BIRD S EYE VIEW OF FEMA By CA D S Vivek & CA Chandra Shekar B D Introduction The Indian government has formulated the Foreign Exchange Management Act (FEMA), which relates to the management of exchange in the country. FEMA has assisted the country by managing the foreign exchange resources of the country and international trade and investments. The Government of India has changed its position from a controller to a facilitator due to the requirement of WTO and International Monetary Fund to participate in the global business system. One may not be wrong to state that it was the appropriate and moderate regulations imposed under FEMA and regulated by RBI, that saved India s economy from the downturn being experienced in others parts of the world. Formulation Foreign Exchange Regulation Act (FERA), 1947, Foreign Exchange Regulation Act, 1973 (FERA) Foreign Exchange Management Act, 1999 (FEMA) superseded FERA Objective FERA, 1947 FERA, 1973 FEMA, 1999 Consolidate, regulate dealing in foreign exchange. Proper Utilisation in the interest of the economic development of the country Conserving, regulating and controlling foreign exchange resources of the country Facilitate external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India Effective Date The FEMA was passed by the Lok Sabha in October, 1999, received the assent of the president of India in December, 1999 and came into force with effect 1 st June 2000.
Applicability Extends to the whole of India In addition it shall also applied to all branches offices, agencies outside India owned or controlled by a person resident in India and to any contravention there under committed outside India by any person to whom this Act applies. Features This enactment is not an entirely self contained law. It is supported by various Regulations and Circulars. As a General Practitioner in the field of international consultancy, one needs to have a working knowledge of the following o FEM(Realisation, Repatriation and Surrender of Foreign Exchange) o FEM(Possession and Retention of Foreign Currency) o FEM(Permissible Capital Account Transactions) o FEM(Transfer or Issue of Security By a Person Resident Outside India) o FEM(Issue of Security in India by a Branch Office or Agency of a Person Resident Outside India ) o FEM(Transfer or Issue of any Foreign Security) o FEM(Establishment in India or Branch or Office or Other Place of Business) o FEM(Off Shore Banking Unit) o FEM(Investment in Firm or Proprietary Concern In India) Regulations, 2000 o FEM(Acquisition and Transfer of Immovable Property in India) o FEM(Acquisition and Transfer of Immovable Property outside India) o FEM(Remittance of Assets) o FEM(Borrowing or Lending in Foreign Exchange) o FEM(Borrowing or Lending in Rupees) o FEM(Deposit) o FEM(Guarantees) o FEM(Insurance) o FEM(Foreign Exchange Derivate Contracts), o FEM(Foreign Currency Accounts By a Person Resident In India) o FEM(Manner of Receipt and Payment) o FEM(Export and Import Currency) o FEM(Withdrawal of General Permission to Overseas Corporate Bodies(OCB s) o FEM(Adjudication Proceedings and Appeal) Rules, 2000
o FEM(Encashment of Draft, Cheque, Instrument and Payment of Interest) Rules, 2000 o FEM(Authentication of Documents) Rules, 2000 o FEM(Compounding Proceedings) Rules, 2000 o FEM(Removal of Difficulties) Order, 2000 o FEM(Recruitment, Salary and Allowances and Other Conditions of Services of Chairperson and Members)Rules, 2000 (All of the above as amended from time to time) Also have to be aware of the following enactments/provisionso Income tax o Property law o Law relating to citizenship and domicile o Foreign Contribution (Regulation) Act o Code of Criminal Procedure o Indian Penal Code o Indian Evidence Act o General Clauses Act o Public Debt Act o Company law o Securities Law o Customs Act o Prevention of Money Laundering Act o Antique and Art Treasure Act o Conservation of Foreign Exchange and Prevention of Smuggling Activities Act Governed by Reserve Bank of India Year RBI follows 1st July to 30 th June as a financial year. Regulation and Management The RBI through its foreign exchange department central office regulates FEMA through issue of o Notifications o Circulars o Forms AP(Dir) Series AP (Dir) Series
