## Capital Account Transactions under FEMA, 1999 — What PROI Can and Cannot Do

Under the Foreign Exchange Management Act, 1999, capital account transactions by a Person Resident Outside India (PROI) are regulated. Some transactions are freely permitted, while others are prohibited under Schedule III of the FEMA (Permissible Capital Account Transactions) Regulations.

### A. Transactions Freely Allowed for PROI

The following transactions do not require special permission and are freely allowed:

1. Amortisation of loan — i.e., repayment of the principal amount of a loan.

2. Depreciation in respect of direct investment abroad — i.e., recording depreciation on assets held as part of overseas direct investment.

> Tip: Both items recognise routine accounting/finance adjustments rather than fresh outflow of foreign exchange, which is why they are unrestricted.

### B. Schedule III — Prohibited Investments for PROI

A PROI is prohibited from investing in any entity engaged in the following businesses:

#	Prohibited Activity
1	Nidhi Company
2	Chit Fund business
3	Agricultural and plantation activities
4	Real estate business
5	Trading in Transferable Development Rights (TDRs)

### C. Carve-out — What "Real Estate Business" does NOT Include

For the purpose of the above prohibition, "real estate business" excludes the following (i.e., a PROI may invest in these):

Development of townships
Construction of residential or commercial premises
Construction of roads and bridges

> Rationale: Genuine real-estate development contributes to infrastructure and is encouraged; mere trading in land/real estate or TDRs (i.e., buying and selling for profit without development) is prohibited to prevent speculative inflows.

### Quick Memory Aid

Allowed (2): Loan repayment (principal) + Depreciation on overseas investment.
Prohibited Sectors (5) — "NCART": Nidhi, Chit Fund, Agriculture/Plantation, Real Estate, TDR trading.
Real estate exceptions (3): Townships, Commercial/Residential premises, Roads & Bridges.

Worked example

### Example 1

Example 1 — Loan Repayment

Q: Mr. X, a PROI, has taken a loan in India and is now repaying the principal amount through normal banking channels. Is this transaction permitted under FEMA?

A: Yes. Amortisation of loan (repayment of principal) is freely allowed under the capital account transaction rules. No special RBI approval is required.

### Example 2

Example 2 — Investment in Chit Fund

Q: ABC Ltd., a company incorporated outside India (PROI), wishes to invest in an Indian chit fund company. Advise.

A: The investment is prohibited under Schedule III. PROIs cannot invest in entities engaged in chit fund business. The proposal must be declined.

### Example 3

Example 3 — Township Development

Q: A PROI wishes to invest in an Indian company that develops integrated townships. Is this allowed?

A: Yes. Although investment in real estate business is prohibited, the definition of real estate business excludes development of townships. Therefore, such investment is permitted.

### Example 4

Example 4 — Trading in TDR

Q: A foreign investor seeks to buy and sell Transferable Development Rights (TDRs) issued by Indian municipal authorities. Is this allowed under FEMA?

A: No. Trading in TDRs is expressly prohibited under Schedule III for a PROI.

⚠️ Common exam mistakes

Confusing 'amortisation of loan' (repayment of principal — freely allowed) with payment of interest on loan, which is a current account transaction and follows separate rules.
Assuming that ALL real estate-related activity is prohibited for PROI. Development of townships, residential/commercial premises, and roads & bridges are specifically EXCLUDED from the prohibition.
Mixing up Schedule I, II and III of the FEMA capital account regulations. Schedule III specifically lists prohibited investments for a Person Resident Outside India.
Forgetting that 'Trading in TDR' is prohibited even though normal construction/development is allowed — the distinction is between speculation and real development.
Treating Nidhi companies and Chit funds as ordinary NBFCs. They have separate, stricter treatment — PROIs are entirely barred from investing in them.

Bare-Act text Schedule III, FEM (Permissible Capital Account Transactions) Regulations, 2000 · Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 — Schedule III, read with FEMA, 1999 · click to expand

Schedule III of the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations prohibits a Person Resident Outside India from making investment in India in any entity engaged in the following: (i) Business of chit fund; (ii) Nidhi Company; (iii) Agricultural or plantation activities; (iv) Real estate business or construction of farm houses; (v) Trading in Transferable Development Rights (TDRs). Explanation: 'Real estate business' shall not include development of townships, construction of residential/commercial premises, roads or bridges.

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Permitted vs Prohibited Capital Account Transactions for Persons Resident Outside India (PROI)

Worked example

⚠️ Common exam mistakes