A Presentation by: Kedar Gharat 20 Manoj Gupta 21 Pramod Jadhav 24

1. Foreign Exchange Management Act A Presentation by: Kedar Gharat 20 Manoj Gupta 21 Pramod Jadhav 24 Ashish Lalpuria 34 Arun Pacheco 38 Nilesh Raut 49 Anand Singh 60 Sachin D’souza 63

2. Forex Management– Shift in focus 1991 – Downward correction of exchange rate (Devaluation) 1992 – LERMS (Liberalised Exchange Rate Management System) 1993 – Modified LERMS 1994 – Current Account Convertibility - declared 1998 – FEMA Bill was introduced in Lok Sabha in Aug 1998 2000 – FEMA 1999 replaced FERA 1973 w.e.f.1.6.2000 IMF loans repaid 2003 – Money Laundering Act, 1999 passed - IMF designates India as Creditor under its Financial Transaction Plan (FTP) 2004 – Reserves exceed external debt 2006 – Capital Account Convertibility– further steps

3. FERA to FEMA – a paradigm shift FERA was replaced by FEMA as it was an impediment in India's to go global.

4. Reason for developing FEMA • FERA was introduced at a time when foreign exchange reserves of the country were low and forex was scarce. • FERA proceeded on the presumption that all foreign exchange earned by Indian residents rightfully belonged to the GOI and had to be collected & surrendered to RBI. • FERA primarily prohibited all transactions, except to the extent permitted by general or specific permission by RBI. • It created a flourishing black market in foreign exchange, with side-effects such as ‘Hawala’. • FERA also became a tool of oppression in the hands of politicians for punishing people who refused to toe their line; for eg.the case of the eminent industrialist, S.L.Kirloskar, being proceeded against under FERA for having the princely amount of $82

5. What is new in FEMA regime ? Restrictions on current account transactions were removed Capital account transactions are deregulated Definition of NRI changed from purpose to residence Offences under FEMA are not regarded as criminal offences and only invite penalties, not prosecution and imprisonment. Compounding powers to RBI Less stringent & more business friendly • FEMA Objectives: • To consolidate & amend the law relating to foreign exchange • To facilitate external trade and payments • To promote the orderly development & maintenance of foreign exchange market in India

6. FEMA: Administration & Jurisdiction • RBI has a very important role. Rules, regulations and norms pertainining to several sections of the Act are laid down by RBI, in consultation with Central Government. • GoI has established the Directorate of Enforcement (ED) for investigating and enforcing the provisions of the Act. The ED is under administrative control of Ministry of Finance. • This Act extends to the whole of India and will also apply to all branches, offices and agencies outside India owned or controlled by a person resident in India.

7. Broad Scheme of FEMA • SECTION 3 - Prohibits dealings in foreign exchange except through an authorised person I.e an authorised dealer, money changer, off shore banking unit or any other person being authorized to deal in foreign exchange or foreign securities. • SECTION 4 - restrains any person resident in India from acquiring, holding, owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India except as specifically provided in the Act. • SECTION 6 - deals with capital account transactions. • SECTION 7 - deals with export of goods and services • SECTIONS 13 and 15 - of the Act with penalties and enforcement of the orders of Adjudicating Authority • SECTION 36 to 37 - pertains to the establishment of Directorate of Enforcement and the powers to investigate the violation of any provisions of Act

8. FOREIGN EXCHANGE TRANSACTIONS Capital Account Current Account FDI Portfolio Loan Invisibles Trade (Govt/ Pvt(ECB) Tour Travel Remittance Gift Profit/Div/int Foreign Indian Source Source Exports Imports Fcy A/C RI & NRI (FII) (GDR/ADR)

9. Transactions Capital Account Transactions Current Account Transactions

10. Transactions Capital Account Transactions (By a person resident in India) Investment in foreign securities Loan raised in foreign currency in India or abroad Acquisition or transfer of immovable property outside India. Guarantees issued in favour of a person resident outside India Export, import or holding of currency or currency notes Loans and overdrafts from a person resident outside India; Maintenance of foreign currency accounts in India and outside India Insurance policy from an insurance company outside India Remittance of capital assets outside India Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad

11. Prohibitions On capital account transactions Two types of prohibitions General Prohibitions A person shall not buy / sell foreign exchange to an authorised person for any capital account transactions. Special Prohibitions A non resident person shall not make investment in India which is engaged in, - the business of chit funds - as nidhi company - in agricultural or plantation activities - in real estate business or construction of farm houses - in trading in Transferable Development Rights (TDRs)

12. Transactions Current Account Transactions A transaction other than a capital account transaction also includes, 1. payments due in connection with - foreign trade - other current business or services, - Short term banking and credit facilities in ordinary course of business. 2. payments due as - interest on loans - Net income from investments - remittances for living expenses of parents, spouse and children residing abroad - expenses in connection with foreign travel, education and medical care of parents, spouse and children

13. Prohibitions On current account transactions Foreign Exchange Management (current account transactions) rules, 2000 The Classification of current account transactions which are, - Totally prohibited - Permitted, subject to prior approval of Govt. - Permitted, subject to prior approval of RBI Exhaustive List - Authorised dealers are free to release foreign exchange upon the satisfaction that the transactions will not involve / designed for violation of the act.

14. Schedule I - Expressly Prohibited • Remittance out of lottery winnings • Remittance of income from racing/riding or any hobby • Remittance for purchase of banned products • Payment of commission on exports made towards investment in JV / WOS abroad of Indian companies • Payment related to callback services of telephones • Remittance of dividend by any company where dividend balancing is applicable • Remittance of interest income on funds held in Non – Resident Special Rupee ( Account ) Scheme. • Payment of commission on exports under Rupee state credit Route, except commission upto 10% of invoice value of exports of tea and tobaco.

15. Schedule II -By ADs on approval from GoI • Remittances which need prior approval from the dealing ministry / department of GOI and permitted up to the amounts as mentioned in the approval letter – • Cultural tours • Advertisement in foreign print media , • Freight of vessel charted by a PSU , • Payment for import by a Govt, dept. on c.i.f. basis, • Multi modal transport operators making remittance to their agents abroad , • hiring of transponders by TV channels , • ISPs , • Remittances under technical collaboration agreements etc.

16. Schedule III-RBI approval if limits exceed Transactions needing RBI approval for amounts exceeding delegated powers of Ads • Travel • Gift • Donation • Employment • Emigration • Maintenance • Medical expenses exceeding the estimates • Higher studies exceeding the estimates • Commission to agents for sale of flats etc. in India • Consultancy fees • Pre- incorporation expenses

17. Limits upto which ADs can release Foreign Exchange

18. Limits upto which ADs can release Foreign Exchange

19. Release of Foreign Currency - Restrictions No release of foreign exchange for any kind of travel to Nepal and Bhutanor for any transaction with persons resident in Nepal and Bhutan. Travellers allowed to purchase/carry foreign currency notes/coins only up to $2,000. Balance amount in the form of traveller’s cheque or banker’s draft. Exceptions: Travellers proceeding to Iraq and Libya - not exceeding $5,000 or its equivalent and travellers proceeding to the Iran, Russia and other Republics of Commonwealth of Independent States.

20. Liberalised Remittance Scheme of $200,000 Facility extended to all resident individuals freely remit upto $200,000 p.a. for any permissible current or capital account transaction or a combination of both. Not available for purposes specifically prohibited (Sch I) or GOI (Sch II) of FEMA(Current Account Transactions) Rules, 2000. free to acquire and hold immovable property, shares or any other asset outside India without prior approval of RBI using the scheme. Free to open, hold and maintain foreign currency accounts with a bank outside India for remittances under the scheme without the prior approval of RBI. Remittance cannot be made directly or indirectly to Bhutan, Nepal, Mauritius or Pakistan. Not available for making remittances directly or indirectly to countries identified by the Financial Action Task Force (FATF) as ‘non-co-operative Countries or Territories, from time to time (website site www.fatf-gafi.org).

