A Bill based on the recommendations of the Task Force, was introduced in the Lok Sabha on 4 August, 98. The Bill was referred to the standing committee on Finance which submitted it's report to the House on 23 December'98 with suggestion and modifications. The 12th Lok Sabha was dissolved before any decision could be taken on the bill. The Bill subsequently lapsed. The bill was again introduced in the 13th Lok Sabha on 25th Oct'99. The presidential Assent was received on 6th Jan 2000. Finally the FEMA came into operation w.e.f. 1st June 2000.
TO WHOM IS THE ACT APPLICABLE
The FEMA, is applicable-
- To the whole of India.
- Any Branch, office and agency, which is situated outside India, but is owned or controlled by a person resident in India.
- Any contravention of provisions of FEMA, by all those, who are covered under above two aspects committed outside India.
Categories & Status of Different Persons
Broadly speaking FEMA, covers, three different types of categories, and deals differently with them.
These categories are:
- Person Resident In India
Person Resident Outside India
For the purpose of provisions, a person shall include any of the following:
- An individual
- A Hindu Undivided family
- A company
- A Firm
- An association of persons or a body of individuals, whether incorporated or not,
- Every artificial judicial person, not falling within any of the preceding sub clauses, and
Any agency, office or branch owned or controlled by such person.
"PERSON RESIDENT IN INDIA"
"A person resident in India", shall include any of the following
- A person who has been residing in India for more than 182 days, in the last financial year. This means if a person has to be assessed, as to whether he is person resident in India, for any offence committed in August 2001, then he should be residing in India for more than 182 days during April 2000 to March 2001
- Any person or body corporate registered or incorporated in India, or
- An office, branch or agency in India owned or controlled by a person resident outside India, or
An office, branch or agency outside India owned or controlled by a person resident in India.
However, in following cases a person shall not be person resident in India", even if he is residing in India for more than 182 days in the last financial year:
A person who has gone abroad, for:
Similarly, a person who has come to India for any purpose except:
- PERSON RESIDENT OUTSIDE INDIA
Simply putting it, "a person resident outside India" means "a person who is not resident in India"
Implication on Different Categories
PERSON RESIDENT IN INDIA
Provision of FEMA, are applicable with different implication on Person resident in, and outside India.
With respect to " Person Resident in India", they are:-
- A person who is resident in India, can acquire, hold, own possess or transfer any foreign Exchange, foreign security or any immovable property situated outside India, only according to FEMA
FOREIGN SECURITY: 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, but where redemption or any form of return such as interest or dividends is payable in Indian currency
- The Reserve Bank of India (R.B.I), may prohibit, restrict or regulate any of the following:
- Transfer or issue of any foreign security by a person resident in India.
- Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India.
- Deposits between persons resident in India and person resident outside India:
R.B.I. may make all these restrictions, in general or with respect to "Capital Account Transactions."
"CAPITAL ACCOUNT TRANSACTIONS" means a transaction, which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India.
- (iv) Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred, by a person resident in India and owed to a person resident outside India.
- (v) Transfer of immovable property outside India, other than a lease not, exceeding five years, by a person resident outside India.
- 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.
- If any amount of foreign exchange has become due or has accrued to any person resident in India, then he shall take steps to realise and bring it back to India within the time frame and manner specified by Reserve Bank
PERSON RESIDENT OUTSIDE INDIA
Implications of FEMA, on "Person Resident outside India", are as follows:
- For making any sort of payment in any manner, to a "person resident outside India", provisions of FEMA has to be complied, and also general or special permission of Reserve Bank is required Similarly, for receiving any payment by order or on behalf of any "person resident outside" in any manner, provisions of FEMA has to be complied, and also general or special permission of Reserve Bank is required.
- The Reserve Bank may prohibit, restrict or regulate any of the following
- Transfer or issue of any security by a person resident outside India.
- Transfer or issue of any security or foreign security by any branch, office or agency in India of a "person resident outside India."
- Any borrowing or lending in rupees in whatever name called between a "person resident in India" and a "person resident outside India"
- Deposit between "persons resident in India" and "persons resident outside India"
- Acquisition or transfer of immovable property in India other than a lease, not exceeding five years, by a person resident outside india.
- Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred, by a person resident outside India.
The Reserve Bank of India may also regulate the above noted activities, with respect to "Capital Account Transactions".
- 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."
- A "person resident outside India" may 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
- Reserve Bank may by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a "person resident outside India", for carrying on any activity relating to such branch, office or other place of business.
CIRCUMSTANCES WHERE HOLDING AND REPATRIATION OF FOREIGN EXCHANGE IS "EXEMPTED" FROM FEMA RULES
In following circumstances, the provisions of FEMA will not apply with regard to Holding and Repatriation of Foreign Exchange:
- Possession of foreign currency or foreign coins by any person upto such limit as the Reserve Bank may specify.
- Foreign currency account held or operated by such person or class of persons and the limit upto, which the Reserve Bank specifies.
- Foreign Exchange acquired or received before the 8th day of July 1947 or any income arising or accruing thereon, which is held outside India by any person in pursuance of a general or special permission granted by the Reserve Bank.
- Foreign Exchange held by a person resident in India upto such limit as the Reserve Bank may specify, if such foreign exchange was acquired by way of gift or inheritance from a person who acquired or received it before 8th of July 1947 or if the income has occurred to him, which was held outside India in pursuance of a general or special permission granted by the Reserve Bank.
- Foreign Exchange acquired from employment, business, trade vocation, services, honorarium, gifts, inheritance or any other legitimate means upto such limit as the Reserve Bank may specify.
- Such other receipt in foreign Exchange as the Reserve Bank may specify.
Important Provisions From FEMA
RELEVANT PROVISIONS OF EXCHANGE CONTROL MANUAL FOR THE PURPOSE OF FEMA
Some of the relevant provisions of Exchange Control Manual under FEMA, which are still existing are:
- REFUND OF INWARD REMITTANCES
If a request is made from the overseas for cancellation of Inward Remittances, Authorised Dealers may do so without referring to Reserve Bank, if refunds is not to compensate for a loss.
APPLICATION FOR REMITTANCES IN FOREIGN CURRENCY
- A person firm or bank may apply to an Authorised Dealer for remittances in any foreign currency to a beneficiary abroad.
- Application should be made in FORM -A1, if the purpose of remittance is import of goods into India.
- For any other purpose in Form-A2
The Authorised Dealer may sell the foreign Exchange applied for if he think fit provided it is within his powers, and the purpose of remittance is an approved one.
- MODE OF PAYMENT OF RUPEES AGAINST SALE OF FOREIGN EXCHANGE
In case of sale of foreign Exchange or remittance foreign Exchange amounting to Rs. 20,000 or more the payment received by the Authorised Dealer, from the applicant should be through a crossed cheque drawn on the applicant bank account or on the bank account of the Firm/ Company. Payment can also be accepted in the form of a Banker's cheque / Pay Order / Demand Draft.
Receipt of Payment in cash in case of such sale of foreign Exchange or remittance in foreign Exchange is strictly prohibited.
However where purpose of sale of foreign exchange is for travel abroad for business etc, cash may be received by Authorised Dealer from Applicant upto Rs. 50,000/-
Where the rupee equivalent for drawing foreign exchange exceeds Rs. 50,000 either for any single installment or for more than one installment recokned--- together for a single journey / visit it should be paid by the traveler by means of a gross cheque / demand draft/ pay order as stated above.
