FEMA & EXCHANGE CONTROL

Articulated By:- Varsha Singh

Spurthi Srinivas
Varun Mittal
Kanishk Bhatnagar
Vedansh Shrivastav
FOREIGN EXCHANGE REGULATION
ACT
TheForeign Exchange Regulation
Act(FERA) was legislation passed
inIndiain 1973 and enacted in the month
of September.
It came into force with effect from January
1, 1974.
FERA was introduced at a time when
foreign exchange (Forex) reserves of the
country were low,
FERA emphasized strict exchange control
over everything that was specified, relating
to foreign exchange.

FERA applied to all citizens of India, all over

India. The idea was to regulate the foreign
payments, regulate the dealings in Foreign
Exchange & securities and conservation of
Foreign exchange for the nation.
To sum up, in FERA anything and
everything that has to do something with
Foreign Exchange was regulated. The
Experts called it a Draconian Act which
hindered the growth and modernization of
Indian Industries.
FEATURES OF FERA
RBI can authorize a person / company to deal in foreign
exchange.
RBI can authorize the dealers to transact in Foreign Currencies,
subject to review and RBI was given power to revoke the
authorization in case of non-compliancy to the rules and
regulations.
RBI would authorize the persons as Money Changers who will
convert the currency of one nation to currency of their nation at
rates Determined by RBI.
NO person, other than authorized dealer would enter in any
transaction of the foreign currency.
For whatever purpose Foreign exchange was required, it was to
be used only for that purpose. If he feels that he cannot use the
currency of that particular purpose, he would sell it to a
authorized dealer within 30 days.
No person in India, without permission from RBI shall
make payments to a person resident outside India and
receive any payment from a person from outside India.
No person shall draw issue or negotiate any bill of
exchange in which a right to receive payment outside
India is created.
No person shall make any credit in an account of a
person resident out of India.
No person except authorized by RBI shall send foreign
currency out of India.
A person who has right to receive the foreign exchange
would have not to delay the receipt of the foreign
exchange.
FOREIGN EXCHANGE MANAGEMENT
ACT
In 1999 the FEMA was passed which replaced
the FERA, though certain provisions of FERA
still exists under FEMA 1999.
FEMA, came into effect from 1st June 2000.
Some structural changes were also made.
FEMA combines and improves the law relating
to Foreign Exchange.
It makes the procedure for foreign exchange
investment easy and consequently
encourages foreign exchange in India.
OBJECTIVES OF FEMA
To facilitate the external trade & payment.
To promote an orderly maintenance of the
foreign exchange market in India.
Regulation of foreign capital in India.
To remove imbalance of payment.
To make strong and developed foreign
exchange market.
To regulate foreign payments.
 BASIS FOR
FERA FEMA
COMPARISON
Meaning An act promulgated, to FEMA an act initiated to
regulate payments and foreign facilitate external trade and
exchange in India, is FERA. payments and to promote
orderly management of the
forex market in the country.
Enactment Old New

Number of sections 81 49

Introduced when Foreign exchange reserves Foreign exchange position

were low. was satisfactory.

Approach towards forex Rigid Flexible

transactions
Basis for determining Citizenship More than 6 months stay in
residential status India

Violation Criminal offence Civil offence

Punishment for Imprisonment Fine or imprisonment (if fine

contravention not paid in the stipulated
time)
 OVERALL STRUCTURE OF
FEMA
The overall structure of Foreign Exchange Management Act,
1999 is covered by legislations, rules and regulations. These
legislations, rules and regulations relating to Foreign Exchange
Management Act, 1999, can be divided in to the followings:

