Fema final

RIZVI INSTITUTE OF MANAGEMENT
STUDIES & RESEARCH

Sr. No Particulars Page no.
1. Introduction to FERA
2. Need to introduce FERA
3. Objectives of FERA
4. About FERA
5. Definitions under FERA
6. Era of 1991- Indian Forex Crisis
7. Asian Crisis of 1997 due to CAC
8. Indonesia & Crisis
9. Introduction of FEMA
10. Need to introduce FEMA
11. Definitions under FEMA
12. A Step ahead from FERA to FEMA
13. Difference between FERA & FEMA
14. Recent Amendments to FEMA
15. Capital Account Convertibility (CAC)
16. ECB
17. FCCB
18. FDI
19. FDI Charts

20. Case Study on violation of FERA- ITC Ltd
21. Case Study on violation of FERA- Reliance Infra

Introduction to FERA
The origin of the Foreign Exchange Regulation Act dates back to the year of Indian
independence, 1947. At that time, it was legislated as a temporary measure to regulate the inflow
of foreign capital in the form of branches and concerns with the substantial non-resident interest,
and the employment of foreigners and later in 1957, it was placed permanently. Gradually, there
arose the need to conserve foreign exchange owing to the rapid industrialization in the country.
Consequently, The Foreign Exchange Regulation Act, 1973 was passed with some important
changes in the old version which contained very harsh laws. Every offence under the act was
made punishable with imprisonment. Thereafter, FERA 1973 was amended in order to remove
unnecessary restrictions in respect of companies registered in India and to simplify the
regulations regarding foreign investment in order to attract better flow of foreign capital and
investment.
The Foreign Exchange Regulation Act (FERA) was legislation passed by the Indian Parliament
in 1973 by the government of Indira Gandhi and came into force with effect from January 1,
1974. FERA imposed stringent regulations on certain kinds of payments, the dealings in foreign
exchange and securities and the transactions which had an indirect impact on the foreign
exchange and the import and export of currency.The bill was formulated with the aim of
regulating payments and foreign exchange. It applies also to all citizens of India outside India
and to branches and agencies outside India of companies or bodies corporate, registered or
incorporated in India.

Need to Introduce FERA
a) FERA was introduced at a time when foreign exchange (Forex) reserves of the country were
low, Forex being a scarce commodity.
b) FERA therefore proceeded on the presumption that all foreign exchange earned by Indian
residents rightfully belonged to the Government of India and had to be collected and surrendered
to the Reserve bank of India (RBI).
c) It regulated not only transactions in Forex, but also all financial transactions with non
residents. FERA primarily prohibited all transactions, except to the extent permitted by general
or specific permission by RBI.
Objective of FERA
The main objective of the FERA 1973 was to consolidate and amend the law regulating:
Certain payments;
Dealings in foreign exchange and securities;
Transactions, indirectly affecting foreign exchange;
Import and export of currency, for the conservation of the foreign exchange resources of
the country;
Proper utilization of foreign exchange, so as to promote the economic development of the
country.
The basic purpose of FERA was:
To help RBI in maintaining exchange rate stability.
To conserve precious foreign exchange.
To prevent/regulate foreign business in India.

Definitions under FERA
"Authorized dealer" means a person for the time being authorized under section 6 to deal
in foreign exchange;
"Certificate of title to a security" means any document used in the ordinary course of
business as proof of the possession or control of the security, or authorizing or purporting
to authorize, either by an endorsement or by delivery, the possessor of the document to
transfer or receive the security thereby represented;
"Currency" includes all coins, currency notes, banks notes, postal notes, postal orders,
money orders, cheques, drafts, traveller's cheques, letters of credit, bills of exchange and
promissory notes;
"Foreign exchange" means foreign currency and includes -
(i) all deposits, credits and balances payable in any foreign currency, and any drafts,
traveller's cheques, letters of credit and bills of exchange, expressed or drawn in
Indian currency but payable in any foreign currency;
(ii) any instrument payable, at the option of the drawee or holder thereof or any other
party thereto, either in Indian currency or in foreign currency or partly in one and
partly in the other;
"Indian custom waters" means the waters extending into the sea to a distance of twelve
nautical miles measured from the appropriate base line on the coast of India and includes
any bay, gulf, harbor, creek or tidal river;
"Money-Changer" means a person for the time being authorized under section 7 to deal in
foreign currency;
"Owner", in relation to any security, includes any person who has power to sell or
transfer the security, or who has the custody thereof or who receives, whether on his own
behalf or on behalf of any other person, dividends or interest thereon, and who has any
interest therein, and in a case where any security is held on any trust or dividends or
interest thereon are paid into a trust fund, also includes any trustee or any person entitled
to enforce the performance of the trust or to revoke or vary, with or without the consent

of any other person, the trust or any terms thereof, or to control the investment of the trust
moneys;

Era of 1991- Indian Forex Crisis
There was no one particular reason why the economy was in such a bad shape in 1991 before
India opened up its economy. There is a basket of reason, to begin with the industrial policy
prevailing prior to the launching of the reforms. The heavy industry was a state monopoly. Other
industries were either subject to strict industrial licensing or reserved for the small-scale sector.
The tight control of the government on industry was aptly captured by a leading cartoonist in a
1980s comic strip showing the industry minister tell his staff, “We shouldn‟t encourage big
industry that is our policy, I know. But I say we shouldn‟t encourage small industries either. If
we do, they are bound to become big”
The reforms of the last 10 years have gone a long way toward freeing up the domestic economy
from state control. State monopoly has been abolished in virtually all sectors, which have been
opened to the private sector. The License Raj is a thing of the past. The small scale industry
reservation still persists but even here progress has been made. Apparel, with its large export
potential, was recently opened to all investors.
In the area of international trade, in 1991, import licensing was pervasive with goods divided
into banned, restricted, limited permissible, and subject to open general licensing (OGL). The
OGL category was the most liberal but it covered only 30 percent of imports. Moreover, certain
conditions had still to be fulfilled before the permission to import was granted under the OGL
system. Imports were also subject to excessively high tariffs. The top rate was 400 percent. As
much as 60 percent of tariff lines were subject to rates ranging from 110 to 150 percent and only
4 percent of the tariff rates were below 60 percent. The exchange rate was highly over-valued.
Strict exchange controls applied to not just capital account but also current account transactions.
Foreign investment was subject to stringent restrictions. Companies were not permitted more
than 40 percent foreign equity unless they were in the high-tech sector or were export-oriented.
As a result, foreign investment amounted to a paltry $100-200 million annually. Today, import
licensing has been completely abolished. This includes textiles and clothing, which remain
protected in developed countries through the multi-fiber arrangement. The highest tariff rate has
come down to 45 percent (including the tariff surcharge and the so-called Special Additional

Duty) with the average tariff rate declining to less than 25 percent. The foreign investment
regime is as liberal as in other developing Asian countries.
These reforms have paid handsomely. The economy has grown at more than 6 percent coupled
with full macroeconomic stability. This compares with a growth rate of 3.5 percent during 1950-
1980. The rate of inflation has been low and foreign exchange reserves are sufficient to finance
imports for more than eight months. Rising incomes have helped bring down poverty. According
to official figures, the proportion of poor in total population has declined from 40 percent in
1993-1994 to 26 percent in 2000.
The crisis was caused by currency overvaluation; the current account deficit and investor
confidence played significant role in the sharp exchange rate depreciation. The economic crisis
was primarily due to the large and growing fiscal imbalances over the 1920s. During mid-
eighties, India started having balance of payments problems.Precipitated by the Gulf War,
India‟s oil import bill swelled, exports slumped, credit dried up and investors took their money
out. Large fiscal deficits, over time, had a spillover effect on the trade deficit culminating in an
external payments crisis. By the end of 1990, India was in serious economic trouble.
The gross fiscal deficit of the government (center and states) rose from 9.0 percent of GDP in
1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the center alone, the
gross fiscal deficit rose from 6.1 percent of GDP in 1980-81 to 8.3 percent in 1985-86 and to 8.4
percent in 1990-91. Since these deficits had to be met by borrowings, the internal debt of the
government accumulated rapidly, rising from 35 percent of GDP at the end of 1980-81 to 53
percent of GDP at the end of 1990-91. The foreign exchange reserves had dried up to the point
that India could barely finance three weeks‟ worth of imports.
In mid-1991, India's exchange rate was subjected to a severe adjustment. This event began with a
slide in the value of the Indian rupee leading up to mid-1991. The authorities at the Reserve
Bank of India took partial action, defending the currency by expending international reserves and
slowing the decline in value. However, in mid-1991, with foreign reserves nearly depleted, the
Indian government permitted a sharp depreciation that took place in two steps within three days
(July 1 and July 3, 1991) against major currencies.

