FOREIGN EXCHANGE

MANAGEMENT ACT, 1999

(FEMA)

The Act was introduced as a part of

liberalization process by the Government of
India. The Act came into force on 1st June,
2000.
Group members:-
 VISHAL
 HONEY
 SATYAJIT
 ABHISHEK
 SANTOSH
 SAMEER
 RAHUL
Back ground
 Earlier known as FERA- FOREIGN
EXCHANGE REGULATION ACT
 Many stringent provisions in FERA.
 Liberalization was announced in 1991.
 Foreign investment was allowed in all sectors.
 Foreign investment flowed.
 Hence, to regulate in a more liberalized
manner, FEMA was enforced in place of FERA
OBJECTIVE
 TO CONSOLIDATE AND AMEND THE
LAW RELATING TO FOREIGN
EXCHANGE
 WITH THE OBJECT OF FACILITATING
EXTERNAL TRADE AND PAYMENTS,
AND
 PROMOTING THE ORDERLY
DEVELOPMENT AND MAINTENANCE
OF FOREIGN EXCHANGE MARKETS.
OBJECTIVE OF FEMA
 Was to conserve foreign exchange
 Control transactions directly/indirectly affecting
foreign exchange, and
 Prevention of leakage of foreign exchange
 Hence, objective of FEMA is from conservation
to FACILITATION, and
 From control to REGULATION
 RBI is the overall controlling/ regulatory
authority under FEMA
Extra territorial in application
 Extends to the whole of India
 And sometimes to outside India also.
 i.e. to all branches, offices and agencies
outside India owned and controlled by a
person resident in India
 And also to any contravention of the Act
happening outside India by any person
to whom the Act applies.
BROAD STRUCTURE OF FEMA
 It mainly deals with matters pertaining to foreign exchange
 All current account transactions are free
 However, Central government can impose restrictions by
issuing rules. S.3
 Capital accounts transactions are permitted to the extent
specified by RBI regulations s.6
 RBI controls management of foreign exchange
 Since it cannot directly deal with foreign exchange it
authorises” authorised persons”to deal in foreign exchange
according to RBI Regulations s.10
 RBI issues directions to such persons u/s.11
 These directions are issued through AP(DIR) circulars.
Authorised Persons (Directions)
PROVISIONS FOR FEMA CANNOT BE
FOUND AT ONE PLACE
 FEMA has provisions for enforcement, penalties, adjudication and
appeals
 SO FEMA CONTAINS ONLY THE BASIC LEGAL FRAME WORK.
 THE PRACTICAL ASPECTS ARE SPREAD OVER RBI
DIRECTIONS AND CIRCULARS ISSUED BY CENTRAL
GOVERNMENT AND VARIOUS POLICIES ISSUED BY SEPARATE
MINISTRIES
 Industrial policy announced by Ministry of Industry contains
provisions for FDI’s (foreign direct investment), foreign technical
collaborations, royalty payments, joint ventures abroad etc. which
also has relevance in understanding FEMA.
 Policy in external commercial borrowing announced by Ministry of
Finance has relevance in FEMA
 SEBI guidelines and Income tax provisions also find relevance in
understanding FEMA provisions.
Duties of authorised persons
 They should act only by RBI guidelines
 Should submit reports to RBI
 Their acounts can be inspected by RBI
 AD’s and FFMC’s can appoint agents/ franchises for
undertaking restricted money changing.
 An authorised person can deal only with those matters to
which the authorisation has been received from RBI.
 He should take written undertaking/ declaration from
person to satisfy himself that there is no violation of
FEMA.
 If there is any evasion found, the matter has to be
reported immediately to RBI. S. 10(5)
Revocation of authorisation by RBI

 The authorisation shall always be in writing

 RBI can revoke the authorisation at any time, if satisfied that-
a. It is in public interest
b. The authorised person has failed to comply with the
requirements subject to which authorisation was granted
c. Or has contravened any provisions of the Act, rule,
regulation, notification, circulars etc.
d. Revocation can be done after giving an opportunity for the
dealer for a representation. S. 10(3)
e. For contravention of any direction a penalty of 10000/- may
be imposed. If the default is continued penalty of 2000/- per
day may be imposed. S. 11
f. RBI can inspect all record books of the authorised person.
General provisions of regulation and
management
 Powers in respect of routine matters have
been delegated to authorised persons by RBI
 If remittance is in accordance with guidelines/
regulations, it is permitted by authorised
dealers
 All current account transactions are freely
permitted
 Even in capital account transactions, the
transactions which are freely permitted can be
allowed by authorised dealer without
permission from RBI.
PROCEDURE FOR
REMITTANCE UNDER FEMA
Applications have to be given to authorised dealer for
remittance of foreign currency in India

 Separate application forms are prescribed.

