Note4Students
From UPSC perspective, the following things are important :
Prelims level: FEMA, 1999
Why in the News?
Reserve Bank of India (RBI) has proposed to rationalise regulations governing export and import transactions. The aim is to promote ease of doing business and empower banks to provide more efficient service to their foreign exchange customers.
RBI Proposal and Directions
- The RBI issued ‘Regulation of Foreign Trade under Foreign Exchange Management Act (FEMA), 1999 – Draft Regulations and Directions.’
- Key propositions include:
- Repatriation Timeline: The full export value of goods and services must be realised and repatriated to India within 9 months from the date of shipment for goods and the date of invoice for services.
- Caution Listing: Exporters who fail to realise the full value within the specified time may be caution-listed by the authorised dealer.
- Caution-Listed Exporters: Caution-listed exporters can undertake exports only against receipt of advance payment in full or an irrecoverable letter of credit, to the satisfaction of the authorised dealer.
- Advance Remittance Restrictions: No advance remittance for the import of gold and silver is permitted unless specifically approved by the RBI.
Expected Benefits
- Ease of Doing Business: The proposed regulations are intended to promote ease of doing business, especially for small exporters and importers.
- Empowerment of Banks: The regulations aim to empower authorised dealer banks to provide quicker and more efficient service to their foreign exchange customers.
About Foreign Exchange Management Act (FEMA), 1999
- The FEMA, 1999, regulates foreign exchange and trade in India.
- FEMA replaced the older Foreign Exchange Regulation Act (FERA), 1973.
How does FEMA regulate EXIM Transaction?
| Regulation under FEMA | |
| Resident Indian Criteria |
Defined in Section 2(v) of FEMA;
A person residing in India for more than 182 days during the course of the preceding financial year. |
| Current Account Transactions | Permitted freely for EXIM activities, including trade payments and remittances. |
| Capital Account Transactions | Regulated by RBI, includes FDI in export-oriented units and overseas investments by Indian entities. |
| Documentation and Declarations | Exporters and importers must furnish declarations to RBI to ensure compliance and monitor foreign exchange. |
| Export Declarations | Declare the value of goods/services exported, expected earnings, and timeframe for realization. |
| Import Declarations | Provide details of goods/services imported, and foreign exchange spent, and ensure payments through authorized channels. |
| Authorized Dealers | Only RBI-approved dealers (banks/financial institutions) can handle foreign exchange transactions for EXIM. |
| Import Payment Regulations | Payments must be made through authorized channels within prescribed time limits, complying with DGFT terms. |
| Foreign Currency Accounts | Entities can maintain foreign currency accounts for efficient handling of foreign exchange for EXIM activities. |
Significance of FEMA in Regulating EXIM Transactions
- Facilitates Trade: By providing a clear regulatory framework, FEMA facilitates smoother and more efficient EXIM transactions, contributing to the growth of international trade.
- Economic Stability: Ensures that foreign exchange earnings and expenditures are monitored and regulated, maintaining economic stability and preventing illegal outflows.
- Investor Confidence: A transparent and regulated foreign exchange environment boosts investor confidence, attracting more foreign investment.
- Liberalization: Replaces the stringent controls of FERA with a more liberal approach, encouraging businesses to engage in global trade.
PYQ:[2013] Which of the following constitutes Capital Account? 1. Foreign Loans 2. Foreign Direct Investment 3. Private Remittances 4. Portfolio Investment Select the correct answer using the codes given below. (a) 1, 2 and 3 (b) 1, 2 and 4 (c) 2, 3 and 4 (d) 1, 3 and 4 |
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