey. Between January and May 2017, foreign portfolio investors funded $13.2
billion of Turkey’s $17.5 billion current account deficit, according to the latest available data.
During the same period this year they plugged just $763 million of a swollen $27.3 billion
deficit.

Consequence of Turkey Crisis

During the emergence of the crisis, lenders in Turkey were hit by restructuring demands of
corporations unable to serve their USD or EUR denominated debt, due to the loss of value of
their earnings in Turkish lira. While financial institutions had been the driver of the Istanbul
stock exchange for many years, accounting for almost half it's value, by mid-April they
accounted for less than one-third.

Banks continuously raised interest rates for business and consumer loans and mortgage
loan rates, towards 20% annually, thus curbing demand from businesses and consumers. With a
corresponding growth in deposits, the gap between total deposits and total loans, which had been
one of the highest in emerging markets, began to narrow. However, this development has also
led to unfinished or unoccupied housing and commercial real estate littering the outskirts of
Turkey’s major cities, as Erdogan's policies had fuelled the construction sector, where many of
his business allies are very active, to lead past economic growth. In March 2018, home sales fell
14% and mortgage sales declined 35% compared to a year earlier. As of May, Turkey had
around 2,000,000 unsold houses, a backlog three times the size of the average annual number of
new housing sales. In the first half of 2018, unsold stock of new housing kept increasing, while
increases in new home prices in Turkey were lagging consumer price inflation by more than 10
percentage points.

Venezuela crisis

A socioeconomic and political crisis has been taking place in Venezuela since 2010 under the
presidency of Hugo Chavez and has continued into the current presidency of Nicolás Maduro.
The current situation is the worst economic crisis in Venezuela's history and among one of the
worst crises experienced in the Americas. The crisis was the result of populist policies that began
under the Chavez administration's Bolivarian Revolution.

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The contraction of national and per capita GDPs between 2013 and 2017 has been more severe
than that of the United States during the Great Depression, or of Russia, Cuba,
and Albania following the fall of communism. In recent years, the annual inflation rate for
consumer prices rose hundreds and thousands of percentage points, while the economy
contracted by nearly 20% annually. According to a study published in 2018 by three Venezuelan
universities, almost 90% of the Venezuelan population now lives in poverty. The crisis has
affected the life of the average Venezuelan on various levels. Political corruption, shortages in
Venezuela, closure of companies, unemployment, deterioration of productivity and high
dependence on oil are other problems that have also contributed to the worsening crisis.
Regarding crime, Venezuela is one of the most violent countries in the world, with a murder
rate in 2015 of 90 per 100,000 people according to the Observatory of Venezuelan Violence.

Venezuelan debt

According to the Central Bank of Venezuela, the foreign debt of the Venezuelan state in 2014 is
divided into:

 Venezuelan public debt: it represents 55% of the total and is what is owed in terms of
domestic and foreign debt bonds, treasury bills and bank loans.

 PDVSA's financial debt, representing 21% of the total.

 Foreign debt, representing 15% of the total, financing obtained through Chinese funds.

 CADIVI's debt, representing 9% of the total. It is CADIVI's non-financial debt (currencies

for imports, dividends, income and services in general).

In November 2017, The Economist estimated Venezuela's debt at US$105 billion and its reserves
at US$10 billion

GDP and Inflation of Venezuela

In 2015 due to the crisis, the Venezuelan economy contracted 5.7% and in 2016 it contracted by
18.6% according to the Venezuelan central bank. Venezuela has a strong dependence on oil,
which generates about 96% of its export revenues. The fall in oil prices has occurred at a time
when the South American country faces runaway inflation, which reached an annualized rate of

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63.9% in November, and a severe scarcity of basic products. In reference to the violent anti-
government protests that shook Venezuela earlier this year and alleged plans to destabilize the
country, which President Maduro said included smuggling and hoarding essential products, the
central bank said that those "actions against the national order prevented the full distribution of
basic goods to the population, as well as the normal development of the production of goods and
services. This resulted in an inflationary upturn and a fall in economic activity.

Inflation in Venezuela remained high through Chavez presidencies and towards the end of his
tenure. By 2010, wage increases began to be futile since inflation would simply remove any
advancement. Inflation rate in 2014 reached 69% and was the highest in the world. The rate then
increased to 181% in 2015, 800% in 2016, 4,000% in 2017 and 200,005% in 2018. In November
2016, Venezuela entered a period of hyperinflation. The Venezuelan government "has essentially
stopped" producing official inflation estimates as of early 2018.

