With FEMA in place, India has moved from a regulatory mechanism to a management mechanism with respect to foreign exchange. It is a step forward in the process of liberalisation initiated in the early nineties.

Blanket Prohibitions:
There is blanket ban on dealing in Foreign exchange by any person without the general or special permission of the RBI or as provided in the Act, Rules or Regulations made thereunder.

General Permission:
RBI or Central Government through various notifications and rules give general permission to deal into a particular type of transaction involving foreign exchange.

Special Permission:
Those transactions which are not generally permitted, may be permitted by the RBI/Central Government by granting a special permission. An application has to be made to the RBI or Central Government as the case may be, for the same..

Definition of "person resident in India"
It means-

1. a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include-
   
   (A) a person who has gone out of India or who stays outside India, in either case-
        (a) for or on taking up employment outside India, or
        (b) for carrying on outside India a business or vocation out-side India, or
        (c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
   
   (B) a person who has come to or stays in India, in either case, otherwise than-
        (a) for or on taking up employment in India, or
        (b) for carrying on in India a business or vocation in India, or
        (c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
   
2. any person or body corporate registered or incorporated in India,
3. an office, branch or agency in India owned or controlled by a person resident outside India,
4. an office, branch or agency outside India owned or controlled by a person resident in India;

Definition of "person resident outside India"
It means a person who is not resident in India.

Note: The dilema regarding residential status of a student has been removed by circular 45 of RBI dated 08.12.2003 which clarifies the status of a student gone abroad for studies as person resident outside India.

Definition of "Authorised Person"
Every person while entering into transactions involving foreign exchange needs to route such transactions through an Authorised Person, and one needs to understand who they are.

"Authorised person" means an authorised dealer, money changer, offshore banking unit or any other person for the time being authorised under sub-section (1) of section 10 to deal in foreign exchange or foreign securities;

Definition of "Current Account Transactions"
The Indian Government has taken many steps towards current account convertibility "What then is current account convertibility. One can say that there is full current account convertibility in a country when there are no restrictions on current account transactions.

The Term "Current account transaction" means "a transaction other than a capital account transaction" and without prejudice to the generality of the foregoing, such transaction include -

• Payment due in connection with foreign trade, other current business, services and other short term banking and credit facilities in the ordinary course of business.
• Payment due as interest on loan and as net income from investment.
• Remittance of living expenses of parents, spouse and children residing abroad.
• Expenses in connection with foreign travel, education and medical care of parents, spouse and children

When we say that current account transactions are free from control in India, it does not imply that any amount of remittance is permitted for a current account transaction. The Government has come out with rules on the subject of permitted current account transactions.

Definition of Capital Account Transactions

Capital Account Transaction means a transaction which:-
i)  alters the assets and/or liabilities, outside India of a person resident in India or
ii) alters assets and/or liabilities in India of a person resident out side India and includes transactions referred to in sub-section (3) of section 6.
Instances of such transactions are investment in shares, immovable property in India, borrowing or lending in foreign exchange and Indian rupees, various kinds of bank accounts, guarantees etc. For each category separate notification is issued by the RBI.

Foreign Currency Vs. Foreign Exchange:
One needs to understand difference between above two terms.
Foreign currency means any currency other than Indian currency. For e.g. dollar, pound, sterling, euro etc.

"Foreign exchange" means foreign currency and also includes:

1. deposits, credits and balances payable in any foreign exchange currency,
2. drafts, travellers' cheques, letters of credit or bills of exchange expressed or drawn in Indian currency but payable in foreign currency.
3. drafts, travellers' cheques, letters of credit or bills of exchange expressed or drawn in foreign currency but payable in Indian currency.

Let us try to understand some commonly used terms when a Non Resident thinks about investment in India.

'Investment on Repatriation Basis' means the investments, which are fully repatriable both, on account of capital and profit, net of Indian taxes.

'Investment on Non Repatriation Basis' means the investments whose sale proceeds including capital gains are not repatriable but the income there from is repatriable net of Indian taxes.(such as dividend , interest etc)

'Non resident Indian' means a person resident outside India who is citizen of India or is a person of Indian Origin

Investment in Deposits with Banks in India
If you are a Non-Resident Indian (NRI) or a Person of Indian Origin (PIO), you can avail of the following facilities without permission from the Reserve Bank:

Deposits in Banks
You can open, hold and maintain following types of accounts with an authorised dealer in India i.e. a bank authorised to deal in foreign exchange.

• Non-Resident (Ordinary) Rupee Account - NRO Account
• Non-Resident (External) Rupee Account - NRE Account
• Foreign Currency Non Resident (Bank) Account - FCNR (B) Account

Investment in Corporate Sector:
1. Foreign Direct Investment Scheme (FDI):
Foreign Direct Investment means investment into capital of the company as a promoter or initial subscriber or as shareholder holding strategic share holdings.

