16. Foreign Exchange Management Act 1999 – Business Law

16

Foreign Exchange Management Act 1999

Learning Objectives

After reading this chapter, you should be able to understand following aspects:

  • Difference between FEMA and FERA.

  • Person resident in India and person resident out of India.

  • Authorized person.

  • Current account transaction and capital account transaction.

  • Export of goods and services.

  • Transfer of immovable property out of India.

  • Dealing in Foreign Exchange and foreign securities.

  • Penalty provisions and compounding of offences.

16.1 APPLICATION OF ACT—SECTION 1

The act extends to the whole of India. It also applies to:

  1. All branches, offices and agencies outside India owned or controlled by a person resident in India.
  2. Any contravention committed outside India by any person to whom this act applies.
16.2 FERA VS. FEMA

The authorized dealers and money changers have been clubbed together under the definition of ‘Authorized Person’. In addition it also includes an ‘offshore banking unit’.

The definitions of capital account transaction and current account transaction have been inserted keeping in mind the possibility of introduction of capital account convertibility.

The definitions of ‘export’ and ‘import’ have been inserted on similar lines as The Customs Act, 1962.

The definition of ‘person’ has been inserted and the definition of ‘person resident in India’ has been aligned with the Income Tax Act, 1961. This has probably been done considering the difficulties arising due to different definitions and different interpretations. All non-resident accounts with the banks were on the basis of the definition in the FERA. Now according to the FEMA definition, very few of them will be non-resident accounts. However, the EXIM policy definition still remains different.

The FEMA is a much smaller enactment—49 sections as against 81 sections of the FERA.

The theme of FERA was: ‘everything that is specified is under control’. While the theme of the FEMA is: ‘everything other than what is expressly covered is not controlled’. Thus, there is a lot of deregulation.

In the process of simplification many of the ‘laid downs’ of the erstwhile the FERA have been withdrawn.

Many provisions of the FERA like the ones relating to blocked accounts Indians taking up employment abroad employment of foreign technicians in India contracts in evasion of the act, vexatious search and culpable mental state have no appearance in the FEMA.

16.3 DEFINITION

16.3.1 Person—Section 2(u)

A person includes individual, HUF, company, firm, AOP whether incorporated or not and any agency, office or branch owned or controlled by such person.

16.3.2 Person Resident in India—Section 2(v)

A person residing in India for more than 182 days during the course of the preceding financial year but does not include—

  1. A person who has gone out of India or who stays outside India in either case
    1. For or on taking up employment outside India.
    2. For carrying on any business or vocation outside India.
    3. For any other purpose in such circumstances as would indicate his intention to stay outside India for an uncertain period.
  2. A person who has come to or stays in India in either case otherwise than
    1. For or on taking up employment in India.
    2. For carrying on any business or vocation in India.
    3. For any other purpose in such circumstances as would indicate his intention to stay in India for an uncertain period.
  3. Any person or body corporate, registered or incorporated in India.
  4. Any branch, office or agency in India owned or controlled by a person resident outside India.
  5. Any branch, office or agency outside India owned or controlled by a person resident in India.

Case Study

‘Printex Computer’ is a Singapore based company having several business units all over the world. It has a unit for manufacturing computer printers with its headquarters in Pune. It has a branch in Dubai which is controlled by the headquarters in Pune. What would be the residential status under the FEMA, 1999 of printer units in Pune and that of Dubai branch?

Case Study

Mr. Ram had resided in India during the financial year 1999–2000, for less than 183 days. He again came to India on 1 May 2000 for higher studies and business and stayed up to 15 July 2001. State under the Foreign Exchange Management Act, 1999:

  1. If Mr. Ram can be considered ‘person resident in India’ during the financial year 2000–2001, and

  2. Is the citizenship relevant for determining such a status?

Case Study

Examine whether the following branches can be considered as a ‘person resident in India’ under the Foreign Exchange Management Act, 1999:

  1. ABC Limited, a company incorporated in India established a branch at London on 1 January 2003.

  2. M/s XYZ, a foreign company established a branch at New Delhi on 1 January 2003. The branch at New Delhi controls a branch at Colombo.

Case Study

Mr. Sekhar resided for a period of 150 days in India during the financial year 2003–2004 and thereafter went abroad. He came back to India on 1 April 2004 as an employee of a business organization. What would be his residential status during the financial year 2004–2005?

Case Study

Examine, with the reference to the provisions of the Foreign Exchange Management Act, 1956 the residential status of the branches mentioned below:

  1. MKP Limited, an Indian company having its Registered office at Mumbai, India established a branch at New York, U.S.A. on 1 April 2004.

  2. WIP Ltd, a company incorporated and registered in London, established a branch at Chandigarh in India on 1 April 2004.

  3. WIP Ltd's Singapore branch which is controlled by its Chandigarh branch.

16.3.3 Currency—Section 2(h)

It includes all the currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange, promissory notes, credit cards or such other similar instruments as may be prescribed by the Reserve Bank of India (RBI).

The RBI has notified that debit cards, ATM cards or any other instrument which can be used to create a financial liability is currency.

16.3.4 Foreign Currency—Section 2(m)

A foreign currency is any currency other than the Indian currency, dollar, euro and yen are examples of foreign currency.

16.3.5 Foreign Exchange—Section 2(n)

Foreign exchange means foreign currency and includes the following:

  1. Deposits, credits and balances payable in any foreign currency.
  2. Demand drafts, travellers cheques, letters of credit or bills of exchange expressed or drawn in the Indian currency but payable in foreign currency.
  3. Demand drafts, travellers cheques, letters of credit or bills of exchange drawn by person outside India but payable in Indian currency.

16.3.6 Foreign Security—Section 2(o)

Any security in the form of shares, stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency and includes the securities expressed in foreign currency but where redemption or any form of return such as interest or dividend is payable in Indian currency.

16.3.7 Person Resident Outside India—Section 2(w)

This is for every person who is not a person resident in India.

16.4 AUTHORIZED PERSONS

The RBI cannot do all the transactions in Foreign Exchange itself. Hence the RBI delegates its powers to the ‘authorized persons’ with suitable guidelines.