Impact of Crisis

At the beginning of the crisis, international airlines had problems getting their normal flights to
and from Venezuela, and as a result, many airlines have left the country. According to
the International Air Transport Association (IATA), the Government of Venezuela retained 3.8
billion dollars from the airlines. As a result of this, the country lost business opportunities,
aggravating the deep crisis that it suffered.

Due to this, Venezuela suffered its highest unemployment rate in years. Due to the inflation and
expropriations by the Venezuelan government to private companies, many others left the
country, which in turn increased unemployment for those remaining. In January 2016 the
unemployment rate closed at 18.1 percent and the economy was the poorest in the world.

Corruption in Venezuela is high and is prevalent throughout many levels of Venezuela's society.
According to international rank, Venezuela was among the top 20 most corrupt countries. Due to
increase in corruption rate and unemployment many citizens are suffering from hunger and
healthcare problems.

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 South East Asian Financial Crisis

Background

The Asian financial crisis, also called the "Asian Contagion," was a sequence of currency
devaluations and other events that began in the summer of 1997 and spread through many Asian
markets. It affected many Asian countries, including South Korea,
Thailand, Malaysia, Indonesia, Singapore and the Philippines. After posting some of the most
impressive growth rates in the world at the time, the so-called "tiger economies" saw their stock
markets and currencies lost about 70% of their value. The currency markets first failed in
Thailand as the result of the government's decision to no longer peg the local currency to the
U.S. dollar (USD). Currency declines spread rapidly throughout Southeast Asia, in turn
causing stock market declines, reduced import revenues and government upheaval.

Although most of the governments of Asia had seemingly sound fiscal policies, the International
Monetary Fund (IMF) stepped in to initiate a $40 billion program to stabilize the currencies of
South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis. The efforts
to stem a global economic crisis did little to stabilize the domestic situation in Indonesia,
however. The effects of the crisis lingered through 1998. In 1998 growth in the Philippines
dropped to virtually zero. Only Singapore and Taiwan proved relatively insulated from the
shock, but both suffered serious hits in passing, the former due to its size and geographical
location between Malaysia and Indonesia. By 1999, however, analysts saw signs that
the economies of Asia were beginning to recover. After the 1997 Asian Financial Crisis,
economies in the region worked toward financial stability and better financial supervision.

Until 1999, Asia attracted almost half of the total capital inflow into developing countries. The
economies of Southeast Asia in particular maintained high interest rates attractive to foreign
investors looking for a high rate of return. As a result, the region's economies received a large
inflow of money and experienced a dramatic run-up in asset prices. At the same time, the
regional economies of Thailand, Malaysia, Indonesia, Singapore and South Korea experienced
high growth rates, of 8–12% GDP, in the late 1980s and early 1990s. This achievement was
widely acclaimed by financial institutions including IMF and World Bank, and was known as
part of the "Asian economic miracle".

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What were the causes of this collapse?

The Asian Financial Crisis, like many other financial crises before and after it, began with a
series of asset bubbles. Growth in the region's export economies led to high levels of foreign
direct investment, which in turn led to soaring real estate values, bolder corporate spending, and
even large public infrastructure projects - all funded largely by heavy borrowing from banks. The
same type of situation happened in Malaysia and Indonesia

Of course, ready investors and easy lending often lead to reduced investment quality and excess
capacity soon began to show in these economies. The United States Federal Reserve also began
to raise its interest rates around this time to counteract inflation, which led to less attractive
exports (for those with currencies pegged to the dollar) and less foreign investment.

The tipping point was the realization by Thailand's investors that its property market was
unsustainable, which was confirmed by Somprasong Land's default and Finance One's
bankruptcy in early 1997. After that, currency traders began attacking the Thai baht's peg to the
U.S. dollar, which proved successful and the currency was eventually floated and devalued.

Following this devaluation, other Asian currencies including the Malaysian ringgit, Indonesian
rupiah, and Singapore dollar all moved sharply lower. These devaluations led to high inflation
and a host of problems that spread as wide as South Korea and Japan.

In the mid-1990s, Thailand, Indonesia and South Korea had large private current
account deficits, and the maintenance of fixed exchange rates encouraged external borrowing
and led to excessive exposure to foreign exchange risk in both the financial and corporate
sectors.

In the mid-1990s, a series of external shocks began to change the economic environment.
The devaluation of the Chinese renminbi, and the Japanese yen due to the Plaza Accord of 1985,
the raising of U.S. interest rates which led to a strong U.S. dollar, and the sharp decline in
semiconductor prices, all adversely affected their growth. As the U.S. economy recovered from a
recession in the early 1990s, the U.S. Federal Reserve Bank under Alan Greenspan began to raise
U.S. interest rates to head off inflation.

