Table of Content

S.no. Particulars Page no.

1 Table of Abbreviations 2
2 Introduction 3
3 Historical Background 3
4 Why FEMA was introduced 4
5 Applicability of FEMA 5
6 Person resident in India 5
7 Regulation and Management 6
8 Supported by various Regulations 6
9 Related Legislation 7
10 Machinery responsible for various Aspects of FEMA 8
11 Important sections of FEMA 9
12 Current account and capital account 11
13 FEMA and commercial Borrowing 12
14 SCHEDULE II contains transactions which require prior 14
approval of the Government of India
15 SCHEDULE III contains transactions which require prior 15
approval of the Reserve Bank of India
16 Transaction which does not requires RBI permission 16
17 Conclusion 16
18 References 17

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 Table of Abbreviations

Abbreviation Full form

FEMA Foreign Exchange Management Act, 1999
FERA Foreign Exchange Regulation Act, 1973
MoF Ministry of Finance
GOI Government of India
DIPP Department of Industrial Policy and Promotion
CCEA Cabinet Committee on Economic Affairs
FIPB Foreign Investment Promotion Board
RBI Reserve Bank of India
WTO World Trade Organization
SPV Special Purpose Vehicle
ECB External Commercial Borrowings
AAR The Authority for Advance Rulings
FCCB Foreign Currency Commercial Bonds
FCEB Foreign Currency Exchange Bonds
Forex Foreign Exchange
NBFI Non-Banking Finance Institution

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1.1 Introduction

Till about 1992-93, government exercised absolute control on the exchange rate, export-import
policy, FDI policy. FERA enacted in 1973, strictly controlled any activities in any remote way
related to foreign exchange. FERA was introduced during 1973, when foreign exchange was a
scarce commodity. Post-independence, union government’s socialistic way of managing business
and the license raj made the Indian companies noncompetitive in the international market,
leading to decline in export. Simultaneously India import bill because of capital goods, crude oil
& petrol products increased the forex outgo leading to sever scarcity of foreign exchange. FERA
was enacted so that all forex earnings by companies and residents have to reported and
surrendered (immediately after receiving) to RBI (Reserve Bank of India) at a rate which was
mandated by RBI.
FERA was given the real power by making “any violation of FERA was a criminal offense liable
to imprisonment”. It a professed a policy of “a person is guilty of forex violations unless he
proves that he has not violated any norms of FERA”. To sum up, FERA prescribed a policy –
“nothing (forex transactions) is permitted unless specifically mentioned in the act”. Post
liberalization, the Government of India, felt the necessity to liberalize the foreign exchange
policy. Hence, Foreign Exchange Management Act (FEMA) was introduced. The FEMA was
passed by the Lok Sabha in October, 1999, received the assent of the president of India in
December, 1999 and came into force with effect 1st June 2000. Foreign trade is a union list
subject matter. The Indian Parliament has the exclusive powers to legislate subject relating to
trade and commerce with foreign countries, import & export. The foreign exchange Management
Act derives its powers from various entries in the Union list.
FEMA expanded the list of activities in which a person/company can undertake forex
transactions. Through FEMA, government liberalized the export-import policy, limits of FDI
(Foreign Direct Investment) & FII (Foreign Institutional Investors) investments and repatriations,
cross-border M&A and fund raising activities. FEMA has assisted the country by managing the
foreign exchange resources of the country and international trade and investments.

1.2 Historical Background

Exchange Control in India dates back to 1939 when for the first time it was introduced as a war
measure under the Defense of India Rules. During the World War II September 1939, there was
a shortage of foreign exchange resources. A system of exchange control was first time
introduced through a series of rules under the Defense of India Act, 1939 on temporary basis.
The foreign crisis persisted for a long time and finally it got enacted in the statute under the title
“Foreign Exchange Regulation Act, 1947.” This was meant to last for 10 years. However, 10
years of economic development did not ease the foreign exchange constraint, it only made things
worse. Thus, FERA permanently entered the statue book in 1957. Subsequently, this Act was
replaced by the Foreign Exchange Regulation Act, 1973 (FERA, 1973), which came into forc
with effect from January 1, 1974. In 1974, FERA was completely overhauled with all offences
being considered as criminal offences with mens rea.
The Enforcement Directorate could arrest any person without even arrest warrant. In the 1990s,
consistent with the general philosophy of economic reforms a sea change relating to the broad

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approach to reform in the external sector took place. In 1991 government of India initiated the
policy of economic liberalization. Foreign investment in many sectors was permitted. This
resulted in increased flow of foreign exchange
in India and foreign exchange reserves increased substantially. In 1997, the Tarapore Committee
on Capital Account Convertibility (CAC), constituted by the Reserve Bank, had indicated the
preconditions for Capital Account Convertibility. The three crucial preconditions were fiscal
consolidation, a mandated inflation target and, strengthening of the financial system. The
Tarapore Committee had also recommended change in the legislative framework governing
foreign exchange transactions. A Bill based on the recommendations of the Task Force, was
introduced in the Lok Sabha on 4 August, 98. The Bill was referred to the standing committee on
Finance which submitted its report to the House on 23 December’98 with suggestion and
modifications. The 12th Lok Sabha was dissolved before any decision could be taken on the bill.
The Bill subsequently lapsed. The bill was again introduced in the 13th Lok Sabha on 25th
Oct’99 and was passed in the winter session of Parliament in 1999. The Presidential Assent was
received on 29th December, 1999. Finally FEMA came into operation w.e.f. 1st June 2000.
Accordingly, the Foreign Exchange Regulation Act (FERA) was repealed and replaced by the
new Foreign Exchange Management Act (FEMA) with effect from June 2000. The philosophical
approach was shifted from that of conservation of foreign exchange to one of facilitating trade
and payments as well as developing orderly foreign exchange market.

1.3 Why FEMA was introduced?

India’s foreign exchange control regime was governed by the Foreign Exchange Regulation Act,
1973 (FERA) until June 2000. Comprehensive amendments to FERA, especially with respect to
foreign investment and foreign trade had been undertaken in order to give effect to the on-going
process of economic liberalizations. Significant developments have taken place since 1993 such
as substantial increase in our foreign exchange reserves, growth in foreign trade, rationalization
of tariffs, current account convertibility, liberalization of Indian investments abroad, increased
access to external commercial borrowings by Indian corporate and participation of foreign
institutional investors in Indian stock markets. Keeping in view the changed environment, the
Central Government introduced the Foreign Exchange Management Bill and repealed the
Foreign Exchange Regulation Act, 1973 with the aim to consolidate and amend the law relating
Foreign Exchange with the objective of facilitating external trade and payments and for
promoting orderly development and maintenance of foreign exchange markets in India. This act
has provided mechanisms in dealing in foreign exchange with a view to facilitate external trade
and payments (which includes imports as well as exports). The impetus is on facilitation of
export and import and freeing the payments relating to the external trade.
The scheme of FERA provided for obtaining Reserve Bank’s permission either special or
general, in respect of most of the regulations there under. The general permissions have been
granted by Reserve Bank under these provisions in respect of various matters by issuing a large
number of notifications from time to time since the Act came into force from 1st January 1974.
Special permissions were granted upon the applicants submitting prescribed applications for the
purpose.
Thus in order to understand the operative part of the regulations one had to refer to the Exchange
Control Manual as well as the various notifications issued by RBI and the Central Government.

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FEMA has brought about a sea change in this regard and except for section 3, which relates to
dealing in foreign exchange, etc. no other provisions of FEMA stipulate obtaining RBI
permission. It appears that this is a transition from an era of permissions to regulations. The
emphasis of FEMA is on RBI laying down the regulations rather than granting permissions on
case to case basis. This transition has also taken away the concept of “Exchange Control” and
brought in the phase of “Exchange Management”. The FERA was replaced by the FEMA as it
was an impediment in India’s to go Global. India’s foreign exchange transactions were governed
under the FERA until June 2000. This law had been enacted in 1973 when Indian economy was
facing a crisis and foreign exchange had become a precious commodity. But by the nineties,
FERA had outlived its utility and was in fact, an impediment in India’s effort to go global and
compete with other developing countries

1.4 Applicability of FEMA

FEMA is applicable to the whole of India. In addition it shall also applied to all branches offices,
agencies outside India owned or controlled by a person resident in India and to any contravention
there under committed outside India by any person to whom this Act applies. FEMA has
considerably liberalised provisions in respect of foreign exchange. However, sometimes an
extraordinary situation may arise. In such cases, Central Government can suspend operation of
any or all provisions of FEMA in public interest, by issuing a notification. The suspension can be
relaxed by issuing a notification. Copy of Notification shall be placed before Parliament for 30
days. (Section 40 of FEMA)

