An Overview

THE Foreign Exchange Regulation Act, 1973 (FERA) was repealed and a new Act called the Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from June 1, 2000, with a view to facilitating external trade and payments and promoting orderly development and maintenance of foreign exchange market in India.

UNDER the FEMA, foreign exchange transactions are divided into two broad categories - current account and capital account transactions. Transactions that alter 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 are classified as capital account transactions. All other transactions are current account transactions.

Current Account Transactions

UNDER the FEMA, the Government of India, in consultation with the Reserve Bank, is empowered to impose reasonable restrictions on current account transactions. The Government of India has notified the Foreign Exchange Management (Current Account Transactions) Rules, 2000, governing the current account transactions (Notification No. G.S.R. 381(E) dated May 3, 2000, as amended from time to time). The Foreign Exchange Management (Current Account Transactions) Rules, 2000 (the Rules) list the current account remittances under three categories.

Remittances,

1. which are prohibited are listed in Schedule – I to the Rules;
2. which need prior approval of the Government of India are listed in Schedule – II to the Rules; and
3. which need prior permission from the Reserve Bank that is, in case the amount of remittance exceeds the stipulated limits are listed in Schedule – III to the Rules.

UNDER the Foreign Exchange Management (Current Account Transaction) Rules, 2000, powers have been delegated to the Authorised Persons (APs) to allow remittances which are of current account in nature, in a hassle-free manner. Under the FEMA, ADs have been classified as under :

Category – I : ADs which include banks;
Category – II : ADs which include upgraded Full Fledged Money Changers (FFMCs), Co-operative Banks, Regional Rural Banks (RRBs) and other entities; and
Category – III : ADs which include select financial and other institutions.

IN addition, Full Fledged Money Changers (FFMCs), which include Department of Posts and Urban Co-operative Banks and other entities, are also allowed to purchase and sell foreign exchange for the purpose of private and business visits abroad.

PERSONS resident in India can avail of various facilities made available to them under the FEMA from the Authorised Persons who, thus, become an interface between the Reserve Bank and the common person.

Capital Account Transactions

THE Reserve Bank, in consultation with the Government of India, has notified comprehensive, simple and transparent regulations under the FEMA, 1999 for capital account transactions. The regulations distinctly indicate the types of permissible capital account transactions, simplified procedures for undertaking transactions and the returns that have to be submitted to the Reserve Bank. The regulations grant substantial powers to the Authorised Dealer Category – I banks to undertake capital account transactions on behalf of their clients.

NO liberalisation effort is complete unless the customers or the end-users are able to access the facilities through simple and transparent procedures. A number of initiatives have, therefore, been taken towards simplifying the procedure for cross-border transactions. The constitution of the ‘Committee on Procedures and Performance Audit on Public Services’ (CPPAPS) in the year 2004 under the chairmanship of Shri S.S. Tarapore reflected this concern. In its report on ‘Exchange Controls Relating to the Individuals’, the Committee focused its attention on the assessment of facilities and procedures for both resident and non-resident individuals. A variety of measures have been implemented to facilitate forex transactions to individuals. The Committee on Fuller Capital Account Convertibility (FCAC), constituted in the year 2006, reviewed the capital account liberalisation since 1997 and recommended several measures to further relax capital controls in a phased manner. Most of the recommendations of this Committee have been implemented. In accordance with the recommendations, a Task Force was constituted to identify the anomalies in the present regulatory framework for the current and the capital accounts and make suitable recommendations to untie the knots in the forex management system, so as to carry forward the liberalisation process in a more meaningful and user friendly maner. The recommendations made by the Task Force in simplifying the procedures of external transactions have also been implemented.

Dealing with Contravention

IN keeping with the spirit of the FEMA, the Government of India has empowered the Reserve Bank under section 15 of the Act to compound the contraventions under all the sections of FEMA, 1999 except section 3(a) of the Act. With an objective to provide comfort to the individuals and the corporate community by minimizing transaction costs while taking serious view of willful, malafide and fraudulent transactions, the Reserve Bank has issued detailed operational guidelines on February 1, 2005, for compounding of contravention under the FEMA. The procedure envisages making an application for compounding with the prescribed fee of Rs. 5,000 along with relevant facts and supporting documents, to the Reserve Bank. Under the provision of the Act, the Compounding Authority in the Reserve Bank is required to dispose of the application within 180 days from the date of receipt of the application.

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