INTRODUCTION TO FOREIGN EXCHANGE MARKET

GLOBAL FOREIGN EXCHANGE MARKET

DOMESTIC FOREIGN EXCHANGE MARKET

GLOBAL FOREIGN EXCHANGE MARKET

HISTORY OF THE GLOBAL FOREX MARKET
The Foreign Exchange market, also referred to as the "Forex" or "FX market
is The largest financial market in the world, with a daily average turnover of
US$1.9 trillion -- 30 times larger than the combined volume of all U.S. equity
Markets. "Foreign Exchange" is the simultaneous buying of one currency and
selling of another. Currencies are traded in pairs, for Example Euro/US Dollar
(EUR/USD) or US Dollar/Japanese Yen (USD/JPY).There are two reasons to
buy and sell currencies. About 5% of daily turnover is from companies and
governments that buys or sells products and services in a foreign country or
must convert Profits made in foreign currencies into their domestic currency.
The other 95% is trading for profit, or speculation. For speculators, the best
trading opportunities are with the most commonly traded (and therefore most
liquid) currencies, called "the Majors." Today, more than 85% of all daily
transactions involve trading of the Majors, which include the US Dollar,
Japanese Yen, Euro, British Pound, Swiss Franc, and Canadian Dollar and
Australian Dollar.
A true 24-hour market, Forex trading begins each day in Sydney, and moves
around the globe as the business day begins in each financial center, first to
Tokyo, London, and New York. Unlike any other financial market, investors
can respond to currency fluctuations caused by economic, social and political
Events at the time they occur - day or night. The FX market is considered an
Over the Counter (OTC) or Interbank market, due to the fact that
transactions are conducted between two counterparts over the telephone or via
an electronic network. Trading is not centralized on an exchange, as with the
stock and futures markets.
If you are interested in trading currencies online, you will find that the Forex
Market offers several advantages over equities trading. 24-Hour Trading

 Forex is a true 24-hour market, which offers a major advantage over equities
trading. Whether it's 6pm or 6am, somewhere in the world there are always
Buyers and sellers actively trading foreign currencies. Traders can always
respond to breaking news immediately, and P&L is not affected by after hours
Earning reports or analyst conference calls. After hours trading for U.S.
equities brings with it several limitations. ECNs (Electronic Communication
Networks), Also called matching systems, exist to bring together buyers and
sellers - when Possible. However, there is no guarantee that every trade will
be executed, nor at a fair market price. Quite frequently, traders must wait
until the market opens the following day in order to receive a tighter spread.
Superior Liquidity
With a daily trading volume that is 50 xs larger than the New York Stock
Exchange, there are always broker/dealers willing to buy or sell currencies in
the FX markets. The liquidity of this market, especially that of the major
Currencies, helps ensure price stability. Traders can almost always open or
Close a position at a fair market price. Because of the lower trade volume,
investors in the stock market are more vulnerable to liquidity risk, which
results in a wider dealing spread or larger price movements in response to any
relatively large transaction.

100:1 Leverage
100:1 leverage is commonly available from online FX dealers, which
substantially exceeds the common 2:1 margin offered by equity brokers. At
100:1, traders post $1000 margin for a $100,000 position, or 1%.While
certainly not for everyone, the substantial leverage available from online
currency trading firms is a powerful, moneymaking tool. Rather than merely
loading up on risk as many people incorrectly assume, leverage is essential in
the Forex market. This is because the average daily percentage move of a
major currency is less than 1%, whereas a stock can easily have a 10% price
move on any given day. The most effective way to manage the risk associated
with margined trading is to diligently follow a disciplined trading style that

consistently utilizes stop and limit orders. Devise and adhere to a system where
your controls kick in when emotion might otherwise take over.

Lower Transaction Costs

It is much more cost-efficient to trade Forex in terms of both commissions and
Transaction fees. FOREX.com charges NO commissions or fees whatsoever,
while still offering traders access to all relevant market information and
trading Tools. In contrast, commissions for stock trades range from $7.95$29.95 per Trade with online discount brokers up to $100 or more per trade
with full Service brokers.
Another important point to consider is the width of the bid/ask spread.
Regardless of deal size, forex dealing spreads are normally 3-4 pips (a pip is .
0001 US cents) in the major currencies. In general, the width of the spread in a
Forex transaction is less than 1/10 that of a stock transaction, which could
Include a .125 (1/8) wide spread. Profit Potential in both Rising and Falling
Markets

DOMESTIC FOREIGN EXCHANGE MARKET

INDIAN ECONOMY
Emerging and growing
The financial landscape has changed forever. There are now new rules of the
game. Change is the only constant. Technology has made the effects of change
manifest quicker.
Forex business seeks new and better ways to address the challenges and
opportunities in this new market economy. At the centre of all activities is the
client around whom the full market revolves, the companies constantly
innovate and refine wealth management practice to create a better product and
service. Nowadays we find forex market is more Professional, the money
changer with their ability builds long term relationships with their client and
understand their problems and provides a unique solution which adds to their
business objectives.
As India, steps out post liberalization by plugging into the global economy
many Indian corporate entities are thinking globally. There is no reason why
Indian investors in India and abroad be left behind and not take advantage of
this new investment climate. Ability to see the bigger picture enables. Various
Investment Company do guide investors, for their investments. They actively
meet various industry leaders to understand their vision, thinking, and long
term plans. Also they find new regulatory environment that offers greater
transparency and innovation. This companies draw rich experience and
expertise to advise clients so they are either able to take advantage of the
opportunities or weather the adverse business environments

GUJARAT MARKET
Gujarat Foreign Exchange market is highly potential market. As per the study
done it was found out that due to high industrial investment in Gujarat it is
predicted that Foreign Exchange market will rise in near future.
As per the 15 sample taken from FFMCs and 2 A.D.s it was found that Gujarat
market is growing specially Saurashtra region and Kutch. The reason is
because a big investment is going to be their in near future as a result money
changer finds a very good corporate business out their in this region.
As far as the main land of Gujarat is concern it was found that more and more
people are going abroad for either study or for immigration. Specially kheda
district which is highest potential for doing foreign exchange business.

MAJOR FOREIGN EXCHANGE TERM

FOREIGN EXCHANGE TERM

FX = Foreign Exchange
RBI = Reserve Bank Of India
AD = Authorized Dealers
FFMC = Full Fledge Money Changer
RAD = Restricted Authorized Dealer
AP = Authorized Person
LERMS = Business Travel Quota
MC = Money Changer
AMC = Authorized Money Changer
MLRO = Money Laundering Reporting Officer
FIU = Financial Intelligence Unit
OBU = Offshore Banking Unit
RRB = Regional Rural Banks
AML = Anti Money Laundering
KYC = Know Your Customer
BTQ = Basic Travel Quota
CDF = Currency Declaration Form
TC = Travelers Cheque
IRS = Interest Rate Swaps
FR = Forward Rates
CR = Cross Rates
NCD = National Currency
ECU = European Currency Unit.
FCY = Foreign Currency
BOP = Balance of Payments
ECN = Electronic Communication Network
SWIFT = Society for world wide international financial
telecommunication.

 CHIPS = Clearing house Interbanks payment system

LIBOR = London Interbanks online /offered rate

CURRENCY
MAJOR
USD = US DOLLAR
GBP = STERLING POUND
AUD = AUSTRALIAN DOLLAR
CAD = CANADIAN DOLLAR
EUR = EURO
JPY = JAPANESE YEN/100
CHF = SWISS FRANC
OTHERS
BHD = BAHRAIN DINAR
CYN = CHINESE YUAN
DKR = DANISH KRONER
EGP = EGYPTIAN POUND
HKD = HONG KONG DOLLAR
KD = KUWAIT DINAR
MYR = MALAYSIAN RINGGIT
NZD = NEW ZEALAND DOLLAR
NKR = NORWEGIAN KRONER
OMR = OMANI RIYAL
QTR = QATAR RIYAL
SAR = SAUDI RIYAL
SGD = SINGAPORE DOLLAR
ZAR = SOUTH AFRICAN RAND
SKR = SWEDISH KRONER
SYP = SYRIAN POUND

 THB = THAI BHAT

AED = UAE DIRHAMS

BASICS OF FOREIGN EXCHANGE

WHAT IS FOREIGN EXCHANGE?
WHAT IS FUNDAMENTAL ANALYSIS?

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12

WHAT IS TECHNICAL ANALYSIS?

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WHAT IS FOREX RISK MANAGEMENT

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EMERGING PRODUCTS

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WHY DOES IT EXIST?

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HOW ARE FX MARKETS ORGANIZED?

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WHO ARE THE PLAYERS?

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THE MECHANICS OF FOREIGN EXCHANGE RATE

QUOTATION

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EURO WHAT IS THE CURRENCY

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THE MECHANICS OF FOREIGN EXCHANGE CROSS

RATES

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THE MECHANICS OF FOREIGN EXCHANGE

FORWARD RATES

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THE DRIVERS OF FOREIGN EXCHANGE

10

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 CENTRAL BANK POLICY

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FOREX VS. EQUITY

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FOREX VS. FUTURES

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WHAT IS FOREIGN EXCHANGE?

Foreign Exchange is essentially the area where a nations currency is
exchanged for that of another. The foreign exchange market is the largest
financial market in the world, with over $ 1.7 trillion being traded on a daily
basis with only 25% of this amount being in actual merchant position. The rest
of the amount denotes trading or speculation that is the principal reason why
currency markets are extremely volatile, being at least ten times faster than
stock markets in any country.
Unlike other markets, Forex markets have no physical location or central
exchanges and operate through an electronic network of banks and
corporations. It is for this reason that Forex markets operate on a 24-hour
basis, spanning from one zone to another across major financial centers. It is
for this reason that constant monitoring across time zones are required so as to
negate adverse movements or book extra-ordinary profits.

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WHAT IS FUNDAMENTAL ANALYSIS?

It is one of the two main approaches of analyzing and forecasting currencies
and basically comprises of financial situations, economic theories and political
developments. Thus the health of a currency of a particular country would be
dependent upon growth rates of GDP, interest rates, inflation, unemployment,
money supply and foreign exchange reserves. While stock markets, bonds and
real estate prices would affect the state of a currency, the state of a government
and natural calamities if any would also be major influences.
Government Policies of a particular country also have impact on their
currency. Currencies may be pegged to a particular major currency or it may
be partially or fully convertible which would dictate the extent to which a
currency would be open to outside influence. Also, Central Banks of a country
intervene either singly or in conjunction with another Central Bank to move or
strengthen/weaken its currency by either intervening directly or by moving
interest rates which should be taken into consideration while evaluating the
health of that particular currency.

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WHAT IS TECHNICAL ANALYSIS?

Technical analysis is a method of forecasting price movements by looking at
purely market-generated data. It is basically different methods of charting and
mathematical tools to analyze movements of price. Price itself has been
defined in many ways but to grasp technical analysis, we must be able to
understand the meaning of price. Price would best be defined as a figure,
which moves between panic, fear and pessimism of the crowd in one hand and
confidence, excessive optimism and greed on the other.
Thus Technical Analysis is a method of predicting future price movements by
examining the past pattern of movements in those prices. These movements
are depicted in Charts and Diagrams, which are analyzed to point our major
and minor trends so as to pinpoint points of entry into and exist from markets.
TREND
One of the first things to learn is that the market is supreme and thus at no
point should one try to over-rule the underlying trend of a market. The Trend
is the Biggest Friend and it is always wise to catch that signal. One should
only enter the market after identifying the long term and them the intermediate
and short-term trend of the market. As regards patterns of currency movements
remember that a currency always goes UP by the LADDER BUT comes
DOWN by a LIFT.
RELATIVE STRENGTH INDEX (RSI)

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 RSI reflects the overbought or oversold position of a market. For this

calculation, to compute support the RSI figure should be taken at 70 and for
the purpose of Resistance, RSI should be taken at 30. However, this method
should ideally be used in a consolidating market and would best be avoided in
a trending market.

BOLLINGER BANDS
This tool carries the advantages of other tools and tried to nullify their
disadvantages and is calculated at 1.95/2.00 Standard Deviation of the Moving
Average (usually 20 day period) which results in an envelope within which
majority of the prices move. The bands of this envelope act as support and
resistance so it is easy to buy at the lower end of the band and sell at the upper
end. Entry and exit should best be done when a price has closed outside the
band and is definitely a leading indicator.
ELLIOT WAVE ANALYSIS
This is done by classifying prices into patterned waves that can indicate future
targets and reversals. Waves moving with the trend are called impulse waves
and waves moving against the trend are called corrective waves. These
Impulse and Corrective waves are broken down into five primary and three
secondary movements respectively which forms a complete wave cycle and
these can be further subdivided. These wave patterns needs to be identified so
as to predict accurately and is best used in conjunction with the Fibonacci
theory.

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WHAT IS FOREX RISK MANAGEMENT?

Forex Risk Management refers to scientific study of currencies and devising
various hedging techniques based of predictions of such currencies. The
expected movements might be either in favor or against the underlying
exposure of a particular organization, and as such the hedging mechanisms
should be geared to extract the maximum profit of / reduce potential losses
arising from such trends.
Though the studies of currencies are based on fundamental and technical
analysis, expected trends are also greatly influenced by the sentiments of the
market which can best be assessed from an inter-bank dealing room where
inter-bank trades takes place. Eforexindia is equipped with professional
dealers and state of the art technology and is backed by the dealing room of its
parent concern M/s S.C.Dutta & Co. The various studies and risk management
strategies, which are done to estimate risk arising from the forex exposures of
an organization, are:

Exposure Analysis Currency and Market Forecasts.

Risk Appraisal and Evolving a Foreign Exchange Risk Management Policy.

Setting up Risk Management Goals.

Formulating Hedging Strategies Designed to meet such Goals.

Implementing such strategies with the assistance of our highly equipped

Dealing Room.

Structured Review / Analysis.

Daily Currency Updation with Weekly and Special Forex Reports.

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EMERGING PRODUCTS
A. INTEREST RATE SWAPS
An IRS can be defined as a contract between two parties (called Counter
Parties) to exchange, on a particular date in the future, one series of Cash
Flows ( fixed interest) for another series of Cash Flows (variable or Floating
Interest) in the same currency on the same principal amount (called Notional
Principal) for an agreed period of time. The two payment streams are called
the legs or sides of a swap. The exchange of Cash Flows need not occur on the
same date. This means payment may be different for each side of the swap. So
the variable rate may be paid monthly and the fixed quarterly, in which case
the pricing of the swap can allow for discounted timing cost.
Swaps, unlike FRAs, generally do not net settle the difference between the
agreed fixed interest rate and the Variable interest rate. Netting of payments is
however allowable. The Floating rate of interest is referenced to a short-term
interest rate like the LIBOR in the international market or the MIBOR in the
Rupee market. The Floating Rate used as benchmark or index is RMIBOR
(Reuters Mumbai Inter Bank Offered Rate) or N-MIBOR (NSE Mumbai Inter
Bank Offered Rate).
The reset frequency for the floating rate index is the term for the interest rate
index itself. However, the reset frequency for the floating rate does not
necessarily match the timetable of the floating rate index. Therefore the
floating rate may be set daily, weekly, month, quarterly while settlement dates
may fall monthly, quarterly, semi-annually etc. If the reset date and the

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settlement date do not coincide, the swap is said to be paid in arrears set in
advance.

