In India, all transactions that include foreign exchange are regulated by the Foreign Exchange Management Act (FEMA), 1999. It repealed the Foreign Exchange Regulations Act (FERA),1973. FEMA has been enacted to facilitate external trade and payments and to promote the orderly development and maintenance of foreign exchange market. It applies to all branches,offices and agencies outside India,owned or controlled by a person resident in India. According to the Act, the term ‘foreign exchange’ means “foreign currency and includes:- (i) deposits, credits and balances payable in any foreign currency; (ii) drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency; (iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency”.
The Reserve Bank of India (RBI) has been assigned the function of administering the various provisions of FEMA. The rules, regulations and norms pertaining to several sections of the Act are laid down by the Reserve Bank of India, in consultation with the Central Government. Besides, the Central Government may appoint an Adjudicating Authority for holding inquiries pertaining to any contravention of the Act. There is also a provision for appointing one or more Special Directors (Appeals) to hear appeals against the order of the Adjudicating authorities. An Appellate Tribunal for Foreign Exchange to hear appeals against the orders of the Adjudicating Authorities and the Special Director (Appeals) may also be established.
The main provisions of the Act are:-
• It permits only authorised person to deal in foreign exchange or foreign security. Such an authorised person, under the Act, means authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised by Reserve Bank. The Act thus prohibits any person who:-
○ Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;
○ Make any payment to or for the credit of any person resident outside India in any manner;
○ Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner;
○ Enter into any financial transaction in India as consideration for or in association with acquisition or creation
or transfer of a right to acquire, any asset outside India by any person;
○ is resident in India which acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.
○ The Act regulates two types of foreign exchange transactions, namely ‘Capital Account Transactions’ and ‘Current Account Transactions’.
1. According to the Act, ‘Capital account transaction’ means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes the following transactions referred in the Act:-
□ Transfer or issue of any foreign security by a person resident in India;
□ Transfer or issue of any security by a person resident outside India;
□ Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
□ Any borrowing or lending in rupees in whatever form or by whatever name called;
□ Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;
□ Deposits between persons resident in India and persons resident outside India;
□ Export, import or holding of currency or currency notes;
□ Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;
□ Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
□ Giving of a guarantee or surety in respect of any debt,obligation or other liability incurred-
(i) By a person resident in India and owed to a person resident outside India; or
(ii) By a person resident outside India.
2. It also defines the term ‘current account transaction’ as a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes:- (i) payments due in connection with 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.
□ The Act has empowered the Reserve Bank of India (RBI) to specify, in consultation with the Central Government, the permissible capital account transactions and the limits upto which foreign exchange may be drawn for such transactions. But it shall not impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.
□ Any person may sell or draw foreign exchange if such sale or drawal is a current account transaction. Under the Act, Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed.
□ Every exporter of goods shall:- (i) furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India; (ii) furnish to the Reserve Bank such other information as may be required by it for the purpose of ensuring the realisation of the export proceeds by such exporter.
□ The Reserve Bank may, at any time, cause an inspection to be made, by any officer specially authorised in writing by it in this behalf, of the business of any authorised person as may appear to it to be necessary or expedient for the purpose of:- (i) verifying the correctness of any statement, information or particulars furnished to the Reserve Bank; (ii) obtaining any information or particulars which such authorised person has failed to furnish on being called upon to do so; (iii) securing compliance with the provisions of this Act or of any rules, regulations, directions or orders made thereunder.
If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorisation is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty