Foreign Exchange Management Act, 1999

FOREIGN EXCHANGE MANAGEMENT ACT,1999
CHAPTER – 2
CONCEPTS PARTICULARS NO. OF Q
CONCEPT-1 BASIC CONCEPTS 4
CONCEPT-2 DEALING, POSSESSION AND SURRENDER 4

OF FOREIGN EXCHANGE
CONCEPT-3 CURRENT ACCOUNT TRANSACTIONS 2
CONCEPT-4 CAPITAL ACCOUNT TRANSACTIONS 3
CONCEPT-5 ACQUISITION AND TRANSFER OF 1

IMMOVABLE PROPERTY IN ABROAD
CONCEPT-6 ACQUISITION AND TRANSFER OF 1

IMMOVABLE PROPERTY IN INDIA
CONCEPT-7 FOREIGN DIRECT INVESTMENT 4
CONCEPT-8 OTHER INVSETMENTS IN INDIA BY 1

FOREIGN ENTITY
CONCEPT-9 APPELLATE TRIBUNAL 1
CONCEPT-10 MISCELLANOUS CONCEPTS 7
TOTAL 28
YOUR ONLY LIMIT IS YOU

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Definitions Authorised
Person, person, Foreign
exchange, foreign security,
Dealing, Possession Realization,
POI
& Surrender of Repatriation of
Foreign exchange foreign
(Sec 3,4) exchange
Routes for
FDI
funding
Current A/c Transactions

(Sec 5)
Automatic Prohibited sectors
Route for FDI Investment
Prohibited Current A/c Transactions
Atomic Energy
Lottery Business  Transactions with Nepal/Bhutan
Gambling  Commission on Exports to
Chit Fund JV/WOS
Nidhi Company  Remittances on Lottery winnings
Government  Payment of commission on export
TDRs
Route credit
Real Estate Business
 Money circulation schemes
Sec 6(4) Acquisition Capital A/c transactions with

and transfer of prohibited capital a/c transactions
property in (Sec 6)
Sec 6(5) India
Application for
compounding
Appeal to Appellate Compounding

Tribunal Tribunal of
Issue of
contraventions
compounding
order

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BIRD’S EYE VIEW
1) The (Foreign Exchange Management Act, 1999) (FEMA) is an Act to facilitating external trade
and payments and for promoting the orderly development and maintenance of foreign exchange
market in India".
2) The provisions of FEMA are spread at different places and so are there regulatory bodies.
Reserve Bank of India (RBI) makes regulations for FEMA and the rules are made by Central
Government.
3) RBI is the overall controlling authority in respect of FEMA, enforcement of FEMA has been
entrusted to a separate “Directorate of Enforcement” formed for this purpose. (Section 36)
4) Foreign Exchange Management Act (FEMA) is applicable to the entire country. Agencies, offices
and branches, outside India, which are owned by Indian residents, also fall under the jurisdiction
of this act.
5) FEMA makes provisions for dealings in foreign exchange. Broadly, all Current Account
Transactions are free. However Central Government can impose reasonable restrictions by issuing
Rules.
6) Capital Account Transactions are permitted to the extent specified by RBI by issuing Regulations.
7) The Act, 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; and other
related matters.

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CHAPTER – 1
CONCEPT 1
INTRODUCTION TO FOREIGN EXCHANGE MANAGEMENT ACT, 1999
Q1: FEMA is to facilitate external trade and payments and promotion of orderly development and
maintenance of foreign exchange market in India. Discuss
(CS EXEC OLD SYLLABUS JUNE 2014)
OR
Discuss the objectives of enacting the Foreign Exchange Management Act, 1999. Explain in
brief the scheme of Foreign Exchange Management Act, 1999.
(CS OLD SYLLABUS JUNE 2015)
OR
State the overview of Foreign Exchange Management Act, 1999.
(CS EXECUTIVE NEW SYLLABUS STUDY TEST PAPER Q1(d)),
(CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST Q1)
OR
Define Authorised person? Briefly discuss the powers of RBI to give directions to Authorised
Persons? (CS EXECUTIVE NEW SYLLABUS STUDY TEST PAPER Q2(a))
OR
Discuss overall scheme of Foreign Exchange Management Act, 1999.
Ans: Foreign Exchange Management Act, 1999 has replaced Foreign Exchange Regulation Act, 1973 and
it has come into effect w.e.f. June, 2000.
The Foreign Exchange Management Act, 1999 was enacted 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. In fact it
is the central legislation that deals with inbound investments into India and outbound investments
from India and trade and business between India and the other countries. Therefore, its main
objectives are:
• To facilitate external trade and payments: and

• To promote the orderly development and maintenance of foreign exchange market in India
• Focuses on facilitation and management instead of having conservative control approach
• Authorization to Central Government and RBI for rules and regulations made there under

