Chapter 8: Role of EXIM Bank, Reserve Bank of India, Exchange Control in India – FEMA, FEDAI, and Others (CAIIB – Paper 2)

1. What is the primary function of the EXIM Bank of India?

  • A. Regulating the Indian money market
  • B. Controlling inflation in India
  • C. Providing financial assistance to promote exports and imports
  • D. Managing government securities
EXIM Bank primarily provides financial assistance, loans, and guarantees to facilitate India’s export and import activities, supporting international trade.

2. Under FEMA, which body has the authority to regulate foreign exchange transactions in India?

  • A. EXIM Bank of India
  • B. Reserve Bank of India
  • C. Securities and Exchange Board of India
  • D. Ministry of Finance
FEMA (Foreign Exchange Management Act) empowers the RBI to regulate and facilitate foreign exchange transactions in India to maintain orderly economic management.

3. Which of the following is a key facility provided by EXIM Bank to Indian exporters?

  • A. Cash Reserve Ratio adjustments
  • B. Repo and reverse repo operations
  • C. Direct investment in stock market
  • D. Export credit and pre-shipment/post-shipment financing
EXIM Bank offers export credit facilities, including pre-shipment and post-shipment financing, to help Indian exporters meet working capital and other requirements.

4. FEDAI in India is primarily associated with:

  • A. Providing guidelines for foreign exchange dealings by authorized dealers
  • B. Regulating domestic banking interest rates
  • C. Issuing government bonds in international markets
  • D. Administering FEMA penalties
FEDAI (Foreign Exchange Dealers Association of India) issues operational guidelines to banks and authorized dealers for smooth handling of foreign exchange transactions.

5. Which of the following statements about the Reserve Bank of India (RBI) and exchange control is correct?

  • A. RBI only prints currency notes and has no role in exchange control
  • B. RBI regulates only domestic interest rates but not foreign exchange
  • C. RBI regulates foreign exchange under FEMA and ensures stability of currency
  • D. RBI supervises stock exchanges for foreign investment purposes
RBI, under FEMA, controls and regulates foreign exchange, monitors forex reserves, and ensures orderly currency management in India.

6. Which of the following is a primary objective of the Reserve Bank of India in exercising exchange control?

  • A. Regulating interest rates of corporate loans
  • B. Ensuring orderly foreign exchange transactions and stability of the rupee
  • C. Managing government fiscal deficit
  • D. Issuing licenses to commercial banks for retail operations
RBI regulates foreign exchange to maintain the stability of the Indian rupee and ensures smooth conduct of international trade and payments.

7. Under FEMA, which of the following is true regarding foreign currency accounts held by residents in India?

  • A. Residents can freely open foreign currency accounts without RBI approval
  • B. Residents can open foreign currency accounts in India only with approval from the Ministry of Finance
  • C. Residents cannot hold any foreign currency accounts under any circumstances
  • D. Residents can open and maintain foreign currency accounts as per RBI guidelines and approvals
FEMA allows residents to maintain foreign currency accounts in India, subject to RBI rules and prescribed limits to ensure proper monitoring of foreign exchange.

8. Which of the following instruments falls under RBI’s exchange control regulations?

  • A. Foreign currency loans, remittances, and trade credits
  • B. Domestic savings accounts in INR only
  • C. Corporate tax filings and GST returns
  • D. SEBI-regulated mutual funds
RBI regulates foreign currency loans, trade credits, remittances, and other external transactions to ensure compliance with FEMA and maintain external sector stability.

9. Under RBI exchange control, what is the permissible purpose of outward remittance by an Indian resident?

  • A. Speculative trading in international markets
  • B. Investment in foreign real estate without RBI approval
  • C. Education, medical expenses, or approved investments abroad
  • D. Any personal expenditure without limit
RBI allows outward remittances for specific purposes like education, medical treatment, or investments abroad under the Liberalized Remittance Scheme, ensuring controlled use of foreign exchange.

10. Which of the following statements about RBI’s role in exchange control is correct?

  • A. RBI only provides advisory services and does not enforce regulations
  • B. RBI monitors, regulates, and enforces foreign exchange transactions in India under FEMA
  • C. RBI’s exchange control applies only to imports but not exports
  • D. RBI controls only the interest rates of foreign currency loans
RBI is the regulatory authority under FEMA, monitoring all foreign exchange inflows and outflows, enforcing compliance, and ensuring orderly functioning of the external sector.

11. What is the primary objective of FEMA 1999?

  • A. To impose criminal penalties for all foreign trade
  • B. To replace RBI in regulating banking operations
  • C. To facilitate external trade and payments while promoting orderly foreign exchange management
  • D. To manage domestic monetary policy
FEMA was enacted to simplify and liberalize the regulation of foreign exchange, focusing on facilitating external trade, payments, and orderly management of foreign exchange in India.

