Capital Account Transactions Lecture Notes

Overview

• Capital transactions divided into five categories:
  1. Definition (Section 2E)
  2. Clarifications (Section 6)
  3. Permissible transactions (as per the Foreign Exchange Management Act - 2000)
  4. Transactions with no restrictions
  5. Prohibited transactions

Definitions

• Capital Account Transaction: Alters assets or liabilities (including contingent liabilities) outside India for a Person Resident in India (PRI).
• Key Points in Definition:
  • Assets/liabilities outside India of PRI
  • Assets/liabilities in India of Person of Indian Origin (POI)

Structure of the Act

• Section 6: Focuses on Capital Account Transactions
  • Subsection 1: Any person may draw or sell foreign currency through authorized persons for capital account transactions.
  • Subsection 2: RBI creates rules for capital account transactions involving debt instruments.
    • Specifies:
      • Permissible transactions involving debt instruments.
      • Limits on foreign exchange.
      • Conditions to be imposed on transactions.
  • Subsection 2(a): Central Government specifies permissible transactions not involving debt instruments.
  • Subsection 4: PRs may hold or transfer foreign assets acquired while classified as POI.
  • Subsection 5: POIs may hold or transfer Indian assets if acquired while classified as PRI.
  • Subsection 6: Regulations on establishments owned by foreign entities in India.
  • Subsection 7: Definition of debt instruments as determined by the Central Government.

Key Transactions

• Permissible Transactions under Foreign Exchange Management Capital Account Transaction Rules, 2000:
  • For PRIs (Schedule 1):
    1. Investment in foreign securities.
    2. Derivative contracts.
    3. Transfer of immovable property outside India.
    4. Loans and overdrafts obtained from POIs.
    5. Loans from PRIs to POIs.
    6. Foreign currency loans by PRs.
    7. Guarantees provided by PRs for POIs.
    8. Maintenance of foreign currency accounts.
    9. Export/import of foreign currency.
    10. Insurance policies from foreign companies.
    11. Remittance of capital assets.

Prohibited Transactions

• No person resident in India shall:
  • Draw, sell, or deal in any kind of foreign exchange involving capital account transactions unless classified as a PR.
• Notification by the Financial Action Task Force (FATF) restricts transactions with non-cooperative countries.
  • Example: North Korea is classified as non-cooperative.
  • Investments in North Korea or with residents of North Korea are prohibited.
  • Existing investments must be liquidated within 180 days of notification.

Conclusion

• Importance of understanding definitions, permissible transactions, and prohibited transactions under the Foreign Exchange Management Act to ensure compliance and avoid legal issues.