Aftermath of Crisis & need for a Stricter & Broader Law
The economy was open for foreign investment & a strict law was required to govern the capital
flow. The risk could arise in future if there is a reverse flow of foreign funds out of the country.
Another issue was regarding allowing the funds to only limited sectors. A highly sensitive sector
such as defense, Railways, Banking, etc. was not open for foreign investment in the initial stage.
The details will be covered in the further parts. Also, private players were allowed to operate in
the banking sector which increased the complexity in regulating the forex. In the post LPG era,
IMF was putting pressure on India to make the rupee fully convertible against dollar. But on
account of Asian Crisis of 1997, the Government pushed the Capital Account Convertibility
issue. Rupee as of now is still partially floated, that is, it has current account convertibility
(Trade transactions) but it is not freely convertible on Capital Account or Capital Transactions.
Post LPG, Foreign funds started flowing in the country, this required a strict FDI norms in order
to avoid any confusion amongst investor & better administration of funds within country. FERA
was not well equipped to solve such an issue. Hence, a broader term was required to define &
direct such transactions. Also, the companies were now allowed to borrow money in foreign
currency, that is, External Commercial was allowed. A law was required to govern such activity
as FERA did not cover such aspects.
Based on our Experience we have defined a narrow study of FEMA, 1999. We will cover
following important topics which are governed by the act. In the end we will give an overview of
current developments & how FEMA has been successfully governing the foreign capital in & out
of the country. Following are the topics that are covered by the group:
Capital Account Convertibility (CAC)
Introduction to FEMA & Need to introduce FEMA
Recent Amendments to FEMA
ECB & FCCB
FDI & Recent Developments
Case Study on violation of FERA- ITC Ltd
Case Study on Violation of FEMA- Reliance Infra

Capital account convertibility
Capital Account Convertibility refers to the freedom to convert local financial assets into foreign
financial assets and vice versa at market determined rates of exchange (Tarapore Committee). It
is associated with changes of ownership in foreign/domestic financial assets and liabilities and
embodies the creation and liquidation of claims on, or by, the rest of the world.
IMF‟s ROLE IN CAC
Convertibility is an IMF clause that all the member countries must adhere to in order to work
towards the common goals of the organization. However convertibility can be looked into from
various perspectives and incorporated accordingly by the member nations. An economy can
choose to be
Partially convertible on CURRENT ACCOUNT
Partially convertible on CAPITAL ACCOUNT
Fully convertible on current account
Fully convertible on capital account
It is important to state here that “The IMF‟s mandate is conspicuous on current account
convertibility as current account liberalization is among the IMF‟s official purposes outlined in
its Articles of Agreement, but it has no explicit mandate to promote capital account
liberalization. Indeed, the Articles give the IMF only limited jurisdiction over the capital account
however the IMF has given greater attention to capital account issues in recent decades, given
the increasing importance of international capital flows for macroeconomic stability and
exchange rate management in many countries. Thus there is no official binding over any member
state to opt for full capital account convertibility but it has been a constant component of the
IMF‟s advisory reports on member countries.

Evolution of CAC in India economic and financial scenarios:
Though the rupee had become fully convertible on current account as early as 1991 (LPG Model
& forex crisis), the RBI has been adopting a cautious approach towards full float of the rupee,
particularly after the 1997 south-east Asian currency crisis. While there has been a substantial
relaxation of foreign exchange controls during the last 10 years, the current account
convertibility since 1994 means that both resident Indians and corporate have easy access to
foreign exchange for a variety of reasons like education, health and travel. They are allowed to
receive and make payments in foreign currencies on trade account. The next logical step in the
same direction would be full convertibility, which would remove restrictions on capital account.
Following are the pre-requisites for Capital Account Convertibility in India:
Jumping into capital account convertibility game without the downside of the step can harm the
economy. The Committee on capital account convertibility (CAC) or Tarapore Committee was
constituted by the Reserve Bank of India for suggesting a roadmap on Full convertibility of
rupee on Capital Account.
The Committee submitted its report in 1997. The Committee observed that there is no clear
definition of CAC. The CAC as per the standards refers to the freedom to convert the local
financial assets or vice versa at the market determined rate of exchange.
The Tarapore Committee observed that the Capital controls can be useful in Insulating the
economy of the country for the volatile capital flows during the transitional periods and also in
providing time to the authorities, so that they can pursue discretionary domestic policies to
strengthen the initial conditions.
The CAC Committee recommended the implementations of the Capital Account. Convertibility
for 3 year period viz.1997-98, 1998-99 and 199-2000.But this committee had laid down some
pre conditions are as follows:

Gross fiscal deficit to the GDP ratio has to come down from a Budgeted 4.5 percent in
1997-98 to 3.5% in 1999-2000.
A consolidated sinking fund has to be set up to meet government‟s debt repayment needs;
to be financed by increase in RBI‟s profit transfer to the government and disinvestment
proceeds .
Inflation rate should remain between an average 3-5 percent or 3-year period 1997-2000.
Gross NPAs of the public sector banking system needs to brought down from the present
13.7% to 5% by 2000. At the same time, average effective CRR needs to be brought
down from the current 9.3% to 3%.
RBI must have a Monitoring Exchange Rate Band of plus minus 5% around a real neutral
Real Effective Exchange rate RBI should be transparent about the change in REER.
External sector policies should be designed to increase current receipts to GDP ratio and
bring down the debt service ratio from 25% to 20%
Proper indicators should be used for evaluation adequacy of foreign exchange reserves to
safeguard against any contingency. Plus, a minimum net foreign asset to currency ratio of
40 per cent should be prescribed by law in the RBI Act.

The above committee‟s report was not translated into any actions. India is still a country with
partial convertibility. However, some important measures in that direction are taken and they are
summarized as below:
The Indian corporate were allowed full convertibility in a automatic route up to $ 500
million overseas ventures .This means that the limited companies are allowed to invest in
foreign countries.
Indian corporate were allowed to prepay their external commercial borrowings via
automatic route if the loan is above $ 500 million.
Individuals were allowed to invest in foreign assets , shares up to $200000 per year.
Unlimited amount of Gold was allowed to be imported.
The Second Tarapore committee on Capital convertibility
Reserve Bank of India appointed the second Tarapore to set out the framework of Fuller Capital
Account Convertibility. The committee was established by RBI in consolidation with
government to revisit the subject of fuller capital account convertibility in the context of the
progress in economic reforms , the stability of the external and financial sectors, accelerated
growth and global integration.
The report of the committee was made public by RBI on 1st
September 2006. The report, the
committee suggested 3 phrases on adapting the fully convertibility of rupee in Capital Account.

1. First phase in 2006-07
2. Second phase in 2007-2009
3. Third Phase in 2011
Following were some of the important recommendations of the committee:
The ceiling for External Commercial Borrowings (ECB) should be raised for automatic
approval
NRI should be allowed to invest in Capital Markets.
NRI deposits should be given tax benefits.
Improvement on the Banking regulations.
FII (Foreign Institutional Investors) should be prohibited from investing fresh money
raised to participatory notes.
Existing PN holders should be given a exit route to phrase out completely the PN notes.
At Present the rupee is fully convertible on current account, but partially convertible on capital
account

Benefits of CAC for INDIA
It allows domestic residents to invest abroad and have a globally diversified investment
portfolio; this reduces risk and stabilizes the economy. A globally diversified equity
portfolio has roughly half the risk of an Indian equity portfolio. So, even when conditions
are bad in India, globally diversified households will be sustained by offshore assets; will
be able to spend more, thus propping up the Indian economy.
Our NRI movement will benefit tremendously if and when CAC becomes a reality. The
reason is on account of current restrictions imposed on movement of their funds. As the
remittances made by NRI‟s are subject to numerous restrictions which will be eased
considerably once CAC is incorporated.
It also opens the gate for international savings to be invested in India. It is good for India
if foreigners invest in Indian assets; this makes more capital available for India‟s
development, that is, it reduces the cost of capital. When steel imports are made easier,
steel becomes cheaper in India. Similarly, when inflows of capital into India are made
easier, capital becomes cheaper in India.
Controls on the capital account are rather easy to evade through unscrupulous means.
Huge amounts of capital are moving across the border anyway. It is better for India if
these transactions happen in white money. Convertibility would reduce the size of the
black economy, and improve law and order, tax compliance and corporate governance.
Most importantly convertibility induces competition against Indian finance. Currently,
finance is a monopoly in mobilizing the savings of Indian households for the investment
plans of Indian firms. No matter how inefficient Indian finance is, households and firms
do not have an alternative, thanks to capital controls. Exactly as we saw with trade
liberalization, which consequently led to lower prices and superior quality of goods
produced in India, capital account liberalization will improve the quality and drop the

price of financial intermediation in India. This will have repercussions for GDP growth,
since finance is the „brain‟ of the economy.
Drawbacks of CAC for INDIA
During the good years of the economy, it might experience huge inflows of foreign
capital, but during the bad times there will be an enormous outflow of capital under “herd
behavior”. For example, the South East Asian countries received US$ 94 billion in 1996
and another US$ 70 billion in the first half of 1997. However, under the threat of the
crisis, US$ 102 billion flowed out from the region in the second half of 1997, thereby
accentuating the crisis. This has serious impact on the economy as a whole, and can even
lead to an economic crisis as in South-East Asia.
There arises the possibility of misallocation of capital inflows. Such capital inflows may
fund low-quality domestic investments, like investments in the stock markets or real
estates, and desist from investing in building up industries and factories, which leads to
more capacity creation and utilisation, and increased level of employment. This also
reduces the potential of the country to increase exports and thus creates external
imbalances.
An open capital account can lead to “the export of domestic savings” (the rich can
convert their savings into dollars or pounds in foreign banks or even assets in foreign
countries), which for capital scarce developing countries would curb domestic
investment. Moreover, under the threat of a crisis, the domestic savings too might leave
the country along with the foreign „investments‟, thereby rendering the government
helpless to counter the threat.
Entry of foreign banks can create an unequal playing field, whereby foreign banks select
the most creditworthy borrowers and depositors. This aggravates the problem of the
farmers and the small-scale industrialists, who are not considered to be credit-worthy by
these banks. In order to remain competitive, the domestic banks too refuse to lend to

these sectors, or demand to raise interest rates to more “competitive” levels from the
„subsidised‟ rates usually followed.
International finance capital today is “highly volatile”, i.e. it shifts from country to
country in search of higher speculative returns. In this process, it has led to economic
crisis in numerous developing countries. Such finance capital is referred to as “hot
money” in today‟s context. Full capital account convertibility exposes an economy to
extreme volatility on account of “hot money” flows.
It does not seem that the Indian economy has the competence of bearing the strains of
free capital mobility given its slowing growth rate and poor investor confidence. Most of
the pre-conditions stated by the Tarapore committee had been well complied in the period
of 2003-2007 rally. The forex reserves at $ 290 bn are a matter of concern for RBI as
well as the Government of India. FDI inflows have dried up & inflation is well above
comfort level. At this moment, India can‟t take a risk of making Capital Account fully
convertible as it will result in higher outflows as against inflows of funds.
It must not be forgotten that CAC is a big step and integrates the economy with the global
economy completely thereby subjecting it to international fluctuations and business
cycles. Thus due caution must be incorporated while taking this decision in order to avoid
any situation that was faced by Argentina in the early 80‟s or by the Asian economies in
1997-98.
If CAC is fully convertible then what will be the impact on India?
If excess Inflow:
Full capital account convertibility is like an exclusive badge to the developed economies
and not help developing country India is still a developing country. It can be too risky if
we allow full capital account convertibility. Risk involve in Exchange rate will be very
volatile so it will affect India Forex reserve.

