Current Account Transactions

Any person may sell or draw foreign exchange to or from an

authorized person if such sale or drawal is a current account
transaction.
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 required
from time to time.
SECTION 5 deals with current account transaction
Any person may sell or draw foreign exchange to or from an
authorized person if such sale or drawl is a current account
transaction.
The definition section 2(j), is inclusive and any expenditure which
is not a capital account transaction will be current account
transaction. It includes:
payments due in connection with foreign trade, other current
business, services, and short-term banking and credit facilities in
the ordinary course of business.
payments due as interest on loans and as 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.
Current Account Transactions Few Examples
Payment for imports of goods
Remittance of interest on investment made and funds borrowed
from abroad after tax deductions
Remittance of Dividend if the investment was allowed without
any condition.
Capital Account Transactions

Section 2(e) defines, capital account transaction means a

transaction which alters the assets or liabilities, including
contingent liabilities, outside India of persons resident in India or
assets or liabilities in India of persons resident outside India, and
includes transactions like:
Changes in Assets/ Liabilities Transfer/ issue of security
Borrowing/ Lending Export, import or holding of currency or
currency notes Giving guarantee
Capital Account Transaction are deemed to be prohibited unless
permitted and Current Account Transactions are deemed to be
permitted unless prohibited
SECTION 6 - deals with capital account transactions.
This section allows a person to draw or sell foreign exchange from
or to an authorized person for a capital account transaction.
The Act has empowered the Reserve Bank of India (RBI) to
specify, in consultation with the Central Government, the
permissible capital account transactions and the limits upto which
foreign exchange may be drawn for these such transactions. But
it 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.
Accordingly, the RBI has issued notifications governing capital
account transaction. TheFEMA Notification No. 1/2000 dated
3-5-2000 contains the list of permissible capital account
transactions as well as list of prohibited capital account
transactions.
The permitted capital account transactions have been classified
into two categories:-

Capital account
includes,

transactions

by

persons

resident

in

India

Investment in foreign securities;

Foreign currency loans raised in India and abroad;
Acquisition and transfer of immovable property outside India;
Guarantees issued in favour of a person resident outside
India;
Export, import and holding of currency or currency notes;
Loans and overdrafts (borrowings) from a person resident
outside India;
Maintenance of foreign currency accounts in India and
outside India;
Taking out the insurance policy from an insurance company
outside India;
Remittance outside India of capital assets of a person
resident in India;
Capital account transactions by non- residents includes,
Investment in India such as (i) issue of security by a body
corporate or an entity in India and investment therein by a
non-resident and (ii) investment by way of contribution to
the capital of a firm or a proprietary concern or an
association of persons in India;
Acquisition and transfer of immovable property in India;

 Guarantee in favour of, or on behalf of, a person resident in

India;
Import and export of currency/currency notes into/from India;
Deposits between a person resident in India and a person
resident outside India;
There are generally two types of prohibitions on capital account
transactions :General Prohibition:- A person shall not undertake or sell or
draw foreign exchange to or from an authorized person for any
capital account transaction. This prohibition is subjected to the
conditions specified by Reserve Bank in its circulars
and notifications. For example, Reserve Bank of India has
issued an AP (DIR) Circular, wherein a resident individual can
draw from an authorized person foreign exchange up to US$
25,000 per calendar year for a capital account transaction
specified in Schedule Ito the Notification.
Special Prohibition:- A non resident person shall not make
investment in India in any form, in any company or partnership
firm or proprietary concern or any entity, whether incorporated or
not, which is engaged or proposes to engage:- (i) in the business
of chit fund, or (ii) as Nidhi Company, or (iii) in agricultural or
plantation activities or (iv) in real estate business, or construction
of farm houses or (v) in trading in Transferable Development
Rights (TDRs).
A person resident in india:
A person who has been residing in India for more than 182 days, in the last financial
year. This means if a person has to be assessed, as to whether he is person
resident in India, for any offence committed in August 2001, then he should be

residing in India for more than 182 days during April 2000 to March 2001.
Section 2(v) - person resident in India means a person residing in india more than
182 days during the course of the preceding financial year but does not includeA person who has gone out of india or who stays out side india, in either cases (a)
for or on taking up employment outside india or (b) for carrying onoutside india any
business or vocation outside india or (c) for any other purpose in such
circumstances as would indicate his intention to stay outside for a uncertain period.
-Any person or body corporate registered or incorporated in India, or
-An office, branch or agency in India owned or controlled by a person resident
outside India,
-An office, branch or agency outside India owned or controlled by a person resident
in India.
Contravention and compounding of contravention:

