CA Final Course Paper 4 Corporate and Allied Laws Chapter 18

CS.R Sridhar

Comparison of FEMA and FERA provisions

Important Definitions

Residential Status

General prohibition in dealing in foreign exchange

Current Account Transactions

Capital Account Transactions

Acquisition and transfer of immovable property in India and outside India

Export of Goods and Services

Realisation and repatriation of foreign exchange

Contraventions and penalties

Compounding of offences

Adjudication and Appeal

Enforcement Directorate

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Basis FERA FEMA Focus Regulation of foreign

exchange transactions Management of foreign exchange transactions

Regulates All transactions between residents and non residents (whether current account or capital account)

Only Capital Account transactions are regulated. Current account transactions are generally free subject to reasonable restrictions

Mens Rea Presumed Not presumed Nature of offence Criminal Civil

Compounding No such powers Specific provisions provided for compounding of offences through the Directorate of Enforcement

Right of accused Cannot take practitioner/CA assistance

Can take such assistance

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Act

Rules

Regulations

Circulars

• Notified by the Central Government • To carry out the provisions of the Act

• Restrictions on Current Account Transactions • Manner of Compounding of contraventions

• Notified by the RBI • To carry out provisions of the Act and the Rules

• Regulation of capital account transactions • The class of transaction as permissible • The limit upto which foreign exchange shall be admissible for the

transaction. • Manner of repatriation and possession of Foreign Exchange • Foreign Currency Accounts by residents

• Directions by the RBI • To the Authorized Dealers • For securing compliance with the Act, Rules and

Regulations

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Capital Account transactions Current account transactions Authorised person Foreign exchange Foreign security Person resident in India

Transaction which alters assets or liabilities (including contingent liabilities)

• Outside India of persons resident in India or • In India of persons resident outside India

Includes following transactions -

• Transfer/ issue of foreign security by an Indian resident • Transfer/ issue of security by a non-resident • Borrowing/ lending in foreign exchange/ Indian Rupees • Deposits • Export/ import of currency • Cross border transactions in immovable properties • Giving guarantees to non-residents/ in connection with cross border liabilities

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A transaction other than a capital account transaction.

Includes following payments/ remittances – • foreign trade, other current business, services • short-term banking and credit facilities in the ordinary course of

business, • interest on loans • net income from investments, • living expenses of parents, spouse and children residing abroad, • foreign travel, education and medical care of parents, spouse

and children;

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Authorized Person: Sec. 2(c) read with Sec.10(1) : Means a person authorised to deal in foreign exchange / securities by the Reserve Bank of India and includes:

• 1. Authorised Dealer; • 2. Money Changer; • 3. Off-Shore Banking Unit; or • 4. Any other person for the time being authorised u/s 10(1)

Foreign Exchange : Sec. 2(n) : Means any currency other than Indian currency and includes:

• Deposits, credits and balances payable in any foreign currency; • Drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable

in any foreign currency; • Drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside

India, but payable in Indian currency;

Foreign security : Sec 2(o) : Means any security, in the form of

• shares, • stocks, • bonds, • debentures or • any other instrument denominated or expressed in foreign currency and • includes securities expressed in foreign currency (even where redemption or any form of return such as interest or

dividends is payable in Indian currency);

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Individual: • If he resides in India for more than 182 days during the preceding financial year but excludes –

• (A) a person who has gone out of India or stays outside India– • for or on taking up employment outside India, or • for carrying on business or vocation outside India, or • for any other purpose, in such circumstances as would indicate his intention to stay outside

India for an uncertain period; • (B) a person who has come to or stays in India, otherwise than –

• for or on taking up employment in India, or • for carrying on business or vocation in India, or • for any other purpose, in such circumstances as would indicate his intention to stay in India for

an uncertain period;

Any other person or body corporate if it is registered/ incorporated in India

Office, branch or agency in India owned or controlled by a non resident

Office, branch or agency outside India owned or controlled by a resident

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Period of stay: Individual Year 1 2 3 4 5

Slide 10

200 days in India

165 days outside India

In India

Questions What is the residential status of the individual as on : • Year 1 (April) ? • Year 1 (November)? • Year 2 and 3 ? • Year 4 ? • Year 5 ?

Purpose of stay : Individual

Q.Is citizenship relevant for determining residential status? • Q. From the following examples determine whether a person is a resident or non

resident : • A person comes to India for taking up employment in India? • A person goes out of India for taking up employment outside India? • A person goes out of India to study abroad ? • A person comes to India to study in India? • A person who comes as a tourist to India?

