Introduction
In the realm of financial regulations, the Foreign Exchange Management Act (FEMA) plays a pivotal role, particularly for residents outside India holding a Permanent Resident status. This blog aims to shed light on Schedule I and Schedule II of FEMA, focusing on capital account transactions of individuals falling under the purview of Persons Resident Outside India (PRO).
Schedule I Transactions
- Investment in Foreign Securities
- PRIIs can engage in investments in foreign securities, expanding their financial portfolio beyond domestic boundaries.
- Foreign Currency Loans
- PRIIs have the flexibility to raise foreign currency loans both within India and abroad, providing avenues for diverse financial strategies.
- Transfer of Immovable Property Outside India
- Guidelines are provided for PRIIs involved in transactions related to the transfer of immovable property situated outside India.
- Guarantees Issued to Persons Outside India
- PRIIs are permitted to issue guarantees in favor of individuals or entities residing outside India, contributing to international business collaborations.
- Export, Import, and Holding of Currency/Notes
- PRIIs have the authorization for engaging in transactions related to the export, import, and holding of currency and currency notes.
- Loans and Overdrafts (Borrowings) from PROL
- PRIIs can secure loans and overdrafts from Persons Resident Outside India (PROL), fostering financial relationships across borders.
- Maintenance of Foreign Currency Accounts
- PRIIs have the flexibility to maintain foreign currency accounts both within India and outside, facilitating efficient management of international transactions.
- Insurance Policies from Foreign Insurance Companies
- PRIIs can take out insurance policies from insurance companies situated outside India, broadening their options for risk management.
- Loans and Overdrafts to PROI
- PRIIs are allowed to extend loans and overdrafts to Persons Resident Outside India (PROI), supporting cross-border financial activities.
- Remittance of Capital Assets Outside India
- PRIIs have the authority to remit capital assets outside India, aligning with international investment strategies.
- Sale and Purchase of Derivatives
- PRIIs can participate in the sale and purchase of foreign exchange derivatives within India and abroad, as well as commodity derivatives abroad, diversifying their investment portfolio.
Schedule II – Capital Account Transactions
Schedule II of FEMA delineates specific classes of capital account transactions applicable to PROs. Notably, these transactions cover a range of activities, including:
- Investment in India by a PROI
- Issuance of securities by an Indian body corporate or entity
- Investment in said securities by a PRO
- Investment by Contribution
- Contributions by a PROI to the capital of a firm, proprietorship concern, or association of persons in India
- Acquisition and Transfer of Immovable Property
- Guidelines for the purchase and sale of immovable property in India by a PROI
- Guarantee by a PROI
- Guarantees in favor of or on behalf of residents in India
- Import and Export of Currency
- Restrictions and guidelines on importing and exporting currency/currency notes by a PROI
- Deposits
- Stipulations regarding deposits between a PRII and a PROI
Overview of FEMA Chapter 1
Chapters in FEMA, such as Chapter 1, provide a comprehensive understanding of the regulations. This includes specifics on the acquisition and transfer of immovable property in India, guarantees issued by PROIs, and the import/export of currency.
Prohibited Transactions
It is essential to note that only transactions specified in Schedules I and II are permissible as capital account transactions. Any transaction outside this scope cannot be undertaken by residents or non-residents. Various notifications under FEMA provide detailed conditions and procedures for the listed permissible transactions.
Investment Limitations
The regulations also highlight restrictions on investment in certain sectors, such as businesses involved in chit funds, Nidhi companies, agricultural or plantation activities, real estate, construction of farmhouses, and trading in Transferable Development Rights (TDRs).
Real Estate Business Clarification
The term “real estate business” is clearly defined within the regulations, encompassing activities like township development, construction of residential/commercial premises, and infrastructure projects such as roads or bridges.
Conclusion
Understanding FEMA regulations, particularly Schedule I and Schedule II, are crucial for individuals residents in India or holding Permanent Resident status outside India. This blog provides a concise overview of the specified capital account transactions, investment limitations, and the importance of adhering to the outlined guidelines. For detailed information, it is advisable to refer to the official notifications and updates under FEMA.
