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Course Instructor: Sneha Sharma

It was a law to replace Foreign Exchange
Regulation Act of 1973


Foreign exchange is the system or process of
converting

one

national

currency

into

another, and of transferring money from one
country to another


Foreign currency means any currency other
than Indian currency.


Foreign security means any security,
 in the form of shares, stocks, bonds, debentures

or any other instrumental denominated or
expressed in foreign currency
 and includes securities expressed in foreign
currency
▪ but where redemption or any form of return such as
interest or dividends is payable in Indian currency.
The 1973 law was created during the tenure of Prime
Minister Indira Gandhi with the goal of conserving
India's foreign exchange resources.


The country was facing a trade deficit, which
was followed by a devaluation of the currency
and an increase in the price of imported oil.



The act specified which foreign exchange

transactions were permitted, including those
between Indian residents and nonresidents.


FERA deals with laws which relate to foreign
exchange in India.
 The

laws were made to manage foreign
investments in India.

 FERA consists of 81 complex sections.
▪ Under FERA, any offence was a criminal one which
included imprisonment as per code of criminal
procedure, 1973.
To prevent the outflow of Indian currency.

To regulate dealings in foreign exchange and securities.

To regulate the transaction indirectly affecting foreign exchange.

To regulate import and export of currency and bullion.

To regulate employment of foreign nationals.
To regulate foreign companies.
To regulate acquisition, holding etc of immovable property in India
by non-residents.
To regulate certain payments.

To regulate dealings in foreign exchange and securities.

To regulate the transactions indirectly affecting foreign exchange.
Regulation of dealing in
foreign exchange.

Restrictions on
payments.

Restrictions regarding
assets held by non
residents and import &
export of certain
currency & bullion.

Duty on persons
entitled to receive
foreign exchange and
payment for exported
goods.
Restriction on appointment
of certain persons and
companies as agents or
technical or management
advisers in india.

Restriction on
establishment of place of
business in india.

Prior permission of Reserve
Bank required for taking up
employment in india by
nationals of foreign state.

Restrictions on immovable
property


The main objective of FERA framed against the
background of severe foreign exchange problem
and controlled economic regime
 was conservation and proper utilization of the foreign

exchange resources of the country.


FERA created flourishing black market in foreign
exchange.
 It brought into the economic lexicon the word

“HAWALA”.


Accordingly, a new act replaced the FERA
called FEMA.


The demand for new legislation was basically
on two main counts
 The FERA was introduced in 1974 when India’s

foreign exchange reserves position was not
satisfactory.
▪ It required stringent controls to conserve foreign
exchange
▪ and to utilize in the best interest of the country.
▪ Very strict restrictions have outlived their utility in the
changed scenario.


In 1999 the FEMA was passed which replaced
the FERA, though certain provisions of FERA
1973 still exist under FEMA 1999.
 FEMA came into effect from 1st June, 2000. Some

structural changes were made.
 The FEMA combines and improves the laws
relating to foreign exchange.
 It makes the procedure for foreign investment
easy and consequently encourages foreign
exchange in India.
To facilitate the external trade and payment.
To promote of an orderly maintenance of the foreign exchange
market In India.
Regulation of foreign capital in India.

To remove imbalance of payment.
To make strong and developed foreign exchange
market.
Regulation of employment business and investment
of non-residents .
To regulate foreign payments.


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
FERA


FERA consisted of 81
sections, and was more
complex.



Presumption of negative
intention (Mens Rea ) and
joining hands in offence
(abatement) existed in FEMA.

FEMA

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

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



These
presumptions
of Mens Rea and abatement
have been excluded in FEMA.






Terms like Capital Account
Transaction, current account
Transaction person, service
etc., have been defined in
detail in FEMA


(A) transactions, specified in Schedule I, of a person
resident In India;



(B) transactions, specified in Schedule II, of a person
resident outside India. (2) Subject to the provisions of the
Act or the rules or regulations or direction or orders made
or issued thereunder, any person may sell or draw foreign
exchange to or from an authorised person for a capital
account transaction specified in the Schedules;



Provided that the transaction is within the limit , if
any, specified in the regulations relevant to the
transaction.
FERA


Definition of "Authorized
Person" in FERA was a
narrow one ( 2(b).



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

FEMA


The definition of Authorized
person has been widened to
include
banks,
money
changes, off shore banking
Units etc. (2 ( c ).



The provision of FEMA, are in
consistent with income Tax
Act, in respect to 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 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 and
staying therefore a period of 182 days or more in a
financial year will become a non-resident under FEMA.
FERA




Any
offence
under
FERA, was a criminal
offence , punishable with
imprisonment as per code
of
criminal
procedure, 1973.
The monetary penalty
payable under FERA, was
nearly the five times the
amount involved.

