THE OVERVIEW OF FEMA

1
THE OVERVIEW OF FEMA

• Presentation
• by
• CA. Anil Sharma

2
FEMA

• Foreign Exchange Management Act, 1999
• Rules and Guidelines by MOF.
• FDI Policy and Press Notes by MOCI.
• Regulations by RBI
• Notifications by RBI
• Circular and Clarifications by RBI
• Master Circulars by RBI
• Instructions and FAQs by RBI

3
FEW IMPORTANT TERMS

• Person
• Person resident in India
• Person resident outside India

4
Dealings in foreign Exchange

• Current Account Transactions
• Capital Account Transactions

5
Dealings in foreign Exchange

• Current Account Transactions
• Section 5 read with Section 2(j) of FEMA.
• FEM( Current Account Transactions) Rules, 2000.
• Capital Account Transactions
• Section 6 read with Section 2(e) of FEMA.
• FEM (Permissible Capital Account Transactions)
  Regulations, 2000

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Current Account Transactions

• Definition
• Section 2(j) of FEMA
• Any transaction which is not a capital account
  transaction and includes
• Payment due in connection with current business,
  trade, services, short term borrowings credit
  facilities in normal course of business.
• Payment of interest on loans.
• Income on investment.
• Remittance of living expenses to
  parents/spouse/children
• Expenses in connection with foreign travel,
  education, medical etc.

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Current account transactions (Section 5)

• Any person may sell or draw foreign exchange to
  or from an authorised person if such sale or
  drawal is a current account transaction.
• Provided that the central Govt. may, in public
  interest and in consultation with RBI, impose
  such reasonable restrictions for current account
  transactions, as may be prescribed.

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FEM( Current Account Transactions) Rules, 2000

• Transactions for which foreign exchange
  withdrawal is prohibited (schedule I).
• Transactions require approval of the Central
  Government ( Schedule II).
• Transactions require approval of Reserve Bank of
  India (Schedule III).

9
Current Account Transactions- Regulations and
circulars by RBI

• FEM (Export of Goods and Services) Regulations,
  2000
• Master Circulars
• Import of Goods and services
• Export of goods and services

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Capital Account Transactions

• Definition
• Section 2(e) of FEMA
• Any transaction
• which alters the assets or liabilities outside
  India of persons resident in India or
• Which alters assets or liabilities in India of
  persons resident outside India
• Including transactions referred to in section
  6(3) of FEMA

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Capital account transactions

• Section 6(3) RBI may by regulations, prohibit,
  restrict or regulate
• Transfer or issue of any
• foreign security by a person resident in India.
• security by a person resident outside India
• security or foreign security by any branch,
  office or agency in India of a person resident
  outside India
• Any borrowing or lending in foreign exchange
• Any borrowing or lending in rupees between a
  person resident in India and a person resident
  outside India
• Deposits between person resident in Indian and
  person resident outside India
• Export, import or holding of currency or currency
  notes
• Acquisition and transfer of immovable property
  other than a lease not exceeding five years,
• outside India by a person resident in India
• in India by a person resident outside India
• Giving a guarantee or surety in respect of any
  debt, obligation or other liability incurred
• by a person resident in India and owed to a
  person resident outside India
• by a person resident outside India

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Capital Account Transactions

• Section 6(2) RBI may in consultation with the
  Central Government specify
• Any class or classes of capital account
  transactions which are permissible.
• The limits up to which foreign exchange shall be
  admissible for such transactions.

13
FEM (Permissible Capital Account Transactions)
Regulations, 2000

• Permissible (Para 3 of the Regulations)
• Transactions by persons Resident in India given
  in Schedule I.
• Transactions by persons Residents outside India
  given in Schedule II.
• Prohibited
• Para 4 of the Regulations.

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Capital Account Transactions-Transactions by
Resident in India

• Transactions which alters the assets or
  liabilities outside India of persons resident in
  India
• Transfer or issue of any foreign security.
• Transfer of immovable property outside India.
• Borrowing lending in foreign currency.
• Giving of a guarantee or surety in respect of any
  debt, obligation or other liability incurred owed
  to a person resident outside India.

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Capital Account Transactions-Transactions by
Persons resident outside India

• Transactions which alters assets or liabilities
  in India of persons resident outside India
• Establishment in India of a branch, office or
  other place of business
• Transfer or issue of security
• Acquisition and transfer of immovable property in
  India
• Borrowing lending in Rupees
• Deposits
• Guarantees

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Capital Account Transactions

• Prohibited transactions
• For person resident outside India investment in
  India, in any form ,in any company, firm or
  proprietory concern or any other entity which is
  or proposed to be engaged in
• Chit fund
• Nidhi co.
• Agricultural and plantation activities
• Real estate business or construction of farm
  houses
• Trading in TDRs.
• For person resident in India investment outside
  India in the business of
• Banking
• Real estate

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Transfer or issue of any foreign security by a
person resident in India.

