Convertibility of INR
At the beginning of the last century, ‘convertibility’ referred to the right to unrestrictedly convert a currency into gold, which made sense when gold standard [i.e. currencies pegged to gold] was prevailing. With its abolition in 1971, now convertibility refers to the right to convert freely a national currency at the prevailing exchange rate into any other currency. There are three perspectives to view this convertibility, as per IMF published document, viz.:
- with regard to the purpose for which such conversion is intended: traditionally this is classified into capital account and current account convertibility
- with regard to holders of the currency: right to convert their holding by foreign holders [external convertibility] and by residents [internal convertibility]
- with regard to geographical permission: the right to convert domestic currencies into the currencies of specified countries in a region [regional convertibility] or into any foreign currency [global convertibility].
We shall discuss here the concept of convertibility as applicable to our currency. The above mentioned third perspective is not practically applicable to INR [though conversion to currencies of Nepal and Bhutan may partially fall under this perspective]. We shall discuss mainly the first perspective and also an overview of the second. Understanding this concept of convertibility is relevant to those who are involved in currency conversions either as corporates, banks, or as any other financial intermediaries. Those who audit such transactions should be familiar to ensure regulatory compliance. We should clearly know what is current account and capital account transactions, before understanding convertibility. Because, if a currency is convertible [into another currency] for current account purposes, then that currency is considered as current account convertible; and similarly, for capital account convertibility.
Till FEMA was enacted, there was no official definition of these two terms.
Section 2 (e) of FEMA defined capital account transaction as a transaction which alters the
- assets or liabilities, including contingent liabilities, outside India of persons resident in India or
- assets or liabilities in India of a person resident outside India.
As per section 2(j) of FEMA, the current account transaction means a transaction other than a capital account transaction. For understanding purpose, we can visualize that a financial transaction that alters the balance sheet is a capital account transaction and which alters the P & L account is a current account transaction. Thus, foreign exchange drawn for travel abroad is an expenditure affecting the revenue account and is a current account transaction. Opening a bank account in foreign currency [whether in India or abroad is immaterial] is a capital account transaction. Obviously the export of goods in the normal course is a current account transaction, even if the export is of capital goods. But if the fixed assets of the company are sold in foreign currency, then it is a capital account transaction.
In addition to the definition, FEMA also lists certain specific transactions as current and capital account transactions viz.:
Current account transactions [section 2(j)]
- Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business
- Payments due as interest on loans and as net income from investments
- Remittances for living expenses of parents, spouse and children residing abroad
- Expenses in connection with foreign travel, education and medical care of parents, spouse and children.
Capital account transactions [Section 6(3)]
- 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 foreign exchange in whatever form or by whatever name called
- 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 person 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
- by a person resident in India and owed to a person resident outside India or
- by a person resident outside India.
Convertibility of INR
RBI announced that that the rupee has become fully convertible on the current account on August 20, 1993. This was after India accepted the status and obligations of Article VIII with the IMF. Actually, this was the culmination of a series of liberalizations introduced since March 1993. While capital account convertibility changes are made by RBI, current account convertibility changes are made by Government because of sovereign commitment, though both with mutual consultations. During these years, several relaxations have been permitted under capital account transactions also. We can summarise the present position of convertibility of INR broadly as under:
Convertibility of INR for residents:
INR is fully convertible on the current account. That means, for purposes, which are classifiable as current account transaction purposes, remittances can be made without any ceiling. This statement looks incorrect because there are quantitative ceilings like USD 250,000 per financial year for most remittances and upper limits for other specialist purposes. But what it means is that there are quantitative ceilings and documentations for availing these remittances from neighboring bank branches and for any higher amount, RBI can be approached through the banks with justification. Such procedural restrictions are allowed under the fully convertible concept.
INR is partially convertible on capital account. For resident individuals, it is up to USD 250,000 per FY, presently [because this ceiling is for remittances for capital account purposes also]. For corporates, depending on the purpose, there are conditions and upper limits. E.g. Varying limits for ECBs, trade credits, investments abroad, etc. For mutual funds, investments abroad is up to USD 7 billion. Technically it means, INR is convertible for capital account transactions to such extent for them.
Convertibility of INR for nonresidents:
NRIs and PIOs have unlimited convertibility for investing in bank deposits in the three schemes. While they can invest in non-agricultural land, there is a restriction on the number of units whose proceeds can be repatriated and the quantum restricted to forex originally brought. They have convertibility of INR funds to the extent of USD one million per financial year. Nonresidents who do not have any Indian linkage have convertibility of investments in industries and capital markets under FDI & FPI scheme, subject to conditions.
It may be noted that even where there are ceilings, the amounts are fairly very high and hence for all practical purposes, it is as if we have fully convertible currency, both on current and capital accounts. The challenge is to properly use the provisions and to ensure regulatory compliance.
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Before joining ICICI Manipal Academy as Dean since its inception in 2008, he had worked in ICFAI Business School as Faculty and had worked for long in Canara Bank, both in India and abroad. He had also worked in a private sector bank as head of international trade and treasury. He has 30 years of banking Experience, 3 years of consulting experience besides teaching experience of over 10 years. He was trained in a leading bank in London and has attended international seminars in Frankfurt, Singapore and Sydney. His current areas of interest include HR applications relevant to bankers, international trade facilitation and forex risk management. He is an alumnus of the prestigious International Teachers Program, having undergone the studies at HEC Paris. He was felicitated by Chairman of ICICI Bank during the convocation in 2012 for the exemplary service rendered as founding Dean of IMA.
Till recently, he was working as Joint Director in Manipal Academy of Banking handling, inter-alia, training and other HR initiatives with partners in Malaysia, UAE and elsewhere.
He has authored a book on FEMA with a foreword by the then Chief Executive of FEDAI, which was well reviewed in the media besides editing couple of books. His articles appear in a number of professional publications & trade magazines. He had been a regular guest faculty in leading Universities, banks and Institutions; besides, he has conducted training programs for colleagues.
He strongly believes that TRS stands for Teaching, Research and Service to the institution, essential qualities of a teacher.
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