Law relating to Foreign Exchange Management: formula sheet

Key formulas

Extent (s 1(2))

Extends to the whole of India

Section 1(3) adds application to branches, offices and agencies outside India owned or controlled by a person resident in India, and to contraventions committed outside India by persons to whom the Act applies.

Person resident in India: individual test (s 2(v)(i))

Residing in India for more than 182 days during the preceding financial year

Excludes a person who has gone out or stays outside India for taking up employment, carrying on business or vocation outside India, or for any other purpose indicating intention to stay outside India for an uncertain period. A person who came to or stays in India other than for employment, business or vocation in India, or with intention to stay for an uncertain period, is also excluded.

Person resident in India: other categories (s 2(v)(ii) to (iv))

Any person or body corporate registered or incorporated in India; an office, branch or agency in India owned or controlled by a person resident outside India; an office, branch or agency outside India owned or controlled by a person resident in India

Companies are resident by registration or incorporation in India, not by the 182-day test.

Person resident outside India (s 2(w))

A person who is not resident in India

It is a residual definition.

Current account transaction (s 2(j))

A transaction other than a capital account transaction

Includes payments for foreign trade, current business, services and short-term banking and credit facilities in the ordinary course; 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.

Capital account transaction (s 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

Includes transactions referred to in section 6(3).

Freedom rules (ss 5 and 6)

Current account: free, subject to reasonable restrictions. Capital account: permitted as specified or prescribed

Under s 6(2), the Reserve Bank specifies permissible classes involving debt instruments, limits and conditions. Under s 6(2A), the Central Government prescribes for transactions not involving debt instruments.

Foreign exchange (s 2(n))

Foreign currency, plus deposits, credits and balances payable in foreign currency, and specified drafts, travellers cheques, letters of credit and bills of exchange

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

Section 3 prohibition

No dealing in or transfer of foreign exchange or foreign security to a non-authorised person; no payment to a non-resident; no receipt except through an authorised person; no financial transaction for an asset outside India

Applies save as otherwise provided in the Act, rules or regulations, or with RBI's general or special permission.

Section 3(c) Explanation

Receipt on behalf of a non-resident without a corresponding inward remittance = deemed received otherwise than through an authorised person

Applies even if the payment came through an authorised person.

Current account (Section 5)

Any person may sell or draw foreign exchange to or from an authorised person for a current account transaction

Central Government may impose reasonable restrictions in public interest, in consultation with RBI.

Capital account (Section 6)

Permitted subject to Section 6(2) and 6(2A): RBI for debt instruments, Central Government for non-debt instruments

Each may specify classes, limits and conditions. No restriction on drawal for loan amortisation or depreciation of direct investment in the ordinary course of business.

Export of goods (Section 7(1))

Declaration to RBI or other authority with true and correct particulars, including full export value

If value is not ascertainable, state the value the exporter expects to receive on sale in a market outside India.

Export of services (Section 7(3))

Declaration with true and correct material particulars relating to payment for services

Form and manner are as specified.

Realisation and repatriation (Section 8)

Resident must take all reasonable steps to realise and repatriate foreign exchange within the period and manner specified by RBI

Section 9 gives exemptions.

Rule and regulation powers

Section 46: Central Government makes rules. Section 47: RBI makes regulations

Section 46(2)(a) covers restrictions on current account transactions; Section 47(2)(c) covers the repatriation period and manner.

Section 4 prohibition

Resident in India: no acquiring, holding, owning, possessing or transferring foreign exchange, foreign security or immovable property outside India, save as the Act provides

The default rule. Learn the five verbs and the three asset types.

Section 6(4) exception

Allowed if acquired or held while resident outside India, or inherited from a person resident outside India

Both limbs matter: own prior holding, or inheritance from a non-resident.

Section 37A(1) seizure

Authorised Officer + reason to believe + reasons recorded in writing → seizes value equivalent situated within India

No seizure if aggregate value of the foreign assets is less than the prescribed value.

Section 37A(2) placing before Competent Authority

Order + relevant material placed before Competent Authority within 30 days of seizure

Competent Authority is an officer not below the rank of Joint Secretary to the Government of India.

