2. 2
• FEMA became an act on the 1st day of June,
2000.
• FEMA is applicable to all parts of India. The
act is also applicable to all branches, offices
and agencies outside India owned or
controlled by a person who is a resident of
India. Shrikant Turalkar-
3. FERA & FEMA
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• Object to conserve and
prevent misuse.
• To facilitate external trade
and payments.
• Violation was Criminal
Offence and was non
compoundable.
• Violation is a civil offence and
is compoundable.
• It was a draconian police law. • It is a civil law. However, special
provision is made w.e.f. 9th Sept
2015 for imprisonment of 5 years
for holding foreign exchange or
property outside India exceeding 1
crore.
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4. FEMA has in total 49 sections in which section 1 to 9 are
substantive and the rest section are
procedural/administrative.
Section 46 of the Act grants power to Central Government
to make rules like Current Account Transaction, FDI limit
on sectors, prohibited sectors, adjudication of offence and
appeals and section 47 of the Act grants power to RBI to
make regulations to implement its provisions and the
rules made thereunder.
RBI is entrusted with administration and implementation
of FEMA.
Every rules and regulations made under this Act shall be
laid before each House of Parliament.
http://www.eximguru.com/exim/reserve-bank/fema.aspx
FEMA COVERAGE
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5. "authorized person" means an authorized dealer, money changer,
off-shore banking unit or any other person for the time being
authorized under the Act to deal in foreign exchange or foreign
securities.
“person resident in India" means-
a person residing in India for more than one hundred and
eighty-two days during the course of the preceding financial
year but does not include-
• a person who has gone out of India or who stays outside
India, in either case-
o for or on taking up employment outside India, or
o for carrying on outside India a business or vocation outside
India, or
o for any other purpose, in such circumstances as would
indicate his intention to stay outside India for an uncertain
period;
Some Important Definitions
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6. • a person who has come to or stays in India, in either case,
otherwise than-
o for or on taking up employment in India, or
o for carrying on in India a business or vocation in India, or
o for any other purpose, in such circumstances as would
indicate his intention to stay in India for an uncertain period;
• 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;
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7. 7
"person resident outside India" means a person who is not resident in
India;
"foreign exchange" means foreign currency and includes,-
o deposits, credits and balances payable in any foreign currency,
o drafts, travellers cheques, letters of credit or bills of exchange,
expressed or drawn in Indian currency but payable in any
foreign currency,
o drafts, travellers cheques, letters of credit or bills of exchange
drawn by banks, institutions or persons outside India, but
payable in Indian currency;
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8. What is restricted in FEMA
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Sec. 3 Save as otherwise provided in this Act, rules or regulations made
thereunder, or with the general or special permission of the Reserve Bank, no
person shall
(a) deal in or transfer any foreign exchange or foreign security to any person
not being an authorised person;
(b) make any payment to or for the credit of any person resident outside India
in any manner;
(c) receive otherwise through an authorised person, any payment by order or
on behalf of any person resident outside India in any manner.
(d) 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.
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9. NRI & PIO
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NRI is a person resident outside India
who is a citizen of India.
PIO means a citizen of any country other
than Bangladesh or Pakistan, if: held
anytime an Indian Passport either of his
parents or grand parents were citizen of
India the person is a spouse of an Indian
origin or of a person referred above.
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10. Facilities available to NRI & PIO
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Bank Accounts: NRE A/C, FCNR A/C, NRO A/C
Repatriation Limit: upto USD 1 million per year from NRO Account
Housing Loans: can obtain Housing Loans for purchasing property in
India
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11. Any person may sell or draw foreign exchange to or from
an authorized person if such sale or drawal is a current
account transaction.
The Central Government may, in public interest and in
consultation with the Reserve Bank, impose such
reasonable restrictions for current account transactions
as may be required from time to time.
Current Account Transactions
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12. 12
The definition is inclusive and any expenditure which is not a capital
account transaction will be current account transaction. It includes:
payments due in connection with foreign trade, other current business,
services, and short-term banking and credit facilities in the ordinary
course of business
payments due as interest on loans and as net income from investments
remittances for living expenses of parents, spouse and children
residing abroad, and
expenses in connection with foreign travel, education and medical care
of parents, spouse and children
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13. Payment for imports of goods
Remittance of interest on investment made and funds borrowed from
abroad after tax deductions
Remittance of Dividend if the investment was allowed without any
condition
Booking with Airlines/Shipping
Salary/remuneration to Foreign Directors subject to restrictions in any
other law
Current Account Transactions
Few Examples
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14. The following requires prior approval of RBI:
• Gifts and Donations above USD 5000
• Corporate Donation above 1 % of Foreign Exchange Earning during 3 previous
years or USD 5 million, whichever is less
• Commission to Agents abroad for sale of residential/commercial plots in India
above 5 % of Inward Remittance or USD 25000 , whichever is higher
• Consultancy Charges paid abroad for more than USD 1 million
• Reimbursement of Pre-incorporation expenses above 5% of FDI or USD 1 lac
whichever is higher
Restrictions on Current Account Transactions
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15. Prohibited Current Account Transactions
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• Drawal of exchange for travel to or with residents
of Nepal/Bhutan
• Commission on export to JV/WOS abroad
• Commission on Rupee Trade
• Call back Charges
• Remittance out of Lottery, racing etc.
