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D. Murali

CAN we use debit cards or ATM cards for foreign exchange transactions? Is my Mumbai friend right when he says we can make direct investment in any foreign security? If under US GAAP there is reduction in profits why then do companies publish their accounts thus? When I visited the bank the other day to enquire about my inward remittance, I overheard a banker enquiring whether his Nostro account had been credited; what does this man mean?

For answers to these and hundreds of other questions, here is B. Srinivasan's Foreign Exchange Simplified, from Tata McGraw-Hill (www.tatamcgrawhill.com). "Foreign exchange has always been regarded as an esoteric subject as it involves international trade, multiple currencies, different legal systems, and different sovereign countries," writes the author in preface, and proceeds to a Q&A format. Srinivasan allows the reader "the flexibility to choose and read any topic without ever feeling lost.

So, you can jump to: "What is a merchant rate?" It's not the price that your grocer charges but means the exchange rate at which merchant business (that is, foreign exchange dealing with a customer) takes place in a bank. "Can I set-off my export trade receivable with my import payables?" Sounds logical as a query, but Srinivasan cautions: "Any arrangement involving adjustment of value of goods imported into India against value of goods exported from India requires RBI permission."

The book has chapters on international financial markets, economics of exchange rates, international trade, forex market in India, risk management, regulatory structure, international accounting, and equity markets. There is a brief intro to relevant macroeconomics such as international trade, theory of comparative advantage, balance of trade, World Bank and so on. There are three major accounts in a balance of payment, viz. current account, capital account, and errors and omissions. The last one arises due to inaccurate recording! To sharpen your number skills, there are many worked-out examples such as: A bank receives a TT from its Los Angeles branch for $10,000 payable to its customer, when spot rate is Rs 47.50/60. And an exchange margin of 0.08 per cent has to be loaded on the rate. To compute how much money the customer will get, first compute the rate applicable to the transaction by subtracting the exchange margin of 0.08 per cent from TT buying rate of Rs 47.50. Answer is Rs 4,74,600.

There are commercial examples too: "Your valued customer Gujarat Ambuja approaches you for booking two forward contracts for imports of limestone from Germany and the US... "

A glossary at the end of the book gives brief meanings of forex jargon, starting with `Accounting Standard 11' and ending with `working group'. You'd learn that `cover deals' are not covert or about pushing envelopes; discover instead that they are "purchase/sale of foreign currency in the market undertaken to acquire/dispose of the foreign exchange required/acquired as a consequence of dealing with customers." Leads and lags refer to "the timing of receipt/payment in foreign currency depending upon the expectation of its change in value." Nostro Account is how the account of an Indian bank with an overseas correspondent is referred to. Mirror Account is "an exact replica of the entries in the nostro account, but on the opposite side."

The chapter on accounting has many questions that you always wanted to ask but were afraid of asking your CA. Here's a sampler: What is the meaning of GAAP, and who sets them? What is Indian GAAP? Why has US GAAP assumed importance all of a sudden? What exactly do you mean when you say that the company adopts US GAAP? Are our accounting standards not good enough? What is the dilemma that an investor faces when the financials of a company are presented in accordance with Indian and US GAAP?

The discussion of tax planning leads you to OFC — not optic fibre cable but offshore financial centre. Offshore finance, as the author explains elsewhere, is "providing financial services by banks and other agents to non-residents," such as borrowing money from non-residents and lending to non-residents.

OFCs are of two types. First, the `brass plate' ones; real transactions happen elsewhere but are merely booked in the OFC to take advantage of favourable tax and exchange laws. And, second, those with banking transactions, such as in the OFCs of Hong Kong and Singapore. Budget 2003 brought in a tax sop for offshore banking units (OBUs) — defined in Sec 80LA of the Income-tax Act as a branch in special economic zone.

Let me return to the question we started off with: the ATM card. The answer is yes, you can use debit/credit cards and "any other instrument called by whatever name that can be used to create a financial liability," as per a RBI communiqué.

"Finance is the art of passing currency from hand to hand until it finally disappears," said Robert W. Sarnoff. The book, however, talks currency from page to page until your doubts disappear. Good read.

BookValue@TheHindu.co.in

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