Full convertibility may lead to massive inflows of foreign currency that may lead to
excessive liquidity problem in the economy and the result would be increase “Inflation”.
To suck the excess liquidity RBI will have to issue debt papers, bond, etc. along with
increasing repo and CRR rates. This will put heavy burden on the RBI, because it has to
pay interest rates for huge amounts and this may lead to more problems if inflows don't
stop (the value of the debt paper the RBI sells to the banks decreases as its market supply
increases).
Excessive capital inflow will lead to currency appreciation. This will have negative effect
on the country‟s export, jobs and will affect balance of trade because Imports will exceed
exports.
Scenario can also exist where there would be increases in short term FIIs due to more
inflow of capital rather than long term FDIs, thus leading to volatility in the system.
If excess out flow:
Excessive outflow of capital will affect the economic growth and currency will be highly
depreciated.
The instability in the international markets (for ex: like the subprime crisis and fears of a
recession, oil crisis) then out flow of currency will be high and speculations will lead to
flight of capital at large scale.
At a time of uncertainty in International market outflow will be very high and lead to
Country required higher foreign exchange reserve to maintain stability in foreign
exchange.
Excess out flow of foreign exchange led to less GDP growth, high BOP crisis, high requirement
of foreign exchange reserve.

Asian Crisis of 1997 due to CAC
The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in
July 1997, and raised fears of a worldwide economic meltdown. The crisis started in Thailand
with the financial collapse of the Thai baht after the Thai government was forced to float the baht
(due to lack of foreign currency to support its fixed exchange rate), cutting its peg to the U.S.
dollar, after exhaustive efforts to support it in the face of a severe financial overextension that
was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that
made the country effectively bankrupt even before the collapse of its currency. As the crisis
spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and
other asset prices, and a precipitous rise in private debt.
Though there has been general agreement on the existence of a crisis and its consequences, what
is less clear are the causes of the crisis, as well as its scope and resolution. Indonesia, South
Korea and Thailand were the countries most affected by the crisis. Hong Kong, Malaysia, Laos
and the Philippines were also hurt by the slump. The People's Republic of China, Taiwan,
Singapore, Brunei and Vietnam were less affected, although all suffered from a loss of demand
and confidence throughout the region.
Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast
Asian Nations (ASEAN) economies in 1993–96, and then shot up beyond 180% during the worst
of the crisis. In South Korea, the ratios rose from 13 to 21% and then as high as 40%, while the
other northern newly industrialized countries fared much better. Only in Thailand and South
Korea did debt service-to-exports ratios rise.
Although most of the governments of Asia had seemingly sound fiscal policies, the International
Monetary Fund (IMF) stepped in to initiate a $40 billion program to stabilize the currencies of
South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis. The efforts
to stem a global economic crisis did little to stabilize the domestic situation in Indonesia, after 30
years in power, President Suharto was forced to step down on 21 May 1998 in the wake of
widespread rioting that followed sharp price increases caused by a drastic devaluation of the
rupiah (Devaluation by 70%).

Indonesia & Crisis
In June 1997, Indonesia seemed far from crisis. Unlike Thailand, Indonesia had low inflation, a
trade surplus of more than $900 million, huge foreign exchange reserves of more than $20
billion, and a good banking sector. But a large number of Indonesian corporations had been
borrowing in U.S. dollars. During the preceding years, as the rupiah had strengthened respective
to the dollar, this practice had worked well for these corporations; their effective levels of debt
and financing costs had decreased as the local currency's value rose.
In July 1997, when Thailand floated the baht, Indonesia's monetary authorities widened the
rupiah currency trading band from 8% to 12%. The rupiah suddenly came under severe attack in
August. On 14 August 1997, the managed floating exchange regime was replaced by a free-
floating exchange rate arrangement. The rupiah dropped further. The IMF came forward with a
rescue package of $23 billion, but the rupiah was sinking further amid fears over corporate debts,
massive selling of rupiah, and strong demand for dollars. The rupiah and the Jakarta Stock
Exchange touched a historic low in September. Moody's eventually downgraded Indonesia's
long-term debt to 'junk bond'.
Although the rupiah crisis began in July and August 1997, it intensified in November when the
effects of that summer devaluation showed up on corporate balance sheets and trade was affected
by massive fire in forests of Indonesia. Companies that had borrowed in dollars had to face the
higher costs imposed upon them by the rupiah's decline, and many reacted by buying dollars
through selling rupiah, undermining the value of the latter further. In February 1998, President
Suharto sacked Bank Indonesia Governor J. Soedradjad Djiwandono, but this proved
insufficient. Suharto resigned under public pressure in May 1998 and Vice President B. J.
Habibie was elevated in his place. Before the crisis, the exchange rate between the rupiah and the
dollar was roughly 2,600 rupiah to 1 USD.
The rate plunged to over 11,000 rupiah to 1 USD on 9 January 1998, with spot rates over 14,000
during January 23–26 and trading again over 14,000 for about six weeks during June–July 1998.
On 31 December 1998, the rate was almost exactly 8,000 to 1 USD. Indonesia lost 13.5% of its
GDP that year.

Impact of 1991-1997 Crisis
India survived near-crisis situations twice in the 1990s. The internal and external constraints
shape the country‟s ability to respond to the crises. India‟s success can be attributed to four sets
of decisions taken during the period 1991–1997: Devaluation, Involvement of the IMF, Partial
liberalization of the Domestic financial sector, and Gradual opening up of the external sector.
It analyzed the options, political opposition, and eventual outcomes for each set of decisions.
India‟s ownership of its reform program helped set the pace of reform, while close interaction
between technocrats and the IMF added credibility. But the balance between entrenched
traditional interest groups and the demands of new interests determined the scope of reform
Notwithstanding the weakening fundamentals, one key factor that reduced vulnerability was the
absence of private sector external debt. Unlike many other countries, individuals and firms could
not raise foreign currency–denominated debt, and the banking sector was not allowed to hold
financial assets abroad. One effect of this was that the private sector‟s interests were geared more
toward internal deregulation than toward external liberalization.
In reaction, and in parallel to these developments, the economic situation worsened. By
September 1990, net inflows of Non-Resident Indiandeposits had turned negative. Access to
commercial borrowing had becomemore costly, and by December even short-term credit was
restricted. Foreign exchange reserves fell to $1.2 billion in January 1991. By the time anew
government took over in June, reserves could cover only two weeks ofimports. India was close
to defaulting on its sovereign debt for the first timein its history
In 1997–1998 the Asian financial crisis again threatened India. Macroeconomic fundamentals
were vastly different, but political instability and external shocks were common in both episodes.

In 1997, India was much less vulnerable, both relative to 1991 and to most East Asian
economies. The fiscal deficit, although still high, had declinedsince the early 1990s. The current
account deficit had fallen to 1.25 percentof GDP in 1996–1997. External debt as a proportion of
GDP (24.7 in 1996-1997) was a fraction of that of Indonesia (61.3) or Thailand (62). The debt
Service ratio had fallen fourteen percentage points since 1990 to 21.2 percent in 1996–1997.
The better fundamentals influenced expectations of crisis. In 1996, theIMF calculated that East
Asian countries had balance-of-payments (BOP)crisis probabilities ranging from 25 percent for
the Philippines to 65 percent for Thailand. India‟s probability was just 11 percent. But as in
1990–1991, India was again experiencing political instability. A minority coalition government
twice lost parliamentary support of theCongress Party during 1996–1998. In May 1998, the two-
month-old BJP-ledgovernment engineered nuclear tests, inviting widespread sanctions. Fresh
commitments from the World Bank, Asian Development Bank, and bilateraldonors ceased.
The pressures of 1991 and 1997 were managed against a backdrop ofinternational and domestic
constraints faced by policymakers. Many in India viewed foreign investment and international
financial institutions with greatsuspicion. A highly regulated economy was considered necessary
to keepcontrol over limited economic resources.
These constraints variously shaped the scope and speed of policy changes, as can be seen by
examining four key decisions: devaluation in 1991; the IMF program of 1991–1993; partial
internal financial liberalization from 1994 onward; and thegradualist change in the exchange rate
and external sector.

Introduction of FEMA
The Foreign Exchange Management Act (1999) or in short FEMA has been introduced as a
replacement for earlier Foreign Exchange Regulation Act (FERA). FEMA became an act on the
1st day of June, 2000. FEMA was introduced because the FERA didn‟t fit in with post-
liberalization policies. A significant change that the FEMA brought with it, was that it made all
offenses regarding foreign exchange civil offenses, as opposed to criminal offenses as dictated
by FERA.
The main objective behind the Foreign Exchange Management Act (1999) is to consolidate and
amend the law relating to foreign exchange with the objective of facilitating external trade and
payments. It was also formulated to promote the orderly development and maintenance of
foreign exchange market in India.
FEMA is applicable to all parts of India. The act is also applicable to all branches, offices and
agencies outside India owned or controlled by a person who is a resident of India.
The FEMA head-office, also known as Enforcement Directorate is situated in New Delhi and is
headed by a Director. The Directorate is further divided into 5 zonal offices in Delhi, Mumbai,
Kolkata, Chennai and Jalandhar and each office is headed by a Deputy Director. Each zone is
further divided into 7 sub-zonal offices headed by the Assistant Directors and 5 field units
headed by Chief Enforcement Officers.

