Foreign Exchange Management Act, 1999 Revised Final

Business Law Class Notes

IV Semester BBM

Foreign Exchange Management Act, 1999 With With the the libe libera rali liza zati tion on and and glob global aliz izat atio ion, n, it was was felt felt that that the the Fore Foreig ign n Exch Exchan ange ge Regu Regula lati tion on Ac Actt 19 1973 73 (FER (FERA) A) sh shou ould ld be repl replac aced ed by a more more business friendly enactment. With this view in mind, the Foreign Exchange Management Act, 1999 (42 of 1999) (FEMA) was passed.

Objective:  The object of Foreign Exchange Regulation Act, 1973 (FERA) was to conserve the the fore foreig ign n reso resour urce ces, s, wher wherea eas s the the obje object cts s of the the Fore Foreig ign n Exch Exchan ange ge Manage Managemen mentt Act, Act, 19 1999 99 (FEMA) (FEMA) were were to consol consolida idate te and amend amend the law relating to Foreign Exchange with the objective of facilitating external trade and payments for promoting the orderly development and maintenance of  foreign exchange market by India. Scop Scope e of the the Act: Act: (Mea (Means ns wher where e all all this this Act Act appl applie ies s and and How How it applies) 1.  This Act may be called the Foreign Exchange Management Act, 1999. 2. It exten extends ds to the the whole whole of of India. India. 3. It shall also apply apply to all branches branches,, office offices s and agenci agencies es outside outside India owne owned d or cont contro roll lled ed by a pers person on resi reside dent nt in Indi India a and and also also to any any contra contraven ventio tion n thereu thereunde nderr commi committe tted d outsid outside e India India by any person person to whom this Act applies. 4. The The Fore Foreig ign n Exch Exchang ange e Mana Manage geme ment nt Ac Act, t, 19 1999 99 (FEM (FEMA) A) as also also the the Rules, Notifications and Orders issued by the Government of India and Reserve Bank of India (RBI) under the Act, form the statutory basis of  Foreign Exchange Management in India. 5. The

Act has received the assent of President of India on 29-12-1999 and has come into force with effect from 01-06-2000.

Salient Features of the Act:  The Foreign Exchange Management Act, 1999 (FEMA) is more transparent in its application. It has laid down the areas where specific permission of the Reserve Bank / Government of India is required. In rest of the cases no such permis permissio sion n would would be needed needed and a person person can remit remit funds funds and acquir acquire e assets, assets, incur liability liability in accordance accordance with the specific provisions provisions laid down in the Act or Notifications issued by the Reserve Bank / Government of India 1

Business Law Class Notes

IV Semester BBM

under the Act, without seeking approval of the Reserve Bank / Government of India.

The salient features of FEMA are given below: Application ion of FEMA may 1. Applicat may be seen seen broa broadl dly y from from two two angle angles s viz. viz.,, capital account transaction and current account transactions. (a) Capital Account Transactions: Capital Account Transactions release to movement movement of capital, capital, e.g., transactions transactions in property property and investmen investments ts and lending and borrowing money. Current Account Transactions: All other transactions, which do not fall in capital account category, are current account transactions. They are freely permitted subject to few restrictions. Like certain transaction needs permission from RBI and Central Govenrament. (In the above two points a clear understanding is required between the two typs of transactions) transactions) (b)

2. Some other other Featu Features res of the the FEMA FEMA are: (a)  The Foreign Exchange Management Act and Rules give full freedom to a person resident in India, who was earlier resident outside India to hold or own or transf transfer er any foreig foreign n securi security ty or immova immovable ble proper property ty sit situate uated d outside India and acquired when he/she was resident there. ---- Rights of persons who is a resident Indian with regards to FEMA (b) Similar Similar freedom freedom is also given given to to a resident resident who who inherits inherits such such securit security y or immovable property from a person resident outside India. (c) A person person resident resident outsid outside e India is permitt permitted ed to hold shares, shares, securi securitie ties s and properties acquired by him while he/she was resident in India. The above three points discusses the rights or degree of freedom given to resident Indian and non residant  To give effect to the provisions of the Act the Government of India have, amon among g othe others rs,, made made Fore Foreig ign n Exch Exchan ange ge Mana Manage geme ment nt (Cur (Curre rent nt Ac Acco coun untt  Transactions) Rules, 2000 under section 5 read with Section 46 of the Act.   The Reserve Bank of India has also made the following Rules/Regulations/ issued Notifications under various provisions of the Act, which are: (i) 2

Rules Rules rela relatin ting g to Curre Current nt Acco Account unt Transa Transacti ctions ons..

