The Foreign Exchange Management Act, 1999

What it does

The Act sets the terms on which money and assets cross India's border. Its method is a general restriction followed by permissions: dealing in foreign exchange is restricted except through an authorised person and except as the Act and the rules under it allow, and then whole classes of dealing are allowed back in. So the question on a cross-border payment is rarely whether the Act applies. It is which permission the payment travels under, and whether its conditions were met.

The division that organises everything else is between a current account transaction and a capital account transaction. A current account transaction, broadly a payment for trade, services, interest, travel, education or maintenance, is permitted unless it is restricted or prohibited. A capital account transaction, one that alters an asset or a liability outside India of a resident, or in India of a non-resident, runs the other way: it is permitted only to the extent specified. Classifying the transaction correctly is the first step, because the burden of showing compliance shifts with the answer.

Since the Finance Act, 2015 the rule-making power on the capital account is split. Non-debt instruments, which is where most foreign investment into an Indian company sits, are specified by the Central Government, now through the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. Debt instruments stay with the Reserve Bank of India. Two instruments, two issuing authorities, and an investment structure that mixes equity with a debt component may answer to both.

Who it binds

Every person resident in India, wherever the act complained of was done, and any person outside India who does something in relation to property or a branch in India. Residence under the Act is its own test, set by section 2(v), and it is not the income tax test. A person may be resident for exchange control and non-resident for tax in the same year, and the consequence of reading one test into the other is usually a filing made in the wrong capacity.

It also binds the intermediaries. An authorised person is under duties of its own, and a declaration made to an authorised dealer about the purpose of a remittance is a statement the Act holds the declarant to. Using the exchange for a purpose other than the one declared is a contravention in itself, which is why a payment that was lawful when sought can become a contravention later without anything new leaving the country.

What changed when it replaced the 1973 Act

The Foreign Exchange Regulation Act, 1973 made a contravention an offence, with arrest and prosecution behind it. The 1999 Act made it a civil contravention adjudicated by an adjudicating authority, with penalty rather than punishment as the ordinary outcome. That is the single largest change and it governs how a proceeding is defended: the question is the quantum and the compounding, not a conviction.

Three later changes matter to a current matter.

• The Finance Act, 2015 inserted section 37A, which allows the seizure of property in India of equivalent value where foreign exchange or property is suspected to be held outside India in contravention of the Act. A civil statute acquired a seizure power, and the safeguards around it are procedural, so the dates and the authority who acted are the first things to check.
• The same Act moved the non-debt rule-making power to the Central Government, as above. Regulations made before 2019 still appear in older advice and in older judgments, and the provision cited there may not be the one in force.
• Undisclosed foreign assets now also engage the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which is a separate statute with a separate authority. The same holding can be looked at under both, and an answer given in one proceeding is read in the other.

How a proceeding runs

A contravention is investigated, usually by the Directorate of Enforcement, and adjudicated by an adjudicating authority appointed under the Act. Where the amount is quantifiable, the penalty under section 13 is capped as a multiple of the sum involved, and a contravention that continues attracts a further daily amount. An appeal lies to the Appellate Tribunal, and from the Tribunal to the High Court on a question of law under section 35.

Compounding under section 15 sits beside that and is the route most matters take. It is an application to the Reserve Bank of India or to the Directorate, depending on the contravention, admitting the contravention and asking for it to be compounded on payment. The decision to compound is not only a view on the amount. It is also a decision about what is admitted, and that admission is available to any other authority looking at the same facts.

What turns on it in practice

Three questions recur. Which limb the transaction falls in, because the test for permission differs. Which instrument governs it today, because the 2019 split moved a large part of the capital account from a Reserve Bank regulation to a Central Government rule. And whether the contravention is one to compound or one to contest, which is a judgement about the record as much as about the sum.

The fourth, on an older holding, is dating. A structure set up a decade ago was lawful or not under the regulations then in force, and the reporting it owed was the reporting then prescribed. Testing it against today's rules produces a contravention that may not exist and misses the one that does.