FOREIGN EXCHANGE MANAGEMENT ACT

Presented By
Dheeraj

FOREIGN EXCHANGE MANAGEMENT ACT

The Foreign Exchange Management Act (FEMA), 1999, has been enacted as part of the ongoing liberalization process. The Act was implemented w.e.f. June 1, 2000.

Foreign exchange control was first introduced in September,

1939 under the Defense 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

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.

DIFFERENCE BETWEEN FERA AND FEMA

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.

SCOPE OF FEMA
FEMA provides:
1. Free transactions on current account subject to reasonable restrictions that may be imposed.
2. 3. RBI controls over capital account transactions. Control over realization of export proceeds.

4. Dealing in foreign exchange through authorized persons like authorized dealer/money changer/off shore banking unit. 5. Adjudication of Offences.

6. Appeal provision including Special Director (Appeals) and Appellate Tribunal.

DEALINGS IN FOREIGN EXCHANGE

Current Account Transactions Capital Account Transactions

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.

CAPITAL ACCOUNT TRANSACTION

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. Export, import or holding of currency or currency notes.

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 authorized 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:

CURRENT ACCOUNT TRANSACTIONS

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.
2. 3.

Payment due as interest on loans as net income from investment.

Remittances for living expenses of parents, spouse and children Expense in connection with foreign travel, education and

residing abroad. medical care of parents, 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)].

CONT..
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)].

CONT..
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)]