Contravention is a breach of the provisions of the Foreign

Exchange Management Act (FEMA), 1999 and rules/ regulations/
notification/ orders/ directions/ circulars issued there under.
Compounding refers to the process of voluntarily admitting the
contravention, pleading guilty and seeking redressal. The Reserve
Bank is empowered to compound any contraventions as defined
under section 13(1) of FEMA, 1999 except the contravention
under section 3(a)(2)ibid, for a specified sum after offering an
opportunity of personal hearing to the contravener. 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
[except section 3(a) of the Act] by minimizing transaction costs.
Willful, malafide and fraudulent transactions are, however, viewed

seriously, which will not be compounded by the Reserve Bank.

3(a) deal in or transfer any foreign exchange or foreign security to
any person not being an authorized person;
Penalties for the contravention of any of the provisions of the Act.
The objective of Foreign Exchange Management Act, 1999 is to facilitate external
trade and payments and maintenance of foreign exchange in India. It should be
noted that FEMA is not a revenue law. Compounding of offences is allowed in this
Act. The compounding of the contravention under FEMA was implemented by the
Reserve Bank of India (RBI). Contravention of FEMA is considered as civil offence.
Contravention
Contravention is a breach of the provisions of the Foreign Exchange Management
Act, 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issued
there under. The contraventions, prima facie, involving money laundering, national
and security concerns involving serious infringement of the regulatory framework,
etc., are sensitive contraventions.

Penalties.-(section 13)
(1) Contravention of any of the sections in the Act, he shall be
adjudicated and be liable to penalty.
If the amount is quantifiable then the penalty will be thrice the
sum involved in the contravention.
Where the amount cannot be quantifed the penality may be
imposed up to two lakh rupees
If the contravention continues every day then Rs.5000/- for every
day during which contravention continues.
(2) Any Adjudicating Authority adjudging any contravention under
sub- section (1), may, if he thinks fit in addition to any penalty
which he may impose for such contravention direct that any
currency, security or any other money or property in respect of

which the contravention has taken place shall be confiscated to

the Central Government and further direct that the foreign
exchange holdings, if any, of the persons committing the
contraventions or any part thereof, shall be brought back into
India or shall be retained outside India in accordance with the
directions made in this behalf. Explanation.- For the purposes of
this sub- section," property" in respect of which contravention has
taken place, shall include(a) deposits in a bank, where the said property is converted into
such deposits;
(b) Indian currency, where the said property is converted into that
currency; and
(c) any other property which has resulted out of the conversion of
that property.
Adjudicating authority in addition to penalty confiscate the
currency, security or any other money or property in respect of
which the contravention has taken place.
The foreign exchange holdings, if any, shall be brought back into
India or retained outside India
The property to be confiscated can be in his possession or from
someone who is holding on his behalf:
Bank deposits : if he has converted the money to deposits
Any forex that has to be brought back to India or retained outside
Any other property that was purchased out of the forex.
Procedure for repatriation and realization of foreign exchange.
Realization and Repatriation of Foreign Exchange When any amount of foreign
exchange is due or has accrued to any person shall take all reasonable steps

torealize and repatriate to India such foreign exchange within such period and in
such manner as may be specified by the Reserve bank.
Procedure:
-

Filling civil suit against foreign buyer.

Writing letter to foreign buyer demanding for export process.

Writing letters to their own banker and also to the foreign bank to which the
recovery has to be made.

On expiry of 6 months exporter should write to the RBI for extension of time.

Getting information from embassy.

Contravention does not apply when RBI gives permission to right of the debt

Exporter should prove that he had taken all reasonable steps to receive or
recover export process. If he feels it.

Mere bolt statement that necessary steps were taken to realize the process
documentary evidence should support it.

Authorized person under FEMA:

The objectives of FEMA are:

(i) To facilitate external trade and payments; and (ii) To promote
the orderly development and maintenance of foreign exchange
market. The Act has assigned an important role to the Reserve
Bank of India (RBI) in the administration of FEMA. The rules,
regulations and norms pertaining to several sections of the Act
are laid down by the Reserve Bank of India, in consultation with
the Central Government.

