Overview of Foreign Exchange

Overview of Foreign Exchange

Foreign Exchange Regulation Act, 1974

Foreign Exchange Regulation Act, 1947 (Act No. VH of 1947) enacted on 11th  March, 1947 in the then British India provides the legal basis for regulating certain payments, dealings in foreign exchange and securities and the import and export of currency and bullion. This Act was first adapted in Pakistan and then, in Bangladesh. The Act is reproduced. Bangladesh Bank is responsible for administration of regulations under the Act. Bangladesh Bank’s offices and their jurisdictions provide a list. Basic regulations under the PER Act are issued by the Government as well as by the Bangladesh Bank in the form of Notifications, which are published in the Bangladesh Gazette. Notifications issued by the Bangladesh Government and the erstwhile Government of Pakistan and the Bangladesh Bank and the erstwhile State Bank of Pakistan is reproduced. Directions having general application are issued by the Bangladesh Bank in the form of notifications, foreign exchange circulars and circular letters. The major objectives of the act are to conserve the limited foreign exchange resources and to ensure that the available foreign exchange is utilized only for priority requirements the economic and financial interests of Bangladesh and the maintenance of the proper accounting of foreign exchange receipt and payments. Bangladesh Bank is responsible for administration of regulations under the Act. Bangladesh Bank reviews the exchange control measures from time to time and revises the instructions on policy and measures, whenever necessary through different Foreign Exchange (FE) circulars.
  Bangladesh Bank:
Bangladesh Bank (BB) means the Bangladesh Bank established under the   Bangladesh Bank Order, 1972 (President’s Order No. 127 of 1972).
  Taka:
             Taka means the Bangladesh Taka unless otherwise specified.
  Dollar:Unless otherwise in ipublication shall mean the US dollar.
  Authorized Dealers:
Wherever used in this publication, the term Authorized Dealer or AD would mean a bank Authorized -by Bangladesh Bank to deal in foreign exchange under the FER Act, 19
 Foreign Exchange Regulation Act, 1994:
This Act regulates the exchange of foreign currencies, remittances and opening of foreign currency account under various classifications. According to this law, FC Accounts can be opened without initial deposits, and bears no interest and both the account holder and the nominee can operate the account. The entire remittance from adored is free from income tax. It also states the documents required for the opening of such account.
Some Definition of Foreign Exchange:
  Foreign exchange means foreign currency and includes all deposits, credits and balance of payable in foreign currency as well as Draft, Traveler’s cheques, Letter of credit, Bills of Exchange drawn in local currency but payable in foreign currency.
—                Foreign Exchange Regulation Act, 47, Sec 2 (a)
  Foreign exchange means foreign currency and includes any instrument drawn, accepted, made or issued under clause 13 of section 16 of the Bangladesh bank Order,  1972 all deposits and credits and balances, Travelers cheques, Letter of credit and bills of exchange, expressed or drawn in Bangladesh currency but payable in any foreign currency.
—    Bangladesh bank order 1972.
  The mechanism through which payments are effected between two countries having different currency systems is termed as foreign exchange. It is related with the exchange method & mechanism through which the payments in connection with international trade are transacted.
—A Banking Expert.
  System or process of converting one national currency into another and of transferring money from one country into another.   —Dr. Paul Einzig.
Foreign Exchange Department:
Foreign exchange department deals with foreign currency and the transaction of it. The major jobs of this department are listed below:
1.    Letter of Credit (for Export and Import)
2.    Dollar/Traveler’s Cheque (TC) Endorsement
3.    Foreign Remittance
4.    Foreign Currency Account
 Types of Letter of Credit:
REVOCABLE CREDIT:
A revocable credit is a credit which can be amended or canceled by the issuing bank at     any time without prior notice to the seller.
IRREVOCABLE CREDIT:
 An irrevocable credit constitutes a definite undertaking of the issuing bank (since it cannot be canceled without the agreement of all parties thereto). Provided that the stipulated documents are presented and the terms and conditions are satisfied by the seller. An irrevocable credit can be either confirmed or unconfirmed depending on the desire of the desire of the seller. This sort of credit is always preferred to revocable letter or credit.
REVOLVING CREDIT:
The revolving credit is one, which provides for resorting the credit to the original amount after it has been utilized. How much time it will be taking place must be specifically mentioned in the credit. The revolving credit may be either cumulative or non-cumulative.
TRANSFERABLE CREDIT:
A transferable credit is one that can be transferred by the original beneficiary in full or in part to one or more subsequent beneficiaries. Such credit can be transferred once only. Fractions of a transferable credit can be transferred separately, provided partial shipments are not prohibited.
BACK TO BACK CREDIT:
The back to back credit is a new credit opened on the basis of an original credit in favor or another beneficiary. Under back to back concept, the seller as the beneficiary of the first credit offers it as security to the advising bank for the issuance of the second credit. The beneficiary of the back to back to back credit may be located inside or the out side the original beneficiary’s country.
ANTICIPATORY CREDIT:
The anticipatory credits make provision for pre-shipment payment to the beneficiary in anticipation of his effecting the shipment as per L/C conditions.
RED CLAUSE:
When   the clause of the credit authorizing the negotiating bank to provide pre-shipment advance to the beneficiary is printed typed in red, the credit is called “Red Clause letter of credit”

