This article sheds light on the relationship between two
significant laws in India, namely, the Foreign Exchange Management
Act, 1999 (FEMA) and the Foreign Contribution Regulation Act, 2010
(FCRA). The recent changes introduced by the Foreign Exchange
Management (Overseas Investment) Rules, 2022 (OI Rules) are also
discussed. FEMA is responsible for regulating foreign exchange
transactions, while FCRA deals with foreign contributions. Both
acts impose reporting obligations on entities involved in foreign
contributions and foreign exchange transactions. The OI Rules
emphasize the importance of complying with both FEMA and FCRA when
acquiring foreign securities through gifts from individuals outside
India. It is crucial for entities involved in foreign contributions
in India to understand and comply with both FEMA and FCRA. This
ensures transparency and legal adherence.
I. Introduction
India’s economic liberalization and globalization have paved
the way for increased foreign participation in various sectors,
including non-profit activities. However, to ensure transparency,
accountability, and prevent money laundering for organizations
engaged in foreign activities, two significant legal frameworks
have been established: the Foreign Exchange Management Act,1999
(‘FEMA’) and the Foreign Contribution
Regulation Act, 2010 (‘FCRA’). These acts
play a vital role in managing foreign exchange transactions and
regulating foreign contributions in India. Although each law has
its distinct objectives and frameworks, there exists an interplay
between FCRA and FEMA in certain contexts. Before exploring this
interrelation further, it is essential to analyse the scope and
objectives underlying both these legislations.
I.I. Scope of FEMA
The Reserve Bank of India (‘RBI’) is
the regulatory authority responsible for overseeing and governing
transactions involving foreign exchange under the FEMA. FEMA
encompasses a broad range of activities, including current account
transactions related to trade in goods and services, as well as
capital account transactions involving investments and movement of
capital. It covers various aspects such as currency conversion,
holding, transfer, and disposal of foreign exchange, foreign
securities, and immovable properties located outside India, and
cross-border transactions involving India.
The primary objective of FEMA is to facilitate seamless external
trade and payments, while also fostering the development and
maintenance of a robust foreign exchange market within India. It
plays a crucial role in regulating and monitoring the flow of
foreign currency in and out of the country. Additionally, FEMA
establishes provisions for offences and penalties to deter and
address any violations of its regulations, thereby ensuring
compliance and maintaining the integrity of foreign exchange
transactions.
I.II. Scope of FCRA
FCRA falls under the purview of the Ministry of Home Affairs
(‘MHA’) and governs the acceptance and
utilization of foreign contributions and hospitality by
individuals, associations, and non-governmental organizations
(‘NGOs’) in India. The main objective of
FCRA is to ensure that foreign contributions and hospitality
received by entities or individuals are utilized for legitimate and
authorized purposes.
FCRA establishes guidelines, procedures, and obligations for the
registration, regulation, and reporting of organizations that
receive foreign contributions. It aims to promote transparency,
accountability, and the proper utilization of funds received from
foreign sources. Organizations are required to adhere to the
regulations and fulfil reporting obligations to ensure compliance
with FCRA provisions.
The act specifies the authorized purposes for which foreign
contributions can be utilized, including social, cultural,
educational, religious, and economic objectives. By delineating the
permissible areas of utilization, FCRA aims to prevent the misuse
or diversion of foreign contributions for activities that are not
in line with the authorized objectives.
The administration of FCRA by the MHA ensures oversight and
monitoring of the utilization of foreign contributions and
hospitality, safeguarding the integrity of transactions, and
ensuring that the contributions serve their intended purposes.
II. Statutory provisions
To maintain transparency and prevent misuse of foreign
contributions, FCRA prohibits activities such as using foreign
contributions for political purposes, speculative purposes, or
activities against national interest. An analysis of the relevant
statutory provisions reveals important aspects of the FCRA and its
interaction with FEMA.
Section 3 of FCRA prohibits the utilization of foreign
contributions for political or speculative purposes and activities
against national interest. This provision ensures that foreign
contributions are utilized in a manner that aligns with the
authorized objectives and promotes societal welfare.
Section 2(1)(h) of FCRA defines “Foreign
Contribution”, and includes donations, deliveries, transfers
of articles, and gifts received from foreign sources for personal
use. It mandates entities receiving foreign contributions to
maintain proper accounts, submit annual returns, and utilize the
funds for prescribed purposes such as social, cultural,
educational, religious, or economic activities. This ensures
transparency, accountability, and the proper utilization of foreign
contributions.
