issues in indian foreign exchange market: a...

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 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 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


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


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


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


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

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