FEMA 1999
Saurabh Nath
Member of Faculty
RBSC, Chennai
Background
FERA 1947Controls imposed for all external transactions
FERA 1973Control framework made more rigorous
’90s ─ the decade of liberalisationEasing of restrictions, esp. on current account
transactions
FEMA 1999Transition from control to management
Framework of Control
Objective of FERA
To conserve foreign exchange
To utilise the same judiciously (by rationing)
among competing claims
Control framework was essentially transaction-
based in terms of which all foreign exchange
transactions were prohibited, unless specifically
permitted
Control to Management
Process initiated in the 1990s
Consistent with the general philosophy of
economic reforms of the time
Balance of Payments crisis of 1990-91
was the impetus
Broad agenda set by the Report of the
High Level Committee on Balance of
Payments (Chairman: Dr. C. Rangarajan,
1993)
Prelude to Reforms
Balance of Payments Crisis 1991
Dipping of reserves
External debt servicing
Withdrawal of investments by NRIs
Exports not competitive
Bleak chance of external assistance due to
downgrading of sovereign rating as „Not safe
destination for investment‟
Prelude to Reforms
Crisis management
Downward adjustments in USD/INR by 17.38% on
July 1 and 3, 1991 to bring US$ to Rs. 26.00
IMF Assistance drawn to maximum
Pledge of official gold with Bank of England (around
65 tonnes)
New Scheme offered to foreign nationals / institutions
and also for NRIs / OCBs
India Development Bonds were issued to NRIs / OCBs
at attractive rate of interest
Prelude to Reforms
Crisis was managed successfully
despite its costs
Long term solution needed
Market reforms
Exchange Rate reforms
Relaxation in exchange control
Rangarajan Committee (1993)
Major recommendations
Introduction of a market-determined exchange
rate regime within limits
Liberalisation of current account transactions
leading to current account convertibility
Gradual approach towards liberalisation of
capital account transactions
The sequence of policy initiatives in the subsequent years
generally followed these recommendations
Years of turnaround
1991 → Downward correction of exchange rate
1992 → LERMS (Liberalised Exchange Rate
Management System)
1993 → Modified LERMS
1994 → GoI accepts IMF‟s Article VIII status (August
20th) – Current Account Convertibility
1997 → Move towards Capital Account Convertibility
2000 → FEMA replaced FERA – IMF loans repaid fully
2004 → Reserves exceeds external debt
Reserves continue to grow thereafter
Need for a separate legal structure
FEMA 1999 came into effect from June 1, 2000
A change in the legislative framework was
necessitated due to following developments
since 1993
Growth in international trade
Liberalisation in financial sector
Deregulated exchange rate regime
Liberalised foreign investments ─ both
inward and outward
Current account convertibility of the Rupee
FEMA – Preamble
To consolidate and amend 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
Regulation of FX Market
Fully regulated through FERA 1973Centralised powers with RBI
Violations were treated as criminal offences – cases
proceeded with Enforcement Directorate
Documentations prescribed by RBI
Liberalisation through FEMA 1999Powers delegated to the Authorised Dealers
Violations are of civil nature – compounding powers
for Enforcement Directorate and RBI
Documentation decided by the Authorised Dealers
Resident & Non-Resident
Resident [Section 2(v)]
A person residing in India for more than 182
days during the preceding financial year and does
not include:
A person gone outside India on employment
A person carrying business outside India
A person staying outside India indicating his
intention to stay there for an uncertain period
Resident & Non-Resident
Resident [Section 2(v)]
Resident also includes a person who has come to
stay in India for
taking up employment in India
carrying on business in India
or for any other purpose indicating his
intention to stay in India for an uncertain
period
Resident & Non-Resident
Resident [Section 2(v)]
Resident also includes
any person or body corporate registered or
incorporated in India
an office, branch or agency in India owned or
controlled by a person resident outside India
an office, branch or agency outside India
owned or controlled by a person resident in
India
Resident & Non-Resident
Non-Resident [Section 2(w)]
“A person resident outside India” means a person who is not
resident in India
Non-Resident Indian (NRI)
A person who is not resident in India for more than 182 days
during the previous financial year and staying outside India
on taking up employment outside India
for carrying on outside India a business or vocation
for any other purpose as would indicate his intention to
stay outside India for an uncertain period
(Indian citizen holding Indian passport)
Includes Indian students studying abroad
Resident & Non-Resident
Person of Indian Origin (PIO)
A citizen of any country other than Bangladesh or
Pakistan, if
he at any time held Indian passport
he or either of his parents or any of his grand-
parents was a citizen of Indian by virtue of the