16.4.1 Authorized Persons—Section 2(c)

An ‘Authorized person’ means an authorized dealer, money changer, off-shore banking unit or any other person authorized by the RBI to deal in Foreign Exchange and foreign securities.

Generally, all the nationalized banks and foreign banks are appointed as the ‘authorized dealers’ to deal in Foreign Exchange. ‘Authorized dealers’ can deal in all other transactions in Foreign Exchange like bill of exchange, cheques, letter of credit and deposits.

The ‘authorized person’ should deal in Foreign Exchange and foreign securities as per the guidelines issued by the RBI. They should submit reports to the RBI as prescribed. Their accounts can be inspected by the RBI.

16.4.2 Duties of Authorized Person

Every authorized person granted permission by the RBI shall follow certain guidelines as under:

  1. To comply with the directions or orders of the RBI in all his dealings.
  2. To deal only in those transactions for which the authorization has been received.
  3. To accept the required undertaking and declaration from the person to satisfy himself that the transaction is not in violation of the FEMA. If he has doubts he should refuse the transaction in writing.
  4. If the authorized person has a reason to believe that any such contravention or evasion is contemplated he should report the matter to the RBI.

16.4.3 Authorization and Its Revocation

The RBI can authorize any person as ‘authorized person’. The authorization shall be in writing and subject to the conditions.

The authorization granted by the RBI may be revoked at any time if the RBI is satisfied that it is in public interest to do so the authorized person has failed to comply with the conditions or any provisions of the act. Such a revocation can be done only after the dealer has given an opportunity for making the representation. The RBI can issue directions to the authorized persons and ask them to furnish information.

The RBI can impose a penalty upto 10,000 for contravention of any direction. In case of continuing contravention a penalty upto 2000 per day can be imposed by the RBI (Section 11).

The RBI can inspect the accounts of an authorized person for verification, obtaining information and seeking compliance. The authorized person is duty bound to produce all the records books and accounts at the time of inspection (Section 12).

16.5 CURRENT ACCOUNT TRANSACTION

Any transaction other than capital account transaction is current account transaction. It includes the following:

  1. Payments due in course of foreign trade, current business, services and other short term banking and credit facilities in the ordinary course of business.
  2. Payments due as interests on loans.
  3. Net income from investments.
  4. Remittances for the living expenses of parents spouse and children residing abroad.
  5. Expenses in connection with foreign travel, education and medical care of parents, spouse and children.

All the current account transactions are generally permitted. A person may sell or draw Foreign Exchange to or from an authorized person if there is such a sale or drawal in the current account transaction.

However, the Central Government may, in public interest and in consultation with the Reserve Bank impose such reasonable restrictions for the current account transactions.

The current account transactions are divided in to the following three categories:

  1. Prohibited current account transactions.
  2. Current account transactions with prior approval of the Central Government (CG).
  3. Current account transactions with prior approval of the RBI.

16.5.1 Prohibited Current Account Transactions

Drawal of Foreign Exchange for the following transactions is prohibited:

  1. Remittance out of lottery winnings.
  2. Remittance of income from racing/riding or any other hobby.
  3. Remittance for the purchase of lottery tickets, banned/prescribed magazines, football pools and sweepstakes.
  4. Payment on commission on exports made towards equity investments in the joint venture/wholly owned subsidiary abroad of Indian company.
  5. Remittance of the dividend by any company to which the requirement of dividend balancing is applicable.
  6. Payment of commission on the exports under Rupee State Credit Route except the commission up to 10% of invoice value of the exports of tea and tobacco.
  7. Payment related to the call back service of telephones.
  8. Payment for travel to Nepal and Bhutan.
  9. Any transaction with a person resident in Nepal and Bhutan.
  10. Remittance of interest income on funds held in non resident special rupee scheme account—NRSR ACCOUNT.

16.5.2 Current Account Transactions with Prior Approval of the CG

The prior approval of the Central Government shall be required for the drawal of Foreign Exchange (by any person) for the purposes listed below:

Purpose of Remittance Permission Granting Authority
1. Cultural Tours Ministry of HRD (Department of Education and Culture).
2. Advertisement in foreign print media for the purposes other than the promotion of tourism, foreign investments and international bidding (exceeding US $10,000) by a State Government and its Public Sector Undertakings Ministry of Finance, Department of Economic Affairs.
3. Remittance of Freight of vessel chartered by a PSU Ministry of Surface Transport (Chartering Wing).
4. Payment of import through ocean transport by a Government Department or a PSU on c.i.f. basis (i.e. other than f.o.b. and f.a.s. basis) Ministry of Surface Transport (Chartering Wing).
5. Multi-modal transport operators making remittance to their agents abroad Registration Certificate from the Director General of Shipping.
6. Remittance of hiring charges of transponders by
  1. TV Channels
  2. Internet service providers
Ministry of Information and Broadcasting.

Ministry of Communication and Information Technology.

7. Remittance of container detention charges exceeding the rate prescribed by the Director General of Shipping Ministry of Surface Transport (Director General of Shipping).
8. Remittances under technical collaboration agreements, where payment of royalty exceeds 5% on local sales and 8% on exports and the lump-sum payment exceeds US $2 million Ministry of Industry and Commerce.
9. Remittance of prize money/sponsorship of the sports activity abroad by a person other than International/National/State Level sports bodies if the amount involved exceeds US $1,00,000 Ministry of HRD (Department of Youth Affairs and Sports).
10. Remittance for membership of P&L Club Ministry of Finance (Insurance Division).

Prior approval of the Central Government is not required where the payment is made out of funds held in the RFC/EEFC account of the remitter.

16.5.3 Current Account Transactions with Prior Approval of the RBI

Prior approval of the RBI shall be required for the drawal of Foreign Exchange by any person for the purposes listed below. A permission is required to be obtained when the drawal is in excess of the limit prescribed.