FEMA


Here,
the
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.



Under FEMA the quantum of
penalty
has
been
considerably decreased to
three times the amount
involved
FERA


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

FEMA


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. (sec 17,18,35)
FERA


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



FERA
conferred
wide
powers on a police officer
not below the rank of a
Deputy Superintendent of
Police to make a search

FEMA


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



The scope and power of
search and seizure has
been curtailed to a great
extent.


The Reserve Bank of India (RBI) has asked the
Anil Dhirubhai Ambani Group firm, Reliance
Infrastructure (earlier, Reliance Energy), to pay
just under Rs 125 crore as compounding fees for
parking its foreign loan proceeds worth $300
million with its mutual fund in India for 315
days, and then repatriating the money abroad to
a joint venture company. These
actions, according to an RBI order, violated
various provisions of the Foreign Exchange
Management Act (FEMA).


In its order, RBI said Reliance Energy
 raised a $360-million ECB on July 25, 2006, for

investment in infrastructure projects in India.
 The ECB proceeds were drawn down on
November 15, 2006, and temporarily parked
overseas in liquid assets.
 On April 26, 2007, Reliance Energy repatriated the
ECB proceeds worth $300 million to India while
the balance remained abroad in liquid assets.






It then invested these funds in Reliance Mutual Fund
Growth Option and Reliance Floating Rate Fund
Growth Option on April 26, 2007.
On the following day, i.e., on April 27 2007, the entire
money was withdrawn and invested in Reliance Fixed
Horizon Fund III Annual Plan series V.
On March 5, 2008, Reliance Energy repatriated $500
million (which included the ECB proceeds repatriated
on April 26, 2007, and invested in capital market
instruments) for investment in capital of an overseas
joint venture called Gourock Ventures based in British
Virgin Islands.




RBI said, under FEMA guidelines issued in
2000, a borrower is required to keep ECB funds
parked abroad till the actual requirement in
India. Further, the central bank said a borrower
cannot utilise the funds for any other purpose.
“The conduct of the applicant was in
contravention of the ECB guidelines and the
same are sought to be compounded,” the RBI
order signed by its chief general manager Salim
Gangadharan said.


During the personal hearing on June
16, 2008, Reliance Energy, represented by group
managing director Gautam Doshi and Price
waterhouse Coopers executive director Sanjay
Kapadia, admitted the contravention and sough
compounding.
 The

company
said
due
to
unforeseen
circumstances, its Dadri power project was delayed.
Therefore, the ECB proceeds of $300 million were
bought to India and was parked in liquid debt mutual
fund schemes, it added.


Rejecting Reliance Energy’s contention, RBI said it
took the company 315 days to realise that the ECB
proceeds are not required for its intended purpose
and to repatriate the same for alternate use of
investment in an overseas joint venture on March
5, 2008.Reliance also contended that they invested
the ECB proceeds in debt mutual fund schemes to
ensure immediate availability of funds for utilisation
in India. “I do not find any merit in this contention also
as the applicant has not approached RBI either for
utilising the proceeds not provided for in the ECB
guidelines, or its repatriation abroad for investment in
the capital of the JV,” the RBI official said in the order.


In its defence, the company said the exchange rate
gain on account of remittance on March 5
2008, would be a notional interim rate gain as such
exchange rate gain is not crystallised.



But RBI does not think so. “They have also stated that
in terms of accounting standard 11 (AS 11), all foreign
exchange loans have to be restated and the difference
between current exchange rate and the rate at which
the same were remitted to India, has to be shown as
foreign exchange loss/gain in profit and loss accounts.


However, in a scenario where the proceeds of
the ECB are parked overseas, the exchange rate
gains or losses are neutralized as the gains or
losses restating of the liability side are offset
with corresponding exchange losses or gains in
the asset. In this case, the exchange gain had
indeed been realised and that too the additional
exchange gain had accrued to the company
through an unlawful act under FEMA,” the order
said.


It said as the company has made additional
income of Rs 124 crore, it is liable to pay a fine of
Rs 124.68 crore. On August this year, the
company submitted another fresh application
for compounding and requested for withdrawal
of the present application dated April
17, 2008, to include contravention committed in
respect of an another transaction of ECB worth
$150 million. But RBI said the company will have
to make separate application for every
transaction and two transactions are different
and independent and cannot be clubbed
together.

