CAPITAL ACCOUNT TRANSACTIONS under FEMA: An overview by Ozg Lawyers –
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Under Foreign Exchange Management Act (‘FEMA’), each transaction has to be categorized as either a capital account transaction or a current account transaction for applicability of relevant regulation thereon. The two have been defined unambiguously which avoids any chance of shortcoming in our understanding.
Section 2(e) of FEMA provides an exhaustive definition of the term ‘Capital Account Transaction’ which means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of person resident in India or assets or liabilities in India of persons resident outside India, and includes a transaction referred in sub-section (3) of section 6.
As per the provision of section 6(4) of FEMA 1999, all capital account transactions are prohibited unless specifically permitted.
Permissible capital account transactions
The permissible capital account transactions are defined under the following two categories:
For persons resident in India
For person resident outside India
Category I - Permissible capital account transactions for persons resident in India
Presented below is the list of capital account transactions which are specifically permitted for the person’s resident outside India:
(a) Investment by a person resident in India in foreign securities
The transaction must be within the limit specified in the Foreign Exchange Management (Transfer or Issue of Foreign Security by a Person Resident in India) Regulations, 2004
For eg. remittance of upto USD 1 billion (or its equivalent) in a financial year is allowed towards investment in foreign securities subject to a stipulation which requires that the remittance should not exceed 400% of the net worth as per the last audited balance sheet of the India Party.
(b) Foreign currency loans raised in India and abroad by a person resident in India
The transaction must be within the limit specified in the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000.
The limit of foreign currency loans is specified in two broad heads:
On the basis of maturity period:
Foreign currency loans may be raised under different tracks depending upon the maturity period. Under track I and track III, the said loan upto USD 50 million (or its equivalent) may be raised if the average maturity period is 3 years. In the event, the average maturity period is 5 years, the limit of borrowing may be enhanced to an indefinite amount (however, relaxation is granted to certain classes of borrowers). Under track II, if the average maturity period is 10 years, unrestricted foreign currency loans may be raised.
On the basis of eligibility of borrowers:
The limit of foreign currency loans differs with the category of borrowers. For Infrastructure Companies, Core Investments Companies, certain NBFCs, etc. may raise upto USD 750 million (or its equivalent). Software development sector and entities engaged in micro financer activities may raise upto USD 200 million or USD 100 million (or its equivalent) respectively. However, other entities as provided may raise upto USD 500 million (or its equivalent).
(c) Transfer of immovable property outside India by a person resident in India
Such transfers shall be governed by the provisions contained in the Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015.
(d) Guarantees issued by a person resident in India in favour of a person resident outside India
Pursuant to Foreign Exchange Management (Guarantee) Regulations, 2000, an authorised dealer may provide guarantee upto USD 5,00,000 (or its equivalent) in favour of a non-resident service provider, on behalf of a resident customer who is a service importer (other than PSU or Government undertaking) on prescribed terms. In case the resident service exporter is a PSU or a Government undertaking, the limit of guarantee shall be upto USD 1,00,000.
No limit has been prescribed in the said regulations for other transactions.
(e) Export, import and holding of currency/currency notes
Foreign Exchange Management (Export and Import of Currency) Regulations, 2015 prescribed the following limits:
For export of currency/currency notes:
A person resident in India may take outside India (other than Nepal and Bhutan) Indian currency notes upto an amount of Rs. 25,000 per person.
A person resident in India may take or send outside India (other than Nepal and Bhutan) commemorative coins upto 2 coins each.
For import of currency/currency notes:
A person resident in India who had gone out of India on a temporary visit may bring currency notes of India upto an amount of Rs. 25,000 per person at the time of his return (from a place other than Nepal and Bhutan)
Aggregate value of the foreign exchange in the form of currency notes, bank notes or travellers’ cheques brought in India by any person in aggregate at one time is upto USD 10,000 (or its equivalent)
Aggregate value of foreign currency notes brought in India by any person at one time is upto USD 5,000 (or its equivalent).
Export and import of currency to or from Nepal and Bhutan:
An individual travelling from India to Nepal or Bhutan may carry Indian currency notes of denomination Rs. 500 and or Rs. 2,000 upto a limit of Rs. 25,000.
Other than above, a person may take or send out of India to Nepal or Bhutan, Indian currency notes (other than notes of denominations of above Rs. 100)
A person may bring into India from Nepal or Bhutan, India Currency notes (other than notes of denominations of above Rs. 100)
The limit for holding of currency notes is specified in Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2015
Foreign exchange in the form of currency notes, bank notes and travellers’ cheque in aggregate upto USD 2,000 (or its equivalent) subject to acquisition of such foreign exchange in the modes prescribed in the said regulations.
(f) Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India
This transaction covers the limits specified in the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 along with the limits specified in the Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations, 2000
It is to be taken into consideration that Rupee Denominated Bonds (also known as Masala Bonds) can also be categorized under such transactions. For minimum average maturity period of 3 years, upto USD 50 million equivalent in INR per financial year may be raised. However, in case the minimum average maturity period is of 5 years, above USD 50 million equivalent in INR per financial year.
(g) Maintenance of foreign currency accounts in India and outside India by a person resident in India
Foreign currency account means an account held or maintained in currency other than the currency of India or Nepal or Bhutan.