Authorized Person
An "Authorized Person" under FEMA, is a person who
is authorized by Reserve Bank to deal in Foreign Exchange.
For being registered as an "Authorized Person", necessary
application along with relevant documents has to be furnished to
Reserve Bank.
An "Authorized Person" is also, not given a free hand to deal in
foreign Exchange. He has to furnish details and information, to
Reserve Bank from time to time as may be required by it.
SECTIONS 10 and 12 - deals with duties and liabilities of the
Authorized persons.
Section 2(c) of Foreign Exchange Management Act,1999
Authorized person means authorized dealer, money changer, off
shore banking unit or any other person for the time being
authorized to deal in foreign exchange or foreign securities.
Section 10(1)- An application should be made to the RBI, RBI can
authorize any person to be known as authorized person to deal in
forex or foreign security as an authorized dealer, money changer
or off-shore banking unit or in any other manner as it deem fit.
Authorized Dealer Means a person authorized as an authorized
dealer under sub-section (1) of section 10 of the Act, and includes
a person carrying on business as a factor and authorized as such
under the said section 10.
FEMA permits only authorized person to deal in foreign exchange
or foreign security. The Act thus prohibits any person who: Deal in or transfer any foreign exchange or foreign security
to any person not being an authorized person;
Make any payment to or for the credit of any person resident
outside India in any manner;
Receive otherwise through an authorized 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 is
resident in India which acquire, hold, own, possess or
transfer any foreign exchange, foreign security or any
immovable property situated outside India.
Duties of an authorized person:
To comply with RBI directions
Not to engage in un authorized transactions
Ensure compliance of FEMA provisions
To produce books, accounts etc

Powers of an authorized person:

To deal in or transfer any foreign exchange
Receive payments by order
To open NRO, NRE, FCNR, NRNR, NRSR accounts
To sell or purchase foreign exchange for current account transactions
To sell or purchase foreign exchange for permissible capital account transactions

Powers of RBI:
Verifying the correctness of any statements, information or particular
Obtaining information which such authorized person has failed to furnish
Securing compliance with the provisions of Act.

Penalties for contravention by authorized person:

Where an authorized person contravenes any direction given by
RBI under this Act shall be penalized.
The penalty shall not exceed 10,000. Where any contravention is
continuing one further penalty not exceeding Rs 2000 per day
may be levied.
Before levying any penalty the RBI shall give reasonable
opportunity for being heard to the authorized person.

Describe the role of SEBI

Securities and Exchange Board of India (SEBI) is an apex body for overall development and
regulation of the securities market. It was set up on April 12, 1988. SEBI was set up as a nonstatutory body. Later on it became a statutory body under the Securities Exchange Board of India
Act, 1992. The Act entrusted SEBI with comprehensive powers over practically all the aspects of
capital market operations.
Role of SEBI
i)To protect the interests of investors through proper education and guidance as regards their
investment in securities. For this, SEBI has made rules and regulation to be followed by the

financial intermediaries such as brokers, etc. SEBI looks after the complaints received from
investors for fair settlement.
ii) To regulate and control the business on stock exchanges and other security markets. For this,
SEBI keeps supervision on brokers. Registration of brokers and sub-brokers is made compulsory
and they are expected to follow certain rules and regulations.
iii) To make registration and to regulate the functioning of intermediaries such as stock brokers,
sub-brokers, share transfer agents, merchant bankers and other intermediaries operating on the
securities market.
iv) To promote self-regulatory organization of intermediaries. SEBI is given wide statutory
powers. However, self-regulation is better than external regulation. Here, the role of SEBI is to
encourage intermediaries to form their professional associations and control undesirable
activities of their members.
v) To regulate mergers, takeovers and acquisitions of companies in order to protect the interest of
investors.
vi) To prohibit fraudulent and unfair practices of intermediaries operating on securities markets.
SEBI is not for interfering in the normal working of these intermediaries.
vii) To conduct inspection, inquiries & audits of stock exchanges, intermediaries and selfregulating organizations and to take suitable remedial measures wherever necessary.
viii) To restrict insider trading activity through suitable measures for avoiding undesirable
activities of brokers and securities scams.
ix) To register and regulate the working of mutual funds including UTI (Unit Trust of India).
SEBI has made rules and regulations to be followed by mutual funds.