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Foreign Exchange Management Act

  • 1. Course Instructor: Sneha Sharma It was a law to replace Foreign Exchange Regulation Act of 1973
  • 2.  Foreign exchange is the system or process of converting one national currency into another, and of transferring money from one country to another
  • 3.  Foreign currency means any currency other than Indian currency.
  • 4.  Foreign security means any security,  in the form of shares, stocks, bonds, debentures or any other instrumental denominated or expressed in foreign currency  and includes securities expressed in foreign currency ▪ but where redemption or any form of return such as interest or dividends is payable in Indian currency.
  • 5. The 1973 law was created during the tenure of Prime Minister Indira Gandhi with the goal of conserving India's foreign exchange resources.
  • 6.  The country was facing a trade deficit, which was followed by a devaluation of the currency and an increase in the price of imported oil.  The act specified which foreign exchange transactions were permitted, including those between Indian residents and nonresidents.
  • 7.  FERA deals with laws which relate to foreign exchange in India.  The laws were made to manage foreign investments in India.  FERA consists of 81 complex sections. ▪ Under FERA, any offence was a criminal one which included imprisonment as per code of criminal procedure, 1973.
  • 8. To prevent the outflow of Indian currency. To regulate dealings in foreign exchange and securities. To regulate the transaction indirectly affecting foreign exchange. To regulate import and export of currency and bullion. To regulate employment of foreign nationals.
  • 9. To regulate foreign companies. To regulate acquisition, holding etc of immovable property in India by non-residents. To regulate certain payments. To regulate dealings in foreign exchange and securities. To regulate the transactions indirectly affecting foreign exchange.
  • 10. Regulation of dealing in foreign exchange. Restrictions on payments. Restrictions regarding assets held by non residents and import & export of certain currency & bullion. Duty on persons entitled to receive foreign exchange and payment for exported goods.
  • 11. Restriction on appointment of certain persons and companies as agents or technical or management advisers in india. Restriction on establishment of place of business in india. Prior permission of Reserve Bank required for taking up employment in india by nationals of foreign state. Restrictions on immovable property
  • 12.  The main objective of FERA framed against the background of severe foreign exchange problem and controlled economic regime  was conservation and proper utilization of the foreign exchange resources of the country.  FERA created flourishing black market in foreign exchange.  It brought into the economic lexicon the word “HAWALA”.
  • 13.
  • 14.  Accordingly, a new act replaced the FERA called FEMA.
  • 15.  The demand for new legislation was basically on two main counts  The FERA was introduced in 1974 when India’s foreign exchange reserves position was not satisfactory. ▪ It required stringent controls to conserve foreign exchange ▪ and to utilize in the best interest of the country. ▪ Very strict restrictions have outlived their utility in the changed scenario.
  • 16.  In 1999 the FEMA was passed which replaced the FERA, though certain provisions of FERA 1973 still exist under FEMA 1999.  FEMA came into effect from 1st June, 2000. Some structural changes were made.  The FEMA combines and improves the laws relating to foreign exchange.  It makes the procedure for foreign investment easy and consequently encourages foreign exchange in India.
  • 17. To facilitate the external trade and payment. To promote of an orderly maintenance of the foreign exchange market In India. Regulation of foreign capital in India. To remove imbalance of payment.
  • 18. To make strong and developed foreign exchange market. Regulation of employment business and investment of non-residents . To regulate foreign payments.
  • 19.  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
  • 20. FERA  FERA consisted of 81 sections, and was more complex.  Presumption of negative intention (Mens Rea ) and joining hands in offence (abatement) existed in FEMA. FEMA Terms like Capital Account Transaction, current Account Transaction, person, service etc. were not defined in FERA. FEMA is much simple, and consist of only 49 sections.  These presumptions of Mens Rea and abatement have been excluded in FEMA.    Terms like Capital Account Transaction, current account Transaction person, service etc., have been defined in detail in FEMA
  • 21.  (A) transactions, specified in Schedule I, of a person resident In India;  (B) transactions, specified in Schedule II, of a person resident outside India. (2) Subject to the provisions of the Act or the rules or regulations or direction or orders made or issued thereunder, any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction specified in the Schedules;  Provided that the transaction is within the limit , if any, specified in the regulations relevant to the transaction.
  • 22. FERA  Definition of "Authorized Person" in FERA was a narrow one ( 2(b).  There was a big difference in the definition of "Resident", under FERA, and Income Tax Act FEMA  The definition of Authorized person has been widened to include banks, money changes, off shore banking Units etc. (2 ( c ).  The provision of FEMA, are in consistent with income Tax Act, in respect to the definition of term" Resident".
