RBI And FEMA

Key Takeaways

• The Foreign Exchange Management Act, or FEMA, is a piece of legislation that regulates the movement of money into and out of India
• The Reserve Bank of India performs a number of functions, including monitoring various policies that are prepared for banks and controlling credit by analysing the economic environment and changing them to have a good handle on financial stability.
• RBI strictly regulates the financial services sector and foreign exchange in India. The majority of financial transfers into and out of the country are covered by FEMA legislation.

The Foreign Exchange Management Act, or FEMA, is a piece of legislation that regulates the movement of money into and out of India. The Foreign Exchange Regulations Act, of 1973 has been replaced by the Foreign Exchange Management Act, of 1999 (FEMA), which was passed by the Parliament. 1st June 2000 was the official start of FEMA.On June 1st, 2000, the Foreign Exchange Regulation Act of 1973 was repealed. The Foreign Exchange Management Act, 1999 (42 of 1999), as announced by the Government of India's Ministry of Finance, took effect on that day.

The Government of India made the Foreign Exchange Management (Current Account Transactions) Rules 2000 under Section 5 read with Section 46 of the Act, among other things, to give effect to the provisions of the Act. In accordance with several Act provisions, the Reserve Bank has also enacted regulations and published notifications.The Foreign Exchange Management Act, 1999, including any rules, regulations, notifications, or orders enacted or issued thereunder, govern all foreign exchange transactions occurring as of June 1, 2000.

The Reserve Bank of India, or RBI, is in charge of enforcing it. The Reserve Bank of India Act, 1934's provisions led to the establishment of RBI as the nation's central bank in the year 1935. RBI is in charge of overseeing currency regulations in India.

The Reserve Bank of India performs a number of functions, including monitoring various policies that are prepared for banks and controlling credit by analysing the economic environment and changing them to have a good handle on financial stability. These activities are beneficial for the banking sector. In accordance with the Foreign Exchange Management Function of 1999, RBI also regulates foreign exchange and grants authorizations to act as authorised persons. Additionally, it oversees the economic growth of the foreign exchange market as well as the management of deals in the external sector. The domestic foreign exchange market is also run effectively and in accordance with all requirements.

According to Section 10(1) of the FEMA, 1999, the Reserve Bank may authorise any individual to conduct foreign exchange business as an authorised dealer or money changer. For the purposes of Section 10(1) of the Act, all authorised dealers and money changers who had been granted licences by the Reserve Bank and were in operation as of May 31, 2000, shall be deemed to be authorised persons, authorised by the Reserve Bank to engage in foreign exchange business as authorised dealers or as authorised money changers.

There are two goals for FEMA. The regulations were put in place in order to prevent money from being moved outside from being used to finance terrorism or other illicit activities. Second, the legislation prevents an abrupt or disproportionate outflow of rupees from India, which might harm the Indian economy and undermine the RBI's efforts to maintain stability in the local currency markets.

Main Powers and functions of RBI under FEMA

• Controlling foreign exchange transactions by issuing general or specific permission, with the exception of situations where specific rules, regulations, or laws have been enacted. - Section 3.
• Current account transactions are not subject to any restrictions from RBI. According to Section 5, only the Central Government may impose these after consulting with the RBI. However, as stated in the Foreign Exchange Management (Current Account Transactions) Rules, 2000, there are several circumstances when prior RBI permission is needed for current account transactions.
• Defining the terms for payment in relation to a capital account transaction - Section 6 (2).
• Regulate/prohibit/restrict the following, by issuing Regulations:

1. Transfer or issue of foreign security to resident and Indian security to non-resident;
2. Borrowing and lending in foreign exchange or to a foreign person;
3. Export/import of currency or currency notes;
4. Transfer of immovable property outside India;
5. Giving guarantee or surety where foreign exchange transaction is involved – Section 6(3)

• Establish (by regulation) the timeframe and procedure for receiving foreign currency payable from exports of goods and services - Section 8.
• To provide an exemption from realisation and repatriation in the circumstances listed in Section 9.
• Sections 10, 11 and 12 grant "Authorized Person" permission to conduct foreign exchange business, to give them instructions, and to inspect the Authorized Person.

FEMA and RBI Compliances

Compliance becomes more crucial as the regulations are liberalised. There are very rigorous deadlines for notifying the Reserve Bank of India (RBI)of any Foreign Direct Investment (FDI) that a company gets from outside India. There is a strict need to meet the deadline for submitting the Single Master form to the RBI along with the required certificates.

• External Commercial Borrowing:A loan from a non-resident entity that is obtained by an Indian entity (qualifying borrower) is known as a "external commercial borrowing" (eligible lender). These loan terms should be confirmed, including the minimum average maturity, allowed end uses, all-in cost cap, etc. The loan must fully satisfy all requirements rather than just one or two. The kind of borrower, average term, and currency have all been taken into consideration while dividing the ECB into various frameworks.
• Export/Import of Goods and Services: FEMA also includes current account operations including the export and import of goods and services in addition to fostering and regulating FDI. Additionally, there are different time frames for either realising payments for exports or making payments for imports. It is important to remember that keeping track of such transactions is necessary to ensure FEMA compliance.
• Submitting Annual Return: Every time a company receives FDI, they are required to file an annual return with the RBI using the Foreign Assets and Liabilities form. The same has a 15 July submission deadline and is required for a financial year.
• Compounding of Offences: While carrying out the compliances required by FEMA, there are times when there is a delay or non-compliance. FEMA offers the choice of compounding either suo motu or after receiving notice from RBI. RBI gives the option to submit the case and provide an explanation for the delay or non-compliance during the compounding procedure. The RBI then imposes the penalty in accordance with the case's facts. It is significant to remember that the RBI has the authority to impose a fine equal to 300% of the amount in default.
• Liberalised Remittance Scheme (LRS): The Liberalized Remittance Scheme, or LRS, is a directive issued by the RBI that establishes the maximum amount that a resident individual can send abroad. The limitation period cycles every Financial Year (Apr-Mar), with the cap being reset at the beginning of each financial year. This programme includes a single limit for both current account transactions and capital account transactions made by an individual. Since this programme only applies to payments made by an individual, corporations, partnership firms, HUFs, trusts, etc. are not covered by it.

Conclusion

In order to safeguard consumers and the economy as a whole, the RBI strictly regulates the financial services sector and foreign exchange in India. The majority of financial transfers into and out of the country are covered by FEMA legislation.