Under FEMA all the transactions are divided into two categories:
(1) Capital Account transactions
(2) Current account transactions
As a general rule all the current account transactions under FEMA are permitted except those specified and all the capital account transactions are prohibited or regulated.
Capital Account Transactions:
As per Section 2(e) of FEMA “capital account transaction” means a transaction which alters 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, and includes transactions referred to in sub-section (3) of section 6;
Section 6 of FEMA provides that:
(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction.
(2) The Reserve Bank may, in consultation with the Central Government, specify:
(a) any class or classes of capital account transactions which are permissible;
(b) the limit up to which foreign exchange shall be admissible for such transactions :
Provided that the Reserve Bank shall not impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.
(3) Without prejudice to the generality of the provisions of sub-section (2), the Reserve Bank may, by regulations, prohibit, restrict or regulate the following:
(a) transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of any security by a person resident outside India;
(c) transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or by whatever name called;
(e) any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;
(f) deposits between persons resident in India and persons resident outside India
(g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or other liability incurred:
(i) by a person resident in India and owed to a person resident outside India; or
(ii) by a person resident outside India.
Purchase of immovable property outside India
This is a Capital Account transaction and although there is a general prohibition, relaxation has been made from time to time.
A company incorporated in India having overseas office, may acquire immovable property outside India for its business and for residential purposes of its staff, in accordance with the direction issued by RBI from time to time.
RBI has permitted remittance by a company incorporated in India to acquire immovable property outside India for its business and for residential purpose of its staff within the limits for initial expenses of 15% of the average annual sales/income or turnover during the last two financial years or 25% of its net worth, whichever is higher and recurring expenses of 10% of the average annual sales/income or turnover during the last two financial years.
(Authored by Shushant Singhal, a qualified Chartered Accountant working with Large Corporates in India & also running a Chartered Accountant Firm & can be contacted at 7838169970 & firstname.lastname@example.org)