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CS Professional · Strategic Management and Corporate Finance · Foreign Funding - Institutions

Under FEMA, transactions in foreign exchange are classified as current account and capital account transactions. Which of the following is a capital account transaction?

Issue of equity shares by an Indian company to a non-resident is a capital account transaction because it changes the company's liabilities in India to a non-resident. Interest, import payments and student living expenses are current account transactions.

  1. APayment of interest on a loan taken by an Indian company from a foreign lender
  2. BRemittance of the living expenses of a student studying abroad
  3. CReceipt of foreign direct investment by an Indian company through issue of equity shares to a non-residentCorrect
  4. DPayment for import of goods by an Indian trader

Explanation

A capital account transaction alters the assets or liabilities, including contingent liabilities, outside India of a resident or in India of a non-resident. Issue of equity shares to a non-resident creates a liability in India to a non-resident. Interest payment, student expenses and import payments are current account transactions, which are generally permitted.

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