International Financial

Management

Dr.P.K. Gupta
Some Issues in Context of IFM
Why do countries trade with each other?

What is the impact of monetary flows on the wealth of

nations?

What is impact of global environment on the business

models of companies/firms?

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Some Issues in Context of IFM
Exchange rates being ratios can be estimated?

What should be the system of exchanging

currencies?

If the substantial basis of deciding an investment is

risk and return, can the parameters be estimated the
same ways as done conventionally?
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 Building Blocks of the Course

International Flow of International Monetary International

Funds System System & Currencies Economics-Principles
and Theories

Foreign Exchange Markets- Mechanism; Products, Instruments and

Trading

International Financial Risk Management Case Applications

Management Decisions

Chinki 4
Regulation of Forex Market in India

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Definitions of Forex
Foreign exchange means foreign currency and also includes:

Deposits, credits and balances payable in any foreign

currency.

Drafts, traveller's cheques, letters of credit or bills of

exchange drawn by banks, institutions or persons outside

India, but payable in foreign and Indian currency.

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Authoritative Regulation
Foreign Exchange Market in India works under the central
government in India and executes wide powers to control
transactions in foreign exchange. The Foreign Exchange
Management Act, 1999 or FEMA regulates the whole foreign
exchange market in India.
Foreign Exchange Dealers Association is a voluntary
association that also provides some help in regulating the
market. The Authorized Dealers and the attributed brokers are
qualified to participate in the foreign Exchange markets of
India.

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Composition of Indian Forex Market
The Indian foreign exchange market is made up of the buyers,
sellers, market mediators and the monetary authority of India.
The main center of foreign exchange in India is Mumbai, the
commercial capital of the country. There are several other
centers for foreign exchange transactions in India including
the major cities of Kolkata, New Delhi, Chennai, Bangalore,
Pondicherry and Cochin.(Source www.eximindia.com)

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Dealing in Foreign Exchange
Except with the general or special permission of the RBI, no
person can :-
deal in or transfer any foreign exchange or 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;
reasonable restrictions for current account transactions as
may be prescribed.
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Powers of RBI
Transfer or issue of securities
Borrowing or lending in foreign exchange
Deposits between persons resident in India and persons resident
outside India;
Export, import or holding of currency or currency notes;
Transfer of immovable properties
Giving of a guarantee or surety in respect of any debt, obligation or
other liability incurred
(i) by a person resident in India and owed to a person resident outside
India or
(ii) by a person resident outside India.

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FEMA & Convertibility
FEMA has formally recognized the distinction between Current
Account and Capital account Transactions. Two golden rules
or principles in FEMA are mentioned below: -
All Current account transactions are permitted unless otherwise
prohibited: and

All Capital account transactions are prohibited unless otherwise

permitted.

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What is a Current Account transaction?
Sec. 2(j) to mean "a transaction other than a capital account 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 other short term banking 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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Specification of transaction by RBI

Any person may sell or draw foreign exchange to or from an

authorized person for a capital account transaction. The
Reserve Bank may, in consultation with the Central
Government, specify :-
any class or classes of capital account transactions which are
permissible;
the limit up to which foreign exchange shall be admissible for
such transactions
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Nature of Transaction Current A/c Capital A/c

1) Import of Machinery If imported on COD basis If imported on Suppliers Credit or funded

out of Foreign loans .

2) Import, Export of goods on Credit Yes

-

3) Payment for Web hosting Yes -

4) Payment for consultancy Yes -

5) Remittance of

- Interest on loans/ Investments Yes -

- Dividend Yes -

- rental from immovable property

- Capital Gains on
a) Movable Assets -- Yes
b) Immovable Property -- Yes

6) Loans/Borrowings other than from banks(whether short -

term or Long term)

7) Short Term Working Capital from Bank Yes -

8). Term Loan from Bank/F1 - Yes

9) Living Expenses of Parents, spouse &Children Yes -

10) Expenses in connection with foreign travel education Yes -

and medical care of parents, spouse, children

11) Investments in Securities (whether in India by a non- - Yes

resident or outside India by a resident)

12) Investments in Immovable Property -

(whether in India by a non-resident or outside India by a
resident
Capital Account Convertibility Attributes
All types of liquid capital assets must be able to be exchanged
freely, between any two nations, with standardized exchange
rates.
The amounts must be a significant amount.
Capital inflows should be invested in semi-liquid assets, to
prevent churning and excessive outflow.
Institutional investors should not use CAC to manipulate fiscal
policy or exchange rates.
Excessive inflows and outflows should be buffered by national
banks to provide collateral.

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IFM vs. DFM – Points of Differences
‰ Cultural issues
‰ Corporate governance issues
‰ Foreign exchange risks
‰ Political Risk
‰ Modification of domestic finance theories
‰ Modification of domestic financial instruments

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MNC vs. TNC
A MNC (Multinational Company) is one that has the ability to
control their operations in more than one country, even if it doesn't
own the operations directly. A TNC (Transnational Company) on
the other hand is one that has outlets/operations in more than one
country.
Transnational Corporation as define by UN is globally integrated
organization with entities in two or more countries, decision making
system permitting coherent policies and common strategy through
decision making center and entities are so linked by ownership so
as to exercise influence over others and share knowledge.

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