INDIAN FOREIGN EXCHANGE MARKET: Fera & fema act

The Indian foreign exchange market may be broadly described as a three-tiered market. The first tier consists of foreign exchange transaction between the banks and their customers, mainly importers and exporters. Secondly, their there is the inter-bank market wherein there are exchange dealings between banks themselves, conducted through foreign exchange brokers and supplemented from time to time by reserve bank of India. The inter-bank market is mainly established in three important port centers, namely Bombay, Kolkatta and chennai. The third tier consists of foreign exchange dealings between banks in India and their counterparts and branches in foreign countries that have exchange business to transact with India. In addition, the banks in India also operate in international markets like London, New York etc. to cover their foreign exchange dealings with the customers and other banks. While the first could be compared with the retail market, the second is in fact a domestic wholesale market. The third is also a wholesale market but on an international plane. All the three are inter connected, this is so because after all the customers are the ultimate suppliers and the consumers (sellers and buyers) of foreign currencies and their needs and met by the banks either by operating in the inter-bank market locally or in the international; exchange market.

In 1999, Foreign

Exchange Management Act was passed to replace FERA to manage the Indian Foreign Exchange Market in a better manner. Definition of FEMA 2000: FEMA 2000 means Foreign exchange management Act 2000. Foreign exchange management act 2000 is very helpful law for development of foreign exchange market in India. It was passed in 1999 and came into effect from June 1, 2000 to entire country. After this foreign exchange regulation act almost all strict regulations of FERA were removed in FEMA . Abstract: The government of India has formulated the Foreign Exchange Management Act (FEMA), which relates to the foreign direct investment in the country. Foreign Exchange Management Act (FEMA) has helped the country by encouraging external payment and trade. Formulation of Foreign Exchange Management Act (FEMA): 1973 was closed . FEMA was most suitable for India corporate sector instead of FERA because

In 1999, the Indian government formulated the Foreign Exchange Management Act (FEMA). On the 1st of June, 2000, FEMA came into force replacing the Foreign Exchange Regulation Act (FERA), which was formulated in 1973. Extensive economic reforms were undertaken in India in the early 1990s and this led to the deregulation and liberalization of the country's economy. Foreign Exchange Management Act (FEMA) was thus formulated in order to be compatible with the policies of proliberalization of the Indian government.

Extent of Foreign Exchange Management Act (FEMA): Foreign Exchange Management Act (FEMA) is applicable to the entire country. Agencies, branches, and offices, outside India, that are owned by Indian residents, also fall under the jurisdiction of this act. Foreign Exchange Management Act (FEMA) also extends to any dispute that are committed in offices, agencies and branches outside India that are owned by individuals covered by this act. Implementation of Foreign Exchange Management Act (FEMA): Extensive efforts have been undertaken to ensure the effective implementation of FEMA in India. Proper implementation measures and efficient supervision are important preconditions for the success of the Foreign Exchange Management Act (FEMA).

FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (FEMA)

A bill based on the recommendations of the Task Force, was introduced in the Lok Sabha on 4 August, 98. The Bill was referred to the standing committee on Finance which submitted its report to the House on 23 December' 98 with suggestion and modifications. The 12th Lok Sabha was dissolved before any decision could be taken on the bill. The Bill subsequently lapsed. The bill was again introduced in the 13th Lok Sabha on 25th Oct'99. The presidential Assent was received on 6th Jan 2000. Finally the FEMA came into operation w.e.f. 1st June 2000.

The FEMA, is applicable to:

To the whole of India. Any Branch, office and agency, which is situated outside India, but is owned or controlled by a person resident in India. Any contravention of provisions of FEMA, by all those, who are covered under above two aspects committed outside India.

IMPORTANT PROVISIONS FROM FEMA:

Some of the relevant provisions of Exchange Control Manual under FEMA, which still exist, are: REFUND OF INWARD REMITTANCES: If a request is made from the overseas for cancellation of Inward Remittances, Authorized Dealers may do so without referring to Reserve Bank, if refunds are not to compensate for a loss. APPLICATION FOR REMITTANCES IN FOREIGN CURRENCY: A person firm or bank may apply to an Authorized Dealer for remittances in any foreign currency to a beneficiary abroad. Application should be made in FORM -A1, if the purpose of remittance is import of goods into India. For any other purpose in Form -A2 The Authorized Dealer may sell the foreign Exchange applied for if he think fit provided it is within his powers, and the purpose of remittance is an approved one. MODE OF PAYMENT OF RUPEES AGAINST SALE OF FOREIGN EXCHANGE: In case of sale of foreign Exchange or remittance foreign Exchange amounting to Rs. 20,000 or more the payment received by the Authorized Dealer, from the applicant should be through a crossed cheque drawn on the applicant bank account or on the bank account of the Firm/ Company. Payment can also be

