FERA AND FEMA

Submitted to : Prof. Anant Amdekar

Group 2• Anand Chafekar 08• Ankit Panchmatia 10• Arham Ali Zaidi 13• Awiz Chogle 22• Deoul Shah 30• Dhvani Pathak 33• Divya Balsara 35• Fahad Kadri 38• Goutam Amasi 50• Haseeb Ansari 53

Key Terms with respect to FERA & FEMA

Authorized Person - "Authorized person" means an authorized dealer, moneychanger, offshore banking unit or any other person for the time being authorized to deal in foreign exchange securities

Capital Account Transaction - "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 person resident outside India

Current account transaction - "Current account transaction" means a transaction other than a capital account transactions”

Foreign exchange reserves - A country's reserves of foreign currencies. Commonly known as "quick cash", they can be used immediately to finance imports and other foreign payables

Capital account convertibility - Capital Account Convertibility refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world

Foreign Exchange Regulation Foreign Exchange Regulation Act ( FERA) , 1973Act ( FERA) , 1973

An Act to consolidate and amend

the law regulating certain payments, dealings in foreign

exchange and securities, transactions indirectly affecting

foreign exchange and the import and export of currency, for enhancing the economic

development of the country.

CASE STUDY 1CASE STUDY 1

FERA VIOLATIONS FERA VIOLATIONS BY ITCBY ITC

ITC started Bukhara chains of restaurants

Huge losses

ITC honoured its commitment by giving 25% ROI

ITC took the help of the “Chitalias”

Chitalias bought the Bukhara chains of restaurants

To compensate them 4 million dollars was transferred to them in cash through Swiss Account

This deal was the beginning of a series of events for which ITC was charged for contravention of FERA regulations

Fraudulent Activities Rotten rice exported to Srilanka Bogey companies ITC had asked all its overseas buyers to route their orders through Chitalias Over invoicing exports Direct Payments Bankruptcy Huge Outstanding debts BAT (British American Tobacco)

Charges Over invoicing Cash payments For bringing funds into India not conforming to prescribed norms Using funds for personal use

Need for fema

• Introduced at a time when foreign exchange (forex) reserves of the country were low

• It regulated not only transactions in forex, but also all financial transactions with non-residents

• The winds of liberalization

• Case of the eminent industrialist, S.L.Kirloskar

To facilitate external trade and payments

To promote orderly maintenance of the foreign exchange market in India

To relax controls on joint ventures, collaborations, subsidiary establishments and the like both in India by foreigners and abroad by Indians

femafema

Extent of femaExtent of fema• FEMA extends to the whole of India

• Applies to all branches, offices and agencies outside India owned or controlled by a person who is a resident of India

• Applies to any contravention there under committed outside India by any person to whom this Act applies

• Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction

Transactions under fema

• Payments due in connection with foreign trade, other account current business, services and short term banking and credit facilities in entire ordinary course of business

• Payments due as interest on loans and as net income from the investments

• Remittances for living expenses of parents, spouse and children residing abroad

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

Current Account Transactions

Some Transactions prohibited in current account

• Remittance out of lottery winnings

• Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian com panies

• Remittance of dividend by any company to which the requirement of dividend balancing is applicable

Capital Account TransactionsResident in India

• Investment by a person resident in India in foreign securities.

• Foreign currency loans raised in India and abroad by a person resident in India

• Transfer of immovable property outside India by a person resident in India

• Export, import and holding of currency/currency notes.

• Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India

• Maintenance of foreign currency accounts in India and outside India by a person resident in India

Resident outside India

Issue of security by a body corporate or an entity in India and investment therein by a person resident outside India; and

Investment by way of contribution by a person resident outside India to the capital of a firm or a proprietorship concern or an association of persons in India

Acquisition and transfer of immovable property in India by a person resident outside India

Deposits between a person resident in India and a person resident outside India

Remittance outside India of capital assets in India of a person resident outside India

FERA V/S FEMAFERA V/S FEMA

Provisions

Features

New terms in FEMA

Definition of authorized person

Meaning of "Resident" as compared with Income Tax Act

Punishment

Quantum of Penalty

Appeal

Right of assistance during legal proceedings

Power of Search and Seize

FERA FEMA

89 sections 49 sectionsPresumption of negative

intention (Mens Rea ) and joining hands in offence (abatement)

existed

These presumptions were excluded

Capital Account Transaction, current

Account Transaction, Person, Service etc.