Purpose of Remittance Remittance Limit
1. Any consultancy service received from outside India. US $10,000,000 per project.
2. One or more private visits to any country except Nepal and Bhutan. US $10,000/financial year.
3. Gift remittance. US $5000/financial year per remitter or donor.
4. Donations by corporate for:
  • Creation of chairs in reputed educational institutes.
  • To funds, promoted by educational institutes.
  • To a technical institution or body or association in the field of activity of the donor company.
1% of Foreign Exchange earnings during the previous three financial years or US $5,000,000 whichever is less.
5. Person going abroad for employment. US $1,00,000.
6. Exchange facility for emigration. US $1,00,000 or amount prescribed by country of emigration.
7. Release of Foreign Exchange to a person for business travel or attending a Conference or specialized training or for maintenance expenses of a patient going abroad for medical treatment or check-up abroad or for accompanying as attendant to a patient going abroad for medical treatment\check-up (irrespective of period of stay). US $25,000.
8. Release of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in India or the hospital\doctor abroad. US $1,00,000 or estimate from doctor whichever is less.
9. Release of exchange for studies abroad. US $1,00,000 or estimate from institution per academic year-whichever is higher.
10. Remittances for the purchase of trade mark/franchise in India.
11. Commission to agents abroad for the sale of residential flats or commercial plots in India. Commission exceeding 5% of the inward remittance or US $25,000 whichever is higher.
12. Reimbursement of pre-incorporation expenses by the Indian entity to meet the incorporate expenses out of India. US $1,00,000 or 5% of inward remittance whichever is higher.

Case Study

Examine, whether the following transactions are permissible or not under the above act as the capital account transactions:

  1. Investment by a person resident in India in Foreign securities.

  2. Foreign currency loans raised in India and abroad by a person resident in India.

  3. Export, import and holding of currency/currency notes.

  4. Trading in transferable development rights.

  5. Investment in a Nidhi Company.

Case Study

Mr. Basu desires to draw Foreign Exchange for the following purposes:

  1. Payment related to ‘Call back services’ of telephones.

  2. US $1,20,000 for studies abroad on the basis of the estimates given by the foreign university.

  3. US $25,000 for sending a cultural troupe on a tour of Europe.

Advise him whether he can get Foreign Exchange and if so, under what conditions.

Case Study

Mr. Atul, an Indian national desires to obtain Foreign Exchange for the following purposes:

  1. Remittance of US $10,000 for the payment for goods purchased from a party situated in Nepal.

  2. US $10,000 for remitting as commission to his agent in U.S.A. for the sale of commercial plots situated near Bangalore, consideration in respect of which was received by Mr. Atul by way of foreign currency inward remittance amounting to US $1,00,000. Advise him if he can get the Foreign Exchange and under what conditions.

Case Study

Mr. Sane, an Indian national desires to obtain Foreign Exchange for the following purposes:

  1. Remittance of US $50,000 out of winnings on a lottery ticket.

  2. US $1,00,000 for sending a cultural troupe on a tour of U.S.A.

US $50,000 for meeting the expenses of his business tour to Europe. Advise him whether he can get Foreign Exchange and if so, under what conditions?

Case Study

State which kind of approval is required for the following transactions under the Foreign Exchange Management Act, 1999:

  1. X, a Film Star wants to perform along with his associates in New York on the occasion of Diwali for the Indians residing at New York. A Foreign Exchange drawal to the extent of US $20,000 is required for this purpose.

  2. F International Ltd has purchased the trade mark from a Foreign company to establish a retail business chain in India as a joint venture at a consolidated price of US $500,000 which is to be paid in the foreign currency of that country.

  3. R wants to get his heart surgery done at UK. Up to what limit Foreign Exchange can be drawn by him and what are the approvals required?

  4. L wants to pursue a course in Fashion design in Paris. The Foreign Exchange drawal is US $20,000 towards the tuition fees and US $30,000 for the incidental and stay expenses for studying abroad.

16.6 EXPORT OF GOODS AND SERVICES

The export of goods and services is current account transaction. The RBI can direct any exporter to comply with the prescribed requirements to ensure that full export value of the goods or such reduced value of the goods as the RBI determines is received without delay.

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 within 21 days from the export.

Prescribed declaration forms are as follows.

Form When it is Applicable?
FORM GR To be completed in duplicate for the export, otherwise than by post including the export of software in physical form, i.e., magnetic tapes/discs and paper media.
FORM SDF To be completed in duplicate and appended to the shipping bill for exports declared to the customs offices, notified by the Central Government which have introduced the Electronic Data Interchange (EDI) system for processing the shipping bills notified by the Central Government.
FORM PP To be completed in duplicate for export by post.
FORM SOFTEX To be completed in triplicate for declaration of export of software otherwise than in physical form, i.e., magnetic tapes/discs and paper media.

The declaration should be supported by the evidence specified containing true and correct material particulars including the amount representing the full export value of the goods or services. If the full export value is not ascertainable at the time of export, the exporter shall indicate the amount he expects to receive.

In respect of the export of services to which none of the forms specified in these regulations apply, the exporter may export such services without furnishing any declaration but shall be liable to realize the amount of Foreign Exchange which becomes due or accrues on account of such export and to repatriate to India as per the act.

However, in the following cases, the export of goods or services may be made without furnishing the declaration:

  1. Trade samples of goods and publicity material supplied free of payment.
  2. Personal effects of travelers whether accompanied or un-accompanied.
  3. Ship's stores, transshipment cargo and goods supplied under the orders of Central Government or of such officers as may be appointed by the Central Government in this behalf or of the military, naval or air force authorities in India for the military, naval or air force requirements.
  4. Goods or software accompanied by a declaration by the exporter that they are not more than 25,000 in value.
  5. By way of gift of goods accompanied by a declaration by the exporter that they are not more than 25,000 in value.
  6. Aircrafts or aircraft engines and spare parts for overhauling and/or repairs abroad subject to their re-import into India after overhauling/repairs within a period 6 months from the date of their export.
  7. Goods imported free of cost on re-export basis.
  8. Goods not exceeding US $1000 or its equivalent in value per transaction exported to Myanmar under the Barter Trade Agreement between the Central Government and the Government of Myanmar.
  9. Replacement goods exported free of charge in accordance with the provisions of the Exim Policy in force for the time being.

16.6.1 Indication of Importer–Exporter Code Number (IEC)

The importer–exporter code number shall be indicated on all copies of the declaration forms submitted by the exporter to the specified authority and in all correspondence of the exporter with the authorized dealer or the Reserve Bank.