 If a person has to open a foreign currency a/c in India
application has to be given to RBI
 For eg. Remittance upto USD 5000(Small value) can be done
by a simple letter specifying all particulars about the applicant
without any accompanying papers to the the authorised dealer
 Separate forms are there for other remittances. E.g. FORM A1
for remittance foreign currency for import of goods to India.
 Any individual can remit up to USD 25000/ calendar year for
holding/ acquiring immovable property abroad, acquiring
shares outside India, opening of foreign currency a/c with a
Bank outside India. No permission of RBI is required. This is
applicable for all current and capital a/c’s and a combination of
both.
The authorised dealers usually banks will issue certificate
of remittance for all inward clearances exceeding 15000/-.

 If the authorised dealer/money changer

purchases foreign currency from a
foreign tourist, they will issue an
encashment certificate.
NRE – Non-resident (external) rupee account
scheme
 Principal and interest are freely repatriable
 Transfer from FCNR(B) A/c is freely permitted
 Opened by Non resident Indians (NRI) with authorized dealers
and banks
 Can be opened by account holder himself and not by POA
holder
 Entities and nationals of Bangladesh, Pakistan will require
special approval of RBI
 Joint a/c with another NRI and not with an Indian resident is
permitted. nomination in the name any individual is permitted
(in the name of NRI)
 The A/c may be maintained in any form- savings, current,
recurring or FD/ term deposits
 On the event of non-resident becoming resident, the NRE
a/c may be redesigned as resident a/c.
 POA holder can operate a/c with respect to local
payments only
 Loans may be given to NRI of the a/c
 Separate cheque books are issued showing NRE status
 Overdrawing up to 50000/- is permissible
 Remittance may be in any form of foreign currency only
 Penalty for premature withdrawal of term deposits
 The only disadvantage is that when rupee depreciates,
the savings of NRI counted in USD also reduces
NRO- Non resident ordinary rupee
account
 A/c is maintained in India rupee
 Any NRI can open an NRO A/c, except
nationals of Bangladesh and Pakistan
only with the prior approval of RBI
 Current income is freely repatriable but
principal amount only up to 1 million
USD.
 Rest all provisions are similar to NREa/c
Foreign currency accounts
 Accounts held or maintained in currency
other than currency of India, Nepal or
Bhutan
 May be maintained as current/ savings
a/c or FD when the a/c Holder is an
individual and as current and term
deposit in all other cases
 Can be maintained singly or jointly
Resident foreign currency account RFC
 Opened and maintained by NRI/PIO who has returned to
India after working abroad
 E.g the a/c may be held to maintain pensions or any
other annuities from the employer abroad, gifts or
inheritance from a person abroad etc.
 There are no restrictions on investment using the money
in RFC in India except a few like in lottery, transactions
with Nepal, Bhutan etc.
 Thus a resident in India can maintain an RFC if-
1. The foreign exchange was earned when he was abroad,
2. He inherited it or obtained gift from a person who was not
a resident of India
FCNR (B)- Foreign currency (Non-
resident) Account (Bank) scheme
 Maintained in foreign exchange
 Fluctuations of currency has no effect
 NRI can open
 Can be maintained using funds remitted from
outside India using normal banking channels
or funds received in rupees to the a/c of a non-
resident bank or by transfers from NRE/FCNR
a/c’s.
 Only term deposits are permitted
Regulation and management of
foreign exchange
The main provisions of the Act are:-

 It permits only authorised person to deal in foreign

exchange or foreign security. Such an authorised person,
under the Act, means authorised dealer, money changer,
off-shore banking unit or any other person for the time being
authorised by Reserve Bank.
 The Act thus prohibits any person who:-

 Deal in or transfer any foreign exchange or foreign security to any

person not being an authorized person;

 Make any payment to or for the credit of any person resident outside
India in any manner;
 Receive otherwise through an authorized person, any
payment by order or on behalf of any person resident
outside India in any manner;

 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;

 is resident in India which acquire, hold, own, possess or

transfer any foreign exchange, foreign security or any
immovable property situated outside India.
The Act regulates two types of foreign exchange transactions, namely
'Capital Account Transactions' and 'Current Account Transactions'.

