Foreign Exchange Management Act (FEMA), 1999: FAQs

Following are frequently asked questions on the Foreign Exchange Management Act, 1999

1. Define import under FEMA, 1999.

According to Section 2 (p) of Foreign Exchange Management Act, 1999 “import”, with its grammatical variations and cognate expressions, means bringing into India any goods or services.

2. Define person resident outside India.

According to Section 2 (w) of Foreign Exchange Management Act, 1999 “person resident outside India” means a person who is not resident in India.

3. Give any two instances of Current Account Transaction under FEMA, 1999.

Current Account Transactions includes:

Business transactions between residents and non-residents.
Short-term banking and credit facilities in the ordinary course of business.
Payments towards interest on loans
Income from investments.
Payment of expenses of parents, spouse or children for living abroad
Payment of expenses of parents, spouse or children on their foreign travel, medical and education.

4. Define Foreign Exchange under FEMA, 1999.

According to Section 2 (n) of Foreign Exchange Management Act, 1999 “foreign exchange” means foreign currency and includes:

(i) deposits, credits and balances payable in any foreign currency,

(ii) drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency,

(iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency.

5. Who is authorized person under FEMA, 1999?

According to Section 2 (c) of Foreign Exchange Management Act, 1999 “authorised person” means an authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under sub-section (1) of section 10 to deal in foreign exchange or foreign securities.

6. What is capital account transaction under FEMA, 1999?

According to Section 2 (e) of FEMA, 1999 “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 referred to in sub-section (3) of section 6.

7. Define Foreign Security under FEMA, 1999.

According to Section 2 (o) of Foreign Exchange Management Act, 1999 “foreign security” means any security, in the form of shares, stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency and includes securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency.

8. What is export under FEMA, 1999?

According to Section 2 (l) of Foreign Exchange Management Act, 1999 “export”, with its grammatical variations and cognate expressions, means—

(i) the taking out of India to a place outside India any goods,

(ii) provision of services from India to any person outside India;

9. What is repatriation of Foreign Exchange under FEMA, 1999?

A person is deemed to have repatriated all the realised foreign exchange to Indian when the person has received payment in India in Rupees from the account of a bank or an exchange house in any country that is situated outside India and which is maintained with an authorised dealer.

Short Notes:

1. Exemption from realization and repatriation in certain cases:

According to Section 9 of FEMA, 199, the provisions of sections 4 and 8 shall not apply to the following, namely:

(a) possession of foreign currency or foreign coins by any person up to such limit as the Reserve Bank may specify;

(b) foreign currency account held or operated by such person or class of persons and the limit up to which the Reserve Bank may specify;

(c) foreign exchange acquired or received before the 8th day of July, 1947 or any income arising or accruing thereon which is held outside India by any person in pursuance of a general or special permission granted by the Reserve Bank;

(d) 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 to in clause (c), including any income arising therefrom;

(e) 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; and

(f) such other receipts in foreign exchange as the Reserve Bank may specify.

2. Direct investment outside India

Overseas Investment (OI) means Financial Commitment and Overseas Portfolio Investment by a person resident in India. Financial Commitment means the aggregate amount of investment made by a person resident in India by way of:

(i) Overseas Direct Investment. (ODI)

(ii) Debt (other than OPI) in a foreign entity or entities in which ODI is made.

(iii) Non-fund-based facilities to or on behalf of such foreign entity or entities.

The total Financial Commitment made by an Indian entity in all the foreign entities taken together at the time of undertaking such commitment cannot exceed 400% of its net worth as on the date of the last audited balance sheet or as directed by RBI. It is pertinent to mention here that the erstwhile regulations allowed unexhausted limit of holding as well as subsidiary for reckoning the limit of 400% of the net worth of the Indian Party. The change is now only the net worth of the investor entity (Indian Entity) is to be considered. Further, Corporate Guarantees by specified group companies are allowed. However, it should be noted that they will be counted towards the utilisation of such group companies’ financial commitment.

3. Instances of Current Account Transactions under FEMA, 1999.

A current account transaction has been defined as a transaction other than capital account transactions and includes transactions such as payments which are due in connection with foreign trade, other current business, services, short term banking and credit facilities taken in the ordinary course of business, payments which are due as interest on loans and also as net income from investments, remittances sent for the living expenses of parents, spouse and children who are residing abroad and also the expenses in relation to education, foreign travel and medical care of parents, spouse and children.

Current Account Transactions includes:

Business transactions between residents and non-residents.
Short-term banking and credit facilities in the ordinary course of business.
Payments towards interest on loans
Income from investments.
Payment of expenses of parents, spouse or children for living abroad
Payment of expenses of parents, spouse or children on their foreign travel, medical and education.

The definition is ‘inclusive’ i.e. besides aforesaid expenses, any expenditure which is not a ‘capital account transaction’ will be a current account transaction.

Example- Own expenses on foreign travel, education, medical care, expenses are covered as ‘current account transaction’ even if not specified above.

4. Capital Account Transactions

A capital account transaction is a very subjective definition and comprises of such transactions which alter the ‘assets’ or ‘liabilities’ and also includes ‘contingent liabilities’ of both non-residents in India and residents outside India. Section 6(3) also provides for the regulated capital account transactions such as transfer or issue of any Indian security by a non-resident, transfer or issue of foreign security by an Indian resident, borrowing or lending etc.

As per Schedule I read with Regulation 3, a person resident of India is permitted to buy or sell foreign currency for following capital account transactions. Provided that the amount transaction should not exceed permitted threshold.

