CORPORATE AND ECONOMIC LAWS

UNIT-I

Introduction to Foreign Exchange Management Act, 1999

Foreign Exchange Management Act, 1999: Introduction – Definition – Current Account

transactions - Capital Account transactions – Realisation, repatriation and surrender of
foreign currency – Remittance of assets – Possession and retention of foreign currency or
foreign coins – Authorised person – Adjudication and Appeal.

FOREIGN EXCHNGE MANAGEMENT ACT, 1999

The Foreign Exchange Management Act (FEMA), 1999 is a significant piece of legislation
in India that governs the management and regulation of foreign exchange transactions.

INTRODUCTION:

The Foreign Exchange Management Act (FEMA), 1999 was enacted by the
Parliament of India to replace the earlier Foreign Exchange Regulation Act (FERA), 1973.
The primary objective of FEMA is to facilitate external trade and payments and promote the
orderly development and maintenance of the foreign exchange market in India2. The Act
came into effect on June 1, 2000.

DEFINITION:

FEMA is a set of regulations that empower the Reserve Bank of India (RBI) and the Central
Government to regulate foreign exchange transactions. It aims to ensure that foreign
exchange transactions are conducted in a manner that supports the economic policies of the
country while allowing for the liberalization of foreign exchange controls3.

CURRENT ACCOUNT TRANSACTIONS, CAPITAL ACCOUNT

TRANSACTIONS:
TRANSACTIONS UNDER FEMA:
1. Government Manages Forex Controls the forex expense.

2. Specify Some Restrictions for Control the Forex expense.

3. For that Current Account Transactions, Capital Account Transactions.

 4. Prohibited Transactions-No illegal but withdraw of foreign currency prohibited.

CURRENT ACCOUNT TRANSACTIONS:

1. Other than Capital Account Transactions.

2. Payment in Ordinary Course of ordinary Forex trade. Ex Machinery Import-Cash

purchase & Credit Purchase (3Months).

 More than 6Months -Capital Account Transactions.

 Period Of borrowing is less than 6months- short Term borrowings.

3. Interest Payment for loans-Both Short and Long Term.

4. Remittance for Living Expense of Family, children, Dependent etc.

5. Foreign Travel and Education Expenses.

CAPITAL ACCOUNT TRANSACTIONS

1. Alters the Assets & Liabilities and contingent Liabilities outside India of PRI.
2. Alters the Assets and Liabilities in India of PROI.
3. Period Of borrowing is more than 6months.
4. Taking Of Loan from Us.
5. Fixed Deposit - Altering Asset.

REALISATION, REPATRIATION, AND SURRENDER OF FOREIGN

CURRENCY:

REALISATION OF FOREIGN CURRENCY:

1. Definition:

Realisation of foreign currency refers to the process of converting foreign exchange earnings
into Indian rupees.

2. Purpose:

The purpose of realisation is to ensure that foreign exchange earnings are converted into
Indian rupees and brought into the country.
3. Methods:

Realisation can be done through various methods, including:

- Spot Realisation: Converting foreign exchange earnings into Indian rupees immediately.

- Forward Realisation: Converting foreign exchange earnings into Indian rupees at a

future date.

4. Time Limit:

The time limit for realisation varies depending on the type of transaction. Generally, it ranges
from 6 months to 1 year.

REPATRIATION OF FOREIGN CURRENCY:

1. Definition:

Repatriation of foreign currency refers to the process of transferring foreign exchange

earnings from abroad to India.

2. Purpose:

The purpose of repatriation is to ensure that foreign exchange earnings are brought back into
the country.

3. Methods:

Repatriation can be done through various methods, including:

- Bank Transfer: Transferring funds through banks.

- Online Transfer: Transferring funds through online platforms.

4. Time Limit:

The time limit for repatriation varies depending on the type of transaction. Generally, it
ranges from 6 months to 1 year.

SURRENDER OF FOREIGN CURRENCY:

1. Definition:

Surrender of foreign currency refers to the process of surrendering foreign exchange earnings
to an authorised dealer.
2. Purpose:

The purpose of surrender is to ensure that foreign exchange earnings are converted into
Indian rupees and brought into the country.

3. Methods:

Surrender can be done through various methods, including:

- Cash Surrender: Surrendering foreign exchange earnings in cash.

- Draft Surrender: Surrendering foreign exchange earnings through drafts.

4. Time Limit:

The time limit for surrender varies depending on the type of transaction. Generally, it ranges
from 6 months to 1 year.

REMITTANCE OF ASSETS:
Key Points on Remittance of Assets

 Definition: Remittance of assets refers to the transfer of funds or assets held in one
country to another country. This can include deposits with banks, provident fund
balances, superannuation benefits, insurance policy proceeds, sale proceeds of shares,
securities, immovable property, and other assets1.
 Regulatory Framework: The Foreign Exchange Management Act (FEMA), 1999,
governs the remittance of assets in India. The Reserve Bank of India (RBI) issues
regulations and directions under FEMA to manage and monitor these transactions2.
 Authorized Persons: Only authorized dealers (banks) and other authorized entities
can facilitate the remittance of assets. Individuals and entities must comply with the
regulations set by the RBI to remit assets outside India1.
 Prohibited Transactions: Certain transactions are prohibited unless specific
permissions are obtained from the RBI. For example, remittance of assets without
proper documentation or exceeding the prescribed limits can lead to penalties1.
 Tax Implications: Remittance of assets is subject to applicable tax laws in India.
Individuals and entities must declare the remittance and pay any taxes due to avoid
legal issues.
  Documentation: Proper documentation is required for remittance of assets, including
proof of acquisition, inheritance, or legacy of the assets. This documentation must be
submitted to the authorized dealer for processing the remittance.
 Special Cases: Certain individuals, such as NRIs (Non-Resident Indians), PIOs
(Persons of Indian Origin), and foreign nationals, have specific provisions under
FEMA for remittance of assets. For example, NRIs can remit up to USD 1 million per
financial year without prior approval from the RBI1.

