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FEMA (Foreign Exchange Management Act, 1999)

October 22, 2019

FEMA (Foreign Exchange Management Act, 1999)

FEMA (Foreign Exchange Management Act, 1999)

What is FEMA?

Foreign Exchange Management Act often abbreviated as FEMA is an Act of the Parliament of India. FEMA was introduced to consolidate and amend the law relating to foreign exchange to facilitate external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.

Transition period {FERA - FEMA}

On June 1, 2000, vide notification No G.S.R. 371(E) the Foreign Exchange Management Act, 1999 (FEMA [or] Act) was brought in force to replace the then existing FERA.

  1. FEMA extends to the whole of India, Citizens of India residing outside India and associate branches or subsidiaries, outside India, of companies or bodies corporate, registered or incorporated in India. It was passed to replace the Foreign Exchange Regulation Act (FERA).
  2. FEMA is a regulatory mechanism that enables the Reserve Bank of India to pass regulations and the Central Government to pass rules relating to foreign exchange in tune with the Foreign Trade policy of India.
  3. FEMA was served to make transactions for external trade easier and those transactions which involved current account for external trade they no longer required RBI’s permission. The deals in Foreign Exchange were to be ‘managed’ instead of ‘regulated’. The switch to FEMA shows the change on the part of the government in terms of, the capital.

 Main Objective of FEMA Act, 1999:

  1. To facilitate and promote external trade and payments in India.
  2. To develop the foreign exchange market in India.

Overview of FEMA Act, 1999:

The Foreign Exchange Management Act, 1999 (FEMA) consists of 49 Sections divided into 7 Chapters.

CHAPTER I – Preliminary - Section 1&2

CHAPTER II- Regulation and Management of Foreign Exchange - Section 3 to 9

CHAPTER III – Authorised Person – Section 10 to 12

CHAPTER IV – Contravention and Penalties Section 13 to 15

CHAPTER V – Adjudication and Appeal - Section 16 to 35

CHAPTER VI – Directorate of Enforcement - Section 36 to 38

CHAPTER VII- Miscellaneous Section 39 to 49

Wherein Section 13 states the penalty for contravening any provisions of this Act, or any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or any condition subject to which an authorization is issued by the Reserve Bank of India (RBI). Section 46 grants the Central Government to make rules to carry out the provisions of FEMA and Section 47 grants the powers to RBI to make regulations to implement its provisions and the Rules made thereunder.

 What is the reference of Foreign Exchange under the FEMA Act, 1999?

 Section 2(n) of the Act states that foreign exchange means foreign currency and includes:

  1. deposits, credits, and balances payable in any foreign currency,
  2. drafts, travelers' cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency
  3. drafts, travelers' cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency.

 Restrictions on dealing in Foreign Exchange

Section 3 of the Act states the restrictions on dealing in Foreign exchange, the Section reads as no person shall:

  1. Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person
  2. Make any payment to or for the credit of any person resident outside India in any manner
  3. Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner.
  4. 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

Further, Section 4 of the Act states 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.

What are the Capital Account transactions (CAT) and Current Account transactions (CUAT) under FEMA Act, 1999?

Capital Account transactions (CAT) are regulated by the Reserve Bank of India and are prohibited unless generally permitted. As per Section 2(e) of the Act "capital account transaction" means a transaction that alters the assets or liabilities, including contingent liabilities, outside India of person’s resident in India or assets or liabilities in India of a person resident outside India. The following transactions are regarded as Capital Account Transaction:

  1. Transfer or issue of any foreign security by a person resident in India;
  2. Transfer or issue of any security by a person resident outside India;
  3. Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
  4. Any borrowing or lending in foreign exchange in whatever form or by whatever name called;
  5. Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;
  6. Deposits between person’s resident in India and persons resident outside India;
  7. Export, import or holding of currency or currency notes;
  8. Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;
  9. Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
  10. Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred
  • By a person resident in India and owed to a person resident outside India; or
  • By a person resident outside India.

Current Account transactions (CUAT) are regulated by Central Government and are freely permitted unless prohibited Section 2(j) of the Act defined Current Account transactions as transaction other than a capital account transaction and it includes:

  1. Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business
  2. Payments due as interest on loans and as net income from investments
  3. Remittances for living expenses of parents, spouse, and children residing abroad, and
  4. Expenses in connection with foreign travel, education and medical care of parents, spouses, and children.

What are the most prominent forms of foreign investments and borrowings seen in India?

Investment made in India with a source of funding which is outside India is termed as foreign investment. Funds from foreign countries could be in the form of shares, properties, ownership/management or collaboration. The types of foreign Investments are classified as below:

Foreign Direct Investment (FDI): is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. FDI could be in the form of either establishing business operations or by entering into joint ventures by mergers and acquisitions, building new facilities, etc.

To get more insights on FDI check on the below links:

FDI policy

FDI in India by the issue of equity shares under the FDI scheme

FDI in Limited Liability Partnership

FDI Report

Escrow accounts for securing FDI transactions

FDI regulatory framework

 Foreign Portfolio Investment (FPI): is a grouping of assets such as stocks, bonds, and cash equivalents. Portfolio investments are held directly by an investor or managed by financial professionals. In economics, foreign portfolio investment is the entry of funds into a country where foreigners deposit money in a country's bank or make purchases in the country’s stock and bond markets, sometimes for speculation.