QUOTING OF SWAP POINTS

The pricing of swaps is against the fixed interest rate. At the start of a
swap, the expected NPV is zero for both counterparties. Theoretically, the
floating legs worth is the same as those of a fixed rate leg and thus swaps
are a zero sum game at the inception. In case at the inception the NPVs
are not exactly equal, one party pays higher to compensate the price.
Generally, swaps have been quoted in a number of ways, but the most
commonly used is setting the floating rate equal to a short term index
(such as a given maturity of MIBOR) with no margin or plus/minus a
given margin, which are payable in the money market by the
counterparties.
When no margin is added to a floating rate, such rate is said to be quoted
'Flat'. The price of a Fixed /Floating swap is quoted in two parts : a fixed
interest rate and a short term index upon which the floating rate is based.
The convention is to quote All-In-Cost (AIC) which means the fixed
interest rate is quoted relative to the floating rate index without any
margin. After having set the floating rate, the fixed rate is set appropriate
to it. Each bank quotes its own swap rate to exchange fixed cash flows
interest for floating in each maturity. Further one should take care of
different day count conventions to calculate interest that is 30 days month
means 360 days a year or actual number of days elapsed since the previous
settlement is due based on a 360 days year.

EFFECT OF RATE CHANGES ON AN IRS

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 Floating Rate payers will gain if interest rate falls, as they will have to pay
lesser interest whereas fixed rate payer will loose as they are locked in fixed
rate. In case the Interest rate rises, The Floating payer will loose and the Fixed
rate will gain.

UNWINDING SWAPS
The party who wishes to unwind a swap has the following three alternatives:

Swap Buy-Back / Closeout/ Termination/ Cancellation.

Swap Reversal with new swap equaling the remaining period of

original swap with Same Reference Rate and Same Notional Principal.

Swap Sale or Assignment

THE MECHANISM OF IRS

It is a known fact that investors willing to invest in fixed rate instruments are
more sensitive to credit rating of the issuer than credit rate lenders. To
compensate for this a higher premium is demanded from the issuer of lower
credit quality in the fixed rate debt market than floating rate market. The
counterparties obtain an arbitrage by drawing down funds where they have
greater relative cost advantage, subsequently by entering into an IRS to cover
the cost of funds so raised from a fixed rate to a floating rate ad vice-versa.
Here it is a win-win situation. Therefore two companies can come together to
an agreement such that both can reduce their cost of borrowings. The fact that
such opportunities exist is due to imperfection in the money market that is the
difference in risk-premium in fixed and floating market. An example will
illustrate the point:
Suppose that there are two parties to the swap viz. X and Y and a dealer
arranges a swap taking a margin (spread). The deal is for Rs. Hundred Million
in One Year. The other related data are hereunder.

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Credit Rating
Fixed Rate Cost
Floating Rate Cost (FR)
Quality Spread Differential

X
AAA
8%
FR+100bp

Y
BBB
10%
FR+150bp

Quality Spread
2%
50bp
1.5%

It is clear from the above that each of the parties have a comparative
advantage in either the floating or fixed rate market. The company X can
borrow more cheaply than Y both fixed and floating loans, but its comparative
advantage is in fixed rate market whereas Y has an advantage in the floating
market.
But X wants to be a floating rate payer and Y a fixed rate payer. One way
which will divide the gain equally is for X to actually borrow at fixed rate and
service floating rate in the swap and Y to borrow in floating and service fixed.
But there are other methods of reaching the same goal and is generally done
through an intermediary who takes credit risk on each counterparty. Suppose
the swap dealer quotes 7.50/100 for the swap:
In the swap, X, the floating payer

Pays floating to the swap bank at the prevailing rate.

Receives fixed rate 7.5%

Pays fixed rate 8%

Receives floating rate from the swap bank at the prevailing rate.
The net cost of funds and savings to X and Y using the swap arrangement can
be worked out clearly. With swap X makes a payment of Floating rate to bank
at 8% and receives 7.5% from swap bank. Thus his cost is floating rate + 50
bp. Without swap on the other hand his cost would be Floating rate +100bp.
For Y with swap will involve a payment of Floating rate +150bp to swap bank
and receive 8% from swap bank. His borrowing cost would be Floating Rate +
150bp + 8% - Floating Rate. Thus we can observe that X and Y are not only
better by 50bp but also the swap bank has made a margin of 50bp (8%-7.5%).

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Thus the gain has been shared out between the swap parties and the bank is
150bp that are equal to the Quality Spread Differential in two markets.

USAGE OF SWAPS
Interest Rate Swaps are used to achieve one of the following:

To lower the cost of borrowings as compared to those otherwise available in

the market or from bank.

To hedge against, or speculate upon Interest Rate Movements.

To obtain fixed rate financing when it is impossible to access the market

directly.

B. FORWARD RATE AGREEMENT (FRA)

A FRA is an agreement between two counter-parties to pay or receive the
difference (called settlement money) between

an agreed fixed rate (the FRA rate)

the interest rate prevailing an a stipulated future date (Fixing Date),

Based on a notional amount for an agreed period.

In short, in a FRA interest rate is fixed now for a future period. The special
feature of FRA is that the only payment is the difference between the FRA rate
and the Reference rate and hence is single settlement contracts. As in IRS, the
principal amount is not exchanged.
The settlement sum is calculated on the fixing date by discounting the
difference between the previously contracted FRA rate and the then prevailing
Reference rate. Money changes hand only on the settlement day and not on the
transaction day or the maturity date. So if an investor wants to lock in
reinvestment rate of January 3rd 2000 for 90 days and is quoted a FRA of 7 /
7.5% , it means he can lock-in an interest rate of 7% if he wishes to protect
himself from a falling interest rate or 7.5% if he is concerned that interest rate

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will go up. The settlement date will be two days before the value/maturity
date.
FRAs are expressed in terms of giving or receiving the fixed rate Vs short
term interest rate index and are quoted numerically like

3 months rate starting in 3 months time is 3/6

3 months rate starting in 6 months time is 6/9

6 months rate starting in 3 months time is 3/9

Two-way quotes are available in the market and levels can be found on the
Reuters (MIBORO2). The lower rate is the bid at which the bank is ready to
pay fixed and the higher rate will be the offer rate at which the bank will be
ready to receive fixed.
We take the case of a borrower who has obtained a one-year credit amounting
to Rs.10 lakhs on September 5th 1999. The interest rate is based on 6 months
MIBOR. For the first six months MIBOR has already been fixed. Now he is
not confident about the second six months, as he is not confident about what
he has to pay and apprehends rates to rise. To protect himself he can buy a
FRA for the next 6 months with a matching notional principal. Suppose a bank
quotes him for 6X12 FRA 9.10 / 90 on September 3rd itself. He can lock in at
9.90% by buying 6X12 FRA on Sept 3rd itself for the period Sept 5th `99 to
Sept 4th `2000. On 3rd March 2000 the 6 months MIBOR will be known (we
assume 10%) and on that date the 6m MIBOR rate is compared with the FRA
rate and the settlement amount is computed by discounting back to the
beginning of the contract period using the formula below:
SA = ((SR FRA) X NP X CP) / 360 + ( SR X CP )
Where SA is Settlement Amount, SR is Settlement Rate, NP is Notional
Principal and CP is Contract period. Using the data in our example we get :
(.10 - .099) X 10, 00,000 X 182 / 360 + (.10 X 182) = Rs. 481.23 Thus the
borrower would receive Rs.481.23 and this amount will be used to pay the

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extra 10bp (10% -9.9%). It is clear from the calculation that the net cost to the
borrower will be the same as agreed under the FRA contract in both the cases.
It should be remembered that the counter-party of a customer is always a bank
as there is no secondary market and an FRA price should be analyzed
/calculated by always keeping the corporates point of view and not that of the
market maker or the bank.
There is no restriction on the Notional Principal of FRA/IRS and any domestic
money market or debt market can be used as benchmark to enter into
FRA/IRS once the basis is computing is acceptable to both the parties. There
is various Exposure and Capital Adequacy Norms that are laid down by the
apex bank to whom all such deals have to be reported on a fortnightly basis.
However the derivative market in India is at a nascent stage with an
underdeveloped MIBOR market, absence of big public sector banks, uniform
pricing mechanism and of course a shaky approach which is more
psychological than lack of knowledge of the product and thus care should be
taken in the initial stages by engaging professional consultants to avoid
untoward losses by either not using the instrument available or using it in an
erroneous manner.

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WHY DOES IT EXIST?

Foreign Exchange (FX) is the buying and selling of foreign currencies. A FX
Rate expresses the relationship between two national monies. It is the price of
one currency in relation to another. The FX Market is similar to any other
financial market except that the commodity being bought and sold is foreign
currencies.
Traditionally, FX was used primarily for international trade. This includes
payment for imports and receipts for exports. With technological advancement
and increase in cross-border investments, the service sector began to make
increasing demand on the FX Market. Uses include payment for
transportation, interest and dividend payments and foreign travel. Today,
financial markets and increased foreign direct investments have substantially
added to the need for FX. These include money and capital movements for
fixed assets, stocks / bonds and currency deposits

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HOW ARE FX MARKETS ORGANIZED?

The FX market is organized into two broad categories: the bank note market
and the Interbanks market. Bank note transactions, the most common of which
are for obtaining foreign currencies for travel purposes, occur at commercial
banks and FX currency changers. The Interbanks has no central geographical
location for FX trading. Transactions are conducted entirely through
telecommunications systems such as wire transfers.

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WHO ARE THE PLAYERS?

There are various players in the market. They include businesses, central
banks, individuals, and commercial banks. There are two sides to the FX
market: the wholesale and the retail side. The wholesale side consists of
commercial banks. This is the interbank market which is made-up of a group
of market makers; i.e. their trading levels set indicative rates for the rest of the
market. The other players represent the retail side as each player, or markettaker, interacts with a commercial bank.
Central banks can influence interbank trading rates and volume through both policy
measures and buying and selling in the FX market. Examples include Federal Reserve
Bank of the US, Bundesbank of Germany, and the Bank of Japan. Some of their
objectives are to manage the value of domestic currency vis--vis foreign currencies,
intervene in support of economic policy objectives, and manage foreign currency
reserves.
Commercial banks are the Interbanks players. Examples include Citibank, and the
Hong Kong Shanghai Banking Corporation (HSBC). Some of their objectives are to
meet customers FX needs, manage the banks overall FX position, and produce profit
for the bank.
Businesses can be broadly categorized into two categories: financial firms and nonfinancial firms. Financial firms (e.g. Morgan Stanley and Fidelity Investment) help
individuals, institutions, and other non-financial firms (e.g., Coca-Cola, Honda) to
meet their FX needs. Their activities include trade finance, hedging, equity/mutual
funds/unit trust investments, interest/dividend remittances, and speculation. On the

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other hand, non-financial firms activities include international trade, foreign direct
investments and hedging. International investing by businesses has had an enormous
impact on the FX market by increasing demand for currencies and changing
investment practices and methods.

Individuals have varied and sometimes very specific FX needs. For this reason, it is
imperative that Relationship Managers (RMs) are knowledgeable about the objectives
of their customers. Their activities include foreign currency transactions for
obligations or remittances, foreign currency investments, portfolio diversification, and
speculation in the FX market. Individuals form the target market for Global Consumer
Bank (GCB)s FX products.
INTERBANKS MARKET RATES AND TRANSACTIONS
Interbanks market rates and retail customer rates will differ. This is because
the customer rates will include the banks markup or markdown. Take for
example the buying and selling of US dollars (USD) and Japanese Yen (JPY):
Say the Interbanks market was quoting:

Bank buys USD 1 for JPY 110.00

Bank sells USD 1 for JPY 110.10

Given these Interbanks market rates, the bank may quote the following to the
retail customer:

Bank buys USD 1 for JPY 110.00 - 0.10 = JPY 109.90 (markdown)

Bank sells USD 1 for JPY 110.10 + 0.05 = JPY 110.15 (markup)

This is just an example to illustrate the point. As you progress through this
Unit, you will find the markup and markdown will depend on how the
currency pairs are expressed. This will be covered in the Mechanics of FX
section

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 Interbank market transactions involve several components: Banks and brokers

transact via telephone, telex, Reuters, and electronic brokering. Settlement is
handled through correspondent accounts using transfer and clearance systems.
SWIFT (Society for Worldwide International Financial Telecommunications)
is a system for transferring funds. CHIPS (Clearinghouse Interbank Payment
Systems) is a system for clearing funds. The actual transaction process varies
by country depending on the size of the bank and level of sophistication of its
systems as well as that of the country.

THE MECHANICS OF FOREIGN EXCHANGE RATE

QUOTATION
COMMODITY CURRENCY AND TERM CURRENCY
There are two currencies in every FX quote. Here is an example: If a customer
wants to buy USD for YEN from a bank, the bank may quote the customer:
USD/JPY = 110.00 what this means it that the customer has to pay the bank
JPY 110.00 in exchange for US$1.00. In this example, the USD is what is
called the base currency or the commodity currency. It is the unit currency and
the currency being priced. It is always represented first in a quote. In this
example, the JPY is what is called the term currency. It is the non-one-unit
currency. It is the price of the commodity currency. It is always represented
second in a quote. The Oblique symbol (e.g. USD/FCY) does not mean USD
divide by FCY or USD per FCY. It means the number Foreign Currency
(FCY) per one dollar.

FX Rate Quotation Terms Direct and Indirect Terms

There are two different ways FX rates are quoted. One method is refereed to as
the American (Direct) System; the other is the European (Indirect) System.

27

 European (Indirect) Term is the number of foreign currency per unit of US

dollar. For example:

USD/JPY

USD/CHF

American (Direct) Term is the number of US dollars per unit of base currency.
For example:

EUR/USD

AUD/USD

Choosing a system depends on the terms of reference one requires. Both terms
express the same relationship but from different perspectives.

FX RATE QUOTATIONS
American = Direct Quotes apply to the following currencies:

Sterling Pound (Cable)

Australian $ (Aussie)

New Zealand $ (Kiwi)

Euro (EUR)

European = Indirect Quotes apply to the following currencies:

Japanese Yen (Yen)

Swiss Franc (Swissy)

Canadian $ (Candy)

BID AND OFFER HOW TO READ AN FX QUOTE

A FX quote is made when two parties enter into a transaction for the exchange
of two currencies. One party is buying currency A and selling currency B. The
second party is selling currency A and buying currency B.

28

 The bid rate is the quoting partys buying price of the commodity currency,
and the offer rate is the quoting partys selling price of the commodity
currency.
Example: Say the Interbank rates were: USD/JPY 105.40(bid)/44(offer). The
bank, based on its interbank trades will markup or markdown the interbank
rates and quotes a bid/offer rate to the customer

The bank will quote bid or offer rates depending on whether the customer
buys or sells. Usually, the larger the customers request, the better the quote
will be.
For example: USD 1 = CAD$ 1.3720/25.

