FOREIGN EXCHANGE MANAGEMENT ACT

K.K. Jindal, Managing Director, Global Management services New Delhi Email Kamaljindal@hotmail.com

FOREX Transaction

DENOMINATED IN FC

SETTLEMENT IN FC

FOREX Transaction

TRADE

PAYMENT

Agencies Connected With Forex business

DGFT - Formulation of trade policy; allotment of importer-exporter code number Customs - Valuation of goods, physical aspects of exports/imports Reserve Bank of India & Authorised Dealers Monitoring receipts / payments & follow up

FOREX Transaction

CURRENT A/C

CAPITAL A/C

Current Account Transactions

Payments due in connection with foreign trade Business services, short term banking & credit facilities in the ordinary course of business Payment of interest on loans Net income from investments Remittance for living expenses of parents, children abroad Foreign travel & medical treatment

FEMA - Current A/c Transactions

All current account transactions can now be put through without RBI permission Government has framed Rules for current a/c transactions under which
Schedule I is prohibited Schedule II is with GOI permission Schedule III with RBI approval only

Transactions in Schedule II & III can be put through without approval if out of RFC funds

Capital Account Transactions

Any transaction which alters the assets & liabilities outside India of persons resident in India or vice-versa Transfer/issue of any foreign security by a person resident in India Transfer/issue of any security or foreign security by any branch, officer or agency in India of a person resident outside India

Capital Account Transactions

Export/import or holding of foreign currency or notes Acquisition/transfer of immoveable property
In India by a person resident outside India Outside India by a person resident in India

Capital Account Transactions

Any borrowing or lending
In foreign exchange In rupees between a person resident in India & a person resident outside India

Capital Account Transactions

Permissible transactions: A ) Transactions in Schedule I for Residents B) Transactions in Schedule II for persons resident outside

Capital Account Transactions - Schedule I

Residents investment in foreign securities, foreign currency loans in India and abroad, transfer of immovable property outside India, Guarantee issued by resident in favour of a person resident outside India, export / import and holding of currency notes Loans/OD from non-residents, maintenance of foreign cy a/cs in India and abroad Taking insurance policy from foreign insurance company.

Capital Account Transactions - Schedule I

Loans/OD by residents to non-residents remittance of cap assets abroad from India Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India

Capital Account Transactions - Schedule II

Non-residents investment in India in companies and firms and proprietorship firms, acquisition and transfer of immovable property in India Guarantee in favour of or on behalf of a resident Deposits between residents and non-residents Foreign currency accounts in India Remittance of capital assets in India to outside

Immovable Property

Residents can hold immovable property abroad if acquired as a NR or inherited from a NR No more holding permission for NR holding immovable property in India, if they had got them while as residents or inherited from a resident Certain countries nationals cannot hold property in India and they will not qualify as Persons of India Origin

Immovable Property
Non-Indian citizens and non-Indian origin people need permission to buy / hold immovable property in India - even if approved, repatriation will not be allowed on sale by RBI. Almost all provisions of Sec. 31 of FERA have been built into FEMA the Act mentions about the Residential status and does away with Citizenship basis

TRADE AND PAYMENT

BENEFICIARY
Contract

REMITTER IMPORTER

EXPORTER

Supplies Goods / Services as per Contract terms

Payment as per Contract terms

ACTUAL PAYMENT SETTLEMENT

EXPORTER IMPORTER

SENDS ADVICE OF PAYMENT

REMITTING BANK
DEBITS NOSTRO A/C

COLLECTING BANK
CREDITS

NOSTRO A/C - RB

FOREX PRINCIPLES
CURRENCY ALWAYS MOVES TO THE COUNTRY OF ITS ORIGIN EXPORT, IMPORTS ARE OUTCOME OF THE THEORY OF COMARAIVE ADVANTAGE FOREX TRANSACTIONS SETTLED THROUGH NOSTRO ,VOSTRO, LORO ACCOUNTS

Methods of Payments
Advance Payment COD system Documentary collection Letter of Credit International Credit Cards

FEMA -INTRODUCTION
SHIFT FROM REGULATORY FRAMEWORK DECONTROL REMOVE RIGOURS AND IRRATIONALITIES OF F.E.R.A.

