What is FERA?
The Foreign Exchange Management
Act, 1999, (FEMA) is an Act to consolidate and amend the law relating to
Foreign Exchange, with the objective of facilitating external trade and,
payments and for promoting the orderly development and maintenance of the foreign
exchange market in India.
(1)
This
Act may be called the Foreign Exchange Regulation Act, 1973.
(2) It extends to the whole of India.
(3) It applies also to all citizens of India
outside India and to branches and agencies outside India of companies or bodies corporate, registered
or incorporated in India.
(4) It shall came into force on such date as the
Central Government may, by notification in the Official Gazette, appoint in this behalf:
Provided
that different dates may be appointed for different provisions of this Act
and any reference in any such provision to the commencement of this Act shall
be construed as a reference to the coming into force of that provision.
Why
FERA?
a) FERA was introduced at a time when foreign
exchange (Forex) reserves of the country were low, Forex being a scarce
commodity.
b)
FERA therefore proceeded on the presumption that all foreign exchange earned by
Indian residents rightfully belonged to
the Government of India and had to be collected and surrendered to the Reserve
bank of India (RBI).
c) It regulated not only transactions in Forex,
but also all financial transactions with non-residents. FERA primarily
prohibited all transactions, except to the extent permitted by general or
specific permission by RBI.
Objective
of FERA
The main objective of the FERA 1973 was to
consolidate and amend the law regulating:
Ø certain
payments;
Ø dealings
in foreign exchange and securities;
Ø transactions,
indirectly affecting foreign exchange;
Ø the import and export of currency, for the
conservation of the foreign exchange resources of the country;
Ø the
proper utilization of this foreign exchange so as to promote the economic
development of the country
The basic purpose of FERA was:
a) To help RBI in maintaining exchange
rate stability.
b) To conserve precious foreign exchange.
c) To prevent/regulate foreign business in
India
Progression/Transfer
of FERA to FEMA
FERA in its existing form became
ineffective, therefore, increasingly incompatible with the change in economic
policy in the early 1990s. While the need for sustained husbandry of foreign
exchange was recognized, there was an outcry for a less aggressive and mellower
enactment, couched in milder language. Thus, the Foreign Exchange Management
Act, 1999 (FEMA) came into being.
The scheme of FERA provided for obtaining Reserve Bank’s
permission either special or general, in respect of most of the regulations
there under. The general permissions have been granted by Reserve bank under
these provisions in respect of various matters by issuing a large number of
notifications from time to time since the Act came into force from 1st
January 1974. Special permissions were granted upon the applicants submitting
prescribed applications for the purpose. Thus, in order to understand the
operative part of the regulations one had to refer to the Exchange Control
Manual as well as the various notifications issued by RBI and the Central
Government.
FEMA has brought about a sea change in this regard and except for
section 3, which relates to dealing in foreign exchange, etc. no other
provisions of FEMA stipulate obtaining RBI permission. It appears that this is
a transition from the era of permissions to regulations. The emphasis of FEMA
is on RBI laying down the regulations rather than granting permissions on case
to case basis. This transition has also taken away the concept of “exchange control”
and brought in the era of “exchange management”. In view of this change, the
title of the legislation has rightly been changed to FEMA.
The preamble to FEMA lays down that the Act is to consolidate and
amend the law relating to foreign exchange with the objective of facilitating
external trade and payments and for promoting the orderly development and
maintenance of foreign exchange market in India. As far as facilitating
external trade is concerned, section 5 of the Act removes restrictions on drawal
of foreign exchange for the purpose of current account transactions. As
external trade i.e. import / export of goods & services involve
transactions on current account, there will be no need for seeking RBI
permissions in connection with remittances involving external trade. The need
to remove restrictions on current account transactions was necessitated as the
country had given notice to the IMF in August, 1994 that it had attained
Article VIII status. This notice meant that no restrictions will be imposed on
remittances of foreign exchange on account of current account transactions.
Need for FEMA
The demand for new legislation was basically on two main counts.
