Overview of FEMA PDF

INTRODUCTION TO FEMA
May, 2011
Shah & Modi
CHARTERED ACCOUNTANTS
Preamble to FEMA
Post liberalization (i.e.
(i e New Industrial policy of 1991) there
was need to remove shackles of regulatory and legal
provisions
Need to consolidate and amend the law relating to foreign
exchange with the objectives of facilitating external trade and
payments and for promoting the orderly development and
maintenance of foreign
g exchange
g market in India.
Need to take various steps to make New Industrial Policyworkable and meaningful.
Industrial licensing was made pragmatic and objective
objectiveoriented
It was decided to review provisions of Foreign Exchange
Regulation Act,
Act 1973 (FERA)
2
Shah & Modi
Preamble to FEMA
Intention was to bring
gp
provisions of FERA so as make it fall
in line with emerging trends of liberalization so as to remove
obstacles in the inward flow of foreign exchange and foreign
investment
Accordingly, on June 1, 2000, the Foreign Exchange
Management Act, 1999 (FEMA) brought in force to replace
the then existing FERA.
It is an act to manage the foreign exchange of India as
opposed to FERA which was enacted to regulate/control the
foreign exchange.
Shah & Modi
Structure of FEMA
Applies
pp
to the whole of India and all branches,, offices and
agencies outside India which are owned or controlled by a
person resident in India.
FEMA has 49 sections of which 9 ((section 1 to 9)) are
substantive and the rest are procedural/ administrative
Section 46 of FEMA grants power to Central Government to
makes rules to carry
y out the p
provision of FEMA
Section 47 of FEMA grants power to RBI to make regulations
to implement its provisions and the rules made there under
RBI is entrusted with the administration and implementation
of FEMA
Shah & Modi
Substantive Provision
Section 1 application
pp
and commencement of FEMA
Section 2 Important definitions like Authorized Person,
Person, Person Resident in India etc.
Section 3 Power to RBI for giving general or special
permission for transactions involving foreign exchange or
any receipt or payments between resident and non- resident
Section 4 Prohibits a person resident in India to acquire,
hold, own, possess or transfer any foreign exchange, foreign
security or immovable property situated outside India
except as provided in the Act
Section 5 - Permits any person to sell or buy foreign exchange
to or from an authorized person on account of any current
account transaction
5
Shah & Modi
Substantive Provision contd

Section 6 Selling
g or drawing
g foreign
g exchange
g to or from an
authorized dealer for capital account transactions
Section 7 Exporter of goods and services shall furnish
declaration to RBI or to any other authority
Section 8 Realization and repatriation of foreign exchange
Section 9 Exemption from realization and repatriation of
foreign exchange in certain cases
Shah & Modi
Some of the important definitions
Authorised Person
Capital Account Transaction
Current Account Transaction
E
Export
t
Foreign Exchange
Person
Person Resident in India
Person resident outside India
Repatriate to India
d
Security
Transfer
7
Shah & Modi
Implementation IT Act
A t visavis
i
i FEMA
Under Income Tax,, issue is of taxability
y of income which
is determined for the full year, therefore generally
amendments are annual
Whereas FEMA regulations are for undertaking
transaction (generally between Resident & Non
Resident) itself & therefore clarity at the time of
undertaking transaction is a must
Therefore amendments keep
p p
pace with changes
g taking
g
place in economy
Shah & Modi
Current and Capital Account Transaction

Capital Account transaction means a transaction which alters
assets or liabilities including contingent liabilities outside
India of person resident in India and vice-versa. Its a
economic definition rather than accounting or legal
definition.
Current Account transaction is transaction other than a
capital
it l accountt transaction.
t
ti
Current Account transactions are freely permitted unless
prohibited,- they are regulated by Central Government.
Capital Account transactions are prohibited unless generally
permitted- they are regulated by RBI.
Shah & Modi
Current and Capital Account Transaction

FEMA looks transaction from Balance of payment
p y
position of Country
Examples IImport off machinery
h
on payment off cash
h - Current
C
A/
A/c
transaction
Machinery is purchased on hire - Capital A/c transaction. There
i an obligated
is
bli
d to make
k future
f
payment to the
h non-resident
id
Consideration for goods & Services Current A/c transaction
Transaction represents a creation or acquisition of wealth
shares, loans or immovable properties Capital A/c transaction
10
Shah & Modi
Capital Account Transaction
RBI has been empowered under section 6(2) of FEMA to

specify, in consultation with the Central Government,
any class or classes of Capital account transactions
which are permissible [i.e. the transactions which are
not included under section 6(3)].
Section 6(3) of FEMA specifies the class of capital
account transactions which are regulated by RBI.
Every transaction listed in this section is regulated by a
corresponding notification
11
Shah & Modi
Capital Account Transaction contd

