final presentation fema

8/22/2019 Final Presentation FEMA

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Abhijeit Bhosle 812

Karan Mitrani

Pankaj Salve 852


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FERA was introduced at a time when foreignexchange (forex) reserves of the country werelow, forex being a scarce commodity.

FERA therefore proceeded on the presumptionthat all foreign exchange earned by Indianresidents rightfully belonged to the Government ofIndia and had to be collected and surrendered tothe Reserve bank of India (RBI).

It regulated not only transactions in forex, but alsoall financial transactions with non-residents. FERAprimarily prohibited all transactions, except to theextent permitted by general or specific permissionby RBI.


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Constrained freedom of foreign investorsThe aim was to regulate foreign exchange

transactions to limit the use of foreign exchangeresources which apparently constrained the

freedom of foreign investors. Huge delays in processing of information

those dealing with foreign exchange weresubjected to stricter scrutiny. The considerablediscretionary powers vested in regulatory

agencies resulted in huge delays in theprocessing of applications, and the wholetransactions to limit the use of foreign exchangeresources which apparently, constrained thesystem developed into an institutionalarrangement that promoted rent-seeking and

discrimination.


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Declining social profitabilityThere was evidence of declining social

profitability of industrial investment during thisperiod. The lack of technological dynamism, theabsence of Competition and the protection ofmarkets drastically restricted the development of acompetitive industrial sector in India during thisperiod .

Greater power to govt. & RBIThis Act had given much wider powers to theGovernment and Reserve Bank of India (RBI) indealing with matters pertaining to foreignexchange regulations, regulating the working offoreign companies, or companies incorporated in

India.


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The Foreign Exchange Regulation Act was replaced by theForeign Exchange Management Act as it was an impedimentin India's to go global.

India's foreign exchange transactions were governed under

the Foreign Exchange Regulation Act until June 2000. Thislaw had been enacted in 1973 when the Indian economy wasfacing a crisis and foreign exchange had become a preciouscommodity.

By the nineties, FERA had outlived its utility and was in fact,an impediment in India's effort to go global and compete withother developing countries.

Thus, there was a need to scrap FERA and the ForeignExchange Management Act, 1999 came into effect on June 1,2000.


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FEMA has been introduced as a replacement forearlier Foreign Exchange Regulation Act (FERA).FEMA came into act on the 1st day of June, 2000

Objective is to consolidate and amend the law

relating to foreign exchange with objective offacilitating external trade and payments and forpromoting the orderly development andmaintenance of foreign exchange market in India.

Applicable to the all parts of India Also applicable to all branches, offices and

agencies outside India owned or controlled by aperson who is resident of India


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FEMA head-office also known as EnforcementDirectorate is situated in New Delhi and isheaded by a Director.

The Directorate is further divided into 5 zonaloffices at Delhi, Bombay, Calcutta, Madras andJalandhar and each office is headed by aDeputy Directors

Each zone is further divided into 7 sub-zonaloffices headed by the Assistant Directors and5 field units headed by the Chief EnforcementOfficers


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Extensive economic reforms were undertaken inIndia in the early 1990s and this led to the

deregulation and liberalization of the country'seconomy.

Foreign Exchange Management Act (FEMA) wasthus formulated in order to be compatible with the

policies of pro- liberalization of the Indiangovernment.

In such liberal atmosphere, the governmentrealized that possession of forex could no longerbe regarded as a crime


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IN FEMA Terms like Capital AccountTransaction, current Account Transaction,export service etc. were defined , but not in

FERA. The restrictions on drawl of Foreign Exchange

for the purpose of current AccountTransactions, has been removed in FEMA.

Reserve Bank has been confirmed withpowers and with consultation with centralgovernment to specify maximum permissiblelimit upto which exchange is admissible for

such transactions.


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The Reserve Bank of India and centralgovernment would continue to be the regulatorybodies.

Presumption of extra territorial jurisdiction aspredicted in section (1) of FERA has beenretained.

The Directorate of Enforcement continues to bethe agency for enforcement of the provisions ofthe law such as conducting search and seizure


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PROVISIONS FERA consisted of 81 sections, and was more

complex

FEMA is much simple, and consist of only 49sections.

