FOREIGN EXCHANGE

MANAGEMENT ACT
Presented By- Aliasgar Dhariwala (106)
Bhavin Doshi (107)
1 Tapan Doshi (108)
Devina Mehta (129)
Riddhi Mehta (130)
Pooja Parekh (137)
 INDIAN FOREX MARKET

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Tier 1
●
Transactions between RBI and Authorized Dealers
●
RBI influences the exchange rates due to its
buying and selling activities

Interbank Market in which ADs trade with each other

Tier 2
●

●
Commercial Banks are the market makers
●
They also buy and sell on their own account and carry
inventory of currencies

Retail Market where ADs deal with their corporate clients and

Tier 3
●

retail customers
●
Brokers who act as middlemen for market makers and 3
counterparty
CATEGORIES OF AUTHORIZED DEALERS
Category I of ADs
- All scheduled commercial banks, which include public sector
banks, private sector banks and foreign banks operating in India

Category II of ADs
- All upgraded full fledged money changers (FFMCs) and select
regional rural banks (RRBs) and co-operative banks

Category III of Ads

- Select financial institutions such as EXIM Bank
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 MARKET PARTICIPANTS
 Banks
- Major players in the Forex market
- Engage in cover operations

 Corporate
- Speculate or trade in currencies to the extent permitted by the exchange
control regulations
- Pay for goods and services

 Central banks
- Control money supply
- Aauthorized dealers have recourse to Reserve Bank to sell/buy US dollars
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 Hedge funds as speculators
- speculating on price movements

 Investment management firms

- typically manage large accounts on behalf of customers
such as pension funds, endowments

 Retail foreign exchange brokers

 Brokers - Agent of the customer

 Dealers - Principal in the transaction versus retail

customers
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 Non-bank foreign exchange companies
- Physical delivery
- Selling point

Money transfer/remittance companies

- High volume, low value
- Largest markets
- Largest provider

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LAWS TO REGULATE FOREX
FLOWS
 Import Licensing

 Customs Duty

 FERA

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PURPOSE OF FERA
 Help RBI in maintaining exchange rate stability

 Conserve precious foreign exchange

 Prevent/regulate Foreign business in India

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FERA VIOLATION
 If you had ever visited a relative abroad, or had non-resident
relatives visiting you, the chances are high that you violated
FERA

 Case of ITC

 Rise and fall of Ajit Kerkar, Alleged FERA violations by Kerkar,

Role of TATA group

 Case of the eminent industrialist, S.L.Kirloskar

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 NEED FOR FEMA
 Felt restrictive

 FERA nothing was permitted unless specifically mentioned

 Tone of the Act

 Imprisonment for a very minor offence

 A person was presumed guilty unless he proved himself innocent

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 The need for having a flexible law
 CHANGES
INCORPORATED IN
FEMA
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TRANSITION FROM REGULATION TO
MANAGEMENT

 Section 5 of FEMA removes the restrictions on drawal of

foreign exchange for current account transaction.

 Section 7 of FEMA : RBI shall determine requirements

(exports)

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TRANSITION FROM CRIMINAL TO CIVIL
PROCEEDINGS

 Enforcement Directorate was vested with unbridled powers

 Contravention of FERA was criminal offence

 FEMA – only civil proceedings are applicable

 Makes legislation more rational and humane

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DEFINITION OF RESIDENTIAL STATUS
 Section 2 of FERA: Definition for residential status incompatible with Income
Tax Act

 FEMA :Makes definition harmonious with I.T. Act

 Residential status based on physical stay of the person

-182 days
-Resident becomes non resident
-A body corporate is resident in India

 Section 73(1)(c) of FERA: Branch was considered a resident of a place

 Section 2(v)(iii) of FEMA: An office, branch or agency outside India 15

-Dubai branch
 RESTRICTIONS ON TRANSACTIONS INVOLVING
IMMOVABLE PROPERTY OUTSIDE INDIA

 Section 25 of FERA: Did not place any restrictions on

foreign citizens who were residents of India

 Section 4 of FEMA: Prohibits a resident to acquire any

property
- irrespective of citizenship

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RESTRICTIONS ON TRANSACTIONS INVOLVING
IMMOVABLE PROPERTY INSIDE INDIA

 Section 31 of FERA: Require permission from RBI

 Under FEMA only a non-resident requires permission to

acquire property

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COVERAGE TO EXPORTS OF SERVICES
 Exports of services was not covered under Section 18 of
FERA

 Section 7 of FEMA :
Furnish to the RBI – declaration form relating to correct
material particulars
e.g. Doctor(services)

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FEMA REGULATIONS: REMITTANCES
 Under FEMA
 All current account transactions in Forex are permitted
 All Capital account transactions in Forex are prohibited

 But, one cannot remit money for purchase of lottery

tickets, for subscription to banned magazines, to football
pools, sweepstakes, etc
 Certain remittances can be made only with prior
approval of RBI
 One can retain up to US $ 2000 of Forex

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PERMISSIBLE REMITTANCES
1. Up to US $ 10,000 in every calendar year for foreign travel -
$ 5000 as cash & $ 5000 as traveller’s cheque per individual
2. Up to US $ 25,000 per business trip
3. For gifts up to US $ 5,000 per beneficiary per annum
4. For donations up to US $ 5,000 per beneficiary
5. For maintenance of close relatives abroad up to US $ 5,000
per recipient
6. For foreign studies up to US $ 30,000, or the estimate from
the foreign institution, whichever is higher
7. For meeting expenses for medical treatment abroad, up to
the estimate from doctor in India or hospital or doctor
abroad
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CASE STUDY: KITES

