Under the Foreign Exchange Management Act (FEMA), capital account transactions involve changes in the financial assets or liabilities of residents and non-residents, such as investments, borrowing, lending, or transferring assets across borders. Here’s a collection of practical case studies to understand their application and regulatory framework.

Case Study 1: Acquisition of Property Outside India by an Indian Resident

Scenario

Meena, an Indian resident, receives an inheritance of $200,000 from her uncle in the UK. She plans to purchase a residential property in London using this inheritance.

Regulatory Framework

1. Permissibility Under FEMA:
   • Indian residents are allowed to acquire property outside India through:
     • Inheritance from a non-resident.
     • Remittances under the Liberalized Remittance Scheme (LRS) (up to $250,000 per financial year).
2. Meena’s Case:
   • Since the property is being acquired through inheritance, it is a permissible capital account transaction.
   • Meena must ensure that the transaction is reported to the Reserve Bank of India (RBI), if required, under FEMA regulations.

Key Considerations

• Meena must retain documentation of the inheritance (e.g., will, probate documents).
• She should comply with local laws in the UK regarding property acquisition.

Outcome

Meena’s acquisition of property is valid under FEMA as it falls under the permissible category of inheritance-based transactions.

Case Study 2: Investment in Overseas Equity by an Indian Resident Individual

Scenario

Ravi, an Indian resident, wants to invest $100,000 in shares of a listed company in the US under the Liberalized Remittance Scheme (LRS).

Regulatory Framework

1. LRS Guidelines:
   • Indian residents are allowed to invest up to $250,000 per financial year in overseas equity under LRS.
   • Investments in shares of a company are considered capital account transactions.
2. Ravi’s Case:
   • The investment of $100,000 is within the LRS limit.
   • Ravi uses funds from his savings account to make the investment via a bank authorized for LRS remittances.

Key Considerations

• Ravi must report the transaction to the authorized dealer bank.
• He must declare income or gains from the investment in his Income Tax Return (ITR) in India.

Outcome

Ravi’s investment in US equity complies with FEMA and LRS guidelines, provided the transaction is routed through proper channels and disclosed for tax purposes.

Case Study 3: Repatriation of Funds from an Overseas Investment

Scenario

Priya, an Indian resident, invested in a mutual fund in Canada five years ago under LRS. The mutual fund has now matured, and Priya wants to repatriate the proceeds of CAD 50,000 to India.

Regulatory Framework

1. Permissibility Under FEMA:
   • Repatriation of funds from overseas investments made under LRS is allowed.
   • The funds must be repatriated to an Indian bank account and reported to the authorized dealer.
2. Priya’s Case:
   • The amount being repatriated (CAD 50,000) corresponds to the investment made earlier under LRS.
   • Priya provides documentation of the initial investment and the maturity proceeds.

Key Considerations

• Priya must report the repatriation to the authorized dealer and file it in her annual income tax return (ITR).
• Any capital gains on the investment must be taxed as per Indian tax laws.

Outcome

Priya’s repatriation of funds is valid under FEMA, provided she complies with tax and reporting requirements.

Case Study 4: Overseas Direct Investment (ODI) by an Indian Company

Scenario

ABC Pvt. Ltd., an Indian IT company, plans to invest $1 million in a wholly owned subsidiary (WOS) in Singapore for expanding its operations.

Regulatory Framework

1. ODI Guidelines:
   • Indian companies are allowed to make overseas investments under the Automatic Route if:
     • The total financial commitment does not exceed 400% of their net worth as per the latest audited balance sheet.
     • The investment is in a bona fide business activity.
   • The investment must be reported in Form ODI to the RBI through an authorized dealer bank.
2. ABC Pvt. Ltd.’s Case:
   • The proposed investment ($1 million) is within the company’s financial commitment limit.
   • The funds are transferred through banking channels after obtaining necessary approvals.

Key Considerations

• The company must file periodic reports on the financial performance of the WOS.
• Profits earned by the WOS can be repatriated to India, subject to FEMA guidelines.

Outcome

ABC Pvt. Ltd.’s investment is valid under FEMA’s ODI framework, ensuring compliance with all procedural requirements.

Case Study 5: Lending by an NRI to an Indian Resident

Scenario

Arjun, an NRI based in the UAE, lends ₹50 lakhs to his brother Rahul, an Indian resident, for purchasing a commercial property in India.

Regulatory Framework

1. Permissible Lending:
   • NRIs can lend money to Indian residents subject to conditions:
     • The loan must be interest-free.
     • The funds must be routed through the NRI’s NRO account.
     • The loan can only be used for personal purposes or specified business purposes (e.g., property purchase).
2. Arjun’s Case:
   • The loan is routed through his NRO account.
   • Rahul uses the loan to purchase property, which is a permissible use.

Key Considerations

• Rahul must repay the loan in INR to Arjun’s NRO account.
• The loan agreement should be documented and filed, if necessary.

Outcome

Arjun’s lending complies with FEMA, provided the loan terms are adhered to.

Case Study 6: Transfer of Shares in an Indian Company by an NRI to a Resident

Scenario

Neha, an NRI, holds shares in an Indian listed company. She plans to sell her shares, worth ₹10 lakhs, to her cousin Raj, an Indian resident.

Regulatory Framework

1. Permissible Transfer:
   • NRIs can sell shares in Indian companies to residents under FEMA, provided:
     • The shares are held on a repatriation or non-repatriation basis.
     • The transaction price is as per the valuation norms prescribed by RBI/SEBI.
2. Neha’s Case:
   • Neha holds the shares in a repatriable Demat account.
   • The sale price is determined based on prevailing market rates, meeting valuation norms.

Key Considerations

• Neha must route the sale proceeds through her NRO/NRE account.
• Raj must report the purchase in his financial statements, if applicable.

Outcome

The transfer of shares complies with FEMA regulations.

Key Takeaways

Would you like detailed examples or further clarification on any specific case?