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Capital and Current Account Transactions: A Complete Guide

Capital and Current Account Transactions: A Complete Guide
rohit
Rohit25 November 2023

While being an entrepreneur exporting services worldwide is thrilling, navigating the complexities of foreign transactions is challenging. The constant struggle is picking a suitable payment method that does not consume your profits. 

It's not just small businesses that face these problems. Even Tesla, in 2018, incurred a staggering $20 million fine from the US Securities and Exchange Commission (SEC) for misleading investors about their capital and current account transactions. 

The SEC discovered how Tesla had exaggerated its cash flow from operations by a staggering $600 million while understating its net income by $300 million. Their financial statements failed to disclose its capital and current account transactions, resulting in severe consequences.

Tesla's problems with capital and current account transactions were due to a major factor: a lack of understanding of the complexity of the rules.

To safeguard your global business from such complications, let's understand capital and current account transactions in detail.

Overview of Capital Account and Current Account Transactions

Overview of Capital Account and Current Account Transactions

Capital Account Transactions   

A capital account transaction meaning is when India and other countries trade money-related things like assets and debts with each other. It includes transactions related to buying or selling non-financial assets, such as real estate and patents, and financial assets, including stocks, bonds, and derivatives. 

The components of a capital account include the flow of foreign capital and loans, banking activities, and other forms of investment, as well as fluctuations in the foreign exchange reserve.

However, capital account transactions are restricted to a certain limit per the relevant regulations. The RBI or Central Government do not impose any restrictions on the withdrawal of foreign exchange for depreciation (decline in value) of direct investments.

Rohit Khurana, a Chartered Accountant professional and finance lead at Skydo, clarifying the rules for capital account transactions, explains, "The business may require a valuation report in the cases where it receives money against the issuance of shares. Similarly, there are many restrictions in particular sectors in terms of shareholding so that foreign companies can not exceed the particular FDI limits."

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