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Evolution of Exchange Control in India 1939

• Defence of India Rules (temporary basis) • Control focus

1947

• Statutory basis - Foreign Exchange Regulation Act • Control focus continues

1973 1993

• Foreign Exchange Regulation Act (More comprehensive) • Foreign Exchange Regulation (Amendment) Act 1993

1999

• Foreign Exchange Management Act (effective June 1, 2000) • facilitating trade and payments, development of forex markets

2005

• Exchange Control Department in RBI renamed as Foreign Exchange Department to reflect the new objective (Word control removed) 2

FERA 1973 to FEMA 1999 Major differences: 1. Object : FERA 1973 – to conserve, preserve and prevent misuse of foreign exchange. FEMA 1999 – to facilitate external trade, payments, maintenance of foreign exchange market. 2. Violations: FERA 1973 – criminal offence , if violated, not compoundable & pursued by ED FEMA 1999 – civil offence, if violated, can be compounded & pursued by RBI and hawala offences perused by ED

FERA 1973 to FEMA 1999 Major differences contd….: 3. Residential status

FERA 1973 – Citizenship was the criteria FEMA 1999 – It defines Resident Indian 4. “Mens rea” – presumption FERA 1973 : presumes everyone is guilty of crime and onus to prove innocence was with individual. He had the intent or motive or knowledge of what he is contravening. FEMA 1999 : prosecution has to prove that the person had committed the offence.

FERA 1973 to FEMA 1999 Major differences contd….: 5. Capital Account and Current Account

FEMA 1999 : such terms are defined in FEMA 1999.

FERA 1973 to FEMA 1999 Major differences contd….: 6. Violation :

FERA 1973 : all contraventions were investigated by ED and penalties and imprisonment or both ( from 6 months to 7 years) were imposed on guilty. FEMA 1999: ED / RBI given power to compound Contraventions and to impose penalty. Penalty up to 3 times the amount contravened and if amount is not quantifiable, penalty is upto Rs.2 lakhs.

Administration of FEMA The Act (FEMA) – passed by the Parliament Notifications (published in the gazette) Regulations – by RBI-Now GoI

Rules – framed by Central Government

AP (DIR) Circulars – directions to APs by RBI

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Authorised Persons • Power to administer FEMA vests with RBI • Powers delegated to Authorised Persons (APs) (banks, money changers etc.) • Categories of Authorised Persons: Category

Entities

Activities

AD Category I

Commercial banks, SCBs, UCBs

All current and capital account transactions

AD Category II

Upgraded FFMCs, RRBs, Co-op banks

Specified non-trade related current account transactions

AD Category III

Financial and other institutions

Forex transactions incidental to their own activities

FFMCs

India Post, UCBs, other companies

Travel related 8

Forex Activities in India – Facilitators • • • • • • • • • • •

Ministry of Finance Ministry of Commerce , DGFT Directorate of Enforcement Customs Export Promotion Councils – FIEO Export Inspection Units Authorised Persons FEDAI EXIM Bank ECGC RBI 9

Classification of Transactions Capital account Regulations (Prohibited unless permitted)

Capital Account Transactions

Alter Assets/ Liabilities Position (FDI, ECB, ODI, bank deposits)

Cross-Border Transactions

Current Account Rules (Permitted unless prohibited)

Current Account Transactions

Trade related (exports, imports)

Non-trade (travel, education, dividend, royalty etc.) 10

Schedule I – Prohibited Transactions 1. Remittance out of lottery winnings. 2. Remittance of income from racing/riding etc. or any other hobby. 3. Remittance for purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes, etc. 4. Payment of commission on exports made towards equity investment in Joint Ventures / Wholly Owned Subsidiaries abroad of Indian companies. 5. Remittance of dividend by any company to which the requirement of dividend balancing is applicable. 6. Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco. 7. Payment related to "Call Back Services" of telephones. 8. Remittance of interest income on funds held in Non-Resident Special Rupee11 (Account) Scheme.

Schedule II – Transactions requiring prior Central Government approval 1. Cultural Tours 2. Ads in foreign print media (other than promotion of tourism, foreign investments and international bidding) exceeding USD 10,000 by a State Government and its PSUs 3. Remittance of freight of vessel chartered by a PSU 4. Payment of import through ocean transport by a Govt. Department or a PSU on c.i.f. basis (i.e. other than f.o.b. and f.a.s. basis) 5. Multi-modal transport operators making remittance to their agents abroad

6. Remittance of hiring charges of transponders by TV Channels and Internet Service providers 7. Remittance of container detention charges exceeding the rate prescribed by DG of Shipping 8. Remittance of prize money/sponsorship of sports activity abroad (other than International/ National/ State Level sports bodies) exceeding USD 100,000.

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Schedule III – Transactions requiring RBI approval (1/2) 1. Private visit - exceeding US$ 10,000 per financial year; business trip exceeding US$ 25,000 per trip[ 2. Gift exceeding US$ 5,000 per financial year per donor other than resident individual 3. Donations by Corporate exceeding one per cent of their foreign exchange earnings during the previous three financial years or US$ 5 million, whichever is less for:(a) creation of Chairs in reputed educational institutes, (b) to funds (not being an investment fund) promoted by educational institutes; and (c) to a technical institution or body or association in the field of activity of the donor Company. 4. Employment, emigration - exceeding USD 100,000

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Schedule III – Transactions requiring RBI approval (2/2) 5. Education, treatment – exceeding estimate or USD 100,000 (whichever is higher) 6. Maintenance of close relatives abroad, i. exceeding net salary – person resident but not permanently resident in India and foreign citizen (other than Pakistan) or Indian citizen working in office/ branch/ subsidiary/ JV of a foreign company in India. ii. exceeding USD 100,000 per year, per recipient, in all other cases. 7. Commission for sale of residential flats or commercial plots in India exceeding US$ 25,000 or 5% of the inward remittance, whichever is more. 8. Exceeding US$ 1 million (US$ 10 million for infrastructure projects) per project for consultancy. 9. Exceeding 5 % of investment brought into India or US$ 100,000 (whichever is higher) for reimbursement of pre-incorporation expenses.

