Opening a Bank Account outside India under FEMA Rules

Varun Hariharan

17 Jun, 2020

Businesses that want to set up offices in a foreign country have to follow several compliances. This would include getting approvals from the government, registering the business, and filing annual returns. Another compliance that has to be followed by an Indian company is opening a bank account outside India.

Rather than being called compliance, opening a bank account outside India is more of a requirement. Therefore, it is compulsory to open a bank account outside India. Companies require opening these accounts outside India to conduct daily transactions. This would include remittances for regular expenses and other operating expenses.

Regulatory Framework for Opening a Bank Account outside India

The Government of India brought out the Foreign Exchange Regulation Act, 1973 (FERA), to regulate foreign exchange in India. However, due to stringent norms, this act was repealed and replaced by the Foreign Exchange Management Act, 1999 (FEMA). Before enacting FEMA, businesses that set up offices in foreign countries would require to carry out transactions regularly.

Under FEMA, foreign exchange regulation has become more relaxed and allows businesses to swiftly open bank accounts to conduct transactions. Setting up of branch offices and foreign offices in another country is encouraged by the Reserve Bank of India (RBI). However, when it comes to opening a bank account outside India, the RBI has a more cynical view.

Though there are various views by the RBI on opening a bank account outside India, still some form of legislation has been brought out on this. RBI and the Government of India (GOI) have brought out the Foreign Exchange Management Act, 1999^[1]. Along with this, the RBI brings out various circulars and notifications related to the governance of bank accounts outside India.

One such regulation brought by the RBI is the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015 (Foreign Currency Regulations). This regulation has to be analyzed with the FEMA for opening a foreign currency account outside India.

Process of Opening a Bank Account outside India

Section 9 of the FEMA applies to open a bank account outside India. The individual or the company has to either have some form of business or representative for opening a bank account in a foreign country.

Depending on the requirements of opening a bank account outside India, the individual or the company has to provide the following documents for opening a foreign bank account:

Types of Foreign Currency Accounts

An individual or an Indian entity is permitted to open different forms of bank accounts outside India.

The following bank accounts outside India can be opened:

• Bank accounts for Authorised Dealer/ Authorised Bank (Category-I) and their branches.
• Bank Account opened by an entity or firm on behalf of its branch office or foreign office.
• Bank Account Opened outside India for Exporters.
• Bank Account Opened for remittances such as Overseas Direct Investments (ODI).
• Bank Accounts opened for other purposes.

Authorized Dealer/ Authorised Bank (Category-I) and Their Branches

Authorized dealers are permitted to provide rules and directions on the operation of foreign transactions in India and outside India. The RBI provides guidelines on the operations of branches of authorized dealers outside India.

An authorized dealer can open, hold, and maintain with every branch outside India a Foreign Currency Account (FCA). This would also apply to the registered head office or any other office outside India. 

Foreign exchange transactions are permitted to occur through these branches. However, compliance related to foreign exchange laws must be followed by the banks and their branches. An Indian bank is allowed to open, hold, and maintain an account with a bank outside India. Foreign currency transactions can take place in these ways as long as there is no form of disruption in regular banking business.

Both the foreign bank and Indian bank carrying this form of bank account has to maintain compliances. The Indian bank has to follow compliances laid down by the RBI. The foreign bank has to follow compliances laid down by the relevant prudential and financial authority of the country.

Bank Account opened by a firm or an entity on behalf of its branch office –

An Indian Company or a partnership is allowed to open a bank account outside India. However, this account must be opened by an Indian entity in its name. The company is allowed to open, hold, and maintain this bank account outside India through its representative branch.

For making foreign currency transactions, the following conditions are required to be followed:

• A representative outside India must open the overseas branch office account.
• The total remittances that are made to and from the branch office do not exceed 15% of the annual sales of the company. This will also include the turnover of the Indian Company. For the calculation of the turnover, the last two financial years are taken into consideration.
  • Either the above criteria have to be fulfilled. Another criterion that has to be fulfilled is the amount of remittance must not be more than 25% to carry out foreign exchange transactions outside India.
  • Remittance must not be more than 10% of the annual sales of the Indian company or the Income turnover of the Indian company during the last financial year. The remittances must be used to cover any such form of recurring expenses of the branch office or the foreign office.
• The overseas company branch office or the foreign office should not enter into any form of agreement that contravenes the provisions related to FEMA, RBI, and any other law in India.