12. Under FEMA, which of the following is classified as a “capital account transaction”?

  • A. Payment for imports of goods
  • B. Investment by a resident in foreign securities
  • C. Payment for imported services
  • D. Remittance for education abroad
Capital account transactions involve transfer of capital, such as investments abroad, loans, or acquisition of foreign assets by residents, as defined under FEMA.

13. Which body is primarily responsible for enforcement of FEMA in India?

  • A. Ministry of Commerce
  • B. SEBI
  • C. Income Tax Department
  • D. Reserve Bank of India
FEMA is enforced by the Reserve Bank of India and authorized dealers, ensuring compliance in foreign exchange transactions and capital account movements.

14. Which of the following statements is true about current account transactions under FEMA?

  • A. Payments for imports, exports, and remittances for personal or business purposes are current account transactions
  • B. Purchase of foreign property is considered a current account transaction
  • C. Loans to foreign companies are always treated as current account transactions
  • D. Capital inflows from FDI are current account transactions
Current account transactions under FEMA include payments related to trade in goods and services, personal remittances, and other routine transfers, distinct from capital account flows.

15. Under FEMA, which of the following is NOT permitted without prior approval from RBI?

  • A. Receiving remittance for education abroad within prescribed limits
  • B. Export of goods and services
  • C. Acquiring immovable property outside India by a resident
  • D. Travel remittances within the Liberalized Remittance Scheme limit
Residents require prior RBI approval to acquire immovable property abroad. Routine remittances for travel, education, or trade are allowed under prescribed limits without prior approval.

16. What is the primary role of FEDAI (Foreign Exchange Dealers Association of India)?

  • A. Issuing banking licenses to commercial banks
  • B. Framing operational guidelines for banks and authorized dealers in foreign exchange transactions
  • C. Setting RBI’s monetary policy rates
  • D. Regulating capital market investments
FEDAI provides operational guidelines and standard practices to banks and authorized dealers for handling foreign exchange transactions efficiently and in compliance with RBI regulations.

17. Which of the following functions is performed by FEDAI in India?

  • A. Formulating rules for forex deals, rates, and settlements among member banks
  • B. Issuing currency notes
  • C. Supervising commercial banks’ domestic lending
  • D. Controlling RBI’s liquidity management operations
FEDAI formulates rules and procedures for forex deals, fixing exchange rates, settlement practices, and ensuring uniformity among member banks in foreign exchange operations.

18. Which of the following is covered under FEDAI Rules?

  • A. Domestic interest rate adjustments
  • B. RBI’s monetary policy directions
  • C. Foreign exchange dealing practices, exchange rates, and settlement procedures
  • D. Import-export licensing formalities
FEDAI Rules provide a standard framework for foreign exchange transactions, including dealing practices, exchange rate quotations, and settlement procedures among authorized dealers.

19. Who are the members of FEDAI?

  • A. Only RBI officials
  • B. Importers and exporters
  • C. All corporate borrowers in foreign currency
  • D. Banks and authorized dealers engaged in foreign exchange operations
Members of FEDAI are banks and authorized dealers who are actively involved in foreign exchange operations and follow FEDAI guidelines for uniformity and compliance.

20. Which of the following is TRUE regarding FEDAI guidelines?

  • A. They are advisory but followed strictly by banks for forex transactions
  • B. They replace FEMA regulations
  • C. They are legally binding and violations are punishable under criminal law
  • D. They apply only to domestic rupee lending
FEDAI guidelines are advisory in nature but are strictly followed by banks and authorized dealers to ensure uniform and orderly conduct of foreign exchange transactions in India.

21. What is the primary purpose of an External Commercial Borrowing (ECB) for an Indian company?

  • A. Raising funds domestically from retail investors
  • B. Financing exports without RBI approval
  • C. Raising debt from foreign sources for capital expenditure, working capital, or refinancing
  • D. Acquiring shares of Indian companies only
ECB allows Indian companies to borrow from international markets to meet long-term capital requirements, refinance existing loans, or fund working capital, subject to RBI and FEMA regulations.

22. What is the difference between an ADR and a GDR?

  • A. ADRs are issued in international markets, GDRs are domestic only
  • B. ADRs are listed on U.S. exchanges, while GDRs are listed on multiple international exchanges outside the U.S.
  • C. ADRs are debt instruments, GDRs are equity instruments
  • D. There is no difference; both are identical in every aspect
ADRs (American Depository Receipts) are listed on U.S. exchanges representing foreign shares, whereas GDRs (Global Depository Receipts) are listed on multiple international exchanges outside the U.S.

23. Which of the following is a feature of a Foreign Currency Convertible Bond (FCCB)?

  • A. It is a short-term domestic rupee debt instrument
  • B. It cannot be converted into equity
  • C. It is issued only to domestic banks
  • D. It is a foreign currency-denominated bond that can be converted into equity at a predetermined price
FCCBs are issued in foreign currency and give investors the option to convert the bonds into equity shares of the issuing company at a predetermined conversion price, combining debt and equity features.

