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FEMA – An Overview
With the advent of the New Industrial Policy, 1991 ("Industrial Policy") and a host of economic reforms and liberalization introduced by the Narsimha Rao Government, the closed Indian economy opened its arms to welcome foreign direct investments ("FDI"). This has acted as a catalyst for the growth and development of various sectors in India. Prior to 1999, the foreign exchange related activities in India were governed and regulated by the Foreign Exchange Regulation Act, 1974 ("FERA").The FERA regime was known for its draconian and stringent provisions and controls. However, in the background of the spirit and objective of the Industrial Policy, the Atal Bihari Vajpayee Government repealed FERA and replaced it with the Foreign Exchange Management Act, 1999 ("FEMA") with effect from June 1, 2000. The promulgation of FEMA further liberalised foreign exchange laws of India and provided a boost to foreign trade which has consequently led to a systematic evolution and development of the foreign exchange milieu in India.

Why is FEMA important?
The foreign exchange market and the entire gamut of foreign exchange transactions in India such as FDI in India by persons resident outside India, investments by resident Indians in wholly owned subsidiaries or joint ventures abroad, borrowing and lending transactions in Indian rupees, external commercial borrowings, acquisition and transfer of immovable property by persons resident outside India, import and export of goods and services, overseas remittances by resident Indians, establishment of a branch or office or any other place of business in India by person resident outside India, falls within, and is governed by FEMA. The provisions of FEMA have to be harmoniously read with the applicable regulations, rules, notifications, directions, press notes, circular etc. issued by the relevant regulatory authorities empowered to issue the same.

The ambit of FEMA comprises regulations and rules, notifications, directions and circulars (collectively, the "Regulations") as are issued by the Reserve Bank of India and the Central Government from time to time. These Regulations govern and regulate the entire gamut of foreign exchange transactions in India. Further, in so far as FDI in India is concerned, the Department of Industrial Policy and Promotion ("DIPP"), Ministry of Commerce and Industry, issues press notes in relation to FDI from time to time as also a consolidated foreign direct investment policy ("FDI Policy") which is a compilation of FDI related provisions. Accordingly, any transaction involving dealing in foreign exchange and/or a counter-party which is a person/entity residing outside India, will have to be undertaken in compliance with the Regulations including the FDI Policy, as are applicable at such time. In addition to compliance of FEMA at the time of undertaking transactions, FEMA has also, under various Regulations prescribed for regular compliances to be made by the concerned entities/persons.

Further, an important aspect which is intrinsic to FEMA is the requirement to adhere to timelines where stipulated under the FEMA for the purposes of actions to be undertaken or filings to be made. A contravention of any provision of FEMA has defined consequences including penalties and procedures prescribed for regularization.

Given the fact that the FEMA is a well-defined law, which touches upon and regulates any form of foreign exchange transaction in India, thereby defining parameters for functioning (as far as relating to the foreign exchange aspects), it becomes important for any person or entity be it Indian companies, foreign investors, persons resident outside India and the other stakeholders operating in the foreign exchange market in India ("Stakeholders") to be cognizant of FEMA and the compliances involved therein and also the changes that are brought about in the FEMA and its Regulations from time to time by the relevant regulatory and enforcement authorities.

Is your Company FEMA compliant?
FEMA reads with the Regulations stipulates several pre-conditions, eligibility criteria, entry route restrictions, monetary thresholds and limits, etc. which are required to be complied either prior to or for the purposes of effectuating a particular foreign exchange transaction. The Stakeholders need to be in compliance with such pre-conditions, eligibility criteria, entry route restrictions, monetary thresholds and limits, etc. and once compliant, are required to be compliant on on-going basis where on-going compliances have been prescribed.

By way of an illustration, if an Indian company which is desirous of raising funds from a foreign company to implement its expansion activities in India, will be required to ascertain conditions and compliances applicable under the relevant Regulation of FEMA to the receipt of foreign direct investment by an Indian company, namely, the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 ("TISPRO") In addition to TISPRO, the FDI Policy will also be applicable and the Indian company will be required to ascertain, in light of its principal business activity whether it is eligible to receive FDI under the automatic or Government approval route and also whether any conditions are prescribed for receipt of such investment the nature of securities which the Indian can issue and allot to the foreign company, the pricing of such securities, etc. In addition to the aforesaid, the Indian company will also be required to make filings in respect of the foreign investment it receives, which will include filings with the RBI on a periodical basis. In addition to this, any transfer of stake by the foreign shareholder or any other significant business activity or action by the Indian company (which has received foreign investment) will have to be first evaluated in light of the applicable Regulations of FEMA and the FDI Policy before such activity or action can be undertaken by the Indian company. Hence it can be seen from the illustration that both prior to and after the Indian company has received foreign investment, FEMA and its Regulations will have a significant bearing and applicability (along with the various other laws which would apply to the Indian company in the course of its activities) on the Indian company as also its foreign shareholder on a continual basis.

Need for an advisor to comprehend FEMA
The illustration set out above is in relation to TISPRO, which is one of the several Regulations prescribed under FEMA. However, in addition to TISPRO, FEMA comprises in totality, 25 regulations, 18 Master Directions, 6 rules and the various press notes and notifications/ circulars issued by DIPP and RBI respectively from time to time for notifying amendments under FEMA. In view thereof, it is important for the Stakeholders (to whom any of the aforesaid would apply) to keep pace with the nuances, subtleties and dynamics of FEMA in order to be in compliance of FEMA at all points of time. For the Stakeholder to completely gauge the import of the compliances and be advised on the extent and parameters within which FEMA may permit the Stakeholder to undertake a particular foreign exchange related transaction, the Stakeholder should be well-assisted by a legal advisor specializing in FEMA.

This would assist the Stakeholder in harmoniously comprehending and interpreting FEMA whether in relation to foreign direct investments in India, overseas investments in subsidiaries and/or joint ventures, borrowing and lending transactions in India rupees, external commercial borrowings, acquisition and transfer of immovable property by persons resident outside India, import and export of goods and services, overseas remittances by resident Indians, establishment of branch or office or any other place of business by person resident outside India or any other transaction involving inflow or outflow of Indian or foreign currencies or any foreign exchange transaction.

This article has been authored by Ms. Poorvi Sanjanwala, Partner, Rajani Associates and  Ms. Nishtha Mehta, Associate, Rajani Associates

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Poorvi Sanjanwala, Partner, Rajani Associates Practice Area Specialization: Private Equity, Joint Ventures and General Corporate & Commercial. Poorvi has been with the Firm since 2006. Poorvi passed her L.L.B. examination in 2003 from the Mumbai University and is a gold medalist in law. Poorvi has also completed her Masters in Commerce from the Mumbai University. Poorvi's practice area in the Firm is private equity wherein her clients have been a healthy mix of target companies and investors. She also handles joint ventures and collaborations along with general corporate and commercial documentation which varies from supply contracts to debt and security documents. Poorvi also renders general corporate advice to clients including on issues relating to prevailing foreign exchange policies and regulations in India. In her spare time Poorvi likes to paint, read, travel and listen to music.