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Amendment to EEFC Account Regulations

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Pursuant to Reserve Bank of India’s (“RBI“) present circular dated 22 January 2013, the account holder’s of Exchange Earner’s Foreign Currency Account (“EEFC”), RFC (Domestic) and Diamond Dollar accounts will now be permitted to access the forex market for purchasing foreign exchange from once they have utilized the available balances in the respective accounts.

 As per the circular dated 30 July 2012, the sum total of the accruals will be required to be converted into rupees only after adjusting utilization of the balances for approved purposes or forward commitments during a calendar month, on or before the last day of the succeeding calendar month. Previously RBI had restored the erstwhile stipulation in terms of which all foreign exchange earners were permitted to retain 100% of their foreign exchange earnings in EEFC with any Authorised Dealer (“AD”) in India. Now the balances outstanding in an EEFC account as on July 31, 2012 and those balances that would accrue in the account with effect from August 1, 2012 shall get converted to Rupee balances on or before close of business on September 30, 2012. Similar procedure will be followed for accruals during the subsequent months. Further, Resident Foreign Currency Account (“RFC”) and Diamond Dollar account will also be required to get the accruals converted in the same manner.

As per the circular dated 10 May 2012, the RBI had directed the Authorised Dealers to convert 50% of the balances in the EEFC accounts to rupee balances and credit it to the rupee accounts of the account holder. For any future forex earnings, an exchange earner was allowed to retain 50% (as against the previous limit of 100%) in non-interest bearing EEFC accounts.  The balance 50% was required to be converted to rupee balances. Further, the RBI has clarified that the EEFC scheme is intended to enable exchange-earners save on conversion/transaction costs while undertaking forex transactions in future. This facility was not intended to enable-exchange earners to maintain assets in foreign currency, as India is still not fully convertible on capital account.  In furtherance, of the circular dated 18 July 2012, the RBI had exempted the RFC from the stringent regulations which were imposed on EEFC account, RFC account and Diamond dollar accounts as per the circular dated 10 May 2012. Moreover, the main reason behind the aforesaid circular was to stem the steep fall in Rupee against the Dollar by making it mandatory for all exporters to sell 50% of their dollar receipts in the market. But the circular was not effective in achieving its intended purpose mainly due poor economics of the country and the rupee continued its slide. Also, it increased administrative and transaction costs for those covered by the circular. As a result, the stipulations under this circular have been dispensed with under the present circular.

RFC accounts are accounts of resident individuals, who had come back to India after being abroad as NRIs for some time. EEFC accounts can be maintained by residents, individuals or corporates, who happen to receive foreign currency as a result of export/import trade. The recent move has benefited these EEFC accounts holders and one basic difference of this account from RFC account is that EEFC account can be opened only out of foreign exchange earned. While RBI intends to prevent speculation in rupee and avoid maintaining of assets in foreign currency by EEFC account holders, the RFC account facilitates NRI / PIO returns to India for permanent settlement to hoard foreign currency in the said accounts. By mandating the convertibility of funds held in NRE / FCNR accounts, RBI intended to prevent NRI/PIO account holders from utilising such foreign currency funds at their own discretion and ensure that the remittances made their way into the economic system. RFC accounts which were not controlled by RBI, were made liable to keep a monthly check on their accounts and end up converting the money brought for permanent settlement in a month. In leap of present circular the treasury and administrative costs have been saved the account holders, it has also helped them to match payments with dollars so received and the volatility in market.

Alpa Sood, 

alpa.sood@pxvlaw.com

 

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