AIM
CONSOLIDATE AND AMEND LAW RELATING TO FOREIGN EXCHANGE FACILITATE EXTERNAL TRADE AND PAYMENTS PROMOTE ORDERLY DEVELOPMENT AND MAINTENANCE OF FOREX MARKET IN INDIA

APPLICATION
WHOLE OF INDIA ALL BRANCHES ,OFFICES AND AGENCIES OUTSIDE INDIA OWNED OR CONTROLED BY A RESIDENT INDIAN ANY CONTRAVENTION COMITTED OUTSIDE INDIA BY SUCH PERSONS

DISTINCTION
FERA REGULATED AND CONTROLLED FEMA FACILITATES AND MANAGES EXTERNAL TRADE AND PAYMENTS FERA WAS PROHIBITORY FEMA IS POSTIVE :FREES CURRENT ACCOUNT TRANSACTIONS

FERA /FEMA VIOLATION

FERA : CRIMINAL IN NATURE FEMA : CIVIL IN NATURE
ED NOW ONLY INVESTIGATING AGENCY THE BURDEN OF PROOF NOW LIES ON THE AUTHORITIES PENALTY : THRICE THE SUM INVOLVED IF QUANTIFIABLE OR Rs 2 Lacs if not quantifiable

TRANSITION

SUNSET PERIOD STARTS TWO YEARS FROM JUNE 01 ,2000

To Whom Act is Applicable ?

The FEMA, is applicable To the whole of India.

Any Branch, office and agency, which is situated outside India, but is owned or controlled by a person resident in India. Broadly speaking FEMA, covers, three different types of categories, and deals differently with them. These categories are: a) Person b) Person Resident In India c) Person Resident Outside India

A. Person
For the purpose of provisions, a person shall include any of the following:

1. 2. 3. 4. 5.

An individual A Hindu Undivided family A company A Firm An association of persons or a body of individuals, whether incorporated or not, 6. Every artificial judicial person, not falling within any of the preceding sub clauses, and 7. Any agency, office or branch owned or controlled by such person.

B. Person resident in India

1. A person who has been residing in India for more than 182 days, in the last financial year. This means if a person has to be assessed, as to whether he is person resident in India, for any offence committed in August 2001, then he should be residing in India for more than 182 days during April 2000 to March 2001 2. Any person or body corporate registered or incorporated in India, or 3. An office, branch or agency in India owned or controlled by a person resident outside India, or 4. An office, branch or agency outside India owned or controlled by a person resident in India.

Non-Residents Under FEMA

A Resident is defined as one who has stayed in India for > 182 in a financial year; Who doesnt fulfil this condition is a Non-resident. Exceptions:
Those who have gone abroad on employment or For pursuing business or vocation or For any other purpose staying abroad indicating circumstances of indefinite stay there

Provisions in Section 3
Prohibits dealings in foreign exchange except through 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 for acquisition or creation or transfer of a right to acquire, any asset outside India by any person

Provisions in Sections
SECTION 4

SECTION 5 deals with current account transaction

Restrains any person resident in India from acquiring, holding, owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India except as specifically provided in the Act. Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawl is a current account transaction This section allows a person to draw or sell foreign exchange from or to an authorized person for a capital account transaction.

SECTION 6 - deals with capital account transactions.

Provisions in Sections
SECTION 7 - deals with export of goods and services.

Every exporter is required to furnish to the RBI or any other authority, a declaration etc. etc. regarding full export value.
SECTIONS 8 and 9

casts the responsibility on the persons resident in India who have any amount of foreign exchange due or accrued in their favor to get same realized and repatriated to India within the specific period and the manner specified by RBI.
SECTION 10 duties of authorized person.

deals with duties and liabilities of the Authorized persons authorized dealer, money changer, off shore banking unit or any other person for the time being authorized to deal in foreign exchange or foreign securities.

