Foreign Exchange Management Act or in short (FEMA) is an act that provides
guidelines for the free flow of foreign exchange in India. It has brought a new
management regime of foreign exchange consistent with the emerging frame work of
the World Trade Organisation (WTO). Foreign Exchange Management Act was earlier
known as FERA (Foreign Exchange Regulation Act), which has been found to be
unsuccessful with the proliberalisation policies of the Government of India.
FEMA is applicable in all over India and even branches, offices and agencies located
outside India, if it belongs to a person who is a resident of India.
- It prohibits foreign exchange dealing undertaken other than
an authorised person;
- It also makes it clear
that if any person residing in India, received any Forex payment (without
there being a corresponding inward remittance from abroad) the concerned
person shall be deemed to have received they payment from a nonauthorised person.
- There are 7 types of current account transactions,
which are totally prohibited, and therefore no transaction can be
undertaken relating to them. These include transaction relating
to lotteries, football pools, banned magazines and a few others.
- FEMA and the related rules give full freedom to
India (ROI) to hold or own or transfer any foreign
security or immovable property situated outside India.
- Similar freedom is also given to a resident who inherits
such security or immovable property from an ROI.
- An ROI is permitted to hold shares, securities and
properties acquired by him while he was a Resident
or inherited such properties from a Resident.
- The exchange drawn can also be used for purpose other
than for which it is drawn provided drawl of exchange is
otherwise permitted for such purpose.
- Certain prescribed limits have been substantially enhanced.
For instance, residence now going abroad for business
purpose or for participating in conferences seminars will not need the
RBI's permission to avail foreign exchange up to US$. 25,000 per
trip irrespective of the period of stay, basic travel
quota has been increased from the existing US$ 3,000 to
US$ 5,000 per calendar year.
Trade Credit have been subjected to dynamic regulation over a
period of last two years. Now, Reserve Bank of India (RBI) vide
circular number A.P. (DIR Series) Circular No. 24, Dated November
1, 2004, has given general permission to ADs for issuance of
Guarantee/ Letter of Undertaking (LoU) / Letter of Comfort (LoC) subject
to certain terms and conditions . In view of the above, we are
issuing consolidated guidelines and process flow for availing trade credit .
- Definition of Trade Credit : Credit
extended for imports of goods directly by the overseas
supplier, bank and financial institution for original maturity
of less than three years from the date of shipment is referred
to as trade credit for imports.
Depending on the source of finance, such trade credit will
include supplier's credit or buyers credit , Supplier 's credit
relates to credit for imports into India extended by the overseas
supplier , while Buyers credit refers to loans for payment of
imports in to India arranged by the importer from a bank or
financial institution outside India for maturity of less than three
It may be noted that buyers credit and suppliers credit
for three years and above come under the category of
External Commercial Borrowing (ECB), which are governed by
ECB guidelines. Trade credit can be availed for import
of goods only therefore interest and other charges will
not be a part of trade credit at any point of time.
- Amount and tenor : For import of
all items permissible under the Foreign Trade Policy (except gold),
Authorized Dealers (ADs) have been permitted to approved trade
credits up to 20 millions per import transaction with a maturity period
( from the date of shipment) up to one year.
Additionally, for import of capital goods, ADs have been
permitted to approved trade credits up to USD 20 millions
transactions with a maturity period of more than one year
and less than three years. No roll over/ extension will be
permitted by the AD beyond the permissible period.
- All in cost ceiling : The all in cost ceiling are
as under: Maturity period up to one year 6 months LIBOR +50
Maturity period more than one year but less than three years 6 months
LIBOR* + 125 basis point
* for the respective currency of credit or applicable benchmark like
EURIBOR., SIBOR, TIBOR, etc.
- Issue of guarantee, letter of undertaking or
letter of comfort in favour of overseas lender : RBI has given
general permission to ADs for issuance of guarantee / Letter of
Undertaking (LOU) / Letter of Comfort (LOC) in favour of overseas
supplier, bank and financial instruction, up to USD 20 millions
per transaction for a period up to one year for
import of all non capital goods permissible under Foreign Trade Policy (except
gold) and up to three years
for import of capital goods.
In case the request for trade credit does not comply
with any of the RBI stipulations, the importer needs to
have approval from the central office of RBI.
FEMA regulations have an immense impact in international
trade transactions and different modes of payments.RBI release regular
notifications and circulars, outlining its clarifications and
modifications related to various sections of FEMA.
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