You are on page 1of 10

Business Law Class Notes IV Semester

BBM

Foreign Exchange Management Act, 1999

With the liberalization and globalization, it was felt that the Foreign
Exchange Regulation Act 1973 (FERA) should be replaced by a more
business friendly enactment. With this view in mind, the Foreign Exchange
Management Act, 1999 (42 of 1999) (FEMA) was passed.

Objective:
The object of Foreign Exchange Regulation Act, 1973 (FERA) was to conserve
the foreign resources, whereas the objects of the Foreign Exchange
Management Act, 1999 (FEMA) were to consolidate and amend the law
relating to Foreign Exchange with the objective of facilitating external trade
and payments for promoting the orderly development and maintenance of
foreign exchange market by India.

Scope of the Act: (Means where all this Act applies and How it
applies)
1. This Act may be called the Foreign Exchange Management Act, 1999.

2. It extends to the whole of India.

3. It shall also apply to all branches, offices and agencies outside India
owned or controlled by a person resident in India and also to any
contravention thereunder committed outside India by any person to
whom this Act applies.

4. The Foreign Exchange Management Act, 1999 (FEMA) as also the


Rules, Notifications and Orders issued by the Government of India and
Reserve Bank of India (RBI) under the Act, form the statutory basis of
Foreign Exchange Management in India.

5. The Act has received the assent of President of India on 29-12-1999


and has come into force with effect from 01-06-2000.

Salient Features of the Act:


The Foreign Exchange Management Act, 1999 (FEMA) is more transparent in
its application. It has laid down the areas where specific permission of the
Reserve Bank / Government of India is required. In rest of the cases no such
permission would be needed and a person can remit funds and acquire
assets, incur liability in accordance with the specific provisions laid down in
the Act or Notifications issued by the Reserve Bank / Government of India

1
Business Law Class Notes IV Semester
BBM

under the Act, without seeking approval of the Reserve Bank / Government
of India.

The salient features of FEMA are given below:


1. Application of FEMA may be seen broadly from two angles viz.,
capital account transaction and current account transactions.
(a) Capital Account Transactions: Capital Account Transactions release
to movement of capital, e.g., transactions in property and investments
and lending and borrowing money.

(b) Current Account Transactions: All other transactions, which do not


fall in capital account category, are current account transactions. They
are freely permitted subject to few restrictions. Like certain transaction
needs permission from RBI and Central Govenrament.
(In the above two points a clear understanding is required between
the two typs of transactions)

2. Some other Features of the FEMA are:


(a) The Foreign Exchange Management Act and Rules give full freedom to a
person resident in India, who was earlier resident outside India to hold or
own or transfer any foreign security or immovable property situated
outside India and acquired when he/she was resident there. ---- Rights
of persons who is a resident Indian with regards to FEMA

(b) Similar freedom is also given to a resident who inherits such security or
immovable property from a person resident outside India.

(c) A person resident outside India is permitted to hold shares, securities


and properties acquired by him while he/she was resident in India.
The above three points discusses the rights or degree of freedom
given to resident Indian and non residant
To give effect to the provisions of the Act the Government of India have,
among others, made Foreign Exchange Management (Current Account
Transactions) Rules, 2000 under section 5 read with Section 46 of the Act.
The Reserve Bank of India has also made the following Rules/Regulations/
issued Notifications under various provisions of the Act, which are:

(i) Rules relating to Current Account Transactions.

2
Business Law Class Notes IV Semester
BBM

(ii) Regulations relating to Capital Account Transactions.

(iii) Regulations relating to Export of Goods Services.

(iv) Other Regulations / Notifications issued by Reserve Bank of India.

1. Definitions: need to have an understanding of the definitions


Chapter - I of the Act, deals with the definitions Section 2 of the Act
has defined certain words, which have been used in the Act. The
important definitions are as follows:

(1) 'Authorized person' - [Section 2(c)] : means an authorized dealer,


money changer, offshore banking unit or any other person for the time
being authorized under sub-section (1) of Section 10 to deal in foreign
exchange of foreign securities. Basically a person/organization who has
the authority to deal in foreign exchange

(2) 'Currency' - [Section 2(h)]: The currency includes all currency notes,
postal orders, money orders, cheques, drafts, travelers cheques, letters
of credit, bills of exchange and promissory notes, credit cards or such
other similar instruments, as may be notified by the Reserve Bank.

