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.

10 RBI issues directions to such persons u/s. Central government can impose restrictions by issuing rules. Authorised Persons (Directions) .BROAD STRUCTURE OF FEMA It mainly deals with matters pertaining to foreign exchange All current account transactions are free However.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.3 Capital accounts transactions are permitted to the extent specified by RBI regulations s.11 These directions are issued through AP(DIR) circulars. S.

. royalty payments. adjudication and appeals SO FEMA CONTAINS ONLY THE BASIC LEGAL FRAME WORK. 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. 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. which also has relevance in understanding FEMA. joint ventures abroad etc.PROVISIONS FOR FEMA CANNOT BE FOUND AT ONE PLACE FEMA has provisions for enforcement. penalties.

CURRENCY AND TRADE 3. PERSONS 2. MISCELLANIOUS .IMPORTANT DEFINITIONS UNDER FEMA 1.

PERSONS include Individual HUF Company Firm Association of persons Agency Office or branch owned or controlled by such person .PERSONS Section 2(u) 1.

Employment outside India 2. For any other purpose such that his intention is to stay outside India for an uncertain period . This does not include a person who has gone outside India for 1. Carrying on any business/vocation outside India 3.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.

Employment in India 2. it includes a person who has come to India for 1. For any other purpose such that his intention is to stay in India for an uncertain period .(iB) A person residing in India for more than 182 days in the preceding financial year However. Carrying on any business/vocation in India 3.

(ii).Also«. branch or agency outside India owned or controlled by a person resident in India . branch or agency in India owned or controlled by a person resident outside India (iv)-Any office.any body corporate registered or incorporated in India (iii) ± any office.

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. branch or agency can be a person . a person resident in India includes persons of India (except those staying abroad for work or business or other purpose) And. Even.µRESIDENT IN INDIA¶ MEANSTo brief. office.

while residence is permanent. Stay is not permanent. . µstay¶ is different from µreside¶.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. An airline pilot having a stay in INDIA cannot be said to have residence in India.

it include1.Persons of Indian origin residing abroad or Non-residents of Indian nationality are usually called as NRI under various statutes.Non Resident Indian. NRI. NRI is not defined under FEMA. PIO has got a very restrictive interpretation.PERSONS RESIDENT OUTSIDE INDIA 2(w) It means a person not being a resident of India. Person of Indian Origin (PIO) Under various regulations of FEMA. and 2. Person resident outside India who is a citizen of India. But under the FEMA regulations. .

proceeds of sale assets outside India can be credited to RFC a/c . FCNR (B) A/c. deposits with Indian companies.NRI¶s and PIO¶s have been given certain special privileges for investments in India under FEMA.units of domestic mutual funds.units of money markets mutual funds of India Immovable property.NRE a/c.RFC A/c. government dated security and treasury bills etc. shares and debentures in Indian companies. Bank accounts & deposits.other than agricultural/ plantation property or farm house Housing loans Facilities to returning NRI/PIO. Investment on non-repatriation basis. NRO A/c Repatriation ± up to USD 1 Million/ year from NRO A/c Investments on repatriation basis.

2. Also called as hard currency c. EURO. b. A foreign currency which is freely convertible as per Regulation 2(v) of FEM (Manner and payment ) Regulations. Yen. Indian rupee is not fully convertible . Pound sterling UK. major currencies among these are: USD. Swiss Frank. 2000. Currency and trade Permitted currency/ convertible currency/ hard currency a.

ATM cards or any other instruments by what ever name called that can be used to create a µfinancial liability¶.Currency s. Postal notes c. Drafts f. Money orders d. Currency notes include cash in the form of bank notes and coins. Such other similar instruments as notified by RBI. Credit cards or k. these list also includes l. Promissory notes j. Traveller¶s cheques g. Debit cards. All currency notes b. Cheques e. S. Letter of credit h. as µcurrency¶. Bills of exchange i. Vide RBI Notification dated 3rd March 2000. 2(h) Includesa. 2(i) .

