FEMA and Foreign Exchange in Banking: Rules and Limits

The correct answer is C, 1 June 2000. FEMA was passed as Act 42 of 1999 and received the assent of the President on 29 December 1999, but it was brought into force only on 1 June 2000, on which date the Foreign Exchange Regulation Act of 1973 stood repealed. Option A is wrong because 29 December 1999 is the date of the President's assent, and a question that asks for commencement is testing exactly this distinction. Option B is wrong because 1 April 2000 is the beginning of a financial year and has no connection with the Act; it is offered because candidates expect a tax-style date. Option D is wrong because by 1 January 2001 the Act had already been in force for seven months. Remember the pair: assent in 1999, commencement in 2000.

The correct answer is A, Foreign Exchange Regulation Act, 1973. FERA suited an economy short of foreign exchange: it presumed every transaction forbidden unless allowed, made a contravention a criminal offence punishable with imprisonment, and placed the burden of proof on the accused. FEMA repealed it and made contraventions civil and compoundable. Option B is wrong because the Prevention of Money Laundering Act of 2002 came three years after FEMA and runs alongside it, dealing with the criminal offence of laundering the proceeds of crime. Option C is wrong because the Banking Regulation Act of 1949 governs the business of banking and is still in force. Option D is wrong because the COFEPOSA Act of 1974 provides for preventive detention in smuggling cases and was not replaced by FEMA.

The correct answer is B, Directorate of Enforcement. The Directorate of Enforcement, which works under the Department of Revenue in the Ministry of Finance, investigates contraventions of FEMA, conducts searches and places cases before the Adjudicating Authority. Option A is wrong because the Reserve Bank administers the Act, frames the regulations on capital account transactions, authorises authorised persons and compounds many contraventions, but it is not the investigating agency, and the paper distinguishes administration from enforcement. Option C is wrong because the Central Bureau of Investigation handles offences under the general criminal law and corruption cases, not foreign exchange contraventions. Option D is wrong because SEBI regulates the securities market and has no role in administering or enforcing this Act. Section 37A, added later, lets the Directorate seize assets of equivalent value inside India where foreign exchange is held abroad in breach of the Act.

The correct answer is C, 182 days. FEMA defines a person resident in India by a stay of more than one hundred and eighty-two days in the preceding financial year, with exceptions for a person who has gone abroad for employment, for business or for an uncertain period, and for a person who has come to India on those terms. Residence under the Act therefore depends on days present and not on citizenship. Option A is wrong because ninety days appears in other statutes but not in this definition. Option B is wrong because one hundred and twenty days is a threshold found in the residence rules of the Income-tax Act for certain Indian citizens, which is why it is a tempting distractor. Option D is wrong because two hundred and forty days has no place in the FEMA definition at all.

The correct answer is C, USD 2,50,000. Under the Liberalised Remittance Scheme every resident individual, including a minor, may freely remit up to two lakh fifty thousand United States dollars in a financial year running from April to March, for any permitted current or capital account transaction or a combination of the two. The scheme is not available to companies, partnership firms, Hindu undivided families or trusts, and the Permanent Account Number must be quoted. Option A is wrong because twenty-five thousand dollars was the limit when the scheme began in 2004 and has been raised several times since. Option B is wrong because one lakh dollars is one of those intermediate limits and is now out of date. Option D is wrong because ten lakh dollars is the annual ceiling for repatriation from an NRO account, a different rule.

The correct answer is C, Section 6. Section 6 governs capital account transactions, which are those that alter the assets or liabilities of a person outside India or in India, such as foreign direct investment, investment in overseas securities, borrowing abroad or buying immovable property abroad. They are permissible only to the extent allowed, and the Reserve Bank frames the regulations while the Central Government makes rules for debt instruments. Option A is wrong because Section 3 is the prohibition on dealing in foreign exchange except through an authorised person. Option B is wrong because Section 5 covers current account transactions, which are ordinarily free subject to reasonable restrictions by the Government. Option D is wrong because Section 10 deals with authorised persons, that is authorised dealers, money changers and offshore banking units.

The correct answer is C, Thrice the sum involved. Section 13 provides that a person contravening the Act is liable to a penalty of up to three times the sum involved where that sum is quantifiable, and up to two lakh rupees where it is not quantifiable, and a continuing contravention attracts a further five thousand rupees for every day it continues. Option A is wrong because a penalty equal to the sum involved is only the floor of what may be imposed, not the ceiling fixed by the section. Option B is wrong because twice the sum appears in some other revenue statutes and not here. Option D is wrong because five times the sum involved is not the FEMA limit; candidates often confuse it with higher multiples found in tax penalty provisions, so the figure to remember for FEMA is three.

The correct answer is B, Tarapore Committee. The committee chaired by S. S. Tarapore examined capital account convertibility for the Reserve Bank and set out the preconditions and a phased road map; the rupee remains fully convertible on the current account but only partly on the capital account. Option A is wrong because the Narasimham Committee reported on banking sector reforms, giving the recommendations on prudential norms, capital adequacy and the tiered banking structure. Option C is wrong because C. Rangarajan chaired the committee on financial inclusion of 2008 and later chaired work on poverty estimation, not on convertibility. Option D is wrong because the Chakravarty Committee of the mid-1980s reviewed the working of the monetary system and is remembered for its recommendations on monetary targeting.

The correct answer is C, FCNR (B) account. A Foreign Currency Non-Resident Bank account is a term deposit held in a permitted foreign currency, so the depositor runs no exchange risk on the rupee, and both principal and interest are freely repatriable. Option A is wrong because a Non-Resident External account is kept in Indian rupees, although it is funded from income earned abroad and is freely repatriable; the exchange risk there falls on the depositor. Option B is wrong because a Non-Resident Ordinary account is also kept in rupees, is meant for income arising in India such as rent, dividend or pension, and allows repatriation only within an annual limit. Option D is wrong because the Basic Savings Bank Deposit Account is a resident financial inclusion account and is not for non-residents.

The correct answer is C, The High Court on a question of law. Under FEMA a contravention is adjudicated by an Adjudicating Authority, an appeal from that order goes to the Appellate Tribunal, and from the Tribunal an appeal lies to the High Court, but only on a question of law and within the period the Act allows. Option A is wrong because the Reserve Bank administers the Act and may compound contraventions, but it sits nowhere in the appellate chain. Option B is wrong because the Adjudicating Authority is the first stage, below the Tribunal, so an appeal cannot travel back to it. Option D is wrong because the Directorate of Enforcement is the investigating agency that brings the case, and an accused person obviously does not appeal to the prosecutor.

The correct answer is A, The Reserve Bank of India. Section 10 of FEMA empowers the Reserve Bank to authorise any person to deal in foreign exchange or in foreign securities as an authorised dealer, money changer, offshore banking unit or in any other way, and to revoke that authorisation in the public interest or for breach of its conditions. The public must transact only through such a person. Option B is wrong because the Ministry of Commerce and Industry frames trade policy and does not license foreign exchange dealers. Option C is wrong because the Directorate General of Foreign Trade issues importer-exporter codes and administers the foreign trade policy. Option D is wrong because the Indian Banks Association is an industry body of banks with no statutory power to authorise anyone.