Foreign Exchange Management Act

Foreign Exchange Management Act

The Foreign Exchange Management Act (FEMA), 1999, has been enacted as
part of the ongoing liberalisation process. The Act was implemented w.e.f. June 1, 2000. Foreign exchange control was first introduced in September, 1939 under the Defence of India Rules. The Foreign Exchange Regulation Act was introduced in 1947, which was replaced with the Foreign Exchange Regulation Act in 1973 and in 2000 by FEMA.

Difference between FERA and FEMA

a. The object of FERA was to conserve foreign exchange and to prevent its misuse. The object of FEMA is to facilitate external trade and payments and maintenance of foreign exchange market in India. Violation of FERA was a criminal offence whereas violation of FEMA is a civil offence. Offences under FERA were not compoundable, while offences under FEMA are compoundable. Citizenship was a criteria to determine the residential status of a person under FERA, while stay of more than 182 days in India is the criteria to decide residential status under FEMA. Provision in respect of Basic Travel Quota (BTQ) business travel export commission, gifts, donation, etc., have been considerably enhanced in FEMA. Almost all current account transactions are free, except a few.

b. c. d.

e.

f.

Scope of FEMA
FEMA provides: 1. 2. 3. 4. 5. 6. 7. Free transactions on current account subject to reasonable restrictions that may be imposed. RBI controls over capital account transactions. Control over realisation of export proceeds. Dealing in foreign exchange through authorised persons like authorised

dealer/money changer/off shore banking unit.

Adjudication of Offences. Appeal provision including Special Director (Appeals) and Appellate Tribunal. Directorate of Enforcement.

Functions of the Reserve Bank of India

FEMA envisages that the RBI will have a key role in the management of foreign exchange. The main functions of RBI under FEMA are: a. Control over dealing in foreign exchange by giving general or special permission for dealing in foreign exchange, excluding those cases where specific provisions have been made into an Act, rules or regulation Section 3. b. The RBI cannot impose any restriction on current account transaction. c. Specifying conditions for payment in respect of capital account transaction Section 6 (2). d. Regulate/prohibit/restrict the following by issuing regulations (i) Transfer or issue of foreign security to resident and Indian security to non-resident. (ii) Borrowing and lending in foreign exchange or to a foreign person (iii) Export/Import of currency or currency notes (iv) Transfer of immovable property outside India (v) Giving guarantee or surety where foreign exchange transaction is involved -Section 6(3). To make regulations Grant authorisation to Authorised Persons to deal in foreign exchange

Export of Goods and Services

Regulations relating to the export of goods and services from India are contained in the Foreign Exchange Management (Export of Goods and Services) Regulations 2000. Every exporter of goods or software in physical form or through any other form, either directly or indirectly, to any place outside India, other than Nepal and Bhutan, shall furnish to the specified authority, a declaration in one of the forms set out in the Schedule. The declaration should be submitted with in 21 days from exports. Such a declaration should be supported by evidence specified, containing true and correct particulars of the material:

the full export value of the goods or software; or if the full export value is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive from the sale of the goods or the software in the overseas market.

Possession and Retention of Foreign Currency

Under FEMA, restrictions prevail only for physical possessions and retention of foreign currency and not in respect of the foreign currency kept in permissible account with authorised dealers (banks). Limits for possessions and retention of foreign currency or foreign Coins: 1. An authorised person can retain and possess foreign currency and coins within the scope of his authority without any limit; 2. Any person can possess foreign coins without limit; 3. A person residing in India can retain foreign currency notes, bank notes and foreign currency travellers cheques not exceeding USD 2000/4. A person residing in India but not permanently resident therein may possess without limit, foreign currency in the form of currency notes, bank notes and travelers cheques if such foreign currency was acquired, held or owned by him when he was resident outside India and has been brought into India in accordance with the regulation made under the Act i.e. after making the declaration when required.

Realisation and Repatriation of Foreign Exchange

A person residing in India to whom any account of foreign exchange is due or has accrued, shall take all reasonable steps to realise and repatriate to India

such foreign exchange within such period and in such manner as may be
specified by the RBI.

Exemption from Realisation and Repatriation in Certain Cases

a. b. c. 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 up to the limit which the Reserve Bank may specify; Foreign exchange acquired or received before July 8, 1947 or any income arising or accruing there on, 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 RBI may specify, if such foreign exchange was acquired by way of gift or inheritance from a person referred to in Clause (c) 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 RBI may specify; Such other receipts in foreign exchange as the RBI may specify.

d.

e.

f.