Investment by a person resident in India in foreign securities.
Foreign currency loans raised in India and abroad by a person resident in India.
Transfer of immovable property outside India by a person resident in India.
Guarantees issued by a person resident in India in favor of a person resident outside India.
Export, import and holding of currency/currency notes
Loans and overdrafts (borrowings) taken by a person resident in India from a person resident outside India.
Maintenance of foreign currency accounts in India and outside India by a person resident in India.
Taking out an insurance policy by a person resident in India from an insurance company outside India.
Loans and overdrafts by a person resident in India to a person resident outside India.
Remittance outside India of capital assets of a person resident in India.
Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India.

Under the Liberalised Remittance scheme (“LRS”), Capital account transactions are permitted upto USD 2,50,000 per financial year without RBI approval. Any capital account transaction above USD 2,50,000 shall require prior approval of RBI.

5. Joint venture Abroad:

The term overseas direct investment (ODI) means an investment that occurs outside India. This term is different from the term foreign direct investment. Foreign direct investment is an investment made by a foreign entity in India.

The RBI has provided the meaning for a joint venture. Joint venture is a foreign company formed as per the laws of the foreign country, where an Indian party makes a direct investment. An Indian Party has to make a direct investment in a joint venture to come under the meaning of overseas direct investment.

An Indian entity has to enter into a joint venture agreement with a foreign company prior to making any form of investment. Under this agreement, the parties may or may not agree to share profits.

The following are allowed to make an investment in a joint venture:

A Partnership which is defined under the Indian Partnership Act, 1932;
A Limited Liability Partnership is defined under the provisions of the Limited Liability Partnership Act, 2008;
Any other entity which is permitted to make this investment as per the instructions of the RBI; and
A group of entities when making overseas direct investment, then all the entities would be termed as an Indian party.

The above entities are permitted to invest in a joint venture under the ODI route.

An investment is also called a financial commitment. Financial commitment can be understood as a contribution to the equity or 100 percent of the amount of guarantee or 50% of performance guarantee. This commitment is provided by the Indian party to the overseas joint venture.

6. Adjudicatory authority under FEMA, 1999:

Foreign Exchange Management Act, 1999 (FEMA) was enacted by an act of Parliament of India. It was enforced on 1^st June 2000. FEMA was brought in with a view to promoting the systematic development and maintenance of a healthy foreign exchange market in India.

Section 16 of the Foreign Exchange Management Act, 1999 (FEMA), provides for the appointment of adjudicating authority. It provides that-

The Central Government is authorized to appoint as many officers as the adjudicating authorities by publishing an order under the official gazette. They are appointed for holding an inquiry against whom the complaint has been made in the prescribed manner.
In the order published in the official gazette, the Central Government is required to specify, while appointing the adjudicating authority under FEMA, about their respective jurisdictions.

If the Adjudicating Authority fails to dispose of the complaint within the said or specified period then the Authority should give the reasons in writing. Section 17 of the Act deals with Appeal to Special Director.

Section 18 of the Act, talks about the establishment of the Appellate Tribunal which says that the Central Government through a notification may establish an Appellate Tribunal for foreign exchange in order to hear the appeals regarding the orders of the Adjudicating Authorities and the Special Director (Appeals).

7. Authorized Person:

As per Section 2(c) of the Foreign Exchange Management Act 1999, authorised person means an authorised dealer, money changer, off shore banking unit or any other person who has been authorised under Section 10(1) of the FEMA to deal in foreign exchange and foreign securities.

Authorised persons have the authorisation from the Reserve Bank of India to deal in foreign exchange. The FEMA 1999, states that RBI may authorise any person to be known as authorised person, on an application made to the RBI in this behalf, to deal in foreign exchange or foreign securities as an authorised dealer, money changer or off shore banking unit. Such authorisation shall be in writing, and such authorisation shall be revoked in case the RBI believes that it is in public interest to do so or where the authorised person has failed to comply with the conditions upon which the authorization was granted. However, a reasonable opportunity of being heard shall be provided before revoking such authorisation.

All the nationalised banks, leading non-nationalised banks as well as foreign banks are chosen as authorised dealers category I to deal in foreign exchange. They may deal in other transactions in foreign exchange such as bill of exchange, cheques, letters of credit, deposits etc. They can buy from the public in India TTs, MTs, drafts, bills etc., drawn in foreign currency against rupees.

The RBI has the power to inspect an authorised person whereby it can verify the authenticity of a statement, information or particulars submitted to the Reserve Bank. The RBI can also obtain any information or particulars that the authorised person has failed to furnish on being asked to do so.

8. Manner of repatriation:

Section 8 of the FEMA provides that where any amount of foreign exchange is due or is accrued to any person resident in India, then it is the responsibility of that person to make all reasonable efforts to realise and repatriate to India such foreign exchange within a specific time period and in such manner as has been specified by the RBI.

Regulation 3 of the Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2015 further provide that a person resident in India should refrain from taking any action which results in delay in receipt of foreign exchange in whole or in part or stops in whole or in part the foreign exchange to be received by him.

For example, if a person resident in India exports develops a software product and sells the same to a company resident outside India. If the person to whom he sold the product is untraceable, then it becomes the responsibility of the seller to make all reasonable efforts to recover from resident outside Indian or otherwise report about the same to RBI.

Once a person has realised an amount of foreign exchange which is due, it shall be his duty to repatriate such foreign exchange in India i.e. bring into or receive in India and –

Sell such foreign exchange to an authorised person in exchange of Indian currency i.e., rupees; or
Retain or hold such amount in an account with a foreign dealer in India up to the ceiling limit specified by the Reserve Bank of India; or
Use such foreign exchange to discharge a debt or any liability denominated in foreign exchange to the extent and manner prescribed by the Reserve Bank of India.

It must be noted that the due foreign exchange amount means an amount which a person has a right to claim or right to receive in foreign exchange.

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