Foreign Exchange Management Act : Foreign Exchange Management Act UMANG GOEL
BHABHA INSTITUTE OF TECHNOLOGY Historical Background : Historical Background The Foreign Exchange Regulation Act of 1973 (FERA)
Enacted in 1973, in the backdrop of acute shortage of Foreign Exchange in the country, FERA had a controversial 27 year stint during which many bosses of the Indian Corporate world found themselves at the mercy of the Enforcement Directorate (E.D.). FERA : FERA FERA was repealed on 1st June, 2000. It was replaced by the Foreign Exchange Management Act (FEMA), which was passed in the winter session of Parliament in 1999. FEMA : FEMA FERA had become incompatible with the pro-liberalisation policies of the Government of India
FEMA has brought a new management regime of Foreign Exchange consistent with the emerging frame work of the World Trade Organisation (WTO). FEMA : FEMA It is another matter that enactment of FEMA also brought with it Prevention of Money Laundering Act, 2002 which came into effect recently from 1st July, 2005 and the heat of which is yet to be felt as “Enforcement Directorate” would be invesitigating the cases under PMLA too. FERA- The Notorious Act : FERA- The Notorious Act 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. Objectives and Extent of FEMA : Objectives and Extent of FEMA The object 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. RBI Guidelines : RBI Guidelines Except with the general or special permission of the Reserve Bank of India, no person can :-
deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;
make any payment to or for the credit of any person resident outside India in any manner;
receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner;
reasonable restrictions for current account transactions as may be prescribed. The Reserve Bank can, by regulations,regulate…… : The Reserve Bank can, by regulations,regulate…… transfer or issue of any foreign security by a person resident in India;
transfer 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 foreign exchange in whatever form or by whatever name called; Slide 10: any borrowing or tending 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. RBI Guidelines : RBI Guidelines Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. The Reserve Bank may, in consultation with the Central Government, specify :-
any class or classes of capital account transactions which are permissible;
the limit up to which foreign exchange shall be admissible for such transactions Investigation : Investigation The Directorate of Enforcement investigate to prevent leakage of foreign exchange which generally occurs through the following malpractices :
Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments.
Acquisition of foreign currency illegally by person in India.
Non-repatriation of the proceeds of the exported goods. Slide 13: Unauthorised maintenance of accounts in foreign countries.
Under-invoicing of exports and over-invoicing of imports and any other type of invoice manipulation.
Siphoning off of foreign exchange against fictitious and bogus imports.
Illegal acquisition of foreign exchange through Hawala.
Secreting of commission abroad. DIFFERENCE BETWEEN FERA AND FEMA : DIFFERENCE BETWEEN FERA AND FEMA 1-The objective of FERA was to conserve forex and to prevent its misuse. The objective of FEMA is to facilitate external trade and payments and maintenance of forex market in india. Slide 15: 2- Violation of FERA was a criminal offence whereas violation of FEMA is a civil offence.
3- Offences under FERA were not compoundable, while offences under FEMA are compoundable.
4- Citizenship was a criteria to determine the residential status of a person under FERA, while stay of more than 182 days in India is the criteria to decide residential status under FEMA. Slide 16: 5- Almost all current account transactions are free, except a few. Slide 17: Current Account Capital Account Trade Invisibles Exports Imports Tour
Profit/Div/int FDI Portfolio Foreign Indian
Source Source (FII) (GDR/ADR) Loan (Govt/
Pvt(ECB) Fcy A/C
RI & NRI FOREIGN EXCHANGE TRANSACTIONS