1.5 Person resident in India

For applicability of FEMA residential status of the persons plays an important role. The FEMA
get triggered only when there is a transaction between a resident Indian and a nonresident.
However, the criteria for determination of residential
Status is different in case of FEMA than in the case of Income Tax Act.
As per Section 2 (v) of FEMA “Person resident in India” means-
(i) A person residing in India for more than one hundred and eighty-two days during the course
of the preceding financial year but does not include;-
(A) A person who has gone out of India or who stays outside India, in either case-
(a) For or on taking up employment outside India, or
(b) For carrying on outside India a business or vocation outside India, or
(c) For any other purpose, in such circumstances as would indicate his intention to stay outside
India for an uncertain period;
(B) A person who has come to or stays in India, in either case, otherwise than-
(a) For or on taking up employment in India, or
(b) For carrying on in India a business or vocation India, or
(c) For any other purpose, in such circumstances as would indicate his intention to stay in India
for an uncertain period;
(ii) Any person or body corporate registered or incorporated in India,
(iii) An office, branch or agency in India owned or controlled by a person resident outside India,
(iv) An office, branch or agency outside India owned or controlled by a person resident in India;

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Non-Resident Indian

A non-resident Indian (NRI) means a person resident outside India who is a citizen of India or is
a person of Indian origin. (Regulation 2(vi) of Foreign Exchange Management (Deposit)
Regulations,2000. Although FEMA, 1999 defines a person resident in India and a person
resident outside India it does not define the term non-resident nor does it define the term Non
Resident Indian (NRI).

1.6 Regulation and Management

FEMA in itself is not an independent and isolated law. The provisions of FEMA are spread at
different places and so are there regulatory bodies. RBI makes regulations for FEMA and the
rules are made by Central Government. Though RBI is the overall controlling authority in
respect of FEMA, enforcement of FEMA has been entrusted to a separate “Directorate of
Enforcement” formed for this purpose. The RBI through its foreign exchange department central
office regulates FEMA through issue of:
 Notifications
 Circulars
 AP(Dir) Series Forms
 AP (Dir) Series
 Master Circulars
 DIPP Circulars (this is not by RBI)

1.7 Supported by various Rules and Regulations

This enactment is not an entirely self-contained law. It is supported by various rules and
regulations which are as follows:
 FEM(Realization, Repatriation and Surrender of Foreign Exchange) Regulations, 2000
 FEM(Possession and Retention of Foreign Currency) Regulations, 2000
 FEM(Permissible Capital Account Transactions) Regulations, 2000
 FEM(Transfer or Issue of Security By a Person Resident Outside India) Regulations,
2000
 FEM(Issue of Security in India by a Branch Office or Agency of a Person Resident
Outside India ) Regulations, 2000
 FEM(Transfer or Issue of any Foreign Security) Regulations, 2000
 FEM(Establishment in India or Branch or Office or Other Place of Business)
Regulations, 2000
 FEM(Off Shore Banking Unit) Regulations, 2000
 FEM(Investment in Firm or Proprietary Concern In India) Regulations, 2000
 FEM(Acquisition and Transfer of Immovable Property in India) Regulations, 2000
 FEM(Acquisition and Transfer of Immovable Property outside India) Regulations, 2000
 FEM(Remittance of Assets) Regulations, 2000
 FEM(Borrowing or Lending in Foreign Exchange) Regulations, 2000

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  FEM(Borrowing or Lending in Rupees) Regulations, 2000
 FEM(Deposit) Regulations, 2000
 FEM(Guarantees) Regulations, 2000
 FEM(Insurance) Regulations, 2000
 FEM(Foreign Exchange Derivate Contracts) Regulations, 2000,
 FEM(Foreign Currency Accounts By a Person Resident In India) Regulations, 2000
 FEM(Manner of Receipt and Payment) Regulations, 2000
 FEM(Export and Import Currency) Regulations, 2000
 FEM(Withdrawal of General Permission to Overseas Corporate Bodies(OCB’s)
Regulations, 2000
 FEM(Adjudication Proceedings and Appeal) Rules, 2000
 FEM(Encashment of Draft, Cheque, Instrument and Payment of Interest) Rules, 2000
 FEM(Authentication of Documents) Rules, 2000
 FEM(Compounding Proceedings) Rules, 2000
 FEM(Removal of Difficulties) Order, 2000
 FEM(Recruitment, Salary and Allowances and Other Conditions of Services of
Chairperson and Members)Rules, 2000

1.8 Related Legislations

Certain other Legislations have a bearing on FEMA. Such allied acts include:
 Foreign Trade (Development and Regulation) Act, 1992
 Foreign Trade (Regulation) Rules 1993
 Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993
 Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974
 Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976
 Smugglers and Foreign Exchange Manipulators (Appellate Tribunal for Forfeited
Property) Rules, 1977
 Smugglers and Foreign Exchange Manipulators(Receipt, Management and Disposal of
Forfeited Property) Rules, 2006
 Appellate Tribunal for Forfeited property(Fees) Rules, 1987
 Appellate Tribunal for Forfeited property(Procedure) Rules, 1986
 Prevention of Money Laundering Act, 2002
 Set of 7 rules under PML Act, 2002
 Foreign Contribution (Regulation) Act, 1976
 The Foreign Contribution (Regulation) Rules, 1976
 The Foreign Contribution (Acceptance or Retention of Gifts or Presentations)
Regulations, 1978
 The Foreign Contribution (Regulation) Act, 2010 (in force from May 1, 2011)
 Foreign Contribution (Regulation) Rules, 2011( in force from May 1, 2011)
 Guidelines issued by the Reserve Bank.
 Foreign Trade Policy

