Foreign Exchange Management Act, 1999

Extent and Application of FEMA (Section 1):

Whole of India;
All branches, offices and agencies outside India owned or controlled by a person resident in India (PRI);
Any contravention committed outside India by any person to whom this Act applies
Person [Section 2(u)]: It includes:
1. Individual;
2. HUF;
3. Company;
4. Firm;
5. AOP/BOI, whether incorporated or not;
6. AJP not covered above; and
7. any agency, office or branch controlled by such person
Person Resident Outside India (PROI) [Section 2(w)]: PROI means a person who is not resident in India
Person Resident in India (PRII) [Section 2(v)]: It means:
1. an individual residing in India > 182 days in the preceding Financial Year (subject to exceptions given below in the flow chart);
2. any person/body corporate registered or incorporated in India;
3. an office, branch, or agency in India owned or controlled by PROI;
4. an office, branch or agency outside India owned or controlled by PRII
Exceptions for an Individual as contained in Section 2(v): 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 in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to
stay in India for an uncertain period;
These provisions can be summarised as follows:
Individual

Comes to India
or Stays in India
Residing in India
>
182 Days

YES

Gone out of India

or Stays outside
India

NO

PROI

Employment outside India; or

Carrying on business/vocation outside
India; or
Other purpose with an intention to stay
outside India for an uncertain period

Employment in India; or
Carrying on business/vocation
in India; or
Other purpose with an intention
to stay in India for an uncertain
period

PRII

Current Account Transactions: Slabs under Section 5 read with FEMA Regulations:
Prohibited Transactions
1. Payment for travel to Nepal and/or Bhutan;
2. Remittance out of income from: lottery winnings, or racing/riding etc., or any other hobby;
3. Remittance for purchase of: lottery tickets, or banned/prescribed magazines, football pools, sweepstakes etc.;
4. Payment of commission. on exports under Rupees State Credit Route except commission upto 10% of Invoice value of
exports of tea & tobacco;
5. Payment of commission. on exports made towards equity investment in JV/WOS abroad of Indian Companies;
6. Remittance of dividend by any company to which the requirement of dividend balancing is applicable;
7. Payment released to Call Back Services of telephone;
8. Remittance of interest. income on funds held in Non Resident Special Rupee (Account) Scheme
Transactions with CG Approval
1. Remittance of freight of vessel chartered by a PSU;
2. Multi-modal transport operators making remittance to their agents abroad;
3. Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping;
4. Advertisement in foreign print media by SG or its PSU > US$ 10,000 (no restriction applies for promotion of tourism, or foreign
investments or international bidding);
5. Payment of imports by a Govt. Deptt. or a PSU on CIF basis;
6. Cultural Tours;
7. Remittance of prize money/sponsorship of sports activity abroad > US$ 1,00,000 (no restriction if payment made by
International/National/State level Sports Bodies);
8. Remittance of hiring charges of transponders by TV Channels & ISP;
9. Remittances under technical collaboration agreements if payment of royalty > 5% on local sales; 8% on exports & US$ 2
million in lump sum (this requirement has now been omitted w.r.e.f. 16-12-2009 Circular 52, 13.5.2010. Thus, at present
there is no ceiling on the amount of royalty that can be remitted under a technical collaboration agreement);
10. Payment for health insurance from a company abroad;
11. Remittance for membership of P & I Clubs (i.e. Protection and Indemnity Clubs)
Transactions with RBI Approval (if beyond limits)
The following Schedule III substituted by the FEM (Current Account Transactions) Amendment Rules, 2015, w.e.f. 26-5-2015, and
hence the above old Schedule III shall not be applicable from this date.
Facilities for individuals
1. Individuals can avail of foreign exchange facility for the following purposes within the limit of USD 2,50,000 only. Any additional
remittance in excess of the said limit for the following purposes shall require prior approval of the Reserve Bank of India.
(i)
Private visits to any country (except Nepal and Bhutan).
(ii)
Gift or donation.
(iii)
Going abroad for employment.
(iv)
Emigration [see first proviso below].
(v)
Maintenance of close relatives abroad.
(vi)
Travel for business, or attending a conference or specialised training or for meeting expenses for
meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going
abroad for medical treatment/check-up.
(vii)
Expenses in connection with medical treatment abroad [see first proviso below].
(viii)
Studies abroad [see first proviso below].
(ix)
Any other current account transaction:
Provided that for the purposes mentioned at item numbers (iv), (vii) and (viii), the individual may avail of exchange facility for an
amount in excess of the limit prescribed under the Liberalised Remittance Scheme as provided in regulation 4 to FEMA Notification
1/2000-RB, dated the 3rd May, 2000 (hereinafter referred to as the said Liberalised Remittance Scheme) if it is so required by a
country of emigration, medical institute offering treatment or the university, respectively:
Provided further that if an individual remits any amount under the said Liberalised Remittance Scheme in a financial year, then the
applicable limit for such individual would be reduced from USD 250,000 (US Dollars Two Hundred and Fifty Thousand Only) by the
amount so remitted:
Provided also that for a person who is resident but not permanently resident in India and
(a)
is a citizen of a foreign State other than Pakistan; or
(b)
is a citizen of India, who is on deputation to the office or branch of a foreign company or subsidiary or
joint venture in India of such foreign company,
may make remittance up to his net salary (after deduction of taxes, contribution to provident fund and other deductions).

