FLY WITH FEMA

ContentsIntroduction.Objective and salient features.Important sections of FEMA.Mechanism under FEMA.Current Account.Capital Account.L. R. S.Penal Provisions.Capital Account Convertibility - Approach

Introduction..Exchange control was introduced as a

temporary measure in 1939.Placed on statutory basis in 1947 (FERA 1947)FERA 1947 replaced by FERA 1973.FERA 1973 replaced by FEMA 1999.Exchange control in existence – 72 years.Can be phased as –

- 5 decades of control; - a decade of reforms; - a decade of FEMA.

FEMA, 1999-Objectives..FEMA, 1999 came into effect from 01.06.2000.To consolidate the law relating to foreign exchange

with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.

It extends to whole of India. It shall also apply to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention thereunder committed outside India by any person to whom this Act applies.

Salient features…Shift in object.Govt. / RBI – powers clearly demarcated.FX transactions categorised – Current / CapitalProvisions dependant on residential status.Residential status on the basis of stay as well as

purpose.Civil Law – No arrest.Prosecution to prove charges against accused.Investigation and adjudication segregated.A new concept - Compounding introduced.Compounding in a definite time-frame (180 days.Sun-set clause introduced.

Important sections..There are 49 sections in FEMA.Main sections are :

Sec.2 : Definitions. Sec.3 : Dealing in FE. Sec.4 : Holding of FE. Sec.5 : Current Account. Sec.6 : Capital Account Sec.7 : Export of Goods and Services. Sec.8 : Realisation / repatriation of FE. Sec.9 : Exemption from Sec.8Sec.10(5): DeclarationSec.10(6): Freedom to utilize forexSec.13 to 15 : Penal provisions

Mechanism under FEMA

Act – FEMA

Notifications

Rules – Current A/C

Regulations- Capital A/C

AP Dir Circulars to APs

Passed by the Parliament – the Legislature

Notified in the Gazette – by the Executive

Current Account by the Government

Capital Account by the RBI

All aspect of Forex transactions by the RBI

A. P. Catagorisation.. AD Cat – I - Com. Banks - State Co-op Banks - Urban Co-op Banks AD Cat – II - Up Graded FFMCs - Co-op. Banks - RRBs - Others Select Financial and

other Institutions FFMCS

All current & capital account transactions.

Specified non-trade current account transactions.

Transactions incidental to their FE activities.

Purchase of FC & sale of FE for pvt/business visits.

Forex Transactions…Types of transactions :- Current A/c ; and Capital A/c.Rational : Current A/c : The transactions which are not prohibited are permitted. [ Sec. 5 freedom to draw FE ] Capital A/c : The transactions which are not permitted are restricted. [ Sec. 6 RB, may by regulation

prohibit, restrict or regulate.

Current A/c transactions..• Meaning: A transaction other than Capital

account transaction and includes…… - payment due in connection with foreign trade, other current business, services… - interest on loans and 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.

Current A/c contd…Governed by: Sec. 5 read with Current

Account rules notified by Govt. and AP (Dir) circulars issued by RBI.

Compliance: Rule No. 3 - Sch. I - Prohibition. [ Items - 8 ] Rule No. 4 - Sch. II - Govt. approval. [ Items - 10 ] Rule No. 5 – Sch. III – RBI approval [ Items – 13 ]All other current a/c transactions freely

permitted

Capital A/c transactions….

Meaning: 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-sec.(3)of Sec. 6.

Governed by : Sec. 6 read with Regulations notified by RBI & AP (Dir) Cir. Issued by RBI.

Regulations: Notf. No. FEMA. 1/2000 read with Nos. 2 to 25, 71 & 101.

Notf. No. 1 : Sch I- classes of cap. a/c transactions of persons resident in India; Sch II – classes of cap a/c transactions of persons resident out side India.

Important cap a/c transactionsSeparate regulations for investments,

borrowings, lending, deposits, export and import of currency, guarantees, surrender of foreign exchange, foreign currency accounts, remittance of assets, immovable property, derivative contracts, etc.

Most of the transactions could be undertaken under the general permission.

