K L UNIVERSITY

SCHOOL OF MANAGEMENT SCIENCES

Vijayawada
September 2010
CONTENTS

 Exchange Control
 Introduction to FEMA
 Exchange control

Foreign Exchange Transactions:

 Foreign Exchange accrues out of foreign exchange transactions.

 Foreign Exchange transaction ultimately purchase or sale of one
national currency. Arise out of import or export of goods and
services and remittances.
 A foreign exchange transaction is transfer of purchasing power, i.e
acquisition or parting with the right to wealth in a foreign country.
Exchange control ……contd.

What is Exchange Control?

 The term exchange means official intervention with the foreign exchange of a country.
 Rationing of foreign exchange among competing demands.
 Effected by controlling receipts and payments
 Aims at restraining demand for foreign exchange in consonance with national interest
within available resources.
 Applies to the rules and regulations designed to regulate transactions involving
foreign exchange.

 Reserve Bank of India is entrusted with the responsibility design and implement .
Exchange control ……contd.

Objectives of the exchange Control:

 To prevent flight of capital.

 To ensure the availability of foreign exchange for specific purposes -
International commitments.
 To stabilize external value of domestic currency.
 To insulate economy from external economic pressures

What is foreign exchange?

 Deposit, credit and balances payable in foreign currency

 Drafts, traveller’s cheques, letters of credit and bills of exchange payable in
foreign currency.
Introduction to FEMA
Introduction to FEMA ……..Contd.

Background of FEMA:

 Govt. initiated process of liberalization of economy in 1991.

 Foreign exchange investment in various sectors was permitted.
 Flow of foreign exchange into India and resulted in increased reserves.
 FERA has been replaced and FEMA has been passed.
 The Act has been made effective from 1st June 2000.

Objective of FEMA

 Amend law relating to foreign exchange to facilitate external trade and

payments
 Development and maintenance of foreign exchange

RBI is the overall controlling authority in respect of FEMA.

Introduction to FEMA ……..Contd.

FERA vs FEMA
 Conserve and prevent misuse. Amend law Facilitate external trade and
payments and maintenance of forex markets.
 Violation : criminal offence - civil offence.
 Residential status: Citizenship criteria - stay of more than 182 days in India.

Draconian police law – Civil Law

Overall Scheme of FEMA

 .Rupee has been made fully convertible on current account. ( May have
reasonable restrictions – by way of rules ( Sec -3 of FEMA)
 Not fully convertible on capital account (funds brought in India for long term
investment and loans not freely repatriable).
 Capital Account transactions permitted to certain extent – RBI by way of
Regulations (Sec. 6 of FEMA)
Overall Scheme of FEMA ………Contd.

 Provision of FEMA cannot be found at once place. FEMA 1999 contains

only basic legal framework.
 Practical aspects are covered in rules and made by Central Govt. and
regulations made by RBI.
 RBI authorizes banks to deal with foreign exchange as per directions of RBI
(Sec 10)
 RBI issues directions to banks through AP(DIR) circulars - (Sec 11)

Rules under FEMA:

 There six Rules. The relevant to the subject is:
 Foreign Exchange Management (current Account Transaction) Rules, 2000
Overall Scheme of FEMA ………Contd.

Regulations under FEMA:

 Total no, of Regulations – 22. The relevant ones are:

 Foreign Exchange Management (Export of Goods and Services) Regulations,
2000
 Foreign Exchange Management (Guarantees) Regulations, 2000
 Foreign Exchange Management (Insurance) Regulations, 2000
 Foreign Exchange Management (Manner of Recipt and Payment) Regulations,
2000
 Foreign Exchange Management (Realisation, Repatriation and Surrender of
Foreign Exchange) Regulations, 2000
Overall Scheme of FEMA ………Contd.

RBI circular and Master circulars:

 Sec 11(1) of FEMA authorizes RBI to give directions to banks (“authorized

person”) to ensure compliance.
 “AP (DIR) circulars” and Master circulars”
 Circular amount to amendment to Regulations and given effect immediately.
 Amended Regulations are issued latter with retrospective effect.
 Master Circulars are consolidated instructions on a particular subject.
Issued in July every year and valid upto 30th June next year.
 Changes made during the year are incorporated in the master circular of
next year.
Overall Scheme of FEMA ………Contd.