Explanation: For the purpose of this item, a person resident in India on account of his employment or deputation of a specified
duration (irrespective of length thereof) or for a specific job or assignments, the duration of which does not exceed three years, is a
resident but not permanently resident :
Facilities for persons other than individual
1.1. Provided also that a person other than an individual may also avail of foreign exchange facility, mutatis mutandis, within the limit
prescribed under the said Liberalised Remittance Scheme for the purposes mentioned herein above.
2. The following remittances by persons other than individuals shall require prior approval of the Reserve Bank of India.
(i)
Donations exceeding one per cent of their foreign exchange earnings during the previous three
financial years or USD 5,000,000, whichever is less, for
(a) creation of Chairs in reputed educational institutes;
(b) contribution to funds (not being an investment fund) promoted by educational institutes;
(c) contribution to a technical institution or body or association in the field of activity of the donor
Company.
(ii)
Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in
India exceeding USD 25,000 or five per cent of the inward remittance whichever is more.
(iii)
Remittances exceeding USD 10,000,000 per project for any consultancy services in respect of
infrastructure projects and USD 1,000,000 per project, for other consultancy services procured from
outside India.
(iv)
Remittances exceeding five per cent of investment brought into India or USD 100,000 whichever is
higher, by an entity in India by way of reimbursement of pre-incorporation expenses.
Capital Account Transaction [Section 61]
(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorised 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, involving debt instruments, which are permissible;
(b)
the limit up to which foreign exchange shall be admissible for such transactions;
(c)
any conditions which may be placed on such transactions
Provided that the Reserve Bank or the Central Government shall not impose any restrictions on the drawal of foreign exchange for
payment due on account of amortisation of loans or for depreciation of direct investments in the ordinary course of business.
(2A) The Central Government may, in consultation with the Reserve Bank, prescribe
(a)
any class or classes of capital account transactions, not involving debt instruments, which are permissible;
(b)
the limit up to which foreign exchange shall be admissible for such transactions; and
(c)
any conditions which may be placed on such transactions.
For the purposes of this section, the term "debt instruments" shall mean, such instruments as may be determined by the Central
Government in consultation with the Reserve Bank.[ Section6(7)]
Question: Jet Airways Ltd. operates a flight between Delhi-USA all through the year. The crew members of such flight stayed in USA
for total period of 110 days as a taking rest period. Advise whether such crew members can be considered as PROI on the grounds
that they went for employment outside India.
Answer:
1. Under FEMA the expression business or employment outside India, as the case may be signifies that such business or
employment is individual and identifiable business or employment outside India.
2. In the given question, the crew members have not gone to USA for taking up a new identifiable employment in USA. In other words,
they went to USA to discharge the obligations of continuing employment from Indian Territory.
3. Since, no new employment in USA has been taken up by the crew members, they shall be deemed as PRII under FEMA.
Question: ABC Ltd., an IT Company is having a subsidiary in USA namely PQR Plc. ABC Ltd. transferred two software engineers to
work for developing a software for PQR Plc. by residing there till development is completed. These software engineers, however,
remained on the payroll of ABC Ltd. Advise whether these software engineers can be considered as PROI.
Answer:
1. In the given question although the period of return to India by these two Software Engineers is uncertain, still this uncertain period
shall not be examined because they have not went to USA for purpose other than employment business or vocation.
2. Accordingly, these two Software Engineers shall be considered as PRII assuming that in the preceding financial year, they resident
in India for a period of more than 182 days [however , it they have went to USA and they work on payroll of PQR Plc., then they shall
be deemed as PROI].