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  Uniform Customs and Practice for Documentary Credits (UCPDC ICC 500).
 Foreign Exchange Dealers Association of India (FEDAI) Rules
 Securities and Exchange Board of India (SEBI) guidelines

1.9 Machinery responsible for various aspects of FEMA

1. ED: Under Section 36 of FEMA Central Government has established a Directorate of

Enforcement for the purpose of enforcement of Act Officers under Directorate of
Enforcement is known as Officers of Enforcement. The officers shall exercise the like
powers which are conferred on the Income Tax authorities under the Income tax Act,
1961 [subject to such conditions and limitations as the central government may impose]
[Section 37]. These officers can investigate the contraventions of FEMA. Some of the
role that Directorate of Enforcement play is as under:
(i) To collect and develop intelligence relating to violation of the provisions of
Foreign Exchange Management Act.
(ii) To conduct searches on suspected persons, conveyances and premises for seizing
incriminating materials (including Indian and foreign currencies involved).
(iii) To enquire into and investigate suspected violations of provisions of the Foreign
Exchange Management Act.
(iv) To adjudicate cases of violations of Foreign Exchange Management Act for
levying penalties and also for confiscating the amounts involved in
contraventions; to realize the penalties imposed in departmental adjudication.
2. Adjudicating Authority: - Section 2 (a) of FEMA defines, adjudicating authority means
an officer authorized under section 16(1). Adjudicating Authority is appointed by the
central government for holding an inquiry in the manner prescribed after giving the
person alleged to have committed contravention under section 13, an opportunity of
being heard for the purpose of imposing any penalty.
3. Special Director (Appeals) : - Any person aggrieved by an order made by the
Adjudicating Authority, being an Assistant Director of Enforcement or a Deputy Director
of Enforcement can prefer an appeal to the Special Director (Appeals). Section 17 of
FEMA, empowers the central government for the appointment of special directors
(Appeals). Every appeal shall be filed within 45 days from the date on which the copy of
the order made by the Adjudicating Authority is received by the aggrieved person.
However, Special Director (Appeals) may allow appeal after the expiry of 45 days on
reasonable grounds. 7
4. Appellate Tribunal: - Any person aggrieved by an order made by the Adjudicating
Authority, or the Special Director (Appeals) can prefer an appeal to the Appellate
Tribunal. Section 18 of FEMA empowers the central government for the establishment of
Appellate Tribunal to hear appeals against the orders of the Adjudicating Authorities and
the special directors (appeals)
5. Foreign Exchange Department of RBI
6. FIPB: The Foreign Investment Promotion Board (FIPB) is a government body that
offers a single window clearance for proposals on Foreign Direct Investment (FDI) in
India that is not allowed access through the automatic route. FIPB comprises of

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 Secretaries drawn from different ministries with Secretary, Department of Economic
Affairs, MoF in the chair. This inter-ministerial body examines and discusses proposals
for foreign investments in the country for sectors with caps, sources and instruments that
require approval under the extant FDI Policy on a regular basis. The MoF, considers the
recommendations of the FIPB on proposals for foreign investment up to 1200 crore.
Proposals involving foreign investment of more than 1200 crore require the approval of
the CCEA.
7. AAR: pronounces rulings on the applications of the non-resident/residents submitted in
the prescribed form following prescribed procedure and such rulings are binding both on
the applicant and the income-tax department.
8. DIPP: The Department of Industrial Policy & Promotion was established in 1995 and has
been reconstituted in the year 2000 with the merger of the Department of Industrial
Development. It’s some of the functions includes, formulation and implementation of
industrial policy and strategies for industrial development in conformity with the
development needs and national objectives; Monitoring the industrial growth, in general,
and performance of industries specifically assigned to it, in particular, including advice
on all industrial and technical matters; Formulation of Foreign Direct Investment (FDI)
Policy and promotion, approval and facilitation of FDI; Encouragement to foreign
technology collaborations at enterprise level and formulating policy parameters for the
same.
.

