Foreign Exchange Management Act (FEMA)

1. Foreign Exchange Management Act(FEMA)

2. Object to conserve and prevent misuse Violation was Criminal Offence and was non compoundable It was a draconian police law To facilitate external trade and payments Violation is a civil offence and is compoundable It is a civil law FERA & FEMA

3. FEMA OVERVIEW FEMA has in total 49 sections in which section 1 to 9 are substantive and the rest sections are procedural/administrative. Section 46 of the Act grants power to Central Government to makes rules and section 47 of the Act grants power to RBI to make regulations to implements its provisions and the rules made there under. RBI is entrusted with the administration and implementation of FEMA Every Rules and Every Rule and Regulation made under this Act shall be laid before each house of parliament

4. Some Important Definitions • "authorized person" means an authorized dealer, money changer, off-shore banking unit or any other person for the time being authorized under the Act to deal in foreign exchange or foreign securities • “person resident in India" means- • a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include- • a person who has gone out of India or who stays outside India, in either case-

5. Some Important Definitions Contd. • for or on taking up employment outside India, or • for carrying on outside India a business or vocation outside India, or • for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; • a person who has come to or stays in India, in either case, otherwise than- • for or on taking up employment in India, or • for carrying on in India a business or vocation in India, or • for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

6. Some Important Definitions Contd. • any person or body corporate registered or incorporated in India, • an office, branch or agency in India owned or controlled by a person resident outside India, • an office, branch or agency outside India owned or controlled by a person resident in India; • "person resident outside India" means a person who is not resident in India;

7. Some Important Definitions Contd. • "foreign exchange" means foreign currency and includes,- • deposits, credits and balances payable in any foreign currency, • drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency, • drafts, travelers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency;

8. Some Important Definitions Contd. • "person" includes- • an individual, • a Hindu undivided family, • a company, • a firm, • an association of persons or a body of individuals, whether incorporated or not, • every artificial juridical person, not falling within any of the preceding sub-clauses, and • any agency, office or branch owned or controlled by such person;

9. NRI & PIO NRI is a person resident outside India who is a citizen of India PIO means a citizen of any country other than Bangladesh or Pakistan, if: • held anytime an Indian Passport • either of his parents or grand parents were citizen of India • the person is a spouse of an Indian origin or of a person referred above

10. Facilities available to NRI & PIO • Bank Accounts: NRE A/C, FCNR A/C, NRO A/C • Repatriation Limit: upto USD 1 million per year from NRO Account • Housing Loans: can obtain Housing Loans for purchasing property in India

11. Acquisition of Immovable Property by NRI & PIO in India • Permitted to purchase Residential and Commercial Property without RBI’S Permission • No Limitation on the Number / size of the Property • Purchase of Agricultural Land/ Plantation Property/ Farm Houses requires RBI Permission • PIO should not be a citizen of Pakistan , Bangladesh , Sri Lanka , Afghanistan , China , Iran , Nepal , Bhutan • Citizen of above Countries not permitted to acquire Immovable Property except by way of Lease for less than five years without permission of RBI

12. Acquisition by NRI & PIO in India Contd. Payment can be made by NRI / PIO out of • Funds remitted to India through normal banking channel or • Funds held in NRE / FCNR / NRO account maintained in India No payment can be made either by traveler's cheque or by foreign currency notes and also no payment can be made outside India.

13. Difference between FEMA & Income Tax Provisions One major distinction is in Income tax unlike FEMA purpose of stay is not relevant and only the period of stay is relevant

14. Types of Accounts-NRE (Non Resident External) • It’s a Rupee Account • Amount Principal as well Interest is freely repatriable • Transfer from/to FCNR A/c permitted • Any form of Account is maintainable • Term Deposit permitted minimum for one and maximum for three years • Nomination/ Joint Holding can be done in name of /with non resident Disadvantages: If Rupee depreciates savings of person counted in USD depreciates