- TRAVELLERS CHEQUE NEGOTIABLE ONLY IN INDIA
Rupee Travellers cheque cannot be encashed outside India, if they are issued solely for use within India. In such a case they cannot be taken or sent out of India.
Reimbursements should be strictly refused where such travellers cheques have been encashed outside India.
- REIMBURSEMENT OUTSIDE INDIA
Rupee Travellers cheque, which are issued by authorised dealers, encashable outside India, may be reimbursed by Authorised Dealers or by their selling Agent.
- IMPORT OF FOREIGN CURRENCY NOTES
When the stock of foreign currency notes with Authorised Dealer is not adequate for meeting their normal business requirement they could import foreign currency notes from their overseas branches or correspondents.
RECONVERSION OF INDIAN CURRENCY
- Foreign currency may be sold against Indian Rupees held by persons who are not resident of India but are passing through or leaving India after a visit, at the time of their departure from India.
- For this purpose, a Bank or Encashment certificate issued by Authorised Dealer, exchange bureau or Authorised Money changer in form BCI, ECF OR ECR, is required to show that the rupee had been acquired by sale of foreign Exchange to an Authorised Dealer or money changer in India.
Such a certificate is valid for such reconversion i.e. a period of three months is not over from the date of sale of the foreign currency by the traveller.
- RATES OF EXCHANGE
Authorised dealers and their Exchange bureau may buy from and sell to public foreign currency notes and coins at rates of exchange determined by market conditions. Dealings in foreign currency notes and coins between authorised dealers and between authorised dealers and money changers would also be at rates determined by market conditions.
FERA and FEMA- Comparision
CHANGES/PROGRESSION FROM FERA TO FEMA- A STEP AHEAD
The similarities between FERA and FEMA are as follows:
- The Reserve Bank of India and central government would continue to be the regulatory bodies.
- Presumption of extra territorial jurisdiction as envisaged in section (1) of FERA has been retained.
The Directorate of Enforcement continues to be the agency for enforcement of the provisions of the law such as conducting search and seizure
DIFFERENCES BETWEEN FERA AND FEMA
|1||PROVISIONS||FERA consisted of 81 sections, and was more complex||FEMA is much simple, and consist of only 49 sections.|
|2||FEATURES|| Presumption of negative intention (Mens Rea ) and joining hands in offence (abatement) existed in FEMA||These presumptions of Mens Rea and abatement have been excluded in FEMA|
|3||NEW TERMS IN FEMA||Terms like Capital Account Transaction, current Account Transaction, person, service etc. were not defined in FERA.||Terms like Capital Account Transaction, current account Transaction person, service etc., have been defined in detail in FEMA|
|4||DEFINITION OF AUTHORISED PERSON||Definition of "Authorised Person" in FERA was a narrow one ( 2(b)||The definition of Authorised person has been widened to include banks, money changes, off shore banking Units etc. (2 ( c )|
|5||MEANING OF "RESIDENT" AS COMPARED WITH INCOME TAX ACT.||There was a big difference in the definition of "Resident", under FERA, and Income Tax Act||The provision of FEMA, are in consistent with income Tax Act, in respect to the definition of term " Resident". Now the criteria of "In India for 182 days" to make a person resident has been brought under FEMA. Therefore a person who qualifies to be a non-resident under the income Tax Act, 1961 will also be considered a non-resident for the purposes of application of FEMA, but a person who is considered to be non-resident under FEMA may not necessarily be a non-resident under the Income Tax Act, for instance a business man going abroad and staying therefor a period of 182 days or more in a financial year will become a non-resident under FEMA.|
|6||PUNISHMENT ||Any offence under FERA, was a criminal offence , punishable with imprisonment as per code of criminal procedure, 1973||Here, the offence is considered to be a civil offence only punishable with some amount of money as a penalty. Imprisonment is prescribed only when one fails to pay the penalty.|
|7||QUANTUM OF PENALTY.||The monetary penalty payable under FERA, was nearly the five times the amount involved.||Under FEMA the quantum of penalty has been considerably decreased to three times the amount involved.|
|8||APPEAL ||An appeal against the order of "Adjudicating office", before " Foreign Exchange Regulation Appellate Board went before High Court||The appellate authority under FEMA is the special Director ( Appeals)Appeal against the order of Adjudicating Authorities and special Director (appeals) lies before "Appellate Tribunal for Foreign Exchange."An appeal from an order of Appellate Tribunal would lie to the High Court. (sec 17,18,35)|
|9||RIGHT OF ASSISTANCE DURING LEGAL PROCEEDINGS.||FERA did not contain any express provision on the right of on impleaded person to take legal assistance||FEMA expressly recognises the right of appellant to take assistance of legal practitioner or chartered accountant (32)|
|10||POWER OF SEARCH AND SEIZE||FERA conferred wide powers on a police officer not below the rank of a Deputy Superintendent of Police to make a search||The scope and power of search and seizure has been curtailed to a great extent|
A STEP AHEAD FROM FERA TO FEMA
Enactment of FEMA has brought in many changes in the dealings of Foreign Exchange, as compared to FERA. Some of them are restrictive, and some has widened the scope.
However some of the relevant progress made, from FERA to FEMA, are as follows:
- RAWAL OF FOREIGN EXCHANGE
Now, the restrictions on drawal of Foreign Exchange for the purpose of current Account Transactions, has been removed. However, the Central Government may, in public interest in consultation with the Reserve Bank impose such reasonable restrictions for current account transactions as may be prescribed.
FEMA has also by and large removed the restrictions on transactions in foreign Exchange on account of trade in goods, services except for retaining certain enabling provisions for the Central Government to impose reasonable restriction in public interest.
OMISSION OF CRIMINAL PROCEEDINGS
Under FERA, any contravention was a criminal offence and the proceedings were governed by the code of Criminal Procedure. Moreover the Enforcement Directorate had powers to arrest any person, search any premises, seize documents, initiate proceeding.
Now all these have been done away with, and contravention of FEMA is no more a Criminal offence, and only monetary penalty, i.e. civil proceedings are applicable. Civil imprisonment is provided, only in case of default to pay fine.
The definition of "Residential Status" under FEMA has gone through considerable change. It has now been made compatible with the definition provided under "Income Tax" Act.
The residential status is now based on the physical stay of the person in the country. The period of 182 days as provided, indicates that it is not necessary that there should be a continuos period of stay. The period of stay would be calculated by adding up all the days of stay of the individual in the country.
An Indian resident becomes a non-resident when he goes abroad and takes up a job or engages in business.
A major change in the definition of residential status of partnerships and firms in worth noticing. Earlier, under FERA, a branch was considered a resident of a place where it was situated. Now, under FEMA, an office, branch or agency outside India owned or controlled by a person resident in India will be considered a resident in India for the purposes of this Act.
For example, a person residing in India has a branch in Maurtius; such branch will be considered a resident in India.
IMMOVABLE PROPERTY OUTSIDE INDIA
Earlier, under FERA, there was no restriction placed on foreign citizens who were residents of India, for acquiring immovable property outside India.
Now FEMA prohibits a resident to acquire, own process, hold or transfer any immovable property situated outside India. This restriction applies irrespective of whether the resident is an Indian citizen or foreign citizen. With this provision being effective a foreign citizen who is a resident in India has to take approval of Reserve Bank of India for selling or buying any immovable property situated outside India.
IMMOVABLE PROPERTY IN INDIA
Earlier, under FERA, a foreign citizen could acquire or transfer immovable property in India only after seeking permission from the Reserve Bank.
