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Representation to Finance Ministry & Financial Institutions  » Suggestions Re. Provisions of FEMA 1999 - 8 June 2011

Suggestions Re. Provisions of FEMA 1999

June 8, 2011.
Chief General Manager-in-Charge,
Foreign Exchange Department,
Reserve Bank of India,
Central Office Building, SBS Road,
Dear Sir,
Sub:-    Suggestions Re. Provisions of FEMA 1999.
With reference to the above and further reference to your Press Release dated 10/05/2011 inviting suggestions in matters relating to foreign exchange facilities for residents, Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs),  I, the undersigned, Rajesh H Dhruva, Chartered Accountant and Adviser to  overseas Indians in matters pertaining to Foreign Exchange Laws; Tax Laws; Double Tax Treaties and Investments; Founder Member of Core Team of Co-federation of Overseas Indians as also the Chief Executive of   - a comprehensive, unique website, presenting edited and updated version   of  Foreign Exchange Management Act, 1999, Rules and Regulations thereunder as also Tax Laws and Banking Regulations pertaining to Non Resident Indians and - the only website showing interest rates of all INR and foreign currency interest rates offered to NRIs by all banks in India am forwarding certain suggestions which are briefly mentioned herein and elaborated thereafter:-
I.   Definition :   
1. The definition in Section 2(v) r.t.w. Section 2(w) defines an NRI returning to India for permanent settlement as person resident in India provided his stay in preceding year i.e. Financial Year (F.Y.) before the year of return exceeds 181 days.
.02 Thus, a returning NRI will become not become a resident in the year of return but in the succeeding year following the year of return and that also only if his stay exceeds 181 days in the year of return.
.03  Now, various regulations and in particular F.E.M. (Deposit) Regulations, 2000 require a returning NRI to immediately re-designate Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts as Resident accounts.  Similarly, not being an NRI, his demat accounts, life policies and other investments can also be made as Resident.
2.   Even if the definition theoretically followed and if such returning NRI considers himself as an NRI in the year of return, he cannot make new investments and settle down as non resident more in particular when his bank accounts are Resident Rupee accounts and practically he has ceased to be a non resident having returned to India for settlement.
3.    As the definition is contradictory, appropriate change is to be made and ideally all conditions regarding number of days should be deleted.
II.     Definition - Person of Indian Origin (POI):-
1.    A PIO is defined as an foreign citizen of Indian origin  who himself or any one of his parents or grand-parents were born in India or were citizen of India.
2.    Now, many NRIs are 3rd / 4th generation residents of foreign countries.
3.    So as to grant various benefits to such 3rd / 4th generation residents, appropriate change may be made to include an NRI whose great grand parents were born in India.
III.     Definition - Hindu Undivided Family :(HUF):-
1.   Section 2(u)(ii) of Foreign Exchange Management Act, 1999  defines the term “person” and this includes  a Hindu Undivided Family. 
2.   Whereas  Section 2(v) defines “person resident in India”  and Section 2(w) defines “person resident outside India”
3.   Now said definitions cover an individual as also a person or body corporate registered or incorporated in India or office branch or agency controlled by a person resident in India or otherwise.
.02 But none of the definitions cover / lay down guidelines for determining residential status of a Hindu Undivided Family.
4.   Appropriate guidelines as also investment facilities should be laid down for HUF.
IV.    Repatriation Abroad:-
1.   Presently, NRIs are granted permission to repatriate upto US$ 1mn out of balances held in NRO account.
2.   Repatriation as defined in Foreign Exchange Management(Acquisition and Transfer of Immovable Property in India) Regulations, 2000 includes :
.01 remittance of foreign exchange from India or
.02 credit in a bank account denominated in foreign currency i.e. Foreign Currency Non Resident (FCNR) account or Indian currency which can be converted into foreign currency i.e. Non Resident External (NRE) account.
2.  Now, banks insist upon remittance being made abroad and often do not permit credit in NRE account under the said scheme.
3.  Not only repatriation to be credited in NRE account is permissible otherwise also transfer of funds abroad can always be remitted to NRE account. 
4.  As it is not an intention of the Statute not to credit such funds in NRE account as supported by said definition  crediting of balance in NRO account into NRE account subject to compliance of specified conditions should be permitted and clarifications as regards the same should be made so as to guide the Banks appropriately.

V.   FAQs Wrongly Over-riding Regulations:-
Frequently Asked Questions (FAQs) and Master Circulars are explanatory and sub-ordinate to various regulations framed under FEMA'99.

V.1 Overseas Investments by Residents  : 
1.   Whereas Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 grant general approval for persons residents in India to invest in foreign securities. [Regulation 3 (1)(A)].
.02   However, FAQ on Liberalized Remittance Scheme prohibits "remittance by resident individuals for setting up of a company abroad".
.03   Such restrictions is not found in the relevant Regulations of FEM (Permissible Capital Account Transactions) Regulations, 2000
.04  Now a resident can purchase shares of an existing company and thereby own  100% shares of a foreign company including shares initially subscribed by foreigner share holders.
.04   Thus , under the circumstances, appropriate correction should be made in by deleting said FAQ which is misguiding and whereby bankers are refusing to residents of India remittance of capital for establishing a company outside India.
V.2   Transfer of Immovable Property by PIO & NRI :-
1.   Regulation 4(d) of Foreign Exchange Management (Acquisition and Transfer of Immovable Properties in India) Regulations, 2000  permit a Person of Indian Origin (PIO) transfer of immovable property other than agricultural land by way of sale to a person resident in India .
.02 FAQ Answer to Q.12 vide (B)(ii) mentions that a PIO can sell property in India to a resident of India who is also citizen of India.
2.   Similarly, Regulation 3(b) grants general approval to an Indian citizen to transfer any immovable property in India to a person resident in India.
.02 Herein also Answer (a) of Q.13 suggest that a NRI can sell agricultural land to a resident of India who is also a  citizen of India.
3. The FAQs be appropriately corrected.

