CA Final Course Paper 4 Corporate and Allied Laws
Chapter 18
CS.R Sridhar
Comparison of FEMA and FERA provisions
Important Definitions
Residential Status
General prohibition in dealing in foreign exchange
Current Account Transactions
Capital Account Transactions
Acquisition and transfer of immovable property in India and outside India
Export of Goods and Services
Realisation and repatriation of foreign exchange
Contraventions and penalties
Compounding of offences
Adjudication and Appeal
Enforcement Directorate
2
Basis
FERA
FEMA
Focus
Regulation of foreign
exchange transactions
Management of foreign
exchange transactions
Regulates
All transactions between
residents and non
residents (whether
current account or capital
account)
Only Capital Account
transactions are regulated.
Current account transactions
are generally free subject to
reasonable restrictions
Mens Rea
Presumed
Not presumed
Nature of offence Criminal
Civil
Compounding
No such powers
Specific provisions provided
for compounding of offences
through the Directorate of
Enforcement
Right of accused
Cannot take
Can take such assistance
practitioner/CA assistance
3
Act
Rules
• Notified by the Central Government
• To carry out the provisions of the Act
• Restrictions on Current Account Transactions
• Manner of Compounding of contraventions
Regulations • Notified by the RBI
• To carry out provisions of the Act and the Rules
Regulation of capital account transactions
The class of transaction as permissible
The limit upto which foreign exchange shall be admissible for the
transaction.
• Manner of repatriation and possession of Foreign Exchange
• Foreign Currency Accounts by residents
•
•
•
Circulars
• Directions by the RBI
• To the Authorized Dealers
• For securing compliance with the Act, Rules and
Regulations
4
Capital Account transactions
Current account transactions
Authorised person
Foreign exchange
Foreign security
Person resident in India
Transaction which alters assets or liabilities (including contingent
liabilities)
• Outside India of persons resident in India or
• In India of persons resident outside India
Includes following transactions •
•
•
•
•
•
•
Transfer/ issue of foreign security by an Indian resident
Transfer/ issue of security by a non-resident
Borrowing/ lending in foreign exchange/ Indian Rupees
Deposits
Export/ import of currency
Cross border transactions in immovable properties
Giving guarantees to non-residents/ in connection with cross border liabilities
6
A transaction other than a capital account transaction.
Includes following payments/ remittances –
• foreign trade, other current business, services
• short-term banking and credit facilities in the ordinary course of
business,
• interest on loans
• net income from investments,
• living expenses of parents, spouse and children residing abroad,
• foreign travel, education and medical care of parents, spouse
and children;
7
Authorized Person: Sec. 2(c) read with Sec.10(1) : Means a person authorised to deal in
foreign exchange / securities by the Reserve Bank of India and includes:
•
•
•
•
1. Authorised Dealer;
2. Money Changer;
3. Off-Shore Banking Unit; or
4. Any other person for the time being authorised u/s 10(1)
Foreign Exchange : Sec. 2(n) : Means any currency other than Indian currency and
includes:
• Deposits, credits and balances payable in any foreign currency;
• Drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable
in any foreign currency;
• Drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside
India, but payable in Indian currency;
Foreign security : Sec 2(o) : Means any security, in the form of
•
•
•
•
•
•
shares,
stocks,
bonds,
debentures or
any other instrument denominated or expressed in foreign currency and
includes securities expressed in foreign currency (even where redemption or any form of return such as interest or
dividends is payable in Indian currency);
8
Individual:
• If he resides in India for more than 182 days during the preceding financial year but excludes –
• (A) a person who has gone out of India or stays outside India–
• for or on taking up employment outside India, or
• for carrying on business or vocation outside India, or
• for any other purpose, in such circumstances as would indicate his intention to stay outside
India for an uncertain period;
• (B) a person who has come to or stays in India, otherwise than –
• for or on taking up employment in India, or
• for carrying on business or vocation in India, or
• for any other purpose, in such circumstances as would indicate his intention to stay in India for
an uncertain period;
Any other person or body corporate if it is registered/ incorporated in India
Office, branch or agency in India owned or controlled by a non resident
Office, branch or agency outside India owned or controlled by a resident
9
Period of stay: Individual
Year
1
2
3
200 days
in India
4
5
In India
165 days
outside
India
Questions
What is the residential status of the individual as on :
•
•
•
•
•
Year 1 (April) ?
