A Glimpse of Foreign Exchange Management Act, 1999

A Glimpse of Foreign Exchange Management Act, 1999

Foreign Exchange Management Act (FEMA) is a regulatory mechanism that enables the Reserve Bank of India and the Central Government to pass regulations and rules relating to foreign exchange in tune with the Foreign Trade policy of India. It extends to whole of India. Every individual, company or any other form of entity which is originated from india have to follow the rules and regulations made under said act if they want to go multinational or if they want to expand their presence worldwide by opening their branches in various countries.

Foreign Exchange Management Act (FEMA) has been described in total 49 sections, of which section 1 to section 9 are substantive in nature and remaining are for procedural/ compliance part.

Section 46 of the Act grants power to Central Government to make rules and section 47 of the Act grants power to RBI to make regulations to implement its provisions and the rules made thereunder.
There are two types of cross border transactions:

  1. Capital Account Transactions
  2. Current Account Transactions

Capital Account Transactions:

  1. Capital Account Transactions means a transaction which alters Assets and Liabilities including contingent Liabilities Outside India of persons resident in India; or
  2. Alters Assets and Liabilities including contingent liabilities in India of persons resident outside India.

Following are the examples of capital account transactions by Residents:

  1. Maintenance of foreign currency accounts in India and outside India by a person resident in India.
  2. Taking insurance policy by a person resident in India from an insurance company outside India.
  3. Loans and overdrafts by a person resident in India to a person resident outside India.
  4. Remittance outside India of capital assets of a person resident in India.
  5. Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India.

Following are the examples of Capital Account Transactions by Non – Residents:

  1. Import and export of currency/currency notes into/from India by a person resident outside India.
  2. Deposits between a person resident in India and a person resident outside India.
  3. Foreign currency accounts in India of a person resident outside India.
  4. Remittance of the assets in India held by a person resident outside India.

There are some transactions which are prohibited Capital Account Transactions, those are as below:
A non resident person shall not make investment in india in any form, in any company or partnership firm or proprietorship concern or any entity, whether incorporated or not, which is engaged or proposes to engage-

  1. In the business of Chit Fund
  2. As Nidhi Company
  3. In agricultural activities
  4. Construction of Farm Houses
  5. In trading of Transferable Development Rights.

Current Account Transactions:

Current Account Transactions are those transactions which are not Capital Account Transactions. Such As:

  1. Payment due for
    1. Foreign Trade
    2. Other Current Business
    3. Services, and
    4. Short – term banking and credit facilities in the ordinary course of business
    5. Interest on Loans; and
    6. Net Income from Investments
  2. Remittances for living expenses of parents, spouse and children residing abroad, and
  3. Expenses in connection with
    1. Foreign travel
    2. Education; and
    3. Medical care of parents, spouse and children

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