FEATURES Presumption of negative intention (Mens Rea )

and joining hands in offence (declined) existed inFERA

These presumptions of Mens Rea and abatementhave been excluded in FEMA


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Definition of "Authorized Person" in FERA was a narrowone

( 2(b)

The definition of Authorized person has been widened toinclude banks, money changes, off shore banking Unitsetc.

(2 ( c))

An "Authorised Person" under FEMA, is a person who is authorized byReserve Bank to deal in Foreign Exchange.

For being registered as an "Authorized Person", necessary applicationalong with relevant documents has to be furnished to Reserve Bank.

An "Authorized Person" is also, not given a free hand to deal in foreignExchange. He has to furnish details and information, to Reserve Bank fromtime to time as may be required by it.


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AS COMPARED WITH INCOME TAX ACT, there was

a big difference in the definition of "Resident", underFERA, and Income Tax Act

The provision of FEMA, are in consistent with incomeTax Act, in respect to the definition of term " Resident".

The residential status is now based on the physical stay of theperson in the country.

The period of 182 days as provided, indicates that it is not

necessary that there should be a continuous period of stay. Now the criteria of "In India for 182 days" to make a person resident

has been brought under FEMA.


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Therefore a person who qualifies to be a non-

resident under the income Tax Act, 1961 will alsobe considered a non-resident for the purposes of

application of FEMA.

But a person who is considered to be non-resident under FEMA may not necessarily be a

non-resident under the Income Tax Act.

*For instance a business man going abroad andstaying there for a period of 182 days or more in afinancial year will become a non-resident underFEMA.


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A major change in the definition of residential status ofpartnerships and firms in worth noticing.

Earlier, under FERA, a branch was considered aresident of a place where it was situated.

Now, under FEMA, an office, branch or agencyoutside India owned or controlled by a person resident

in India will be considered a resident in India for thepurposes of this Act.

*For example, a person residing in India has a branchin Mauritius; such branch will be considered a resident

in India


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FERA no restriction placed on foreign citizens who

were residents of India, for acquiring immovableproperty outside India.

Now FEMA prohibits a resident to acquire, ownprocess, hold or transfer any immovable propertysituated outside India.This restriction applies irrespective of whether theresident is an Indian citizen or foreign citizen.

With this provision being effective a foreign citizenwho is a resident in India has to take approval ofReserve Bank of India for selling or buying anyimmovable property situated outside India.


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Earlier, under FERA, a foreign citizen could

acquire or transfer immovable property in Indiaonly after seeking permission from the Reserve

Bank.

Now, under FEMA, the control of Reserve Bank isdetermined by the residential status of a person.

Only a non-resident as defined within themeaning of FEMA would require permission of theReserve Bank to acquire or transfer an immovableproperty in India.The distinction based on citizenship has been

abolished and that based on resident ship has


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An appeal against the order of "adjudicating office",

before " Foreign Exchange Regulation AppellateBoard went before High Court.

The appellate authority under FEMA is the specialDirector

( Appeals) Appeal against the order of AdjudicatingAuthorities and special Director (appeals) lies before"Appellate Tribunal for Foreign Exchange.

"An appeal from an order of Appellate Tribunal wouldlie to the High Court. (sec 17,18,35)


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ADJUDICATING AUTHORITY

The inquiry of any breach of FEMA is conducted by anAdjudicating Authority appointed by the Central Government.

APPEAL TO SPECIAL DIRECTOR (APPEALS)

The special Director (Appeals) is authorised to hear theappeals arising out of in order of the Adjudicating Authority. APPEAL TO THE APPELLATE TRIBUNAL

The Appellate Tribunal is entitled to hear appeals made inaccordance, from an order made by Adjudicating Authority orspecial Director (Appeals).

DIRECTOR OF ENFORCEMENTThe Director of Enforcement and other officers has power toconduct investigation, search and seize any articles.


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The inquiry of any contravention of FEMA is conducted by anAdjudicating Authority.

Appeal from an order of "Adjudicating Authority" lies before"special Director (appeal)

"Appellate Tribunal" is entitled to hear appeal arising out of anorder from "Adjudicating Authority" and "special Director(appeal).

