Foreign Exchange

Management Act
Introduction
 India had for long time an adverse BOP in international
trade, i.e. imports were more than exports.
 Therefore, foreign exchange was in shortage in India.
 To conserve the forex reserves and prevent its misuse, the
Foreign Exchange Regulation Act, 1973 was passed.
 FERA was a very rigid statute, stringent provisions with
criminal proceedings, hence feared by business, travellers.
 However, the Govt. policy changed in 1991, with the advent
of L.P.G (Liberalization, Privatization, Globalization)
 As a result, foreign investment was permitted and flow of
forex into India increased.
 FERA was replaced by FEMA, effective from 1st June 2000.
Foreign Exchange Mgt. Act
 The passing of FEMA is a milestone, a transition from
control and prohibition (in FERA) to growth and mgt. of
foreign exchange (in FEMA).
 The purpose of FEMA is to facilitate external trade &
payments and development of forex markets in India.
 FEMA is a progressive law with emphasis on promoting
foreign trade and forex transactions.
 This Act extends to the whole of India. It also applies to
all branches, offices and agencies outside India but owned
and controlled by an Indian resident.
 The RBI is the overall controlling authority for FEMA.
Forex Reserves (incl. Gold & SDR)
 In 1991, India was at the brink of default in forex payments.
 Due to the Govt. liberalization policy in 1991, the forex
reserves increased significantly. Following is some data –
 July 1991 1.10 billion US $
 December 1998 29.97 billion US $
 March 2000 38.00 billion US $
 October 2002 64.00 billion US $
 March 2003 75.40 billion US $
 January 2004 104 billion US $
 February 2005 128.9 billion US $
 March 2007 191.92 billion US $
 October 2007 261.1 billion US $
 February 2008 281.18 billion US $
Definitions
 Currency – includes all currency notes, postal notes, postal
orders, money orders, cheques, drafts, travelers’ cheques,
letters of credit, bills of exchange, promissory notes, credit
cards or such instruments as notified by the RBI.
 Freely Convertible Currency – means a currency that can be
exchanged with any currency without any restriction. For
e.g. US Dollar, Euro, Yen, Pound Sterling etc.
 Authorized Person – means an authorized dealer, money
changer, authorized to deal in forex or foreign securities.
 Repatriate to India – means bringing into India the realized
forex and i) selling to auth. person in India against rupees,
or ii) holding in an account with auth. person in India.
Definitions (contd.)
 Foreign Exchange – means foreign currency and includes:
 Deposits, credits and balances payable in any foreign currency,
 Drafts, TC, LC, bills of exchange drawn by banks in Indian
currency, but payable in any foreign currency,
 Drafts, TC, LC, bills of exchange drawn by banks in outside India,
but payable in Indian currency.
 Foreign Security – means any security in the form of
shares, stocks, bonds, debentures or any other instrument
denominated in foreign currency.
 Export – means taking out of India to a place outside India,
any goods or provision of services.
 Import – means bringing into India any goods and services.
Definitions (contd.)
 Repatriate outside India – means buying forex from auth.
person in India and remitting outside India or Bank A/c.
 Capital Account Transaction – means a transaction which
alters the assets or liabilities, outside India of persons
resident in India or assets or liabilities, in India of persons
resident outside India.
 Current Account Transaction – means a transaction other
than a capital account transaction. Includes the following:
 Payments w.r.t. foreign trade, services, banking transactions etc.,
 Payments due as interest on loans and income from investments,
 Remittances for living expenses of family residing abroad, and
 Expenses w.r.t. foreign travel, education, medical treatment etc.
Definitions (contd.)
 Person resident in India – means:
 a person residing in India for more than 182 days during the
course of preceding financial year,
 a body corporate registered or incorporated in India,
 an office, branch, or agency in India owned and controlled by a
person resident outside India,
 an office, branch, or agency outside India owned and controlled
by a person resident in India,
 Money Changer – are authorized by RBI only to purchase or
sale foreign currency. They can deal in notes, coins and
travelers’ cheques only.
 Surrender of forex – means selling of forex to an authorized
person in India in exchange of rupees.
Functions of RBI w.r.t Forex
 Control over dealings in forex by giving general /
special permissions for such dealings.
 Regulate / prohibit / restrict the following –
 Transfer or issue of foreign security to resident,
 Transfer or issue of Indian security to non-resident,
 Borrowing or lending in forex or to a foreign person,
 Export-import of currency,
 Transfer of immovable property outside India,
 Giving guarantee / surety for forex transactions.
 Specify the period & manner in which forex due from
export of goods and services should be received.
Functions of RBI (contd.)
 To grant exemption from realization or repatriation of
forex.
 To grant authorization to ‘Authorized Person’ to deal
in foreign exchange.
 Generally, all current account transactions are free.
RBI cannot impose restrictions on current account
transactions, only Central Govt. has that power.