FOREIGN EXCHANGE MANAGEMENT ACT, 1999.

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FOREIGN EXCHANGE MANAGEMENT ACT,1999.

• FLY WITH FEMA

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Contents

• Introduction.
• Objective and salient features.
• Important sections of FEMA.
• Mechanism under FEMA.
• Current Account.
• Capital Account.
• L. R. S.
• Penal Provisions.
• Capital Account Convertibility - Approach

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Introduction..

• Exchange control was introduced as a temporary
  measure in 1939.
• Placed on statutory basis in 1947 (FERA 1947)
• FERA 1947 replaced by FERA 1973.
• FERA 1973 replaced by FEMA 1999.
• Exchange control in existence 72 years.
• Can be phased as
  - 5 decades of
  control
• - a decade of reforms
• - a decade of FEMA.

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FEMA, 1999-Objectives..

• FEMA, 1999 came into effect from 01.06.2000.
• To consolidate the law relating to foreign
  exchange with the objective of facilitating
  external trade and payments and for promoting the
  orderly development and maintenance of foreign
  exchange market in India.
• It extends to whole of India. 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
  thereunder committed outside India by any person
  to whom this Act applies.

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Salient features

• Shift in object.
• Govt. / RBI powers clearly demarcated.
• FX transactions categorised Current / Capital
• Provisions dependant on residential status.
• Residential status on the basis of stay as well
  as purpose.
• Civil Law
• No arrest.
• Prosecution to prove charges against accused.
• Investigation and adjudication segregated.
• A new concept - Compounding introduced.
• Compounding in a definite time-frame (180 days.
• Sun-set clause introduced.

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Important sections..

• There are 49 sections in FEMA.
• Main sections are
• Sec.2 Definitions.
• Sec.3 Dealing in FE.
• Sec.4 Holding of FE.
• Sec.5 Current Account.
• Sec.6 Capital Account
• Sec.7 Export of Goods and Services.
• Sec.8 Realisation / repatriation of FE.
• Sec.9 Exemption from Sec.8
• Sec.10(5) Declaration
• Sec.10(6) Freedom to utilize forex
• Sec.13 to 15 Penal provisions

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Mechanism under FEMA
Passed by the Parliament the Legislature
Current Account by the Government
Act FEMA
AP Dir Circulars to APs
Notified in the Gazette by the Executive
All aspect of Forex transactions by the RBI
Capital Account by the RBI
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A. P. Catagorisation..

• AD Cat I
• - Com. Banks
• - State Co-op Banks
• - Urban Co-op Banks
• AD Cat II
• - Up Graded FFMCs
• - Co-op. Banks
• - RRBs
• - Others
• Select Financial and other Institutions
• FFMCS

• All current capital account transactions.
• Specified non-trade current account transactions.
• Transactions incidental to their FE activities.
• Purchase of FC sale of FE for pvt/business
  visits.

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Forex Transactions

• Types of transactions -
• Current A/c and
• Capital A/c.
• Rational
• Current A/c The transactions which are
• not prohibited are
  permitted.
• Sec. 5 freedom to
  draw FE
• Capital A/c The transactions which are
• not permitted are
  restricted.
• Sec. 6 RB, may by
  regulation prohibit,
• restrict or regulate.

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Current A/c transactions..

• Meaning A transaction other than Capital account
  transaction and includes
• - payment due in connection with foreign
• trade, other current business, services
• - interest on loans and 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.

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Current A/c contd

• Governed by Sec. 5 read with Current Account
  rules notified by Govt. and AP (Dir) circulars
  issued by RBI.
• Compliance
• Rule No. 3 - Sch. I - Prohibition.
• Items - 8
• Rule No. 4 - Sch. II - Govt. approval.
• Items - 10
• Rule No. 5 Sch. III RBI approval
• Items 13
• All other current a/c transactions freely
  permitted

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Capital A/c transactions.

• Meaning 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-sec.(3)of Sec. 6.
• Governed by Sec. 6 read with Regulations
  notified by RBI AP (Dir) Cir. Issued by RBI.
• Regulations Notf. No. FEMA. 1/2000 read with
  Nos. 2 to 25, 71 101.
• Notf. No. 1 Sch I- classes of cap. a/c
  transactions of persons
• resident in
  India
• Sch II classes of cap
  a/c transactions of
• persons resident
  out side India.

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Important cap a/c transactions

• Separate regulations for investments, borrowings,
  lending, deposits, export and import of currency,
  guarantees, surrender of foreign exchange,
  foreign currency accounts, remittance of assets,
  immovable property, derivative contracts, etc.
• Most of the transactions could be undertaken
  under the general permission.