No limit has been prescribed for credit to or debit from such Foreign Currency Accounts.
(h) Taking out of insurance policy by a person resident in India from an insurance company outside India
The limit of aggregate remittance including the amount of premium by person resident in India to an insurance company outside India should be upto USD 2,50,000 per financial year pursuant to Foreign Exchange Management (Insurance) regulations, 2015. However, this limit is not applicable if the insurer is under the specific/ general permission of Indian Government.
(i) Loans and overdrafts by a person resident in India to a person resident outside India
Lending in foreign exchange by person in India is governed by Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 and Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations, 2000.
In case, the rupee loan is granted to a close non-resident Indian relative by crossed cheque/ electronic transfer, the loan amount shall be within the overall limit of USD 2,50,000 per financial year.
(j) Remittance outside India of capital assets of a person resident in India
Pursuant to Foreign Exchange Management (Remittance of Assets) Regulations, 2016, prescribed classes of persons may remit amount through Authorised Dealer upto USD 1 million per financial year.
(k) Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India
Such transactions shall be governed by Foreign Exchange Management (Foreign Exchange Derivatives Contracts) Regulations, 2000.
Note: A resident Individual may draw from AD foreign exchange upto USD 2,50,000 per financial year for capital account transactions where no other limit has been prescribed in the relevant regulations.
Category 2 : Permissible capital account transactions for persons resident outside India
(a) Investment in India by a person resident outside India, that is to say,
(i) Issue of security by a body corporate or an entity in India and investment therein by a person resident outside India; and
(ii) Investment by way of contribution by a person resident outside India to the capital of a firm or a proprietorship concern or an association of persons in India.
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The limits are governed by Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000. The sectoral caps are provided in the Annex B to the said regulations. However, it is to be taken note that no foreign direct investment is permitted to be made in the sectors specifically prohibited in the Annex A.
(b) Acquisition and transfer of immovable property in India by a person resident outside India
No limit has been prescribed in Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000. However the acquisitions and transfers are subject to the conditionalities prescribed.
(c) Guarantee by a person resident outside India in favour of, or on behalf of, a person resident in India
The Foreign Exchange Management (Guarantee) Regulations, 2000 provide restrictions for Indian companies to avail overseas guarantees in the form of domestic rupee denominated structured obligations by obtaining credit enhancement from international banks, international financial institutions or joint venture partners.
However, this restriction does not apply to eligible borrowers (under ECB regulations) for guarantee for similar transaction for domestic debts raised by such companies through issue of capital market instruments.
(d) Import and export of currency/currency notes into/from India by a person resident outside India
Foreign Exchange Management (Export and Import of Currency) Regulations, 2015 prescribed the following limits:
For export of currency/ currency notes
A person resident outside India (other than citizen of Pakistan or Bangladesh) and visiting India, may take outside India, Indian currency notes upto an amount not exceeding INR 25,000 per person.
For import of currency/ currency notes
A person resident outside India (other than citizen of Pakistan or Bangladesh) and visiting India, may bring into India, India currency notes upto an amount not exceeding INR 25,000 per person.
Aggregate value of the foreign exchange in the form of currency notes, bank notes or travellers’ cheques brought in India by any person in aggregate at one time is upto USD 10,000 (or its equivalent)
Aggregate value of foreign currency notes brought in India by any person at one time is upto USD 5,000 (or its equivalent).
Export and Import of currency to or from Nepal and Bhutan:
An individual travelling from India to Nepal or Bhutan may carry Indian currency notes of denomination Rs. 500 and or Rs. 2,000 upto a limit of Rs. 25,000.
Other than above, a person may take or send out of India to Nepal or Bhutan, Indian currency notes (other than notes of denominations of above Rs. 100)
A person may bring into India from Nepal or Bhutan, India Currency notes (other than notes of denominations of above Rs. 100)
(e) Deposits between a person resident in India and a person resident outside India
The deposits between a person resident in India and a person resident outside India are governed by Foreign Exchange Management (Deposits) Regulations, 2016.
The regulations nowhere restrict the amount of the deposits, rather provide that the amount of deposits accepted shall not be allowed to be repatriated outside India. Further, an Indian company may accept deposits by issue of commercial paper to a non-resident Indian or a person of Indian origin or foreign portfolio investor registered under SEBI subject to prescribed conditions.
(f) Foreign currency accounts in India of a person resident outside India
NRI and PIO are eligible to obtain NRE, NRO and FCNR accounts with AD. Maximum amount of remittance allowed from NRO account is USD 1 million per financial year.
(g) Remittance outside India of capital assets in India of a person resident outside India.
An NRI or a PIO may remit through AD upto USD 1 million per financial year.
Prohibition on person resident outside India
A person resident outside India shall not make investment in the following sectors:
📌 Business of chitfund (may be allowed subject to authorization given by Registrar Of Chits or officer authorised by concerned State Government).
📌 Nidhi Company (learn more at nidhicompany.com).
📌 Agricultural or plantation activities.
📌 Real estate business or construction of farm house.
📌 Trading in transferable development rights.
Mode of payment for investment.
Normal banking channels or debit to an account of the investor maintained with AD in India.
Declaration
Declaration shall be furnished by each person at the time of selling or drawing the foreign exchange to or from AD for capital account transactions as prescribed under relevant regulations.
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