Regulatory Provisions in FEMA with Respect to Current Account & Capital Account

Current Account Transactions

Current Account Transactions as defined in Section 2 (j) of FEMA, means a transaction other than a capital account transaction and without prejudice to the generality of the other provisions shall include:

  • payments due in connection with foreign trade, other account current business, services and short term banking and credit facilities in tire ordinary course of business;
  • payments due as interest on loans and as net income from the investments;
  • remittances for living expenses of parents, spouse and children resid­ing abroad;
  • expenses in connection with foreign travel, education and medical care of parents, spouse and children.

Provisions to Section 5 of FEMA empowers the Central Government in public interest and in consultation with the Reserve Bank to impose such reasonable restrictions for current account transactions in exercise of the powers conferred and in consultation with the Reserve Bank the Central Government issued Foreign Exchange Management (Current Account Transactions) Rules 2000 on 3rd May, 2000 in this regard.

In terms of provisions of Section 5 of FEMA, any person may sell or draw foreign exchange to or from an authorised dealer if such sale or with­drawal is a current account transaction.

The proviso to Section 5 empowers Government of India, in public interest and in consultation with the Reserve Bank to impose reasonable restrictions on certain current account transactions.

In terms of the rules 3, drawal of exchange for the following transactions is prohibited.

  • Travel to Nepal or Bhutan
  • Transactions with a person resident in Nepal or Bhutan (unless specifically exempted by Reserve Bank by general or special order).
  • Remittance out of lottery winnings
  • Remittance of income from racing/riding etc. or any other hobby.
  • Remittance for purchase of lottery tickets, banned/proscribed maga­zines, football pools, sweepstakes, etc.
  • Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian com­panies.
  • Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
  • Payment of commission on exports under Rupee State Credit Route. Payment related to “Call Back Services” of telephones.
  • Remittance of interest income on funds held in Non-Resident Special Rupee (NRSR) Account scheme.

Prohibition on drawal of foreign exchange.

Rule 3 of Foreign Exchange Management (Current Account Transactions) Rules, 2000 provides that the drawal of foreign exchange by a person is prohibited for the following purposes, namely:

  • transactions specified in Schedule III of the notification;
  • travel to Nepal and/or Bhutan;
  • a transactions to the person resident in Nepal/or Bhutan.

The prohibition on the transaction with a person resident in Nepal or Bhutan may be exempted by the Reserve Bank of lndia subject to such terms and conditions as it may considered necessary to stipulate by general or special order.

The transactions which are specified in ScheduleP and thereby absolutely prohibited are:

  • remittance out of lottery winnings;
  • remittance of income from racing/riding etc. or any other hobby;
  • remittance for purchase of lottery tickets, banned/prescribed magazines, foot­ball pools, sweepstakes ete. ;
  • payment of commission on exports made towards equity investment in joint ventures/wholly owned subsidiaries abroad of Indian companies;
  • remittance of dividend by any company to which the requirement of dividend balancing is applicable;
  • payment of commission on exports under Rupee State Credit Route; . payment related to “Call Back Services” of telephone;
  • remittance of interest income on funds held in Non-Resident Special Rupee Scheme Account;

Prior approval of the Government of India.

Provides that no person shall draw foreign exchange for the transaction included in .Table-A without prior approval of the Government of India.

The provisions to this rule states that this rule shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account or Exchange Earners Foreign Currency (EEFC) Account of the remitter.

TABLE-A

Purpose of Remittance Whose approval is required
Cultural Tours Ministry of Human Resources Developments (Department of Education and Culture) Ministry of Finance, (Department of Economic Affairs)
Advertisement abroad by any PSU/State And Central Government Department Ministry of Finance, (Department of Economic Affairs).
Remittance of freight of vessel charted by a PSU (Chartering Wing) Ministry of Surface Transport
Payment of import by a Government Department (Chartering Wing) or a PSU on C.I.F basis (i.e. other than F.O.B and F.A.S basis) Ministry of Surface Transport
Multi-modal transport operators making remittance to their agents abroad Registration Certificate from the Director General of Shipping.
Remittance of hiring charges of transponders Ministry of Finance, (Department of Economic Affairs)
Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping Ministry of Surface Transport (Director General of Shipping)
Remittances under technical collaboration agreements where payment of royalty exceeds 5%on local sales and 8% on exports and lump-sum payment exceeds US$ 2 million Ministry of Industry and Commerce.
Remittance of prize money/ sponsorship of sports activity abroad by person other than International/National/State level sports bodies, if the amount involved exceeds US $100000 Ministry of Human Resource Development (Department of Youth Affairs and Sports)
Payment for securing Insurance for health from a company abroad Ministry of Finance, (Insurance Division)
Remittance for membership of P & I Club Ministry of Finance, (Insurance Division)

Prior approval of the Reserve Bank.

