FLY WITH FEMA
Contents
 Introduction.
 Objective and salient features.
 Important sections of FEMA.
 Mechanism under FEMA.
 Current Account.
 Capital Account.
 L. R. S.
 Penal Provisions.
 Capital Account Convertibility - Approach
Introduction..
 Exchange control was introduced as a temporary
measure in 1939.
 Placed on statutory basis in 1947 (FERA 1947)
 FERA 1947 replaced by FERA 1973.
 FERA 1973 replaced by FEMA 1999.
 Exchange control in existence – 72 years.
 Can be phased as –
- 5 decades of control;
- a decade of reforms;
- a decade of FEMA.
FEMA, 1999-Objectives..
 FEMA, 1999 came into effect from 01.06.2000.
 To consolidate the law relating to foreign exchange with the
objective of facilitating external trade and payments and
for promoting the orderly development and maintenance
of foreign exchange market in India.
 It extends to whole of India. It shall also apply to all
branches, offices and agencies outside India owned or
controlled by a person resident in India and also to any
contravention thereunder committed outside India by any
person to whom this Act applies.
Salient features…












Shift in object.
Govt. / RBI – powers clearly demarcated.
FX transactions categorised – Current / Capital
Provisions dependant on residential status.
Residential status on the basis of stay as well as purpose.
Civil Law –
No arrest.
Prosecution to prove charges against accused.
Investigation and adjudication segregated.
A new concept - Compounding introduced.
Compounding in a definite time-frame (180 days.
Sun-set clause introduced.
Important sections..
 There are 49 sections in FEMA.
 Main sections are :
 Sec.2 : Definitions.
 Sec.3 : Dealing in FE.
 Sec.4 : Holding of FE.
 Sec.5 : Current Account.
 Sec.6 : Capital Account
 Sec.7 : Export of Goods and Services.
 Sec.8 : Realisation / repatriation of FE.
 Sec.9 : Exemption from Sec.8
 Sec.10(5): Declaration
 Sec.10(6): Freedom to utilize forex
 Sec.13 to 15 : Penal provisions
Mechanism under FEMA
Passed by the
Parliament –
the Legislature
Current Account by the
Government
Act – FEMA
Rules –
Current A/C
Notifications
Notified in the
Gazette – by the
Executive
AP Dir Circulars
to APs
RegulationsCapital A/C
All aspect of Forex
transactions
by the RBI
Capital Account by
the RBI
A. P. Catagorisation..
 AD Cat – I
- Com. Banks
- State Co-op Banks
- Urban Co-op Banks
 AD Cat – II
- Up Graded FFMCs
- Co-op. Banks
- RRBs
- Others
 Select Financial and
other Institutions
 FFMCS
 All current & capital
account transactions.
 Specified non-trade current
account transactions.
 Transactions incidental to
their FE activities.
 Purchase of FC & sale of FE
for pvt/business visits.
Forex Transactions…
 Types of transactions :-
Current A/c ; and
Capital A/c.
 Rational :
Current A/c : The transactions which are
not prohibited are permitted.
[ Sec. 5 freedom to draw FE ]
Capital A/c : The transactions which are
not permitted are restricted.
[ Sec. 6 RB, may by regulation prohibit,
restrict or regulate.
Current A/c transactions..
• Meaning: A transaction other than Capital account
transaction and includes……
- payment due in connection with foreign
trade, other current business, services…
- interest on loans and net income from
investments;
- remittances for living expenses of parents,
spouse and children residing abroad; and
- expenses in connection with foreign travel,
education and medical care of parents,
spouse and children.
Current A/c contd…
 Governed by: Sec. 5 read with Current Account
rules notified by Govt. and AP (Dir) circulars
issued by RBI.
 Compliance:
Rule No. 3 - Sch. I - Prohibition.
[ Items - 8 ]
Rule No. 4 - Sch. II - Govt. approval.
[ Items - 10 ]
Rule No. 5 – Sch. III – RBI approval
[ Items – 13 ]
All other current a/c transactions freely permitted
Capital A/c transactions….
 Meaning: 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 transactions referred to in sub-sec.(3)of Sec. 6.
 Governed by : Sec. 6 read with Regulations notified by RBI & AP (Dir)
Cir. Issued by RBI.
 Regulations: Notf. No. FEMA. 1/2000 read with Nos. 2 to 25, 71 & 101.
 Notf. No. 1 : Sch I- classes of cap. a/c transactions of persons
resident in India;
Sch II – classes of cap a/c transactions of
persons resident out side India.
Important cap a/c transactions
 Separate regulations for investments, borrowings,
lending, deposits, export and import of currency,
guarantees, surrender of foreign exchange, foreign
currency accounts, remittance of assets, immovable
property, derivative contracts, etc.
 Most of the transactions could be undertaken under
the general permission.
Foreign Direct
Investment
Diagrammatic presentation
Foreign
Investments
FDI
Portfolio
Investments
Venture Capital
Investments
Other
investments
Investment
on non
repartriable
basis
SEBI regd.
FVCIs
Automati
c route
Govt
Route
FIIs
VCF,
IVCUs
PROI
FII
15
NRI,
PIO
NRI, PIO
NRI, PIO
Perspective of the policy
•
Government Policy : The entire FDI policy and
procedures, as notified by the Government from time to
time, are duly incorporated under FEMA Regulations.
•
Transparent and liberal FDI.
- Positive list.
- The differential treatment is limited to a few entry
rules.
- A few banned sectors (like lotteries, gambling, betting,
etc.)
- Sectors with limits on foreign equity proportion.
•
National treatment
- Subject to these foreign equity conditions a foreign
company can operate under the same laws, rules and
regulations as any Indian owned company.
16
FDI Policy Framework
•
FDI by NRs in Res. Entities through transfer or issue of
security to PROI is a Cap. A/c transaction is regulated
under FEMA, 1999 & its regulations. The regulatory
framework consists of Acts, Regulations, Press Notes,
Press Releases, Clarifications, etc.
•
Inbound investments are regulated by :
− Department of Industrial Policy & Promotion (FC
Section), Ministry of Commerce, Government of India
makes policy pronouncements on FDI through
PNs/PRs. DIPP has released Consolidated FDI Policy
vide Circular NO.1 of 2011 dated 1 April 2011 which is
effective from 1st April2011.
− RBI has the power to prohibit, restrict or regulate the
transfer or issue of any security by a person resident
outside India under section 6(3)(b) of the Foreign
Exchange Management Act, 1999 (“FEMA”)
17
Sector classification

