FEMA 1999: Notes and Repeated Questions

The Foreign Exchange Management Act, 1999 replaced FERA and shifted the entire philosophy from regulation by prohibition to management by facilitation. That single sentence explains most of the conceptual questions in this chapter. The numerical ones come from the limits table in Part 3.

Part 1Chapter-wise quick notes

Framework and administration

• FEMA came into force on 1 June 2000, replacing FERA 1973.
• The objective is to facilitate external trade and payments and to promote the orderly development and maintenance of the foreign exchange market in India.
• Reserve Bank of India administers FEMA. Central Government makes rules for current account transactions; RBI makes regulations for capital account transactions.
• Contravention under FEMA is a civil offence, not criminal as under FERA. Burden of proof shifted from the accused to the department.
• Enforcement is by the Directorate of Enforcement.

Key definitions Sec 2

• Person resident in India Sec 2(v) — a person residing in India for more than 182 days during the preceding financial year, but excluding a person who has gone out of India or stays outside India for employment, business, or any other purpose indicating an intention to stay outside India for an uncertain period.
• Note the direction of travel: intention matters. A person leaving India for employment becomes a non-resident from the day of departure, irrespective of the 182-day count.
• Capital account transaction Sec 2(e) — one that alters the assets or liabilities outside India of a person resident in India, or assets or liabilities in India of a person resident outside India.
• Current account transaction Sec 2(j) — a transaction other than a capital account transaction. Includes payments due in connection with foreign trade, short-term banking and credit facilities, interest on loans, net income from investments, remittances for living expenses of family, and expenses for foreign travel, education and medical care.
• Authorised person Sec 2(c) — an authorised dealer, money changer, offshore banking unit or any other person authorised by RBI to deal in foreign exchange.
• Repatriate to India Sec 2(y) — bringing into India the realised foreign exchange and selling it to an authorised person, or holding it in an account with an authorised dealer.

Regulation of transactions Sec 3 to 9

• Sec 3 — Dealing in foreign exchange only through an authorised person. Prohibits hawala type transactions.
• Sec 4 — Restriction on holding foreign exchange, foreign security, or immovable property outside India by a person resident in India.
• Sec 5 — Current account transactions are freely permitted, subject to reasonable restrictions imposed by the Central Government in consultation with RBI.
• Sec 6 — Capital account transactions. Permitted only to the extent specified by RBI regulations.
• Sec 7 — Export of goods and services; declaration of full export value to be furnished.
• Sec 8 — Realisation and repatriation of foreign exchange.
• Sec 9 — Exemptions from realisation and repatriation.

Current account transaction rules

The Foreign Exchange Management (Current Account Transactions) Rules, 2000 classify transactions into three schedules:

• Schedule I — Transactions prohibited altogether. Remittance out of lottery winnings, income from racing or riding, purchase of lottery tickets and sweepstakes, remittance of dividend where dividend balancing applies, payment of commission on exports towards equity investment in Indian JVs abroad, remittance of interest income on funds held in an NRSR account.
• Schedule II — Transactions requiring prior approval of the Central Government (the concerned Ministry). Cultural tours, remittance of freight of vessel chartered by a PSU, multi-modal transport operators making remittances to their agents abroad, remittance of prize money exceeding prescribed limits.
• Schedule III — Transactions requiring prior approval of RBI above specified limits. This is where the Liberalised Remittance Scheme sits.

Liberalised Remittance Scheme

• Available to resident individuals only, including minors. Not available to corporates, partnership firms, HUFs, trusts.
• Limit of USD 2,50,000 per financial year per individual for permitted current and capital account transactions, or a combination of both.
• Permitted uses include private visits, gift or donation, employment abroad, emigration, maintenance of close relatives, business travel, medical treatment, studies abroad, and investment in shares or immovable property overseas.
• Not permitted for margin trading, lottery, purchase of FCCBs issued by Indian companies in the overseas secondary market, or remittance to countries identified by FATF as non-cooperative.
• A PAN is mandatory. Remittances are subject to TCS under the Income-tax law at prescribed rates and thresholds.

Foreign direct investment

• Two entry routes: Automatic Route, requiring no prior approval, and Government Route, requiring prior approval of the concerned administrative ministry through the Foreign Investment Facilitation Portal.
• Sectors where FDI is prohibited: lottery and gambling, chit funds, Nidhi company, trading in transferable development rights, real estate business or construction of farm houses, manufacture of cigars and tobacco substitutes, and sectors not open to private sector investment such as atomic energy and railway operations.
• Note that “real estate business” excludes development of townships, construction of residential or commercial premises, roads or bridges, and REITs registered with SEBI.
• Investment from a country sharing a land border with India requires Government approval regardless of sector.
• Reporting: Form FC-GPR for issue of shares, filed within 30 days of allotment. Form FC-TRS for transfer between resident and non-resident, filed within 60 days of receipt or remittance of funds. Annual return on Foreign Liabilities and Assets (FLA) by 15 July each year.

Contravention, penalty and appeal Sec 13 to 35

• Sec 13 — Penalty up to three times the sum involved where the amount is quantifiable, or up to ₹2 lakh where it is not. Where the contravention is continuing, a further penalty up to ₹5,000 per day.
• Sec 15 — Compounding of contraventions. Any contravention under Sec 13 may be compounded within 180 days of receipt of the application. Compounding is not available for contraventions under Sec 3(a), which are dealt with by the Directorate of Enforcement.
• Sec 16 — Adjudicating Authority appointed by the Central Government.
• Sec 17 — Appeal to Special Director (Appeals) within 45 days.
• Sec 19 — Appeal to the Appellate Tribunal within 45 days, on deposit of the penalty amount.
• Sec 35 — Appeal to the High Court on a question of law within 60 days.
• Sec 37A — Seizure of value equivalent situated in India, where foreign exchange or property is held outside India in contravention of Sec 4.

Part 2Repeated questions

Part 3Recall rail