Now, under FEMA, the control of Reserve Bank is determined by the residential status of a person. Only a non-resident as defined within the meaning of FEMA would require permission of the Reserve Bank to acquire or transfer an immovable property in India. The distinction based on citizenship has been abolished and that based on residentship has been introduced.
EXPORT OF SERVICES
FERA had no provision for export of services. Now, FEMA has included payment received by an Exporter of Services in its ambit.
Every Exporter, who receives payment from outside India, for his services rendered is obliged to furnish details of payment to the 'Reserve Bank.
For example; a Doctor, or Engineer or Lawyer or Accountant or any other professional may give opinions or consultation to people outside India, via internet or mail, and his fees may be credited to his credit account. Then he is obliged to furnish details of such payment to Reserve Bank.
INCLUSION OF NEW TERMS
Some new terms like "Capital Account Transactions, Current Account Transactions"; have been included in FEMA. Reserve Bank has been confirmed with powers and with consultation with central government to specify maximum permissible limit upto which exchange is admissible for such transactions.
WHAT TYPE OF OFFENCES?
Although under FEMA, offences pertain to transactions in foreign Exchange only. However relevant offences are as follows:
DETAILS IN FOREIGN EXCHANGE:
- Only a person Authorised by Reserve Bank can deal in foreign Exchange
- No one can make a payment to a person resident outside India, without permission of Reserve Bank.
- No one receives any payment from a person resident outside India, without permission of Reserve Bank.
- A person resident in India cannot deal in foreign exchange, foreign security or any immovable property situated outside India, without permission of Reserve Bank. (sec 4)
- Similarly a person resident outside India, cannot acquire immovable property in India without permission.
EXPORTER OF GOODS AND SERVICES
Every exporter of goods and services is under an obligation, to give details to Reserve Bank regarding value of export, mode of payment, amount of payment received etc.
REPATRIATION OF FOREIGN EXCHANGE
Where any amount of foreign exchange has become due or accrued to any person who is a resident in India, he shall realise and repatriate (Bring Back) such amount, within the time specified by Reserve Bank.
An "Authorised Person" under FEMA, is a person who is authorised by Reserve Bank to deal in Foreign Exchange.
For being registered as an "Authorised Person", necessary application alongwith relevant documents has to be furnished to Reserve Bank.
An "Authorised Person" is also, not given a free hand to deal in foreign Exchange. He has to furnish details and information, to Reserve Bank from time to time as may be required by it.
PROSECUTION OF OFFENCES COMMITTED
Before detailing the procedure for prosecution, it is important to mark out the Adjudicating Agencies. They are:
The inquiry of any contravention of FEMA is conducted by an Adjudicating Authority appointed by the Central Government.
APPEAL TO SPECIAL DIRECTOR (APPEALS)
The special Director (Appeals) is authorised to hear the appeals arising out of in order of the Adjudicating Authority.
APPEAL TO THE APPELLATE TRIBUNAL
The Appellate Tribunal is entitled to hear appeals made in accordance, from an order made by Adjudicating Authority or special Director (Appeals).
DIRECTOR OF ENFORCEMENT
The Director of Enforcement and other officers has power to conduct investigation, search and seize any articles.
PROCEDURE INQUIRY BY ADJUDICATING AUTHORITY (14)
The inquiry of any contravention of FEMA is conducted by an Adjudicating Authority.
- When, an inquiry is to be conducted against a person for any contravention; the Adjudicating Authority shall issue a notice to such person.
- The notice will also indicate the date on which the offender is required to appear before authority, and will also mention the nature of offence committed by him.
- Such person (offender) will have a right to give reasons or explanation, and then a date will be fixed for his appearance. He can appear either personally or through an Advocate or chartered accountant.
- On the date of appearance, the Adjudicating Authority shall present its case, and explain the reason and type & implications of offence committed by offender.
- Then in turn, such person will also be given an opportunity to put up his case, and to produce documents and evidence.
- Finally, if Adjudicating Authority is convinced, that the offender has committed an offence, then it will impose such fine and penalty, as it thinks fit.
APPEAL TO SPECIAL DIRECTOR (APPEALS) (17)
Appeal from an order of "Adjudicating Authority" lies before" special Director (appeal)"
- The appeal shall be made in "Form No. 1", alongwith three copies of the order appealed against and the requisite fees.
- The appeal should be filed within 45 days, from the date of receipt of receipt of impugned order.
- On the date of hearing the appeal the applicant may appoint a legal practitioner or a chartered accountant to appear, plead and act on their behalf before the special Director (Appeal)
- The order of the special Director (Appeals) made at the conclusion of the proceedings shall be in writing and shall state briefly the grounds for the decision.
APPEAL TO THE APPELLATE TRIBUNAL (19)
"Appellate Tribunal" is entitled to hear appeal arising out of an order from "Adjudicating Authority" and "special Director (appeal)."
- The appeal shall be made in Form No. 2, alongwith three copies of the impugned order and requisite fees.
- The appeal shall be made within 45 days, from the date on which copy of the impugned order is received.
- A copy of the order and appeal shall be sent to the opposite party, i.e. "Director of Enforcement," and a date shall be fixed for hearing of the appeal.
- The appellant shall have the right to present his case/appeal through a legal practitioner or chartered Accountant.
- On the fixed date of hearing, the "Appellate Tribunal" shall pass its order in writing and the reasons therefore.
APPEAL TO HIGH COURT (35)
- An appeal from the decision of "Appellate Tribunal" lies before High Court.
- The appeal shall be filed within "60 days" from the date of communication of the decision or order of the Appellate Tribunal to him on any question of law arising from the impugned order.
AMOUNT OF PENALTY
Any contravention, under FEMA, may invite following kinds of penalties:
- If, the amount against which offence is quantities, then penalty will be "THRICE" the sum involved in contravention.
- Where the amount cannot be quantified the penalty may be imposed upto two lakh rupees.
- If, the contravention is continuing everyday, then Rs. Five Thousand for every day after the first day during which the contravention continues.
Further in addition to the penalty, any currency, security or other money or property involved in the contravention may also be confiscated.
FEMA Regulations, 2000 -
Acquisition and Transfer of Immovable Property Outside India
RBI'S PERMISSION FOR ACQUISITION AND TRANSFER:
A person, resident in India, shall acquire or transfer any immovable property situated outside India only with the general or special permission of the Reserve Bank of India.
The following properties are exempted from these regulations:
- Property held by a foreigner who is resident in India;
- Property acquired by a person resident in India on or before 8th July, 1947 and continued to be held by him with the permission of the Reserve Bank of India.
PERMISSIBLE ACQUISITION OF IMMOVABLE PROPERTY OUTSIDE INDIA:
- Gift or Inheritance: A person resident in India may acquire immovable property outside India by way of gift or inheritance from a person
- who was resident outside India;
- who was resident in India on or before 8th July, 1947.
- Purchase from Resident Foreign Currency (RFC) account: A person resident in India may acquire immovable property outside India by way of purchase out of foreign exchange held in Resident Foreign Currency account which is maintained according to the FEMA Regulations, 2000.
Permission granted to a company by RBI: On an application made to it, the Reserve Bank of India may permit a company incorporated in India having overseas offices, to acquire immovable property outside India for its business and for residential purposes of its staff, subject to certain terms and conditions.
PERMISSIBLE TRANSFER OF IMMOVABLE PROPERTY OUTSIDE INDIA:
Transfer by way of Gift: A person resident in India, who has acquired immovable property outside India as per the permissibility mentioned above, may transfer it by way of gift to his relative (spouse, sibling, any lineal ascendant/descendant) who is a person resident in India.