Relevant Master Circulars

 Miscellaneous remittances from India – Facilities for Residence.

 External Commercial Borrowings and Trade Credits

 Risk-Management and Inter-Bank Dealings

 Import of Goods and Services

 Export of Goods and Services

 Rupee / Foreign currency Export Credit and Customer services to

exporters
 Overall Scheme of FEMA ………Contd.

 Forms under FEMA: Relevant to exports and imports

A-1 Application for remittance of foreign currency for import

payments
A-2 Application – cum declaration for drawal of foreign exchange
(other then imports)
BEF Statement by AD of import remittances for which no
documentary evidence received. Submitted half yearly
XOS Statement of export bills outstanding beyond the prescribed
period as on 30th June / 31st of December.
GR Exchange Control Declaration (manual shipping bills)
SDF Declaration of exports (EDI shipping bills)
PP Exchange Control – exports by post
Overall Scheme of FEMA ………Contd.

 Forms:
EXT Application for extension of time for realization of export
proceeds.
SOFTEX Soft Export Declaration form
DPX-1 Application by exporter after award of contract for export on
deferred payment /turnkey basis
EFC Application for opening with foreign currency account with a
bank in India or abroad by exporters
ECB –Annexure 1 Application raising External Commercial Borrowings (ECB)
ECB –Annexure 2 Reporting of loan agreement details

ECB –Annexure 3 Reporting of actual transaction of ECB

Regulations on Export of goods and
Services
Declaration as regards to export of goods
and services.
 As per Sec 7(1) and Sec 7(3) information in form of declaration on true and correct
material particulars in relation to payment of goods and services.
 IEC Number issued by DGFT to be indicated on declaration forms
 Commission payable to foreign agents to be declared on declaration forms.

When export declaration is not required:

 Trade samples supplied free of payment
 Baggage – Personal effects of travellers
 Ship stores and transhipment cargo
 Goods of value less than USD 25,000
 Gifts less than Rs. Five lakhs
 Import on re-export basis
 Replacement of goods exported free of charge
 Goods sent for testing and re-import
 Defective goods sent abroad for repair and re-import
Regulations on Export of goods and
Services ………Contd.
Manner of dealing with the declaration forms

 GR/SDF, PP, SOFTEX (Duplicate) to be submitted by exporter to bank.

 Customs/post office/designated officials of STP/SEZ to submit original
GR/SDF, PP, SOFTEX to RBI
 GR/SDF forms to be submitted within 21 days from date of export
 Bank to submit duplicate copies of GR/SDF, PP, SOFTEX forms to RBI
 RBI tally the copy sent by Customs/post office with the copy of forwarded by
bank.
Regulations on Export of goods and
Services ……….Contd.
Time limit for realization of export proceeds:
 Export proceeds to be realized within 12 months from date of
export.
 Circular no 70 dt. 30-06-2009. Prior to June 2009 180 days.
 Status holders, EOU/EHPT/STP/BPT units in 12 months.
 No time limit for realization of export proceeds to SEZs.

Extension of time limit.

 AD can grant extension in the following cases
 Extension can be granted 3 months at a time for max six months
 Beyond one year total export outstanding should not be more
than USD one million or 10% of average of export realization
whichever is higher.
Regulations on Export of goods and
Services ……….Contd.
Write off of unrealized bills by AD:
 Bill is outstanding beyond one year
 Aggregate write off should be less than 10% of the exports of the pervious
year.
 Status holders:
 5 % of 3 years average annual realization

 Or 10% of export proceeds realized during the financial year, whichever

is higher.
 When overseas buyer has been declared insolvent / untraceable /goods
have been auctioned or destroyed by port or customs abroad.
 Case is not subjected to any civil or criminal suit
 Exporter should surrender export incentive
All other cases permission from RBI is required.
Regulations on Export of goods and
Services ……….Contd.
Remittance for export claim:

 Export proceeds have already been realised.