1.10 Important Sections under FEMA

Section 2 -The Act here provides clarity on several definitions and terms used in the context of
foreign exchange. Starting with the identification of the Non-resident Indian and Persons of
Indian origin, it defines "foreign exchange" and "foreign security" in sections 2(n) and 2(o)
respectively of the Act. It describes at length the foreign exchange facilities and where one can
buy foreign exchange in India. FEMA defines an authorized dealer, and addresses the
permissible exchange allowed for a business trip, for studies and medical treatment abroad, forex
for foreign travel, the use of an international credit card, and remittance facility. Important and
relevant definitions are reproduced here in below in annexure in the context of the provisions of
the FEMA.
Section 3 prohibits dealings in foreign exchange except through an authorised person. Similarly,
without the prior approval of the RBI, no person can make any payment to any person resident
outside India in any manner other than that prescribed by it.
The Act restricts non-authorised persons from entering 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.
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. This section allows a person to draw or sell
foreign exchange from or to an authorised person for a capital account transaction. RBI in
consultation with the Central Government has issued various regulations on capital account
transactions in terms of sub-sect ion (2) and (3) of section 6.

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Section 7 covers the export of goods and services. All exporters are required to furnish to the
RBI or any other authority, a declaration regarding full export value.
Section 8 puts the responsibility of repatriation on the person resident in India who has any
amount of foreign exchange due or accrued in their favour to get the same realised and
repatriated to India within the specific period and in the manner specified by the RBI.
The duties and liabilities of the Authorised Dealers have been dealt with in Sections 10, 11 and
12. The Act also provides for the contraventions and penalties of this act, rules or regulations of
FEM and lays down the provisions for adjudication and appeal. Sections 13 to 15 cover penalties
and enforcement of the orders of the Adjudicating Authority as well as the power to compound
contraventions under the Act.

1.11 Current Account Transactions and Capital Account Transactions

Under FEMA all the transactions are divided into two categories:
(1) Capital Account transactions
(2) Current account transactions
As a general rule all the current account transactions under FEMA are permitted except those
specified and all the capital account transactions are prohibited or regulated.

Current Account Transaction: As per Section 2(j) of FEMA “Current Account Transaction”
means a transaction other than a capital account transaction and without prejudice to the
generality of the foregoing such transaction includes:
(i) Payments due in connection with foreign trade, other current business, services, and short-
term banking and credit facilities in the ordinary course of business,
(ii) Payments due as interest on loans and as net income from investments,
(iii) Remittances for living expenses of parents, spouse and children residing abroad, and
(iv) Expenses in connection with foreign travel, education and medical care of parents, spouse
and children;
As per section 5 of FEMA, Any person may sell or draw foreign exchange to or from an
authorized person if such sale or drawal is a current account transaction:
Provided that 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
prescribed.
In exercise of the power conferred under Section5 and Section 46 of FEMA the central
government in consultation with RBI have framed Foreign Exchange Management (Current
Account Transactions) Rules, 2000.In terms of the said Rules, drawal of foreign exchange for
certain categories of transactions as listed in Schedule I is expressly prohibited.
Exchange facilities for transactions included in Schedule II to the Rules may be permitted by the
Authorised Dealer banks provided the applicant has secured the approval from the
Ministry/Department of the Government of India as specified therein.

Capital Account Transactions: As per Section 2(e) of FEMA “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 referred to in sub-section (3) of section 6;
Section 6 of FEMA provides that:

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(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to
or from an authorized person for a capital account transaction.
(2) The Reserve Bank may, in consultation with the Central Government, specify:
(a) any class or classes of capital account transactions which are permissible;
(b) the limit up to which foreign exchange shall be admissible for such transactions :
Provided that the Reserve Bank 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.
(3) Without prejudice to the generality of the provisions of sub-section (2), the RBI may, by
regulations, prohibit, restrict or regulate the following:
(a) transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of any security by a person resident outside India;
(c) transfer or issue of any security or foreign security by any branch, office or agency in India of
a person resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or by whatever name called;
(e) 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;
(f) deposits between persons resident in India and persons resident outside India;
(g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease not exceeding five years, by
a person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease not exceeding five
years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or other liability incurred:
(i) by a person resident in India and owed to a person resident outside India; or
(ii) by a person resident outside India.
In practice, the distinction between current and capital account transactions is not always clear-
cut. There are transactions which straddle the current and capital account. Illustratively,
payments for imports are a current account item but to the extent these are on credit terms, a
capital liability emerges.

