Concept of foreign exchange regulation was introduced in 1939, when India was facing scarcity of foreign exchange in the times of world war-II. As a result, Foreign Exchange Regulations Act, 1947 (“FERA”) was enacted for a temporary period of 10 years. Considering law was loosely drafted, the motive of enactment of FERA was not served and accordingly, in order for need of conserving foreign exchange rates for maintaining value of rupees in the international market and regulate its use in the interest of Indian economy, Foreign Exchange Regulations Act, 1973 replaced its erstwhile law.
With rupees losing its value increasingly, the Government of India under its 1991 policy, introduced policies in relation to economic liberalisation, globalisation and privatisation. Within few years of policy implementation, India’s foreign exchange reserves increased and need for change in legislative framework was realised. As a result, FERA was replaced by Foreign Exchange Management Act, 1999 (“FEMA”) to be effective from June 1, 2000, with an intention of promoting and maintaining foreign exchange market in India and facilitate foreign trade and payments.
Provisions of FEMA applies to whole of India and all branches, offices and agencies outside India which are owned or controlled by a person resident in India. Section 46 of FEMA, Central Government is empowered to make rules to carry out the provisions of FEMA. Section 47 of FEMA, Reserve Bank of India (“RBI”) is empowered to make regulations to implement its provisions and the rules made thereunder.
Under FEMA, foreign exchange refers to currency other than Indian Rupees (“INR”), which includes, (i) deposits, credits and balances payable in any foreign currency, (ii) drafts, traveller’s cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency, (iii) drafts, traveller’s cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency.
In order to manage foreign currency flow in India and outside India, concept of residential status under FEMA plays a significant role. Section 3 of the FEMA provides for major prohibition of using foreign exchange under the law. As per section 4 of FEMA, Indian residents are not allowed to hold foreign exchange or foreign security in India or outside India. Also, Indian residents are prohibited from holding of immovable property outside India.
Further, section 5 and 6 of the FEMA outlines the formalities and procedures for the dealings of all foreign exchange transactions in India, which are classified into two categories — Capital Account Transactions and Current Account Transactions.
Current account transactions are provided under section 5 of FEMA. Government of India has issued several notifications under section 5 of the FEMA for outlining current account transactions. It outlines transactions which are restricted under current account transactions.
A person may deal in foreign exchange (this is an exception / relief from the provisions of section 3) on current account. India has adopted chapter VIII status under IMF. Hence Rupee is now convertible on current account. I have discussed at length the meaning of “Current Account”. This is the jurisdiction of Central Government of India (GOI). Hence notifications under Section 5 are issued by the GOI.
Capital account transactions are provided under section 6 of the FEMA. Capital account means foreign investment into the country and Indian investment out of the country. Prima facie, Capital Account was under the jurisdiction of RBI. Hence all notifications under section 6 were to be issued by RBI. By Finance Act, 2015, FEMA has been amended to shift the jurisdiction to GOI. Effect of this change is that RBI is no longer an autonomous institution as far as administration of FEMA is concerned. RBI is like CBDT under Government.
Foreign investment is further sub-divided. NRI investment is administered by RBI. Foreign Direct Investment (FDI) is administered by DIPP. FDI policy is declared by GOI. But certain administration like issue & transfer of shares is in RBI jurisdiction. DIPP & RBI do have differences of opinion in some cases. Foreign Institutional Investment (FII) is governed by SEBI & RBI. Overseas investment by Indian residents is governed by RBI.
Provisions for export of goods and services is provided in section 7 of the FEMA where exporter is duty bound to bring back the sale proceed in India at the earliest. In order to ensure that export proceeds are brought back into India, customs department and RBI work together.
Further, in case, an individual is entitled to possesses any immovable property outside India, as per section 8 of FEMA, it is compulsory to dispose of such an asset that is held outside India and bring the sale proceed back into India.
Thus, it is very important to analyse each and every provisions in detail and understand eligibility to hold foreign exchange or foreign currency by each individual depending upon their residential status under FEMA law.
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