Definition of Foreign Exchange Management Act

Introduction

The Foreign Exchange Management Act (FEMA) is a 1999 Indian law “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”. It was passed in the winter session of Parliament in 1999, replacing the Foreign Exchange Regulation Act (FERA).

This act seeks to make offenses related to foreign exchange civil offenses. It extends to the whole of India.,[1] replacing FERA, which had become incompatible with the pre-liberalization policies of the Government of India. It enabled a new foreign exchange management regime consistent with the emerging framework of the World Trade Organisation (WTO). It is another matter that the enactment of FEMA also brought with it the Prevention of Money Laundering Act of 2002, which came into effect from 1 July 2005.

Unlike other laws where everything is permitted unless specifically prohibited, under this act everything was prohibited unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It required imprisonment even for minor offences. Under FERA a person was presumed guilty unless he proved himself innocent, whereas under other laws a person is presumed innocent unless he is proven guilty.

Definition of FEMA 2000

FEMA 2000 means Foreign exchange management Act 2000. Foreign exchange management act 2000 is very helpful law for development of foreign exchange market in India. It was passed in 1999 and came into effect from June 1, 2000 to entire country. After this foreign exchange regulation act (FERA) 1973 was closed. FEMA was most suitable for India corporate sector instead of FERA because almost all strict regulations of FERA were removed in FEMA.

Objectives of FEMA

Main objective of apply FEMA is to reduce the restriction on foreign exchange. Now, any offense in foreign exchange will be civil offense not criminal offense.

This law’s main objective is to increase the flow of foreign exchange in India. Now, under this law, you can bring foreign currency in India without any legal barrier.

Switch from FERA

FERA, in place since 1974, did not succeed in restricting activities such as the expansion of transnational corporations (TNCs). The concessions made to FERA in 1991-1993 showed that FERA was on the verge of becoming redundant. After the amendment of FERA in 1993, it was decided that the act would become the FEMA. This was done in order to relax the controls on foreign exchange in India, as a result of economic liberalization. FEMA served to make transactions for external trade (exports and imports) easier – transactions involving current account for external trade no longer required RBI’s permission. The deals in Foreign Exchange were to be ‘managed’ instead of ‘regulated’. The switch to FEMA shows the change on the part of the government in terms of foreign capital.

Need for this Management

The buying and selling of foreign currency and other debt instruments by businesses, individuals and governments happens in the foreign exchange market. Apart from being very competitive, this market is also the largest and most liquid market in the world as well as in India.[4] It constantly undergoes changes and innovations, which can either be beneficial to a country or expose them to greater risks. The management of foreign exchange market becomes necessary in order to mitigate and avoid the risks. Central banks would work towards an orderly functioning of the transactions which can also develop their foreign exchange market.

Whether under FERA or FEMA’s control, the need for the management of foreign exchange is important. It is necessary to keep adequate amount of foreign exchange from Import Substitution to Export Promotion.

Main Features

Activities such as payments made to any person outside India or receipts from them, along with the deals in foreign exchange and foreign security is restricted. It is FEMA that gives the central government the power to impose the restrictions.

Restrictions are imposed on people living in India who carry out transactions in foreign exchange, foreign security or who own or hold immovable property abroad.

Without general or specific permission of the MA restricts the transactions involving foreign exchange or foreign security and payments from outside the country to India the transactions should be made only through an authorised person.

Deals in foreign exchange under the current account by an authorised person can be restricted by the Central Government, based on public interest.

Although selling or drawing of foreign exchange is done through an authorised person, the RBI is empowered by this Act to subject the capital account transactions to a number of restrictions.

People living in India will be permitted to carry out transactions in foreign exchange, foreign security or to own or hold immovable property abroad if the currency, security or property was owned or acquired when he/she was living outside India, or when it was inherited by him/her from someone living outside India.

Exporters are needed to furnish their export details to RBI. To ensure that the transactions are carried out properly, RBI may ask the exporters to comply with its necessary requirements.

Provision /Rules / Regulation of FEMA

Provision regarding dealing in foreign exchange:-

According to section 3 of FEMA 2000,” only authorized person under the govt. terms can deal in foreign exchange in India. “

Provision Regarding Holding of Foreign Exchange

According to section 4 of FEMA 2000, “All persons which are provided authority only can hold or purchase foreign exchange in India or outside India.”

Provision Regarding Current Account Transactions

According to section 5 of FEMA 2000,” There is no restriction regarding sale or deal foreign exchange, if it is a current account transaction.”