Penalties under SEBI Act 1992

Introduction
Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of
securities market. SEBI promotes orderly and healthy development in the stock market but
initially SEBI was not able to exercise complete control over the stock market transactions. It
was left as a watch dog to observe the activities but was found ineffective in regulating and
controlling them. As a result in May 1992, SEBI was granted legal status. SEBI is a body
corporate having a separate legal existence and perpetual succession.
Reasons for establishment of SEBI:

With the growth in the dealings of stock markets, lot of malpractices also started in stock markets
such as price rigging, unofficial premium on new issue, and delay in delivery of shares,
violation of rules and regulations of stock exchange and listing requirements. Due to these
malpractices the customers started losing confidence and faith in the stock exchange. So
government of India decided to set up an agency or regulatory body known as Securities
Exchange Board of India (SEBI).
Penalties under SEBI Act, 1992
Section 15A: Penalty for failure to furnish information, return, etc.
If any person, who is required under this Act or any rules or regulations made thereunder,
(a) to furnish any document, return or report to the Board
(b) to file any return or furnish any information, books or other documents within the time
specified therefore in regulation
(c) to maintain books of accounts or records,
if he fails to furnish the same, he shall be liable to a penalty of 1lakh rupees
for each day during which such failure continues or 1 crore rupees, whichever is less.
In, Subhash A. Gandhi v .Securities and Exchange Board of India
SEBI imposed penalty of Rs. 10,000 on appellant for a delay in
submitting information's in prescribed format as prescribed. Held since appellant had complied
with part of requirements and had exceeded limit only by .03 per cent, this was a case for taking
a lenient view and consequently, penalty could be reduced to Rs. 1,000.

Section 15B: Penalty for failure to by any person to enter into agreement with clients
If any person, who is registered as an intermediary and is required under this Act or any rules or
regulations made thereunder,
to enter into an agreement with his clients, fails to enter into such agreement, , he shall be
liable to a penalty of 1lakh rupees for each day during which such failure continues or 1 crore
rupees, whichever is less.
Section 15C: Penalty for failure to redress investors grievances:
If any listed company or any person who is registered as an intermediary, after having
been called upon by the Board in writing, to redress the grievances of investors, fails to redress

such grievances within the time specified by the Board then such company or intermediary shall
be liable to a penalty of 1lakh rupees for each day during which such failure continues or 1 crore
rupees, whichever is less.
In, Dharnendra Industries Ltd v Securities and Exchange Board of India
Appellants companies having failed to redress investors grievances, SEBI debarred
them from securities market for five years.
Section 15D: Penalty for certain defaults in case of mutual funds:
If any person who is doing such activity without obtaining certificate of registration, or fails to
comply the conditions specified in the governing regulations he shall be liable to a penalty of 1
lakh rupees for each day during which such failure continues or 1 crore rupees, whichever is less.
Section 15E: Penalty for failure to observe rules and regulations by an asset management
company:
Where any asset management company of a mutual fund registered under this Act, fails to
comply with any of the regulations providing for restrictions on the activities of the assts
management companies, such company shall be liable to a penalty of 1lakh rupees for each day
during which such failure continues or 1 crore rupees, whichever is less.
Section 15F: Penalty for default in case of stock brokers:
If any person who is registered as a stock broker under this Act,
(a) fails to issue contract notes in the form, he shall be liable to a penalty 5 times the amount
of contract note.
(b) fails to deliver any security or fails to make payment due to the investor, shall be liable to
a penalty of 1 lakh rupees for each day during which such failure continues or 1 crore
rupees, whichever is less.
(c) charges excess brokerage, he shall be liable to a penalty of 1 lakh rupees or 5 times the
amount of brokerage excess charged, whichever is higher.
Section 15G: Penalty for insider trading:
Contravention of provisions of insider trading, shall be liable to a penalty of 25
crore or 3 times the amount of profit made out of such insider trading, whichever is higher.
In, Rakesh Agrawal v. SEBI
Held dealing in securities while possessing the unpublished price sensitive
information is not sufficient to hold the appellant guilty. The dealing should result in an
advantage to him. The appellant has acted in the interest of the company and was not held

guilty.
S. Ramesh, S. Padmalata and Asis Bhaumik v. SEBI
Held that the term "insider" has the following three essential ingredients:

Insider is a person; and

Who is connected or deemed to have been connected with the Company; and
Who is reasonably expected to have access by virtue of such connection, to
Unpublished Price Sensitive Information or who has received or has had access to
Unpublished Price Sensitive Information.

