FOREIGN EXCHANGE MANAGEMENT ACT

PRESENTERS:
YATINDER SAGAR (020) RATNDEEP (024) DEEPAK KUMAR (009) SURABH DATTA (XXX) BHASKAR (XXX)

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.

FOREIGN EXCHANGE MANAGEMENT ACT

FEMA is an Act 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.

OBJECTIVES OF FOREIGN EXCHANGE MANAGEMENT ACT (FEMA):

To revise and unite all the laws that relate to foreign exchange. To promote foreign payments and trade in the country. To encourage the orderly maintenance and development of the foreign exchange market in India

FORMULATION OF FOREIGN EXCHANGE MANAGEMENT ACT (FEMA):

In 1999, the Indian government formulated the Foreign Exchange Management Act (FEMA). On the 1st of June, 2000, FEMA came into force replacing the FERA, which was formulated in 1973. Extensive economic reforms were undertaken in India in the early 1990s. In FEMA is that there is no imprisonment prescribed for contraventions of the law, not even as an alternative punishment and for the blatant and deliberate of violations.

BROAD STRUCTURE OF FEMA

Pertaining to foreign exchange

All current account transactions are free. However, Central government can impose restrictions .
Capital accounts transactions are permitted to the extent specified by RBI regulations . RBI controls management of foreign exchange. RBI authorizes Authorized persons to deal in foreign exchange. RBI issues directions to such persons u/s.11 These directions are issued through AP(DIR) circulars. Authorized Persons (Directions)

SIMILARITIES BETWEEN FEMA AND FERA

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

DIFFERENCE BETWEEN FERA AND FEMA

Sr. No

DIFFERENCES

FERA

FEMA

PROVISIONS

FERA consisted of 81 sections, and was more complex. Presumption of negative intention

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

FEATURES

Presumptions of Mens Rea and (Mens Rea ) and joining hands in abatement have been excluded in offence (abatement) existed in FERA FEMA
Terms like Capital Account Transaction, current account Transaction person, service etc., have been defined in detail in FEMA

Terms like Capital Account NEW TERMS IN Transaction, current Account Transaction, person, service etc. FEMA were not defined in FERA.

DEFINITION OF Definition of "Authorized Person" in AUTHORIZED FERA was a narrow one PERSON

The definition of Authorized person has been widened to include banks, money changes, off shore banking Units etc.

Sr. No

DIFFERENCES

FERA

FEMA

MEANING OF "RESIDENT" AS COMPARED WITH INCOME TAX ACT.

There was a big difference in the definition of "Resident", under FERA, and Income Tax Act.

A person who qualifies to be a resident under the income Tax Act, 1961 will also be considered a resident under FEMA but not necessarily same in opposite case.

PUNISHMENT

Any offence under FERA, was a criminal offence , punishable with imprisonment as per code of criminal procedure, 1973

Offence is considered to be a civil offence only punishable with some amount of money as a penalty. Imprisonment is prescribed only when one fails to pay the penalty.

QUANTUM OF PENALTY.

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

Under FEMA the quantum of penalty has been considerably decreased to three times the amount involved. The appellate authority under FEMA is the special Director ( Appeals) Appeal against the order of 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.

APPEAL

An appeal against the order of "Adjudicating office", before " Foreign Exchange Regulation Appellate Board went before High Court

Sr. No

DIFFERENCES

FERA

FEMA

RIGHT OF ASSISTANCE DURING LEGAL PROCEEDINGS.

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

FEMA expressly recognizes the right of appellant to take assistance of legal practitioner or chartered accountant (32)

10

POWER OF SEARCH FERA conferred wide powers on a The scope and power of search AND SEIZE police officer not below the rank of and seizure has been curtailed to a Deputy Superintendent of Police a great extent to make a search

IMPORTANT TERMS (SEC-2)

Authorized Person: Authorized under the Act to deal in foreign exchange Capital account transaction: Alters the assets or liability Currency: Currency notes, Money order, cheque, drafts etc Currency Notes: Coin and bank notes Currency Account Transaction: Transactions other than capital account transactions Indian Currency: Indian rupees

Export: Goods and services from India to outside

Foreign Currency: Other than Indian currency Foreign Exchange: Means foreign currency Foreign Security: Security expressed in foreign currency Import: Goods and services from outside to India Security: Shares, Stock etc as defined in the Public Debt Act of 1994

Repatriate to India: Realized foreign exchange to India Service: Banking, Financing, insurance etc

Transfer: Sale, Purchase, Exchange etc

Non-Resident Indian (NRI): Citizen of India residing outside Overseas Corporate Body (OCB): A company, firm etc.. Owned at least 60% by NRIs

Person of Indian Origin (PIO): Citizen of country other then Bangladesh and Pakistan, if Any time held Indian passport or Either of his parents or grandparents was citizen of India The Person is spouse of an Indian citizen

TO WHOM ACT IS APPLICABLE ?

