The Basics of Foreign Exchange Management Act, 1999

Table of Contents

1. Objectives & Scope of FEMA
2. Difference between Foreign Exchange vs. Foreign Securities
3. Difference between Persons vs. Authorized Persons
4. Limits on possession and retention of foreign currency
5. Realization, Repatriation & Surrender of Foreign Exchange
6. Obligations of Authorized Persons & RBI’s Power to Issue Directions such Persons
7. Contravention & Penalties under the Foreign Exchange Management Act, 1999
8. Compounding of Offences under Foreign Exchange (Compounding Proceedings) Rules, 2000.
9. Procedure relating to establishment of Appellate Tribunal under Foreign Exchange Management Act, 1999.
10. Difference between Appellate Tribunal & Courts

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1. Objectives & Scope of FEMA

1. 1. Objective as per Preamble: -The objective is to consolidate and amend the law relating to foreign exchange with view to:
      • Facilitate external trade and payments.
      • For promoting development & maintenance of foreign exchange market in India.
   2. Scope: The Act extends to the whole of India. It also applies to:
      • All branches, offices and agencies outside India owned or controlled by a person resident in India (PRI), and
      • Any contravention committed outside India, by any person to whom this Act applies.
   3. Central Legislation:- It deals with inbound investments into India and outbound investments from India and deal with trade and business between India and the other countries.
   4. Provisions:- Foreign Exchange Management Act, 1999 makes provisions for dealings in foreign exchange. Broadly, all Current Account Transactions are free. However, Central Government can impose reasonable restrictions by issuing Rules. Capital Account Transactions are permitted to the extent specified by Reserve Bank of India (RBI) by issuing Regulations.
   5. RBI:- Foreign Exchange Management Act, 1999 envisages that RBI shall have a controlling role in management of foreign exchange. Since RBI cannot directly handle foreign exchange transactions, it authorizes “Authorised Persons” to deal in foreign exchange.
   6. Penalty, Adjudication, Appeal:- Foreign Exchange Management Act, 1999 also makes provisions for enforcement, penalties, adjudication and appeal also contains only basic legal framework. The practical aspects are covered in Rules made by Central Government and Regulations made by RBI.

2. Difference between Foreign Exchange vs. Foreign Securities

(A) Foreign Exchange: Section 2(n):-

1. 1. 1. Foreign exchange means foreign currency
      2. Foreign exchange includes –
         • Deposits, credits and balances payable in any foreign currency;
         • Drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency;
         • Drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency.
      3. Any draft, travellers cheque, letters of credit or bills of exchange drawn by banks, institutions or persons outside India but payable in Indian currency has also been included in the definition of foreign exchange.

(B) Foreign Security: Section 2(o):-

1. 1. 1. Foreign security means any security, in the form of shares, stocks, bonds, debentures or any other instrument in foreign currency.
      2. It also includes securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency.

3. Difference between Persons vs. Authorized Persons

1. 1. Person [Section 2(u)]: Person includes –
      • Individual
      • Hindu undivided family
      • Company
      • Firm
      • AOP or BOI (whether incorporated or not)
      • Every artificial juridical person, and
      • Any agency, office or branch owned or controlled by any person.
   2. Authorized Person [Section 2(c)]: Authorized person means an—
      • Authorized dealer.
      • Money changer,
      • Off-shore banking unit or
      • Any other person for the time being authorized u/s 10 to deal in foreign exchange or foreign securities.

       

Generally, all nationalized banks, leading non-nationalized banks and foreign banks are appointed as authorized dealers to deal in foreign exchange. Eg: -HDFC bank deals with foreign currency

4. Limits on possession and retention of foreign currency or foreign coins, under Foreign Exchange Management (Possession & Retention of Foreign Currency) Regulations, 2015

1. 1. Meaning of possession and retention
      ‘To possess’ or ‘to retain’ means to possess or to retain in physical form and the words ‘possession’ or ‘retention’ shall be construed accordingly
   2. Provision in the Act: Section 4 of Foreign Exchange Management Act,1999
      Person resident in India can acquire, hold, own, possess or transfer any foreign exchange only after compliance with the provisions of the Act, Rules and Regulations.
   3. Regulation framed
      RBI has framed FEM (Possession & Retention of Foreign Currency) Regulations, 2015.
   4. Limits for possession and retention of foreign currency or foreign coins [Regulation 3]:
      The RBI specifies the following limits for possession or retention of foreign currency or foreign coins:

(a) An authorized person acting within the scope of his authority may possess foreign currency and coins without any limit.

(b) Any person may possess foreign coins without any limit.

