Section 6 FEMA 1999: Capital Account Transactions
Section 6 of the Foreign Exchange Management Act, 1999 regulates capital account transactions and divides rule-making responsibility between the Reserve Bank of India for debt instruments and the Central Government for non-debt instruments.
What is a capital account transaction?
Section 2(e) of FEMA defines a capital account transaction as a transaction which alters the assets or liabilities, including contingent liabilities, outside India of a person resident in India, or the assets or liabilities in India of a person resident outside India. In practical terms, capital account transactions commonly include foreign investment, overseas investment, borrowing and lending, guarantees, deposits and specified dealings in immovable property, subject to the applicable FEMA framework.
Current structure of Section 6
Section 6(1): Subject to Section 6(2), a person may sell or draw foreign exchange to or from an authorised person for a capital account transaction.
Section 6(2): Debt instruments. The Reserve Bank of India, in consultation with the Central Government, may specify permissible classes of capital account transactions involving debt instruments, the admissible foreign exchange limits and conditions applicable to those transactions.
Section 6(2A): Non-debt instruments. The Central Government, in consultation with the Reserve Bank, may prescribe permissible classes of capital account transactions not involving debt instruments, the admissible limits and applicable conditions.
Section 6(3): Omitted with effect from 15 October 2019.
Sections 6(4) and 6(5): Preserve specified rights to hold, own, transfer or invest in certain foreign or Indian currency, securities and immovable property where the asset was acquired while the person had the corresponding residential status, or was inherited from a person with that status.
Section 6(6): Enables the Reserve Bank, by regulation, to prohibit, restrict or regulate establishment in India of a branch, office or other place of business by a person resident outside India for carrying on the related activity.
Section 6(7): Provides that "debt instruments" means instruments determined by the Central Government in consultation with the Reserve Bank.
Debt instruments and non-debt instruments
| Category | Primary authority under Section 6 | Practical framework |
|---|---|---|
| Capital account transactions involving debt instruments | Reserve Bank of India, in consultation with the Central Government | Relevant FEMA regulations and RBI directions, including frameworks for borrowing, lending, deposits and debt investment as applicable. |
| Capital account transactions not involving debt instruments | Central Government, in consultation with the Reserve Bank | Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and related RBI payment/reporting regulations and directions. |
| Overseas investment by persons resident in India | Central Government rules and RBI regulations/directions under the current overseas investment framework | Foreign Exchange Management (Overseas Investment) Rules, 2022, Overseas Investment Regulations, 2022 and RBI Master Direction on Overseas Investment. |
Section 6(2): RBI power over debt instruments
For capital account transactions involving debt instruments, Section 6(2) authorises the RBI, after consultation with the Central Government, to identify permissible classes of transactions, prescribe the amount of foreign exchange admissible and impose conditions. The applicable permission, route, limit and reporting requirement depend on the specific transaction and the regulations or directions governing it.
The proviso to Section 6(2) protects drawal of foreign exchange for payments due on account of amortisation of loans or depreciation of direct investments in the ordinary course of business from restrictions by the RBI or Central Government under this provision.
Section 6(2A): Central Government power over non-debt instruments
Section 6(2A) gives the Central Government, in consultation with the RBI, authority over capital account transactions not involving debt instruments. The principal framework for foreign investment in India is the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, as amended from time to time.
The NDI Rules cover important areas such as investment in equity instruments by persons resident outside India, sectoral conditions and entry routes, investment by NRIs and OCIs, foreign portfolio investment, investment vehicles and specified immovable-property transactions. RBI regulations and directions separately address the mode of payment, reporting and operational requirements.
Overseas investment under FEMA
Investment outside India by persons resident in India must be read with the current overseas investment regime. The Foreign Exchange Management (Overseas Investment) Rules, 2022 and Foreign Exchange Management (Overseas Investment) Regulations, 2022 came into operation on 22 August 2022, supported by RBI directions. The framework distinguishes, among other concepts, Overseas Direct Investment (ODI), Overseas Portfolio Investment (OPI) and financial commitment.
A proposed overseas investment should be tested against the eligibility of the investor, nature of the foreign entity or investment, financial commitment limits, prohibited or restricted activities, pricing or valuation requirements where applicable, routing through the designated authorised dealer bank and prescribed reporting.
Sections 6(4) and 6(5): assets retained after change of residential status
Person resident in 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 where it was acquired, held or owned when that person was resident outside India, or was inherited from a person who was resident outside India.
Person resident outside India
Section 6(5) similarly permits a person resident outside India to hold, own, transfer or invest in Indian currency, security or immovable property situated in India where it was acquired, held or owned when that person was resident in India, or was inherited from a person who was resident in India. The manner of dealing with a particular asset may still be subject to the applicable rules, regulations and directions.
Section 6(6): branch, office or other place of business in India
Section 6(6) empowers the RBI, by regulation, to prohibit, restrict or regulate establishment in India of a branch, office or other place of business by a person resident outside India. Persons proposing to establish or operate such presence in India should check the applicable RBI framework and any sector-specific approval requirements.
Why the 2019 amendment matters
The Finance Act, 2015 amended Section 6, but the relevant changes were brought into force from 15 October 2019. The amendment created the present debt versus non-debt regulatory division. It also omitted the former Section 6(3), which had contained a detailed list of transactions that RBI could prohibit, restrict or regulate, and inserted Section 6(7) concerning the meaning of debt instruments.
Accordingly, relying on the former Section 6(3) list as though it remains the operative text can be misleading. Current compliance should instead be checked under the amended Act together with the rules, regulations, notifications and RBI directions now governing the relevant transaction.
Official legal resources
Official notifications and directions may be amended. For a transaction, verify the latest applicable notification, rule, regulation, master direction and authorised dealer requirements before acting.