CA Inter P2 · Chapter 13
The Foreign Exchange Management Act, 1999 MCQs with Answers
10 multiple-choice questions on The Foreign Exchange Management Act, 1999 for CA Inter P2 Corporate and Other Laws. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
The Foreign Exchange Management Act, 1999 was enacted to consolidate and amend the law relating to foreign exchange with the objective of:
- A) Conserving foreign exchange by prohibiting all foreign exchange transactions
- B) Facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India
- C) Prescribing the procedure for levy of customs duty on imports
- D) Regulating the issue of securities by companies to the public
Show answer & explanation
Answer: B) Facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India
The preamble of FEMA states that it is an Act to consolidate and amend the law relating to foreign exchange, with the objective of facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India. It replaced the more restrictive Foreign Exchange Regulation Act, 1973.
Question 2
Mr. Kunal stayed in India for 250 days during the preceding financial year. In May of the current financial year he left India to take up employment in Dubai. His residential status under section 2(v) of FEMA from the date of his departure is:
- A) Person resident in India for the whole current financial year, since he stayed more than 182 days in the preceding year
- B) Person resident in India, since residential status changes only from the next financial year
- C) Person resident in India until he has stayed abroad for 182 days
- D) Person resident outside India, as a person who goes out of India for taking up employment outside India is excluded
Show answer & explanation
Answer: D) Person resident outside India, as a person who goes out of India for taking up employment outside India is excluded
Under section 2(v)(i), a person residing in India for more than 182 days in the preceding financial year is resident, but this excludes a person who has gone out of India for or on taking up employment outside India. The exclusion applies from the time he leaves. So Mr. Kunal becomes a person resident outside India from his departure, even though he stayed 250 days in the preceding year.
Question 3
Ms. Laura, a foreign national, came to India purely on a long holiday and stayed for 200 days during the preceding financial year. She has no employment or business in India and no intention to stay for an uncertain period. Under section 2(v) of FEMA, she is:
- A) A person resident in India if the Reserve Bank of India so certifies
- B) A person resident in India only for the period of her stay
- C) A person resident in India, because she stayed more than 182 days in the preceding financial year
- D) A person resident outside India, because she came to India for a purpose other than employment, business or vocation, or an intention to stay for an uncertain period
Show answer & explanation
Answer: D) A person resident outside India, because she came to India for a purpose other than employment, business or vocation, or an intention to stay for an uncertain period
Section 2(v)(i)(B) excludes from 'person resident in India' a person who has come to or stays in India otherwise than for employment, for carrying on business or vocation, or for any other purpose indicating an intention to stay for an uncertain period. A stay for a holiday falls within this exclusion. Despite 200 days in the preceding year, she is a person resident outside India.
Question 4
Which of the following is a current account transaction under section 2(j) of FEMA?
- A) Remittance by a resident for the living expenses of his parents residing abroad
- B) Investment by a person resident in India in shares of a foreign company
- C) Purchase of a residential flat in London by a person resident in India
- D) Taking a long-term loan from a bank outside India by an Indian company
Show answer & explanation
Answer: A) Remittance by a resident for the living expenses of his parents residing abroad
Section 2(j) defines a current account transaction as one other than a capital account transaction. It includes payments in connection with foreign trade and services, interest on loans, net income from investments, and remittances for living expenses of parents, spouse and children residing abroad. Acquiring foreign property, foreign shares or long-term foreign borrowing alters assets or liabilities outside India and is a capital account transaction under section 2(e).
Question 5
Under section 2(e) of FEMA, a 'capital account transaction' means a transaction which alters:
- A) Only the foreign currency balances held by authorised dealers
- B) Only the exports and imports of goods and services of India
- C) The assets or liabilities, including contingent liabilities, outside India of persons resident in India, or the assets or liabilities in India of persons resident outside India
- D) Only the current income and expenditure of persons resident in India
Show answer & explanation
Answer: C) The assets or liabilities, including contingent liabilities, outside India of persons resident in India, or the assets or liabilities in India of persons resident outside India
Section 2(e) defines a capital account transaction as one that alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India, or in India of persons resident outside India. It includes the transactions referred to in section 6(3). Payments for trade, services and income are current account transactions.