Section 15H: Penalty for non disclosure of acquisition of shares and takeovers:
Contravention of provisions of Takeover Code Regulations, shall be liable to a
penalty of 25 crore rupees or 3 times the amount of profit made out of such failure, whichever is
higher.
In, Krishna Naik v SEBI
SEBI imposed penalty of Rs. 5 lakhs upon appellant for the violation.
Section 15HA: Penalty for fraudulent and unfair trade practices.
Indulging in any fraudulent and unfair trade practices, shall be liable to a penalty of 25 crore
rupees or 3 times the amount of profit made out of such practices, whichever is higher.
Section 15HB: Penalty for contravention where no separate penalty has been provided:
Contravention of any of the provisions of the Act where no specific penalty is specified, shall be
liable to a penalty which may extend to 1 crore rupees.

Powers and functions of SEBI

Introduction
SEBI was established as a statutory authority through an Ordinance promulgated
on 30.01.1992 by the President of India. SEBI is the regulator for the Securities Market in India.
It is managed by a Board comprising of nine members including the chairman. SEBI promotes
orderly and healthy development in the stock market.
Objectives of SEBI:
1. To regulate the activities of stock exchange.

2. To protect the rights of investors and ensuring safety to their investment.

3. To prevent fraudulent and malpractices by having balance between self regulation of
business and its statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers,
underwriters, etc.
Powers and Functions of SEBI: (Section 11)
Functions of SEBI:

i.
ii.
iii.

Protective functions
ii. Developmental functions
Regulatory functions.

1. Protective Functions:
These functions are performed by SEBI to protect the interest of investor and provide safety of
investment.
As protective functions SEBI performs following functions:
(i) It Checks Price Rigging:
Price rigging refers to manipulating the prices of securities with the main objective of
inflating or depressing the market price of securities. SEBI prohibits such practice because this
can defraud and cheat the investors.
(ii) It Prohibits Insider trading:
Insider is any person connected with the company such as directors, promoters etc.
These insiders have sensitive information which affects the prices of the securities. This
information is not available to people at large but the insiders get this privileged information by
working inside the company and if they use this information to make profit, then it is known as
insider trading, e.g., the directors of a company may know that company will issue Bonus shares
to its shareholders at the end of year and they purchase shares from market to make profit with
bonus issue. This is known as insider trading. SEBI keeps a strict check when insiders are buying
securities of the company and takes strict action on insider trading.
(iii) SEBI prohibits fraudulent and Unfair Trade Practices:
SEBI does not allow the companies to make misleading statements which are
likely to induce the sale or purchase of securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of
various companies and select the most profitable securities.

(v) SEBI promotes fair practices and code of conduct in security market by taking following
steps:
(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies
cannot change terms in midterm.
(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and
imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market
prices.
2. Developmental Functions:
These functions are performed by the SEBI to promote and develop activities in
stock exchange and increase the business in stock exchange. Under developmental categories
following functions are performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable
approach in following way:
(a) SEBI has permitted internet trading through registered stock brokers.
(b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock exchange.
3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock exchange.
To regulate the activities of stock exchange following functions are performed:
(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries
such as merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private placement
has been made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer
agents, trustees, merchant bankers and all those who are associated with stock exchange in any
manner.