Prohibition – 9 items.
 Investment up to 100% under Automatic Route in
most sectors (like Floriculture, Horticulture,
Greenfield Airports projects);
 Investment in 17 sectors under Government Route
(such as Defence – 26%, Tea-100%, ARC-49%, CIC49%, Commodity Exchanges-49%, Sex-49%, Satelite74%).
 13 sectors subject to sectoral caps (Pvt. banking-74%,
Insurance-26%, Air Port-74%, Telecom-49% to 74%,
Broadcasting-20% to 49%, Print media-26%)
FDI procedure
 Governed by :[Govt. Policy 01-10-2011, FEMA
Notf. No 20 & Circulars issued by RBI ].
 Eligible investment : [EQ/FMCPS/FMCD].
 Routes : [Automatic & Approval].
 Pricing : [ listed SEBI/unlisted DCF method].
 Time limit : [within 180 days from the date
receipt
of investment].
 Reporting : [ Inflow, FC-GPR part A(RO)/B(DSIM),
FC-TRS ( transfer ), DR [ADRs/GDRs]
monthly/quarterly
External Commercial
Borrowings
ECB Policy
• India’s external debt includes external assistance, NRI
deposits, short-term credit and rupee debt. ECB’s are a
key component of external debt.
• The important aspect of ECB policy is to provide
flexibility in borrowings by Indian corporates, at the
same time maintaining prudent limits for total ECBs
(USD 30 bn. – 2011-12)
• The guiding principles for ECB policy are to keep
maturities long, costs low and encourage
infrastructure ( 9 areas ) and export sector financing .
 Governed by Sec. 6(3)(d) of FEMA, Notf. No 3 /2000
and Cirs. issued by RBI.
Latest Developments
 Redemption of FCCBs – Refinancing;
 Utilisation of 25% of the fresh ECB towards
refinancing of rupee loans;
 Bridge finance for infrastructure sector;
 Enhancement of ECB limit (USD 500 mn. >750 mn.);
 ECBs designated in INR;
 ECB for IDC;
 Structured Obligation for infrastructure sector;
 ECB from foreign equity holders;
 ECB in Renminbi (RMB) – Yuan.
Overseas
Investment
Introduction…

Overseas Investment in JVs/WOSs is an important avenue for
promoting global business by Indian entrepreneurs.

