Sec. 6 –

Capital account transactions. —(1) Subject to the provisions of sub-section (2), any person may
sell or draw foreign exchange to or from an authorised person for a capital account transaction.
(2) The Reserve Bank may, in consultation with the Central Government, specify—
1
[(a) any class or classes of capital account transactions, involving debt instruments, which are
permissible;]
(b) the limit up to which foreign exchange shall be admissible for such transactions:
2
[(c) any conditions which may be placed on such transactions;]
3
[Provided that the Reserve Bank or the Central Government shall not impose any restrictions on
the drawal of foreign exchange for payment due on account of amortisation of loans or for
depreciation of direct investments in the ordinary course of business.]

Question – Please explain the following regarding the FEMA, 1999 – “restrictions on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments.” –

Answer –

Loan amortization: This is the process of paying back a loan over time through regular payments. In the context of FEMA, restrictions on the use of foreign currency for loan disbursements mean that there are rules governing the ability of a person or entity to convert Indian currency into foreign currency for the purpose of “making principal payments.” Amounts and interest on loans received from foreign funds.

Simply put, “loan amortization” refers to the process of repaying a loan over time with regular payments, and “depreciation of direct investments” refers to a decrease in the value of an investment.

Depreciation of direct investments. Direct investment is when a foreign entity invests in an Indian business or asset. In this context, depreciation generally refers to the decrease in the value of an investment over time due to factors such as wear and tear, obsolescence, and market conditions. FEMA has imposed restrictions on the conversion of Indian currency into foreign currencies to compensate for losses arising from depreciation of these direct investments. These restrictions are put in place to control and regulate foreign exchange outflows from the country, ensure stability in the foreign exchange market, and protect the Indian economy from excessive capital flight. The Reserve Bank of India (RBI) typically monitors and enforces these rules under FEMA.

Example – Let’s say ABC Ltd, an Indian company, made a direct investment in a foreign company, XYZ Ltd. ABC Corporation recorded this investment on its balance sheet at a cost of $1 million. However, due to bad market scenario, the value of XYZ Ltd. has decreased, leading to depreciation of ABC Ltd.1’s direct investment. Now, ABC Ltd. decides to compensate for losses in investment value. It may need to remit funds or inject additional capital into XYZ Ltd. This may be done by the transfer of funds from ABC Ltd’s foreign exchange reserves or the company may choose to raise additional capital through debt or equity financing. Here, RBI cannot impose any limits on such payments, all such transactions have to comply with other rules and guidelines laid down by FEMA and RBI.

Source:

(1) What is the meaning of ‘depreciation of direct investments’?. https://www.caclubindia.com/Forum/what-is-the-meaning-of-8216-depreciation-of-direct-investments-8217–351583.asp.

(2) Capital & Current Account Transactions. https://bcasonline.org/Referencer2018-19/part1/capital-current-account-transactions.html.

(3) Depreciation: Definition and Types, With Calculation Examples. https://www.investopedia.com/terms/d/depreciation.asp.

(4) Recognition and Measurement of Leases (IFRS 16). https://ifrscommunity.com/knowledge-base/ifrs-16-recognition-and-measurement-of-leases/.

Question – u/s 6 (2) (a) debt instrument is included whereas u/s 6 (2A) (a) of FEMA debt instruments are excluded. Why is that?

This is notable that 6 (2) (a) deals with the power of the RBI and 6 (2A) (a) deals with the power of Central Government regarding declaration of capital account transactions, this means CG cannot regulate debt instruments.

Sec 6.
[(2A) The Central Government may, in consultation with the Reserve Bank, prescribe—
(a) any class or classes of capital account transactions, not involving debt instruments, which are
permissible;
(b) the limit up to which foreign exchange shall be admissible for such transactions; and
(c) any conditions which may be placed on such transactions.]

Answer –

The Indian Foreign Exchange Management Act, 1999 (FEMA) regulates and controls foreign exchange to facilitate foreign trade and payments and to promote the orderly development and maintenance of the domestic foreign exchange market. Under Section 6(2)(a) of FEMA, 1999, the Reserve Bank of India (RBI), in consultation with the Central Government, is empowered to decide on the types of capital transactions permitted, including those relating to debt. This means that the RBI can regulate trading in debt instruments such as bonds and loans. However, his 2015 amendment to FEMA added a new section 6(2A)(a). Under this provision, the central government, in consultation with the RBI, has the power to regulate capital transaction excluding the debt instruments. This means that the central government can decide what types of capital transactions other than debts are allowed. The reason for this distinction is to provide more specific regulations for different types of financial products. Debt instruments that are loans in nature have repayment obligations and can increase financial risk, particularly in the event of currency fluctuations. Therefore, the rules applicable to fixed income transactions are often clearer and stricter than those applicable to other types of capital account transactions. Further, RBI is more conversant with handling debt instrument.

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Sources –

(1) Section 6 in The Foreign Exchange Management Act, 1999 – Indian Kanoon. https://indiankanoon.org/doc/1977615/. 

(2) THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999 ARRANGEMENT OF SECTIONS. https://ifsca.gov.in/Document/Legal/63-the-foreign-exchange-management-act-199917092020075653.pdf. 

(3) 6 FEMA act 1999| Capital account transactions | Section 6 Foreign …. https://www.aaptaxlaw.com/fema-act-1999/section-6-fema-act-1999-capital-account-transactions-section-6-of-foreign-exchange-management-act-1999.html. 

(4) CG now empowered to specify classes of permissible capital account …. https://taxguru.in/rbi/central-government-empowered-classes-permissible-capital-account-transactions-respect-non-debt-instruments.html. 