Acquisition and Transfer of Immovable Property in India
An Indian citizen resident outside India may acquire immovable property in India provided it is not an agricultural or plantation property or a farm house. It is required that payment of the purchase price, if any, is made out of:
- funds received in India through normal banking channels by way of inward remittance from any place outside India;
funds held in any non-resident account which is maintained according to the Foreign Exchange Management Act or RBI's regulations.
It is further required that such payment is not made by traveller's cheque or by foreign currency notes.
An Indian citizen resident outside India may transfer:
- any immovable property in India to a person resident in India, and
- any immovable property other than agricultural or plantation property or a farm house to a person resident outside India who is an Indian citizen or to a person of Indian origin who is resident outside India.
ACQUISITION AND TRANSFER BY A PERSON OF INDIAN ORIGIN:
A person of Indian origin as per the Reserve Bank regulations refers to an individual who is not a citizen of Pakistan/Bangladesh/Sri Lanka/Afghanistan/China/Iran/Nepal/Bhutan, and who at any time held Indian passport; or who or either of whose father/grandfather was an Indian citizen by virtue of the Indian Constitution or the Citizenship Act, 1955.
A person of Indian origin resident outside India may acquire any immovable property in India other than an agricultural or plantation property or a farm house:
- provided that payment of the purchase price, if any, is made out of:
- funds received in India through normal banking channels by way of inward remittance from any place outside India;
- funds held in any non-resident account which is maintained according to the Foreign Exchange Management Act or RBI's regulations.
- It is further required that such payment is not made by traveller's cheque or by foreign currency notes. by way of gift from a person resident in India / a person resident outside India who is an Indian citizen/a person of Indian origin resident outside India;
by way of inheritance 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/the provisions of these Regulations/from a person resident in India.
A person of Indian origin resident outside India may transfer any immovable property in India other than an agricultural or plantation property or a farm house by way of sale to a person resident in India.
- A person of Indian origin resident outside India may transfer agricultural or plantation property or a farm house in India, by way of gift or sale to a person resident in India who is an Indian citizen.
- A person of Indian origin resident outside India may transfer residential or commercial property in India by way of gift to a person resident in India / to a person resident outside India who is an Indian citizen / to a person of Indian origin resident outside India.
ACQUISITION OF IMMOVABLE PROPERTY FOR CARRYING ON A PERMITTED ACTIVITY:
A person resident outside India who has established in India a branch, office or other place of business (as per the Foreign Exchange Management Regulations, 2000) for carrying on in India any activity, excluding a liaison office, may:
- acquire any immovable property in India, which is necessary for or incidental to carrying on such activity, provided all applicable laws, rules, regulations, and directions are complied with and the person files a declaration with the Reserve Bank;
- transfer the immovable property acquired in the manner mentioned above, by mortgaging it to an authorized dealer as a security for any borrowing.
Establishment in India of Branch or Office or Other Place of Business
"Branch Office" has the meaning assigned to it under the Companies Act, 1956.
"Liaison Office" refers to a place of business which acts as a channel of communication between the principal place of business or head office and entities in India but which does not undertake any commercial/trading/industrial activity, and maintains itself out of inward remittances received from abroad through normal banking channel.
"Project Office" refers to a place of business to represent the interests of the foreign company executing a project in India but excludes a Liaison Office.
PROCEDURE OF ESTABLISHMENT OF A BRANCH OR LIAISON OFFICE IN INDIA:
- A person resident outside India must make an application to the Reserve Bank of India in the prescribed form.
- A foreign company may open a 'Project Office' in India if it has secured from an Indian company, a contract to execute a project in India.
- The foreign company will need to furnish a report to the concerned Regional Office of the Reserve Bank of India giving details of its name, address, contract amount, address and tenure of the place of business and nature of project undertaken.
PROHIBITIONS AND EXEMPTIONS:
- A person resident outside India shall not establish in India a branch or a liaison office or any other place of business without prior approval of the Reserve Bank of India;
- Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China shall not establish in India a branch or a liaison office or any other place of business without prior permission of the Reserve Bank of India.
No approval of the Reserve Bank of India is required for the following:
- a banking company which has obtained necessary approval under the Banking Regulation Act, 1949;
- for a company to establish a branch/unit in Special Economic Zones to undertake manufacturing and service activities;
- an insurance company which has obtained approval from the Insurance Regulatory and Development Authority for establishing a Liaison Office in India.
ACTIVITIES PERMITTED TO BE UNDERTAKEN BY A PERSON RESIDENT OUTSIDE INDIA:
- For a Branch in India:
- Export/Import of goods;
- Professional/Consultancy services;
- Research work;
- Promoting technical/financial collaborations between Indian and overseas companies;
- Software development and Information Technology services;
- Technical support to products supplied by parent/group companies;
- Foreign airline/shipping company.
- For a Liaison Office in India:
- Representing the parent company in India;
- Promoting export/import from/to India;
- Promoting technical/financial collaborations between parent/group companies and companies in India;
- Acting as a communication channel between the parent and Indian companies.
REMITTANCE OF PROFIT OR SURPLUS:
A person resident outside India may remit outside India the profit of the branch or surplus of the Project on its completion, on production of certain documents, to the satisfaction of the authorized dealer through whom the remittance is effected.
Foreign Currency Accounts By A Person Resident in India
What is a Foreign Currency Account?
Foreign Currency Account refers to an account which is maintained in currency other than the currency of India/Nepal/ Bhutan.
Restrictions on holding Foreign Currency Account:
- A person resident in India shall open/hold/maintain a Foreign Currency Account only as provided in the Foreign Exchange Management Act, its rules or regulations.
- A Foreign Currency Account may be opened/held/maintained by a person resident in India with the permission of the Reserve Bank of India, subject to certain terms and conditions.
EXCHANGE EARNER'S FOREIGN CURRENCY ACCOUNT:
An Exchange Earner's Foreign Currency (EEFC) Account is an account maintained in foreign currency with an authorized dealer (a bank dealing in foreign exchange). It can be opened/held/maintained by a person resident in India.
The Reserve Bank allows individual professionals to credit 100 percent of their foreign exchange earnings into this account subject to the permissible credits and debits.
The Exchange Earner's Foreign Currency Account Scheme lays down the following permissible credits and debits to the EEFC Account:
Permissible Credits to EEFC Account:
- Inward remittance through normal banking channel, other than remittances received on account of foreign currency loan or investment received from abroad or received for meeting specific obligations by the account holder.
- Payments received in foreign exchange by a 100 per cent Export Oriented Unit or a unit in Export Processing Zone/Software Technology Park/Electronic Hardware Technology Park for supply of goods to similar such unit or to a unit in Domestic Tariff Area.
- Payments received in foreign exchange by a unit in Domestic tariff Area for supply of goods to a unit in Special Economic Zone
- Payment received by an exporter from an account maintained with an authorized dealer for the purpose of counter trade.
- Advance remittance received by an exporter towards export of goods or services.
- Payment received for export of goods and services from India, out of funds representing repayment of State Credit in U.S. dollar held in the account of Bank for Foreign Economic Affairs, Moscow, with an authorized dealer in India.
- Professional earnings including directors fees, consultancy fees, lecture fees, honorarium and similar other earnings received by a professional by rendering services in his individual capacity.
- Interest earned on the funds held in the account.
- Re-credit of unutilized foreign currency earlier withdrawn from the account.
- Amount representing repayment by the account holder's importer customer, of loan/advances granted, by the exporter holding such account.