The FEMA, is applicablea) To the whole of India. b) Any Branch, office and agency, which is situated outside India, but is owned or controlled by a person resident in India. Broadly speaking FEMA, covers, three different types of categories, and deals differently with them. These categories are: a) Person b) Person Resident In India c) Person Resident Outside India

PERSON

For the purpose of provisions, a person shall include any of the following:
1. 2. 3. 4. 5. 6. 7.

An individual A Hindu Undivided family A company A Firm An association of persons or a body of individuals, whether incorporated or not, Every artificial judicial person, not falling within any of the preceding sub clauses, and Any agency, office or branch owned or controlled by such person.

PERSON RESIDENT IN INDIA

1.

2.

3.

4.

A person who has been residing in India for more than 182 days, in the last financial year. This means if a person has to be assessed, as to whether he is person resident in India, for any offence committed in August 2001, then he should be residing in India for more than 182 days during April 2000 to March 2001 Any person or body corporate registered or incorporated in India, or An office, branch or agency in India owned or controlled by a person resident outside India, or An office, branch or agency outside India owned or controlled by a person resident in India.

PERSON RESIDENT OUTSIDE INDIA

Simply putting it, "a person resident outside India" means "a person who is not resident in India"

CAPITAL ACCOUNT TRANSACTION (SEC 2(E))

Transaction which alters the assets/liabilities (including contingent), Outside India of persons resident in India; In India of person resident outside India(PROI).

INCLUDES Transfer/issue of security/foreign security Borrowings/rupees/deposits/lending of forex Dealings in immovable property Export/import/holding of currency or currency notes

PROHIBITION
Rules & regulations made thereunder No person shall undertake or sell or draw foreign exchange to or from an AP for any CAT. No PROI shall make investment in India, in any form, which is engaged or purposes to engage :- In the business of chit fund - As Nidhi company - In agricultural or plantation activities - In real estate business, or construction, - In trading in transferable development rights.

SCHEDULE-I Classes of CAT s of PRI Investment by a PRI in foreign securities.

SCHEDULE-II Classes of CAT of PROI Investment in india by a PROI- issue of security in india and investment therein by a PROI.

Foreign currency loans raised in india Foreign currency accounts in india of and abroad by a PRI. a PROI. Transfer of immovable property outside india by a PRI Acquisition and transfer of immovable property in india by a PROI.

Guarantees issued by a PRI in favour Guarantee by a PROI in favour of, or of a PROI. on behalf of, a PRI.

Loans and drafts by a PRI to a PROI. Deposits between a PRI and a PROI.
Remittance outside india of capital assets of a PRI. Import, export and holdings of currency/currency notes. Remittance outside india of capital assets in india of a PROI. Import and export of currency/currency notes into /from india by a PROI.

CURRENT ACCOUNT TRANSACTIONS (SEC-2(J))

A transactions other than the capital account transaction. Includes Payment for foreign trade ,other current business , services Payment for interest on loan & as income from investment Remittances abroad for living expenses and expenses for foreign travel ,education & medical.

PROHIBITION ON DRAWAL OF FOREX

Drawal of forex by any person for the following purpose is prohibited, namely: A transaction specified in the schedule-I A travel to nepal and bhutan. A transaction with a person resident in nepal and bhutan.

PRIOR APPROVAL OF GOVT OF INDIA

No person shall draw foreign exchange for a transaction included in schedule-II without prior approval of the govt of India. Provided that this rule shall not apply where the payment is made out of funds held in RFC/EEFC account of the remitter.

PRIOR APPROVAL OF RBI

No person shall draw foreign exchange for a transaction included in schedule-III without prior approval of the RBI. Provided that this rule shall not apply where the payment is made out of funds held in RFC/EEFC account of the remitter.

