Legal Aspects of Business

2nd Sem-MBA
CHAPTER I
PRILIMINARY:
1. Short title, extent, application and
commencement: (1) This Act may be called
the Foreign Exchange Management Act, 1999.
(2) It extends to the whole of India.
(3) It shall also apply to all branches, offices
and agencies outside India owned or
controlled by a person resident in India and
also to any contravention there under
committed outside India by any person to
whom this Act applies.
(4) It shall come into force on such date as
the Central Government may, by notification
in the Official Gazette, appoint:
Provided that different dates may be
appointed for different provisions of this Act
and any reference in any such provision to the
commencement of this Act shall be construed
as a reference to the coming into force of that
provision.

1. Foreign Exchange Management Act,

1999:
1. Foreign Exchange Management Act, 1999
2. Background Replaced FERA Foreign
Exchange Regulation Act 1974. FERA had
become incompatible with the proliberalization policies of the Govt. of India.
3. This was done in order to relax the controls
on foreign exchange in India, as a result of
economic liberalization.
4. FEMA served to make transactions for
external trade (exports and imports) easier
transactions involving current account for
external trade no longer required RBIs
permission.
FERA vs FEMA:
The objective of FERA was to conserve and
prevent its misuse.
The objective of FEMA is to facilitate
external trade and payments and
maintenance of foreign exchange in India.
Violation of FERA was considered a
criminal offence.

 Whereas violation of FEMA was considered

a civil offence.
Under FERA citizenship was a criteria while
determining a person as resident of India
whereas under FEMA stay of more than
182 days is a criteria to determine
residential status of a person.
Facilitating Objectives of the Act for
promoting the orderly development and
maintenance of foreign exchange market
in India.
2. Definitions.In this Act, unless the context otherwise
requires,(a) "Adjudicating Authority" means an
officer authorized under sub-section (1) of
section 16
(b) "Appellate Tribunal" means the
Appellate Tribunal for Foreign Exchange
established under section 18;
(c) "Authorized person" means an
authorized dealer, money changer, off-shore
banking unit or any other person for the time
being authorized under sub-section (1) of
section 10 to deal in foreign exchange or
foreign securities;

(d) "Bench" means a Bench of the Appellate

Tribunal;
(e) "capital account transaction" means a
transaction which alters the assets or
liabilities, including contingent liabilities,
outside India of persons resident in India or
assets or liabilities in India of persons resident
outside India, and includes transactions
referred to in sub-section (3) of section 6;
(f) "Chairperson" means the Chairperson of
the Appellate Tribunal;
(g) "Chartered accountant" shall have the
meaning assigned to it in clause (b) of subsection (1) of section 2 of the Chartered
Accounts Act, 1949 (38 of 1949);
(h) "currency" includes all currency notes,
postal notes, postal orders, money orders,
cheques, drafts, travelers cheques, letters of
credit, bills of exchange and promissory
notes, credit cards or such other similar
instruments, as may be notified by the
Reserve Bank;
(i) "Currency notes" means and includes
cash in the form of coins and bank notes;
(j) "Current account transaction" means a
transaction other than a capital account
transaction and without prejudice to the

generality of the foregoing such transaction

includes,(i) Payments due in connection with foreign
trade, other current business, services, and
short-term banking and credit facilities in the
ordinary course of business,
(ii) Payments due as interest on loans and as
net income from investments,
(iii) Remittances for living expenses of
parents, spouse and children residing abroad,
and
(iv) Expenses in connection with foreign
travel, education and medical care of parents,
spouse and children;
(k) "Director of Enforcement" means the
Director of Enforcement appointed under subsection (1) of section 36;
(l) "Export", with its grammatical variations
and cognate expressions, means(i) The taking out of India to a place outside
India any goods,
(ii) Provision of services from India to any
person outside India;
(m) "Foreign currency" means any currency
other than Indian currency;
(n) "Foreign exchange" means foreign
currency and includes,-

(i) Deposits, credits and balances payable in

any foreign currency,
(ii) Drafts, travelers cheques, letters of credit
or bills of exchange, expressed or drawn in
Indian currency but payable in any foreign
currency,
(iii) Drafts, travelers cheques, letters of credit
or bills of exchange drawn by banks,
institutions or persons outside India, but
payable in Indian currency;
(o) "foreign security" means any security,
in the form of shares, stocks, bonds,
debentures or any other instrument
denominated or expressed in foreign currency
and includes securities expressed in foreign
currency, but where redemption or any form
of return such as interest or dividends is
payable in Indian currency;
(p) "Import", with its grammatical variations
and cognate expressions, means bringing into
India any goods or services;
(q) "Indian currency" means currency which
is expressed or drawn in Indian rupees but
does not include special bank notes and
special one rupee notes issued under section
28A of the Reserve
Bank of India Act, 1934 (2 of 1934);

(r) "legal practitioner" shall have the

meaning assigned to it in clause (i) of subsection (1) of section 2 of the Advocates Act,
1961 (25 of 1961);
(s) "Member" means a Member of the
Appellate Tribunal and includes the
Chairperson thereof;
(t) "Notify" means to notify in the Official
Gazette and the expression "notification" shall
be construed accordingly;
(u) "Person" includes(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of
individuals, whether incorporated or not,
(vi) every artificial juridical person, not falling
within any of the preceding sub-clauses, and
(vii) any agency, office or branch owned or
controlled by such person;
(v) "person resident in India" means(i) 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 outside 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;
(ii) any person or body corporate registered or
incorporated in India,
(iii) an office, branch or agency in India owned
or controlled by a person resident outside
India,
(iv) an office, branch or agency outside India
owned or controlled by a person resident in
India;