accepted in the form of a Banker's cheque / Pay Order / Demand Draft. Receipt of Payment in cash in case of such sale of foreign Exchange or remittance in foreign Exchange is strictly prohibited. EXCEPTION: However where purpose of sale of foreign exchange is for travel abroad for business etc, cash may be received by Authorized Dealer from Applicant upto Rs. 50,000/Where the rupee equivalent for drawing foreign exchange exceeds Rs. 50,000 either for any single installment or for more than one installment reckoned--together for a single journey / visit it should be paid by the traveler by means of a gross cheque / demand draft/ pay order as stated above. TRAVELERS CHEQUE NEGOTIABLE ONLY IN INDIA: Rupee Travelers cheque cannot be encashed outside India, if they are issued solely for use within India. In such a case they cannot be taken or sent out of India. Reimbursements should be strictly refused where such travelers cheques have been encashed outside India. REIMBURSEMENT OUTSIDE INDIA: Rupee Travellers cheque, which are issued by authorized dealers, encashable outside India, may be reimbursed by Authorized Dealers or by their selling Agent. IMPORT OF FOREIGN CURRENCY NOTES: When the stock of foreign currency notes with Authorized Dealer is not adequate for meeting their normal business requirement they could import foreign currency notes from their overseas branches or correspondents. RECONVERSION OF INDIAN CURRENCY:

Foreign currency may be sold against Indian Rupees held by persons who are not resident of India but are passing through or leaving India after a visit, at the time of their departure from India. For this purpose, a Bank or Encashment certificate issued by Authorized Dealer, exchange bureau or Authorized Money changer in form BCI, ECF OR ECR, is required to show that the rupee had been acquired by sale of foreign Exchange to an Authorized Dealer or money changer in India. Such a certificate is valid for such reconversion i.e. a period of three months is not over from the date of sale of the foreign currency by the traveller. RATES OF EXCHANGE: Authorized dealers and their Exchange bureau may buy from and sell to public foreign currency notes and coins at rates of exchange determined by market conditions. Dealings in foreign currency notes and coins between authorized dealers and between authorized dealers and money changers would also be at rates determined by market conditions.

COMPARISION OF FERA AND FEMA:

1. SIMILARITIES:
THE SIMILARITIES BETWEEN FERA AND FEMA ARE AS FOLLOWS: The Reserve Bank of India and central government would continue to be the regulatory bodies. Presumption of extra territorial jurisdiction as envisaged in section (1) of FERA has been retained. The Directorate of Enforcement continues to be the agency for enforcement of the provisions of the law such as conducting search and seizure

2. DIFFERENCES BETWEEN FERA AND FEMA:

Sr. No

DIFFERENCES FERA sections, complex

FERA consisted and was of

FEMA 81 FEMA is much simple, more and consist of only 49 sections.

1 PROVISIONS

2 FEATURES

Presumption joining hands

of in

negative These offence have

presumptions been excluded

of in

intention (Mens Rea ) and Mens Rea and abatement (abatement) existed in FEMA FEMA 3 NEW TERMS IN Terms like Capital Account Terms FEMA Transaction, Account current Account Transaction, current like Capital account person,

Transaction,

person, service etc. were not Transaction defined in FERA.

service etc., have been defined in detail in FEMA

4 DEFINITION OF Definition AUTHORISED PERSON Person" in

of

"Authorised The was

definition person

of has

FERA

a Authorised banks,

narrow one ( 2(b)

been widened to include money changes, off shore banking Units etc. (2 ( c )

5 MEANING COMPARED TAX ACT.

OF There was a big difference in The provision of FEMA, in consistent with under FERA, and Income income Tax Act, in respect to the definition of term " Resident". Now the criteria of "In India for

"RESIDENT" AS the definition of "Resident", are WITH INCOME Tax Act

182

days"

to

make

person resident has been brought under FEMA. Therefore a person who qualifies to be a nonresident under the income Tax Act, 1961 will also be considered a non-resident for a the person to purposes who be of is nonapplication of FEMA, but considered

resident under FEMA may not necessarily be a nonresident under the Income Tax Act, for instance a business abroad days a or man and more going staying in a

therefore a period of 182 financial year will become non-resident under FEMA. 6 PUNISHMENT Any offence under FERA, Here, punishable with offence money the only as offence is

was a criminal offence , considered to be a civil punishable amount a of is penalty. imprisonment as per code of with criminal procedure, 1973 some

Imprisonment

prescribed only when one fails to pay the penalty. 7 QUANTUM PENALTY. OF The monetary penalty Under FEMA the

payable under FERA, was quantum of penalty has nearly the five times the been considerably amount involved. decreased to three times the amount involved.