(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies.
(vi) SEBI conducts inquiries and audit of stock exchanges.
Powers of SEBI:
i)Power to Seek Information: Section 11 of the SEBI Act, 1992 alas amended by the Amending
Act of 2002 confers a very important power on SEBI to seek information and records from any
bank or any other statutory authority or board or corporation established either by central, state
or local government.
ii)Powers of Inspection: The new section 11(2) inserted by the Securities and Exchange Board
of India (Amendment) Act 202 empowers SEBI to conduct inspection of books, registers,
documents and records of any listed company or public company intending to get its securities
listed.
iii) Powers of Civil Court Exercisable by SEBI: The SEBI shall have the same powers as
revested in a civil court under the code of Civil Procedure, 1908 while trying a suit, in respect of
the following matters
,
(a) The discovery and production of books of account and other documents, at such place and
such time as may be specified by the SEBI.
.
(b) Summoning and enforcing the attendance of persons and examining them on oath;
(c) Inspection of any books, registers and other documents of any person referred to in section
12, at any place.
.
(d) Inspection of any book, or register, or other document or record of the company;
(e) Issuing commissions for the examination of witnesses or documents.
iv) Power to issue directions : SEBI has the power to direct inquiries to be made in relation to
affairs of stock exchanges or their members.
v) Power of Search and Seizure: A new section 11C has been introduced in the principal Act by
the Securities and Exchange Board of India (Amendment) Act 2002 which covers the power of
search and seizure.
vi) Power to Order Cease and Desist: Section 11D, a new section inserted by the
securities and Exchange Board of India (Amendment) Act 2002 empowers SEBI to issue a cease
and desist order, where necessary. It provides that if the Board finds, after causing an inquiry to
be made, that any person has violated, or is likely to violate, any provisions of this Act, or any
rules or regulations made there under, the Board may pass an order requiring such person to
cease and desist from committing or causing such violation.
vii) Power of SEBI Under SCRA: Following are the powers enjoyed by the SEBI under the

Securities
Contracts
Regulations
Act,
1956.
a)To grant recognition to a stock exchange.
.
b)To withdraw recognition of any stock exchange in the interest of the trade.
c)To require every stock exchange to furnish periodical returns of day to day affairs.
d)To approve any stock exchange to make bye laws
.
e)To super said the governing body of a recognized stock exchange.
f) To suspend the business of a any recognized stock exchange for a limited period.
g)To compel listing of securities by public companies.
CASE LAWS
In, Ramrakh R.Bohra Vs. SEBI
It was also held that the power to issue directions under section 11B carries with it
by necessary implication all powers and duties incidental and necessary to make exercise of
these powers fully effective including power to pass interim orders in aid of final orders.
In, SEBI vs. Alka Synthetics Ltd.
The Gujarat High Court held that section 11B is essentially a power to issue
directions after inquiry and SEBI had the authority of law to take measures under the provisions
of the Act.
In,SEBI Vs. Libra Plantation Limited
The Court held that where the corporate character is employed for the purpose of
committing illegality or for defrauding others, the Court would ignore the corporate character
and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders
to do justice between the parties concerned.
In, A Vaidyanathan Vs.UOI and anr
The Honble High Court of Madras held that trading in securities is not a
fundamental right but a statutory right and the trading can be regulated by statute. It was also
held that rejection of membership of a recognized stock exchange cannot be challenged on the
ground of violation of Articles 14 and 19(1)(g) of the Constitution of India.
.

Scope and objectives

To facilitate external trade and payments; and
The Reserve Bank of India today stated that the Foreign
Exchange Management Act (FEMA) and rules give full
freedom to a person now resident in India who was earlier a
non- resident to hold or own or transfer any foreign security
or immovable property situated outside India and acquired
when he/she was resident there. Similar freedom is also
given to a resident who inherits such security or immovable
property from a person resident outside India.
`the object of the Foreign Exchange Regulation Act, 1973,
was to conserve foreign exchange resources, whereas the
object of the new Act, Foreign Exchange Management Act,
1999, is to facilitate external trade and payments and to
promote orderly maintenance of the foreign exchange
market in India.''
,

a person resident outside India is permitted to hold shares,

securities and properties acquired by him while he/she was
resident in India. A person resident outside India is also
permitted to hold such properties inherited from a person
resident in India. The exchange drawn can also be used for
purposes other than for which it is drawn provided drawal of
exchange is otherwise permitted for such purpose.
To promote the orderly development and maintenance
of foreign exchange market in India without any chaos
and violations.
Regulation of foreign companies in India:
A foreign company is a company which is incorporated outside
India but having its place of business (including a share
transfer or an office registered with a regulatory authority) in

India. Under the Companies Act 2013, a foreign company

means any company or body corporate incorporated outside
India which has a place of business in India, either of its own or
if it conducts business through an agent, physically /
electronically or any other manner. However, all foreign
companies are not required to comply with the Companies Act,
it is only applicable to foreign companies where 50% or more of
the paid-up share capital (calculated by including preference
shares) is held by Indian entities.
Foreign companies must comply with the provisions of the
Companies Act, 2013 in respect to the business as if it were a
company incorporated in India.
g To make strong and developed foreign exchange market
Without any hawala : An important objective of exchange
regulation is to prevent hawala transactions.
We may briefly consider hawala from two angles.
(i) legal; and
(ii) Economic.
Legal restrictions on hawala.
Under FERA, sections 8 & 9 provided detailed legal prohibitions
on hawala market. Section 8 provided the restrictions on
transactions in foreign currency as well as conversions
between Indian currency & foreign currency, Section 9 covered
rupee transactions. Section 9(1)(f) provided specific prohibition
on hawala. Rest of the clauses in section 9 were direct /
indirect support to the main target of preventing flight of
capital outwards through any channel.

