MADE BY:-KEVIN DESAI(10)RINKY GHAI(15)

BHAVIK PANCHOLI(37)SONAL INTWALA(18)MONA RATHOD(47)

The scenario of foreign exchange market The purpose of foreign exchange market Indian attitude towards foreign exchange market FDI inflows into India The introduction of FERA FERA and its effects on the FDI inflows From FERA to FEMA

The foreign exchange regulation act (FERA)• The first of the policies that directly affected foreign firms have revolved around the

1973 FERA, based on an earlier Foreign Exchange Regulation Act promulgated in 1947, and later repealed, the provisions of which would ensure that India was quite willing to wave foreign firms goodbye from its shores.

• The basic policy that was put into place by FERA in 1973 was the inability of the majority of foreign companies to hold more than 40% shares in their Indian companies. Thereby, foreign firms lost control of their Indian operations.

• Other than that, there were several restrictions on the use of foreign exchange. By and large, other than the ownership constraints, FERA was not transformed into FEMA until 1999.

• Severe restrictions on current account transactions continued till the mid-1990s when relaxations were made in the operations of the FERA. The framework was essentially transaction-oriented based in terms of which all transactions in foreign exchange including those between residents and nonresidents were prohibited, unless specifically permitted.

The transformation of FERA to FEMA• The FERA legislation was promulgated during a period of economic crisis, when a

left wing mind set was in place among India’s policy makers and the principal objective of the FERA legislation was to stop the unnecessary flow of foreign exchange out of the country. The change to FEMA reflects more than a legislative re-write of rules and procedures.

• The specifics of the legislation apply towards making current transactions with firms based in India and those abroad easier, paperwork has been simplified and the role of the government is less intrusive.

• The new FEMA legislation simplifies the maze of controls, procedures and bureaucratic details that have to be observed by all those undertaking to set up and operate a business in India. These processes slow down considerably the pace of activity and make Indian items uncompetitive, especially in today’s context where time compression is a source of critical competitive advantage. Removal of these administrative gaps makes India potentially attractive as a destination for foreign firms wishing to make investments.

The history behind and logic of FEMA• Consistent with the philosophy of economic reforms in the 1990s changes in the

broad approach to reform in the external sector took place. • The Committee recommended the introduction of a market determined exchange

rate regime within limits, liberalization of current account transactions leading to current account convertibility, shifts in capital flows away from debt to non debt creating flows, regulation of external commercial borrowings especially short-term debt, discouraging volatile elements of flows from nonresident

• Indians, full freedom for outflows associated with inflows and gradual liberalization of other outflows, and the disassociation of Government in the intermediation of flow of external assistance.

• In 1997, a Committee on Capital Account Convertibility (CAC), constituted by the Reserve Bank of India and chaired by S. S. Tarapore, indicated the preconditions for Capital Account Convertibility.

• The Tarapore Committee had also recommended change in the legislative framework governing foreign exchange transactions. Accordingly, FERA which formed the statutory basis for exchange control in India was repealed and replaced by FEMA.

• The philosophical approach shifted from that of conservation of foreign exchange to one of facilitating trade and payments as well as developing orderly foreign exchange markets, and from a negative attitude of control to a positive attitude of management.

Definitional and intellectual changes brought about by FEMA

• The procedural changes include reduction of complexity. FERA consisted of 81 sections and was a considerably complex piece of legislation while FEMA is much simpler and consists of 49 sections.

• Standard terms in international trade and finance such as capital account transaction, current account transaction, person, service etc. were not defined in FERA but have been defined in detail in FEMA.

• The definition of authorized person in FERA was narrow while it has been widened to include banks, money changes and off shore banking units, among others, in FEMA. Also, there was a substantial difference in the definition of resident under FERA and tax legislation, while the provisions of FEMA are now consistent with the Indian tax legislation.

• Any offence under FERA was a criminal offence, punishable with imprisonment as per the code of criminal procedure extant in India. In FEMA, offences are considered to be civil offences only punishable with a monetary fine as a penalty with imprisonment prescribed only for failure to pay the penalty.

• FERA conferred wide powers on police officers to conduct searches while the scope and power of search and seizure has been curtailed in FEMA.

The procedural changes brought about by FEMA• The Act of 1999 (FEMA) contains the substantive and procedural aspects of

Foreign Exchange Regulations. The detailed provisions in regard to various aspects connected with foreign exchange regulations are found in the rules, regulations and notifications under FEMA issued or promulgated by the Government of India or the Reserve Bank of India.