The bank sells (offer) USD 1 for CAD$ 1.3725 (=1.3700+0.0025)

The bank buys (bid) USD 1 for CAD$1.3720

The lower number represents the bid, i.e. the rate at which the bank will buy
(bid) USD and sell CAD. The higher number represents the offer, i.e. the rate
at which the bank will sell (offer) USD and buy CAD. The figure 25 is 0.0025.
Thus the offer is 1.3700+0.0025 = 1.3725. Often, a bid/offer quote is also
written with an oblique (/), i.e.1.3720/25. Please note that in the case of
1.3798/03, the offer is NOT 1.3700+0.0003. It is 1.3800+0.0003.
The quality of a bid and offer quote or a quote can be judged upon several
criteria. A fast reply usually indicates a high volume, experienced commercial
bank that is able to be a market maker. A narrow spread implies a more stable
currency. Reasonable or large amounts tend to receive better quotes because
the trade volume is high.

29

THE EURO WHAT IS THIS CURRENCY?

In the earlier section, reference was made to a currency called the euro. The
following is a brief description of this currency and its mechanics. On January
1, 1999, this currency was introduced as a single European currency. The
economic rationale is that the euro may strengthen the single European
market.
From January 1, 1999 to January 1, 2002, no one is forced to use the euro or
prohibited from using it. Customers account balance in European Currency
Unit (ECU) has been replaced by euro on a 1:1 basis on January 1, 1999. By
January 1, 2002, national currencies (NCD) such as Deutschmark, French
Franc, etc. will migrate to a euro account.

WHICH CURRENCIES ARE INVOLVED?

There are 11 participating Member States. They are:
11. German Deutschmark (DEM)
22. Austrian Schilling (ATS)
33. Netherlands Guilder (NLG)
44. French Franc (FRF)
55. Italian Lira (ILT)
16. Spanish Peseta (ESP)

30

27. Belgium Franc (BEF)

38. Finnish Marka (FIM)
49. Luxembourg Franc (LUF)
510. Irish Punt (IEP)
611. Portuguese Escudo (PTE)
12. Swedish Mark

THE MECHANICS OF FOREIGN EXCHANGE CROSS RATES

CROSS RATES
A Cross rate is a FX rate of two currencies derived via a third currency.
Usually the intermediate currency is the USD. Cross rates depend on the
perspective of the currency holder and his/her desire trade. Cross rate between
two currencies can differ depending on which currency is being bought and
which is being sold. Cross Rate tables are often published on a daily basis. An
example of which can be found in The Asian Wall Street Journal.
The commodity or base currency is the one unit of currency; the term currency
is the non-unit currency. An example is AUD/JPY 65.49. The AUD 1 is the
commodity or base currency; the JPY 65.49 is the term currency. The most
important part is to determine which bid rate and which offer rate to use. Here
is an example using the AUD/JPY example.
How was the AUD/JPY derived? The AUD/JPY quote can be split into two
quotes: AUD/USD and USD/JPY First, sell AUD to buy USD and then sell
USD to buy JPY. Here, AUD is the base currency and is traded to buy USD,
the correct quote to use is the offer rate. Then the bid rate is used because the
USD is traded to buy the term currency of JPY. Hence, in determining which
bid and offer to use, you must bear in mind whether the currencies use the

31

direct or indirect quote. For example, when calculating CHF/JPY, the quote
can be split into: USD/CHF and USD/JPY You will see this more clearly in the
examples in the Chain Rule section. The Chain Rule is a standard formula
used to derive any cross rate.

THE MECHANICS OF FOREIGN EXCHANGE FORWARD

RATES
SPREADS: BUSINESS SPREADS AND BID/OFFER SPREADS
Note that there are two different spreads. It is important to understand the
distinction between them in order to calculate the correct profit margin from a
transaction.
Market bid/offer spread is the difference between the bid and offer rate as
quoted in the interbank market. The business spread is the markup or
markdown which the bank charges the customer. It is the profit margin made
from a FX transaction.
DETERMINING BID/OFFER SPREAD
Wide spreads usually signify risk because they result from trading in soft
currencies whose markets tend to be volatile and illiquid. A wide spread may
also be due to a small degree of market competition.
On the other hand, narrow spreads represent relatively stable currencies,
whose markets tend to be liquid. The greater the market competition, the

32

narrower the spread. Size and experience of the commercial bank greatly
influence the spread.
TOTAL RETURN CONCEPT
Currency time deposits are the most common form of FX investment. From
which the bank will earn a FCY deposit spread. This is the difference
between the interest rate assumed by the bank and the interest rate charged by
the bank to the customer.

So if a customer makes a foreign currency time deposit, what is the return for
the bank and the customer? From the customer and the banks standpoint, their
total return is as follows:
Customer Standpoint:
Total Return = Currency Appreciation/Depreciation + FCY Deposit Interest
Return
Bank Standpoint:
Total Spread = FX Spread (Markup / Markdown) + FCY Deposit Spread
TIME ELEMENT IN FX QUOTES
A SPOT transaction is a transaction which settles in two business days. This
accounts for two-thirds of all FX transactions. A Forward transaction contract
is for a FX transaction at a future date at a rate determined at the time the
contract is entered. Settlement can range from the spot date up to five years.
Various forward rates exist depending on the time frame (i.e., 30-day, 90-day,
180-day). The forward transaction can be used to lock in FX gains, protect
against future adverse FX movements, and eliminate exchange rate
uncertainty.
FORWARD RATES

33

 The forward price for a unit of foreign currency may be at par with the spot
price (the same), but usually it is either at a premium (higher than the spot
rate) or at a discount (lower than the spot rate). The exchange differential
reflects whether the forward rate is at a premium or at a discount, and what the
price difference is for delivery on a specified future date. This differential is
called the SWAP rate or SWAP points.
If the SWAP bid appears to be higher than the SWAP offer, the commodity
currency trades at a discount against the term currency. To find the forward
Bid and offer, subtract the SWAP bid from the SPOT bid and the SWAP offer
from the SPOT offer. The reverse is true if the SWAP bid is lower than the
SWAP offer. Hence, you will add the SWAP bid and offer to the SPOT bid
and offer.
INTEREST DIFFERENTIAL

Interest rate differential and the length of time between the Spot and forward
transaction are the main two factors which determine the SWAP rate.

34

THE DRIVERS OF FOREIGN EXCHANGE

FACTORS AFFECTING EXCHANGE RATES
The FX market is one of the more volatile financial markets. Understanding
and predicting the factors that affect FX rate is a valuable but difficult skill to
obtain. The key is in understanding the fundamental forces that drive these
factors in todays world.
FX SUPPLY AND DEMAND
The forces that drive FX rate fluctuations are the changes in the supply and
demand of currencies. Moving away from the equilibrium FX rate creates
pressure on the currency to return to that rate. This pressure results in an
appreciation or a depreciation of a currency. Supply of FCY comes from
exports and capital inflow. Demand of FCY comes from imports and
capital outflow. Supply and demand of a nations currency are captured in a
national account called the balance of payments (BOP). The BOP consists
of the current account and the capital account. The current account covers the
imports and exports of goods and services while the capital account covers
the movement of investments or capital inflows and outflows. The capital
account refers to both short-term and long-term capital flows and foreign
direct investments.

35

 The components in the current account (i.e. imports and exports, imports)
and the capital account (i.e. investments) are the dynamic forces which drive
FX rate movement. In addition, market expectations and central bank
initiatives are also key determinants of FX supply and demand.

BALANCE OF PAYMENTS (BOP)

The Balance of Payment consists of the Current Account and the Capital
Account.
BOP = Current Account + Capital Account

Current Account = Exports Imports of Goods & Services

Capital Account = Foreign Domestic Investment Domestic Investment
Abroad.
BALANCE OF PAYMENTS: CURRENT ACCOUNT
A current account surplus signals that a countrys exports are greater
than its imports. A surplus results in excess demand for domestic
currency. Other things being equal, the domestic currency will most likely
undergo an appreciation.
A current account deficit signals that a countrys exports are less than its
imports. A deficit results in excess supply for domestic currency.

36

 Other things being equal, the domestic currency will most likely undergo
depreciation.
Remember that all factors must be seen from a relative perspective because it
is the performance of one country compared with the performance of another.
Consider the scenario where there is relatively more income growth in
country A than B. An increase in Country As growth rate means residents of
Country A may purchase more imports from Country B. If more imports are
needed by Country A, then its current account will decrease, and Currency B
will be demanded by Country A to pay for the imports. As a result, Country
As currency can depreciate relative to Country Bs currency.
MARKET EXPECTATIONS
Expectations can change rapidly depending on market psychology. Analyzing
the effect of expectations requires a feel for the market. Expectations
capture the unpredictability of the FX market because there can be more than
one possible outcome for a single expectation.
MARKET SENTIMENT
Market sentiment can run the gamut from being bearish to neutral to bullish.
Below are examples:
Consol dative: Market pauses normally after a big move before expecting
further movement.
Neutral: Lack of direction; lack of interest or view on part of players
Volatile: Violent movements in market prices
Range Trading: Market trades within a band; whenever there is no significant
news or interest.

37

 Bullish: Market expects prices to rise.

Bearish: Market expects prices to fall.
CENTRAL BANK INTERVENTION
There are various reasons for central bank interventions including currency
stabilization (reduced fluctuations), maintaining FX rate policies, and to meet
economic policy objectives. Each central bank has a distinct character, i.e.,
policy orientation. To understand a central bank you must be knowledgeable
about the macroeconomic environment in which it exists. Central bank actions
and policies are based on the performance of key economic indicators
DIRECT CENTRAL BANK INTERVENTION
Central banks can directly intervene in the FX market by buying and selling
currencies in order to manage a rate. This will lead to an appreciation or
depreciation of FX rate. The impact that central banks can have over a
sustained period is limited with direct intervention.
INDIRECT CENTRAL BANK INTERVENTION
Central banks play a key role in affecting short-term interest rates which in
turn affect the FX rate. The central bank is then making an indirect
intervention to affect FX rates. For example, Open-market operations are
activities carried out by the Federal Reserve Bank based upon instructions
from the Federal Open Market Committee (FOMC) of New York. These
activities are designed to regulate the money supply. The operations are
important tools because they affect the federal funds rate. Short-term interest
rates are priced off the federal funds rates. Short-term interest rates affect the
FX rate because they affect investment decisions and forward rates.
FLOATING FX RATE SYSTEM

38

 This is when market forces determine the FX rates. The advantages and
disadvantages of this include the following:
ADVANTAGES

DISADVANTAGES

1. Automatic adjustment if there is a

1. Speculation leading to market

destabilization.

trade deficit

1
2

2. Flexible to use other policy measures

discourage
1

2. Uncertain exchange rates may

international trade

3. Creates liquidity

FIXED FX RATE SYSTEM

This is where the FX rates are determined by government decisions, not
market conditions. The central bank maintains the external value of the
currency by buying or selling.
ADVANTAGES

DISADVANTAGES

1. Currency certainty

1. Delays in adjustment process

2. Adjustments may be more costly
than the floating system

39

CENTRAL BANK POLICY

The central bank seeks to impact their currencies primarily by three ways:

Controlling the money supply

Controlling interest rates

Intervening directly in the market

Tightening money supply, increasing short-term interest rates and actively

intervening to support the currency causes the currency to gain strength. Loose
monetary policy, cutting short-term interest rates and active intervention to
devalue a currency causes the currency to weaken.
The first two ways are indirect attempts to influence the exchange rate. The
third (direct intervention) has both a direct and indirect effect.

Buying or selling a currency directly affects the supply and demand of

the currency.

Indirectly the central banks actions send a message to the market

about the intentions of the central bank to support or devalue a
currency.

40

POLITICAL NEWS
Political news can have an equally big impact on the strength or weakness of a
currency. Two types of political news influence exchange rate fluctuations:

Confidence in political leadership

Stability of the region

Increase in confidence in political leadership and more stable regional

situations can lead to strengthening of the domestic currency. Whereas loss of
confidence in the political leadership and destabilized regional situation can
cause the domestic currency to weaken.

FOREX VS. EQUITY

If you are interested in trading currencies online, you will find that the Forex
market offers several advantages over equities trading.
24-HOUR TRADING
Forex is a true 24-hour market, which offers a major advantage over equities
trading. Whether it's 6pm or 6am, somewhere in the world there are always
buyers and sellers actively trading foreign currencies. Traders can always
respond to breaking news immediately, and P&L is not affected by after hours
earning reports or analyst conference calls.
After hours trading for U.S. equities brings with it several limitations. ECN's
(Electronic Communication Networks), also called matching systems, exist to
bring together buyers and sellers - when possible. However, there is no
guarantee that every trade will be executed, nor at a fair market price. Quite
frequently, traders must wait until the market opens the following day in order
to receive a tighter spread.

41

SUPERIOR LIQUIDITY
With a daily trading volume that is 50x larger than the New York Stock
Exchange, there are always broker/dealers willing to buy or sell currencies in
the FX markets. The liquidity of this market, especially that of the major
currencies, helps ensure price stability. Traders can almost always open or
close a position at a fair market price.
Because of the lower trade volume, investors in the stock market are more
vulnerable to liquidity risk, which results in a wider dealing spread or larger
price movements in response to any relatively large transaction.

100:1 LEVERAGE
100:1 leverage is commonly available from online FX dealers, which
substantially exceeds the common 2:1 margin offered by equity brokers. At
100:1, traders post $1000 margin for a $100,000 position, or 1%.
While certainly not for everyone, the substantial leverage available from
online currency trading firms is a powerful, moneymaking tool. Rather than
merely loading up on risk as many people incorrectly assume, leverage is
essential in the Forex market. This is because the average daily percentage
move of a major currency is less than 1%, whereas a stock can easily have a
10% price move on any given day.
The most effective way to manage the risk associated with margined trading is
to diligently follow a disciplined trading style that consistently utilizes stop
and limit orders. Devise and adhere to a system where your controls kick in
when emotion might otherwise take over.
LOWER TRANSACTION COSTS

42

 It is much more cost-efficient to trade Forex in terms of both commissions and

transaction fees. FOREX.com charges NO commissions or fees whatsoever,
while still offering traders access to all relevant market information and
trading tools. In contrast, commissions for stock trades range from $7.95$29.95 per trade with online discount brokers up to $100 or more per trade
with full service brokers.
Another important point to consider is the width of the bid/ask spread.
Regardless of deal size, forex dealing spreads are normally 3-4 pips (a pip is .
0001 US cents) in the major currencies. In general, the width of the spread in a
forex transaction is less than 1/10 that of a stock transaction, which could
include a .125 (1/8) wide spread.

PROFIT POTENTIAL IN BOTH RISING AND FALLING MARKETS

In every open FX position, an investor is long in one currency and shorts the
other. A short position is one in which the trader sells a currency in
anticipation that it will depreciate. This means that potential exists in a rising
as well as a falling market.
The ability to sell currencies without any limitations is another distinct
advantage over equity trading. In the US equity markets, it is much more
difficult to establish a short position due to the Zero Up tick rule, which
prevents investors from shorting a stock unless the immediately preceding
trade was equal to or lower than the price of the short sale.