15. Types of Accounts-NRO (Non Resident Ordinary) • It’s a Rupee Account • Current incomes in the account is freely repatriable • Principal amount is repatriable upto USD 1 million Dollar subject to applicable taxes • Any form of Account is maintainable • Term Deposit permitted minimum for one and maximum for three years • Nomination/ Joint Holding can be done in name of /with resident also Disadvantages: If Rupee depreciates savings of person counted in USD depreciates

16. Foreign Currency Non Resident Account • Maintained in Foreign Exchange • No loss or gain due to fluctuations • Both Principal & Interest are repatriable • NRI can open this account • Residents of Pakistan and Bangladesh requires prior RBI approval • Joint Account only with NRI is permissible • Can be opened with funds remitted from outside India through normal Banking Channels and those are of repatriable nature

17. FOREIGN EXCHANGE FEMA prohibits: • Dealing in or transfer of Foreign Exchange or Foreign Security to any person other than Authorised Person • Make any payment otherwise through an authorized person to or for the credit of any person resident outside India in any manner • receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner. • 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

18. Exemptions • possession of foreign currency or foreign coins by any person up to such limit as the Reserve Bank may specify • foreign currency account held or operated by such person or class of persons and the limit up to which the Reserve Bank may specify • foreign exchange acquired or received before the 8th day of July, 1947 • foreign exchange held by a person resident in India up to such limit as the Reserve Bank may specify, if such foreign exchange was acquired by way of gift or inheritance from a person referred above

19. Exemptions Contd. • foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means up to such limit as the Reserve Bank may specify • such other receipts in foreign exchange as the Reserve Bank may specify

20. Repatriation “Repatriate to India" means bringing into India the realized foreign exchange and- • the selling of such foreign exchange to an authorized person in India in exchange for rupees, or • the holding of realized amount in an account with an authorized person in India to the extent notified by the Reserve Bank, • It includes use of the realized amount for discharge of a debt or liability denominated in foreign exchange

21. Manner of Repatriation It can be done in the following manner: • Sell it to Authorised Person in India in exchange for Rupees • Retain in an account with an authorised dealer • Use it for discharge of a debt or liability denominated in foreign exchange in the manner specified by RBI

22. Surrender • Any Foreign Exchange earned by a person other than person resident in India not used for permissible purposes should be surrendered within 60 days of such acquisition / purchase • However if acquired for Foreign Travel within 90 days if the exchange is in currency and coins and 180 days if it is in traveler’s cheque or if the same is acquired by person resident in India These provisions are not applicable to Foreign Currencies of Nepal and Bhutan

23. Manner of receipt in Foreign Exchange Payment for Export can be received : • in form of Draft, cheque, foreign currency notes/traveler’s cheque etc. provided the foreign currency so received is surrendered within the specified time period • by debit to FCNR /NRE Account • In rupees from the credit card servicing bank in India where payment is made via credit card

24. Manner of receipt in Foreign Exchange Contd. • From a rupee account held in the name of exchange house with an authorised dealer if the amount does not exceed Rs 2 lacs • In the form of precious metals • Payment can be received in cash from Foreign Travelers in India if the same foreign exchange is duly surrendered • RBI also permits offsetting of export proceeds against import payables etc. after obtaining prescribed certificate from CA/Cost Accountant in this regard

25. Manner of payment in Foreign Exchange • Payment shall be made in a currency appropriate to the country of shipment of goods • Drawal of Foreign Currency means drawal from an authorised person and includes opening of letter of credit, use of international credit card etc. which has an effect of creating foreign exchange liability

26. Current Account Transactions • Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawal is a current account transaction. • The Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be required from time to time.