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SCHEME OF FEMA
FEMA makes provisions for dealings in foreign exchange. Broadly, all Current Account Transactions
are free. However, Central Government can impose reasonable restrictions by issuing rules (Section 3
FEMA).
Capital Account Transactions are permitted to the extent specified by RBI by issuing Regulations.
(Section 6 of FEMA) FEMA envisages that RBI shall have a controlling role in management of foreign
exchange.
Since RBI cannot directly handle foreign exchange transactions, it authorizes “Authorised Persons”
to deal in foreign exchange.
RBI has been empowered to issue directions to such “Authorised Persons” under Section 11. FEMA
also makes provisions for enforcement, penalties, adjudication and appeal. The FEMA 1999 contains
only basic legal framework. The practical aspects are covered in Rules made by Central Government
and Regulations made by RBI.
FDI Policy announced by Department of Industrial Policy & Promotion, Ministry of Industries and
Commerce directly relevant to understanding the provisions of FEMA. Instructions/Guidelines etc. of
Ministry of Finance and Securities and Exchange Board of India (SEBI) become relevant when (ECB)
/ADR/GDR and capital market is involved.
Q2: Discuss between Person and Authorised Person. (CS OLD SYLLABUS JUNE 2008),
Ans: PERSON [Sec 2(u)]:
Person includes:
 Individual
 Hindu undivided family
 Company
 Firm
 AOP or BOI
 Every Artificial juridical person and
 Any agency, office or branch owned or controlled by any person
AUTHORIZED PERSON [Sec 2(C)]:
Authorized Person means an :

 Authorized dealer
 Money changer
 Off-shore banking unit, or

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 Any other person for the time being authorized under sec 10 to deal in foreign exchange
or foreign securities.
Generally all nationalised banks, leading non-nationalized banks and foreign banks are
appointed as authorized dealers to deal in foreign exchange.
Q3: Discuss between Foreign Exchange and Foreign Security

(CS EXEC OLD AND NEW SYLLABUS DEC 2010)
Ans: FOREIGN EXCHANGE [Sec 2(n)]:
Foreign Exchange means foreign currency and includes:
 Deposits, credits and balances payable in any foreign currency;

 Drafts, travellers cheque, letters of credit or bills of exchange, expressed or drawn in
Indian currency but payable in any foreign currency;
 Drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or
persons outside India, but payable in Indian Currency.
FOREIGN SECURITY [Sec 2(n)]:
Foreign Security means any security in the form of:

 Shares; Stocks, bonds;
 Debentures; or
 Any other instrument in foreign currency.
It also includes securities expressed in foreign currency,

but where redemption or any form of return such as
interest or dividends is payable in Indian currency.
Q4: Write a short note on Person of Indian Origin. (CS OLD SYLLABUS JUNE 2013)
Ans: PERSON OF INDIAN ORIGIN
As per FDI policy, person of Indian origin means a citizen of any country other than Bangladesh or
Pakistan, if-
 He at any time held Indian Passport

 He or either of his parents or any of his grandparents was a citizen of India by virtue of
the Constitution of India or the Citizenship Act, 1955 or
 The person is a spouse of an Indian citizen or a person referred to in clause 1 0r 2 above.

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CONCEPT 2
DEALINGS, POSSESSION,SURRENDER OF FOREIGN EXCHANGE (Sec 3,4)
Q5: Discuss the transactions which should be in accordance (or permissible) with the FEMA ACT,
1999. (KALANK TYPE Q)
Ans: All the below mentioned transaction in foreign exchange should be in accordance with the Act,
Rules and Regulation of FEMA, or with prior permission of Reserve Bank of India:
a) to deal and transfer foreign exchange to any person except Authorized Dealer.
b) for making payment of credit taken by Non Resident.
c) taking payment on behalf of Non resident from any person except Authorized Dealer.
d) Enter in to any financial transaction in India as a consideration for or in association with
requisition or creation or transfer of a right to acquire any asset outside India by any person
Q6: Mention the transactions of the FEMA Act, 1999 regarding possession and retention of
foreign exchange. (SUPER 30 TYPE Q)
OR
Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations,
2015 deals with limits on possession and retention of foreign currency or foreign coins. What
is the limit of possession or retention of foreign currency or foreign coins under Regulation 3?
(CS EXECUTIVE NEW SYLLABUS DEC 2018)
Ans: POSSESSION AND RETENTION OF FOREIGN EXCHANGE:
Foreign Exchange can possessed and retained subject to the following limits:-
 An authorized person can possess or retain foreign currency and coins within the scope of his
authority without limit;
 Any person possess foreign coins without limit;
 A person resident in India can retain foreign exchange upto US $2000 or its equivalent in
aggregate in the following cases:
a) Such foreign exchange have been acquired by him while on a visit to any place outside India
by way of payment for services or by way of honorarium or gift; or
b) Such foreign exchange have been acquired by him from any person resident out of India and
who is on a visit to India for services or by ay of honorarium or gift or in settlement of any
lawful obligation; or
c) Such foreign exchange represents unspent amount of foreign exchange acquired by him
from an authorized person for travel abroad.
 A person resident in India but not permanently resident in India may possess foreign exchange
without any limit if such foreign exchange was acquired, held or owned by him when he was
resident outside India and has been brought into India in accordance with the prescribed
regulations.
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Q7: Discuss the exemptions from the provisions relating to retention and repatriation of foreign
currency under the Foreign Exchange Management Act, 1999. (CS OLD SYLLABUS JUNE 2006)
Ans: EXEMPTION FROM REALIZATION AND REPATRIATION OF FOREIGN EXCHANGE
Repatriation of Foreign Exchange
 Where any amount of foreign exchange has become due or accrued to any person who is a resident
in India, he shall realize and repatriate (Bring Back) such amount, within the time specified by
Reserve Bank to authorized dealer.
In following cases foreign exchange need not be repatriated to India:
 Possession of foreign currency or coins by any person upto specified limit.