However, Rule 6A of the Foreign Contribution Regulation Rules,
2011 provides an exception. It states that if an article received
by an individual for personal use exceeds the value of 1 lakh
rupees, it will not be treated as a foreign contribution. This rule
provides clarity and sets a threshold for personal use articles to
determine their treatment under FCRA.
Regarding security received under FCRA, the definition falls
under Section 2(o) of FEMA. “Foreign security” refers to
any security, such as shares, stocks, bonds, debentures, or other
instruments, denominated or expressed in foreign currency including
securities that are expressed in foreign currency but with
redemption or any form of return, such as interest or dividends,
payable in Indian currency. This provision highlights the
regulation of foreign securities under FEMA and their implications
for foreign exchange transactions.
It is relevant to note s. 2(2) of FCRA which provides that words
and expressions used but not defined under the FCRA would have the
same meaning as defined or used in FEMA. This clearly indicates
that for the purposes of inward remittances, FEMA continues to be
the general law, while FCRA carves out certain areas from it and is
the special law for such areas or issues.
Overall, the analysis of these statutory provisions underscores
the importance of maintaining transparency, adhering to prescribed
purposes, and preventing misuse or diversion of foreign
contributions. It also highlights the interplay between FCRA and
FEMA, emphasizing the need for compliance with both legal
frameworks in managing foreign contributions, foreign securities,
and foreign exchange transactions.
III. General interplay Between FEMA & FCRA
The interplay between FEMA and FCRA becomes more apparent when
foreign contributions are involved, as they typically involve
foreign currency transactions. Entities registered under FCRA are
required to comply with FEMA regulations for converting foreign
currency into Indian rupees and managing subsequent foreign
exchange transactions. This includes adhering to FEMA guidelines on
conversion rates, repatriation limits, and reporting requirements
for foreign exchange transactions. FCRA must comply with FEMA
regulations for foreign exchange transactions.
Both FEMA and FCRA impose reporting obligations on entities
involved in foreign contributions and foreign exchange
transactions. FCRA mandates the submission of annual returns and
reporting of foreign contributions exceeding specified thresholds
to the MHA. Similarly, FEMA requires reporting of foreign exchange
transactions, including the receipt and utilization of foreign
currency, through prescribed forms to authorized banks or financial
institutions.
Thus, while FEMA governs the inflow and outflow of funds in
India, FCRA governs the inflow of funds. Needless to say, because
both laws are in force, the transactions must comply with FEMA as
well as FCRA as mandated in the respective laws.
Generally, the interplay between the FEMA and the FCRA is
evident in their reporting requirements and their application in
the case of cross-border transactions. Key points to consider are
as follows:
- Reporting Requirements: Both FEMA and FCRA have reporting
obligations for transactions involving foreign contributions and
foreign exchange. Entities registered under FCRA need to comply
with FEMA regulations when converting foreign currency into Indian
rupees and conducting foreign exchange transactions. This includes
following FEMA guidelines on conversion rates, repatriation limits,
and reporting requirements. FCRA entities must adhere to FEMA
regulations for foreign exchange transactions. - Reporting Obligations: FEMA and FCRA impose reporting
obligations on entities involved in foreign contributions and
foreign exchange transactions. FCRA requires the submission of
annual returns and reporting of foreign contributions exceeding
specific thresholds to the Ministry of Home Affairs (MHA).
Similarly, FEMA mandates reporting of foreign exchange
transactions, including the receipt and utilization of foreign
currency, through prescribed forms to authorized banks or financial
institutions. - Applicability: FEMA applies to all foreign exchange
transactions, including the acquisition, holding, transfer, and
disposal of foreign currency, securities, and immovable property
outside India. FCRA specifically applies to the acceptance and
utilization of foreign contributions and hospitality by
individuals, associations, and non-governmental organizations
(NGOs) in India. FEMA has a broader scope, as FCRA focuses only on
foreign contributions. - Foreign Contributions: FCRA requires organizations receiving
foreign contributions to register under the act and comply with
reporting requirements. Foreign contributions can include funds,
securities, or other articles. In some cases, the receipt and
utilization of foreign contributions may involve foreign exchange
transactions, which would fall under the purview of FEMA as
well. - Cross-border Transactions: Both FEMA and FCRA regulate
cross-border transactions. FEMA oversees various aspects of
cross-border transactions, such as remittances, foreign
investments, and trade-related transactions. FCRA specifically
addresses foreign contributions and hospitality received by
organizations in India. If the receipt or utilization of foreign
contributions involves cross-border transactions, compliance with
both FEMA and FCRA is necessary. - Understanding the interplay between FEMA and FCRA is crucial
for entities engaged in foreign contributions and foreign exchange
transactions in India. Compliance with the regulations and
reporting obligations of both acts is essential to ensure
transparency, accountability, and adherence to the legal framework
governing these transactions.