Sr.
No.
1
Transactions specified under section 6(3)
Corresponding Notification
Transfer or issue of any foreign security by Notification No. 120 dated July 7, 2004 Foreign
a person resident in India
Exchange Management (Transfer or Issue of Any
Foreign Security) Regulations, 2004
Transfer or issue of any

y security
y by
y a Notification No. 20 dated May
y 3, 2000 - Foreign
g
person resident outside India
Exchange Management (Transfer or Issue of Security
by a Person Resident Outside India) Regulations, 2000
Transfer or issue of any security or foreign Notification No. 2 dated May 3, 2000 - Foreign
security by any branch, office or agency in Exchange Management (Issue of Security in India by a
India of a person resident outside India
branch, office or agency of a person resident outside
India) Regulations, 2000
Any borrowing or lending in rupees in Notification No. 3 dated May 3, 2000 - Foreign
whatever form or by whatever name Exchange Management (Borrowing or Lending in
called
ll d
F i Exchange)
Foreign
E h
) Regulations,
R
l ti
2000
Any borrowing or lending in rupees in Notification No. 4 dated May 3, 2000 - Foreign
whatever form or by whatever name Exchange Management (Borrowing and Lending in
called between a person resident in India Rupees) Regulations, 2000
and
d a person resident
d
outside
d India
d
12
Shah & Modi
Capital Account Transaction contd

Sr.
No.
6
7
10
Transactions specified under section 6(3)
Corresponding Notification
Deposits between persons resident in Notification No. 5 dated May 3, 2000 - Foreign Exchange
India and persons resident outside India Management (Deposit) Regulations, 2000
Export, import or holding of currency or Notification No. 6 dated May 3, 2000 - Foreign Exchange
currency
y notes
Management
g
((Export
p
and Import
p
of Currency)
y)
Regulations, 2000
Transfer of immovable property outside Notification No. 7 dated May 3, 2000 - Foreign Exchange
India, other than a lease not exceeding Management (Acquisition and Transfer of Immovable
five years, by a person resident in India
Property outside India) Regulations, 2000
Acquisition or transfer of immovable Notification No. 21 dated May 3, 2000 - Foreign
property in India, other than a lease not Exchange Management (Acquisition and transfer of
exceeding five years, by a person resident Immovable Property in India) Regulations, 2000
outside India
Giving
Gi
i off a guarantee
t or surety
t in
i respectt N
Notification
tifi ti No.
N 8 dated
d t d May
M 3,
3 2000 - Foreign
F i Exchange
E h
of any debt, obligation or other liability Management (Guarantees) Regulations, 2000
incurred (i) by a person resident in India and
owed to a person resident outside India
(ii) by a person resident outside India
13
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Other important sections of FEMA

Section 6(4) a person resident in India may hold, own,
transfer or invest in foreign currency, foreign security or any
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
Section 6(5)
( )ap
person resident outside India may
y 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
person when he was resident in India or inherited from a
person who was resident in India
14
Shah & Modi
Notification under FEMA
RBI had initially issued 25 notifications, covering capital

accountt transaction
t
ti
prescribed
ib d in
i Sec
S
6(3) & certain
t i
miscellaneous provisions
15 related to capital account transactions, 1 on Export of
goods and services and 9 for other regulations
The same term may be defined differently in different
notifications
For eg. Person of Indian Origin (PIO) is defined differently in 3
notifications namely:
FEMA 13/2000-RB pertaining to remittance of assets
FEMA 21/2000-RB pertaining to the acquisition and transfer of
immovable property in India
FEMA 24/2000-RB pertaining to investment in a firm or proprietary
concern in India
15
Shah & Modi
Definition of PIO
Under FEMA 13/2000
/
((Remittance of Assets):)
'Person of Indian Origin' means a citizen of any country other than
Bangladesh or Pakistan if
a)) He
H att anytime
ti
h ld Indian
held
I di passport;
t or
b) He or either of his parents or any of his grand-parents was a
citizen of India by virtue of the Constitution of India or the
Citizenship Act, 1955 (57 of 1955); or
c) The person is a spouse of an Indian citizen or a person referred
);
to in sub-clause ((a)) or ((b);
16
Shah & Modi
Definition of PIO
Under FEMA 21/2000 ((Acquisition
q
immovable property in India):-
and
transfer
of
'Person of Indian Origin' means an individual (not being a citizen

of Pakistan or Bangladesh
g
or Sri Lanka or Afghanistan
g
or China or
Iran or Nepal or Bhutan), who
a) At any time, held India passport; or
b) who or either of whose father or mother or whose grandfather
or grandmother was a citizen of India by virtue of the
Constitution of India or the Citizenship Act, 1955 (57 of 1955)."
((Recently
y included vide Notification No.200 dated October 5,,
2009)
17
Shah & Modi
Definition of PIO
Under FEMA 24/2000 ((Investment in Firm or p
proprietary
p
y
concern in India):'Person of Indian Origin' means a citizen of any country other than
Bangladesh
g
or Pakistan or Sri Lanka,, if
a) He at any time held India passport; or
b) He or either of his parents or any of his grandparents was a
citizen of India by virtue of the Constitution of India or the
Citizenship Act, 1955 (57 of 1955); or
c) The person is a spouse of an Indian citizen or a person referred
to in sub
sub-clause
clause (a) or (b);
18
Shah & Modi
Notification under FEMA contd