 According to the Act, 'Capital account transaction' means

a transaction which alters the assets or liabilities,
including contingent liabilities, outside India of persons
resident in India or assets or liabilities in India of persons
resident outside India, and includes the following
transactions referred in the Act:-

 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-

(i) By a person resident in India and owed to a person resident

outside India; or
(ii) By a person resident outside India.
It also 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:-

 (i) payments due in connection with foreign trade, other current

business, services, and short-term banking and credit facilities in
the ordinary course of business;
 (ii) payments due as interest on loans and as net income from
investments;
 (iii) remittances for living expenses of parents, spouse and children
residing abroad; and
 (iv) expenses in connection with foreign travel, education and
medical care of parents, spouse and children.
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 such 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.
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.
Every exporter of goods shall:-
 (i) 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;

 (ii) furnish to the Reserve Bank such other information as

may be required by it for the purpose of ensuring the
realisation of the export proceeds by such exporter.
The Reserve Bank may, at any time, cause an inspection to be made, by any
officer specially authorised in writing by it in this behalf, of the business of any
authorised person as may appear to it to be necessary or expedient for the
purpose of:-

 (i) verifying the correctness of any statement,

information or particulars furnished to the Reserve
Bank;
 (ii) obtaining any information or particulars which
such authorised person has failed to furnish on
being called upon to do so;
 (iii) securing compliance with the provisions of this
Act or of any rules, regulations, directions or
orders made thereunder.
Enforcement
 Enforcement is with enforcement directorate
 The central government has appointed Directors of
Enforcement, Additional directors, Special Director,
Deputy Director and Assistant Directors for enforcement
of FEMA. S. 36
 Powers are similar to Income tax authorities
 Main powers include inspection and investigation of
violations of FEMA provisions.
 Cheques and other NI’S recovered during enforcement
will be deposited with RBI. If Indian currency is found, it
shall be deposited in a separate a/c in the name of
Director of enforcement.
 The central government will indemnify the enforcement
authority for encashing the NI’s.
Penalties under FEMA
 Offenses under FEMA are civil offenses.
 Central government appoints the adjudicating authority.
S.16(1)
 They conduct enquiry on the complaint received from an
authorised person.
 It should give the verdict within 1 year, if not should state
the reason.
 While adjudicating the case, it acts as a quasi judicial
body and has to follow the principles of natural justice.
 Opportunity should be given to the respondent to
represent his case.
An officer not below the rank of Assistant
director can file the complaint
 The adjudicating authority has got the powers of a civil court
 The penalty can be upto thrice the sum involved in
contravention where the amount is quantifiable. If not, penalty
can be up to Rs. 2 lakhs. If the transgression continues all
officers in default will be liable to pay 5000/ per day. S. 13(1)
 The foe may be confiscated. S.13 (2)
 A person on whom the verdict is passed has to make payment
within 90 days. If not he is liable to civil imprisonment. S. 14(1)
 For amount less than 1 crore- 6 months
 For amount more than 1 crores- up to 3 years s. 14(11)
 Compunding is permitted within 180 days
Appeals
 Assist. Director/deputy director to special directors
 Further appeal lies with Appellate Tribunal for foreign
exchange
 The tribunal consists of chair person and members
 It sits in Delhi or other places as may be notified
 Division bench will hear matters above 5 lakhs
 Jurisdiction of civil court is barred when the matter is
pending before the tribunal
 Second appeal lies to high courts and supreme court
Case Study on FEMA: RBI slapped Rs.125 crore on Reliance Infrastructure

 The Reserve Bank of India (RBI) has asked the Anil Dhirubhai Ambani
Group firm, Reliance Infrastructure (earlier, Reliance Energy), to pay just
under Rs 125 crore as compounding fees for parking its foreign loan
proceeds worth $300 million with its mutual fund in India for 315 days, and
then repatriating the money abroad to a joint venture company. These
actions, according to an RBI order, violated various provisions of the Foreign
Exchange Management Act (FEMA).
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