On realization of the export proceeds, the authorized dealer shall after due certification submit the duplicate of the GR/SDF, PP or as the case may be SOFTEX form to the nearest office of the Reserve Bank.

16.6.2 Period Within Which Export Value of Goods/Software to Be Realized

The amount representing the full export value of goods or software exported shall be realized and repatriated to India within 6 months from the date of export.

However, if the goods are exported to a warehouse established outside India with the permission of the Reserve Bank, the amount representing the full export value of the goods exported shall be paid to the authorized dealer, as soon as it is realized and in any case within 15 months from the date of the shipment of goods. This period of 6 months/15 months can be extended by the RBI or the authorized dealer as per the directions issued by the RBI for a sufficient and reasonable cause. The export on elongated credit terms beyond 6 months can be given only with the approval of the RBI.

16.6.3 Transfer of Documents

An authorized dealer may accept for negotiation or collection, shipping documents, including the invoice and the bill of exchange, covering the exports from his constituent. The person submitting the documents has to give declaration regarding full value of the export goods.

16.7 CAPITAL ACCOUNT TRANSACTIONS—SECTION 2(E)

A capital account transactions means, a transaction which alters the assets or liabilities positioned outside India of the persons resident in India or assets or liabilities in India of the persons resident outside India. The liabilities also include the contingent liabilities.

The term capital account transactions include the following:

  1. Transfer or issue of foreign security by a person resident in India.
  2. Transfer or issue of security by a person resident outside India.
  3. Borrowing or lending in Foreign Exchange.
  4. Borrowing or lending in rupees between a person resident in India and a person resident outside India.
  5. Deposits between persons resident in India and persons resident outside India.
  6. Export import or holding of currency.
  7. Transfer of immovable property outside India other than a lease not exceeding 5 years by a person resident in India.
  8. Acquisition or transfer of immovable property in India other than a lease not exceeding 5 years by a person resident outside India.
  9. Guarantee or surety in respect of any debt by a person resident in India and owed to a person resident outside India or by a person resident outside India.

A person may sell or draw Foreign Exchange from an authorized person for a capital account transaction under an act within the limit.

The capital account transactions can be divided into the following two categories:

  1. Permissible capital account transactions.
  2. Prohibited capital account transactions.

16.7.1 Permissible Capital Account Transactions for Residents

  1. Investment in foreign securities.
  2. Foreign currency loans raised in India or abroad.
  3. Transfer of immovable property outside India.
  4. Guarantee in favour of a person resident outside India.
  5. Export/import and holding of foreign currency notes.
  6. Borrowings from a non-resident.
  7. Maintenance of foreign currency account in India and abroad.
  8. Purchase of insurance policy from a company outside India.
  9. Lending to non-resident.
  10. Remittance of capital assets outside India.
  11. Sale and purchase of Foreign Exchange derivatives in India and abroad and commodity derivative abroad.

16.7.2 Permissible Capital Account Transactions for Non-residents

  1. Issue of security in India.
  2. Investment in securities if Indian companies or investment in firms and proprietorship concern or association.
  3. Acquisition and transfer of the immovable property in India.
  4. Guarantee in favour of a resident.
  5. Import and export of the currency notes.
  6. Deposits between a person resident and non-resident.
  7. Foreign currency accounts in India.
  8. Remittances outside India of the capital assets in India.

16.7.3 Prohibited Capital Account Transactions

Any person who is a resident outside India cannot make investment in India in any company or partnership firm or proprietary concern or any entity which is engaged:

  1. In the business of chit fund.
  2. As Nidhi company.
  3. In agricultural or plantation activities.
  4. In real estate business or construction of farm houses.
  5. In trading in Transferable Development Rights (TDRs).

‘Real estate business’ shall not include development of townships construction of residential/commercial premises roads or bridges.

Case Study

State whether there are any restrictions in respect of the following transactions:

  1. The drawal of Foreign Exchange for payments due on account of amortization of loans in ordinary course of business.

  2. Purchase by a person resident outside India, of shares of a company in India engaged in plantation activities.

16.8 ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY IN INDIA

A person resident outside India who is a citizen of India may acquire any immovable property in India other than agricultural/plantation/farm house subject to the following conditions:

  1. He can transfer immovable property in India to a person resident in India.
  2. He can transfer any immovable property other than agricultural/plantation property/farm house to a person resident outside India.
  3. The asset is sold after three years.
  4. An amount equivalent to the Foreign Exchange brought in can be repatriated.

16.8.1 Acquisition and Transfer of Property in India by a Person of Indian Origin (PIO)

A person of Indian origin resident outside India may acquire property other than agricultural/plant/farm from out of the funds received in India by way of inward remittance or the fund held in the NR Account on the following conditions:

  1. He can acquire it by gift inheritance.
  2. It can be transferred to the citizen of India.
  3. If the asset is sold after three years, the amount equivalent to Foreign Exchange brought in can be repatriated.

16.8.2 Acquisition of Immovable Property for Carrying on Business

A person resident outside India who has established in India a branch/place of business in accordance with the RBI regulations can acquire any immovable property which is necessary for or incidental to carrying on such activity:

  1. A person acquiring property should file with the RBI declaration from the NRI within 90 days.
  2. The property can be transferred by way of mortgage to the authorized dealer as a security for any borrowing.
  3. If the asset is sold, the sale proceeds can be repatriated only with prior permission of the RBI.
16.9 ACQUISITION AND TRANSFER OF IMMOVABLE PROPERTY OUTSIDE INDIA

A person resident in India can acquire/transfers any immovable property situated outside India as per the following conditions. In other cases general/special permission of the RBI will be required.

The restrictions do not apply to a property held by a person resident in India who is a national of a foreign state or was acquired on or before 1947 or had inherited from the person who was resident outside India.

The person resident in India acquires immovable property outside India by way of gift/inheritance from person resident in India.

The person resident of India also acquires property outside India by way of purchase out of Foreign Exchange held in the RFC account maintained.

The person resident in India has acquired immovable property outside India as per the above provisions; he may transfer it by way of gift to his relative who is the person resident in India.