The FERA was introduced in 1974when India’s foreign exchange
reserves position was not satisfactory. It required stringent controls to
conserve foreign exchange and to utilize in the best interest of the country.
Very strict restrictions have outlived their utility in the current changed
scenario. Secondly there was a need to remove the draconian provisions of FERA
and have a forward-looking legislation covering foreign exchange matters.
Repeal of draconian provisions under FERA
The draconian regulations under FERA related to unbridled powers
of Enforcement Directorate. These powers enabled Enforcement Directorate to
arrest any person, search any premises, seize documents and start proceedings
against any person for contravention of FERA or for preparations of
contravention of FERA. The contravention under FERA was treated as criminal
offence and the burden of proof was on the guilty.
Why there was a need to scrap FERA?
a)
The Foreign Exchange Regulation Act was replaced by the Foreign Exchange
Management Act as it was an
impediment in India's to go global.
b) India's foreign exchange transactions were governed under the Foreign Exchange Regulation Act until June 2000. This law had been enacted in 1973 when the Indian economy was facing a crisis and foreign exchange had become a precious commodity. But by the nineties, FERA had outlived its utility and was in fact, an impediment in India's effort to go global and compete with other developing countries.
c) Thus, there was a need to scrap FERA and the Foreign Exchange Management Act, 1999 came into effect on June 1, 2000. However some of the relevant progresses made, from FERA to FEMA, are as follows:
b) India's foreign exchange transactions were governed under the Foreign Exchange Regulation Act until June 2000. This law had been enacted in 1973 when the Indian economy was facing a crisis and foreign exchange had become a precious commodity. But by the nineties, FERA had outlived its utility and was in fact, an impediment in India's effort to go global and compete with other developing countries.
c) Thus, there was a need to scrap FERA and the Foreign Exchange Management Act, 1999 came into effect on June 1, 2000. However some of the relevant progresses made, from FERA to FEMA, are as follows:
Withdrawal
of Foreign Exchange
Now,
the restrictions on withdrawal of Foreign Exchange for the purpose of current
Account Transactions, has been removed. However, the Central Government may, in
public interest in consultation with the Reserve Bank impose such reasonable
restrictions for current account transactions as may be prescribed.
FEMA has also by and large removed the
restrictions on transactions in foreign Exchange on account of trade in goods,
services except for retaining certain enabling provisions for the Central
Government to impose reasonable restriction in public interest.
What is FEMA?
Unlike other laws where everything is
permitted unless specifically prohibited, under FERA nothing was permitted
unless specifically permitted. Hence the tenor and tone of the Act was very
drastic. It provided for imprisonment of even a very minor offence. Under FERA,
a person was presumed guilty unless he proved himself innocent whereas under
other laws, a person is presumed innocent unless he is proven guilty.
a) Objectives
and Extent of FEMA
The objective of the Act is to consolidate and amend
the law relating to foreign exchange with the objective of facilitating
external trade and payments and for promoting the orderly development and
maintenance of foreign exchange market in India. FEMA extends to the whole of
India. It applies to all branches, offices and agencies outside India owned or
controlled by a person who is a resident of India and also to any contravention
there under committed outside India by any person to whom this Act applies.
FERA & FEMA
a) Similarities & Differences
between FERA & FEMA
Similarities:
The similarities between FERA and FEMA are
as follows:
- The Reserve
Bank of India and central government would continue to be the regulatory
bodies.
- The
Directorate of Enforcement continues to be the agency for enforcement of
the provisions of the law such as conducting search and seizure
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Sr. No
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DIFFERENCES
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FERA
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FEMA
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1
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PROVISIONS
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FERA consisted of 81
sections, and was more complex
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FEMA is much simple,
and consist of only 49 sections.
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2
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FEATURES
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Presumption of
negative intention (Mens Rea ) and joining hands in offence (abatement)
existed in FEMA
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These presumptions of
Mens Rea and abatement have been excluded in FEMA
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3
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NEW TERMS IN FEMA
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Terms like Capital
Account Transaction, current Account Transaction, person, service etc. were
not defined in FERA.