The following transaction are deemed current account transactions under FEMA:-

Expenses in connection with foreign travel, education and medical care of parents, spouse and children (Anybody now can send the foreign currency in India for above expenses under current account)

Payment due as interest on loan

Payment due under short term loan for business.

Provision Regarding Capital Account Transactions

Under section six,” RBI will fix the limit of foreign exchange transactions relating to capital account after discussion with Indian govt.”

RBI can restrict following:-

Transfer of foreign security by Indian resident.

Transfer of foreign security by Indian resident which is now outside India.

Transfer of immovable property.

Provision Regarding Export of Goods and Services

According to section 7 of FEMA 2000, “ It is the duty of exporter to declare the true and correct detail of goods which, he have to sell the market outside India and must send complete report to RBI. RBI can make particular requirement for any exporter. RBI can also make rules and regulations for realization of amount earned from foreign country.

Provision Regarding Authorised Persons

RBI can authorize anybody who can deal in money exchange or off shore transaction and foreign exchange. He has to follow the rules and guidelines of RBI. It can revoke the authorisation granted to any person at any time in public interest. If authorized person will be done contravention the rules of RBI, he will be liable to pay up to ` 10000 penalty and 2000 for every day during which such contravention continue.

Provision Regarding Contravention and Penalties: - Section 13 to 15

If anybody or person contravenes the rules and regulation of FEMA 2000 or RBI direction, he will be liable to a penalty three times of sum involved in contravention. If contravention will continue, then he will pay up to ` 5000 per day during the time of contravention.

Provision Regarding Adjudication and Appeal

According to section 18, “Central Government can appoint adjudicating authority who can give the punishment of civil imprisonment of maximum six months if case is less than one crore . If demanded value is more than one crore then punishment of imprisonment may be of three years . The person can appeal to special director against the decisions of adjudicating officer. He can also appeal in appellate tribunal and also in high court with the sixty days of communication of order

Applicability of FEMA

The foreign exchange management act 1999 was enacted to consolidated and amend the law relating to foreign exchange with the objective of facilitating external trade and for promoting the orderly development and maintenance of foreign exchange market in India. FEMA extends to the whole of India. The act also applies to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention committed there under outside India by any person to whom this Act is applies.

Regulation and Management of Foreign Exchange

Dealings in Foreign Exchange

Save as otherwise provided in this Act, rules or regulations made there under, or with the general or special permission of the Reserve Bank, no person shall-

Deal in or transfer any foreign exchange or foreign security to any person not being an authorised person;

Make any payment to or for the credit of any person resident outside India in any manner;

Receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner;

Explanation

For the purpose of this clause, where any person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person (including an authorised person) without a corresponding inward remittance from any place outside India, then, such person shall be deemed to have received such payment otherwise than through an authorised person;

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.

For the purpose of this clause, “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.

Authorised Person

An “Authorized Person” under FEMA, is a person who is authorized by Reserve Bank to deal in Foreign Exchange.

For being registered as an “Authorized Person”, necessary application along with relevant documents has to be furnished to Reserve Bank.

An “Authorized Person” is also, not given a free hand to deal in foreign Exchange. He has to furnish details and information, to Reserve Bank from time to time as may be required by it.

Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

Current Account Transactions

The Act defines the term ‘current account transaction’ as a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,

Payments due in connection with

Foreign trade,

Other current business

Services, and

Short-term banking and credit facilities in the ordinary course of business Payments due as

Interest on loans and

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.

In the above definition, the words “without prejudice to the generality of the foregoing such transaction includes” imply that even if the transactions listed above may fit into the definition of capital account transactions, such transactions shall be treated current account transactions. For example, resident of India imports goods from outside India on a short term credit (for a period of less than 6 months), he is creating a liability outside India and thus, it can be treated a capital account transaction but, it is specifically included in the above definition as a current account transaction.

As a general rule, any person may sell or draw foreign exchange if such sale or drawal is a current account transaction. Under the Act, 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. Accordingly, the Central Government has issued the Foreign Exchange Management (Current Account Transaction) Rules, 2000. It contains the list of current account transactions for which drawal of foreign exchange is:-

Totally prohibited;

Permitted, subject to the prior approval of concerned Ministry, Central Government;

Permitted, subject to prior approval of the Reserve Bank of India; No restrictions or limits are applicable for undertaking the transactions that are not covered by the above rules and the authorized dealers are free to release foreign exchange upon the satisfaction that the transactions will not involve and is not designed for the purpose of violation of the Act, or any rules, regulations made there under.