• FEM (Transfer or Issue of any Foreign Security)
  Regulations, 2004.
• Overseas investment in JV/WOS
• By way of contribution to MOA of foreign entity,
• By purchase of existing shares,
• Portfolio Investment
• Investment by Indian Residents.

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JV/WOS Abroad

• Master Circular dated 1.7.2010
• Indian Party may make direct investment in
  JV/WOS
• Automatic Route
• Approval Route
• Indian Party
• Company incorporated in India
• Registered partnership firm
• Registered trust or society which has set up
  hospital in India for hospital
• Any other entity as notified by RBI
• More than one of the above shall together
  constitute the Indian Party

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Portfolio Investment

• By listed Indian companies in equity, rated
  bonds/fixed income securities of companies listed
  in foreign stock exchanges (not exceeding 50 of
  its net worth of last audited Balance sheet).
• By Indian parties in equity or rated bonds of
  companies having at least 10 shares in any
  listed company in India.

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Acquisition of foreign security by a person
resident in India

• General Permission
• Approval Route
• Liberalised Remittance Scheme

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Acquisition or Transfer of Immovable Property
outside India

• FEM (Acquisition and Transfer of Immovable
  Property Outside India) Regulations, 2000
• A person resident in India may acquire immovable
  property outside India by way of
• Gift or inheritance
• Purchase out of RFC account
• Acquisition of immovable property by branch/
  trading offices for business and also for staff
  residence purposes
• Indian entity can maintain office abroad and send
  funds for its maintenance and acquiring and
  holding immovable property with RBI approval.
• Acquisition of immovable property under
  Liberalised Remittance Scheme by resident Indians.

22
Borrowing or lending in Foreign exchange

• FEM (Borrowing or Lending in Foreign Exchange)
  Regulations, 2000
• Permitted from an authorised dealer in India
• External commercial borrowings.
• General permission in case of project export
• In case of individual can borrow upto USD
  2,50,000 from his close relatives
• In all other cases only with the approval of RBI.

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Foreign exchange dealings by residents

• FEM (Realisation , repatriation and surrender of
  foreign exchange) Regulations, 2000
• FEM )Foreign currency accounts by a person
  resident in India) Regulations, 2000
• FEM (Possession and retention of foreign
  currency) Regulation ,2000
• FEM (Insurance) Regulations, 2000

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Establishing an office in India

• FEM (Establishment in India of Branch or Office
  or Other Place of Business) Regulations, 2000
• A branch,
• A liaison office,
• A Project Office.

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Legal Requirements for setting up an office in
India

• To establish a branch or liaison office in India
  
• prior approval of RBI/Govt. is required,
• Now only eligible entity can set up BO/LO,
• Application to be forwarded through a designated
  AD Cat. I bank
• AD to exercise due diligence, KYC and then
  recommend,
• UID would be allotted,
• BO/LO to obtain PAN and inform to RBI/Govt.
• No approval for setting up project office.

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Issue of Security by Branch, office or Agency of
a person resident outside India

• FEM (Issue of Security in India by a branch,
  office or a person resident outside India)
  Regulations, 2000
• Shall not transfer or issue any security or
  foreign security in India without prior approval
  of RBI.

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Consolidated FDI Policy

• Effective 1.4.2011.
• Circular no 1 of 2011 dated 31.3.2011.
• Issued by Ministry of Commerce and Industry,
  Department of Industrial Policy and Promotion.
• Consolidates into one all the prior
  policies/regulations on FDI issued by RBI and
  DIPP.
• Changes notified by RBI from time to time would
  have to be complied with, in case of
  interpretation, the relevant FEMA notification
  shall prevail.
• Issued with sunset clause of six months.

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Press Notes by MOCI

• Pricing norms for issue of shares to person
  resident outside India.
• Pricing guidelines for transfer of shares
• Calculation of total foreign investment
• Downstream investment by Indian co. owned and
  controlled by non-residents

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FDI Policy coverage

• Portfolio Investment by NRIs and PIOs.
• Portfolio Investment by FIIs.
• Operating through an Indian company.
• Investment in capital of partnership or
  proprietary concerns in India.
• Acquisition of immovable property in India.
• Sectors prohibited for FDI.
• Sector specific policy for FDI
• FDI cap
• Entry Route
• Guidelines through Press notes.

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Prohibition on investment in India

• Retail trading (except single brand product
  retailing)
• Atomic energy
• Lottery (all types), gambling, betting
• Business of Chit fund and Nidhi company
• Real estate business or construction of farm
  houses
• Sectors not opened for private sector investment.
• Trading in Transferable Development Rights.

