Introduction to FEMA

Group Members:P. VijayRahulRupeshSameeraSpurtiVijay Singh

INTRODUCTIONThe Foreign Exchange Management Act, 1999

(FEMA) came into force with effect from June 1, 2000.

With the introduction of the new Act in place of FERA, certain structural changes were brought in.

The Act consolidates and amends the law relating to foreign exchange to facilitate external trade and payments, and to promote the orderly development and maintenance of foreign exchange in India.

(1) This Act may be called the Foreign Exchange Management Act, 1999.

(2) It extends to the whole of India.(3) 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 there under committed outside India by any person to whom this Act applies.

(4) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint:

FERA vs. FEMA Preamble of FERA:

An act to consolidate and amend the law regulating certain payments, dealings in foreign exchanges and securities.

Transactions affecting foreign exchange and import and export of currency for the conservation of the foreign exchange resources of the country.

In simple terms:

It is amended to regulate the ebb and flow of foreign exchange in and out of the country, in the interest of the economic development of the country.

Preamble of FEMA:

An act:I. To consolidate and amend the law relating to

foreign exchange.II. With the objective of facilitating external trade

and payments.III. For promoting the orderly development and

maintenance of foreign exchange market in India.

From the preamble of both the acts the objectives are obviously different.

FEMA

I. Amended. in 1999.

II. Regulates & manages foreign exchange.

III. All current account transactions are permissible by law.

IV. Civil law.

V. It is the duty of enforcement authority to prove a that a person has committed an offense.

FERA

I. Amended in 1973.

II. It controls foreign exchange.

III. Almost all foreign exchange transactions are prohibited unless under a specific or general permission.

IV. Criminal law.

V. It is the duty of the accused to prove his innocence

FEMA

VI. Burden of proof is on the enforcement agency.

VII. Offences are compounded by paying penalty.

VIII. Elaborate redressal procedure is available for the implicated person for fair and total justice while settling the question of contravention.

IX. Both FEMA & FERA were Issued by the Central Govt

/ granting general

permission.

FERA

VI. Burden of proof is on the implicated person.

VII. Offenses are not compounded.

VIII. No elaborate procedure is available for the implied person to prove his innocence.

governed by the notifications

Reserve Bank of India for

X. FEMA enumerates all the areas where special permission of the Reserve Bank of India / Central Government is required.

This is not in of case FERA.

Applicability of the Law:

The act extends to the whole of India. It applies to all branches, offices and agencies

outside India owned or controlled by a person resident in India.

The act has come into force with effect from June 1st 2000.

Definition under Sec 2 of this Act

Authorized Person:

Authorized dealer, money changer, offshore banking

unit or any other person for the time being

authorized under the Act to deal in foreign

exchange or foreign securities.

Capital Account Transaction:

Transaction that alters the assets or liabilities

outside India or assets or liabilities in India of

persons resident outside India.

Currency:

All currency notes, postal notes, postal orders, money orders,

cheques, letters of credit, bill of exchange and promissory notes

or such other similar instruments are recognized as currency by

RBI.

RBI has notified debit cards, ATM cards or any other instrument

that can be used to create a financial liability as “currency”.

Foreign Exchange: Foreign currency which includes …..

I. Deposits, credits and bills of balances payable in any foreign

currency.

II. Drafts, traveller’s cheques, letters of credit letters of credit of

bills of exchange expressed or drawn in Indian currency but

payable in any foreign currency.

III. Drafts, traveller’s cheques, letters of credit or bills

of exchange drawn by banks, institutions or

persons outside India, but payable in Indian

currency.

Foreign Security:

Any security in form of shares, stocks, bonds,

debentures or any other instrument denominated of

expressed in foreign currency.

But redemption or any form of return such as

interest or dividend is payable in Indian currency.

Person resident in India:

I. A person residing in India for more than 182

days during the course of the preceding

Financial year.

II. Any person or corporate registered or

incorporated in India.

III. An office, branch or agency in India owned or

controlled by a person resident outside India.

IV. An office, branch or agency outside India owned

or controlled by a person resident in India.

Repatriate to India:

Bringing into India the realized foreign exchange.

I. The selling of realized foreign exchange to an

authorized person in India in exchange for

rupees or

II. Holding the realized amount in an a/c with an

authorized person in India notified by RBI.

This realized foreign exchange can be used for

discharge of a debt or liability denominated in

foreign exchange.

Overseas Corporate Body (OBC):

A company, partnership firm, society and other

corporate body owned directly or indirectly to the

extent of at least 60% by non-resident Indians.

Convertible currency / Hard currency:

Certain currencies are freely convertible i.e. one can

exchange these currencies with any other currencies

without any restriction.