21. Resident definition - Simplified Mr. Aarush goes abroad to take up employment. Mr. Aarush, a tourist comes to India with a definite plan for returning after two years.  Mr. Aarush comes to India for family marriage etc. Then some other cause prevents him from returning & continues to stay in India for more than 6 months. On the first day itself he becomes a non-resident. Non-resident . If he has no employment and no business in India; and he has substantial employment or business abroad plus house / office etc. abroad; he will be able to establish that he is still, a non-resident. Case Studies FEMA says “Intention of remaining a non-resident has to be supported by facts”

22. Resident Going Abroad- Indian Currency • Residents are free to take outside India (other than to Nepal and Bhutan) currency notes of GOI and RBI notes up to not exceeding `. 5,000/ - per person. • They may take or send outside India (other than to Nepal and Bhutan) commemorative coins not exceeding two coins each.

23. Utilisation of forex The foreign exchange acquired has to be used within 180 days of purchase. If not possible, to be surrendered to an AD within 180 days. Can retain upto $2000 in currency notes/TCs. Foreign Exchange purchased for a specific purpose is not utilized for that purpose, it could be utilized for any other eligible purpose permitted under the relevant regulation.

24. Residents coming to India from broad • regarding Indian Currency - can bring in with him • up to `. 5,000 from any country other than Nepal or Bhutan, and • any amount in denomination not exceeding Rs.100 from Nepal or Bhutan. • Foreign Exchange- can bring without any limit. • If the aggregate value of the foreign exchange in the form of currency notes, bank notes or TCs brought in exceeds $ 10,000/- or its equivalent and/or • the value of foreign currency exceeds $5,000/- or its equivalent, • To be declared to the Customs Authorities at the Airport in the Currency Declaration Form (CDF), on arrival in India.

25. FACILITIES FOR NON-RESIDENT INDIANS(NRI)/ PERSON OF INDIAN ORIGIN(PIO)

26. Definition Non-Resident Indian (NRI): is a person  resident outside India who is a citizen of India or is a person of Indian origin . (defined in Regulation 2 of FEMA Notification No.5 dated May 3, 2000) Person of Indian Origin (PIO) : (defined in Regulation 2 of FEMA) is a citizen of any country other than Bangladesh or Pakistan, if (a) he at any time held Indian passport; or (b) he or either of his parents or any of his grand-parents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 or (c) the person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b) above.

27. Accounts and Deposits-NRI • Non-Resident (External) Rupee (NRE) Accounts • Foreign Currency (Non-Resident) Account (Banks) Scheme FCNR(B) Account • NRO Accounts • NRO/NRE/FCNR accounts can be maintained with ADs. • Also certain co-operative banks and RRBs have been authorised.

28. Non Resident Accounts • NRE /NRO A/c.- Indian Rupee type: Savings, Current & Recurring, Fixed deposits • FCNR (B) A/c. – Foreign currency • In designated currencies- • USD, Pound Sterling, Euro, JY, AD, CD Type: Only Term Deposit • Restriction • Individuals / entities of Bangladesh / Pakistan nationality / ownership require prior approval of RBI.

29. Non Resident Accounts • NRO A/c:- • Any person resident outside India other than those resident in Nepal/Bhutan can open an NRO a/c. with an AD for the purpose of putting through bonafide transcations in Rupees. • POA cannot open any a/c. on behalf of the Non-resident. • Individuals / entities of Bangladesh / Pakistan nationality / ownership require prior approval of RBI.

30. Remittance Facilities for NRI/PIO • Remittance of Rent, Dividend, Pension, Interest etc. of NRI/PIO (even those who do not maintain an NRO account) is freely allowed on the basis of • appropriate certification by a CA that the amount proposed to be remitted is eligible for remittance • and that applicable taxes have been paid/provided for. • NRI/PIO have the option to credit the current income to their NRE (rupee) account provided • the AD is satisfied that the credit represents current income of the Non resident account holder and income tax thereon has been deducted / provided for.