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Sectoral caps

• Agriculture
• Agriculture and animal husbandry, -Tea plantation
• Industry
• Mining, -Coal and lignite
• Manufacturing
• Items reserved for MSEs, -Alcohol distillation
  and brewing
• Cigars and cigarette -Coffee and rubber
  processing
• Defence industry, -Drug and pharmaceutical
• Industrial explosives, -Power
• Service Sector
• Advertising and films, -Civil aviation
• Banking, -Broadcasting
• Commodity exchange, - Insurance
• NBFCs, - Petroleum and natural gas
• Print media, - Telecommunication

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Govt. route

• Application to FIPB is to be filed online.
• Status of the file can also be found online.
• Companies may not require fresh prior approval of
  the Govt. for bringing in additional foreign
  investment into the same entity in cases where
  approvals were obtained and subsequently
  sector/activities have been placed under
  automatic route or where sectoral caps have been
  increased. (Press Note 1(2010 Series) dated
  25.3.2010.

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Portfolio Investment by FIIs

• A SEBI registered FII
• Through authorised dealer bank
• Special Non-resident Rupee Account
• Sub-account holding not to exceed 10 of the
  total paid up capital
• Total holding of all FIIs put together not to
  exceed 24( can be increased by Co. subject to
  sectoral limits)
• Allocation of investment in equity and debt in
  the ratio of 7030
• Shall not engage in short selling.

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Portfolio Investment by NRIs

• On repatriation basis
• Payment for purchases to be made through normal
  banking channel
• Remittance from abroad/ NRE/FCNR accounts
• Through broker only
• On non-repatriation basis
• Payment for purchases through normal banking
  channel
• Remittance from abroad/ NRE/FCNR/NRO accounts
• Through broker only

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OPERATING THROUGH AN INDIAN COMPANY

• Mode of operations
• Joint venture with local partner
• Wholly owned subsidiary company

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Acquisition or Transfer of Immovable Property in
India

• FEM (Acquisition and Transfer of Immovable
  Property in India) Regulations, 2000.
• Indian citizen/ PIO resident outside India may
  acquire any immovable property other than
  agricultural/plantation/farm house even after
  taking loan in India. (PIO to to bring in funds
  from outside India).
• Citizens of Bangladesh, Sri Lanka, Afghanistan,
  China, Nepal, Iran and Bhutan can not acquire
  without prior approval of RBI. Foreign national
  can acquire property by way of inheritance from
  resident Indian.
• Branch of foreign company can acquire for
  business purposes only.
• A declaration in Form IPI to be filed with RBI
  within 90 days.

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Investment in Firm and proprietory concern in
India

• FEM (Investment in Firm or Proprietory Concern in
  India) Regulations, 2000
• No investment or repatriation basis without
  approval from RBI by non-residents (other than
  NRI/PIO)
• NRI/PIO investment on repatriation basis with
  prior approval of RBI.

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Borrowing or Lending in Rupee

• FEM (Borrowing and Lending in Rupees)
  Regulations, 2000.
• A resident in India may borrow in Rupee on
  non-repatriation basis from a NRI/PIO subject to
  certain conditions.
• A company may borrow in Rupee on repatriation or
  non-repatriation basis from a NRI/PIO by way of
  NCDs subject to certain conditions.
• Restriction on use of borrowed funds for
  agricultural/ plantation/ real estate business.

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GUARANTEES

• FEM (Guarantees) Regulations, 2000.
• Guarantees which may be given by an authorised
  dealer.
• Guarantees which may be given by persons other
  than an authorised dealer.

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Forex derivative contracts

• FEM ( Foreign Exchange Derivative Contracts)
  Regulations, 2000.
• Permission to a person resident in India to enter
  into a forex derivative contract-Schedule I.
• Permission to a person resident outside India to
  enter into a forex derivative contracts- Schedule
  II.
• Permission to a person resident in India to enter
  into a currency futures
• Commodity hedge.

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Foreign currency and foreign currency accounts

• FEM (Deposit) Regulations, 2000
• Accounts in India in Rupees as well as foreign
  currency by persons resident outside India
• NRE Account
• NRO Account
• Foreign national resident in India can open a
  normal resident account in Rupee
• Account by branch/project office of person
  resident outside India with RBI permission.

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Remittance Facilities to Non-Residents

• Remittance of current income
• Repatriation of sale proceeds of residential
  property purchased by NRI/PIO out of foreign
  exchange

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Master Circulars by RBI

• Direct Investment by Residents in JV/WOS abroad
• Foreign Investment in India
• NRO Account
• Remittance facilities for Non-resident Indians/
  Person of Indian Origin/Foreign nationals
• Miscellaneous remittances from India- facilities
  for residents
• ECB and Trade Credits

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Compounding of offences under FEMA

• FEM ( Adjudication proceedings and appeals)
  Rules, 2000
• Quantum of penalties. (section 13 of FEMA)
• FEM( Compounding proceedings) Rules, 2000

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