Foreign Exchange Management Act, 1999: formula sheet

Key formulas

Short title, extent, application (Section 1)

Extends to the whole of India; applies also to branches, offices and agencies outside India owned or controlled by a person resident in India, and to contraventions outside India by persons to whom the Act applies

Commenced on 1 June 2000 by notification dated 1 May 2000. Different dates may be appointed for different provisions.

Person resident in India (Section 2(v))

(i) person residing in India for more than 182 days during the preceding financial year (with exclusions); (ii) any person or body corporate registered or incorporated in India; (iii) office, branch or agency in India owned or controlled by a person resident outside India; (iv) office, branch or agency outside India owned or controlled by a person resident in India

The 182-day test applies to individuals and uses the preceding financial year. The test is 'more than' 182 days.

Exclusions from the 182-day limb

Excluded: person who has gone out of or stays outside India for taking up employment, for carrying on a business or vocation outside India, or for any other purpose indicating intention to stay outside India for an uncertain period. Also excluded: person who has come to or stays in India otherwise than for employment, business or vocation in India, or other purpose indicating intention to stay for an uncertain period

So intention matters. Days alone do not decide residence.

Person resident outside India (Section 2(w))

A person who is not resident in India

It is a residual definition.

Authorised person (Section 2(c))

Authorised dealer, money changer, off-shore banking unit or any other person authorised under Section 10(1) to deal in foreign exchange or foreign securities

Section 3(a) bars dealing with anyone who is not an authorised person.

Foreign exchange (Section 2(n))

Foreign currency, plus deposits, credits and balances payable in foreign currency, plus drafts, travellers cheques, letters of credit or bills of exchange expressed in Indian currency but payable in foreign currency, plus those drawn by banks, institutions or persons outside India but payable in Indian currency

Foreign currency means any currency other than Indian currency (Section 2(m)).

Capital account transaction (Section 2(e))

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

It includes transactions referred to in Section 6(3).

Current account transaction (Section 2(j))

A transaction other than a capital account transaction; includes payments for foreign trade, business, services and short-term banking and credit; interest on loans and net income from investments; remittances for living expenses of parents, spouse and children abroad; expenses for foreign travel, education and medical care of parents, spouse and children

It is defined by exclusion, so first test whether it is a capital account transaction.

Export and import (Section 2(l), 2(p))

Export: taking goods out of India to a place outside India, or providing services from India to a person outside India. Import: bringing any goods or services into India

Both cover goods and services.

Person (Section 2(u))

Includes individual, HUF, company, firm, AOP or BOI (incorporated or not), every artificial juridical person, and any agency, office or branch owned or controlled by such person

The definition is inclusive, so it is wide.

Section 4 rule on holding

Save as otherwise provided in the Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or immovable property situated outside India

Section 6(4) permits holding where the asset was acquired or held while resident outside India, or inherited from a person resident outside India.

Section 3 prohibitions

No dealing with non-authorised person (a) | No payment to or for credit of non-resident (b) | No receipt except through authorised person (c) | No financial transaction for foreign asset (d)

Applies save as otherwise provided, or with general or special RBI permission.

Section 4 holding rule

Resident in India cannot acquire, hold, own, possess or transfer foreign exchange, foreign security or foreign immovable property

Applies save as otherwise provided in the Act. Section 6(4) exception covers assets acquired while non-resident or inherited from a non-resident.

Section 5 current account

Free sale or drawal through authorised person, subject to reasonable restrictions by Central Government

Restrictions are in public interest and in consultation with RBI.

Section 6 capital account

Permitted per RBI (debt instruments) or Central Government (non-debt) specification of classes, limits, conditions

Section 6(2) proviso: no restriction on drawal for loan amortisation or depreciation of direct investments in the ordinary course of business.

Deemed receipt (Section 3(c) Explanation)

Payment received for non-resident through any person without corresponding inward remittance = received otherwise than through authorised person

Even if the intermediary is an authorised person.

Rule-making split

Rules: Central Government (Section 46) | Regulations: RBI (Section 47)

Non-debt capital account: Central Government. Debt-instrument capital account: RBI.