 Foreign currency account held or operated as specified by RBI
 Foreign exchange acquired and held by way of gift or inheritance by a person resident in India
up to limit as specified by RBI.
 Foreign exchange acquired from employment, business trade, honorarium, gifts, inheritance or
any other legitimate means up to specified limits by RBI
 Such other receipts in foreign exchange as may be specified by the RBI..
Q8: In how many days foreign exchange should be surrender after returning to India. (3*** Q)
Ans: In case the foreign exchange acquired was for travel abroad the unspent amount must be
surrendered to an authorized person in the following manner
 Within 180 days from the date of return to India when the
unspent foreign exchange is in the form of traveller’s cheque;
 Within 90 days from the date of return to India when the

unspent foreign exchange is in the form of currency notes and
coins.

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CONCEPT 3
CURRENT ACCOUNT TRANSACTIONS
Q9 Write a short note on Current Account Transactions. (CS OLD SYLLABUS JUNE 2014)
Ans: CURRENT ACCOUNT TRANSACTIONS (SEC 5)
A Current Account Transaction has been defined as a Transaction other than Capital Account
Transactions, means all transaction which do not alter assets or liability outside India of resident or
assets or liability in India of Non Resident treated as Current Account Transactions and without
prejudice to the generality of the foregoing such transaction includes,
 Payments due in connection with foreign trade, other current business, services, and short
term banking and credit facilities in the ordinary course of business.
 Payments due as interest on loans and as net income from investments,
 Remittances for living expenses of parents, children, and spouse residing abroad,
 Expenses in connection with foreign travel, education and medical care of Parents, Spouse and
children’s.
Provided that Central Government may impose such reasonable restrictions as may be prescribed in
case of public interest and in consultation with Reserve Bank of India.
Q10 Discuss the transactions which are prohibited under FEMA even if they are referred as
Current Account Transactions. (DILWALE TYPE Q)
Ans: Prohibited Current Account Transactions
Following are the prohibited Current Account Transactions.
 Transactions with a person resident in Nepal or Bhutan or drawl of foreign exchange are not
permitted unless permitted by RBI.
 Commission on exports to Joint Venture/Wholly Owned Subsidiary abroad of Indian Companies is
not permitted
 Payment related to call back services of telephone is prohibited
 Remittances out of lottery/racing/riding etc are prohibited under FEMA.
 Remittances from Money circulation schemes/lottery tickets are prohibited.
 Payment of commission on exports under Rupee State Credit Route are prohibited

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CONCEPT 4
CAPITAL ACCOUNT TRANSACTIONS
Q11 Write a short note on Capital Account Transactions. (CS OLD SYLLABUS 2014)
(CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST Q5 (ii) OF Foreign Exchange
Transactions & Compliances)
Ans: CAPITAL ACCOUNT TRANSACTIONS
A Capital Account Transaction has been defined as a Transaction which

 alters the assets or liability including contingent liabilities outside India of persons resident in
India or
 Assets or liabilities in India of person resident outside India.
CAPITAL ACCOUNT TRANSACTIONS: Any person may sell or draw foreign exchange to or from an
authorized person for a Capital Account transaction.
The RBI, may in consultation with the Central Government specify-
 Any class or classes of capital account transactions which are permissible
 The limit upto which foreign exchange shall be admissible for such transactions.
 The RBI shall not impose any restriction on the drawl of foreign exchange for payments
due on account of amortization of loans or for depreciation of direct investments in the
ordinary course of business.
Q12 What are the classes of capital account transactions of persons resident of India.
((CS EXECUTIVE OLD SYLLABUS DEC 2015)
Ans:PCLASSES OF CAPITAL ACCOUNT TRANSACTIONS
As per Schedule I to the Foreign Exchange Management (Permissible Capital Account Transactions)
Regulations, 2000 a person resident in India may enter into following classes of capital account
transactions:
(a) Investment by a person resident in India in foreign securities.