PROVISIONS

PROVISIONS IN SECTIONS
Section 3

Prohibits dealings in foreign exchange except through 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 any person resident outside India in any manner Enter into any financial transaction in India for acquisition or creation or transfer of a right to acquire, any asset outside India by any person

PROVISIONS IN SECTIONS

SECTION 4 Restrains any person resident in India from acquiring, holding, owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India except as specifically provided in the Act.

SECTION 5 deals with current account transaction Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawl is a current account transaction SECTION 6 - deals with capital account transactions. This section allows a person to draw or sell foreign exchange from or to an authorized person for a capital account transaction.

PROVISIONS IN SECTIONS

SECTION 7 - deals with export of goods and services. Every exporter is required to furnish to the RBI or any other authority, a declaration etc. etc. regarding full export value. SECTIONS 8 and 9 Casts the responsibility on the persons resident in India who have any amount of foreign exchange due or accrued in their favor to get same realized and repatriated to India within the specific period and the manner specified by RBI. SECTION 10 duties of authorized person. deals with duties and liabilities of the Authorized persons authorized dealer, money changer, off shore banking unit or any other person for the time being authorized to deal in foreign exchange or foreign securities.

PROVISIONS IN SECTIONS

SECTION 11 and 12 Powers of reserve bank The reserve bank is empowered to order inspection of the business of any authorized person for any of following reasons: Verifying the correctness of any statements, information or particular

a) b)

Obtaining information which such authorized person has failed to

furnish

c)

Securing compliance with the provisions of Act

PROVISIONS IN SECTIONS

SECTION 13 Any contravention, under FEMA, may invite following kinds of 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 up to two lakh rupees.
If, the contravention is continuing everyday, then Rs. Five Thousand for every day after the first day during which the contravention continues.

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

PROVISIONS IN SECTIONS

SECTION 14 If a person fails to make full payment of the penalty imposed with in a period of 90 days, he shall be liable to civil imprisonment. SECTION 15 Empowers the Directorate of Enforcement and Officers of the Reserve Bank of India as may be authorized by the central Govt. in this behalf to compound the offences. SECTION 16 Empowers the central Govt. to appoint the as many adjudicating authorities as it may think fit for holding enquiries. SECTION 17 Empowers the central Govt. to appoint one or more special Directors to hear the appeals against the orders of the Adjudicating Authorities.

PROVISIONS IN SECTIONS

SECTION 18 Empowers the central Govt. to establish Appellate Tribunal to hear appeals against the orders of Adjudicating Authorities and special Director. SECTION 19 It makes provisions as regards appeals to Appellate Tribunal. SECTION 20 Composition of Appellate Tribunal. SECTION 21 Qualifications for appointment of Chairperson member and Special Director. SECTION 22 Term of Office. SECTION 23 Terms and Conditions of service. SECTION 24 Vacancies.

PROVISIONS IN SECTIONS

SECTION 25 Resignation and Removal.

SECTION 26 Member to act as Chairperson in certain circumstances.

SECTION 27 Staff of Appellate Tribunal and Special Directorate. SECTION 28 Power of Appellate Tribunal and Special Director.

SECTION 29 Distribution of business among benches.

SECTION 30 Power of Chairperson to Transfer cases.

PROVISIONS IN SECTIONS

SECTION 31 Decision to be by majority. SECTION 32 Right of Appellant to take assistance of legal practitioner or CA and of Govt. to appoint presenting officer. SECTION 33 Members, etc to public servants.

SECTION 34
Civil court not to have jurisdiction.

SECTION 35 Appeal to High Court.

PROVISIONS IN SECTIONS

SECTION 36 to 38 Directorate of Enforcement

Enforcement of the provisions of the Foreign Exchange Management Act prevent leakage of foreign exchange Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments. Acquisition of foreign currency illegally by person in India. Non-repatriation of the proceeds of the exported goods. Unauthorized maintenance of accounts in foreign countries. Siphoning off of foreign exchange against fictitious and bogus imports land by. Illegal acquisition of foreign exchange through Hawala

DUTIES OF AN AUTHORIZED PERSON

To comply with RBI directions Not to engage in un authorized transactions Ensure compliance of FEMA provisions

To produce books, accounts etc

REVOCATION OF AUTHORISATION BY RBI

The authorisation shall always be in writing. RBI can revoke the authorisation at any time, if satisfied that It is in public interest The authorised person has failed to comply with the requirements subject to which authorisation was granted Or has contravened any provisions of the Act, rule, regulation, notification, circulars etc. Revocation can be done after giving an opportunity for the dealer for a representation. S. 10(3) For contravention of any direction a penalty of 10000/- may be imposed. If the default is continued penalty of 2000/- per day may be imposed. S. 11 RBI can inspect all record books of the authorised person.