Year 1 (November)?
Year 2 and 3 ?
Year 4 ?
Year 5 ?
Slide 10
Purpose of stay : Individual
Q.Is citizenship relevant for determining residential status?
• Q. From the following examples determine whether a person is a resident or non
resident :
• A person comes to India for taking up employment in India?
• A person goes out of India for taking up employment outside India?
• A person goes out of India to study abroad ?
• A person comes to India to study in India?
• A person who comes as a tourist to India?
Residential status : Corporates
• Q. From the following examples determine whether a person is a resident
or non resident :
• Branch of an Indian company abroad?
• Branch of a foreign company in India?
11
Section 3 : Charging section:
Except as provided in FEMA or with general or special
permission of the Reserve Bank of India no person shall –
• deal in or transfer any foreign exchange or foreign security to any
person not being an authorized person;
• make any payment to or for the credit of any person resident outside
India in any manner;
• receive otherwise through an authorized person, any payment by order
or on behalf of any person resident outside India in any manner;
12
Schedule I
Schedule II
Schedule III
Current account transactions split into three categories
Prohibited – Schedule I Items & Transactions with Nepal/
Bhutan
Prior approval of Government of India – Schedule II
Prior approval of RBI – Schedule III
NO APPROVALS FOR TRANSACTIONS NOT COVERED ABOVE
14
Lottery winnings & income from racing/ riding
Purchase of lottery tickets, banned/ prescribed
magazines, football pools, sweepstakes
Payment of commission on exports made towards equity
investments in WOS/JV
Payments related to call back services of telephones
15
•
Undertaking cultural tours
•
Remittance towards hiring of transponder charges by TV channels and
ISPs.
•
Royalty and
Lump Sum fees
Prior Position: Automatic route for:
• Lump sum payment up to US$ 2 mio. and
• Royalty up to 5% on domestic sales and 8% on
export sales
Freely Permitted
after December 2009
16
Remittances exceeding
• USD 10,000 per person p.a. for holiday travel
• USD 5,000 per remitter (other than resident individual) p.a. for gift
• Lower of 1% of forex earnings (previous three FY) or USD 5 million per
corporate donor p.a for donation
• USD 25,000 per person per visit for business travel
• Estimate of institution or USD 100,000 per academic year whichever is higher
on account of studies abroad
• For maintenance of close relatives abroad :
• 100% net salary of a person who is a resident but not permanently resident
(for Indian citizen on deputation)
• US$ 100,000 per year per recipient in all other cases
• US$ 1,000,000 per project for consultancy services procured from abroad
• US$ 100,000 or 5% of the investment in India towards reimbursement of preincorporation expenses, whichever is higher
17
Section 6:
Reserve Bank of India is the nodal agency to specify :
•
any class or classes of capital account transactions which are permissible;
•
the limit up to which foreign exchange shall be admissible for such transactions
This power is exercised in consultation with the Central Government
General prohibition on undertaking or selling or drawing foreign exchange to or from an
authorised person for any capital account transaction
Specific prohibition on non residents from making investment in India, in any form, in
any company or partnership firm or proprietary concern or any entity, which is engaged
or proposes to engage in –
• the business of chit fund,
• as Nidhi Company ,
• agricultural or plantation activities
• real estate business, or construction of farm houses
• trading in Transferable Development Rights (TDRs)
For the purpose of this regulation, 'real estate business' shall excludes development of
townships, construction of residential/commercial premises, roads or bridges
19
Person resident in India :
•
•
•
•
•
•
•
•
•
•
•
Investment in foreign securities
Foreign currency loans raised in India and
abroad
Transfer of immovable property outside India
Guarantees issued in favour of a person
resident outside India
Export, import and holding of
currency/currency notes
Loans and overdrafts (borrowings) from a
person resident outside India
Maintenance of foreign currency accounts in
India and outside India
Taking out of insurance policy from an
insurance company outside India
Loans and overdrafts to a person resident
outside India
Remittance outside India of capital assets
Sale and purchase of foreign exchange
derivatives in India and abroad and
commodity derivatives abroad
Person resident outside India :
•
•
•
•
•
•
•
Investment in Indian securities
Acquisition and transfer of immovable
property in India
Guarantees issued in favour of or on
behalf of a person resident in India
Export, import and holding of
currency/currency notes
Deposits between a person resident