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This made the United States a more attractive investment destination relative to Southeast Asia,
which had been attracting hot money flows through high short-term interest rates, and raised the
value of the U.S. dollar. For the Southeast Asian nations which had currencies pegged to the U.S.
dollar, the higher U.S. dollar caused their own exports to become more expensive and less
competitive in the global markets. At the same time, Southeast Asia's export growth slowed
dramatically in the spring of 1996, deteriorating their current account position.

The resulting panic among lenders led to a large withdrawal of credit from the crisis countries,
causing a credit crunch and further bankruptcies. In addition, as foreign investors attempted to
withdraw their money, the exchange market was flooded with the currencies of the crisis
countries, putting depreciative pressure on their exchange rates. To prevent currency values
collapsing, these countries' governments raised domestic interest rates to exceedingly high levels
(to help diminish flight of capital by making lending more attractive to investors), and to
intervene in the exchange market - buying up any excess domestic currency at the fixed
exchange rate with foreign reserves. Neither of these policy responses could be sustained for
long.

Very high interest rates, which can be extremely damaging to an economy that is healthy,
wreaked further havoc on economies in an already fragile state, while the central banks were
haemorrhaging foreign reserves, of which they had finite amounts. When it became clear that the
tide of capital fleeing these countries was not to be stopped, the authorities ceased defending
their fixed exchange rates and allowed their currencies to float. The resulting depreciated value
of those currencies meant that foreign currency-denominated liabilities grew substantially in
domestic currency terms, causing more bankruptcies and further deepening the crisis.

As a result of the devaluation of Thailand's baht, a large portion of East Asian currencies fell by
as much as 38 percent. International stocks also declined as much as 60 percent. Luckily, the
Asian financial crisis was stemmed somewhat due to financial intervention from the International
Monetary Fund and the World Bank. However, the market declines were also felt in the United
States, Europe, and Russia as the Asian economies slumped.

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Solutions to the Asian Financial Crisis

Since the countries melting down were among not only the richest in their region, but in the
world, and since hundreds of billions of dollars were at stake, any response to the crisis was
likely to be cooperative and international, in this case through the International Monetary
Fund (IMF). The IMF created a series of bailouts ("rescue packages") for the most-affected
economies to enable affected nations to avoid default, tying the packages to currency, banking
and financial system reforms.

The Asian Financial Crisis was ultimately solved by the International Monetary Fund (IMF),
which provided the loans necessary to stabilize the troubled Asian economies. In late 1997, the
organization had committed over $110 billion in short-term loans to Thailand, Indonesia, and
South Korea to help stabilize the economies - more than double its largest loan earlier.

In exchange for the funding, the IMF required the countries to adhere to strict conditions,
including higher taxes, reduced public spending, privatization of state-owned businesses and
higher interest rates designed to cool the overheated economies. Some other restrictions required
countries to close illiquid financial institutions without concern for employment.

The IMF's support was conditional on a series of economic reforms, the "structural
adjustment package" (SAP). The SAPs called on crisis-struck nations to reduce government
spending and deficits, allow insolvent banks and financial institutions to fail, and aggressively
raise interest rates. The reasoning was that these steps would restore confidence in the nations'
fiscal solvency, penalize insolvent companies, and protect currency values. Above all, it was
stipulated that IMF-funded capital had to be administered rationally in the future, with no
favoured parties receiving funds by preference. In at least one of the affected countries the
restrictions on foreign ownership were greatly reduced.

There were to be adequate government controls set up to supervise all financial activities, ones
that were to be independent, in theory, of private interest. Insolvent institutions had to be closed,
and insolvency itself had to be clearly defined. In addition, financial systems were to become
"transparent", that is, provide the kind of reliable financial information used in the West to make
sound financial decisions.

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Many commentators in retrospect criticized the IMF for encouraging the developing economies
of Asia down the path of "fast-track capitalism", meaning liberalization of the financial sector
(elimination of restrictions on capital flows), maintenance of high domestic interest rates to
attract portfolio investment and bank capital, and pegging of the national currency to the dollar to
reassure foreign investors against currency risk.

By 1999, many of the countries affected by the Asian Financial Crisis showed signs of recovery
with gross domestic product (GDP) growth resuming. Many of the countries saw their stock
markets and currency valuations dramatically reduced from pre-1997 levels, but the solutions
imposed set the stage for the re-emergence of Asia as a strong investment destination.

