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FEMA

laxmi (student) (59 Points)

02 December 2007

Drawal of foreign exchange for travel to Nepal or Bhutan is prohibited under FEMA. What is the logic behind this provision?

Suppose a person wants to draw foreign exchange for travelling to these nations. Then what is to be done?

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7 Replies

Navin Kumar (211 Points)
Replied 02 December 2007

Hi Laxmi.. Trust u had never been to these countries... In these countries u can use Indian Currency very easily. Ething u want to pay for is quoted in Indian currency in these countries.

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KAAPIL (COACHING ) (11717 Points)
Replied 02 December 2007

You can take Rs. with you after necessary disclosures.

laxmi (student) (59 Points)
Replied 02 December 2007

ok... but why the prohibitive provision??

Nidhi Jain (Chartered Accountant) (54 Points)
Replied 03 December 2007

Because in the both countries you can take Rs. so no problem regarding travel. Further why foreign exchange is prohibited in my opinion reason because foreign currency is valuable for us in respect of Balance of Trade and in these countries you can easily use Indian Rs.

Bhavesh (Chartered Accountant) (39 Points)
Replied 05 December 2007

In support & addition to the important point mentioned by Nidhi, To understand logic behind prohibition, lets go to past………………

Nepal – Until 1951 Nepal had very little contact with countries other than India, Tibet, and Britain. Movement of goods or people from one part of the country to another usually required passage through India, making Nepal dependent on trade with or via India.

Nepal's economy is irrevocably tied to India & Nepalese rupee was linked to the Indian rupee. Before 1960, Nepal had little control over its foreign currency holdings. Indian rupees were the prevalent medium of exchange in most parts of the country. Nepalese currency was used mostly in the Kathmandu and the surrounding hill areas. The existence of a dual currency system made it hard for the government to know the status of Indian currency holdings in Nepal. The exchange rates between Indian and Nepalese rupees were determined in the marketplace.

It was only after the signing of the 1960 Trade and Transit Treaty with India that Nepal had full access to foreign currencies other than the Indian rupee. Prior to the treaty, all foreign exchange earnings went to the Central Bank of India, and all foreign currency needs were provided by the Indian government. After 1960 Nepal had full access to all foreign currency transactions and directly controlled its exports and imports with countries other than India.

Nepal Rastra Bank was created in 1956 as the central bank. Its function was to supervise commercial banks and to guide the basic monetary policy of the nation. Nepal Rastra Bank also was to oversee foreign exchange rates and foreign exchange reserves. An act was passed in 1960 to regulate foreign exchange transactions. In 1960s, the Nepal Government made special efforts to use Nepalese currency inside the country as a medium of exchange

As a result of the Trade and Transit Treaty with India, the Nepal government had to separate Indian currency (convertible currency because of free convertibility) from other currencies (nonconvertible currency because it was directly controlled by Nepal Rastra Bank).

Bhutan - The financial sector in Bhutan has begun to develop only recently. Bhutan remained closed to the rest of the world till the early 1960s. Until then, there was limited barter trade with India and Tibet. Most internal transactions took the form of barter.

Even after it opened to the outside world in 1961, Bhutan did not have its own bank notes, but transactions were no longer confined to barter. India provided both financial and technical assistance to initiate development activities. Through this assistance, Indian rupees began to circulate in Bhutan & the rupee has been legal tender in Bhutan. The use of money increased with the progress in development activities.

A Secretariat of Finance (Bhutan) was established in order to facilitate the flow of cash in the Bhutan. It was upgraded to a Ministry of Finance in 1968. In that same year, the Bank of Bhutan, which was the first commercial bank, was established. The Bhutanese bank note called Ngultrum (Nu.) was introduced in 1974. In 1982 the government passed an act that established the Royal Monetary Authority as the country’s central bank.

Since the introduction of the Ngultrum, the Bhutanese government has pegged it at par with the Indian Rupee. Bhutanese currency has no independent exchange rate with other major currencies of the world. The Nugultrum’s exchange rate with some prominent currencies such as the USD or Euro is replicated from the rupee’s rate against these currencies. The ngultrum does not exchange independently with other nation's currencies but is interchangeable with the Indian rupee.

In addition to pegging its currency to the rupee, Bhutan allows free circulation of the rupee in Bhutan. Rupee is accepted as a legal tender. Bhutanese currency is also accepted in those frontier regions of India that have major business transactions with Bhutan. However, it is not accepted in rest of India. Bhutanese do not prefer one currency to the other; Ngultrum and Rupee are equally preferred.

Due to the above mentioned reasons, the drawal of foreign exchange for travel to Nepal/Bhutan is prohibited & drawal for various other purposes where drawal of foreign currency for use in Nepal & Bhutan is involved is also prohibited.