(c) A person resident in India may possess foreign currency notes, bank notes and foreign currency travellers cheque not exceeding US$ 2,000 provided that such foreign exchange –

• • • • • was acquired by him while on a visit to any place outside India by way of payment for services not arising from any business in or anything done in India,
        • was acquired by him, from any person not resident in India and who is on a visit to India as honorarium or gift or for services rendered or in settlement of any lawful obligation,
        • was acquired by him by way of honorarium or gift while on a visit to any place outside India,
        • represents unspent amount of foreign exchange acquired by him from an authorized person for travel abroad.

5. Realization, Repatriation & Surrender of Foreign Exchange

1. 1. Definition of Repatriate to India:Section 2(y): Repatriate to India means bringing into India the realized foreign exchange and –
      • The selling of foreign exchange to an authorized person in India in exchange for rupees, or
      • The holding of realized amount in an account with an authorized person to the extent notified by the RBI, and
      • Use of the realized amount for discharge of a debt or liability denominated in foreign exchange.
   2. Provision relating to realization & repatriation of foreign exchange [Section 8]: 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 specified period and in specified manner by the RBI.
   3. Exemption from realization and repatriation in certain cases [Section 9]: In following cases foreign exchange need not be repatriated to India:
      • Possession of foreign currency or coins by any person up to specified limit.
      • Foreign currency account held or operated as specified by RBI.
      • Foreign exchange acquired or received before the 8.7.1947 or any income arising or accruing which is held outside India by any person in pursuance of a general or special permission granted by the RBI.
      • Foreign exchange acquired and held by way of gift or inheritance by a person resident in India up to limit as specified by RBI.
      • Foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means up to limit specified by the RBI.
      • Such other receipts in foreign exchange as may be specified by the RBI.

6. Obligations of Authorized Persons & RBI’s Power to Issue Directions such Persons

1. 1. Authorized Person [Section 2(c)]: Authorized person means an authorized dealer, money changer, off-shore banking unit or any other person for the time being authorized u/s. 10 to deal in foreign exchange or foreign securities.Generally, all nationalized banks, leading non-nationalized banks and foreign banks are appointed as authorized dealers to deal in foreign exchange. Eg: HDFC bank buy and sell foreign currency.
   2. Authorization to act as Authorized Person [Section 10(1) & (2)]: The RBI may, on an application made to it, authorize any person to be known as authorized person to deal in foreign exchange or securities. An authorization shall be in writing and shall be subject to the prescribed conditions.
   3. Obligation of Authorized Person
      • General and Special Directions:- An authorized person shall comply with general or special directions or orders given by the RBI. An authorized person shall not engage in any transaction which is not in conformity with the terms of his authorization without the previous permission of the RBI.
      • Obtaining Declaration and information & refusal to deal:- An authorized person shall before undertaking transaction in foreign exchange, require the person to give declaration from a person to satisfy himself that the transaction in is not violation of FEMA.
      • Doubtful transaction should be refused:- If authorized person has any doubt, he should refuse the transaction in writing.
      • Contemplated Transaction:- If the authorized person has reason to believe that transaction is contemplated, he should the matter to the RBI.
   4. Effect of misuse: A person who has foreign exchange shall be deemed to have committed contravention of the provisions of the FEMA if such person –
      • Does not use foreign exchange for purpose for which it was acquired or
      • Does not surrender it to authorized person within the specified period or
      • Uses the foreign exchange for any other purpose other than for which it was acquired.

      RBI’s powers to issue directions to authorized person [Section 11]:

      1. Issue Direction:- The RBI may give to the authorized persons any direction in regard to making of payment or the doing or desist from doing any act relating to foreign exchange or foreign security for the purpose of securing compliance with the provisions of FEMA.
      2. Furnish Information:- The RBI may also direct any authorized person to furnish necessary information in prescribed manner for the purpose of ensuring the compliance with FEMA.
      3. Penalty:- Where any authorized person contravenes any direction or fails to file any return, the RBI may after giving reasonable opportunity of being heard impose on the authorized person a penalty which may extend to ` 10,000. In the case of continuing contravention an additional penalty up to ` 2,000 per day can be imposed.

7. Contravention & Penalties under the Foreign Exchange Management Act, 1999

1. 1. Contravention: Contravention is a breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and rules/regulations/notifications/orders/directions/circulars issued thereunder.
   2. Penalties [Section 13]: If any person contravenes any provision of FEMA, he shall be liable to a penalty as stated below:
      • If amount is quantifiable: Penalty up to thrice the sum involved in such contravention.
      • If amount is not quantifiable: Penalty up to ` 2 lakhs.
      • Continuing Contravention:- In case of continuing contravention additional penalty up to ` 5,000 per day can be imposed.
   3. Confiscation:- Adjudicating Authority can also order confiscation of any currency, security or any other money or property in respect of which the contravention has taken place.
   4. Direction:- Adjudicating Authority can also direct that foreign exchange holdings of any person committing the contraventions shall be brought back into India or shall be retained outside India as per directions.