31. Remittance of assets by NRI/PIO • remit an amount upto USD 1 million per financial year, out of the balances held in his NRO account/sale proceeds of assets (inclusive of assets acquired by way of inheritance or settlement) for all bona fide purposes, to the satisfaction of the AD bank, • on production of an undertaking by the remitter • certificate by CA in the formats prescribed by CBDT vide circular No.10/2002 dated October 09, 2002. • remit sale proceeds immovable property purchased by him out of Rupee funds ( as a person in India) without any lock in period subject to- • submit documentary evidence in support of inheritance or legacy of assets • An undertaking by the remitter • Certificate by CA in the prescribed format

32. Restriction on Remittance Facility • The remittance facility in respect of sale proceeds of immovable property is not available to citizens of - • Pakistan, Bangladesh, Sri Lanka, China, Afghanistan, Iran, Nepal and Bhutan • The facility of remittance of sale proceeds of other financial assets is not available to citizens of • Pakistan, Bangladesh, Nepal and Bhutan

33. Exemptions from Declaration under Regulation 4 13 items exempted under regulation 4 of FEMA 23. A few such cases are as under; • Trade samples of goods and publicity material supplied free of payment • Personal effects of travellers , whether accompanied or unaccompanied; • Goods or software accompanied by a declaration by the exporter that they are not more than USD 25000 in value • By way of gift of goods accompanied by a declaration by the exporter that they are not more than five lakh rupees in value etc

34. GR Approval for Trade Fair/Exhibitions abroad • Firms / Companies and other organisations take/export goods for exhibition outside India without the prior approval of the RBI. • Unsold exhibit items may be sold outside the exhibition/trade fair in the same country or in a third country. • Such sales at discounted value are also permissible. • It would also be permissible to `gift' unsold goods up to the value of $5,000 per exporter, per exhibition/trade fair. • AD Banks may approve GR Form of export items for display or display-cum-sale in trade fairs/exhibitions outside India subject to conditions

35. EXPORT

36. Grant of GR waiver AD banks may consider request from exporters for granting GR waiver as per below for export promotion: Upto 2% of average annual exports of applicant during preceding three financial years subject to ceiling of Rs. 5 lakhs. For Status Holder Exporter present limit is 2% of average annual exports realization of applicant during preceding three licensing years or Rs. 10 lakhs whichever is higher. 36

37. GR approval for Export of Goods for re-imports • AD banks may consider request from exporters for granting GR approval in cases where goods are being exported for re-import after repairs / maintenance / testing / calibration etc. subject to the condition that the exporter shall; • produce relative Bill of Entry within one month of re-import of the exported item from India. • Where the goods being exported for testing are destroyed during testing, AD banks may obtain a certificate issued by the testing agency that the goods have been destroyed during testing, in lieu of Bill of Entry for import.

38. Reduction in export Value – Damages etc. ADs can allow reduction in value subject to the following conditions: • The reduction does not exceed 25% of invoice value • It does not relate to export of commodities subject to floor price stipulations • The exporter is not on the exporters’ caution list of Reserve Bank, and • The exporter is advised to surrender proportionate export incentives availed of, if any. • In the case of exporters who have been in the export business for more than 3 Yrs, no such ceiling subject to the above conditions as also subject to their track record being satisfactory, i.e., the export outstandings do not exceed 5% of the average annual export realisation during the preceding 3 financial years.

39. Extension of time & Self write off exporters All exporters have been allowed to self write off (including reduction in invoice value) outstanding export dues and extend the period of realisation, provided; • The aggregate value of such export bills written-off does not exceed 10% of the export proceeds due during the financial year. • Such export bills are not a subject of investigation by Enforcement Directorate / CBI. • Exporters dealing with more than one AD Banks can avail of this facility.