Duty of persons to realise foreign exchange due :A person resident in India to whom any amount of foreign exchange is due or has accrued shall, save as otherwise provided under the provisions of the Act, or the rules and regulations made thereunder, or with the general or special permission of the Reserve Bank, take all reasonable steps to realise and repatriate to India such foreign exchange, and shall in no case do or refrain from doing anything, or take or refrain from taking any action, which has the effect of securing that the receipt by him of the whole or part of that foreign exchange is delayed; or that the foreign exchange ceases in whole or in part to be receivable by him. Manner of Repatriation :(1)On realisation of foreign exchange due, a person shall repatriate the same to India, namely bring into, or receive in, India and (a)sell it to an authorised person in India in exchange for rupees; or (b)retain or hold it in account with an authorised dealer in India to the extent specified by the Reserve Bank; or use it for discharge of a debt or liability denominated in foreign exchange to the extent and in the manner specified by the Reserve Bank.
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(2) A person shall be deemed to have repatriated the realised foreign exchange to India when he receives in India payment in rupees from the account of a bank or an exchange house situated in any country outside India, maintained with an authorised dealer. 5.Period for surrender of realised foreign exchange :A person shall sell the realised foreign exchange to an authorised person under clause (a) of sub-regulation (1) of regulation 4, within the period specified below :i) foreign exchange due or accrued as remuneration for services rendered, whether in or outside India, or in settlement of any lawful obligation, or an income on assets held outside India, or as inheritance, settlement or gift, within seven days from the date of its receipt ; Ii) in all other cases within a period of ninety days from the date of its receipt.
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Capital Account Transaction

Capital Account Transaction: Section 2(e) states that 'Capital Account Transaction' means: A transaction that alters the assets or liabilities, including contingent liabilities outside India of a person residing in India. A transaction that alters the assets or liabilities in India of persons residing outside India. Transfer or issue of any foreign security by a person residing in India. Transfer or issue of any security by a person residing outside India. Transfer or issue of any security or foreign security by any branch, office or agency in India or a person residing outside India. Any borrowing or lending in foreign exchanges in whatever form or by whatever name known. Any borrowing or lending in rupees in whatever form or by whatever name known between a person residing in India and a person residing outside India. Cont. Export, import or holding of currency or currency notes.

Some Terms Used in FEMA Convertible Currency/Hard Currency Some currencies are freely convertible, i.e., one can exchange these currencies with any other currency without any restriction. The major ones are: Dollars (USA), Pound Sterling, Euro, DM, Yen, Franc, Lira, etc. This are often referred to as hard currency Rupee Trade India has rupee trade with Nepal and Bhutan, i.e., payments in respect of trade with Nepal and Bhutan are made in Indian Rupees. Currency Currency includes all currency notes, postal notes, postal orders, money orders, cheques, drafts , traveller's cheques, letter of credit, Bill of Exchange and Promissory notes, credit cards or such other similar instruments as may be notified by the RBI. The RBI has notified 'debit cards', ATM cards or any other instruments by whatever name known that can be used to create a financial liability' as 'currency'. Foreign Exchange Foreign exchange means foreign currency and includes (i) deposits, credits, and balances payable in any foreign currency (ii) drafts, traveller's cheques, letter of credit or bill of exchange expressed or drawn in Indian currency but payable in foreign currency (iii) drafts, traveller's cheques letter of credit or bill of exchange expressed drawn by banks, institutions or persons outside India, but payable in Indian currency. Overseas Corporate Bodies OCB means any overseas company, partnership, firm, society, and other corporate body predominantly owned directly or indirectly to the extent of at least 60% by NRIs. It also includes overseas trusts in which at least 60% beneficial interest is irrevocably held by NRIs.

Current Account Transactions

FEMA has eased the regulation over transactions in foreign exchange and security. Transactions in current account have been made restrictions- free: No restriction on current account transaction unless specified: Any person can sell or draw foreign exchange to or from authorised persons if such sale or withdrawal is a current account transaction. Reasonable restrictions on current account transaction can be imposed by the Central government in public interest, in consultation with the RBI. Current Account Transaction: Section 2(j) states that current account transaction means a transaction other than a capital account transaction. It includes the following: Payment due in connection with foreign trade, other current businesses, services and short term banking, and credit facilities in the ordinary course of business. 1. Payment due as interest on loans as net income from investment. 2. Remittances for living expenses of parents, spouse and children residing abroad. 3. Expense in connection with foreign travel, education and medical care of patents, spouse and children.
Cont.

Foreign Currency/Security/Property by Resident 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 residing outside India or inherited from a person who was residing outside India [section6(4)]. Indian Currency/Security/Property by Non-resident A person residing 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 residing in India or inherited from a person who was residing in India. [Section 6 (4)]. Restrictions on Branches, Offices of Non-residents The RBI may prohibit, restrict or regulate establishment of branch, office or other place of business by a person residing outside India; for carrying on any activity relating to such branch, office or other place of business. [Section 6(6)]

Under the Foreign Exchange Management Act (FEMA), any Indian resident going abroad can carry or avail a stipulated amount of foreign exchange.