• Bogus Prizes / Fictitious Schemes etc.
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16. “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 like:
o Changes in Assets/ Liabilities
o Transfer/ issue of security
o Borrowing/ Lending
o Export, import or holding of currency or currency notes
o Giving guarantee
Capital Account Transaction are deemed to be prohibited unless
permitted and Current Account Transactions are deemed to be
permitted unless prohibited.
Capital Account Transactions
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17. 17
Investing in India
Automatic Route
General Rule
No prior Permission Required
Only informing RBI within 30
days
of issue and reciept of funds
Government Route
(FIPB)
Prior Permission Required
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18. • Person Resident outside India except of Pakistan
• Entity incorporated outside except Pakistan & Bangladesh
• Person Resident of Bangladesh & entities incorporated
there can make investment in India in form of shares and
conv. Debentures with prior approval of RBI
Who can make FDI?
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19. FDI in shares is permitted 100% in all industries except the
following:
• Proposals requiring Industrial License
• Investment exceeding 24% inn SSI reserved items
• Investment in Defense sector upto 49%
• Foreign collaborator having previous tie up
• Acquisition in shares of existing Company
• Prohibited Sectors
Industrial Policy towards Foreign Investment
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20. Overseas Direct Investment
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(1) financial commitment (FC) exceeding USD 1 (one) billion (or its equivalent)
in a financial year would require prior approval of the Reserve Bank even
when the total FC of the Indian Party is within the eligible limit under the
automatic route (i.e., within 400% of the net worth as per the last audited
balance sheet).
(2) an application in Form ODI (Master Document on Reporting) and
prescribed enclosures / documents for effecting such remittances.
(3) The total financial commitment of the Indian Party in all the Joint Ventures
/ Wholly Owned Subsidiaries shall comprise of the following:
a. 100% of the amount of equity shares, loan and preference shares;
b. 100% of the amount of guarantee (other than performance guarantee)
issued by the Indian Party;
c. 50% of the amount of performance guarantee issued by the Indian Party.
(4) The Indian Party should not be on the Reserve Bank’s Exporters' caution
list / list of defaulters to the banking system circulated by the Reserve Bank /
Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information
company as approved by the Reserve Bank or under investigation by any
investigation / enforcement agency or regulatory body.
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21. 21
(5) All transactions relating to a JV / WOS should be routed through one branch of
an Authorised Dealer bank to be designated by the Indian Party.
(6) In case of partial / full acquisition of an existing foreign company, where the
investment is more than USD 5 million, valuation of the shares of the company
shall be made by a Category I Merchant Banker registered with SEBI or an
Investment Banker / Merchant Banker outside India registered with the
appropriate regulatory authority in the host country; and, in all other cases by a
Chartered Accountant or a Certified Public Accountant.
(7) In cases of investment by way of swap of shares, irrespective of the amount,
valuation of the shares will have to be made.
(8) Investment (or financial commitment) through Special Purpose Vehicle (SPV)
under Automatic Route.
(9) Issue of guarantee by an Indian Party to step down subsidiary of JV / WOS.
(10) Transfer by way of sale of shares of a JV / WOS.
(11) Pledge of shares of Joint Venture (JV), Wholly Owned Subsidiary (WOS) and
Step Down Subsidiary (SDS).
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22. ECB Loan
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(1) The list of entities eligible to raise ECB under the three tracks is set out in RBI
Regulations
(2) The all-in-cost ceiling is prescribed through a spread over the benchmark as
under:
a. For ECB with minimum average maturity period of 3 to 5 years - 300 basis points
per annum over 6 month LIBOR or applicable bench mark for the respective
currency.
b. For ECB with average maturity period of more than 5 years – 450 basis points
per annum over 6 month LIBOR or applicable bench mark for the respective
currency.
(3) Limit of Borrowing per financial year.
(4) The ECB proceeds can be used for all purposes:
• Import of capital goods;
• Local sourcing of capital goods;
• New project
• Modernisation /expansion of existing units
(5) ECB should happen only after obtaining the LRN from RBI
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23. Penalties for Contravention under FEMA
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• The Penalty could be up to thrice the sum involved where amount is
quantifiable
• If the Amount is not quantifiable , penalty upto Rs 2 lacs can be
imposed
• If contravention is of continuing nature, further penalty up to Rs 5000
per day during which the contravention continues can be imposed
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