Need to introduce FEMA
Foreign Exchange Management Act (FEMA), which was to replace the Foreign Exchange
Regulation Act, 1973 (FERA) was ultimately passed by Parliament in 1999, and it has been
notified that FEMA has come into force from 1st
June 2000.
FERA proceeded on the presumption that all foreign exchange earned by Indian residents
rightfully belonged to the Government of India and had to be collected and surrendered to the
Reserve bank of India (RBI) expeditiously. It regulated not only transactions in forex, but also all
financial transactions with non-residents. FERA primarily prohibited all transactions, except to
the extent permitted by general or specific permission by RBI.
Violation of FERA was a criminal offence. The case of the eminent industrialist, S.L.Kirloskar,
beingproceeded against under FERA for having the princely amount of $82in hispossession is
well known. If a person had ever visited a relative abroad, or had non-resident relatives
visiting them, the chances are high that they had also violated FERA. In such cases, it is highly
likelythat the relatives may have given him or his visiting family members some small gift in
forex,which they spent on buying some small article which they wanted to bring back. Or they
may havespent some money on hospitality towards their non-resident relatives visiting them.
Strictly,speaking, till the 1990's, these were FERA violations. FERA had become more of a tool
inthe hands of politicians for punishing people who refused to toe their line.
Fortunately, with the winds of liberalization blowing in the early 1990's, the Government relaxed
many of the rigors of FERA by issuing notifications. Forex reserves swelled, the rupee was made
convertible on current account. In this liberal atmosphere, the government realized that
possession of forex could no longer be regarded as a crime, but was an economic offence, for
which the more appropriate punishment was a penaly. Thus, the need of FEMA was felt. The
primary difference between FERA and FEMA therefore lies in the fact that offences under
FEMA are not regarded as criminal offences and only invite penalties, not prosecution and
imprisonment.

FEMA now codifies in the legislation and rules itself various transactions, which had been
permitted by notification under FERA. Under FEMA, all current account transactions in forex
(such as expenses, which are not for capital purposes) are permitted, except to the extent that the
Central Government notifies. However, so far as capital account transactions are concerned, all
capital account transactions in forex are prohibited, except to the extent as may be notified by
RBI.
Certain prohibitions are laid down in the Foreign Exchange Management (Current Account
Transactions) Rules, 2000. You cannot remit money for purchaseof lottery tickets, for
subscription to banned/prescribed magazines, to football pools, sweepstakes,for payment for
telephone callback services, etc. Under the rules, certain remittances can bemade only with prior
approval of RBI. Many of these require permission only if the spending exceeds a particular
limit. In effect, this means that you can spend amounts less than that without any approval being
required.
Some of these remittances, not requiring approval, are :
Up to US $ 5,000 in every calendar year for foreign travel (increased from the limit of US
$ 3,000 under FERA).
Up to US $ 25,000 per trip for a business trip or for attending a conference abroad,
irrespective of the length of the trip (under FERA, you had limits per day plus an
entertainment allowance).
For gifts up to US $ 5,000 per beneficiary per annum (under FERA, the limit was US $
1,000 and restricted only to defined relatives).
For donations up to US $ 5,000 per beneficiary.
For maintenance of close relatives abroad up to US $ 5,000 per recipient.
For foreign studies up to US $ 30,000, or the estimate from the foreign institution,
whichever is higher.
For meeting expenses for medical treatment abroad, up to the estimate from doctor in
India or hospital or doctor abroad.

Important definitions under FEMA
1. Capital Account Transaction –
"Capital account transaction" means a transaction which alters the assets or liabilities, including
contingent liabilities, outside India of persons resident in India or assets or liabilities in India of
person resident outside India, and includes transactions referred to in sub-section (3) of section 6.
2. Current Account Transaction –
"Current account transaction" means a transaction other than a capital account transaction and
without prejudice to the generality of the foregoing such transaction includes,-
Payments due in connection with foreign trade, other current business, services, and
short-term banking and credit facilities in the ordinary course of business.
Payments due as interest on loans and as net income from investments.
Remittances for living expenses of parents, spouse and children residing abroad, and
Expenses in connection with foreign travel, education and medical care of parents, spouse
and children;
3. Foreign portfolio investment -
It is investment into financial instruments such as stocks and bonds in which the objective is not
to engage in business but to merely generate dividend income and capital gains. The larger
portion of international investment flows in the world today is FPIs.
4. Forward contract - An arrangement between two parties to trade specified amounts of two
Currencies at some designated future due date at an agreed price. More than a formal hedge
against unforeseen changes in currency prices, it guarantees certainty in the foreign exchange
rate at the contract's delivery date.
5. Forward swap - The most common type of forward transaction, forward swaps comprise
60 per cent of all foreign exchange transactions. In a swap transaction, two companies
immediately exchange currency for an agreed-upon length of time at an agreed exchange

rate. At the end of the time period, each company returns the currency to the former
owner at the original exchange rate with an adjustment for interest rate differences.
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:
1. Withdrawal of Foreign Exchange
Now, the restrictions on withdrawal 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.
2. 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, 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
3. 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.
4. 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
5. 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 resident ship has been introduced
6. 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.
7. 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.

Difference between FERA & FEMA
Sr.
No
DIFFERENCES FERA FEMA
1
PROVISIONS FERA consisted of 81 sections, and
was more complex
FEMA is much simple, and
consist of only 49 sections.
2
FEATURES Presumption of negative intention
(MensRea ) and joining hands in
offence (abatement) existed in
FEMA
These presumptions of Mens
Rea and abatement have been
excluded in FEMA
3
NEW TERMS
IN FEMA
Terms like Capital Account
Transaction, current Account
Transaction, person, service etc.
were not defined in FERA.
Terms like Capital Account
Transaction, current account
Transaction person, service etc.,
have been defined in detail in
FEMA
4
DEFINITION
OF
AUTHORIZED
PERSON
Definition of "Authorized Person" in
FERA was a narrow one ( 2(b)
The definition of Authorized
person has been widened to
include banks, money changes,
off shore banking Units etc. (2 (
c )
5
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
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.
6
PUNISHMENT Any offence under FERA, was a
criminal offence , punishable with
imprisonment as per code of
criminal procedure, 1973
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.
7
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.
8
APPEAL An appeal against the order of
"Adjudicating office", before "
The appellate authority under
FEMA is the special Director (

Foreign Exchange Regulation
Appellate Board went before High
Court
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)
9
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 AND
SEIZE
FERA conferred wide powers on a
police officer not below the rank of
a Deputy Superintendent of Police to
make a search
The scope and power of search
and seizure has been curtailed to
a great extent

Recent Amendment to FEMA:
Opening of Foreign Currency Accounts Outside India:
Earlier, Indian Companies which needed to open foreign currency accounts outside India
neededto take the approval of the RBI. This was a cumbersome and time consuming process.
This has now been liberalized by the Foreign Exchange Management (Foreign Currency
Accounts by a Person Resident in India) (Second Amendment) Regulations, 2001issued by the
RBI on December 5th 2001.
Under these regulations, an Indian Entity can now open a Bank Account outside India without
any prior approval from the RBI / Authorize Dealer, subject to the following limits on
remittances :
Source of
Remittance
Amount which can
be remitted for
initial expenses
Amount which can
be remitted for
recurring expenses
A 100% EOU or a
unit in EPZ or in a
Hardware
Technology Park or
in a Software
Technology Park,
within two years of
establishment of the
Unit
From out of its
Current A/c or out of
its EEFC(exchange
earner foreign
currency account)
A/c
No Limit No Limit
Other Companies From out of its
Current A/c
2 per cent of the
average annual
sales/income or
turnover during last
two accounting years
of the Indian Entity.
1 per cent of the
average annual
sales/income or
turnover during last
two accounting years
of the Indian Entity.
From out of its EEFC
A/c
No Limit No Limit

Two way Fungibility for ADR / GDRs
Two Way fungibility of ADR / GDR issued by Indian Companies was permitted by the
Government of India & the RBI. The RBI has now, vide APDIR Circular No: 21 dated February
13th 2002, issued operative guidelines for the 2 way fungibility of ADR / GDR.
Earlier, once a company issues ADR / GDR, and if the holder wanted to obtain the
underlyingequity shares of the Indian Company, then, such ADR / GDR would be converted into
shares ofthe Indian Company. Once such conversion has taken place, it was not possible to
reconvert theequity shares into ADR / GDR.
The present rules of the RBI make such reconversion possible, to the extent of ADR / GDR
which have been converted into equity shares and sold in the local market. This would take place
in the following manner:
Stock Brokers in India have been authorized to purchase shares of Indian Companies for
reconversion.
The Domestic Custodian would coordinate with the Overseas Depository and the Indian
Company to verify the quantum of reconversion which is possible and also to ensure that the
sectoral cap is not breached.
The Domestic Custodian would then inform the Overseas Depository to issue ADR / GDR to the
Overseas Investor.
Investment outside India by Indian Companies:
Pursuant to the Union Budget, outbound investment by Indian Companies has been further
liberalized. The highlights of these changes are: Indian Companies are now permitted to invest
up to 100 Million US Dollars per financial year under the automatic route, provided the other
conditions as specified in FEMA Notification No: 19/2000 dated 3rd May 2000 are complied
with. Earlier the limit for investment under the Automatic Route was 50 Million US Dollars per
financial year.
Companies which do not have access to foreign exchange for overseas investments are permitted
to purchase foreign exchange from the Authorized Dealers up to 50% of their net worth. Earlier,
the limit was 25% of their net worth

