Current and Capital Account Transactions under FEMA
The Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from June 1, 2000, and as per the Preamble of FEMA, the Act was made with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
Under the FEMA, foreign exchange transactions are divided into two broad categories:
- Current Account Transactions, and
- Capital Account Transactions.
As per FEMA, transactions that alter 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 are classified as capital account transactions, whereas, all other transactions are current account transactions.
As part of the obligations assumed under Article VIII of the charter of its membership of International Monetary Fund, India accepted the move towards full current account convertibility in August 1994. Most of the quantitative and sectoral restrictions were, therefore, removed for the current account transactions. As such most of current account transactions do not require prior approval of the Reserve Bank.
The Government of India has notified the Foreign Exchange Management (Current Account Transactions) Rules, 2000, governing the current account transaction.
These Rules list the current account remittances under three categories.
- First, the transactions, the remittances for which are prohibited;
- Second, the transactions, remittances for which is made after obtaining the approval of Government of India; and
- Third, the transactions, remittances for which may be made by the Authorised Dealer, up to the limits given in the Rules. Prior approval of RBI is required, where the amount to be remitted exceeds the stipulated limit.
Under these Current Account Transactions Rules, powers have been delegated to the Authorised Persons (APs) to allow permitted remittances which are of current account in nature, in a hassle-free manner.
While FEMA formalised the current account convertibility with the Common Law principle “all that is not forbidden is permitted”, it did the reverse with respect to capital account transactions: “all that is not permitted is forbidden”.
Presently India is not fully convertible on the capital account. Reserve Bank has been progressively relaxing and simplifying the procedures for capital account transactions. Accordingly, certain capital account transactions involving foreign direct investment, external commercial borrowings and the overseas direct investment have been permitted to be undertaken under automatic route/general permission. In respect of transactions which are not covered under general permission, the entities are required to approach the Reserve Bank through their authorized dealers for necessary approvals.
The Reserve Bank, in consultation with the Government of India, has notified comprehensive, simple and transparent regulations under the FEMA, 1999 for capital account transactions. The regulations distinctly indicate the types of permissible capital account transactions and simplified procedures for undertaking transactions. The regulations grant substantial powers to the Authorised Dealer Category – I banks to undertake capital account transactions on behalf of their clients.
Compiled by Mr. G. D. Chugh
(Associate Partner in Factum Legal Advocates & Solicitors)