Dealing in and Holding Foreign Exchange

In one line

Sections 3 and 4 are FEMA's two prohibitions: section 3 forbids dealing outside the authorised channel, and section 4 forbids a resident from holding foreign exchange, foreign security or immovable property abroad, save as the Act provides. Everything else in the Act is permission, restriction or machinery; these two are the prohibitions on which the penalty in section 13 principally operates.

Why a permissive statute still prohibits

Because a management regime needs a channel, and a channel needs a monopoly. If dealings could pass through anybody, the state would have no record of its external position, no means of applying limits, and no point at which restrictions could be enforced. Section 3 does not forbid dealing in foreign exchange; it forbids dealing otherwise than through an authorised person.

And because a channel can be bypassed without any foreign exchange crossing the frontier at all. That is the hawala arrangement, and section 3(d) exists for it.

Section 3: dealing in foreign exchange

Section 3 provides that save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank, no person shall:

(a) deal in or transfer any foreign exchange or foreign security to any person not being an authorised person;

(b) make any payment to or for the credit of any person resident outside India in any manner;

(c) receive otherwise than through an authorised person, any payment by order or on behalf of any person resident outside India in any manner;

(d) enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.

The Explanation to clause (c) provides that where any person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person, including an authorised person, without a corresponding inward remittance from any place outside India, then such person shall be deemed to have received such payment otherwise than through an authorised person.

Each clause should be explained rather than recited, because they are not four ways of saying one thing.

Clause (a) protects the channel. It forbids dealing in or transferring foreign exchange or foreign security to a person who is not an authorised person. A resident may buy dollars, but from an authorised dealer or money changer; a private sale of currency between two people is within the prohibition.

Clause (b) covers outward payments. No payment may be made to or for the credit of a person resident outside India in any manner, save as the Act, rules or regulations provide or the Reserve Bank permits. The words "in any manner" and "for the credit of" are wide, and they catch a payment made to a third party at the direction of a non-resident as much as a direct remittance.