o Master Circulars o DIPP Circulars (this is not by RBI) These notifications, circulars including Master Circulars, issued by RBI is available on its website www.rbi.org.in. The section is searchable on functions, departments, date and period. This quick link has been created to facilitate easy access to the Most Important Policy Documents released by the Reserve Bank of India. Master Circulars Master Circulars are a one-point reference of instructions issued by the Reserve Bank of India on a particular subject between July-June. These are issued on July 1 every year and automatically expire on June 30 of the following year. These will have the updated regulations till the issue of the circular on that particular subject the circular deals with Sl Master circular No 1 Master circular on Direct investments by residents in Joint venture(jv)/wholly owned subsidiary(wos) abroad ( Used for investment made by Indian companies outside India ) 2 Master circular on Foreign Investment in India (Used for Foreign Companies or Foreign nationals investing in Indian business entities ) 3 Master circular on Non-Resident Ordinary Rupee(NRO) Account 4 Master Circular on Remittance facilities for Non resident Indians/Persons of Indian Origin/Foreign National (used to refer what funds can be repatriated outside India from the funds or transaction made in India) 5 Master circular on Misc remittances from India facilities for residents (Used to refer what type of transactions and what quantum of funds can be remitted by residents outside India) 6 Master circular on Risk Management and Interbank dealings 7 Master circular External commercial borrowings and Trade Credits (used to refer what type of borrowings can be taken by residents from Non residents and on what terms) 8 Master circular on Import of goods and services 9 Master circular on export of goods and services For detailed circulars login in to the blow mentioned website http://www.rbi.org.in/scripts/bs_viewmastercirculardetails.aspx
Overview of FEMA Section Reference 1-2 Preliminary, Preamble and Definitions 3-9 Regulation and Management of Foreign Exchange 10-12 Authorised Persons 13-15 Contravention and Penalties 16-35 Adjudication and Procedure for Appeal 36-38 Directorate of Enforcement 39-49 Miscellaneous provisions From where does one purchase foreign exchange? From authorised dealers or money changers. Who are authorized dealers? Banks certified by the RBI to transact in foreign exchange and foreign securities are also referred to as authorized dealers. What s the difference between a NRI and Person of Indian Origin? NRI - A person resident outside India who is a citizen of India. PIO One has to be careful in applying the meaning of PIO, as the same has been defined differently under various rules. For the purpose of acquisition and transfer of immovable property in India, a PIO means an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan), who (i) at any time, held Indian passport; or (ii) who or either of whose father or mother or whose grandfather or grandmother was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955). Investments from outside India Investment by resident in Joint venture/wholly owned subsidiary which would include equity investments and providing loan and guarantee. This would be under automatic rule subject to overall investment upto 400% of networth. Investments into India Foreign Direct Investment Foreign Portfolio Investment Foreign Venture Capital Investment Other Foreign Investment
o Purchase of other securities by NRIs o Purchase of Securities by FIIs o Investment by Multilateral Development Banks Acquistion and transfer of Immovable Property In India Establishment of Branch/Liaison/Project Office In India Investment in partnership firms/proprietary concerns Entry Routes for FDI into India Automatic Route With permission from RBI What are the different types of bank accounts which can be maintained by nonresident s: For NRI s NRI s are allowed to maintain accounts with authorised dealers in Indian rupees as well as in foreign currency. Generally, NRI s and PIO s are allowed to open accounts with authorised dealers/banks, with the exception of individuals residing in Pakistan and Bangladesh, who require special permission from the RBI. There are two types of accounts based on repatriability: Repatriable accounts: Non-Resident (External) Rupee (NRE) Accounts FCNR (B) Accounts NRO Accounts Resident Foreign Currency (RFC) Account o NRIs and PIOs returning to India can maintain an RFC account with an authorized bank in India to transfer funds from their NRE/FCNR (B) accounts. Proceeds of assets held outside India before their return to India can be credited to the RFC account. These funds are free from all restrictions as to their utilization or in investment in any form outside India.