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Terms like Capital
Account Transaction, current account Transaction person, service etc., have
been defined in detail in FEMA.
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4
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DEFINITION OF
AUTHORIZED PERSON
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Definition of
"Authorized Person" in FERA was a narrow one ( 2(b)
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The definition of
Authorized person has been widened to include banks, money changes, off shore
banking Units etc. (2 ( c )
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5
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MEANING OF
"RESIDENT" AS COMPARED WITH INCOME TAX ACT.
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There was a big
difference in the definition of "Resident", under FERA, and Income
Tax Act
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The provision of
FEMA, are in consistent with income Tax Act, in respect to the definition of
term " Resident". Now the criteria of "In India for 182
days" to make a person resident has been brought under FEMA. Therefore a
person who qualifies to be a non-resident under the income Tax Act, 1961 will
also be considered a non-resident for the purposes of application of FEMA,
but a person who is considered to be non-resident under FEMA may not
necessarily be a non-resident under the Income Tax Act, for instance a
business man going abroad and staying therefore a period of 182 days or more
in a financial year will become a non-resident under FEMA.
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6
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PUNISHMENT
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Any offence under
FERA, was a criminal offence , punishable with imprisonment as per code of
criminal procedure, 1973
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Here, the offence is
considered to be a civil offence only punishable with some amount of money as
a penalty. Imprisonment is prescribed only when one fails to pay the penalty.
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7
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QUANTUM OF PENALTY.
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The monetary penalty
payable under FERA, was nearly the five times the amount involved.
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Under FEMA the
quantum of penalty has been considerably decreased to three times the amount
involved.
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8
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APPEAL
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An appeal against the
order of "Adjudicating office", before " Foreign Exchange
Regulation Appellate Board went before High Court
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The appellate
authority under FEMA is the special Director ( Appeals) Appeal against the
order of Adjudicating Authorities and special Director (appeals) lies before
"Appellate Tribunal for Foreign Exchange." An appeal from an order
of Appellate Tribunal would lie to the High Court. (sec 17,18,35)
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9
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RIGHT OF ASSISTANCE
DURING LEGAL PROCEEDINGS.
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FERA did not contain
any express provision on the right of on impleaded person to take legal
assistance
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FEMA expressly
recognizes the right of appellant to take assistance of legal practitioner or
chartered accountant (32)
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10
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POWER OF SEARCH AND
SEIZE
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FERA conferred wide
powers on a police officer not below the rank of a Deputy Superintendent of
Police to make a search
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The scope and power
of search and seizure has been curtailed to a great extent
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a) Key
Terms/Glossary with respect to FERA & FEMA
1. Authorised Person - "Authorised person" means an authorised
dealer, moneychanger, offshore banking unit or any other person for the time
being authorised under section 10(1) to deal in foreign exchange securities.
2. Capital
Account Transaction - "Capital account transaction" means a
transaction which alters the assets or liabilities, including contingent
liabilities, outside India of persons resident in India or assets or
liabilities in India of person resident outside India, and includes transactions
referred to in sub-section (3) of section 6
3.
Current Account Transaction - "Current account transaction"
means a transaction other than a capital account transaction and without
prejudice to the generality of the foregoing such transaction includes,-
Ø Payments due in connection with foreign trade, other
current business, services, and short-term banking and credit facilities in the
ordinary course of business.
Ø Payments due as interest on loans and as net income
from investments.
Ø Remittances for living expenses of parents, spouse and
children residing abroad, and
Ø Expenses in connection with foreign travel, education
and medical care of parents, spouse and children;
1.
Foreign exchange reserves
- A country's reserves of foreign currencies. Commonly known as
"quick
cash", they can be used immediately to finance imports and other
foreign payables.
2.
Foreign portfolio investment - Investment into financial instruments such
as stocks and bonds
in which the objective is not to engage in business
but to merely generate dividend income and
capital gains. The larger portion of international investment flows in
the world today is FPIs.
3.
