FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (FEMA)

The Act was introduced as a part of liberalization process by the Government of India. The Act came into force on 1st June, 2000.

Back ground Earlier known as FERA- FOREIGN

EXCHANGE REGULATION ACT Many stringent provisions in FERA. Liberalization was announced in 1991. Foreign investment was allowed in all

sectors. Foreign investment flowed. Hence, to regulate in a more liberalized

manner, FEMA was enforced in place of FERA

OBJECTIVE TO CONSOLIDATE AND AMEND THE

LAW RELATING TO FOREIGN EXCHANGE

WITH THE OBJECT OF FACILITATING EXTERNAL TRADE AND PAYMENTS, AND

PROMOTING THE ORDERLY DEVELOPMENT AND MAINTENANCE OF FOREIGN EXCHANGE MARKETS.

OBJECTIVE OF FERA Was to conserve foreign exchange Control transactions directly/indirectly

affecting foreign exchange, and Prevention of leakage of foreign exchange Hence, objective of FEMA is from

conservation to FACILITATION, and From control to REGULATION RBI is the overall controlling/ regulatory

authority under FEMA

Extra territorial in application Extends to the whole of India And sometimes to outside India also. i.e. to all branches, offices and

agencies outside India owned and controlled by a person resident in India

And also to any contravention of the Act happening outside India by any person to whom the Act applies.

BROAD STRUCTURE OF FEMA It mainly deals with matters pertaining to foreign

exchange All current account transactions are free However, Central government can impose restrictions

by issuing rules. S.3 Capital accounts transactions are permitted to the

extent specified by RBI regulations s.6 RBI controls management of foreign exchange Since it cannot directly deal with foreign exchange it

authorises” authorised persons”to deal in foreign exchange according to RBI Regulations s.10

RBI issues directions to such persons u/s.11 These directions are issued through AP(DIR) circulars.

Authorised Persons (Directions)

PROVISIONS FOR FEMA CANNOT BE FOUND AT ONE PLACE FEMA has provisions for enforcement, penalties,

adjudication and appeals SO FEMA CONTAINS ONLY THE BASIC LEGAL FRAME

WORK. THE PRACTICAL ASPECTS ARE SPREAD OVER RBI

DIRECTIONS AND CIRCULARS ISSUED BY CENTRAL GOVERNMENT AND VARIOUS POLICIES ISSUED BY SEPARATE MINISTRIES

Industrial policy announced by Ministry of Industry contains provisions for FDI’s (foreign direct investment), foreign technical collaborations, royalty payments, joint ventures abroad etc. which also has relevance in understanding FEMA.

Policy in external commercial borrowing announced by Ministry of Finance has relevance in FEMA

SEBI guidelines and Income tax provisions also find relevance in understanding FEMA provisions.

IMPORTANT DEFINITIONS UNDER FEMA

1. PERSONS2. CURRENCY AND TRADE3. MISCELLANIOUS

PERSONS Section 2(u)

1. PERSONS include Individual HUF Company Firm Association of persons Agency Office or branch owned or controlled by

such person

Persons resident in India Section 2(v) (iA) a person residing in India for more

than 182 days during the course of preceding financial year. This does not include a person who has gone outside India for

1. Employment outside India2. Carrying on any business/vocation outside

India3. For any other purpose such that his

intention is to stay outside India for an uncertain period

(iB) A person residing in India for more than 182 days in the preceding financial year

However, it includes a person who has come to India for

1. Employment in India2. Carrying on any business/vocation in

India3. For any other purpose such that his

intention is to stay in India for an uncertain period

Also….

(ii)- any body corporate registered or incorporated in India

(iii) – any office, branch or agency in India owned or controlled by a person resident outside India

(iv)-Any office, branch or agency outside India owned or controlled by a person resident in India

‘RESIDENT IN INDIA’ MEANS- To brief, a person resident in India includes

persons of India (except those staying abroad for work or business or other purpose)

And, foreign persons who have come to India or stay in India for employment, carrying out any business or other purpose with an intention to stay in India for an uncertain period.

Even, office, branch or agency can be a person

STUDENT GOING ABROAD FOR UNCERTAIN PERIOD

HE/SHE is not a resident if the period of stay abroad is ’uncertain’ or for any reasons has been extended beyond the time initially thought of while leaving India.

‘stay’ is different from ‘reside’. Stay is not permanent, while residence is permanent. An airline pilot having a stay in INDIA cannot be said to have residence in India.

