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FOREIGN EXCHANGE MANAGEMENT

AMIT MISHRA LECTURER AMITY LAW SCHOOL AMY.M1983@GMAIL.COM

MEANING OF FOREIGN EXCHANGE


Foreign exchange means 'foreign currency' and includes deposits, credits and balances payable in any foreign currency; drafts, travellers' cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency; and drafts, travellers' cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency. When a business enterprise imports goods from other countries or exports its products to them or makes investments abroad, it deals in foreign exchange.

BACKGROUND OF FOREIGN EXCHANGE


India has for long time adverse balance of payment position in international trade i.e imports are more than exports; due to which there was shortage of foreign exchange in India. Therefore, it was thought to exercise strict control over Indias foreign exchange dealings. Thus, the Government formulated the Act i.e Foreign Exchange Regulation Act [FERA] in the year 1973 and gave vast power to RBI to regulate and control the Foreign Exchange.

SALIENT FEATURES OF FERA, 1973


1. It consisted of 81 sections and was more complex. 2. The main object was to conserve the foreign exchange resources and prevent the misuse thereof. 3. The RBI acts as a REGULATOR of foreign exchange. 4. Citizenship was the criterion to determine the residential status of a person. 5. The nature of offences were subject to criminal punishments. Thus, it was held to be draconian, severe and brutal law. 6. There was a presumption of existence of guilty mind, unless the accused proved otherwise.

6. It conferred wide powers to police officers to make search and seizure. 7. It empowered the Enforcement Officers to arrest a person on the basis of suspicion of FERA violations. 8. The offence was of criminal nature and punishable with imprisonment as per CrPC, 1973. 9. All the offences were non-compoundable. 10. The monetary compensation was nearly FIVE times the amount involved. 11. There was only one APPELLATE Authority. 12. The Act was silent on the right of an accused to take legal assistance.

A STEP AHEAD FROM FERA, 1973 TO FEMA,2000


The main reason behind to implement the FEMA law was: Liberalisation of Indian Investments abroad, Substantial development in our foreign exchange reserves, Growth in foreign trade, Rationalisation of tariffs, Increased access to external commercial burrowings by Indian corporates and Participation of foreign institutional investors in our stock markets.

GROWTH OF LIBERALISATION
In 1990, the Government initiated the process of liberalisation of Indian economy in 1991. Due to this, Foreign Investment in various sectors was permitted. This increased flow of foreign exchange to India and foreign exchange reserves had increased substantially. It was felt that the FERA had outlived its utility in view of Indias comfortable foreign exchange resources and the impressive participation by FIIs and FDIs in the Indian economy. In view of this, FERA was repealed and FEMA (Foreign Exchange Management Act) was passed on 1 June, 2000.

INTRODUCTION OF FEMA
The new FEMA was radically different from the conservative FERA:

The objectives of FEMA to promote foreign payments and trade in the country. to encourage the orderly maintenance and development of the foreign exchange market in India. to control and regulate the forex market in India. It helps all concerned people to make the financial transactions smoothly.

* Thus, the approach of FEMA is completely different form FERAfrom conservation to facilitation and

from control to regulation and


drastic penal provisions in FERA had been removed in FEMA.

SALIENT FEATURES OF FEMA


1. To facilitate external trade and payments. 2. To promote the orderly development and maintenance of foreign exchange market. 3. RBI as Facilitator not RegulatorThe Act has assigned an important role to the Reserve Bank of India (RBI) in the administration of FEMA. The rules, regulations and norms pertaining to several sections of the Act are laid down by the Reserve Bank of India, in consultation with the Central Government. 4. Widened the scope of Authorised PersonAn Authorised Person is a person who is authorised by Reserve Bank to deal in foreign exchange or foreign security. Such an authorised person, under the Act, means Authorised dealer, Money Changer, Off-shore banking unit or any other person for the time being authorised by Reserve Bank.

SALIENT FEATURES OF FEMA


5. Change the definition of Residential StatusThe definition of RS has now been made compatible with the definition provided under the Income Tax Act.
The residential status is now based on the physical stay of the person 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.

6. Position of Immovable Property in IndiaEarlier under FERA, a foreign citizen could acquire or transfer immovable property in India only after seeking permission from the RBI. Now, under FEMA, the control of RBI is determined by residential status of a person. Only a non-resident as defined within the meaning of FEMA would require permission of the RBI to acquire or transfer of an immovable property in India. Thus, the distinction based on Citizenship has been abolished and that based on residentship has been introducted.

