FEMA Act: Law For International Commerce & Payments

The Indian Parliament passed the Foreign Exchange Management Act (FEMA) in 1999 with the goal of “consolidating and amending the law relating to foreign exchange to facilitate external country trade and payments and promote the orderly development and maintenance of the foreign exchange market in India.”

It superseded the Foreign Exchange Regulation Act, adopted by parliament on December 29, 1999. (FERA). Under this statute, violations of foreign exchange now get classified as civil offences. It covers the whole country, replacing FERA, which had become incompatible with the Indian government’s pro-liberalization objectives.

It permitted a new foreign exchange management regime following the World Trade Organization‘s developing framework (WTO)

OBJECTIVES OF FEMA ACT

• The primary goal for the establishment of FEMA was to facilitate international commerce and payments. The motto of the FEMA act was also to aid the growth and management of the Indian currency market in an orderly manner.
• The Foreign Exchange Management Act (FEMA) establishes the rules and processes for all foreign exchange transactions in India.

  The two types of foreign currency transactions include Capital Account Transactions and Current Account Transactions.

• The FEMA Act defines the balance of payment as a record of transactions in goods, services, and assets between residents of other countries.

  The two basic types of accounts include Capital Account and Current Account.

• Capital Account refers to all capital transactions, whereas Current Account refers to merchandise commerce.

  The entrance and outflow of money to and from a nation or country during a year due to the trading/rendering of commodities, services, and income are current account transactions.

• The current account is a measure of an economy’s health. As previously indicated, the current and capital accounts make up the balance of payment.

The rest of the balance of payment incorporates capital accounts, which show the movement of capital in the economy due to capital receipts and spending.

APPLICABILITY OF FEMA ACT

FEMA (Foreign Exchange Management Act) applies to the entire country of India and agencies and offices situated outside of India (which are owned or managed by an Indian Citizen). The Enforcement Directorate, FEMA’s headquarters, is located in New Delhi.

The Federal Emergency Management Agency (FEMA) commands the following:

• Foreign exchange.
• Foreign security.
• Any item and/or service exported from India to a nation other than India.
• Importation of any commodity and/or services from outside India.
• Securities are those that fall under the definition of the Public Debt Act of 1994.
• Any type of purchase, sell, or exchange (i.e. Transfer).
• Banking, financial and insurance services
• Any overseas company owned by an NRI (Non-Resident Indian) and the owner is 60% or more.
• Any citizen of India residing in the country or outside (NRI)

The FEMA Act categorises current account transactions into three sections, which are as follows:

• Transactions prohibited by FEMA,
• The transaction requires Central Government’s permission,
• The transaction requires RBI’s permission.

PROVISIONS OF FEMA ACT

The following are the key provisions of FEMA (1999):

• Current account transactions are free, subject to reasonable limits that may get applied.
• The Reserve Bank of India (RBI), the in charge of capital account transactions
• Possession of control over the realisation of export profits
• Dealing in foreign exchange through authorised individuals, such as a licenced dealer or money changer, etc
• Provision for Appeals, Including the Special Director (Appeals)
• Enforcement Directorate
• Anyone can sell or withdraw foreign currency without obtaining prior authorization from the RBI and then notify the RBI afterwards.
• The Enforcement Directorate’s role will be more investigative.
• FEMA acknowledged the possibility of Capital Account convertibility.
• FEMA violations are a civil offence.
• FEMA is more concerned with management than with rules and regulations.
• FEMA is a regulatory framework that allows the RBI and the Central Government to adopt foreign exchange laws and guidelines per India’s foreign trade strategy.

GUIDELINES OF FEMA Act

The Foreign Exchange Management Act of 1999 establishes the legal basis for managing foreign exchange transactions in India. All foreign exchange transactions get categorised as either capital or current account transactions under the Foreign Exchange Management Act of 1999 (FEMA), which took effect on June 1, 2000.

Current account transactions are any transactions outside India, and it does not change a resident’s assets or obligations, including contingent liabilities.

• Persons residing in India are free to buy or sell foreign exchange for any current account transaction under Section 5 of the FEMA.

  It is for the transactions except which the Central Government has prohibited using foreign exchange, like remittance of lottery winnings; remittance of income from racing/riding, etc. or any other hobby; remittance for purchasing lottery tickets.

• Persons residing in India are free to buy or sell foreign currency for any current account transaction under Section 5 of the FEMA. It is for the transactions except for which the Central Government has prohibited the use of foreign currency, such as remittance of lottery winnings; remittance of income from racing/riding, etc., or any other hobby; remittance for the purchase of lottery tickets.

PENALTIES OF FEMA

(1) If any person:

contravenes any provision of this Act, or

a person violates any rule, regulation, notification, direction, or order issued in the exercise of powers under this Act or violates any condition subject to which the Reserve Bank issues an authorisation. In that case, he /she may get fined up to thrice the amount involved in the contravention if the amount is quantifiable, or up to two lakh rupees if the amount is not quantifiable, and if the amount is not quantifiable, and if the amount is not quant if This penalty can get increased to 5,000 rupees for each day the violation persists after the first.

(1A) If any person acquires any foreign exchange, foreign security, or immovable property of the aggregate value exceeding the threshold prescribed under the proviso to sub-section (1) of section 37A, he shall get liable to a penalty of up to three times the sum involved in such contravention and confiscation of the value equivalent, located in India, the Foreign equivalence.

