Overview Foreign Exchange Regulations

The Central Government developed the Foreign Exchange Management Act to encourage external payments and cross-border trade. The Foreign Exchange Management Act or FEMA was introduced in the year 1999, replacing the FERA (Foreign Exchange Regulation Act). FEMA was introduced to fill all of FERA's deficiencies and flaws. The FEMA Act therefore added various important reforms.

The Foreign Management Act (FEMA) is an official act that consolidates and amends the laws governing foreign exchange in India. FEMA Act's main objective was to facilitate orderly development, external payment and maintenance of the foreign exchange market in India.

When a foreign investor invests in India or an Indian investor invests outside India, that person should follow foreign exchange regulations. Foreign exchange regulations are prepared by the Directorate General of Foreign Trade and the Reserve Bank of India (RBI). Foreign Exchange Regulations introduced compliance in foreign exchange to keep a check on the increasing flow of both inbound and outbound funds.

Applicability of FEMA Act

FEMA is applicable in India and is equally applicable to the agencies and offices located outside India that are owned or managed by an Indian Citizen. The Head Office for foreign exchange is situated in New Delhi and is known as Enforcement Directorate. FEMA applies to the following:

• Foreign Security.
• Foreign Exchange.
• Exportation of commodity or service from India to a country outside India.
• Securities, as explained under Public Debt, 1994.
• Purchase, sale, and exchange of any kind.
• Banking, insurance, and financial services.
• An Overseas Company owned by an NRI.
• Any Citizen of India, residing in a country outside India (NRI).

Rules and Regulations

The Rules and Regulations specified by FEMA are as follows:

• Foreign Exchange Management (Current Account Transactions) Rule, 2000.
• Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000.
• Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.
• Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2000.
• Foreign Exchange Management (Acquisition and transfer of immovable property in India) regulations, 2000.
• Foreign Exchange Management (Establishment in India of branch or office or other places of business) regulations, 2000.
• Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2000.
• Foreign Exchange Management (Export of Goods and Services) regulations, 2000.
• Foreign Exchange Management (Realization, repatriation, and surrender of Foreign Exchange) Regulations, 2000.
• Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000.
• Foreign Exchange (proceedings) Rules, 2000. 

Which foreign currency transactions are allowed according to foreign exchange regulations?

The procedures and formalities for dealing with all the foreign exchange transactions in India are streamlined by FEMA. Foreign Exchange transactions are classified into two categories:

According to the FEMA Act, the actual balance payments must record the business assets of the goods and services. Moreover, these transactions take place between the citizens of other countries with India.

Current Account Transactions

The Current Account Transactions include the inflow and outflow of money during any year to and fro from different countries outside India. This transaction takes place because of trading or rendering services, commodities, and income between the countries. The Current Account Transactions are further categorized into three parts, according to Foreign exchange Regulations. They are:

• Transactions that are prohibited by FEMA.
• Transaction requiring prior approval from the Central Government.
• Transaction requiring RBI’s prior approval.

Capital Account Transactions

The Capital Account checks domestic investments within foreign assets and vice versa. According to FEMA, the Capital Account Transactions are transactions that alter the assets or liabilities of a person resident in India outside of India or assets or liabilities in India of the resident individual outside India.

Direct Investments Outside India

As per Foreign Exchange Regulations specified by FEMA direct investments outside India is permitted in following:

• An Indian party can make direct Investment in a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India.
• The financial commitment of an Indian party in a Joint Ventures or Wholly Owned Subsidiary shall not exceed 100% of the net worth of the concerned Indian Party as on the date of the last audited balance sheet.
• Investment prescribed under the Foreign Exchange Regulation may be funded by:

1) Balance held in the Exchange Earners' Foreign Currency Account of the Indian party that is maintained with an Authorized Dealer (AD).

2) Drawn on foreign exchange from an authorized dealer in India not exceeding 100 % of the Indian Party's net worth as on the date of the last audited balance sheet.

• A person resident in India, can be an individual or a listed company or a mutual fund registered in India can invest in:
• A Company incorporated in India or a Partnership firm that is registered under the Indian Partnership Act, 1932, can undertake Agricultural Operations. Agricultural Operations will include the purchase of land that is incidental to such activity either done directly or through the overseas offices.
• To make investment as per the Foreign Exchange Regulations through Remittance from India in an existing Company outside India shall be made.
• An Indian Party can make direct Investment in any foreign security without any specified limit. This can be done out of the proceeds of the international offering of shares through the mechanism of ADR or GDR.
• An Indian Party can extend the loan or guarantee to or on behalf of the WOS/JV aboard within the permissible financial commitment. This is possible if the Indian Party has made Investment by contributing to the joint venture's equity capital.

1) Shares of overseas Company that is listed on a recognized stock exchange. It must also have a shareholding of at least 10% in any listed company as on 1st January of the year of Investment.

2) Rated Bonds or Fixed Income Securities that are issued by Companies.

• The Indian Party can also invest as per Foreign Exchange Regulations to an entity outside India that is engaged in financial services activities. Provided that the Indian Party:

1) Has earned a net profit from the financial services during the preceding three fiscal years.

2) For conducting financial services activities if registered with the regulatory authority.

3) Has also obtained approval from the concerned regulatory authority in India and a foreign country for making ventures in the financial sector.

4) It has fulfilled all the prudential norms relating to capital adequacy as per the concerned regulatory authority in India, as specified by the Foreign Exchange Regulations.

How can one invest through capitalization according to foreign exchange regulations?

