Dealing in foreign exchange is not an easy task to manage. RBI (Reserve Bank of India) is stringent regarding foreign exchange reserves. A person or even company, be it a private limited company, public limited company or Listed company, can not deal in foreign currency freely. They have to approach authorised dealers as prescribed by the RBI for every transaction.
This is even more important when dealing with foreign currency loans or investments on behalf of the company. Private Limited Company is the one that attracts a hefty flow of FDI.
Being an Indian resident, if you have current accounts, saving accounts and fixed deposit accounts are sufficient to conduct any transaction domestically but may not be for those transactions which involve dealing in foreign currency.
So, these types of accounts are suitable if you are not into importing or exporting goods or services and your business is limited to the boundaries of countries.
But, if you are importing or exporting goods or involved in a foreign financial transaction, you have to follow laws related to foreign exchange.
Purchase or sale of goods or shares in India must be undertaken through bank accounts that are permitted to route the transaction under the Foreign Exchange Management Act, 1991 (FEMA).
Therefore, you must understand the different types of accounts that must be opened to undertake foreign exchange transactions.
You must consider the following points before opening any bank account in India:
An Exchange Earners Foreign Currency (EEFC) Account can be opened to keep foreign exchange. Exporters can hold the proceeds in foreign exchange instead of converting them, saving the transaction cost. But you cant hold the foreign currency in this account infinitely.
So, this type of strategy can be adopted to save the transaction cost only but can be used to hedge currency risk. Hedging is a technique to minimise the loss in currency transactions.
EEFC account is like a current account. Therefore, no interest is payable on its balance.
A non-resident can open a Non-resident Ordinary account Rupee Account (NRO account). This is a rupee account. This account can be used for investing in Indian companies to invest in Indian companies and making other payments in India. But, all these transactions must be done as per rules and regulations made in this regard by RBI.
This account can also be opened by the NRIs (Non-resident Indians).