(5) 51 FAQs on Foreign Exchange Management Act (FEMA), 1999 in India – Tax Guru. https://taxguru.in/rbi/51-faqs-foreign-exchange-management-act-fema-1999-india.html. 

Question –

Section 7 – In its relevant part provides the following –

“The Reserve Bank may, for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the Reserve Bank determines, having regard to the prevailing market conditions, is received without any delay…..”what is the purpose of “is received without any delay.”

Answer – The phrase “is received without any delay” in the context of the Foreign Exchange Management Act (FEMA), 1999, refers to the timely receipt of the full export value of goods. When goods are exported from India, the exporter is expected to receive payment for those goods. This payment, known as the export value, should ideally be received promptly after the goods have been delivered. The Reserve Bank of India (RBI), in its role as the regulator of foreign exchange transactions, has the power to ensure that this happens. The RBI can set rules and regulations to ensure that the full export value of the goods, or a reduced value as determined by the RBI considering the prevailing market conditions, is received without any delay.  The purpose of this provision is to safeguard the interests of exporters and the overall health of the Indian economy. Timely receipt of export proceeds ensures that exporters have the funds necessary to continue their business operations. It also helps in maintaining the balance of payments, stabilizing the foreign exchange market, and supporting the overall economic stability of the country.

Source:

(1) Reserve Bank of India – Foreign Exchange Management Act Notification. https://rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=10256.

(2) Time period of realisation of Export Proceeds under FEMA – Tax Guru. https://taxguru.in/rbi/time-period-realisation-export-proceeds-fema.html.

(3) All about Foreign Exchange Management Act, 1999 – iPleaders. https://blog.ipleaders.in/foreign-exchange-management-act-1999/.

(4) Regulatory Insights – PwC. https://www.pwc.in/assets/pdfs/news-alert/regulatory-insights/2021/pwc_regulatory_insights_13_august_2021_overseas_investment_regulations_under_fema_1999_draft_rules_regulations.pdf.

(5) RBI notifies Late Submission Fee for reporting delays under FEMA. https://www.scconline.com/blog/post/2022/10/03/rbi-notifies-late-submission-fee-for-reporting-delays-under-fema/.

Question – Why are we talking only about the reduced value and why not the increased value of the exported goods in the relevant section?

The provision in the Foreign Exchange Management Act (FEMA), 1999, that you’re referring to is primarily concerned with ensuring that the full value of exported goods is received without delay¹. This is to ensure that exporters receive at least the value of goods they have exported, which is crucial for their financial stability and for maintaining the balance of payments. The mention of a “reduced value” in this context is to account for situations where the market conditions change after the goods have been exported but before the payment has been received. In such cases, the RBI, in consultation with the Central Government, may determine a reduced value for the goods considering the prevailing market conditions. The reason why an “increased value” is not mentioned could be because the primary concern of this provision is to protect exporters from receiving less than the value of their goods due to changes in market conditions. If the market value of the goods increases after export, the exporter would still receive at least the agreed-upon value of the goods, so their interests are not adversely affected. However, it’s important to note that the specifics of each transaction, including any potential adjustments to the value of the goods, would likely be governed by the terms of the contract between the exporter and the buyer.

Source:

(1) Foreign Exchange Management Act Notification – Reserve Bank of India. https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=245.

(2) 51 FAQs on Foreign Exchange Management Act (FEMA), 1999 in India – Tax Guru. https://taxguru.in/rbi/51-faqs-foreign-exchange-management-act-fema-1999-india.html.

(3) Foreign Exchange Management Act Notification – Reserve Bank of India. https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?id=174.

(4) Understanding the Valuation under FEMA – Taxmann. https://www.taxmann.com/post/blog/understanding-the-valuation-under-fema/.

RBI requires compliance with certain requirements as per FEMA regulations. for example:

Annual rate of return on foreign debt and assets (FLA rate of return): This report covers all foreign direct investments (FDI) received and/or made foreign direct investment (ODI) in the past few years. Must be submitted by an Indian resident company. Including this year. Annual Performance Report (APR): Indian Parties (IPs) / Resident Individuals (RIs) who have made Overseas Direct Investments (ODIs) shall submit APRs in Form ODI Part II for the respective items to Authorized Dealer Banks (ADs). ) must be submitted. Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS) outside India.
External Commercial Borrowing (ECB): A borrower has to report all his ECB transactions to her RBI on a monthly basis in the form of “ECB Declaration 2” through AD Category – Bank I. Common Basic Form: This form consolidates the reporting requirements for FDI into India irrespective of the means by which the foreign investment is made.
These requirements will help the RBI monitor and regulate the flow of foreign exchange into and out of the country, thereby maintaining stability in the foreign exchange market and the overall stability of the country’s economy.

The RBI requires certain compliances to be followed under the provisions of FEMA. For example:

Annual Return on Foreign Liabilities and Assets (FLA Return): This return is required to be submitted by all Indian resident companies which have received Foreign Direct Investment (FDI) and/or made Overseas Direct Investment (ODI) in any of the previous years, including the current year.

Annual Performance Report (APR): An Indian Party (IP) / Resident Individual (RI) which has made an Overseas Direct Investment (ODI) has to submit an APR in Form ODI Part II to the Authorized Dealer (AD) bank in respect of each Joint Venture (JV) / Wholly Owned Subsidiary (WOS) outside India.

External Commercial Borrowings (ECB): Borrowers are required to report all ECB transactions to the RBI on a monthly basis through an AD Category – I Bank in the form of ‘ECB 2 Return’.

Single Master Form: This form integrates the reporting requirements for FDI in India, irrespective of the instrument through which foreign investment is made.

These compliances help the RBI to monitor and regulate the flow of foreign exchange in and out of the country, thereby maintaining the stability of the foreign exchange market and supporting the overall economic stability of the country.