43

FOREX VS. FUTURES

The global foreign exchange market is the largest, most active market in the
world. Trading in the forex markets takes place nearly round the clock with
$1.9 trillion changing hands every day. It is the main event.
The benefits of forex over currency futures trading are considerable. The
dissimilarities between the two instruments range from philosophical realities
such as the history of each, their target audience, and their relevance in the
modern forex markets, to more tangible issues such as transactions fees,
margin requirements, access to liquidity, ease of use and the technical and
educational support offered by providers of each service. These differences are
outlined below:

More Volume = Better Liquidity. Daily currency futures volume on

the CME is just over 2% of the volume seen every day in the forex
markets. Incomparable liquidity is one of many advantages that forex
markets hold over currency futures. Truth be told, this is old news. Any

44

currency professional can tell you that cash has been king since the
dawn of the modern currency markets in the early 1970's. The real
news is that individual traders from every risk profile now have full
access to the opportunities available in the forex markets.

Forex markets offer tighter bid to offer spreads than currency

futures markets. By inverting the futures price to compare it to cash,
you can readily see that in the USD/CHF example above, inverting the
futures dealing price of .5894 - .5897 results in a cash price of 1.6958 1.6966, 8 pips vs. the 5-pip spread available in the cash markets.

Forex markets offer higher leverage and lower margin rates than
those found in currency futures trading. When trading currency
futures, traders have one margin rate for "day" trades and another for
"overnight" positions. These margin rates can vary depending on
transaction size. When trading cash markets, you have access to the
same margin rates day and night.

Forex markets utilize easily understood and universally used terms

and price quotes. Currency futures quotes are inversions of the cash
price. For example, if the cash price for USD/CHF is 1.7100/1.7105,
the futures equivalent is .5894/ .5897; a methodology followed only in
the confines of futures trading.
Currency futures prices have the added complication of including a
forward forex component that takes into account a time factor, interest
rates and the interest differentials between various currencies. The
forex markets require no such adjustments, mathematical manipulation
or consideration for the interest rate component of futures contracts.

Forex trades executed through FOREX.com are commission free.

Currency futures have the added baggage of trading commissions,
exchange fees and clearing fees. These fees can add up quickly and
seriously eat into a trader's profits.

In contrast, currency futures are a small part of a much larger market; one that
has undergone historical changes over the last decade.

45

Currency futures contracts (called IMM contracts or international

monetary market futures) were created at the Chicago Mercantile
Exchange in 1972.

These contracts were created for the market professionals, who at that
time, accounted for 99% of the volume generated in the currency
markets.

While some intrepid individuals did speculate in currency futures,

highly trained specialists dominated the pits.

Rather than becoming a hub for global currency transactions, currency

futures became more of a sideshow (relative to the cash markets) for
hedgers and arbitragers on the prowl for small, momentary anomalies
between cash and futures currency prices.

In what appears to be a permanent rather than cyclical change, fewer

and fewer of these arbitrage windows are opening these days. And,
when they do, they are immediately slammed shut by a swarm of
professional dealers.

These changes have significantly reduced the number of currency futures

professionals, closed the window further on forex vs. futures arbitrage
opportunities and so far, have paved the way to more orderly markets. And
while a more level playing field is poison to the P&L of a currency futures
trader, it's been the pathway out of the maze for individuals trading in the
forex markets.

46

TYPES OF FOREIGN EXCHANGE MARKET

AUTHORIZED DEALERS

49

FULL FLEDGE MONEY CHANGERS

50

47

 RESTRICTED AUTHORIZED DEALERS

56

TYPES OF FOREX MARKET

INDIAN FOREX MARKET

RESERVE BANK OF INDIA

Authorized

Full Fledged

Restricted

Restricted

Dealers

Money

Money

Authorized

Changers

Changers

Dealers

48

Authorized to sell foreign exchange to:

1. Exporters

1. Travelers

Discontinued Recently introduce

2. Importers

2. Foreign Tourists

after 31st

License yet to be

3. Non-residents

3. Business Travelers

December

issued by RBI

4. NRIs

(Purchase & Sale)

2004

AUTHORIZED DEALER
There are 84 Commercial Banks and 1 State Co-operative Bank and 2 Urban
Co-operative this all are permissible current and capital account transaction.
Authorized Dealers major activities are to buy and sell foreign exchanges
apart from this they are given rights to issue demand draft which FFMCs are
not getting.
The company which fulfill the below criteria get eligibility for Authorized
Dealers.

Sl. Category of

Entities

Eligibility

No. license (Number)

Activities
Commercial Banks,

Major

Authorized

No Change
All current and

49

Dealers

State Co-op Bank,

Urban Co-op Banks

1) License to conduct capital account

Banking business in

transactions

India.

according to
RBI directions

2) Report from the

concerned regulatory

issued from
time-to-time.

department of RBI.

FULL FLEDGE MONEY CHANGER (FFMCs).

Payment for Foreign Exchange sold to public exceeding Rs.50, 000/- should
be received by crossed Cheque only.
FFMC should not hold huge idle balances in Foreign Currency.
All transactions with other FFMCs / Ads should be settled in account payee
Cheque only.
If written off any foreign currency exceeding US $ 2000 in calendar year RBI
permission must require.

50

RBI GUDELINES ON FOREX BUSINESS

Memorandum instructions (FLM) issued to FFMC (Full Fledge Money
Changers) by RBI under Section 73(3) of Foreign Exchange Regulations Act,
1973 (46 of 1973).
As per the FLM, FFMCs are required to maintain following forms.
FLM 1 (daily summary and Balance Book)
FLM 2 (daily currency wise summary and Balance Book)
FLM 3 (register of FOREX purchased from public)
FLM 4 (register of FOREX purchased from Ads/Authorized money
changers)
FLM 5 (register of sales of FOREX to public)

51

 FLM 6 (register of sales of FOREX to Ads/ Authorized

Moneychangers)
FLM 7 (Register of TCs surrendered to Ads/Authorized
Moneychangers)
FLM 8 (summary statement of purchases and sales of foreign
currency notes during the month)-TO BE SUBMITTED TO RBI
EVERY MONTH.
FLM-8:
Monthly consolidates statements for all its offices in form FLM-8 so as to
reach Reserve Bank not later than 10th of the succeeding/next month.
FFMC, should submit to the Reserve Bank a monthly statement including
details of Receipt/Purchase of US $ 10,000/- or equivalent and above per
transactions within 10 days of the close of the previous month. FFMCs should
include transactions of their franchisees in the statement.

CONCURRENT AUDIT REPORT

MONTHLY AUDIT:
Single Branch FFMCs having turn over of more than US $ 1, 00,000 or
equivalent and multiple Branch FFMCs.
QUARTERLY AUDIT:
Single Branch having turnover of less than US $ 1 lac or equivalent.
FFMCs should submit a statement certifying that the Concurrent Audit and the
Internal Control Systems are working satisfactorily.

52

 Specimen signature of Authorized officials every year.

Written off statement:
Written off any currency up to US $ 2000 in a calendar year should be
submitted to Reserve Bank in April every year.

DOCUMENTS FOR RENEWAL OF FFMC LICENCE

FFMC LICENCE RENEWAL DOCUMENTS:
1. A copy of the latest audited balance sheet with a Chartered Accountants
certificate for net owned Funds as on date.)
2. C.R. Form Bankers in a sealed cover.
3. A declaration to the effect that no proceedings have initiated by the ED/DRI
and no criminal cases are pending against the agency.
4. List of Authorized Signatories.
5. Original License issued earlier.
6. Certificate issued under Shops & Establishment Act.
7. Provisional Balance Sheet as on date..
N.B.: All documents should be submitted before one month.

53

FFMC DOCUMENTS FOR BRANCH / ADDITIONAL

LOCATION
1. Net owned Funds Rs.50 lakhs.
2. A copy of the latest audited balance sheet with a Chartered Accountants
certificate for net owned Funds as on date)
3. C.R. Form Bankers in a sealed cover.
4. A declaration to the effect that no proceedings have initiated by the ED / DRI
and no criminal cases are pending against the agency.
5. List of Authorized Signatories.
6. Original License issued earlier.
7. Certificate issued under Shops & Establishment Act.
8. Provisional Balance Sheet as on date..

54

DOCUMENTS REQUIRED FOR FRANCHISEESHIP BY FFMC

1. Form RMC F.
2. Franchisee agreement between both the parties.
3. Application by franchisee on their letterhead for their willingness to work as
franchisee under the name of FFMC.
4. Copy of Certificate issued under Shops & Establishment Act in the name of
Franchisee.
5. Undertaking by the directors of FFMC to take due diligence while selecting
franchisee.
6. Undertaking by the directors of FFMC to comply with all the provisions of the
Franchising Agreement / Prevailing RBI regulations regarding money
changing.

55

7. Undertaking by the franchisee for reporting of transactions on monthly basis

to their franchisor and for inspection once in a year. This condition also
include in Franchisee ship Agreement
8. Undertaking for surrender of foreign exchange to the FFMC by the proposed
franchisee within 7 days from the date of its purpose.
Note:
(1) Franchisee can be given only for RMC business.
(2) FFMC cannot be appointed as franchisee under other FFMC.
Validity of the Agreement should not exceed the validity of the FFMC Licensee.

RESTRICTED AUTHORIZED DEALERS (RAD)

NEW CASES OF RESTRICTED AD
RBI is considering liberalizing in licensing policy
Well functioning FFMCs with strong financials that demonstrate good
governance with minimum net owned funds of Rs. 10 crores may be
considered for Restricted ADs license.
The Following Current Account Transactions & Prohibits
Schedule-I
[Rule.3]

Remittance out of Lottery

Example: Winning

56

Schedule-II

Require Prior Approval of Ministry, Govt. of India

[Rule.4]

Example: Cultural Tours.

Schedule-III

Require Prior Approval of RBI

[Rule.5]

Example: Private Visits

Exceeding US $ 10,000

Some of the Ceilings Pertaining to Miscellaneous Remittances:

US Dollars
1. Travel Quota

10,000

2. Business Travel

25,000

3. Donations

5,000

4. Gifts

5,000

5. Employments

1,00,000

6. Emigration

1,00,000

7. Maintenance of Close
Relative

1,00,000

57

RBI GUIDELINES
CURRENT RBI GUIDELINES

58

LATEST RBI GUIDELINES

62

(A) CURRENT RBI GUIDELINES

58

 RBI GUIDELINES ON FOREX BUSINESS BUYING OF

FOREIGN CURRENCY
RBI GUIDELINES ON FOREX BUSINESS SELLING
OF FOREIGN CURRENCY
RBI GUIDELINES OF FOREX BUSINESS CASH
MEMO

RBI GUIDELINES ON FOREX BUSINESS - BUYING

Buying of Foreign Currency from public
As per FLM instructions Ads/FFMCs can freely purchase foreign currently
up to USD10000 and beyond that CDF (currency declaration form) should
be verified.

On purchase of FOREX from any person, FFMC is required to issue

ENCASHMENT CERTIFICATE in prescribed format.

As per rule 6DD (m) of I.T. Act, cash transaction cap of Rs.20000/- dose
not apply to FOREX purchase transaction by any AD/FFMC.

59

 FFMCs can freely purchase FOREX from any other AD/FFMC but
payment of the same should be made only by way of crossed Cheque/draft.

RBI GUIDELINES ON FOREX BUSINESS - SELLING

Selling of Foreign Exchange
AD/FFMC can sell FOREX to general public as per following limits:
Sale against Basic Travel Quota (BTQ)
Travelers proceeding to Bangladesh, Bhutan & NEPAL-not exceeding
USD50.

Travelers proceeding to other countries- (maximum

USD10000( currency maximum USD2000 balance compulsorily
by way of TC)
Sale against Business Visits (LERMS)

60

FOREX can be released against business visits sponsored by

firms/organizations/companies maximum USD25000 per trip
(currency maximum USD2000 balance compulsorily by way of
TC)

HOWEVER, ENTIRE FOREX LIMIT CAN BE AVAILED BY WAY OF

TRAVELLERS CHEQUE FOR ANY TYPE OF ABROAD VISIT
Documents required for release of FOREX

Valid Passport, Visa and confirmed Air Ticket- for BTQ release

LERMS Letter of Co.s letter head as per prescribed format.

RBI GUIDELINES OF FOREX BUSINESS CASH MEMO

CASH MEMO
Money changers are required issue a Cash Memo on their letter head
against each sale of FOREX. Each cash memo should be serially
numbered and prepared in duplicate.
Rates of exchange are to be displayed at a prominent place at the business
place of AD/FFMC.

61

 Inspection of transaction by RBI

Any office authorized by RBI can any time inspect books of

accounts of AD/FFMC.

Renewal of License

FFMC should apply for renewal of license at least 3 months

in advance of the expiry of current license.

Submission of statement to RBI

Money changers should submit their FLM 8 to the office of

RBI not later than 10th of succeeding month along with
supporting documents.

62

(B) LATEST RBI GUIDELINES

ANTI-MONEY LAUNDERING GUIDELINES FOR
AUTHORIZED MONEY CHANGER
LICENSING POLICY FOR AUTHORIZED PERSONS:
LIBERALIZATIONS

ANTI-MONEY LAUNDERING GUIDELINES FOR AUTHORIZED

MONEY CHANGER
1. MONEY LAUNDERING
The offence of money laundering has been defined in section 3 of the
Prevention of money laundering Act, 2002 (PMLA) as whosoever directly or
indirectly attempts to indulge of knowingly assists or knowingly is a party or
is actually involved in any process or activity connected with the proceeds of

63

crime and projecting it as untainted property shall be guilty of offence of

money-laundering.
In common mans language, money laundering can be called a process by
which money or other assets obtained as proceeds of crime are exchanged for
clean money or other assets with no obvious link to their criminal origins.
2. ANTI-MONEY LAUNDERING GUIDELINES
The purpose of prescribing Anti-Money Laundering Guidelines is to prevent
the system of Authorized Money Changers (AMCs) engaged in the purchase
and / or sale of foreign currency notes/Travelers cheques from being used for
money laundering. Therefore, Anti-Money Laundering (AML) measures
should include.
a. Identification of Customer according to Know Your Customer
norms,
b. Recognition, handling and disclosure of suspicious transactions,
c. Appointment of Money Laundering Reporting Officer (MLRO),
d. Staff Training,
e. Maintenance of records,
f. Audit of transactions.

The following paragraphs contain broad guidelines to enable AMCs to

formulate and put in place a proper policy framework for AML measures.
3. KNOW YOUR CUSTOMER (KYC) IDENTIFICATION OF
CUSTOMERS
All transactions should be undertaken only after proper identification of the
customer. Photocopies of proof of identification should invariably be
retained by the AMC after verifying the document in original. Full details

64

of the and address as well as the details of the identity document provided
should also be kept on record.
If a transaction is being undertaken on behalf of another person, identification
evidence of all the persons concerned should be obtained and kept on record.
4. PURCHASE OF FOREIGN EXCHANGE
a) For encashment of foreign currency notes and/or Travelers Cheques up to
USD 500 or its equivalent, production of passport need not be insisted upon
and any other suitable document of identification like ration card, driving
license etc. can also be accepted.
b) For verification of the identity of customer for encashment in excess of USD
500 or its equivalent, a photo identity document such as passport, driving
license, PAN card, voter identity card issued by the Election Commission, etc.
should be obtained.
c) Requests for payment of sale proceeds in cash may be acceded to the extent of
USD 1000 or its equivalent per transaction. All encashment within one month
may be treated as single transaction for the purpose. In all other cases AMCs
should make payment by way of Account Payee cheque / demand draft only.
d) Where the amount of forex tendered for encashment by a non-resident or a
person returning from abroad exceeds the limits prescribed for Currency
Declaration Form (CDF), the AMC should invariably insist for production of
declaration in CDF.