Permissible Debits to EEFC Account:
- Payment outside India towards a permissible current account transaction in accordance with the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 and permissible capital account transaction in accordance with the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000.
- Payment in foreign exchange towards cost of goods purchased from a 100 percent Export Oriented Unit or a Unit in an Export Processing Zone/Software Technology Park/Electronic Hardware Technology Park.
- Payment of customs duty in accordance with the provisions of the Export Import Policy of Central Government for the time being in force.
- Trade related loans/advances, by an exporter holding such account to his importer customer outside India, subject to compliance with the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000.
- Payment in foreign exchange to a person resident in India for supply of goods/services including payments for airfare and hotel expenditure.
RESIDENT FOREIGN CURRENCY ACCOUNT:
A person resident in India may open/hold/maintain with an authorized dealer in India a Foreign Currency Account known as a Resident Foreign Currency (RFC) Account, out of foreign exchange:
- received as pension or any other superannuation or other monetary benefits from his employer outside India.
- realised on conversion of assets which were acquired, held or owned by such person when he was resident outside India.
- received or acquired as gift or inheritance from a person who was resident outside India.
- acquired or received before the 8th day of July, 1947 or any income arising or accruing thereon which is held outside India by any person or acquired as gift or inheritance from there.
- received as the proceeds of life insurance policy claims/maturity/surrender values settled in foreign currency from an insurance company in India permitted to undertake life insurance business by the Insurance Regulatory and Development Authority.
- The funds held in a Resident Foreign Currency Account shall be free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form, by whatever name called, outside India.
RESIDENT FOREIGN CURRENCY (DOMESTIC) ACCOUNT:
A person resident in India may open/hold/maintain with an authorized dealer in India, a Resident Foreign Currency (Domestic) Account out of:
- foreign exchange acquired in the form of currency notes, bank notes and travellers cheques; and
- foreign exchange earned through export of goods/services, royalty, honorarium or by any other lawful means, and/or gifts received from close relatives (as defined in the Companies Act).
This account is not interest bearing and is maintained in the form of Current Account. There is no ceiling on the balances in the account.
FOREIGN CURRENCY ACCOUNT OF A UNIT IN A SPECIAL ECONOMIC ZONE:
A unit located in a Special Economic Zone may open/hold/maintain a Foreign Currency Account with an authorized dealer in India provided:
- all foreign exchange funds received by the unit in the Special Economic Zone are credited to such account;
no foreign exchange purchased in India against rupees is credited to the account without the Reserve Bank's permission;
the funds held in the account are used for bonafide trade transactions of the unit.
The funds held in these accounts are not to be lent or made available to any person/entity resident in India, not being a unit n Special Economic Zones.
FOREIGN CURRENCY ACCOUNT OUTSIDE INDIA:
The following can open/hold/maintain a Foreign Currency Account with their respective offices/branches or banks outside India for the purpose of transacting their business, subject to certain terms and conditions:
- An authorized dealer in India with his branch/head office/correspondent outside India.
- A branch outside India of a bank incorporated in India with a bank outside India.
- A shipping/airline company incorporated in India with a bank outside India.
- Life Insurance Corporation of India or General Insurance Corporation of India and its subsidiaries with a bank outside India.
- A firm/company/body corporate registered in India with a bank outside India, in the name of its office/branch set up outside India.
- A person resident in India, being an exporter, with a bank outside or in India.
- A person resident in India who has gone abroad for studies or who is on a visit to a foreign country with a bank outside India.
- A person resident in India who has gone out of India to participate in an exhibition/trade fair outside side India with a bank outside India.
- A foreign national resident in India being an employee of a foreign company/an Indian citizen employed by a foreign company outside India, with a bank outside India.
Transfer or Issue of Security By A Person Resident Outside India
"Asset Reconstruction Company" means a company registered with the Reserve Bank of India under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
"Investment on repatriation basis" means an investment the sale proceeds of which are, net of taxes, eligible to be repatriated out of India.
RESTRICTIONS ON ISSUE/TRANSFER OF SECURITY:
- A person resident outside India shall issue or transfer any security only as prescribed under the Foreign Exchange Management Act, its rules or regulations.
- A security which is issued prior to and is held on the date of commencement of the Reserve Bank Regulations, 2000 shall be deemed to have been issued under such Regulations and shall be governed by them.
- On an application made to it and for sufficient reasons, the Reserve Bank may allow a person resident outside India to issue or transfer any security subject to the necessary terms and conditions.
- An Indian entity is not allowed to issue any security to a person resident outside India or to record in its books any transfer of security from or to such person, unless the Reserve Bank allows it on an application made to it and for sufficient reasons.
PERMISSION FOR PURCHASE OF SHARES BY CERTAIN PERSONS RESIDENT OUTSIDE INDIA:
The following persons can purchase Indian shares or convertible debentures of an Indian company under the given schemes and as per the Schedules to the Reserve Bank regulations:
- A person resident outside India (other than a citizen of Bangladesh/Pakistan/Sri Lanka) or an entity incorporated outside India (other than that in Bangladesh or Pakistan) under the Foreign Direct Investment-Scheme.
- A registered Foreign Institutional Investor (FII) under the Portfolio Investment Scheme (no investments to be made in the paid up equity capital of Asset Reconstruction Companies or with an Indian company engaged in the print media sector).
- A Non-resident Indian, on a Stock Exchange, under the Portfolio Investment Scheme, (no investments to be made with an Indian company engaged in the print media sector)
- A Non-resident Indian / an Overseas Corporate Body, on non-repatriation basis, other than under Portfolio Investment Scheme.
- A non-resident Indian/an overseas corporate body/a registered Foreign Institutional Investor may purchase securities other than shares or convertible debentures of an Indian company.
- A foreign venture capital investor registered with SEBI may invest in a venture Capital Fund or an Indian Venture Capital Undertaking (no investments to be made with an Indian company engaged in the print media sector).
- A registered Foreign Institutional Investor (FII) having valid approval under FERA, 1973 or FEMA, 1999 may trade in all exchange traded derivative contracts approved by SEBI, subject to the limits prescribed by SEBI.
- A non-resident Indian may invest in exchange traded derivative contracts approved by SEBI on non-repatriable basis subject to the limits prescribed by SEBI.
ISSUE/ACQUISITION OF SHARES:
Right Shares: An Indian company may offer to a person resident outside India equity/preference shares/convertible debentures offered on right basis, provided it satisfies the following conditions:
- there is no increase in the percentage of foreign equity already permissible under the Foreign Direct Investment Scheme;
- the existing non-resident shareholders may apply for issue of additional shares and the investee company may allow it provided the overall issue of shares to non-residents in the total paid-up capital does not exceed the sectoral cap;
- the existing shares or debentures against which shares or debentures are issued by the company on right basis were acquired and are held by the non-resident Indian as per the Reserve Bank regulations;
- the offer on right basis to the non-resident Indians is at a price not lower than that at which it is made to resident shareholders.
- the right shares or debentures are subjected to the same conditions and restrictions in regard to repatriability as are applicable to the original shares.
- Bonus Shares: An Indian company may issue bonus shares to its non-resident shareholders, subject to the following conditions:
The original shares were acquired / held by the non-resident shareholder in accordance with the Rules/Regulations applicable to such acquisition;
The bonus shares are subjected to the same conditions and restrictions in regard to repatriability as are applicable to original shares.