Section 8 duty

Foreign exchange due or accrued to a person resident in India → take all reasonable steps to realise and repatriate it, within the period and in the manner specified by the RBI

The period and manner are fixed by the RBI, not stated in the Act.

Repatriate to India (Section 2(y))

Bring realised foreign exchange into India AND (sell it to an authorised person for rupees OR hold it in an account with an authorised person, to the extent notified by the RBI); includes using it to discharge a foreign-exchange-denominated debt or liability

Use this definition word for word in theory answers.

Export of goods declaration (Section 7(1))

Declaration with true and correct material particulars, including full export value or expected value if not ascertainable

Furnished to the RBI or another specified authority, in the form and manner specified.

Export of services declaration (Section 7(3))

Declaration with true and correct material particulars in relation to payment for services

Form and manner are specified by regulations.

Export (Section 2(l))

Export = taking goods out of India to a place outside India, or providing services from India to any person outside India

Covers both goods and services.

Exemptions (Section 9)

Sections 4 and 8 do not apply to: possession of foreign currency or coins up to the RBI limit; specified foreign currency accounts; pre-8 July 1947 foreign exchange held with RBI permission; gift or inheritance of that exchange up to a limit; foreign exchange from employment, business, services, gifts, inheritance or other legitimate means up to a limit; other receipts the RBI specifies

Limits are set by the RBI. Do not quote numbers from memory unless you are sure.

Meaning of authorised person (Section 2(c))

Authorised person = authorised dealer + money changer + off-shore banking unit + any other person authorised under Section 10(1)

The test is authorisation by the RBI. Being a bank does not by itself make a person authorised for this purpose.

Grant of authorisation (Section 10(1)-(2))

RBI authorises on application; authorisation in writing; subject to conditions

The RBI may authorise a person as dealer, money changer, off-shore banking unit or in any other manner it thinks fit.

Revocation (Section 10(3))

Revoke if (a) public interest, or (b) breach of condition or contravention of Act, rule, regulation, notification, direction or order

For ground (b), a reasonable opportunity to make a representation must be given first. The proviso does not apply to ground (a).

Duty to comply and stay within authorisation (Section 10(4))

Follow RBI general or special directions; no transaction outside authorisation terms without prior RBI permission

Applies to all dealings in foreign exchange or foreign security.

Customer declaration (Section 10(5))

Before any foreign exchange transaction: obtain declaration and information; if unsatisfactory, refuse in writing; if contravention suspected, report to RBI

Report to RBI is required where there is reason to believe contravention or evasion is contemplated.

Misuse of purchased foreign exchange (Section 10(6))

Non-authorised person who does not use it for the declared purpose, does not surrender it within the specified period, or uses it for a non-permissible purpose = deemed contravention

This rule applies to customers, not to the authorised person.

RBI directions and information (Section 11(1)-(2))

RBI may direct payment, doing or desisting from any act; may direct furnishing of information in the manner it deems fit

Purpose: securing compliance with the Act and rules, regulations, notifications or directions.

Penalty on authorised person (Section 11(3))

Penalty up to ₹10,000 + continuing contravention: additional up to ₹2,000 per day

Applies for contravening an RBI direction or failing to file a return as directed. The RBI must first give a reasonable opportunity of being heard.

Penalty where amount is quantifiable (Section 13(1))

Penalty ≤ 3 × sum involved in the contravention

This is a ceiling. The adjudicating authority decides the actual amount.

Penalty where amount is not quantifiable (Section 13(1))

Penalty ≤ ₹2,00,000

Applies only when the sum involved cannot be quantified.

Continuing contravention (Section 13(1))

Further penalty ≤ ₹5,000 × number of days after the first day

The first day is excluded. Count days from the second day.

Appeal time limit (Section 19(2))

Appeal within 45 days of receiving the order

Delay can be condoned if the Tribunal finds sufficient cause.

Disposal targets

Adjudicating Authority: 1 year (Section 16(6)); Tribunal: 180 days (Section 19(5))

These are endeavour targets. Reasons must be recorded if the time is exceeded.