Any person resident outside India , can invest into Indian companies by way of Foreign Direct Investment either as individual share holder or Joint Venture or wholly owned subsidiary. However an unincorporated entity is not allowed to make investment under FDI. The investment is permitted under automatic route wherein no prior approval of Government is required. For investment under FDI in very few restricted industries, approval of Central Government is required.

2. Portfolio Investment Scheme:
Portfolio Investment means investment in shares and or convertible debentures of an Indian company through a registered broker on a recognized stock exchange in India. Basically, intention of acquisition of shares is to invest and trade and not to involve oneself in management of the company.

Only NRI's on repatriation basis or on non repatriation basis, can invest into shares and or convertible debentures of an Indian company through registered broker on a recognized stock exchange.
If investment is made from repatriable sources such as from NRE account, FCNR(B) a/c or remittance from abroad , then sale proceeds can be repatriated outside India subject to payment of taxes in India.
If investment is made from non-repatriable sources such as from NRO account then sale proceeds cannot be repatriated outside India.

Investment in Non corporate sector: Partnership or Proprietory Firm in India

Originally only NRIs were permitted to invest into partnership or proprietorship concern as capital without repatriation benefit and without RBI permission, provided that

1. The amount invested is received either by inward remittance through normal banking channels or out of account maintained with an authorised dealer/authorised bank by the Non resident Indian or the person of Indian Origin in accordance with the relevant regulations.
2. The firm or the proprietary concern is not engaged in any agricultural/plantation activity or real estate business i.e. dealing in land and immovable property with a view to earning profit or earning income therefrom.
3. The amount invested shall not be eligible for repatriation outside India.
   The Income arising out of such investment such as profit, interest on capital and remuneration to partners is allowed to be repatriated net of taxes

However as per the amendments made now NRI's & PIO can invest in proprietary concern or partnership firm with repatriation benefit but only with prior approval Government/RBI. Also a Person Resident Outside India other than NRI's & PIO can approach RBI for permission to invest in Indian Proprietary Concern/Partnership Firm.

Acquisition and Transfer of Immovable Property in India.
General permission is given to Non Resident Indians to buy and sell immovable property to:-

• those individuals who are non residents under FEMA and are citizens of India or
• those individuals who are non resident under FEMA and are Persons of Indian origin defined as under

Person of Indian origin means-
individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan), who

1. any time, held Indian passport; or
2. who or either of whose father or whose grandfather was a citizen of India
   by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of
   1955);

There are some restrictions on acquisition and transfer of Immovable Property of which the NRI shall have to take care.

1. The Formalities to be Complied with for Change of Residential Status:
   i.e Resident becoming non resident & A Non Resident becoming a Resident?

   The following formalities amongst others are required to be complied with upon change of residential status from a RESIDENT TO A NON RESIDENT

1. Bank Accounts

• intimate change of residential status
• bank will redesignate account as NRO A/c
• Interest on NRO A/c is repatriable net of Indian taxes

2. Investments in Securities/ Shares/ Debentures/Units of MF etc

• Inform about change of residential status
• Sale proceeds not repatriable (subject to the limits & type of assets permitted) and shall be credited to NRO A/c but dividend or interest income repatriable net of Indian taxes.

3. Immovable property

• Continue to hold
• No intimation to RBI or no RBI permission
• Sale proceeds not repatriable. If such property is held for a period of 10 years or more then sale proceeds upto $ 10,00,000 per calendar year can be repatriated subject to payment of Indian taxes.
• Rental income if any from such immovable property can be repatriated net of Indian taxes

4. Jewellery, Motor car and other movable assets

• Continue to hold
• No intimation to RBI or no RBI permission
• Sale proceeds non-repatriable

5. Continuation as Partner or Proprietor firm

• General permission
• Capital in the concern is not repatriable (subject to limits prescribed) but profit if any can be repatriated.
• Retire if real estate business or agricultural activity

6. Continuing as director of a company or a trustee of a Trust

• No RBI permission
• Inform to company or Trust about change of status

7. Continuation of loans given

• Continuation possible - No RBI permission
• Interest rate can not exceed 2% above bank rate
• The loan amount is not repatriable (subject to limit prescribed) but interest on it is repatriable.
• Intimate borrower about change in status as he will be under obligation to deduct tax from interest payable to non resident.

8. Continuation of rupee loan / overdraft (OD) obtained

• Loan from AD/Bank can be continued.
• Period of loan originally fixed can not be extended
• Repayment by remittance from inward remittance or from NRO a/c.
• No guidance about private loan taken from relatives, friends or other persons. In such a case RBI permission may be obtained.

9. Keeping Indian Currency

• can not keep more than Rs.5000/-

9. Power of Attorney

• It is recommended that one shall execute a power of attorney (general or special) in favour of a trusted friend or a relative to undertake certain transactions while one is away. The power of attorney holder can operate bank account for local disbursement (for expenses) & investment in India but can not make remittance outside India nor can make a gift to a resident on behalf of the account holder, out of his NRE & FCNR A/c.