27. Current Account Transactions Contd. The definition is inclusive and any expenditure which is not a capital account transaction will be current account transaction. It includes: • payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business • payments due as interest on loans and as 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

28. Current Account Transactions Few Examples • Payment for imports of goods • Remittance of interest on investment made and funds borrowed from abroad after tax deductions • Remittance of Dividend if the investment was allowed without any condition • Booking with Airlines/Shipping • Salary/remuneration to Foreign Directors subject to restrictions in any other law

29. Release of Exchange for Travel The following do not require any approval from RBI: • Upto USD 10,000 or equivalent in one financial year for one or more pvt visits abroad (nepal and Bhutan being exempted ) • Upto USD 25,000 for business visits • Upto USD 1,00,000 for person going to abroad for employment, education (yearly) and for medical Treatment

30. Business and Commercial Remittance Abroad • Foreign Technology Agreements are permitted except in High Priority Industries • Payment can be made on lump sum or Royalty based on sales or by issue of Equity Shares after deducting TDS • There are no limitations on royalty payment and payment of Technical Fees • No collaboration permitted in Lottery, Gambling etc.

31. Restrictions on Current Account Transactions The following requires prior approval of RBI: • Gifts and Donations above USD 5000 • Corporate Donation above 1 % of Foreign Exchange Earning during 3 previous years or USD 5 million, whichever is less • Commission to Agents abroad for sale of residential/commercial plots in India above 5 % of Inward Remittance or USD 25000 , whichever is higher • Consultancy Charges paid abroad for more than USD 1 million • Reimbursement of Pre-incorporation expenses above 5% of FDI or USD 1 lac whichever is higher

32. Prohibited Current Account Transactions • Drawal of exchange for travel to or with residents of Nepal/Bhutan • Commission on export to JV/WOS abroad • Commission on Rupee Trade • Call back Charges • Remittance out of Lottery, racing etc. • Bogus Prizes / Fictitious Schemes etc.

33. Import of Goods & Services Import of Goods and Services is also a Current Account Transaction and is freely permitted however few procedures are required to be followed as • Obtaining of Import License if required • Opening of Letter of Credit • CA Certificate for deduction of TDS for payment made outside • Gold may be imported by nominated agencies/banks on consignment basis

34. Export of Goods & Services • Exporter should make proper Declaration in prescribed forms to Authorised Dealers • Declaration is not required in case Trade Samples, Baggage, Gifts less than 5 lacs etc. • Export of Goods on following requires prior approval • Lease/hire • Counter Trade • Export on Elongated Credit Terms

35. Capital Account Transactions • "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, and includes transactions like: • Changes in Assets/ Liabilities • Transfer/ issue of security • Borrowing/ Lending • Export, import or holding of currency or currency notes • Giving guarantee • Capital Account Transaction are deemed to be prohibited unless permitted and Current Account Transactions are deemed to be permitted unless prohibited

36. Foreign Direct Investment(FDI)

38. Who can make FDI? • Person Resident outside India except of Pakistan • Entity incorporated outside except Pakistan & Bangladesh • Person Resident of Bangladesh & entities incorporated there can make investment in India in form of shares and conv. Debentures with prior approval of RBI

39. Industrial Policy towards Foreign Investment FDI in shares is permitted 100% in all industries except the following: • Proposals requiring Industrial License • Investment exceeding 24% inn SSI reserved items • Investment in Defense sector upto 26% • Foreign collaborator having previous tie up • Acquisition in shares of existing Company • Prohibited Sectors

40. Prohibited Sectors • Retail Trading (except single brand retailing) • Atomic Energy • Lottery Business • Gambling Betting etc. • Business of chit fund • Nidhi Company • Trading in TDRs • Activity /sector not opened for private sector investment • Agriculture except few prescribed • Plantation except tea plantation • Real Estate Business except few prescribed • Manufacture of Cigars, cigarettes etc.

41. Activities requiring Government Approval • Petroleum Sector • Investing Companies in Infrastructure and Service Sector • Defense & Strategic Industries • Atomic Minerals • Print Media • Broadcasting • Postal Services • Courier Services • Establishment & operation of Satellite • Development of Integrated Township • Tea Sector • Asset Reconstruction Company

42. Penalties for Contravention under FEMA • The Penalty could be up to thrice the sum involved where amount is quantifiable • If the Amount is not quantifiable , penalty upto Rs 2 lacs can be imposed • If contravention is of continuing nature, further penalty up to Rs 5000 per day during which the contravention continues can be imposed

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