PERSON OF INDIAN ORIGIN (PIO) UNDER FEMA
FEMA,1999 has not given definition of Person of Indian Origin. However, Reserve Bank of
India in its various FEMA Notifications issued under FEMA, 1999 has defined a Person of
Indian Origin as under:
I. For the purpose of opening non-resident bank accounts in India PIO means a citizen of any
country other than that of Bangladesh or Pakistan if
He at any time held Indian passport
He or either of his parents or any of his grandparents was a citizen of India by virtue of the
Constitution of India of the Citizenship Act, 1955 or
The person is a spouse of an Indian citizen or a person referred to in sub-clause a) or b) above
For the purpose of Investing in shares/debentures etc in India person of Indian origin means a
citizen of any country other than that of Bangladesh or Pakistan if
He at any time held Indian passport; or
He or either of his parents or any of his grandparents was a citizen of India by virtue of
the Constitution of India of the Citizenship Act, 1955
The person is a spouse of an Indian citizen or a person referred to in sub-clause a) or b)
II. For the purpose of acquiring immovable property in India person of Indian Origin means a
citizen of any country other than that of Bangladesh or Pakistan or Sri Lanka or Afghanistan or
China or Iran or Nepal and Bhutan if
Constitution of India of the Citizenship Act 1955 or

III. For the purpose of establishing Branch of Office in India PIO means a citizen of any
country other than that of Bangladesh or Pakistan or Sri Lanka or Afghanistan or China Or Iran
if
Constitution of India of the Citizenship Act 1955 or
The person is a spouse of an Indian citizen or a person referred to in sub-clause a) or b) above.
1. For the purpose of acquiring PIO Card PIO means a citizen of any country other than that
of Bangladesh or Pakistan, if
1. He at any time held an Indian Pass port; or
1. He/she or either of his /her parents or grandparents or great grandparents was born
in India and permanently resident in India as defined in the Government of India
Act, 1935 and other territories that became part of India thereafter provided
neither was at any time a citizen of any country as may be specified by Central
Government from time to time
2. Who is spouse of a citizen of India or a Person of Indian Origin as mentioned
above

FEMA guidelines provide Indian companies to access funds from abroad by following
methods:-
• External Commercial Borrowings (ECB):- It refers to commercial loans in the form of bank
loans, buyers‟ credit, suppliers‟ credit, securitized instruments (e.g. floating rate notes and fixed
rate bonds, non-convertible, optionally convertible or partially convertible preference shares)
availed of from non-resident lenders with a minimum average maturity of 3 years.
• Foreign Currency Convertible Bonds (FCCBs):- It refers to a bond issued by an Indian
company expressed in foreign currency, and the principal and interest in respect of which is
payable in foreign currency.
• Preference shares - (i.e. non-convertible, optionally convertible or partially convertible). These
instruments are considered as debt and denominated in Rupees and rupee interest rate will be
based on the swap equivalent of LIBOR plus spread.
• Foreign Currency Exchangeable Bond (FCEB):- FCEB is a bond expressed in foreign currency,
the principal and interest in respect of which is payable in foreign currency, issued by an Issuing
Company and subscribed to by a person who is a resident outside India, in foreign currency and
exchangeable into equity share of another company, to be called the Offered Company, in any
manner, either wholly, or partly or on the basis of any equity related warrants attached to debt
instruments. The FCEB may be denominated in any freely convertible foreign currency.

ECB
External Commercial Borrowings (ECB) refer to commercial loans [in the form of bank loans,
buyers‟ credit, suppliers‟ credit, securitized instruments (e.g. floating rate notes and fixed rate
bonds)] availed from non-resident lenders with minimum average maturity of 3 years. By simple,
foreign currency borrowings raised by the Indian companies from sources outside India are
called ECB and ECBs act as an additional source of funds for companies to finance its
Investment needs.
Benefits of ECB
The ECBs route provides an Indian company with the foreign currency funds that may not be
available in India; the cost of funds at times works out to be cheaper as compared to the cost of
rupee funds and the availability of the funds from the International market is huge compared to
the domestic market. Moreover corporate can raise a large amount of funds depending on the risk
perception of the International market.
Corporates (registered under the Companies Act except financial intermediaries (such as banks,
financial institutions (FIs), housing finance companies and NBFCs) are eligible to raise ECB
under the automatic route. However Individuals, Trusts and Non-Profit making Organizations
are not eligible to raise ECB.
The external debt to GDP ratio which is an indicator of an economies debt servicing capability,
showed a steady improvement, dropping to 17.4 per cent in March 2005 as compared to 38.7
percent in end-March, 1992.It is noteworthy to mention that debt owed to the International
Monetary Fund (IMF) was fully extinguished by 2000-01.ECBs can be used as a borrowing
means for any purpose (rupee-related expenditure as well as imports)except for investment in
stock market and speculation in real estate.
External Commercial Borrowing can be raised only for investments such as import of capital
goods (as classified by DGFT in the Foreign Trade Policy), new projects,
modernization/expansion of existing production units in the industrial sector including small and
medium enterprises and infrastructure sector - in India. Infrastructure sector is defined as power,
telecommunication, railways, road including bridges, seaport and airport industrial parks and

urban infrastructure (water supply, sanitation and sewage projects). ECB proceeds can also be
utilized for overseas direct investment in Joint Ventures /Wholly Owned overseas subsidiaries
subject to the existing guidelines on Indian Direct Investment. Utilization of ECB proceeds is
permitted in the first stage acquisition of shares in the disinvestments process

ECB can be accessed under two routes, viz.:-
A) Automatic Route:-
Access of funds under Automatic Route does not require RBI/GOI approval. Corporate including
hotel, hospital, software sectors (registered under the Companies Act 1956) and Infrastructure
Finance Companies (IFCs) except financial intermediaries such as banks, FIs, HFCs, and NBFCs
are eligible to raise ECB. Units in SEZs are allowed to raise ECB for their captive requirements.
NGOs engaged in micro finance activities are eligible to avail of ECB (subject to certain
conditions). Trusts and Non-Profit making organizations are not eligible to raise ECB.
ECB can be raised by borrowers from internationally recognized sources such as
Overseas organizations and individuals may provide ECB to NGOs engaged in micro finance
activities subject to complying with some safeguards outlined in the RBI circular
Amount and Maturity
The maximum amount of ECB which can be raised by a corporate is USD 500 million or
equivalent during a financial year.
ECB up to USD 20 million or equivalent in a financial year with minimum average
maturity of three years.
ECB above USD 20 million and up to USD 500 million or equivalent with a minimum
average maturity average maturity of five years.
ECB up to USD 20 million can have call / put option provided the minimum average
maturity of three years is complied with before exercising call / put option.
International banks International capital markets
Multilateral financial institutions (IFC,ADB,CDC) Suppliers of Equipment
Foreign Collaborators Foreign Equity Holders

All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency except
commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the
payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.
The all-in-cost ceilings for ECB are reviewed from time to time. The following ceilings
are valid till reviewed:
Average Maturity Period All-in-cost Ceilings over 6 month LIBOR*
Three years and up to five years 200 basis points
More than five years 350 basis points
* For the respective currency of borrowing or applicable benchmark

B. APPROVAL ROUTE
Proposals falling under the category include:-
a) On lending by the EXIM Bank for specific purposes (case to case basis).
b) Banks and financial institutions which had participated in the textile or steel sector
restructuring package as approved by the Government.
c) ECB with minimum average maturity of 5 years by NBFC to finance import of
infrastructure equipment for leasing to infrastructure projects.
d) Infrastructure Finance Companies (IFCs) i.e. NBFCs, categorized as IFCs, by RBI
(beyond 50% of their owned funds) for on-lending to the infrastructure sector as defined
under the ECB policy and subject to compliance of certain stipulations.
e) Foreign Currency Convertible Bonds (FCCBs) by Housing Finance Companies.
f) Special Purpose Vehicles (SPV) or any other entity notified by the RBI, set up to finance
infrastructure companies / projects exclusively.
g) Financially solvent Multi-State Co-operative Societies engaged in manufacturing.
h) SEZ developers for providing infrastructure facilities within SEZ.
i) Eligible Corporate under automatic route other than in the services sector viz. hotels,
hospitals and software sector can avail of ECB beyond USD 750 million per financial
year.
j) Corporate in the service sector for availing ECB beyond USD 200 Mn. Per financial year.
k) Cases falling outside the purview of the automatic route limits and maturity indicated,
etc.

Amount and Maturity
1. Corporates can avail of ECB of an additional amount of USD 250 million with average
maturity of more than 10 years under the approval route, over and above the existing
limit of USD 500 million under the automatic route, during a financial year. Other ECB
criteria such as end-use, all-in-cost ceiling, recognized lender, etc., need to be complied
with. Prepayment and call / put options, however, would not be permissible for such ECB
up to a period of 10 years.
2. Corporates in infrastructure sector {as defined in paragraph 1(A) (v) (a)} can avail ECB
up to USD 100 million and Corporates in industrial sector can avail ECB up to USD 50
million for Rupee capital expenditure for permissible end- users within the overall limit
of USD 500 million per borrower, per financial year, under Automatic Route.
3. NGOs engaged in micro finance activities can raise ECB up to USD 5 million during a
financial year. Designated AD bank has to ensure that at the time of drawdown the forex
exposure of the borrower is hedged.
4. Corporates in the services sector viz. hotels, hospitals and software companies can avail
ECB up to USD 100 million, per borrower, per financial year, for import of capital
goods.
All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency except
commitment fee, pre-payment fee, and fee payable in Indian Rupees. Moreover, the payment of
withholding tax in Indian Rupees is excluded for calculating the all-in-cost.
The current all-in-cost ceilings are as under: The following ceilings are valid till reviewed:
Average Maturity Period All-in-cost Ceilings over 6 month LIBOR*
Three years and up to five years 200 basis points
More than five years 350 basis points
* For the respective currency of borrowing or applicable benchmark