were not defined

Capital Account Transaction, current

Account Transaction, Person,

Service etc. were defined

Criminal offenceCivil offence

Five timesThree times

Foreign direct investment ( FDI ) in india

Background

• FDI basically means investment by a foreign company for purchase of land, equipments, buildings etc in another country

• It also refers to the purchase of controlling interest in existing operations and businesses. It could be through mergers and acquisitions

• It helps MNCs keep production costs down by accessing low wage labour pools in developing countries

• As for developing nations, such investments help them access technology and ensure jobs for its unemployed population

Foreign direct investments in India are approved through two routes

Automatic approval by RBI – The Reserve Bank of India accords automatic approval within a period of two weeks

(subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable

The lists are comprehensive and cover most industries of interest to foreign companies

Investments in high priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI

The FIPB Route – Processing of non-automatic approval cases –

FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met

Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few

It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public

FDI Inflow over the yearsYear FDI inflow (Rs in Cr)

1991-92 316

1995-96 7172

2000-01 18406

2001-02 29235

2002-03 24367

2003-04 19860

2004-05 27188

2005-06 39674

2006-07 103367

2007-08 140180

2008-09 161536

2009-10 176304

Source : Directorate General of Commercial Intelligence & Statistics

FDI SCENERIO IN INDIA

India attracted FDI equity inflows of US$ 2,214 million in April 2010

The cumulative amount of FDI equity inflows from August 1991 to April 2010 stood at US$ 134,642 million

In April 2010, the telecommunication sector attracted the highest amount of FDI worth US$ 430 million, followed by services sector at US$ 355 million and computer hardware and software at US$ 172 million

India has been ranked at the third place in global foreign direct investments in 2009 and will continue to remain among the top

five attractive destinations for international investors during 2010-11

Investment Scenario

In May 2010, the government cleared 24 foreign investment proposals, worth US$ 304.7 million. These include:

• Asianet's proposal worth US$ 91.7 million to undertake the business of broadcasting non-news and current affairs television channels

• Global media magnate Rupert Murdoch-controlled Star India holdings' investment of US$ 70 million to acquire shares of direct-to-home (DTH) provider Tata Sky

• AIP Power will set up power plants either directly or indirectly by promotion of joint ventures at an investment of US$ 24.4 million

• Sembcorp Utilities, a company based in Singapore, has picked up 49 per cent stake in the 1,320 mega watt (MW) coal-fired plant of Thermal Powertech Corporation India Ltd, a special purpose vehicle and subsidiary of Gayatri Projects Ltd, for US$ 235.1 million

• IL&FS Investment Managers (IIML) plans to invest US$ 300 million, in real estate and urban infrastructure projects by the end of 2010

• Cinepolis, a Mexico-based multiplex operator, is looking at expanding its footprint in India. The company which started operations in India last year plans to invest US$ 350 million in the next five years to operate 500 screens in 40 cities

Exports and Exports and imports of indiaimports of india

Export Import through the Years

Year Export(Rs in CR)

Import(Rs in CR)

Trade Balance(Rs in CR)

1991-92 44041 47851 (3810)

1995 -96 106353 122678 (16325)

2000-01 203571 230873 (27302)

2006-07 571779 840506 (268727)

2007-08 655864 1012312 (356448)

2008-09 840755 1374436 (533680)

2009-10(Sep) 845125 1356468 (511343)

Source : Directorate General of Commercial Intelligence & Statistics

CASE STUDY 2

FEMAVIOLATIONS BY

RELIANCE

• Reliance Energy raised a $360-million ECB for investment in infrastructure projects in India

• Out of this $300 million repatriated to India

• Invested these funds in Reliance Mutual Fund Growth Option and Reliance Floating Rate Fund Growth Option

• On the next day the entire funds where withdrawn & invested in Reliance Fixed Horizon Fund III Annual Plan series V

• After 315 days these funds where again withdrawn & used for investment in capital of an overseas joint venture called Gourock Ventures based in British Virgin Islands

Conclusion• Thus it can be concluded that FERA was introduced so that

Government Of India acquire complete monopoly over forex

• FEMA was introduced as situation changed economically, socially and politically

• Once FEMA came into the picture liberalisation entered the expressway towards globalisation

• Since FEMA was introduced the FDI scenario has improved tremendously and INDIA has become a major global player

• INDIA has also emerged as an important partner to many countries in terms of trade over the years, FEMA has played an important part in this development

FEMA has played a pivotal part in INDIA becoming a major FEMA has played a pivotal part in INDIA becoming a major global player global player

THANK YOU