(b) Foreign currency loans raised in India and abroad by a person resident in India.
(c) Transfer of immovable property outside India by a person resident in India
(d) Guarantees issued by a person resident in India in favour of a person resident outside India
(e) Export, import and holding of currency/currency notes
(f) Loans and overdrafts (borrowings) by a person resident in India from a person resident outside
India

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(g) Maintenance of foreign currency accounts in India and outside India by a person resident in
India
(h) Taking out of insurance policy by a person resident in India from an insurance company outside
India
(i) Loans and overdrafts by a person resident in India to a person resident outside India
(j) Remittance outside India of capital assets of a person resident in India.
(k) Sale and purchase of foreign exchange derivatives in India and abroad and commodity
derivatives abroad by a person resident in India.
Q13 What are the classes of capital account transactions of persons resident outside
India. (INTERESTING Q)
OR
Define the Capital Account Transactions and enumerate permissible capital account
transactions in relation to persons resident in India and resident outside India?
(CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST Q1 of Foreign Exchange Transactions &
Compliances)
Ans:PPERMISSIBLE CAPITAL ACCOUNT TRANSACTIONS
As per Schedule II to the Foreign Exchange Management (Permissible Capital Account

Transactions) Regulations, 2000 a person resident outside India may enter into following classes of
capital account transactions:
a) Investment in India by a person resident outside India, that is to say:

 issue of security by a body corporate or an entity in India and investment therein by a
person resident outside India; and
 investment by way of contribution by a person resident outside India to the capital of
a firm or a proprietorship concern or an association of persons in India.
b) Acquisition and transfer of immovable property in India by a person resident outside India.
c) Guarantee by a person resident outside India in favour of, or on behalf of a person resident
in India.
d) Import and export of currency/currency notes into/from India by a person resident outside
India.
e) Deposits between a person resident in India and a person resident outside India.
f) Foreign Currency accounts in India of a person resident outside India.
g) Remittance outside India of capital assets in India of a person resident outside India.

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CONCEPT 5
ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY OUTSIDE INDIA BY A
PERSON RESIDENT IN INDIA
Q14 What are the modes by which person resident in India can acquire property outside India.
(CS EXEC NEW SYLLABUS STUDY)
OR
How a person resident in India can hold, own, transfer or invest in any immovable property
situated outside India. Comment. (CS EXECUTIVE NEW SYLLABUS JUNE 2019)
OR
Discuss the Acquisition and Transfer of Immovable Property in India under FEMA?
(CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST Q2 OF FETC)
Ans:PACQUISTION AND TRANSFER OF IMMOVABLE PROPERTY OUTSIDE INDIA
According to section 6(4) of the FEMA read with Foreign Exchange Management (Acquisition and
transfer of immovable property outside India) Regulations, 2015, a person resident in India can hold,
own, transfer or invest in any immovable property situated outside India if such property was
acquired, held or owned by him/her when he/ she was resident outside India or inherited from a
person resident outside India.
i. A resident can acquire immovable property outside India by way of gift or inheritance from:
a person referred to at 3.1 above;
or a person resident in India who had acquired such property on or before July 8, 1947 and
continued to be held by him with the permission of the Reserve Bank. A person resident in
India who has acquired such property in accordance with the foreign exchange provisions in
force at the time of such acquisition.
ii. A resident can purchase immovable property outside India out of foreign exchange held in
his/ her Resident Foreign Currency (RFC) account.
iii. A resident can acquire immovable property outside India jointly with a relative who is a
person resident outside India, provided there is no outflow of funds from India.
CONCEPT 6
ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY IN INDIA
Q15 What are the modes by which person resident outside India can acquire property in India?
(OUTSTANDING Q)
Ans:PACQUISTION AND TRANSFER OF IMMOVABLE PROPERTY IN INDIA

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As per section 6(5) of FEMA read with Foreign Exchange Management (Acquisition and transfer of
immovable property in India) Regulations, 2000, a person resident outside India can hold, own,
transfer or invest in any immovable property situated in India if such property was acquired, held
or owned by him/ her when he/ she was resident in India or inherited from a person resident in
India.
i) An NRI can acquire by way of purchase any immovable property (other than agriculture).
An NRI may transfer any immovable property in India to a person resident in India.
ii) An NRI can acquire by way of purchase any immovable property (other than agriculture or
plantation property or farm house) to NRI or PIO resident outside India.
iii) NRI can make payment for acquisition of immovable property (other than agriculture or
plantation property or farm house) out of funds received in India through normal banking
channels by way of inward remittances from any place outside India or by debit to his
NRE/FCNR/ NRO A/c.
iv) Such payments cannot be made either by traveller’s cheque or by foreign currency notes or
by other mode except those specifically mentioned above.
CONCEPT 7
FOREIGN DIRECT INVESTMENT
Q16 What is direct investment outside India. Discuss the regulations in respect of acquisition and
transfer of immovable property outside India? (CS EXECUTIVE OLD SYLLABUS DEC 2016)
Ans:PFOREIGN DIRECT INVESTMENT
Direct investment outside India means investments

either under the Automatic Route or the Approval Route
by way of contribution to the capital or subscription to
the Memorandum of a foreign entity or by way of
purchase of existing shares of a foreign entity either by
market purchase or private placement or through stock
exchange signifying a long term interest in the foreign
entity (joint venture or wholly owned subsidiary)
Provisions of the Foreign exchange Management (Acquisition and Transfer of Immovable Property
outside India) Regulations, 2000.
Restrictions on acquisition or transfer of immovable property outside India [Regulation 3]:

No person resident In India shall acquire or transfer any immovable property situated outside India
without general or special permission of the RBI.