7. Position of Immovable Property outside IndiaEarlier, 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, possess, hold or transfer any immovable property situated outside India. It means a resident of India has to take approval of the RBI for buying and selling any immovable property situated outside India.

8.

Creation of Two Appellate AuthotityThere is also a provision for appointing one or more Special Directors (Appeals) to hear appeals against the order of the Adjudicating authorities. The Central Government also establish an Appellate Tribunal for Foreign Exchange to hear appeals against the orders of the Special Director (Appeals). From Adjudicating Authority To Special Director (Appeals)To Appellate TribunalTo High Court

9.

Provision of Export of ServicesFEMA has included payment received by an Exporter of services in its ambit. It means every exporter of goods and services is under an obligation to give details to the RBI regarding the value of export, mode of payment and amount of payment received etc. For example: A Doctor or Engineer or Lawyer or Accountant or any other professional may give opinions or consultations to people outside India via internet or e-mail, and his fees may be credited to his credit account. Then, he is obliged to furnish details of such payment to RBI.

MODE OF PAYMENT OF RUPEES AGAINST SALE OF FOREIGN EXCHANGE


In case of sale of Foreign Exchange amounting to Rs. 20,000 or more , the payment received by the Authorised 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 Bankers cheque/ Pay order/ Demand Draft. Note: Receipt of Payment in CASH in case of such sale of Foreign Exchange is strictly prohibited.

RESTRICTIONS PERTAIN TO FOREIGN EXCHANGE UNDER FEMA


1. Only a person Authorised by RBI can deal in Foreign Exchange. 2. No one can make a payment to a person who is a nonresident, without permission of RBI. 3. No one can receive any payment from a person who is non-resident, without permission of RBI. 4. A resident of India cant deal in foreign exchange, foreign security, or any immovable property situated outside India, without the permission of the RBI.

5. Similarly, a person who is non-resident cant acquire immovable property in India without permission.

DIFFERENCE BETWEEN:
FERA,1973
1.The object of FERA was to conserve foreign exchange and to prevent its misuse.

FEMA,2000
1.The object of FEMA is to facilitate external trade and payments and maintenance of foreign exchange market in India. 2.But under FEMA, the RBI acts as a facilitator.

2.The role of RBI has been portrayed as a regulator of foreign exchange under FERA.

3.FERA consists of 81 complex sections.

3.FEMA has only 49 sections.

4.The citizenship was a criteria to determine residential status of a person under FERA.

4.While, stay of more than 182 days in India is the criteria to decide residential status.

DIFFERENCE BETWEEN
FERA, 1973
4.While defining Resident, FERA and Income Tax Act differed a lot.

FEMA, 2000
4.The provisions of FEMA, are in consistent with Income Tax Act, in respect of the definition of term RESIDENT. Now, the criteria of In India for 182 days to make a person resident has been brought under FEMA. Therefore, a person who qualifies to be a non-resident under the Income Tax Act, 1961 will also be considered a non-resident for the purposes FEMA.

5.Definition of Authorized person as per FERA was limited and narrow one. [sec 2 (b)]

5.while in FEMA it has been extended to include banks, money changes, off shore banking Units etc. [sec 2 (c)].

6.Some terms like Capital Account Transaction, Current Account Transaction, Person, Service etc were not defined at all in FERA.

6.while they have been defined in detail in FEMA.

8.

Under FERA, the offences were subject to criminal punishments. Therefore, FERA was held to be a draconian, severe and harsh. Under FERA, there was a presumption of existence of guilty mind, unless the accused proved otherwise.

8.

FEMA shall be treated as a civil wrongs.

9.

9.

Under FEMA, the prosecution will have to prove that a person has committed an offence.

10. Violation of FERA was a criminal offence. 11. Offences under FERA were not compoundable.

10. While violation of FEMA is a civil offence.

11. Offences under FEMA are compoundable.

12.Under FERA, any offence was a criminal one which included imprisonment as per code of criminal procedure, 1973.

12.Under FEMA, offence is treated as civil offence. A penalty has to be paid in terms of money and imprisonment is only for those people who do not pay the penalty.

13.The amount of money paid as penalty was quite large in FERA. It was five times the amount involved.

13.Under FEMA, the amount has been considerably reduced to three times the amount involved.