(3) 'Foreign Exchange' - [Section 2(n)] : Foreign Exchange means


foreign currency and include:

(i) deposits, credits and balances payable in any foreign currency.

(ii) drafts, traveller cheques, letters of credit or bills of exchange,


expressed or drawn in Indian currency but payable in any foreign
currency.

(iii) drafts, travellers cheque, letters of credit or bills of exchange drawn by


banks, institutions or persons outside India, but payable in Indian
currency.

(4) 'Foreign Currency' - [Section 2(M)]: Foreign Currency means any

3
Business Law Class Notes IV Semester
BBM

currency other than Indian currency.

(5) 'Person' - [Section 2(u)]: Person includes:

(i) an individual;
(ii) a hindu undivided family;
(iii) a company;
(iv) a firm;
(v) an association of person or a body of individuals, whether any of the
proceeding sub-clauses.

(6) 'Person Resident in India' - [Section 2(V)]: A person resident of


India means;
A person residing in India for more than one hundred and eighty two days
during the course of the preceding, financial year. It is important to note
that the reason for travelling abroad is important. If a person is staying
abroad for an uncertain period he becomes an NRI if he comes back
before 182 days.

(7) 'Security' - [Section 2(za)]: Security means shares, stocks, bonds and
debentures. Government securities as defined in the public debt Act,
1944 (18 of 1944), Saving Certificates to which the Government savings
Certificate Act, 1859 (46 of 1959) applies, deposit receipts in respect of
deposits and securities and units of the Unit Trust of India established
under Sub-section (1) of Section 3 of the Unit Trust of India Act, 1963
(52 of 1963) or of any mutual fund and including certificates of title to
securities, but does not include bills of exchange or notes other than
Government Promissory Notes or any other instrumentals which may be
notified by the Reserve Bank as the security for the purposes of this Act.

(8) 'Capital Account Transaction' - [Section 2(e)] : Capital Account


Transaction means a transaction which alters the assets or liabilities,
including contingent liabilities, outside India or persons resident in India
or assets or liabilities in India of persons resident outside India, and
includes transactions referred to in sub-section (3) of the Section 6.

(9) 'Current Account Transaction' - [Section 2(h)]: Current Account

4
Business Law Class Notes IV Semester
BBM

Transaction means, transaction other than a capital account transaction


and without prejudice to the generality of the foregoing such
transactions includes:

(i) Payment 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.

2. Regulation and Management of Foreign Exchange: Provisions of


FEMA

Dealing in Foreign Exchange, Etc., - [Section 3]: ---- who can deal in
Foreign Exchange

Save as otherwise provided in this Act, rules or regulations made thereunder,


or with the general or special permission of Reserve Bank, no person shall:

(a) deal in or transfer any foreign exchange or foreign security to any person
not being an authorized person;

(b) make any payment to or for the credit of any person resident outside
India in any manner;

(c) receive otherwise through an authorized person, any payment by order


or on behalf of any person resident outside India in any manner;
In nutshell only an authorized person shall deal in foreign exchange.

5
Business Law Class Notes IV Semester
BBM

Holding Of Foreign Exchange, Etc., - (Section 4): ------ Handling


similar to handling of baggage in airports. – means when a foreign
exnache is transacted who can handle or involve in the transaction
Save as otherwise provided in this Act, no person resident in India shall
acquire, hold, own, possess or transfer any foreign exchange, foreign
security or any immovable property situated outside India.

Current Account Transactions - (Section 5):


Any person may sell or draw foreign exchange to or from an authorized
person if such sale or drawn is a current account transaction:

Provided that the 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.
However certain transactions are not restricted------(no restrictions
examples)
1. payment for imports under open general license
2. payment of dividend on approved foreign investment
3. payment of interest on approved borrowed funds
4. salary to foreign directors
5. payment to airline bookings, shipping companies and for transfer of
cargo

Capital Account Transactions-(Section 6):


(1) Subject to the provisions of sub-section (2), any person may sell or draw
foreign exchange to or from an authorized person for a capital account
transaction.

(2) The Reserve Bank may, in consultation with the Central Government,
specify :
(a) any class or classes of capital account transactions which are
permissible;
(b) the limit up to which foreign exchange shall be admissible for such
transactions:

(3) Restrictions of capital account transactions ------(Restrictions


examples)

6
Business Law Class Notes IV Semester
BBM

(a) transfer or issue of any foreign security by a person resident outside


India;
(b) transfer or issue of any security by a person resident outside India;
(c) any borrowing or lending in foreign exchange or in Indian rupees in
whatever form or by whatever name called;
(d) deposits between persons resident in India and persons resident outside
India;
(e) export, import or holding of currency or currency notes;
(f) transfer of immovable property outside India, other than a lease not
exceeding five years, by a person resident in India;
(g) acquisition or transfer of immovable property in India, other than a lease
not exceeding five years, by a person resident outside India;
(h) 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; and
(ii) by a person resident outside India.

