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.
Authored by Purvi Garg, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.