Foreign Exchange Regulation Act, 1973 (FERA) & Foreign Exchange
Management Act, 1999 (FEMA)

Foreign Exchange Regulation Act,(FERA)

The Foreign Exchange Regulation Act, 1947, was enacted as a temporary measure and later placed permanently in the year 1957. At that time the limited objective of the Act was to regulate the inflow of foreign capital in the form of branches and concerns with the substantial non-resident interest, and the the employment of foreigners. The country attained freedom in 1947, after two centuries of foreign rule and protracted freedom struggle stretched over decades. The prevailing mood then was one of preserving and consolidating the freedom and not to permit once again any type of foreign domination, political or economic. Initial approach on foreign capital was negative to a not-interested attitude. Prime Minister explained that "the stress on the need to regulate, in the national interest, the scope and manner of foreign capital and control (as per the Industrial Policy Statement 48) arose from the past association of foreign capital and control with foreign domination of the economy of the country."

However after initiation of a process of rapid industrialisation of the country, the need to conserve foreign exchange was keenly felt. Exports were not picking up and imports were surging, putting the country to severe balance of trade and balance of payment crisis. This in trn led to the need to tap the donors or Foreign Aid Givers.

In this background the recommendation of the Public Accounts Committee ( 56th Report of 1968 to study the question of "leakage of foreign exchange through invoice manipulation received in June 1971) and the Report of the Law Commission (on "Trial and Punishment of Social and Economic Offences" received in April 1972) induced the Government of India to re-focus the FERA act with the main aim of conservation of foreign exchange rather than regulation of entry of foreign capital. The Foreign Exchange Regulation Act, 1973, (hereinafter referred to as FERA) was drafted with the object of introducing the changes felt necessary for the effective implementation of the Government policy and removing the difficulties faced in the working of the previous enactment. FERA is crisis-driven regulation and naturally it contained several draconian provisions. Any offence under FERA was a criminal offence liable for imprisonment.

However in the early Nineties due to the major changes in Indian economy and liberalization of industrial and trade policies, consistent with the fast changing international economic and trade relations the need for a more conducive climate for increased inflow of foreign investment and capital in the country to accelerate industrial growth and promotion of trade (especially exports) was felt. In order to remove the special restrictions in respect of companies registered in India and to simplify the regulations in regard to foreign investment to attract better flow of foreign capital and investment was paramount. The Amending Act 29 of 1993 was enacted in order to remove unnecessary restrictions and simplify procedure. Thereby certain provisions dealing with emergencies of different kinds, which were no longer relevant, were removed for improving the climate for investment in India.

As the crisis of foreign exchange melted once for all and the country came to be endowed with sizeable reserves of foreign exchange, the basic aim of foreign exchange policy shifted from one of control and conservation to that of effective management, to facilitate external trade/payment and promote the orderly development and maintenance of the forex market in India. The Act was thoroughly revised and replaced by the by the Foreign Exchange Management Act, 1999. The latter has dropped many of the stringent provisions of the older Act, in the area of transactions involving foreign exchange. The FEMA 1999 took effect from June 1, 2000.

To investigate due adherence to the provisions of the Act by the market participants, the Central Govt. have established the Directorate of Enforcement with a Director and other officers as officers of the Enforcement. This Act extends to the whole of India and will also apply to all branches, offices and agencies outside India owned or controlled by a person resident in India. It will also be applicable to any contravention committed outside India by any person to whom this Act is applicable.

Section 3 - Prohibits dealings in foreign exchange except through an authorised person. This Section says that no person can, without general or special permission of the RBI-

1. Deal in or transfer any foreign exchange or foreign securities to any person not being an authorised person (corresponding to sections 8 and 19 of FERA).

2. Make any payment to or for the credit of any person resident outside India in any manner (corresponding to section 9(l)(a) of FERA).

3. Receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner (corresponding to section 9(1)(b) of FERA) and

4. Enter 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 by any person (corresponding to sections9(l)(f) & (g) of FERA).

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. The terms "foreign exchange" and "foreign security" are defined in sections 2(n) and 2(o) respectively of the Act. The Central Govt. has made Foreign Exchange Management (Current Account Transactions) Rules, 2000.

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 Central Govt. has issued various regulations on capital account transactions in terms of sub-sect ion (2)and (3 )f section 6.

Section 7 - deals with export of goods and services. Every exporter is required to furnish to the RBI or any other authority, a declaration etc. etc. regarding full export value.

Section 8 - casts the responsibility on the persons resident in India who have any amount of foreign exchange due or accrued in their favour to get same realised and repatriated to India within the specific period and the manner specified by RBI.

Section 10 and 12 - deals with duties and liabilities of the Authorized persons. Authorised person has been defined in Sec.2(c) of the Act which means an authorised dealer, money changer, off shore banking unit or any other person for the time being authorized to deal in foreign exchange or foreign securities.

Section 13 and 15 - of the Act with penalties and enforcement of the orders of Adjudicating Authority as well power to compound contraventions under the Act.

Section 36 to 37 - pertains to the establishment of Directorate of Enforcement and the powers to investigate the violation of any provisions of Act, rule, regulation, notifications, directions or order issued in exercise of the powers under this Act. The Director of Enforcement and other officer of Enforcement not below the rank of Asstt. Director have been empowered to take up investigations. Detailed account of the provisions of the act is given in a subsequent article.

The Directorate of Enforcement is mainly concerned with the enforcement of the provisions of the Foreign Exchange Management Act to prevent leakage of foreign exchange which generally occurs through the following malpractices

1. Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments.