(1B) In a proceeding under sub-section (1A), the Adjudicating Authority may propose the start of prosecution after documenting the grounds in writing. If the Director of Enforcement is convinced, he can order prosecution by having an official, not below the Assistant Director file a criminal complaint against the offending individual after recording the grounds in writing.

(1C) If any person:

• is found to have acquired any foreign exchange,
• foreign security or
• In addition to the penalty imposed under sub-section (1A), immovable property located outside India with an aggregate value above the threshold established under the proviso to sub-section (1) of section 37A is punishable by sentence for a term of up to five years imprisonment and a fine.

(1D) A court must not take cognizance of an offence under paragraph (1C) of section 13 unless an officer not below the level of Assistant Director gets named in the complaint (1B).

(2) Any Adjudicating Authority adjudicating any contravention under subsection (1) may, in addition to any penalty he may impose, direct that any currency, security, or other money or property in respect of which the contravention occurred get confiscated to the Central Government, and further direct that any foreign exchange holdings, if any, be confiscated to the Central Government.

Explanation.— For this subsection, “property” in respect of which contravention has taken place shall include—

(a) deposits in a bank, into which the said property gets converted;

(b) Indian currency, into which the said property gets changed; and

(c) any other property resulting from the conversion of that property.

CASE STUDY ON FEMA

RBI slapped Rs.125 crore on Reliance Infrastructure.

• The Reserve Bank of India (RBI) has mandated that Reliance Infrastructure, a consortium of the Anil Dhirubhai Ambani Group, pay accumulative fees of less than Rs 125 crore for parking $300 large amount of foreign loan proceeds in India with its mutual fund for 315 days before deporting the funds to a joint venture company.

  According to an RBI order, these actions violated various Foreign Exchange Management Act (FEMA) provisions.

• The RBI stated that on July 25, 2006, Reliance Energy raised a $360 million ECB for investment in infrastructure projects in India. On November 15, 2006, the ECB proceeds were drawn down and temporarily parked overseas in liquid assets. On April 26, 2007, Reliance Energy returned $300 million in ECB proceeds to India, while the remainder remained in liquid assets abroad.
• These funds were placed in Reliance Mutual Fund Growth Option and Reliance Floating Rate Fund Growth Option on April 26, 2007. The full money was withdrawn and invested in Reliance Fixed Horizon Fund III Annual Plan Series V on April 27, 2007.

• Reliance Energy remitted $500 million on March 5, 2008, to invest in the capital of Gourock Ventures, an offshore joint venture based in the British Virgin Islands.

• According to the RBI, under FEMA guidelines issued in 2000, a borrower must keep ECB funds parked abroad until the actual requirement in India is met. Furthermore, the central bank stated that the funds could not get used for any other purpose.

  “The applicant’s conduct was in violation of the ECB guidelines, and the same is sought to be compounded,” said the RBI order, signed by its chief general manager Salim Gangadharan.

• Reliance Energy admitted the violation and requested compounding during a personal hearing on June 16, 2008, represented by group managing director Gautam Doshi and Price Waterhouse Coopers executive director Sanjay Kapadia. Dadri power project has been delayed, according to the company, due to unforeseen circumstances.

  As a result, the $300 million ECB proceeds were purchased by India and parked in liquid debt mutual fund schemes, according to the statement.

• Rejecting Reliance Energy’s claim, RBI stated that on March 5, 2008, it took the company 315 days to realise that the ECB proceeds were not required for its intended purpose and to repatriate the funds for use in an overseas joint venture.

  Reliance further claimed that the ECB profits got placed in debt mutual fund schemes to ensure prompt availability of cash for use in India.

• “I do not find any merit in this contention either, as the applicant has not approached RBI either for utilising the proceeds not provided for in the ECB guidelines or for repatriating the proceeds abroad for investment in the capital of the JV,” the RBI official said in the order.
• The company justified that the exchange rate gain due to remittance on March 5, 2008, would be a hypothetical interim rate gain because it had not yet crystallised.

• RBI, on the other hand, disagrees. “They’ve also said that, under accounting standard 11 (AS 11), all foreign exchange loans must be restated, and the difference between the current exchange rate and the rate at which they were sent to India must be recorded in profit and loss statements as foreign exchange loss/gain.”

• In a scenario where the ECB’s proceeds are parked overseas, the exchange rate gains or losses get neutralised because the liability side’s gains or losses get offset by corresponding exchange losses or gains in the asset.

• According to the judgement, “the exchange gain was realised in this case, and the additional exchange gain was accumulated to the business through an illegal act under FEMA.”
• It stated that the business is obliged to pay a fine of Rs 124.68 crore since it earned additional revenue of Rs 124 crore. In August of this year, the business filed a new application for compounding and requested that the current application, dated April 17, 2008, be withdrawn to add a violation committed in connection with another ECB transaction for $150 million.
• However, the RBI stated that the business will have to submit a new application for each transaction and that two transactions are distinct and cannot be combined.

CONCLUSION

All current account transactions are free under Section 3 of the FEMA; nevertheless, the central government may provide reasonable directions at any time by adopting special rules. Capital Account Transactions are authorised only to the amount stipulated by RBI in its published rules, according to Section 6 of FEMA.

According to Section 10 of the FEMA, the RBI has a controlling role in its management. However, it cannot handle foreign currency transactions directly and must choose someone following RBI’s instructions. FEMA has provisions for varied enforcement, fines, adjudication, and appeals.