Consequences

After the Asian crisis, international investors were reluctant to lend to developing countries,
leading to economic slowdowns in developing countries in many parts of the world. The crisis
had significant macroeconomic-level effects, including sharp reductions in values of
currencies, stock markets, and other asset prices of several Asian countries. The nominal U.S.
dollar GDP of ASEAN fell by $9.2 billion in 1997 and $218.2 billion (31.7%) in 1998. In South
Korea, the $170.9 billion fall in 1998 was equal to 33.1% of the 1997 GDP. Many businesses
collapsed, and as a consequence, millions of people fell below the poverty line in 1997–1998.
Indonesia, South Korea and Thailand were the countries most affected by the crisis.

More long-term consequences included reversal of the relative gains made in the boom years just
preceding the crisis. Nominal U.S. dollar GDP per capital fell 42.3% in Indonesia in 1997,
21.2% in Thailand, 19% in Malaysia, 18.5% in South Korea and 12.5% in the Philippines. The
per capital income (measured by purchasing power parity) in Thailand declined from $8,800 to
$8,300 between 1997 and 2005; in Indonesia it increased from $2,628 to $3,185; in Malaysia it
declined from $11,100 to $10,400. Over the same period, world per capita income rose from
$6,500 to $9,300. The analysis asserted that the economy of Indonesia was still smaller in 2005
than it had been in 1997, suggesting an impact on that country similar to that of the Great
Depression. Within East Asia, the bulk of investment and a significant amount of economic
weight shifted from Japan and ASEAN to China and India.

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It is believed that 10,400 people committed suicide in Hong Kong, Japan and South Korea as a
result of the crisis.

The Asian crisis underscored the vulnerability of regional economies to hot money outflows and
the importance of adequate foreign exchange reserves, which they squandered on an
unsustainable defence of their currencies. Nations that experienced the crisis, which are also
among the favourite destinations of yield-hungry overseas investors, have built up a war chest of
reserves to shield their economies against the flight of hot money. That should also cushion them
against the impact of rising interest rates in the US.

Since the financial crisis on 1997, Indian equity markets have posted the second highest
annualized returns after Indonesia. Investors have primarily placed their bets on an expansion of
Asia’s third-largest economy, its consumption story and in more recent time’s structural reforms
being implemented by the government. Investors are optimistic about the long-term growth of
India, which has overtaken China as the fastest growing major economy in Asia, in light of the

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continuing reforms process. India’s forex reserves have also increased from $29B to $400B
during the period 1997-2018.

Lessons of the Asian Financial Crisis

The Asian Financial Crisis has many important lessons that are applicable to events happening
today and events likely to occur in the future.

Here are some important takeaways:

 Watch Government Spending: Government dictated spending on public infrastructure

projects and guidance of private capital into certain industries contributed to asset
bubbles that may have been responsible for the crisis.

 Re-Evaluate Fixed Exchange Rates: Fixed exchange rates have largely disappeared,
except for the instance where they use a basket of currencies, since flexibility may be
needed in many cases in order to avert a crisis like these.

 Concerns about the IMF: The IMF took a lot of criticism after the crisis for being too
strict in its loan agreements, particularly with successful economies like South Korea.
Moreover, the moral hazard created by the IMF may be a cause of the crisis.

 Always Beware of Asset Bubbles: Investors should carefully watch out for asset bubbles
in the latest/hottest economies around the world. All too often, these bubbles end up
popping and investors are caught off-guard.

Why didn’t India get affected as much?

In 1997 India had several capital account restrictions that prevented the inflow and outflow of
short term portfolio investments flowing into the country. Think of capital account restrictions as
a bunch of laws with which government of India had made it harder and in some cases
impossible for foreign money to flow into the country and domestic money to flow out of the
country. One example would be - it was impossible in 1997 for foreign mutual funds or privates
investors to trade in Indian stock exchanges. (These restrictions are now gone)

India didn't have these problems because capital account restrictions in place at the time meant
that there was very little portfolio investment, there was hardly any current account deficit and

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the private sector had very little US Dollar denominated debt in India. In India's case the
currency was already floating.

In the case of India, though CAD had risen in 1995-6 and 1996-7 over 1994-5, it still remained at
around 1.5 per cent of GDP i.e. at a level considerably below that in the seriously affected Asian
economies. Therefore, as a proportion of GDP, CAD was not a serious problem.