Notification FEMA 1/2000-RB dated 3-5-2000:
Relates to permissible capital account transaction
Capital account transactions of a person may be classified
under the following heads, namely
namelyA. Transaction,
specified in Schedule I, of a person resident in India

B. Transactions, specified in Schedule II, of a person resident
outside India
Subject to the provisions of the Act or the rules or the

regulations or
directions or orders made or issued
thereunder,, any
yp
person may
y sell or draw foreign
g exchange
g to
or from an authorized person for a capital account transaction
specified in the Schedules
19
Shah & Modi

Schedule I: Classes of capital
p
account transactions of
persons resident in India
a) Investment by a person resident in India in foreign securities
b) Foreign currency loans raised in India and abroad by a
person resident in India
c) Transfer of immovable property outside India by a person
resident in India
d) Guarantees issued by a person resident in India in favour of a
person resident outside India
e) Export,
Export import and holding of currency/currency notes
f) Loans and overdrafts (borrowings) by a person resident in
India from a person resident outside India
20
Shah & Modi

g) Maintenance of foreign currency accounts in India and
outside India by a person resident in India
h) Taking out of insurance policy by a person resident in India
from an insurance company outside India.
i) Loans and overdrafts by a person resident in India to a
person resident outside India.
j) Remittance outside India of capital
p
assets of a p
person resident
in India.
k) Sale and purchase of foreign exchange derivatives in India
and abroad and commodity
y derivatives abroad by
yap
person
resident in India.
21
Shah & Modi

With effect from September
p
26, 2007, a resident individual may
y
draw foreign exchange up to USD 2,00,000 per financial year,
for a capital account transaction specified in this Schedule I
((Proviso to Reg.
g 4 ((a)).
))
If the drawal of foreign exchange by the resident individual
exceeds USD 2,00,000 per financial year, then the limits
specified
ifi d in
i the
th particular
ti l regulations
l ti
which
hi h are relevant
l
t to
t that
th t
particular transaction, shall apply to such drawal. (Proviso to
Reg. 4(a))
Note: No part of the foreign exchange drawn as per this
proviso shall be remitted to countries notified as noncooperative countries and territories by Financial Action Task
Force (FATF).
22
Shah & Modi

Schedule II: Classes of capital account transactions of
persons resident
id
outside
id India.
I di
a) Investment in India by a person resident outside India, that is
to say,
IIssue off security
it by
b a body
b d corporate
t or an entity
tit in
i India
I di and
d
investment therein by a person resident outside India; &
ii. Investment by way of contribution by a person resident outside
p
of a firm or a p
proprietorship
p
p concern or an
India to the capital
association of persons in India.
i
i.
b)
c)
d))
Acquisition and transfer of immovable property in India by

a person resident outside India.
Guarantee by a person resident outside India in favour of, or
on behalf of, a person resident in India.
Import
p
and export
p
of currency/currency
y
y notes into/from
India by a person resident outside India.
23
Shah & Modi

e) Deposits between a person resident in India and a person
resident
id t outside
t id India.
I di
f) Foreign currency accounts in India of a person resident
outside India.
g) Remittance outside India of capital assets in India of a person
resident outside India.
24
Shah & Modi
Prohibited Capital Account Transactions

No p
person resident outside India shall make investment
in India, in any form, in any Company or partnership
firm or proprietary concern or any entity, whether
incorporated
p
or not, which is engaged
g g
or p
proposes
p
to
engagei.
ii.
iii.
iv.
In the business of chit fund, or

As Nidhi Company,
p y, or
In agricultural or plantation activities, or
In real estate business, or construction of farm houses, or
For the p
purpose
p
of this regulation
g
real estate business shall not include
development of townships, construction of residential/commercial premises,
roads or bridges
v. In trading in Transferable Development Rights (TDRs)
25
Shah & Modi
Current Account Transaction

Current account transaction is a transaction other than a
capital account transaction
Current account transactions are governed by Foreign
Exchange Management (Current Account Transaction) Rules,
Rules
2000 ("Current Account Transactions Rules").
Current account transactions are divided into 3 schedules in
Current Account Transactions Rules:Schedule I Prohibited Transactions
Schedule II Transactions requiring
q
gp
prior approval
pp
of Government
of India
Schedule III Transactions requiring prior approval of RBI
26
Shah & Modi
Current Account Transaction contd

