Foreign Exchange Management Act

INTRODUCTION :
The Foreign Exchange Management Act (FEMA) is a 1999
Indian law "to consolidate and amend the law relating to foreign
exchange with the objective of facilitating external trade and
payments and for promoting the orderly development and
maintenance of foreign exchange market in India". It was passed
in the winter session of Parliament in 1999, replacing the Foreign
Exchange Regulation Act (FERA). This act seeks to make
offenses related to foreign exchange civil offenses. It extends to
the whole of India replacing FERA, which had become
incompatible with the pro-liberalisation policies of the Government
of India. It enabled a new foreign exchange management regime
consistent with the emerging framework of the World Trade
Organisation (WTO). It is another matter that the enactment of
FEMA also brought with it the Prevention of Money Laundering
Act of 2002, which came into effect from 1 July 2005.
Foreign Exchange Management Act or in short (FEMA)
is an act that provides guidelines for the free flow of foreign
exchange in India. It has brought a new management regime of
foreign exchange consistent with the emerging frame work of the
World Trade Organisation (WTO). Foreign Exchange
Management Act was earlier known as FERA (Foreign Exchange
Regulation Act), which has been found to be unsuccessful with
the pro liberalisation policies of the Government of India.


HIGHLIGHTS OF FEMA :
It prohibits foreign exchange dealing undertaken other than an
authorised person;
It also makes it clear that if any person residing in India,
received any Forex payment (without there being a
corresponding inward remittance from abroad) the concerned
person shall be deemed to have received they payment from a
non-authorised person.
There are 7 types of current account transactions, which are
totally prohibited, and therefore no transaction can be
undertaken relating to them. These include transaction relating
to lotteries, football pools, banned magazines and a few others.
FEMA and the related rules give full freedom to Resident of
India (ROI) to hold or own or transfer any foreign security or
immovable property situated outside India.
Similar freedom is also given to a resident who inherits such
security or immovable property from an ROI.
An ROI is permitted to hold shares, securities and properties
acquired by him while he was a Resident or inherited such
properties from a Resident.
The exchange drawn can also be used for purpose other than
for which it is drawn provided drawl of exchange is otherwise
permitted for such purpose.
Certain prescribed limits have been substantially enhanced.
For instance, residence now going abroad for business
purpose or for participating in conferences seminars will not
need the RBI's permission to avail foreign exchange up to US$.
25,000 per trip irrespective of the period of stay.
Switch from FREA :
FERA, in place since 1974, did not succeed in restricting activities
such as the expansion of transnational corporations (TNCs). The
concessions made to FERA in 1991-1993 showed that FERA was
on the verge of becoming redundant. After the amendment of
FERA in 1993, it was decided that the act would become the
FEMA. This was done in order to relax the controls on foreign
exchange in India, as a result of economic liberalization. FEMA
served to make transactions for external trade (exports and
imports) easier transactions involving current account for
external trade no longer required RBIs permission. The deals in
Foreign Exchange were to be managed instead of regulated.
The switch to FEMA shows the change on the part of the
government in terms of foreign capital.










Needs of FEMA
The buying and selling of foreign currency and other debt
instruments by businesses, individuals and governments happens
in the foreign exchange market. Apart from being very
competitive, this market is also the largest and most liquid market
in the world as well as in India.
]
It constantly undergoes changes
and innovations, which can either be beneficial to a country or
expose them to greater risks. The management of foreign
exchange market becomes necessary in order to mitigate and
avoid the risks. Central banks would work towards an orderly
functioning of the transactions which can also develop their
foreign exchange market.
Whether under FERA or FEMAs control, the need for the
management of foreign exchange is important. It is necessary to
keep adequate amount of foreign exchange from Import
Substitution to Export Promotion.