The growth rate of India's exports slowed down markedly to around 8 per cent and 5 per cent
respectively in 1996-7 and 1997-8 from 23 per cent in 1994-5. For the first half of the 1998-9
fiscal year, there was a negative growth in exports. This reflected India's reduced international
competitiveness, flowing from its relatively high inflation rate and the large depreciation of the
Asian currencies. The falling demand in Asian countries also reduced its exports, though India's
major markets are outside Southeast and East Asia. There was pressure on the rupee to
depreciate in 1998 as a consequence. But there were two major differences between India and the
Asian economies. Since 1994, the rupee had been allowed to float or was market determined on
the current account. Therefore, India did not use its scarce foreign exchange reserves to defend
the rupee, even as it fell to a low of Rupees 43.71 for one US dollar in August 1998.9 In addition
since there was limited capital account convertibility, the pressures from the capital outflows
were also limited in India's case.

Therefore, though largely insulated from the contagion, India's economy slowed down in 1997-8.
The change in sentiment was mildly infectious for India. Its currency depreciated and for part of
the fiscal year 1998-9 there was a reversal of capital inflows and an increase in the trade deficit.
Though the former was connected in part at least to the sanctions imposed after the Pokhran
tests, the reversal of flows after October-November 1998 suggests that both the capital outflows
and capital inflows were at least in part connected to the shifts in sentiments about Asia. There
was no financial crisis in India of the type experienced by the Southeast and East Asian
economies. This is because there was little capital account convertibility and no build-up of
short-term debt. In addition, the exposure of the banks to risky investments in real estate and
shares was not there. Consequently, India could let its currency depreciate without being
concerned with the impact on its financial sector. The floating of the rupee on the current
account and the depreciation of the rupee in this context enabled India to rectify imbalances on
its current account and to regenerate its exports.

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 Capital Account Convertibility

Capital Account Convertibility (CAC) is a monetary policy that centres around the ability to
conduct transactions of local financial assets into foreign financial assets freely and at market
determined exchange rates. Capital Account Convertibility was first coined as a theory by the
Reserve Bank of India in 1997 by the Tarapore Committee.

Capital Account Convertibility means that the currency of a country can be converted into
foreign exchange without any controls or restrictions. In other words, Indians can convert their
Rupees into Dollars or Euros and Vice Versa without any restrictions placed on them. The reason
why it is called capital account convertibility is that the conversion of domestic currencies into
foreign currencies is allowed in the capital account and not only the current account.

Capital account refers to expenditures and investments in hard assets, physical premises, and
factories as well as investments in land and other capital-intensive items. Current account on the
other hand, refers to investments that are short term in duration and hence, they fall under the
current account head. There is a significant difference between capital and current accounts as
they are different in the period of holding and the kind of investments made. A precondition for
many countries to get IMF (International Monetary Fund) or World Bank assistance is to make
their currencies capital account convertible so that foreign investors have the exit option quickly
and without hassles in times of economic crises.

Section 2(i) defines a current account transaction as a transaction and without prejudice to the
generality of the foregoing such transaction includes:

1. Payments due in connection with foreign trade, other current business, services, and short term
banking and credit facilities in the ordinary course of business.

2. Payments due as interest on loans and as net income from investments.

3. Remittances for living expenses of parents, spouse and children residing abroad.

4. Expenses in connection with foreign travel, education and medical care of parents, spouse and
children.

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For the current account transactions any one can sell or draw foreign exchange to or from any
authorized person. However, the Regulatory body may restrict current account transactions/limit
of transactions in case of need and keeping in view the public interest. Taking everything into
account and liberalized economic policies adopted by the government of India is fully
convertible on the current account which means all payments and receipts concerning trade and
services (export/import payments/receipts) are free from Forex regulations. One can make
payment in any currency to other parts of world for goods/services purchased but not for capital
creation. If person wants to pay supplier $ 100 million for import of raw material one can do it
freely. RBI will not come in the way of making such huge payment as it is a payment on the
current account. But in case of buying any immoveable property like investment in real estate
exceeding the cost of $ 100000/- the permission of RBI is required.

Example of Capital Account Convertibility

If an Indian needs some foreign exchange for paying his fees for study abroad or wishes to visit
his relatives settled abroad he can get foreign currency exchanged from any approved money-
changer or from any bank. It is treated as Current Account Transaction.

But if any Indian citizen wants to import some heavy equipment, plant or machinery or wants to
invest abroad and the amount involved is big it will be treated as a capital account transaction for
which he shall be required to obtain the permission of Reserve Bank of India. As per monetary
policy of any country with regard to capital account convertibility to ensure ability to accept such
transactions where local financial assets are transacted into foreign financial assets freely and at
the same time also at the foreign exchange rate of interest prevailing in the market.

