Casting Light on the Role of RBI under FEMA

Casting Light on the Role of RBI under FEMA

FEMA was introduced in India with a view to simplify import and export trade and to protect foreign exchange market. The Foreign Exchange Management Act replaced the Foreign Exchange Regulations Act, considering the need for a new act where it can regulate the payments and to allow growth of foreign exchange reserves in the country. Do you know that RBI is the regulator in FEMA and foreign exchange transactions. In this article, we will examine the role of RBI under FEMA 1999.

Introduction to the role of RBI under FEMA 1999

RBI, being the central bank in India, enjoys control over currency regulations. RBI also regulates foreign exchange under the Act, where it issues licenses to act as an authorized person. It plays a crucial role in economic development of the foreign exchange market.

FEMA provides the role of controller to the RBI, and RBI supervises and ensures proper flow of foreign exchange. The role of RBI under FEMA can be best understood by the following:

  • The transactions under Foreign exchange can be performed through the authorized person registered by the RBI. He must follow the rules and regulations and take general or special permission from the RBI.
  • Further Indian residents cannot possess or hold foreign currency more than the specified limit by the RBI.
  • RBI has also made different regulations in Capital and Current Account Transactions.

Capital and Current Account Transactions: RBI’s role

Under FEMA, accounts are classified into Capital and Current Account Transactions. Let us now understand the purpose and the RBI’s role in such accounts.

  • Current Account Transactions

According to Section 5 of the FEMA 1999, a person can transact in foreign exchange through authorized dealer allowed by RBI if it falls under Current Account transactions. RBI has also executed limitations that should be adhered to in case of certain current account transactions.

Further in schedule, 3 individuals can avail of foreign exchange facility for certain purposes such as gifts, travel to other country, business travels, medical treatment or any other transactions which can be valid in case of current account transactions, but the limit will be 250000 USD. A person can also avail of foreign exchange facility for some other purposes, but RBI approval is mandatory.

  • Capital Account Transactions

Transactions referred to under Section 6(2) entail that the RBI has the authority along with the consultation of Central Government that any class/es can have capital account transactions permissible by RBI. RBI also has the right in case of limitations that can be permitted for transactions. Under Section 6(3), the RBI has provided various directions where they can disallow/regulate/restrict some of the transactions:

  1. Transfer of security by a person resident in India or outside;
  2. Borrowing or advancing in foreign exchange or in rupees between a person resident in India and resident outside;
  3. Any payment/transfer performed by offices or any other companies in India to someone outside India;
  4. Transfer of immoveable property done in or outside India;
  5. In case a resident outside India wishes to locate new branches or new type of business to perform an activity, the RBI can disallow/regulate/restrict as it deems fit.

RBI’s role under FDI

FDI is crucial to the growth of the country’s economy. Foreign investments have a great significance in a country such as India. Services, telecommunications, automobiles industry brought in a huge inflow of FDI in India.

There were measures taken by the RBI for foreign investment where two separate routes were notified i.e., automatic route & Government’s approval route.

The control of foreign investment in India is under the RBI where the following are permitted to invest in India:

  • Non-resident may invest in India as per the guidelines under FDI policy. However, prior permission is to be taken from the government in case of citizens from Bangladesh and Pakistan or companies registered there.
  • Resident from Nepal and Bhutan are allowed to invest, but certain restrictions have been made like they can invest only in repatriation basis and the payment can be made through normal banking channel.
  • Foreign Institutional Investors and Foreign Portfolio investors can invest, but it limits the individual holdings below 10% of capital of the company.
  •  Foreign venture capital investors registered under SEBI can invest 100% of their funds in Indian Venture Capital Undertaking.
  • The FDI policy allows FPIs, FIIs and NRIs to invest in India through registered dealers in stock exchanges as per Schedule 2, 2A and 3 of the FEM (Transfer or issue of security by person resident outside India) Regulations 2000[1].

The two routes via which the foreign investment can be made in shares, debentures and preference shares include automatic and government route. It may be noted that under the automatic route, the investor doesn’t need to take any approval from the RBI. In contrast, in case of government route, approval from RBI, government of India is necessary.

Role of RBI under FEMA: Compounding of Contraventions

Under FEMA 1999, a provision of compounding of contravention is available. The RBI has the authority under Section13 to compound contraventions except for Section 3 subsection a. Under this section, involves dealing in foreign exchange to a person who is not an authorized person, in this case ED will take action.

Compounding of contraventions can be done in case a person violates the provisions of the FEMA 1999, if the amount is:

  • 10 lakh rupees or below; The Assistant Manager of the RBI will have the authority.
  • In case of more than 10 lakh rupees but below 40 lakhs then the RBI deputy manager has the authority.
  • If it’s more than 40 lakhs rupees but below 1 crore then it will be handled by the RBI General Manager.
  • And in case of more than 1 crore; The Chief GM of the RBI.

The Regional Office of RBI can compound violations of FEMA including delay in filing Form FC-GPR, delay in issuance of shares, pricing regulations violations, shares issued without RBI approval.

For compounding, an application should be submitted with a fee of 5000 rupees in favor of RBI. It is worth mentioning here that with respect to any violation by a person where similar contravention was committed by him & compounded and within 3 years, then it won’t be compounded.

Moreover, when the compounding application is received by the RBI, it shall verify the documents and the application to check if the violation can be compounded or not. Further the authority can ask for record, documents etc which has to be submitted to it within the prescribed time period, failing to do so may result in withdrawal of such application. At the time of passing compounding order, the following factors are considered:

  • Gain by unfair means;
  • Amount of loss caused to the authority;
  • Nature of violations;
  • History of the contravener.

Moreover, the amount that can be levied by RBI can’t be beyond 300% of the violated amount. In case the amount violated is not beyond 1 lakh rupees then the amount that can be permitted in penalty cannot be beyond simple interest of 5% of the amount of contravention. The order of compounding has to be according to the provisions of the FEMA 1999 and the order needs to specify all the details of violations.


The role of RBI under FEMA is a significant one. RBI has some strict provisions for the regulation of the Foreign Exchange Management Act and it is crucial to ensure that contraventions are reduced and the functioning becomes more orderly.

Read our article:A Detailed Review of Foreign Exchange Management Act 1999

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