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Schedule III – Transactions requiring RBI approval (2/2) Schedule III - Amended. AP Dir Circular 106 Dt June 1, 2015 I. For Resident Individuals - 1. Individuals can avail of foreign exchange facility for the following purposes within the limit of USD 2,50,000 only. Any additional remittance in excess of the said limit for the following purposes shall require prior approval of the Reserve Bank of India. (i) Private visits to any country (except Nepal and Bhutan) (ii) Gift or donation., (iii) Going abroad for employment (iv) Emigration (v) Maintenance of close relatives abroad (vi) Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up. (vii) Expenses in connection with medical treatment abroad (viii) Studies abroad (ix) Any other current account transaction 15

Schedule III – Transactions requiring RBI approval (2/2) Schedule III - Amended. AP Dir Circular 106 Dt June 1, 2015 Facilities for persons other than individual 2. The following remittances by persons other than individuals shall require prior approval of the Reserve Bank of India. (i) Donations exceeding one per cent. of their foreign exchange earnings during the previous three financial years or USD 5,000,000, whichever is less, for- (a) creation of Chairs in reputed educational institutes, (b)) contribution to funds (not being an investment fund) promoted by educational institutes; and (c) contribution to a technical institution or body or association in the field of activity of the donor Company. (ii) Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in India exceeding USD 25,000 or five percent of the inward remittance whichever is more. (iii) Remittances exceeding USD 10,000,000 per project for any consultancy services in respect of infrastructure projects and USD 1,000,000 per project, for other consultancy services procured from outside India. (iv) Remittances exceeding five per cent of investment brought into India or USD 100,000 whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.”

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Foreign Currency Accounts - A Schematic Representation Foreign Currency Accounts

All foreign exchange earners

In India

Returning Indians

NonResidents

Residents

Abroad

Participants in fairs/ exhibitions Exporters with good track record

EEFC

RFC Resident Indians

RFC(D)

Foreign nationals, tourists

Project/ Service Exporters Entities with overseas branches/ offices

Type of Accounts in India NRI/PIO/ NR FCNR(B)

NRE

NRO

FCNR- in F.Currency – Exchange risk born by AD NRE- in Rupees – Exchange risk by Investor

NRO- any NR in rupees. 1,000,000 USD per year 18

Foreign Trade (Import/ Export) Agencies Involved DGFT

Customs

RBI

(Trade Policy Formulation)

(Valuation, physical aspects)

(Receipts and payments )

Exports and Imports are free unless regulated by FTP or any other law in force

Mandatory to realise and repatriate export proceeds and produce evidence of import in the manner and within the time prescribed by RBI 19

External Commercial Borrowing Commercial loans from abroad (bank loans, trade credit, securitized instruments (e.g. bonds, preference shares, FCCB etc.) - quantitative, cost and end-use and tenor restrictions Automatic Route

Eligible borrowers – corporates, NGOs, SEZ units

Approval route (RBI) Recognised lenders – banks, capital markets, financial Institutions, export credit agencies, suppliers, collaborators, equity holders 20

Joint Ventures, Wholly Owned Subsidiaries

Automatic Route (not available for real estate and banking business)

General Permission to persons resident in India – RFC, LRS, bonus shares

Approval route (RBI)

General Permission to Indian parties up to 4 times net worth (no limit for investments out of EEFC accounts and ADRs/ GDRs 21

Foreign Investments in India – Schematic Representation Investment types

Foreign Investments in India

Foreign Direct Investments Persons resident outside India

Automatic Route

Approval Route

Foreign Portfolio Investments

FIIS, NRIs, PIOs, QFIs

Foreign Venture capital Investments SEBI registered FVCIs

VCFS, IVCUs

Other Investments (G-Secs, NCDs etc.)

FIIs

NRIs, PIOs

Investments on non-repatriation basis

NRIs, PIOs

Permissible Investors

RBI Caution

Modus Operandi - Trap

Modus Operandi - Lure

Ask victim to NOTE deposit PLEASE

RBI does not hold any accounts for individuals

money in bank Attractive offers accounts – genuine Nobody from RBI calls up from abroad of sounding reasons undertake anypeople about lottery lottery winnings/ RBI does likenot processing fees, winnings/ funds from jobs/ cheap loans/ conversion charges, abroad type of money arrangement, by inheritance etc. thru service charges etc. emails, SMSs whatever name called, and RBI does not send any emails intimating award of lottery funds, etc.

does not Once takedeposited, any responsibility ask Impersonation of for more money – for recovering remitted RBI officials, clone amount moneys goes up web sites in response to such bogusOnly official and genuine website of RBI is www. Phone calls claiming rbi.org.in communications Say money lying in RBI

to be from RBI

Inform local police or Cyber Crime Cell 23

RBI will be more than happy to associate itself with and contribute to any awareness programme/ knowledge initiative

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Y. Rambabu, Asstt General Manger [email protected] [email protected] 040-23241325 9963996664