Residential status : Corporates • Q. From the following examples determine whether a person is a resident

or non resident : • Branch of an Indian company abroad? • Branch of a foreign company in India?

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Section 3 : Charging section:

Except as provided in FEMA or with general or special permission of the Reserve Bank of India no person shall – • deal in or transfer any foreign exchange or foreign security to any

person not being an authorized person; • make any payment to or for the credit of any person resident outside

India in any manner; • receive otherwise through an authorized person, any payment by order

or on behalf of any person resident outside India in any manner;

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Schedule I Schedule II Schedule III

Current account transactions split into three categories

Prohibited – Schedule I Items & Transactions with Nepal/ Bhutan

Prior approval of Government of India – Schedule II

Prior approval of RBI – Schedule III

NO APPROVALS FOR TRANSACTIONS NOT COVERED ABOVE

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Lottery winnings & income from racing/ riding

Purchase of lottery tickets, banned/ prescribed magazines, football pools, sweepstakes

Payment of commission on exports made towards equity investments in WOS/JV

Payments related to call back services of telephones

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Royalty and Lump Sum fees

Freely Permitted after December 2009

Prior Position: Automatic route for:

• Lump sum payment up to US$ 2 mio. and

• Royalty up to 5% on domestic sales and 8% on export sales

• Undertaking cultural tours

• Remittance towards hiring of transponder charges by TV channels and ISPs.

•

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Remittances exceeding • USD 10,000 per person p.a. for holiday travel • USD 5,000 per remitter (other than resident individual) p.a. for gift • Lower of 1% of forex earnings (previous three FY) or USD 5 million per

corporate donor p.a for donation • USD 25,000 per person per visit for business travel • Estimate of institution or USD 100,000 per academic year whichever is higher

on account of studies abroad • For maintenance of close relatives abroad :

• 100% net salary of a person who is a resident but not permanently resident (for Indian citizen on deputation)

• US$ 100,000 per year per recipient in all other cases • US$ 1,000,000 per project for consultancy services procured from abroad • US$ 100,000 or 5% of the investment in India towards reimbursement of pre-

incorporation expenses, whichever is higher

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Section 6: Reserve Bank of India is the nodal agency to specify : • any class or classes of capital account transactions which are permissible; • the limit up to which foreign exchange shall be admissible for such transactions

This power is exercised in consultation with the Central Government General prohibition on undertaking or selling or drawing foreign exchange to or from an authorised person for any capital account transaction Specific prohibition on non residents from making investment in India, in any form, in any company or partnership firm or proprietary concern or any entity, which is engaged or proposes to engage in – • the business of chit fund, • as Nidhi Company , • agricultural or plantation activities • real estate business, or construction of farm houses • trading in Transferable Development Rights (TDRs) For the purpose of this regulation, 'real estate business' shall excludes development of townships, construction of residential/commercial premises, roads or bridges

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Person resident in India : • Investment in foreign securities • Foreign currency loans raised in India and

abroad • Transfer of immovable property outside India • Guarantees issued in favour of a person

resident outside India • Export, import and holding of

currency/currency notes • Loans and overdrafts (borrowings) from a

person resident outside India • Maintenance of foreign currency accounts in

India and outside India • Taking out of insurance policy from an

insurance company outside India • Loans and overdrafts to a person resident

outside India • Remittance outside India of capital assets • Sale and purchase of foreign exchange

derivatives in India and abroad and commodity derivatives abroad

Person resident outside India : • Investment in Indian securities • Acquisition and transfer of immovable

property in India • Guarantees issued in favour of or on

behalf of a person resident in India • Export, import and holding of

currency/currency notes • Deposits between a person resident

in India • Maintenance of foreign currency

accounts in India • Remittance outside India of capital

assets in India

An Indian Citizen / Person of Indian origin resident outside India can acquire immovable property in India other than agricultural / plantation / farm house out of

• inward remittances; or • NRO account

An Indian Citizen resident outside India can transfer any immovable property in India to :

• a person resident in India

transfer immovable property other than agricultural / plantation / farm house to :

• a person resident outside India who is a citizen of India ; or • a person of Indian origin resident outside India

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A Person of Indian origin resident outside India can : • acquire immovable property in India other than agricultural land / farm house /

plantation by way of gift from : • a resident ; or • a non resident who is a citizen of India ; • a person of Indian origin resident outside India;

• Inherit any immovable property in India from • a person resident outside India who had acquired such property in accordance

with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regulations or from a person resident in India

• Sell any immovable property in India other than agricultural land / farm house / plantation property to a person resident in India;