In today’s changed scenario, Indian rupee has become fully convertible so far as current account transactions are concerned. This implies that foreign exchange is freely available to the residents for remittance on account of current account transactions for the various purposes like foreign travel, foreign education, and medical treatment abroad etc. The non residents are also freely allowed to remit outside India the income or capital gain generated in India. But, even today, the Indian rupee, in respect of capital account transactions, is not fully convertible.

Capital Account Transactions

Capital account transaction is defined as a transaction which:-

Alters the assets or liabilities including contingent liabilities, outside India of persons resident in India. In other words, it includes those transactions which are undertaken by a resident of India such that his/her assets or liabilities outside India are altered (either increased or decreased). For example: - (i) a resident of India acquire an immovable property outside India or acquire shares of a foreign company. This way his/her overseas assets are increased; or (ii) a resident of India borrows from a non-resident through External commercial Borrowings (ECBs). This way he/she has created a liability outside India.

Alters the assets or liabilities in India of persons resident outside the India. In other words, it includes those transactions which are undertaken by a non-resident such that his/ her assets or liabilities in India are altered (either increased or decreased). For example, (i) a non-resident acquire immovable property in India or acquire shares of an Indian company or invest in a Wholly Owned Subsidiary or a Joint Venture with a resident of India. This way his/her assets in India are increased; or (ii) a non-resident borrows from Indian housing finance institute for acquiring a house in India. This way he/she has created a liability in India

The Act also contains a list of some of the most common capital account transactions:-

Transfer or issue of any foreign security by a person resident in India;

Transfer or issue of any security by a person resident outside India;

Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;

Any borrowing or lending in rupees in whatever form or by whatever name called;

Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;

Deposits between persons resident in India and persons resident outside India;

Export, import or holding of currency or currency notes;

Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;

Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;

Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred-

By a person resident in India and owed to a person resident outside India; or

By a person resident outside India.

The Act has empowered the Reserve Bank of India (RBI) to specify, in consultation with the Central Government, the permissible capital account transactions and the limits up to which foreign exchange may be drawn for these transactions. But it shall not 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.

Accordingly, the RBI has issued notifications governing capital account transaction. The FEMA Notification No. 1/2000 dated 3-5-2000 contains the list of permissible capital account transactions as well as list of prohibited capital account transactions.

The permitted capital account transactions have been classified into two categories:-

Capital account transactions by persons resident in India includes,

Investment in foreign securities;

Foreign currency loans raised in India and abroad;

Acquisition and transfer of immovable property outside India;

Guarantees issued in favour of a person resident outside India;

Export, import and holding of currency or currency notes;

Loans and overdrafts (borrowings) from a person resident outside India;

Maintenance of foreign currency accounts in India and outside India;

Taking out the insurance policy from an insurance company 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.

Capital account transactions by non- residents includes, Investment in India such as

Issue of security by a body corporate or an entity in India and investment therein by a non-resident and

Investment by way of contribution to the capital of a firm or a proprietary concern or an association of persons in India;

Acquisition and transfer of immovable property in India;

Guarantee in favour of, or on behalf of, a person resident in India;

Import and export of currency/currency notes into/from India;

Deposits between a person resident in India and a person resident outside India;

Foreign currency accounts in India of a non-resident;

Remittance of the assets in India held by a non-resident.

There are generally two types of prohibitions on capital account transactions:-

General Prohibition

A person shall not undertake or sell or draw foreign exchange to or from an authorized person for any capital account transaction. This prohibition is subjected to the conditions specified by Reserve Bank in its circulars and notifications. For example, Reserve Bank of India has issued an AP (DIR) Circular, wherein a resident individual can draw from an authorized person foreign exchange up to US$ 25,000 per calendar year for a capital account transaction specified in Schedule I to the Notification.

Special Prohibition

A nonresident person shall not make investment in India in any form, in any company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage: - (i) in the business of chit fund, or (ii) as Nidhi Company, or (iii) In agricultural or plantation activities or (iv) in real estate business, or construction of farm houses or (v) in trading in Transferable Development Rights (TDRs).

Export of Goods and Services

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, 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;

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.

The Reserve Bank may, for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the Reserve Bank determines, having regard to the prevailing market conditions, is received without any delay, direct any exporter to comply with such requirements as it deems fit.

Every exporter of services shall furnish to the Reserve Bank or to such other authorities a declaration in such form and in such manner as may be specified, containing the true and correct material particulars in relation to payment for such services.