24. Which regulatory body oversees ECBs, ADR/GDRs, and FCCBs in India?

  • A. Securities and Exchange Board of India (SEBI) only
  • B. Reserve Bank of India, under FEMA regulations
  • C. Ministry of Corporate Affairs only
  • D. Ministry of Finance without RBI intervention
RBI regulates ECBs, ADRs/GDRs, and FCCBs under FEMA to ensure orderly foreign exchange management and compliance with external borrowing norms.

25. Which of the following is a key advantage of raising funds through ADRs or GDRs?

  • A. Lower domestic regulatory compliance for Indian investors
  • B. Avoiding disclosure requirements in international markets
  • C. Access to foreign capital and enhanced global visibility of the company
  • D. Guaranteed government subsidy on issue proceeds
ADRs and GDRs help Indian companies access foreign capital markets, raise funds in foreign currency, and increase their international presence and visibility among global investors.

26. An Indian company raises an ECB of USD 5 million at an interest rate of 6% p.a. for 5 years. What is the total interest payable over the tenure?

  • A. USD 1,000,000
  • B. USD 1,200,000
  • C. USD 1,500,000
  • D. USD 2,000,000
Total interest = Principal × Rate × Time = 5,000,000 × 6% × 5 = USD 1,500,000.

27. A company issues 1,00,000 FCCBs at USD 10 each, convertible into 2 equity shares per bond. How many shares will be issued if all bonds are converted?

  • A. 1,00,000 shares
  • B. 2,00,000 shares
  • C. 1,50,000 shares
  • D. 2,50,000 shares
Each bond converts into 2 shares. Total shares = 1,00,000 × 2 = 2,00,000 shares.

28. An Indian company wants to raise funds through GDRs. Which of the following is TRUE?

  • A. GDRs can be issued without RBI approval
  • B. GDRs are listed only in the U.S. stock exchanges
  • C. GDRs require RBI and SEBI approval and are listed on foreign exchanges outside the U.S.
  • D. GDRs are debt instruments only
GDRs are listed on international exchanges outside the U.S. and require regulatory approvals from RBI and SEBI for issuance by Indian companies.

29. An ADR of an Indian company is trading at USD 50 per share, representing 2 underlying Indian shares. What is the implied price of one Indian share?

  • A. USD 25
  • B. USD 25
  • C. USD 50
  • D. USD 100
ADR price per underlying share = ADR price ÷ number of underlying shares = 50 ÷ 2 = USD 25.

30. A company issues FCCBs at a coupon rate of 5% p.a., convertible after 3 years. What is the main advantage for the company?

  • A. Immediate equity dilution
  • B. Avoiding foreign currency exposure
  • C. Raising foreign currency funds at lower cost with potential future conversion to equity
  • D. No interest payment required
FCCBs allow companies to borrow in foreign currency at lower interest rates with the option to convert debt into equity later, reducing immediate repayment pressure.

31. An Indian company wants to issue an ECB for USD 10 million with a repayment period of 7 years. Which of the following is TRUE?

  • A. No RBI approval is required for ECB of any amount
  • B. ECB can only be raised from domestic banks
  • C. ECB cannot be used for working capital
  • D. ECB requires RBI approval and must follow FEMA regulations
ECBs are subject to FEMA and require RBI approval, specifying end-use, repayment tenure, and eligible lenders.

32. If the conversion price of FCCB is INR 500 and the bondholder holds 100 bonds, how many equity shares will the investor receive on conversion?

  • A. 50 shares
  • B. 100 shares
  • C. 200 shares
  • D. 500 shares
Number of shares = Number of bonds × Par value ÷ Conversion price = 100 × 500 ÷ 500 = 100 shares.

33. A GDR representing 5 underlying Indian shares is trading at USD 75. What is the price of one underlying Indian share?

  • A. USD 10
  • B. USD 15
  • C. USD 15
  • D. USD 75
Price per underlying share = GDR price ÷ number of underlying shares = 75 ÷ 5 = USD 15.

34. An Indian company raises USD 2 million via FCCB at 6% interest, convertible after 2 years. What is the key risk for the company?

  • A. Domestic interest rate fluctuations
  • B. SEBI compliance issues only
  • C. RBI disapproval of conversion
  • D. Foreign currency depreciation increasing repayment burden
FCCB repayment in foreign currency exposes the company to forex risk; depreciation of INR against USD can increase repayment cost in INR terms.

35. A company plans to issue ADRs on the NYSE. Which of the following steps is necessary?

  • A. Approval from only the Ministry of Finance
  • B. No regulatory approval required
  • C. Compliance with SEBI and RBI regulations, appointing a depository bank in the U.S.
  • D. Issue domestic equity first
Issuance of ADRs requires SEBI and RBI approval, appointing a U.S. depository bank, and compliance with FEMA regulations for foreign investment and capital flows.

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