Some examples
p are:
Schedule I :
1. Remittance out of lottery winnings
2 Remittance of income from racing/riding etc.,
2.
etc or any other
hobby
3. Remittance for purchase of lottery tickets, banned/prescribed
magazines football pools,
magazines,
pools sweepstakes etc.
etc
Schedule II:
1. Cultural tours
2. Remittance of container detention charges exceeding the rate
prescribed by Director General of Shipping
27
Shah & Modi
Current Account Transaction contd

Schedule III:
1. Gift remittance exceeding US$ 5,000 per remitter/donor per
annum
2 Donation
2.
D
ti
exceeding
di
US$ 10,000
10 000 per remitter/
itt / donor
d
per
annum
3. Release of exchange for meeting expenses for medical
treatment abroad exceeding the estimate from the doctor in
India or hospital or hospital/doctor abroad.
Note: Drawal of foreign
g exchange
g by
y resident individuals
towards remittance of gift or donations as per this Schedule III
shall be within the limit specified under the proviso of Reg. 4
(i.e. US$ 2,00,000)
28
Shah & Modi
Residential Status under FEMA
Under FEMA residential status is of two types:

yp
Person resident in India

Under FERA citizenship was considered as deciding

factor
FEMA lays emphasis on 'residing' which denotes
permanency
29
Shah & Modi
Definition - Person Resident in India and

Person Resident outside India
Section 2(v)
( ) of FEMA defines 'person
p
resident in India' as:
(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
g up
p employment
p y
outside India,, or
(b) for carrying on outside India a business or vocation
outside India, or
((c)) for any
y other p
purpose,
p
in such circumstances as would
indicate his intention to stay outside India for an uncertain
period;
30
Shah & Modi

(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,
purpose in such circumstances as would
indicate his intention to stay in India for an uncertain period;
(ii) any person or body corporate registered or incorporated in

India,
(iii) an office, branch or agency in India owned or controlled by
a person resident outside India,
((iv)) an office, branch or agency
g
y outside India owned or
controlled by a person resident in India
( ) defines person
p
resident outside India to mean
Section 2(w)
a person who is not resident in India
31
Shah & Modi

Person to be resident in India, has to reside in India for more
than 182 days during the previous financial year
Exclusion to this is - if a person stays outside India for
employment, for vocation or for any other purpose for
uncertain period, then even if he has resided in India for
more than 182 days he will become a person resident outside
India
Moreover a person to be
b treated
d as person resident
d
in India
d
he has to satisfy not only the condition of period of stay (i.e.
182 days) but has to also comply with the conditions of the
'purpose' of stay i.e.
i e for taking up employment,
employment carrying on
business or vocation in India or for any other purpose which
would indicate his intention to stay in India for an uncertain
period
32
Shah & Modi

RBI may ignore the arithmetic condition (i.e. of 182 days) and
treat the person who comes to or stays in India for any of the
three purposes set out in section 2(v)(i)(B) as person resident
in India even though he may not have resided in India for a
period
i d off 182 days
d
or more during
d i
th preceding
the
di
fi
financial
i l
year. However legal tenability of such a view cannot be said
to be free from doubt.
RBI has
h
a very narrow approach
h towards
t
d non resident
id t
acquiring immovable property in India. It gives a weighted
significance to the arithmetic condition of staying in India for
more than 182 days during the preceding financial year.
year
(FAQs on Acquisition and Transfer of Immovable Property
in India by a person resident outside India issued by RBI)
33
Shah & Modi
FAQs on acquisition of Immovable

Property in India
Q.37- What is meant by a person resident in India?

A.37 - Under FEMA, a person resident in India is defined as a person
residing in India for more than one hundred and eighty-two days during
the course of the preceding financial year (April-March) and who has
come to or stays in India either for taking up employment, carrying on
business or vocation in India or for any other purpose, that would
indicate his intention to stay in India for an uncertain period. In other
words, to be treated as `a person resident in India' under FEMA, a person
has not only to satisfy the condition of the period of stay (being more
than 182 days during the course of the preceding financial year) but has
also to comply with the condition of the purpose / intention of stay
Q.39 - who can determine whether a person is resident in India or not?

A.39 - Reserve Bank does not determine the residential status. Under
FEMA, residential status is determined by operation of law. The onus is
on an individual to prove his / her residential status,
status if questioned by
any authority
34
Shah & Modi
Deposits By Non-residents
Deposit,
p
a capital
p
account transaction referred to in
section 6(3)(f) and sub-section (2) of sec. 47 of FEMA,
includes deposit of money with a bank, company,
proprietary
p
p
y concern, p
partnership
p firm, corporate
p
body,
y
trust or any other person.
Acceptance of deposits by an authorized dealer/bank
from persons resident outside India would be as under:
- Non-resident (Ordinary) Account Scheme (NRO Account)
- Non-resident (External) Account Scheme (NRE Account)
- Foreign Currency (Non-resident) Account Banks Scheme
(FCNR(B) Account)
35
Shah & Modi
Deposits By Non-residents contd

