Foreign Exchange Management Act, 1999

Introduction

FERA (Foreign Exchange Regulation Act), 1974 was introduced with the object of
having stringent control to conserve foreign exchange and utilize these scarce
resources in the best interest of the country.

With the liberalized economic environment and increased flow of foreign

exchange to India the draconian provision of FERA were needed to be reviewed.
Therefore FERA was repealed and FEMA, 1999 was passed. However it was
brought into force from June1, 2000.

Objective

FEMA was enacted with the object of

 Consolidating and amending law relating to foreign exchange
 Facilitating external trade and payments
 Promoting orderly payment, development and maintenance of foreign
exchange market in India.

Applicability

This act applies to whole of India and all branches, offices and agencies outside
India owned or controlled by person resident in India.

Important Definitions

1. A person means u/s 2u means

 A individual
 A HUF
 A Company
 A firm
 An association of persons or a body of individual
 Every artificial judicial person
 Any agency, office or branch owned or controlled by such person
2. Person resident in India u/s 2(v) means

 A person residing in India fro more then 182 days in the preceding financial
year but does not include
a. A person who has gone outside India or who stays outside India-
i. For taking up employment outside India
ii. For carrying on business outside India
iii. For any other purpose which indicate his intention to stay
outside India for uncertain period

b. A person who has come to India or who stays in India otherwise than –
i. For taking employment in India
ii. For carrying business in India
iii. Fro any other purpose which indicate his intention to stay in
India for uncertain period.

 Any person or body corporate registered in India

 An office, branch or agency in India owned or controlled by PROI
 An office, branch or agency outside India owned or controlled by PRI

Example 1: Mr. X resided in India during financial year 1999-2000. He left India
on August 1 for USA for pursuing higher studies. State his residential status.

Example 2: Mr. Shekhar resided fro a period of 150 days in India during the
financial year 2003-2004 and then went abroad. State his residential status fro
year 2004-2005.

Restrictions on dealings in foreign exchange u/s 3

1. No person shall deal in transfer of foreign exchange not being a

authorized person.
2. No person shall make any payment to or from the order of any person
resident outside India in any manner.
3. No person shall receive , otherwise through an authorized person, any
payment by order or on behalf of nay person outside India
4. No person shall enter into financial transaction in India to acquire any
asset outside India.
5. No person shall hold, possess, own or transfer any foreign exchange
except in accordance to Act.

However RBI has issued a general permission permitting any person resident in
India to make payment in Indian rupees in the following cases:
1. Expenses of hospitality of person visiting India
2. Purchase of gold or silver
3. Payment to guarantor
4. payment to a whole time director

RBI has also permitted to receive any amount as passed in notification from time
to time.

Definition of Authorized person u/s 10 to 12

AP means any dealer, money changer, offshore banking unit or any other person
from the time being authorized to deal in foreign exchange or foreign securities.

The RBI may, on application made to it in this behalf authorize any person to be
known as authorized person. The authorization will be in writing and shall be
subject to certain condition. Such an authorization can be revoked in public
interest or if the authorized dealer act in contravention of such act.

An authorized dealer has to comply with certain duties which include:

1. to comply with RBI directions
2. not to get engage in any unlawful transaction
3. to ensure compliance with the act
4. to report to RBI apprehended contravention of the act

RBI has power to inspect the AP and its duty of AP to furnish required
information to the inspector.

Regulations regarding Transactions

There are two types of transactions. They are:

1. Current account transaction: Transactions other then capital account
transactions
2. Capital account transaction: means a transaction which alters the asset or
liabilities of a person.

Rules on Current Account Transaction

It is categorized under three categories:

1) Transaction fro which drawl of foreign exchange is prohibited
 Remittance out of lottery winning or income from racing
  Payment of commission on exports made toward equity investment
in joint ventures or wholly owned subsidiaries abroad India
 Payment related to call back services of telephone
 Payment for travel to Nepal or Bhutan
 Any transaction with a person resident in Nepal or Bhutan etc.

2) Transaction permissible with approval of CG

 Cultural tours
 Advertisement in foreign print media
 Remittance of freight of vessel chartered by PSU
 Remittance for membership of P&I club etc.

3) Transaction permissible with approval of RBI

 Remittance exceeding US$10,00,000 per project, for nay consultancy
service procured from outside India
 Donation exceeding US$5000 per donor per annum
 Gift remittance exceeding US$5000 per remitter p.a.
 Remittance for maintenance of close relative abroad
 Remittance fro purchase of trade marks/ franchise in India etc.

Regulation on Capital Account Transaction

1. Permissible transactions of persons resident in India:

 Investment in foreign securities
 Foreign currency loan raised in or abroad
 Transfer of immovable property
 Guarantee issued in favor of PROI
 Loans and overdrafts by PROI
 Maintenance of foreign currency account in and outside India
 Taking insurance policy from company outside India
 Sale and purchase of foreign derivatives

2. Permissible transactions to PROI

 Investment in India in securities or capital in any firm
 Acquisition and transfer of any immovable property
 Guarantee given to PRI
 Deposits in India
 Foreign currency account in India
 Remittance outside India fro capita asset
 3. Prohibited transactions
Investment in:
 Business of chit fund
 As Niddhi company
 In agriculture activities
 In real estate business
 In trading in Transferable Development Rights

Rules regarding exports

As per seation7 every exporters should

 Submit Declaration by the exporter to RBI
 Submit information about the goods to be exported to RBI
 Comply the direction given by RBI
 Take all the necessary steps to release the repatriated amount in foreign
exchange

Penalties under FEMA (section 13)

Penalty is levied in following cases:

1. Where a person contravenes the act
2. Where a person contravenes the condition given by RBI

Amount of penalty is:

1. Where amount is quantifiable, the penalty should not exceed three times the sum
involved
2. Where amount is not quantifiable. Penalty up to Rs.200000 may be levied
3. Where contravention is continuing one. Futher penalty not exceeding Rs.5000 per
day may be levied

Procedure for adjudication

Adjudication means process by which a contravention of nay provision of the Act

is dealt with the appropriate adjudicating authority.

The provisions of adjudication are contained in section 14 and 16 of the act. These
provisions are explained as follows:
1. Cognizance of offence: no enquiry shall be held until and unless a
complaint in writing is made by any officer authorized by CG
2. after receiving the complaint the adjudicating authority shall send notice to
show cause to the accused person as to why an enquiry shall not held
against him
3. The adjudicating authority shall consider the reply of accused person. There
after if it is opinion that the enquiry shall be held, then a notice shall be
issued by the adjudicating authority fixing a date of hearing
4. Accused person may take assistance of a legal practitioner or a CA for
presenting his case
5. The adjudicating authority will explain the contravention made by accused
person and then give an opportunity to such person to produce such
documents or evidence as he may consider relevant for enquiry.
6. adjudicating authority shall endeavor to dispose of complaint within one
year from date of receipt of complaint

The CG shall appoint a special director or appellate tribunal to hear appeal

against the orders of adjudicating authority.