FEMA Flashcards
Explain the meaning of the term “Current Account Transaction” and the right of a citizen to
obtain Foreign Exchange under the Foreign Exchange Management Act, 1999.
The term “current account transaction” is defined in section 2(j) of Foreign Exchange
Management Act, 1999. It means a transaction other than a capital account transaction and
includes:
(i) payments due in connection with foreign trade, other current business, services, and
short – term banking and credit facilities in the ordinary course of business.
(ii) payments due as interest on loans and as net income from investments.
(iii) remittances for living expenses of parents, spouse and children residing abroad and
(iv) expenses in connection with foreign travel education and medical care of parents,
spouse and children.
According to Section 5 of FEMA, 1999 any person may sell or draw foreign exchange to or
from an authorised person if such sale or drawal is 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.
Further, any person may sell or draw foreign exchange to or from an authorised person for a
capital account transaction subject to the provisions of section 6(2).
Mr. X, an Indian national has failed to realise and repatriate foreign exchange worth more than
` 2 crores. Mr. X having realised that he had committed a contravention of the provisions of
the Foreign Exchange Management Act, 1999, desires to compound the said offence. Advise
Mr. X.
Because of his failure to realise and repatriate foreign exchange, Mr. X has contravened the provisions of section 8 of FEMA and he is liable to the penalties leviable
under section 13, followed by adjudication proceedings. Section 15 of FEMA permits the
offending party to compound the contravention within 180 days from the date of receipt of
application by the Director of Enforcement or such other officers of the Directorate of
Enforcement and officers of the Reserve Bank of India as may be authorised in this
behalf by the Central Government in such manner as may be prescribed. No
contravention shall be compounded unless the amount involved in such contravention is
quantifiable. Where a contravention has been compounded, no proceeding can continue
or be initiated against the person in respect of the contravention so compounded.
Question 3
Mr. G., an Indian national desires to obtain Foreign Exchange on current account transactions
for the following purposes:
(i) Payment of commission on exports made towards equity investment in wholly owned
subsidiary abroad of an Indian Company.
(ii) Remittance of hiring charges of transponder by TV channels
Advise G whether he can obtain Foreign Exchange and, if so, under what conditions?
Under Section 5 of Foreign Exchange Management Act, 1999, certain rules have been framed
for drawal of foreign exchange on current account. According to the said rules, drawal of
foreign exchange for certain transactions are prohibited. In respect of certain transactions
drawal of foreign exchange is permissible with the prior approval of Central Government. In
respect of some of the transaction, prior permission of RBI is sufficient for drawal of foreign
exchange.
(i) In respect of item No.1 i.e. Payment of Commission on exports made towards equity
investment in wholly owned subsidiary abroad of an Indian company is prohibited.
(ii) Drawal of foreign exchange for remittance of hiring charges of transponder by TV
Channels, can be made with the prior approval of the Central Government.
In the case of (ii) above, approval of concerned authority is not required if the payment is
made out of funds held in Resident Foreign Currency (RFC) Account or Exchange
Earner’s Foreign Currency (EEFC) Account of the remitter. Further foreign Exchange can
be drawn only from an authorised person.
According to Foreign Exchange Management Act, 1999, a person resident in India shall
take all reasonable steps to repatriate to India any amount of foreign exchange earned
and accrued to him. What is meant by the expression ‘Repatriate to India’? State the
cases where foreign exchange can be held or need not be repatriated to India by a
resident in India.
The word “repatriate to India” is defined in section 2(y) of the FEMA, Act 1999.
‘Repatriate to India’ means the realized foreign exchange should be sold to an authorised
person in India in exchange for rupees. It also includes the holding of realised amount in
an account with an authorised person in India to the extent notified by the Reserve Bank
and includes use of the realised amount for discharge of a debt or liability denominated in
foreign exchange.
Exemption from holding/repatriation.
Section 4 of the FEMA, 1999 prohibits holding of foreign exchange by a resident in India.
Section 8 requires that foreign exchange earned by a resident in India is realised and
repatriated to India.
However, in the following cases, the foreign exchange can be held or need not be
repatriated to India:-
1. Possession of foreign currency – possession of foreign currency or foreign coins
upto limit prescribed by RBI is permitted (section 9(a))
2. Foreign currency account – Foreign currency account can be held and operated by
such persons and within such limits as specified by RBI (Section 9(b))
3 Foreign currency acquired before July 1947 – Foreign exchange acquired or
received before 8th July 1947 or income arising or accruing thereon can be held
outside India (section 9(c))
4. Gift or inheritance – If such foreign exchange is acquired as a gift or inheritance,
that exchange and income arising therefrom can be held as foreign exchange in
India or held abroad and need not be repatriated (Section 9(d)).