There are certain transactions listed in below which cannot be undertaken without the prior approval of the Reserve Bank, these provisions shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account or Exchange Earners Foreign Currency (EEFC) Account of the remitter.

The transactions for which prior approval of the Reserve Bank is needed are as follows:

Remittance by artiste e.g. wrestler, dancer, entertainer etc. (This restriction is not applicable to artistes engaged by tourism related organizations in India like ITDC, State Tourism Development Corporations etc. during special festivals or those artistes engaged by hotels in five star categories, provided the expenditure is met out of EEFC account) ;

  • Release of exchange exceeding US$ 5,000 or its equivalent in one calendar year, for one or more private visits to any country (except Nepal and Bhutan)
  • Gift, remittance exceeding US$ 5,000 per beneficiary per annum;
  • Donation exceeding US$ 5,000 per annum per beneficiary ;
  • Exchange Facilities exceeding US$ 5000 for persons going abroad for employment;
  • Exchange Facilities for emigration exceeding US$ 5,000 or amount prescribed by country of emigration;
  • Remittance for maintenance of close relatives abroad exceeding US$ 5,000 per year per recipient;
  • Release of foreign exchange, exceeding US$ 25,000 to a person, irrespective of period of stay, for business travel, or attending a Conference or specialized training or for maintenance expenses of a patient going abroad for medical treatment or check-up abroad, or for accompanying as attended to a patient going abroad for medical treatment/Check-up;
  • Release of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in India or hospital/doctor abroad;
  • Release of exchange for studies abroad exceeding the estimates from the institution abroad or US$ 30,000, whichever is higher;
  • Commission to agents abroad for sale of resident flats/commercial plots in India, exceeding 5%of the inward remittance;
  • Short term credit to overseas offices of Indian companies;
  • Remittance for advertisement on foreign television by a person whose export earnings are less  than Rs. 10 lakhs during each of the preceding two years;
  • Remittances of royalty and payment of lump-sum fee under the technical. collaboration agreement which has not been registered with Reserve Bank;
  • Remittance exceeding US$ 100,000 for architectural/consultancy services procured from abroad;
  • Remittances for use and/or purchase of trade mark/franchises in India. Exchange facilities for transactions.

Exchange facilities for transactions

Exchange facilitate for transaction in schedule II to the rules may be permitted by authorised dealers provided the applicant has secured the approval from the Ministry Department of Government of India indicated against the transactions.

In respect of transactions included in Schedule III where the remittance applied for exceeds the limit, if any, indicated in the schedule or other transactions included in Schedule III for which no limit have been stipulated would require prior approval of Reserve Bank.

Remittances for other current Account transactions

Remittances for all other current transactions which are not specifically prohibited under the rules or which are not included in Schedule II or III may be permitted by authorised dealers without any monetary/percentage ceilings subject to compliance with the provisions of Sub-section (5) of Section 10 of FEMA. Remittances for transactions included in Schedule III’ may be permitted by authorised dealers up to the ceilings prescribed therein.

For removal of doubts, it is clarified that ­-

  • The existing procedure to be followed by Indian companies for entering into collaboration arrangements with overseas collaborators would continue.
  • There would be ‘no restriction regarding receipt of advance payment or back to back letter of credit for merchanting trade transactions.
  • In terms of Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 approval of Reserve Bank would be required for importers availing of Supplier’s Credit beyond 180 days and Buyer’s Credit irrespective of the period of credit.
  • Transactions relating to import of ship stores into bond for supply to Indian/foreign flag vessels, Indian Naval ships, and foreign diplomatic personnel will no more be regulated by Reserve Bank.
  • Remittance of surplus freight/passage collections by shipping/airline compa­nies or their agents, remittances by break bulk agents, multimodal transport operators, remittance of freight pre-paid on inward consolidation of cargo, operating expenses of Indian airline/shipping companies etc. may be permitted by authorised dealers after verification of documentary evidence in support of the remittance.