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Acquisition and Transfer of immovable Property outside India

A. A person resident in India may acquire immovable property outside India,-
 By way of gift or inheritance from a person resident in India or person resident outside
India or person resident in India who is a national of a foreign state.
 By way of purchase out of foreign exchange held in Resident Foreign Currency Account.
 By way of purchase of property acquired on or before July 8, 1947.
B. A person resident in India who has acquired immovable property outside India may transfer it by
way of gift to his relative who is a person resident in India.
C. A company incorporated in India having overseas offices may acquire immovable property outside
India for its business and for residential purposes in accordance with the RBI from time to time.
Q17 Mention the activities/sectors in which Foreign Direct Investment (FDI) is prohibited?
(CS EXECUTIVE OLD SYLLABUS DEC 2015)
Ans: FDI is prohibited under the Government Route as well as the Automatic Route in the following
sectors:
 Atomic Energy
 Lottery Business
 Gambling and Betting
 Business of Chit Fund
 Nidhi Company
 Agricultural (excluding Floriculture, Horticulture,
Development of seeds, Animal Husbandry,
Pisciculture and cultivation of vegetables, mushrooms
etc) under controlled situations and Plantations
activities (other than Tea plantations)
 Housing and real estate business (except development of townships, constructions of
residential houses)
 Trading in Transferable Development Rights (TDRs)
 Manufacture of cigars, cheroots, cigarettes, or tobacco substitutes.
Q18: Discuss the method of funding of foreign direct investment under the FEMA Act,1999
Ans: There are two methods of funding foreign direct investment (FDI) which are discussed below:

27
Automatic Route
 FDI in sectors/activities permitted under automatic route does not require any prior approval
either by the Government or RBI.
 The investors are only required to notify the Regional office concerned of RBI within 30 days
of receipt of inward remittances and file the required documents with that office within 30
days of issue of shares to foreign investors.
Government Route
 FDI in activities not covered under the automatic route require prior Government approval.
 Such proposals are considered by the Foreign Investment Promotion Board (FIPB), a
Government body that offers single window clearance for proposals on foreign investment in
the country that is not allowed access through the automatic route.
Investment in an overseas JV/WOS may be funded out of one or more of the following sources:
 Drawal of foreign exchange from an authorized bank in India.

 Capitalization of exports
 Swap of Shares.
 Proceeds of ECBs/FCCBs
 Balances held in EEFC account of Indian Party
 In case of ADRs/GDRs issued in accordance with scheme for issue of FCCB and Ordinary
Shares (through Depository Receipt Mechanism) Scheme,1993 and the guidelines issued
thereunder from time to time by the Government of India
 Proceeds of foreign currency funds raised through ADR/GDR issues.
Q19: Define the term ‘Authorized Person’ under the FEMA Act, 1999 and state the Powers of RBI
to issue directions to an Authorized Person. (CS OLD SYLLABUS DEC 2015)
OR
Who is an Authorized Person under Foreign Exchange Management Act, 1999 and what are
his obligations? (CS EXECUTIVE NEW SYLLABUS DEC 2018)
OR
Define Authorised Person? Briefly discuss the powers of RBI to give directions to Authorised
Persons? (CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST Q4 OF FETC)

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Ans: Authorized Person
It means an
 Authorizes dealer,
 Money changer,
 Off-shore banking unit,
 Or any other person for the time being authorized under Section 10 to deal in foreign
exchange or foreign securities.
Reserve Bank of India powers to issue directions to authorized person
 The RBI may give to the authorized person any direction in regard to making of payment or
the doing or desist from doing any act relating to foreign exchange or security for the
purpose of securing compliance with the RBI.
 The RBI may also direct any authorized person to furnish necessary information in
prescribed manner for the purpose of securing compliance with the RBI.
 Where any authorized person contravenes any provisions, the RBI may after giving
reasonable opportunity of being heard may impose a penalty which may extend to Rs.
10000/- and additional penalty upto Rs.2000/-per day may be imposed for continuing
contravention of the directions of RBI.
Obligations of Authorized Person
1) An authorised person shall, in all his dealings in foreign exchange or foreign security, comply
with such general or special directions or orders as the Reserve Bank may, from time to
time, think fit to give.,
2) An authorised person shall not engage in any transaction involving any foreign exchange or
foreign security which is not in conformity with the terms of his authorisation under this
section.
3) 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.
4) Where the said person refuses to comply with any such requirement or makes only
unsatisfactory compliance therewith, the authorised person shall refuse in writing to
undertake the transaction and shall, if he has reason to believe that any such contravention
or evasion as aforesaid is contemplated by the person, report the matter to the Reserve
Bank.

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CONCEPT 8
OTHER INVESTMENTS IN INDIA BY FOREIGN ENTITY
Q20 State the investments options available in India by Foreign entity. (VERY NICE Q)
Ans: Following are the investment options by foreign entity:
 Acquisition of right shares/convertible debentures issued by an Indian Company.