• Gift or sell agricultural land / farm house / plantation property in India to a person resident in India who is a citizen of India;

• Gift residential or commercial property in India to : • a person resident in India ; or • to a person resident outside India who is a citizen of India ; or • to a person of Indian Origin resident outside India

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A citizen of India or a person of Indian origin can repatriate sale proceeds of immovable property (other than agricultural land/farm house /plantation), provided the following conditions are satisfied, namely: • the immovable property was validly acquired by the seller in

accordance with the provisions of the foreign exchange law; • the sale takes place after three years from the date of acquisition of

such immovable property or from the date of payment of final instalment of consideration for its acquisition, whichever is later; and ;

• the amount to be repatriated does not exceed the amount paid for acquisition of the immovable property;

• in the case of residential property, the repatriation of sale proceeds is restricted to two properties

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A resident may continue to hold immovable property acquired outside India while he was a non resident

A resident shall not acquire, hold, possess, own or transfer any immovable property outside India without the prior permission of the Reserve Bank of India

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Export [Section 2(l)]: Means • the taking out of India to place outside India any goods; and • provision of services from India to any person outside India

Every exporter of goods is required to : • furnish to the Reserve Bank a declaration of the amount representing

the full export value or its expected value;

Every exporter of services is required to : • furnish to the Reserve Bank a declaration containing the true and

correct material particulars in relation to payment for such services

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Section 8 : Where any amount of foreign exchange is due or has accrued to any resident such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within a period and in such manner as may be specified by the Reserve Bank : full value to be realised;

Exemption from realization and repatriation in certain cases possession of foreign currency / coins up to limit prescribed by Reserve

Bank; foreign currency accounts within the limits prescribed by Reserve Bank; foreign exchange acquired or received before the 8th day of July, 1947 or

any income arising or accruing thereon held outside India under permission of the Reserve Bank;

foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means within limits prescribed by Reserve Bank; and

other receipts in foreign exchange as the Reserve Bank may specify 26

Time period :

For exports : proceeds to be realised within 6 months of shipment • Goods / software exported by SEZ units • Export to a warehouse established outside India: • Goods / software exported by status holders as defined in EXIM

policy

RBI can extend the above period on valid and sufficient reasons given by the exporter

12 months from date of shipment

Manner of Repatriation : Foreign exchange due shall be • brought into or received in India and sold to an authorised person in India in

exchange for rupees; or • retained in an account with an authorised dealer in India; or • used for discharge of a debt or liability denominated in foreign exchange to the

extent and in the manner specified by the Reserve Bank.

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Offences under FERA were not compoundable while offences under FEMA are compoundable.

Any action seizes to be contravention once it is compounded.

Contraventions relating to any transaction where proper approvals or permissions from the Government or statutory authority concerned, as the case may be, have not been obtained, such contraventions would not be compounded unless the required approvals are obtained from the authorities concerned.

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Compounding Authority

Directorate of Enforcement

Reserve Bank of India

Hawala Offences

Other offences (including capital account)

Intent is to take severe view of willful, malafide/ fraudulent transactions

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Penalties for Contravention (Section 13) • Quantifiable Offence: Penalty up to 3 times the sum involved • Non – Quantifiable Offence : Penalty up to Rs. 2 lakh • Continuing Penalty : Rs. 5000 per day

Arrest (Section 14) • Imprisonment only when a person fails to pay penalty imposed U/s 13 • Imprisonment :

• <= 3 yrs if penalty is > 1 Crore; • <= 6 months for all other cases

Compounding (Section 15) • Voluntary • Time Bound completion (Within 180 days) • No further proceedings for contravention so compounded

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Payment of sum of contravention (within fifteen days)

Once the order is passed, no contravener shall withdraw the order or to hold it as void or request a review of the order

No appeal against the Order

Non-payment shall be deemed as no application is made

No compounding before expiry of 3 years of previous order for similar contravention

No Compounding of cases where approval of any statutory authority/Govt. etc. was required unless such approval has been granted

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Whether contravention is technical/minor in nature - Cautionary advice/No penalty

Serious in nature- Compounding is attracted

Involves Money-laundering, National and Security concerns/ Hawala or where the contravener fails to pay the sum for which the contravention was compounded within the specified time – RBI may refer the matter to be adjudicated by Enforcement Directorate

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Application Form

How and which of the FEMA provisions were contravened while undertaking the transaction

Transaction (including Parties involved, Date and Amount of the transaction)