PARTICULARS
FCNR(B) ACCOUNT
NRE ACCOUNT
NRO ACCOUNT
(Individuals
of
Who can open an NRI
Bangladesh / Pakistan
account?
nationality / ownership
requires prior approval
of RBI)
NRI (Individuals of
Bangladesh / Pakistan
nationality / ownership
requires prior approval
of RBI)

[other than a person resident
in
Nepal
and
Bhutan]
(Individuals / entities of
Bangladesh
/
Pakistan
nationality / ownership as
well as erstwhile Overseas
Corporate Bodies requires
prior approval of RBI)
Repatriable / Non- Repatriable

repatriable
Repatriable
Non-Repatriable (Except (i)

current income and (ii) under
USD 1 million scheme per
financial year)
Type of account
Term deposits only
Current,
Savings, Current, Savings, Recurring or
Recurring
or
Fixed Fixed Deposit Accounts
Deposit Accounts
Joint accounts
2 or more NRI of Indian 2 or more NRI of Indian Jointly with residents

nationality or origin
nationality or origin
36
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PARTICULARS
FCNR(B) ACCOUNT
NRE ACCOUNT
NRO ACCOUNT
Nomination
Permitted
Permitted
Permitted
Currency
in
which
account
denominated
GBP, USD, JPY, EURO,

CAD and AUD
Indian Rupees
Indian Rupees
Operations
by
Power
of
Attorney (POA)
in favour
f
off a
resident by the
non-resident
account holder
Operation
in
the
account in terms of POA
is
restricted
to
withdrawals
hd
l
f
for
permissible
local
payments or remittance
to the account holder
himself
se tthrough
oug normal
o a
banking channels.
Operation
in
the
account in terms of
POA is restricted to
withdrawals
hd
l
f
for
permissible
local
payments
or
remittance
to
the
accountt holder
accou
o de himself
se
through
normal
banking channels.
Operations in the account in

terms of POA is restricted to
withdrawals for permissible
l l payments in rupees,
local
remittance of current income
to the account holder outside
India or remittance to the
accountt
accou
holder
o de
himself
se
through normal banking
channels.
Remittance
is
subject to the ceiling of USD
1 million per financial year.
37
Shah & Modi

PARTICULARS
FCNR(B) ACCOUNT
Permissible
Credits
Remittance in permitted
foreign
currency,
proceeds of foreign
currency / bank notes
tendered
during
temporary visit to India,
transfer from other NRE
/ FCNR account etc.
Permissible
Debits
Local
disbursements,
remittance
outside
India, transfer to other
NRE / FCNR account
etc.
NRE ACCOUNT
Remittance
in
permitted
foreign
currency, proceeds of
foreign currency /
bank notes tendered
during temporary visit
to India, transfer from
other NRE / FCNR
account etc.
Local disbursements,
remittance
outside
India, transfer to other
NRE / FCNR account
etc.
38
NRO ACCOUNT
Remittance in permitted
foreign currency, Deposit by
account
holder
during
temporary visit to India,
Transfer from rupee account
of non-resident banks, Dues
in India of accountholder
Local
rupee
payments,
Remittance outside India of
current income in India (net
of taxes)
Shah & Modi

PARTICULARS
FCNR(B) ACCOUNT
Loan to the Rupee Loan account
India - Upto Rs. 10
holders
million
NRE ACCOUNT
Rupee Loan India million
Upto
Rs.
NRO ACCOUNT
Rupee Loan 10
India - Permitted
Outside India Not
permitted
Outside
India
Permitted provided no
funds are remitted back
to India and are used
abroad only
Outside India Permitted

provided no funds are
remitted back to India
and are used abroad only
Foreign Currency Loan in

India -

India -
Foreign Currency Loan

in India -
Not permitted
Not permitted
Upto Rs. 10 million
39
Shah & Modi

PARTICULARS
Loan to the
L
h
account
holders
(contd.)
FCNR(B) ACCOUNT
NRE ACCOUNT
NRO ACCOUNT
P
Purpose
P
Purpose
P
Purpose
In India
In India
In India
For personal purpose or

business purpose except
for
relending
or
agricultural / plantation
activity or for investment
in real estate business
For personal purpose or

business purpose except for
relending or agricultural /
plantation activity or for
investment in real estate
business
F
For direct
di t investment
i
t
t in
i
India in firms / companies
on non-repatriation basis
F
For direct
di t investment
i
t
t in
i
India in firms / companies
on non-repatriation basis
For purchase of flat in

India for own residential
purpose
For purchase of flat in India

for own residential purpose
For
personal
purpose
or
business purpose
except
for
relending
or
agricultural
/
plantation activity
or for investment
in
real
estate
business
Outside India
Fund based or non-fund

based facilities for bonafide
purposes

based
facilities
for
bonafide purposes
Outside India
40
Outside India
Not permitted
Shah & Modi