in India
Maintenance of foreign currency
accounts in India
Remittance outside India of capital
assets in India
20
An Indian Citizen / Person of Indian origin resident outside India can
acquire immovable property in India other than agricultural / plantation /
farm house out of
• inward remittances; or
• NRO account
An Indian Citizen resident outside India can transfer any immovable
property in India to :
• a person resident in India
transfer immovable property other than agricultural / plantation / farm
house to :
• a person resident outside India who is a citizen of India ; or
• a person of Indian origin resident outside India
21
A Person of Indian origin resident outside India can :
• acquire immovable property in India other than agricultural land / farm house /
plantation by way of gift from :
• a resident ; or
• a non resident who is a citizen of India ;
• a person of Indian origin resident outside India;
• Inherit any immovable property in India from
• a person resident outside India who had acquired such property in accordance
with the provisions of the foreign exchange law in force at the time of acquisition
by him or the provisions of these Regulations or from a person resident in India
• Sell any immovable property in India other than agricultural land / farm house /
plantation property to a person resident in India;
• Gift or sell agricultural land / farm house / plantation property in India to a person
resident in India who is a citizen of India;
• Gift residential or commercial property in India to :
• a person resident in India ; or
• to a person resident outside India who is a citizen of India ; or
• to a person of Indian Origin resident outside India
22
A citizen of India or a person of Indian origin can repatriate
sale proceeds of immovable property (other than
agricultural land/farm house /plantation), provided the
following conditions are satisfied, namely:
• the immovable property was validly acquired by the seller in
accordance with the provisions of the foreign exchange law;
• the sale takes place after three years from the date of acquisition of
such immovable property or from the date of payment of final
instalment of consideration for its acquisition, whichever is later; and ;
• the amount to be repatriated does not exceed the amount paid for
acquisition of the immovable property;
• in the case of residential property, the repatriation of sale proceeds is
restricted to two properties
23
A resident may continue to hold immovable property
acquired outside India while he was a non resident
A resident shall not acquire, hold, possess, own or
transfer any immovable property outside India without the
prior permission of the Reserve Bank of India
24
Export [Section 2(l)]: Means
• the taking out of India to place outside India any goods; and
• provision of services from India to any person outside India
Every exporter of goods is required to :
• furnish to the Reserve Bank a declaration of the amount representing
the full export value or its expected value;
Every exporter of services is required to :
• furnish to the Reserve Bank a declaration containing the true and
correct material particulars in relation to payment for such services
25
Section 8 :
Where any amount of foreign exchange is due or has accrued to any resident
such person shall take all reasonable steps to realize and repatriate to India
such foreign exchange within a period and in such manner as may be specified
by the Reserve Bank :
 full value to be realised;
Exemption from realization and repatriation in certain cases
 possession of foreign currency / coins up to limit prescribed by Reserve
Bank;
 foreign currency accounts within the limits prescribed by Reserve Bank;
 foreign exchange acquired or received before the 8th day of July, 1947 or
any income arising or accruing thereon held outside India under permission
of the Reserve Bank;
 foreign exchange acquired from employment, business, trade, vocation,
services, honorarium, gifts, inheritance or any other legitimate means within
limits prescribed by Reserve Bank; and
 other receipts in foreign exchange as the Reserve Bank may specify
26
Time period :
For exports : proceeds to be realised within 6 months
of shipment
• Goods / software exported by SEZ units
• Export to a warehouse established outside India:
• Goods / software exported by status holders as defined in EXIM
policy
12 months from
date of shipment
RBI can extend the above period on valid and
sufficient reasons given by the exporter
Manner of Repatriation : Foreign exchange due shall be
• brought into or received in India and sold to an authorised person in India in
exchange for rupees; or
• retained in an account with an authorised dealer in India; or
• used for discharge of a debt or liability denominated in foreign exchange to the
extent and in the manner specified by the Reserve Bank.