IV. Interplay arising from the new OI Regulations: Receipt of
gifts
The newly introduced Foreign Exchange Management (Overseas
Investment) Rules, 2022 (‘OI Rules’) have
inter alia superseded the Foreign Exchange Management,
(Transfer or Issue of any Foreign Security) Regulations, 2004
(‘TIFS Regulations’) and consequently,
amendments to the FCRA Rules, 2011 have been made thereby shaping
the legal framework regarding the interrelation of these two acts.
With respect to the receipt of gifts in the form of foreign
securities, there is an express interplay between FEMA and FCRA,
and the following points are noteworthy in this regard:
- According to Rule 4 of the OI Rules, general permissions are
available for the acquisition or transfer of instruments outside
India. While RBI approval is required in some cases, in certain
situations, permission from the MHA is necessary. - The acquisition of foreign securities falls under the purview
of s. 2(o) of FEMA, which has been borrowed into the definition of
‘foreign contribution’ in s. 2(h)(iii) of FCRA. Thus, any
foreign security received by a person would amount to the receipt
of a foreign contribution, thereby mandating compliance with the
FCRA. - Previously, Regulation 22 of the TIFS Regulations inter alia
allowed for the acquisition of foreign securities through a gift
from a person residing outside India. Notably, Regulation 22 did
not contain any compliance requirement with FCRA. - Now, with the implementation of Rule 13 of the OI Rules, 2022,
the manner of making overseas investments by a resident individual
is outlined under Schedule III 2(3) of the rules. It specifies that
a resident individual may acquire foreign securities by way of a
gift from a person residing outside India in accordance with the
provisions of the FCRA and its rules and regulations. - According to Rule 6 of the Foreign Contribution (Regulation)
Rule, 2011 states that a person receiving a foreign contribution
equivalent to 10 lakh rupees or more from any relatives must inform
the central government, MHA regarding the details of the foreign
contribution received by him in an electronic form i.e., Form FC- 1
within three months from the date of receipt of such
contribution. - A table under Form FC- 1, Part B, (added through the Foreign
Contribution (Regulation) Amendment Rules, 2022) includes a table
where the applicant must submit the details of security to RBI.
There is a column titled ‘Reserve Bank of India permission
details,’ implying that this Form which is required to be
filled in compliance with FCRA also requires the reporting of
permission that would have been sought under FEMA from RBI. Apart
from this Form, the FCRA does not concern itself with RBI, which is
the regulator for FEMA.
Thus, the implementation of OI Rules, 2022, which replaced the
earlier TIFS Regulations has evolved the legal framework with
respect to interrelations between FEMA and FCRA. It emphasized the
need for compliance and the regulatory requirements in managing
overseas investments and foreign contributions in India. One
significant aspect with respect to gifts received in the form of
foreign securities as ‘foreign contributions’, highlighting
a clear connection and interplay between FEMA and FCRA going
forward.
V. Conclusion
It is concluded that FEMA and FCRA are both indispensable laws
in India that govern foreign exchange transactions and foreign
contributions, respectively. While they serve distinct purposes,
their interplay becomes significant when managing foreign
contributions and adhering to foreign exchange regulations.
Entities registered under FCRA must comply with FEMA provisions
pertaining to the conversion and utilization of foreign currency
received as foreign contributions, as well as fulfil reporting
obligations under both acts. It is imperative for entities engaged
in foreign contributions within India to possess a comprehensive
understanding of the regulatory framework of FEMA and FCRA. This
understanding ensures adherence to legal requirements, fosters
transparency, and facilitates responsible utilization of funds.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
