We all are aware about the FDIs and FIIs.
But in hurry we sometimes miss to understand
en route of the same.
We all being IAS aspirants, we ought to know this. The actual process being much more complex , it is sometimes difficult to understand. I will try to explain it in simple, understandable words and with examples, wherever needed.
Actually this was a question by someone on this forum. The question went unanswered.
This process being very conceptual and important, I have made this dedicated thread so that maximum people can have their concept cleared on this topic.
Enjoy !
Doubts, please help.
1. When FDI & FII comes in, who receives the forex? (Does the investee company or the stake seller get it or they get the converted amount in rupees while RBI keeps the forex?)2. How does this forex get circulated to the people who need it, i.e. the importers?
Thanks.
Answer to question 1:
Whenever any foreign company wants to invest in India then they have following options:
A. They choose not to convert the investment into equity and debentures sold by the investee company. But invest in the investee company via direct route like physical infrastructure, technical tools etc. Then they have to get converted their money into INR via Authorised Dealer Banks. (A.D.). These AD banks are RBI approved. The conversion takes place at
market rate. This way ADs get funds as 'Forex reserve'.
B. Another option with the investor from abroad is to invest in equities /debentures of investee company. If they select this then the investor has following options:
(i) inward remittance through normal banking channels.
(ii) debit to NRE / FCNR account of a person concerned maintained with an AD bank
(iii) conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
(iv) debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD bank and is maintained with the AD bank on behalf of residents and non-residents towards payment of share purchase consideration the investor is to directly invest in Equities and Debentures of investee company.
AD bank will get forex this way too. AD banks are directly supervised and controlled by RBI.
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Answer to question 2:
Importer of India will get his INR converted into foreign currency from AD to import goods/services from abroad.
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Some data about AD and RBI. What happens to funds which ADs have with them?
-Till March 1 ,1992 all forex remitted to India was implicitly handed over to RBI by ADs. and then RBI made forex available for approved purchase.
But from 1 March 1992, new system came which is known as LERMS (Liberalized Exchange Rate Management System).
Under this system RBI retains only 40% of the forex from ADs. Rest 60% are brought by ADs at market rate for sale to other ADs , authorized brokers or 'buyers' of forex.
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I hope this helped.
Take care everyone.
Regards,
Sheen.
Comments
Whenever any foreign company wants to invest in India then they have following options:
A. They choose not to convert the investment into equity and debentures sold by the investee company. But invest in the investee company via direct route like physical infrastructure, technical tools etc. Then they have to get converted their money into INR via Authorised Dealer Banks. (A.D.). These AD banks are RBI approved. The conversion takes place at market rate. This way ADs get funds as 'Forex reserve'.
B. Another option with the investor from abroad is to invest in equities /debentures of investee company. If they select this then the investor has following options:
(i) inward remittance through normal banking channels.
(ii) debit to NRE / FCNR account of a person concerned maintained with an AD bank
(iii) conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
(iv) debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD bank and is maintained with the AD bank on behalf of residents and non-residents towards payment of share purchase consideration the investor is to directly invest in Equities and Debentures of investee company.
AD bank will get forex this way too. AD banks are directly supervised and controlled by RBI.
---------------
Answer to question 2:
Importer of India will get his INR converted into foreign currency from AD to import goods/services from abroad.
---------------
Some data about AD and RBI. What happens to funds which ADs have with them?
-Till March 1 ,1992 all forex remitted to India was implicitly handed over to RBI by ADs. and then RBI made forex available for approved purchase.
But from 1 March 1992, new system came which is known as LERMS (Liberalized Exchange Rate Management System).
Under this system RBI retains only 40% of the forex from ADs. Rest 60% are brought by ADs at market rate for sale to other ADs , authorized brokers or 'buyers' of forex.
-----------
I hope this helped.
Take care everyone.
Regards,
Sheen.
Unbelievably awesome, thx
However, on capital account rupee is still not fully convertible. So to say that the conversion of FDI inflow takes place at market rate would be incorrect. There are limits prescribed by RBI on every capital transaction to protect our domestic currency from sudden upward and downward movement. Even if an Indian wants to invest abroad or borrow via ECB, he can't do it beyond a prescribed limit.
Few economists started to dream about introduction of CAC in India post 2008 crisis when India remained mostly unaffected and looked stable. However, recent crisis in our economy has proved beyond doubt - how much vulnerable we remain to foreign investments.
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Non deliverable forward is the instrument though which everything happens.