As amended by the Finance Act, 2015

Current Account and Capital Account Transaction: Basic Rules

As per FEMA regulation;
1) Current account transactions are always permitted unless prohibited;
2) Capital account transactions are always prohibited unless permitted.
Deposit accepted by an Indian Co. from an NR nominating director under section 160 of the Companies Act, 2013 is a current
account transaction [RBI Circular, Dated 13-4-2016]:
As per Regulation 3 of the Foreign Exchange Management (Deposit) Regulations, 2016, vide Notification, dated April 1,
2016, no person resident in India shall accept any deposit from, or make any deposit with, a person resident outside India;
But u/s 160 of the Companies Act, 2013, it is provided that a person who intends to nominate himself or any other person as
a director in an Indian company is required to place a deposit with the said company. In this context, it has come to the
notice of the RBI that there is ambiguity whether such deposits will require any specific approval from the RBI, in cases
where the deposit is received from a person resident outside India;
It is clarified that keeping deposits with an Indian company by PROI, in accordance with section 160 of the Co. Act, 2013, is
a current account transaction and, as such, does not require any approval from RBI. All refunds of such deposits, arising in
the event of selection of the person as director or getting more than twenty five percent votes, shall be treated similarly.
New Terms: Slabs under FEMA Regulations

RUPEE STATE CREDIT ROUTE: Rupee state credit route is a mechanism whereby Indian Exporters are paid by RBI for exports
made by them. For example, Mr. A of India exported goods worth Rs. 10 lakhs to Russia, for which the payment to Mr. X is being
made by RBI instead of Russian importer. Such kind of payment is known as payment under Rupee State Credit Route.