- Issue of shares after merger/de-merger/amalgamation of Indian companies: In case of merger/de-merger/amalgamation of Indian companies, the transferee or new company may issue shares to the shareholders of the transferor company resident outside India, subject to following conditions:
the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the percentage specified in the approval granted by the Central Government or the Reserve Bank;
in case the above percentage exceeds, an approval is sought from the Central Government and the Reserve Bank;
the transferor/transferee/new company does not engage in agriculture/plantation/real estate business;
the transferee/new company files a report with the Reserve Bank giving full details of the shares held by persons resident outside India in the transferor and the transferee or the new company, before and after the merger/amalgamation/reconstruction.
- Issue of shares under Employees Stock Options Scheme to persons resident outside India:
An Indian company may issue either directly or through a Trust, shares under the Employees' Stock Options Scheme, to its employees/employees of its joint venture/wholly owned subsidiary abroad who are resident outside India.
The Scheme must comply with the regulations issued under the Securities and Exchange Board of India Act, 1992.
The value of shares held by persons resident outside India must not exceed 5% of the paid-up capital of the issuing company.
The issuing company must furnish a report to the Reserve Bank giving details of names of persons to whom shares are issued, number of shares issued to them and a certificate from the issuing company's Company Secretary that the SEBI regulations are complied with.
TRANSFER OF SHARES/CONVERTIBLE DEBENTURES OF AN INDIAN COMPANY:
- By a person resident outside India:
- A person resident outside India who is not a non-resident Indian or an overseas corporate body, may transfer by way of sale or gift the shares / convertible debentures held by him / it to any person resident outside India.
- A non-resident Indian or an overseas corporate body may transfer by way of sale or gift, the shares/convertible debentures held by him/it to another non-resident Indian or overseas corporate body.
- Prior permission of the Central Government must be obtained if the person to whom the shares are being transferred has previous venture / tie up in India through investment in shares or debentures or a technical collaboration or a trade mark agreement in India in the same field in which the Indian company transferring the shares is engaged.
- A person resident outside India may transfer by way of gift, the shares/convertible debentures held by him to a person resident in India, or may sell the same on a recognized Stock Exchange in India through a registered broker.
- By way of gift or sale by a person resident in India: A person resident in India who proposes to transfer to a person resident outside India:
- any security, by way of gift, shall make an application to the Reserve Bank for its approval furnishing the required information or documents and the Reserve Bank may grant such approval on being satisfied of certain conditions.
- any share/convertible debenture of an Indian company, whose activities fall under Private Sector Banking, Non-Banking Financial Companies or Insurance, by way of sale, must obtain the prior approval of the Government and the Reserve Bank. In case the share/convertible debenture is of an Indian company involved in other activities as specified in the Annexure to the Reserve Bank Regulations, such approval is not required.
- A person resident outside India may transfer by way of sale the shares / convertible debentures held by him to a person resident in India with prior permission of the Reserve Bank.
- A person resident outside India may transfer share or convertible debenture of an Indian company without the Reserve Bank's permission., by way of sale, to a person resident in India, provided the pricing guidelines, documentation and reporting requirements for such transfers as specified by the Reserve Bank are complied with.
REMITTANCE OF SALE PROCEEDS:
The remittance of sale proceeds of an Indian security held by a person resident outside India can be made only in accordance with the Reserve Bank regulations.
An authorized dealer may allow the remittance of sale proceeds of a security to the seller of shares resident outside India provided the security was held by him on repatriation basis/the security was sold on a recognized stock exchange in India or with Reserve Bank's approval in other cases/a no tax clearance certificate has been produced from the income-tax authority.
FOREIGN DIRECT INVESTMENT SCHEME:
Restricted and Prohibited Activities:
For the following activities, Automatic Route of Reserve Bank for investment from person resident outside India is not available:
Natural Gas / LNG Pipelines, Investing companies in Infrastructure and Services Sector, Defence and Strategic Industries, Atomic Minerals, Print Media, Broadcasting, Postal Services, Courier Services, Establishment and Operation of satellite, Development of Integrated Township, Tea Sector, Asset Reconstruction Companies.
- For the following activities or items Foreign Direct Investment is prohibited:
Retail Trading, Atomic Energy, Lottery Business, Gambling and Betting, Housing and Real Estate business, Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc.) and Plantations (other than Tea plantations).
Issue of shares by an Indian Company under Reserve Bank's Automatic Route:
The following kinds of Indian companies may issue shares or convertible debentures to a person resident outside India (other than a citizen of Bangladesh/Pakistan/Sri Lanka) up to the extent specified in the Reserve Bank regulations and provided that such company is not engaged in any activity or in manufacturing of item included in the list of Restricted and Prohibited Activities:
- An Indian company which complies with the Industrial Policy and Procedures as notified by Secretariat for Industrial Assistance (SIA) in the Ministry of Commerce and Industry provided the activities of the issuer company do not require an industrial license and the issuance of shares is not with the purpose of acquiring existing shares of any Indian company.
- A trading company incorporated in India subject to certain conditions.
- A small scale industrial unit.
- An Export Oriented Unit/Unit in Free Trade Zone/Export Processing Zone/Software Technology Park/Electronic Hardware Technology Park.
- An Indian company, being a provider of technology / technical know-how, against Royalty / Lump sum fees due for payment or against External Commercial Borrowing.
Issue of shares by a Company requiring the Government approval:
Foreign Direct Investment in activities not covered under the automatic route requires prior approval of the Secretariat for Industrial Assistance or the Foreign Investment Promotion Board (FIPB) of the Government of India. Such activities refer to the following:
- a company being engaged or proposing to engage in any activity included in the list of Restricted and Prohibited Activities;
- a company proposing to issue shares beyond the sectoral limits as specified in the Reserve Bank regulations;
- a company otherwise not being eligible to issue shares to a person resident outside India.
Issue of Shares by International offering:
- An Indian company can raise foreign currency resources abroad by issuing its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/or American Depository Receipts (ADRs).
- Such Indian company must have an approval from the Ministry of Finance to issue such ADRs/GDRs and must not be otherwise ineligible to issue shares to persons resident outside India.
- The ADRs/GDRs must be issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government from time to time.
- A registered broker in India may purchase shares of an Indian company on behalf of a person resident outside India for converting them into ADRs/GDRs, subject to certain conditions.
- An Indian company may sponsor an issue of ADRs/GDRs with an overseas depository against shares held by its shareholders subject to certain conditions.
Mode of Payment for issued shares:
A company in India issuing shares/convertible debentures to a person resident outside India shall receive the payment:
- by inward remittance through normal banking channels, or
- by debit to Non Resident External (NRE) account/Foreign Currency (FCNR) account of the person concerned maintained with an authorized dealer/bank.
PORTFOLIO INVESTMENT SCHEME
Purchase of shares/debentures by a Registered Foreign Institutional Investor:
- A registered Foreign Institutional Investor (FII) may purchase shares/convertible debentures of an Indian company through a registered broker on a recognized stock exchange, subject to certain conditions.
- Payment for purchase of shares/debentures must be made by inward remittance from abroad through normal banking channels or out of funds held in an account maintained with the designated branch of an authorized dealer in India.
- A registered FII is permitted to purchase shares/convertible debentures of an Indian company through offer/private placement, subject to the ceiling specified in the Reserve Bank regulations.
Purchase/Sale of shares/debentures by a Non Resident Indian:
- A Non-resident Indian may purchase/sell shares/convertible debentures of an Indian company through a registered broker on a recognized stock exchange, subject to certain conditions.
- Non-resident Indians may purchase and sell shares/convertible debentures under this scheme through a branch designated by an Authorised Dealer approved by the Reserve Bank.
