You are on page 1of 14

FERA and FEMA

Foreign Exchange Regulation Act (FERA), 1973


o Foreign Exchange Regulation Act (FERA)
o Soon after independence, the Govt. of India enacted Foreign Exchange Regulation
Act in 1947, to regulate operations of foreign controlled companies in India.
o The Act was latter on comprehensively amended in 1973.
o FERA, 1973 was enacted in wake of acute foreign exchange shortage faced by the
country at that point of time.
o The major objectives of FERA, 1973:
1. Conservation and proper utilisation of Indias precious foreign exchange;
2. To issue guidelines to the foreign companies investing in India.
3. Under FERA, 1973, it was necessary to take necessary permission from the
government in respect of transactions those involved foreign exchange dealings.
4. The Enforcement Directorate, under FERA had unlimited powers to search, arrest
and seize.
5. FERA (1973) categorized foreign exchange law violators as criminals and actions
against them were very strict. It was replaced by FEMA (1999) which aimed at
facilitating external trade and payment. Also law violators under FEMA were
treated as civic offenders rather than as criminals as under FERA.

Foreign Exchange Management Act


(FEMA), 1999
Foreign Exchange Management Act
(FEMA),1999
Enacted in 1999, replaced the earlier
Foreign Exchange Regulation Act
(FERA), 1973.
Came into force on the 1st day of
June, 2000;

Objectives of FEMA
To facilitate external trade and payments; and
To promote orderly development and maintenance of
foreign exchange market in India.
To investigate into violations of the Act, the Central
Govt. has established a department called
Enforcement Directorate.
This Act extends to the whole of India and also
applies on all branches, offices and agencies outside
India owned or controlled by a person resident in
India. It is also applicable on any contravention
committed outside India by any person to whom this
Act is applicable.

Various provisions (measures) of


FEMA, 1999
Section 3 - Prohibits dealings in foreign exchange except through an
authorised person (forex dealer).
Section 2(c) - defines authorised person as one who is an authorised dealer,
money changer, off shore banking unit or any other person for the time being
authorized (by RBI) to deal in foreign exchange or foreign securities.
Section 4 provides that no person can, without a general or special
permission of the RBI1. Deal in or transfer any foreign exchange or foreign securities;
2. Make / receive any payment to/from any person resident outside India;
3. Enter into any financial transaction for acquiring any asset outside India.
. Section 5 - provides that any person may sell or draw foreign exchange to and
from an authorised person for a current account transaction, provided that the
Central Government may, in public interest, impose such reasonable
restrictions as may be prescribed.

Section 6 - provides that any person may sell or draw foreign exchange to and
from an authorised person for a capital account transaction, provided that the
Central Government may, in public interest, impose such reasonable
restrictions as may be prescribed.
Section 7 - deals with export of goods and services. Every exporter is
required to furnish to the RBI or any other authority, a declaration 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.
Sections 10 and 12 - deal with duties and liabilities of the authorised persons.
Sections 13 and 15 - of the Act deal with penalties and enforcement under the
Act.
Section 36 and 37 - pertains to the establishment of Enforcement Directorate
and its powers to investigate any violation of under the Act.

ENFORCEMENT DIRECTORATE (ED)


The ED is mainly concerned with enforcing the provisions of
the FEMA for preventing the leakage of foreign exchange.
Such leakage of foreign exchange generally occurs through
following malpractices (contraventions of FEMA):1. Foreign exchange remittances by Indians otherwise than
through normal banking channels;
2. Acquisition of foreign currency illegally by a person in India;
3. Non-repatriation of export proceeds;
4. Under-invoicing of exports and over-invoicing of imports and
any other type of invoice manipulation;
5. Unauthorised maintenance of accounts in foreign countries;
6. Illegal acquisition of foreign exchange through Hawala.

FERA to FEMA
The main objective of FERA framed against the background
of severe foreign exchange problem and controlled
economic regime , was conservation and proper utilization
of the foreign exchange resources of the country.
FERA created flourishing black market in foreign exchange.
It brought into the economic lexicon the word HAWALA.
There was a demand for a substantial modification of FERA
in the light of ongoing Economic liberalization and
improving foreign exchange reserves position. Accordingly,
a new act ,FEMA( Foreign Exchange Management Act )
1999 replaced the FERA.