 Exporter is not in caution list of RBI
 Export incentives to be surrendered
Agency commission on exports:

Agency commission to foreign agents can be paid if:

 Amount of commission declared in GR/SDF/PP/SOFTEX form
 If not declared there should be a valid agreement
 Payment of Commission is not permitted on exports under Rupee credit
Route.
Change of buyer:

RBI permission not required when:

 Reduction in price is less than 25%
 Realisation of export proceeds within 6 months
Regulations on Export of goods and
Services ……….Contd.
Reduction in export value:
 Upto 10% of annual exports proceeds received during the FY
 Upto 25% permitted in certain cases

Undrawn balances / partial drawings

 AD can allow 10% full export value.

Exports requiring prior approval of RBI

 Lease/hire – exports of goods on lease/hire
 Exports on elongated credit terms – more than – 12 months
 Counter trade: Any arrangement involving adjustment of value of goods
imported against value of exports exported.

Advance payment received by exporter:

 Shipment to be made within one year
 Advance to be refunded within one year
Regulations on Export of goods and
Services ……….Contd.
Dispatch of export documents:
 Following cases shipping documents may be dispatched directly to
consignee.
 Advance payment or LC transactions

 Exporter is a regular customer of bank

 Value is not more than USD 25,000

 Status holders and SEZ units

Consignment exports:
 Documents though AD
 Delivery against trust receipt/undertaking
 Freight and insurance to be paid in India
 Account sales to be submitted to AD
.
Regulations on Export of goods and
Services ……….Contd.
Export to warehouse:
 Exporters can open / hire warehouses with permission of RBI or AD
 Export proceeds to be realised within 15 from date of shipment.
 AD can permit grant permission to open warehouses without RBI approval
 Export outstanding less then 5 %
 Export T/O USD 100,000 in the pervious year
 All transactions to be routed through AD
 Permission will be granted for one year and can be renewed
Import of goods and Services
Current account transaction – Freely permitted.
Procedures:
 Import license (if required) to be submitted
 A1 form to be submitted if payment exceeds UD 500
 Import payments to be made within 6 months
 Evidence of imports:
 Exchange control copy of Bill of entry to be submitted

 Post appraisal form / Customs Assessment certificate for imports through

post.
 Imports in non-physical form – CA certificate.

 Imports through courier:

 Bill of Entry in the name of courier for if value is Rs. One lakh or less
 Bill of Entry in the name of importer if value exceeds Rs. One lakh.
Import of goods and Services
.Contd.
 Evidence of imports ……….contd.
 In case of imports upto US$ 100,000 – No evidence required provided AD
is satisfied with genuineness of the transaction.
 Imports less than US$ 1,000,000 exchange control copy of Bill of Exchange
or certificate from Chief Executive Officer or auditor of the Co. confirming
receipt of goods.( PSUs and listed Cos with net worth exceeds Rs 100
crores). In all other cases exchange control copy of Bill of Exchange to be
submitted.
Import Bills (documents):
 Normally import bill should be received through banker of seller to banker of
buyer in India.
 Cases where import bills may be received directly by buyers in India.
 Bill value less than US$ 300,000 and importer is a customer of bank.
 Imports by wholly owned subsidiary from parent company
 Imports by Status holders, EOUs, PSUs and Public and Private limited cos.
 Import of rough diamonds, rough precious and semi-precious stones non-status
holders can receive import bill directly from sellers provided value is less than US
$ 300,000
Import of goods and Services
.Contd.
Restrictions on import related current account transactions:
 Advance for import of goods and services:
 Remittance of advance for import of goods permitted. Physical import of goods
into India shall be made within six months from the date of remittance.
 Remittance should be made directly to foreign supplier
 Remittance of advance for import of goods (other than rough diamonds) beyond
USD 100,000 will require bank guarantee from a bank outside India
Overview of Current account
Transactions
Section 2(j)of FEMA states ‘Current Account Transaction other than capital account
transaction. It includes following-
 Payment in connection with foreign trade, other current business, services, short term
banking and credit facilities in the ordinary course of business.
 Interest on loans
 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. (subject to certain restrictions)
Remittance of salary:
 Foreign nationals employed in India or Indian nationals employed by a foreign
company outside India on deputation to India can maintain foreign currency account
abroad. Net salary can be remitted abroad.

DTA units can make payments to EOU/SEZ/STP/EHTP in foreign exchange for

goods received from latter.

No restrictions on current account transactions unless specified.