An appeal from the decision of "Appellate Tribunal" liesbefore High Court.


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FERA had no provision for export of services.

Now, FEMA has included payment received by an Exporterof Services in its ambit.

Every Exporter, who receives payment from outside India, forhis services rendered is obliged to furnish details of paymentto the 'Reserve Bank.

For example; a Doctor, or Engineer or Lawyer or Accountantor any other professional may give opinions or consultation to

people outside India, via internet or mail, and his fees may becredited to his credit account. Then he is obliged to furnishdetails of such payment to Reserve Bank.


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PROCEEDINGS

Under FERA, any contravention was a criminaloffence and the proceedings were governed bythe code of Criminal Procedure. Moreover theEnforcement Directorate had powers to arrest anyperson, search any premises, seize documents,initiate proceeding.

Now all these have been done away with, andcontravention of FEMA is no more a Criminaloffence, and only monetary penalty, i.e. civilproceedings are applicable. Civil imprisonment isprovided, only in case of default to pay fine.


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Relevant offences are as

follows:

DETAILS IN FOREIGN EXCHANGE: Only a person Authorized by Reserve Bank can

deal in foreign Exchange No one can make a payment to a person resident

outside India, without permission of ReserveBank. No one receives any payment from a person

resident outside India, without permission ofReserve Bank.

A person resident in India cannot deal in foreign

exchange, foreign security or any immovableproperty situated outside India, without permissionof Reserve Bank. (sec 4)

Similarly a person resident outside India, cannotacquire immovable property in India withoutpermission.


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QUANTUM OF PENALTY

The monetary penalty payable under FERA, was nearly thefive times the amount involved.

Any contravention, under FEMA, may invite following kindsof penalties: If, the amount against which offence is quantities, then penalty will be

"THRICE" the sum involved in contravention.

Where the amount cannot be quantified the penalty may be imposed uptotwo lakh rupees.

If, the contravention is continuing everyday, then Rs. Five Thousand forevery day after the first day during which the contravention continues.

Further in addition to the penalty, any currency, security or other money orproperty involved in the contravention may also be confiscated.


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RIGHT OF ASSISTANCE DURING LEGALPROCEEDINGS.

FERA did not contain any express provision on the right of onimpleaded person to take legal assistance

FEMA expressly recognises the right of appellant to takeassistance of legal practitioner or chartered accountant (32)

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


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1. Up to US $ 5,000 in every calendar year for

foreign travel (increased from the limit of US $3,000 under FERA).

2. Up to US $ 25,000 per trip for a business trip orfor attending a conference abroad, irrespective ofthe length of the trip (under FERA, you had limitsper day plus an entertainment allowance).

3. For gifts up to US $ 5,000 per beneficiary perannum (under FERA, the limit was US $ 1,000and restricted only to defined relatives).

4. For donations up to US $ 5,000 per beneficiary.


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5. For maintenance of close relatives abroad up to US $ 5,000per recipient.

6. For foreign studies up to US $ 30,000, or the estimate fromthe foreign institution, whichever is higher.

7. For meeting expenses for medical treatment abroad, up tothe estimate from doctor in India or hospital or doctor abroad.

*There do not seem to be any restrictions on payments to bemade in forex for various sundry expenses, such as purchaseof books or software for your own use, for which there werecertain limits under FERA.


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Exchange Control Regulations have beenframed by RBI, being the Exchange Control

Authority of India. These regulations have been framed in terms of

the provisions of the FEMA,1999.

The various exchange control Rules andRegulations relating to export of goods and

services are:1. FEM (Current Account Transactions)Rules,2000.