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Foreign Direct Investment
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Diagrammatic presentation
Foreign Investments
Investment on non repartriable basis
Venture Capital Investments
Portfolio Investments
Other investments
FDI
SEBI regd. FVCIs
FIIs
NRI, PIO
Automatic route
Govt Route
NRI, PIO
VCF, IVCUs
PROI
FII
NRI, PIO
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Perspective of the policy

• Government Policy The entire FDI policy and
  procedures, as notified by the Government from
  time to time, are duly incorporated under FEMA
  Regulations.
• Transparent and liberal FDI.
• - Positive list.
• - The differential treatment is limited to a few
  entry rules.
• - A few banned sectors (like lotteries,
  gambling, betting, etc.)
• - Sectors with limits on foreign equity
  proportion.
• National treatment
• - Subject to these foreign equity conditions a
  foreign company can operate under the same laws,
  rules and regulations as any Indian owned
  company.

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FDI Policy Framework

• FDI by NRs in Res. Entities through transfer or
  issue of security to PROI is a Cap. A/c
  transaction is regulated under FEMA, 1999 its
  regulations. The regulatory framework consists of
  Acts, Regulations, Press Notes, Press Releases,
  Clarifications, etc.
• Inbound investments are regulated by
• Department of Industrial Policy Promotion (FC
  Section), Ministry of Commerce, Government of
  India makes policy pronouncements on FDI through
  PNs/PRs. DIPP has released Consolidated FDI
  Policy vide Circular NO.1 of 2011 dated 1 April
  2011 which is effective from 1st April2011.
• RBI has the power to prohibit, restrict or
  regulate the transfer or issue of any security by
  a person resident outside India under section
  6(3)(b) of the Foreign Exchange Management Act,
  1999 (FEMA)

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Sector classification

• Prohibition 9 items.
• Investment up to 100 under Automatic Route in
  most sectors (like Floriculture, Horticulture,
  Greenfield Airports projects)
• Investment in 17 sectors under Government Route
  (such as Defence 26, Tea-100, ARC-49,
  CIC-49, Commodity Exchanges-49, Sex-49,
  Satelite-74).
• 13 sectors subject to sectoral caps (Pvt.
  banking-74, Insurance-26, Air Port-74,
  Telecom-49 to 74, Broadcasting-20 to 49,
  Print media-26)

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FDI procedure

• Governed by Govt. Policy 01-10-2011, FEMA
  Notf. No 20 Circulars issued by
  RBI .
• Eligible investment EQ/FMCPS/FMCD.
• Routes Automatic Approval.
• Pricing listed SEBI/unlisted DCF method.
• Time limit within 180 days from the date
  receipt of investment.
• Reporting Inflow, FC-GPR part A(RO)/B(DSIM),
• FC-TRS ( transfer ), DR
  ADRs/GDRs
• monthly/quarterly

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External Commercial Borrowings
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ECB Policy

• Indias external debt includes external
  assistance, NRI deposits, short-term credit and
  rupee debt. ECBs are a key component of external
  debt.
• The important aspect of ECB policy is to provide
  flexibility in borrowings by Indian corporates,
  at the same time maintaining prudent limits for
  total ECBs (USD 30 bn. 2011-12)
• The guiding principles for ECB policy are to keep
  maturities long, costs low and encourage
  infrastructure ( 9 areas ) and export sector
  financing .
• Governed by Sec. 6(3)(d) of FEMA, Notf. No 3
  /2000 and Cirs. issued by RBI.

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Latest Developments

• Redemption of FCCBs Refinancing
• Utilisation of 25 of the fresh ECB towards
  refinancing of rupee loans
• Bridge finance for infrastructure sector
• Enhancement of ECB limit (USD 500 mn. gt750 mn.)
• ECBs designated in INR
• ECB for IDC
• Structured Obligation for infrastructure sector
• ECB from foreign equity holders
• ECB in Renminbi (RMB) Yuan.

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Overseas Investment
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Introduction

• Overseas Investment in JVs/WOSs is an important
  avenue for promoting global business by Indian
  entrepreneurs.
• Advantages
• - medium of economic co-op. between India and
  other countries
• - transfer of technology and skill
• - access to wider global market
• - share of result of R D
• - promotion of brand image
• 
  contd

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Introduction contd..

• - generation of employment
• - utilisation of raw material available in
• India
• - utilisation of raw material available in the
• host country
• - increase in export of plant machinery,
• goods and services from India
• - source of foreign exchange earnings by way of
  dividend, royalty, technical know-how fees and
• other entitlements on such investments.

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Governed by..

• Section 6 ( 3 ) ( d ) of FEMA, 1999
• Notification No FEMA. 120/RB-2004
• dated July 22, 2004
• Prohibition No investment without prior
• approval of RB in the following areas-
• - Dealing in real estate
• - Trading in TDRs
• - Banking.