5. Foreign exchange acquired abroad – Foreign exchange acquired from employment,
business, trade, vocation, services honorarium, gifts, inheritance, or any other legitimate means can be held as foreign exchange in India or it need not be
repatriated to India subject to limits specified by RBI (Section 9(e))
6. Any other receipts specified by RBI [Section 9(f)]
Explain the meaning of the term “Adjudicating Authority” under the Foreign Exchange
Management Act, 1999, the powers available with the said authority to pass orders
imposing penalty and enforce the same in relation to violation of any provision of FEMA
by Mr. Dubious, a resident in India.
Adjudicating authority: According to Section 2(a) of FEMA, 1999, ‘Adjudicating
Authority’ means an officer authorised under section 16(i).
Power of adjudicating authority: Persons committing an offence under FEMA are liable to
penalty. An adjudicating authority appointed by the Central Government under FEMA can
impose any penalty for violation of any provision of FEMA or contravention of any rule,
regulation, directions or orders issued under the powers conferred by the Act. Their
jurisdiction will be prescribed by the Central Government (section 16(1) & (2)). The
Adjudicating Authority can hold inquiry only on receiving a complaint from an authorised
officer [Section 16(3)].
They have to follow principles of natural justice by giving opportunity to Mr. Dubious of
making representation. The adjudicating authority should endeavor to dispose off the
complaint within one year from the date of receipt of the complaint [Section 16(6)]
The adjudicating authority can impose penalty upto thrice the sum involved in such
contravention where the amount is quantifiable. If the amount is not quantifiable, penalty
upto ` 2 lakhs can be imposed. If contravention is of continuing nature, further penalty
upto Rs 5,000 per day during which the default continues can be imposed [Section 13(i)].
The Adjudicating Authority adjudicating the contravention can also order confiscation of
any currency, security or any other money or property in respect of which the
contravention has taken place. He can also direct that foreign exchange holdings of any
person committing the contravention shall be brought back to India or retained outside as
per directions [Section 13(2)].
Enforcement of orders of adjudicating authority.
Person on whom penalty is imposed is required to make payment within 90 days of
receipt of notice. If such payment is not made, he is liable to civil imprisonment [Section
14(i)]. Such civil imprisonment can be upto 6 months, if demand is for less than ` 1 crore.
If demand exceeds ` 1 crore, civil imprisonment can be upto 3 years. If he pays the
amount, he shall be released. Order for arrest and detention cannot be made unless a
show cause notice is issued to the defaulter. However, arrest can be made without show
cause notice, if adjudicating authority is satisfied (a) that the defaulter has dishonesty
transferred, concealed or removed his property or he is refusing or neglecting to pay
even if he has means to pay [Section 14(2) (b)] and (b) he is likely to abscond the local
limits [Section14(3)].
If a person to whom show cause notice is issued does not appear before Adjudicating
authority, warrant of arrest can be issued [Section 14 (4)].
(i) How will you determine whether a particular business unit like a factory or office is a
‘person resident in India’ under the Foreign Exchange Management Act, 1999?
(ii) ‘Printex Computer’ is a Singapore based company having several business units all
over the world. It has a unit for manufacturing computer printers with its
Headquarters in Pune. It has a Branch in Dubai which is controlled by the
Headquarters in Pune. What would be the residential status under the FEMA, 1999
of printer units in Pune and that of Dubai branch?
(i) Person resident in India
Section 2(v) of FEMA, 1999 defines the term “person resident in India”. According to
Section 2(v) (iii), all business units in India will be “resident in India” even though
these units are owned or controlled by a person resident outside India.
Similarly all business units outside India will be ‘resident in India’ provided the
business units are either owned or controlled by a person resident in India [Section
2(v) (iv)]. It is necessary to determine the residential status of the person who owns
or controls the business unit.
(ii) Printex Computer being a Singapore based company would be person resident
outside India [(Section 2(w)] Section 2 (u) defines ‘person’ under clause (vii)
thereof, as person would include any agency, office or branch owned or controlled
by such person. The term such person appears to refer to a person who is included
in clause (i) to (vii). Accordingly printex unit in Pune, being a branch of a company
would be a ‘person’.
Section 2(v) defines a person resident in India. Under clause (iii) thereof person
resident in India would include an office, branch or agency in India owned or
controlled by a person resident outside India. Printex unit in Pune is owned or
controlled by a person resident outside India, and hence it, would be a ‘person
resident in India.’