EXPORT MADE TOWRDS EQUITY INVESTMENT IN JV/ WOS ABROAD: It is a transaction whereby Export Sales of Indian
holding company or Indian company, as the case may be, are contributed towards Equity Share Capital:
Journal Entry in the books of Holding Company:
Journal Entry in the books of WOS abroad:
Investment in Equity Shares of WOS A/c Dr.
Import purchase A/c Dr.
To Export sales A/c
To Equity Share Capital A/c
[This Equity Share Capital represents equity allotted to holding Co.]
DIVIDEND BALANCING: Such as transaction signifies adjustment of dividend receivable with dividends payable
CALL BACK SERVICES: Call back service is a mechanism whereby the recipient of the call pays the billing amount.
P&I CLUBS: P&I clubs is on association of persons which is created by shipping industries worldwide to provide insurance cover
to the shipping industries.
Meaning of Capital Account Transactions & Current Account Transactions
1. Capital account transaction means a transaction which alters or changes:
(i) assets and/ or liabilities in India of PROI [contingent liabilities are not covered];
(ii) assets and/ or liabilities including contingent liabilities outside India of PRII
2. Current Account transaction means a transaction other than capital account transaction and it includes
(i) Payment due towards foreign trade and short-term credit facilities in ordinary course of business.
(ii) Payment due as interest on loans or as income on investment.
(iii) Payment in respect of living expenses or foreign travels or education or medical care of parents, spouse and children, as the
case may be, if they are residing abroad.
RULES ABOUT CAPITAL ACCOUNT TRANSACTIONS
1. A PROI is prohibited to make investment in India in certain enterprises as prescribed in FEMA Regulations. As per FEMA Capital
Account Transactions Regulations, 2000, a PROI is prohibited to make investment in India in any enterprise, which is engaged or
proposes to engage:
(a) in the business of chit fund; or
(b) as Nidhi Company; or
(c) in agricultural/plantation activities; or
(d) in real estate business (except development of townships, construction of residential/commercial premises, roads/bridges); or
(e) in construction of farm houses;
(f) in trading of TDRs (these are the certificates which are issued as a consideration to the owner of the land, by CG/SG for
acquiring land for public purposes. TDRs are transferable in part or whole)
2. As per FEMA regulation, an immovable property can be taken on lease by PROI in India or by PRII outside India provided the
lease period is not exceeding 5 years.
3. There is no prohibition to receive advance against export provide that:
(i) the shipment of goods is being made within one year of receipt of such advance; and
(ii) the rate of interest on such advance do not exceed LIBOR+1%
4. As per FEMA regulations, PRII cannot dispatch goods on lease or hire to a PROI.
5. The export on credit beyond 6 months and project exports require prior approval from RBI;
6. The export proceeds should be realised within nine2 months from such export (these 9 months can be extended by RBI on
sufficient reason being shown)

The export proceeds are required to be realised within 9 months from the date of shipment [RBI/2014-15/306, A.P. (DIR Series)
Circular No. 37, November 20, 2014]

Question: Meru cabs, USA has taken on lease 100 Indica cars from TATA Motors in India for a period of 5 years. Advise whether such
transaction is permissible under FEMA regulations would your answer be different if these Indica cars have been sold to Meru cabs,
USA.
Answer: As per FEMA regulation, dispatching goods on lease for any period to PROI is a prohibited transaction. In the second part of
question, there is no restriction to export Indica cars provided the export proceeds are realised by TATA Motors within nine months
from such export (these 9 months can be extended by RBI on sufficient reason being shown).
CONTEMPORARY TOPICS:
(A). Liberalised Remittance Scheme [LRS]: Under liberalised remittance scheme, any individual who is PRII is allowed to remit a
maximum of US$ 2,50,000 per annum for permissible capital account and current account transaction. Such remittance is in addition to
amount mentioned in FEMA slabs. The benefit of LRS is not available for remitting gifts or donations outside India.
(B). Foreign Direct Investments [FDI] In India:
1. On receipt of money towards share application, the Indian company shall intimate RBI about such receipt within next 30 days by
filling a copy of foreign inward remittance certificate [FIRC].
2. Within 180 days of such money, the Indian company shall allot the shares to the person investing in the company.
3. The share allotment shall be made at a price which is computed on the basis of internationally accepted valuation method for
example, discounted cash flow model.
4. However, shares can be allotted at face value if investors are subscribers to MOA.
5. Such valuation shall be certified by a CA in practice and the Indian company shall be required to file its annual return in Form FCGPR.
(C). Overseas Direct Investment [ODI] In India:
1. A person resident in India can make investments outside India with prior permission of RBI by filing from ODI and by obtaining a
certificate that no investigation or proceeding is going against it by Enforcement Directorate
2. The maximum permissible amount that can be invested abroad cannot exceed 400% of the net worth of PRII;
Net Worth = Paid up share capital (+) Free reserves (-) Intangible assets
(D). Transfer of Shares and Securities: Shares and securities can be transferred from PRII to PROI and vice-versa by filing Form
TRS-1 before RBI. Such filing can be made within 30 days of such transfer.
(E). Acquisition of Immovable Property in India:
1. A PROI or a Branch Office of PROI can acquire immovable property in India, by filing Form IPI with RBI
2. The Liaison Office is not permitted to acquire property in India but it can take property on lease for upto 5 years;
3. The Citizens of Pakistan, Bangladesh, Sri Lanka, China, Iran, Nepal and Bhutan can acquire such property in India only after
obtaining RBI approval.
(F). Branch Office/ Liaison Office in India:
1. Track Record for Branch Office:
a) Entity Establishing Branch office to have profit making track record during 5 preceding financial years in the home country;
b) Paid up capital (+) Free Reserves (-) Intangible Assets > US$100000.
2. Track Record for Liaison Office:
a) Entity Establishing Liaison office to have profit making track record during 3 preceding financial year in the home country;
b) Paid up capital (+) Free Reserves (-) Intangible Assets > US $ 50000.
3. Permitted activities of Liaison Office/ Representative Office: A Liaison Office (also known as Representative Office) can
undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not
allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met
entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore,
limited to collecting information about possible market opportunities and providing information about the company and its products to
the prospective Indian customers. A Liaison Office can undertake the following activities in India:
(i)
Representing in India the parent company/group companies.
(ii)
Promoting export/import from/to India.
(iii)
Promoting technical/financial collaborations between parent/group companies and companies in India.
(iv)
Acting as a communication channel between the parent company and Indian companies.
4. Permitted activities of Branch Office: Companies incorporated outside India and engaged in manufacturing or trading activities
are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Such Branch Offices are permitted to
represent the parent / group companies and undertake the following activities in India:
(i)
Export/Import of goods.
(ii)
Rendering professional or consultancy services.
(iii)
Carrying out research work, in areas in which the parent company is engaged.
(iv)
Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
(v)
Representing the parent company in India and acting as buying/selling agent in India.
(vi)
Rendering services in information technology and development of software in India.
(vii)
Rendering technical support to the products supplied by parent/group companies.
(viii)
Foreign airline/shipping company.
Normally, the Branch Office should be engaged in the activity in which the parent company is engaged.
Note:
(a)
Retail trading activities of any nature is not allowed for a Branch Office in India.
(b)
A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.
(c)
Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.