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Obligation of Indian party..

• Receiving share certificates/documentary evidence
  in r/o investment and submission of it to the
  designated AD
• Repatriation of all receivables due in r/o
  investments made
• Compliance with the reporting requirement ( Form
  ODI/APR)
• Reporting of FCCB
• Repatriation of disinvestment proceeds.

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LATEST LIBERALISATION..

• Performance Guarantee issued by the Indian Party
• Restructuring of Balance Sheet of the overseas
  entity involving write-off of capital and
  receivables
• Disinvestment by the Indian Parties of their
  stakes in an overseas JV/WOS involving write-off
• Issue of guarantees by an Indian Party to step
  down subsidiary of JV/WOS under general
  permission.

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TRADEIMPORT/EXPORT
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Trade Imports..

• Import is regulated by DGFT as per FTP. ADs
  should ensure that import is in conformity with
  FTP and Current A/c. transactions Rules, 2000.
  ADs should also follow normal banking procedures
  and adhere to the provisions of UCPDC as well as
  R D Cess Act, 1986, Income Tax Act and KYC
  guidelines issued by RBI.

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Trade Exports

• Export trade is regulated by DGFT as per FTP
  Sec.7 of FEMA. Applicable Rules / Regulations
  are
• Current A/c. Rules (sch.II and III)
• FEMA Notification No.8, 9, 14 and 23
• RBI guidelines in respect of exports to erstwhile
  USSR
• By RBI in respect of Romania.
• Exemption from declarations are listed in
  Regulation 4 of FEMA 23/2000.
• Latest development Online Payment Gateway
  Service Provider. OPGSP . Value per
  transaction enhanced from USD 500 to USD 3000.

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OTHER CAPITAL ACCOUNT TRANSACTIONS
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Foreign Currency Accounts..

• Governed by Notf. No. 10/ 2000.
• Types of Accounts permitted
• - EEFC
• - RFC
• - RFC(D)
• - EFC
• - OTHERS (Diplomats, non-diplomats, Ads,
• shipping/ airline companies, LIC, GIC,
• students, trading/non-trading offices, etc).
  

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Deposit Accounts

• Governed by Notf. No. 5/2000
• Types of Accounts
• - NRO
• - NRE
• - FCNR(B)
• ADs can allow remittance/s up to USD 1 million,
  for bonafide purpose per calendar year from
  balances in NRO accounts subject to payment of
  applicable taxes. The limit of USD 1 million per
  year includes sale proceeds of immovable
  properties held by NRIs/ PIO.

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Liberalised Remittance Scheme

• Any Resident can remit 200,000 in a
• financial year for any current (except
  Schedule I and II) or capital account
  transactions.
• This is a new facility in addition to all the
• existing facilities.
• Only for individuals (not for corporate, trusts
• firms, etc) GP to open foreign currency a/c
  abroad and acquire immovable property out of this
  amount.
• Requirement- PAN No 1 year banking relation.
• An application cum declaration has been
  prescribed .
• Banks to market schemes after clearance from DBOD.

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Latest liberalisations - individuals

• NRIs can be joint holders in Resident SB / EEFC
  / RFC accounts
• Residents can be joint holders in NRE / FCNR
  accounts
• Resident can gift shares / Debentures up to USD
  50,000 per financial year
• Sale proceeds of FDIs can be credited to NRE /
  FCNR account
• Gift to NRIs can be credited to NRO account in
  Rupees
• Loans to close relatives can be given in Rupees
• Residents can repay the loans given to close
  relatives
• Residents can bear Medical Expenses of NRIs
  (close relatives)
• FNCR (B) allowed in permitted currencies.
• Income and sales proceeds of assets held abroad
  under LRS need not be repatriated on return to
  India.

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Penal provisions.

• Governed by Chapter IV viz. Contravention and
  penalties.
• - Sec 13 Adjudication and penalties.
• - Sec 14 Enforcement of the order of the
• Adjudication authority.
• - Sec 15 Compounding by RBI/DoE
• A.P(Dir Series Circular
• No. 56/28.06.2010).
• - Sec 49 Sunset clause.

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CAC approach

• Endeavour to move towards CAC.
• Process not an event.
• Cautious approach.
• Inflow related outflows no restrictions.
• No back-tracking.
• Festina lente.
• Guiding force FCAC, 2006.

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Initiatives taken by RBI

• CAC 1997
• FEMA, 1999
• CPPAPS, 2003.
• Compounding, 2005 and 2010.
• FCAC, 2006
• Task Force, 2006
• CRFI, 2011

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THANKS