Foreign Institutional Investment (FII): An institutional investor is an entity that pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include banks, insurance companies, pensions, hedge funds, investment advisors, endowments, and mutual funds. Operating companies that invest excess capital in these types of assets may also be included in the term. Activist institutional investors may also influence corporate governance by exercising voting rights in their investments.

External Commercial Borrowing (ECB): External commercial borrowings (ECBs) are loans in India made by non-resident lenders in foreign currency to Indian borrowers. They are used widely in India to facilitate access to foreign money by Indian corporations and PSUs (public sector undertakings)

To get more insights on ECB return check on the below link:

ECB return

Overseas Direct Investment(ODI): Overseas Direct Investment means investments done outside India by an Indian, by way of subscription to the Memorandum of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, signifying a long-term interest in the foreign entity (JV or WOS).

What are the event-based mandatory compliances under the FEMA Act, 1999?

1.     Annual Return on Foreign Liabilities and Assets (FLA Return):

Portal Link/ Submission details:

Description of the Compliance:  FLA Return is required to be submitted mandatorily by all the India resident companies which have received Foreign Direct Investment (FDI) and/ or made Overseas Direct Investment (ODI) in any of the previous year(s), including the current year.

Who is mandated to Comply: Who holds foreign assets or liabilities in their financial statements as on 31 March. If the Indian company does not have any outstanding investment in respect of FDI and/or ODI as on end of the reporting year, the Company need not submit the FLA Return.

Due date of filing: On or before 15 July every year on the flair portal.

2.     Annual Performance Report (APR)

Portal Link/ Submission details: Submission of Form ODI Part II to Authorised dealer Bank Description of the Compliance:  An Indian Party (IP) / Resident Individual (RI) which has made an Overseas Direct Investment (ODI) has to submit an Annual Performance Report (APR) in Form ODI Part II to the AD bank in respect of each Joint Venture (JV) / Wholly Owned Subsidiary (WOS) outside India.

Who is mandated to Comply: An Indian Party (IP) / Resident Individual (RI) which has made an Overseas Direct Investment (ODI)?

Due date of filing: On or before 31st December, every year.

3.     External Commercial Borrowings (ECB) Return:

Portal Link/ Submission details: Monthly submission through an AD Category – I Bank in the form of ‘ECB 2 Return’

Description of the Compliance:  Borrowers are required to report all ECB transactions to the RBI every month through an AD Category – I Bank in the form of ‘ECB 2 Return'.

Who is mandated to Comply: ECB transaction borrowers are required to report every month

Due date of filing: Monthly Compliance.

4.     Single Master Form (SMF) - Foreign Investment Reporting and Management System (FIRMS) Reporting:

Integrated reporting portal for FDI in India, irrespective of the instrument through which foreign investment is made. The below mentioned are the various forms of SMF for reporting:

Form FC-GPR:

Portal Link/ Submission details:

Description of the Compliance:  Issue of shares, bonus shares or rights shares to person’s resident outside India directly or on amalgamation/ merger with an existing Indian company, as well as issue of shares on conversion of ECB/ royalty/ lump sum technical know-how fee/ import of capital goods by units in SEZs has to be reported in Form FC-GPR

Who is mandated to Comply: the Indian company has to file after issuing shares or other eligible securities to residents outside India.

 Due date of filing: Within 30 days from the date of Allotment of shares.

Form FC-TRS:

Portal Link/ Submission details:

Description of the Compliance:  Reporting of transfer of shares and other eligible securities between residents and non-residents and vice- versa is to be made in Form FC-TRS.

Who is mandated to Comply: The onus of submission of the Form FC-TRS within the given timeframe would be on the transferor/ transferee, resident in India.

Due date of filing: Within 60 days from the date of receipt of the amount of consideration.

Form LLP I:

Portal Link/ Submission details:

Description of the Compliance: LLP receiving consideration for capital contribution and acquisition of profit shares has to intimate RBI through AD Bank.

Who is mandated to Comply: LLP which has received capital consideration and acquisition of profit shares

Due date of filing: Within 30 days from date of receipt of capital contribution.

Form LLP II:

Portal Link/ Submission details:

Description of the Compliance: Disinvestment/Transfer of Capital Contribution or profit

share between R to NR and vice-versa is to be reported in Form LLP

Who is mandated to Comply: LLP which has disinvestment or transfer of capital contribution or profit

Due date of filing: Within 60 days from date of receipt of funds.

Form CN:

Portal Link/ Submission details:

Description of the Compliance: For issue or transfer of Convertible Notes.

Who is mandated to Comply: Entities which issue or transfer the Convertible Notes (CN)

Due date of filing: Within 60 days of such transfer and Indian entity making downstream investment in another Indian company or LLP shall notify the same to DIPP within 30 days of such investment.

To know more: the issue of Convertible Notes by Start-up Companies and their reporting 

Note: Late Submission Fee (LSF) - Entities responsible for delays in submission of any of the reports shall be liable for payment of LSF. This shall be applicable for transactions undertaken on or after November 07, 2017. LSF is option for regularising delays without going for compounding

5.     Form ODI (Overseas Direct Investments)

Description of the Compliance:  Overseas investments (or financial commitment) in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS)

Who is mandated to Comply: An Indian Party and a Resident Individual making an overseas investment is required to submit form ODI.

Due date of filing FLA Return: Within 6 months from the date of receipt of evidence of investment and submit the same to the designated Authorised dealer Bank.

Disclaimer:

The entire contents of this document have been developed based on relevant information and are purely for private circulation. Though the authors have made utmost efforts to provide authentic information however, the authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

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