1.12 Capital Account Convertibility

Capital Account Convertibility refers to the freedom to convert local financial assets into foreign
financial assets and vice versa at market determined rates of exchange. It is associated with
changes of ownership in foreign/domestic financial assets and liabilities and embodies the
creation and liquidation of claims on, or by, the rest of the world. Convertibility is an
International Monetary Fund clause that all the member countries must adhere to in order to
work towards the common goals of the organization.
An economy can choose to be (a) partially convertible on CURRENT ACCOUNT, (b) partially
convertible on CAPITAL ACCOUNT, (c) fully convertible on current account and (d) fully
convertible on capital account. Though the rupee had become fully convertible on current
account as early as 1991, the RBI has been adopting a cautious approach towards full float of the
rupee. While there has been a substantial relaxation of foreign exchange controls during the last
10 years, the current account convertibility since 1994 means that both resident Indians and
corporate have easy access to foreign exchange for a variety of reasons. They are allowed to
receive and make payments in foreign currencies on trade account.

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By “Capital Account Convertibility” (or CAC in short), we mean “the freedom to convert the
local financial assets into foreign financial assets and vice-versa at market determined rates of
exchange. It is associated with the changes of ownership in foreign/domestic financial assets
and liabilities and embodies the creation and liquidation of claims on, or by the rest of the world.
…” (Report of the Committee on Capital Account Convertibility, RBI, 1997) Thus, in simpler
terms, it means that irrespective of whether one is a resident or non-resident of India one’s assets
and liabilities can be freely (i.e. without permission of any regulatory authority) denominated (or
cashed) in any currency and easily interchanged between that currency and the Rupee

1.13FEMA and Foreign Commercial Borrowings

FEMA guidelines provide Indian companies to access funds from abroad by following methods:-
a) ECB:- It refers to commercial loans in the form of bank loans, buyers’ credit, suppliers’
credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible,
optionally convertible or partially convertible preference shares) availed of from non-resident
lenders with a minimum average maturity of 3 years.
b) FCCB:- It refers to a bond issued by an Indian company expressed in foreign currency, and
the principal and interest in respect of which is payable in foreign currency.
c) Preference shares- (i.e. non-convertible, optionally convertible or partially convertible).
These instruments are considered as debt and denominated in Rupees and rupee interest rate will
be based on the swap equivalent of LIBOR plus spread.
d) FCEB:- FCEB is a bond expressed in foreign currency, the principal and interest in respect of
which is payable in foreign currency, issued by an Issuing Company and subscribed to by a
person who is a resident outside India, in foreign currency and exchangeable into equity share of
another company, to be called the Offered Company, in any manner, either wholly, or partly or
on the basis of any equity related warrants attached to debt instruments. The FCEB may be
denominated in any freely convertible foreign currency. ECB can be accessed under two routes,
viz.:-

A) Automatic Route:
• Access of funds under Automatic Route does not require RBI/GOI approval. Corporate
including hotel, hospital, software sectors (registered under the Companies Act 1956 or
Companies Act, 2013) and Infrastructure Finance Companies (IFCs) except financial
intermediaries such as banks, FIs, HFCs, and NBFCs are eligible to raise ECB. Units in SEZs are
allowed to raise ECB for their captive requirements. NGOs engaged in micro finance activities
are eligible to avail of ECB (subject to certain conditions). Trusts and Non-Profit making
organizations are not eligible to raise ECB.
 ECB can be raised by borrowers from internationally recognized sources such as (i)
international banks, (ii) international capital markets, (iii) multilateral financial
institutions (such as IFC, ADB, CDC, etc.)/ Regional Financial Institutions and
Government owned Development Financial Institutions, (iv) Export Credit Agencies, (v)
Suppliers of Equipment, (vi) Foreign Collaborators and (vii) Foreign Equity Holder
(other than erstwhile Overseas Corporate Bodies).
 Overseas organizations and individuals may provide ECB to NGOs engaged in micro
finance activities subject to complying with some safeguards outlined in the RBI circular.

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Amount and Maturity
(i) Corporate other than those in services sector viz. hotel, hospital, and software:
Amount (USD) per unit/ per financial year 750 Mn. Or equivalent.
(ii) Corporate in service sector i.e. hotel, hospital, and software (Proceeds of ECBs
should not be used for acquisition of Land: Amount (USD) per unit/ per financial year
up to 200 Mn. Or equivalent.
(iii) NGOs engaged in micro finance activities: Amount (USD) per unit/ per financial year
up to 10 Mn. Or equivalent (Forex exposure to be fully hedged)

Maturity: (For all the above three categories) Upto USD 20 Mn. Of equivalent in a financial year
- 3 years (Can have put/call option). Above USD 20 Mn. and upto 750 Mn. – 5 years
End use
 ECBs can be raised for investment [import of capital goods as classified by DGFT in
(FTP)] in new projects, modernization/expansion of existing units in industrial and
service sectors including infrastructure sector.
 Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS)
subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad.
 First stage acquisition of shares in the disinvestment process and also in the mandatory
second stage offer to the public under the Government’s disinvestment programme of
PSU shares.
 NBFCs categorized as Infrastructure Financing Companies (IFC) are permitted to avail
ECBs including outstanding in existing ECBs upto 50% of their owned funds under
Automatic Route for on lending to infrastructure sector and beyond 50% of owned funds
under Approval Route.
 For lending to self-help groups or for micro-credit or for bonafide micro finance activity
including capacity building by NGOs engaged in micro finance activities, etc