 Conservation and proper utilization of forex resources

of the country.
As foreign exchange being a scare commodity, the administrators
doesnt have any option than controlling the forex demand. Any
breach of FERA was a criminal offence. It was more a prohibitive
law. Except the list of transactions permitted by RBI, FERA
prohibited all other dealings in foreign exchange and foreign
securities. Along with FERA, another draconian law with
preventive detention right was enacted as Conservation of
Foreign Exchange and Prevention of Smuggling Activities Act 1974
(Popularly referred as COFEPOSA) followed by another preventive
detention law namely Smugglers and Foreign Exchange
Manipulators (Forfeiture of Property) Act, 1976 (popularly
referred as SAFEMA).

Control certain aspects of the conduct of business

outside the country by Indian Companies and in India
by Foreign companies.
This is done through FDI
To regulate acquisition, holding etc of immovable
property in India by NRI
Acquisition of immovable property in India by persons resident
outside India (foreign national) is regulated in terms of section 6
(3) (i) of the Foreign Exchange Management Act (FEMA), 1999 as
well as by the regulations contained in the Notification No. FEMA
21/2000-RB dated May 3, 2000
-----------------------------------------------------------------------------------------__

What is meant by a person resident in India?

A.53. From FEMA angle, a person resident in India means a person
residing in India for more than one hundred and eighty-two days
during the course of the preceding financial year (April-March)
and who has come to or stays in India either for taking up
employment, carrying on business or vocation in India or for any
other purpose, that would indicate his intention to stay in India for
an uncertain period. In other words, to be treated as a
person resident in India, under FEMA a person has not
only to satisfy the condition of the period of stay (being
more than 182 days during the course of the preceding
financial year) but has also to comply with the condition of
the purpose/intention of stay.
If we take the interpretation of it would appear that a resident is a
person who:
1. Spends more than 182 days in India during the Preceding
Financial Year AND
2. Does not fall in either (a) or (b) in the definition above.
Point (a) excludes from the definition of FEMA resident those who
meet (1) and then go abroad for an indefinite period, say for
employment. Point (b) excludes from the definition of FEMA
resident those who meet (1), but have come to India as visitors/
tourists to India with a definite plan to return abroad
__________________________________________________________________
________________________
What is meant by contravention and compounding of
contravention?
Ans. Contravention is a breach of the provisions of the Foreign
Exchange Management Act (FEMA), 1999 and rules/ regulations/

notification/ orders/ directions/ circulars issued there under.

Compounding refers to the process of voluntarily admitting the
contravention, pleading guilty and seeking redressal. The Reserve
Bank is empowered to compound any contraventions as defined
under section 131 of FEMA, 1999 except the contravention under
section 3(a)2 ibid, for a specified sum after offering an opportunity
of personal hearing to the contravener. 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 [except section 3(a) of
the Act] by minimizing transaction costs. Willful, malafide and
fraudulent transactions are, however, viewed seriously, which will
not be compounded by the Reserve Bank.
3(a) deal in or transfer any foreign exchange or foreign security to
any person not being an authorized person;
Who can apply for compounding?
Ans. Any person who contravenes any provision of the FEMA,
1999 [except section 3(a)] or contravenes any rule, regulation,
notification, direction or order issued in exercise of the powers
under this Act or contravenes any condition subject to which an
authorization is issued by the Reserve Bank, can apply for
compounding

to

the

Reserve

Bank.

Applications

seeking

compounding of contraventions under section 3(a) of FEMA, 1999

may be submitted to the Directorate of Enforcement.