PARTICULARS
FCNR(B) ACCOUNT
Loan to Rupee Loan third parties
India - Upto Rs. 10
million
NRE ACCOUNT
Rupee Loan India million
Upto
Rs.
NRO ACCOUNT
Rupee Loan 10
India - Permitted
Outside India Not
permitted
Outside
India
Permitted provided no
funds are remitted back
to India and are used
abroad only
Outside India Permitted

provided no funds are
remitted back to India
and are used abroad only

India -

India -
Foreign Currency Loan

in India -
Not permitted
Not permitted
Not permitted
41
Shah & Modi

PARTICULARS
Loan to
L
third parties
(contd.)
FCNR(B) ACCOUNT
NRE ACCOUNT
NRO ACCOUNT
P
Purpose
P
Purpose
P
Purpose
In India
In India
In India
Fund based and / or nonfund based facilities for

personal
purposes
or
business purposes except
for
relending
or
agricultural / plantation
activity or for investment
in real estate business
Fund based and / or nonfund based facilities for

personal
purposes
or
business purposes except
for relending or agricultural
/ plantation activity or for
investment in real estate
business
Outside India
Outside India

based
facilities
for
bonafide purposes

based facilities for bonafide
purposes
For
personal
purpose
or
business purpose
except
for
relending
or
agricultural
/
plantation activity
or for investment
in
real
estate
business
42
Outside India
Not permitted
Shah & Modi
Income exempt for NRIs

Sec. 10 (4) (ii) Interest on NRE Account (w.e.f. A.Y.1991-92)
Conditions:
Account should be maintained as per FEMA
Person should be Person Resident Outside India as per FEMA
Available only to Individuals & not to HUF
Sec. 10(15)(iv)(fa)- Interest on deposits made in foreign currency
Conditions:
Deposits in foreign currency (will include Resident Foreign
Currency (RFC) deposits and FCNR(B) deposits.)
Available to individuals and HUFs who are either Non Resident or
Resident But Not Ordinarily Resident in terms of Sec. 6(6)
Account should be with SBI or Scheduled Bank
43
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Inbound Investments
Shah & Modi
Background
FDI p
policy
y is formulated by
y Government of India
FEMA regulations prescribe the mode of investments
i.e. manner of receipt of funds, issue of
shares/convertible
h
/
tibl debentures
d b t
and
d preference
f
shares
h
and reporting of the investments to RBI
45
Shah & Modi
Inbound Investments - Process
Investor
(Other than
citizen &
entity of
Pakistan))
NRI
NonResident
Proposed
p
Activity in
India
Prohibited
Activities
Approval
Route
Automatic
Route
Mode of
Remittance
NRE
Inward
Remittance
46
Procedural
Compliance
at the time
of
Investment
Annual
Compliance
Shah & Modi
Inbound Investments - Overview
Inbound Investments
Corporate
Entity
Fresh Investment
FDI, Portfolio
Investment,
FVCI,
Investment on
non-repatriation
basis, Investment
in securities other
than shares &
debentures
Partnership
firm/
Proprietary
concern
Limited
Liability
Partnership
Venture
Capital Fund
Establishment of
Branch / Liaison
/ Project office
Transfer of
existing
shares
To NonResident
By Non
NonResident
47
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Inbound Regulations
Broad Framework
Inbound investment in India is governed by the Foreign

E h
Exchange
M
Management
(T
(Transfer
f or Issue
I
off Security
S
i by
b a Person
P
Resident Outside India) Regulations, 2000 ("Inbound
Regulations") and Consolidated FDI Policy issued by DIPP.
Inbound Regulations provides for the following schemes for
inbound investment in India.
Schedule 1
Schedule 2
Schedule 3
Schedule 4
Schedule 5
Schedule 6
: Foreign Direct Investment (FDI) Scheme

: Investment in shares / debentures by
y FII under Portfolio
Investment Scheme
: Portfolio Investment Scheme for NRI (Repatriable)
: Investment Scheme for NRI (Non-repatriable)
: Investment Scheme for securities other than share /
convertible debentures
: Investment Scheme for Foreign Venture Capital
Undertaking
48
Shah & Modi
Inbound Regulations
B d Framework
Broad
F
k
Regulation 4 Except as provided in FEMA or Rules or
Regulations made thereunder,
thereunder an Indian entity shall not issue
any security to any person resident outside India or record in its
books any transfer of security from or to such person.
Regulation 5 - prescribes various schemes under inbound
investment for NR and NRIs
Regulation 6 & 7 - Acquisition of Right Shares & under
merger/de merger
merger/de-merger
Regulation 8 - Issue of shares under ESOP
g
9 & 10 - p
provisions relating
g to transfer of shares
Regulation
by/to Non Resident
Regulation 11 - Repatriation of sale proceeds
49
Shah & Modi
FDI Scheme Corporate Entity
Types of instruments permitted
Equity Shares; Fully, compulsorily and mandatorily convertible

debentures; and Fully, compulsorily and mandatorily convertible
preference shares
Remittance received via issuance of Depository Receipts (DRs) and

