FOREIGN EXCHANGE

MANAGEMENT ACT, 1999

1
 SYNOPSIS
1. INTRODUCTION
2. PROVISIONS RELATING TO AUTHORISED
PERSON
3. REGULATION AND MANAGEMENT OF FOREIGN
EXCHANGE
4. CONTRAVENTION, PENALTIES AND APPEAL
5. DIRECTORATE OF ENFORCEMENT
6. MISCELLANEOUS PROVISIONS

2
 INTRODUCTION

LEGAL FRAMEWORK

ACTS

Reserve Bank of India, 1934

FEMA, 1999

Foreign Contribution (Regulation) Act, 2010

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 Overall Structure

• FEMA – 7 Chapters – 49 Sections (Supreme Legislation)

• Rules by Ministry of Commerce – Section 46 of FEMA
(Delegated Legislation)
• Regulations by RBI – Section 47 of FEMA –
(Subordinate legislation)
• Master Circular issued by RBI every year
• FDI policy issued by Dept. of Industrial Policy (DPIIT)
• Notifications and Circulars issued by RBI from time to
time.
4
 Rules

• F.E.M. (Non-debt Instruments) Rules, 2019

• F.E.M. (Encashment Of Draft, Cheque, Instrument And Payment
Of Interest ) Rules, 2000
• F.E.M. (Authentication of Documents) Rules, 2000
• F.E.M. (Current Account Transactions) Rules, 2000
• F.E.M. (Adjudication Proceedings And Appeal) Rules, 2000.

• F.E.M. (Compounding Proceedings) Rules, 2000.

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 - 23 Regulations notified by RBI
- Policy – Foreign Direct Investment Policy
- Foreign Trade Policy
- RBI Directives

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 Authorities Governing
Enforcement of FEMA

• Directorate of Enforcement, Dept. of

Revenue, Min. of Finance
• Capital Market Division, Dept. of
Economic Affairs, Min. of Finance
• Foreign Trade Division, Dept. of
Economic Affairs, Min. of Finance

7
Introduction…..contd.

Applicability:

- Extends to the whole of India.

- Applicable to all branches/offices and agencies outside

India owned/controlled by a person resident in India

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9
Introduction…..contd.

Important Terms under FEMA:

1. Authorised person: means an authorised dealer, money changer,
off-shore banking unit or any other person for the time being
authorised under to deal in foreign exchange or foreign securities.
2. Capital Account Transaction: Essentially an economic
definition, intended to cover cross-border investments, cross
border loans and transfer of wealth across borders.
A transaction which-
a. alters foreign assets and foreign liabilities of Indian residents.
b. alters Indian assets and Indian liabilities of foreign residents.
c. Specified transactions listed under S. 6(3).
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 Capital Account Transactions by Person Resident in India

• Investment by a person resident in in India in foreign securities

• Foreign currency loans raised in India and abroad by a person resident in India
• Transfer of immovable property outside India by person resident in India
• Guarantees issued by a person resident in India in favour of a person resident outside
India
• Export, import and holding of currency/currency notes
• Loans and overdrafts by a person resident in India from a person resident outside India
• Maintenance of foreign currency accounts in India and outside India by a person
resident in India
• Taking out of insurance policy by a person resident in India from an insurance company
outside India
• Loans and overdrafts by a person resident in India to a person resident outside India
• Remittance outside India of capital assets of a person resident in India
• Sale and purchase of foreign exchange derivatives in India and abroad and commodity
derivatives abroad by a person resident in India
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 Capital Account Transaction by Persons Resident Outside
India

• Issue of security by a body corporate or an entity in India and investment therein by a

person resident outside India
• 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
• Acquisition and transfer of immovable property in India by a person resident outside
India
• Guarantee by a person resident outside India in favour of, or on behalf of a person
resident in India
• Import and export of currency/currency notes into/from India by a person resident
outside India.
• Deposits between a person resident in India and a person resident outside India
• Foreign Currency accounts in India of a person resident outside India
• Remittance outside India of capital assets in India of a person resident outside India.

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Introduction…..contd.