Application of capital account convertibility:

In international trade theories, the reasoning for capital account convertibility was so that foreign
investors could invest without barriers. Prior to its implementation, foreign investment was
hindered by uneven exchange rates due to corrupt officials, local businessmen had no convenient
way to handle large cash transactions, and national banks were disassociated from fiscal
exchange policy and incurred high costs in supplying hard-currency loans for those few local
companies that wished to do business abroad.

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Due to the low exchange rates and lower costs associated with Third World nations, this was
expected to spur domestic capital, which would lead to welfare gains, and in turn lead to higher
GDP growth. The trade-off for such growth was seen as a lack of sustainable internal GNP
growth and a decrease in domestic capital investments.

When CAC is used with the proper restraints, this is exactly what happens. The entire
outsourcing movement with jobs and factories going overseas is a direct result of the foreign
investment aspect of CAC. The Tarapore Committee's recommendation of tying liquid assets to
static assets (i.e., investing in long term government bonds, etc.) was seen by many economists
as directly responsible for stabilizing the idea of capital account liberalization.

Partially and Fully Convertible Currencies

Partially convertible currencies are those where the currency can be converted in the current
account. This means that investors can invest in stock markets and bond markets of the target
countries with an option to repatriate their holdings. Further, ordinary citizens can convert their
domestic currencies to dollars for expenses like going abroad for work, tourism, and education.
On the other hand, capital account convertibility or fully convertible currencies are those where
just about anybody can convert the local currency for foreign currency without any questions or
restrictions placed on such conversions.

The key aspect here is that many countries do not allow their currencies to be fully convertible if
they do not hold significant foreign exchange reserves. This is also the reason why capital
controls are imposed in times of economic crises to prevent a capital flight from these countries.
Many Asian countries have learnt from the bitter experience of the Asian financial crisis of 1997
and the Russian Default of 1998 where full convertibility lead to a stampede of foreign investors
fleeing the countries in the aftermath of the economic crisis. The other aspect here is that even in
the European Union, capital controls are being planned to contain flight of capital to other
countries as the Eurozone crisis deepens.

Advantages of CAC:

1. The advantage of capital account convertibility is that it helps the currency of the country
because due to capital convertibility being implemented foreign investors feel free to invest

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 in the country resulting in glut of foreign currency flowing into the country and due to
foreign currency inflows, the currency of the country appreciates against the foreign
currencies. Hence as far currency is concerned capital account convertibility initially is a
boon and indirectly helps the imports of the country getting cheaper because appreciation
in currency results in imports of the country getting cheaper.

2. Another advantage of capital account convertibility is that it helps in increasing the

confidence of the foreign investors as they can freely buy and sell assets and also convert
the domestic currency into foreign currency anytime they want which results in an
improved outlook for the economy of the country by the foreign investors.

3. As far as domestic companies and individuals are concerned they also benefit from capital
convertibility because they also can invest in the foreign countries so if an individual wants
to take advantage of opportunities in foreign country due to fall in price of stock or real
estate or other asset classes in foreign countries then they can easily do it under capital
convertibility regime and on the other side domestic companies can also borrow funds
from foreign countries if the rate of interest is on the lower side. So for example the rate of
interest on borrowings in developing nations like India is 10 percent to 14 percent whereas
in developed countries like the USA it is between 3 to 5 percent, capital account
convertibility results in companies taking advantage of this huge gap between the rate of
interest between developing and developed nations.

Disadvantages of CAC:

1. The capital account convertibility is that it exposes the country to the volatility of global
world markets hence if anything happens globally it will have repercussions in the
domestic markets also even if the domestic economy has no or little relation to global
events. For example, in the year 2008 Lehman brothers’ crisis was related to United States
of America but it affected all the financial markets and if country has adopted full capital
account convertibility then it could lead to panic like situation because in case of global
problem foreign investors would withdraw large sums of money leading to pressure on
currency of the country and in worst case scenario it can lead to complete collapse of the
currency.

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 2. Another disadvantage of it is that it may lead to inflation in the domestic economy because
due to opening up of economy money flows into the economy and when excess money
chases goods or assets it leads to inflation as supply of goods or assets in any country is
limited, although moderate inflation is good for the economy excessive inflation leads to
many other problems both for people as well as government of the country.

3. Also capital account convertibility is that it can result in bubble like situation in asset
classes, so for example in case of housing market if there is no capital account
convertibility then only domestic investors who really require the house for living would
buy hence the demand for housing will be real whereas if capital account convertibility is
implemented then foreign investors would buy house as an investment looking to sell it for
profit leading to artificial rise in price as demand is not real creating a bubble like situation
and we all know that bubbles eventually burst and when they burst it affects many innocent
investors.