PERSONS RESIDENT OUTSIDE INDIA 2(w) It means a person not being a resident of India. NRI- Non Resident Indian- Persons of Indian origin

residing abroad or Non-residents of Indian nationality are usually called as NRI under various statutes. NRI is not defined under FEMA. But under the FEMA regulations, it include-

1. Person resident outside India who is a citizen of India, and

2. Person of Indian Origin (PIO)Under various regulations of FEMA, PIO has got a very

restrictive interpretation.

NRI’s and PIO’s have been given certain special privileges for investments in India under FEMA.

Bank accounts & deposits- NRE a/c, FCNR (B) A/c, NRO A/c

Repatriation – up to USD 1 Million/ year from NRO A/c Investments on repatriation basis- units of domestic

mutual funds, shares and debentures in Indian companies, deposits with Indian companies, government dated security and treasury bills etc.

Investment on non-repatriation basis- units of money markets mutual funds of India

Immovable property- other than agricultural/ plantation property or farm house

Housing loans Facilities to returning NRI/PIO- RFC A/c. proceeds of

sale assets outside India can be credited to RFC a/c

2. Currency and trade Permitted currency/ convertible

currency/ hard currencya. A foreign currency which is freely

convertible as per Regulation 2(v) of FEM (Manner and payment ) Regulations, 2000. major currencies among these are: USD, Pound sterling UK, EURO, Swiss Frank, Yen.

b. Also called as hard currencyc. Indian rupee is not fully convertible

Currency s. 2(h) Includes-a. All currency notesb. Postal notesc. Money ordersd. Chequese. Draftsf. Traveller’s chequesg. Letter of credith. Bills of exchangei. Promissory notesj. Credit cards ork. Such other similar instruments as notified by RBI. Vide RBI

Notification dated 3rd March 2000, these list also includesl. Debit cards, ATM cards or any other instruments by what ever

name called that can be used to create a ‘financial liability’, as ‘currency’.

Currency notes include cash in the form of bank notes and coins. S. 2(i)

Foreign exchange s. 2(n) Means foreign currency and includes;i. Deposits, credits and balances payable in

foreign currencyii. Drafts, traveller’s cheques, letter of credit

or Bill of exchange expressed or drawn in Indian currency but payable in foreign currency

iii. Drafts, traveller’s cheques, letter of credit or Bill of exchange drawn by banks, institutions or persons outside india, but payable in Indian currency

Repatriate to India s. 2(y) Means bringing into India the realized

foreign exchange andi. Selling of that foreign exchange to an

authorised person in India in exchange for rupees

ii. The holding of realised amount in account with an authorised dealer in India to the extent notified by RBI.

iii. ALSO, includes use of that realised amount for discharge of a debt or liability denominated in foreign currency.

Repatriation outside India Buying or drawing of foreign

exchange from authorised dealer in India and remitting it outside India through normal banking channels or crediting it on to the account denominated in foreign exchange or to an account in Indian currency maintained by an authorised person from which it can be converted in foreign currency.

Miscellaneous definitions Authorised persons- RBI cannot do all transactions in

foreign exchange by itself. Therefore, this power is delegated to authorised persons with suitable guidelines, to deal in foreign exchange and foreign securities.

Authorised person means an authorised dealer, money changer, off-shore banking unit or any other person authorised u/s. 10 (1) to deal in foreign exchange and foreign securities.

Generally, all nationalised banks, leading non-nationalised banks and foreign banks are appointed as authorised dealers. They can deal in all forms of foreign exchange.

Money changers can deal only with coins, notes and traveller’s cheques. American express, Thomas cook etc. are full fledged money changers (FFMC)

Some hotels and shops, leading travel agencies etc. are appointed as Restricted money changers(RMC). They cannot sell foreign exchange but can purchase foreign currency and traveller’s cheques.

FFMC’s and RMC’s have to surrender foreign exchange with them to authorised dealers.

Surrender means selling of foreign exchange to an authorised dealer in India in exchange for rupees.

Offshore Banking Units (OBU’S) can be appointed as authorised persons. They are foreign branches of Indian banks working inside SEZ premises. They deal with SEZ and SEZ developers only. They can source foreign currency fund from abroad. They deal in international rates. They will deal only in foreign exchange.