3. Current Account Transaction: transactions other than capital

account transaction, includes –
a. Business transactions between residents and non-residents.
b. Short-term banking and credit facilities in the ordinary course of
business.
c. Payment towards interest of loans and by way of income from
investments.
d. Payment of expenses of parents, spouse or children living abroad
or expenses on their foreign travel, medical and education.
e. Gifts.
Distinction b/w Capital and Currency A/c Transaction:
If a transaction gives rise to any claim or obligation b/w a resident
and non-resident, it is current account transaction. Eg. Machinery
purchased on hire by a resident from non-resident.
If on completion of a transaction, there is no further obligation, it 13
is capital account transaction. For Eg. Sale of machinery.
 Transactions under
Schedule III
(i) Private visits to any country (except Nepal and Bhutan)
(ii) Gift or donation.
(iii) Going abroad for employment
(iv) Emigration
(v) Maintenance of close relatives abroad
(vi) Travel for business, or attending a conference or specialised training or for
meeting expenses for meeting medical expenses, or check-up abroad, or for
accompanying as attendant to a patient going abroad for medical treatment/ check-
up.
(vii) Expenses in connection with medical treatment abroad
(viii) Studies abroad
(ix) Any other current account transaction

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Introduction…..contd.

4. Foreign Exchange: means foreign currency and includes-

i. deposits, credits and balances payable in any foreign currency,
ii. drafts, travelers cheques, letters of credit or bills of exchange,
expressed or drawn in Indian currency but payable in any foreign
currency,
iii. drafts, travelers cheques, letters of credit or bills of exchange drawn
by banks, institutions or persons outside India, but payable in Indian
currency.

5. Foreign Security: means any security, in the form of shares, stocks,

bonds, debentures or any other instrument denominated or expressed in
foreign currency and includes securities expressed in foreign currency,
but where redemption or any form of return such as interest or dividends
is payable in Indian currency.
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Introduction…..contd.

6. Person: includes an individual, a Hindu undivided

family, a company, a firm, an association of persons or a
body of individuals, whether incorporated or not, every
artificial juridical person and any agency, office or branch
owned or controlled by such person.

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Introduction…..contd.

7. Person resident in India : means

(i) a person residing in India for more than 182 days during the course of
the preceding financial year but does not include :-
(a) a person who has gone out of India or who stays outside India, for or
on taking up employment outside India, or
for carrying on outside India a business or vocation outside India, or for
any other purpose, in such circumstances as would indicate his intention
to stay outside India for an uncertain period;
(b) a person who has come to or stays in India, otherwise than for or on
taking up employment in India, or for carrying on in India a business or
vocation in India, or
for any other purpose, in such circumstances as would indicate his
intention to stay in India for an uncertain period;
(ii) any person or body corporate registered or incorporated in India,
(iii) an office, branch or agency in India owned or controlled by a person
resident outside India,
an office, branch or agency outside India owned or controlled by a person
resident in India.
17
Examine the residential status of the branches mentioned
below :
(i) Neon Ltd., an Indian Company having its registered office
at Mumbai India established a branch at New York on 1st
April 2012.
(ii) ICT Ltd., a company incorporated and registered in
London established a branch at Bangalore, India on 1st April
2012.
(iii) AVR Ltd. has a branch office at Singapore which is
controlled by its Kanpur branch.

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Introduction…..contd.

8. Repatriate to India: means bringing into India the realized

foreign exchange and
(i) the selling of such foreign exchange to an authorized
person in India in exchange for rupees, or
(ii) the holding of realized amount in an account with an
authorized person in India to the extent notified by the
Reserve Bank,
and includes use of the realized amount for discharge of a
debt or liability denominated in foreign exchange and the
expression "repatriation" shall be construed accordingly.

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PROVISIONS RELATING TO AUTHORISED PERSON
 Section 10 – RBI may on application made to it in this behalf,
authorise any person to be known as authorised person to deal in
foreign exchange/foreign securities, as an authorised dealer,
money changer or off-shore banking unit or in any manner as it
deems fit.
 Authorisation to be in writing and subject to conditions laid down
therein.
 Authorisation may be revoked by RBI at any time if it is satisfied
that –
i. It is in public interest.
ii. The authorised person has failed to comply with the conditions
subject to which authorisation was granted/ has contravened any
provisions of the Act, rule, regulation, notification, direction or
order made thereunder. 20
Authorised Person…contd.