14.Section 35 of FERA empowered the Enforcement officers to arrest a person, if they had a reason to believe that the person was guilty of FERA violations. 15.There Appellate FERA. was only one Authority under

14.FEMA provides such power of arrest only in the case where the accused person fails to pay the full payment of penalty within 90 days from service of notice on him. 15.Whereas in FEMA, there exists two Appellate Authorities. 16.The accused has a right to take the assistance of a legal practitioner or a chartered accountant under FEMA.

16.FERA didnt contain any express provision on the right of an accused to take legal assistance.

FERA,1973
17.FERA conferred wide powers on a police officer not below the rank of a Deputy Superintendant of police to make search and seizure.

FEMA,2000
17.The scope and power of search and seizure has been curtailed to a great extent.

SIMILARITIES BETWEEN:
1. The RBI and central government would continue to be the regulatory bodies. 2. The Directorate of Enforcement continues to be the agency for enforcement of the provisions of the law such as conducting search and seizure.

3. Presumption of extra territorial jurisdiction as envisaged in section (1) of FERA has been retained.
Note: Extra-territorial Jurisdiction- This Act extends to whole of the India. It has some extra territorial jurisdiction too i.e it also applies to all branches, offices and agencies outside India owned and controlled by a person resident in India and also to any contravention thereunder committed outside India by any person to whom the Act applies.

PROCEDURE OF PROSECUTION UNDER FEMA

UNDER SECTION 14
1. Adjudicating Authority- The inquiry of any contravention of FEMA is conducted by an Adjudication Authority. i) Issuance of Notice- when, an inquiry is to be conducted against a person for any contravention, the Adjudicating Authority shall issue a Notice to such person. ii) Date and Nature of Offence committed- The notice will also indicate the date on which the offender is required to appear before authority, and also the nature of the offence committed by him. iii) Right to be Heard- Such person (offender) will have a right to be give reasons or explanations, and then a date will be fixed for his appearance. He can appear either personally or through an Advocate or a Chartered Accountant.

Allegation of Enforcement Directorate- on the date of appearance, the Adjudicating Authority shall present its case, and explain the reason, type and implications of the offence committed by offender. Defend by Offender- Then, in turn, such person will also given an opportunity to put up his case, and to produce documents and evidence. Order by Adjudicating Authority- Finally, if Adjudicating Authority is convinced, that the offender has committed an offence, it will impose such fine and penalty, as it thinks fit.

UNDER SECTION 17
2. Special Director (Appeal)- Appeal form an order of Adjudicating Authority lies before Special Director (Appeal). Form No. 1- The appeal shall be made in Form No. 1, along with three copies of the order appealed against and the requisite fees. Time of Appeal- The appeal should be filed within 45 days, from the date of receipt of the impugned order. Right to be Heard- On the date of hearing of the appeal, the applicant may appoint a legal practitioner or a chartered accountant to appear, plead and act on his behalf before the Special Director ( Appeal). Order of the Special Director ( Appeal)- The order of the Special Director (Appeals) made at the conclusion of the proceedings shall be in writing and shall briefly the grounds

UNDER SECTION 19
3. Appellate Tribunal- It is entitled to hear appeal arising out of an order from Special Director (Appeal). Form No. 2- The appeal shall made in Form No. 2, along with three copies of the impugned order and requisite fees. Time for appeal- The appeal shall be made within 45 days, from the date on which copy of the impugned order is received. Intimation to opposite party- A copy of the order and appeal shall be sent to the opposite party i.e. Director of Enforcement, and a date shall be fixed for hearing of the appeal. Right to Defend- The appellant shall have a right to present his case/appeal through a legal practitioner or a chartered accountant. Order in writing- on the fixed date of hearing, the Appellate Tribunal shall pass its order in writing with the reasons.

UNDER SECTION 35
4. High Court- An appeal from the decision of Appellate Tribunal lies before High Court. Time of Appeal- The appeal shall be filed within 60 days from the date of communication of the decision or order of the Appellate Tribunal to him on any question of law arising from the impugned order.

PENALTY UNDER FEMA

AMOUNT OF PENALTY UNDER FEMA


Any contravention, under FEMA, may invite following kinds of penalties. If the amount against the offence can be quantified, then penalty will be THRICE, the sum involved in contravention. If the amount against the offence cant be quantified, the penalty may be imposed upto two lakh rupees. If, the contravention is continuing everyday, then Rs. Five Thousand (Rs. 5,000) 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.

THANKS!

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