2(n) Means foreign currency and includes. traveller¶s cheques. letter of credit or Bill of exchange drawn by banks. credits and balances payable in foreign currency ii. traveller¶s cheques. institutions or persons outside india. i. but payable in Indian currency . Drafts. Deposits.Foreign exchange s. letter of credit or Bill of exchange expressed or drawn in Indian currency but payable in foreign currency iii. Drafts.

. The holding of realised amount in account with an authorised dealer in India to the extent notified by RBI. includes use of that realised amount for discharge of a debt or liability denominated in foreign currency.Repatriate to India s. ALSO. Selling of that foreign exchange to an authorised person in India in exchange for rupees ii. 2(y) Means bringing into India the realized foreign exchange and i. iii.

.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.

Therefore. all nationalised banks. Authorised person means an authorised dealer. leading nonnationalised banks and foreign banks are appointed as authorised dealers. 10 (1) to deal in foreign exchange and foreign securities. to deal in foreign exchange and foreign securities. off-shore banking unit or any other person authorised u/s. They can deal in all forms of foreign exchange. .Miscellaneous definitions Authorised persons. money changer. this power is delegated to authorised persons with suitable guidelines. Generally.RBI cannot do all transactions in foreign exchange by itself.

FFMC¶s and RMC¶s have to surrender foreign exchange with them to authorised dealers. They deal with SEZ and SEZ developers only. They will deal only in foreign exchange. They cannot sell foreign exchange but can purchase foreign currency and traveller¶s cheques. They are foreign branches of Indian banks working inside SEZ premises. are appointed as Restricted money changers(RMC). American express. Thomas cook etc. leading travel agencies etc. are full fledged money changers (FFMC) Some hotels and shops. notes and traveller¶s cheques. They deal in international rates. They can source foreign currency fund from abroad. Offshore Banking Units (OBU¶S) can be appointed as authorised persons. .Money changers can deal only with coins. Surrender means selling of foreign exchange to an authorised dealer in India in exchange for rupees.

He should take written undertaking/ declaration from person to satisfy himself that there is no violation of FEMA. S. If there is any evasion found.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. 10(5) . the matter has to be reported immediately to RBI.

per day may be imposed. e.may be imposed. 10(3) For contravention of any direction a penalty of 10000/. notification. a. Revocation can be done after giving an opportunity for the dealer for a representation. circulars etc. S. if satisfied thatIt is in public interest The authorised person has failed to comply with the requirements subject to which authorisation was granted Or has contravened any provisions of the Act. b. . rule. d. 11 RBI can inspect all record books of the authorised person. f. If the default is continued penalty of 2000/. regulation. S. c.Revocation of authorisation by RBI The authorisation shall always be in writing RBI can revoke the authorisation at any time.

.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. the transactions which are freely permitted can be allowed by authorised dealer without permission from RBI. it is permitted by authorised dealers All current account transactions are freely permitted Even in capital account transactions.

PROCEDURE FOR REMITTANCE UNDER FEMA .

Application to authorized dealer Supporting documents Remittance CA/ PCS certificate Payment to authorized dealer TDS Certificate .

This is applicable for all current and capital a/c¶s and a combination of both. E. If a person has to open a foreign currency a/c in India application has to be given to RBI For eg. No permission of RBI is required.g. acquiring shares outside India. Any individual can remit up to USD 25000/ calendar year for holding/ acquiring immovable property abroad.Applications have to be given to authorised dealer for remittance of foreign currency in India Separate application forms are prescribed. FORM A1 for remittance foreign currency for import of goods to India. 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. opening of foreign currency a/c with a Bank outside India. .

they will issue an encashment certificate.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.

BANK ACCOUNTS IN INDIA IN RUPEES .

recurring or FD/ term deposits .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. nomination in the name any individual is permitted (in the name of NRI) The A/c may be maintained in any form. current.savings. Pakistan will require special approval of RBI Joint a/c with another NRI and not with an Indian resident is permitted.

the NRE a/c may be redesigned as resident a/c. the savings of NRI counted in USD also reduces .On the event of non-resident becoming resident. 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.

Rest all provisions are similar to NREa/c .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.NRO.