Duties of Authorised Person:

1. Comply with RBI directions.
2. Not to engage in unauthorised transactions involving foreign
exchange and foreign security not in conformity with terms of
authorisation.
3. Ensure compliance of FEMA provisions
4. Duty to produce books, accounts etc. to RBI.
Powers of Authorised Person:
1. To deal in or transfer any foreign exchange or foreign security to
any person.
2. Receive any payment by order or on behalf of any person resident
outside India in any name.
3. To open NRO, NRE, FCNR accounts.
4. To sell/purchase foreign exchange for current account
transaction/capital account transaction. 21
Authorised Person…contd.

 Sec.11 – RBI is empowered to issue directions to authorised person

in regard to making payment or to do or abstain from doing any act
relating to foreign exchange or foreign security.
 RBI may direct authorised person to furnish information as and
when necessary.
 Sec. 12 – RBI has powers to inspect authorised persons for

(a) Verifying the correctness of any statement, informations or

particulars furnished to the RBI.
(b) obtain any information which such authorised person has failed to
furnish on being called upon to do so.
(c) Securing compliance with provisions of the Act.
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 REGULATION AND MANAGEMENT OF
FOREIGN EXCHANGE (Sec.3-9)
Sec. 3 – Dealing in Foreign Exchange etc.
 All dealings in foreign exchange or foreign
securities will be governed by the provisions of
FEMA.
 Receipts and payments in foreign exchange will be
through an authorised person in the manner
prescribed.
 Except for section 3, which relates to dealing in
foreign exchange, etc. no other provisions of FEMA
stipulate obtaining RBI permission 23
Regulation and Management ….contd.

Sec. 3- Except with the general or special permission of the

Reserve Bank, no person can :-
(a.) deal in or transfer any foreign exchange or foreign security to
any person not being an authorized person;
(b) make any payment to or for the credit of any person resident
outside India in any manner;
(c ) receive otherwise through an authorized person, any payment
by order or on behalf of any person resident outside India in
any manner;
(d) enter into any financial transaction in India as consideration for
or in association with acquisition or creation or transfer of a
right to acquire, any asset outside India by any person
Explanation: Financial transaction means making any payment to,
or for the credit of any person, or receiving any payment for, by
order or on behalf of any person, or drawing, issuing or
negotiating any bill of exchange or promissory note, or
transferring any security or acknowledging any debt. 24
Regulation and Management ….contd.

Section 4: Holding of Foreign Exchange etc.

No person resident in India can acquire, hold, own, possess or
transfer any foreign exchange, foreign security or any immovable
property situated outside India except with the general or special
permission of the Reserve Bank.

Section 5: Current Account Transaction

Any person may sell or draw foreign exchange to or from an
authorized person if such sale or drawal is a current account
transaction. However, the Central Government may, in public
interest and in consultation with the Reserve Bank, impose such
reasonable restrictions for current account transactions as may be
prescribed.
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Regulation and Management ….contd.

Section 6: Capital Account Transaction

Any person may sell or draw foreign exchange to or from an

authorized person for a capital account transaction. The Reserve
Bank may, in consultation with the Central Government, specify :-
(a) any class or classes of capital account transactions which are
permissible;
(b) the limit up to which foreign exchange shall be admissible for
such transactions:
However, the Reserve Bank cannot impose any restriction on the
drawal of foreign exchange for payments due on account of
amortization of loans or for depreciation of direct investments in
the ordinary course of business.
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Regulation and Management ….contd.

The Reserve Bank can, by regulations, prohibit, restrict or regulate:-

(a)transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of any security by a person resident outside India;
(c ) transfer or issue of any security or foreign security by any branch, office
or agency in India of a person resident outside India;
(d) any borrowing or lending in foreign exchange;
(e) any borrowing or tending in rupees in whatever form or by whatever
name called between a person resident in India and a person resident outside
India;
(f) deposits between persons resident in India and persons resident outside
India;
(g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease not
exceeding five years, by a person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease
not exceeding five years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or other
liability incurred (i) by a person resident in India and owed to a person
resident outside India or (ii) by a person resident outside India. 27
Regulation and Management ….contd.

 A person resident in India may hold, own, transfer or invest in foreign

currency, foreign security or any immovable property situated outside
India if such currency, security or property was acquired, held or owned
by such person when he was resident outside India or inherited from a
person who was resident outside India.

 A person resident outside India may hold, own, transfer or invest in

Indian currency, security or any immovable property situated in India if
such currency, security or property was acquired, held or owned by
such person when he was resident in India or inherited from a person
who was resident in India.