(w) "Person resident outside India"

means a person who is not resident in India;
(x) "Prescribed" means prescribed by rules
made under this Act;
(y) "Repatriate to India" means bringing
into India the realized foreign exchange and(i) the selling of such foreign exchange to an
authorized person in India in exchange for
rupees, or
(ii) the holding of realized amount in an
account with an authorized person in India to
the extent notified by the Reserve Bank, and
includes use of the realized amount for
discharge of a debt or liability denominated in
foreign exchange and the expression
"repatriation" shall be construed accordingly;
(z) "Reserve Bank" means the Reserve Bank
of India constituted under sub-section (1) of
section 3 of the Reserve Bank of India Act,
1934 (2 of 1934);
(za) "security" means shares, stocks, bonds
and debentures, Government securities as
defined in he Public Debt Act, 1944 (18 of
1944), savings certificates to which the
Government Savings
Certificates Act, 1959 (46 of 1959) applies,
deposit receipts in respect of deposits of

securities and units of the Unit Trust of India

established under sub-section (1) of section 3
of the Unit Trust of
India Act, 1963 (52 of 1963) or of any mutual
fund and includes certificates of title to
securities, but does not include bills of
exchange or promissory notes other than
Government promissory notes or any other
instruments which may be notified by the
Reserve Bank as security for the purposes of
this Act;
(zb) "service" means service of any
description which is made available to
potential users and includes the provision of
facilities in connection with banking,
financing, insurance, medical assistance, legal
assistance, chit fund, real estate, transport,
processing, supply of electrical or other
energy, boarding or lodging or both,
entertainment, amusement or the purveying
of news or other information, but does not
include the rendering of any service free of
charge or under a contract of personal service
;
(zc) "Special Director (Appeals)" means
an officer appointed under section 18;

(zd) "Specify" means to specify by

regulations made under this Act and the
expression "specified" shall be construed
accordingly;
(ze) "Transfer" includes sale, purchase,
exchange, mortgage, pledge, gift, loan or any
other form of transfer of right, title,
possession or lien.
REGULATION AND MANAGEMENT OF
FOREIGN EXCHANGE:
Dealing in foreign exchange- As per the
Act no person shall a) deal in or transfer any foreign exchange
or foreign security to any person not being
an authorized person;
b) make any payment to or for the credit
of any person resident outside India in any
manner;
c) Receive otherwise through an
authorized person, any payment by order
or on behalf of any person resident
outside India in any manner.
d) Enter into any financial transaction in
India as consideration for or in association

with acquisition or creation or transfer of a

right to acquire, any asset outside India by
any person.
E)Current account transactions Any person
may sell or draw foreign exchange to or
from an authorized person if such sale or
drawl is a current account transaction:
F) Provided that the Central Government
may, in public interest and in consultation
with the Reserve Bank, impose such
reasonable restrictions for current account
transactions as may be prescribed.
G) Capital account transactions Subject to
certain provisions, any person may sell or
draw foreign exchange to or from an
authorized person for a capital account
transaction.
H) The Reserve Bank may, in consultation
with the Central Government, specify
(a) any class or classes of capital account
transactions which are permissible;
(b) the limit up to which foreign exchange
shall be admissible for such transactions:

 I) Provided that the Reserve Bank shall not

impose any restriction on the drawl of
foreign exchange for payments due on
account of amortization of loans or for
depreciation of direct investments in the
ordinary courts of business.
J) The Reserve Bank may, by regulations,
prohibit, restrict or regulate the following
(a) transfer or issue of any foreign security
by a person resident in India;
(b) transfer or issue of any security by a
person resident outside India;
(c) transfer or issue of any security or
foreign security by any branch, office or
agency in India of a person resident
outside India;
(d) any borrowing or lending in rupees in
whatever form or by whatever name
called;
(e) any borrowing or lending in rupees in
whatever form or by whatever name
called between a person resident in India
and a person resident outside India;

 (f) deposits between persons resident in

India and persons resident outside India;
(g) export, import or holding of currency or
currency notes;
(h) transfer of immovable property outside
India, other than a lease exceeding five
years, by a person resident in India;
(i) acquisition or transfer of immovable
property in India, other than a lease not
exceeding five years, by a person resident
outside India;
(j) giving of a guarantee or surety in
respect of any debt, obligation or other
liability incurred
(i) by a person resident in India and owed
to a person resident outside India; or
(ii) by a person resident outside India.
A person resident in India may hold, own,
transfer or invest in foreign currency,
foreign security or any immovable
property situated outside India if such
currency, security or property was

acquired, held or owned by such person

when he was resident outside India or
inherited from a person who was resident
outside India.
A person resident outside India may hold,
own, transfer or invest in Indian currency,
security or any immovable property
situated in India if such currency, security
or property was acquired, held or owned
by such person when he was resident in
India or inherited from a person who was
resident in India.
K) Export of goods and services Every
exporter of goods shall
(a) furnish to the Reserve Bank or to such
other authority a declaration in such form
and in such manner as may be specified,
containing true and correct material
particulars, including the amount
representing the full export value or, if the
full export value of the goods is not
ascertainable at the time of export, the
value which the exporter, having regard to
the prevailing market conditions, expects

to receive on the sale of the goods in a

market outside India;
(b) Furnish to the Reserve Bank such other
information as may be required by the
Reserve Bank for the purpose of ensuring
the realization of the export proceeds by
such exporter.