Duties of authorised persons They should act only by RBI guidelines Should submit reports to RBI Their acounts can be inspected by RBI AD’s and FFMC’s can appoint agents/ franchises for

undertaking restricted money changing. An authorised person can deal only with those matters

to which the authorisation has been received from RBI.

He should take written undertaking/ declaration from person to satisfy himself that there is no violation of FEMA.

If there is any evasion found, the matter has to be reported immediately to RBI. S. 10(5)

Revocation of authorisation by RBI The authorisation shall always be in writing RBI can revoke the authorisation at any time, if

satisfied that-a. It is in public interestb. The authorised person has failed to comply with the

requirements subject to which authorisation was granted

c. Or has contravened any provisions of the Act, rule, regulation, notification, circulars etc.

d. Revocation can be done after giving an opportunity for the dealer for a representation. S. 10(3)

e. For contravention of any direction a penalty of 10000/- may be imposed. If the default is continued penalty of 2000/- per day may be imposed. S. 11

f. RBI can inspect all record books of the authorised person.

General provisions of regulation and management Powers in respect of routine matters have

been delegated to authorised persons by RBI

If remittance is in accordance with guidelines/ regulations, it is permitted by authorised dealers

All current account transactions are freely permitted

Even in capital account transactions, the transactions which are freely permitted can be allowed by authorised dealer without permission from RBI.

PROCEDURE FOR REMITTANCE UNDER FEMA

Supporting documents

CA/ PCS certificate

Application to

authorized dealer

TDS Certificate

Payment to

authorized dealer

Remittance

Applications have to be given to authorised dealer for remittance of foreign currency in India

Separate application forms are prescribed. If a person has to open a foreign currency a/c in India

application has to be given to RBI For eg. Remittance upto USD 5000(Small value) can

be done by a simple letter specifying all particulars about the applicant without any accompanying papers to the the authorised dealer

Separate forms are there for other remittances. E.g. FORM A1 for remittance foreign currency for import of goods to India.

Any individual can remit up to USD 25000/ calendar year for holding/ acquiring immovable property abroad, acquiring shares outside India, opening of foreign currency a/c with a Bank outside India. No permission of RBI is required. This is applicable for all current and capital a/c’s and a combination of both.

The authorised dealers usually banks will issue certificate of remittance for all inward clearances exceeding 15000/-.

If the authorised dealer/money changer purchases foreign currency from a foreign tourist, they will issue an encashment certificate.

BANK ACCOUNTS IN INDIA IN RUPEES

NRE – Non-resident (external) rupee account scheme

Principal and interest are freely repatriable Transfer from FCNR(B) A/c is freely permitted Opened by Non resident Indians (NRI) with authorized

dealers and banks Can be opened by account holder himself and not by

POA holder Entities and nationals of Bangladesh, Pakistan will

require special approval of RBI Joint a/c with another NRI and not with an Indian

resident is permitted. nomination in the name any individual is permitted (in the name of NRI)

The A/c may be maintained in any form- savings, current, recurring or FD/ term deposits

On the event of non-resident becoming resident, the NRE a/c may be redesigned as resident a/c.

POA holder can operate a/c with respect to local payments only

Loans may be given to NRI of the a/c Separate cheque books are issued showing NRE status Overdrawing up to 50000/- is permissible Remittance may be in any form of foreign currency

only Penalty for premature withdrawal of term deposits The only disadvantage is that when rupee

depreciates, the savings of NRI counted in USD also reduces

NRO- Non resident ordinary rupee account

A/c is maintained in India rupee Any NRI can open an NRO A/c, except

nationals of Bangladesh and Pakistan only with the prior approval of RBI

Current income is freely repatriable but principal amount only up to 1 million USD.

Rest all provisions are similar to NREa/c

Foreign currency accounts

Accounts held or maintained in currency other than currency of India, Nepal or Bhutan

May be maintained as current/ savings a/c or FD when the a/c Holder is an individual and as current and term deposit in all other cases

Can be maintained singly or jointly

Resident foreign currency account RFC Opened and maintained by NRI/PIO who has returned

to India after working abroad E.g the a/c may be held to maintain pensions or any

other annuities from the employer abroad, gifts or inheritance from a person abroad etc.

There are no restrictions on investment using the money in RFC in India except a few like in lottery, transactions with Nepal, Bhutan etc.

