Foreign exchange Management Act, 1999

SHORT HISTORY OF FORIEGN EXCHANGE CONTROL IN INDIA

Her Majesty

Defence of India Act, 1939

FERA, 1947

FERA, 1973FEMA, 1999

NEW INDUSTRIAL POLICY,1991BEFORE 1991

We remained a closed economy in the eyes of world.BOP breached its limits demanding an immediate airlift of tonnes of gold to Bank of England and Switzerland to raise dollar loan in 1991

AFTER 1991

The nation emerged stronger from 67 tonnes gold pledging for $2.2 billion loan in 1991 to $300+ billions reserve in 7 years.The favourable forex reserves and the industries demand triggered the nation to liberalize its forex control regime

Object“facilitating external trade and payment and promoting orderly development and maintenance of foreign exchange market”

Contravention attracts penalty / fine and not imprisonment (except in some cases) / compounding

Only specified acts regulated Citizenship - not relevant /

Residence - Emphasized No Presumption of Mens Rea……..

Prosecution to prove

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NEW ERA UNDER FEMA

The Foreign Exchange Regulation Act, 1973 (‘FERA’)

The Foreign Exchange Management Act, 1999 (‘FEMA’)

Object “Conservation of foreign

Exchange” Severe penal provisions All acts controlled and regulated Applied to Indian Citizens

in/outside India and Foreign Citizens in India.

Blanket powers of search, seizure, imprisonment, etc.

Presumption of Mens-rea

Mechanism under FEMA

Act – FEMA (Passed by the Parliament – the Legislature)

Notifications Notified in the Gazette – by the Executive

Rules – Current A/C (Current Account by the Government )

Regulations- Capital A/C (Capital Account by the RBI)

AP Dir Circulars to Aps (All aspect of Forex transactions by the RBI)

ESTABLISHMENT OF BUSINESS IN INDIA BY FOREIGN ENTITIES

Apart from establishment of wholly owned Subsidiary or enter in

to a Joint Venture Agreement (JV) in India, foreign entities can also set up the business in India through the establishment of Liaison office (LO), Branch Office (BO), Project Office (PO) as per the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016.

An offshore business which has a direct Indian operation in India (and is not operating through an agent) will be treated as one of Liaison Office (LO), Branch Office (BO) or Project Office (PO), for which Reserve Bank of India (RBI) under provisions of the FEMA

MODE OF ESTABLISHMENT OF BUSINESS IN INDIA

Liaison Office (LO) Branch Office (BO) Wholly owned Subsidiary (WOS)

A Liaison Office [also known as representative office] can undertake onlyliaison activities i.e. it can act as a channel of communication between Head Office abroad & parties in India.

It is not allowed to undertake any business activity in India and have any income in India.

Companies incorporate outside India andEngaged in manufacturing or tradingactivities are allowed to setup BranchOffices with specific approval of the RBI.

Normally, the Branch Office be engaged in the activity of the ParentCompany.

An incorporated entity formed and registered under the Companies Act,2013 or other earlier Act. It is a distinct legal entity, apart from its shareholders.

STRUCTURE OF FEMA

Foreign Exchange Management Act, 1999 (W.e.f 01-06-2000)

Section 1 (Application

&Commence

ment)

Section2

( Definitions)

Section 3 to Section 9

( deals with Current A/c transaction

Rules & capital A/cRegulations

Section 10 to Section

12(deals with Authorised

Person)

Section 13 to Section

38 (Contravent

ion , Penalties, Appeals & Adjudicatio

n)

Section 39 to 49

(Miscellaneous

Provisions)

There are 49 sections under FEMA ,of which 9 sections (Section1-9) are substantive and

the rest are procedural/ administrative.

TWO GOLDEN RULES OR PRINCIPLES IN FEMA FOR FOREX TRANSACTION

• All Current Account Transactions are permitted unless otherwise Prohibited

Current Account

Transaction

• All Capital account transactions are prohibited unless otherwise permitted

Capital Account

Transaction

CURRENT ACCOUNT TRANSACTION

• Any Person may sell or draw foreign exchange to or from an Authorized person if such sale or drawl is a current Account transaction.

The definition is exclusive and any expenditure which is not a capital account transaction will be current account transaction. It include:

Payment due in connection with foreign trade, other current business,

Services, and short-term banking and credit facilities in the ordinary course of business

Payment due as interest on loans and as 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

CAPITAL ACCOUNT TRANSACTION

Capital Account Transaction Means a transaction which the

alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India person resident outside India, and include transaction like:

Changes in Assets/ Liabilities Transfer/issue of Security Borrowing/ Lending Export, import or holding of currency or currency notes Giving Guarantee

Capital Account Transaction are deemed to be prohibited unless permitted.

TYPES OF FDI

Inward Foreign Direct Investment

Outward Foreign Direct Investment

Vertical Foreign Direct Investment

Horizontal Foreign Direct Investment

Inflow of equipment and technology.

Improved consumer welfare through reduced cost, wider choice & improved quality.

Employment generation.

Provide access to global markets for Indian producer.

ADVANTAGE OF FDI

DISADVANTAGE OF FDI

Hindrance to Domestic Investment.

Loss of control.

Negative influence on Exchange Rate.

Risk of Political Changes.

Higher Cost.

FDI ROUTE

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI.

The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the documents with that office within 30 days of issue of shares of foreign investors.

The lists are comprehensive and cover most Industries of Interest to Foreign Companies.

AUTOMATIC APPROVAL

FDI ROUTE

FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration are granted on the recommendations of Foreign Investment Promotion Board (FIPB).

Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.

Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion.

GOVERNMENT APPROVAL

Overseas Direct Investment (‘ODI’)- Background

Investment by an Indian Party by way of contribution to the capital or subscription to the Memorandum of Association (‘MOA’) of a foreign entity or by way of purchase of existing shares of a foreign entity by:

Investment through stock exchange; or Private placement in that entity; or Market purchase; or Investment in a Joint Venture or Wholly Owned Subsidiary abroad; . But does not include Portfolio Investment

POSSIBLE ROUTES FOR INVESTMENT

Automatic Route

Overseas JV/WOS to be engaged in bonafide business activity except real estate and banking;

Investment in Financial Sector should comply with additional conditions

Indian party not on RBI’s Exporters’ Caution List/list of defaulters/under investigation by an Authority such as ED, SEBI etc.

Overall ceiling of financial commitment in all JV/WOS is 100% of net worth as on last audited Balance Sheet

Submission of Form Annual Performance Report in respect of all its overseas investment

Approval Route

Cases not covered under Automatic route

Specific application to RBI with necessary documents in Form ODI through the AD (Category I Bank) along with prescribed supporting and documents

RBI would inter alia consider the following factors:o Prima facie viability of JV/WOS outside

Indiao Contribution to external trade and other

benefits • which will accrue to India through such

investmento Financial position and business track

record of the• Indian party and foreign entityo Expertise and experience of the Indian

party in the• same or related line of activity of the

JV/WOS outside India.

External Commercial Borrowing (ECB)

Automatic Route Approval Route

U$ 750 M-Maximum U$ 200 M- Hotel, Hospital, S/W and Miscellaneous Service; U$ 10 M- NGO in MF –MFI;Specified NBFC and SIDBI as per conditions

Approval route applicable - when not covered in Automatic route

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Short term debt not encouraged

Minimum average maturity 3 or 5 years depending on the quantum of ECB

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ECB Policy- An OverviewExternal Commercial Borrowings – Commercial Loans, buyer / suppliers credit, securitized instruments (Bonds, Preference shares etc.) with a minimum average maturity of 3 years.

ECB Policy- At A Glance

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Eligible

Lender

• International Capital Markets• Multilateral Financial

Institutions• Export credit agencies• Suppliers of equipment• Foreign collaborators • Foreign Equity Holders (min.

25%)

Eligible Borrowers

• Corporates• NGOs in Micro Finance• SEZ Units (except financial

intermediaries, individuals, Trusts)

• Companies in Miscellaneous Services i.e. Training Activities, R&D; and Infra Support; (except Edu Inst., Trading business, Financial Services, and Consultancy Services) only from its Direct/Indirect Equity Holder/Group Cos

• Other specified

End Use

• Real/ Industrial sector (SME)– • Import of capital goods, • New Projects, Expansion/

modernization of existing units • ODI in JV/ WOS abroad

• Payment of Interest During Construction (IDC)

• Payment for obtaining License/ permit for 3G spectrum.

• For lending to self help groups or for micro credit by NGO’s

• Repayment of rupee loans by companies in infrastructure sector manufacturing and hotel sector (with project cost of INR 250 or more)

• General corporate purpose from foreign direct equity holder

Maturity & interest

Prohibition

Minimum avg. maturity period

USD 20 M – 3 years >USD 20 upto 750 M – 5 years

•On lending, Investment in capital market or acquiring a company in India •Real Estate•General corporate purposes•Repayment of existing INR Loan

ECB POLICY- PROCEDURES & COMPLIANCE

•Execution of Loan Agreement (filing is not compulsory)

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Filing of Form 83 duly certified by CA/CS to AD

AD to process the request and send to RBI for LRN

Drawn should take place post allotment of LRN

Filing of Monthly Return in ECB 2 by 7th of next month

SECTION 13 – Any contravention, under FEMA, may invite following kinds

of penalties: If, the amount against which offence is quantities, then

penalty will be "THRICE" the sum involved in contravention.

Where the amount cannot be quantified the penalty may be imposed up to two lakh rupees.

If, the contravention is continuing everyday, then Rs. Five Thousand for every day after the first day during which the contravention continues.

Further in addition to the penalty, any currency, security or other money or property involved in the contravention may also be confiscated.

CONTRAVENTION, PENALTIES & ADJUDICATION

SECTION 17 – Empowers the central Govt. to appoint one or more

special Directors to hear the appeals against the orders of the Adjudicating Authorities.

SECTION 18 – Empowers the central Govt. to establish Appellate

Tribunal to hear appeals against the orders of Adjudicating Authorities and special Director.

SECTION 19 – It makes provisions as regards appeals to Appellate

Tribunal.

PROVISIONS IN SECTIONS ……

SECTION 20 – 25

Composition of Appellate Tribunal. Qualifications for appointment of Chairperson

member and Special Director. Term of Office. Terms and Conditions of service. Vacancies.

PROVISIONS IN SECTIONS ……

SECTION 25 – 30 Resignation and Removal. Member to act as Chairperson in certain circumstances. Staff of Appellate Tribunal and Special Directorate. Power of Appellate Tribunal and Special Director. Distribution of business among benches. Power of Chairperson to Transfer cases.

SECTION 31-35 Decision to be by majority. Right of Appellant to take assistance of legal practitioner or CA and of Govt.

to appoint presenting officer. Members, etc to public servants. Civil court not to have jurisdiction. Appeal to High Court.

PROVISIONS IN SECTIONS ……

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