Question 6
Under section 2(n) of FEMA, 'foreign exchange' includes:
- A) Drafts, travellers' cheques, letters of credit or bills of exchange expressed or drawn in Indian currency but payable in any foreign currency
- B) Indian currency notes held by a person resident outside India
- C) Special bank notes issued under section 28A of the RBI Act, 1934
- D) Gold jewellery held by a person resident in India
Show answer & explanation
Answer: A) Drafts, travellers' cheques, letters of credit or bills of exchange expressed or drawn in Indian currency but payable in any foreign currency
Section 2(n) defines foreign exchange as foreign currency, including deposits, credits and balances payable in foreign currency. It also covers drafts, travellers' cheques, letters of credit or bills of exchange expressed or drawn in Indian currency but payable in foreign currency, and similar instruments drawn by banks outside India payable in Indian currency. Special bank notes are expressly excluded from 'Indian currency' by section 2(q). Gold is not foreign exchange.
Question 7
Under section 2(c) of FEMA, an 'authorised person' means:
- A) Any scheduled commercial bank, whether or not authorised by the RBI
- B) An authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under section 10(1) to deal in foreign exchange or foreign securities
- C) Any person holding a valid passport and visa
- D) Any exporter registered with the Director General of Foreign Trade
Show answer & explanation
Answer: B) An authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under section 10(1) to deal in foreign exchange or foreign securities
Section 2(c) defines an authorised person as an authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under section 10(1) to deal in foreign exchange or foreign securities. Authorisation is given by the Reserve Bank of India on an application under section 10.
Question 8
Mr. Sen, a person resident in India, owns a house in Singapore that he inherited from his uncle, who was a person resident outside India. Under section 6(4) of FEMA, Mr. Sen:
- A) May hold the house but cannot transfer it to anyone
- B) Must sell the house and repatriate the proceeds within 180 days
- C) May hold, own, transfer or invest in the house, since it was inherited from a person resident outside India
- D) May hold the house only with the specific prior approval of the RBI
Show answer & explanation
Answer: C) May hold, own, transfer or invest in the house, since it was inherited from a person resident outside India
Section 6(4) permits a person resident in India to hold, own, transfer or invest in foreign currency, foreign security or immovable property situated outside India if it was acquired, held or owned by him when he was resident outside India, or inherited from a person who was resident outside India. Inherited property therefore needs no further permission.
Question 9
A person contravenes a provision of FEMA, and the sum involved in the contravention is quantifiable at ₹4 lakh. Under section 13(1), the maximum penalty that can be imposed (ignoring any continuing contravention) is:
- A) ₹8 lakh
- B) ₹12 lakh
- C) ₹4 lakh
- D) ₹2 lakh
Show answer & explanation
Answer: B) ₹12 lakh
Section 13(1) provides for a penalty of up to thrice the sum involved where the amount is quantifiable, or up to ₹2 lakh where it is not quantifiable. A continuing contravention attracts a further penalty of up to ₹5,000 per day after the first day. Maximum = 3 x ₹4 lakh = ₹12 lakh.
Question 10
Under section 8 of FEMA, where any amount of foreign exchange is due or has accrued to a person resident in India, that person shall:
- A) Invest it in foreign securities within ninety days
- B) Convert it into gold and bring it into India
- C) Take all reasonable steps to realise and repatriate it to India within the period and manner specified by the RBI
- D) Hold it outside India indefinitely at his option
Show answer & explanation
Answer: C) Take all reasonable steps to realise and repatriate it to India within the period and manner specified by the RBI
Section 8 provides that, save as otherwise provided, a person resident in India to whom any amount of foreign exchange is due or has accrued must take all reasonable steps to realise and repatriate it to India. This must be done within the period and in the manner specified by the Reserve Bank. Section 9 lists exemptions, such as possession of foreign currency or coins within limits specified by the Reserve Bank.