Export of Goods and Services - (Section 7): --------rules while


exporting
(1) Every exporter of goods shall:

(a) furnish to the Reserve Bank or to such other authority a declaration in

7
Business Law Class Notes IV Semester
BBM

such form and in such manner as may be specified, containing true and
correct material particulars, including the amount representing the full
export.

(b) furnish to the Reserve Bank such other information as may be required
by the Reserve Bank for the purpose of ensuring the realization of the
export proceeds by such exporter.

(2) Every exporter of services shall furnish to the Reserve Bank or to such
other authorities a declaration in such form and in such manner as may
be specified, containing the true and correct material particulars in
relation to payment for such services.

Realization And Repatriation Of Foreign Exchange - (Section 8):


Save as otherwise provided in this Act, where any amount of foreign
exchange is due or has accrued to any person resident in India, such person
shall take all reasonable steps to realize and repatriate to India such foreign
exchange within such period and in such manner as may be specified by the
Reserve Bank.

Exemption from Realization and Repatriation in Certain Cases-


(Section 9):

(a) possession of foreign currency or foreign coins by any person up to such


limit as the Reserve Bank may specify;
(b) foreign currency account held or operated by such person or class of
persons and the limit up to which the Reserve Bank may specify;
(c) foreign exchange acquired from employment, business, trade, vocation,
services, honorarium, gifts, inheritance or any other legitimate means
up to such limit as the Reserve Bank may specify; and
(d) such other receipts in foreign exchange as the Reserve Bank may
specify.

3. Authorized Persons To Deal In Foreign Exchange:


Chapter - III of the Act, relates to the Authorization of a person by
the Reserve Bank to deal in Foreign Exchange:

8
Business Law Class Notes IV Semester
BBM

Authorized Person - (Section 10):


(1) The Reserve Bank may authorize any person to be known as authorized
person to deal in foreign exchange or in foreign securities, as an
authorized dealer, money changer or off-shore banking unit or in any
other manner as it deems fit.
Reserve Bank's Powers To Issue Directions To Authorized Person -
(Section 11):
The Reserve Bank may, for the purpose of securing compliance with the
provisions of this Act and of any rules, regulations, notifications or
directions made thereunder, give to the authorized persons any
direction in regard to making of payment or the doing or desist from
doing any act relating to foreign exchange or foreign security.
Power Of Reserve Bank To Inspect Authorized Person – (Section 12):
The Reserve Bank may, at any time, cause an inspection to be made by
any officer of the Reserve Bank specially authorized in writing by the
Reserve Bank in this behalf, of the business of any authorized person as
may appear to be necessary.

4. Contravention and Penalties:


Penalties-(Section 13):
(1) If any person contravenes any provision of this Act, or contravenes any
rules, regulation, notification, direction or order issued in exercise of the
powers under this Act, or contravenes any condition subject to which an
authorization is issued by the Reserve Bank, he shall upon adjudication,
be liable to a penalty up to thrice the sum involved in such
contravention where such amount is quantifiable,
or up to two lakh rupees where the amount is not quantifiable, and
where such contravention is a continuing one, further penalty which
may extend to five thousand rupees for every day after the first day
during which the contravention continues.

(2) Any Adjudicating Authority adjudging any contravention under sub-


section (1), may, if he thinks fit in addition to any penalty which he may
impose for such contravention direct that any currency, security or any
other money or property in respect of which the contravention has taken
place shall be confiscated to the Central Government and further direct
that the foreign exchange holdings, if any, of the persons committing
the contraventions or any part thereof, shall be brought back into India
or shall be retained outside India in accordance with the directions made
in this behalf.

9
Business Law Class Notes IV Semester
BBM

Appeal to Appellate Tribunal - (Section 19):


Save as provided in sub-section (2), the Central Government or any
person aggrieved by an order made by an Adjudicating Authority, other
than those referred to in sub-section (1) of Section 17, or the Special
Director (Appeals), may prefer all appeal to the Appellate Tribunal;

1
0