FEMA contains 7 chapters divided into 49 sections (Supreme

Legislation)
5 sets of Rules made by Ministry under section 46 of FEMA.
(Delegated legislations)
23 sets of Regulations made by RBI under section 47 of
FEMA. (Subordinate Legislations)
Master Circular issued by Reserve Bank of India every year.
 Foreign Direct Investment (FDI) policy
issued by Department of Industrial Policy
and Promotion (DIPP) time to time.
Notifications and Circulars issued by
Reserve Bank of India.
Enforcement Directorate.
FEMA contains 7 Chapters divided into 49 sections of
which 12 sections cover operational part and the rest
37 sections deal with contraventions, penalties,
adjudication, appeals, enforcement directions, etc.
FEMA makes provisions for dealings in foreign
exchanges. Broadly, all current account transactions
are free. However, Central Government can impose
reasonable restrictions by issuing rules. The capital
account transactions will be regulated by RBI/Central
Government for which necessary circulars/notifications
will have to be issued under FEMA.
Why FEMA replaced FERA?
FERA was to control everything that was specified, relating to
foreign exchange whereas FEMA lay down that everything other
than what is expressly covered is not controlled'. The overriding
objective of FERA was to regulate and minimize dealings in
foreign exchange and foreign securities while FEMA on the other
hand aims to aid in creation of a liberal foreign exchange market
in India.
This difference in terminology reflects seriousness of
government towards deregulation of foreign exchange and
promotion of free flow of international trade. To facilitate external
trade is concerned; section 5 of the Act removes restrictions on
withdrawal of foreign exchange for the purpose of current
account transactions. As external trade i.e. imports / export of
goods & services involve transactions on current account, there
is no need for seeking RBI permissions in connection with
remittances involving external trade.
Two golden rules or principles in
FEMA

All the current account transactions are

permitted unless otherwise prohibited

All the capital account transactions are

prohibited unless otherwise permitted
 Important sections under
fema
Provisions in Section 3 : Dealings in
Foreign Exchange
Provisions under this section,
a) Prohibits dealing or transferring in foreign
exchange or foreign security except through an
authorised person.
b) Make any payment to or for the credit of any person
resident outside India in any manner.
c) Receive otherwise through an authorised person,
any payment by order or on behalf of any person
resident outside India in any manner.
d) Enter into any financial transaction in India as
consideration for or in association with acquisition
or creation or transfer of a right to acquire, any
asset outside India by any person.
Provisions in Section 4:- Holding of Foreign Exchange
This section restrains any person resident in India from acquiring,
holding, owning, possessing or transferring any foreign exchange,
foreign security or any immovable property situated outside India
except as specifically provided in the Act.
Provisions in Section 5:-Current account transactions
Under this section, any person may sell or draw foreign exchange
to or from an authorised person if such sale or withdrawal is a
current account transaction.
The definition is exclusive and any expenditure which is not a
capital account transaction will be current account transaction. It
includes
Payment due in connection with the foreign trade , other current
business, services and short term banking and credit facilities in
the ordinary course of the business.
Payment due as 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.
Provisions in Section 6:- Capital account transaction
Capital account transaction 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 .
1) Subject to the provisions of sub-section (2), any person may sell or draw
foreign exchange to or from an authorised person for a capital account
transaction.
2) The Reserve Bank may, in consultation with the Central Government,
specify
a. any class or classes of capital account transactions which are permissible;
b. the limit up to which foreign exchange shall be admissible for such transactions

3) Without prejudice to the generality of the provisions of sub-section (2),

the Reserve Bank may by regulations, prohibit, restrict or regulate the
following-
a) transfer or issue of any foreign security by a person resident in India;
b) transfer or issue of any security by a person resident outside India;
c) transfer or issue of any security or foreign security by any branch, office
or agency in India of a person resident outside India;
d) any borrowing or lending in rupees in whatever form or by whatever
name called;
e) any borrowing or lending in rupees in whatever form or by whatever
name called between a person resident in India and a person resident
outside India;
f) deposits between persons resident in India and persons resident outside
India;
g) export, import or holding of currency or currency notes;
h) transfer of immovable property outside India, other than a
lease not exceeding five years, by a person resident in India;
i) acquisition or transfer of immovable property in India, other
than a lease not exceeding five years, by a person resident
outside India;
j) giving of a guarantee or surety in respect of any debt,
obligation or other liability incurred-
i. by a person resident in India and owed to a person resident outside India; or
ii. by a person resident outside India.
4) 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 resident outside India or inherited from a person who was
resident outside India.
5) A person resident 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 resident
in India or inherited from a person who was resident in India.
5) A person resident 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 resident in India or inherited
from a person who was resident in India.