COMPLIANCE WITH ECB GUIDELINES
The primary responsibility to ensure that ECB raised / utilized are in conformity with the ECB
guidelines and the Reserve Bank regulations / directions is that of the concerned borrower and
any contravention of the ECB guidelines will be viewed seriously and will invite penal action
under FEMA 1999 ( cf. A.P. (DIR Series) Circular No.31 dates February 1, 2005). The
designated AD bank is also required to ensure that raising / utilization of ECB is in compliance
with ECB guidelines at the time of certification.
External Commercial Borrowing of last 5 years
Automatic Route:
Approval Route:
2,258
1,286
1,064
1,524
2,622
0
5,000,000,000
10,000,000,000
15,000,000,000
20,000,000,000
25,000,000,000
30,000,000,000
2007 2008 2009 2010 2011
Automatic Route
1,279
981
532
858
1,038
0
2,000,000,000
4,000,000,000
6,000,000,000
8,000,000,000
10,000,000,000
12,000,000,000
14,000,000,000
2007 2008 2009 2010 2011
Approval Route

Above graph we can see that India external commercial borrowings(ECB) through Automatic
Route in 2007 is 2250 crore, 2008 is reduce to 1200 crore again reduce in 2009 is only 1000
crorer. The reason of decrease of ECB is in 2008 US crisis and in 2009 Euro crisis and interest
rate are also not vary favorable. In 2012 is 2600 crore which is higest in last 5 year. Because
market candition is improving and Interest rate also very feverable for Indian companies.
Reliance industries ltd and Tata steel who has borrower $500 million borrower in 2008. sterlite
industies has borrow $500million in 2009. Indian Oil corporation borrow $500 in 2010. Adani
power has borrow $475 million in 2008.
Latest Amendments in the ECB guidelines
External Commercial Borrowings (ECB) – Rationalization and Liberalization September 23,
2011 A.P. (DIR Series) Circular No.27
Enhancement of ECB limit under the automatic route
(a) Eligible borrowers in real sector-industrial sector-infrastructure sector can avail of ECB up to
USD 750 million or equivalent per financial year under the automatic route as against the present
limit of USD 500 million or equivalent per financial year.
(b) Corporates in specified service sectors viz. hotel, hospital and software, can avail of ECB up
to USD 200 million or equivalent during a financial year as against the present limit of USD 100
million or equivalent per financial year subject to the condition that the proceeds of the ECBs
should not be used for acquisition of land.

Issue of Foreign Currency Convertible Bonds by Indian Companies.
Earlier, Indian Companies required approval of the Government of India before issue of
Foreign Currency Convertible Bonds (FCCBs). The RBI has vide FEMA Notification
No: 55 dated March 7th2002, liberalized these rules. Accordingly: Indian Companies
seeking to raise FCCBs are permitted to raise them under the Automatic Route up to US
50 Million Dollars per financial year without any approval.
The FCCBs raised shall be subject to the sectoral limits prescribed by the Government of
India. Maturity period for the FCCBs shall be at least 5 years and the "all in cost" at least
100 basis points less than that prescribed for External Commercial Borrowings.
Foreign Currency Exchangeable Bonds (FCCB)
The Issuing Company shall be part of the promoter group of the Offered Company and
shall hold the equity share/s being offered at the time of issuance of FCEB. The Offered
Company shall be a listed company, which is engaged in a sector eligible to receive FDI
and eligible to issue or avail of FCCB or ECB.
Entities complying with the FDI policy and adhering to the sectors caps at the time of
issue of FCEB can subscribe to FCEB. Prior approval of the Foreign Investment
Promotion Board, wherever required is to be obtained.
An Indian company, which is not eligible to raise funds from the Indian securities market,
including a company which has been restrained from accessing the securities market by
the SEBI are not be eligible to issue FCEB. Entities prohibited to buy, sell or deal in
securities by the SEBI will not be eligible to subscribe to FCEB.

FOREIGN DIRECT INVESTMENT
Foreign Direct Investment (FDI), a source of investment from investors other than the host
country, is considered as a major contributor in accelerating the economic growth of a country.
Recognizing the potential of FDI, the Indian Government over years has taken various steps on
policy and implementation front to encourage greater inflow of FDI under automatic route and
has shifted its stringent regime to liberal one.
Enduring efforts are being made to open up Indian economy to international participation and
attracting international investments by raising sectoral caps and relaxing conditions attached to
the same. Department of Industrial Policy & Promotion (DIPP), Foreign Investment Promotion
Board (FIPB), Secretarial of Industrial Assistance (SIA) and Reserve Bank of India (RBI) are the
nodal agencies which monitor the regulatory and administrative aspects of FDI in India. This
article aims at enlightening the recent developments in context of liberalization of the prevailing
FDI norms in India.
Recent Sector Specific developments are discussed as follows.
SINGLE BRAND RETAILING
DIPP on January 10, 2012 enhanced the limit of FDI in Single Brand Retail Trading from 51%
to 100% 2
, subject to terms and conditions stated below. 100% FDI in Single Brand Retail
Trading aims at (a) attracting investments in production and marketing; (b) improving the
availability of such goods for the consumer; (c) encouraging increased sourcing of goods from
India; and (d) enhancing competitiveness of Indian enterprises through access to global designs,
technologies and management practices.
♦ Terms And Conditions
The conditions for 51% „Single Brand‟ product retail trading, which continues to apply in the
revised policy allowing 100% FDI in this sector are:
1. Products to be sold should be of „Single Brand‟ only;
2. Products should be sold under the same brand internationally;

3. Products should be branded during manufacturing;
4. Foreign Investor should be the owner of the brand.
In addition to the aforesaid conditions, the revised policy prescribes that in respect of proposals
involving FDI beyond 51%, there should be mandatory sourcing of at least 30% of the value of
the products sold from Indian small Industries/village and cottage Industries, artisans and
craftsmen. Small Industries has been defined as Industries which have a total investment in plant
and machinery not exceeding USD 1 Million. The aforesaid valuation is the value ascertained at
the time of installation of plant and machinery, not including depreciation. If at any time, the
valuation of plant and machinery exceeds the aforesaid sum of USD 1 Million, the given industry
would not qualify as „Small Industry‟. The aforesaid compliance would be ensured by the FDI
company through self-certification, to be subsequently checked by the statutory auditors of the
FDI company from its audited accounts.
♦ Procedure
An application has to be filed with SIA seeking permission of the Indian Government for 100%
investment in Single Brand product retail trading. The application should specifically indicate
the product/product categories which are proposed to be sold under a „Single Brand‟. Any
addition to the product/product categories to be sold under ‟Single Brand‟ would require a fresh
approval of the Indian Government. All the applications filed would be processed in DIPP, to
determine whether the products proposed to be sold satisfy the notified guidelines, before being
considered by FIPB for Government approval.

PHARMA SECTOR
In the year 2001, Indian Government allowed 100% FDI in Pharmaceutical sector that such a
move will bring in new investments, which will help in expanding the sector. Conversely, the
foreign companies took over the existing businesses from the local players and increased their
market share significantly rather than making new investments in the pharmaceutical sector.
Considering these aspects, Indian Government decided to tighten FDI norms in this sector on
November 08, 2011 by doing away with the automatic approval of FDI 3
in the existing
Pharmaceutical companies. The revised policy in the Pharmaceutical sector stands as under:
Greenfield Investments – Greenfield Investments herein refers to FDI made for augmenting the
new projects. Under the revised policy, no changes have been made with respect to the
Greenfield Investments. FDI, up to 100 percent, under the automatic route, under which the
investors would only have to inform the RBI about the inflows and no specific government nod
is required, would continue to be permitted for Greenfield Investments.
Brownfield Investments – Brownfield Investments herein refers to FDI made for extension or
expansion of existing facilities. Under the revised policy, FDI, up to 100 percent, have been
permitted for brown field investments under the government approval route. In cases of
Brownfield Investments, FDI would be allowed through FIPB approval path for a period of up to
six months. In this period, the Indian Government will put in place the essential enabling
mechanism for oversight by the Competition Commission of India (CCI). After six months, the
oversight will be done by CCI in accordance with the Indian competition laws. Also, for any
merger or acquisition, the overseas investor will have to seek permission from FIPB.
Revision in the FDI policy in Pharmaceutical sector is only a procedural filter and not a roll-
back. This move of the Indian Government is to encourage more and more Greenfield
Investments in the India in Pharmaceutical sector instead of Brownfield Investments which may
have adverse effect on the availability of inexpensive healthcare. The impact of the revised

policy would lengthen the timeline for FDI in the existing companies in the Pharmaceutical
sector.
LIMITED LIABILITY PARTNERSHIP FIRMS
FDI in limited liability partnership (LLP) firms was allowed by the Indian Government on May
20, 2011 4
. The foreign investors would need to fulfill the following requirements before
investing in LLPs in India:
1. FDI in LLPs would be allowed, through the Government approval route, in those
sectors/activities where 100% FDI is allowed, through the automatic route and there are
no FDI-linked performance related conditions.
2. LLPs with FDI would not be allowed to operate in agricultural/plantation activity, print
media or real estate business.
3. LLPs with FDI will not be eligible to make any downstream investments.
4. An Indian company, having FDI, would be permitted to make downstream investment in
LLPs only if both the company and LLP are operating in sectors where 100% FDI is
allowed, through the automatic route and there are no FDI-linked performance related
conditions.
5. Foreign capital participation in the capital structure of the LLPs will be allowed only by
way of cash considerations, received by inward remittance, through normal banking
channels, or by debit to Non Residential External Accounts(NRE)/Foreign Currency Non
Resident(FCNR) account of the person concerned, maintained with an authorized
dealer/authorized bank; and
6. Foreign Institutional Investors (Flls) and Foreign Venture Capital Investors (FVCIs) will
not be permitted to invest in LLPs. LLPs will also not be permitted to avail External
Commercial Borrowings (ECBs).