40. Extension of Time by AD Bank • Reserve Bank of India has permitted the AD Banks to extend the period of realisation of export proceeds beyond the prescribed period from the date of export, up to a period of 6 months. • While considering extension beyond one year from the date of export, the total outstanding of the exporter does not exceed $1Mn or 10% of the average export realisations during the preceding 3 financial years, whichever is higher

41. Methods of Payment • payment must be received through the medium of an authorised dealer • export proceeds - in the form of bank draft, pay order, banker's cheque, personal cheque, foreign currency notes, foreigncurrency travellers' cheques, etc. • Payment made by Credit card – decleration for receipt of foreign exchange

42. IMPORT

43. Advance Remittance • If the amount of advance remittance exceeds USD 100,000 or its equivalent • An unconditional, irrevocable standby Letter of Credit or a guarantee from an international bank of repute situated outside India • If the importer unable to obtain bank guarantee from overseas suppliers and the Authorised Dealer is satisfied about the track record and bonafides of the importer the requirement of the bank guarantee/ standby Letter of Credit may not be insisted upon for advance remittances upto USD 5,000,000 • Authorised Dealers may frame their own internal guidelines to as per a suitable policy framed by the bank's Board of Directors.

44. Non Physical Imports • Where imports are made in non-physical form, • i.e., software or data through internet / datacom channels and drawings and designs through e-mail/fax, a certificate from a Chartered Accountantthat the software / data / drawing/ design has been received by the importer, may be obtained.

45. Receipt of import documents by the importer directly from overseas suppliers • Import documents should be received from the banker of the supplier by the banker of the importer in India. • AD bank should not make remittances where import bills have been received directly by the importers from the overseas supplier, except in the following cases:i. Where the value of import bill does not exceed $300,000. ii. Import bills received by wholly-owned Indian subsidiaries of foreign companies from their principals. iii. Import bills received by Status Holder Exporters as defined in the Foreign Trade Policy. iv. Import bills received by all limited companies.

46. 46 Authority

47. Directorate of Enforcement (ED) ED may invstigate following transaction to prevent leakage of foreign exchange 1) Remittances of Indians abroad otherwise than through normal banking channels. 2) Acquisition of foreign currency illegally by person in India. 3) Non-repatriation of export proceeds. 4) Unauthorised maintenance of accounts in foreign countries. 5) Under-invoicing and over-invoicing. 6)  Siphoning off of foreign exchange against fictitious and bogus imports land by. 7) Illegal acquisition of foreign exchange through Hawala. PENALTIES: If any person contravenes any provision of this Act he shall be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to Rs. 200, 000 where the amount is not quantifiable & where such contravention is a continuing one, further penalty of Rs. 5,000 per day. Fails to make full payment of the penalty within a period of 90 days, he shall be liable to civil imprisonment 47

48. Hawala Transactions

49. 3(d)(FEMA) of FEMA is difficult to interpret and understand. Following example will explain one of the several forms of hawala transactions and make it easier to understand Sec 3(d). Assume that Mr. F is an Indian resident, settled in India. His son Mr. L has gone to London for employment. He has become a non-resident of India (NRI). Mr. L wants to send a regular monthly remittance to his father in India. If he sends pounds 100 through the banking channel, his father will get Rs. 7,000 in India. If he sends pounds 100 through the hawala channel, his father will get Rs. 7,700. Hawala premium is assumed @ 10%.

50. What transactions actually take place ! • Mr. L. will pay pounds 100 to Mr. HDL in London. • As a compensatory payment, on the instructions of Mr. HDL; • Mr. HC in India will pay ` 7,700 to Mr. F. • The clearing between HDL & HC is compensated by transactions with the smugglers. • These facts reduced to legal language would mean - • HC, an Indian resident, makes a payment of Indian rupee, within India, to Mr. F, an Indian resident. • in compensation of ; • Payment in U.K., by Mr. L a British resident; of British pounds to Mr. HDL another British resident. • Transactions under clauses (i) and (iii) above are independently, perfectly legal transactions. No one can prohibit them. • The fact that they are compensatory payments makes them illegal. • This is the essence of S.3(d) of FEMA.