Foreign Exchange Management Act , 2000

Foreign Exchange transactions were earlier regulated in India by the Foreign Exchange Regulation Act, 1973. It was widely described as a draconian and obnoxious law. After Liberalization in 1973, some amendments to FERA were affected in 1991. The main objective of FERA was conservation and proper utilization of the foreign exchange resources of the country.

 Foreign Exchange Management Act (FEMA) has replaced Foreign Exchange Regulation Act (FERA). While the FERA was a law which sought to control Foreign Exchange (FX) transactions, FEMA seeks to regulate. FERA was enacted at the time when there was scarcity of FX. It was inherited from the British government which had passed laws controlling FX, to keep control over its colony. We also needed the law in the early years of FX scarcity. With changed scenario, FX is no longer a precious & rare commodity. It is just like any other commodity. There should be proper regulation, but not control. For economic issues, one needs a commercial law.

 The preamble to FEMA lays down that the Act is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. As far as facilitating external trade is concerned, section 5 of the Act removes restrictions on drawal of foreign exchange for the purpose of current account transactions

 . As external trade i.e. import / export of goods & services involve transactions on current account, there will be no need for seeking RBI permissions in connection with remittances involving external trade. The need to remove restrictions on current account transactions was necessitated as the country had given notice to the IMF in August, 1994 that it had attained Article VIII status. This notice meant that no restrictions will be imposed on remittances of foreign exchange on account of current account transactions.

 Civil Law Foreign Exchange Regulation Act had its genesis in the Defence of India Rules. The British Government had enacted the rules to exercise control over its colonies. Hence FERA was like a criminal law. Section 35 empowered any officer of Enforcement Directorate to arrest a person, if he had a reason to believe that the person is guilty of violation of FERA. There are several reported cases of human rights violations by the Enforcement Directorate. Such laws do not have a place in a democratic country like ours.

FEMA is a civil law. Primarily there is no imprisonment for violation of the law. Only penalty can be levied .However, if the person cannot pay the penalty, then he can be arrested.

 The emphasis of FEMA is on RBI laying down the regulations rather than granting permissions on case to case basis. This transition has also taken away the concept of exchange control and brought in the era of exchange management. In view of this change, the title of the legislation has rightly been changed to FEMA.

 FEMA replaced FERA in 1999. Came into effect from Jan 1, 2000. It extends to the whole of India and also applies to all branches , offices and agencies outside India , owned or controlled by a person resident in India.

 Objectives : Facilitate external trade and payments. Promote the orderly development and maintenance of Foreign exchange market

 Dealings in Foreign Exchange : Section 3 of FEMA imposes restrictions on dealings in foreign exchange and foreign security and payments to and receipts from any person outside India. Accordingly except as provided in terms of the act, or with the general or special permission of the Reserve Bank , no person shall :

deal in any foreign exchange or foreign security with any person other than an authorized person . Make any payment to or for the credit of any person resident outside India in any manner.

Receive otherwise through an authorized person , any payment by order or on behalf of a person resident outside India in any manner. Enter in to any Financial Transaction in India as a consideration for or in association with acquisition or creation or transfer of a right to acquire , any asset outside India by any person.

 Holding of Foreign Exchange Save as otherwise provided in this act , no person resident in India shall acquire , hold , own , possess or transfer any foreign exchange , foreign security or any immediate property situated outside India.

 Current Account Transactions FEMA permits dealings in Foreign exchange through authorized persons for current account transactions. However the central govt. can impose reasonable restrictions in public interest.

 Capital account Transactions Any person shall sell or draw foreign exchange to or from an authorized person for a capital account Transaction permitted by the RBI in consultation with the central govt.

 A person resident in India may hold , own, transfer or invest in foreign currency , foreign security or any immovable property situated outside India if such currency , security or property was acquired , held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

 A person resident outside India may hold , own , transfer or invest in Indian currency, security or any immovable property situated in India if such currency was acquired , held, or owned by such person when he was resident in India or inherited from a person who was resident in India.

 The RBI is empowered by this act to prohibit , restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India for carrying on any such activity relating to such branch, office or other place of business.

 Export of Goods and services Every exporter of goods shall furnish to RBI or to such other authority a declaration as specified containing true and correct material, particulars , including the amount representing the full export value.

Contravention and Penalties

Any kind of contravention under this act is liable to a penalty up to thrice the amount involved where it is quantifiable or up to 2 lakhs where it is not quantifiable. Further penalty may extend up to five thousand rupees for every day after the first day. In FERA there was provision for imprisonment and no limit on fine.

 In FEMA a person will be liable to civil imprisonment only if he does not pay the fine within 90 days from the date of notice. Administration of this act FEMA provides for the establishment of an Enforcement Directorate for investigating the contraventions under this act.

FERA & FEMA A Comparison

Anything and everything that has to do with foreign exchange was controlled . Aim of FERA is to prevent misuse of Foreign Trade. Theme of FERA was Everything that is specified is under control. FERA had 81 sections. Only the specified acts related to foreign exchange are regulated . The aim of FEMA is facilitating Trade. Theme of FEMA is, Everything other than what is expressly covered is not controlled. FEMA has only 49 sections.

 Many provisions of FERA like Indians taking up employment abroad, employment of foreign technicians in India etc. have no appearance in FEMA.

Changing Dimensions of these laws

With the advent of Liberalization and privatization , all these laws have undergone a tremendous change , which is clearly visible from the amendments that had been made in these laws from time to time. The provisions of MRTP Act, 1969 were amended after 1991 to make it more reform oriented and remove its provisions related to Monopolies restriction .

 The FERA was totally scrapped and it gave way to FEMA. The Industries Development and regulation act 1951 had also undergone through various amendments to make way for reforms. In short it can be said that all these laws and constitutional provisions which earlier played a regulatory role were transformed to play a facilitator role for Industrial development.