Non-Repatriable accounts: Non-repatriable funds are those which cannot be taken out of India. These have to be maintained in a separate bank account i.e. a Non Resident Ordinary Bank account. Investments made from non-repatriable accounts cannot be repatriated but have to be maintained in a Non-Repatriable Demat account. Money once transferred from an NRE account to an NRO account cannot be transferred back to an NRE account. Non Resident Ordinary (NRO) Account The NRO accounts could be maintained in the nature of current, saving, recurring or term deposits. NRIs can also open NRO accounts for depositing their funds from local transactions. The interest earned from NRO accounts is accountable to tax laws. NRO accounts can be opened in the name of NRIs who have left India to take up employment or business temporarily or permanently in a foreign country. Funds from NRO accounts are not repatriable or transferred to NRE accounts without the prior approval of the RBI. Change of Resident Status of Account holder - a) From Resident to Non-resident- existing savings account is designated as a Non-resident Rupee (NRO) account. b) From Non-Resident to Resident - shall be re-designated as resident rupee accounts. Comparison Chart Particulars NRO NRE FCNR Definition Is a Rupee a/c and can be opened in with funds either remitted Is a Rupee A/c on a repartiable basis, it can be opened with either fund Is similar to NRE A/c except the that the funds are held in foreign currency. from abroad or generated in India remitted from abroad or local funds, which can be remitted abroad Eligibility NRI, PIO, OCB NRI NRI, PIO Type of Accounts current, savings, recurring or fixed deposit accounts current, savings, recurring or fixed deposit accounts term deposits of 1 to 5 years Currencies INR INR Pound Sterling, US Dollar, Japanese Yen, Euro, Canadian Dollar and Australian Dollar Nomination Permissible with NRIs as well as Residents. Permissible Permissible. Interest Rates Savings A/c - the interest rate is 3.5 %. Term Deposits - Savings A/c - the interest rate is 3.5%. Term Deposits - interest rates on NRE deposits for interest shall be paid within the ceiling rate of LIBOR / SWAP rates plus 100 basis points for
Repatriation Taxation Permitted Credits Permitted Debits Banks are free to determine the interest rates Interest Repatriablesubject to payment of tax,balance repatriable upto US$ 1 mn per financial year [under US $ one million scheme] Interest income liable to tax transfers from rupee accounts of non-resident banks. remittances received in permitted currency from outside India through normal banking channels. permitted currency tendered by account holder during his temporary visit to India. legitimate dues in India of the account holder all local payments in rupees including one to three years should not exceed the LIBOR/SWAP rates plus 175 basis points, as on the last working day of the previous month, for US dollar of corresponding maturities. Principal & Interest-both Fully Repatriable. Interest exempt from Income Tax & Wealth Tax inward remittance to India in permitted currency. proceeds of account payee cheques,dd / bankers' cheques, issued against encashment of foreign currency, where the instruments issued to the NRE account holder are supported by encashment certificate issued by AD Category-I / Category-II, transfers from other NRE / FCNR accounts, interest accruing on the funds held in such accounts. interest on Government securities/dividends on units of mutual funds purchased by debit to the NRE/FCNR(B) account of the holder, certain types of refunds, etc. local disbursements. transfer to other NRE / FCNR accounts of person the respective currency/corresponding maturities (as against LIBOR/SWAP rates plus 25 basis points effective from close of business on October 15, 2008). On floating rate deposits, interest shall be paid within the ceiling of SWAP rates for the respective currency / maturity plus 100 basis points. For floating rate deposits, the interest reset period shall be six months. Principal and Interest - both Fully Repatriable. Interest exempt from Income Tax & Wealth Tax All Credits Permissible in respect of NRE A/c shall be permissible in respect of these accounts also. All Debits Permissible in respect of NRE A/c shall be permissible in respect of
Transfers payments for investments as specified by the Reserve Bank remittance outside India of current income in India of the account holder net of applicable taxes. Permissible in account holder's other NRO accounts eligible to open such accounts. remittance outside India, investments in shares/securities/comme rcial paper of an Indian company, etc. any other Transaction if covered under general or Special permission granted by RBI Transfer to NRE/FCNR Account of the accountholder or any other NRI permitted. Gift to Resident/NRI permitted [POA cannot make a Gift on behalf of an NRI ] these account also. Same As NRE Account This article was written with an intention to create interest in general practitioners to have a glimpse of the field of International Financial Transactions. XXXXX