Forward contract
- An arrangement between two parties to trade specified amounts of two
Currencies
at some designated future due date at an agreed price. More than a formal hedge
against
unforeseen changes in currency prices, it guarantees certainty in the foreign
exchange
rate at the
contract's delivery date.
4.
Authorised dealer - "authorised dealer" means a
person for the time being authorised under
section 6 to deal in foreign exchange;
5. Drawal
- "Drawal' means drawal of foreign exchange from an authorized person and
includes
opening of
Letter of Credit or use of International Debit Card or A TM card or any other
thing by
whatever name called which has the effect of creating foreign exchange
liability.
6.
Currency
[including relevant notification]
"Currency" includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank;
"Currency" includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank;
FEMA Rules & Policies
The Foreign
Exchange Management Act, 1999 (FEMA) came into force with effect from June 1,
2000. With the introduction of the new Act in place of FERA, certain structural
changes were brought in. The Act consolidates and amends the law relating to
foreign exchange to facilitate external trade and payments, and to promote the
orderly development and maintenance of foreign exchange in India.
From the NRI
perspective, FEMA broadly covers all matters related to foreign exchange,
investment avenues for NRIs such as immovable property, bank deposits,
government bonds, investment in shares, units and other securities, and foreign
direct investment in India.
FEMA vests with
the Reserve Bank of India, the sole authority to grant general or special
permission for all foreign exchange related activities mentioned above.
Section 2 -
The Act here provides clarity on several definitions and terms used in the
context of foreign exchange. Starting with the identification of the
Non-resident Indian and Persons of Indian origin, it defines "foreign
exchange" and "foreign security" in sections 2(n) and 2(o)
respectively of the Act. It describes at length the foreign exchange facilities
and where one can buy foreign exchange in India. FEMA defines an authorised
dealer, and addresses the permissible exchange allowed for a business trip, for
studies and medical treatment abroad, forex for foreign travel, the use of an
international credit card, and remittance facility
Section 3
prohibits dealings in foreign exchange except through an authorised person.
Similarly, without the prior approval of the RBI, no person can make any
payment to any person resident outside India in any manner other than that
prescribed by it. The Act restricts non-authorised persons from entering into
any financial transaction in India as consideration for or in association with
acquisition or creation or transfer of a right to acquire any asset outside
India.
Section 4
restrains any person resident in India from acquiring, holding, owning,
possessing or transferring any foreign exchange, foreign security or any
immovable property situated outside India except as specifically provided in
the Act.
Section 6
deals with capital account transactions. This section allows a person to draw
or sell foreign exchange from or to an authorised person for a capital account
transaction. RBI in consultation with the Central Government has issued various
regulations on capital account transactions in terms of sub-sect ion (2) and (3)
of section 6.
Section 7
covers the export of goods and services. All exporters are required to furnish
to the RBI or any other authority, a declaration regarding full export value.
Section 8
puts the responsibility of repatriation on the persons resident in India who
have any amount of foreign exchange due or accrued in their favour to get the
same realised and repatriated to India within the specific period and in the
manner specified by the RBI.
The duties and
liabilities of the Authorised Dealers have been dealt with in Sections 10,
11 and 12, while Sections 13 to 15 cover penalties and enforcement
of the orders of the Adjudicating Authority as well as the power to compound
contraventions under the Act.
Case
Study on FEMA
RBI slapped Rs.125 crore on Reliance
Infrastructure:
The
Reserve Bank of India (RBI) has asked the Anil Dhirubhai Ambani Group firm,
Reliance Infrastructure (earlier, Reliance Energy), to pay just under Rs 125
crore as compounding fees for parking its foreign loan proceeds worth $300
million with its mutual fund in India for 315 days, and then repatriating the
money abroad to a joint venture company. These actions, according to an RBI
order, violated various provisions of the Foreign Exchange Management Act
(FEMA).
In its order, RBI said Reliance Energy raised a $360-million ECB on July 25, 2006, for investment in infrastructure projects in India. The ECB proceeds were drawn down on November 15, 2006, and temporarily parked overseas in liquid assets. On April 26, 2007, Reliance Energy repatriated the ECB proceeds worth $300 million to India while the balance remained abroad in liquid assets.