5. IN ALL CASES OF SALE OF FOREIGN EXCHANGE,

IRRESPECTIVE OF THE AMOUNT INVOLVED,
For identification purpose the passport of the customer should be insisted
upon. The sale of forex should be made only on personal application and
identification. Payment in excess of Rs.50, 000/- towards sale of foreign
exchange should be received only by account payee cheque / demand draft.

65

 All purchases by a person within one month may be treated as single

transaction for the purpose. Encashment Certificate, wherever required, should
also be insisted upon.
6. ESTABLISHMENT OF BUSINESS RELATIONSHIP
Relationship with a business entity like a company / firm should be established
only after obtaining and verifying suitable documents in support of name,
address and business activity such as certificate of incorporation under the
Companies Act, 1956, MOA and AOA, registration certificate of a firm (if
registered), partnership deed, etc.
A list of employees who would be authorized to transact on behalf of the
company / firm and documents of their identification together with their
signatures, should also be called for.
Copies of all documents called for verification should be kept on record.
7. SUSPICIOUS TRANSACTIONS
The AMC must ensure that its staff is vigilant against money laundering
transactions at all times. An important part of the AML measures is
determining whether a transaction is suspicious or not. A transaction may be of
suspicious nature irrespective of the amount involved.
Some possible suspicious activity indicators are given below.

Customer is reluctant to provide details/documents on frivolous

grounds.

The transactions is undertaken by one or more intermediaries to protect

the identity of the beneficiary or hidden their involvement.

Large cash transactions.

Size and frequency of transactions is high considering the normal

business of the customer.

66

Change in the pattern of business transacted.

The above list is only indicative and non exhaustive.

8. APPOINTMENT OF MONEY LAUNDERING REPORTING OFFICER
(MLRO)
An MLRO may be appointed by every AMC for monitoring transactions
and ensuring compliance with the AML Guidelines issued by the Reserve
Bank from time to time. The MLRO will also be responsible or reporting
of suspicious transaction/s to the Financial Intelligence Unit (FIU). Any
suspicious transaction/s, if undertaken, should have prior approval of
MLRO.
The MLRO shall have reasonable access to all the necessary information/
documents, which would help him in effective discharge of his
responsibilities.
The responsibility of the MLRO may include:

Putting in place necessary controls for detection of suspicious

transactions.

Receiving disclosures related to suspicious transactions from

the staff or otherwise.

Deciding whether a transaction should be reported to the

appropriate authorities.

Training of staff and preparing detailed guidelines/handbook

for detection of suspicious transactions.

Preparing annual reports on the adequacy or otherwise of systems and

procedures in place to prevent money laundering and submit it to the Top
Management within 3 months of the end of the financial year.
9. REPORTING OF SUSPICIOUS ACTIVITY

67

 To the extent possible, all suspicious transactions should be reported to the

MLRO before they are undertaken.
Full details of all suspicious transactions, whether put through or not, should
be reported, in writing, to the MLRO.
Any transaction which seems suspicious may be undertaken only with prior
approval of MLRO.
If the MLRO is reasonably satisfied that the suspicious transaction has/may
have resulted in money laundering he should make a report to the appropriate
authority viz. the FIU.
10. STAFF TRAINING
All the managers and staff of the AMC must be trained to be aware of the
policies and procedures relating to prevention of money laundering, provisions
of the PMLA and the need to monitor all transactions to ensure that no
suspicious activity is being undertaken under the guise of money changing.
The steps to be taken when the staff come across any suspicious transactions
(such as asking questions about the source of funds, checking the
identification documents carefully, reporting immediately to the MLRO, etc)
should be carefully formulated by the AMC and suitable procedure laid down.
The AMCs should have an ongoing training programmed for consistent
implementation of the AML measure.
11. AUDIT/COMPLIANCE
The concurrent auditor should check all transaction to verify that they have
been done in compliance with the anti-money laundering guidelines and have
been reported as required. Compliance on the lapses, if any, recorded by the
concurrent auditor should be put up to the Board.

68

 A certificate from the Statutory Auditor on the compliance with AML

guidelines should be obtained at the time of preparation of the Annual Report
and kept on record.
12. MAINTENANCE OF RECORDS
The following documents should be preserved for a minimum period of five
years.

Records including identification obtained in respect of all transactions.

Statements/Registers prescribed by the Reserve Bank from time to

time.

All Inspection/Audit/Concurrent Audit Reports.

Annual reports of the MLRO submitted to the Top Management in

terms of paragraph 8 above.

Details of all suspicious transactions reported in writing or otherwise to

the MLRO.

Details of all transactions involving purchase of foreign exchange

against payment in cash exceeding Indian Rupees 10,00,000 from
inter-related persons during one month.

All correspondence/reports with the appropriate authority in

connection with suspicious transactions.

References from Law Enforcement Authorities, including FIU, should

be preserved until the cases are adjudicated and closed.

LICENSING POLICY FOR AUTHORIZED PERSONS:

LIBERALIZATIONS
Foreign Exchange Management Act (FEMA) stipulates that all foreign
exchange transactions are required to be routed only through the entities that
are licensed by the Reserve Bank to undertake such transactions. Such entities
are defined as Authorized persons in Section 10 of the Act. Under current
dispensation, such authorized person may be:
a. A Commercial bank (AD), or

69

b. A Money changer (FFMC), or

c. Any financial institution authorized for limited kind of transactions, depending on
their activity, or
d. Any other entity authorized by the Reserve Bank.
ENHANCED ACCESS TO COMMON PERSON
With the progressive liberalization in foreign exchange related transactions
common person can now undertake variety of current account transactions
without approaching the Reserve Bank. A large segment of population is
increasingly getting connected with forex transactions of an expanding nature
on individual accounts. Taking into account the day-to- day needs of (a)
common persons for undertaking various transactions, (b) tourists for better
encashment services and (c) requests received from existing FFMCs there is a
felt need for widening and rationalizing the intermediate tier of authorized
persons which is licensed to undertake foreign exchange transactions to meet
the day-to-day needs. These would cater to tourists for encashment and
common persons for release of foreign exchange for medical treatment,
education, employment, travel related transactions and in general a large
variety of current account transactions that are not trade transactions
Therefore, with a view to liberalizing and rationalizing the scope of activities
currently undertaken by the authorized persons an internal Group consisting of
Shri H. Bhattacharya, CGM-I-C, DEIO, Shri G. Padmanabhan, CGM-I-C, DIT
and Shri Vinay Baijal, CGM, FED was constituted to study the related issues
and make recommendations keeping in view the need for enhanced as well as
wider access and accompanying safeguards, especially reporting requirements.
The observations and recommendations of the Group are detailed in following
paragraphs.
LEGAL FRAME WORK

70

 Section 10 (1) of FEMA enables Reserve Bank to authorized any person to be

known as Authorized Person (AP), to deal in foreign exchange or foreign
securities, as an Authorized Dealer (AD), Money Changer (MC) or Offshore
Banking Unit (OBU) or in any other manner as it deems fit. The Bank has
therefore wide discretion to authorize a person as AD or MC or OBU or in any
other manner, and all such persons would be known as 'authorized person.'
Within the broad categories of AD or MC or OBU, it may be permissible to
have sub-categories. There should however be clear eligibility norms for the
classification and the norms should have nexus with the object of
classification.
The authorization is subject to the conditions laid down therein. The
conditions may be for the purpose of ensuring continued eligibility for
conducting the authorized business, and/or relatable to the conduct of
business. While there may be standard conditions uniformly applicable to all
APs or applicable to APs in a category/sub-category, there may also be special
conditions applicable in a particular case on the facts thereof.

EXISTING ARRANGEMENT
The Reserve Bank has currently authorized 976 entities as authorized persons
in following categories:

Category of license

Entities

Major Activities

( Number)

71

Authorized Dealers

Commercial Banks - 84;

All permissible current and

(87)

State Co-operative Bank - 1;

capital account transactions

Urban Co-operative Bank - 2.

Financial Institutions Financial Institutions 4

Activities related to financing of

(9)

(EXIM, IFCI, SIDBI ,CCIL)

international trade undertaken

Factoring Agencies 5

by these institutions

Full Fledged Money Department of Post

Sale/Purchase of foreign

Changers

Urban Cooperative Bank 9

exchange for private and

(879)

Other FFMCs 869

business visits abroad

Others

Thomas Cook India Ltd.

Specified non trade related

(1)

current account transactions

Total (976)
Details of the various activities that each of these categories can undertake are
given in Annex-1

Authorized FFMCs (879)

Financial Institutions

Others

(9)

(1)

Dealers
(87)

SIDBI, EXIM and IFCI

All

Sale/Purchase

permissible of foreign

exchange for private and

1. Transactions relating to

current and exchange for foreign currency borrowing/

capital

private and

lending debt servicing and

account

business

trade finance (both fund and

transactions travel

1. Sale/purchase of foreign

non-fund based) which are

incidental to the normal
functions.

business travel, including for

medical treatment,
participation in
conferences/exhibitions/fair,
competitions, training,
education abroad,
membership of International

2. Maintaining foreign
currency accounts with
banks, correspondents
abroad.

Organizations etc..
2. Remittances by tour
operators / travel agents to
overseas agents / principals /

72

3. Investing surplus foreign hotels, Film shooting,

currency balances in
accordance with RBI/GoI
guidelines in force.

3. Reimbursement of travel
expenses of foreign
nationals on business visits

4. Buying/selling foreign

to India, / temporarily

exchange in the domestic as engaged by organizations in

well as international markets India., Payment of crew
in cover of transactions

wages, Remittance towards

which are incidental to

cultural tour where prior

permitted foreign exchange approval has been obtained

transactions.

from the Ministry of Human

Resource Development,

5. Entering into forward

contracts and other risk
management products on
behalf of clients as also for

Remuneration for visiting

professionals who are on a
short-term assignment in
India.

own balance sheet

management.

4. Remittance for
educational tie up

6. Maintaining open
exchange/gap positions
arising on account of the

arrangements with
universities abroad,
examination fees etc.

above transactions up to the

limits approved

5. Visa/Emigration/
Emigration Consultancy

7. Offering long dated

foreign currency-rupee
swaps to clients/non-clients
8. Availing temporary
overdrafts from the
correspondent banks for
activities related to
negotiation of payment

73

Fees, assessment fees for

overseas job applications
etc.
6. Maintenance of close
relatives abroad.

under the letter of credit,

other payments etc.
9. Undertaking foreign
currency rupee sell/buy
swaps
10. Extending pre and postshipment credit facility.
(only SIDBI)
Clearing Corporation of
India Ltd. (CCIL)
1. Maintaining foreign
currency accounts with a
settlement bank outside
India.
2. Accept foreign currency
deposits from Authorised
Persons who are members of
CCIL
3. Invest the foreign
currency funds placed as
deposits by the clearing
members in US $ Treasury
Bills/Notes or other US
Government Securities.
4. Avail one or more Lines
of Credit from the settlement
bank outside India to
facilitate the clearing

74

operations.
5. Access the domestic forex
markets, either directly or
through an Authorised
Dealer, in case of default by
any of the clearing members
or for making remittances
incidental to forex clearing
and settlement operations.
Factoring agencies
a. Provide import factoring,
assuming all the relevant
obligations enjoined on
Authorised Dealers in
respect of import
transactions as per extant
exchange control
regulations.
b. Handling of all
Import/Export documents
relating to factoring services
and forfeiting transactions.
c. Acceptance and release of
GR Forms.
d. Maintenance of Nostro
Account balances
commensurate with the
business needs.
e. Undertaking forex cover

75

operations purely to hedge

exposures occasioned by
factoring/forfeiting.
f. Make payments towards
various charges incidental to
factoring/ forfeiting to
overseas
associates/forfeiting
agencies.
g. Export factoring to be
provided on 'with recourse
basis' and forfeiting on
'without recourse basis'.
h. In cases where exporters
have availed of pre-shipment
finance, funds/discounted
value of forfeiting bills
should be transferred direct
to the concerned bank in
foreign currency/ rupee as
the case may be.
i. Permitted to consider the
requests (i) for reduction in
invoice value, (ii) payment
of agency commission and
(iii) write off of export
proceeds from your exporter
clients under extant rules
and regulations as applicable
to authorized dealer in
foreign exchange.

76

REVIEW
The Reserve Bank has been receiving representations from existing Full
Fledged Money Changers (FFMCs) requesting to expand the scope of the
foreign exchange transactions that they are permitted to undertake. These
requests were revisited by the Group in the light of on going liberalization in
foreign exchange transactions, convenience of the tourists, improved
technology and with an object to rationalize the institutional structure and
expand the number of entities eligible to undertake foreign exchange
transactions, while ensuring appropriate safeguards against misuse.
In the light of the above, the Group had detailed discussions on the
transactions that various entities are permitted to undertake and also the
growing need of the common person and tourist for foreign exchange
transactions in the light of progressive liberalization over the last 15 years as
well as globalization of the Indian economy. The Group feels that there is a
distinct growing demand to undertake current account foreign exchange
transactions that are not related to trade but are required to meet miscellaneous
needs of common person like fees and maintenance expenses of students,
foreign exchange for medical treatment etc.

RECOMMENDATIONS
With a view to providing adequate foreign exchange facilities to common
persons the Group, observes that for efficient customer service through
competition there is a need to widen the scope of activities which the
Authorized persons are eligible to undertake and also to increase the number
of entities that are eligible to sell foreign exchange to public for their day-today current account transactions. The Group, therefore, recommends that
Reserve Bank may consider granting licenses to certain entities to undertake
some more transactions, in addition to what FFMCs are currently permitted,

77

by authorizing them to undertake certain non-trade related current account

transactions. Such entities may be called Restricted Authorized Dealers
(Restricted ADs).
Proposed Classification of Entities

Sl.

Category of license

No.

(Number)

Authorized Dealers

Entities

Major Activities

Commercial Banks ,

All current and capital account

State Co-op Bank ,

transactions according to RBI

Urban Co-op Bank ,

directions issued from time-totime.

( No Change)

2.

Restricted Authorized
Dealers (RADs)
i)

Category-I

Financial Institutions

Activities incidental to

EXIM, IFCI, SIDBI

financing of international

,CCIL and

trade related activities

Factoring Agencies

undertaken by these
institutions. (No Change)

ii) Category-II

1. Upgraded FFMCs Specified non-trade related

2. Select UCBs

current account transactions as

3. Select RRBs

at Para. 6.3 of the Report

4. Thomas Cook
India Ltd.
3

Full Fledged Money

Changers (FFMCs)

Sale/Purchase of foreign
Department of Post

exchange for private and

Urban Coop Bank

business visits Abroad.

