The Momentous Decision

8/7/2019 The Momentous Decision

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Presented by : Sushil Sharma

2009mb08


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1. History of Forex Regulation

2. Foreign Exchange Regulation Act.

3. Foreign Exchange Management Act.

4. FEMA Salient features.

5. FERA vs FEMA.

6. Applicability of FEMA

7. FEMA Shortcomings.8. Current Account and Capital Account Transactions.

9. Capital Account Convertibility.

10. References.


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Exchange rate control were fist imposed as atemporary measure as a war time measure in1939.

After independence in 1947 Foreign ExchangeRegulation Act (FERA ) was introduce toregulate the outflow of capital.

In 1973 in the name of economic and industrialdevelopment, it was made permanent.


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The law under FERA was draconian and oftenmisused.

A violation under FERA was a criminal offencepunishable by imprisonment.

In 1960s, and 1970s most Indians were allowedto officially carry just $8 for any trip over seas.


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FERA was replaced by the Foreign ExchangeManagement Act (FEMA) in 1999.

This Act consolidates and amends the laws relating

to foreign exchange with the objective of facilitating

external trade and payments and for promoting the

orderly development and maintenance of the foreign

exchange market in India.


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RBI is entrusted with the administration and

implementation of FEMA.

It extends to the whole of India. It shall also apply to all branches, offices and

agencies outside India owned or controlled by

a person resident in India and also to any

contravention there under committed outside

India by any person to whom this Act applies .


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FERA FEMA

Came into force in Jan 1,1974 Came into existence in 1999

Emphasis on exchange regulation and

exchange control.

Emphasis on exchange management

and facilitates external trade &

payments.

Necessary to obtain RBIs permission

in respect of most regulationshereunder.

With exception to section(3) which

relates to dealings in foreignexchange, no other provisions require

permission from RBI.

A contravention under FERA was

treated as criminal offence.

The contravention will be treated as a

civil offence.


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If an Indian company opens a branch in New York,

that branch will become a resident of India and

therefore all restrictions applicable to Indian

residents for overseas transactions are equallyapplicable to such a branch. Then right from

opening of a bank account to entering into any

transaction of capital nature it will need prior

approval of RBI.


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The Income tax considers the physical presence of a

person in the current FY for determining his tax

liabilities of the current year, whereas FEMA

considers physical presence of a person in thepreceding FY, with the result that a person might

have to wait for even one and a half year to become

resident of India.

FY in India April 1 to March 31


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Two golden rules or principles in FEMA:-

All current account transactions are permitted unless

otherwise prohibited.

All capital account transactions are prohibited

unless otherwise permitted .


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payments due in connection with foreign trade,

services, and short-term banking and credit facilities

in the ordinary course of business.

payments due as interest on loans and as net incomefrom investments.

remittances for living expenses of parents, spouse

and children residing abroad, and

expenses in connection with foreign travel,

education and medical care of parents, spouse and

children.


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" 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 ofpersons resident outside India.


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e.g.:- Import of machinery on payment of cash or on

normal credit terms of the vendor will be regarded as

current account transaction.

If the same machinery is imported on a deferred

credit basis or is funded out of ECB, and the credit

beyond 12 months would result in creation of long

term liability outside India and therefore will be

termed as Capital account convertibility.


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Individuals are now allowed to remit up to$200,000 a year & such money can be used topurchase debt, equity and property in foreign

locations. Outward ward remittances have trebled to

nearly $1 billion in 2009-10-up from $ 9.6million in 2004-05.


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While travelling overseas, individuals cancarry up to $2000 ( capped at $10,000 for anentire year).

Individual can remit $100,000 a year, but onlyfor medical expenses.

Individual are allowed to carry rupee notes,

not more than Rs 7500, while leaving thecountry.


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Indian companies can borrow from overseas,

but there is restriction on end use of ECB. Companies can invest in acquisition or set up

subsidiaries overseas, up to 4 times their Networth.

NBFCs & Mutual funds are not allowed to setup subsidiaries overseas.

Indian businessmen who have propertiesoverseas can buy them with funds generated

from overseas business. Travelling businessmen are allowed to spend

up to $25,000.


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CAC : Defined as the freedom to convert localfinancial assets into foreign financial assets andvice versa at market determined rates of

exchange. (Tarapore committee 1997) In simple language what this means is that

CAC allows anyone to freely move from localcurrency into foreign currency and back.


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http://www.finmin.nic.in/the_ministry/dept_eco_affairs

Business India, 10thJan 2011


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The Momentous Decision

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