Obviously an individual does not "accept" deposits. He borrows. Anyway such borrowing is permissible up to a ceiling. Further, if that individual floats a proprietorship concern and such concern desires to have an office premise, it can raise deposits subject to certain conditions.

How does the RBI or the Government know whether the money a person has received is borrowed or is accepted as deposits and for which purpose?

When an inward remittance is received through banking channels, the bank is required to ascertain the purpose and record it in a fortnightly statement being submitted to the RBI. However, such enquiry is only for amount exceeding $10,000 per remittance. Besides, the bank will not delay the crediting of the amount to the account pending reply for the purpose query.

Under FEMA and, to some extent, even earlier, many transactions depend on declarations. While a person may make a wrong declaration and get away with it in one instance, he may get into problems either from the income-tax angle or while writing his own assets and liabilities. Since FEMA freely permits such activities, it is desirable that declarations are given correctly. There are also instances where the purpose is mentioned by the remitter and conveyed to the bank along with the remittance.

As long as a person is a non-resident, he does not have to be concerned with the rigours of the exchange control regulations within India.

Why should there be any restriction at all if the acceptance of deposits or borrowings is on non-repatriation basis?

Logically this seems to be a good question. However, to ensure that the movement of funds across the border is not on account of any illegal activity or undesirable purpose (which could have a destabilising effect on certain segments of economic activity), there are some restrictions on the quantum and also a requirement of recording of the purposes.

Borrowings from non-residents in rupees

Why should anyone borrow from a non-resident in Indian rupees?

One simple reason is that the non-resident may be already having rupee funds in India out of his income in India, which cannot be taken out of India because of its non-repatriable nature. Instead of the funds lying in the bank, he may lend to earn higher interest.

From the borrower's angle, is there any difference in borrowing in rupees or foreign currency?

If the borrowed funds will be used for some purpose (say business) in India, the difference from the borrower's point is the exchange risk and consequently the rate of interest difference. If he borrows in India rupees, his interest rate will be higher and will face exchange risk as well, that is, the prospects of paying higher amount of rupee for repayment of the loan and payment of interest.

Can a borrower in India borrow in one currency and switch over to another currency or to Indian rupee to take advantage of interest rate or exchange rate movements?

This is permitted, subject to the lender agreeing. Usually such options are written in the standard loan agreement. Where a loan is taken from a known source, say, a relative or a business associate, such switching over seldom takes place, as the benefit to the borrower in India will look as a disadvantage to the lender abroad. More importantly, the harsh truth is that the lender dictates the terms.

Is it possible to borrow from a bank abroad in Indian rupees for a business in India and what are its implications for the Indian borrower-company?

Legally this is not prohibited. But no bank abroad will lend to an Indian company in rupees, which can make the funds non-repatriable. Even if a company raises NCDs, and so on, on repatriation basis, the exchange risk will be on the lender. If such loan can materialise, from the Indian borrower's angle it will be exchange-risk free but will carry higher rate of interest (comparable to rate of interest prevailing for rupees rather than the lower rate of interest prevailing, say, for the dollar).

Current, capital account transactions

Who decides whether a particular transaction is current or capital account?

This is for the bank to decide. If the bank's decision is not acceptable to the applicant, he can always seek the RBI's intervention. Usually a certificate from a chartered accountant satisfies both the bank and the RBI.

Can a remittance be made up to $500 for any purpose without any documentary evidence?

No documentary evidence is needed up to that amount except a request-cum-declaration letter. However the purpose as per the declaration has to be a permitted one. For example, if an applicant declares that he wishes to remit $450 for investment in a company, and if the same is not permitted, the bank will not release the foreign exchange.

What are the common purposes for which forex can be released classifying them as current account expenses, that is, without any RBI approval and under the bank's powers?

Payment of agency commission, payment for import of goods and services, expenses relating to travel abroad, gift and donation, expenses for engaging foreign consultant, and so on. But it should be noted that for each such purpose, there could be conditions attached. For example, for payment of agency commission, the same should have been generally declared in the GR form and accepted by the Customs for payment of gift or donation, and the annual ceiling should be adhered to. For incurring expenses of foreign consultant, there is, among other things, a ceiling (at present $100,000).

Literally the difference is the extent to which a person can get his domestic currency converted into free foreign exchange without hassles and without ceiling. Decades back, the rupee was not convertible at all except to the limited extent permitted by the RBI.

In the past decade though, the RBI permitted full convertibility as far as conversion on current account purposes is considered. There are still restrictions on converting one's holding of Indian rupee into foreign currency without any ceiling. Thus one can say that the rupee is fully convertible on current account and partly convertible on capital account.

The cash or bank balance is a part of one's assets and, hence, its conversion is a capital account transaction. Thus it can be converted only to a limited extent in the Indian context, as the rupee is not fully convertible on capital account.

Foreign exchange for travel abroad

Any company or firm or any such entity is entitled to send his employees abroad for business. It can be for promoting an existing business or for exploring a market. It need not necessarily result in any business success. There is no documentary evidence to be produced for availing foreign exchange, though however, such evidence may be needed to convince the tax authorities for getting visa.

There is no ceiling on the number of employees that can be sent at one time or over a period of time. There is also no ceiling on the total amount that can be spent in foreign exchange by a company in India in any given period. The forex entitlement is obviously not related to any forex earnings of the business.

The employer company has to give an undertaking to the bank that it is sponsoring the expenses of the employees and, hence, undertakes that the exchange will be used for permitted purposes only. Thus, while how the individual employees spend the forex and how much they "save" is left to the discretion of the employer-employee relationship, the forex taken cannot be used, for example, for any capital expenditure such as investments or lending.

Similarly, the unspent forex can be permitted to be retained by the employee by its employer but the same becomes part of taxable income in the hands of the employee.

Should an account be given to RBI or to the bank as to how the forex has been spent after the return of the employees?

While there is no necessity to produce any such accounts to the bank or the RBI from the exchange control angle, it would be necessary to keep such accounts from taxation angle.

Under FEMA, forex drawn for one permitted purpose can be used for another permitted purpose. In other words, forex drawn from a bank for travel purpose (which is a current account expenditure) can be used for any other current account purpose. Thus in particular, out of the travel foreign exchange entitlement, the employee can pay off any agency commission, buy books, catalogues, make advance payment for any import of goods or services, and so on. There is no need to report this to the RBI or the bank concerned. This may look too good to be true, but it is so.

(Edited extracts from Users' Manual On Foreign Exchange Management Act, 1999. Book courtesy: PP Publications, Chennai. E-mail: pp_publications @yahoo.co.in)

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