Other FFMCs

(No Change)

The Group recommends that RADs-Category II may be permitted to release

foreign exchange for the following transactions:

Private Visits,

78

Remittance by tour operators / travel agents to overseas agents /

principals / hotels,

Business Travel,

Fee for participation in global conferences and specialized training

Remittance for participation in international events / competitions

(towards training, sponsorship and prize money).

Film shooting,

Medical Treatment abroad,

Disbursement of crew wages,

Overseas Education,

Remittance under educational tie up arrangements with universities

abroad,

Remittance towards fees for examinations held in India and abroad and
additional score sheets for GRE, TOEFL etc.,

Employment and processing, assessment fees for overseas job

applications,

Emigration and Emigration Consultancy Fees,

Skills / credential assessment fees for intending migrants,

Visa fees,

Processing fees for registration of documents as required by the

Portuguese / other Governments,

Registration / Subscription / Membership fees to International

Organizations,

It will be observed that the recommendations imply that the entities proposed
to be licensed as RAD-Category II may be permitted to undertake the
transactions that involve conversion of one currency into other on the basis of
a simple declaration from the applicant and/or on production of appropriate
document. Such transactions may not necessarily require opening and
maintaining foreign currency denominated (NOSTRO) account with a bank
outside India. However, the Group recommends that to facilitate issuance of
foreign currency draft etc. for such transactions the RAD-Category II may be

79

allowed enter into an arrangement with banks authorized to deal in foreign

exchange in India.
ELIGIBILITY CRITERIA FOR GRANT OF RESTRICTED AD (RADCATEGORY II) LICENSE
The Group has deliberated in detail the current dispensation available to
various categories of authorized persons and in the light of regulatory
framework under which each category of institutions is functioning the issue
of granting them license as a Restricted AD has been considered. The
eligibility criteria should primarily depend on strong financials, good
governance, regulatory / prudential comfort and adequate control mechanism.
The Group recommends that the following category of institutions could be
considered for the purpose.
Existing Full-fledged Money Changers as RADs Category II
Currently, a company with minimum capital of Rs.25 lakhs for a single branch
and Rs.50 lakhs for multi-branch is eligible to apply for a license of FFMC for
consideration by the Reserve Bank. The Group recommends that the Reserve
Bank may consider granting RAD-Category II license to the existing, well
functioning FFMCs, with strong financials, that demonstrate good governance
while providing regulatory/ prudential comfort. Illustratively, the criteria for
up gradation of existing FFMC to RAD-Category II may include net owned
funds Rs 10 crores; satisfactory functioning as FFMC for at least two years
and credit report from their bankers.
Urban Co-operative Banks (UCBs)
No new Authorized Dealer/FFMC license is being currently granted to any
Cooperative Bank. Although, fresh FFMC licenses are not being issued to
UCBs, the existing licenses are being renewed under the same conditions.

80

 The Group observes that with the adoption of the road map as outlined in the
'vision document' for Cooperative sector many of the supervisory concerns of
the sector are being addressed. Therefore, the Group recommends that the
Urban Cooperative banks with strong financials, good governance and
providing regulatory/prudential comfort may be considered, on case by case
basis, for licensing as RAD-Category II.
The Group would like to emphasize that the license to deal in foreign
exchange in capacity other than Authorized Dealers is different insofar as
these entities are not permitted to undertake any open position risk. The
activities permitted under these licenses only allow conversion from one
currency to other currency. Therefore, a beginning can be made by granting
them license as RAD-Category II.
REGIONAL RURAL BANKS
The Group observes that the Regional Rural Banks (RRBs) are jointly
promoted by public sector banks, the Central Government and the State
Government. As on date there are 177 RRBs (196 - as on March, 2005).
Further, currently the RRBs are undergoing financial restructuring and
amalgamation. The Group also notes that in terms of ownership the RRBs
satisfy the criteria of 'fit and proper'. The sponsor banks have rich experience
in foreign exchange transactions and the RRBs can draw upon the sponsor
banks for training and skill up gradation, if needed.
Therefore, in view of the wide branch network of RRBs and with a view to
providing foreign exchange services at the doorstep of the common person the
Group recommends that the Reserve Bank may also consider RRBs with
strong financials, good governance and providing regulatory/prudential
comfort for granting licenses as RAD-Category II.
To ensure active involvement of the sponsor banks the Group recommends
that the Reserve Bank may consider requests provided it is recommended by
the sponsor bank to grant RAD Category II license to RRBs on case by
case basis. Since the supervision of the RRBs is entrusted to NABARD the
Reserve Bank may consider taking into account the recommendations of the

81

NABARD also before taking a decision on the application for grant of RADCategory II license.

Before granting license, the Bank may also consider obtaining an undertaking
from the sponsor bank of the RRB that it would impart training to the staff of
the RRB to ensure that they are able to discharge their responsibility as RADCategory II.
PROPOSED STRUCTURE
Proposed structure of the authorized persons would be as follows:

Sl.

Category of

Entities

Eligibility

Major Activities

No. license
(Number)
Commercial Banks, No Change
1

Authorized
Dealers

All current and capital

State Co-op Bank,
Urban Co-op Banks

1) License to

account transactions

conduct Banking

according to RBI

business in India.

directions issued from

time-to-time.

2) Report from the

concerned
regulatory
department of RBI.
2.

Restricted
Authorised
Dealers (RADs)
Financial
i) Category-I

No Change
Activities incidental to

Institutions ;
(On case to case
EXIM, IFCI, SIDBI basis to facilitate
,CCIL and

financing of
international trade

the core activity of related activities

82

Factoring Agencies the institutions.)

undertaken by these
institutions.

1. Upgraded
ii) Category-II

Strong financials, Specified non-trade

FFMCs
2. Select
UCBs

good governance

related current account

and regulatory/

transactions as at

prudential comfort paragraph 6.3 of the

and adequate

3. Select RRBs

Report

control mechanism
as in paragraph 7

4. Thomas

of the Report.

Cook India
Ltd.

No Change
3

Full Fledged
Money

Sale/Purchase of
Department of Post 1) Registered

foreign exchange for

under Indian

private and business

Companies Act.

visits Abroad

Changers
(FFMCs)

Urban Coop Bank ,

Other FFMCs,

2) Minimum
capital of Rs. 25
lakhs for single
branch Rs. 50
lakhs for multibranch,
3) Satisfactory
report from
bankers.

TRANSITIONAL ARRANGEMENTS
The Group notes that in adopting the proposed structure it is unlikely that it
may result in limiting the present activities of any of the licensed entities.

83

However, in the event that there is any entity which considers the proposed
structure restrictive as compared to the current dispensation, the Group
recommends that such entity may be granted special dispensation, on case by
case basis, with a view to continuing their present status, as appropriate.
However, Group is of the view that all such special permission may be granted
subject to annual review.
REPORTING REQUIREMENT
In case of Authorized Dealers, RADs-Category I and FFMCs the existing
reporting requirements may continue.
It is recommended that the RADs-Category II may be required to submit a
monthly statement of all transactions (category wise) where the amount
exceeds a prescribed cut-off value, say USD 5,000 per transaction initially, so
that a review could be made of the threshold in six months and a firmer
threshold may arrived at.
INSPECTION / AUDIT
The existing arrangement of inspection/audit of Authorized Dealers and
RADs-Category I will continue.

As regards the FFMCs as has been decided that an auditor certificate

confirming the compliance with the Rules/Regulations/ Directions will be
adequate. However, the Reserve Bank may reserve the right to inspect when
considered necessary.
For RADs-Category II also the prescription as provided for FFMCs (Para.
12.2) may be made applicable. However, the Group recommends that the
Reserve Bank may require a special audit of the RADs-Category II depending
on the nature of the transactions by an auditor from the approved list of the
RBI/ICAI.
KYC AND ANTI MONEY LAUNDERING NORMS

84

 The existing arrangement of KYC and Anti Money Laundering norms for
Authorized Dealers may continue.
KYC and Anti Money Laundering norms are being prescribed separately for
FFMCs. These may be made applicable to RADs-Category II also.
MISCELLANEOUS
The Group recommends that to begin with all RAD-Category II licenses may
be issued only for ONE year subject to renewal.

Sd/=

Sd/=

Sd./=

(H. Bhattacharya)

(G. Padmanabhan)

(Vinay Baijal)

November 29, 2005

Mumbai.

85

LIMITS OF FOREIGN EXCHANGE

LIMITS FOR FOREIGN CURRECNY / NOTES / COINS

1. Travelers proceeding to countries other than

not exceeding US $

2000
Iraq, Libya, Islamic Requblic of Iran, Russian

or its equivalent.

Federation & other Republics of Commonwealth

Of Independent States.
2. Travellers proceeding to Iraq or Libya

Not exceeding US $

5000
Its equivalent.

86

3. Travellers proceeding to Islamic Republic of

Full Exchange may be

Iran, Russian Federation & Other Republics of

released.

Commonwealth of Independent States.

AD may accept payment in cash up-to Rs.50,000/- against sale of foreign
exchange for travel abroad (for private visit of any purpose.)
Above Rs.50,000/- payment must be received only by:
1. Crossed cheque drawn on applicants Banks Account.
2. Crossed cheque drawn on Bank account of the first applicant
sponsoring for visit of the applicant for
3. Bankers cheque / Payment Order / Demand draft scheme for
Authorized Dealers & Full Fledged Money Changers appointing
Agents/ Franchisees for undertaking Restricted Money changing.
OBJECTIVE:
To provide easier conversion facilities for tourists, NRIs by enlarging the
network of Money changing facilities in the country.
SCHEME:
Reserve Bank freely permits ADs & FFMCs to enter into franchising
agreement.
FRANCHISE:
A franchise can be any entity who has a place of business and whose bonafide
are acceptable to AD/FFMC. These franchises would undertake any restricted
money changing business.
PROCEDURE OF APPLICATION:

87

1. The franchiser i.e. AD or an FFMC would need to apply to Reserve Bank in

Form RMC-F.
2. A declaration by AD or FFMC that while selecting the franchisee adequate due
diligence has been carried out and that such entities have undertaken to
comply with agreement/prevailing Reserve Bank of India regulations
regarding money changing.
3. Approval by Reserve Bank on a one time basis. Thereafter as and when new
franchise agreements are entered into these would have to be reported on a
post facto basis along with similar declaration as indicated above.
Franchisers are free to decide on the tenor of the agreement.
Franchisee agreement should include the following silent features:
1. The display of exchange rates. Exchange rate of foreign currency in to rupees
should be the same or close to the daily exchange rate charged by ADs/FFMCs
as its branches.
2. Surrender of collection to the franchiser or other ADs within 7 days.
3. Maintenance of proper records of transaction by the franchisee.
4. On site inspection of premises and records by the franchise at least once in a
year.

COMPANY PROFILE OF NPR FINANCE LIMITED

88

 HISTORY

89

PRESENT STATUS OF THE FIRM

90

BUSINESS POLICY

91

CORE COMPETENCE

92

UNIQUENESS

92

RISK AND REWARDS

92

BRANCHES

93

HISTORY
NPR FINANCE LIMITED is a part of NPR Group which has various
businesses such as Hire purchase finance and leasing, Foreign Exchange,
Paper manufacturing, automobile dealership, Transportation of heavy goods
and Real estate property development along with civil construction. The total
turnover of NPR Group is Rs. 800 Crores. (Three Hundred Crores) annually.
Head office is located at 19, R.N.Mukherjee Road, Main Building, 1st Floor,
Kolkata-700 001. There are total of four offices in Kolkata, a paper mill at
Chakdah, workshops at Kolkata, Asansol, Kharagpur and Burdwan and eight
branch offices in the cities of New Delhi, Mumbai, Chennai, Ahmedabad,

89

Kochi, Bhubaneswar, Jaipur & Agra. NPR Group operates from a total of
eighteen locations all over the country and controls various business activities.
Mr. N.L.Todi is heading the NPR Group. The NPR Groups roots can be traced
back to the year 1860 when Mr. N.L.Todis grandfather started trading in
Narayanganj (now in Bangladesh) after having moved from Rajasthan. They
began with trading of commodities and diversified into manufacturing by
setting up their own Glass Factory (Hardeo Glass Works) in the year 1927 at
Dhaka. Soon after, they began manufacturing of Aluminium, ceramic and
Silicate Enamel wares. They also have had vast and varied experience in
trading and wholesale dealing of food grains, cotton textiles and jute bailing.
In fact, Dinajpur Industries Ltd. set up by Mr. N.L.Todi and was one of the
foremost Jute Bailing presses in North Bengal and exported Jute to Japan,
Russia and many parts of Europe. Once all the properties of Mr. N.L.Todi
were declared as Enemy property by the Pakistani Government he had to flee
East Pakistan (now Bangladesh) and had to come to Kolkata, India.
Mr. N.L.Todi all by himself started business in Kolkata, India in the year 1959
and successfully implemented many ventures in the field of Engineering,
Printing and Packaging, Real Estate & Property Development, Paper
Manufacturing, Automobile Dealership & Workshops, Transportation of heavy
goods and Hire Purchases and Leasing

PRESENT STATUS OF THE FIRM

Presently, the Group is headed by Mr. N.L.Todi, who is a dynamic
entrepreneur and bye his imagination and restless effort, the group has been
successful in setting up many industrial & business units, His recipe for
success has always been unmatched quality at affordable prices and customer
satisfaction. He is aided by his two sons
Mr. Pawan Kumar Todi, Mr. Raj Kumar Todi and his grandsons Mr. Rishi Todi
and Mr. Varun Todi

90

 At present, the Group is involved in the following activities:

Paper Manufacturing.

Automobile Dealership with Workshop.

Hire Purchase finance and leasing.

Foreign Exchange

Transportation of heavy goods.

Real Estates, Property Development along with Civil Constructions.

Granite Mining (first of its kind in West Bengal)

BUSINESS POLICY
MISSION AND VISION STATEMENT
GROWTH WITH CUSTOMER SATISFACTION.
UNLESS YOU SATISFY YOUR CUSTOMES YOU CANT GROW.

NPR FINANCE Ahmedabad Stands For

N Newly Started in 1997

91

P Providing Non-banking finance services

R Refinance is the beginning of our branch
F Finance and Foreign Exchange Facility
I Insurance inspiration to the customers
N - Negotiations with customers with positive attitude
A Approach establishes long term association
N New expansion with planning & efficiency
C Customers satisfaction with commitment
E Excellent office Environment
BUSINESS POLICY
NPR Finance Ltd. Doesnt encourage credit sale.
NPR planning to expand franchises base in rural potential areas.
To increase man power.
By expanding branch network NPR will focus on large corporate plants who
wants Forex at different location.
NPR sticks to minimum margin policy and opt to loose any transaction if that
margin is not covered.

CORE COMPETENCE
Excellent customer services.
Utmost satisfaction of the customers.
Good team work.

UNIQUENESS

92

 Fair and transparent dealings.

RISK AND REWARDS

Forex market is highly risk oriented business despite that margins are very
low.