DD of Rs. 5000 in favour of “RESERVE BANK OF INDIA” payable at MUMBAI

Delay in reporting of inward remittance, delay in filing of form FC-GPR after allotment of shares and delay in issue of shares beyond 180 days – To be submitted to RBI (Regional offices)

•Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Jaipur, Jammu, Kanpur, Kochi, Patna and Panaji for amount of contravention below Rs. 1 Lakh

•at Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi for amount of contravention without any limit

All other applications to be submitted to the Compounding Authority, Mumbai

Formats notified for details to be furnished with compounding applications for FDI, ECB, ODI and Branch and Liaison Offices

•Compounding Of Contraventions Compounding of Contraventions

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Adjudicating Authority shall be appointed by the Central Government through publication in the Official Gazette,

Adjudicating Authorities shall hold inquiry after giving the person a reasonable opportunity of being heard for the purpose of imposing any penalty:

Adjudicating Authority shall hold an enquiry only upon a written complaint made by any officer authorized by the Central Government.

The person may appear either in person or take the assistance of a legal practitioner or a chartered accountant of his choice for presenting his case before the Adjudicating Authority

Adjudicating Authority shall have the same powers of a civil court which are conferred on the Appellate Tribunal

Adjudicating Authority shall deal with the compliant as expeditiously as possible and endeavour shall be made to dispose off the complaint finally within one year from the date of receipt of the complaint:

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Special Director (Appeals): Section 17 • Any person aggrieved by an order made by the Adjudicating Authority -

Assistant Director of Enforcement or Deputy Director of Enforcement, may appeal to the Special Director (Appeals)

• Every such appeal shall be filed within 45 days from the date on which the copy of the order made by the Adjudicating Authority is received

• On receipt of an appeal under sub-section (1), the Special Director (Appeals) may after giving the parties to the appeal an opportunity of being heard, pass such order thereon as he thinks fit confirming, modifying or setting aside the order appealed against.

• The Special Director (Appeals) shall send a copy of every order made by him to the parties to appeal and to the concerned Adjudicating Authority.

• The Special Director (Appeals) shall have the same powers of a civil court which are conferred on the Appellate Tribunal

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Appellate Tribunal : Section 19 • Any other orders (other than those passed by Assistant Director of Enforcement or

Deputy Director of Enforcement, may appeal to Appellate Tribunal • The person appealing against the order of the Adjudicating Authority or the Special

Director (Appeals) levying any penalty, shall deposit the amount of such penalty • Every appeal shall be filed within a period of 45 days from the date on which a copy

of the order made by the Adjudicating Authority or the Special Director (Appeals) is received

• On receipt of an appeal the Appellate Tribunal may after giving the parties to the appeal an opportunity of being heard, pass such order thereon as he thinks fit confirming, modifying or setting aside the order appealed against.

• The Appellate Tribunal shall send a copy of every order made by him to the parties to appeal and to the concerned Adjudicating Authority.

• The Appellate Tribunal shall have the same powers of a civil court which are conferred on the Appellate Tribunal

• The Appellate Tribunal shall endeavour to dispose off the appeal within 180 days

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Appeal to High Court : Section 35 • Any person aggrieved by any decision or order of the

Appellate Tribunal or the Special Director (Appeals) may file an appeal to the High Court within 60 days from the date of communication of the decision or order of the Appellate Tribunal or the Special Director (Appeals) • Appeal only on a question of law arising out of such order

• Jurisdiction of civil court barred (section 34)

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Directorate of Enforcement : Sections 36 – 38 • Central Government shall establish a Directorate of

Enforcement • Powers shall be exercised subject to conditions and

limitations imposed by the Central Government • Power of search and seizure:

• Officers can exercise powers similar to the Income-Tax Authorities

• Other Central Government / State Government / RBI officers (not below Under Secretary rank ) may also be authorized by Central Government

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1) Mr. Basu desires to draw Foreign exchange for the following purposes :

a) Payment relating to ‘’call back services’’ of telephones b) USD 120,000 for studies abroad on the basis of

estimates given by the foreign universities c) USD 25,000 for sending a cultural troupe on a tour of

Europe. Advise him whether he can get foreign exchange and, if so, under what conditions? (Nov 2008)

Answer 1: • The Transaction is prohibited since it falls under Schedule

I (Rule 3) • Approval of RBI is not required for release of Foreign

Exchange for studies abroad if Foreign Exchange drawn does not exceed the estimates from the institution abroad or USD 100,000 per academic year Whichever is higher.

• Drawal of Foreign Exchange for cultural tours falls under Schedule II (Rule 4) .Hence approval of CG is required. Note : Approval of CG is not required if payment is made out of funds held in RFC A/c.