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Diagrammatic presentationForeign

Investments

Investment on non

repartriable basis

Automatic route

Venture Capital Investments

Portfolio Investments

FII

Other investmentsFDI

Govt Route

PROINRI, PIO

FIIs NRI, PIO

SEBI regd. FVCIs

VCF, IVCUs

NRI, PIO

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Perspective of the policy • Government Policy : The entire FDI policy and

procedures, as notified by the Government from time to time, are duly incorporated under FEMA Regulations.

• Transparent and liberal FDI.- Positive list.- The differential treatment is limited to a few entry rules.- A few banned sectors (like lotteries, gambling, betting, etc.)- Sectors with limits on foreign equity proportion.

• National treatment- Subject to these foreign equity conditions a foreign company can operate under the same laws, rules and regulations as any Indian owned company.

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FDI Policy Framework • FDI by NRs in Res. Entities through transfer or issue of

security to PROI is a Cap. A/c transaction is regulated under FEMA, 1999 & its regulations. The regulatory framework consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.

• Inbound investments are regulated by :− Department of Industrial Policy & Promotion (FC

Section), Ministry of Commerce, Government of India makes policy pronouncements on FDI through PNs/PRs. DIPP has released Consolidated FDI Policy vide Circular NO.1 of 2011 dated 1 April 2011 which is effective from 1st April2011.

− RBI has the power to prohibit, restrict or regulate the transfer or issue of any security by a person resident outside India under section 6(3)(b) of the Foreign Exchange Management Act, 1999 (“FEMA”)

Sector classification Prohibition – 9 items. Investment up to 100% under Automatic Route

in most sectors (like Floriculture, Horticulture, Greenfield Airports projects);

Investment in 17 sectors under Government Route (such as Defence – 26%, Tea-100%, ARC-49%, CIC-49%, Commodity Exchanges-49%, Sex-49%, Satelite-74%).

13 sectors subject to sectoral caps (Pvt. banking-74%, Insurance-26%, Air Port-74%, Telecom-49% to 74%, Broadcasting-20% to 49%, Print media-26%)

FDI procedureGoverned by :[Govt. Policy 01-10-2011, FEMA

Notf. No 20 & Circulars issued by RBI ].Eligible investment : [EQ/FMCPS/FMCD].Routes : [Automatic & Approval].Pricing : [ listed SEBI/unlisted DCF method].Time limit : [within 180 days from the date

receipt of investment].Reporting : [ Inflow, FC-GPR part

A(RO)/B(DSIM), FC-TRS ( transfer ), DR

[ADRs/GDRs] monthly/quarterly

ECB Policy• India’s external debt includes external assistance,

NRI deposits, short-term credit and rupee debt. ECB’s are a key component of external debt.

• The important aspect of ECB policy is to provide flexibility in borrowings by Indian corporates, at the same time maintaining prudent limits for total ECBs (USD 30 bn. – 2011-12)

• The guiding principles for ECB policy are to keep maturities long, costs low and encourage infrastructure ( 9 areas ) and export sector financing .

Governed by Sec. 6(3)(d) of FEMA, Notf. No 3 /2000 and Cirs. issued by RBI.

Latest DevelopmentsRedemption of FCCBs – Refinancing;Utilisation of 25% of the fresh ECB towards

refinancing of rupee loans;Bridge finance for infrastructure sector;Enhancement of ECB limit (USD 500 mn. >750

mn.);ECBs designated in INR;ECB for IDC;Structured Obligation for infrastructure sector;ECB from foreign equity holders;ECB in Renminbi (RMB) – Yuan.

Introduction… Overseas Investment in JVs/WOSs is an important

avenue for promoting global business by Indian entrepreneurs.

Advantages : - medium of economic co-op. between India and other

countries; - transfer of technology and skill; - access to wider global market; - share of result of R & D; - promotion of brand image; contd…

Introduction contd.. - generation of employment; - utilisation of raw material available in India; - utilisation of raw material available in the host country; - increase in export of plant & machinery, goods and services from India; - source of foreign exchange earnings by way of dividend,

royalty, technical know-how fees and other entitlements on such investments.