27
Offences under FERA were not compoundable while offences under FEMA are
compoundable.
Any action seizes to be contravention once it is compounded.
Contraventions relating to any transaction where proper approvals or permissions
from the Government or statutory authority concerned, as the case may be, have
not been obtained, such contraventions would not be compounded unless the
required approvals are obtained from the authorities concerned.
29
Compounding
Authority
Directorate of
Enforcement
Hawala Offences
Reserve Bank
of India
Other offences
(including capital
account)
Intent is to take severe view of willful, malafide/
fraudulent transactions
30
Penalties for Contravention (Section 13)
• Quantifiable Offence: Penalty up to 3 times the sum involved
• Non – Quantifiable Offence : Penalty up to Rs. 2 lakh
• Continuing Penalty : Rs. 5000 per day
Arrest (Section 14)
• Imprisonment only when a person fails to pay penalty imposed U/s 13
• Imprisonment :
• <= 3 yrs if penalty is > 1 Crore;
• <= 6 months for all other cases
Compounding (Section 15)
• Voluntary
• Time Bound completion (Within 180 days)
• No further proceedings for contravention so compounded
31
Payment of sum of contravention (within fifteen days)
Once the order is passed, no contravener shall withdraw the order or to
hold it as void or request a review of the order
No appeal against the Order
Non-payment shall be deemed as no application is made
No compounding before expiry of 3 years of previous order for similar
contravention
No Compounding of cases where approval of any statutory authority/Govt.
etc. was required unless such approval has been granted
32
Whether contravention is technical/minor in nature Cautionary advice/No penalty
Serious in nature- Compounding is attracted
Involves Money-laundering, National and Security concerns/
Hawala or where the contravener fails to pay the sum for which
the contravention was compounded within the specified time –
RBI may refer the matter to be adjudicated by Enforcement
Directorate
33
•Compounding
Of Contraventions
Compounding
of Contraventions
Application Form
How and which of the FEMA provisions were contravened while undertaking the transaction
Transaction (including Parties involved, Date and Amount of the transaction)
DD of Rs. 5000 in favour of “RESERVE BANK OF INDIA” payable at MUMBAI
Delay in reporting of inward remittance, delay in filing of form FC-GPR after allotment of shares and
delay in issue of shares beyond 180 days – To be submitted to RBI (Regional offices)
•Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Jaipur, Jammu, Kanpur, Kochi, Patna and Panaji for amount of
contravention below Rs. 1 Lakh
•at Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi for amount of contravention without any
limit
All other applications to be submitted to the Compounding Authority, Mumbai
Formats notified for details to be furnished with compounding applications for FDI, ECB, ODI and
Branch and Liaison Offices
34
Adjudicating Authority shall be appointed by the Central Government through publication in the
Official Gazette,
Adjudicating Authorities shall hold inquiry after giving the person a reasonable opportunity of
being heard for the purpose of imposing any penalty:
Adjudicating Authority shall hold an enquiry only upon a written complaint made by any officer
authorized by the Central Government.
The person may appear either in person or take the assistance of a legal practitioner or a
chartered accountant of his choice for presenting his case before the Adjudicating Authority
Adjudicating Authority shall have the same powers of a civil court which are conferred on the
Appellate Tribunal
Adjudicating Authority shall deal with the compliant as expeditiously as possible and endeavour
shall be made to dispose off the complaint finally within one year from the date of receipt of the
complaint:
35
Special Director (Appeals): Section 17
• Any person aggrieved by an order made by the Adjudicating Authority Assistant Director of Enforcement or Deputy Director of Enforcement, may
appeal to the Special Director (Appeals)
• Every such appeal shall be filed within 45 days from the date on which the copy
of the order made by the Adjudicating Authority is received
• On receipt of an appeal under sub-section (1), the Special Director (Appeals)
may after giving the parties to the appeal an opportunity of being heard, pass
such order thereon as he thinks fit confirming, modifying or setting aside the
order appealed against.
