Role of FEDAI in Foreign Exchange

Authorized Dealers in Foreign Exchange (Ads) have formed an association called Foreign Exchange Dealers Association of India (FEDAI) in order to lay down certain terms and conditions for transactions in Foreign Exchange Business. Ad has to given an undertaking to Reserve Bank of India to abide by the exchange control and other terms and conditions introduced by the association for transactions in foreign exchange business. Accordingly FEDAI has evolved various rules for various transactions in order to protect the interest of the exporters, importers general public and also the authorized in dealers. FEDAI which is a company registered under Section 25 of the companies Act, 1956 has subscribed to the

1. Uniform customs and practice for documentary credits (UCPDC)

2. Uniform rules for collections(URC)

3. Uniform rules for bank to bank reimbursement.

Various rules of FEDAI

  • Rules No 1. of FEDAI deals with hours of business of banks which is the normal banking hours of ADs. On Saturdays no commercial transaction in foreign exchange will be conducted except purchase/sale of traveller’s cheques and currency notes and transactions where exchange rates have been already fixed.
  • Rules No.2 deals with export transactions export bills purchased/discounted negotiation, export bills for collection export letters of credit, etc.

Application of Rates of Crystallization of Liabilities and Recovers

1. Foreign currency bill will be purchased/ negotiation / discounted at the Authorized Dealers current bill purchase rate or at the contract rate.

2. Exporters are liable for the repatriation of proceeds of the export bills negotiated/purchased/discounted sent for collection through the Authorized Dealers. They would transfer the exchange risk to the exporter by crystallizing, the foreign currency liability into Rupee liability on the 30th day after the transit period in case of unpaid demand bills. In case of unpaid usance bills crystallization will take place on the 30th day after notional due date or actual due date. Notional due date is arrived at by adding transit period, usance period and grace period if any to the date of  purchase/discount/negotiation. In case 30th day happens to be a holiday or Saturday, the export bill will be crystallized on the next working day. For crystallization into rupee liability the bank will apply the TT selling rate on the date of crystallization the original buying rate whichever is higher. Normal Transit period comprises usual time involved from negotiation/purchase/discount of documents till receipt of proceeds thereof in the Nostro account. It is not, as is commonly misunderstood, the time taken for the arrival of goods at the destination.

Crystallisation of Import Bills (Rules 30)

All foreign currency import bills drawn under letter of credit shall be crystallized into Rupee liability on the 10th day from the date of c\receipt of documents at the letter of credit opening bank in the case of demand bills and on the due date in the case of usance bills. In case the 10th day or due date falls on a holiday or Saturday the importers liability should be crystallized, into Rupee liability on the next working day.

Interest on Export Bills/Normal Transit Period

Concessional rate of interest on export bills is linked to the concept of normal transit period and notional due date. Normal transit period comprised the average period normally in involved from the date of negotiation/purchase/discount till the receipt of bill proceeds in the Nostro account of the bank. Normal Transit period is not to be confused with the time taken for the arrival of goods at the destination.

In case of bills payable  at sight or on demand  basis Concessional rate of interest ad directed by the RBI on export bill is applicable for the normal transit period in case of all foreign currency bills.

In case of usance bills, Concessional rate of interest as directed by the RBI on export bills is applicable for the normal transit period plus usance period. Thus a foreign currency bill payable for example at 60 days after sight will be eligible for Concessional interest rate for 60 days usance plus the normal transit period of 25 days, i.e., a total number of 85 days.

Normal Transit period for purpose of all bills in foreign Currencies 25 days.

Interest on Import Bills

a. Bills negotiated under import letter of credit shall carry domestic commercial rate of interest as applicable to advances prescribed by Reserve Bank of India from time to time and shall be recovered from the date of debit to the AD‘s Nostro account to the date of crystallization/retirement whichever earlier.

B.From the dates of crystallization up to the date of retirement the bills shall carry the overdue rate of interest as specified by Reserve Bank of India from time to time.

Exchange Contracts

Exchange contracts shall be for definite amount unless date of delivery is fixed and indicated in the contract, the option period of delivery should be specified as.

a. The option of delivery shall not exceed beyond, one month. The merchant whether a buyer or a seller will have the option of delivery.

  • Early delivery: If a bank accepts or gives early delivery the bank shall recover/pay swap difference if any.
  • Extension: forward contract either short term or long term contracts where extension is sought by the customers (or as rolled over) shall be cancelled (at TT selling or buying rate as on the date of cancellation) and re book only at (current rate of exchange). The difference between the contracted rate and the rate at which the contract is cancelled should be recovered from/paid to be customer at the time of extension. Such request for the extension should be made on or before the maturity date of the contract.
  • Cancellation: In the case of cancellation of a contract at the request of the customer, the bank shall recover/pay as the case may be difference between the contract rate and the rate at which the cancellation is effected.

b. Rate at which cancellation to be effected.

  • Purchase contract shall be cancelled at the contracting banks spot TT selling rate current on the dater of cancellation.
  • Sale contracts shall be cancelled at the contracting banks spot TT buying rate current on the date of cancellation.
  • Where the contract is cancelled before maturity the appropriate TT rate shall be applied.

SWAP Cost:

a. If any shall be recovered from the customers under advise to him.

b.In the absence of any instruction from the customer contracts which have matured shall on the 15th day from the date of maturity be automatically cancelled. In case the 15th day falls on a Saturday or holiday the contract will be cancelled on the succeeding working day.

In the above case the customer will not be entitles to the exchange different if any since the contract is cancelled on account of his default.

In case of delivery subsequent to automatic cancellation the appropriate current rate prevailing on such delivery date shall be applied.

Payment of SWAP gains to the customer will normally be made at the end of the swap period.

Outlay and inflow of funds:

a. Interest at not below the prime lending rate of the respective bank on outlay of funds by the bank for the purpose of covering the swap shall be recovered in addition to be swap cost, in case early delivery of purchase or sale contracts and early realization do export bill negotiated. The amount of funds out laid shall be arrived at by calculating the difference between the original contracted rate and the rate at which swap could be arranged.

B. If such a swap leads to inflow of funds the amount shall be paid at the discretion of banks to the customer at the appropriate rate applicable for the term deposits the period for which the funds remained with the bank.

C.Banks will levy a minimum charge of Rs.250 for every request from a customer for early delivery, extension or cancellation of a contract.

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