9. Time limit for intimations/ permission

• Unfortunately no time limit is prescribed for the various formalities listed above. However it is advised to complete the formalities within 30 days of the change of residential status.

2. Remittances which are Generally Permitted for Residents as well as Non- Residents

1. Drawal of foreign exchange for travel to Nepal or Bhutan.
2. Winnings from Lottery or races in India.
3. Participation in Lottery ticket scheme or money circulation scheme abroad.
4. Call back charges- Payment related to "call back services" of telephones. Call back charges means the party which is receiving the telephone call makes payment of telephone charges.
5. Commission on exports to Joint Venture / Wholly owned subsidiary abroad.
6. Commission on rupee trade.

Requirements to be compiled with by the remitter

a. To avail of this facility, the individual will have to designate a branch of a AD through which all the remittances under the scheme will be made.

b. The resident individual seeking to make the remittance should furnish an application letter cum declaration in the prescribed format regarding the purpose of the remittance and declaration that the funds belong to the remitter and will not be used for the prohibited purpose.

• The above facility is in addition to the facilities of remittances allowed for Resident Indians as stated herein before for gifts, employment, education etc.  The said fund cannot be utilized for the purpose prohibited under RBI or Central Government.

4. In addition to the above following Investment Facilities are also separately available with Indian Residents for making investment abroad without RBI permission.

• Corporates
  Listed Indian Companies are permitted to invest abroad in companies satisfying the prescribed conditions and such investment shall not exceed 25% of the Indian Company's Net Worth.
  
  
  
• Individuals
  Resident Individuals are permitted to invest in above said overseas companies without any monetary limit.
  
  The overseas companies prescribed are those which
  a.  are listed on a recognized stock exchange
  b.  which has the shareholding of at least 10% in an Indian Company, listed on a recognized stock exchange in India (As on 1st January of the year of investment)

5. Import-Export related Important Amendments

1. Submission of Declaration in Form GR/SDF/PP/SOFTEX in respect of goods and software of value not exceeding US $ 25000 or its equivalent is waived w.e.f. 1st April, 2004.
2. Extension of time limit for realization of export proceeds in respect of certain cases allowed upto 360 days instead of original limit of 180 days as per the specified conditions.
3. All exporters including status holder allowed to write off outstanding export not exceeding 10% of the export proceeds due during the calendar year and also allowed to extend the prescribed period of realization beyond 180 days or further period as applicable strictly subject to the conditions presented which may be referred to.
4. With a view to liberalize the procedure for exports of books Authorised dealers may approve proposal for export of books on consignment basis with realization of export proceeds upto 360 days from the date of shipment.
5. Authorised dealers are permitted to make advance remittance upto UDS 10,00,000 without bank guarantee for import of goods into India.
   

VI Import-Export related Important Amendments

1. Derecognition of OCB as a class of investor has led to various operational issues associated with the transitional arrangements for OCBS pertaining to Investments in shares/convertible debentures and other security deposits by OCBS.  Borrowing and lending in foreign currency and Indian Rupees by OCB.

Some of the Major consequences are:

1. Opening and Maintaining of NRE/FCNR/NRO A/c by OCB shall not be permitted.
2. Investment in sectors where foreign investment not permitted which was allowed to OCB on non repatriation basis shall not be permitted any more.
3. Free transfer of shares by one OCB to another OCB shall not be permitted.
4. Fresh investment in Government securities, Mutual Funds not permitted.
5. Fresh borrowings by Indian company from OCB in the form of ECB/NCD shall not be permitted.
6. However w.r.t. FDI OCB shall now be treated at par with any other foreign entity.
   Sale proceeds not repatriable (subject to the limits & type of assets permitted) and shall be credited to NRO A/c but dividend or interest income repatriable net of Indian taxes.

2. Acquisition of bonus shares by non-resident share holders who have acquired the original shares in accordance with Rules & Regulations applicable to such acquisition is allowed.
   
   
   
3. Monetary ceiling for overseas investment removed & accordingly resident corporates & registered partnership firm can invest upto 100% of their net worth in overseas JV/WOS without any separate limit.
   
   
   
4. Fresh investments by unincorporated entities under Foreign Direct Investments (FDI) Scheme shall not be allowed as per APDir Circular no.54 dated 20.12.2003.
   
   
   
5. Foreign investment in proprietary concern/partnership firm.
   
   

1. No Person resident outside India other than NRIs/PIO shall make investment by way of contribution to the capital of a firm or a proprietary concern or AOP without RBI permission.
2. NRI & PIO allowed to invest in capital of a firm or proprietary concern on non-repatriable basis who are not engaged in any agriculture/plantation or real estate business.
3. For NRIs & PIOs to invest in Proprietary concern or a firm on repatriable basis prior approval of secretariat for Industrial Assistant, Government of India/RBI has to be obtained.