Foreign Exchange Management Act (FEMA) is a body that strengthens and amends laws regarding foreign exchange in India. The main motive of FEMA was to enable external trade and payments and improving the timely improvement and upkeep of foreign exchange market in India. FEMA was approved by the Parliament of India in 1999 in the place of the Foreign Exchange Regulation Act (FERA) of 1973.
The Reserve Bank of India proposed FEMA to regulate foreign trade and exchange activities. According to the official order, FEMA would therefore substantially strengthen and change the regulations for the foreign exchange. The FEMA officially came into action from June 2000. Therefore, the foreign exchange market in India is managed by RBI and its inception made the way for the Prevention of Money Laundering Act (PMLA) of 2002. FEMA was initiated with prime objectives to enable external trade and payments along with promotion and timely development and regulation of foreign exchange market in India. FEMA also defined all the necessary formalities with the procedures for foreign exchange transaction in India.
FEMA regarded offences pertaining all foreign exchange as civil offences, instead of FERA which constituted them as criminal offences. FERA did not apply to Non-Residential Indians. The eligibility was enabled by checking the number of days a person stayed in India during the last financial year (182 days or more to be a resident). Also, to be noted was that even an office, a branch, or an agency could be a ‘person’ for the purpose of verifying residency.
Credit which can be extended for imports straight from the foreign supplier, bank and financial organization for maturity of less than 3 years from the shipment date is known as trade credit for imports.
Based on the origin, trade credit will constitute supplier's or buyers credit. Buyer's credit are loans for payment of imports organised by the importer from a bank or financial institution outside India for maturity term of less than 3 years while supplier 's credit is the credit for imports into India extended by the foreign supplier. The buyers and suppliers credit for term of 3 years and above fall under the group of External Commercial Borrowing, which are governed by ECB guidelines. Trade credit can be benefitted for import of goods only hence incurred interest and other charges won’t be constituted in trade credit at any point of time.
Authorized Dealers (ADs) have been allowed to grant trade credits up to USD 20 mn per import transaction with a maturity period (since the date of shipment) up to 1 year for import of all items allowed under the Foreign Trade Policy (excluding gold)
ADs have been allowed to grant trade credits up to USD 20 mn transactions with a maturity period of more than 1 year and less than 3 years for import of capital goods. ADs will not permit roll over or extension beyond the permissible period.
RBI has granted permission to ADs for issuing of guarantee or Letter of Undertaking or Comfort of a foreign supplier, bank and financial institution, up to USD 20 mn per transaction for a period up to 1 year for import of all non-capital goods allowed under Foreign Trade Policy (with exception of gold) and up to 3 years for import of capital goods. If the request for trade credit does not obey with any of the RBI conditions, the importer needs to get approval from the RBI.
FEMA rules and regulations have a great effect in international trade related transactions and various modes of payments. Reserve Bank of India releases timely notifications and circulars, regarding its clarifications and improvements in various sections of FEMA.
