The Foreign Exchange Management Act (FEMA), 1999, regulates foreign exchange transactions in India and aims to facilitate external trade and payments while promoting the orderly development and maintenance of the foreign exchange market. Under FEMA, various types of transactions are recognized, each governed by specific regulations. Here are the main types:
1. Current Account Transactions
Current account transactions involve payments related to the trade of goods and services and are not subject to restrictions.
Regulations:
- Permitted Transactions: Includes imports and exports of goods and services, remittances for personal expenses, and interest payments on foreign loans.
- Regulatory Authority: These transactions are regulated by the Reserve Bank of India (RBI) under FEMA.
- Limits: There are generally no limits on current account transactions, but certain transactions may require reporting or compliance with specific guidelines.
2. Capital Account Transactions
Capital account transactions pertain to investments and financial transactions, such as buying and selling assets, and are subject to regulation.
Regulations:
- Permitted Transactions: Includes foreign direct investment (FDI), portfolio investment, and capital transfers.
- Regulatory Framework: Specific guidelines are issued by the RBI, detailing the conditions under which capital account transactions can be conducted.
- Limits and Compliance: There are restrictions on certain types of capital account transactions, including limits on the amount of foreign investment in specific sectors. Transactions need to comply with the Foreign Direct Investment Policy and other applicable guidelines.
3. Foreign Direct Investment (FDI)
FDI refers to investment by a foreign entity in an Indian company, typically through the purchase of equity shares.
Regulations:
- Automatic Route: Certain sectors allow FDI under the automatic route without prior approval from the government.
- Approval Route: Some sectors require government approval for foreign investment.
- Sectoral Caps: There are limits on the percentage of FDI allowed in various sectors, defined in the FDI Policy.
4. Portfolio Investment
Portfolio investment involves investment in shares and securities of Indian companies by foreign investors.
Regulations:
- Foreign Institutional Investors (FIIs): Portfolio investments by FIIs are governed by separate guidelines, including registration with the SEBI (Securities and Exchange Board of India).
- Investment Limits: There are limits on foreign ownership in Indian companies, and specific regulations apply to prevent market manipulation.
5. External Commercial Borrowings (ECB)
ECB refers to loans made by foreign lenders to Indian companies for various purposes.
Regulations:
- Framework: The RBI lays down guidelines for ECB, including eligible borrowers, permitted end-uses, and maturity periods.
- Reporting Requirements: Borrowers are required to report ECB transactions to the RBI within specified timelines.
6. Remittances
Remittances involve sending money from India to foreign countries, often by individuals for family support or personal expenses.
Regulations:
- Liberalized Remittance Scheme (LRS): Under the LRS, resident individuals can remit a certain amount of money abroad for permissible transactions such as education, travel, and medical expenses.
- Limits: There is a cap on the amount that can be remitted under LRS, which is subject to periodic review by the RBI.
Conclusion
FEMA, 1999, provides a comprehensive framework for managing foreign exchange transactions in India, distinguishing between current and capital account transactions, each with specific regulations. By doing so, FEMA facilitates trade and investment while maintaining regulatory oversight to promote economic stability.