• The Special Director (Appeals) shall send a copy of every order made by him to
the parties to appeal and to the concerned Adjudicating Authority.
• The Special Director (Appeals) shall have the same powers of a civil court
which are conferred on the Appellate Tribunal
36
Appellate Tribunal : Section 19
• Any other orders (other than those passed by Assistant Director of Enforcement or
Deputy Director of Enforcement, may appeal to Appellate Tribunal
• The person appealing against the order of the Adjudicating Authority or the Special
Director (Appeals) levying any penalty, shall deposit the amount of such penalty
• Every appeal shall be filed within a period of 45 days from the date on which a copy
of the order made by the Adjudicating Authority or the Special Director (Appeals) is
received
• On receipt of an appeal the Appellate Tribunal may after giving the parties to the
appeal an opportunity of being heard, pass such order thereon as he thinks fit
confirming, modifying or setting aside the order appealed against.
• The Appellate Tribunal shall send a copy of every order made by him to the parties to
appeal and to the concerned Adjudicating Authority.
• The Appellate Tribunal shall have the same powers of a civil court which are
conferred on the Appellate Tribunal
• The Appellate Tribunal shall endeavour to dispose off the appeal within 180 days
37
Appeal to High Court : Section 35
• Any person aggrieved by any decision or order of the
Appellate Tribunal or the Special Director (Appeals) may
file an appeal to the High Court within 60 days from the
date of communication of the decision or order of the
Appellate Tribunal or the Special Director (Appeals)
• Appeal only on a question of law arising out of such order
• Jurisdiction of civil court barred (section 34)
38
Directorate of Enforcement : Sections 36 – 38
• Central Government shall establish a Directorate of
Enforcement
• Powers shall be exercised subject to conditions and
limitations imposed by the Central Government
• Power of search and seizure:
• Officers can exercise powers similar to the Income-Tax
Authorities
• Other Central Government / State Government / RBI
officers (not below Under Secretary rank ) may also be
authorized by Central Government
39
1) Mr. Basu desires to draw Foreign exchange for
the following purposes :
a) Payment relating to ‘’call back services’’ of telephones
b) USD 120,000 for studies abroad on the basis of
estimates given by the foreign universities
c) USD 25,000 for sending a cultural troupe on a tour of
Europe.
Advise him whether he can get foreign exchange and, if so,
under what conditions? (Nov 2008)
Answer 1:
• The Transaction is prohibited since it falls under Schedule
I (Rule 3)
• Approval of RBI is not required for release of Foreign
Exchange for studies abroad if Foreign Exchange drawn
does not exceed the estimates from the institution abroad
or USD 100,000 per academic year Whichever is higher.
• Drawal of Foreign Exchange for cultural tours falls under
Schedule II (Rule 4) .Hence approval of CG is required.
Note : Approval of CG is not required if payment is made
out of funds held in RFC A/c.
2) Mr. Sekhar resided in India for a period of 150
days during the year FY 2007-08 and thereafter
went abroad. He came back to India on 1st April
2008 as an employee of a business organisation.
