FOREIGN EXCHANGE MANAGEMENT ACT, 2000

SYNOPSIS
1. INTRODUCTION 2. FERA v. FEMA 3. PROVISIONS RELATING TO AUTHORISED PERSON 4. REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE 5. CONTRAVENTION, PENALTIES AND APPEAL 6. DIRECTORATE OF ENFORCEMENT 7. MISCELLANEOUS PROVISIONS
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INTRODUCTION With liberalization, need was felt to remove the drastic measures of FERA and replace them by a set of liberal foreign exchange management regulations. FEMA was enacted to replace FERA. FEMA A major shift in Indias approach to foreign exchange control. Facilitates Foreign Direct Investments in Indian entities. Eliminates RBI approvals to a very large extent.
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FERA v. FEMA
Preamble to FERA reads An act to consolidate and amend the law relating to certain payments, dealing in foreign exchange and securities, transactions affecting foreign exchange and import and export of currency for the conservation of foreign exchange resources of the country and proper utilisation thereof in the interest of economic development. FEMA An act 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. Shift from a regulatory mechanism to management mechanism w.r.t. foreign exchange.

FERA v. FEMA .Contd.

FERA
1. Control exchange. of foreign

FEMA
1. Regulate and manage foreign exchange.

2. FERA prohibited almost all foreign transactions unless there was a general/specific permission. 3. Offences criminal in nature 4. Presumption of existence of guilty mind unless accused proved otherwise.

2. FEMA permits almost all foreign transactions unless there is a general/specific prohibition.
3. Offences civil in nature. 4. Prosecution has to prove existence of offence. Offence compoundable in nature. 5. Describes an elaborate redressal machinery for total justice and fairness.
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FERA v. FEMA .Contd.

Similarity

-Both FERA and FEMA are governed by notifications issued by the Central Government or RBI for granting general permission. -FEMA enumerates areas where specific permission of RBI or Central Government is required.

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

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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Introduction..contd.

3. Currency 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 capital 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 is current account transaction. For Eg. Sale of machinery.
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Introduction..contd.

4. Foreign Exchange: means foreign currency and includesi. 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.
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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.

Authorised person to be given reasonable opportunity to be heard.

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Authorised Personcontd.

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.
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Authorised Personcontd.

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

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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.

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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.

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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. 2. 3. Rupee rates in the FX market are market determined and not RBI prescribed. Most of the transactions for inward foreign investment are liberalised. 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. 22

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 realization of the export proceeds by such exporter.

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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.

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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.

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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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Other Regulations made by RBI w.r.t foreign exchange management:

1. Foreign Exchange Management (Investment in Firm or Proprietary Concern in India), 2000 - To regulate investment by a person resident outside India in a partnership firm or proprietary concern in India. 2. Foreign Exchange Management ( Transfer or Issue of any Foreign Security) Regulations, 2000 - Under these Regulations, RBI regulates investment in foreign securities either by direct investment or otherwise. 3. Foreign Exchange Management ( Deposit) Regulations, 2000 - To regulate matters relating to deposits between a person resident in India and a person resident outside India. ( Ex. NRE, FCNR A/c, NRN)
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Other Regulations contd.

4. Foreign Exchange Management ( Foreign Currency Accounts by a person Resident in India) Regulations 2000 - Prescribes rules for opening, holding, maintaining of Foreign Currency Accounts and the limits upto which amounts can be held in such accounts by a person resident in India. 5. Foreign Exchange Management Regulations, 2000 - provides for manner of receipt of foreign exchange and receipt of payment for export in certain cases and the manner of payment in foreign exchange. 6. Foreign Exchange Management ( Transfer or Issue of Security by a person resident outside India) Regulations, 2000 - governs issue of or recording of a transfer of security, acquisition of right shares, issue of shares under ESO scheme, remittance of sale proceeds of Indian security, purchase by person resident outside India of equity/preference shares or debentures issued by an Indian company.

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Other Regulations contd.

7. Foreign Exchange Management ( Acquisition and Transfer of Immovable Property outside India) Regulations, 2000 - governs acquisition or transfer of immovable property situated outside India by a person resident in India. 8. Foreign Exchange Management (Acquisition and Transfer of Immovable Property) Regulations, 2000 - governs acquisition or transfer of immovable property situated in India by (i) an Indian citizen resident outside India and (ii) a person of Indian origin. 9. Foreign Exchange Management ( Establishment in India of branch or office or other place of business) Regulations, 2000 10. Foreign Exchange Management ( Export of Goods or Services) Regulations, 2000

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