Foreign Exchange Regulation

Presented by : Sushil Sharma

2009mb08
Content:
1. History of Forex Regulation
2. Foreign Exchange Regulation Act.
3. Foreign Exchange Management Act.
4. FEMA – Salient features.
5. FERA vs FEMA.
6. Applicability of FEMA
7. FEMA – Shortcomings.
8. Current Account and Capital Account Transactions.
9. Capital Account Convertibility.
10. References.
 History of Forex Regulation
 Exchange rate control were fist imposed as a
temporary measure – as a war time measure in
1939.
 After independence in 1947 Foreign Exchange
Regulation Act (FERA ) was introduce to
regulate the outflow of capital.
 In 1973 in the name of economic and industrial
development, it was made permanent.
 Foreign Exchange Regulation Act
 The law under FERA was draconian and often
misused.
 A violation under FERA was a criminal offence
punishable by imprisonment.
 In 1960s, and 1970s most Indians were allowed
to officially carry just $8 for any trip over seas.
 Foreign Exchange Management Act -
Introduction
 FERA was replaced by the Foreign Exchange
Management Act (FEMA) in 1999.
 This Act consolidates and amends the laws relating
to foreign exchange with the objective of facilitating
external trade and payments and for promoting the
orderly development and maintenance of the foreign
exchange market in India.
 FEMA – Salient features
 RBI is entrusted with the administration and
implementation of FEMA.
 It extends to the whole of India.
 It shall also apply to all branches, offices and
agencies outside India owned or controlled by
a person resident in India and also to any
contravention there under committed outside
India by any person to whom this Act applies .
 FERA vs FEMA
FERA
Came into force in Jan 1,1974
Emphasis on exchange regulation and
exchange control.
Necessary to obtain RBI’s permission
in respect of most regulations
hereunder.
A contravention under FERA was
treated as criminal offence.
FEMA
Came into existence in 1999
Emphasis on exchange management
and facilitates external trade &
payments.
With exception to section(3) which
relates to dealings in foreign
exchange, no other provisions require
permission from RBI.
The contravention will be treated as a
civil offence.
 Applicability of FEMA
 If an Indian company opens a branch in New York,
that branch will become a resident of India and
therefore all restrictions applicable to Indian
residents for overseas transactions are equally
applicable to such a branch. Then right from
opening of a bank account to entering into any
transaction of capital nature it will need prior
approval of RBI.
 FEMA -- Shortcomings
 The Income tax considers the physical presence of a
person in the current FY for determining his tax
liabilities of the current year, whereas FEMA
considers physical presence of a person in the
preceding FY, with the result that a person might
have to wait for even one and a half year to become
resident of India.
 FY in India April 1 to March 31
 Current Account and Capital Account
Transactions
 Two golden rules or principles in FEMA:-
 All current account transactions are permitted unless
otherwise prohibited.
 All capital account transactions are prohibited
unless otherwise permitted .
 Current Account Transactions
 payments due in connection with foreign trade,
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, spouse

and children residing abroad, and

 expenses in connection with foreign travel,

education and medical care of parents, spouse and

children.
 Capital Account Transactions
 " capital account transaction" means a transaction
which alters the assets or liabilities, including
contingent liabilities, outside India of persons
resident in India or assets or liabilities in India of
persons resident outside India.
 Current Account and Capital Account
Transactions
 e.g.:- Import of machinery on payment of cash or on
normal credit terms of the vendor will be regarded as
current account transaction.
 If the same machinery is imported on a deferred
credit basis or is funded out of ECB, and the credit
beyond 12 months would result in creation of long
term liability outside India and therefore will be
termed as Capital account convertibility.
FEMA Rules :
 Individuals are now allowed to remit up to
$200,000 a year & such money can be used to
purchase debt, equity and property in foreign
locations.
 Outward ward remittances have trebled to
nearly $1 billion in 2009-10-up from $ 9.6
million in 2004-05.
FEMA Rules :
 While travelling overseas, individuals can
carry up to $2000 ( capped at $10,000 for an
entire year).
 Individual can remit $100,000 a year, but only
for medical expenses.
 Individual are allowed to carry rupee notes,
not more than Rs 7500, while leaving the
country.
 Indian companies can borrow from overseas,
but there is restriction on end use of ECB.
 Companies can invest in acquisition or set up
subsidiaries overseas, up to 4 times their Net
worth.
 NBFCs & Mutual funds are not allowed to set
up subsidiaries overseas.
 Indian businessmen who have properties
overseas can buy them with funds generated
from overseas business.
 Travelling businessmen are allowed to spend
up to $25,000.
 Capital Account Convertibility
 CAC : Defined as the freedom to convert local
financial assets into foreign financial assets and
vice versa at market determined rates of
exchange. (Tarapore committee 1997)
 In simple language what this means is that
CAC allows anyone to freely move from local
currency into foreign currency and back.
References.

 http://www.finmin.nic.in/the_ministry/dept_
eco_affairs
 Business India, 10th Jan 2011