Foreign Currency Convertible Bonds (FCCBs) are treated as FDI
Other types of Preference shares/Debentures i.e. non-convertible,

optionally
ll convertible
bl or partially
ll convertible
bl are considered
d d as
debt and accordingly all norms applicable for External Commercial
Borrowings (ECB) applies to such instruments.
Citizens of Pakistan or entities of Pakistan are prohibited from

making investment in India
Citizens & entities of Bangladesh are allowed with approval of

FIPB
50
Shah & Modi
FDI Scheme
FDI Scheme is divided into 3 parts:
p
Prohibited Sectors - Sectors/activities where FDI is prohibited
Approval Route - Sectors/activities which require Approval from

Government i.e. SIA or FIPB -
Automatic Route - Sectors/activities which require procedural

compliance and intimation to RBI without any approval
51
Shah & Modi
FDI Scheme Prohibited sectors

Paragraph 5.1 of Consolidated FDI Policy:
Retail Trading (except single brand product retailing)
Lottery Business including Government /private lottery, online lotteries
etc.
Gambling and Betting including casinos etc.
Business of chit fund
Nidhi company
Trading in Transferable Development Rights (TDRs)
Real
R l Estate
E t t Business
B i
or Construction
C
t ti off Farm
F
H
Houses
Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of
tobacco substitutes
Activities / sectors not opened
p
to p
private sector investment including
g
Atomic Energy and Railway Transport (other than Mass Rapid Transport
Systems).
Besides above foreign investment in any form, foreign technology collaboration in any
form including licensing for franchise,
franchise trademark,
trademark brand name,
name management contract is
also completely prohibited for Lottery Business and Gambling and Betting activities.
52
Shah & Modi
FDI Scheme Automatic Route

In those sectors/activities
/
listed under p
paragraph
g p 5.2 of
Consolidated FDI Policy, where FDI upto limit specified
against each sector /activity is allowed/permitted under
automatic route subject
j
to other conditions indicated &
security conditions where applicable.
FDI is permitted upto 100% under the automatic route, in
sectors/activities not listed in paragraph 5.2 of Consolidated
FDI
Policy,
subject
to
applicable
laws/sectoral
rules/regulations/security conditions.
General permission is available for issue of shares/preference
shares against conversion of ECB (excluding those deemed as
ECB) lump sum technical know-how fee, royalty, subject to
entry route,
route sectoral cap and pricing guidelines and
compliance with applicable tax laws.
53
Shah & Modi
FDI Scheme Approval Route

In those sectors/activities
/
listed under p
paragraph
g p 5.2 of
Consolidated FDI Policy, where FDI upto limit specified
against each sector /activity is allowed/permitted under
approval
pp
route subject
j
to other conditions indicated &
security conditions where applicable
Proposals falling outside sectoral policy/cap
Any industrial undertaking manufacturing items reserved for
the MSE sector would require Government approval where
foreign investment is more than 24% in the capital
Issue of equity shares import of capital goods/ machinery/
equipment (including second-hand machinery) and preoperative/ pre-incorporation expenses (including payments
of rent etc.)
etc ) subject to pricing guidelines of RBI and
appropriate tax clearance and other specified conditions.
54
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FDI Scheme Other Provisions

Pricing Guidelines - Issue Price shall not be less than
Listed Company- price as per SEBI guidelines
Unlisted Company price as per Discounted Free Cash Flow (DCF)
method
Mode of payment for inbound investment
Inward remittance through banking channels
Debit to NRE/FCNR (B) Account
Capitalization of lumpsum fee, royalty and ECBs (other than import
dues deemed as ECB or Trade Credit)
Capitalization of import of capital goods/ machinery/ equipment
(including second-hand machinery) and pre-operative/ preincorporation expenses (including payments of rent etc.)
55
Shah & Modi
Portfolio Investment on repatriation / nonrepatriation basis by NRIs Schedule 3
Limit of 5% by single NRI, 10% by all NRIs (this can be increased to

24%) to be
b maintained
i i d
Payment for purchase to be made by way of inward remittance
through normal banking channels or out of funds held in
NRE/FCNR(B) account or NRO account (only in case of non
repatriable investment)
Only delivery based purchase and sale permitted
Shares purchased under PIS cannot be transferred under private
arrangements or by way of gift to person resident in India or
outside India without prior approval of RBI
Gift to relatives defined in Section 6 of Companies

p
Act,, 1956 or to
charitable trust in India is permitted without RBI approval
OCBs are not permitted after 29/11/2001 to invest in PIS
56
Shah & Modi
Investment in shares and debentures on nonrepatriation basis by NRIs Schedule 4
Scheme applies to investment other than Portfolio Investments