However, Dubai Branch though not owned is controlled by Print unit in Pune which
is a person resident in India. Hence prima facie, it may be possible to hold a view
that the Dubai Branch is a person resident in India.
Mr. Ram had resided in India during the Financial Year 1999-2000 for less than 183
days. He again came to India on 1st May, 2000 for higher studies and business and
stayed upto 15th July, 2001. State under the Foreign Exchange Management Act, 1999.
(i) If Mr. Ram can be considered ‘person Resident in India’ during the Financial year
2000-2001 and
(ii) Is citizenship relevant for determining such a status?
(i) No. Mr. Ram cannot be considered ‘Person resident in India’ during the financial
year 2000-2001 notwithstanding the purpose or duration of his stay in India during
2000-2001. An individual has to be present in India for more than 182 days in the
preceding financial year. Mr. Ram does not satisfy this condition for the financial
year 2000-2001.
(ii) No. Citizenship is no more relevant for determining the status.
Mr. Ramesh of Nagpur wants to travel to Nepal and for this purpose proposes to draw
Foreign Exchange. Specify.
(i) Can Mr. Ramesh draw any Foreign Exchange for his journey?
(ii) What are the purposes for which Foreign Exchange drawal is not allowed for
Current Account Transaction?
(i) No. According to the rules, drawal of foreign exchange is not allowed for travel to
Nepal or Bhutan.
(ii) Following are the transactions (current account) for which drawal of foreign
exchange is prohibited.
(1) Remittance out of lottery winnings.
(2) Remittance of income from racing/riding, etc., or any other hobby.
(3) Remittance for purchase of lottery tickets, banned/prescribed magazines,
football pools, sweepstakes etc.
(4) Payment of commission on exports made towards equity investment in Joint
Ventures/Wholly Owned Subsidiaries abroad of Indian companies.
(5) Remittance of dividend by any company to which the requirement of dividend
balancing is applicable.
(6) Payment of commission on exports under Rupee State Credit Route, except
commission up to 10% of invoice value of exports of tea and tobacco.
(7) Payment related to “Call Back Services” of telephones.
(8) Remittance of interest income on funds held in Non-resident Special Rupee
Scheme a/c.
Examine whether the following branches can be considered as a ‘Person resident in
India’ under Foreign Exchange Management Act, 1999:
(i) ABC Limited, a company incorporated in India established a branch at London on
1st January, 2003.
(ii) M/s XYZ, a foreign company, established a branch at New Delhi on 1st January,
2003. The branch at New Delhi controls a branch at Colombo.
Person resident in India (Foreign Exchange Management Act, 1999):
(i) Any person or body corporate registered or incorporated in India is a resident in
India [section 2(v)(ii)]. ‘Person’ includes a company [section 2(u)]. An office,
branches or agency outside India owned or controlled by a person resident in India
is a person resident in India. [Section 2(v)(iv)].
In view of the above provisions in FEMA, 1999 London branch established by ABC
Ltd, a company incorporated in India, is a ‘person resident in India’ under the Act
from the date of establishment i.e. 1st January, 2003.
(ii) According to Section 2(v)(iii) of FEMA, 1999 an office, branch or agency in India
owned or controlled by a person resident outside India is a person resident in India’.
Only a body corporate registered or incorporated in India is a ’person resident in
India’. According to section 2(w), ‘person resident outside India’ means a person
who is not resident in India. Hence M/s XYZ, foreign company is a ‘resident outside
India. But the branch at New Delhi owned by M/s XYZ is a ‘resident in India’ within
the meaning of section 2(v) (iii) from the date of establishment i.e. 1st January,
2003. The branch at Colombo controlled by the branch at New Delhi referred to in
the question is a person ‘resident in India’ within the meaning of section 2(v)(iii)
read with section 2(v)(iv).
Mr. Ramesh is an exporter of goods and services. Explain briefly his duties under
Foreign Exchange Management Act, 1999 with regard to the following:
(i) Furnishing of information relating to such exports.
Duty of every exporter of goods and services under FEMA, 1999:
(i) Furnishing of Information:- Every exporter of goods is required to furnish to RBI or
other prescribed authority, a declaration containing true and correct material
particulars, including the amount representing full export value. If full exportable
value is not ascertainable at the time of export due to prevailing market conditions,
the exporter shall indicate the amount he expects to receive on sale of goods in a
market outside India. The exporter of goods shall also furnish to RBI such other
information as may be required by RBI for the purpose of ensuring realization of
export proceeds by such exporter [section 7(i)].
RBI can direct any exporter to comply with prescribed requirements to ensure that
full export value of the goods or such reduced value of the goods as RBI
determines, is received without delay [section 7(2)]. Every exporter of services shall
furnish to RBI or other prescribed authority a declaration containing true and correct
material particulars in relation to payment of such services [section 7(3)].
