The Foreign Exchange Management Act, 1999 (“FEMA”) came to in force on 29th December 1999. It is a law related to foreign exchange with an objective to ease out the regulations related foreign payments or receipts and to develop & maintain foreign exchange.
In order to maintain a stable foreign exchange market, facilitate seamless external transactions, and promote the significance of the balance of payments, FEMA was enacted, these regulations allow the Indian government the power to implement foreign exchange policies that align with the nation's international trade policy, as well as the Reserve Bank of India (RBI) the right to impose rules.
Coverage of FEMA
FEMA Regulations mainly covers the following activities:
| Transaction between Residents and Non-Residents | Investments in India by Non- Resident | Overseas Investment by Resident |
| Freely permissible transactions related to current account subject to approvals, if required | RBI and Central Government regulations related to capital transactions | Realisation of export proceeds |
| Payment of imports | Repatriation of funds | Dealing in Foreign Exchange |
| Adjudication and Compounding of Offences | Investigation of Offences | Appeal |
Broadly speaking, FEMA covers wide range of concepts but the concepts which pertains to inflow and outflow of foreign currency are discussed in detail:
- Current Transactions
- Capital Transactions
- Export
- Imports
Current Transactions
Current Transactions means transactions which are not of capital nature and it includes following types of transactions:
- Expense related to foreign travel, abroad education, etc
- Payment outside India for living expenses of parents, spouse or children
- Remittances outside India in the ordinary course of business
- Payment of interest on foreign loans or income from investment in India
FEMA has laid various provisions in relation to current account transactions and such transactions are enlisted in three schedules:
- Schedule I- Transactions which are Prohibited
- Schedule II- Transactions which require prior approval of the Central Government
- Schedule III-Transactions which require RBI’s prior approval for drawal of foreign exchange
If any transaction that is not mentioned in the said schedules, then, such transaction can be freely undertaken.
Schedule I- Transactions which are Prohibited
Transactions for which drawal of foreign exchange is prohibited:
- Remittance out of lottery winnings.
- Remittance of income from racing/riding, etc., or any other hobby.
- Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes etc.
- Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies.
- Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
- Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco.
- Payment related to “Call Back Services” of telephones.
- Remittance of interest income on funds held in Non-resident Special Rupee Scheme a/c.
Schedule II-Prior Approval
Transactions, which require prior approval of the Government of India for drawal of foreign exchange:
| Purpose of Remittance | Ministry/Department of Govt. of India whose approval is required |
| Cultural Tours | Ministry of Human Resources Development (Department of Education and Culture) |
| Advertisement in foreign print media for the purposes other than promotion of tourism, foreign investments and international bidding (exceeding US$ 10,000) by a State Government and its Public Sector Undertakings | Ministry of Finance, Department of Economic Affairs |
| Remittance of freight of vessel charted by a PSU | Ministry of Surface Transport (Chartering Wing) |
| Payment of import through ocean transport by a Govt. Department or a PSU on c.i.f. basis (i.e., other than f.o.b. and f.a.s. basis) | Ministry of Surface Transport (Chartering Wing) |
| Multi-modal transport operators making remittance to their agents abroad | Registration Certificate from the Director General of Shipping |
| Remittance of hiring charges of transponders by (a) TV Channels (b) Internet service providers | Ministry of Information and Broadcasting Ministry of Communication and Information Technology. |
| Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping | Ministry of Surface Transport (Director General of Shipping) |
| Remittance of prize money/sponsorship of sports activity abroad by a person other than International/National/State Level sports bodies, if the amount involved exceeds US $ 100,000 | Ministry of Human Resource Development (Department of Youth Affairs and Sports) |
| Remittance for membership of P & I Club | Ministry of Finance (Insurance Division) |
Schedule III-Transactions which require RBI’s prior approval for drawal of foreign exchange
| Facilities for individuals | Facilities for persons other than individual |
| Individuals can remit upto USD 250,000: i. Private visits to any country (except Nepal and Bhutan) ii. Gift or donation. iii. Going abroad for employment iv. Emigration 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 viii. Studies abroad ix. Any other current account transaction The aforementioned remittances are specified as transactions under ?Liberalised Remittance Scheme-LRS? | Following remittances by persons require approval RBI: i. Donation exceeding 1% of the foreign earnings during 3 previous financial years or USD 5,000,000 whichever is less to education institutions outside India ii. Commission to agent abroad of USD 25,000 or five percent of inward remittance whichever is more on account of sale of residential plots or commercial plots in India iii. Consultancy fees exceeding USD 10,000,000 per project abroad in respect of infrastructure project iv. Consultancy services exceeding USD 1,000,000 per project, for the services procured from outside India. v. Payment on account of reimbursement of pre-incorporation expenses exceeding 5% of investment brought into India or USD 100,000 whichever is higher. |
| If in case the specified limits are crossed, then, the individual is required to take approval from RBI. | If in case the specified limits are crossed, then, the persons other individual is required to take approval from RBI. |
| In case of emigration, medical treatment abroad and studies abroad, the individual can make payment excess of the limit under LRS. |
Capital Transaction
Capital transaction means transaction which alter the nature:
- Assets or liabilities including contingent liabilities outside India of person resident in India;
- Assets or liabilities including contingent liabilities in India of persons outside India;
Such transactions are divided into the following categories:
- Permissible transaction, which are permissible in respect of persons resident in India and outside India.
