FEMA

Foreign Exchange Management Act

In order to trace the origin of FEMA, we ll have to go back into history……

……when it was known as FERA.

FERA

FERA

Foreign Exchange Regulation Act

FERA was an act to regulate:

certain payments, transactions indirectly affecting foreign exchange,

the import and export of currency,

the conservation of the foreign exchange resources of the country and their proper utilization thereof in the development of the country.

FERA

OBJECTIVES:

To prevent the outflow of the Indian Currency

To see that the foreign exchange legitimately due to India should be received.

Contd……..

OBJECTIVES

To regulate the transactions indirectly affecting foreign exchange

To regulate holding of immovable property outside India

To regulate employment of foreign nationals

Provisions:

Regulation of dealings in Foreign Exchange: Take permission from the Reserve Bank for Foreign Exchange Transactions.

Contd..

Restrictions on Payments: No body shall

-make any payment to or for any person outside India

-receive any payment on behalf of anybody outside India

Contd..

Restrictions regarding assets held by Non residents and Import and Export of certain currency and Bullion.

Contd..

Restriction on Establishment of place of business in India.

Contd..

Prior permission of Reserve Bank required for taking up employment in India by Nationals of foreign state.

Contd..

Restrictions on appointment of certain persons and companies as agents or technical or management advisors in India.

Insights into FERA:

FERA applies to the whole of India, to citizens of India outside India and to branches and agencies outside India registered in India .

Came into force with effect from January 1, 1974.

Was enacted by Parliament in the Twenty-fourth Year of the Republic of India.

Reflections on FERA:

1) No legal forum or a court for a person to recover money due to him from outside India on account of sale, etc.

Must have the recourse to International Commercial Arbitration, only if enormous amounts are involved.

Contd..

Of late, demand is that FERA should be abolished. Corporates find themselves confronted by serious allegations of violation of the Act.

Contd.. 2) Impression created by the Government Agencies :

Foreign Exchange is very precious and must be protected at all cost.

So, FERA contains stringent provisions.

FERA violators are treated as criminals.

eg: an entrepreneur arrested for being in possession of Rs. 450 in foreign exchange , though was left over from a journey abroad, sanctioned by the Government.

Contd..

3) As India has app 30 billion dollar foreign exchange reserve position and there is no scarcity of the foreign exchange, the act should be done away with.

Some experts observed that the Act is outdated and either needs to re-written or over-hauled. It should be liberated.

4) There is no harmony between FERA and Direct tax laws, eg: basic definition of resident are dichotomous and totally different.

From FERA to FEMA

FERA had outlived its utility on account of significant developments as follows:

Reasons to repeal the FERA: Substantial increase in the foreign exchange

resources. Growth in Liberalization of Indian

Investments abroad foreign trade Rationalization of tariffs Increased access to external commercial

borrowings by Indian corporates Participation of foreign investors in the Stock

markets

Amendments:

Section 11: Restrictions regarding assets held by non-residents: blocking bank accounts and securities for people who had migrated abroad.

Contd..

Section 13: Restriction on Import and export of certain currency bullion: Gold and Silver through Exim Policy and foreign exchange and Indian Currency under FERA.

Section 17: Power to regulate uses , etc, of imported silver and gold- deleted as has been covered in Section 13

Contd..

Section 25: Restrictions on holding of immovable outside India: has enabled RBI to grant permission to holding of property outside India under certain conditions.

FEMA

Foreign Exchange Management Act

On August 4, 1998, the finance minister introduced FEMA in the Lok Sabha.

Objective

To consolidate and amend the law relating to foreign exchange to facilitate external trade and payments.

To promote the orderly development and maintenance of the foreign exchange market in India.

Some basic terms:

Authorized Person means any authorized dealer, money changer, or any other person for the time being authorized under Section 10(1) to deal in foreign exchange or foreign securities.

Types of transactions: Capital Account

Transaction means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or vice versa. (borrowing, lending & borrowing, lending & investment – FDI , FII, investment – FDI , FII, ECBs , NRI deposits , ECBs , NRI deposits , Overseas Investments Overseas Investments – expanding – expanding convertibility )convertibility )

Current Account Transaction has been defined as a transaction other than capital account transaction.

Means that all transactions that do not alter assets or liabilities outside India of residents or assets or liabilities in India of non-residents transactions.

Currency includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank.

ProvisionsSection 3: Dealings in Foreign

Exchange: No person shall deal in and transfer foreign exchangemake or receive payment for anybody outside India without

permission from the Reserve Bank.

Contd..

Section 4: Holding of Foreign Exchange: No resident in India shall acquire or transfer foreign exchange or any immovable property outside India without permission from the Reserve Bank.

Contd..

Section 5: Current Account transactions: any person may sell or draw foreign exchange to or from an authorized person if such a sale or drawal is a current account transaction.

Contd..

Section 6: Capital Account Transaction: Any person may sell or draw foreign exchange to or from an authorized person is a capital account transaction. Only limited Capital Account Convertibility allowed.

Contd..

Section 7: Export of Goods and Services : Every exporter of goods or services shall furnish to the Reserve Bank details regarding the export value of such goods or services.

Contd..

Section 8: Realisation and Repatriation of Foreign Exchange: Where any amount of foreign exchange is due or accrued to any person resident in India, such a person shall take steps to realise and repatriate to India, such for foreign exchange within a specified period of time.