Section 37A(3) disposal

Competent Authority disposes within 180 days of seizure: confirms or sets aside, after hearing Enforcement Directorate and aggrieved person

Court stay period is excluded, and at least 30 more days are given after the stay is vacated.

Section 37A(4) duration and disclosure

Confirmed seizure continues till adjudication ends; Adjudicating Authority then gives directions. Disclosure and bringing back into India can lead to seizure being set aside

The proviso applies at any stage of proceedings under the Act.

Section 37A(5) and (6)

Appeal against Competent Authority order to Appellate Tribunal; section 15 does not apply

Section 15 is the provision for compounding of contraventions. Section 37A(6) excludes it, so a seizure under section 37A cannot be compounded. The appeal against a Competent Authority order lies directly to the Appellate Tribunal under section 37A(5).

Section 13(1A), (1C)

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

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

General penalty, section 13(1)

Up to 3 × sum involved (if quantifiable); up to ₹2,00,000 (if not quantifiable)

Imposed upon adjudication. It is a maximum, not a fixed amount.

Continuing contravention

Further penalty up to ₹5,000 per day after the first day

Counted for every day after the first day the contravention continues.

Confiscation, section 13(2)

Adjudicating Authority may confiscate currency, security or property, and direct foreign exchange holdings be brought back or retained abroad

Is in addition to penalty, and covers property converted into bank deposits or Indian currency.

Foreign assets above threshold, section 13(1A) and (1C)

Penalty up to 3 × sum involved + 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). Prosecution only on written complaint by an officer not below Assistant Director.

Compounding, section 15

Compounded within 180 days from receipt of application

Application by the contravener. Compounding bars further proceedings for that contravention.

Appeal, section 19

Within 45 days of receipt of order; Tribunal aims to dispose within 180 days

Late appeal is allowed on sufficient cause. Penalty deposit is required unless waived for undue hardship.

Adjudication timeline, section 16(6)

Endeavour to dispose of complaint within 1 year

If not, the authority records reasons in writing periodically.

Seizure under section 37A

Order placed before Competent Authority within 30 days of seizure; Competent Authority decides within 180 days

Competent Authority is an officer not below Joint Secretary. Appeal against its order lies to the Appellate Tribunal.

Authorisation (s. 10(1)-(2))

RBI authorises on application; in writing; subject to conditions

Authorised person can be an authorised dealer, money changer, off-shore banking unit or another person as RBI deems fit.

Revocation (s. 10(3))

Public interest OR breach of condition/Act/rule/direction

For breach, a reasonable opportunity of making a representation must be given first. The proviso does not require this for the public interest ground.

Directions to authorised persons (s. 11(1))

RBI may direct on payments, doing or desisting from acts relating to foreign exchange or foreign security

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

Information (s. 11(2))

RBI may direct authorised person to furnish information in the manner it deems fit

Purpose: ensuring compliance.

Penalty on authorised person (s. 11(3))

Up to ₹10,000 + up to ₹2,000 per day for continuing contravention

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

Inspection (s. 12)

RBI officer specially authorised in writing may inspect business at any time

Purposes: verify information, obtain information not furnished, secure compliance. Authorised person and its directors, partners or officers must produce books, accounts and documents.

Central Government directions (s. 41)

Central Government gives general or special directions to RBI; RBI shall comply

Applies in the discharge of RBI functions under the Act.

Capital account transactions: debt instruments

RBI, in consultation with the Central Government, specifies permissible classes, limits and conditions (Section 6(2))

Use this for ECB and other debt-type flows.

Capital account transactions: non-debt

Central Government, in consultation with RBI, prescribes permissible classes, limits and conditions (Section 6(2A))

Use this for equity-type FDI and similar non-debt flows.

Meaning of debt instruments

Instruments determined by the Central Government in consultation with RBI (Section 6(7))

The Centre decides what counts as debt.

Rule-making power

Section 46(2)(aa) and (ab): Central Government rules on debt instruments and permissible capital account classes

Rules are made by notification of the Central Government.