  • 23.  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 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 and staying therefore a period of 182 days or more in a financial year will become a non-resident under FEMA.
  • 24. FERA   Any offence under FERA, was a criminal offence , punishable with imprisonment as per code of criminal procedure, 1973. The monetary penalty payable under FERA, was nearly the five times the amount involved. FEMA  Here, the 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.  Under FEMA the quantum of penalty has been considerably decreased to three times the amount involved
  • 25. FERA  An appeal against the order of "Adjudicating office", before " Foreign Exchange Regulation Appellate Board went before High Court FEMA  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. (sec 17,18,35)
  • 26. FERA  FERA did not contain any express provision on the right of on impleaded person to take legal assistance.  FERA conferred wide powers on a police officer not below the rank of a Deputy Superintendent of Police to make a search FEMA  FEMA expressly recognizes the right of appellant to take assistance of legal practitioner or chartered accountant (32).  The scope and power of search and seizure has been curtailed to a great extent.
  • 27.
  • 28.  The Reserve Bank of India (RBI) has asked the Anil Dhirubhai Ambani Group firm, Reliance Infrastructure (earlier, Reliance Energy), to pay just under Rs 125 crore as compounding fees for parking its foreign loan proceeds worth $300 million with its mutual fund in India for 315 days, and then repatriating the money abroad to a joint venture company. These actions, according to an RBI order, violated various provisions of the Foreign Exchange Management Act (FEMA).
  • 29.  In its order, RBI said Reliance Energy  raised a $360-million ECB on July 25, 2006, for investment in infrastructure projects in India.  The ECB proceeds were drawn down on November 15, 2006, and temporarily parked overseas in liquid assets.  On April 26, 2007, Reliance Energy repatriated the ECB proceeds worth $300 million to India while the balance remained abroad in liquid assets.
  • 30.    It then invested these funds in Reliance Mutual Fund Growth Option and Reliance Floating Rate Fund Growth Option on April 26, 2007. On the following day, i.e., on April 27 2007, the entire money was withdrawn and invested in Reliance Fixed Horizon Fund III Annual Plan series V. On March 5, 2008, Reliance Energy repatriated $500 million (which included the ECB proceeds repatriated on April 26, 2007, and invested in capital market instruments) for investment in capital of an overseas joint venture called Gourock Ventures based in British Virgin Islands.
  • 31.   RBI said, under FEMA guidelines issued in 2000, a borrower is required to keep ECB funds parked abroad till the actual requirement in India. Further, the central bank said a borrower cannot utilise the funds for any other purpose. “The conduct of the applicant was in contravention of the ECB guidelines and the same are sought to be compounded,” the RBI order signed by its chief general manager Salim Gangadharan said.
  • 32.  During the personal hearing on June 16, 2008, Reliance Energy, represented by group managing director Gautam Doshi and Price waterhouse Coopers executive director Sanjay Kapadia, admitted the contravention and sough compounding.  The company said due to unforeseen circumstances, its Dadri power project was delayed. Therefore, the ECB proceeds of $300 million were bought to India and was parked in liquid debt mutual fund schemes, it added.
  • 33.  Rejecting Reliance Energy’s contention, RBI said it took the company 315 days to realise that the ECB proceeds are not required for its intended purpose and to repatriate the same for alternate use of investment in an overseas joint venture on March 5, 2008.Reliance also contended that they invested the ECB proceeds in debt mutual fund schemes to ensure immediate availability of funds for utilisation in India. “I do not find any merit in this contention also as the applicant has not approached RBI either for utilising the proceeds not provided for in the ECB guidelines, or its repatriation abroad for investment in the capital of the JV,” the RBI official said in the order.
  • 34.  In its defence, the company said the exchange rate gain on account of remittance on March 5 2008, would be a notional interim rate gain as such exchange rate gain is not crystallised.  But RBI does not think so. “They have also stated that in terms of accounting standard 11 (AS 11), all foreign exchange loans have to be restated and the difference between current exchange rate and the rate at which the same were remitted to India, has to be shown as foreign exchange loss/gain in profit and loss accounts.
  • 35.  However, in a scenario where the proceeds of the ECB are parked overseas, the exchange rate gains or losses are neutralized as the gains or losses restating of the liability side are offset with corresponding exchange losses or gains in the asset. In this case, the exchange gain had indeed been realised and that too the additional exchange gain had accrued to the company through an unlawful act under FEMA,” the order said.
  • 36.  It said as the company has made additional income of Rs 124 crore, it is liable to pay a fine of Rs 124.68 crore. On August this year, the company submitted another fresh application for compounding and requested for withdrawal of the present application dated April 17, 2008, to include contravention committed in respect of an another transaction of ECB worth $150 million. But RBI said the company will have to make separate application for every transaction and two transactions are different and independent and cannot be clubbed together.