Impact on countries

The impact of convertibility on economies is felt in the way assets held in the domestic country
can be repatriated with ease or partially. For instance, in India where the currency is partially
convertible, investors cannot liquidate their assets and leave the country without approval. On
the other hand, they can repatriate the money that they have invested in the stock market, as was
the case in recent months. The effect of this is that many foreign companies do not hold assets
like buildings, premises, and other items that fall in the capital account. They also tie up with
local companies because in times of crisis, they can exit the joint venture easily and get back
their monies invested in the merged entity. As for other countries in South East Asia that were
fully convertible, the Asian financial crisis of 1997 was a wakeup call for them as investors fled
the country and capital flight accelerated leading to a near collapse of the economies in the
region with the exception of Singapore.

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Case Study of FEMA recommendations of Tarapore Committee on Capital Account
Convertibility

A committee on capital account convertibility was setup by the Reserve Bank of India (RBI)
under the chairmanship of former RBI deputy governor S.S. Tarapore to "lay the road map" to
capital account convertibility. In 1997, the Tarapore Committee had indicated the preconditions
for Capital Account Convertibility. The three crucial preconditions were fiscal consolidation a
mandated inflation target and strengthening of the financial system. The five-member
committee has recommended a three-year time frame for complete convertibility by 1999-2000.
The highlights of the report including the preconditions to be achieved for the full float of
money are as follows:

Gross fiscal deficit to GDP ratio has to come down from a budgeted 4.5 per cent in 1997-98 to
3.5% in 1999-2000. A consolidated sinking fund must be set up to meet government's debt
repayment needs; to be financed by increased in RBI's profit transfer to the government and
disinvestment proceeds. Inflation rate should remain between an average 3-5 per cent for the 3-
year period 1997-2000. Gross NPAs of the public-sector banking system needs to be brought
down from the present 13.7% to 5% by 2000. At the same time, average effective CRR needs
to be brought down from the current 9.3% to 3%. RBI should have a Monitoring Exchange
Rate Band of plus minus 5% around a neutral Real Effective Exchange Rate RBI should be
transparent about the changes in external sector policies should be designed to increase current
receipts to GDP ratio and bring down the debt servicing ratio from 25% to 20%. Four
indicators should be used for evaluating adequacy of foreign exchange reserves to safeguard
against any contingency. Plus, a minimum net foreign asset to currency ratio of 40 per cent
should be prescribed by law in the RBI Act.

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 Statistical data on – SENSEX, NIFTY, $ - INR exchange and co-relation

45,000.00 0
40,000.00 10
35,000.00 20
30,000.00
30
25,000.00
40
20,000.00
50
15,000.00
10,000.00 60

5,000.00 70

0.00 80
Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18
Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17
Nifty Sensex USD/INR

0.803166 Correlation Between Nifty and USD/INR High Positive Correlation

0.800977 Correlation Between Sensex and USD/INR High Positive Correlation
0.999125 Correlation Between Sensex and Nifty Very High Correlation(Perfect Linear)

Conclusion:

Over the past decade, we have seen that the trend in INR value versus the Dollar and the Nifty &
Sensex moving in tandem on many occasions. If one looks at the last five years performance, the
connection between the exchange rate and the Nifty has not been too clear. During the five year
period, the INR has depreciated by about 14% but during the same period the Nifty gave a
positive return of over 89 %. This huge divergence questions the relationship between the INR
strength and the Nifty returns over the longer term.

Nifty is not overly dependent on the INR/USD currency over the longer term. Here are three key
reasons why the currency and the Nifty have diverged over a five-year period.

 If you look at the weightage of the Nifty, the biggest weightage belongs to banking,
which is not exactly impacted by the INR/USD movements in a big way. Among the key
sectors, there are heavy weights like Information Technology and pharma as well as
small sectors like auto ancillaries that actually benefit from a weak rupee. These three

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 sectors are export-driven sectors and exports tend to benefit from a weak rupee. That is
because a weak rupee makes the Indian products cheaper for the foreign customer as they
can buy more with the same amount of dollars. There are other sectors like oil, capital
goods, autos and metals that benefit from a strong rupee. But the bottom-line is that there
are enough companies in the Nifty that benefit from a strong rupee as also from a weak
rupee.
 The linkage between the INR/USD equations was brought out by the Fll activity in equity
markets. Fll activity impacts the equity market and the currency market and that used to
be the link. But two subtle shifts have happened in the last few years. Firstly, with the
government permitting FlIs to invest in sovereign and corporate debt in a big way.
Secondly, domestic mutual funds have become a potent force and have been infusing
over $10 billion into equities each year. This has also weakened the relationship between
the Nifty and the INR/USD movement.
 Lastly, India has managed to put its macros in order through a fiscal discipline focus
under the current government. As a result, FDI inflows have picked up sharply and today
India attracts more FDI annually than China. Therefore, India's USD/INR is not overly
dependent on the FII flows alone, which has reduced the correlation between the currency
and the Nifty.