 Acquisition of Bonus shares issued by an Indian Company.
 Issue of shares under ESOS to person resident outside India.
CONCEPT 9
APPELLATE TRIBUNAL
Q21 Explain the procedure relating to establishment of Appellate Tribunal under FEMA Act, 1999.
(CS EXECUTIVE OLD SYLLABUS JUNE 2017)
OR
The Central Government being aggrieved with the decision/orders of the Adjudicating
Authority and Special Director (Appeals), appointed under section 16 & 17 of the Foreign
Exchange Management Act (FEMA), 1999 respectively, desires to file an appeal against such
orders. Advise, how to proceed with? (CS EXECUTIVE OLD SYLLABUS DEC 2018)
Ans: Establishment of Appellate Tribunal
The Central Government u/s 18 is empowered to establish an Appellate Tribunal, by a notification in

the Official Gazette, to hear appeals against the orders of Adjudication Authorities and Special
director (Appeals).
The Central Government or any person aggrieved by the orders of Adjudicating Authority or Special
Director (Appeals) may prefer an appeal to the Appellate Tribunal under Section 19 of the Act.
Section 20 of the Act empowers the Central Government to appoint a Chairperson and as many
members as it may deem fit to the Appellate Tribunal.
A bench may be constituted by the Chairperson with one or more member as the Chairperson deem
fit. The Chairperson can also transfer member of one bench to another bench.
The Central Government however may, in consultation with the Chairperson, notify the sitting of the
Tribunal elsewhere as it may deem fit
A person who is or has been or is qualified to be a judge of a High Court shall be eligible for the
appointment as chairperson of Appellate Tribunal.
A person who is or has been or is eligible to be a
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 district judge shall be eligible for appointment as a member of Appellate Tribunal.

 A member of the Indian Legal Service and holding the post in Grade I of that Services or
 the member of Indian Revenue Service and holding the post equivalent to a Joint Secretary
to the Government of India, shall be eligible to be appointed as Special Director (Appeals).
The Chairperson and Members will hold office for a period of 5 years from the date of assuming
office. However, no chairperson or member shall hold office on attaining the age of 65 years and 62
years respectively.
Appeal to Appellate Tribunal: An appeal can be filed by with Appellate Tribunal against the order
made by-
 Special Director (Appeals)

 An adjudicating authority other than Assistant Director of the Enforcement or Deputy
Director of Enforcement.
CONCEPT 10
MISC TOPICS
Q22 Write short notes on following:

a) Compounding of Contraventions,
(CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST Q5(ii) OF FET&C)
OR
What is meant by contravention under the Foreign Exchange Management Act (FEMA),
1999? (CS EXECUTIVE OLD SYLLABUS DEC 2018)
b) Application for Compounding
c) Issue of compounding order
d) Investigations (CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST Q5(iii) OF FET&C)
Ans: There are the following terms:-
A. COMPOUNDING OF CONTRAVENTIONS
 Contravention is a breach of the provisions of the Foreign Exchange Management Act, 1999 and
rules regulations notification orders directions/ circulars issued there under.
 Compounding refers to the process of voluntarily admitting the contravention, pleading guilty
and seeking redressal.
 The Reserve Bank is empowered to compound any contraventions as defined under section 131
of FEMA, 1999, for a specified sum after offering an opportunity of personal hearing to the
contravener.

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 It is a voluntary process in which an individual or a corporate seeks compounding of an admitted

contravention.
 It provides comfort to any person who contravenes any provisions of FEMA, 1999 by minimizing
transaction costs. Wilful, malafide and fraudulent transactions are, however, viewed seriously,
which will not be compounded by the Reserve Bank.
 The contraventions, prima facie, involving money laundering, national and security concerns
involving serious infringement of the regulatory framework, etc., are sensitive contravention.
B. APPLICATION FOR COMPOUNDING
 All applications for compounding may be submitted together with the prescribed fee of
Rs.5000/-by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at
the concerned Regional Office and by way of a demand draft drawn in favour of “Reserve Bank
of India” and payable at Mumbai for cases submitted to the Compounding Authority, [Cell for
Effective implementation of FEMA (CEFA)], Foreign Exchange Department, Reserve Bank of
India, Central Office, Mumbai.
 Along with the application in the prescribed format, the applicant may also furnish the details
relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct
Investment and Branch Office / Liaison Office, as applicable, a copy of the Memorandum of
Association and latest audited balance sheet along with an undertaking that they are not under
investigation of any agency such as DOE, CBI, etc. in order to complete the compounding
process within the time frame.
 In case the application has to be returned where required approvals are not obtained from the
authorities concerned or in case of incomplete application for any other reason, the application
fees of Rs.5000/- received along with the application will be returned by crediting the same to
the applicant’s account through NEFT as per the ECS mandate and details of their bank
account as furnished along with the application. The application will be treated as incomplete
without these details.
 The applicants are also advised to bring to the notice of the compounding authority change, if
any, in the address/ contact details of the applicant during the pendency of the compounding
application with Reserve Bank.
C. ISSUE OF THE COMPOUNDING ORDER
 The Compounding Authority shall pass an order of compounding after affording an opportunity
of being heard to all the concerned as expeditiously as possible as and not later than 180 days
from the date of application on the basis of the averments made in the application as well as
other documents.
 The time limit for this purpose would be reckoned from the date of receipt of the completed
application for compounding by the Reserve Bank.