Constitution of India or the Citizenship Act, 1955
the person is a spouse of an Indian citizen or a
person referred to above
Administration of FEMA
Central Government may, in consultation
with RBI, impose restrictions for current
account transactions (Section 5)
Reserve Bank may, in consultation with
the Central Government, specify the type
of capital account transactions and the
limit of foreign exchange admissible for
such transactions [Section 6(2)]
Capital account transactions
Transactions which alter the assets or
liabilities, including contingent liabilities,
outside India of persons resident in India
or assets or liabilities in India of persons
residents outside India
Includes transactions referred to in Section
6(3)
Capital account transactions Section 6(3)
a) Transfer or issue of any foreign security by a resident;
b) Transfer or issue of any security by a non-resident;
c) Transfer or issue of any security or foreign security by any branch, office
or agency in India of a non-resident;
d) Borrowing or lending in foreign exchange;
e) Borrowing or lending in rupees between a resident and a non-resident;
f) Deposits between residents and non-residents;
g) Export, import or holding of currency or currency notes;
h) Transfer of immovable property outside India, other than a lease not
exceeding 5 years, by a resident;
i) Acquisition or transfer of immovable property in India, other than a lease
not exceeding 5 years, by a non-resident;
j) Giving of guarantee or surety in respect of any debt, obligation or other
liability incurred –
i. by a resident and owed to a non-resident; or
ii. by a non-resident
Current account transaction
Transaction other than a capital account transaction
and includes
i. Payments due regarding 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
Current account transaction
Schedule I (Prohibited Transactions)
1. Remittance out of lottery winnings
2. Remittance of income from racing / riding etc.
3. Remittance for purchase or lottery tickets, banned magazines,
football pools, sweepstakes etc.
4. Payment related to callback services of telephones
5. Remittance of dividend of any company where 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 of commission on exports made towards equity
investment in JV/WOS abroad of Indian companies
Current account transaction
Schedule – II
Transactions permitted with approval of
Govt. of India (concerned Ministries)
Schedule – III
Transactions permitted with approval of
the Reserve Bank of India
Authorised Person
Means an authorised dealer, money changer, off-shore
banking unit or any other person for the time being
authorised under section 10(1) to deal in foreign
exchange or foreign securities
No person, other than an „Authorised Person‟ is allowed
to deal in foreign exchange (Section 3)
Power of Reserve Bank to authorise a person as
„Authorised Person‟ and revoke the authorisation thereof
(Section 10)
Power of RBI to issue directions to APs, call for
information and impose penalty on APs on contravention
of its directions (Section 11)
Categorisation of APs
Sr. No. AP Category Entities Major Activities
1. AD Category – I
Commercial Banks
State Co-op Banks
Urban Co-op Banks
All current and capital account
transactions according to RBI
directions
2. AD Category – II
Upgraded FFMCs
UCBs
RRBs
Others
Specified non-trade current a/c
transactions, as also all the
activities permitted to FFMCs
Any other activity as prescribed
by RBI
3. AD Category – III Select Financial and
other Institutions
Transactions incidental to the
FX activities undertaken by
these institutions
4. FFMCs
Purchase of FX and sale for
private and business visits
abroad
Inspection of APs
Section 12 (1)
Reserve Bank may, at any time, cause an inspection to be
made, by any officer of the Reserve Bank specially
authorised in writing by the Reserve Bank in this behalf,
of the business of any AP as may appear to it to be
necessary or expedient for the purpose of –
a) Verifying the correctness of any statement, information or
particulars furnished to the Reserve Bank;
b) Obtaining any information or particulars which such AP has
failed to furnish on being called upon to do so;
c) Securing compliance with the provisions of this Act or of
any rules, regulations, directions or orders made thereunder
Rules & Regulations
Central Government may, by notification, make Rules to carry out the provisions of the Act
Such rules may generally provide for
Imposition of reasonable restrictions on current account transactions
Guidelines regarding contravention, penalties, adjudication and appeal
Rules & Regulations
Reserve Bank of India may, by notification, make Regulations to carry out the provisions of the Act and the Rules made thereunder
Such regulations may generally provide for provisions regarding
Capital account transactions
Exports and their realisation
Rules & Regulations
Initially
GoI issued 5 notifications (rules)
RBI issued 25 notifications (regulations)
to carry out the provisions of the Act
The amendments to the notifications are
announced by the Reserve Bank to the
authorised persons through AP (DIR
Series) circulars
THANK YOU