B. APPROVAL ROUTE
Proposals falling under the category include:-
a) On lending by the EXIM Bank for specific purposes (case to case basis).
b) Banks and financial institutions which had participated in the textile or steel sector
restructuring package as approved by the Government.
c) ECB with minimum average maturity of 5 years by NBFC to finance import of infrastructure
equipment for leasing to infrastructure projects.
d) Infrastructure Finance Companies (IFCs) i.e. NBFCs, categorized as IFCs, by RBI (beyond
50% of their owned funds) for on-lending to the infrastructure sector as defined under the ECB
policy and subject to compliance of certain stipulations.
e) FCCBs by Housing Finance Companies.
f) SPV or any other entity notified by the RBI, set up to finance infrastructure companies /
projects exclusively.
g) Financially solvent Multi-State Co-operative Societies engaged in manufacturing.
h) SEZ developers for providing infrastructure facilities within SEZ.
i) Eligible Corporate under automatic route other than in the services sector viz. hotels,

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hospitals and software sector can avail of ECB beyond USD 750 million per financial year.
j) Corporate in the service sector for availing ECB beyond USD 200 million. per financial year.
k) Cases falling outside the purview of the automatic route limits and maturity indicated,
etc.
Amount and Maturity
 Eligible borrowers under the automatic route other than corporate in the services sector
hotel, hospital and software can avail of ECB beyond USD 750 or equivalent per
financial year.
 Corporate in the service sector beyond ECB USD 200 Million for permissible end-uses.
End-use
 End-use would be the same for the funds raised under Automatic Route.
 The payment by eligible borrowers in the Telecom sector, for spectrum allocation may,
initially, be met out of Rupee resources by the successful bidders, to be refinanced with a
long-term ECB, under the approval route, subject to certain conditions outlined in the
Circular.

Trade Credits for Imports into India

• Trade Credits’ (TC) such as suppliers’ credit or buyers’ credit refer to credits extended
for imports directly by the overseas supplier, bank and financial institution for maturity of less
than three years.
• Suppliers’ credit refers to credit extended by the overseas supplier for imports into India
whereas the buyers’ credit refers to loans for payment of imports into India arranged by the
importer from a bank or financial institution outside India for maturity of less than 3 years.
• Suppliers’ credit and buyers’ credit for 3 years and above come under the category of ECB and
governed by ECB guidelines.

1.14 SCHEDULE II contains transactions which require prior approval of the Government
of India.
Given below are the Purpose of Remittance and the concerned Ministry/Department of
Government of India whose approval is required.
1. Cultural Tours – Ministry of Human Resource Development (Department of Education and
Culture)
2. Advertisement in foreign print media for the purposes other than promotion of tourism,
foreign investments and international bidding (exceeding US$ 10,000) by a State Government
and its Public Sector Undertakings - Ministry of Finance, Department of Economic Affairs.
3. Remittance of Freight of vessel chartered by a PSU - Ministry of Surface Transport
(Chartering Wing)
4. Payment of import through ocean transport by a Government Department or a PSU on c.i.f.
basis (i.e., other than f.o.b. and f.a.s. basis) - Ministry of Surface Transport (Chartering Wing)
5. Multi-modal transport operators making remittance to their agents abroad Registration
Certificate from the Director General of Shipping

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6. Remittance of hiring charges of transponders by (a) TV Channels - Ministry of Information
and Broadcasting (b) Internet service providers - Ministry of Communication and Information
Technology
7. Remittance of container detention charges exceeding the rate prescribed by Director General
of Shipping - Ministry of Surface Transport (Director General of Shipping)
8. Remittance of prize money/sponsorship of sports activity abroad by a person other than
International/National/ State Level sports bodies, if the amount involved exceeds US$ 100,000 -
Ministry of Human Resource Development, (Department of Youth Affairs and Sports)
9. Remittance for membership of P&I Club - Ministry of Finance (Insurance Division)

