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The framework for management and administration of foreign exchange in India is present under the Foreign Exchange Management Act 1999 (FEMA). Before this, foreign exchange was regulated under the Foreign Exchange Regulation Act, 1973 (FERA). The objective of FERA was the preservation and appropriation of assets related to foreign exchange in India. Under FERA, criminal punishments were imposed on offenders. This act was repealed, and the FEMA was brought out. With the introduction of FEMA in 1999, the transactions have been considered and divided into capital account and current account transactions. Under the FEMA, there is completed freedom for an individual to buy and sell foreign exchange related to current account transactions.
Individuals and companies require foreign exchange for various purposes. An individual travelling abroad for tourism and educational purposes would require foreign exchange to conduct transactions in the respective country. When an individual goes and settles abroad for work, foreign exchange would be required to conduct transactions. Apart from this Indian Companies, that send employees abroad would provide foreign exchange to conduct transactions in a foreign country.
To receive a specific amount of foreign exchange, an individual would need to make an application to a foreign exchange broker or an institution dealing in foreign exchange. There are specific rules related to the possession of foreign currency in India. These rules have to be adhered to by individuals and companies while dealing in foreign exchange transactions in India. The Foreign Exchange Management Act (FEMA) regulates possession of Foreign Currency in India. Apart from this, the RBI makes various laws related to the buying and selling of foreign currency in India. These rules have to be adhered to by institutions that deal with foreign exchange regularly.
Foreign exchange is not only required by individuals and companies. Businesses that have a liaison office and branch office outside India would be dealing with foreign exchange regularly. This would also apply to import and export transactions. Therefore it is essential to have a proper framework dealing with the possession of foreign currency in India.
Foreign exchange means and includes any form of freely convertible currency that is issued by Central Banks outside India. Money that is earned outside India is also foreign exchange. The following can be classified as foreign exchange in India:
Buying and selling of foreign exchange in India is regulated by the Foreign Exchange Management Act 1999. Apart from this, the Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000 deals with possession and retention of foreign exchange in India. Dealing with foreign exchange is explicitly not prohibited in India, but there are certain limitations in the amount of limit that an individual can have in India. The meaning of possession and retention of money has been explained in the above regulations. Possession and retention of money means to hold the money in some physical form. This would not include sums of money, which are held in electronic form.
Specific regulations and law related to FEMA explain the limits of foreign currency, which can be possessed in India. Possession of foreign currency has some rules related to the institutions dealing in foreign exchange. On an application made to the RBI, a financial institution or a bank (the ‘Authorised Dealer’ or ‘Authorised Person’) would deal in the buying and selling of foreign currency. Apart from this, the Authorised dealer is only permitted to deal in foreign exchange and possess foreign exchange. The possession of foreign currency by an Authorised dealer has no limit. An authorized dealer can maintain foreign exchange of different countries.
An authorized dealer can be a money changer, money manager, or an offshore banking company. These institutions have the authority to freely purchase foreign currency in the form of traveller’s cheques, demand draft and other modes of foreign currency from non-resident Indians as well as resident Indians. Authorized banks are also permitted to purchase foreign currency from companies as well.
There is no limit of foreign currency and coins which can be retained and possessed by an authorized person. An individual can possess foreign currency in coins without any particular limits. Possession of foreign currency is also allowed by a resident of India. The following would apply to a resident of India:
Read, Also: Money Transfer from Overseas / NRIs to India.
Under the Foreign Exchange Management Act, only authorized persons can deal in foreign currencies. Inward and outward remittances can be made through authorized dealers. Any payment or credit can be made through the authorized dealer to a person who is resident outside India. There are specific exemptions related to this. The Government of India and the RBI has classified the limits for possession of foreign currency by an individual. The following are the limits allowed by resident Indians:
Therefore there are certain limits on restrictions on the possession of foreign currency in India. Specific limits would also apply to possession of foreign currency for travelling, business purposes, and educational visits outside India. As long as the individual retains a limited amount of foreign currency that falls under the exceptions, then such amount would be permissible by the Authorised banks and the RBI.
Capital account transactions and current account transactions are also present under the Foreign Exchange Management Act. These transactions will allow individuals to buy and sell foreign exchange to and from unauthorized persons. Capital Account transactions are the transactions which alters the assets and liabilities outside India. This would apply to a person who is resident in India.
Under the Foreign Exchange Management Act, specific penalties are imposed for non-compliance with the above provisions. These penalties would be applicable when an individual breaches foreign exchange regulations. According to the regulations, if an individual contradicts any form of rule, then he would be liable to pay a penalty, which is equivalent to thrice the amount of sum involved or up to two lakhs where the amount is not quantifiable. On further infringement the individual would have to pay a fine of Rs.5000 every day. Apart from this, the authority would order the confiscation of all forms of foreign currency, which includes- travellers’ cheques, foreign currency, and foreign coins.
The penalty imposed under FEMA is merely civil and not criminal. Stringent penalties were under the FERA for breach of foreign exchange regulations. In the case of Union of India and Another v. Venkateshan S. and Another, the court stated that violation of FEMA law is not treated as a criminal penalty. Under the Conservation of Foreign Exchange and Prevention of Smuggling Activities, 1974 (COFEPOSA) violation of foreign exchange activities would attract criminal punishments.
These punishments under COFEPOSA would also include preventive detention. Both acts deal with different fields. FEMA deals with the promotion and maintenance of foreign exchange in India, whereas the COFEPOSA act deals with the violation of foreign exchange regulation and the prevention of smuggling activities. On construing the above laws, if an individual commits a civil offense under FEMA, then if interpreted under the COFEPOSA Act, the punishment would be criminal in nature. Therefore if a person is punished for possession of foreign currency in India under COFEPOSA, then a criminal penalty would be levied on the individual. Possession of Foreign currency in India must be strictly regulated, which would deter offenders from carrying out further offenses.
Under the Foreign Exchange Management Act, an individual is allowed possession of foreign currency in India. The RBI regulates authorized Dealers and Authorised Persons in buying and selling foreign currency in India. Therefore Authorised Dealers are allowed to have foreign currency of no particular limit on the possession of foreign currency. Possession of foreign currency is also allowed by resident Indians. However, there are certain exceptions for the possession of foreign currency by the individual. Foreign currency in the form of coins can be retained by an individual as the value of foreign currency in coins is minimal. Foreign currency, which is earned outside India and brought to India, is allowed. Only US$ 2000 is allowed. Resident Indians who are not permanently staying in India are allowed to carry foreign exchange into India. The RBI has made certain limits of foreign exchange that can be carried by an individual outside India.
Also, Read: FFMC License: Business Regulations by RBI.