What would be his residential status under
Fema,1999 during the FY 2008-09? (June 2009)
Mr. Sekhar is a Non resident since he resided in
India for less than 183 days in preceding FY
2007-08.The purpose of stay in current FY is not
relevant if a person has not resided in preceding
FY for more than 183 days
3) Mr. Atul, an Indian national Desires to obtain Foreign
exchange for the following purpose
a) Remittance of USD 10,000 for purchase for goods
purchased from a party situated in Nepal.
b) USD 10,000 for remitting as commission to his agent in USA
for sale of commercial plot situated near Bangalore,
consideration in respect of which was received by Mr. Atul by
way of foreign currency inward remittance amounting to USD
100,000
Advise him whether he can obtain Foreign exchange and under
what conditions for making the above remittances. (June 2009)
a) Transaction is prohibited as it falls under
Schedule I (Rule 3)
b) It is a current account transaction. Approval of
RBI is not required as it does not exceed higher
of 5% of inward remittance or USD 25,000 per
transaction
4) A company incorporated in UK established a
branch at Chennai. What is the residential
status of the Chennai branch? The Chennai
branch proposes to purchase some immovable
property at Chennai for the purpose of its
business. Is it a Capital Account transaction
within the meaning of Sec 2(e) of FEMA,1999?
Are there any restrictions under FEMA,1999 in
respect of such acquisition? (Nov 2009)
The company incorporated in UK is a non resident as it is not a
company incorporated in India. The Chennai branch is a branch in
India owned or controlled by the UK company (Non resident), and
hence the Chennai branch is a Resident in India. The Chennai branch
(Resident) can acquire immovable property at Chennai (in India) for its
business purpose as it is a resident. Hence it is not a Capital account
transaction. However, section 6(6) of FEMA,1999 empowers the RBI
to regulate the establishment in India of such branch and accordingly
RBI has given a general permission under Foreign Exchange
management (Acquisition and transfer of immovable property in India)
Regulations, 2000 for such branches to acquire immovable property in
India which is necessary or incidental to carrying on its permitted
activities.
5) RBI issued certain directions to
Dream Constructions Ltd, an authorised
person under FEMA,1999 to file certain
returns. The company failed to file the
said returns. Decide as to what penal
provisions are applicable against the
said authorised person under the said
Act (May 2010)
If any authorised person contravenes any direction
given by RBI or fails to file any return as directed by
RBI, the RBI (After giving a reasonable opportunity
of being heard) will impose penalty upto INR 10,000
and additional penalty of INR 2000 for every day
during which such contravention continues
Whether `payment of Remuneration to foreign
technicians’ is a permissible transaction under the
provisions of FEMA,1999? (May 2010)
It is a current account transaction. The transaction
is permitted without any restrictions
7) Advise whether the approval of Central
Government is needed in the following cases
under FEMA,1999?
a) X wants to remit certain sum of money out of lottery
winnings
b) Payment of Royalty in case it is 10% of local sales and
20% of exports and the lump sum payment of USD 3
million ( Nov 2010)
a) It is a current account transaction. This transaction is prohibited as it
falls under Schedule I.
b) Effective November 2009 the limits for royalty and lump sum
payments have been relaxed by RBI and hence there are no
restrictions on payment of 10% of local sales and 20% of export
sales and lump sum payment of USD 3 million.
8) During the FY 2010-11 Mr. Bhattacharya resided
in India for 180 days and thereafter went abroad.
On 1st April 2011 he came back to India as an
employee of a business organisation. Decide the
residential status of Mr. Bhattacharya during the
FY 2010-11 under the provisions of FEMA,1999 (
May 2011)
8. Mr. Bhattacharya is a resident till the time he was residing in
India during the FY 2010-11 (assuming that he resided in India for
more than 183 days in preceding FY ie. 2009-10).
Mr. Bhattacharya is a non resident for the period he was abroad
during the FY 2010-11 (provided he went abroad for a purpose of
taking up employment/ business / or for any other purpose with
the intention to stay abroad for an uncertain period of time).
We have discussed about :
• 1. Important definitions under FEMA,1999
• 2. The concept of residential status with some practical
examples.
• 3. capital and current account transactions and its
classifications.
• 4. General prohibition in dealing with Foreign Exchange(
Charging section)
• 5. Acquisition and transfer of immovable property in India
and outside India
• 6. Export of Goods and Services
7. Realisation and Repatriation of Foreign Exchange
8. Compounding of Offences
9. Contraventions and penalties
10. Adjudication and Appeals
11. Enforcement Directorate