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FOREIGN EXCHANGE MANAGEMENT ACT, 1999

FERA to FEMA
A Paradigm Shift

BACKGOUND
Exchange Control regime was first introduced as temporary measure in 1939 on the outbreak of World War II under Defence of India Rules. Object Mainly to conserve non-sterling area currency to utilise them for essential purposes.

Contd
Exchange Control continued even after the War on systematic basis in order to ensure availability of exchange for development purposes. Foreign Exchange Regulation Act, 1947 was enacted to regulate and control foreign exchange transactions. FERA, 1947 was replaced by FERA, 1973 and came into force w.e.f. January 1, 1973. Objective Conservation of Foreign Exchange and utilisation for desired purpose.

Contd..
Balance of Payment Crises-1991 Foreign exchange reserves <USD 2 bn. Realisation Complex System of decision making. Foreign exchange transactions were expensive. Tight control over economic activities.

CHANGE IN THINKING
LERMS March 1992. Unified Exchange Rate Management System, 1993. Radical changes in Exchange Control and Exchange Rate Management.

Contd..
Exchange Rate Market determined. Major amendments to FERA, 1973. Opening of Indian economy. Delegation of powers to ADs. Adoption of IMF article VIII w.e.f. August 20, 1994. (Freeing Current Account Transactions or making Rupee convertible for Current Account Transactions).

IMPACT OF IMF ARTICLE

No need to control current account transactions. No need to control capital account transactions - delegated to ADs. Required large scale amendments to FERA, 1973. It was decided to repeal FERA, 1973 and replace it by new Legislation.

FEMA, 1999
In 1999 a new and more transparent legislation reflecting the change objective was enacted viz. Foreign Exchange Management Act, 1999 (42 of 1999). FEMA came into force w.e.f. June 1, 2000.

OBJECTIVES
FERA, 1973 To regulate and conserve foreign exchange and properly utilise it for economic development of the country. FEMA, 1999 To facilitate external trade and payments and to promote orderly developments and maintenance of forex market in India. The important change is that emphasise is no more on conservation.

DIFFERENCE BETWEEN FERA AND FEMA

FERA had 81 sections. Presumption of culpable mind. Criminal law. Enormous powers to ED. Residential status dependent on intention. FEMA has 49 sections. Absence of presumption of culpable mind. Civil Law. Powers to ED on par with IT authority. Residential Status dependent on combined status of stay and intention.

Contd..
Transactions were not categorised. Arrest. Search/seizure. Party involved to prove innocence. Current/Capital account transactions clearly defined. Arrest only for nonpayment/fine. No search/seizure without warrant. Prosecution to prove guilt.

Important Sections of FEMA.

First nine sections are substantive rest are administrative. Section 1 Commencement. Section 2 Definitions. Section 3 Restrictions on dealing in Foreign Exchange. Section 4 Holding assets outside India by Residents. Section 5 Current Account Transactions.

Contd
Section 6 Capital Account Transactions. Section 7 Export of Goods and Services. Section 8 Realisation, repatriation of Foreign Exchange. Section 9 Exemption from provisions of Sections 4 and 8. Section 13 Maximum penalty imposable under FEMA.

Definitions
Person Person includes
An individual A Hindu undivided family. A company. A firm. An association of person or body of individuals, whether incorporated or not. Every artificial judicial person not falling in any of the above clauses. Any agency, office or branch owned or controlled by such person.

Definitions FEMA,1999
Clause 2 (v) defines Person Resident in India (i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include :

Definitions FEMA,1999
...but does not include : (A) A person who has gone out of India or who stays outside India, . a) for employment outside India, or b) for carrying on outside India a business or vocation outside India or c)for any other purpose, where circumstances would indicate his intention to stay outside India for an uncertain period;

Definitions FEMA,1999
. (B) A person who has come to or stays in India,
a) for or taking up employment in India, or b) for carrying on on in India a business or vocation in India, or c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

Definitions FEMA,1999
Clause 2 (v) defines Person Resident in India
(ii) any person or body corporate registered or incorporated in India,

(iii) an office , branch or agency in India of a foreign company/ body, (iv) an office , branch or agency outside India of a company in India,

Definitions FEMA, 1999

Person Resident Outside India means a person who is not resident in India.

Definitions .. FEMA, 1999

Person of Indian Origin (PIO) means a citizen of any country other than Bangladesh or Pakistan, if
He at any time held Indian passport. He or either his parents or any of his grand parents were citizens of India, or The person is a spouse of an Indian citizen or a person who falls in any of the two categories mentioned above.

Definitions
2(h) Currency
Currency includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank. Notification No FEMA 15 ATM and Debit Card included

Authorised Persons..Sec 10
(1)The Reserve Bank may, .., authorise any person to be known as authorised person to deal in foreign exchange or in foreign securities, as an authorised dealer, money changer or off-shore banking unit or 1. Authorised dealers,
2. Money changers, 3. Foreign security dealers, 4. Off-shore banking units

Responsibility of ADs
1. Seek declaration and information 2. That will reasonably satisfy authorised dealer 3. If satisfied undertake transaction, otherwise 4. If refuse to give required information or declaration to undertake the transaction, AND 5. If AD has reasons to believe that the transaction was designed to contravene or evade provisions of the Act, Rules or Regulations inform Reserve Bank

Responsibility of ADs
No document has been prescribed by Reserve Bank for current account transactions

Issues... 1. What documents an AD should obtain for any current account transaction .. ?????? 2. How AD was reasonably satisfied..????

Current Account Transaction

Current account transaction means a transaction other than a capital account transaction

Contd
It includes
all trade related payments, say for example, payments for import, export, business services in 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. Foreign travel, education and medical expenses of parents, spouse or children.

Current accountSec 5
Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is for a current account transaction:

Current accountSec 5
Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is for a current account transaction:
Provided that the Central Government may , in public interest and in consultation with Reserve Bank, impose reasonable restrictions for current account transactions as may be prescribed.

Nature of transactions???
Purchase of flat and renting it out, Purchase of share and receipt of dividend, Fixed deposit and interest on deposit, Loan and payment of interest, Admission fees for examination/admission Medical treatment Studies Travel for business, tourism, seminar, workshop etc. Gift

Current Account Rules

Foreign Exchange Management (Current account Transaction) Rules ,2000 Notification dt. 3rd May,2000 Rule 3 Schedule I Prohibited 8 items

Rule 4
Schedule II. Prior permission of Govt. 10 items

Rule 5
Schedule IIIPrior permission of Reserve Bank 18 items

No sale of Fx for transaction with person resident in Nepal or Bhutan and for travel to Nepal and Bhutan

Current a/c transactions

Gift/donation US$5,000 per donor per year

Tourism travel US$10,000 calendar year Business travel US$25,000 per trip, Remittance by foreign nationals employed in India, Education US$100,000 or estimate per academic year Medical US$100,000 or estimate, Consultancy US$1,000,000 per project, Pre-incorporation US$100,000

Capital Account Transactions

Capital Account Transaction is defined to mean a transaction, which alters the assets or liabilities including contingent liabilities, outside India or PRII or assets or liabilities in India of PROI. It specifically includes
a) Transfer or issue of foreign securities by a PRII. b) Transfer or issue of Indian securities to a PROI. c) Transfer or issue of any Indian security or foreign security by any branch, office or agency in India of a PROI. d) Borrowing and lending in foreign exchange

e) Borrowing and lending in Indian Rupees between a PRII and a PROI. f) Deposits between a PRII and a PROI.

Contd..
g) Export, import or holding of currency or currency notes. h) Transfer of immovable property outside India by a PRII. i) Acquisition or transfer of immovable property in India by a PROI. j) Giving guarantee or surety in respect of debt, obligation or other liability by a PRII to a PROI. Similarly giving of guarantee by PROI for a PRII is also covered. CURRENT ACCOUNT TRANSACTIONS and CAPITAL ACCOUNT TRANSACTIONS are two pillars of FEMA. In fact the entire scheme of FEMA revolves around these two concepts.

Capital A/c. transactions - Prohibitions

Investments in shares or convertible debentures of an Indian company in the following activities are prohibited
Chit fund and Nidhi company. Agricultural or plantation activity. Real estate business. Construction or farm houses. Dealing in TDRs Investment in Lottery business, gambling, betting and casinos.

Foreign Exchange
The term foreign exchange is defined to include foreign currency, which means all currencies other than Indian currency. It includes deposits, credits and balances payable in foreign currency, instruments like drafts, travellers cheques, letters of credit, bills of exchange payable in foreign currency, whether or not these are expressed or drawn in Indian currency. instruments like drafts, travellers cheques, letters of credit, bills of exchange, payable in Indian currency, issued by banks, institutions or persons resident outside India.

Arrangement under FEMA

Current A/c. rules are framed by Government in consultation with RBI and notified in the Official Gazette. Capital A/c. transactions regulations are framed by RBI in consultation with Government of India and notified in the Official Gazette. A.P. (DIR Series) Circulars are issued by RBI.

Contd..
Rules by GOI for Current account transactions imposing restrictions - Notification dt 3 May 2000 Regulations by Reserve Bank to restrict and prohibit Capital account transactions FEMA Notifications No.1 to 25 dt. 3 May 2000 No.71 Directions by way of AP (DIR Series) circulars u/s 10(4) and 11(3) of FEMA, 1999.

Rules
For current a/c by GOI

Directions
{AP(DIR) circulars}

Regulations
on capital a/c by Reserve Bank

International Credit Card

Free from all current account restrictions No ceiling on travel for business, tourism, Bill is paid by debit to the card holders bank account

End use of exchange

Foreign Exchange purchased for any purpose can also be used for any other purpose, for which purchase of exchange is permissible, Irrespective of the purpose indicated in Form A2 at the time of purchase of exchange, It can NOT be used for any purpose for which purchase of exchange is not permitted under the extant EC Rules. e.g. purchase of lottery ticket

Surrender Requirement
Exchange purchased or its unused portion to be surrendered within 60 days of purchase Surrender of unspent Fx cy Notes within 90 days from return Surrender of unspent Fx cy TCs within 180 days from return Permitted to hold upto US2,000 in Fx Notes and TCs

Export of goods and services

Notification No.FEMA 23/2000- RB dated 3rd May, 2000 In exercise of powers conferred by clause(a) of sub- section (1),sub- section (3) of Section 7 and sub- section (2) 0f Section 47 of FEMA

Declaration of Export
Every exporter of goods and software in any form,except Nepal & Bhutan, shall furnish a declaration in prescribed format The declaration to include value, description & destination of goods

Follow up of Export
Section 7 (1) & (2) Every exporter of goods shall furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified Section 7 (3) Every exporter of services shall furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified

Export Import of Currency

Clause (g) of sub-section (3) of section 6 Notification No FEMA 6 /RB-2000 Nepal and Bhutan brought at par (Reg. 8) Limit of Indian currency permitted to be taken out raised to Rs.5,000 from Rs.1,000 [Reg. 3 (1)(a)] Like wise limit of Indian currency to be brought in raised to Rs.5,000 from Rs. 1,000 [(Reg. 3 (1)(c)]

Import Directions
In conformity with EXIM Policy Advance remittance upto US$1,00,000 without guarantee Payment /guarantee for replacement goods, Follow up for import remittance exceeding US25,000 Bill of Entry for home consumption Document of evidence Other than by courier ... B/E for home, Postal appraisal Import in non-physical form .. Inform customs Import by courier ( Rs. 1 lakh ) In case of a listed company with net worth Rs. 100 crores a certificate from a Director or Auditor that the import has been made, PSUs or Departmental Undertaking, IITs, or Institutions under CAG.a certificate from CEO.

Export Import of Currency

Indian currency permitted to be taken out or brought in to/from places other than Nepal & Bhutan is Rs.5,000, in any denomination, Indian currency permitted to be taken out or brought in to/from Nepal and\ Bhutan is unlimited but in denomination not exceeding Rs.100

NRI Deposit Accounts

Non-Resident Ordinary Rupee Account (NRO) Non-Resident External rupee Account (NRE) Foreign Currency Non-Resident Account {FCNR (B)}

Import of Goods
# Regulated by DGFT # Govt of India Notification No. GSR. 381 (E) dated 3rd May, 2000 # Foreign Exchange Management (Current Account Transactions) Rules, 2000 # A.D.s to follow UCPDC # Import licences as applicable # Manner of Rupee payment # Advance Remittance # Time limit

Import of Goods contd...

# Interest on import bills # Postal imports # Import of gold/ silver/ platinum by nominated banks/ agencies # Import of films on lease # Import of gold/ silver/ jewellery by NRIs # Import of currency # Merchanting Trade # Receipt of documents directly

Indian Investment abroad

Under the automatic route overseas direct investment by Indian promoter companies is permitted within the 100% of the networth of the company upto USD 100 mn. on annual basis in any bonafide activity. Financial limit in respect of partnership firms is USD 1 mn. on annual basis in certain activities. SAARC countries USD 150 mn. Nepal and Bhutan Rs.700 crores. Except above needs RBI approval. Real Estate and Banking Sector prohibited. Restrictions on investment in Pakistan.

