Download Rbi`s capital a/c

RBI’S CAPITAL A/C
NAME OF GROUP MEMBERS
NAME
ROLL NO
KAJAL BHALSOD
5161
KRISHNA BHARATIYA
5162
NILAM RATHOD
5198
AMI VALERA
5223
VANDITA ZALA
5227
CAPITAL A/C:INTRODUCTION
THE Foreign Exchange Regulation Act, 1973
(FERA) was repealed and a new Act called the
Foreign Exchange Management Act, 1999
(FEMA) came into force with effect from June 1,
2000, with a view to facilitating external trade
and
payments
and
promoting
orderly
development and maintenance of foreign
exchange market in India.
 UNDER
the
FEMA,
foreign
exchange
transactions are divided into two broad
categories - current account and capital account
transactions.
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THE Reserve Bank, in consultation with the
Government of India, has notified comprehensive,
simple and transparent regulations under the FEMA,
1999 for capital account transactions.
The regulations distinctly indicate the types of
permissible capital account transactions, simplified
procedures for undertaking transactions and the
returns that have to be submitted to the Reserve
Bank.
The regulations grant substantial powers to the
Authorised Dealer Category – I banks to undertake
capital account transactions on behalf of their clients.
CAPITAL A/C VS CURRENT A/C
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Transactions that alter the assets or liabilities, including
contingent liabilities outside India, of persons resident in India or
assets or liabilities in India of persons resident outside India are
classified as capital account transactions. All other transactions
are current account transactions.
Current account shows current year transactions and capital
account shows both current transactions relating to businessman
and initial capital of businessman.
According to FEMA Act 2000, "There is no restrictions on holding
or exchanging of foreign currency under Current Account . But
Any foreign currency is under capital account , then it must be
controlled under the regulations of RBI."

In partnership , partners can make current account separately
from capital account in which they can show only their salary,
interest on capital and interest on drawing etc. and in capital
account, they can show only their capital invested in the
business of partnership.

Current account is the net balance of international transactions of
currently produced goods and services.
Capital account is the net balance of international (investment)
capital transactions.
Capital Account Transactions
Capital account transaction is defined as a transaction which:Alters the assets or liabilities, including contingent liabilities, outside
India of persons resident in India.
example: a resident of India acquires an immovable property outside
India or acquires shares of a foreign company. This way his/her
overseas assets are increased
Alters the assets or liabilities in India of persons resident outside the
India.
Example: a non-resident acquires immovable property in India or
acquires shares of an Indian company or invest in a Wholly Owned
Subsidiary or a Joint Venture with a resident of India. This way
his/her assets in India are increased
A list of some of the most common
capital account transactions
Transfer or issue of any foreign security by a person resident in
India
Transfer or issue of any security by a person resident outside India
Transfer or issue of any security or foreign security by any branch,
office or agency in India of a person resident outside India
Any borrowing or lending in rupees in whatever form or by
whatever name called between a person resident in India and a
person resident outside India
Deposits between persons resident in India and persons resident
outside India
Export, import or holding of currency or currency notes.
Transfer of immovable property outside India, other than a lease not
exceeding five years, by a person resident in India.
Acquisition or transfer of immovable property in India, other than a
lease not exceeding five years, by a person resident outside India.
Giving of a guarantee or surety in respect of any debt, obligation or
other liability incurred(i) By a person resident in India and owed to a person resident
outside India; or
(ii) By a person resident outside India.
The permitted capital account
transactions
The permitted capital account transactions have been classified into
two categories:1. Capital account transactions by persons resident in India
2. capital account transactions by non- residents
Capital account transactions by persons resident in
India
Investment in foreign securities.
Foreign currency loans raised in India and abroad.
Acquisition and transfer of immovable property outside India.
Guarantees issued in favor of a person resident outside India.
Export, import and holding of currency or currency notes.
Loans and overdrafts (borrowings) from a person resident outside India.
Maintenance of foreign currency accounts in India and outside India.
Taking out the insurance policy from an insurance company outside
India.
Capital account transactions by non- residents
Acquisition and transfer of immovable property in India.
Guarantee in favor of, or on behalf of, a person resident in India.
Import and export of currency/currency notes into/from India.
Deposits between a person resident in India and a person resident
outside India.
Foreign currency accounts in India of a non-resident.
Remittance of the assets in India held by a non-resident.
Prohibitions on capital account transactions
A nonresident person shall not make investment in India in any
form, in any company or partnership firm or proprietary concern or
any entity, whether incorporated or not, which is engaged or
proposes to engage:I. In the business of chit fund.
II. In agricultural or plantation activities.
III. In real estate business, or construction of farm houses.
CAPITAL ADEQUACY RULES OF RBI
DEFINATION
 Capital adequacy rules relate to the
minimum amount of capital (equity)
that institutions must hold relative to
their assets set by financial market
regulators.
 These rules are designed to ensure that
capital is sufficient to absorb likely
losses.
CONCEPTS OF CAPITAL ADEQUACY NORMS
Types of capital
Tier I capital
Tier II capital
Capital which is first readily
available to protect the
unexpected losses is called
as Tier-I Capital. It is also
termed as Core Capital.
Capital which is second
readily available to protect
the unexpected losses is
called as Tier-II Capital.
Tier-I Capital consists of :-
Tier-II Capital consists of :Undisclosed Reserves and
Paid-Up Capital Perpetual
Preference Shares.
Revaluation Reserves (at
discount of 55%).
Hybrid (Debt / Equity)
Capital.
Subordinated Debt.
General Provisions and
Loss Reserves.
 Paid-Up Capital.
 Statutory Reserves.
 Other Disclosed Free
Reserves Reserves which
are not kept side for
meeting any specific
liability.
 Capital Reserves :
Surplus generated from
sale of Capital Assets.
RISK WEIGHTED ASSETS
 Capital
Adequacy Ratio is calculated
based on the assets of the bank.
 The values of bank's assets are not taken
according to the book value but according
to the risk factor involved.
 The value of each asset is assigned with a
risk factor in percentage terms.
RISK WEIGHTED ASSETS
 Capital
Adequacy Ratio is calculated
based on the assets of the bank.
 The values of bank's assets are not taken
according to the book value but according
to the risk factor involved.
 The value of each asset is assigned with a
risk factor in percentage terms.
RISK WEIGHTED ASSETS
 Capital
Adequacy Ratio is calculated
based on the assets of the bank.
 The values of bank's assets are not taken
according to the book value but according
to the risk factor involved.
 The value of each asset is assigned with a
risk factor in percentage terms.
SUBORDINATED DEBT

