In this article, Shreya Saraiya who is currently pursuing Diploma in Entrepreneurship Administration and Business Law from NUJS, Kolkata, discusses The legal framework governing foreign exchange transactions.

Foreign Exchange Regulations in India

The regulatory regime with respect to foreign exchange is majorly governed by the Foreign Exchange Management Act, 1999 and the regulations; power under this Act has been derived from various entries in the Union List. In the earlier scenario, the foreign exchange in India was governed by the Foreign Exchange Regulation Act, 1973 (FERA). However, with the objective to consolidate and amend the foreign exchange related law for the facilitation of external trade and payments and to promote systematic development and maintenance of Forex market in India, the FERA was repealed by the new Act namely Foreign Exchange Management Act,1999. Moreover, the changed circumstances in relation to the foreign exchange market compelled the Government of India to repeal the above Act (FERA) and formulate the new Act, suiting to the requirements of the prevailing environment. The major aim of the Act is the promotion of exports and imports and brings in ease in the transactions pertaining to the external trade.

Under the earlier Act (FERA), it was required to take the permission of Reserve Bank of India either special or general regarding the various regulations as laid under the Act. However, a change has been observed under the new Act (FEMA) for which no permission is required to be taken from the RBI, except under the section 3 of the instant Act. There has been observed a transition from the phase of permissions to the regulations. This changed scenario is depicted in the Preamble of FEMA,1999 which states that the Act aims for consolidation and amendment of the law relating to the foreign exchange, keeping under consideration the following objectives- facilitation of the external trade and payments and promotion of the orderly development and maintenance of the foreign exchange market.

It was noticed that the approach pertaining to the dealing with the foreign exchange transactions underwent a change from the conservation of foreign exchange to the facilitation of trade and payments as well as the development of orderly Forex market. The section 5 of the Act facilitates the external trade by removing the restrictions on drawal of foreign exchange for undergoing the current account transactions as it provided for no need of seeking the permission of the RBI in the cases of the remittances involving external trade. The removal of the restrictions on the current account transactions was important as the notice was given to the International Monetary Fund (IMF) regarding the attainment of Article VIII status. However, the Central Government was given the power to impose restriction in consultation with the Reserve Bank of India for the purpose of securing interests of the public at large. The control on the exports is retained through Section 7.

As already mentioned, FEMA was enacted leading to the replacement of FERA due to the major reason that the latter became obsolete due to the changed scenario with respect to the foreign exchange. The Indian economy was facing the crisis situation in which the foreign exchange became the part and parcel for the survival of the country. There are 49 sections, of which 12 sections are operative in nature while the rest of the sections are contraventions, penalties, appeals, enforcement etc. The new Act (FEMA) has led to the reduction in the restrictions on the foreign exchange transactions relating to the trade in goods and services, with the exception of the power which has been provided to the Central Government to impose restrictions in the interest of the public.

Objectives and Extent of FEMA

As above mentioned, the broad objective of the new Act is to bring out the ease in the Foreign Exchange transactions. The Act is applicable to whole of the India, to the branches, agencies and offices outside India which is owned or controlled by a person resident in India and also covers any contravention committed under this Act by the person outside India. Therefore, this Act is extra-territorial as it applies to person even outside India if he/she falls under the ambit of this Act. Let us highlight the situations in which general permission of RBI is required for undergoing the transactions –

• Dealing in or transferring any foreign exchange or security to any person not being an authorised person.
• For the purpose of making any payment or for the credit of any person who is residing outside India in any manner.
• Receiving from a person resident outside India any payment, not through an authorized person.
• The current account transactions can be reasonably restricted as per the prescribed restrictions. The foreign exchange can be sold or drawn by any person to or from an authorized person for a Capital Account transaction.

The Reserve Bank of India may, specify after consulting with the Central Government, lay down the specifications regarding –

• The permissible class or classes of Capital Account transactions.
• The admissible limit up to which the foreign exchange shall be allowed for such transactions.

However, the restrictions can be imposed by the Reserve Bank of India on the withdrawal of foreign exchange for paying for the sums which are due on the account of authorization of loan or for investments which are direct in nature being made in the ordinary course of business.

The regulations can be imposed by the RBI, through the necessary restrictions or prohibitions in on the following matters –

• The person to whom any transfer or issue of any foreign security is made who is a resident outside India.
• The person to whom any transfer or issue of any foreign security is made who is a resident in India.
• The transfer or issue of any foreign security by any branch, office or agency in India of a person resident outside India.
• The borrowing or lending of foreign exchange in any orm or with any name.
• The borrowing or lending in rupees between a person resident outside India and person resident inside India in whatever form or by whatever name called.
• Any form of the deposits between a person resident inside India and a person resident outside India.
• Currency or currency notes if they are exported, imported or are being held.
• If the person resident in India transfers any immovable property outside India, other than lease not exceeding five years.
• If the person resident outside India acquires or transfers any immovable property in India, other than the lease not exceeding five years.
• When any guarantee or surety is provided with respect to any debt or any other liability incurred by a person who is a resident of India and who owes to a person who is resident outside India or by a person resident outside India.

Any transfer of or investment in the foreign currency or security can be made by a person, resident in India who may hold or own the immovable property when such a property is situated outside India when he was residing outside India or he inherited the property from the person residing outside India. Any investment can be made in the Indian currency in immovable property or Indian currency or security which is held, owned or transferred by any person resident outside India in case when such currency, security or property was acquired, held or owed by such a person when he was a resident in India or is inherited from a person who was a resident in India.

Any regulation can be passed by the RBI for the purpose of prohibiting, or regulating the establishment in India of a branch, office or other place of business by a person resident outside India, for undergoing any activity relating to such a branch, office or other place of business. The person who exports goods or services must comply to the following requirements –

• He must provide a declaration as per the prescribed form to the RBI or any authority. Such a declaration must contain true and correct particulars, the amount representing the full export value must be included or if such a value cannot be ascertained, the value can be decided by the exporter who may decide considering the prevailing market conditions, who expects will receive the amount on the sale of goods in the market.
• He must also furnish any such information as may be required by the RBI for ensuring the realization of the export proceeds by such exporter.

The RBI may give the direction to any exporter to comply with the requirements as it deems with for the purpose of ensuring the full export value or the value as determined by RBI, according to the market conditions. The RBI may also lay down the specifications in the case when any foreign exchange is due or has accrued to any person resident in India where the person will have to take all the reasonable steps to realize and repatriate to India such foreign exchange with the period prescribed. The RBI plays a very important role in managing the transactions with respect to foreign exchange in India.