The Reserve Bank of India's new directive stating that exporters will be required to convert 50 per cent of their future foreign exchange holdings into rupees may impact small companies, say industry watchers.

“If a company has a reserve of $1 million, they will have to forego 50 per cent of it. It is a big amount for them,” said Mr L. Suresh, former President of ITsAP (IT and ITES industry of Andhra Pradesh. Others shared a similar view point.

“It may have adverse impact on companies with low reserves as they have to pay half of their suppliers in dollars and look to convert the other half, which may result in conversion losses,” said a senior finance executive in Ramco Systems who did not wish to be named. Ramco does not hold an Exchange Earners' Foreign Currency Account (EEFC) account.

EEFC is an account maintained in foreign currency with a bank dealing in foreign exchange. It is a facility provided to the foreign exchange earners, including exporters, to credit 100 per cent of their foreign exchange earnings to the account, so that the account holders do not have to convert foreign exchange into rupees and vice versa, thereby minimising the transaction costs.

Impact on firms such as Infosys and TCS may be less since they have huge chunks of foreign exchange holdings, say industry watchers. “Big companies generally use it for salary pay outs and other expenditure that is not very much when you compare with the size of the reserves,” said Mr Suresh.

Before this directive, an exporter was allowed to retain 100 per cent of his earnings into foreign currency.

Related Topics
comment COMMENT NOW