Non-Resident Ordinary Account (NRO)

It is a Rupee account Any person resident outside India Joint A/c with other NR or resident permitted Rate of Interest - ADs free to determine

NRO..
Repatriability
Principal Interest Not repatriable Freely repatriable

Risk
Account holder is exposed to the fluctuations, in the value of INR to the extent of interest amount

Non-Resident (External) Rupee Account ( NRE )

It is a Rupee Account NRIs and OCBs Joint A/c with other NRI permitted Joint A/C with resident not permitted Banks are free to determine interest rates

NRE..
Repatriability
Principal Interest Freely repatriable Freely repatriable

Risk
Account holder is exposed to the fluctuations, in the value of INR

NRE..
Type of Account
Current Savings Recurring Fixed Deposits - As per ADs Schemes

Loans against NRE A/c

Rupee loans in India are permitted for account holder and third party Foreign Currency loans out side India permitted for account holder and third party

Foreign Currency Non-Resident Account (FCNR )

Currencies permitted - Pound Sterling, US Dollar, Japanese Yen and Euro NRIs and OCBs Joint A/c with other NRI or OCB only. Not with resident Banks are free to determine interest rates within the ceiling, if any, prescribed by the Reserve Bank

FCNR..
Repatriability
Principal Interest Freely repatriable Freely repatriable

Risk
Account holder is protected against changes in INR value vis--vis the currency in which the account is denominated

FCNR..
Type of Account
Fixed Deposits only For terms not less than one year and not

exceeding three years

Loans against FCNR A/c

Rupee loans in India are permitted for A/c holder and third party Foreign Currency loans out side India are permitted for A/c holder and third party

Exchange Earners Foreign Currency Account Scheme (EEFC)

Introduced in 1992 Notification No.FEMA 10/ 2000- RB

dated 3rd May 2000 Any person resident in India who has earned the foreign exchange

EEFC Account
Policy as announced by the Reserve Bank from time to time Accounts to be opened with an AD in India It is a non-interest bearing current account No credit facilities fund based or non-fund based are permitted No credit if the forex or inward remittance is converted in Indian rupees Only amount realised is eligible and not amount of bills purchased

Resident Foreign Currency Account (RFC)

A person resident in India can open RFC out of foreign exchange received
pension/superannuation/monetary benefit from employer outside India realisation of assets repatriated to India gifts or inheritance forex held prior to 8th July 1947 or acquired as gift/ inheritance from an eligible person

Personal Remittances on declaration basis

BTQ Gift Donation Employment Emigration Maintenance of close relative Medical Treatment/Checkup Study abroad US$ 10,000 US$ 5,000 US$ 5,000 US$100,000 US$100,000 US$100,000

US$ 100,000

US$ 100,000

LOANS TO INDIAN RESIDENTS

LOANS TO INDIAN RESIDENTS AN INDIVIDUAL RESIDENT IN INDIA MAY BORROW A SUM NOT EXCEEDING US $ 250000/- OR ITS EQUIVALENT FROM HIS CLOSE RELATIVES OUTSIDE INDIA SUBJECT TO THE CONDITIONS THAT : THE MINIMUM MATURITY PERIOD OF THE LOAN IS 1 YR. THE LOAN IS FREE OF INTT. THE AMOUNT OF LOAN RECEIVED BY INWARD REMITTANCE IN FREE FOREIGN EXCHANGE THROUGH NORMAL BANKING CHANNELS OR BY DEBIT TO THE NRE / FCNR A/C OF THE NONRESIDENT LENDER

New .
Unlike FERA , FEMA does not apply to Indian citizens resident outside India, Provision for arrest is only in exceptional cases, Powers of the officers of the Enforcement Directorate have been brought at par with Income tax authorities, In FEMA there is no presumption of mens-rea, {Sec. 59 of FERA},

Functioning of ECD has relations with the following departments

1. DEIO Exchange Reserve Management. 2. DEAP Analysis of Trends and Policy decisions. DESACS Processing of data.

Liberalisations because of
Comfortable position of forex reserves USD 86 bn. Stable forex market No volatility. Hightened public expectations expectation of capital account convertibility (CAC).

Directions of change towards

Simplifying procedures. Enhancing forex entitlements. Rationalising deposit accounts. Increase facilities for NRIs/PIOs. Market liberalisation. Trust based regime. March towards CAC.

Customer Service
Highly influential people visit department. Media keeps watch on services rendered. Top Management is concerned about the services rendered. Globalisation/liberalisation is a order of the day. Changes taking at fast speed. Technology developments in communication.

Contd.
Keep yourself abreast of changes. Avoid delays. Be polite and courteous. Always be helpful. Enhance the image of the Institution.

Recently concluded Annual Conference of Authorised Dealers, Governor said that The Indian Rupee should become as good a currency as a Dollar or the Yen or the Pound Sterling or the Euro and India should be the strongest in the external sector.

Contd.

Foreign exchange is now not a constraint at all. Strong external position of the country has many dimensions. It gave a sense of security and confidence to the entire country. Policies help in times of crises. They should not be used to make individual transactions difficult. The bankers and policy makers should get out of the hang over of FERA. While accountability is necessary, it is not necessary to mistrust Indians.

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