(ii) Realisation and repatriation of foreign exchange: Where any amount of foreign
exchange is due or has accrued to any resident in India, such person shall take all
reasonable steps to realize and repatriate to India the foreign exchange within such
period and in such manner as may be specified by RBI (section 8). Mr. Ramesh as an exporter of goods and services must comply with the requirements of section 7
and 8 of the FEMA, 1999 and also with the requirements under Foreign Exchange
Management (Export of Goods and Services) Regulations, 2015 .
Mr. Ram, citizen of India, left India for employment in U.S.A. on 1st June, 2002. Mr. Ram
purchased a flat at New Delhi for 15 lakhs in September, 2003. His brother, Mr. Gopal
employed in New Delhi, also purchased a flat in the same building in September, 2003 for 15
lakhs. Mr. Gopal’s flat was financed by a loan from a Housing Finance Company and the loan
was guaranteed by Mr. Ram.
Examine with reference to the provisions of the Foreign Exchange Management Act, 1999
whether purchase of flat and guarantee by Mr. Ram are Capital Account transactions and
whether these transactions are permissible.
Section 2(e) of Foreign Exchange Management Act, 1999 states that ‘capital account
transactions’ means (a) a transaction which alters the assets or liabilities, including contingent
liabilities, outside India of person’s resident in India (b) a transaction which alters assets or
liabilities in India of persons resident outside India and includes transactions referred to in
section 6(3). According to the said definition, a transaction which alters the contingent liability
will be considered as capital account transaction in the case of person resident in India, but it
is not so in the case of person resident outside India.
Purchase of immovable property by Mr. Ram in India is a capital account transaction. It has
also been specifically provided in section 6(3)(i) as a capital account transaction.
Guarantee will be considered as a capital account transaction in the following cases:
(1) Guarantee in respect of any debt, obligation or other liability incurred by a person
resident in India and owed to a person resident outside India.
(2) Guarantee in respect of any liability, debt or other obligation incurred by a person
resident outside India.
In this case, Mr. Ram, a resident outside India gives a guarantee in respect of a debt
incurred by a person resident in India and owed to a person resident in India. Hence, it
would appear that guarantee by Mr. Ram cannot be considered as a capital account
transaction within the meaning of Section 2(e), particularly because it is a contingent
liability.
All capital account transactions are prohibited unless specifically permitted. RBI is
empowered to issue regulations in this regard [Section 6(3)]. Permissible capital account
transactions by persons resident outside India are given in Schedule II to the Foreign
Exchange Management (Permissible Capital Account Transactions) Regulations, 2000.
According to the said regulations both the purchase of immovable property by Mr. Ram
and guarantee by Mr. Ram are permissible.
Mr. Sane, an Indian National desires to obtain Foreign Exchange for the following
purposes:
(i) Remittance of US Dollar 50,000 out of winnings on a lottery ticket.
(ii) US Dollar 1,00,000 for sending a cultural troupe on a tour of U.S.A.
Advise him whether he can get Foreign Exchange and if so, under what conditions?
(a) Under provisions of section 5 of the Foreign Exchange Management Act, 1999 certain
Rules have been made for drawal of Foreign Exchange for Current Account transactions.
As per these Rules, Foreign Exchange for some of the Current Account transactions is
prohibited. As regards some other Current Account transactions, Foreign Exchange can
be drawn with prior permission of the Central Government while in case of some Current
Account transactions, prior permission of Reserve Bank of India is required.
(i) In respect of item No.(i), i.e., remittance out of lottery winnings, such remittance is
prohibited and the same is included in First Schedule to the Foreign Exchange
Management (Current Account Transactions) Rules, 2000. Hence Mr. Sane cannot
withdraw Foreign Exchange for this purpose.
(ii) Foreign Exchange for meeting expenses of cultural tour can be withdrawn by any
person after obtaining permission from Government of India, Ministry of Human
Resources Development, (Department of Education and Culture) as prescribed in
Second Schedule to the Foreign Exchange Management (Current Account
Transactions) Rules, 2000. Hence, in respect of item (ii), Mr. Sane can withdraw the
Foreign Exchange after obtaining such permission.
In all the cases, where remittance of Foreign Exchange is allowed, either by general
or specific permission, the remitter has to obtain the Foreign Exchange from an
Authorised Person as defined in Section 2(c) read with section 10 of the Foreign
Exchange Management Act, 1999.