5. Branch Offices are permitted to remit profit outside India: B.O. are permitted to remit outside India profit of the branch net of
applicable Indian taxes, on production of the following documents to the satisfaction of the AD through whom the remittance is effected:
(a)
A Certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year;
(b)
A Chartered Accountants certificate certifying (i)
the manner of arriving at the remittable profit
(ii)
that the entire remittable profit has been earned by undertaking the permitted activities
(iii)
that the profit does not include any profit on revaluation of the assets of the branch
As per section 34 of FEMA, the civil court has no jurisdiction over FEMA matters;
Under Section 13, the amount of penalty is upto 3 times the sum involved in contravention or upto Rs. 2 lacs if the aforesaid
amount is not quantifiable. Further, in case of continuing contravention the penalty is upto Rs. 5,000 per day. Any
currency/security/any other money/property involved in contravention may be confiscated by the authorities;
If the person fails to pay the penalty amount determined u/s 13 within 90 days of service of notice, then order can be passed
subject to SCN, for arrest and civil imprisonment for a prescribed period [Section 14];
Imprisonment Term u/s 14: < 3 yrs, if Penalty > Rs. 1 crore; and < 6 months, in other cases;
First Appeal u/s 17 to Special Director (Appeals) against penalty order under FEMA and second appeal u/s 19 for the same before
the Appellate Tribunal (AT) within 45 days of receipt of the order ;
Appeal can be filed before HC on questions of law, within 60 days (extension possible for sufficient reasons) of communication of
the order from Appellate Tribunal [Section 35];
Enforcement Directorate has the powers to carry out search and seizure operations under FEMA in the same manner as
prescribed under Income Tax Act, 1961 [Section 36 to 38]
(G). Special provisions relating to assets held outside India in contravention of section 4 [Section 37A]3:
(1). Power to seize: Upon receipt of any information or otherwise, if the Authorised Officer prescribed by the Central Government has
reason to believe that any:
foreign exchange,
foreign security, or
immovable property,
situated outside India, is suspected to have been held in contravention of section 4, he may after recording the reasons in writing, by
an order, seize value equivalent, situated within India, of such foreign exchange, foreign security or immovable property:
Provided that no such seizure shall be made in case where the aggregate value of such foreign exchange, foreign security or any
immovable property, situated outside India, is less than the value as may be prescribed.
(2). Order of seizure with relevant material to be placed before competent authority within 30 days: The order of seizure along
with relevant material shall be placed before the Competent Authority, appointed by the Central Government, who shall be an officer
not below the rank of Joint Secretary to the Government of India by the Authorised Officer within a period of thirty days from the date
of such seizure.
(3). Disposal of petition by the competent authority subject to principal of natural justice: The Competent Authority shall
dispose of the petition within a period of one hundred eighty days from the date of seizure by either confirming or by setting aside such
order, after giving an opportunity of being heard to the representatives of the Directorate of Enforcement and the aggrieved person.
Explanation While computing the period of one hundred eighty days, the period of stay granted by court shall be excluded and a
further period of at least thirty days shall be granted from the date of communication of vacation of such stay order.
(4). Order of competent authority to continue till the disposal of adjudication proceedings and passing of appropriate orders
if the aggrieved person discloses and brings back the assets held outside India: The order of the Competent Authority
confirming seizure of equivalent asset shall continue till the disposal of adjudication proceedings and thereafter, the Adjudicating
Authority shall pass appropriate directions in the adjudication order with regard to further action as regards the seizure made under
sub-section (1):
Provided that if, at any stage of the proceedings under this Act, the aggrieved person discloses the fact of such foreign exchange,
foreign security or immovable property and brings back the same into India, then the Competent Authority or the Adjudicating
Authority, as the case may be, on receipt of an application in this regard from the aggrieved person, and after affording an opportunity
of being heard to the aggrieved person and representatives of the Directorate of Enforcement, shall pass an appropriate order as it
deems fit, including setting aside of the seizure made under sub-section (1).
(5). Right of further appeal: Any person aggrieved by any order passed by the Competent Authority may prefer an appeal to the
Appellate Tribunal.
(6). Compounding provisions not applicable: Nothing contained in section 15 shall apply to this section.
(G.1.). Foreign Exchange Management (Regularization of assets held abroad by a person resident in India) Regulations, 2015:
1. The Government of India has enacted The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
(Black Money Act) on May 26, 2015 to address the issue of undisclosed assets held abroad. It provides for separate taxation of income
and assets acquired abroad from income not disclosed but chargeable to tax in India.
3