16.10 ESTABLISHMENT IN INDIA OF BRANCH OR OFFICE OR OTHER PLACE OF BUSINESS

16.10.1 Liaison Office

It means a place of business to act as a channel of communication between the principal place of business/H.O. by whatever name called and the entities in India but which does not undertake any commercial/trading/industrial activity directly or indirectly.

No person resident outside India shall without prior approval of the RBI establish in India a branch or liaison office or project office or any other place of business. However, no approval is necessary for the banking company if it has obtained the necessary approval from the RBI.

A citizen of Pakistan, Bangladesh, China, Iran and Sri-Lanka cannot establish branch or liaison office or project office or any other place of business without the permission of the RBI.

The person resident outside India desiring to establish branch/liaison office shall apply to the RBI in FNC-1.

Where a person resident outside India has secured from India a company contract to execute a project in India and the project is funded by bilateral international finance agency shall apply to the RBI in FNC-1 for the permission to establish a project/site office in India.

The person resident outside India and permitted by the RBI may undertake or carry such activities as specified in the regulation.

The person resident outside India permitted by the RBI to establish project/site office in India shall not undertake or carry on any activity other than activity relating to the execution of the project.

The permitted activities of a person resident outside India for a branch in India:

  1. Export/import of goods.
  2. Rendering professional/consultancy services.
  3. Carrying out research work in which perfect company is engaged.
  4. Promoting technical/financial collaboration between the Indian company and the overseas company.
  5. Representing the parent company in India and acting as buying/selling agent.
  6. Rendering services in IT and development of software in India.
  7. Rendering technical support to products supplied by parent company.
  8. Foreign shipping/Airline company.

The person resident outside India permitted by the RBI to establish a branch/project office in India may remit outside India, the profit of branch or surplus of project on its completion, net applicable to taxes on the production of the prescribed documents and establishing net profits.

16.11 ACCEPTANCE OF THE DEPOSIT

The deposit includes deposit of money with bank, company, proprietary concern, firm, trust or any other person.

The funds raised through the ADR/GDR can be held in the deposit in foreign currency accounts with bank outside India, pending its utilization or repatriation in India.

16.11.1 Deposits by the India Company and NBFC from NRI/PI on Repatriation Basis

The company incorporated in India, the NBFC registered with the RBI may accept deposits from the NRI on repatriation basis subject to following conditions:

  1. Deposits are received under the public deposit scheme.
  2. If it is NBFC it should have acquired credit rating.
  3. The amount representing the deposit is received by inward remittance from outside India through the normal banking channel or debit to the NRE/FCNR account.
  4. The rate of interest payable shall be in conformity with the guidelines of the RBI.
  5. Maturity period shall not exceed three years.
  6. The company accepting the deposits shall comply with the provisions of any other law regulations as are applicable to in regard to the acceptance of deposits.
  7. The amount of aggregate deposits accepted shall not exceed 35% of its NBF.
  8. The payment of the interest net of taxes may be made by the company to the depositor by remittance through authorized dealer or credit to the depositors’ NRE/FCNR/NRNR/NRO account.
  9. The amount of deposits so collected shall not be utilized by the company for re-lending or for undertaking agricultural/plantation activities/real estate business.

16.11.2 Deposits by Indian Proprietorship/Film/Company and NBFC on Non-repatriation Basis from NRI/PIO/OCB

Same provisions as above are applicable but repatriation is not permitted.

16.12 EXPORT AND IMPORT OF CURRENCY

If the export/import of currency is outside the prescribed norms permission of the RBI will be required.

16.12.1 Export and Import of Indian Currency and Currency Notes

Any person resident in India may take outside India (other than to Nepal and Bhutan) currency notes of the Government of India and the RBI notes upto an amount not exceeding 5000 per person.

The person resident of India who had gone out of India on a temporary visit may bring into India at the time of his return from any place outside India (other than from Nepal and Bhutan), currency notes of the Government of India and the RBI notes upto an amount not exceeding 5000 per person.

16.12.2 Prohibition of Export of Indian Coins

No person shall take or send out of India, the Indian coins which are covered by the Antique and Art Treasure Act, 1972.

16.12.3 Import of Foreign Exchange into India

The person may send into India without the limit of Foreign Exchange in any form other than the currency notes, bank notes and traveller cheques.

Any person can bring into India from any place outside India without limit Foreign Exchange (other than un-issued notes) in form of currency notes, bank notes and traveller cheques. He has to make a declaration in form CDF, if (a) the aggregate value of the Foreign Exchange in the form of currency notes, bank notes or traveller cheques brought in by such person at any one time exceeds US $10,000 or its equivalent and/or (b) the aggregate value of the foreign currency notes brought in by such a person at any one time does not exceed US $5000 or its equivalent.

16.12.4 Export of Foreign Exchange and Currency Notes

An authorized person may send out of India, foreign currency acquired in the normal course of business.

Any person may take or send out of India (i) Cheques drawn on foreign currency account maintained. (ii) Foreign Exchange obtained by him by drawal from an authorized person in accordance (iii) currency in the safe of vessels or aircrafts which has been taken on board a vessel or aircraft with the permission of the Reserve Bank.

Any person may take out of India—(i) Foreign Exchange possessed by him in accordance with the FEMA Regulations (ii) un-spent Foreign Exchange brought back by him to India while returning from travel abroad and retained in accordance with the FEMA Regulations.

Any person resident outside India may take out of India un-spent Foreign Exchange which he had brought in India. If the amount exceeds the prescribed limit (of 5000/10,000 US $) he should have made a declaration in the CDF form on his arrival in India.

16.12.5 Export and Import of Currency to or from Nepal and Bhutan

A person may (i) take or send out of India to Nepal or Bhutan, currency notes of the Government of India and the RBI notes (other than notes of denominations of above 100), (ii) bring into India from Nepal or Bhutan, currency notes of Government of India and the RBI notes (other than notes of denominations of above 100 and (iii) take out of India to Nepal or Bhutan or bring into India from Nepal or Bhutan currency notes bring the currency of Nepal or Bhutan.

