Current and Capital Account Transactions under
FEMA
The Foreign Exchange Management Act, 1999 (FEMA)
came into force with effect from June 1, 2000, and as per the Preamble of FEMA,
the Act was made with the objective of facilitating external trade and
payments and for promoting the orderly development and maintenance of foreign
exchange market in India.
Under the FEMA, foreign exchange transactions
are divided into two broad categories:
- Current
Account Transactions, and
- Capital
Account Transactions.
As per FEMA, transactions that alter 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 are classified as capital account transactions, whereas, all other
transactions are current account transactions.
As part of the obligations assumed under Article
VIII of the charter of its membership of International Monetary Fund, India
accepted the move towards full current account convertibility in August 1994.
Most of the quantitative and sectoral restrictions were, therefore, removed for
the current account transactions. As such most of current account transactions
do not require prior approval of the Reserve Bank.
The Government of India has notified the Foreign
Exchange Management (Current Account Transactions) Rules, 2000, governing the
current account transaction.
These Rules list the current account remittances
under three categories.
- First,
the transactions, the remittances for which are prohibited;
- Second,
the transactions, remittances for which is made after obtaining the
approval of Government of India; and
- Third,
the transactions, remittances for which may be made by the Authorised
Dealer, up to the limits given in the Rules. Prior approval of RBI is
required, where the amount to be remitted exceeds the stipulated
limit.
Under these Current Account Transactions Rules,
powers have been delegated to the Authorised Persons (APs) to allow permitted
remittances which are of current account in nature, in a hassle-free manner.
While FEMA formalised the current account
convertibility with the Common Law principle “all that is not forbidden is
permitted”, it did the reverse with respect to capital account transactions:
“all that is not permitted is forbidden”.
Presently India is not fully convertible on the
capital account. Reserve Bank has been progressively relaxing and simplifying
the procedures for capital account transactions. Accordingly, certain capital
account transactions involving foreign direct investment, external commercial
borrowings and the overseas direct investment have been permitted to be
undertaken under automatic route/general permission. In respect of transactions
which are not covered under general permission, the entities are required to
approach the Reserve Bank through their authorized dealers for necessary
approvals.
The Reserve Bank, in consultation with the
Government of India, has notified comprehensive, simple and transparent
regulations under the FEMA, 1999 for capital account transactions. The
regulations distinctly indicate the types of permissible capital account
transactions and simplified procedures for undertaking transactions. The
regulations grant substantial powers to the Authorised Dealer Category – I banks
to undertake capital account transactions on behalf of their clients.
Compiled by Mr. G. D. Chugh
(Associate Partner in Factum Legal Advocates &
Solicitors)