Overview of Current account
Transactions
Current account transactions : Approval of Govt. of India is required:
 Cultural Tours
 Advertisement by PSU/Government
 Chartering of vessels by PSU/Government
 Payment of import on CIF basis by PSU/Government
 Agents of multi modal transporters
 Hire charges of transponders
 Container detention charges beyond prescribed limits.
 Royalty beyond prescribed limits
 Prize money for sports
 Membership of P&I club
Overview of Current account
Transactions
Prohibited current account transactions:
 Transactions with Nepal and Bhutan
 Commission on exports to JV/WOS abroad
 Commission on rupee trade
 Call back charges
 Lottery / Races
 Money circulation schemes / Prizes

Restrictions on Current Account Transactions:

 Schedule I - Prohibited items

 Schedule II - Prior approval of G O I
 Schedule III - Permitted upto a ceiling beyond which RBI
approval is required.
Overview of Capital account
Transactions
Capital account transactions are deemed to be prohibited unless permitted
Current account transactions are deemed to be permitted unless prohibited.
As per Section 2(e) of FEMA capital account transaction means:
 Transaction which alters the assets or liabilities / contingent liability, outside
India of persons resident in India
 Transaction which alters the assets or liabilities / contingent liability, outside
India of persons resident outside India

Nature of Capital account transactions

 Transfer / issue of security

 Borrowing /lending
 Currency /currency notes
 Dealings in immovable property
 Giving guarantee
Overview of Capital account
Transactions
Permissible Capital Account transactions by persons resident of India
 Schedule I to Foreign Exchange Management (Permissible Capital Account
Transactions) Regulations, 2000, permit resident of India can draw/sell
foreign exchange (from/to AD) for following capital account transactions,
within the limits specified in the Regulation.
 Investment in foreign securities
 Foreign currency loans raised in India and abroad.
 Transfer of immovable property outside India
 Issue of guarantees in favour of a person outside India.
 Export, import and holding of currency/currency notes.
 Maintenance of foreign currency account in India and outside India
 Taking out 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 abroad.
Overview of Capital account
Transactions
Permissible Capital Account transactions by persons resident outside India
 Schedule II to Foreign Exchange Management (Permissible Capital Account
Transactions) Regulations, 2000, permit resident outside India to draw /sell
foreign exchange ( from/to AD) for following capital account transactions,
within the limits specified in the Regulation.
 Investment in India in:
 Security issued by a body corporate or an entity in India
 Investments by way of capital of firm or a proprietorship or association of persons in
India
 Acquisition and transfer of immovable property in India
 Issue of guarantees by a person resident outside India in favour of, or on behalf of
a person resident in India.
 Export, import and holding of currency/currency notes into/from India
 Maintenance of foreign currency account in India
 Deposit between resident and nonresident.
 Remittance outside India of capital assets in India.
Overview of Capital account
Transactions
Prohibited transactions:
 Any investment in any form in firms, companies (whether

incorporated or not) or any entity engaged in

 the business of chit fund, or

 nidhi company, or

 agricultural or plantation activities or

 real estate business, or construction of farm houses or

 trading in Transferable Development Rights

Liberalized Remittance Scheme (LRS) :

 In addition to various remittance permitted, a resident individual can remit
upto USD 200,000 per financial year for permitted capital account and
current account transactions under LRS.
Guarantees to person Resident outside
India
Provisions of Foreign Exchange Management (Guarantees) Regulations, 2000
 Guarantees can be given only as per following provisions. In other cases,
permission of RBI is required.
 AD can give guarantee
 in respect of any debt, obligation or liability incurred by an exporter on account of exports from
India, an importer in respect of imports on deferred payment basis as per RBI directions.
 In connection with a bona fide trade transaction
 In favour of foreign airlines /International Air Transport Association (IATA) on behalf of IATA
approved travel agents.
 In favour of non-resident service provider in behalf of resident customer who is service importer
upto USD 500,000
 In connection with payment of margin money in respective of approved commodity hedging
transactions.
 An exporter company can give guarantee, in lieu of bid bond guarantee, for bidding for
contract outside India, if the amount of such guarantee does not exceed 5% of the contract
value.
 An agent in India of a foreign shipping line or airline company can give guarantee on behalf
of foreign company in connection with its obligations or liabilities owned to any statutory or
Govt. authority in India.
Guarantees to person Resident outside
India…Contd.