- The Non-resident Indian investor will have to take delivery of the shares purchased and give delivery of the shares sold.
- Payment for purchase of shares/debentures must be made by inward remittance in foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India if the shares are purchased on repatriation basis and by inward remittance or out of funds held in NRE/FCNR/NRO/NRNR/NRSR account of the Non-resident Indian concerned, maintained in India where the shares/debentures are purchased on non-repatriation basis.
Transfer or Issue of Any Foreign Security
Prohibition on issue/transfer of foreign security:
- A person resident in India may issue or transfer any foreign security only in accordance with the Foreign Exchange Management Act, 1999, its rules, regulations or directions.
- The Reserve Bank may on an application made to it, permit any person resident in India to issue or transfer any foreign security.
Purchase and sale of foreign security by an Indian resident:
An Indian resident may purchase foreign security through one of the following ways:
- by purchasing a foreign security out of funds held in Resident Foreign Currency (RFC) account;
- by acquiring bonus shares on the foreign securities held in accordance with the Foreign Exchange Management Act, 1999, its rules and regulations;
- by purchasing a foreign security from out of his foreign currency resources outside India, when not permanently resident in India.
An Indian resident may sell the foreign security purchased or acquired by him through any of the above methods.
DIRECT INVESTMENT OUTSIDE INDIA
Direct Investment in certain cases:
An Indian party may make direct investment in a Joint Venture or Wholly Owned Subsidiary outside India subject to the following conditions:
- the total financial commitment of the Indian party does not exceed the ceiling as prescribed by the Reserve Bank;
- the direct investment is made in an overseas Joint Venture or Wholly Owned Subsidiary engaged in a bonafide business activity;
- the Indian Party is not on the Reserve Bank's Exporters caution list/list of defaulters to the banking system or under investigation by any investigation/enforcement agency or regulatory body;
- the Indian party has submitted up to date returns in respect of all its overseas investments;
- the Indian Party routes all transactions relating to the investment through only one branch of an authorized dealer.
Permissible Sources for funding direct investment:
Funding for direct investment outside India can be made by one or more of the following sources:
- the balances held in Exchange Earner's Foreign Currency Account of the Indian Party maintained with an authorized dealer;
- cash remittance by market purchase of foreign exchange;
- capitalization of export proceeds and other dues and entitlements;
- guarantees issued by the Indian party to or on behalf of the Joint Venture company or Wholly Owned Subsidiary;
- utilization of the amount raised by issue of ADRs/GDRs by the Indian party;
- proceeds of External Commercial Borrowing.
Investment in Agricultural Operations Overseas:
A person resident in India being a company incorporated in India or a partnership firm registered under Indian Partnership Act, 1932, may invest in agricultural operations including purchase of land, either directly or through their overseas offices. The following conditions must also be satisfied:
- the Indian party must be eligible to make such investment;
- the investment must be within the prescribed limits;
- the valuation of the acquired land must be certified by a certified valuer registered with the appropriate valuation authority in the host country.
Investment in Equity of a Company Registered Overseas:
A person resident in India, being an individual or a listed Indian company may invest in any of the following, subject to compliance with the prescribed investment ceilings:
- the shares of an overseas company which is listed on a recognized stock exchange;
- the rated bonds/fixed income securities issued by companies at a recognized stock exchange.
Investment by Mutual Funds:
Mutual funds registered with the Securities Exchange Board of India may invest in any of the following, subject to compliance with the specified limits:
- shares or rated bonds/fixed income securities of an overseas company listed on a recognized stock exchange;
- Exchange Traded Funds;
- other securities as stipulated by the Reserve Bank from time to time.
Investment in Financial Services Sector:
An Indian party may make investment in the financial services sector outside India, provided that the Indian party fulfills the following conditions:
- It has earned net profit during the preceding 3 financial years from the financial services activities;
- It is registered with the regulatory authority in India for conducting the financial services activities;
- It has obtained approval from the concerned regulatory authorities both in India and abroad for venturing into such financial sector activity;
- It has fulfilled the norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.
Investment by swap or exchange of shares of an Indian company:
An Indian Party may acquire shares of a foreign company engaged in bonafide business activity in exchange of ADRs/GDRs issued to it under the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued under it by the Central Government. The following conditions must also be satisfied:
- ADRs/GDRs are listed on any stock exchange outside India;
- the ADR/GDR issue for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian Party;
- the total holding in the Indian Party by persons resident outside India after the new ADR/GDR issue must not exceed the sectoral cap prescribed under the relevant regulations for such investment;
- the valuation of the shares of the foreign company is made as per the recommendations of the Investment Banker if the shares are not listed on any stock exchange/on the current market capitalization of the foreign company.
Approval of the Reserve Bank in certain cases:
An Indian Party which does not satisfy the eligibility norms under the above mentioned paragraphs may apply to the Reserve Bank for approval. The Reserve Bank may take into account the following factors while considering any such application:
- Prima facie viability of the Joint Venture / Wholly Owned Subsidiary outside India;
- Contribution to external trade and other benefits which will accrue to India through such investment;
- Financial position and business track record of the Indian Party and the foreign entity;
- Expertise and experience of the Indian Party in the same or related line of activity of the Joint Venture or Wholly Owned Subsidiary outside India.
Obligations of the Indian Party:
An Indian Party which has acquired foreign security is under the following obligations:
- to receive share certificates or any other document as an evidence of investment in the foreign entity to the Reserve Bank's satisfaction;
- to repatriate to India all dues receivable from the foreign entity;
- to submit to the Reserve Bank an Annual Performance Report and other reports or documents as may be stipulated by the Reserve Bank.
Transfer of Shares:
An Indian Party may transfer shares held in a Joint Venture or Wholly Owned Subsidiary outside India, subject to certain criteria laid down by the Reserve Bank, through one of the following methods:
- by way of sale of shares, not involving write-off of the investment made, subject to the Reserve Bank's prior approval;
- by way of sale of shares involving write-off, subject to the Reserve Bank's prior approval;
- by way of pledge of shares to an authorised dealer or a public financial institution in India.
INVESTMENTS ABROAD BY INDIVIDUALS IN INDIA
Investment by a Proprietary Concern in India:
- A proprietary concern, subject to certain conditions, may accept shares of a company outside India instead of fees due to it for professional services rendered to the said company.
- Such proprietary concern must apply to the Reserve Bank and seek its prior permission for making direct investment abroad.
Investment by Individuals:
A resident individual must apply to the Reserve Bank for permission to acquire shares in a foreign entity offered as consideration for professional services rendered to the foreign entity.
The Reserve Bank may grant permission after taking into account the following factors:
- credentials and net worth of the individual and the nature of his profession;
- the extent of his forex earnings/balances in his EEFC and/or RFC account;
- financial and business track record of the foreign entity;
- potential for forex inflow to the country;
- other likely benefits to the country.
INVESTMENTS IN FOREIGN SECURITIES OTHER THAN BY WAY OF DIRECT INVESTMENT
Purchase/acquisition of foreign securities in certain cases:
A person resident in India being an individual may acquire foreign securities through one of the following ways:
- by way of gift from a person resident outside India;
- under Cashless Employees Stock Option Scheme issued by a company incorporated outside India, provided it does not involve any remittance from India;
- by way of inheritance from a person whether resident in or outside India;
- by purchasing the equity shares offered by a foreign company if he is an employee or a director of an Indian office or branch of a foreign company or of a subsidiary in India of a foreign company or of an Indian company in which the foreign equity holding meets the prescribed limit.