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 If the applicant opts for appearing for the personal hearing, the Reserve Bank would encourage
the applicant to appear directly for it rather than being represented / accompanied by legal
experts /consultants, as compounding is only for admitted contraventions. Appearing for or
opting out of personal hearing does not have any bearing whatsoever on the amount imposed in
the compounding order.
 If the authorized representative of the applicant is unavailable for the personal hearing, the
Compounding Authority may pass the order based on available information/ documents.
 The Compounding Order shall specify the provisions of the FEMA, 1999 or any rule, regulation,
notification, direction or order issued in exercise of the powers under FEMA, 1999 in respect
of which contravention has taken place along with details of the contravention.
 One copy of the compounding order issued under sub rule (2) of Rule 8 of Foreign Exchange
(Compounding Proceedings) Rules, 2000 shall be supplied to the applicant (the contravener) and
also to the Adjudicating Authority, where the compounding
of any contravention is made after making of a complaint under sub-section (3) of section 16 of
the FEMA, as the case may be.
 To ensure more transparency and greater disclosure, it has been decided to host the
compounding orders passed on the Reserve Bank’s website (www.rbi.org.in).
D. INVESTIGATION
Section 37 of the Act empowers the Director of Enforcement and other officers below the
rank of an Assistant Director to take up for investigation the contravention referred to in
Section 13 of the Act.
In addition, the Central Government may also authorize any officer or class of officers in the
Central Government, State Government, Reserve Bank of India, not below the rank of Under
Secretary to Government of India, to investigate any contravention under Section 13 of the
Act.
The officers so appointed shall exercise the like powers which are conferred on income tax
authorities under the Income Tax Act, 1961, subject to such conditions and limitations as laid
down under that Act.
Q23 With reference to the relevant provisions of the FEMA Act, 1999 and the rules and
regulations made thereunder, advise on the following:
a) Rajiv, a person resident in India wishes to acquire foreign securities as qualification
shares issued by a company incorporated outside India for holding the position of a
director in the company.

33
b) Shyam, a non-resident Indian working in the USA intends to sell his ancestral house in
India to a person resident in India.
c) Ashok, a person resident in India, has been offered bonus shares of the value of
US$20,000 by a company incorporated outside India.
d) Indel Manufacturing Inc., a company incorporated outside India, engaged in software
development, intends to open its branch in special economic zones (SEZ) in India.
e) An Indian company intends to make FDI in a joint venture outside India.
Ans: As per FEMA Act, 1999:-
a) As per Regulation 21 of the FEMA (Transfer or Issue of Foreign Securities) Regulations,

2000, RBI on an application may permit a person resident in India to acquire foreign
securities as qualification shares issued by a company incorporated outside India for holding
the post of a director in the company provided that the number of shares so acquired shall be
the minimum required to be held for holding the post of Director and shall not exceed 1% of
the paid-up capital of the company. Thus Rajiv can acquire foreign securities a qualification
shares issued by a company incorporated outside India for holding the position of Director
subject to compliance of above stated provision.
b) As per Regulation 3 of the FEMA Act, a person resident outside India who is a citizen of
India may transfer any immovable property in India to a person resident in India. Thus,
Shyam, a non-resident Indian working in the USA can sell his ancestral house in India to a
person resident in India.
c) As per Regulation 4 of the FEMA Act, a person resident in India may acquire bonus shares
on the foreign securities. Thus, Ashok can take bonus shares of the value of US $ 20,000 of a
company incorporated outside India.
d) As per Regulation 3 of the FEMA Act, no approval shall be necessary from RBI for a
company to establish a branch or unit in SEZ to undertake manufacturing and service
activities if conditions mentioned in that regulation are complied with. Thus, Indel
Manufacturing Inc., opens its branch in a SEZ in India subject to compliance mentioned in
regulation 3.
e) As per Regulation 4, an Indian party has been permitted to make investment in JV/WOS not
exceeding 400 % of the net worth of the Indian party as on the date of the last audited
34
balance sheet. This ceiling will not be applicable where the investment made out of balances
held in EEFC Account or out of funds raised through ADR/GDR. Thu, Indian Company can
make direct investment in a joint venture.
Q24 What obligations may be imposed upon an exporter, who receives advance payment from a
buyer outside India, under Foreign Exchange Management Act (FEMA), 1999? (NICE Q)
Ans: Where an exporter receives advance payment (with or without interest), from a buyer outside
India, the exporter has been put under an obligation to ensure that –
 The Shipment of goods is made within one year from the date of receipt of advance payment;
 The rate of interest, if any, payable on the advance payment does not exceed London Inter-
Bank Offered Rate (LIBOR) – 100 basis points and
 The documents covering the shipment are route through the Authorised Dealer through whom
the advance payment is received.
However, in the event of the exporter’s inability to make shipment, partly or fully, within one year
from the date of receipt of advance payment, no remittance towards refund of unutilized portion
of advance payment or towards payment of interest, shall be made after the expiry of the said
period of one year, without the prior approval of the Reserve Bank. In case the export agreement
provides for shipment of goods extending beyond period of one year from the date of receipt of
advance payment, the exporter shall require the prior approval of the Reserve Bank.
Q25 Which kind of approval is essential for the following transactions, under the FEMA, 1999:
(a) Yusuf, a non-resident Indian wants to transfer his shares of a company to non-resident.
(b) Karan, wants foreign exchange facility to visit England, for which he requires USD
3,50,000.
(c) Nalini, wants to get USD 2,50,000 for brain tumor surgery at London.
Ans:
(a) Subject to FDI sectoral policy (relating to sectoral caps and entry routes), applicable laws and
other conditionality including security conditions, non-resident investors can also invest in Indian
companies by purchasing/acquiring existing shares from Indian shareholders or from other non-
resident shareholders. General permission has been granted to non-residents/NRIs for
acquisition of shares by way of transfer subject to the following:
A person resident outside India (other than NRI and erstwhile OCB) may transfer by way of sale
or gift, the shares or convertible debentures to any person resident outside India (including
35
NRIs). Government approval is not required for transfer of shares in the investee company from
one non-resident to another non-resident in sectors which are under automatic route. In
addition, approval of Government will be required for transfer of stake from one non-resident to
another non-resident in sectors which are under Government approval route.
NRIs may transfer by way of sale or gift the shares or convertible debentures held by them to
another NRI.
A person resident outside India can transfer any security to a person resident in India by way of
gift.
(b) Individuals can avail of foreign exchange facility for the visit purposes within the limit of USD
250,000 only. Any additional remittance in excess of the said limit for the visit purposes shall
require prior approval of the Reserve Bank of India.
So in given case Karan will require prior approval of RBI in excess of USD 250,000.
(c) Individuals can avail of foreign exchange facility for the medical treatment purposes within the
limit of USD 250,000 only. Any additional remittance in excess of the said limit for the medical
treatment purposes shall require prior approval of the Reserve Bank of India.
So in given case Nalini will not require prior approval of RBI.
Q26 List out the Rules framed under the Foreign Exchange Management Act, 1999.
Ans: The Rules made under FEMA are as follows:
a) FEM (Encashment of Draft, Cheque, Instrument and Payment of Interest) Rules, 2000
b) FEM (Authentication of Documents) Rules, 2000
c) FEM (Current Account Transaction) Rules, 2000
d) FEM (Adjudication Proceedings and Appeal) Rules, 2000
e) FEM (Compounding Proceedings) Rules, 2000
f) The Appellate Tribunal for Foreign Exchange (Recruitment, Salary and Allowances and Other
Conditions of Service of Chairperson and Members) Rules, 2000.
Q27 List out the Regulations issued by Reserve Bank issued under the Foreign Exchange
Management Act, 1999. (CS EXECUTIVE NEW SYLLABUS STUDY SELF TEST Q4)
Ans: The Regulations made under FEMA are as follows:

36
1) FEM (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015
2) FEM (Borrowing and Lending in Rupees) Regulations, 2000
3) FEM (Borrowing or Lending in Foreign Exchange) Regulations, 2000
4) FEM (Deposit) Regulations, 2016
5) FEM (Export and Import of Currency) Regulations, 2015
6) FEM (Guarantees) Regulations, 2000
7) FEM (Acquisition and Transfer of Immovable Property in India) Regulations, 2000
8) FEM (Establishment in India of Branch office or a Project office or any other Place of
Business) Regulations, 2016
9) FEM (Export of Goods and Services) Regulations, 2015
10) FEM (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015
11) FEM (Insurance) Regulations, 2015
12) FEM (Investment in Firm or Proprietary Concern in India) Regulations, 2000
13) FEM (Manner of Receipt and Payment) Regulations, 2016
14) FEM (Permissible Capital Account Transactions) Regulations, 2000
15) FEM (Possession and Retention of Foreign Currency) Regulations, 2015
16) FEM (Realization, Repatriation and Surrender of Foreign Exchange) Regulations, 2015
17) FEM (Remittance of Assets) Regulations, 2016
18) FEM (Transfer or Issue of Security by a person Resident outside India) Regulations, 2017
19) FEM (Foreign Exchange Derivative Contracts) Regulations, 2000
20) FEM (Transfer or Issue of any Foreign Security) Regulations, 2004
21) FEM (Crystallization of inoperative Foreign Currency Deposits) Regulations, 2014
22) F.E.M (Transfer or Issue of any foreign Security) Regulations, 2004
23) FEM (International Financial Services Centre) Regulations, 2015
24) FEM (Regularization of Assets Held Abroad by a Person Resident in India) Regulations,
2015
Q28 Advise with reason on availing foreign exchange facility under Foreign Exchange Management
Act, 1999, for:
i. John desires USD 2,00,000 for a private visit to any country excluding Nepal and
Bhutan. Jitesh has to maintain his close relative abroad, needs USD 50,000 per year.
ii. Sohan desires to gift his sister USD 100,000 on her birthday.
iii. A person who is resident, but not permanently resident in India, this a citizen of a
foreign state other than Pakistan desires to remit his total net salary to his spouse
without any limit and without being questioned about his expenses for survival in India.
Can he do so or not? Is there any limit? (CS OLD SYLLABUS JUNE 2019)

37

Foreign Exchange Management Act, 1999

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FOREIGN EXCHANGE MANAGEMENT ACT,1999