Governed by..Section 6 ( 3 ) ( d ) of FEMA, 1999;Notification No FEMA. 120/RB-2004 dated July 22, 2004;Prohibition: No investment without prior approval of RB in the following areas- - Dealing in real estate; - Trading in TDRs; - Banking.

Obligation of Indian party..Receiving share certificates/documentary

evidence in r/o investment and submission of it to the designated AD;

Repatriation of all receivables due in r/o investments made;

Compliance with the reporting requirement ( Form ODI/APR);

Reporting of FCCB;Repatriation of disinvestment proceeds.

LATEST LIBERALISATION..Performance Guarantee issued by the Indian Party;

Restructuring of Balance Sheet of the overseas entity involving write-off of capital and receivables;

Disinvestment by the Indian Parties of their stakes in an overseas JV/WOS involving write-off;

Issue of guarantees by an Indian Party to step down subsidiary of JV/WOS under general permission.

Trade – Imports..Import is regulated by DGFT as per FTP.

ADs should ensure that import is in conformity with FTP and Current A/c. transactions Rules, 2000. ADs should also follow normal banking procedures and adhere to the provisions of UCPDC as well as R & D Cess Act, 1986, Income Tax Act and KYC guidelines issued by RBI.

Trade – Exports…Export trade is regulated by DGFT as per FTP –

Sec.7 of FEMA. Applicable Rules / Regulations are Current A/c. Rules (sch.II and III)FEMA Notification No.8, 9, 14 and 23RBI guidelines in respect of exports to erstwhile

USSRBy RBI in respect of Romania.

Exemption from declarations are listed in Regulation 4 of FEMA 23/2000.

Latest development : Online Payment Gateway Service Provider. [ OPGSP ]. Value per transaction enhanced from USD 500 to USD 3000.

Foreign Currency Accounts..Governed by Notf. No. 10/ 2000.Types of Accounts permitted: - EEFC - RFC - RFC(D) - EFC - OTHERS (Diplomats, non-diplomats, Ads, shipping/ airline companies, LIC, GIC, students, trading/non-trading offices, etc).

Deposit Accounts…Governed by Notf. No. 5/2000Types of Accounts: - NRO - NRE - FCNR(B)ADs can allow remittance/s up to USD 1

million, for bonafide purpose per calendar year from balances in NRO accounts subject to payment of applicable taxes. The limit of USD 1 million per year includes sale proceeds of immovable properties held by NRIs/ PIO.

Liberalised Remittance Scheme…Any Resident can remit $200,000 in a financial year: for any current (except Schedule

I and II) or capital account transactions.This is a new facility in addition to all the existing facilities.Only for individuals (not for corporate, trusts firms, etc); GP to open foreign currency a/c

abroad and acquire immovable property out of this amount.

Requirement- PAN No & 1 year banking relation.An application cum declaration has been

prescribed .Banks to market schemes after clearance from

DBOD.

Latest liberalisations - individualsNRIs can be joint holders in Resident – SB / EEFC / RFC

accounts;Residents can be joint holders in NRE / FCNR accounts;Resident can gift shares / Debentures up to USD 50,000 per

financial year;Sale proceeds of FDIs can be credited to NRE / FCNR account;Gift to NRIs can be credited to NRO account in Rupees;Loans to close relatives can be given in Rupees;Residents can repay the loans given to close relatives;Residents can bear Medical Expenses of NRIs (close relatives);FNCR (B) allowed in permitted currencies.Income and sales proceeds of assets held abroad under LRS

need not be repatriated on return to India.

Penal provisions….Governed by Chapter IV viz.

Contravention and penalties. - Sec 13: Adjudication and penalties. - Sec 14: Enforcement of the order of the Adjudication authority. - Sec 15: Compounding by RBI/DoE [A.P(Dir Series Circular No. 56/28.06.2010)]. - Sec 49: Sunset clause.

CAC approach Endeavour to move towards CAC.Process not an event.Cautious approach.Inflow related outflows – no restrictions.No back-tracking.Festina lente.Guiding force – FCAC, 2006.

Initiatives taken by RBI

CAC 1997;FEMA, 1999CPPAPS, 2003.Compounding, 2005 and 2010.FCAC, 2006Task Force, 2006CRFI, 2011