The provisions of sections 4 and 8 shall not apply to the following, namely:—

Possession of foreign currency or foreign coins by any person up to such limit as the Reserve Bank may specify;

Foreign currency account held or operated by such person or class of persons and the limit up to which the Reserve Bank may specify;

Foreign exchange acquired or received before the 8th day of July, 1947 or any income arising or accruing thereon which is held outside India by any person in pursuance of a general or special permission granted by the Reserve Bank;

Foreign exchange held by a person resident in India up to such limit as the Reserve Bank may specify, if such foreign exchange was acquired by way of gift or inheritance from a person referred to in clause

 including any income arising there from;

Foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means up to such limit as the Reserve Bank may specify; and

Such other receipts in foreign exchange as the Reserve Bank may specify.

Contravention and Penalties

Penalties, any person contravening FEMA, shall be liable, upon adjudication, to a penalty up to three times the sum involved in such contravention, where such amount is quantifiable, or up to Rupees Two hundred thousand, where the amount is not quantifiable. In addition, where such contravention is a continuing one, the person will be liable to further penalty, which may extend to Rupees Five thousand

Power to Compound Contravention

Any contravention under section 13 may, on an application made by the person committing such contravention, be compounded within one hundred and eighty days from the date of receipt of application by the Director of Enforcement or such other officers of the Directorate of Enforcement and Officers of the Reserve Bank as may be authorized in this behalf by the Central Government in such manner as may be prescribed.

Where a contravention has been compounded under sub-section (1), no proceeding or further proceeding, as the case may be, shall be initiated or continued, as the case may be, against the person committing such contravention under that section, in respect of the contravention so compounded.

Adjudication and Appeal

Adjudicating Authority

The inquiry of any contravention of FEMA is conducted by an Adjudicating Authority appointed by the Central Government.

Appeal to Special Director (Appeals)

The special Director (Appeals) is authorized to hear the appeals arising out of in order of the Adjudicating Authority.

Appeal to Special Director (Appeals)

Appeal from an order of “Adjudicating Authority” lies before” special Director (appeal)”

The appeal shall be made in “Form No. 1”, along with three copies of the order appealed against and the requisite fees.

The appeal should be filed within 45 days, from the date of receipt of receipt of impugned order.

On the date of hearing the appeal the applicant may appoint a legal practitioner or a chartered accountant to appear, plead and act on their behalf before the special Director (Appeal)

The order of the special Director (Appeals) made at the conclusion of the proceedings shall be in writing and shall state briefly the grounds for the decision.

Appeal to the Appellate Tribunal

“Appellate Tribunal” is entitled to hear appeal arising out of an order from “Adjudicating Authority” and “special Director (appeal).”

The appeal shall be made in Form No. 2, along with three copies of the impugned order and requisite fees.

The appeal shall be made within 45 days, from the date on which copy of the impugned order is received.

A copy of the order and appeal shall be sent to the opposite party, i.e. “Director of Enforcement,” and a date shall be fixed for hearing of the appeal.

The appellant shall have the right to present his case / appeal through a legal practitioner or chartered Accountant.

On the fixed date of hearing, the “Appellate Tribunal” shall pass its order in writing and the reasons therefore.

Appeal to High Court

An appeal from the decision of “Appellate Tribunal” lies before High Court.

The appeal shall be filed within “60 days” from the date of communication of the decision or order of the Appellate Tribunal to him on any question of law arising from the impugned order.

Amount of Penalty

Any contravention, under FEMA, may invite the following kinds of penalties:

If, the amount against which offence is quantities and then penalty will be “THRICE” the sum involved in contravention.

Where the amount cannot be quantified the penalty may be imposed up to two lakhs rupees.

If, the contravention is continuing every day, then ` Five Thousand for every day after the first day during which the contravention continues.

Further in addition to the penalty, any currency, security or other money or property involved in the contravention may also be confiscated.

Composition of Appellate Tribunal

The Appellate Tribunal shall consist of a Chairperson and such number of Members as the Central Government may deem fit.

Subject to the provisions of this Act,—

The jurisdiction of the Appellate Tribunal may be exercised by Benches thereof;

A Bench may be constituted by the Chairperson with one or more Members as the Chairperson may deem fit;

The Benches of the Appellate Tribunal shall ordinarily sit at New Delhi and at such other places as the Central Government may, in consultation with the Chairperson, notify;

The Central Government shall notify the areas in relation to which each Bench of the Appellate Tribunal may exercise jurisdiction.

the Chairperson may transfer a Member from one Bench to another Bench.

Notwithstanding anything contained in sub-section

If at any stage of the hearing of any case or matter it appears to the Chairperson or a Member that the case or matter is of such a nature that it ought to be heard by a Bench consisting of two Members, the case or matter may be transferred by the Chairperson or, as the case may be, referred to him for transfer, to such Bench as the Chairperson may deem fit.