BRANCHES
COMPANY
NPR FINANCE LTD.
HEAD OFFICE

BRANCH OFFICE

ADDRESS
KOLKATA
19, R.N.Mukherjee Road,
Main Building, 1st Floor
Kolkata - 700 001

TELEPHONE
(003)2248 4788
(033)2248 9902
(033)2248 8824

FAX
(033)2243 0151

NEW DELHI
2nd Floor
8C/6, W.E.A. Abdul Aziz Road
Karol Bagh
(Opp. Shastri Park)

(011)2581 2585
(011)2571 1461
(011)2574 8542

(011)2575 0672

93

New Delhi - 110 005

(022)2380 1507
(022)2380 1508
(022)2380 1509

(022)2380 2715

BRANCH OFFICE

MUMBAI
2nd Floor, Room No. 218
Majestic Shopping Centre
144 Jagnnath Shankar Seth
Road
Girgaum
Mumbai - 400 004

(044)2829 5754
(044)2829 5746

(044)2829 5746

BRANCH OFFICE

CHENNAI
No. 35/36 Greams Rd,2nd Floor
Chennai - 600 006
AHMEDABAD
106-107 "Samedh"
Above O.B.C.
Panchvati
C.G.Road,
Ahmedabad - 380 006

(079)640 1482
(079)640 1483

(079)640 5655

KOCHI
41/1787, Chittor Road
Opp. Sree sudheendra Hospital
Kochi 682 018

(0484)236 7927
(0484)236 6490

(0484)235 1589

BHUBANESWAR
A/173 Sahidnagar
Bhubaneswar - 751 007

(0674)254 5561

(0674)254 5583

JAIPUR
301,2nd Floor
Shalimar Complex
Church Road,
Off Mirza Isamail Road
Jaipur - 302 001

(0141)2369 371
(0141)2374 273
(0141)3109 408

AGRA
18/163/B/5
Fatherhabad Road
Opp. Hanuman Temple
Near Taj View Hotel
Agra

(0562)2234 053
(0562)2234 054

BRANCH OFFICE

BRANCH OFFICE

BRANCH OFFICE

BRANCH OFFICE

BRANCH OFFICE

94

REASONS FOR NPR FINANCE DIVERSIFY INTO

FOREX BUSINESS

95

REASONS FOR NPR FINANCE DIVERSIFY INTO FOREX

BUSINESS
It gives boost reputation and to create larger customer base which will help in
building volumes for both the forex and finance dept.

Diversification policy of company.

The profit margin gain from the Forex fulfills all expenses of the Finance dept.

To increase wealth maximization.

To gain the benefit of vastly developing Forex business.

To expand the business as the whole.

96

MANAGEMENT BACKGROUND AND

ORGANIZATIONAL STRUCTURE

97

MANAGEMENT BACKGROUND
NPR FINANCE LIMITED
GANESHNARAYAN BRIJLAL LIMITED
The group made their foray into the financial world with the incorporation of
GANESH-NARAYAN BRIJLAL LIMITED (GNB LIMITED) in 1959 at
Calcutta, the groups first Company in Eastern India providing financing
facilities for Commercial Vehicles (CVs).
NPR FINANCE LIMITED, a company promoted by the reputed TODI group
of Calcutta, began operations in 1989. The Company is engaged in the
activities of leasing and hiring purchase of Commercial Vehicles, Cars, Plant
& Machinery, Office equipment etc. It went to Public in February, 1995 and
the response was very satisfactory. Due to the untiring efforts of its chairman
Sri Nand Lal Todi and Directors, the Company has been expanding operation
and today has offices at Mumbai, Ahmedabad, New Delhi, Chennai, cochin
and Asansol, catering to the financial needs of various clients at a national
level.

98

 The company has also benefited from the experience of Shri P. K. Todi,
present Managing Director, and is today one of the leading Hire
Purchase/Leasing companies in Eastern India.

99

BOARD OF DIRECTORS

TECHNICAL
TEAM

REGIONAL
MANAGER

BRANCH
MANAGER

SENIOR
OFFICERS

ADMINISTRA
TIVE
OFFICERS

ORGANIZATIONAL STRUCTURE

100

101

102

103

FINANCIAL DATA OF NPR FINANCE LTD.

104

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2003

Schedule

For the year

ended 31.03.2003
Rs.

For the year

ended 31.03.2002
Rs.

65,78,131
13,75,65,161
0

34,35,829
9,76,99,277
11,26,749

19,52,25,793

9,46,53,909

9,94,05,608
68,17,574

10,23,91,219
85,68,980

44,55,92,267

30,78,75,963

10,23,91,219
21,13,46,837
55,79,434
1,81,30,462
1,38,50,685
3,03,824
6,79,69,071

2,00,21,369
17,87,84,997
49,87,145
1,18,86,563
1,52,80,935
3,03,824
4,89,87,447

41,95,71,532

28,02,52,280

2,60,20,735
(2,54,58,996)
86,98,359

2,76,23,683
(3,76,90,229)
1,10,73,230

92,60,098

10,06,684

Provision for Income Tax

Current
Deferred
PROFIT AFTER TAX
Balance brought forward
Opening unadjusted Deferred Tax Liability

(40,00,000)
51,66,624
1,04,26,722
66,52,896
0

(9,70,000)
-33,360
3,324
4,97,50,451
(4,28,11,168)

PROFIT AVAILABLE FOR APPROPRIATION

1,70,79,618

69,42,607

Transfer to statutory reserve for earlier years

Transfer to statutory reserve

0
20,85,344

2,89,046
665

1,49,94,274

66,52,896

1,70,79,618

69,42,607

INCOME
Income from Money changing operation
Income from financing operation
Income from franchise operation
Sale:
Shares & Securities
Closing Stock:
Shares & Securities
Other Income

M
N

EXPENDITURE
Opening Stock (Shares & Securities)
Purchase of Shares & Securities
Establishment Charges
Other expenses
Financial expenses
Preliminary/Issue expenses written off
Bad Debts

P
Q
R

Profit before depreciation, Lease Equalisation A/c

and Tax
Depreciation
Add/(Less) : Lease equalisation Account
PROFIT BEFORE TAX

Surplus balance carried to Balance Sheet

TOTAL
S

Notes on Accounts
Balance Sheet abstract & companies
general business profile

105

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2004

Schedule

INCOME
Income from Money changing operation
Income from financing operation
Sales
Closing Stock
Other Income

L
M

EXPENDITURE
Opening Stock
Purchases
Establishment Charges
Other expenses
Financial expenses
Preliminary/Issure expenses written off
Bad Debts

O
P
Q

Profit before depreciation, Lease Equalisation A/c

and Tax
Depreciation
Add/(Less) : Lease equalisation Account

106

For the year

ended 31.03.2004
Rs.

For the year

ended 31.03.2003
Rs.

1,05,99,412
8,45,75,692
36,09,65,763
9,90,90,542
1,77,16,795
57,29,48,204

65,78,131
13,75,65,161
19,52,25,793
9,94,05,608
68,17,574
44,55,92,267

9,94,05,608
37,21,09,148
82,99,619
2,33,01,536
1,14,37,086
3,03,824
1,39,40,007
52,87,96,828

10,23,91,219
21,13,46,837
55,79,434
1,81,30,462
1,38,50,685
3,03,824
6,79,69,071
41,95,71,532

4,41,51,376
(1,64,30,622)
1,12,49,228

2,60,20,735
(2,54,58,996)
86,98,359

PROFIT BEFORE TAX

Provision for Income Tax
Current
Deferred
PROFIT AFTER TAX
Income Tax Adj. of earlier years
Excess Deferred Tax Liability written back
Balance brought forward
PROFIT AVAILABLE FOR APPROPRIATION
Transfer to statutory reserve
Surplus balance carried to Balance Sheet
TOTAL
R

Notes on Accounts
Balance Sheet abstract & companies
general business profile

107

3,89,69,982

92,60,098

(72,50,000)
1,28,27,030
4,45,47,012
(2,87,580)
92,27,550
1,49,94,274
6,84,81,256
89,10,000
5,95,71,256
6,84,81,256

(40,00,000)
51,66,624
1,04,26,722
0
0
66,52,896
1,70,79,618
20,85,344
1,49,94,274
1,70,79,618

BALANCE SHEET AS AT 31ST MARCH,2004

Schedule

As at
31.03.2004
Rs.

As at
31.03.2003
Rs.

A
B

5,99,66,000
15,05,76,797

5,99,66,000
9,70,89,815

C
D

3,68,85,181
7,63,12,041

4,60,23,249
7,23, 27,025

TOTAL

32,37,40,019

27,54,06,089

17,31,24,350
(8,99,64,376)
8,31,59,974

26,77,42,498
17,08,12,626
9,69,29,872

(50,38,785)
(8,87,802)

(53,56,382)
(9,35,013)

7,72,33,387

9,06,38,477

SOURCES OF FUNDS
Shareholder's Funds
a) Share Capital
b) Reserves and Surplus
Loan Funds
a) Secured Loans
b) Unsecured Loans

APPLICATION OF FUNDS
Fixed Assets
a) Gross Block
b) Less: Accumulated Depreciation

c) Add/(Less): Lease Adjusment Account

d) Less: Loss on valuation of Non
performing lease assets
Net Fixed Assets
Current Assets, Loans and Advances
a) Inventories
b) Sundary Debtors
c) Cash & Bank Balances
e) Loans and advances

F
G
H
I

10,35,26,020
60,14,052
2,92,67,955
28,51,41,982
42,39,50,009

10,17,94,031
66,56,604
2,35,12,933
34,11,56,114
47,31,19,682

Less: Current Liabilities & Provisions

a) Current Liabilities
b) Provisions

J
K

16,05,69,921
1,71,77,280
17,77,47,201
24,62,02,808
3,03,824

25,01,12,688
3,88,47,030
28,89,59,718
18,41,59,964
6,07,648

TOTAL
R

32,37,40,019

27,54,06,089

Net Current Assets

Miscellaneous expenditure
(to the extent not written off or adjusted)
Notes on Accounts
Balance Sheet abstract & companies
general business profile

108

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2005

Schedule

INCOME
Income from Monaey changing operation

109

For the year

ended 31.03.2005
Rs.

For the year

ended 31.03.2004
Rs.

1,32,24,398

1,05,99,412

Income from financing operations

Sales
Closing Stock
Other income

EXPENDITURE
Opening Stock
Purchases
Establishment Charges
Other expenses
Financial expenses
Preliminary/Issue expenses written off
Bad Debts

O
P
Q

Profit before depreciation, Lease Equalization A/c and Tax

Depreciation
Add/(Less) : Lease Equalization Account
PROFIT BEFORE TAX
Provision for Income Tax
Current
Deferred
PROFIT AFTER TAX
Income Tad Adj. of earlier years
Excess Deferred Tax Liability written back
Balance brought forward
PROFIT AVAILABLE FOR APPROPRIATION
Transfer to statutory reserve
Proposed Dividend
Dividend Distribution Tax
Surplus balance carried to Balance Sheet
TOTAL
R

Notes on Accounts
Balance Sheet Abstract & Companies
General Business Profile

110

8,05,90,573
45,59,63,822
7,06,20,062
1,19,25,819

8,45,75,692
36,09,65,763
9,90,90,542
1,77,16,795

63,23,24,674

57,29,48,204

9,90,90,542
43,63,52,584
1,12,43,603
2,33,04,517
1,01,35,420
3,03,824
41,37,906

9,94,05,608
37,21,09,148
82,99,619
2,33,01,536
1,14,37,086
3,03,824
1,39,40,007

58,45,68,396

52,87,96,828

4,77,56,278

4,41,51,376

(1,12,62,882)
35,50,547

(1,64,30,622)
1,12,49,228

4,00,43,943

3,89,69,982

(1,47,85,029)
22,44,402

(72,50,000)
1,28,27,030

2,75,03,316
5,95,71,256
8,70,74,572
55,00,670
59,89,600
8,40,042
7,47,44,260
8,70,74,572

4,45,47,012
(2,87,580)
92,27,550
1,49,94,274
6,84,81,256
89,10,000
5,95,71,256
6,84,81,256

BALANCE SHEET AS AT 31ST MARCH,2005

Schedule

As at
31.03.2005
Rs.

As at
31.03.2004
Rs.

A
B

5,99,66,000
17,12,50,471

5,99,66,000
15,05,76,797

C
B
TOTAL

5,90,43,186
8,79,66,474
37,82,26,131

3.68,85,181
7,63,12,041
32,37,40,019

9,96,12,742
(3,67,19,879)
6,28,92,863
(45,87,109)
(4,20,316)

17,31,24,350
(8,99,64,376)
8,31,59,974
(50,38,785)
(8,87,802)

5,78,85,438

7,72,33,387

7,55,43,158

10,35,26,018

SOURCES OF FUNDS
Shareholders Funds
a) Share Capital
b) Reserves and Surplus
Loan Funds
a) Secured Loans
b) Unsecured Loans

APPLICATION OF FUNDS
Fixed Assets
a) Gross Block
b) Less : Accumulated Depreciation

c) Add/Less : Lease adjustment account

d) Less : Loss on valuation of Non performing lease assets
Net Current Assets
Current Assets, Loans and Advances
a) Inventories

111

b) Sundry Debtors
c) Cash & Bank Balances
d) Loans and advances

G
H
I

Less : Current Liabilities & Provisions

a) Current Liabilities
b) Provisions

J
K

Net Current Assets

Miscellaneous expenditure
(to the extent not written off or adjusted)
TOTAL
R

Notes on Accounts
Balance Sheet Abstract & Companies
General Business Profile

112

1,55,76,887
3,65,92,734
36,84,93,469

2,95,47,636
2,92,67,955
26,16,08,400

49,62,06,248

42,39,50,009

15,40,15,973
2,18,49,582

16,08,98,326
1,68,48,875

17,58,65,555

17,77,47,201

32,03,40,693
-

24,62,02,808
3,03,824

37,82,26,131

32,37,40,019

SWOT ANALYSIS OF NPR FINANCE LTD.

STRENGTHS

114

WEAKNESS

114

OPPORTUNITY

115

THREATS

115

113

STRENGTHS
Committed Staff.
Excellent Teamwork.
Excellent relationship with client
Attachment with clients as human being.
Healthy environment for work and family like atmosphere.
Sweet relations with customers.
Parallel in other business also.
Huge database.
Very strong retail presence.
Excellent infrastructure and good ambience of office premises.

WEAKNESS
Lack of man power in Forex department.
Limited number of branches.
For getting maximum retail customers Forex department should be at prime
location

Lack of aggressiveness.

114

 No designation for Branch Manager and there for problem of power and
authority arises.

Due to lack of sales staff it becomes difficult to give quick service to

customers.

At times due to healthy competition in the market company needs to do certain

transaction even at a loss when competition arises. So, that company can be
more aggressive.

OPPORTUNITIES
Creating new corporate base.
Expanding branch network
New branches soon at Faridabad, Bhopal, and Udaipur.

THREATS
Very thin Profit Margins.
New license issued by RBI which will increase present competition.
Gray market operations increase.
Limited branch network.

115

 New Modus-operandi for frauds.