Barring Nepal and Bhutan, for private visits to meet relatives or tourism, the allowed limit is $10,000 (Rs.5,35,700) per person in any financial year. Which means that even if you make multiple visits for such purposes, the aggregate limit remains $10,000. Out of the said amount, $3,000 can be carried in the form of currency notes and the rest needs to be carried in the form of travellers cheques, bankers draft or travel cards. For any business trips abroad, including conferences, seminars, study tour or training, an individual can carry up to $25,000 for each visit and the number of days required for the visit does not change the stipulation. 16

If an individual requires more foreign exchange, prior permission from the Reserve Bank of India will be required. An amount of $100,000 can be obtained in foreign exchange if the purpose of visit is medical treatment. The issuer in this case is authorized to do so without requiring an estimate from a medical practitioner or hospital in India or abroad. This has been done to expedite the process. Further requirement of foreign currency can be met by furnishing estimates. Students who secure a seat in any educational institute abroad can avail $100,000 per academic year or the estimate received by the institute, 17 whichever is higher.

Enforcement and Penalties

Directorate of Enforcement The Directorate of Enforcement has been formed to ensure that the provisions of the Act are adhered to. In the Directorate of Enforcement, an Additional Director, a special Director and Assistant Directors of Enforcement are appointed by the Central govt. under section 36. Penalties under the Act An Adjudicating Authority appointed by the Central Government under FEMA can impose penalties for violating any provision of the Act or contravention of any rule, regulation, direction or order issued under the power conferred by the Act. Departmental Adjudication The Central government can authorise certain officers as 'Adjudicating Authority' under Section 16(1). Their jurisdiction will be prescribed by the Central government [Section16 (2)]. They can adjudicate cases in respect of violation of FEMA.

Cont.

Powers of Adjudicating and Appellate Authorities The adjudicating authority, Special Director (Appeals) and Appellate Tribunal have the following powers of the civil court:

1.
2. 3. 4.

5. 6.

7.
8.

Summoning witnesses and enforcing attendance of any person and examining them on oath. Requiring discovery and production of any document. Receiving evidence on affidavits. Requisition of any public record or document or copy of such record/document from any office (subject to sections 123 and 124 of the Indian Evidence Act). Reviewing its decisions. Dismissing a representation of default or deciding it exparte. Setting aside any order of any representation for default or any order passed by it ex parte. Any other matter as may be prescribed by the Central government.

Penalties
If any person contravenes any provision of the Act, he shall be liable for a penalty upto thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakhs rupees where the amount is not quantifiable, and where such contravention is a continuing one. Further penalty may extend to five thousand rupees for every day after the first day during which the contravention continues. Any Adjudicating Authority adjudging any contravention under sub-section (1) may, if he thinks fit, in addition to any penalty that he may impose for such contravention, direct that any currency, security or any other money or property in respect of which the contravention has taken place, shall be confiscated to the Central government and further direct that the foreign exchange holdings, if any, of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf.

PREVENTION OF MONEY LAUNDERING ACT 2002

The offence of money laundering is defined as: Whosoever directly or indirectly tries to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of money laundering

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MONEY LAUNDERING

A person commits the offence of money laundering if he: Acquires, owns, possesses or transfers any proceeds of crime or Enters into any transaction which is related to proceeds of crime either directly or indirectly or Conceals or aids in the concealment of the proceeds of crime The essentials of the definition are: A crime has been committed There are proceeds of or gains from the crime and There is a transaction in respect of the proceeds of 22 the gains

PENALTY / PUNISHMENT

As per section 4 whoever commits the offence of money laundering shall be punishable with rigorous imprisonment for a term not less than three years but which may extend to seven years and shall also be liable to fine which may extend to Rs 5 lakh However, where the proceeds of crime involved in money laundering relates to an offence, under the Narcotics Drugs and Psychotropic Substances Act 1985, the punishment may extend upto ten years of rigorous imprisonment Adjudicating authority will have same powers as are vested in a civil court under the Code of Civil Procedure 1908. 23

OBLIGATIONS OF FINANCIAL INSTITUTIONS AND INTERMEDIARIES It is obligatory for every financial institution and intermediary to maintain a record of transactions integrally connected to each other and where such series of transactions take place within a month, they are required to furnish the information to the Director within the prescribed times. Summons Power of survey Section 16 confers powers on an authority to carry out a survey of the premises on the basis of material in his possession

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MONEY LAUNDERING ACT

Section 17 empowers the Director to authorize search and seizure operations in a premises, provided that he has reason to believe that any person has committed an act of money laundering. Section 25 authorizes the central government to establish an appellate tribunal by notification to hear appeals against the order of the adjudicating authority.

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