POSSESSION AND RETENTION OF FOREIGN CURRENCY OR

FOREIGN COINS
The topic of possession and retention of foreign currency or foreign coins is governed by the
Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations,
2015 issued by the Reserve Bank of India (RBI). Here are some key points:

Key Regulations

Authorized Persons: Authorized persons can possess and retain foreign currency and coins
without any limit within the scope of their authority.

General Public: Any person can possess foreign coins without any limit.

Residents in India: Residents in India can retain foreign currency notes, bank notes, and
foreign currency travellers cheques up to USD 2000 or its equivalent in aggregate. This
foreign exchange must have been acquired while on a visit to any place outside India.

Non-Permanent Residents: A person resident in India but not permanently resident can
possess foreign currency without limit if it was acquired, held, or owned when they were
resident outside India.

Corporate and Economic Implications

Compliance: Corporations must ensure compliance with these regulations to avoid penalties
and legal issues.

Financial Planning: Understanding these regulations helps in better financial planning and
management of foreign currency holdings.
Risk Management: Proper management of foreign currency can mitigate risks associated
with currency fluctuations and exchange rates

AUTHORISED PERSON:

 Definition: An authorized person is defined under Section 2(c) of the Foreign

Exchange Management Act (FEMA), 1999, as:
 Authorized Dealer: Banks authorized by the Reserve Bank of India (RBI) to deal in
foreign exchange.
 Money Changer: Entities authorized to exchange currency.
 Offshore Banking Unit (OBU): A branch of a bank located in a Special Economic
Zone (SEZ) authorized to deal in foreign exchange.
 Other Persons: Any other entity authorized by the RBI to deal in foreign exchange or
foreign securities.

Role and Responsibilities

 Facilitating Transactions: Conducting foreign exchange transactions on behalf of

individuals and entities.
 Compliance: Ensuring that all transactions comply with FEMA regulations and other
relevant laws.
 Reporting: Reporting any suspicious transactions or activities to the regulatory
authorities.
 Documentation: Requiring proper documentation and declarations from clients to
prevent illegal activities.

ADJUDICATION AND APPEAL:

Under the Foreign Exchange Management Act (FEMA), adjudication and appeal processes
are essential mechanisms to resolve violations of foreign exchange regulations in India.
FEMA governs external trade, foreign investment, and foreign exchange transactions in
India, with the aim of facilitating external trade and payments and promoting the orderly
development and maintenance of the foreign exchange market.
Adjudication under FEMA

Adjudication under FEMA refers to the process by which violations of the Act are
investigated and decided upon by an adjudicating authority, which is empowered to impose
penalties if violations are proven.

Adjudicating Authority

Section 16 of FEMA provides for the appointment of an Adjudicating Authority by the

Reserve Bank of India (RBI) or the Government of India.

The adjudicating authority is typically a senior official with legal or financial expertise, and it
functions independently of other regulatory agencies.

The authority's role is to decide on the penalties for contraventions of FEMA, based on the
facts presented during the proceedings.

Process of Adjudication

1. Issuance of Show-Cause Notice: If a contravention of FEMA is suspected, the

Enforcement Directorate (ED) or other regulatory bodies like the RBI may issue a show-
cause notice to the accused party. This notice outlines the violation and the proposed
penalties.

2. Investigation: Following the notice, an investigation is conducted. The accused party may
present their defense or explanations during the process.

3. Hearing and Decision: The adjudicating authority then conducts hearings, examines
evidence, and considers the defense. If the violation is substantiated, the authority imposes a
penalty, which could range from fines to more severe penalties depending on the nature of the
violation.

4. Penalties: FEMA provides for penalties depending on the violation:

Section 13 allows penalties up to three times the sum involved in the contravention, or
₹2,00,000, whichever is higher, for violations related to foreign exchange transactions.

Section 14 allows penalties for non-compliance with reporting obligations.

5. Orders: After adjudication, the authority issues an order. If the party is found in violation,
penalties and other enforcement actions can be imposed.

Appeal under FEMA

If a party is dissatisfied with the adjudicating authority’s decision, they can appeal the order
to a higher authority.

Appellate Authority

Section 17 of FEMA provides for an Appellate Tribunal called the Foreign Exchange
Appellate Tribunal (FEAT), which hears appeals against orders passed by the adjudicating
authority.

The Appellate Tribunal is a specialized body created to handle FEMA-related disputes and
appeals.

It is headed by a Chairperson, and members typically include professionals with experience

in law, finance, or economics.

Process of Appeal

1. Filing an Appeal: A party can file an appeal within 45 days from the date of the
adjudicating authority's order. If the party is unable to file the appeal within this time, they
may seek an extension by showing sufficient cause for the delay.

2. Review by the Appellate Tribunal: The Appellate Tribunal reviews the records,
examines the merits of the case, and hears arguments from both parties. The Tribunal can
either uphold, modify, or annul the adjudicating authority’s order.

3. Final Decision: The Appellate Tribunal has the power to:Confirm the penalty imposed.

Reduce the penalty if the Tribunal deems the original penalty excessive or inappropriate.

Set aside the order if the Tribunal finds that the adjudicating authority acted inappropriately
or there was no violation.

4. Further Appeals: After the Appellate Tribunal's decision, an aggrieved party can appeal
to the High Court on matters of law. However, appeals to the High Court are limited