7. For the purpose of determination of the designated partners in respect of LLPs with FDI,
the term "resident in India" would have the meaning, as defined for "person resident in
India", under Section 2(v) (i) (A) & (B) of the Foreign Exchange Management Act, 1999.
8. In case LLP has a body corporate as a designated partner, the body corporate should only
be a company registered under the Companies Act, 1956 and not any other body, such as
an LLP or a trust.
9. The designated partners will be responsible for compliance with the above conditions and
liable for all penalties imposed on the LLP for their contravention.
10. Conversion of a company with FDI into an LLP will be allowed only if the above
stipulations are met and with the prior approval of FIPB/Government.
The FDI approval in LLPs would help a great deal in attracting larger FDI inflow in the country.
This move of the Indian Government is highly appreciated as this will benefit the Indian
economy in the long run by creating more employment opportunities and bringing in
international best practices and latest technologies in the country.
MANUFACTURING SECTOR
Indian Government way back in the year 2006 permitted 100% FDI in manufacturing of cigars
and cigarettes, under government approval route, subject to obtaining industrial license under the
Industries (Development and Regulation) Act, 1951. In response to the growing public
opposition against FDI into this sector and fulfilling its commitments towards anti-smoking
regime, Indian Government imposed a ban on FDI in manufacturing of cigars and cigarettes on
May 10, 2010 5
and placed “Manufacturing of cigars, cheroots, cigarillos and cigarettes, of
tobacco or of tobacco substitutes” under the list of sectors where FDI is prohibited. Indians
welcomed this move of the Indian Government as this supports their long-standing drive against
smoking.

PROPOSED REFORMS IN CIVIL AVIATION
Civil Aviation sector includes Airports, Scheduled and Non-Scheduled domestic passenger
airlines, Helicopter services / Seaplane services, Ground Handling services, Maintenance and
Repair organizations; Flying training institutes; and Technical training institutions. Presently,
FDI up to 49 percent is allowed by the Indian Government in Aviation sector, with a restriction
on the foreign airlines from making investment in the domestic airline companies. The Civil
Aviation Ministry considered liberalization of the rules on foreign investment in Aviation sector
and issued a draft cabinet note, which provided that the existing restrictions in the Aviation
sector needs to be removed. This is under consideration.
Sectors Prohibited for Foreign Direct Investment
FDI is prohibited in only the following activities:
(a)Retail Trading (except single brand product retailing)
(b) Atomic Energy
(c) Lottery Business including Government /private lottery, online lotteries,etc.
(d)Gambling and Betting including casinos etc.
(e)Business of chit fund
(f) Nidhi company
(g)Trading in Transferable Development Rights (TDRs)
(h)Real Estate Business or Construction of Farm Houses
(i) Activities/sectors not opened to private sector investment e.g. Railways
(j) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
Substitutes.

India‟s Foreign Direct Investment Flows
India‟s International Trade
India‟s total merchandise trade increased over three-fold from US$ 252 bn in FY 2006 to US$
794 bn in FY 2012
Trade-GDP ratio increased from 30.2% in FY 2006 to 42.9% in FY 2012
Exports-GDP ratio increased from 12.4% in FY 2006 to 16.5% in FY 2012
Share of India in world merchandise export – 1.67% in 2011; Rank– 19 (up from 28th in 2006)
22.8
34.8
41.9
37.7
34.8
46.6
13.3
18.5 18.6
14.8
16.8
14.6
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
FDI Inflow FDI Outflow

India‟s export in 2001-02 was around USD 44bn whereas it is around USD 305bn
We see that the direction of exports is moving towards southern countries particularly Asia and
Africa, share of Asia and Africa have increased at a decent rate.
India‟s Trade Basket
Top Export Items ( FY 2012, USD bn) Top Export Items ( FY 2012, USD bn)
40%
5%
25%
2%
21%
2% 5%
India’s Export in
2001-02
ASIA AFRICA
EUROPE CIS
NORTH AMERICA LAC
OTHERS
52%
7%
19%
1%
12%
4% 5%
India's Export in
2011-12
ASIA AFRICA
EUROPE CIS
NORTH AMERICA LAC
OTHERS
0 20 40 60
Petroleum products
Gems & Jewellery
Pharma Products
Transport Equipment
Readymade…
Electronic Goods
rubber Glass product
cotton yarn & Fabric
56
47
24
21
14
14
10
9
7
7
155
62
33
31
30
19
17
14
13
12
0 50 100 150 200
Petroleum Crude
Gold & Silver
Electronic Goods
Pearls & Precious…
coal, cokes &…
Transport Equipment
Iron & Steel

Sectored Pattern of Indian Outward FDI
Regional ODI Flows
Destination analysis of Indian ODI flow reveals that the share of developing and
emerging countries is relatively higher vis-à-vis that of developed countries
Mauritius was the largest destination of Indian ODI in 2011-12, followed by Singapore
Other important ODI destinations among emerging markets include Australia, Netherlands,
Panama, UK and USA.
24%
19%
8%7%
6%
6%
6%
5%
4%
3% 12%
Mauritius
Singapore
Australia
Netherlands
Panama
U.K
USA
Bristish Virgin Island
Agriculture
Forestry and
fishing
7%
Wholesale retail
Trade, Restaurants
and hotels
11%
Construction
12%
Transport Storage
and
communication
15%
Insurance Real
Estateand Business
services
21%
Manufacturing
34%

Although we can see that Major flow is from Mauritius but the only reason lie behind such a
major chunk of flow is due to Tax benefits. As it‟s a complete tax heaven country. The major
flows are still contributed from UK, USA & Singapore. The Indian government is working on
its policies to implement certain tax reforms for such regions or countries.
Amount of FDI MID
1948
March
1964
March
1980
March
1990
March
2000
March
2010
In crores 256 565.5 933.2 2705 18486 1,23,378
There is a considerable decrease in the tariff rates on various importable goods.
The above shows FDI inflows in India from 1948 – 2010.FDI inflows during 1991-92 to March
2010 in India increased manifold as compared to during mid 1948 to march 1990
The measures introduced by the government to liberalize provisions relating to FDI in 1991 lure
investors from every corner of the world. There were just few (U.K, USA, Japan, Germany, etc.)
major countries investing in India during the period mid 1948 to march 1990 and this number has
increased to fifteen in 1991. India emerged as a strong economic player on the global front after
its first generation of economic reforms. As a result of this, the list of investing countries to India
reached to maximum number of 120 in 2008. Although, India is receiving FDI inflows from a
number of sources but large percentage of FDI inflows is vested with few major countries.
Mauritius, USA, UK, Japan, Singapore, Netherlands constitute 66 percent of the entire FDI
inflows to India.
FDI inflows are welcomed in 63 sectors in 2008 as compared to 16 sectors in 1991.
The FDI inflows in India during mid 1948 were Rs, 256 crores. It is almost double in March
1964 and increases further to Rs. 916 crores. India received a cumulative FDI inflow of Rs.
5,384.7 crores during mid 1948 to march 1990 as compared to Rs.1,41,864 crores during August
1991 to march 2010. It is observed from that there has been a steady flow of FDI in India after its
independence. But there is a sharp rise in FDI inflows from 1998 onwards. U.K. the prominent
investor during the pre and post independent era stands nowhere today as it holds a share of 6.1
percent of the total FDI inflows to India.

Case Study on violation of FERA- ITC Ltd
ITC was started by UK-based tobacco major BAT (British American Tobacco). It was called the
Peninsular Tobacco Company, for cigarette manufacturing, tobacco procurement and processing
activities. In 1910, it set up a full-fledged sales organization named the Imperial Tobacco
Company of India Limited. To cope with the growing demand, BAT set up another cigarette
manufacturing unit in Bangalore in 1912. To handle the raw material (tobacco leaf)
requirements, a new company called Indian Leaf Tobacco Company (ILTC) was incorporated in
July 1912. By 1919, BAT had transferred its holdings in Peninsular and ILTC to Imperial.
Following this, Imperial replaced Peninsular as BAT's main subsidiary in India.
By the late 1960s, the Indian government began putting pressure on multinational companies to
reduce their holdings. Imperial divested its equity in 1969 through a public offer, which raised
the shareholdings of Indian individual and institutional investors from 6.6% to 26%. After this,
the holdings of Indian financial institutions were 38% and the foreign collaborator held 36%.
Though Imperial clearly dominated the cigarette business, it soon realized that making only a
single product, especially one that was considered injurious to health, could become a problem.
In addition, regular increases in excise duty on cigarettes started having a negative impact on the
company's profitability. To reduce its dependence on the cigarette and tobacco business, Imperial
decided to diversify into new businesses. It set up a marine products export division in 1971. The
company's name was changed to ITC Ltd. in 1974. In the same year, ITC reorganized itself and
emerged as a new organization divided along product lines. In 1975, ITC set up its first hotel in
Chennai. The same year, ITC set up Bhadrachalam Paperboards. In 1981, ITC diversified into
the cement business and bought a 33% stake in India Cements from IDBI. This investment
however did not generate the synergies that ITC had hoped for and two years later the company
divested its stake. In 1986, ITC established ITC Hotels, to which its three hotels were sold. It
also entered the financial services business by setting up its subsidiary, ITC Classic.
In 1994, ITC commissioned consultants McKinsey & Co. to study the businesses of the company
and make suitable recommendations. McKinsey advised ITC to concentrate on its core strengths
and withdraw from agri-business where it was incurring losses. During the late 1990s, ITC

decided to retain its interests in tobacco, hospitality and paper and either sold off or gave up the
controlling stake in several non-core businesses. ITC divested its 51% stake in ITC Agrotech to
ConAgra of the US. Tribeni Tissues (which manufactured newsprint, bond paper, carbon and
thermal paper) was merged with ITC.
By 2001, ITC had emerged as the undisputed leader, with over 70% share in the Indian cigarette
market. ITC‟ popular cigarette brands included Gold Flake, Scissors, Wills, India Kings and
Classic.
Allegations:
A majority of ITC‟s legal troubles could be traced back to its association with the US based
Suresh Chitalia and Devang Chitalia (Chitalias). The Chitalias were ITC‟s trading partners in its
international trading business and were also directors of ITC International, the international
trading subsidiary of ITC. In 1989, ITC started the „Bukhara‟ chain of restaurants in the US,
jointly with its subsidiary ITC International and some Non-Resident Indian (NRI) doctors.
Though the venture ran into huge losses, ITC decided to make good the losses and honour its
commitment of providing a 25% return on the investments to the NRI doctors. ITC sought
Chitalias‟ help for this.
According to the deal, the Chitalias later bought the Bukhara venture in 1990 for around $1
million. Investors were paid off through the Chitalias New-Jersey based company, ETS Fibers,
which supplied waste paper to ITC Bhadrachalam. To compensate the Chitalias, the Indian Leaf
Tobacco Division (ILTD) of ITC transferred $4 million to a Swiss bank account, from where the
money was transferred to Lokman Establishments, another Chitalia company in Liechtenstein.
Lokman Establishments made the payment to the Chitalias. This deal marked the beginning of a
series of events that eventually resulted in the company being charged for contravention of
FERA regulations.

