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Fema -- Current account transactions unshackled 

Ketan Dalal & Chetan Rajput  
Backdrop
The freeing of current account transactions is a key facet of The Foreign Exchange Management Act, 1999 (Fema) which substituted The Foreign Exchange Regulation Act, 1973 (Fera) with effect from June 1, 2000. While current account transactions have been liberalised on an ongoing basis, the "negative" list concept (ie, regulating only certain current account payments and freeing all others) in Fema is a great leap ahead and is expected to significantly facilitate cross border business transactions.

A current account transaction has been defined as a transaction other than capital account transaction. This means that all transactions that do not alter assets or liabilities outside India of residents or assets or liabilities in India of non-residents are termed as current account transactions.

This article highlights some of the key changes relating to current account transactions.

Overview Fema allows free selling/drawal of foreign exchange to/from authorised dealer (AD); however, it empowers the Union government to notify certain restrictions for current account remittances, in consultation with the Reserve Bank of India (RBI). The Centre has issued a notification dated May 3, 2000; the notification provides for certain expenses/remittances, which are:

  • Completely prohibited;
  • Permissible only after obtaining prior approval of the Central;
  • Permissible after obtaining prior approval of the RBI.

    Remittances for all current account transactions, which are not prohibited or restricted as above, would be permitted by ADs, without any monetary ceilings or limits. Further, where the remittance is made out of EEFC account or RFC account, the condition of prior approval for certain payments (from the government of India/RBI) is not applicable.

    Regulated payments
    Current account transactions have been categorised into three different sets for the purpose of restriction/regulation. The first relates to those, which are completely prohibited, and from a business standpoint, the key item there is prohibition on repatriability of dividend where dividend balancing is applicable. In essence, the dividend balancing condition (applicable to 22 consumer goods industries) requires that repatriation of dividend is balanced by export earnings over a period of seven years. Recent press reports indicate that the condition has been waived.

    The second contains certain items, which can be remitted only with the approval of Union government. In addition to a few items which relate to remittances by public sector undertakings, the key items relate to hiring charges of transponders and technical collaboration agreements where royalties exceed the stipulated rates of 5 per cent on local sales or 8 per cent on exports or a lumpsum payment which exceeds US $ 2 million.

    Even under the current regulations, this requires the permission of the FIPB. However, under Fema, there is no reference to the limits being net of tax, probably an oversight. The third, which is the one which is likely to have the most applicability in practice, relates to those items requiring approval of RBI. Important items in that list relate to travel expenses exceeding US $ 25,000, consultancy fees exceeding US $ 100,000 and remittances on royalties and payment of lumpsum fee under technical collaboration agreements which have not been registered with the RBI.

    There are certain other items which are more relevant from a non business (personal) standpoint such as exchange facilities for emigration, gift remittances, donation remittances and remittances for personal travel, all of which have been liberalised, but still with a cap retained thereon. It is important to note that items which are not in the lists and which are of a current account transaction nature are freely remittable without anyapprovals subject, of course, to providing adequate documentation to the satisfaction of the authorised dealer i.e. the banker that it does constitute a current account payment (and probably, that the taxe due on the same have been withheld and paid).

    Fema vs Fera: Certain payments
    Business travel has hitherto been permitted with a cap of US $ 350 per day/ US $ 500 per day depending upon the level of the person travelling; this has now been liberalised upto US $ 25,000 per trip, irrespective of the number of days for which the trip is made. Under Fema, remittances upto US$ 100,000 for architectural/consultancy services procured from abroad does not require RBI approval, as opposed to a more restrictive environment for such payments under Fera. A large number of Indian subsidiaries of multinational companies are required to pay cost sharing expenses/shared service fees either to their parents or to regional hubs based in Asia.

    This hitherto required RBI approval. Assuming that the cost sharing does not have a component of restricted/regulated payments, such payments are remittable without any approval. Similarly, commission on exports which was capped under the Fema regime at 12.5 per cent of invoice value can now be permitted as per the commercial arrangement without any cap. Items such as royalties on books or on reproduction of audio software or computer software which has been permitted under the Fera regime upto 15 per cent, 20 per cent and 30 per cent respectively no longer finds a mention in any of the regulated items, which would mean that there is no cap in respect of these items.

    Documentation
    The RBI/Centre has not prescribed any particular set of formalities/ documentation for current account remittances. However, persons seeking remittances would be required to file a declaration with the AD confirming that the transaction undertaken does not contravene any provisions of the Fema or any rule, regulation, notification or direction made thereunder.

    The AD has to satisfy himself about the authenticity of remittance and has authority to call for all such information/documents that would form the basis for remittance. On unsatisfactory compliance of the information furnished, the AD may refuse in writing to make the remittance.

    ADs are empowered to refer a remittance case to the RBI on suspicion that the transaction is contravening/evading any provisions of the Act. In Summary, relaxation of current account transactions under Fema has removed the shackles on payments for current account expenses, reflecting the growing confidence in the Indian economy and its ability to retain and attract foreign exchange, displacing the bogey of the flight of foreign exchange through these transactions.

    The significant relaxation will require a considerable change in mindset on the part of the bankers as well as the business community. It is expected that after an initial transitory phase, for the relevant players to get acclimatised to the new regime, the benefits of a less regulated regime should manifest itself.

    Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.

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