NEED of FEMA
The demand for new legislation was basically on two
main counts
1. The FERA was introduced in 1974 when Indias
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.
2. there was a need to remove the draconian
provisions of FERA and have a forward-looking
legislation covering foreign exchange matters.

FEMA replaces FERA


The older version had very strict laws (for example, a person was assumed
guilty unless proven otherwise.) All the unnecessary restrictions were
removed. The rules regarding foreign investments were simplified to
encourage more foreign investment in India and consequently ensure better
foreign cash flow. However, FERA was not in accordance with the proliberalization policies of the Indian Government.
Finally, in 1999 the FEMA was passed which replaced the FERA, though
certain provisions of FERA 1973 still exist under FEMA 1999.
FEMA came into effect from 1st June, 2000. Some structural changes were
made. The FEMA combines and improves the laws relating to foreign
exchange It makes the procedure for foreign investment easy and
consequently encourages foreign exchange in India.
Under FEMA, violation of foreign exchange rules has ceased to be a criminal
offence and would now be treated as a civil offence and the ED would no
longer have the power to arrest persons for such offences. Extreme cases of
money laundering, drug trafficking and gun running would now be dealt
with under the proposed new legislation aimed at curbing money laundering

Salient features of FEMA


It will facilitate trade rather than prevent misuse of foreign exchange.
Definitions of capital account transaction and current account
transaction have been introduced keeping in mind the possibility of
introduction of capital account convertibility in the near future.
All current account transactions shall be allowed (subject to reasonable
restrictions). Reserve Bank to classify those capital account
transactions that are to be permitted and to regulate transfer and issue
of foreign securities by a resident in/outside India as well as setting up
of branches/offices by foreign companies in India.
All key sections relating to dealings, holding and payments in foreign
exchange and exports have been simplified.
Liberalization in enforcement provisions reflects that the attitude is of
putting trust in the persons covered

Difference between
DIFFERENCES
FERA&FEMA
FERA
FEMA
FERA consisted of 81 sections, and
was more complex

FEMA is much simple, and consist of


only 49 sections.

FEATURES

Presumption of negative intention


(Mens Rea ) and joining hands in
offence (abatement) existed in FEMA

These presumptions of Mens Rea and


abatement have been excluded in
FEMA

NEW TERMS IN FEMA

Terms like Capital Account Transaction, Terms like Capital Account Transaction,
current Account Transaction, person,
current account Transaction person,
service etc. were not defined in FERA. service etc., have been defined in
detail in FEMA

DEFINITION OF AUTHORIZED
PERSON

Definition of "Authorized Person" in


FERA was a narrow one ( 2(b)

PROVISIONS

The definition of Authorized person has


been widened to include banks, money
changes, off shore banking Units etc.
2(c)

POWER OF SEARCH AND SEIZE

FERA conferred wide powers on a


police officer not below the rank of a
Deputy Superintendent of Police to
make a search

The scope and power of search and


seizure has been curtailed to a great
extent

RIGHT OF ASSISTANCE DURING


LEGAL PROCEEDINGS.

FERA did not contain any express


provision on the right of on impleaded
person to take legal assistance

FEMA expressly recognizes the right of


appellant to take assistance of legal
practitioner or chartered accountant
(32)

APPEAL

An appeal against the order of


"Adjudicating office", before " Foreign
Exchange Regulation Appellate
Board went before High Court

MEANING OF
"RESIDENT" AS
COMPARED WITH
INCOME TAX ACT.

There was a big difference in the


The provision of FEMA, are in consistent with income
definition of "Resident", under FERA, Tax Act, in respect to the definition of term" Resident".
and Income Tax Act
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 nonresident under FEMA may not necessarily be a nonresident 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.

PUNISHMENT

criminal offence , punishable with


imprisonment as per code of
criminal procedure, 1973

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)

civil offence only punishable with some amount of


money as a penalty. Imprisonment is prescribed only
when one fails to pay the penalty

Similarities between
FERA&FEMA
The Reserve Bank ofIndiaand central
government would continue to be the
regulatory bodies.
Presumption of extra territorial jurisdiction
as envisaged in section (1) of FERA has
been retained.
The Directorate of Enforcement continues
to be the agency for enforcement of the
provisions of the law such as conducting
search and seizure

You might also like