Foreign Exchange Operation (Theoretical Aspects):
 Introduction:
In EXIM Bank limited foreign exchange is divided in to two parts according to the major activities:
•    Import oriented foreign exchange activities.
•    Export oriented foreign exchange activities
There is also foreign Remittance operation that carryout by the foreign exchange department. Import Section:
The function of this section is mainly to deal with various components such as:
  Letter of Credit (L/C)
  Payment against Document (PAD)
  Payment against Trust Receipt (PATR)
  Loan against Imported Merchandise (LIM)
There are a number of formalities, which on Importer has to fulfill before import goods. These formalities are explained bellow —
 Import Registration Certificate (IRC):
The first thing one need to carry on a business of import is called Import Registration Certificate. But registration is not required for import goods, which do not involved remittance of foreign exchange like medicine; reading materials etc. can be imported without registration by the users within monetary limit. Documents to be required for Import Registration Certificate are as follows —
•    Income Registration Certificate
•    Nationality Certificate
•    Certificate from Chambers of Commerce and Industry Registered Trade
•    Association
•    Bank Solvency Certificate
•    Copy of Trade License
•    Requisite fees
On receiving application, the respective CCI&E officer will scrutinize the documents and conduct physical verification and issue demand note to the prospective importers to furnish the following papers through their nominated Bank-
²  Partnership deed in case of partnership firms
²  Certificate of Registration, Memorandum and Articles of Association in case of Limited Company.

After scrutinizing and verifying, the nominated Bank will forward the same to the respective CCI&E office with forwarding schedule in duplicate through Banks representative. CCI&E then issue Import Registration Certificate to the Applicant.
Function of Import Section:
IMP-form:
The form IMP contains the followings—
•    Name and address of the Authorized dealers.
•    Amount of remittance to be permitted (i.e.L/C amount)
•    LCA form no. Date and value in Taka.
•    Description of goods.
•    Invoice value in foreign currency, (i.e./C amount)
•    Country of origin.
•    Port of shipment.
•    Name of steamer / Airline
•    Port of importation.
•    Indenter’s name and address.
•    Indenter’s registration number with CCI & E and Bangladesh Bank.
•    Full name and address of the applicant.
•    Registration number of the applicant with CCI & E.
•    Type of LCAF
 Import procedures:
The procedures, which follows at the time of Import areas, follow —
•    The buyer and the seller conclude a sale contract provided for payment by documentary credit.
•    The buyer instructs his Bank (the issuing Bank) to issue a credit in favor of the seller / Exporter / Beneficiary.
•    The Issuing Bank then send message to another Bank (Advising Bank /Confirming Bank) usually situated in the country of seller, advice or confirms the Credit Issue.
•    The Advising / confirming Bank then informs the seller through his Bank that the Credit has been issued.
•    As soon as the seller receives the credit, if the credits satisfy him the he can reply that, he can meet its terms and conditions, he is in position to load the goods and dispatch them.
•    The seller then sends the documents evidencing the shipment to the „! Bank where the Credit is available (nominated Bank). This can be the ^ issuing Bank or Confirming Bank; Bank named in the Credit as the paying, accepting and
•    Negotiating Bank.
•    The Bank then checks the documents against the credit. If the documents meet the requirements of the credit, the Bank then pay, accept or negotiate according to the terms of credit. In the case of credit available by negotiation, Issuing Bank will negotiate with recourse. The Bank, if other then the issuing bank, sends the documents to the issuing Bank.
•    The issuing Bank checks the document and if they found that the document has meet the credit requirements, they realize to the buyer upon payment of the amount due or other terms agreed between him and the issuing Bank.
•    The buyer sends transport documents to the carrier who will then proceed to deliver the goods.
An importer is required to have the followings to import through the bank:
  A bank account in the bank.
  Import Registration certificate.
  Taxpaying identification number.
  Performa invoice indent
  Membership certificate
  LCA (Letter of credit application) form duly attested.
  One set of IMP form.
  Insurance cover note with money receipts.
  Others.
 Typical Letter of Credit Transaction:
In case of an L/C of a small amount only the prescribed application form i.e. the LCA (Letter of credit application) form is enough to open an L/C. but when the L/C amount is reasonably high, and then the importer is asked to submit a proposal to the bank authority to have a limit of L/C amount. This proposal should be approved in the meeting of the executive committee of the bank. The sufficient features of a proposal are —
  Full particulars of bank account.
  Nature of business.
  Required amount of limit.
  Payment terms and conditions.
  Goods to be imported.
  Offered security.
  Repayment schedule.
A credit officer scrutinizes this application and accordingly prepares a proposal (CLP) and forwards it to the Head office Credit Committee (HOCC). The committee, if satisfied, sanctions the limits and returns back to the branch. Thus the importer is entitled for the limit.
Step-2: L/C Application:
BDI provides a printed form for opening of L/C to the importer. This form is known as credit application form. A special adhesive stamp is affixed on the form. While opening, the stamp is cancelled. Usually the importer expresses his desire to open the L/C quoting the amount of margin percentage. The importer gives the following information –