NRIs may acquire without any limit, shares under public issue,
private placement or right issue
Payment for purchase to be made by way of inward remittance
through normal banking channels or out of funds held in
NRE/FCNR(B) account or NRO account
Not permitted - investment in companies engaged in chit
f d/ idhi agricultural/plantation
fund/nidhi,
i lt l/ l t ti
or reall estate
t t business
b i
or
construction of farm house or dealing in TDRs
57
Shah & Modi
Investment in Securities other than shares or

debentures by Non
Non-Resident
Resident Schedule 5
Scheme available to FIIs & NRIs
Investment on repatriation basis in
dated Govt., securities/treasury bills, NCD issued by Indian
company and units of domestic MF
other conditions on FII for composition of investment and
registration with SEBI
NRIs can also invest in shares of Public Sector enterprise

in disinvestment process and in bonds of Public Sector
Undertaking in India
Investment on non repatriation basis by NRIs in also
units of money market funds in India or National
g Certificates
Plan/Saving
58
Shah & Modi
Procedure under Automatic Route

Intimation to RBI through Authorized Dealer:
within 30 days from receipt of funds in the Advance Reporting Form

to be filed along with copy of FIRC and KYC Report (in prescribed format)
on the non-resident investor
R
Reporting
ti off issue
i
off shares:
h
Shares shall be issued within 180 days from the date of from the date of
receipt of fund (from the date of receipt of the inward remittance or date of
debit to NRE/FCNR(B)
/
( ) account))
If the shares are not issued within 180 days, then amount received shall be
refunded back
Refund / allotment of shares beyond a period of 180 days from the date of
p of fund may
y be considered by
y RBI, on the merits of the case.
receipt
Report to be filed in Part A of form FC-GPR within 30 days from the date of
issue of shares alongwith valuation certificate and certificate from the
Company Secretary for compliance of Companies Act, 1956
Annual Return in shall be filed in the revised format by 15tth July every year
59
Shah & Modi
Procedure under Approval Route

Applications
pp
for NRI investment, Export
p
Oriented Units
and Retail Trading (Single Brand) should be submitted
to SIA in DIPP
Applications for FDI other than above should be
submitted to FIPB unit, Department of Economic
Affairs, Ministry of Finance
Application
A li ti in
i Form
F
FC IL
FC-IL
60
Shah & Modi
Investment in Limited Liability

Partnership (LLP)
Permitted under approval
pp
route
Allowed in sectors/activities with 100% FDI under the
automatic route and where there are no FDI-linked
performance related conditions
LLP should not undertake - Print Media, Agricultural/
Plantation & real estate business
Not allowed to make downstream investment
Investment shall be brought in cash by way of inward
remittance or by debit to NRE/FCNR account
Not allowed to avail ECBs
61
Shah & Modi
Investment in Partnership Firm or

Proprietary concern
Permitted to NRIs/PIOs
PIOs who are not citizen of Bangladesh, Pakistan or Sri
Lanka
Firm
Fi
should
h ld nott undertake
d t k - Print
P i t Media,
M di Agricultural/
A i lt
l/
Plantation & real estate business
Capital
p
invested cannot be repatriated
p
Income can however be repatriated
62
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Investment in Venture Capital Fund

(VCF)
Allowed under automatic route in VCF set-up
p as a
company under the Companies Act, 1956
Investment in VCF set up as a trust is allowed only
under
d approvall route
t
63
Shah & Modi
If y
you learn onlyy methods you
y will
be tied to your methods,
but if you learn principles you can
device your own methods.
methods

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INTRODUCTION TO FEMA

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Substantive Provision contd

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Some of the important definitions

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Current and Capital Account Transaction

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Current and Capital Account Transaction

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Capital Account Transaction

RBI has been empowered under section 6(2) of FEMA to

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Capital Account Transaction contd

Transactions specified under section 6(3)

Transfer or issue of any

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Capital Account Transaction contd

Transactions specified under section 6(3)

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Other important sections of FEMA

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Notification under FEMA

RBI had initially issued 25 notifications, covering capital

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'Person of Indian Origin' means an individual (not being a citizen

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Notification under FEMA contd

specified in Schedule I, of a person resident in India

Subject to the provisions of the Act or the rules or the

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Notification under FEMA contd

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Notification under FEMA contd

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Notification under FEMA contd

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Notification under FEMA contd

Acquisition and transfer of immovable property in India by

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Notification under FEMA contd

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Prohibited Capital Account Transactions

In the business of chit fund, or

v. In trading in Transferable Development Rights (TDRs)

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Current Account Transaction

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Current Account Transaction contd

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Current Account Transaction contd

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Residential Status under FEMA

Under FEMA residential status is of two types:

Person resident in India

Under FERA citizenship was considered as deciding