Facts

Current account convertibility introduced in India in August 1994 Comply obligations under Article VIII of the IMF s Articles of Agreement This drastic measure contributed significantly to boost India s exports Presently, there is almost full convertibility on the current account

What is current account convertibility

Convertibility = converting one currency into another Like rupee to dollar, yen to pound anything Current account includes transactions on import and export goods or receiving or making payments for services rendered Investments and borrowings are restricted Since money is incoming and outgoing, people will need to convert the money into different currencies based on their requirements

Cont
One has a big mobile store, import 5000 i-phones a month from America, but the American supplier accepts payment only in $. So one gets y rupee converted into $ at forex market at anytime, nobody prevents from this Again, some of those i-phones, one sells to Bangladesh and Nepal, and gets their currency, and converts it into Rupees

Manifestation of full convertibility

On trade account and on account of the receipt side of the invisibles, the rupee is fully convertible at market determined exchange rates The payment side of the invisible and receipts and payments of account are subject to exchange control Exchange rates for all these permissible transactions are undertaken at the free market exchange rates

Allowed convertibility on transactions

It allows residents to make and receive trade-related payments
 receives dollars (or any other foreign currency) for export of goods and services  pay dollars for import of goods and services  make sundry remittances  access foreign currency for travel, studies abroad, medical treatment and gifts etc

Authorized Dealers to Deal in Foreign Exchange

Sr No 1 Catagor Entities y Ad- I Commercial Banks State Co-op Banks Urban Co-op Banks Major Activities All current and capital account transactions according to RBI directions issued from timeto-time.

AD-II

Upgraded FFMCs Co-op. Banks Regional Rural Banks (RRBs) Others Select Financial and other Institutions

AD-III

Specified non-trade related current account transactions and also all the activities permitted to Full Fledged Money Changers. Any other activity as decided by the Reserve Bank. Transactions incidental to the foreign exchange activities undertaken by these institutions.

FFMC

Dept. of Posts Urban Co-op. Banks Other FFMC

Purchase of foreign exchange and sale for private and business visits abroad.

Criteria for Granting Licenses

Eligibility Criteria for grant of AD Category II licence
The eligibility criteria primarily depend on strong financials, good governance, regulatory / prudential comfort and adequate internal control mechanism

Existing Full-fledged Money Changers (FFMCs)

Reserve Bank will consider granting AD-Category II licence to the existing, well functioning FFMCs, with strong financials, that demonstrate good governance while providing regulatory / prudential comfort. The criteria for up-gradation of existing FFMCs to AD-Category II include minimum net owned funds of Rs. 10 crores satisfactory functioning as FFMC for at least two years and satisfactory credit report from their bankers

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Urban Co-operative Banks (UCBs)
Urban Co-operative Banks with strong financials, good governance and providing regulatory / prudential comfort will be considered, on case by case basis, for licensing as AD-Category II

Regional Rural Banks (RRBs)

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, RRBs with strong financials, good governance and providing regulatory/supervisory comfort and having requisite skills and capabilities will be considered for granting licences as AD-Category II

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Opening of Foreign Currency Accounts (Nostro) abroad
The entities proposed to be licensed as AD-Category II are being permitted to undertake the transactions that involve conversion of one currency into another Such transactions may not necessarily require opening and maintaining foreign currency denominated (NOSTRO) account with a bank outside India However, to facilitate issuance of foreign currency draft, etc. for such transactions, the AD-Category II may enter into arrangements with banks authorised to deal in foreign exchange in India.

Reporting The ADs-Category II are required to submit the following monthly statements of transactions: A. Category-wise statement of transactions where the amount exceeds USD 5,000 per transaction initially, so that a review could be made of the threshold in six months and a firmer threshold may be arrived at B. Category-wise, transaction-wise statement where the amount exceeds US $ 25,000 per transaction.

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Inspection / Audit
For ADs-Category II, an auditor s certificate confirming compliance with the Rules / Regulations / Directions will be adequate Reserve Bank reserves the right to inspect them when considered necessary Reserve Bank may also require a special audit of the ADs-Category II, depending on the nature of the transactions, by an auditor from the approved list of the Reserve Bank/ Institute of

Chartered Accountants of India

Anti-Money Laundering / Know Your Customer (KYC) Norms KYC and Anti-Money Laundering norms prescribed for FFMCs will be applicable to ADs-Category II also

Reference
http://mrunalexam.blogspot.com/2011/03/economy-qcapital-and-current-account.html http://kannanpersonal.com/learning/forexmarket/basics2.html