• The Government of India, in exercise of the powers conferred on it under Section 46 of FEMA, has made various sets of rules, namely the Foreign Exchange Management (Current Transactions) Rules, 2000, the Foreign Exchange (Compounding Proceedings) Rules, 2000, the Foreign Exchange Management (Adjudication Proceedings and Appeal), Rules, 2000, the Foreign Exchange (Authentication of Documents) Rules, 2000 and the Foreign Exchange Management (Encashment of Draft, Cheque, Instrument and Payment of Interest) Rules, 2000.

• These govern the implementation of FEMA. Additionally, the implementation process for enforcement and appeals has been made transparent and independent.

The corporate demography of India• The approach is to highlight the demography of India’s corporate sector, in a

relatively straightforward way, and first describe the different patterns of growth displayed by three types of firms that are important within the context being evaluated: foreign firms, private domestic firms and government firms. Table 1 provides details of the basic statistics.

• Table 1 shows the average number of foreign, domestic private and government firms within India’s corporate sector for the overall period 1957–1958 to 2001– 2002. The average numbers in total, for each category, may not provide as much insights as the proportions that each category bears to the whole.

• The proportion of foreign firms in India is less than 1% of India’s firms but their share has ranged from a high of 1.94% of all firms in India in the period between 1957–1958 to 1972– 1973, to a low of 0.186% of all firms in India in the period from 1991–1992 to 2001–2002. This is shown in panel C. Clearly, there has been a substantial rise and fall in the proportion of foreign firms within India’s corporate economy. The lowest number of foreign firms was 300 while the maximum number is 1,141, as panel A shows.

• From a review of the table, it is clear that the domestic private enterprise is the dominant type of enterprise in the Indian industrial landscape, at least in numbers. They have accounted for, in the period as a whole, over 95% of India’s companies but again the minimum and maximum values have ranged from 93% to over 98% of all firms in India.

• Panel A of the table shows that at one point the lowest number of domestic private firms in India was 24,821 but the maximum number of domestic private Indian firms has grown to 567,834. Very clearly, there has been substantial growth in the number of domestic private enterprises in India. In line with the growth of domestic private firms in India has been the growth of government owned firms.

• While accounting for less than 1% of India’s corporate sector for the entire period assessed, with a low of 0.330% and a high of just over 1% of India’s firms, their numbers have grown from 74 to 1,266 in the five decades

• While this impressive growth in the number of companies is not as robust as that of the growth of the number of domestic private firms in India, it is considerably greater than that of the growth in the number of foreign firms.

The above definitions under FEMA will lead to a situation where an Indian resident going abroad to take up employment, business or profession will have to undergo a gestation period of 182 days to attain NRI status and avail of the liberal FCNR and repairable investment facilities which is presently available to NRIs. Consequently there will be delay in Forex inflows from such NRIs.

Similarly, NRIs coming back to India to take up employment, business or profession will have to wait at least 182 days to acquire residential status and in the interregnum they will have to suffer the rigors of relevant statutory provisions. In contrast FERA considered Indians returning to India as residents immediately on their arrival.

Vice-versa NRIs visiting India temporarily for business, social or other purpose would lose their non-resident status if their stay exceeds 182 days in a financial year.

Only has FEMA changed the definition of person resident in India but has also delinked it from citizenship. Unlike FERA, FEMA recognizes even capital account transactions. Overseas offices/ branches Section 2(v)(iv) treats offices, branches and agencies outside India owned or controlled by Indian residents as "persons resident in India" and consequently such outfits would be subject to FEMA restrictions and rules and regulations that may be framed there under.

Presently for all intents and purposes overseas offices and branches of corporate including banks in India are treated as non-residents and they have full freedom to carry on their business operations abroad and if these offices and branches are treated as persons resident in India the provisions of FEMA and the relevant rules and regulations that may be framed there under for normal "residents" would apply to such outfits.

Also, rupee accounts in India of overseas branches of Indian banks would be treated as "resident accounts" and would therefore cease to be eligible for settlement of international transactions involving inward/outward remittances.

In order to become eligible to deal in forex, under Section 3 of FEMA as"authorised person" the person concerned would have to make a specific application to RBI in terms of Section 10. Under this dispensation RBI can no longer grant "general permission" to individuals, corporate or to A class of persons as provided under FERA.

An attempt has been made to bring on par the term with a similar definition under the Income Tax Act, 1961. Earlier, `intention' of the person was the main determining factor while ascertaining the status of `resident ship.' As a result, non-residents coming to India will now have to ensure that their total stay in a financial year is less than 182 days.

Besides, exporters have also been encouraged resulting in the opening up of offices abroad by several Indian exporters. By treating such an overseas office, branch or agency, owned or controlled by a person resident in India or outside India, as an Indian resident under FEMA would result in limitations as are applicable to other residents in India.