Inserted by the Finance Act, 2015, w.e.f. 9-9-2015

2. To effectively deal with assets held abroad by persons resident in India in violation of the Foreign Exchange Management Act, 1999
(FEMA) for which declarations have been made and taxes and penalties have been paid under the provisions of the Black Money Act,
Reserve Bank has issued the Foreign Exchange Management (Regularization of assets held abroad by a person resident in India)
Regulations, 2015 notified though Notification dated September 25, 2015.
3. Accordingly, it is clarified that:
a) No proceedings shall lie under the Foreign Exchange Management Act, 1999 (FEMA) against the declarant with respect to an
asset held abroad for which taxes and penalties under the provisions of Black Money Act have been paid.
b) No permission under FEMA will be required to dispose of the asset so declared and bring back the proceeds to India through
banking channels within 180 days from the date of declaration.
c) In case the declarant wishes to hold the asset so declared, she/ he may apply to the Reserve Bank of India within 180 days from
the date of declaration if such permission is necessary as on date of application. Such applications will be dealt by the Reserve
Bank of India as per extant regulations. In case such permission is not granted, the asset will have to be disposed of within 180
days from the date of receipt of the communication from the Reserve Bank conveying refusal of permission or within such
extended period as may be permitted by the Reserve Bank and proceeds brought back to India immediately through the banking
channel.