BOMBAY, 23 September — For times immemorable now, any talk of foreign exchange control, almost always led to a reference to the draconian Foreign Exchange Control Act or FERA as it is more popularly recognized. And it has been quite some time since the FERA has been scrapped and a new exchange control in the form of Foreign Exchange Management Act or FEMA has come in. Almost everyone agrees that the FEMA is more contemporary and gives more freedom but very few know the exact gambit of this FEMA. So this week, we will look into what this FEMA is all about.
First and foremost, the word “regulation” in FERA has been replaced by the word “management’ in FEMA. This is supposed to mean that era of controls and regulations have gone and under the new act, there is none or very little regulation. But that is a misnomer. A closer scrutiny unravels a new story.
There is no doubt that a lot of liberalization has been ushered in but at this juncture, it is pertinent to note that India is not yet fully convertible on the current account nor have the exchange controls disappeared.
FEMA helps facilitate the external trade and payments and promotes the orderly development and maintenance of the foreign exchange market in India. What still remains intact is that one can enter into foreign exchange transactions only with persons authorized by the Reserve Bank of India (RBI). And it also continues to stipulate that no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property outside India.
Section 5 of the FEMA says that current account transactions are freely allowed and for one brief moment it looks like we are now convertible on the current account! But this is not so. What this purports is that foreign exchange can be drawn for all current account transactions, except those that are prohibited. The government and the RBI have issued notifications, which tell us which current account transactions are prohibited or are allowed only with permission.
Under the prohibited transactions, money earned from lottery winnings, racing/riding or any other hobby etc. cannot be remitted abroad. Similarly, send money abroad for buying lottery tickets, football pools, sweepstakes etc. and payment related to telephone “call back” services are also on the banned list.
And those forex transactions which are allowed after getting government’s approval, includes, cultural tours and health insurance from a company abroad and such similar transactions which do not mean much, or rather anything to the general public.
But what is interesting is the transactions which need prior RBI’s permission. These include private visits to any country, except Nepal and Bhutan ($5,000 per calendar year), gift remittances, donations, maintenance expenses for close relatives abroad ($5,000 per year per recipient), travel abroad for employment or emigration ($5,000 or amount prescribed by country of emigration). A person going abroad on business, for attending a conference or specialized training needs RBI permission only if he wants to draw more than $25,000. Any one going abroad for higher studies, needs to go to the RBI only if he wants more than what is estimated by the institution abroad or $30,000, whichever is higher.
And how does this change from FERA to FEMA affect the non resident Indians (NRIs)? Under FEMA, an authorized dealer in India may accept deposits from an NRI or an overseas corporate body (OCB) under the NRE or FCNR (B) account, NRO or NRNR or NRSR account. Deposits under NRE, NRO and NRSR account schemes can also be accepted by an authorized bank.
NRE, non resident (external) account is opened by the NRI himself and can be maintained in any form, ie, savings, current, recurring, fixed deposit, etc. Loans can be given to the account holder for personal or business purposes except for re-lending, agriculture / plantation activities or investment in a real estate business. Repayment can be made by adjusting the deposit or by way of inward remittance from outside India or out of local rupee resources in the NRO account of the borrower.
In FCNR(B) or foreign currency (non-resident)(banks)accounts, they can be opened only in the form of term deposits, viz. for one year and above but less than two years, for two years and above but less than three years, for three years only. These accounts can be opened with funds remitted from outside India through normal banking channels or by transfer of funds from existing NRE/FCNR accounts or from funds received in rupees by debiting the account of a non-resident bank maintained with an authorized dealer in India or from funds which are of repatriable nature.
Remittances from outside India to these accounts should be made in the designated currency in which the account is opened.
And in NRO or non-resident ordinary rupee account, the account holder cannot make available foreign exchange to any Indian resident against reimbursement in rupees or in any other manner. A balance in an NRO account cannot be remitted outside India without the approval of the Reserve Bank.
If a foreign tourist visiting India opens the account with funds remitted from outside India, then at the time of his/her departure from India, the balance in the account is converted into foreign currency by the authorized dealer. However, the account should have been maintained for a period of not more than six months.
In NRNR or non-resident (non-repatriable) rupee deposit account, money is deposited in Indian rupees out of the funds remitted from outside India.
There is no doubt that the new rules have brought a great deal of liberalization on forex transactions and though exchange control is still around and real convertibility on the current account remains a myth, there is no doubt that FEMA is better than FERA!
