Foreign Exchange Management Act, 1999 is the regulatory statute that governs the foreign exchange in India. It replaced the erstwhile Foreign Exchange Regulatory Act (FERA) as FERA was more regulatory in nature and wasn’t sustainable in the post-liberalization regime. The redundance of FERA necessitated the implementation of the FEMA act 1999 that eased and provided liberty for foreign exchange transactions while also converting criminal offenses under FERA to civil offenses under FEMA. Here’s a complete guide to obtaining a profound understanding of FEMA 1999 and its implications in the Indian Foreign Exchange Market.
FEMA 1999 was enacted to encourage foreign trade and payments and assist in the development of the Indian Foreign Exchange Market. It advocates a balance of payment as the true record of dealings in goods, services, and assets between citizens of two countries. It has streamlined the procedural and legal aspects of foreign exchange management in line with liberalization and globalization.
Foreign investments have become an important part of corporate strategies. These are multi-disciplinary regulated transactions and FEMA lays explicit regulations and compliance requirements to deal with the same. Here’s a guide to FEMA compliances that shall be adhered to when attracting as well as undertaking foreign investments.
Foreign Direct Investments is the investment in one entity by an investor located in another country or territory. FDIs have been an important source of generating investments by the corporates. However, as it involves changes in ownership interest, the government, by laying down regulations, has put certain checks to ensure that the provisions are in line with the national interest. FDIs involves two routes for investments:
Meaning: ODI means direct investment outside India by way of contribution to the capital, subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares either by market purchase or private placement or through the stock exchange, signifying a long-term interest in such foreign entity (JV or WOS) but does not include portfolio investment.
Like FDI, ODI also involves automatic route and approval route. While the meaning is the same, industries covered under the automatic and approval routes are different than those under the FDI. The companies shall adhere to the following compliances while engaging in ODI transactions:
Annual return on Foreign Liabilities and Assets (FLA Return) is mandatory for all the companies who have received foreign investments, including ECB and/or made any overseas investment in the current or previous years. The return is required to be filed on the 15th of July each year to the RBI giving details of outstanding assets and liabilities. Partnership firms are also required to file FLA return in case of FDI or ODI transactions. Upon request, RBI issues a dummy CIN to facilitate the filing of FLA return by partnership firms.
Non-compliance with the regulations attracts adverse consequences, triggering the penal provisions. Section 13 of FEMA, 1999 provides the following consequences for not complying with FDI and ODI regulations:
Any contravention or non-adherence to the requirements, conditions, rules, regulations, orders, etc. attracts the penalty up to thrice the amount of sum involved where the non-compliance or non-adherence is quantifiable. However, in the case where the sum cannot be determined or quantified, then the penalty of up to Rs. 2 lakhs is leviable.
Where the offense is of continuing nature, then a further penalty that may extend up to Rs. 5000 per day may be levied.
FEMA 1999 has its own provisions for determining the residential status for the purpose of this act. Apart from that, various regulations form part of this enactment to cover and regulate transactions involving foreign exchange. Compliances and procedural aspects need to be adhered to while dealing in foreign exchange to avoid violation of FEMA provisions and its regulations that attracts penalties.
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