Allegations:
1. Used foreign exchange meant for production work to
meet personal expenses
2. Carried junk film reels from India for the shoot but
used fresh reels bought in the US
3. Paid Spectrum Entertainment just $ 4.3 million against
pending bills of $ 5.9 million

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BACKGROUND OF CASE
 Production budget of Rs. 60 crore
 Sold for Rs. 110 crore in worldwide rights to the
Reliance Group
 Film shot in Maldives, Mexico and the US

 Spectrum Entertainment hired by Roshan to manage all

outdoor shoots of Kites in the US
 Reels were bought in US and cost Roshan Rs. 50 lakhs

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EVALUATION
1. The production house is gaining tax benefits showing
personnel expenditure as creative expenses
2. Evaded duty on Reels, bought from US, when returned
to India
3. Spectrum has all the challans of withdrawals by
Roshan

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CONCLUSIONS
1. The personal expense, if proved, must only invite
minimal penalty of 3 times the duty evaded
2. Spending of Rs. 50 lakhs in US is violation of FEMA
and can invite penalty of upto 3 times the original
amount applicable
3. The Spectrum matter will not be taken up by the ED
without a proper evaluation of the situation between the
complainant & the Indian production house

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FEMA REGULATIONS: FOREIGNERS
BUYING IMMOVABLE PROPERTIES

Law:
 Foreigners are free to buy real estate, but within limits:
Any money invested in the country must stay in India,
and for the first year, buyers must be in residence more
than 182 days and file income tax
 Permit an NRI or a PIO to acquire immovable property
in India other than agricultural land or, plantation
property or farm house
 Foreign companies who have been permitted to open an
office in India are also allowed to acquire any
immovable property in India
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CASE 1 : GOA PROPERTIES : BACKGROUND

 Illegal property transfer

 Russians on tourist visa are buying food joints, taxis
where licences from panchayats and other authorities
stand in the name of locals
 Real estate deals – Dirty Funds

 Large volumes of money were being illegally routed

 Land was purchased in the name of hospitality industry

units by foreign companies but was being used for some
other purposes only
 No IT returns are filed which is in contravention of
FEMA 26
CONCLUSIONS

 Political Issue – to increase vote bank

 Taxis and motorbikes do not fall under a FEMA
violation.
 The formation of a Company under Companies Act is
being followed and advised by some of the foreign
nationals, so it falls under completely legal activities
 The shops are being run by the foreign nationals and the
owner on paper is a PIO/NRI, which can definitely
attract litigation – this is a clear violation

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CASE 2: SAMI KABABBED

 Law:
Acquisition or transfer of properties by foreign nationals
without the permission of the RBI is prohibited under the
FEMA
 Charges:

1. Misleading the authorities by falsely declaring that he was

Indian while seeking Rs. 1.5 crore loan from a bank to buy
8 flats in Mumbai
2. Purchasing property without the permission of RBI

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BACKGROUND OF CASE

 In 2002 filed an application with RBI to purchase flats

 2003 he bought flats even after rejection

 8 flats in Oberoi Sky Gardens, Andheri

 Axis Bank: Loan of Rs. 1.5 crores & was mislead by

Adnan
 ED is not convinced with the costs of the flats shown on
papers

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PENALTIES UNDER FEMA

If proven guilty,
 Penalty upto 3 times the amount involved in
contravention
 If price is not ascertainable then Rs. 200000/-

 Continuous contravention charges Rs. 5000 per day

 Confiscation of property, currency or security in addition

to penalty
 Civil imprisonment after 90 days

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SECTION 3 - FEMA
 A Non-Resident Indian (NRI) can remit money to a company
against shares through normal banking channels
 The pricing of the shares issued by unlisted company to non-
resident have to use DCF valuation decided by CA
 Prohibits dealings in foreign exchange except through an
authorised person
 Eg. Rajasthan Royals

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SECTION 6 - FEMA
 A borrower is required to keep ECB funds parked abroad till
the actual requirement in India
 The central bank said a borrower cannot utilise the funds for
any other purpose
 Companies are not allowed to use funds raised through GDRs,
FCCBs, ECBs and ADRs for share market operations within
the country
 Eg. Reliance Infrastructure – Section 6(3)(d)
Apollo Hospital - Section 6(3)(b)

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 FERA VS FEMA
Sr.No. Point FERA FEMA
1 Emphasis On regulation of foreign On management of foreign exchange
exchange
2 Permission Need to take permission of RBI No need for seeking the permission of
in connection with remittances RBI in connection with remittances
involving external trade involving external trade except
section3 relates to dealing in foreign
exchange
3 Restrictions These restrictions on drawals of Removes all the restrictions on
foreign exchange for the purpose drawals of foreign exchange for the
current account transactions purpose of current account
transactions
4 Violations of Violations of FERA was treated Violations of FEMA treated as civil
Rules as criminal offence offence
5 Definition There was big difference in the There was consistency in the meaning
meaning of terms like resident in of terms like resident in FERA and IT
FERA and IT Act Act
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Thank You

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