2) Mr. Sekhar resided in India for a period of 150

days during the year FY 2007-08 and thereafter went abroad. He came back to India on 1st April 2008 as an employee of a business organisation. What would be his residential status under Fema,1999 during the FY 2008-09? (June 2009)

Mr. Sekhar is a Non resident since he resided in

India for less than 183 days in preceding FY 2007-08.The purpose of stay in current FY is not relevant if a person has not resided in preceding FY for more than 183 days

3) Mr. Atul, an Indian national Desires to obtain Foreign exchange for the following purpose

a) Remittance of USD 10,000 for purchase for goods purchased from a party situated in Nepal.

b) USD 10,000 for remitting as commission to his agent in USA for sale of commercial plot situated near Bangalore, consideration in respect of which was received by Mr. Atul by way of foreign currency inward remittance amounting to USD 100,000

Advise him whether he can obtain Foreign exchange and under what conditions for making the above remittances. (June 2009)

a) Transaction is prohibited as it falls under

Schedule I (Rule 3) b) It is a current account transaction. Approval of

RBI is not required as it does not exceed higher of 5% of inward remittance or USD 25,000 per transaction

4) A company incorporated in UK established a branch at Chennai. What is the residential status of the Chennai branch? The Chennai branch proposes to purchase some immovable property at Chennai for the purpose of its business. Is it a Capital Account transaction within the meaning of Sec 2(e) of FEMA,1999? Are there any restrictions under FEMA,1999 in respect of such acquisition? (Nov 2009)

The company incorporated in UK is a non resident as it is not a company incorporated in India. The Chennai branch is a branch in India owned or controlled by the UK company (Non resident), and hence the Chennai branch is a Resident in India. The Chennai branch (Resident) can acquire immovable property at Chennai (in India) for its business purpose as it is a resident. Hence it is not a Capital account transaction. However, section 6(6) of FEMA,1999 empowers the RBI to regulate the establishment in India of such branch and accordingly RBI has given a general permission under Foreign Exchange management (Acquisition and transfer of immovable property in India) Regulations, 2000 for such branches to acquire immovable property in India which is necessary or incidental to carrying on its permitted activities.

5) RBI issued certain directions to Dream Constructions Ltd, an authorised person under FEMA,1999 to file certain returns. The company failed to file the said returns. Decide as to what penal provisions are applicable against the said authorised person under the said Act (May 2010)

If any authorised person contravenes any direction given by RBI or fails to file any return as directed by RBI, the RBI (After giving a reasonable opportunity of being heard) will impose penalty upto INR 10,000 and additional penalty of INR 2000 for every day during which such contravention continues

Whether `payment of Remuneration to foreign technicians’ is a permissible transaction under the provisions of FEMA,1999? (May 2010)

It is a current account transaction. The transaction is permitted without any restrictions

7) Advise whether the approval of Central

Government is needed in the following cases under FEMA,1999? a) X wants to remit certain sum of money out of lottery

winnings b) Payment of Royalty in case it is 10% of local sales and

20% of exports and the lump sum payment of USD 3 million ( Nov 2010)

a) It is a current account transaction. This transaction is prohibited as it

falls under Schedule I. b) Effective November 2009 the limits for royalty and lump sum

payments have been relaxed by RBI and hence there are no restrictions on payment of 10% of local sales and 20% of export sales and lump sum payment of USD 3 million.

8) During the FY 2010-11 Mr. Bhattacharya resided

in India for 180 days and thereafter went abroad. On 1st April 2011 he came back to India as an employee of a business organisation. Decide the residential status of Mr. Bhattacharya during the FY 2010-11 under the provisions of FEMA,1999 ( May 2011)

8. Mr. Bhattacharya is a resident till the time he was residing in India during the FY 2010-11 (assuming that he resided in India for more than 183 days in preceding FY ie. 2009-10).

Mr. Bhattacharya is a non resident for the period he was abroad during the FY 2010-11 (provided he went abroad for a purpose of taking up employment/ business / or for any other purpose with the intention to stay abroad for an uncertain period of time).

We have discussed about : • 1. Important definitions under FEMA,1999 • 2. The concept of residential status with some practical

examples. • 3. capital and current account transactions and its

classifications. • 4. General prohibition in dealing with Foreign Exchange(

Charging section) • 5. Acquisition and transfer of immovable property in India

and outside India • 6. Export of Goods and Services

7. Realisation and Repatriation of Foreign Exchange

8. Compounding of Offences

9. Contraventions and penalties

10. Adjudication and Appeals

11. Enforcement Directorate