Business Law Class Notes

IV Semester BBM

(ii) Regulation Regulations s relati relating ng to to Capital Capital Account Account Transactions Transactions.. (iii) (iii) Regulation Regulations s relating relating to Export Export of Goods Goods Service Services. s. (iv) Other Other Regulation Regulations s / Notifications Notifications issued issued by Reserve Reserve Bank Bank of India.

1. Definitions: Definitions: need to have an understanding understanding of the definitions definitions Chapter - I of the Act, deals with the definitions Section 2 of the Act has defined certain words, which have been used in the Act. The important definitions definitions are as follows: (1)

'Authorized person' - [Section 2(c)] : means an authorized dealer, money changer, offshore banking unit or any other person for the time being authorized under sub-section (1) of Section 10 to deal in foreign exchange exchange of foreign foreign securitie securities. s. Basically Basically a person/org person/organizat anization ion who has the authority to deal in foreign exchange

(2)

'Currency' - [Section 2(h)]: The currency includes all currency notes, postal orders, money orders, cheques, drafts, travelers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank.

(3)

'Forei 'Foreign gn Ex Excha change nge'' - [Sect [Section ion 2(n)] 2(n)] : Foreig Foreign n Exchan Exchange ge means means foreign currency and include:

(i) deposits, deposits, credits credits and balances balances payabl payable e in any foreign foreign currency currency.. draf drafts ts,, trav travel elle lerr cheq cheque ues, s, lett letter ers s of cred credit it or bill bills s of exch exchan ange ge,, expr expres esse sed d or draw drawn n in Indi Indian an curr curren ency cy but but payabl payable e in any any fore foreig ign n currency.

(ii)

(iii) (iii) drafts, drafts, travellers travellers cheque, letters letters of credit credit or bills bills of exchange drawn by bank banks, s, insti institu tuti tion ons s or pers person ons s outs outsid ide e Indi India, a, but but paya payabl ble e in Indi Indian an currency. (4)

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'Foreign 'Foreign Currency Currency'' - [Section [Section 2(M)]: 2(M)]: Foreign Currency means any

Business Law Class Notes

IV Semester BBM

currency other than Indian currency. (5)

'Person' - [Section 2(u)]: Person includes:

(i) (ii) (ii) (iii (iii)) (iv) iv)

an in individual; a hin hindu du undi undivi vide ded d fami family ly;; a com compa pany ny;; a fir firm; an association of person or a body of individuals, whether any of the proceeding sub-clauses.

(v)

'Person Resident in India' - [Section 2(V)]: A person resident of  India means; A person residing in India for more than one hundred and eighty two days during during the course of the preceding, preceding, financial year. It is important important to note that the reason for travelling abroad is important. If a person is staying abroad for an uncertain period he becomes an NRI if he comes back before 182 days.

(6)

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(7)

'Security' - [Section 2(za)]: Security means shares, stocks, bonds and debentures. Government securities as defined in the public debt Act, 1944 (18 of 1944), Saving Certificates to which the Government savings Certificate Act, 1859 (46 of 1959) applies, deposit receipts in respect of  deposits and securities and units of the Unit Trust of India established under Sub-section (1) of Section 3 of the Unit Trust of India Act, 1963 (52 of 1963) or of any mutual fund and including certificates of title to securities, but does not include bills of exchange or notes other than Government Promissory Notes or any other instrumentals which may be notified by the Reserve Bank as the security for the purposes of this Act.

(8)

'Capi 'Capital tal Accoun Accountt Transa Transacti ction' on' - [Sect [Section ion 2(e)] 2(e)] : Capital Capital Account Account   Transaction means a transaction which alters the assets or liabilities, including contingent liabilities, outside India or 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 the Section 6.

(9)

'Curre 'Current nt Accou Account nt Transa Transact ction ion'' - [Sect [Section ion 2(h)]: 2(h)]: Current Current Account Account

Business Law Class Notes

IV Semester BBM

 Transaction means, transaction other than a capital account transaction and and withou thoutt prej prejud udic ice e to the gene generralit ality y of the for foregoi egoing ng su such ch transactions includes: (i)

Payment due in connection with foreign trade, other current business, servic services es and shortshort-ter term m banking banking and credit credit facili facilitie ties s in the ordina ordinary ry course of Business.