8. Compounding of Offences under Foreign Exchange (Compounding Proceedings) Rules, 2000.

1. 1. Compounding Meaning:- Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. The RBI is empowered to compound contraventions of the provisions of the FEMA. It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention. It provides comfort to any person who contravenes any provisions of FEMA, 1999 by minimizing transaction costs.Wilful, mala fide and fraudulent transactions are, however, viewed seriously, which will not be compounded by the RBI.
   2. Power to compound contravention [Section 15(1)]: Any contravention u/s 13 may, on an application made by the person committing such contravention, be compounded within 180 days from the date of receipt of application by the Director of Enforcement or such other officers of the Directorate of Enforcement and Officers of the RBI as may be authorized in this behalf by the Central Government in prescribed manner.
   3. No further proceedings after compounding [Section 15(2)]: Where a contravention has been compounded, no proceeding or further proceeding, as the case may be, shall be initiated or continued against the person committing such contravention in respect of the contravention so compounded.
   4. Power of Reserve Bank to compound contravention [Rule 4(1)]:
      • If any Person contravenes any provisions of Foreign Exchange Management Act, 1999 except Section 3(a) of the Act, then application for compounding can be made as specified below:
        

        Sum involved in contravention is	Officer of RBI that can compound the offence
        ` 10 lakh or below	Assistant General Manager
        More than ` 10 lakh but less than ` 40 lakh	Deputy General Manager
        More than ` 40 lakh but less than ` 100 lakh	General Manager
        More than ` 100 lakh	Chief General Manager

        Section 3(a): No person shall deal in or transfer any foreign exchange or foreign security to any person not being an authorized person.

      • No compounding if similar offence is committed within a period of 3 years [Rule 4(2)]: No contravention shall be compounded unless the amount involved in such contravention is quantifiable.
      • Once an offence is compounded, similar offence committed within period of 3 years cannot be compounded. Thus, similar offence can be compounded only once in 3 years.
      • Every officer shall exercise the powers to compound any contravention subject to the direction, control and supervision of the Governor of the RBI. [Rule 4(3)]
      • Fee for compounding [Rule 4(4)]: Every application for compounding any contravention shall be made in prescribed Form to the Reserve Bank of India, Exchange Control Department, Central Office, Mumbai along with a fee of ` 5,000 by way of DD in favour of compounding authority.
   5. The Power of Enforcement Directorate to compound contraventions [Rule 5(1)]:
      • Applications seeking compounding of contraventions u/s 3(a) shall be submitted to Enforcement Directorate as specified below:
        

        Sum involved in contravention is	Directorate that can compound the offence
        ` 5 lakh or below	Deputy Director of the Directorate of Enforcement
        More than ` 5 lakh but less than ` 10 lakh	Additional Director of the Directorate of Enforcement
        More than ` 10 lakh but less than ` 50 lakh	Special Director of the Directorate of Enforcement
        More than ` 50 lakh but less than ` 100 lakh	Special Director with Legal Advisor of the Directorate of Enforcement
        More than ` 100 lakh	Director of Enforcement with Special Director of the Directorate of Enforcement.

      • No compounding if similar offence is committed within a period of 3 years [Rule 5(2)]: No contravention shall be compounded unless the amount involved in such contravention is quantifiable.
      • Once an offence is compounded, similar offence committed within period of 3 years cannot be compounded. Thus, similar offence can be compounded only once in 3 years.
      • Every officer of the Directorate of Enforcement shall exercise the powers to compound any contravention subject to the direction, control and supervision of the Governor of the RBI. [Rule 5(3)]
      • Fee for compounding [Rule 5(4)]: Every application for compounding any contravention rule shall be made in prescribed Form to the Director, Directorate of Enforcement, New Delhi, along with a fee of ` 5,000 by way of DD in favour of compounding authority.

9. Procedure relating to establishment of Appellate Tribunal under Foreign Exchange Management Act, 1999.

1. 1. Establishment of Appellate Tribunal [Section 18]: The Appellate Tribunal constituted u/s 12(1) of the Smugglers & Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 shall be the Appellate Tribunal for the FEMA Act, 1999 and the said Appellate Tribunal shall exercise the jurisdiction, powers and authority conferred on it under the FEMA Act, 1999.
   2. Appeal to Appellate Tribunal [Section 19(1)]: An appeal can be filed with Appellate Tribunal against the order made by –
      1. Special Director (Appeals)
      2. An Adjudicating Authority [other than Assistant Director of the Enforcement or Deputy Director of Enforcement]

10. Difference between Appellate Tribunal & Courts