Authorised Persons - Section 10

The Reserve Bank may, .., authorise any person to be known as authorised person to deal in foreign exchange or in foreign securities, as an
1. Authorised dealers 2. Money changers 3. Foreign security dealers 4. Off-shore banking units

Authorised Persons Section 10

An authorised person shall, before undertaking any transaction in foreign exchange on behalf of any person, require that person to make such declaration and to give such information as will reasonably satisfy him that the transaction will not involve, and is not designed for the purpose of any contravention or evasion of the provisions of this Act or of any rule, regulation, notification, direction or order made thereunder,

Responsibility of ADs
Seek declaration or information to reasonably satisfy the authorised dealer before undertaking any transaction on behalf of customers if satisfied undertake transaction In case customer refuses to give required information or declaration, AD should refuse in writing to undertake the transaction In case AD has reasons to believe that the transaction was designed to contravene or evade provisions of the Act, Rules or Regulations - inform Reserve Bank

Responsibility of ADs
No document has been prescribed by Reserve Bank for current account transactions

DUTIES OF AN AUTHORIZED PERSON

To comply with RBI directions Not to engage in un authorized transactions Ensure compliance of FEMA provisions To produce books, accounts etc

Provisions in Sections
SECTION 11 and 12 Powers of reserve bank

The reserve bank is empowered to order inspection of the business of any authorized person for any of following reasons: a)Verifying the correctness of any statements, information or particular b)Obtaining information which such authorized person has failed to furnish c)Securing compliance with the provisions of Act

Provisions in Sections
SECTION 13 Any contravention, under FEMA, may invite following kinds of penalties:

If, the amount against which offence is quantities, then penalty will be "THRICE" the sum involved in contravention. Where the amount cannot be quantified the penalty may be imposed up to two lakh rupees. If, the contravention is continuing everyday, then Rs. Five Thousand for every day after the first day during which the contravention continues.
Further in addition to the penalty, any currency, security or other money or property involved in the contravention may also be confiscated.

Provisions in Sections
SECTION 14

If a person fails to make full payment of the penalty imposed with in a period of 90 days, he shall be liable to civil imprisonment.
SECTION 15

Empowers the Directorate of Enforcement and Officers of the Reserve Bank of India as may be authorized by the central Govt. in this behalf to compound the offences.
SECTION 16

Empowers the central Govt. to appoint the as many adjudicating authorities as it may think fit for holding enquiries.

Provisions in Sections
SECTION 17
Empowers the central Govt. to appoint one or more special Directors to hear the appeals against the orders of the Adjudicating Authorities. SECTION 18 Empowers the central Govt. to establish Appellate Tribunal to hear appeals against the orders of Adjudicating Authorities and special Director. SECTION 19 It makes provisions as regards appeals to Appellate Tribunal.

Provisions in Sections
SECTION 20 Composition of Appellate Tribunal. SECTION 21 Qualifications for appointment of Chairperson member and Special Director. SECTION 22 Term of Office. SECTION 23 Terms and Conditions of service. SECTION 24 Vacancies.

Provisions in Sections
SECTION 25 Resignation and Removal. SECTION 26 Member to act as Chairperson in certain circumstances. SECTION 27 Staff of Appellate Tribunal and Special Directorate. SECTION 28 Power of Appellate Tribunal and Special Director. SECTION 29 Distribution of business among benches. SECTION 30 Power of Chairperson to Transfer cases.

Provisions in Sections
SECTION 31 Decision to be by majority. SECTION 32 Right of Appellant to take assistance of legal practitioner or CA and of Govt. to appoint presenting officer. SECTION 33 Members, etc to public servants. SECTION 34 Civil court not to have jurisdiction. SECTION 35 Appeal to High Court.

Provisions in Sections
SECTION 36 to 38 Directorate of Enforcement

enforcement of the provisions of the Foreign Exchange Management Act prevent leakage of foreign exchange
Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments. Acquisition of foreign currency illegally by person in India. Non-repatriation of the proceeds of the exported goods. Unauthorized maintenance of accounts in foreign countries. Siphoning off of foreign exchange against fictitious and bogus imports land by. Illegal acquisition of foreign exchange through Hawala

Provisions in Sections
SECTION 39 Presumption as to documents in certain cases. SECTION 40 Suspension of operation of this Act. SECTION 41 Power of Central Government to give directions. SECTION 42 Contravention by companies. SECTION 43 Death or insolvency in certain cases.

