Introduction
FEMA regulates cross-border transactions undertaken by individuals and entities in India and abroad. It facilitates external trade, ensures foreign exchange management, and promotes a stable foreign exchange market in India.
Need for FEMA, 1999
FEMA replaced FERA, 1973, as a modern legal framework for managing foreign exchange in India. FERA primarily focused on conserving foreign exchange during a period of scarcity. With the liberalization of the Indian economy in 1991, FEMA shifted the focus from regulation to facilitation, addressing the growth in cross-border trade, foreign investments, and an increase in foreign exchange reserves.
Commencement and Applicability
FEMA came into force on June 1, 2000, and applies to:
- The entire territory of India.
- Individuals and entities outside India that are owned or controlled by Indian residents.
- Any contraventions committed abroad by individuals or entities subject to FEMA, regardless of their location.
Differences Between FERA, 1973, and FEMA, 1999
Key distinctions include:
- Objective:
- FERA: Conservation and regulation of foreign exchange.
- FEMA: Facilitation of external trade and development of foreign exchange markets.
- Nature of Law:
- FERA: Criminal liabilities for violations.
- FEMA: Civil liabilities for most contraventions.
- Applicability:
- FERA: Based on citizenship.
- FEMA: Based on residential status.
- Penalties:
- FERA: Five times the contravention amount.
- FEMA: Three times the contravention amount.
- Delegation:
- FERA required Central Government approval for RBI delegations; FEMA allows more direct RBI control.
Framework and Structure of FEMA
FEMA comprises:
- Seven Chapters and 49 Sections.
- Substantive and procedural rules addressing foreign exchange transactions.
- Provisions enforced by the Reserve Bank of India (RBI) and the Directorate of Enforcement.
Key Definitions
- Foreign Exchange: Includes foreign currencies, deposits, credits, and balances expressed in foreign currencies.
- Foreign Security: Securities (e.g., stocks, bonds) denominated in foreign currencies.
- Person: Includes individuals, Hindu Undivided Families, companies, firms, or any artificial juridical person.
- Residential Status:
- Residents: Individuals staying in India for more than 182 days in the preceding financial year.
- Non-Residents: Individuals staying outside India for specified purposes.
- Authorized Persons: Includes authorized dealers, money changers, and offshore banking units licensed by the RBI.
Regulation and Management of Foreign Exchange
FEMA regulates cross-border transactions, ensuring they align with legal provisions:
- Current Account Transactions: Payments related to foreign trade, travel, and remittances.
- Capital Account Transactions: Investments in foreign assets or liabilities.
Permissible and Prohibited Transactions
- Permissible Transactions:
- Buying foreign exchange for travel, education, or business.
- Remitting funds abroad under the Liberalized Remittance Scheme (LRS).
- Prohibited Transactions:
- Remittances for lottery tickets, banned magazines, or gambling.
- Transactions with individuals or entities in sanctioned countries.
Special Schemes
- Liberalized Remittance Scheme (LRS):
- Allows Indian residents to remit up to USD 250,000 annually for permissible transactions, including education, travel, and investments abroad.
Role of Authorized Persons
The RBI designates authorized persons (e.g., banks, money changers) to manage foreign exchange transactions. They must comply with FEMA regulations and RBI directives.
Classification of Transactions: Capital and Current Accounts
FEMA classifies transactions into Capital Account and Current Account based on their impact on assets and liabilities.
-
Capital Account Transactions:
- Affect the assets or liabilities of residents or non-residents.
- Include investments in foreign securities, acquisition of immovable property abroad, and borrowing or lending in foreign currency.
- Governed by Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000.
Prohibited Capital Account Transactions:
- Transactions exceeding USD 250,000 for individuals unless specifically approved by RBI.
- Transactions with sanctioned countries or prohibited sectors like agriculture or real estate.
Special Permissible Transactions:
- Residents can retain foreign currency assets acquired before becoming residents.
- Non-residents can hold assets in India acquired while they were residents.
-
Current Account Transactions:
- Payments related to foreign trade, travel, remittances, or services.
- Governed by Foreign Exchange Management (Current Account Transactions) Rules, 2000.
- Divided into three categories:
- Prohibited Transactions: E.g., lottery winnings or gambling.
- Transactions Requiring Government Approval: E.g., cultural tours exceeding USD 100,000.
- RBI-Approved Transactions: E.g., private visits, education, or medical expenses.
Holding and Transfer of Assets
-
Foreign Exchange Holding:
- Residents can hold foreign currency up to USD 2,000 in cash or travelers' cheques.
-
Acquisition and Transfer of Immovable Property:
- Residents can acquire property abroad under LRS or as inheritance/gift from a non-resident.
- Non-residents can acquire property in India as inheritance or from funds legally remitted.
Export and Import Regulations
-
Export of Goods and Services:
- Exporters must file declarations and realize export proceeds within 9 months.
- Warehoused goods abroad must be repatriated within 15 months.
-
Import of Goods and Services:
- Governed by current account regulations and allows for invoicing and payment in Indian Rupees for international trade.
Role of Authorized Persons (APs)
-
Appointment and Responsibilities:
- RBI grants authorization to banks, money changers, and financial institutions.
- APs must ensure transactions comply with FEMA and may demand declarations from clients.
-
Penalties for Non-Compliance:
- Up to ₹10,000 for initial contraventions, with ₹2,000 per day for continued violations.
-
Revocation of Authorization:
- RBI can revoke authorization if compliance is not maintained.
Enforcement and Adjudication
-
Directorate of Enforcement:
- Enforces FEMA provisions and investigates contraventions.
-
Adjudicating Authorities:
- Officers with jurisdiction based on the value of the contravention (e.g., Assistant Director for amounts up to ₹2 crores).
-
Adjudication Process:
- Requires a written complaint and provides the accused with a fair hearing.
- Penalties and confiscations can be imposed post-adjudication.
Contraventions, Penalties, and Compounding
-
Penalties for Contraventions:
- Up to three times the contravention amount.
- Fixed penalties up to ₹2 lakhs for non-quantifiable contraventions.
-
Seizure and Confiscation:
- Assets violating Section 4 may be seized.
- Assets valued over ₹1 crore may require adjudication by Competent Authorities.
-
Compounding of Offenses:
- Allows individuals to settle first-time, quantifiable contraventions without legal proceedings.
- Not applicable for serious violations like money laundering.
Appeals Mechanism
-
Appeal to Special Director (Appeals):
- Appeals against orders of Assistant or Deputy Directors.
- Must be filed within 45 days of the order.
-
Appeal to Appellate Tribunal:
- Appeals against Special Director or Adjudicating Authority orders.
- Requires deposit of penalty unless exempted due to hardship.
-
Appeal to High Court:
- Only for legal questions arising from Appellate Tribunal orders.
- Must be filed within 60 days, extendable by another 60 days.
Summary
FEMA, 1999, provides a robust framework for managing foreign exchange transactions in India. It emphasizes facilitation over regulation, ensuring compliance through clear guidelines, designated authorities, and strict penalties. The act also provides recourse for disputes through a structured appeal mechanism, maintaining transparency and fairness in its enforcement.