Main Features :
Activities such as payments made to any person outside India or
receipts from them, along with the deals in foreign exchange and
foreign security is restricted. It is FEMA that gives the central
government the power to impose the restrictions.
Restrictions are imposed on people living in India who carry out
transactions in foreign exchange, foreign security or who own or
hold immovable property abroad.
Without general or specific permission of the MA restricts the
transactions involving foreign exchange or foreign security and
payments from outside the country to India the transactions
should be made only through an authorised person.
Deals in foreign exchange under the current account by an
authorised person can be restricted by the Central Government,
based on public interest.
Although selling or drawing of foreign exchange is done through
an authorised person, the RBI is empowered by this Act to subject
the capital account transactions to a number of restrictions.
People living in India will be permitted to carry out transactions in
foreign exchange, foreign security or to own or hold immovable
property abroad if the currency, security or property was owned or
acquired when he/she was living outside India, or when it was
inherited by him/her from someone living outside India.
Exporters are needed to furnish their export details to RBI. To
ensure that the transactions are carried out properly, RBI may ask
the exporters to comply with its necessary requirements.

Buyers /Supplier's Credit :

Trade Credit has been subjected to dynamic regulation over a
period of last two years. Now, Reserve Bank of India (RBI) vide
circular number A.P. (DIR Series) Circular No. 24, Dated
November 1, 2004, has given general permission to ADs for
issuance of Guarantee/ Letter of Undertaking (LoU) / Letter of
Comfort (LoC) subject to certain terms and conditions . In view of
the above, we are issuing consolidated guidelines and process
flow for availing trade credit .
1. Definition of Trade Credit: Credit extended for imports of
goods directly by the overseas supplier, bank and financial
institution for original maturity of less than three years from
the date of shipment is referred to as trade credit for imports.
Depending on the source of finance, such trade credit will
include supplier's credit or buyers credit, Suppliers credit
relates to credit for imports into India extended by the
overseas supplier, while Buyers credit refers to loans for
payment of imports in to India arranged by the importer from
a bank or financial institution outside India for maturity of
less than three years.

It may be noted that buyers credit and suppliers credit for
three years and above come under the category of External
Commercial Borrowing (ECB), which are governed by ECB
guidelines. Trade credit can be availed for import of goods
only therefore interest and other charges will not be a part of
trade credit at any point of time.
2. Amount and tenor : For import of all items permissible under
the Foreign Trade Policy (except gold), Authorized Dealers
(ADs) have been permitted to approved trade credits up to
20 millions per import transaction with a maturity period (
from the date of shipment) up to one year.

Additionally, for import of capital goods, ADs have been
permitted to approved trade credits up to USD 20 millions
transactions with a maturity period of more than one year
and less than three years. No roll over/ extension will be
permitted by the AD beyond the permissible period.
3. All in cost ceiling: The all in cost ceiling are as under:
Maturity period up to one year 6 months LIBOR +50 basis
points.

Maturity period more than one year but less than three years
6 months LIBOR* + 125 basis point
* for the respective currency of credit or applicable
benchmark like EURIBOR. SIBOR, TIBOR, etc.
4. Issue of guarantee, letter of undertaking or letter of comfort
in favour of overseas lender: RBI has given general
permission to ADs for issuance of guarantee / Letter of
Undertaking (LOU) / Letter of Comfort (LOC) in favour of
overseas supplier, bank and financial instruction, up to USD
20 millions per transaction for a period up to one year for
import of all non capital goods permissible under Foreign
Trade Policy (except gold) and up to three years for import of
capital goods.

In case the request for trade credit does not comply with any
of the RBI stipulations, the importer needs to have approval
from the central office of RBI.

FEMA regulations have an immense impact in international
trade transactions and different modes of payments.RBI
release regular notifications and circulars, outlining its
clarifications and modifications related to various sections of
FEMA.
NAME: HARSH.T.MEHTA
ROLLNO: 128
STD: S.Y.BFM
PROJECT: FOREIGN EXCHANGE MANAGEMENT
ACT, 1999