An Indian party can make direct investment through capital investment outside India as per foreign exchange regulations and the entire portion of the amount due from the foreign organization to the Indian party:

• Payment made for Export of Plant and Machinery or Equipment and other goods and software.
• Fees, Commissions, Royalties, or other entitlements due to the Indian Party from any foreign entity with regard to the supply of technical know-how, managerial, consultancy, or other services.
• The royalties, commissions, fees, or other entitlements if remained unrealized from the date of such payment beyond a period of six months shall not be capitalized without obtaining prior permission of the Reserve Bank.
• An Indian Software exporter can receive up to 25% of the value of exports in the form of shares to an overseas software startup company by applying with the Reserve Bank through an Authorized Dealer.

How to get a foreign company without tendering or bidding process according to foreign exchange regulations?

Foreign Exchange Regulations specify specific procedures for the acquisition of a foreign company without any tender or bidding process. They are listed below:

• Under the regulations, an eligible Indian party can invest outside the authorized dealer in India, allowing remittances. Remittances may be made on behalf of earnest deposits or by issuing a bid bond guarantee on their behalf for the purpose of bidding for the acquisition of a company incorporated outside India or participating in the tender process.
• In cases where the Indian party wins the bid:

1) The authorized dealer may allow further remittances for the acquisition of the foreign company specified in Regulation 6 of the foreign company.

2) The Indian team will have to submit a report in Form ODA to the RBI through an authorized dealer within 30 days of giving effect to the final remittance.

• For the purpose of participating in the tender process, the Reserve Bank may allow the remittance of foreign currency for depositing foreign currency in Form ODI or issuing a bond guarantee subject to terms and conditions as required to the Authorized Dealer May allow. Of the Reserve Bank.

How can individuals invest abroad according to foreign exchange regulations?

According to foreign exchange regulations, individuals can invest abroad in the following ways:

• A resident individual may apply to the Reserve Bank in respect of permission to acquire shares in a foreign entity for professional services provided to a foreign bank.
• After considering all the points, RBI can allow such terms and conditions:

1) Credentials and net worth of the individual and also the nature of his profession.

2) The extent of the individuals’ forex earnings or balances in his EEFC or RFC Account.

3) The business track record, as well as the financial history of the foreign entity.

4) Potentials with regard to forex inflow of the country.

5) Other benefits to the country.

Foreign Currency Convertible Bonds (FCCB) as per Foreign Exchange Regulations

Foreign Exchange Regulations have suggested some automatic routes for foreign currency convertible bonds (FCCB):

• The FCCBS to be issued is required to conform to the Foreign Direct Investment Policy of the Government from time to time and in accordance with the regulations or directives issued by the Reserve Bank.
• The FCCB will be issued to the extent of USD 500 million in any financial year.
• The public issue of the FCCB will be handled by key managers in the international capital market.
• FCCB shall have a maturity of not less than five years.
• FCCB bonds will not be used as an investment in the stock market.
• Banks, NBFCs or financial institutions will not provide guarantees or LOCs for issuing FCCBs.

What are the major services we offer?

The Key Services offered by us for Foreign Exchange Regulations are:

• Provide assistance to foreign companies to set up branch offices or liaison offices and project offices.
• Regulatory Due Diligence.
• Advice on foreign currency transactions
• Compliance regarding past and present regulatory risk analysis.
• Representation before officials like RBI and Revenue Departments.
• Obtaining approval for ECB.

Some facts

What is foreign exchange regulation?

Foreign exchange regulation is called a form of financial regulation specifically targeted at the foreign exchange market. Therefore, it is decentralized and operates with no central exchange or clearinghouse.

Who regulates foreign exchange in India?

FEMA or Foreign Exchange Management Act, 1999 regulates foreign exchange regulations in India. Whereas, the top foreign regulatory authority in India is the Reserve Bank of India (RBI) which regulates the law and is also responsible for important approvals.

What is the FEMA limit?

Under FEMA's LRS scheme, a resident Indian NRI or a foreign national can remit from India 2 to 50,000 USD in a financial year without obtaining approval from the Reserve Bank of India or the federal government.

What is an example of foreign exchange?

As explained, foreign exchange is the exchange of one currency for another by governments, businesses and residents of two different countries. A clear example of foreign exchange is a U.S.-based company that does business with a company in Japan and pays them in US currency.

Who controls the foreign exchange rate?

If the currency is free-floating, its exchange rate may be different against other currencies. The exchange rate on currencies is most likely because it is quoted in financial markets, mainly by banks around the world.

Where can NRIs invest?

NRIs are allowed unlimited amounts of investment options through repatriable and non-repatriable transactions. However, investments cannot be made in the Government's Small Savings or Public Provident Fund (PPF) schemes specified by FEMA rules for NRIs.

Can NRIs get immovable property?

NRI is permitted to purchase residential or commercial property in India. However, they are not allowed to buy agricultural property, plantations or farmhouse land etc. NRIs can also get immovable property as a gift or inheritance from relatives.

What are Capital Account Transactions?

Capital account transactions refer to transactions that change assets or liabilities, including all contingent liabilities, assets or liabilities in India of persons residing in India or of persons residing outside India. It also includes transactions referred to in section 6 (3) of FEMA1999.

Who is an Authorized Dealer in Foreign Exchange?

Authorized Dealers in Foreign Exchange Those entities or banks are permitted by RBI under Section 10 of the Foreign Exchange Management Act, 1999. These dealers are allowed to engage in foreign exchange transactions with non-residents and non-residents with each other. Banking customers for specific purposes.

What are current account transactions?

A transaction other than a capital account transaction is a current account transaction. Payments associated with foreign trade, services and other miscellaneous remittances are current account transactions as directed by FEMA (Current Account Transactions) Rules 2000.