The legislative framework primarily relating to the management of the foreign exchange in India comprises of –
(a) The Foreign Exchange Management Act, 1999 (FEMA) ;
(b) Allied Rules made by Ministry (under section 46 of FEMA);
(c) Regulations made by RBI (under section 47 of FEMA);
(d) Master circulars issued by RBI on 1st July of every year ;
(e) Foreign Direct Investment policy issued by Department of Industrial Policy and Promotion,
(f) Reserve Bank of India’s notifications and circulars.
Prior to 1999, Foreign Exchange Regulation Act, 1973 governed the transactions relating to foreign exchange in India. Post liberalization reforms, various legislations were amended to adapt to the new policies of the Government. As a result, the Parliament enacted the Foreign Exchange Management Act,1999 and replaced the Foreign Exchange Regulation Act, 1973. This Act came into force on the 1st day of June 2000.
Application of the Act –
Section 1(2) provides that the Act extends to the whole of India.
Section 1(3) provides that the Act 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.
Definition of foreign exchange
Section 2(n) states that “foreign exchange” means foreign currency and includes,—
- deposits, credits and balances payable in any foreign currency,
- drafts, travellers cheques, letters of credit or Acts of exchange, expressed or drawn in Indian currency but payable in any foreign currency,
- drafts, travellers cheques, letters of credit or Acts of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency.
Other Legislations relating to Foreign Exchange in India –
- Foreign Trade (Development and Regulation) Act, 1992 ;
- Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974;
- Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976;
- Prevention of Money Laundering Act, 2002;
- Foreign Contribution (Regulation) Act, 2010.
Salient Features –
The objective of the Act is to consolidate and amend 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.
A. Regulation and Management of Foreign Exchange
Chapter II- Sections 3 –9 deal with regulation and management of Foreign Exchange as follows :
- Provision as to dealing in foreign exchange (Section 3)
Section 3 provides that no person shall deal in or transfer any foreign exchange or foreign security to any person not being an authorised person; make any payment to or for the credit of any person resident outside India in any manner; receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner; 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. It further provides that any such dealing may be permitted under this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank.
- Holding of foreign exchange, etc. by a person resident in India (Section 4)
Section 4 provides that no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.
- Current account transactions (Section 5)
Section 5 provides that any person may sell or draw foreign exchange to or from an authorized person if such sale or drawal is a current account transaction. Proviso to Section 5 provides that 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 prescribed.
Foreign Exchange Management (Current Account Transactions) Rules, 2000 has Three Schedules.
(a) Schedule I prohibits drawal of foreign exchange by any person for the activities mentioned in the said Schedule. (eg.- Remittance out of lottery winnings, Remittance of income from racing/riding, etc., or any other hobby.) (b) Schedule II specifies transactions which require prior approval of the Central Government for the drawal of foreign exchange. (eg- Cultural Tours, Multi-modal transport operators making remittance to their agents abroad).
(c) Schedule III specifies transactions which require prior approval of Reserve Bank.
- Capital account transactions (Section 6)
Any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction. The Reserve Bank may, in consultation with the Central Government, specify any class or classes of capital account transactions which are permissible; the limit up to which foreign exchange shall be admissible for such transactions. Proviso to Section 6(2) states that the Reserve Bank shall not impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.
Foreign Exchange Management (Permissible capital account transactions) Regulations, 2000 –
Regulation 6 provides that every person selling or drawing foreign exchange to or from the an authorized person for a capital account transaction shall furnish to the Reserve Bank , a declaration in the form and within the time specified in the regulations relevant to the transaction.
Schedule I specifies Classes of capital account transactions of person resident in India. (eg.-Foreign currency loans raised in India and abroad by a person resident in India, Export, import and holding of currency/currency notes). Schedule II specifies Classes of capital account transactions of persons resident outside India. (eg.- Foreign currency accounts in India of a person resident outside India, Acquisition and transfer of immovable property in India by a person resident outside India.)
- Export of goods and services (Section 7)
(a) Every exporter of goods shall furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India; and furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realisation of the export proceeds by such exporter.
- Realisation and repatriation of foreign exchange (Section 8)
Section 8 provides that where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.
Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 –
Regulation 4 provides that on realisation of foreign exchange due, a person shall repatriate the same to India, namely bring into, or receive in, India and sell it to an authorized person in India in exchange for rupees; or retain or hold it in account with an authorised dealer in India to the extent specified by the Reserve Bank; or use it for discharge of a debt or liability denominated in foreign exchange to the extent and in the manner specified by the Reserve Bank. A person shall be deemed to have repatriated the realized foreign exchange to India when he receives in India payment in rupees from the account of a bank or an exchange house situated in any country outside India, maintained with an authorized dealer.
- Exemption from realization and repatriation in certain cases (Section 9)
The provisions of sections 4 and 8 shall not apply to the following namely possession of foreign currency or foreign coins by any person up to such limit as the Reserve Bank may specify; foreign currency account held or operated by such person or class of persons and the limit up to which the Reserve Bank may specify; foreign exchange acquired or received before the 8th day of July, 1947 or any income arising or accruing thereon which is held outside India by any person in pursuance of a general or special permission granted by the Reserve Bank; foreign exchange held by a person resident in India up to such limit as the Reserve Bank may specify, if such foreign exchange was acquired by way of gift or inheritance from a person referred to in clause (c), including any income arising therefrom; foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means up to such limit as the Reserve Bank may specify; and such other receipts in foreign exchange as the Reserve Bank may specify.
The remaining features shall be dealt with in coming posts.
- Leena Patil, “Foreign Exchange Regulatory Regimes in India”, available at http://legalintegrity.in/Foriegn%20Exchange%20Regulatory%20Regimes%20In%20India.pdf.
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