2. Acquisition of foreign currency illegally by person in India.

3. Non-repatriation of the proceeds of the exported goods.

4. Unauthorised maintenance of accounts in foreign countries.

5. Under-invoicing of exports and over-invoicing of imports and any other type of invoice manipulation

6. Siphoning off of foreign exchange against fictitious and bogus imports land by.

7. Illegal acquisition of foreign exchange through Hawala.

8. Secreting of commission abroad.

Directorate has to detect cases of violation and also perform substantial adjudicatory functions to curb such malpractices

The Exchange Control Department of the Reserve Bank administers Foreign Exchange Management Act, 1999, (FEMA) which has replaced the earlier Act , FERA, with effect from June 1, 2000. The new legislation reflects the current economic realities and is far more pragmatic in its approach. The objective of the earlier Act as contained in its preamble was the conservation of foreign exchange and its utilisation for economic development of the country whereas the objective of the new Act is "facilitating external trade" and "promoting the orderly development and maintenance of foreign exchange market in India". The most significant feature of the new Act is that it provides legal basis to the current account convertibility.

For purchase of foreign exchange for most of the current account transaction, with exception of those listed in Schedule III to the Government of India Notification G.S.R. No 381(E) dated May 3, 2000, no permission from the Reserve Bank is required. Extensive powers are available to banks authorised to deal in foreign exchange , known as authorised dealers. As a result, foreign exchange can be purchased for practically all transactions which are of current account nature. Every effort is made by the Department to deal with the applications which are still required to be referred to the Reserve Bank, promptly and expeditiously, with a view to rendering satisfactory customer service.

With a view to facilitating external trade and promoting orderly development of foreign exchange market in India, a new Act called the Foreign Exchange Act, 1999 (FEMA) came into force from June 1, 2000. With FEMA coming into force, the Foreign Exchange Regulation Act, 1973 stands repealed.

Under FEMA, foreign exchange transactions have been divided into two broad categories - current account transactions and capital account transactions. Transactions that alter the domestic assets and liabilities of a person resident in India or a person resident outside India in relation to his country have been classified as capital account transactions. All other transactions would be current account transactions.

Under FEMA only the Government of India in consultation with the Reserve Bank would be empowered to impose reasonable restrictions on current account transactions. Accordingly, Government of India has notified the Rules governing the current account transaction vide its Notification No.G.S.R381(E) dated May 3, 2000 as amended vide S.O. No.301(E) dated March 30, 2001. As per the Government of India Rules, remittances of only eight type of current account transactions are prohibited, eleven types of transactions need Government of India's prior approval whereas seventeen transactions need prior permission from the Reserve Bank in case the amount of remittances exceeds prescribed limit for such remittances.

Reserve Bank of India has notified comprehensive simple and transparent regulations under the FEMA, 1999 governing various capital account transactions. These are dealt with in subsequent articles. The new regulations clearly indicate the types of permissible capital account transactions, leave very few individual transactions to be dealt in by Reserve Bank, simplify procedures, reduce the number of forms to a bare minimum and grant more powers to authorised dealers i.e. banks.

1. Remittances by artists e.g. Wrestler, dancer, entertainer etc. (This is not applicable to artists engaged by tourism related organisations in India like ITDC, State Tourism Departments, Corporations etc., during special festivals or those artists engaged by hotels in five star categories, provided the expenditure is met out of EEFC account.)

2. Release of exchange exceeding US$5,000 or its equivalent in one calendar year, for one or more private visits to any country (except Nepal and Bhutan).

3. Gift remittance exceeding US$5,000 per remitter/donor per annum.

4. Donation exceeding US$5,000 per remitter/donor per annum.

5. Exchange facilities exceeding US$5,000 for persons going abroad for employment.

6. Exchange facilities for emigration exceeding US$5,000 or amount prescribed by country of emigration.

7. Remittance for maintenance of close relatives abroad

   1. exceeding net salary (after deduction of taxes contribution to Provident Fund and other deductions) of a person who is resident but not permanently resident in India and is a citizen of a foreign state other than the Pakistan

   Explanation : 'not permanently resident' means a person resident in India for employment of a specified duration (irrespective of length thereof) or for a specific job or assignment, the duration of which does not exceed three years.

   2. Exceeding US$ 5000 per year, per recipient, in all other cases.

8. Release of foreign exchange, exceeding US$25,000 to a person irrespective of period of stay, for business travel or attending a conference or specialised training or for maintenance expenses of a patient going abroad for medical treatment or check-up abroad or accompanying as attendant to a patient going abroad for medical treatment/check-up.

9. Release of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in India or hospital/doctor abroad

10. Release of exchange for studies abroad exceeding the estimates from the institution abroad or US$30,000 per academic year, whichever is higher.

11. Commission to agents abroad for sale of residential flats/commercial plots in India, exceeding 5% of the inward remittance

12. Short term credit to overseas offices of Indian companies.

13. Remittance for advertisement on foreign television by a person whose export earnings are less than Rs.10 lakhs during each of the preceding two years.

14. Remittances of royalty and payment of lump-sum fee under the technical collaboration agreement which has not been registered with Reserve Bank

15. Remittances exceeding US$100,000 per project, for any consultancy service procured from outside India

16. Remittances for use and/or purchase of trade mark/franchise in India.

17. Remittance exceeding US$ 1,00,000 by an entity in India by way of reimbursement of pre-incorporation expenses.