The bank account outside India must also follow other conditions such as:

• The bank account outside India must be closed if the branch office or foreign office is not opened within six months of opening the bank account outside India.
• The bank account must be closed if there is no form of business operations with the branch office or the foreign office. The account must be closed within one month of closure of business operations.
• The bank account must also be closed if no representative has been appointed within six months of opening a bank account.
• Any form of balance present in the account must be repatriated to India.

The branch office or the foreign office is allowed to receive remittances for the purchase of office equipment and carrying out other activities. However, for the acquisition of immovable property outside India, the remittances sent through the Indian office is regulated by the RBI. No consent from the Government of India is required for renting the office for a period less than five years. Any purchase of foreign property or a lease above five years requires prior approval from the RBI.

Bank Accounts opened outside India for Exporters

Indian exporters who take up any form of construction contracts are also permitted to open a bank account outside India. Construction contracts and turnkey projects for the export of engineering and other services would be allowed under this agreement.

The following conditions have to be followed for bank account outside India for exporters:

• The RBI requires prior approval for carrying out such a form of export transactions. Moreover, approval is required under the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015 (Foreign Currency Regulations).
• Apart from this, prior approval is required from other prescribed regulatory authorities.
• All the conditions on the approval letter duly comply with the exporter.

Bank Account open outside India for Overseas Direct Investment (ODI)

An Indian entity or Indian company is permitted to open foreign currency accounts for carrying out remittances for overseas direct investment. Overseas direct investment is a form of investment that is carried out by an Indian company by subscribing to the shares and securities of a foreign-controlled joint venture or a wholly-owned subsidiary. For carrying out any form of remittance, the authorized bank has to be approached.

The following conditions have to be followed for carrying out remittances for ODI transactions:

• The company or Indian entity must satisfy the eligibility criteria for carrying out ODI transactions in Joint ventures and wholly-owned subsidiary.
• Foreign country regulations should allow ODI carried out through remittances. The respective prudential authority of the foreign country must also permit this.
• Compliance with the regulation of the foreign country must be followed.
• Funds or remittances sent through the ODI route must be utilized by the Joint Venture / Wholly Owned Subsidiary for carrying out permitted activities.
• Any form of dividend or distribution of dividends received by the subsidiary in India must be repatriated to India. The repatriation must be carried out within 30 days from the date of credit of the funds to the foreign currency account.
• The Indian Company must submit all the documents to the respective authority. In the documents, the details of the respective credits and debits of remittances must be submitted to the statutory auditor.  The submission is required where the company has its office. The company must maintain compliance under the FEMA regulations.
• The account must be closed if there is any form of divestment with the Joint Venture or the Wholly Owned Subsidiary.

Bank account outside India opened for other purposes

There are other situations where Indian entities/ individuals are allowed to open bank accounts. However, these accounts must be opened as per the guidelines of the RBI. It must also be noted that accounts opened by an individual must be carried out when the individual is present outside India.

In the following circumstances, a bank account can be opened outside India:

• Any amount of funds that are raised through the form of External Commercial Borrowings (ECBs).
• For Funds raised through the framework governing American Depository Receipts and Global Depository Receipts (ADR and GDR), a bank account outside India can be opened.
• An account can be opened for an Individual outside India under the Liberalised Remittance Scheme (LRS). Individuals and entrepreneurs usually utilize this scheme. Under the LRS scheme, a remittance of USD 2,50,000 can be made for an Individual. Bank account opened for LRS can be used for remittances.
• An International Transport company or a commercial airline or shipping company can open a bank account outside India for carrying out transactions in the normal course of business.
• Any form of Insurance Corporation established outside India, such as the Life Insurance Corporation of India and the General Insurance Corporation of India, can open bank accounts outside India to carry out daily business expenses. Apart from this, any policy credit would be sent to the foreign currency account.
• An Individual taking part in some form of exhibition or fair can open a bank account outside India. This is for transferring any sale proceeds from the exhibition or the products sold in a foreign country. However, the balance maintained in the foreign currency account must be repatriated back to India within one month of ending of the fair.
• An Individual going abroad for studies is allowed to open a foreign currency account. However, the funds must be repatriated to India when the individual returns to India.
• An individual going for travel abroad is allowed to open a bank account. However, the funds must be repatriated back to India on the individual’s arrival.
• A resident individual is allowed to open a bank account abroad for employment. Upon the return, the funds must be repatriated back to India.

Conclusion