Exchange Control Legislation – A Foreigner’s Perspective

Exchange Control Legislation – A Foreigner’s Perspective

Foreigner’s Perspective – Published in Butterworths Journal of International Banking & Financial Law, October 1997

The law has changed substantially since this article, due to the promulgation of Foreign Exchange Management Act

A vast amount of legislation affects foreigners in India – it reaches into the areas of tax, corporate affairs, visa and registration, and exchange control. This briefing aims to cover the more important aspects of the exchange control law in terms of its relevance to foreigners in India (but does not touch on offences or penalties)

India is currently in a period of economic and financial transition in a move towards the liberalisation of its markets, and the Reserve Bank of India (India’s central regulatory bank) is constantly amending, altering and easing the provisions applicable to foreigners. The pace of this change is such that new developments may well occur between the writing of this briefing and its publication. The promulgation of the Foreign Exchange Management Act, to replace the present Foreign Exchange Regulation Act, is also likely in the near future

At the time of writing, the exchange rate was pegged at US$1 to 35 Indian Rupees (the current rate is Rs.48)


The legislation governing exchange control in India is the Foreign Exchange Regulation Act, 1973 (the “FERA”). The FERA is supplemented by the Exchange Control Manual, which contains directives issued by the Reserve Bank of India (“RBI”)

Whilst the term “foreigner” is not positively defined in the FERA, it is defined in section 2(a) of the Foreigners Act, 1946 as meaning a person who is not a citizen of India (ie someone who does not hold an Indian passport)

Foreigners generally become subject to the provisions of the FERA only if they travel to India or reside there. Exceptionally, and for the purpose of extending different degrees of benefits, the FERA outlines several categories of foreign nationals –

Foreign nationals resident in India. This classification includes those who are –

permanently resident in India

resident, but not permanently resident, in India

temporarily resident in India (incoming tourists, for example)

Foreign nationals resident outside India (non-residents)

Foreign nationals as persons of Indian

Other foreign nationals

Section 2(p) of the FERA (insofar as it is relevant here) defines a “person resident in India” as someone without Indian citizenship who has come to, or stays in, India –

to take up employment in India

to carry out business or a vocation in there

to stay with his or Jier spouse, if the spouse is resident in India

for any other purpose, in circumstances that indicate an intention to stay in India for an indefinite period

A foreign national is deemed to be of “Indian origin” if

he has, at any time, held an Indian passport

if he, either of his parents or any of his grandparents was an Indian and was permanently resident in undivided India at any time

FERA’s Main Provisions

Three sections of the FERA are of particular importance.

Acting as an Agent

Section 28 of the FERA provides, inter alia, that a foreign national (whether resident in India or not) shall not, except with the general or special permission of the RBI, act, or accept an appointment to act, as agent in India for any person or company in the course of that company’s trading or commercial transactions. The term “agent” includes any person who buys goods with a view to selling them before any processing thereof. Application for this permission must be made on form FNC I to the Central Office of the RBI (Foreign Investment Division)

Carrying on Business

Section 29(1) of the FERA provides that a foreign national (whether resident in India or not) shall not, except with the general or special permission of the RBI –

carry on in India, or establish in India, a branch, office or other place of business for carrying on any activity of a trading, commercial or industrial nature (save as permitted under section 28)

acquire the whole or any part of any undertaking in India of any person or company carrying on any trade or commercial or industrial activity, or purchase the shares in India of any such company. The association of a foreign national as a partner with an existing partnership firm in India is deemed to be an acquisition of an undertaking in India and, as such, requires approval

Application for permission in the first case must be made on form FNC 3 and, in the second case, on form FNC 6 to the Central Office of the RBI (Foreign Investment Division). Application for approval for the purchase of shares must be made on form FNC 7. A general exemption from the above approval requirements has been given to foreign nationals of Indian origin who are permanently resident in India

Practising a Profession

Section 30 of the FERA provides that no national of a foreign state shall, without first obtaining permission from the RBI, practice any profession or carry on any occupation, trade or business in India in circumstances where that national wishes to purchase any foreign currency (intended to be remitted outside India) with any moneys received by him in India as a result of practising that profession or carrying on that occupation, trade or business. Applications for this purpose must be made on form EFN to the office of the RBI under whose jurisdiction the applicant resides

Other Provisions Transfer of Shares

Section 19(5) of the FERA specifies that (notwithstanding anything contained in any other law) no transfer of any share, bond or debenture of a company registered in India made by a foreign national to another person resident in India shall be valid unless the transfer is confirmed by the RBI on an application made to it by the transferor or the transferee. Applications in this instance must be made by non-resident foreign nationals on form TSI, and by resident foreign nationals on form TS2

Foreign nationals of Indian origin resident outside India have been given general exemption from the above provisions in respect of holdings in companies in India whose shares are quoted on recognised stock exchanges

Immovable Property

Section 31 of the FERA deals with restrictions on the acquisition and holding of immovable property in India. It states that no foreign national shall, except with a general or special RBI permission, acquire, hold or dispose of any immovable property in India by sale, mortgage, lease (of more than five years), gift, settlement or other method. Prior permission is also required for the acquisition or disposal of flats in co-operative housing societies. In the case of partnerships where one or more partners is a foreign citizen, permission is also required

General permission (subject to specific conditions) to acquire, hold or dispose of immovable property in India is given to foreign citizens of Indian origin, including permission to rent out such property

Foreign nationals of non-Indian origin (whether resident in India or not) will be permitted by the RBI, on application (on form IPI 1), to acquire immovable property in India, provided the following conditions are satisfied –

the property to be purchased must be for residential use only

the consideration for the purchase must be met out of convertible foreign currency remitted from abroad through normal banking channels

income accruing by way of rent, or sale proceeds, may not be repatriated outside India

The RBI may refuse permission for remittances outside India for savings, family maintenance and so forth by foreign nationals not permanently resident in India unless the permissions specified in sections 28-31 of the FERA have been obtained

Maintenance of Bank Accounts

Foreign nationals who are resident, but not permanently resident, in India are permitted to open and operate bank accounts in India only with authorised dealers (persons authorised under section 6 of the FERA to deal in foreign exchange – normally banks). An undertaking on form QA 22 must be obtained by the authorised dealers. This form is not necessary for officials in India of foreign embassies, consulates, legations, trade representations or other foreign government establishments or the United Nations Organisation and its subsidiary/affiliate bodies (but is necessary for members of their families). Similarly, the form is not necessary for foreign nationals of non-Indian origin permanently resident in India, foreign nationals of Indian origin (other than those who are residing in India for employment of a specified duration irrespective of the length thereof or for a specific job or assignment, the duration of which does not exceed three years) or for foreignborn wives of Indian nationals/persons of Indian origin resident in India


Approval for loans and advances to foreign nationals not permanently resident in India is not granted if they are required for investment purposes or for dealing in stocks and shares. Personal loans (for the purchase of household articles, for example) may be given up to a maximum of one hundred thousand Rupees. This limit applies to total borrowing from all the banks of the borrower and his dependants. Applications on form LOV2 for loans in excess of this limit will be referred to the RBI for approval


Foreign nationals who have taken up temporary residence in India on account of their employment, profession or other activity with the intention of retiring eventually to their own or any other foreign country, are ordinarily considered, for the purposes of remittances, as “not permanently resident in India”. Foreign nationals permanently resident in India and persons of Indian origin other than those residing in India for employment of a specified duration (irrespective of the length of that duration) or for a specific job or assignment (the duration of which does not exceed three years) are treated on a par with Indian nationals resident in India

Engagement of Foreign Nationals on a Short-term Basis

Indian firms and companies may engage foreign nationals on short-term assignments without prior approval from the RBI. Applications for remittance of remuneration to them should be made by the firm or company in question to the authorised dealers using form A2 together with a statement made on form EFT and a “no-objection certificate” from the income tax authorities indicating the remittance amount. The authorised dealers may allow the remittance on being satisfied that –

prior Ministry of Home Affairs clearance has been obtained if the period of a foreign national’s engagement is to exceed three months at any one time

the total duration of engagement of all foreign nationals by the applicant firm/company does not exceed 12 man-months in any one calendar year

the amount of the remittance is in accordance with the terms of the contract entered into by the applicant firm/company with the foreign national

the services of the foreign national are not covered by any foreign collaboration agreement entered into by the Indian firm or company, or under any warranty/guarantee providing for theservices of foreign nationals without any remuneration or any payment during the warranty/guarantee period.