Major among these are: Dollars, Pound Sterling, Euro,

Yen etc.

This is often called as ‘hard currency’.

Dealing in foreign exchange: Except as otherwise provided in this Act, rules or regulations

made there under, or with the general or special permission of the Reserve Bank, no person shall:-

(a) deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;

(b) make any payment to or for the credit of any person resident outside India in any manner;

(c) receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner.

• For the purpose of this clause, where any person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person (including an authorized person) without a corresponding inward remittance from any place outside India, then, such person shall be deemed to have received such payment otherwise than through an authorized person;

• (d) enter into any financial transaction in India as consideration for or in association with acquisition or creationor transfer of a right to acquire, any asset outside India by any person.

• Explanation.-For the purpose of this clause, "financial transaction" means making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt.

HOLDAINGS OF FEMA

• Holding of foreign exchange, :- except as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

Current account transactions.-

• Any person may sell or draw foreign exchange to or from an authorized person for a current account transaction. Provided that 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 prescribed.

Capital account transactions.- 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: Provided that the Reserve Bank shall not impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary courts of business.

• (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.

• (6) Without prejudice to the provisions of this section, the Reserve Bank may, by regulation, prohibit, restrict, orregulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business.

EXPORT OF GOODS & SERVICES

• Under section 7 its mandatory for every exporter to furnish a declaration containing the information about the amount & export value of exporting goods to RBI or other authority as prescribed. If export value is not ascertainable then expected value must be informed.

• Similarly in case of services exporter is required to submit a declaration to RBI or other prescribed authority containing the true & correct particulars in relation to payment for such services.

REALIZATION & REPATRIATION OF FOREIGN EXCHANGE

• Under section 8 the person resident in India has to follow all reasonable steps to realize & repatriation the foreign exchange within a time period & according the procedure as per guidelines issued by RBI

EXEMPTION FROM REALIZATION & REPATRIATION• section 9 provides exemption in some cases where section 4

& 8 shall not apply1) Possession of foreign currency or foreign coins up to a limit

given by RBI2) Possession of foreign currency notes, banks note, or

travellers cheques not exceeding US$ 2000 or equivalent.

3) Foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means up to limit decided by RBI.

4) Other receipt in foreign exchange as the RBI may specify.

CONTRAVENTION AND PENALTIES1. PENALTIES:• If any person contravenes any provision of this Act, or

contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization s issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to RS.2,00,000 where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.

• Again, Section 13, Any Adjudicating Authority may, if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government and further direct that the foreign exchange holdings, if any, of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf.

2. ENFORCEMENT OF THE ORDERS OF ADJUDICATING AUTHORITY:

• section 14, provide that if any person fails to make full payment of the penalty imposed on him within a period of 90 days from the dateon which the notice for payment of such penalty is served on him, he shall be liable to civil imprisonment under this section.

• No order for the arrest and detention in civil prison of a defaulter shall be made unless the Adjudication Authority has issued and served a notice upon the defaulter calling upon him to appear before him on the date specified in the notice and to show cause why he should not be committed to the civil prison.

• A warrant for the arrest of the defaulter may be issued by the Adjudicating Authority if the Adjudicating Authority is satisfied, by affidavit or otherwise, that with the object or effect of dealing the execution of the certificate the defaulter is likely to abscond or leave the local limits of the jurisdiction of the Adjudicating Authority. The arrest warrant may be issued by the Adjudicating Authority if the defaulter fails to make an appearance in pursuance of the notice issued by him. A arrest warrant issued by the Adjudicating Authority may also be executed by any other Adjudicating Authority within whose jurisdiction the defaulter may for the time being be found.

• Every person arrested in pursuance of a warrant of arrest under this section shall be brought before the Adjudicating Authority issuing the warrant as soon as practicable and in any event within 24 hours of his arrest (exclusive of the time required for the journey). However, if the defaulter pays the amount entered in the warrant of arrest as due and the costs of the arrest to the officer arresting him, such officer shall at once release him.

• However, pending conclusion of inquiry, the Adjudication Authority may detain the defaulter or release him on his furnishing the security to the satisfaction of the Adjudicating Authority for his presence as and when required. After the conclusion of the inquiry, the Adjudicating Authority may make an order of detention in civil prison and order for arrest if not accounted earlier.

3. POWER TO COMPOUND CONTRAVENTIONS:• Section 15 empowers the Directorate of Enforcement

or Officers of the Directorate of Enforcement and Officers of the Reserve Bank as may be authorised by the Central Government in this behalf to compound the offences. Any contravention under section 13 may be compounded on an application made by the person committing such contravention within 180 days from the date of receipt of application. Further, any contravention so compounded, relieves the accused person from further proceedings for that contravention.