Provisions in Sections
SECTION 44 Bar or legal proceedings. SECTION 45 Removal of difficulties. SECTION 46 Power to make rules. SECTION 47 Power to make regulations. SECTION 48 Rules and regulations to be laid before parliament. SECTION 49 Repeal and saving.

Compounding General
ED / RBI have powers to compound Any contravention compounded cannot be inquired for adjudication (if compounded before adjudication) Compounding authority may call for any relevant document, information or record Shall pass an order in writing after affording an opportunity of being heard, within 180 days No contravention can be compounded, if an appeal is filed and pending

Compounding
RBI has powers to compound contraventions relating to provisions of Sections 7, 8 and 9 or the Third Schedule to the Current Account Transactions For contraventions relating to hawala transactions, the power to compound is with the Enforcement Directorate

Compounding
Imprisonment only on non-payment of penalty No presumption of culpable mental state (that everyone is a criminal trying to siphon out foreign exchange ) Less draconian and more business friendly

SALIENT FEATURES
RESIDENTIAL STATUS
DURATION CONCEPT AS IN INDIAN INCOME TAX ACT FOR INDIVIDUALS INTENTION ALSO RETAINED

SALIENT FEATURES: CLASSIFICATION OF TRANSACTIONS

A STEP TOWARDS REAL CURRENT ACCOUNT CONVERTIBILTY CAPITAL ACCOUNT/CURRENT ACCOUNT PERMITTED/PROHIBITED CLEAR DEMARCATION OF POWERS
Govt./RBI/ADS

SALIENT FEATURES
CURRENCY
INCLUDES LETTERS OF CREDIT,CREDIT CARDS AND SIMILAR INSTRUMENTS

SERVICE
OF ANY DESCRIPTION EXCEPT FREE SERVICE

SALIENT FEATURES DUTIES OF AUTHORISED PERSONS

COMPLY WITH DIRECTIONS OR ORDERS OF RESERVE BANK OF INDIA SHALL NOT ENGAGE IN TRANSACTIONS NOT IN CONFORMITY WITH THE AUTHORISATION

SALIENT FEATURES DUTIES OF AUTHORISED PERSONS

TRANSACTION IN FOREIGN EXCHANGE FOR ANY PERSON TO BE UNDERTAKEN ONLY AFTER OBTENTION OF DECLARATION TO HIS SATISFACTION REFUSAL TO BE GIVEN IN WRITING AND REPORT TO RBI IF REASONS TO BELIEVE OF CONTRAVENTION

REALISATION AND REPATRIATION OF

FOREIGN EXCHANGE
REASONABLE STEPS TO REALISE AND REPARTRIATE TO INDIA ANY AMOUNT DUE OR ACCRUED TO ANY PERSON RESIDENT IN INIDA SHOULD BE TAKEN BY SUCH PERSON AS SPECIFIED BY RESERVE BANK OF INDIA

Recent Violations noticed under FEMA FEMA violation by Adnan Sami: The Enforcement Directorate has confiscated eight flats and five car parking spaces of singer Adnan Sami in a high rise buildingin Mumbaiand slapped a Rs 20 lakh fine on him for acquiring assets without permission of Reserve Bank of India as he was a Pakistani national. Under Foreign Exchange Management (acquisition and transfer of immovable property in India) Act, 2000 , any person, who is a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanisthan, China, Iran, Nepal or Bhutan cannot purchase or transfer any kind of immovable property in India without taking permission of RBI.

Recent Violations noticed under FEMA violation by IPL Franchises. FEMA

Lalit Modi will be interrogated in London by Enforcement Directorate for the foreign investments in the IPL Teams. ED authorities can appoint a Commission to take statement and collect information The Directorate has registered an Enforcement Case Information Report under Foreign Exchange Management Act in connection with alleged forex violations of several hundred crores in the Relay held last year in London

FEMA violation in 19th CWG in Queen Baton Relay

What is New ?
Utilisation of Forex Obtained for a specific purpose can be used for any other permitted purpose Concept of due date for realisation done away with Value of exports should be realised within 6 months from date of shipment No restrictions on Agency Commissions

THANK YOU !