Case Study

Mr. Loma, an Indian national desires to obtain Foreign Exchange for the following purposes:

  1. Payment to be made for securing insurance for health from a company abroad.

  2. Payment of commission on exports under Rupee State Credit Route.

  3. Gift remittance exceeding US $10,000.

Advise him whether he can get Foreign Exchange and if so, under what condition?

16.13 POSSESSION AND RETENTION OF FOREIGN CURRENCY

The restrictions are only for the physical possession and retention of foreign currency and not in respect of foreign currency kept in permissible accounts with the authorized dealer's banks.

16.13.1 Limit for Possession and Retention of Foreign Currency or Foreign Coins

Foreign currency or foreign coins can be possessed and retained’ subject to the following limits:

  1. An authorized person within the scope of his authority without any limit.
  2. Any person can possess foreign coins without limit.
  3. A person, resident in India can retain foreign currency notes, bank notes and foreign currency traveller cheques not exceeding US $2000 or its equivalent in aggregate. Such Foreign Exchange in the form of currency notes, bank notes and traveller cheques should have been acquired by him:
    1. While on a visit to any place outside India by way of payment for services not arising from any business in or anything done in India; or
    2. Acquired by him from any person not resident in India and who is on a visit to India as honorarium or gift or for services rendered or in settlement of any lawful obligation; or
    3. Was acquired by him by way of honorarium or gift while on a visit to any place outside India; or
    4. Represents an un-spent amount of Foreign Exchange acquired by him from an authorized person for travel abroad.
  4. A person resident in India but not permanently resident therein may possess without limit foreign currency in the form of currency notes or bank notes without limit. Foreign currency was acquired, held or owned by him when him was resident outside India and has been brought into India in accordance with the regulations made under the act.

‘Not permanently resident’ means a person resident in India for employment of a specified duration (irrespective of length thereof) or for a specific job or assignment the duration of which does not exceed three years.

16.14 REALIZATION, REPARTIATION AND SURRENDER OF FOREIGN EXCHANGE

A person who is entitled to obtain Foreign Exchange should surrender it to ‘authorized dealer’. He can retain with himself in only as per provisions of the regulations. The provisions of these regulations do not apply to Foreign Exchange in the form of currency of Nepal or Bhutan.

16.14.1 Duty of Persons to Realize Foreign Exchange

The person, resident in India to whom any amount of Foreign Exchange is due or has accrued shall take all reasonable steps to realize and repatriate to India such Foreign Exchange.

On realization of the Foreign Exchange due a person shall repatriate the same to India, i.e. bring into or receive in India, and

  1. Sell it to an authorized person in India in exchange for rupees.
  2. Retain it in account with an authorized dealer in India or EEFC account to the extent specified by the RBI.
  3. 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.

The person shall be deemed to have repatriated the realized Foreign Exchange to India when he receives in India a payment in rupees from the account of a bank or an exchange house situated in any country outside India maintained with an authorized dealer.

The person shall sell the realized Foreign Exchange to an authorized person within:

  1. Seven days if the Foreign Exchange is due or accrued as remuneration for the services rendered or in settlement of any lawful obligation or an income and assets held outside India or as inheritance settlement or gift.
  2. Ninety days from the date of receipt in all the other cases.

16.14.2 Period for Surrender in Certain Cases

If a person who has acquired or purchased Foreign Exchange for any purpose mentioned in the declaration made by him to an authorized person does not use it for such purpose or for any other purpose for which the purchase or acquisition of Foreign Exchange is permissible he shall surrender such Foreign Exchange or the unused portion thereof to an authorized person within a period a 60 days from the date of its acquisition or purchase by him.

If Foreign Exchange acquired or purchased by any person from an authorized person, is for the purpose of foreign travel then the un-spent balance of such Foreign Exchange shall be surrendered to an authorized person:

  1. Within 90 days from the date of return of the traveler to India when the un-spent Foreign Exchange is in the form of currency notes and coins.
  2. Within 180 days from the date of return of the traveler to India when the un-spent Foreign Exchange is in the form of traveller cheques.
16.15 ENFORCEMENT DIRECTORATE

The directors of enforcement, additional director, special director, deputy director and asst. director of enforcement are appointed by the Central Government. These officers have powers similar to those conferred on the I.T. Act to the income tax authority:

  1. Power regarding discovery and production of evidence.
  2. Search and seizure.
  3. Power to requisition books of accounts.
  4. Power to inspect books of accounts.

It may happen that during investigation, draft/cheque/other instrument may come in possession of E.A. That instrument can be given to the RBI/Authorized person for encashment. They will encash the instrument and credit the proceeds realized to separate A/c in name of ‘Directorate of Enforcement’.

The RBI/authorized person who encashes cheque/draft/instrument will be identified by the Central Government for any liability that may be incurred by them.

The amount in credit may be returned to the person by the adjudicating authority if it is found that these is no contravention. The Indian currency seized will be returned at the rate 6% interest.

16.16 DEPARTMENTAL ADJUDICATION—SECTION 16

The Central Government can authorize certain officers as a adjudicating authority. They can adjudicate cases in respect of violation of the FEMA. These are quasi-judicial authority. They have to follow the principles of natural justice by giving the opportunity of making representation.

The adjudicating authority can hold enquiry only on receiving complaint from the authorized officer. The person can appear either in person or take assistance of the legal practitioner. The adjudicating authority shall dispose off the complaint within one year. If it is not possible he should record the reason for not disposing off the complaint within one year.

A penalty can be imposed, up to thrice the sum involved in such contravention where the amount is quantifiable. If the amount is not quantifiable a penalty up to 2,00,000 can be imposed.

The adjudicating authority can order the confiscation of any currency, security or any other money property in respect of which contravention has taken place. The authority can direct that the Foreign Exchange holding of any person committing contravention shall be brought back to India.

Right/obligations/proceedings/appeal shall not abate by reason of death or insolvency of the person liable. A proceeding can be continued by or against legal representative.

The person to whom penalty is imposed, is required to make a payment within 90 days of receipt of notice. If such payment is not made he is liable to civil imprisonment up to six months if the demand is for less than 1 crore if the demand exceeds 1 crore civil imprisonment can be up to three years. If a person to whom show cause notice is issued does not appear before the adjudicating authority warrant of arrest can be issued.

