Concept of Capital Account Transaction was introduced under Foreign Exchange Management Act, 1999 (“FEMA”) vide section 6 of FEMA. Purpose of introducing concept of capital account transaction is to manage foreign currency transactions in relation to assets purchased in foreign exchange.
It is essential to manage current account transactions records. International Monetary Fund (“IMF”) requires the Central Banks of all member countries to make regular and periodical reporting of their ‘balance of payment’ position. Accordingly, based on periodical reporting from all the banks in relation to balance of payment position of foreign exchange, RBI makes consolidated reporting to IMF. Broadly, capital account transaction is an economic concept and which requires to be reported to IMF periodically.
In simple terms, capital account transaction means foreign investment into the country and Indian investment out of the country. Earlier, prima facie, Capital Account was under the jurisdiction of RBI. Hence all notifications under section 6 were to be issued by RBI. Vide Finance Act, 2015, FEMA has been amended to shift the jurisdiction to GOI, with effect from October 15, 2019. In line with the said amendment, Central Government has notified Foreign Exchange Management (Debt Instruments) Rules, 2019 and Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 on October 17, 2019.
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 under RBI jurisdiction. Foreign Institutional Investment (FII) is governed by SEBI & RBI. Overseas investment by Indian residents is governed by RBI.
Under FEMA, dealings in foreign exchange for capital account transaction is allowed only through authorised dealers. Any dealings not involving authorised dealers is prohibited.
As per section 2(e) of the FEMA, “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 transactions referred to in sub-section (3) of section 6 of FEMA.
As per Section 6(3) of FEMA, list of capital account transactions is given, which are prohibited, restricted or regulated by RBI is as under:
- 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 foreign exchange 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-
- by a person resident in India and owed to a person resident outside India; or
- by a person resident outside India.
In relation to above transactions, separate notifications are issued as under:
Sr. no. | Transactions | Corresponding Notification | Corresponding section of FEMA |
1. | Permissible Capital Account Transactions | Notification No. 1 / 2000-RB dated 3rd May 2000 | Section 6(2) read with Section 47(2) of FEMA |
2 | Transfer or issue of any foreign security by a person resident in India | Notification No. 120 dated April 7, 2004 | Section 6(3)(a) read with section 47 of FEMA |
3 | Transfer or issue of any foreign security by a person resident outside India | Notification No. 20 (R)/ 2017/ RB dated November 7, 2017 | Section 6(3)(b) read with section 47 of FEMA |
4 | Transfer or Issue of any security or foreign security by any branch, office or agency in India of a person resident outside India | Notification No. 2 / 2000-RB dated 3rd May 2000 | Section 6(3)( c) read with Section 47(2) of FEMA |
5 | Any borrowing or lending in foreign exchange in whatever form or by whatever name called | Notification No. 3(R ) dated December 17, 2018 | Section 6(3)(a), 6(3)(d) and 6(3)(e ) read with Section 47(2) of FEMA |
6 | Deposits between persons resident in India and persons resident outside India | Notification No. 5(R ) dated April 1, 2016 | Section 6(3)(f) read with Section 47(2) of FEMA |
7 | Export, Import or holding of currency notes | Notification No. 6(R ) dated December 29, 2015 | Section 6(3)(g) read with Section 47(2) of FEMA |
8 | Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India | Notification No. 7(R ) dated December 29, 2015 | Section 6(3)(h) read with Section 47(2) of FEMA |
9 | Giving of 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; (ii) by a person resident outside India | Notification no. 8 / 2000-RB dated 3rd May 2000 | Section 6(3)(j) read with Section 47(2) of FEMA |
10 | Insurance | Notification no. 12(R ) dates December 29, 2015 | Section 47(2) of FEMA |
11 | Remittance of assets | Notification no. 13(R ) dates April 1, 2016 | Section 47 of FEMA |
12 | Acquisition or Transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India | Notification No. 21 (R ) dated March 26, 2018 | Section 6(3)(i) read with section 47(2) of FEMA |
13 | Establishment in India of Branch or Office or other place of Business | Notification No. 22( R) dates March 31, 2016 | Section 6(6) of FEMA |
As Capital Account Transactions are regulated under FEMA law, each of the above transactions needs to be studied in detail based on notification mentioned in respect of same. Each of the above transactions are explained in the greater detail in separate articles. For understanding same, click on link attached to each of the transactions. In order to avoid any contraventions in relation to FEMA law, it is imperative to understand and apply each of the provisions, before transacting in foreign currency.
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