Expansion of banks (AD), branches which ultimately harm the business of
FFMC.
Unethical practices followed by Authorized Persons.
Small players coming in the market and operate with low margins and without
any specific policy.
Unethical practices by employees so, integrity of employees is very important.
Business through Travel Agents which will lead more commission to them.
More demand of services by customers.

116

METHODOLOGY

RELEVANCE OF THE STUDY

RESEARCH PROBLEMS
OBJECTIVE
HYPOTHESIS
SCOPE OF THE STUDY
DATA COLLECTION
LIMITATION OF THE STUDY

117
117
117
117
117
118
118

RELEVANCE OF THE STUDY

Finding out Market study and Market potential of Foreign Exchange market of
India

RESEARCH PROBLEMS
To find out Foreign Exchange Market in India.

117

OBJECTIVE OF THE STUDY

The objective of the study is to identify the Market potential and Market study
of Foreign Exchange Market in India and study the perception of Authorized
Dealers and Authorized Money Changer regarding foreign exchange market in
India.

HYPOTHESIS
Descriptive research

SCOPE OF THE STUDY

Identify the Market Potential and Market Study of Foreign Exchange Market
in India
Different Market shares of Money Changer in Ahmedabad.
Studying the Problem faced by FFMCs.
Identify the perception of Money Changer.
Studying the effect of foreign exchange market if U.K. accepts EURO.
Identify the effect on Indian Economy if U.K. accepts EURO.
Identify the month wise forex demand in India.
Identifying where the company is going wrong.

TOOLS FOR DATA COLLECTION

Primary
1. Sample design
Non-probability
Sampling unit Geographical area City
Ahmedabad.
Sample size (16)
Authorized Dealers (2)
FFMCs (Full Fledge Money Changers) (14)

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2. Instrument
Questionnaires
3. Mode of collection of data
Personalize
4. Tools for Data Analysis

Weighted Mean Scores

LIMITATIONS OF THE STUDY

The study has been done for Ahmedabad city only.
The study was done of only 14 Major FFMCs.
The study has ignored study of Authorized Dealers.
Inter bank study was ignored.
Overseas foreign market was ignored.

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DATA ANALYSIS

MAJOR FOREIGN EXCHANGE PLAYERS

120

 As Per the survey done among 15 FFMC and 2 AD. It was founded that
Thomas Cook was the Major Foreign Exchange player among AD. This was
followed by Bank of Punjab (Centurion Bank). The major source through
which Thomas Cooks business is sourced is Travel Agents, Retail Customers
and Corporate. It covers 31% of the total market share. There Strong
Marketing strategy and companies goodwill has made them No.1.
And among FFMC it was LKP forex who is leading Among FFMCs the
players who followed LKP were Wall Street Forex and NPR Finance which
holds 2nd and 3rd

Position holding the market share of 16% and 7%

respectively. LKPs aggressiveness has made them No.1 in FFMCs.

SUITABILITY OF RBI GUIDELINES

121

 As per the survey done from 16 FFMC regarding the suitability of RBI
Guidelines. I found some of FFMCs were not satisfied with the RBI
Guidelines while some of them were happy with the guidelines. Among all it
was found 75% of them were happy with RBI Guidelines and 25% were not.
The persons who were not happy with RBI guidelines said that there are
several reasons why RBI guidelines are not suitable. Some of them are as
under.

Even For small encashment, Customers need to give their Identity

Proof which is not practically feasible.

Some of them said that even though they are not satisfied with RBI
guidelines they have to follow it but as per their opinion guidelines are
not practically applicable.

As per RBI guidelines no person can get full amount in cash if the cash
exceeds Rs.50, 000/- . But when the foreigner comes they dont have
their bank a/c. in India so its very difficult for them to get the
conversion money in cash. .

Remaining other 75% of them was favoring RBI guidelines. As per their
opinion RBIguidelines and RBI rules and regulation are very much important
as the economy is growing the scope of foreign exchange is going to become

122

wide so it is very much necessary for RBI to frame strict policy so that illegal
transactions are reduced.

PROBLEMS FACED BY FFMC AGAINST CUSTOMERS

As per survey done there are some problems faced by these FFMC against
Customers.
Among these problems the major one is Documentation and second is
bargaining for rates with customers. As per new RBI guidelines for the
encasements of single USD, customers need to give their identity proof. So
sometimes customers are not ready to disclose their identity which is the major
problem faced by FFMC.
The second is bargaining for rates, because of competition customers always
bargain in rates. And so money changers have to work on thin margins.
Apart from them other problems was of convincing customers. It was found
that it was very difficult for money changers to convince their customers
specially for rates and for documentations as customers are not willing to
disclose their identity.
Moreover, customers mostly prefer currency rather than Cheque but as per
RBI guidelines cash cannot be given if the transaction amount exceeds Rs.50,
000

123

REACTION OF FOREIGN EXCHANGE MARKET IF U.K.

ACCEPTS EURO

When the study was made regarding the reaction of foreign exchange market
if U.K. accepts Euro as its common currency it was found that 48% out of the
total sample said that currency rate of USD will decrease and Euro will
Increase. 20% said that pound rate will decrease and chances of becoming
EURO as international currency will increase.
From the above graph we can study that if U.K. will accept EURO as common
currency than there are all chance that EURO currency rate will increase the
reason is that demand of EURO will increase and as we know that EURO is
already scarce in present days so the rate of EURO will increase.
There are all chances that pound rate will also decrease the reason is that the
demand of pound will be decreased and supply will increase, so pound will be
easily available and so there are all chances of pounds price decreasing.

124

DEGREE OF CHANGE IN INDIAN FOREIGN EXCHANGE

MARKET IF U.K. ACCEPTS EURO

When the research had done for what would be the reaction of Indian foreign
exchange market if U.K. accepts Euro was done it was found that 31% of the
total population said that it would actually effect Indian foreign Exchange
market while 69% said it would not.
The reason was found for not affecting Indian Foreign Exchange Market was
Indian Economy is growing and it is showing positive sign in future also as a
result it was found that people were optimistic about the same and so as per
there saying it was found that there would be no reaction in Indian Foreign
Exchange market.
As per the 31% of the population it was found that there would be some
reaction on Indian Foreign Exchange market as per there saying it was found
that Indian Rupee would become stronger against USD and POUND while it
will become weak against Euro.

125

MONTH VISE FOREX DEMANG IN INDIA

The above graph shows Month wise forex demand in India. It was found that
36% of the business was done from October to December mainly encashment
was done more the reason is because foreigner use to come to India during this
season and so encashment was done by them.
It was even found that 32% of the business was done from January to March
during this seasons generally student going to abroad for studying was found
and so business form Placement consultant was found.
24% of the business was found during April to June as during summer
vacation it was found that more and more people do visit abroad for vacations.
Generally during this season it was found that mostly selling of currency took
place. Travel agents use to do good foreign exchange business during this
season.

126

SOURCES FORM WHICH FOREIGN EXCHANGE BUSINESS IS

SOURCED

The main sources form which foreign exchange business is sourced is

Corporate, Retail Customers, and Travel agents, Franchises, Consultants and
Banks. From the researched done it was found that 28% of the total foreign
exchange business is sourced from Travel agents and so it was found that the
money changers had got a very good tie-ups with travel agents.
The second major source through which foreign exchange business is sourced
is corporate. The total share in the foreign exchange business is 24%. The
businessman going abroad needs foreign exchange and so they need to buy it
from money changer. Even it was found that money changer use to provide
special services to these corporate clients.
The third major source through which foreign exchange business is sourced is
Retail Customers as its total share is 21% of total foreign exchange business. It

127

was found that a good location of money changer helps to attract the retail
customers.
The share of consultant, banks and franchises was found as 12%, 9%, and 6%
respectively in total foreign exchange business.

MOST POTENTIAL CITY IN INDIA

The research for most potential city of India for foreign exchange business
was done and it was found that Mumbai was found No.1 with total share of
29% than second was Ahmedabad with 24% and Delhi stood No.3 with 22%
share.
Ahmedabad was preferable to do the foreign exchange business the reason
was that because here, less number of fraud is been done and so money
changer are safe irrespective of thin margin and so most money changer were
happy to expand their branches in Saurashtra region and in proper
Ahmedabad.

128

 Out of the full research 10% of the population was interested to do business in
Calcutta, 5% in Pune, Chennai and Hyderabad. It was found that in Hyderabad
maximum illegal transaction is been done in foreign exchange business.

COMPANY WHICH HAS GOT MAJOR MARKET SHARE IN

TRAVELLERS CHEQUE

Travelers Cheque is one of the important instruments which are widely used
nowadays instead of currency as they are safe and convenient to carry. As per
the study done to find out company which has got major market share in
travelers Cheque it was found that American Express was leading with total
market share of 61% following Thomas Cook with 17% was second followed
by other players like Visa, City bank and Master card.

129

 The reason why American Express has got major share was American express
travelers Cheque are accepted world wide and has got a very good channel
liked to it. It was found that almost all money changer had got American
express and they prefer to sell that brand the most.

FACTORS WHICH DECIDES VALUE OF CURRENCY

The very Important thing to be noted in the foreign exchange is the factor
which decides the value of currency basically it has got two factor i.e.
Domestic and International factor.
The domestic factor which affects most is Local Economy. As per the research
done it was found that due to local economy currency rate to fluctuate. Than

130

comes equity and commodity market, this market is directly related to forex
market specially gold and silver in commodity market. Political situation also
affects the currency rate along with it Demand & Supply, Export and Import
and RBI guidelines.
The demand and supply affects the market most as per some of the experts, the
demand and supply balances the value of the currency.

The Major International Factor which affects is Price of Crude. As per the
survey 42% of them had said price of crude is the major factor which is
affecting the value of the currency. The other factor which affects are
Terrorism & war as we have seen that as soon as war is declared the prices of
the currency starts fluctuating.

131

 Other International factor which affects the value of currency is International

Equity and Commodity Market, political situation and value of other currency
this factors are the main factors which affects the value of currency.

SUGGESTIONS

132

 The guidelines issued by RBI are not followed strictly by some of the Money
changers and A.Ds.

Customers are not aware about the RBI guidelines and so customers do face
many problems.

Regarding the day to day rates of Indian rupee RBI hold should be there so
that monitoring of the currency is done effectively.

RBI Strong hold should be there on different Money Changers and should
strictly punish the culprit.

Due to healthy competition margins are becoming thin and at times even some
money changer does the transaction in loss, there should be some restriction
on this strategy which harms the money changer as the whole.

All the Money Changers should make Association so that a minimum profit
percentage is fixed.

133

APPENDICES
QUESTIONNAIRE

134

134

 RESPONSE SHEETS

139

QUESTIONNAIRE

Foreign Exchange Market in India

Name of Organization: _________________________________________________
Address:
_____________________________________________________________________
_____________________________________________________________________

135

Name of
Person:_______________________________________________________
Designation:__________________________________________________________

1. Which according to you is the major foreign Exchange Player in India?

A. NPR
B. LKP
C. Thomas cook
D. Wall Street Mart
E. Centrum
F. Weizemann
G. UAE Exchange
F. Bank of Punjab
2. Who are your Main Competitors?
A. NPR
B. LKP
C. Thomas cook
D. Wall Street Mart
E. Centrum
F. Weizemann
3. Does R.B.I. Foreign Exchange guidelines suitable for Present Indian working
condition?
A. Yes
B. No
4. What are the Problems that you are facing against the customer?

136

A. Documentation
B. Convincing Customers
C. Bargaining for Rates
D. No Problems
E. Customers Prefer currency rather than Cheque.

5. What are the Problems that you are facing with present the R.B.I. Guidelines?
A. Customers not aware about the RBI guidelines
B. More Documentation needed
C. Limit of encashment
D. No Problems
6. What would be the reaction on foreign exchange market if U.K. would accept
the Euro?
A. Currency rate of USD will decrease and Euro will increase
B. Pound rate will decrease
C. Chances of becoming EURO becoming international currency.
D. No effect in Forex Market.
7. Would accepting Euro as a common currency / International currency, affect
the Indian Foreign Exchange Market?
A. Yes
B. No
8. How it would affect the valuation of INR (Indian rupee)?
A. INR will increase against USD
B. INR will decrease against USD
C. No effect

137

9. In which month Foreign Exchange Business is highest?

A. Jan-Mar
B. April-June
C. July-Sept.
D. Oct-Dec.
10. Does a good location helps to generate Forex business?
A. Yes
B. No
11. What are the factors which decide value of a currency?
a). Domestic Factors
A. RBI Interbanks
B. Equity Market & Commodity
C. Political Situation
D. Local economy
E. Demand and Supply of currency
F. Export Import
b). International Factors
A. Crude Prices
B. Terrorism
C. Value of other currency
D. International Equity & Commodity market
E. Political Situation
12. Which are major sources through which your business is sourced?
A. Corporate
B. Retail customers

138

C. Travel agents
D. Franchises
E. Consultant
F. Banks
13. Do travel agent helps you to increase your business?
A. Yes
B. No
14. Are there any KYC norms applicable in Forex market as similar to banking
sector?
A. Yes
B. No
15. Is there any recent guideline which has changed the Forex market?
A. Yes
B. No

16. What are limits for buying of the Forex when a person is visiting abroad?
A. 5,000 USD
B. 10,000 USD
C. 15,000 USD
D. 20,000 USD
17. As per your opinion are the present limits sufficient for foreign travelers?
A. Yes
B. No

139

18. Do you recommend a person to start retail outlet of Forex?

A. Yes
B. No
19. Which city has got largest foreign exchange business in India?
A. Delhi
B. Bombay
C. Calcutta
D. Ahmedabad
E. Chennai
F. Hyderabad
G. Pune
20. Is there any regulation or intervention by RBI for pricing of day to day Forex
transactions?
A. Yes
B. No

21. What is the time limit of a license issued by RBI?

A. 1 Year
B. 3 Year
C. 6 Year
D. 9 Year
22. Do you stock travelers Cheque?
A. Yes
B. No

140

23. Which company has got the major market share in Travelers Cheque?
A. American Express
B. Visa
C. Thomas Cook
D. City Bank
E. Master Card

RESPONSE SHEET
Company name

10

11(A)

NPR Finance
Wall Street Forex
Weizemann Forex
Paul Merchant
VKC Credit & Forex Services
Centrum direct Limited
Cox & Kings (I) Pvt Ltd
Bhavani Forex Pvt. Ltd
Pheroze Framroze & company
UAE Exchange & Financial Services Ltd.
Anmol Finsec Ltd.
Trade-wings Ltd.
Choksi Forex Pvt Ltd.
LKP Forex Limited

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141

Thomas Cook
Green Channel Travel Services

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Company name

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NPR Finance
Wall Street Forex
Weizemann Forex
Paul Merchant
VKC Credit & Forex Services

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Centrum direct Limited

Cox & Kings (I) Pvt Ltd

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142

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Green Channel Travel Services

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BIBLIOGRAPHY

143

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WEB SITES
www.forex.com
www.eforexindia.com
www.rbi.org
www.xe.com
www.speedforex.com
www.coesfx.com

REFERENCE BOOKS
Research Methodology by C. R. Kothari
International Business by Charles Hill

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