The new definition makes it more difficult for a person to become a resident in India then prevailing under FERA. Now a person will have to stay for at least 182 days and that too in the previous year, which means in reality he will have to stay and wait for the next year to be declared a resident in India.

CII works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes.

CII is a non-government, not-for-profit, industry led and industry managed organization, playing a proactive role in India’s development process.

Founded over 110 years ago, it is India’s premier business association, with a direct membership of over 5800 companies form the private as well as public sectors, including SMEs and MNCs and indirect membership of over 95000 organizations from around 325 national and regional sectoral associations.

with 44 offices in India, 8 overseas in Australia, Austria, China, France, Japan, Singapore, UK, USA and institutional partnerships with 239 counterpart organizations in 101 countries, CII serves as a reference point for Indian industry and the international business community.

The history of CII is the story of the transformation of a miniscule association, representing a small segment of industry, to the premier business association of modern India.

The journey began in 1895 when 5 engineering firms, all members of the Bengal Chamber of Commerce and Industry, joined hands to form the Engineering and Iron Trades Association (EITA).

Engineering and Iron Trades Association (EITA) Indian Engineering Association(IEA) Engineering Association of India(EAI)

Association of Indian Engineering Industry(AIEI) Confederation of Engineering Industry(CEI) Confederation of Indian Industry(CII)

The primary goal of CII is to develop Indian Industry and to ensure that government and society as a whole, understand both the needs of industry and its contribution to the nation’s well-being.

For this CII works To identify and strengthen industry’s role in the economic

development of the country To act as a catalyst in bringing about the growth and

development of Indian industry To reinforce industry’s commitment to society To provide up-to-date information and data to industry and govt.

To create awareness and support industry’s efforts on quality, environment and consumer protection

To identify and address the special needs of the small sector

To promote co-operation with counterpart organizationsTo work towards the globalization of Indian industry and

integration into the world economy

Economies around the world are aligning themselves to the requirement of rapid globalization. In a global village, where market accessibility is no longer a hurdle, the tough part is capturing market shares and retaining them.

Only those who have adopted global quality standards leveraging their intellectual capital have managed this feat.

Guided by this fact, CII has embarked on smarter initiatives that enhance competitiveness of Indian Industry by underlining the need for rapid up gradation on parameters like Quality, Corporate Governance, Knowledge management, Energy efficiency and Environment management.

While the above discussion has dealt with the big picture, a more interesting line of analysis revolves around an assessment of the trends on a year-by-year basis. These trends are easily assessed using figures, and Fig shows the actual numbers of foreign companies in existence and in operation in India for all of the years studied.

Figure shows that there were, on average, 568 foreign companies operating in India from 1957–1958 to 1972–1973, the year before FERA was promulgated in all its harsh manifestation. Policies towards foreign firms were not illiberal before that. After that year, with the introduction of the 40% maximum foreign ownership limit, the number of foreign companies operating in India went down steadily till the early 1980s.

In the 1977–1979 periods there had been substantial confusion over the role of foreign companies’ operations in India.

Coca-Cola and IBM, on their refusal to dilute their ownership holdings in their Indian companies from 100 to 40%, left India. Taking this a signal more companies left India thereafter and the net position was that by 1981 the number of foreign companies operating in India had fallen to 300. This trend is very clearly visible from Fig.

Mr. Alex and Mr. Murthy are planning to start a business in Mumbai, Mr. Alex wants to invest Rs 3 crore and Mr. Murthy Rs 2 crore in the business. Mr. Murthy is a resident of India; Alex wants to buy his own land for business purpose in Mumbai. For this he is ready to invest more than Rs 50 lakh. Mr. Murthy suggests to Mr. Alex that it is not easy to buy land in Mumbai in the latter’s name. it would be better to buy the land and all assets required for the business in his, Mr. Murthy’s name because RBI may prohibit any borrowings or lending in rupees between a person resident in India and person resident outside India and under Section 6 of FEMA, RBI may by regulation, prohibit, restrict or regulate the establishment in India of branch office, or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or any place of business.

Therefore Mr. Murthy suggest that Mr. Alex just invest the money.Whatever assets they will buy will be owned by Mr. Murthy alone.Mr. Alex does not agree with this suggestion of Mr. Murthy. He says,“We will buy all assets in partnership as we are starting a business inpartnership”

1. Do you support the suggestion of Mr. Murthy?2. Do you think the suggestion of Mr. Murthy is correct?3. Give correct suggestions to Mr. Alex to start a business in

India