Capital account transaction is defined as a transaction which:-

• Alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India. In other words, it includes those transactions which are undertaken by a resident of India such that his/her assets or liabilities outside India are altered ( either increased or decreased). For example:- (i) a resident of India acquires an immovable property outside India or acquires shares of a foreign company. This way his/her overseas assets are increased; or (ii) a resident of India borrows from a non-resident through External commercial Borrowings (ECBs). This way he/she has created a liability outside India.



• Alters the assets or liabilities in India of persons resident outside the India. In other words, it includes those transactions which are undertaken by a non-resident such that his/her assets or liabilities in India are altered (either increased or decreased). For example, (i) a non-resident acquires immovable property in India or acquires shares of an Indian company or invest in a Wholly Owned Subsidiary or a Joint Venture with a resident of India. This way his/her assets in India are increased; or (ii) a non-resident borrows from Indian housing finance institute for acquiring a house in India. This way he/she has created a liability in India.



• The Act also contains a list of some of the most common capital account transactions:-
  
  
  • Transfer or issue of any foreign security by a person resident in India;
  
  
  
  • Ttransfer or issue of any security by a person resident outside India;
  
  
  
  • Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
  
  
  
  • Any borrowing or lending in rupees in whatever form or by whatever name called;
  
  
  
  • Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;
  
  
  
  • Deposits between persons resident in India and persons resident outside India;
  
  
  
  • Export, import or holding of currency or currency notes;
  
  
  
  • Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;
  
  
  
  • Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
  
  
  
  • Giving of a guarantee or surety in respect of any debt,obligation or other liability incurred-
    
    (i) By a person resident in India and owed to a person resident outside India; or
    (ii) By a person resident outside India.

The Act has empowered the Reserve Bank of India (RBI) to specify, in consultation with the Central Government, the permissible capital account transactions and the limits upto which foreign exchange may be drawn for these such transactions. But it shall not impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.

Accordingly, the RBI has issued notifications governing capital account transaction. The FEMA Notification No. 1/2000 dated 3-5-2000 contains the list of permissible capital account transactions as well as list of prohibited capital account transactions.

The permitted capital account transactions have been classified into two categories:-

• Capital account transactions by persons resident in India includes,
  
  
  • Investment in foreign securities;
  
  
  
  • Foreign currency loans raised in India and abroad;
  
  
  
  • Acquisition and transfer of immovable property outside India;
  
  
  
  • Guarantees issued in favour of a person resident outside India;
  
  
  
  • Export, import and holding of currency or currency notes;
  
  
  
  • Loans and overdrafts (borrowings) from a person resident outside India;
  
  
  
  • Maintenance of foreign currency accounts in India and outside India;
  
  
  
  • Taking out the insurance policy from an insurance company outside India;
  
  
  
  • Remittance outside India of capital assets of a person resident in India;
  
  
  
  • Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad.
  
  



• Capital account transactions by non- residents includes,
  
  
  • Investment in India such as (i) issue of security by a body corporate or an entity in India and investment therein by a non-resident and (ii) investment by way of contribution to the capital of a firm or a proprietary concern or an association of persons in India;
  
  
  
  • Acquisition and transfer of immovable property in India;
  
  
  
  • Guarantee in favour of, or on behalf of, a person resident in India;
  
  
  
  • Import and export of currency/currency notes into/from India;
  
  
  
  • Deposits between a person resident in India and a person resident outside India;
  
  
  
  • Foreign currency accounts in India of a non-resident;
  
  
  
  • Remittance of the assets in India held by a non-resident.

There are generally two types of prohibitions on capital account transactions :-

• General Prohibition:- A person shall not undertake or sell or draw foreign exchange to or from an authorized person for any capital account transaction. This prohibition is subjected to the conditions specified by Reserve Bank in its circulars and notifications. For example, Reserve Bank of India has issued an AP (DIR) Circular, wherein a resident individual can draw from an authorized person foreign exchange up to US$ 25,000 per calendar year for a capital account transaction specified in Schedule I to the Notification.



• Special Prohibition:- A non resident person shall not make investment in India in any form, in any company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage:- (i) in the business of chit fund, or (ii) as Nidhi Company, or (iii) in agricultural or plantation activities or (iv) in real estate business, or construction of farm houses or (v) in trading in Transferable Development Rights (TDRs).