The Reserve Bank will not prescribe the documentation which should be verified by the authorised dealers while permitting remittances for various transactions, particularly of current account. In this connection attention of authorised dealers is drawn to Sub­section (5) of Section 10 of FEMA which provides that an authorised person shall before undertaking any transaction in foreign exchange on behalf of any person require that person to make such a declaration and to give such information as will reasonably satisfy him that the transaction will not involve and is not designed for the purpose of any contravention or evasion of the provisions of FEMA or of any rule, regulation, notification, direction or order issued there under. Authorised dealers are advised to keep on record any information/documentation on the basis of which the transaction was undertaken for verification by the Reserve Bank. The said clause further provides that where the said person (applicant) refuses to comply with any such requirement or makes unsatisfactory compliance therewith, the authorised person shall refuse in writing to undertake the transaction and shall if he has reason to believe that any contravention/ evasion is contemplated by the person, report the matter to Reserve Bank

Capital Account Transactions

A capital account transaction as defined in Section 2(e) of FEMA 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, and includes transactions referred to in Sub-section (3) of Section 6.

The new legislation vide Section 6 deals with capital accounts transactions.

Sub-section (1) of the Section 6 gives a general liberty providing that any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. The application of this clause is however subject to the provisions of Sub-section (2) of the Section 6 which states that the Reserve Bank may in consultation with the Central Government specify any class or classes of capital account transactions which are permissible and the limit up to which foreign exchange shall be admissible for such transactions.

According to the regulations made under Section 6 (2) of FEMA, investment in India by a person resident outside India in any company or partnership firm or proprietary concern which is engaged in the business of Chit Fund or as a Nidhi Company or in Agricultural or Plantation activities or in Real Estate business (other than development of townships, construction of residential commercial premises, roads or bridges) or construction of farm houses or trading in Transferable Development Rights (TDRs) is prohibited.

Schedule I to the regulations specifies the permissible classes of Capital account transactions of a person resident in India and Schedule II specifies the permissible classes of such transactions by a person resident outside India.

Classification of capital account transactions:

The capital account transactions have been classified into two categories:

Capital Account Transactions of the following types made by persons resident in India:

  • Investment by a person resident in India in foreign securities.
  • Foreign currency loans raised in India and abroad by a person resident in India.
  • Transfer of immovable property outside India by a person resident in India.
  • Guarantees issued by a person resident in India in favor of a person resident outside India.
  • Export, import and holding of currency/currency notes.
  • Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India.
  • Maintenance of foreign currency accounts in India and outside India by a person resident in India.
  • Taking out of insurance policy by a person resident in India from an insurance company outside India.
    • Loans and overdrafts by a person resident in India to a person resident outside India.
    • Remittance outside India of capital assets of a person resident in India.
    • Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India.

Capital account transactions of the following types made by persons resident outside India:

  • Investment in India by a person resident outside India, that is to say,
    • Issue of security by a body corporate or an entity in India and investment therein by a person resident outside India; and
    • Investment by way of contribution by a person resident outside India to the capital of a firm or a proprietorship concern or an association of persons in India.
    • Acquisition and transfer of immovable property in India by a person resident outside India.
    • Guarantee by a person resident outside India in favour of, or on behalf of, a person resident in India.
    • Import and export of currency/currency notes into/from India by a person resident outside India.
    • Deposits between a person resident in India and a person resident outside India. .
    • Foreign currency accounts in India of a person resident outside India.
    • Remittance outside India of capital assets in India of a person resident outside India.

Capital account transactions on which restrictions cannot be imposed. There are two types of drawing foreign exchange, they are:

  • for amortization of loan; and
  • for depreciation of direct investments in ordinary course of business.

Restrictions cannot be imposed when drawal is for the purpose of repayments of loan installments.

Earlier permission relating to capital account transaction:

Under the provisions of FERA no person could make any capital account transac­tions except with the previous general or special permission of the Reserve Bank.

Prohibitions on capital account transactions in the new legislation.

A person resident outside India is prohibited from making investment in India in any form in any company or partnership firm or proprietary concern or any entity, whether in corporate or not, which is engaged or proposes to engage in :

  • in the business of chit fund;
    • a Nidhi Company;
    • agricultural or plantation activities;
    • real estate business (the term shall not include development of townships, construction of residential or commercial premises, roads or bridges) or construction of farm houses; or
    • trading in Transferable Development Rights (TDRs).The term Transferable Development Rights has been explained under the head ‘Meaning of terms’.

Bookmark the permalink.