Undisclosed foreign assets (Section 13(1A) and 13(1C))

Penalty ≤ 3 × sum involved plus confiscation of equivalent value in India; imprisonment up to 5 years and fine

Applies where value exceeds the threshold prescribed under the proviso to Section 37A(1).

Section 37A seizure process

Seizure order placed before Competent Authority within 30 days; Competent Authority disposes within 180 days

The Competent Authority is an officer not below the rank of Joint Secretary.

Quick revision

• FEMA 1999 extends to the whole of India and applies to branches, offices and agencies outside India owned or controlled by a resident of India.
• It also applies to contraventions committed outside India by any person to whom it applies.
• Section 3: without permission, no person may deal in or transfer foreign exchange to a person who is not an authorised person.
• Section 3 also bars payments to or for the credit of a person resident outside India, unless permitted.
• Receiving a payment for a non-resident without a corresponding inward remittance is treated as received otherwise than through an authorised person.
• Section 8: a resident in India must take all reasonable steps to realise and repatriate foreign exchange due to them, within the period and manner the Reserve Bank specifies.
• Section 9 exempts certain cases from Sections 4 and 8, such as limited possession of foreign currency, with limits set by the Reserve Bank.
• Section 10: the Reserve Bank authorises persons in writing, subject to conditions, and may revoke the authorisation.
• Revocation for breach of conditions needs a reasonable opportunity to make a representation first.
• An authorised person must obtain a declaration before a transaction and refuse in writing if not satisfied.
• Section 11(3): penalty on an authorised person up to ₹10,000, plus up to ₹2,000 per day for a continuing contravention.
• Section 13(1): penalty up to thrice the sum involved, or up to ₹2,00,000 if not quantifiable, plus up to ₹5,000 per day if continuing.

Common mistakes

• Treating 182 days or more as the test. Fix: Write 'more than 182 days during the preceding financial year', exactly as in Section 2(v)(i).
• Deciding residence only on days spent in India. Fix: After the day count, check the purpose of stay: employment, business or vocation, or an intention to stay for an uncertain period.
• Saying Section 3 bans all foreign exchange dealings absolutely. Fix: Always write 'save as otherwise provided in the Act, rules or regulations, or with general or special permission of the RBI'.
• Saying a resident can never hold foreign currency or foreign property. Fix: Add the exception: assets acquired or held while resident outside India, or inherited from a non-resident, may be held.
• Quoting a fixed number of days as if Section 8 itself prescribes it. Fix: Write that the period and manner are specified by the Reserve Bank, as Section 8 says. Quote a number only if the question supplies it.
• Treating repatriation as only converting into rupees. Fix: Remember Section 2(y): selling to an authorised person, holding in an account with an authorised person to the extent notified, or using it to discharge a foreign-exchange debt or liability.
• Stating the penalty under Section 11(3) as a fixed amount. Fix: Always write 'up to ₹10,000, and up to ₹2,000 for every day of continuing contravention'. The RBI sets the amount within the cap after a hearing.
• Saying the RBI can revoke authorisation without hearing the authorised person. Fix: Revocation for breach (ground (b)) needs a reasonable opportunity to make a representation. The proviso names only ground (b).
• Treating the penalty as fixed at three times the sum involved. Fix: Always write up to. The adjudicating authority fixes the amount within the ceiling.
• Counting the daily penalty from the first day of contravention. Fix: The text says for every day after the first day. Use days minus one.

Exam tips

• Learn the wording of Section 2(v) closely. Case questions change one fact, such as days, purpose or ownership of a branch.
• In theory answers, give three parts for Section 1: extent, application to offices outside India, and commencement on 1 June 2000.
• For FERA versus FEMA, write a two-column comparison on objective and approach, and avoid unverified details such as the number of sections.
• In MCQs, check 'more than 182 days' and 'preceding financial year' before choosing an option.
• Always tie a transaction label to the definition: current account is the residual category, so test capital account first.
• Quote the opening words of Sections 3 and 4: 'save as otherwise provided' and the RBI permission. Examiners look for the exception.
• In case scenarios, check the authorised-person element and the inward-remittance Explanation first.
• For current vs capital account questions, give the section, the default position (free or controlled) and who prescribes (Central Government or RBI).