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.).


Foreign Exchange Regulation Act
The Foreign Exchange Regulation Act (FERA) was legislation passed by
the Indian Parliament in 1973 by the government of Indira Gandhi
It came into force with effect from January 1, 1974.
FERA imposed stringent regulations on certain kinds of payments.
It deals in foreign exchange and securities and the transactions
which had an indirect impact on the foreign exchange and the import
and export of currency.
The purpose of the act, inter alia, was to "regulate certain payments,
dealings in foreign exchange and securities, transactions indirectly
affecting foreign exchange and the import and export of currency, for
the conservation of foreign exchange resources of the country".
FERA was repealed in 1999 by the government of Atal Bihari
Vajpayee.
It replaced by the Foreign Exchange Management Act,which
liberalised foreign exchange controls and restrictions on foreign
investment.

Foreign Exchange Management Act
The Foreign Exchange Management Act(FEMA) was an act passed
in the winter session of Parliament in 1999 which replaced Foreign
Exchange Regulation Act.
This act seeks to make offenses related to foreign exchange civil
offenses.
It extends to the whole of India.
FEMA, which replaced Foreign Exchange Regulation Act(FERA).
It had become the need of the hour since 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 framework of the World
Trade Organisation(WTO).
It is another matter that the enactment of FEMA also brought with
it the Prevention of Money Laundering Act 2002, which came into
effect from 1 July 2005.

Objective Of F.E.R.A &F.E.MA
1) To help RBI in maintaining exchange rate stability.
2) To conserve precious foreign exchange.
3) To prevent/regulate Foreign business in India.
4) To consolidate and amend the law relating to foreign
exchange with the object to facilitating external trade
and payments and for promoting the foreign exchange
market in India.
5) So the new law is for the management of foreign
exchange instead of regulation of foreign exchange.
6) The draconian provisions were droped out in new
enactment.
7) The size of the bare act got reduced to 49 sections in
place of 81 sections in FERA



Objectives
8) To facilitate external trade and payments
9) To promote the orderly development and
maintenance of foreign exchange market


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.

2-Violation of FERA was a criminal offence
whereas violation of FEMA is a civil offence.

3- Offences under FERA were not compoundable
Offences under FEMA are compoundable.

4- Citizenship was a criteria to determine the
residential status of a person underFERA.
while stay of more than 182 days in India is the
criteria to decide residential status under FEMA.

5- Almost all current account transactions are free,
except a few.

8
FERA & FEMA
Object to conserve and
prevent misuse

Violation was Criminal
Offence and was non
compoundable

It was a draconian
police law
To facilitate external
trade and payments

Violation is a civil
offence and is
compoundable

It is a civil law
Current Account and Capital Account
transactions
Under the FEMA regime, the thrust was on regulation and
control of the scarce foreign exchange, whereas under the
FEMA, the emphasis is on the management of foreign
exchange resources.

Under FERA it was safe to presume that any transaction in
foreign exchange or with a non-resident was prohibited
unless it was generally or specially permitted.
FEMA has formally recognised the distinction between
current account and capital account transactions.


Two golden rules or principles in FEMA are
mentioned as follows:

all current account transactions are permitted
unless otherwise prohibited.

all capital account transactions are prohibited
unless otherwise permitted.
11
Current Account Transactions
Any person may sell or draw foreign exchange to or from
an authorized person if such sale or drawal is a current
account transaction.

The Central Government may, in public interest and in
consultation with the Reserve Bank, impose such
reasonable restrictions for current account transactions
as may be required from time to time.
12
Current Account Transactions Contd.
The definition is inclusive and any expenditure which is not a capital
account transaction will be current account transaction. It includes:

payments due in connection with foreign trade, other current
business, services, and short-term banking and credit facilities in the
ordinary course of business

payments due as interest on loans and as net income from
investments

remittances for living expenses of parents, spouse and children
residing abroad, and

expenses in connection with foreign travel, education and medical
care of parents, spouse and children

13
Current Account Transactions
Few Examples
Payment for imports of goods
Remittance of interest on investment made and
funds borrowed from abroad after tax deductions
Remittance of Dividend if the investment was
allowed without any condition
Booking with Airlines/Shipping
Salary/remuneration to Foreign Directors subject to
restrictions in any other law


14
Capital Account Transactions
"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 persons resident outside
India, and includes transactions like:

Changes in Assets/ Liabilities
Transfer/ issue of security
Borrowing/ Lending
Export, import or holding of currency or currency notes
Giving guarantee

Capital Account Transaction are deemed to be prohibited
unless permitted and Current Account Transactions are
deemed to be permitted unless prohibited

15
Penalties for Contravention under FEMA
The Penalty could be up to thrice the sum involved
where amount is quantifiable

If the Amount is not quantifiable , penalty upto Rs 2
lacs can be imposed

If contravention is of continuing nature, further
penalty up to Rs 5000 per day during which the
contravention continues can be imposed

16
Repatriation
Repatriate to India" means bringing into India the realized
foreign exchange and-

the selling of such foreign exchange to an authorized person
in India in exchange for rupees, or

the holding of realized amount in an account with an
authorized person in India to the extent notified by the
Reserve Bank,

It includes use of the realized amount for discharge of a debt
or liability denominated in foreign exchange
17
Manner of Repatriation
It can be done in the following manner:

Sell it to Authorized Person in India in exchange for
Rupees

Retain in an account with an authorized dealer

Use it for discharge of a debt or liability denominated in
foreign exchange in the manner specified by RBI

Administration Of The Act
- The rules regulations and norms pertaining to many sections are
laid down by RBI in consultation with central Government.

- The Act requires central Government to appoint,
Adjudicating Authorities for holding enquires related to the
contravention of the Act
one or more Special Directors (appeals) to hear appeals against
the order of the Adjudicating authorities

- Central Government shall have to establish
1. An Appellate Tribunal for foreign Exchange to hear appeals
against the order of the Adjudicating Authorities and the Special
Directors
2. A Director of Enforcement with a Director and such officers or
class of officers as it thinks fit for taking up for investigation the
contravention under this Act

Export of goods and services

Every exporter of goods shall:
(a) Furnish to the Reserve bank or to such other authority a
declaration in such form as may be specified, containing true and
correct material, including the amount representing the full export
value, if the full export value of goods is not ascertainable at the
time of export , the value which the exporter, having in regard to
the prevailing market conditions, expects to receive on the sale of
the goods in the market outside India;

(b) Furnish to the Reserve bank all information as may be required by
the reserve bank for the purpose of ensuring the realization of
export proceeds by such exporter.
The Reserve may, for the purpose of ensuring
that the full export value of the goods as the
Reserve bank determines, having regard to the
prevailing market conditions, is received without
any delay.

Every exporter of services shall furnish to the
Reserve bank a declaration in such form as may
be specified, containing the true and correct
material particulars in relation to payment for
such services.
Realization and Repatriation of Foreign
Exchange
When any amount of foreign exchange is due or has
accrued to any person shall take all reasonable steps to
realize and repatriate to India such foreign exchange
within such period and in such manner as may be
specified by the Reserve bank.