It then invested these funds in Reliance Mutual Fund Growth Option and Reliance Floating Rate Fund Growth Option on April 26, 2007. On the following day, i.e., on April 27 2007, the entire money was withdrawn and invested in Reliance Fixed Horizon Fund III Annual Plan series V. On March 5, 2008, Reliance Energy repatriated $500 million (which included the ECB proceeds repatriated on April 26, 2007, and invested in capital market instruments) for investment in capital of an overseas joint venture called Gourock Ventures based in British Virgin Islands.
In its order, RBI said Reliance Energy raised a $360-million ECB on July 25, 2006, for investment in infrastructure projects in India. The ECB proceeds were drawn down on November 15, 2006, and temporarily parked overseas in liquid assets. On April 26, 2007, Reliance Energy repatriated the ECB proceeds worth $300 million to India while the balance remained abroad in liquid assets.
It then invested these funds in Reliance Mutual Fund Growth Option and Reliance Floating Rate Fund Growth Option on April 26, 2007. On the following day, i.e., on April 27 2007, the entire money was withdrawn and invested in Reliance Fixed Horizon Fund III Annual Plan series V. On March 5, 2008, Reliance Energy repatriated $500 million (which included the ECB proceeds repatriated on April 26, 2007, and invested in capital market instruments) for investment in capital of an overseas joint venture called Gourock Ventures based in British Virgin Islands.
RBI
said, under FEMA guidelines issued in 2000, a borrower is required to keep ECB
funds parked abroad till the actual requirement in India. Further, the central
bank said a borrower cannot utilise the funds for any other purpose.
“The conduct of the applicant was in contravention of the ECB guidelines and the same are sought to be compounded,” the RBI order signed by its chief general manager Salim Gangadharan said.
During the personal hearing on June 16, 2008, Reliance Energy, represented by group managing director Gautam Doshi and Price waterhouse Coopers executive director Sanjay Kapadia, admitted the contravention and sough compounding. The company said due to unforeseen circumstances, its Dadri power project was delayed. Therefore, the ECB proceeds of $300 million were bought to India and was parked in liquid debt mutual fund schemes, it added.
Rejecting
Reliance Energy’s contention, RBI said it took the company 315 days to realise
that the ECB proceeds are not required for its intended purpose and to
repatriate the same for alternate use of investment in an overseas joint
venture on March 5, 2008.
Reliance also contended that they invested the ECB proceeds in debt mutual fund schemes to ensure immediate availability of funds for utilisation in India.
“I
do not find any merit in this contention also as the applicant has not
approached RBI either for utilising the proceeds not provided for in the ECB
guidelines, or its repatriation abroad for investment in the capital of the
JV,” the RBI official said in the order.
In
its defence, the company said the exchange rate gain on account of remittance
on March 5 2008, would be a notional interim rate gain as such exchange rate
gain is not crystallised.
But
RBI does not think so. “They have also stated that in terms of accounting
standard 11 (AS 11), all foreign exchange loans have to be restated and the
difference between current exchange rate and the rate at which the same were
remitted to India, has to be shown as foreign exchange loss/gain in profit and
loss accounts.
However, in a scenario where the proceeds of the ECB are parked overseas, the exchange rate gains or losses are neutralized as the gains or losses restating of the liability side are offset with corresponding exchange losses or gains in the asset. In this case, the exchange gain had indeed been realised and that too the additional exchange gain had accrued to the company through an unlawful act under FEMA,” the order said.
It said as the company has made additional income of Rs 124 crore, it is liable to pay a fine of Rs 124.68 crore. On August this year, the company submitted another fresh application for compounding and requested for withdrawal of the present application dated April 17, 2008, to include contravention committed in respect of an another transaction of ECB worth $150 million. But RBI said the company will have to make separate application for every transaction and two transactions are different and independent and cannot be clubbed together.
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