Transfer of a foreign security by a person resident in India
A person resident in India who has acquired or holds foreign securities in accordance with the provisions of the Foreign Exchange Management Act, 1999 or its Rules or Regulations, may transfer them by way of pledge for obtaining fund or non-fund based facilities in India from an authorized dealer.
Acquisition of foreign securities as qualification/rights shares
An Indian resident may acquire foreign securities, if it represents:
- qualification shares issued by a company incorporated outside India for holding the post of a director in the company, subject to certain conditions;
- rights shares in a company incorporated outside India;
- purchase of shares of a Joint Venture or Wholly Owned Subsidiary outside India of the Indian promoter company by the employees/directors of an Indian promoter company engaged in the field of software;
- purchase of foreign securities under ADR/GDR linked stock option schemes by resident employees (including working directors) of an Indian company in the knowledge based sector.
Export of Goods and Services
Declaration of export of goods and services:
Every exporter of goods/software in physical form or through any other form, either directly or indirectly, to any place outside India (other than Nepal and Bhutan), is required to furnish to the specified authority, a declaration in one of the Forms set out in the Reserve Bank regulations.
Such declaration must contain true and correct material particulars including the amount representing:
- the full export value of the goods or software;
if full export value is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods or software in overseas market;
In respect of export of services to which none of the Forms specified in the Reserve Bank regulations apply, there is no need to furnish any declaration, but the exporter will be liable to realize the amount of foreign exchange which becomes due or accrues on account of such export, and to repatriate the same to India.
Importer-exporter code number:
The importer-exporter code number allotted by the Director General of Foreign Trade under the Foreign Trade (Development and Regulation) Act, 1992 must be indicated on all copies of the declaration forms submitted by the exporter to the specified authority and in all correspondence of the exporter with the authorized dealer or the Reserve Bank.
Authority to whom declaration is to be furnished:
- Declaration in Form GR/SDF: Commissioner of Customs.
- Declaration in Form PP: Authorised Dealer named in the form.
- Declaration in Form SOFTEX: Designated Official of Ministry of Information &Technology
- Duplicate Declaration Forms: Authorised Dealers.
Exports requiring Prior Approval:
- Export of goods on lease, hire: Prior permission of the Reserve Bank is required for export of any goods from India to any place outside India on lease, hire or any arrangement or in any other manner other than sale or disposal of such goods.
- Exports under trade agreement/rupee credit:
- Export of goods under special arrangement between the Central Government and Government of a foreign state, or under rupee credits extended by the Central Government to Government of a foreign state must be governed by the public notices issued by the Trade Control Authority in India and instructions of the Reserve Bank.
- An export under the line of credit extended to a bank/financial institution operating in a foreign state by the Exim bank for financing exports from India, is to be governed by the Reserve Bank's terms and conditions laid down for the authorized dealers.
- Counter Trade: Reserve Bank's prior approval is required for any arrangement involving adjustment of value of goods imported into India against value of goods exported from India.
Investment in Firm or Proprietary Concern in India
Restrictions on investment:
- No person resident outside India is allowed to make any investment to the capital of a firm/proprietary concern/any association of persons in India, except as provided in the Foreign Exchange Management Act, 1999, its rules, regulations, directions or orders.
- Such a person may make such an investment with the Reserve Bank's permission, on an application made to it, subject to certain terms and conditions.
Permission for investment in certain cases:
A Non-resident Indian or a person of Indian origin resident outside India may invest by making contributions to the capital of a firm or a proprietary concern in India. The following conditions must also be satisfied:
- the amount invested must be received either by inward remittance through normal banking channels or out of an account maintained with an authorized dealer/bank;
- the firm or the proprietary concern is not engaged in any agricultural/plantation activity or real estate business;
- the amount invested shall not be eligible for repatriation outside India;
- where investment is made out of NRSR account of the non-resident investor, the income earned on investment or proceeds of investment must be credited only to such account;
- the firm or the proprietary concern must not be engaged in print media.
Permission to a firm or a proprietary concern to make payment for the investments:
A firm or a proprietary concern in India may make payment to a non-resident Indian or a person of Indian origin for the following:
- the sum invested by such person in that firm or proprietary concern;
- the income accruing to such person by way of profit on such investment.
Offshore Banking Unit
An Offshore Banking Unit refers to a branch of a bank in India located in the Special Economic Zone and holding an authorization issued under the Banking Regulation Act, 1949.
- An Offshore Banking Unit is not regarded as an authorized dealer for the purpose of the Foreign Exchange Management Act, 1999, its Rules or Regulations, unless so directed by the Reserve Bank.
- An Offshore Banking Unit shall be governed only by the Reserve Bank Regulations and no other Regulations shall apply to it.
- An Offshore Banking Unit shall not conduct any activity or undertake any transaction with residents in India, unless the Reserve Bank permits it.
Permissible Transactions by an Offshore Banking Unit:
An Offshore Banking Unit may undertake the following transactions:
- foreign exchange transactions with any authorized dealer in India only on principal-to-principal basis;
- foreign exchange transaction with a unit located in Special Economic Zone, subject to the specified ceilings and other conditions.
Withdrawal of General Permission and Unwinding of Investments and Transactions
Overseas Corporate Bodies (OCBs) are no longer recognized as a class of investor entity in India since September, 2003. Therefore, the Reserve Bank of India has made the following Regulations for withdrawal of general permission to Overseas Corporate Bodies (OCBs) to undertake transactions:
- No fresh account to be opened or maintained in the name of an OCB;
- An existing NRE (Saving and Current) Account held or maintained in the name of an OCB to be closed and balances to be repatriated;
- An existing NRO (Saving) Account held or maintained in the name of an OCB to be closed and balances transferred to non-interest bearing NRO (Current) Account;
- An existing NRE (Recurring/Fixed Deposit) Account or FCNR Account held in the name of an OCB to be continued till original maturity and the proceeds to be repatriated on maturity;
- An existing NRO (Recurring/Fixed) Account held in the name of an OCB to be continued till original maturity and on maturity the proceeds to be credited to NRO (Current) Account;
- No facility of any nature to be granted on the security of an account held in the name of an OCB;
- Non-renewal and closure of any loan or other facility granted against the security of a Recurring/Fixed Deposit Account held in the name of an OCB;
- No investment in any security to be made by an OCB;
- An OCB may transfer an existing investment held by it (shares/convertible debentures) by sale/gift to any Non-resident Indian or dispose it of by sale through a registered stock broker on a recognized stock exchange in India;
- An OCB not to be eligible to purchase equity or preference shares or convertible debentures offered on right basis by an Indian company and an Indian company not allowed to offer the same;
- An OCB to renounce the shares offered on rights basis before the commencement of these Regulations in favour of a person resident in India/a person resident outside India who is eligible to invest in a security of an Indian company;
- No person resident in India to either borrow from or lend to an OCB either in foreign exchange or in Rupees;
- Non-renewal on becoming due, of any outstanding borrowing from or loan to an OCB, whether in foreign exchange or in Rupees, and non accrual of any interest after it falls due for repayment.
Permission to hedge certain transactions:
An OCB may enter into a forward contract with rupee as one of the currencies with an Authorised Dealer in India to hedge:
- the amount of dividend due to it on an existing investment in the form of shares of an Indian company;
- the balances held in an existing Foreign Currency Non- Resident (FCNR) account or Non-resident External Rupee (NRE-Rupee) Term Deposit account;
- the amount of existing investment made under Portfolio Investment Scheme in accordance with the relevant Acts and Regulations governing it.
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