PROCEDURE FOR REMITTANCE UNDER FEMA

Application to authorized dealer

Supporting documents

Remittance

CA/ PCS certificate

Payment to authorized dealer

TDS Certificate

APPLICATIONS HAVE TO BE GIVEN TO AUTHORISED DEALER FOR REMITTANCE OF FOREIGN CURRENCY IN INDIA

Separate application forms are prescribed. If a person has to open a foreign currency a/c in India application has to be given to RBI For eg. Remittance upto USD 5000(Small value) can be done by a simple letter specifying all particulars about the applicant without any accompanying papers to the the authorised dealer Separate forms are there for other remittances. E.g. FORM A1 for remittance foreign currency for import of goods to India. Any individual can remit up to USD 25000/ calendar year for holding/ acquiring immovable property abroad, acquiring shares outside India, opening of foreign currency a/c with a Bank outside India. No permission of RBI is required. This is applicable for all current and capital a/cs and a combination of both.

ENFORCEMENT

Enforcement is with enforcement directorate The central government has appointed Directors of Enforcement, Additional directors, Special Director, Deputy Director and Assistant Directors for enforcement of FEMA. S. 36 Powers are similar to Income tax authorities Main powers include inspection and investigation of violations of FEMA provisions. Cheques and other NIS recovered during enforcement will be deposited with RBI. If Indian currency is found, it shall be deposited in a separate a/c in the name of Director of enforcement. The central government will indemnify the enforcement authority for encashing the NIs.

PENALTIES UNDER FEMA

Offenses under FEMA are civil offenses. Central government appoints the adjudicating authority. S.16(1) They conduct enquiry on the complaint received from an authorised person. It should give the verdict within 1 year, if not should state the reason. While adjudicating the case, it acts as a quasi judicial body and has to follow the principles of natural justice. Opportunity should be given to the respondent to represent his case.

AN OFFICER NOT BELOW THE RANK OF ASSISTANT DIRECTOR CAN FILE THE COMPLAINT

The adjudicating authority has got the powers of a civil court The penalty can be upto thrice the sum involved in contravention where the amount is quantifiable. If not, penalty can be up to Rs. 2 lakhs. If the transgression continues all officers in default will be liable to pay 5000/ per day. S. 13(1)

The foe may be confiscated. S.13 (2)

A person on whom the verdict is passed has to make payment within 90 days. If not he is liable to civil imprisonment. S. 14(1) For amount less than 1 crore- 6 months For amount more than 1 crores- up to 3 years s. 14(11) Compunding is permitted within 180 days

APPEALS

Assist. Director/deputy director to special directors Further appeal lies with Appellate Tribunal for foreign exchange The tribunal consists of chair person and members It sits in Delhi or other places as may be notified Division bench will hear matters above 5 lakhs Jurisdiction of civil court is barred when the matter is pending before the tribunal Second appeal lies to high courts and supreme court

EXAMPLES

RAJ KUMAR SHIVHARE VS. ASSISTANT DIRECTOR, DIRECTORATE OF ENFORCEMENT

Raj Kumar Shivhare was indulged in receiving unauthorized payments worth Rs. 5 crores under instructions from persons living outside India in connection with his illegal cricket betting operation.

The charges were proved against him.

He was held guilty according to the provisions given by the section 3 of FEMA. So he get punishment as under:
A penalty of Rs. 2 crores was imposed on him.
And the confiscated money was disposed of.

RECENT VIOLATIONS NOTICED UNDER FEMA

FEMA violation by IPL Franchises. Lalit Modi will be interrogated in London by Enforcement Directorate for the foreign investments in the IPL Teams. ED authorities can appoint a Commission to take statement and collect information FEMA violation in 19th CWG in Queen Baton Relay The Directorate has registered an Enforcement Case Information Report under Foreign Exchange Management Act in connection with alleged forex violations of several hundred crores in the Relay held last year in London