Explain the restrictions, if any, under Foreign Exchange Management Act, 1999 in
respect of the following issue and transfer of shares:
(i) Issue of Equity Shares of ` 1 crore at face value accounting for 45 percent of post-
issue capital to non-resident Indians in U.S.A. on non-repatriation basis. The shares
are issued by M/s ABC Knitwear Limited to finance the modernization of its plant.
(ii) A Non-resident Indian, who is holding Equity shares in M/s DEF Textiles Limited,
proposes to sell some shares to another Non-resident Indian for a consideration of 50 lakhs and also transfer shares of face value of 25 lakhs to a person resident
in India by way of Gift.
(i) Issue of equity shares to NRI’s and transfer of shares by NRIs are capital
account transactions.
RBI may in consultation with the Central Government specify any class or classes of
transactions which are permissible (Section 6(2)(a).
According to Regulation 3(1) of the Foreign Exchange Management (Permissible
capital Account Transactions) Regulations, 2000 issued by RBI Investment in India
by a person resident outside India is a permissible capital account transactions
(Schedule II).
Further RBI is empowered under Section 6(3)(b) to prohibit, restrict or regulate, by
regulations, transfer or issue of any security by a person resident outside India. In
exercise of these powers RBI issued Foreign Exchange Management (Transfer or
issue of security by a person resident outside India) Regulations 2000.
According to Regulation 5(3)(ii) of the said regulations a NRI may purchase shares
of an Indian Company which is not engaged in Print Media Sector on non-
repatriation basis without any limit (para 2 of Schedule 4). The shares may be
issued by the company either by public issue or private placement. The only
condition is that the amount of consideration for purchase of shares shall be paid by
way of inward remittance through normal banking channels from abroad or out of
funds held in NRE/FCNR/NRO/NRSR/N&NR account maintained with an authorized
dealer or as the case may be with an authorised bank in India (Para 3 of Schedule
4).
(ii) Transfer of shares of an Indian Company by a person resident outside India.
Regulation 9(2)(ii) of Foreign Exchange Management (Transfer or issue of security
by a person resident outside India) Regulations, 2000 permits NRI to transfer by
way of sale the shares held by him to another NRI. Further according to Regulation
9(2)(iii) a person resident outside India may transfer any security held by him, to a
person resident in India by way of gift. There are no restrictions in this regard.
Hence the proposed sale of shares to NRI and transfer to a persons resident in
India by way of gift are permissible under FEMA.
Indian company can issue the above shares and record in its books the above
transfer (Regulation 4).
Tomco Ltd., a vehicles manufacturing company in India has received an order from
a transport company in Italy for supply of 100 Trucks on lease. You are required to
state, how the said Tomco Ltd. can accept such an order.
“Export,” means the taking out of India to a place outside India any goods (Section
2(1) of the Foreign Exchange Management Act, 1999). Hence sending 100 trucks
on lease to Italy is an ‘export’ within the meaning of Section 2(1).
Under provisions of section 7 of the Foreign Exchange Management Act, 1999 rules
have been made governing export of goods and services. Regulation 14-A of the
Foreign Exchange Management (Export of Goods and Services) Regulations, 2000
prescribes that no person shall, except with prior permission of the Reserve Bank of
India, take or send out by land, sea or air any goods from India to any place outside
India on lease or hire or under any arrangement or in any other manner other than
sale or disposal of such goods.
Based on the above provisions, it can be concluded that if the company, namely,
Tomco Ltd. wants to accept the order for despatching 100 trucks to Italy on lease, it
has to take prior permission of the Reserve Bank of India.
Forex Dealers Ltd. is an Authorised Person within the meaning of Foreign Exchange
Management Act, 1999. Reserve Bank of India issued certain directions to the said Authorised Person to file certain returns, which it failed to file. You are required to
state the penal provisions to which the said Authorised Person has exposed itself.
Section 11(3) of the Foreign Exchange Management Act, 1999 states that where
any Authorised person contravenes any direction given by the Reserve Bank of
India under the said Act or fails to file any return as directed by the Reserve Bank of
India, the Reserve Bank of India may, after giving reasonable opportunity of being
heard, impose on Authorised Person a penalty which may extend to ten thousand
rupees and in the case of continuing contraventions with an additional penalty which
may extend to two thousand rupees for every day during which such contravention
continues.
Since as per the facts given in the question, the Authorised person, namely, Forex
Dealers Ltd., has failed to file the returns as directed by the Reserve Bank of India.
According to the above provisions, it has exposed itself to a penalty which may
extend to ten thousand rupees and in the case of continuing contraventions in the
nature of failure to file the returns, with an additional penalty which may extend to
two thousand rupees for every day during which such contravention continues.