Advantages :
- medium of economic co-op. between India and other countries;
- transfer of technology and skill;
- access to wider global market;
- share of result of R & D;
- promotion of brand image;
contd…
Introduction contd..
- generation of employment;
- utilisation of raw material available in
India;
- utilisation of raw material available in the
host country;
- increase in export of plant & machinery,
goods and services from India;
- source of foreign exchange earnings by way of dividend, royalty,
technical know-how fees and
other entitlements on such investments.
Governed by..
 Section 6 ( 3 ) ( d ) of FEMA, 1999;
 Notification No FEMA. 120/RB-2004
dated July 22, 2004;
 Prohibition: No investment without prior
approval of RB in the following areas- Dealing in real estate;
- Trading in TDRs;
- Banking.
Obligation of Indian party..
 Receiving share certificates/documentary evidence in
r/o investment and submission of it to the designated
AD;
 Repatriation of all receivables due in r/o investments
made;
 Compliance with the reporting requirement ( Form
ODI/APR);
 Reporting of FCCB;
 Repatriation of disinvestment proceeds.
LATEST LIBERALISATION..
 Performance Guarantee issued by the Indian Party;
 Restructuring of Balance Sheet of the overseas entity
involving write-off of capital and receivables;
 Disinvestment by the Indian Parties of their stakes in
an overseas JV/WOS involving write-off;
 Issue of guarantees by an Indian Party to step down
subsidiary of JV/WOS under general permission.
TRADE
IMPORT/EXPORT
Trade – Imports..
 Import is regulated by DGFT as per FTP. ADs
should ensure that import is in conformity with
FTP and Current A/c. transactions Rules, 2000.
ADs should also follow normal banking
procedures and adhere to the provisions of UCPDC
as well as R & D Cess Act, 1986, Income Tax Act
and KYC guidelines issued by RBI.
Trade – Exports…
 Export trade is regulated by DGFT as per FTP –
Sec.7 of FEMA. Applicable Rules / Regulations are




Current A/c. Rules (sch.II and III)
FEMA Notification No.8, 9, 14 and 23
RBI guidelines in respect of exports to erstwhile USSR
By RBI in respect of Romania.
 Exemption from declarations are listed in
Regulation 4 of FEMA 23/2000.
 Latest development : Online Payment Gateway
Service Provider. [ OPGSP ]. Value per transaction
enhanced from USD 500 to USD 3000.
OTHER CAPITAL
ACCOUNT
TRANSACTIONS
Foreign Currency Accounts..
 Governed by Notf. No. 10/ 2000.
 Types of Accounts permitted:
- EEFC
- RFC
- RFC(D)
- EFC
- OTHERS (Diplomats, non-diplomats, Ads,
shipping/ airline companies, LIC, GIC,
students, trading/non-trading offices, etc).
Deposit Accounts…
 Governed by Notf. No. 5/2000
 Types of Accounts:
- NRO
- NRE
- FCNR(B)
 ADs can allow remittance/s up to USD 1 million,
for bonafide purpose per calendar year from
balances in NRO accounts subject to payment of
applicable taxes. The limit of USD 1 million per
year includes sale proceeds of immovable
properties held by NRIs/ PIO.
Liberalised Remittance Scheme…
 Any Resident can remit $200,000 in a
financial year: for any current (except Schedule I
and II) or capital account transactions.
 This is a new facility in addition to all the
existing facilities.
 Only for individuals (not for corporate, trusts
firms, etc); GP to open foreign currency a/c abroad
and acquire immovable property out of this amount.
 Requirement- PAN No & 1 year banking relation.
 An application cum declaration has been prescribed
.
 Banks to market schemes after clearance from
DBOD.
Latest liberalisations - individuals
 NRIs can be joint holders in Resident – SB / EEFC / RFC









accounts;
Residents can be joint holders in NRE / FCNR accounts;
Resident can gift shares / Debentures up to USD 50,000 per
financial year;
Sale proceeds of FDIs can be credited to NRE / FCNR account;
Gift to NRIs can be credited to NRO account in Rupees;
Loans to close relatives can be given in Rupees;
Residents can repay the loans given to close relatives;
Residents can bear Medical Expenses of NRIs (close relatives);
FNCR (B) allowed in permitted currencies.
Income and sales proceeds of assets held abroad under LRS need
not be repatriated on return to India.
Penal provisions….
 Governed by Chapter IV viz. Contravention and
penalties.
- Sec 13: Adjudication and penalties.
- Sec 14: Enforcement of the order of the
Adjudication authority.
- Sec 15: Compounding by RBI/DoE
[A.P(Dir Series Circular
No. 56/28.06.2010)].
- Sec 49: Sunset clause.
CAC approach
 Endeavour to move towards CAC.
 Process not an event.
 Cautious approach.
 Inflow related outflows – no restrictions.
 No back-tracking.
 Festina lente.
 Guiding force – FCAC, 2006.
Initiatives taken by RBI
 CAC 1997;
 FEMA, 1999
 CPPAPS, 2003.
 Compounding, 2005 and 2010.
 FCAC, 2006
 Task Force, 2006
 CRFI, 2011