Dealing with foreign currency transactions in India

We all know what foreign currency is and how it is being dealt in day to day business operations. Foreign currency not only being dealt in business transactions but it is also used for multiple personal purpose. In this blog, I will try to brief the background of subject and how important for us in India to handle such transactions as it is need of the business and closely monitored and driven by regulatory norms.

Background:

Let me start with the interested parties who are involved in dealing with foreign currency in India, They are listed as below:

I. Reserve Bank of India

II. Foreign Exchange Management Act

III. Buyer from India who imports the goods and services from outside India

IV. Seller from India who exports the goods and services to outside India

V. Bankers / Financial Institutions

VI. SEBI

VII. Individual from India

VIII. Licensed agent approved by Reserve Bank of India

There are multiple different types of foreign currency exist like USA has US Doller, European countries has EURO, Japan has JPY, United Kingdom has GBP and we in India has INR currency. The most commonly used currency in global market is USD and EURO.

India and Foreign Currency:

India is major contributor in global business environment. Entire world is focusing on India for next growth phase. If there is any potential business opportunity in world, India stands at number one position as its first preference for any multinational investment. The current positive political environment attracting lot of foreign investments in India. Make in India initiative supporting nation to bring huge amount of foreign currency in India. Aviation, manufacturing and IT services are major area of interest for multinationals for investments in India. The boost to “start-up” initiative again supported India in brining huge amount of foreign currency investments. Latest example of flipkart sale shows how India’s all sector attracting the multinationals in India.

India has become IT hub for rest of the world. All multinational IT companies has huge setup in India. Moreover Indian IT companies are successfully demonstrating their ability to deliver quality services to rest of the world which brings in foreign currency inflow in India. India’s IT sector is net exporter to the world. Indian spends lot of foreign currency on travelling abroad. The spending power of Indians on tourism and purchasing also demands foreign currency.

For any country it is most important to have balanced foreign currency reserve to back up foreign currency liabilities. In India, RBI acts as custodian of countries foreign currency reserve.

So what does all this mean? It means lot of positive sentiment in India for dealing with other countries for business growth.

Now let’s see how regulatory body monitor and control entire foreign currency transactions in India.

Foreign currency dealing and compliances in India:

When we deal in foreign currency, it means two countries are dealing with each other for mutual benefits. Hence it becomes very important to strictly adhere to all the laid down regulations in home country so that there are no issues from other country on account of non-compliance. Dealing with foreign currency comes with list of compliances in India. When an organization deals with foreign currency, it has to comply with all regulatory requirements. There are requirements from your bankers who support you to make available foreign currency. There are requirements laid down by RBI where in companies needs to submit the information in periodically in return form. Company auditors ask you to disclose the foreign currency income and expenditure details in your annual financials. Apart from this compliance, if we opt for External Commercial Borrowing loan in foreign currency, it has its own compliance. There are accounting standards you need to follow for all foreign currency income and expenditure including revaluation of all outstanding asset and liabilities in foreign currency. If you do hedging of foreign currency, you have to comply with certain specific banking compliances. If you send foreign currency outward remittance, you have to take certificate in the form of 15CA and 15CB from your Chartered Accountant. These various compliances ensure smooth and hassle free foreign currency handling.

Netting-off (adjustment of receivables with payables) not allowed:

Adjustment on account of receivable versus payables is not allowed under FEMA guideline. Both the transactions have to be treated as independent transactions and remittance from both the end is mandatory to complete the transactions. If at all netting off is required, it requires prior approval from RBI via manual application route.

Outward remittance for personal purpose:

An individual from India can make foreign currency outward remittance up certain limit in one financial year for following purpose.

• Education abroad;

• Employment abroad;

• Emigration;

• Maintenance of close relatives; and,

• Medical treatment abroad.

Outward remittance for business purpose:

All outward remittance from India to abroad countries has to be paid within six months from the date of invoice or receipts of good and services. Non-payment within stipulated timeframe required prior approval from RBI. Such approvals are initiated by your bankers. RBI may consider such incidences very seriously and can consider such lapses as non-compliance and company may be levied with huge penalties by RBI.

Foreign currency loan / ECB:

As far as interest rates are concern, a foreign currency loan comes with cheaper interest rate then local currency loan in India. Hence lot of multinational companies in India borrows from their parent company for expansion of business in India. Such loan comes with manual as well as automated approval process regulated by RBI in India. For service industry in India, foreign currency loan is only allowed after RBI approves by manual approval route. The money received in foreign currency loan can only be utilized for the purpose mentioned in documents submitted to RBI for approval. Normally such loans are used for capital investment in business and cannot be used for working capital requirement.

Foreign currency bank accounts (EEFC Account):

If company has regular imports and exports, it is advisable to have the foreign currency bank account with your banker. All inward foreign remittance amounts can be credited to this foreign currency account. From balance in your foreign currency account, you can make outward foreign currency payment. This helps in reducing the foreign exchange loss risk for the company. You can keep inward remittance in this account for maximum to specific period after which banker convert such foreign currency in to INR and transfer the funds to your INR bank account, unless you demonstrate you have equal amount of outward remittance to be paid.

Hedging of foreign currency:

Hedging means fixing your future value of asset or liability which are in foreign currency. Hedging in foreign currency helps companies to reduce the risk on account of frequent change in foreign currency rates. For example company A has booked their USD liability on 1st Oct 2018 for USD 10000 at exchange rate 72 rupees per USD and actual liability to be paid is after 45 days, company A can evaluate the risk of increase in USD rate after 45 days and if they feel that after 45 days the USD rate may cross 75 rupees per dollar, they can request their banker to hedge this liability on 1st Oct 2018 at 72 rupees per dollar plus 6% to 8% per annum cost of hedging. Similarly an exporter can also hedge their foreign currency inward remittance. This helps company to reduce the huge foreign currency gain or loss.

Conclusion:

With all above information, I am sure you must have got some insight about dealing with foreign currency in India. It is extremely important for us to see all business as well as compliance requirements are fulfilled.