1.15 SCHEDULE III contains transactions which require prior approval of the Reserve
Bank of India
1. Release of exchange exceeding US $ 10,000 or its equivalent in one financial year, for
one or more private visits to any country (except Nepal and Bhutan)
2. Gift remittance exceeding US$ 5,000 per financial year per remitter/donor other than
resident individual.
3. Donation exceeding US$ 5,000 per financial year per remitter/donor other than resident
individual.
4. Donations by corporate, exceeding one per cent of their foreign exchange earnings during
the previous three financial years or US$ 5,000,000, whichever is less, for,-
(i) creation of Chairs in reputed educational institutes;
(ii) to funds (not being an investment fund) promoted by educational institutes; and
(iii) to a technical institution or body or association in the field of activity of the donor
company.
5. Exchange facilities exceeding US $ 100,000 for persons going abroad for employment.
6. Exchange facilities for emigration exceeding US $ 100,000 or amount prescribed b
country or emigration.
7. Remittance for maintenance of close relatives abroad, exceeding net salary (after
deduction of taxes, contribution to provident fund and other deductions) of a person who
is resident but not permanently resident in India and – (a) is a citizen of a foreign State
other Pakistan; or (b) is a citizen of India, who is on deputation to the office or branch or
subsidiary or joint venture in India of such foreign company and exceeding US $ 100,000
per year per recipient, in all other cases.

8. Release of foreign exchange, exceeding US$ 25,000 to a person, irrespective of period of

stay, for business travel, or attending a conference or specialized training or for
maintenance expenses of a patient going abroad for medical treatment or check-up
abroad, or for accompanying as attendant to a patient going abroad for medical
treatment/check- up.
9. Release of exchange for meeting expenses for medical treatment abroad exceeding the
estimate from the doctor in India or hospital/doctor abroad.
10. Release of exchange for studies abroad exceeding the estimates from the institution
abroad or US $ 100,000 per academic year, whichever is higher.

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 11. Commission, per transaction, to agents abroad for sale of residential flats or commercial
plots in India exceeding USD 25,000 or 5% of the inward remittance whichever is more.
12. Remittances exceeding US$ 10,00,000, per project, for any consultancy service in respect
of infrastructure projects and US$ 1,000,000 per project for other consultancy services
procured from outside India.

1.16 Transaction which does not requires RBI permission

1. Advance Remittance for Import of services: Authorised dealers can allow advance
remittance for providing services under current account transaction for which the release
of foreign exchange is admissible. However, where the amount exceeds USD 500,000 or
its equivalent, a guarantee from a bank of International repute situated outside India or a
guarantee from an authorized dealer in India, if such a guarantee is issued against the
counter-guarantee of a bank of International repute situated outside India, should be
obtained from the overseas beneficiary.
2. International Credit Cards: Prior approval of Reserve Bank of India is not required for
use of International Credit Cards by residents for making payment towards expenses,
while on a visit outside India. Residents can use International Credit Cards on internet for
any purpose for which exchange can be purchased from an Authorised Dealer in India,
e.g. for import of books, purchase of downloadable software or import of any other item
permissible under Foreign Trade Policy (FTP).
3. International Debit Cards: Banks authorised to deal in foreign exchange issue
International Debit Cards which can be used by a resident for drawing cash or making
payment to a merchant establishment overseas during his visit abroad. International Debit
Cards can be used only for permissible current account transactions.

1.17 Conclusion

The Foreign Exchange Management Act, 1999 was enacted to consolidate and amend the law
relating to foreign exchange with the objective of facilitating external trade and payments and for
promoting the orderly development and maintenance of foreign exchange market in India. In fact
it is the central legislation that deals with inbound investments into India and outbound
investments from India and trade and business between India and the other countries.
FEMA replaced FERA, not just as piece of paper but in terms of inflows and outflows of forex
in India. FERA was only the regulations, where FEMA works for the proper management of the
forex. Under FERA all violations would attract prosecutions.
FEMA diluted the rigorous enforcement provisions which were the hallmark of the erstwhile
legislation. Violation of FERA was a criminal offence whereas violation of FEMA is a civil
offence. I am of the view that FEMA has rightly replaced FERA, as to boost the Indian economy
and its shall be hurting the growth process if all the time corporates runs behind the RBI and
other authorities to seek permission to even small and medium size of foreign investment. Hence,
the automatic route available to the Indian corporate for foreign funding.

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References

 Foreign Exchange Management Act, 1999

 CA D S Vivek & CA Chandra Shekar B D, Article on FEMA “BIRD’S EYE VIEW OF
FEMA”
 CA Kirit Dedhia, Overview of FEMA & Investment opportunities in India for NRIs
 Nidhi Jain, Note on Compounding of Contraventions under FEMA
 IIT. Kharagpur’s note on Indian Foreign Exchange Market
 CA. Sudha G. Bhushan, Due Diligence under FEMA
 Puneet Gupta , The Foreign Exchange Management Act, 1999: An overview
 CS Vishal L Aggarwal, Fly with FEMA

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