But the short term convergence is still evident if one were to intuitively look at the relationship
between the Nifty and the INR/USD over a shorter period, the relationship appears to be quite
strong around pivots. Hence the correlation between the INR/USD and the Nifty becomes more
pronounced.

The crux of the story is that over the long run the Nifty is driven more by structural and
fundamental factors. But in the short term, the INR and the Nifty do tend to correlate positively.
That is the distinction that one needs to apprehend.

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 Conclusion
FDI, being a major driver of economic growth and a source for non-debt, long-term finance for
the economic development of the country, has been one of top priorities of the current
Government. In the past 2 years, we have witnessed many reforms and new initiatives announced
by Government across various sectors. One of the common features in most of the reforms has
been the focus of the Government towards ease of doing business in India, which has led to
India’s improved position in the World Bank’s report on Ease of Doing Business and earned
India an enhanced sovereign rating by Moody’s. Most of the proposals discussed above are along
similar lines, it either eliminates an existing defect in the system or puts in place a newer
innovative mechanism to make the process quicker than before. While India is already seen as
one of the most attractive country for FDI, the above-said relaxations would further enhance the
inflow of FDI into the country.
The Indian foreign exchange market has operated in a liberalised environment for more than a
decade. A cautious and well-calibrated approach was followed while liberalising the foreign
exchange market with an emphasis on the need to safeguard against potential financial instability
that could arise due to excessive speculation.
Besides, with the Indian economy moving towards further capital account liberalisation, the
development of a well-integrated foreign exchange market also becomes important as it is
through this market that cross-border financial inflows and outflows are channelled to other
markets. Replacing of FERA, 1973 by FEMA, 1999 helped removing the flaws and overcoming
the hurdles posed by it.
The Foreign Exchange Management Act (FEMA), 1999 was enacted to consolidate and amend
the law relating to foreign exchange with the objective of facilitating external trade and payments
and for promoting the orderly development and maintenance of foreign exchange market in
India. In fact it is the central legislation that deals with inbound investments into India and
outbound investments from India and trade and business between India and the other countries.
Foreign Exchange Management Act (FEMA) replaced Foreign Exchange Regulation Act
(FERA), not just as piece of paper but in terms of inflows and outflows of forex in India. Foreign
Exchange Regulation Act (FERA) was only the regulations, where Foreign Exchange
Management Act (FEMA) works for the proper management of the forex. Under Foreign
Exchange Regulation Act (FERA) all violations would attract prosecutions. Foreign Exchange

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Management Act (FEMA) diluted the rigorous enforcement provisions which were the hallmark
of the erstwhile legislation. Violation of Foreign Exchange Regulation Act (FERA) was a
criminal offence whereas violation of Foreign Exchange Management Act (FEMA) is a civil
offence. We are of the view that Foreign Exchange Management Act (FEMA) has rightly
replaced Foreign Exchange Regulation Act (FERA), as to boost the Indian economy and it shall
be hurting the growth process if all the time corporates runs behind the RBI and other authorities
to seek permission to even small and medium size of foreign investment. Hence, the automatic
route was made available to the Indian corporate for foreign funding.

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 Bibliography
 https://rbi.org.in/scripts/FAQView.aspx?Id=26
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 https://en.wikipedia.org/wiki/Foreign_Exchange_Management_Act
 http://dipp.nic.in/foreign-direct-investment/foreign-exchange-management-act
 https://rbi.org.in/Scripts/BS_ViewMasterDirections.aspx?id=10202
 https://economictimes.indiatimes.com/small-biz/resources/startup-handbook/foreign-
investment-compliance-under-rbi/fema/articleshow/59488429.cms
 https://economictimes.indiatimes.com/topic/FEMA-regulations
 https://www.investopedia.com/terms/a/asian-financial-crisis.asp
 https://www.thebalance.com/what-was-the-asian-financial-crisis-1978997
 https://en.wikipedia.org/wiki/1997_Asian_financial_crisis#Credit_bubbles_and_fixed_cu
rrency_exchange_rates
 https://www.livemint.com/Money/TIU7pSzL5JqAn6X2TQzfaJ/Twenty-years-since-the-
Asian-financial-crisis.html
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