8 APPEAL

An appeal against the order The appellate authority of "Adjudicating office", under FEMA is the special before " Foreign Exchange Director ( Appeals)Appeal Regulation Appellate Board against the order of went before High Court Adjudicating Authorities and special Director (appeals) lies before "Appellate Tribunal for Foreign Exchange. An appeal from an order of Appellate Tribunal would lie to the High Court. (sec 17,18,35)

9 RIGHT ASSISTANCE

OF FERA did not contain any FEMA expressly express provision on the recognises the right of assistance of legal practitioner or chartered accountant (32)

DURING LEGAL right of on impleaded person appellant to take PROCEEDINGS. to take legal assistance

10 POWER SEARCH

OF FERA conferred wide powers The scope and power of AND on a police officer not below search and seizure has

SEIZE

the rank of a Deputy Superintendent of Police to make a search

been curtailed to a great extent

3. A STEP AHEAD FROM FERA TO FEMA:

Enactment of FEMA has brought in many changes in the dealings of Foreign Exchange, as compared to FERA. Some of them are restrictive, and some has widened the scope. However some of the relevant progresses made, from FERA to FEMA, are as follows: DRAWAL OF FOREIGN EXCHANGE Now, the restrictions on drawal of Foreign Exchange for the purpose of current Account Transactions, has been removed. However, the Central Government may, in public interest in consultation with the Reserve Bank impose such reasonable restrictions for current account transactions as may be prescribed. FEMA has also by and large removed the restrictions on transactions in foreign Exchange on account of trade in goods, services except for retaining certain enabling provisions for the Central Government to impose reasonable restriction in public interest. OMISSION OF CRIMINAL PROCEEDINGS Under FERA, any contravention was a criminal offence and the proceedings were governed by the code of Criminal Procedure. Moreover the Enforcement Directorate had powers to arrest any person, search any premises, seize documents, and initiate proceeding. Now all these have been done away with, and contravention of FEMA is no more a Criminal offence, and only monetary penalty, i.e. civil proceedings are applicable. Civil imprisonment is provided, only in case of default to pay fine.

 RESIDENTIAL STATUS The definition of "Residential Status" under FEMA has gone through considerable change. It has now been made compatible with the definition provided under "Income Tax" Act. The residential status is now based on the physical stay of the person 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. The period of stay would be calculated by adding up all the days of stay of the individual in the country. An Indian resident becomes a non-resident when he goes abroad and takes up a job or engages in business. A major change in the definition of residential status of partnerships and firms in worth noticing. Earlier, under FERA, a branch was considered a resident of a place where it was situated. Now, under FEMA, an office, branch or agency outside India owned or controlled by a person resident in India will be considered a resident in India for the purposes of this Act. For example, a person residing in India has a branch in Mauritius; such branch will be considered a resident in India. IMMOVABLE PROPERTY OUTSIDE INDIA Earlier, under FERA, there was no restriction placed on foreign citizens who were residents of India, for acquiring immovable property outside India. Now FEMA prohibits a resident to acquire, own process, hold or transfer any immovable property situated outside India. This restriction applies irrespective of whether the resident is an Indian citizen or foreign citizen. With this provision being effective a foreign citizen who is a resident in India has to take approval of Reserve Bank of India for selling or buying any immovable property situated outside India. IMMOVABLE PROPERTY IN INDIA Earlier, under FERA, a foreign citizen could acquire or transfer immovable property in India only after seeking permission from the Reserve Bank. Now,

under FEMA, the control of Reserve Bank is determined by the residential status of a person. Only a non-resident as defined within the meaning of FEMA would require permission of the Reserve Bank to acquire or transfer an immovable property in India. The distinction based on citizenship has been abolished and that based on residentship has been introduced. EXPORT OF SERVICES FERA had no provision for export of services. Now, FEMA has included payment received by an Exporter of Services in its ambit. Every Exporter, who receives payment from outside India, for his services rendered is obliged to furnish details of payment to the 'Reserve Bank. For example; a Doctor, or Engineer or Lawyer or Accountant or any other professional may give opinions or consultation to people outside India, via internet or mail, and his fees may be credited to his credit account. Then he is obliged to furnish details of such payment to Reserve Bank. INCLUSION OF NEW TERMS Some new terms like "Capital Account Transactions, Current Account Transactions"; have been included in FEMA. Reserve Bank has been confirmed with powers and with consultation with central government to specify maximum permissible limit upto which exchange is admissible for such transactions.