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 .Foreign currency accounts Accounts held or maintained in currency other than currency of India.

g the a/c may be held to maintain pensions or any other annuities from the employer abroad. The foreign exchange was earned when he was abroad. 2. Thus a resident in India can maintain an RFC if1.Resident foreign currency account RFC Opened and maintained by NRI/PIO who has returned to India after working abroad E. There are no restrictions on investment using the money in RFC in India except a few like in lottery. He inherited it or obtained gift from a person who was not a resident of India . gifts or inheritance from a person abroad etc. Bhutan etc. transactions with Nepal.

FCNR (B). Only term deposits are permitted .Foreign currency (Nonresident) 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.

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. means authorised dealer. Make any payment to or for the credit of any person resident outside India in any manner. 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. money changer.  . under the Act. Such an authorised person. off-shore banking unit or any other person for the time being authorised by Reserve Bank.

. Receive otherwise through an authorized person.  is resident in India which acquire. own. any asset outside India by any person. foreign security or any immovable property situated outside India. any payment by order or on behalf of any person resident outside India in any manner. possess or transfer any foreign exchange. hold.  Enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire.

outside India of persons resident in India or assets or liabilities in India of persons resident outside India. . 'Capital account transaction' means a transaction which alters the assets or liabilities. including contingent liabilities. and includes the following transactions referred in the Act:Transfer or issue of any foreign security by a person resident in India. namely 'Capital Account Transactions' and 'Current Account Transactions'.The Act regulates two types of foreign exchange transactions. Transfer or issue of any security by a person resident outside India. According to the Act.

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

Giving of a guarantee or surety in respect of any debt. . by a person resident in India.Export. import or holding of currency or currency notes. or (ii) By a person resident outside India. Acquisition or transfer of immovable property in India. other than a lease not exceeding five years. by a person resident outside India. obligation or other liability incurred(i) By a person resident in India and owed to a person resident outside India. other than a lease not exceeding five years. Transfer of immovable property outside India.

(ii) payments due as interest on loans and as net income from investments. education and medical care of parents. and (iv) expenses in connection with foreign travel. spouse and children residing abroad. services. other current business. and short-term banking and credit facilities in the ordinary course of business. (iii) remittances for living expenses of parents. . spouse and children.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.

.The Act has empowered the Reserve Bank of India (RBI) to specify. in consultation with the Central Government. 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. the permissible capital account transactions and the limits up to which foreign exchange may be drawn for such transactions.

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

containing true and correct material particulars. the value which the exporter. 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. having regard to the prevailing market conditions. if the full export value of the goods is not ascertainable at the time of export.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. . including the amount representing the full export value or.

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. by any officer specially authorised in writing by it in this behalf.The Reserve Bank may. (ii) obtaining any information or particulars which such authorised person has failed to furnish on being called upon to do so. directions or orders made thereunder. (iii) securing compliance with the provisions of this Act or of any rules. . information or particulars furnished to the Reserve Bank. cause an inspection to be made. regulations. at any time.

it shall be deposited in a separate a/c in the name of Director of enforcement. S.Enforcement Enforcement is with enforcement directorate The central government has appointed Directors of Enforcement. Additional directors. . Deputy Director and Assistant Directors for enforcement of FEMA. If Indian currency is found. 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. The central government will indemnify the enforcement authority for encashing the NI¶s. Special Director.

S.Penalties under FEMA Offenses under FEMA are civil offenses.16(1) They conduct enquiry on the complaint received from an authorised person. While adjudicating the case. if not should state the reason. It should give the verdict within 1 year. . Opportunity should be given to the respondent to represent his case. Central government appoints the adjudicating authority. it acts as a quasi judicial body and has to follow the principles of natural justice.

S. 2 lakhs. If not he is liable to civil imprisonment.6 months For amount more than 1 crores. 13(1) The foe may be confiscated. If the transgression continues all officers in default will be liable to pay 5000/ per day.13 (2) A person on whom the verdict is passed has to make payment within 90 days. S.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.up to 3 years s. 14(1) For amount less than 1 crore. penalty can be up to Rs. S. 14(11) Compunding is permitted within 180 days .

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 .Appeals Assist.

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