These are bonds issued by banks for raising Tier II
Capital.

They are as follows :-
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Fully paid up instruments.
Unsecured debt.
Subordinated to the claims of other creditors. This
means that the bank's holder's claims for their money
will be paid at last in order of preference as compared
with the claims of other creditors of the bank.
The bonds should not be redeemable at the option of
the holders.
The repayment of bond value will be decided only by
the issuing bank.
 What is capital account convertibility?
CAC defined it as the freedom to convert local
financial assets into foreign financial assets and vice versa at
market determined rates of exchange without any sort of
intermediation and regulation.
 In layman's terms, full capital account convertibility allows
local currency to be exchanged for foreign currency without
any restriction on the amount.
 local merchants can easily conduct transnational business
without needing foreign currency exchanges to handle small
transactions.
 CAC is mostly a guideline to changes of ownership in
foreign or domestic financial assets and liabilities.
 In case a currency Is fully capital account convertible,
then anybody from anywhere In the world can Invest In
any assets In that currency.
 CAC also allows the people and companies not only to
convert one currency to other but also free cross-border
movement of those currencies, without the intervention of
the law of the country concerned.
 CAC in India is regulated as follows:
 All types of liquid capital assets must be able to be
exchanged freely, between any two nations in the world,
with standardized exchange-rates.
 The amounts must be a significant amount (in excess of
$500,000).
 Capital inflows should be invested in semi-liquid assets, to
prevent churning and excessive outflow.
 Institutional investors should not use CAC to manipulate
fiscal policy or exchange rates.
 Excessive inflows and outflows should be protected
by national banks to provide security.
 Why is CAC such an emotive issue?
 CAC is widely regarded as one of the hallmarks of a
developed economy.
 It is also seen as a major comfort factor for overseas
investors since they know that anytime they change their
mind they will be able to re-convert local currency back
into foreign currency and take out their money.
 In a bid to attract foreign investment, many developing
countries went in for CAC in the 80s not realizing that
free mobility of capital leaves countries open to both
sudden and huge inflows as well as outflows, both of
which
can
be
potentially
destabilizing.
 More important, that unless you have the financial
institutions, capable of dealing with such huge flows
countries may just not be able to cope as was
demonstrated by the East Asian crisis of the late
nineties.
 In India, the Tarapore committee had laid down a threeyear road-map ending 1999-2000 for CAC.
 It also cautioned that this time-frame could be speeded up
or delayed depending on the success achieved in
establishing certain pre-conditions — primarily fiscal
consolidation, strengthening of the financial system and a
low rate of inflation.
 With the exception of the last, the other two preconditions have not yet been achieved.
Implies progressive integration of the domestic financial system with
international financial flows.
Regarded as one of the hallmarks of a developed economy. Signals
openness of the economy
Comfort factor for overseas investors. Encourages global capital flows into
the country
Indian businesses - access to cheaper external credit (Global rates +
Country risk) - without having to ask permission of the RBI.
High Risk – High Gain – Good Times – Chance of huge inflows of foreign
capital; Bad times – Chance of an enormous outflow of capital
Chance of “export of domestic savings” - for capital scarce
developing countries this could curb domestic investment
Exposes an economy to extreme volatility on account of “hot money” flows
Pros:
•Increases competition and reduces inefficiency; aids
price discovery
•Allows access to funds at global rates (plus country
risk)
•Disciplines domestic policy and exchange rate
monitoring.
•Integrates economy to global trade and capital flows.
•Capital controls ineffective with open trade, human
movement.
•Natural direction of evolution for Developing
economies (globalization)
Cons:
• No evidence linking improved growth to CAC
(Bhagwati, Rodrik, Stiglitz)
• Increases vulnerability to herd behaviour,
contagion, sentiment.
• Downside exceeds upside – High Risk,
High/Moderate Gain.
• Reduces monetary, exchange rate autonomy
for a nation.