16.17 COMPOUNDING OF OFFENCE

Every application for compounding shall be made along with a fee of 5000 by way of demand draft in favour of the compounding authority. The application can be made before the commencement of the adjudication or during the process of adjudication but not after the determination of penalty through adjudication.

The offence once compounded, will not be a subject matter of adjudication at any time in future. An application for compounding shall be disposed off by the respective authority within a period of 180 days and the compounding fee so determined shall be paid within a period of 15 days failing which it is presumed that the offence has not been compounded. An offence once compounded and then a similar offence cannot be compounded again within a period of three years. No contravention shall be compounded unless the amount involved in such contravention is quantifiable.

One copy of the order made shall be supplied to the applicant and the adjudicating authority as the case may be.

 

16.18 LIBERALIZED REMITTANCE SCHEME FOR RESIDENT INDIVIDUALS

All resident individuals are eligible to avail of the facility under the scheme. The facility is not available to corporate, partnership firms, HUF and Trusts.

This facility is available for making remittance upto $ 2,00,000 per financial year for any current or capital account transactions or a combination of both but including remittances towards gift and donation by a resident individual.

The facility under the scheme is in addition to those already available under Schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, 2000.

The remittance facility under the scheme is not available for:

  1. Remittance for any purpose specifically prohibited under Schedule I of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
  2. Remittance for any purpose restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
  3. Remittances made directly or indirectly to Bhutan, Nepal, Mauritius or Pakistan.
  4. Remittances made directly or indirectly to countries identified by the Financial Action Task Force (FATF) as ‘non co-operative countries and territories’ viz. Cook Islands, Egypt, Guatemala, Indonesia, Myanmar, Nauru, Nigeria, Philippines and Ukraine.
  5. Remittances made directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.
TEST YOUR KNOWLEDGE
1. Bring out the significant differences between the Foreign Exchange Regulation Act, 1973 and Foreign Exchange Management Act, 1999. (Ref. Para-16.2)
2. Define the following terms
  1. Currency
  2. Currency note
  3. Foreign currency
  4. Foreign Exchange
  5. Foreign security
  6. Import
  7. Security
  8. Transfer
(Ref. Para-16.3)
3. Define the term ‘person resident in India’ and ‘person resident outside India’. (Ref. Para-16.3)
4. How will you determine whether a particular business unit like a factory or office, is ‘person resident in India’ under the FEMA? (Ref. Para-16.3)
5. What do you mean by the expression ‘authorized person’? Explain the provisions relating to the authorized person. (Ref. Para-16.4)
6. What are the duties of the authorized person? (Ref. Para-16.4)
7. What do you understand by the current account transactions? (Ref. Para-16.5)
8. Which are the current account transactions for which drawal of Foreign Exchange is prohibited? (Ref. Para-16.5)
9. Which are the current account transactions for which the Foreign Exchange can be drawn subject to the prior approval of the Central Government? (Ref. Para-16.5)
10. Which are the current account transactions for which the Foreign Exchange can be drawn subject to the prior approval of the RBI? (Ref. Para-16.5)
11. What are the provisions of the FEMA, relating to the export of goods and services? (Ref. Para-16.6)
12. In which cases can exports of goods or services be made without furnishing the declaration? (Ref. Para-16.6)
13. Explain the meaning of the term ‘capital account transaction’ under the FEMA? (Ref. Para-16.7)
14. Which are the prohibited capital account transactions? (Ref. Para-16.7)
15. Explain the provisions for acquiring and transferring immovable property in India by the foreign nationals. (Ref. Para-16.8)
16. Explain the provisions for acquiring and transferring immovable property out of India by the Indian citizen or persons of Indian origin. (Ref. Para-16.9)
17. What are the provisions for opening and maintaining the branch office or place of business in India by the person resident out of India? (Ref. Para-16.10)
18. What are the provisions for acceptance of deposit by Indian company from NRI/PIO? (Ref. Para-16.11)
19. Write a short note on import and export of Indian currency. (Ref. Para-16.12)
20. What are the provisions in respect of possession and retention of foreign currency? (Ref. Para-16.13)
21. What are the provisions relating to realization and repatriation of Foreign Exchange? (Ref. Para-16.14)
22. Explain the meaning of the term ‘adjudicating authority’ under the FEMA. (Ref. Para-16.16)
23. What are the penalties provided under the FEMA for the contravention of provisions of Act? (Ref. Para-16.16)
24. Explain the provisions relating to the compounding of offence under the act? (Ref. Para-16.17)
25. Explain about the liberalized remittance scheme for the resident individual. (Ref. Para-16.18)
MULTIPLE CHOICE QUESTIONS
  1. Foreign Exchange Management Act provides for
    1. free transactions on current account subject to reasonable restrictions.
    2. The RBI control over capital account transactions.
    3. either (i) or (ii).
    4. both (i) and (ii).
  2. Foreign Exchange Management Act provides for
    1. control over realization of export proceeds.
    2. dealing in Foreign Exchange through authorized person.
    3. either (i) or (ii).
    4. both (i) and (ii).
  3. An individual can now open account in can remit upto per calendar year for the purchase of immovable assets and shares abroad.
    1. Foreign Bank, US $25,000
    2. Indian Bank, US $25,000
    3. Indian Bank, US $1,00,000
    4. Foreign Bank, US $1,00,000
  4. A person resident in India means a person who stayed in India for more than during the course of preceding year.
    1. 180 days
    2. 260 days
    3. 365 days
    4. 182 days
  5. Residential status of a person is determined, based upon his stay in
    1. preceding financial year.
    2. previous accounting year.
    3. current financial year.
    4. current accounting year.
  6. As per the FEMA, currency includes all
    1. currency notes.
    2. postal notes.
    3. postal order.
    4. all of the above.
  7. As per the FEMA, currency includes all
