Foreign Exchange Management Act (FEMA)

Foreign Exchange Management Act (FEMA)

Subject :Economy

Section: External sector

Context:

Chinese mobile phone maker Xiaomi has come under the Enforcement Directorate (ED) scanner in connection with alleged foreign remittances of Rs 1,000 crore, which according to the agency is not compliant with the foreign exchange rules.

Foreign Exchange Management Act (FEMA):

FEMA came into effect on the 1st of June, 2000, replacing the Foreign Exchange Regulation Act (FERA).It aims to revise and unite laws that relate to transactions of foreign exchange and encourage an orderly maintenance and development of the foreign exchange markets in India.

All transactions involving foreign exchange have been classified either as capital or current account transactions. Only capital account transactions are regulated by the RBI. While current account transactions under FEMA are permissible freely subject to certain restrictions.

The exceptions for current account transactions include:

• Remittance out of lottery winnings.
• Remittance of income from racing/riding etc. or any other hobby
• Remittance for purchase of lottery tickets, banned/prescribed magazines,
• football pools, sweeps takes, etc.
• Payment of commission on exports made towards equity investment in joint
• ventures/wholly owned subsidiaries abroad of Indian companies.
• Remittance of dividend by any company to which the requirement of
• dividend balancing is applicable.
• Payment related to ‘call back services’ of telephones.
• Remittance of interest income on funds held in non-resident account

No person shall engage in the under specified actions unless given special sanction from RBI:

• 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

Holding of Foreign exchange:

Sub-section (4) allows a person resident in India to hold, own, transfer or invest in foreign currency, foreign security or an immovable property situated outside India, if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

Similarly, a person resident outside India is permitted to hold, own, transfer or invest in Indian currency, security, or any immovable property situated in India if such currency, security or property was acquired, held or owned by such a person when he was resident in India or inherited from a person who was resident in India.

Capital account transaction:

Section 6 empowers the Reserve Bank of India to specify, in consultation with the Central Government, any class or classes of capital account transactions permissible and the limit up to which foreign exchange shall be admissible for such transactions.

The Reserve Bank may, by regulations, prohibit, restrict or regulate the following:

• transfer or issue of any foreign security by a person resident in India;
• transfer or issue of any security by a person resident outside India;
• transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
• borrowing or lending in foreign exchange in whatever form or by whatever name called;
• 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;
• deposits between persons resident in India and persons resident outside
• India;
• export, import or holding of currency or currency notes;
• transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;
• acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
• giving of a guarantee or surety in respect of any debt, obligation or other liability incurred.