3 When should one apply for compounding?

Ans. When a person is made aware of the contravention of the
provisions of FEMA, 1999 by the Reserve Bank or the Foreign
Investment Promotion Board (FIPB) or any other statutory
authority or the auditors or by any other means, she/he may
apply for compounding. One can also make an application for
compounding, suo moto, on becoming aware of the
contravention.
What action is taken by the Reserve Bank on receipt of the
application?
Ans. The Reserve Bank makes a scrutiny of the application to
verify whether the required details and documents furnished by
the

applicant

are

prima-facie

in

order.

Applications

with

incomplete details or where the contravention is not admitted will

be returned to the applicant. On the admission of applications, the
Reserve Bank will examine and decide if the contravention is
technical, material or sensitive in nature. If technical, the
applicant will be issued a cautionary advice. If the contravention
is material, it will be compounded by imposing a penalty after
giving an opportunity to the contravener to appear before the
compounding
contravention

authority
is

for

personal

hearing.

sensitive

in

nature

requiring

If

the

further

investigations, the same would be referred to the Directorate of

Enforcement (DoE) for further investigation/ action.
__________________________________________________________________

________________________

In C V Govinda Rao vs govt of India

The term giving of notice was held to mean communication of notice to
person concerned and not mere dispatch of notice to the address of the
person. It should be actually tendered to him. The expression understood
in the common parlance would convey that the notices must be served or
tendered in order to complete the process of giving such notice.
Procedure to be followed on arrest of a person:
In N H Wane V Mohaammed Akthar Hussain , it was held that under the
Customs act that when the provisions of that act are silent as to what a
magistrate has to do in a case where a person is arrested for an offence
punishable under that Act, the accused should be dealt with in accordance
with the provisions of Sec.437 of the Criminal Procedure Code.
Detention order can be executed anywhere in India as per cr.p.c
Capital Account Transactions
During the long journey from FERA to FEMA, there was a time when India
pondered over Capital Account convertibility. The Tarapore Committee
submitted a detailed report laying down the road map to Capital Account
convertibility. However, with the eruption of the South East Asian currency
crisis, the idea of full convertibility of rupee on Capital Account has been
shifted to the slow track. An honest attempt is made in FEMA to define and
codify the Capital Account transactions to govern which Regulations have
been framed. This will facilitate the Government to introduce Capital Account
convertibility in a phased manner. In fact, one such step had already been

taken by the Government by allowing remittance of up to US$ 1 million out

of balances held in NRO Accounts/sale proceeds of the immovable property
held for more than ten years, on production of an undertaking from the
person making the remittance, coupled with the certificate from a Chartered
Accountant about payment of applicable taxes. A resident individual has also
been permitted to draw foreign exchange up to USD 2,00,000/- per Financial
Year for a capital account transaction.
Section 2(e) defines Capital Account Transactions to mean a transaction
whichalters the assets or liabilities, including contingent liabilities, outside
India of a person resident in India or assets or liabilitiesin India of persons
resident outside India, and
includes transactions referred to in sub-section (3) of Section 6. [Refer
Annexure 2 for Capital Account Transactions specified in Section
6(3)]. Permissible Capital Account Transactions are discussed in Annexure 3.

Section 6(3) contains ten sub-clauses covering a wide range of transactions,

namely, Foreign Direct Investments in India, Overseas Direct Investments
from India, Borrowing or Lending in foreign exchange and in Indian rupees,
various kinds of bank accounts, immovable property in India and abroad,
guarantees, etc., for each of such categories, the RBI has issued separate
Notifications.
1.10 Distinction between Capital Account and Current Account
Transactions
The distinction between the two types of transactions needs to be
understood from the viewpoint of balance of payments of the country.
There is a difference between our normal understanding of a Capital asset
or a Capital expenditure and a Capital account transaction per se.
For example, import of machinery on payment of cash or on normal credit
terms of the vendor will be regarded as a current account transaction. The
importer may capitalise it in his account books and claim depreciation
thereon. As far as the country is concerned, it is a trade transaction.
However, if the same machinery is imported on deferred credit basis or is
funded out of ECB etc., then the credit beyond twelve months (as less than
twelve months again would fall within the definition of Current account

transactions) would result in the creation of the long-term liability outside

India and therefore, be termed as a Capital account transaction.
A word of caution here is that, the meaning of alteration of assets or
liabilities is not properly defined and therefore, leads to different
interpretations. In order to be on right side of the law, it is advised that in
case of doubt, the matter may be referred to the Reserve Bank of India, for
guidance.