Regulation-making power

Section 47(2)(a): RBI regulations on debt-instrument capital account transactions, limits, prohibition, restriction or regulation

Regulations are made by RBI notification.

FDI entry routes

Automatic route: no prior approval. Government route: prior government approval

Check sectoral cap and conditions in both routes.

Penalty for authorised person

Up to ₹10,000, plus up to ₹2,000 per day of continuing contravention (Section 11(3))

Applies after a reasonable opportunity of being heard.

Quick revision

• FEMA 1999 extends to the whole of India and applies to branches, offices and agencies abroad owned or controlled by a resident in India (Section 1).
• FEMA came into force on 1 June 2000.
• Section 4: save as otherwise provided, a person resident in India cannot acquire, hold, own, possess or transfer foreign exchange, foreign security or immovable property outside India.
• Section 13(1): penalty up to thrice the sum involved if quantifiable, or up to ₹2,00,000 if not quantifiable.
• Section 13(1): for a continuing contravention, a further penalty up to ₹5,000 for every day after the first day.
• Section 13(2): the Adjudicating Authority may also order confiscation and direct that foreign exchange holdings be brought back or retained outside India.
• Section 37A: an Authorised Officer may seize value equivalent, situated within India, of suspected overseas assets, after recording reasons in writing.
• Section 37A: no seizure if the aggregate value of the overseas assets is below the prescribed value.
• Section 37A: the seizure order goes to the Competent Authority (not below Joint Secretary) within thirty days; it decides within one hundred eighty days.
• Section 37A: if the aggrieved person discloses and brings the assets back into India, the seizure may be set aside; appeals lie to the Appellate Tribunal.
• Section 11(3): an authorised person who breaks an RBI direction faces a penalty up to ₹10,000, plus up to ₹2,000 per day if continuing.
• Section 13(1C): imprisonment up to five years and fine for acquiring overseas assets above the prescribed threshold; cognizance only on a written complaint by an officer not below Assistant Director.

Common mistakes

• Applying the 182-day test to a company. Fix: A company registered or incorporated in India is resident under section 2(v)(ii). Use the 182-day test only for individuals.
• Treating citizenship as the test of residence. Fix: Residence under FEMA depends on stay, purpose and intention, or on registration for entities. Nationality is not the test.
• Saying all foreign exchange dealing is banned. Fix: Always add the opening words: save as otherwise provided, or with RBI's general or special permission.
• Treating capital account transactions as prohibited. Fix: Quote Section 6(1): any person may sell or draw foreign exchange for them, subject to Section 6(2) and (2A).
• Saying section 37A allows seizure of the foreign asset itself. Fix: Write that it allows seizure of the value equivalent situated within India.
• Mixing up the 30-day and 180-day periods. Fix: 30 days: the Authorised Officer places the order before the Competent Authority. 180 days: the Competent Authority decides.
• Stating the penalty as exactly three times the sum involved. Fix: Always write 'up to thrice the sum involved'. The authority has discretion below that ceiling.
• Charging the daily penalty from day one. Fix: The text says every day after the first day. For 10 days, count 9 days.
• Saying the Central Government issues directions to authorised dealers under section 11. Fix: Section 11 powers belong to the RBI. Section 41 is the Central Government's power to direct the RBI.
• Claiming the RBI can revoke authorisation without hearing on every ground. Fix: Representation is a must where revocation rests on breach under section 10(3)(b). The public interest ground has no such proviso.

Exam tips

• Write the section number with each definition. Examiners reward the provision followed by application and a conclusion.
• For 'residence' questions, name the category of person first. This shows structure and avoids losing marks to the wrong test.
• In extent questions, give both limbs: the whole of India, and the extra-territorial application under section 1(3).
• Learn the four listed current account items by heart, but state the general definition first.
• Where a question asks for FERA versus FEMA, use the ICSI study material for the comparison points and write them in a two-column style using short lines.
• Learn Sections 3, 5, 6, 7, 8 and 9 in order; questions often test one section, so quote its words.
• In case studies, first classify as current or capital account, then cite the section.
• Write the rule-versus-regulation point: Section 46 (Central Government rules) and Section 47 (RBI regulations).