The convertibility of Indian rupees in relation to residents is almost zero. The transactions involving foreign exchange, that is, what a resident can receive and what he can pay in foreign exchange are all regulated. A resident cannot deal in foreign exchange except as specified. There are various facilities also given to the resident individuals for dealing in foreign exchange. There is general permission given to residents by RBI for purchasing the foreign exchange for various reasons like travel abroad and other current account transactions. There are also specific permissions given by the Reserve Bank of India for undertaking various capital account transactions like investment in foreign securities, direct overseas investment, acquisition of immovable property, etc. The specific permissions are given subject to terms and conditions and the manner in which the transaction can be executed as per the respective regulation governing the transaction. Each of the facilities of investment given to the resident individual along with all the provisions of FEMA, 1999 relevant to residents have been discussed in detail below along with the terms and conditions and the governing regulation.
The convertibility of Indian Rupees can be seen from the charging section of the Act. That is section 3. It is reproduced below.
Section 3 of the Act
“3. Dealing in foreign exchange, etc.- Save as otherwise provided in this Act, rules or regulations made there under, or with the general or special permission of the Reserve Bank, no person shall-
(a) deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;
(b) make any payment to or for the credit of any person resident outside India in any manner;
(c) receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner.
Explanation.- For the purpose of this clause, where any person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person (including an authorized person) without a corresponding inward remittance from any place outside India, then, such person shall be deemed to have received such payment otherwise than through an authorized person;
(d) enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.
Explanation.-For the purpose of this clause, “financial transaction” means making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt.”
As can be seen that Section 3 is very restrictive in nature. It prohibits a person to deal in or transfer any foreign exchange or foreign security to any person not being an authorised person, make any payment to or for the credit of any person resident outside in any manner or receive otherwise through the authorised person any payment by order or on behalf of any person resident outside India in any manner, or to enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person otherwise than as per the Act, Rules or Regulations or without the general or specific permission of the RBI.
It may be noted that residents needs to be cautious and aware of the provisions of the Act while dealing in foreign exchange lest he/she will end up contravening the provisions unknowingly and unintentionally.
Residential Status
Section 2(v) of FEMA, 1999, defines the term “person resident in India” as:
(i) a person residing in India for more than 182 days during the course of the preceding financial year but does not include-
(A) a person who has gone out of India or who stays outside India, in either case-
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
(B) a person who has come to or stays in India, in either case, otherwise than-
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
Determination of Residential status is most critical in FEMA, 1999. As the applicability of provisions is dependent completely on the residential status. As under Income Tax Act, 1961, the residential status under FEMA also is dependent on the period of stay of the individual in India.
The residential status of individuals is determined on the basis of the period of their stay in India. A person residing in India for more than 182 days during the course of the preceding financial year shall be construed as a resident under FEMA; however, there are exceptions to this definition, that is, if he is leaving India for or on taking up employment outside India, for carrying on outside India a business or vocation outside India, or for any other purpose, in such circumstances if it would indicate his intention to stay outside India for an uncertain period, in that case he will be regarded as the non-resident from the date of his leaving even if he has stayed in India for more than 182 days in the preceding financial year. Similarly, in case of person who has come to India or stays in India for or on taking up employment in India, or for carrying on in India a business or vocation in India, or for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period, in that case he becomes the resident in India from the day one.
For a detailed discussion on the definition of “Person resident in India” kindly refer to chapter 1 wherein we have discussed the various aspects of the definition in detail.
Bank Accounts
The resident can hold foreign currency account in India as well as outside India. Reserve Bank of India through regulations regulates opening, holding and maintaining Foreign Currency Accounts in India and opening, holding and maintaining a Foreign Currency Account outside India.
In the following paragraphs, we have discussed in detail the various types of accounts that can be opened by a resident in Foreign Currency and that can be opened outside India. Below is the pictorial representation of the same for easy understanding.
Services provided by us
- Investment by Non-residents in India
- Background check of investments of Non-resident directors
- Advisory on Liberalised Remittance Scheme
- Advisory on NRO/NRE Account
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