(ii) Payments Payments due due as intere interest st on loans loans and as net income income from from invest investment ments. s. (iii) (iii) Remittance Remittances s for living expense expenses s of parents, spouse and and children children residing residing abroad, and Expenses in connection with foreign travel, education and medical care of parents, spouse and children.

(iv)

2. Regulation Regulation and Management Management of Foreign Exchange: Exchange: Provisions of  FEMA Dealing in Foreign Foreign Exchange, Etc., Etc., - [Section [Section 3]: ---- who can deal in in Foreign Exchange Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of Reserve Bank, no person shall: (a) deal in or transfer transfer any foreign foreign exchange exchange or foreign security security to any person person not being an authorized person; (b) make make any payment payment to or for the credit credit of any person person residen residentt outsid outside e India in any manner; (c) receive receive otherwis otherwise e through an authorized authorized person, person, any payment payment by order or on behalf of any person resident outside India in any a ny manner; In nutshell only an authorized person shall deal in foreign exchange.

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Business Law Class Notes

IV Semester BBM

Hold Holdin ing g Of Fo Fore reig ign n Ex Exch chan ange ge,, Et Etc. c.,, - (Sec (Secti tion on 4): 4): ---------- Hand Handli ling ng similar to handling of baggage in airports. – means when a foreign exnache is transacted who can handle or involve in the transaction Save as otherwise provided in this Act, no person resident in India shall acqu acquir ire, e, hold hold,, own, own, poss posses ess s or trans transfe ferr any any fore foreig ign n exch exchang ange, e, fore foreig ign n security or any immovable property situated outside India. Current Account Transactions - (Section 5): Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawn is a current account transaction: Prov Provid ided ed that that the the Cent Centra rall Gove Govern rnme ment nt may, may, in publ public ic inte intere rest st and and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed. ------(no restrict restrictions ions Howe Howeve verr cert certai ain n tran transac sacti tion ons s are are not not rest restri rict cted ed------(no examples) 1. payment payment for impor imports ts under open open general general license license 2. payment payment of dividen dividend d on approved approved foreign foreign investme investment nt 3. payment payment of intere interest st on approve approved d borrowed borrowed funds funds 4. salary salary to to foreig foreign n direct directors ors 5. paymen paymentt to airlin airline e bookin bookings, gs, shipping shipping compani companies es and for transfe transferr of  cargo

Capital Account Transactions-(Section 6): (1) Subject Subject to the provisions provisions of sub-section sub-section (2), any person person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. (2) (2) The Reserve Reserve Bank may, may, in consul consultat tation ion with the Central Central Govern Governmen ment, t, specify : (a) any class or classe asses s of capi apital account trans ansactions which are are permissible; (b) (b) the the limi limitt up to whic which h fore foreig ign n exch exchang ange e sh shal alll be admis admissi sibl ble e for for su such ch transactions: (3)

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Rest Restri rict ctio ions ns examples)

of

capi capita tall

acco accoun untt

tran transa sact ctio ions ns

------(Restrictions

Business Law Class Notes

IV Semester BBM

(a) (a) tran transf sfer er or issue issue of any any fore foreig ign n secu securi rity ty by a pers person on resi reside dent nt outs outsid ide e India; (b) transfer transfer or issue issue of any any securit security y by a person person reside resident nt outside outside India; India; (c)

any borrowin borrowing g or lendin lending g in forei foreign gn exchan exchange ge or in Indian Indian rupees rupees in whatever form or by whatever name called;

(d) deposits deposits between between persons persons resident resident in in India and person persons s resident resident outside outside India; (e) export, export, impor importt or holdin holding g of curren currency cy or currency currency notes; (f) (f)

tran transf sfer er of immo immova vabl ble e prop proper erty ty outsid outside e Indi India, a, other other than than a lease lease not exceeding five years, by a person resident in India;

(g) acquisitio acquisition n or transfer transfer of immovab immovable le propert property y in India, India, other than than a lease not exceeding five years, by a person resident outside India; (h) (h) givi giving ng of a guar guarant antee ee or su sure rety ty in resp respec ectt of any debt, debt, obli obligat gatio ion n or other liability incurred: (i) (i)

by a pers person on resi reside dent nt in Indi India a and and owed owed to a pers person on resid residen entt outs outsid ide e India; and

(ii) (ii) by a person person resid resident ent outsid outside e India India..