VI.  Section 6(4)  & (5) re. Transfer of property by Returnee NRI  & Immigrating Resident  :
 1.  Section 6(4) of  Foreign Exchange Management Act, 1999  permits a person resident in India to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.
Whereas first part of the Section permits an NRI who has returned to India for settlement “ transfer of or investment in foreign assets”;  second part stipulates a condition re: “ such foreign asset owned when the person was resident outside India”.
.03 Simply speaking the section  requires ownership of an asset before the  NRI’s return to India for settlement, which in turn restricts transfer     of existing asset and/or investment in a new asset as every transfer results into cessation of an  old asset and creation of a new asset and similarly, investment also results in creation of  a new asset.
2.  Thus appropriate amendment be made in the Section to permit transfer of old asset and reinvestment of sale proceeds in new permissible asset abroad .
3   Similar change should be made in  Section 6(5) pertaining to assets in India of an immigrating resident.

VII. Permissible Debits in NRE Account :

Para-4 of Schedule-I – Non Resident (External) Rupee Account Scheme of Foreign Exchange Management (Deposit) Regulations, 2000, enumerates various permissible debits. 

This debits do not include : in the case of an individual account holder a gift to any person resident / non resident or any charitable trust in India recognized under the Income Tax Act, 1961 as specifically provided in Para 6 of Schedule 4 pertaining to Non- Resident (Non Repatriable) Rupee Deposit Scheme.
Although the Schedule contains a paragraph regarding debits covered under general permission granted by Reserve Bank of India, these suggestions are made on account of importance & multiplicity of transactions by NRIs & also enumeration of other examples of generally permitted debits. 


VIII. Overseas Funds of Returnee NRI for Purchase of Overseas Immovable Property :


1. Regulation 5(1)(b) of  Foreign Exchange Management ( Acquisition and Transfer of Immovable Property Outside India.) Regulations. 2000 provides  for Acquisition and Transfer of Immovable Property Outside India stating that " A person resident in India may acquire immovable property outside India and by way of purchase out of foreign exchange held in Resident Foreign Currency (RFC) account maintained in accordance with the Foreign Exchange Management (Foreign Currency accounts by a person resident in India) Regulations, 2000”.
2.  Said regulations do not permit and provide for utilization of  funds./balances held outside India for acquisition of an immovable property outside India as permitted vide provisions of Section 6(4) of the Act to this extent, the regulations restrict the permission granted by Section 6(4) of  the Act.
3.  Appropriate changes be made to allow a returnee NRI utilisation of overseas balances for purchase of overseas assets.

IX. RFC Accounts - specifications & Guidance Notes :
1. Regulation 5 of Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India), Regulations, 2000, provides for opening, holding and maintaining Resident Foreign Currency (RFC) Accounts.
2. These provisions do not specify /  include Eligibility norms / conditions ; Rate of interest ;Provisions regarding loans against funds in such accounts.; Change of residential  status of account holder i.e. a resident once again becoming a non resident  and Tax exemption.
3. Appropriate changes should be made so as to include and / or notify the above.” 

X. Filing Date of Annual Return By Companies Be Extended :
1.   Indian companies which have issued shares or accepted loans / deposits from Non-Resident Indians (NRIs); Persons of Indian Origin (PIOs) ; foreigners or overseas entities are required to file Annual Return  showing the position as on 31st March on or before 15th July under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000
2.   Now under the Companies Act, 1956, an Indian company is required to file audited accounts  and Annual Return before 31st October.
3.   Whereas under the
Income Tax Act, 1961 [I.T. Act], an Indian company is required to file income tax return alongwith audited accounts on or before 30th September.
4.  As many Indian companies do not have their accounts audited on or before 15th July, such companies are required to submit Annual Return under FEMA based on unaudited provisional accounts and if there are major changes,  file revised Annual Return based on audited account.
5.  To mitigate this difficulty, the due date for filing Annual Return under FEMA be aligned with the date under the Companies Act ,1956 and be specified as 30th September.

XI. PIO's  Immovable Property - Sale to NRI Not Permissible :
1.    Under Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2000, vide Regulation 4(f) a PIO can transfer residential or commercial property in India by way of gift to a person resident outside India who is a Non-Resident Indian (NRI) or a Person of Indian Origin (PIO).
.02  However, such PIO cannot transfer by way of sale such residential or commercial property to an NRI or a PIO.
.03  Vide Regulation 3(c), an NRI is allowed to transfer such immovable property to a person resident outside India.
.04   Permitting gift by a PIO to an NRI or a PIO and restricting sale does not seem to be the intention of the Statute and is also detrimental to the interest of the Exchequer.
.05    Appropriate changes be made to permit sale by a PIO to an NRI or  a PIO as this will not only mitigate the difficulties of PIOs wanting to well to NRIs/PIOs but also the capital gains tax will add to tax collection of the Exchequer.

If any clarifications are required , I will be happy to provide the same and look forward to your response at earliest convenience.

With regards.

Chief Executive
Tel. No. : 0091 281 245 3367 (four lines) / 245 9613
Cell : 0091 98240 49944