- Restricted transaction on which restrictions cannot be imposed; and
- Prohibited transactions, which are prohibited.
Permissible transaction, which are permissible in respect of persons resident in India and outside India.
Schedule I
The list of permissible classes of transactions made by persons resident in India is:
- Investment by a person resident in India in foreign securities.
- Foreign currency loans raised in India and abroad by a person resident in India.
- Transfer of immovable property outside India by a person resident in India.
- Guarantees issued by a person resident in India in favour of a person resident outside India.
- Export, import and holding of currency/currency notes.
- Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India.
- Maintenance of foreign currency accounts in India and outside India by a person resident in India.
- Taking out of insurance policy by a person resident in India from an insurance company outside India.
- Loans and overdrafts by a person resident in India to a person resident outside India.
- Remittance outside India of capital assets of a person resident in India.
- Undertake derivative contracts
SCHEDULE II
The list of permissible classes of transactions made by persons resident outside India is:
- Investment in India by a person resident outside India
- 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 and export of currency/currency notes into/from India by a person resident outside India.
- Deposits between a person resident in India and a person resident outside India.
- Foreign currency accounts in India of a person resident outside India.
- Remittance outside India of capital assets in India of a person resident outside India.
- Undertake derivative contracts
Further, the transactions related to the followings can be entered with no restrictions:
- For amortisation of loan
- For depreciation of direct investments on ordinary course of business
Prohibited Transactions
No part of foreign exchange transactions exchange of USD 250000 can be used:
- For making remittance directly or indirectly to countries notified as non-cooperative countries and territories by Financial Action Task Force (FATF)
- Person resident outside India is prohibited from making investments in India in:
- business of chit fund;
- Nidhi Company
- agricultural or plantation activities;
- Real estate business, or construction of farm houses, It shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs)
- Trading in Transferable Development Rights
- No person resident in India can undertake capital account transaction if its not permissible from Government of India as it notifies from time to time.
In general, it can be said that one can undertake capital account transaction if it’s permitted by the law. Otherwise, approval from RBI would be needed.
Exports & Imports of Goods & Services
| Exports | Imports |
| Export means as any goods that are being taken out of India or provision of services to any person outside India. | Import means bringing of goods to India or availing services from a person located outside India. |
| FEMA prescribes the rules and regulations to be followed while making export such as: - Filing of Declarations - Filing of Softex Forms - Manner of payments | FEMA prescribes the rules and regulations to be followed while making import such as: - Settlement of payments - Requirement of import licenses - Import documentation |
| Realisation of export proceeds- Proceeds should be realised and repatriated to India within nine months | Payment: Payment for imports should be completed not later than six months from the date of shipment |
How SKMC can help you?
At SKMC Global, our goal is to make FEMA compliance simple for your business. Our FEMA Consultant expert’s team offer continuous support to keep your foreign exchange transactions in align with the rules and regulations of FEMA. We ensure that proper documentation is prepared and submitted before the deadline. FEMA rules can be tough to manage, but SKMC Global is here to help with a full range of services for getting hassle free compliances:
- Determining the residential status of the person
- Assistance in understanding the provisions of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) and obtaining necessary approval from RBI/Government of India.
- Assistance in understanding the Regulation involved in Foreign Exchange Transactions
- Assistance in understanding the procedural compliances under External Commercial Borrowings (ECBs)
- Providing complete guidance in Repatriation of Funds considering the regulations of FEMA
- Ensuring proper compliance are done in case of Inward Remittances and Outward Remittance Services, Foreign Exchange Transactions for Indian Residents and Investment by Non-Residents
- Assistance in Establishing Branches/Wholly Owned Subsidiaries (WOS) in India
Here's how we get involved:
Regulatory Advisory:
As a service provider, our team's first move is to provide advice on FEMA laws and how they relate to different investments and transactions. We support companies like yours in comprehending the regulatory environment and making sure that their operations adhere to FEMA regulations.
Documentation and Filing:
We help with the preparation and submission of necessary paperwork to the Reserve Bank of India (RBI) and other regulatory agencies. This covers reports, compliance statements, and applications for approval.
Transaction Support:
Our team goes above and beyond to assist the businesses in carrying out FEMA-regulated operations, including currency exchanges, overseas investments, and fund repatriations, while making sure that every transaction complies with applicable laws. To make sure all foreign exchange transactions & investments follow FEMA rules, our team performs thorough checks. This means confirming that the transaction is legal & that the proper approvals are in place.
Compliance Monitoring:
We offer ongoing monitoring to ensure all foreign exchange operations stay in line with FEMA rules. Our team keeps track of any changes to these rules & provides businesses with the right guidance. We help identify & reduce risks related to FEMA compliance, like legal issues or fines. This includes advice on how to manage & minimize compliance risks. Additionally, we assist with understanding the tax impact of foreign exchange transactions & help with financial planning to ensure maximum compliance & tax efficiency.
Legal Support:
We handle the legal frameworks and support your business in the event of conflicts or concerns pertaining to FEMA compliance. This includes providing representation in regulatory proceedings or aiding in the resolution of compliance-related problems.