2. FEM (Export of goods & Services )Regulation,2000.

3. FEM (Manner of Receipt & Payment)


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(a ) Purchase and sale of and other dealings in forexand maintenance of balances at foreign centres

(b) Procedure for realisation of proceeds of exports(c) Payments to NRI or to their accounts in India

(d) Transfer of securities between residents andnon-residents and acquisition and holding offoreign securities

(e) Foreign travel with exchange(f) Export and import of currency, cheques, drafts,

travellers cheques and other financial instruments,securities, etc.(g) Activities in India of branches of foreign firms and

companies and foreign nationals


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(h) Fdi and portfolio investment in India includinginvestment by non-resident Indian nationals/personsof Indian origin and corporate bodies predominantlyowned by such persons

(i) Appointment of non-residents and foreign nationalsand foreign companies as agents in India

(j) Setting up of joint ventures/subsidiaries outside Indiaby Indian companies

(k) Acquisition, holding and disposal of immovableproperty in India by foreign nationals and foreigncompanies

(l) Acquisition, holding and disposal of immovable

property outside India by Indian nationals resident inIndia.


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Capital Account Transactions (By a person resident inIndia)

1. Investment in foreign securities2. Loan raised in foreign currency in India or abroad3. Acquisition or transfer of immovable property outside

India.4. Guarantees issued in favour of a person resident outside

India5. Export, import or holding of currency or currency notes6. Loans and overdrafts from a person resident outside

India;7. Maintenance of foreign currency accounts in India and

outside India8. Insurance policy from an insurance company outside

India9. Remittance of capital assets outside India10. Sale and purchase of foreign exchange derivatives in

India and abroad and commodity derivatives abroad


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Two types of prohibitions

General Prohibitions A person shall not undertake or sell or draw foreign exchange

to or from an authorised person for any capital accounttransactions, subject to circulars and notifications specified by

RBI.

Special Prohibitions A non resident person shall not make investment in India in

any form in any company or partnership firm or proprietaryconcern or any entity, whether incorporated or not, which isengaged or proposes to engage,

- In the business of chit funds - as nidhi company - in agricultural or plantation activities - in real estate business or construction of farm houses - in trading in Transferable Development Rights (TDRs)


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Current Account Transactions

A transaction other than a capital account transaction alsoincludes,

1. payments due in connection with - foreign trade

- other current business or services,- Short term banking and credit facilities inordinary course of business.

2. payments due as - interest on loans - Net income from investments - remittances for living expenses of parents,

spouse and children residing abroad - expenses in connection with foreign travel,

education and medical care of parents, spouseand children


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Foreign Exchange Management (current account

transactions) rules, 2000

The Classification of current account transactions whichare,

- Totally prohibited - Permitted, subject to the prior approval of

concerned ministry, Central government - Permitted, subject to prior approval of the RBI

Exhaustive List For transactions not covered in this notifications,

authorised dealers are free to release foreign exchangeupon the satisfaction that the transactions will notinvolve and is not designed for violation of the act or rulemade there under.


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Under FEMA an Indian company with foreignequity participation is treated at par with otherlocally incorporated companies.

Accordingly, the exchange control laws andregulations for residents apply to foreign-invested companies as well


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Foreign investment is freely permitted inalmost all sectors. Foreign Direct Investments(FDI) can be made under two routes

Automatic Route and Government Route.

Under the Automatic Route, the foreigninvestor or the Indian company does notrequire any approval from the RBI or GOI for

the investment. Under the Government Route, prior approval

of the Government of India, Ministry ofFinance, Foreign Investment Promotion Board

(FIPB) is required


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FEMA Regulations prescribe the mode ofinvestments i.e. manner of receipt of funds,issue of shares/convertible debentures and

preference shares and reporting of theinvestments to RBI.

The impact of amendment in act from FERA toFEMA is evident in the BOP table shown


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After the amendment in 1993 by allowing thefully convertibility of the Indian rupee oncurrent account the Forex inflow increased

from Rs.18 bn in 1992-93 to Rs. 144 bn in1993-94

forex outflow increased from Rs.1 bn in 1992-93 to Rs. 11 bn in 1993-94.This shows theimpact on forex reserve as well whichincreased from Rs. 8.8 bn in 1992-93 toRs.267.8 bn in 1993-94


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Year (April-March) Amount of FDI inflows (InUS$ million)

1991-2000 16,698

2000-2001 2,908

2001-2002 4,222

2002-2003 3,134

2003-2004 2,634

2004-2005 3,759

2005-2006 5,546

2006-2007 15,726 2007-2008 24,579

2008 (April , May) 7,681


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