Export Expo rt of Good Goods s and and Serv Servic ices es - (Sec (Secti tion on 7): 7): exporting (1) (1) Every Every export exporter er of goods goods shal shall: l: (a)

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-------------ru rule les s whil while e

furnish to the Reserve Bank or to such other authority a declaration in

Business Law Class Notes

IV Semester BBM

such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export. (b) furnis furnish h to the Reser Reserve ve Bank such such other infor informat mation ion as may be require required d by the Reserve Bank for the purpose of ensuring the realization of the export proceeds by such exporter. (2) (2) Every Every export exporter er of service services s shall furnis furnish h to the Reser Reserve ve Bank Bank or to such other authorities a declaration in such form and in such manner as may be specif specified ied,, contai containin ning g the true true and correc correctt mater material ial partic particula ulars rs in relation to payment for such services.

Realization Realization And Repatriation Repatriation Of Foreign Exchange - (Section 8): Save Save as othe otherw rwis ise e prov provid ided ed in this this Ac Act, t, wher where e any any amou amount nt of fore foreig ign n exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank. Exempt Exem ptio ion n from from Re Real aliz izat atio ion n and and Re Repa patr tria iati tion on in Cert Certai ain n Case Casess(Section 9): (a) possession possession of forei foreign gn currency currency or or foreign foreign coins coins by any any person person up to such such limit as the Reserve Bank may specify; s pecify; (b) (b) fore foreig ign n curr curren ency cy accoun accountt held held or oper operat ated ed by su such ch perso person n or class class of  persons and the limit up to which the Reserve Bank may specify; (c) foreign foreign exchange exchange acquir acquired ed from from employme employment, nt, business, business, trade, trade, vocation, vocation, services, honorarium, gifts, inheritance or any other legitimate means up to such limit as the Reserve Bank may specify; and (d) (d) su such ch othe otherr rece receip ipts ts in fore foreig ign n exch exchan ange ge as the the Rese Reserv rve e Bank Bank may specify.

3. Authorized Persons To Deal In Foreign Exchange: Chapter - III of the Act, relates to the Authorization of a person by the Reserve Bank to deal in Foreign Exchange:

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Business Law Class Notes

IV Semester BBM

Authorized Person - (Section 10): (1)  The Reserve Bank may authorize any person to be known as authorized pers person on to deal deal in fore foreig ign n exch exchan ange ge or in fore foreig ign n secu securi riti ties es,, as an authorized dealer, money changer or off-shore banking unit or in any other manner as it deems fit. Reserve Bank's Powers To Issue Directions To Authorized Person (Section 11):  The Reserve Bank may, for the purpose of securing compliance with the provi provisio sions ns of this this Act and of any rules, rules, regula regulatio tions, ns, notifi notificat cation ions s or dire direct ctio ions ns made ade ther thereu eund nder er,, give give to the the auth author oriz ized ed pers person ons s any any direction in regard to making of payment or the doing or desist from doing any act relating to foreign exchange or foreign security. Power Of Reserve Bank To Inspect Authorized Person – (Section 12):  The Reserve Bank may, at any time, cause an inspection to be made by any officer of the Reserve Bank specially authorized in writing by the Reserve Bank in this behalf, of the business of any authorized person as may appear to be necessary. 4. Contravention and Penalties: Penalties-(Section Penalties-(Section 13): (1) (1) If any person person contrav contravene enes s any provisio provision n of this Act, Act, or contra contraven venes es any rules, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is 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 two lakh rupees where the amount is not quantifiable, and where where such such contra contraven ventio tion n is a contin continuin uing g one, one, furthe furtherr penalt penalty y which which may extend to five thousand rupees for every day after the first day during which the contravention continues. (2) (2) Any Any Ad Adju judi dicat catin ing g Au Auth thor orit ity y adju adjudg dgin ing g any cont contra rave vent ntio ion n unde underr su subbsection (1), 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.

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Business Law Class Notes

IV Semester BBM

Appeal to Appellate Tribunal - (Section 19): Save as provided in sub-section (2), the Central Government or any person aggrieved by an order made by an Adjudicating Authority, other than those referred to in sub-section (1) of Section 17, or the Special Director (Appeals), may prefer all appeal to the Appellate Tribunal;

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