    1. money order.
    2. cheque and draft.
    3. both (i) and (ii).
    4. none of the above.
  8. As per the FEMA, currency includes all
    1. travellers’ cheque.
    2. letter of credit.
    3. both (i) and (ii).
    4. neither (i) nor (ii).
  9. As per the FEMA, currency includes all
    1. credit cards.
    2. ATM cards.
    3. debit cards.
    4. all of the above.
  10. As per the FEMA, Foreign Exchange means
    1. foreign currency.
    2. balance payable in any foreign currency.
    3. either (i) or (ii).
    4. both (i) and (ii).
  11. As per the FEMA, Foreign Exchange means
    1. draft, cheque, bill of exchange drawn in Indian currency but payable in foreign currency.
    2. draft, cheque, bill of exchange drawn in Indian currency but payable in Indian currency.
    3. either (i) or (ii).
    4. both (i) and (ii).
  12. As per the FEMA, Foreign Exchange means
    1. draft, cheque, bill of exchange drawn in Indian rupee and payable in Indian rupee.
    2. draft, cheque, bill of exchange drawn by person outside Indian but payable in Indian currency.
    3. either (i) or (ii).
    4. none of the above.
  13. As per the FEMA, foreign security means
    1. shares denominated in foreign currency.
    2. debenture denominated in foreign currency.
    3. bonds denominated in foreign currency.
    4. all of the above.
  14. As per the FEMA, foreign security means
    1. shares expressed in foreign currency and dividend is payable in Indian currency.
    2. bonds denominated in foreign currency.
    3. bonds denominated in foreign currency and redemption will take place in Indian currency.
    4. all of the above.
  15. As per the FEMA, foreign security means
    1. stock certificate expressed in Indian rupee.
    2. debenture expressed in foreign currency.
    3. debenture expressed in foreign currency but redemption will take place in Indian currency.
    4. all of the above.
  16. Application for permission to extend the period for realization of export period should be made to
    1. RBI.
    2. Central Government.
    3. authorized dealer.
    4. any one of the above.
  17. Which bank account(s) can be opened by NRI/Foreign National in India?
    1. FCNR
    2. NRE
    3. NRO
    4. Any one of the above
  18. Which bank account(s) can be opened by NRI/Foreign National in India maintained in designated foreign currency?
    1. FCNR
    2. NRE
    3. NRO
    4. Any one of the above
  19. Remittance under technical collaboration agreements where payment is in form of royalty is transaction.
    1. general account
    2. current account
    3. capital account
    4. business
  20. Gift remittance exceeding US $5000 per financial year per remitter or donor other than resident individual is permissible with approval of
    1. Central Government.
    2. RBI.
    3. authorized dealer.
    4. none of the above.
  21. Gift remittance upto per financial year per remitter or donor other than resident individual is permissible without approval of any authority.
    1. US $5000
    2. US $2000
    3. 5000
    4. 25,000
  22. Out of the following transactions, for which drawals of Foreign Exchange is prohibited?
    1. Remittance out of lottery winning.
    2. Remittance of income from racing.
    3. Both (i) and (ii).
    4. Neither (i) nor (ii).
  23. Out of the following transactions for which drawals of Foreign Exchange is prohibited?
    1. Remittance for purchase of lottery tickets.
    2. Remittance for purchase of banned magazine.
    3. Payment for travel to Nepal
    4. All of the above.
  24. Remittance under technical coloration agreements for payment of royalty is allowed upto % on local sales.
    1. 5
    2. 8
    3. 3
    4. 1
  25. Remittance under technical coloration agreements for payment of royalty is allowed upto % on export sales.
    1. 5
    2. 8
    3. 3
    4. 1
  26. Remittance exceeding 10,00,000 per project for any consultancy services in respect of consultancy project from outside India is allowed with permission of
    1. Central Government.
    2. State Government.
    3. RBI.
    4. authorized dealer.
  27. Release of exchange exceeding US $10,000 or its equivalent in one financial year for one or more private visits to any country is allowed with permission of
    1. Central Government.
    2. State Government.
    3. RBI.
    4. authorized dealer.
  28. Out of following, which are the current account transactions?
    1. Gift remittance.
    2. Release of exchange for studies abroad.
    3. Either (i) or (ii).
    4. Neither (i) nor (ii).
  29. Out of following, which are the current account transactions?
    1. Release of Foreign Exchange for business travel.
    2. Release of Foreign Exchange for meeting expenses for medical treatment abroad.
    3. Both (i) and (ii).
    4. Neither (i) nor (ii).
  30. Which of the following activities are permitted by the RBI for a company engaged in manufacturing and trading activities aboard to set up branch office in India?
    1. To conduct research work.
    2. To render professional or consultancy work.
    3. Both (i) and (ii).
    4. Neither (i) nor (ii).
  31. Which of the following activities are permitted by the RBI for a company engaged in manufacturing and trading activities aboard to set up branch office in India?
    1. To undertake export and import trading work.
    2. To represent the parent company.
    3. Both (i) and (ii).
    4. Neither (i) nor (ii).
  32. Capital account transaction means
    1. transfer or issue of any foreign security by a person resident in India.
    2. transfer or issue of any security by a person resident outside India.
    3. both (i) and (ii).
    4. neither (i) nor (ii).
  33. Capital account transaction means
    1. any borrowing or lending in Foreign Exchange.
    2. deposit between persons resident in India and persons resident outside India.
    3. both (i) and (ii).
    4. neither (i) nor (ii).
  34. Capital account transaction means
    1. acquisition or transfer of immovable property in India by person resident outside India.
    2. export, import or holding of currency of currency note.
    3. either (i) or (ii).
    4. neither (i) nor (ii).
  35. An application for compounding of an offence shall be made by compounding authority in days.
    1. 15
    2. 30
    3. 60
    4. 180
ANSWERS—MULTIPLE CHOICE QUESTIONS
1 (iv) 2 (iv) 3 (i) 4 (iv) 5 (i)
6 (iv) 7 (iii) 8 (iii) 9 (iv) 10 (iv)
11 (iv) 12 (ii) 13 (iv) 14 (iv) 15 (iv)
16 (i) 17 (iv) 18 (i) 19 (iii) 20 (ii)
21 (i) 22 (iii) 23 (iv) 24 (i) 25 (ii)
26 (iii) 27 (iii) 28 (iii) 29 (iii) 30 (iii)
31 (iii) 32 (iii) 33 (iii) 34 (iii) 35 (iv)