6) Without
section, theprejudice to the provisions of this
Reserve Bank
restrict, or may, by regulation, prohibit,
regulate
establishment
other place of in India of a branch, office or
business by on
for carrying a person
any resident outside India,
activity relating
other place of to such branch, office or
business.
Provisions in Section 7:- Exports of goods and
services
1. Every exporter is required to furnish to the RBI or any
other authority, a declaration including the amount
representing the full export value containing true and
correct particulars.
2. The Reserve Bank may, for the purpose of ensuring
that the full export value of the goods or such
reduced value of the goods as the Reserve Bank
determines, having regard to the prevailing market
conditions, is received without any delay, direct any
exporter to comply with such requirements as it
deems fit.
3. Every exporter of services shall furnish to the Reserve
Bank or to such other authorities a declaration in
such form and in such manner as may be specified,
containing the true and correct material particulars in
relation to payment for such services.
GUIDELINES ON EXPORTS AND SERVICES
Realization and Repatriation of Export Proceeds:
- It is obligatory on the part of the exporter to realize and
repatriate full value of goods or software to India within a
stipulated period as under:-
Category of exporter Time frame
Units in Special Economic No specific time frame fixed
Zones (ZESs)
Status Holder Exporter Within 12 months from date of
export
Cent percent EOUs set up Within 12 months from date of
under Electronic Hardware export
Technology Parks (EHTPs) and
Biotechnology Parks (BTPs)
Schemes
Goods exported to Warehouse As soon as it is realized and in
established outside India any case within 15 months
from the date of shipment of
goods
All other cases of export 12 months from the date of
GUIDELINES ON IMPORTS & SERVICES
Imports of goods & services
- General provisions
Import, regulated by FTP, DGFT, GOI, RBI.
Authorised dealers need not obtain any
document, including Form A-1, except a
simple letter from the applicant containing
containing the basic information,
information, as long as the exchange being
purchased is for a current account
transaction when the amount does not
exceed USD 5,000 and the payment is
made by a cheque drawn on the applicant's
bank or by a Demand Draft.
Form A-1 for import
remittances
Applications by persons, firms and
companies for making payments,
exceeding USD 5000 or its equivalent,
towards imports into India must be made in
Form A-1.
ADs may freely open L/Cs and allow
remittances for import. (Except for goods in
negative list)
For Exchange Control purposes copy of
the Licence should be called for & after
effecting remittances banks may preserve
the copies of utilised licences till they are
verified by the internal auditors or
Guarantees for Export
Advance
Banks should, be careful while extending
guarantees against export advances-to ensure that
no violation of FEMA regulations takes place and
banks are not exposed to various risks. It will be
important to carry out due diligence and verify the
track record of such exporters to assess their ability
to execute export orders.
ADs have been allowed to issue guarantees in
respect of a debt, obligation or other liability
incurred by an exporter, exporter, on account of
exports from India, intended to facilitate execution
of export contracts by the exporter and not for
other purposes.
 It has, however, been found that some
exporter borrowers are using export
advances, received on the strength of
guarantees issued by Indian banks, for
repayment of loans availed of fro m Indian
banks. This is a clear violation of FEMA
instructions.
Banks should ensure -export advances
received are in compliance with the FEMA
regulations/ directions.
Other Guarantees regulated by
Foreign Exchange Management Rules
Minor Guarantees in the ordinary
course of business, in respect of missing or
defective documents, authenticity of
signatures and for similar other purposes.
Bank Guarantees - Import under Foreign
Loans/Credits
Guarantees for Non-Residents
Trade Credits for imports into India
Issue of Guarantees
Applications for providing guarantees/
standby letters of credit or letters of
comfort by banks relating to ECB in the
case of SMEs and by textile companies for
modernization or expansion of the textile
units, will be considered by the Reserve
Bank on merit under the Approval Route,
subject to prudential norms.
Dos for NRIs

Distinguish between PRII & PROI

Distinguish current account transactions from
capital account transactions
Inform respective persons of the change in
residential status
Plan ahead- keep a track of investments made from
rupee funds in India and funds remitted from abroad
Understand repatriability of sale proceeds of assets
located in India
Comply with statutory guidelines for filing
documents / reporting requirements for different
transactions
Donts for NRI
Executing Capital Account transactions
which are prohibited/ not covered by a
general permission
Effecting current account transactions
which are prohibited/ restricted
Instructing residents to make onward
payments on their behalf
Netting off of transactions with
residents.