All payments made in connection with the engagement of foreign personnel, including payments made locally in Rupees towards their passage fare, local living expenses and so forth are liable to a levy of cess under the Research and Development Cess Act, 1986. Authorised dealers should accordingly advise their constituents to deposit the cess amount while allowing the remittance towards fees of foreign personnel

Engagement of Foreign Nationals in Regular Employment

Foreign nationals who are not permanently resident in India but who are in regular employment with Indian firms or companies and receive a monthly salary are permitted to make regular remittances for family maintenance. Authorised dealers may accordingly allow regular remittances of up to 75 per cent of their net salary (ie after deduction of contributions to provident funds, etc and taxes payable) on being satisfied that the foreign national holds a valid employment visa. A declaration on form A2 must be obtained to confirm compliance

It should be noted that foreign nationals employed or engaged in the horseracing trade (jockeys, stewards, book makers, horse trainers, horse breeders) as well as foreign musicians, cabaret artistes, wrestlers and other entertainers who are visiting India for short periods, are not eligible for the remittance allowances described above

Retirement Facilities

Foreign nationals not permanently resident in India are permitted to transfer in full to their own countries, at the time of their retirement from India, current assets (such as savings from salary, dividends, interest, commission, provident fund balances, sale proceeds of personal effects and so forth). In addition, they may also repatriate any assets of a capital nature which they hold in India, such as the sale proceeds of any investments in India, up to a limit of one million Rupee’s at the time of retirement. Any investments in excess of this amount may only be repatriated by way of annual instalments not exceeding half a million Rupees per annum. For this purpose, the entire family of a person will be considered as a single unit. Applications for remittance should be made on form RFN. A sum of US$2,000 (or its equivalent) shall be released by authorised dealers to retiring foreign nationals pending the disposal of their applications for remittance

Foreign-born Widows of Indian Nationals

The RBI permits, on a selective basis, remittance allowances to foreign-born widows of Indian nationals who wish to return to the country of their birth. Applications should be made on form EMG. In approved cases, a facility for the transfer of assets held in India will be allowed, up to a maximum of one million Rupees at the time of leaving India for good and up to half a million Rupees annually thereafter

Repatriation Allowances for Foreign Students and Trainees

Foreign students and trainees may, on completion of their studies/training in India, transfer to their own country the funds in their bank accounts (form QA22 accounts). Remittances are permitted without prior RBI permission provided that the bank balance represents funds derived from Rupee proceeds of remittances in foreign currency received from abroad in an approved manner, or Rupee proceeds of foreign currency brought by them into India and sold lo authorised dealers, or any stipend or scholarship received from the government. Foreign currency of up to US$1,000 is also allowed to meet any travelling expenses incurred while visiting home/neighbouring countries during vacation periods

Fees Payable to Non-resident Directors

Companies in India are permitted (subject to certain company law sanctions) to make payments in Rupees to their nonresident directors (including foreign nationals) who are visiting India on company business (to attend board meetings, for example) towards attendance fees, commission or remuneration by way of monthly, quarterly or annual payments

Applications for the remittance of savings (if any) from attendance fees, commission or remuneration should be made using form A2

Legacies, Bequests and Inheritances

Applications for legacies, bequests and inheritances to foreign nationals who are permanently resident outside India should be submitted to the RBI using form LEG

Winnings front Betting Activities

Foreign nationals may not remit outside India any winnings made in India from state lotteries, horse racing or similar activities