During the 1980s, ITC had emerged as one of the largest exporters in India and had received
accolades from the government. In the early 1990s, ITC started exporting rice to West Asia.
When the Gulf war began, ITC was forced to withdraw rice exports to Iraq, which resulted in
large quantities of rice lying waste in the warehouses. ITC tried to export this rice to Sri Lanka,
which however turned out to be a damp squib because the rice was beginning to rot already.
There were discussions in the Colombo parliament as to the quality of the rotting rice. This
forced ITC to import the rice back to India, which was not allowed under FERA.
There were a host of other such dubious transactions, especially in ITC‟s various export deals in
the Asian markets. The company, following the Bukhara deal, had set up various front
companies (shell or bogus companies) with the help of the Chitalias. Some of the front
companies were Hup Hoon Traders Pvt. Ltd., EST Fibers, Sunny Trading, Fortune Tobacco Ltd.,
Cyprus, Vaam Impex & Warehousing, RS Commodities, Sunny Snack Foods and Lokman
Establishment, the one involved in the Bukhara deal. These front companies were for export
transactions. It was reported that ITC artificially hiked its profits by over-invoicing imports and
later transferring the excess funds as export proceeds into India. Analysts remarked that ITC did
all this to portray itself as the largest exporter in the country.
In 1991, ITC asked all its overseas buyers to route their orders through the Chitalias. The
Chitalias over-invoiced the export orders, which meant they paid ITC more than what they
received from overseas buyers. For instance, in an export deal to Sri Lanka, ITC claimed to have
sold rice at $350 per ton – but according to ED, the rice was actually sold for just $175 per ton.
ITC compensated the difference in amount to the Chitalias through various means including
under invoicing other exports to them, direct payments to Chitalia companies and through ITC
Global Holdings Pvt. Ltd. (ITC Global), a Singapore-based subsidiary of ITC. ITC Global was
involved in a number majority of the money laundering deals between ITC and Chitalias.
However, by 1995, ITC Global was on the verge of bankruptcy because of all its cash payments
to the Chitalias. It registered a loss of US $ 16.34 million for the financial year 1995-96, as
against a profit of US $1.7 million in 1994-95. The loss was reportedly due to the attrition in
trade margins, slow moving stock and bad debts in respect of which provisions had to be made.

It was also reported that ITC Global incurred a loss of $20 million on rice purchased from the
Agricultural Products Export Development Authority (APEDA), which was underwritten by the
Chitalias. By the time this consignment was exported to S Armagulam Brothers in Sri Lanka
through Vaam Impex, another ITC front company, there was an acute fall in international rice
prices. The consignee (S Armagulam Brothers) rejected the consignment because of the delay in
dispatch. Following this, ITC bought back that rice and exported it to Dubai, which was against
FERA.
This resulted in huge outstanding debts to the Chitalias, following which they turned against ITC
and approached BAT complaining of the debts and other financial irregularities at ITC in late
1995. BAT, which was not on good terms with Chugh, reportedly took this as an opportunity to
tarnish his reputation and compel him to resign. BAT appointed a renowned audit firm Lovelock
and Lewes to probe into the irregularities at ITC. Though the audit committee confirmed the
charges of financial irregularities at ITC during the early 1990s and the role of the Chitalias in
the trading losses and misappropriations at ITC during the year 1995-96, it cleared Chugh of all
charges. Chugh agreed to resign and BAT dropped all charges against him. He was given a
handsome severance package as well as the „Chairman Emeritus‟ status at ITC. However
according to industry sources, though the Chitalias were on good terms with ITC, it was BAT,
which instigated the Chitalias to implicate the top management of ITC. BAT reportedly wanted
to „step in as a savior‟ and take control of ITC with the active support of the FI nominees on the
board, which had supported ITC before charges of unethical practices surfaced.
Meanwhile, the Chitalias filed a lawsuit against ITC in US courts to recover their dues. They
alleged that ITC used them to float front companies in foreign countries in order to route its
exports through them. They also alleged ITC of various wrongdoings in the Bukhara deal. These
events attracted ED‟s attention to the on goings at ITC and it began probing into the company‟s
operations. ED began collecting documents to prove that ITC had violated various FERA norms
to pay the NRI Doctors.

FERA Violations
The ED found out that around $ 83 million was transferred into India as per ITC‟s instructions
on the basis of the accounts maintained by the Chitalia group of companies. According to the ED
officials, the ITC management gave daily instructions to manipulate the invoices related to
exports in order to post artificial profits in its books. A sum of $ 6.5 million was transferred from
ITC Global to the Chitalias‟ companies and the same was remitted to ITC at a later date. Another
instance cited of money laundering by ITC was regarding the over-invoicing of machinery
imported by ITC Bhadrachalam Paperboards Ltd., from Italy. The difference in amount was
retained abroad and then passed to the Chitalias, which was eventually remitted to ITC.
The ED issued charge sheets to a few top executives of ITC and raided on nearly 40 ITC offices
including the premises of its top executives in Kolkata, Delhi, Hyderabad, Guntur, Chennai and
Mumbai. The charge sheets accused ITC and its functionaries of FERA violations that included
over-invoicing and providing cash to the Chitalias for acquiring and retaining funds abroad, for
bringing funds into India in a manner not conforming to the prescribed norms, for not realizing
outstanding export proceeds and for acknowledging debt abroad TABLE II

Overview of FERA Violations by ITC
ILTD transferred $4 million to a Swiss bank account. The amount was later
transferred to
Lokman Establishment, which in turn transferred the amount to a Chitalia company in
the US.
ITC also made payments to non-resident shareholders in the case of certain
settlements without
The permission of the RBI. This was against Sections 8(1) and 9(1)(a) of FERA;
ITC under-invoiced exports to the tune of $1.35 million, thereby violating the
provisions of
Sections 16(1)(b) and 18(2);
ITC transferred funds in an unauthorized manner, to the tune of $0.5 million outside
India
Suppressing facts with regard to a tobacco deal. This was in contravention of Section a
(1) read
with Section 48;
ITC acquired $0.2 million through counter trade premium amounting to between 3 and 4
per
cent on a total business of 1.30 billion, contravening Section 8(1);
The company had debts to the tune of 25 million due to over-invoicing in coffee and
cashew
Exports during 1992- 93 to the Chitalias, contravening Section 9(1)(c) read with Section
26(6);
G. K. P. Reddi, R. K. Kutty, Dr. E. Ravindranath and M. B. Rao also violated the
provisions of
Sections 8(1), 9(1) (a), 9(1) (c), 16(b), 18(2) and 26(6) read with Section 68 of FERA.

The ED also investigated the use of funds retained abroad for personal use by ITC executives.
Though the ED had documentary proof to indicate illegal transfer of funds by top ITC
executives, nothing was reported in the media. The top executives were soon arrested. In
addition, the ED questioned many executives including Ashutosh Garg, former chief of ITC
Global, S Khattar, the then chief of ITC Global, the Chitalias, officials‟ at BAT and FI nominees
on ITC board.
Meanwhile, the Chitalias and ITC continued their court battles against each other in the US and
Singapore. ITC stated that the Chitalias acted as traders for ITC‟s commodities including rice,
coffee, soybeans and shrimp. ITC accused the Chitalias of non-payment for 43 contracts
executed in 1994. ITC sued the Chitalias seeking $12.19 million in damages that included the
unpaid amount for the executed contracts plus interest and other relief. Following this, the
Chitalias filed a counter-claim for $55 million, accusing ITC of commission defaults (trading
commission not paid) and defamation.
In August 1996, the Chitalias indicated to the Government of India and the ED their willingness
to turn approvers in the FERA violation case against ITC, if they were given immunity from
prosecution in India. The government granted the Chitalias, immunity under section 360 of the
Indian Criminal Procedure Act, following which the Chitalias were reported to have provided
concrete proof of large scale over-invoicing by ITC mainly in the export of rice, coffee and
cashew nuts. In another major development, a few directors and senior executives of ITC turned
approvers in the FERA violation case against the company in November 1996. A top ED official
confirmed the news and said that these officials were ready to divulge sensitive information
related to the case if they were given immunity against prosecution, as granted to the Chitalias.
The same month, the High Court of Singapore appointed judicial managers to take over the
management of ITC Global. They informed ITC that ITC Global owed approximately US $ 49
million to creditors and sought ITC‟s financial support to settle the accounts. Though ITC did not
accept any legal liability to support ITC Global, it offered financial assistance up to $26 million,
subject to the consent and approval of both the Singapore and Indian governments.
In December 1996, most of the arrested executives including Chugh, Sapru, R. Ranganathan, R
K Kutty, E Ravindranathan, and K.P. Reddi were granted bail. ITC sources commented that

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