 The Reserve Bank may, by regulation, prohibit, restrict, or regulate

establishment in India of a branch, office or other place of business by a
person resident outside India, for carrying on any activity relating to
such branch, office or other place of business.

 Note:
1. Rupee rates in the FX market are market determined and not RBI prescribed.
2. Most of the transactions for inward foreign investment are liberalised.
3. For outward investments, upto U.S. $ 15 million, automatic permission is available. Larger
outward investments are also permissible if one can satisfy RBI about the project. 28
Regulation and Management ….contd.

Section 7 : Export of Goods and Services

 Every exporter of goods must :-

(a) furnish to the Reserve Bank or to such other authority a
declaration in such form and in such manner as may be specified,
containing true and correct material particulars, including the
amount representing the full export value or, if the full export
value of the goods is not ascertainable at the time of export, the
value which the exporter, having regard to the prevailing market
conditions, expects to receive on the sale of the goods in a market
outside India;
(b) furnish to the Reserve Bank such other information as may be
required by the Reserve Bank for the purpose of ensuring the
29
Regulation and Management ….contd.

Section 8: Realization and repatriation of foreign exchange

Where any amount of foreign exchange is due or has accrued
to any person resident in India, such person shall take all
reasonable steps to realize and repatriate to India such foreign
exchange within such period and in such manner as may be
specified by the Reserve Bank.
Section 9 provides exceptions to realization and repatriation
of foreign exchange in cases where possession of foreign
currency or foreign exchange transaction is upto such limit as
the RBI may specify.

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 CONTRAVENTIONS, PENALTIES AND APPEALS
 The penalties for contraventions under FEMA are per se monetary in
nature.
 If any person contravenes any provisions, rules, regulations etc. the
penalty imposed may go upto 3 times the amount involved in the
contravention and if the amount involved in the contravention is not
ascertainable, then upto Rs. 2,00,000.
 If the contravention is a continuing one, penalty upto Rs.5,000 per
day may be imposed for every day after the first day during which the
contravention continues.
 The adjudicating authority may also confiscate any currency, security
or property in addition to imposing penalty.
 If the person does not pay upon the penalty within 90 days, he will be
liable to civil imprisonment. 31
Contravention, Penalties….contd.

 If the person does not pay upon the penalty within 90 days, he will be
liable to civil imprisonment.

 There is a right to appeal given at every stage and an appeal against

the order of the adjudicating authority can be made to the Special
Director (Appeal).

 An appeal against the Special Director (Appeal) can be made to the

Appellate Tribunal (Sec. 20 deals with the Composition of Appellate
Tribunal)

 An appeal, on question of law, against the order of the Appellate

Tribunal can be made to the High Court.

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 DIRECTORATE OF ENFORCEMENT
Sections 36-38 makes provisions relating to Directorate of
Enforcement.
The Central Government may establish a Directorate of
Enforcement comprising of a director or such officers or
class of officers as it thinks fit, who shall be called Officers
of Enforcement.
The officers of the Directorate shall have powers to
investigate contraventions of provisions under Section 13.
The powers and limitations of these officers shall be the
same as those conferred on Income Tax authorities under
Income Tax Act. 33
 MISCELLANEOUS PROVISIONS

Section 42 – Provides for contravention by companies

where a person committing contravention of any
provisions of the Act on behalf of the company.
However, such a person would not be liable to
punishment if he proves that the contravention took
place without his knowledge or that he exercised due
diligence to prevent such contravention.

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Ravi, a citizen of India, left India for employment in the US
on 1st April,2020. He purchased a flat in Bangalore for Rs.
75 Lakh, while he was on a vacation to India during August
2021. His brother Gopal, employed in Bangalore also
purchased a flat in the same building in August 2021 for 60
Lakh. Gopal’s flat was financed by a loan from a Housing
Finance Company and the loan was guaranteed by Ravi.
Examine with reference to FEMA,1999 whether purchase
of flat and guarantee given by Ravi are Capital Account
Transactions?
Paras, an Indian national desires to obtain foreign exchange
for the following purposes:
(i)USD 30,000 for a business trip to Singapore
(ii)Remittance of USD 200,000 for payment as prize money
to the winning team in a hockey tournament to be held in
Australia.
Advise him if he can get the foreign exchange and under
what condition