Thus a resident in India can maintain an RFC if-1. The foreign exchange was earned when he was

abroad,2. He inherited it or obtained gift from a person who was

not a resident of India

FCNR (B)- Foreign currency (Non-resident) Account (Bank) scheme

Maintained in foreign exchange Fluctuations of currency has no effect NRI can open Can be maintained using funds remitted

from outside India using normal banking channels or funds received in rupees to the a/c of a non-resident bank or by transfers from NRE/FCNR a/c’s.

Only term deposits are permitted

Regulation and management of foreign exchange

The main provisions of the Act are:-

It permits only authorised person to deal in foreign exchange or foreign security. Such an authorised person, under the Act, means authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised by Reserve Bank.

The Act thus prohibits any person who:-

Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;

Make any payment to or for the credit of any person resident outside India in any manner;

Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner;

Enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person;

is resident in India which acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

The Act regulates two types of foreign exchange transactions, namely 'Capital Account Transactions' and 'Current Account Transactions'.

According to the Act, 'Capital account transaction' means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes the following transactions referred in the Act:-

Transfer or issue of any foreign security by a person resident in India;

Transfer or issue of any security by a person resident outside India;

Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;

Any borrowing or lending in rupees in whatever form or by whatever name called;

Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;

Deposits between persons resident in India and persons resident outside India;

Export, import or holding of currency or currency notes;

Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;

Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;

Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred-

(i) By a person resident in India and owed to a person resident outside India; or

(ii) By a person resident outside India.

It also defines the term 'current account transaction' as a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes:-

(i) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business;

(ii) payments due as interest on loans and as net income from investments;

(iii) remittances for living expenses of parents, spouse and children residing abroad; and

(iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children.

The Act has empowered the Reserve Bank of India (RBI) to specify, in consultation with the Central Government, the permissible capital account transactions and the limits up to which foreign exchange may be drawn for such transactions. But it shall not impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.

Any person may sell or draw foreign exchange if such sale or drawal is a current account transaction. Under the Act, Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed.

Every exporter of goods shall:- (i) furnish to the Reserve Bank or to such other

authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India;

(ii) furnish to the Reserve Bank such other information

as may be required by it for the purpose of ensuring the realisation of the export proceeds by such exporter.

The Reserve Bank may, at any time, cause an inspection to be made, by any officer specially authorised in writing by it in this behalf, of the business of any authorised person as may appear to it to be necessary or expedient for the purpose of:-

(i) verifying the correctness of any statement, information or particulars furnished to the Reserve Bank;

(ii) obtaining any information or particulars which such authorised person has failed to furnish on being called upon to do so;

(iii) securing compliance with the provisions of this Act or of any rules, regulations, directions or orders made thereunder.

Enforcement Enforcement is with enforcement directorate The central government has appointed Directors of

Enforcement, Additional directors, Special Director, Deputy Director and Assistant Directors for enforcement of FEMA. S. 36

Powers are similar to Income tax authorities Main powers include inspection and investigation of

violations of FEMA provisions. Cheques and other NI’S recovered during enforcement

will be deposited with RBI. If Indian currency is found, it shall be deposited in a separate a/c in the name of Director of enforcement.

The central government will indemnify the enforcement authority for encashing the NI’s.

Penalties under FEMA Offenses under FEMA are civil offenses. Central government appoints the adjudicating

authority. S.16(1) They conduct enquiry on the complaint received from

an authorised person. It should give the verdict within 1 year, if not should

state the reason. While adjudicating the case, it acts as a quasi judicial

body and has to follow the principles of natural justice.

Opportunity should be given to the respondent to represent his case.

An officer not below the rank of Assistant director can file the complaint The adjudicating authority has got the powers of a civil

court The penalty can be upto thrice the sum involved in

contravention where the amount is quantifiable. If not, penalty can be up to Rs. 2 lakhs. If the transgression continues all officers in default will be liable to pay 5000/ per day. S. 13(1)

The foe may be confiscated. S.13 (2) A person on whom the verdict is passed has to make

payment within 90 days. If not he is liable to civil imprisonment. S. 14(1)

For amount less than 1 crore- 6 months For amount more than 1 crores- up to 3 years s. 14(11) Compunding is permitted within 180 days

Appeals Assist. Director/deputy director to special directors Further appeal lies with Appellate Tribunal for foreign

exchange The tribunal consists of chair person and members It sits in Delhi or other places as may be notified Division bench will hear matters above 5 lakhs Jurisdiction of civil court is barred when the matter is

pending before the tribunal Second appeal lies to high courts and supreme court