8/10/2019 FERA FEMA12

1/21

Historical Background :

Historical Background The Foreign Exchange

Regulation Act of 1973 (FERA) Enacted in 1973

In the backdrop of acute shortage of Foreign

Exchange in the country.

FERA had a controversial 27 year stint during

which many bosses of the Indian Corporate world

found themselves at the mercy of theEnforcement Directorate (E.D.).

8/10/2019 FERA FEMA12

2/21

Foreign Exchange Regulation Act

The Foreign Exchange Regulation Act (FERA) was legislation passed by

the Indian Parliament in 1973 by the government of Indira Gandhi It came into force with effect from January 1, 1974.

FERA imposed stringent regulations on certain kinds of payments.

It deals in foreign exchange and securities and the transactionswhich had an indirect impact on the foreign exchange and the importand export of currency.

The purpose of the act, inter alia, was to "regulate certain payments,dealings in foreign exchange and securities, transactions indirectlyaffecting foreign exchange and the import and export of currency, forthe conservation of foreign exchange resources of the country".

FERA was repealed in 1999 by the government of Atal BihariVajpayee.

It replaced by the Foreign Exchange Management Act,whichliberalised foreign exchange controls and restrictions on foreigninvestment.

8/10/2019 FERA FEMA12

3/21

Foreign Exchange Management Act The Foreign Exchange Management Act(FEMA) was an act passed

in the winter session of Parliament in 1999 which replaced ForeignExchange Regulation Act.

This act seeks to make offenses related to foreign exchange civiloffenses.

It extends to the whole of India.

FEMA, which replaced Foreign Exchange Regulation Act(FERA). It had become the need of the hour since FERA had become

incompatible with the pro-liberalisation policies ofthe Government of India.

FEMA has brought a new management regime of ForeignExchange consistent with the emerging framework of the WorldTrade Organisation(WTO).

It is another matter that the enactment of FEMA also brought withit the Prevention of Money Laundering Act 2002, which came intoeffect from 1 July 2005.

8/10/2019 FERA FEMA12

4/21

Objective Of F.E.R.A &F.E.MA

1) To help RBI in maintaining exchange rate stability.

2) To conserve precious foreign exchange. 3) To prevent/regulate Foreign business in India.

4) To consolidate and amend the law relating to foreignexchange with the object to facilitating external trade

and payments and for promoting the foreign exchangemarket in India.

5) So the new law is for the management of foreignexchange instead of regulation of foreign exchange.

6) The draconian provisions were droped out in newenactment.

7) The size of the bare act got reduced to 49 sections inplace of 81 sections in FERA

8/10/2019 FERA FEMA12

5/21

Objectives

8) To facilitate external trade and payments

9) To promote the orderly development and

maintenance of foreign exchange market

8/10/2019 FERA FEMA12

6/21

DIFFERENCE BETWEEN FERA AND

FEMA :

1)-The objective of FERA was to conserve forex

and to prevent its misuse.

The objective of FEMA is to facilitate external

trade and payments and maintenance of forex

market in india.

8/10/2019 FERA FEMA12

7/21

2-Violation of FERA was a criminal offence

whereas violation of FEMA is a civil offence.

3- Offences under FERA were not compoundable

Offences under FEMA are compoundable.

4- Citizenship was a criteria to determine theresidential status of a person underFERA.

while stay of more than 182 days in India is the

criteria to decide residential status under FEMA.

5- Almost all current account transactions are free,

except a few.

8/10/2019 FERA FEMA12

8/21

8

FERA & FEMA

Object to conserve andprevent misuse

Violation was CriminalOffence and was noncompoundable

It was a draconianpolice law

To facilitate externaltrade and payments

Violation is a civiloffence and iscompoundable

It is a civil law

8/10/2019 FERA FEMA12

9/21

Current Account and Capital Account

transactions

Under the FEMA regime, the thrust was on regulation and

control of the scarce foreign exchange, whereas under the

FEMA, the emphasis is on the management of foreign

exchange resources.

Under FERA it was safe to presume that any transaction in

foreign exchange or with a non-resident was prohibited

unless it was generally or specially permitted.FEMA has formally recognised the distinction between

current account and capital account transactions.

8/10/2019 FERA FEMA12

10/21

Two golden rules or principles in FEMA are

mentioned as follows:

all current account transactions are permitted

unless otherwise prohibited.

all capital account transactions are prohibited

unless otherwise permitted.

8/10/2019 FERA FEMA12

11/21

11

Current Account Transactions

Any person may sell or draw foreign exchange to or froman authorized person if such sale or drawal is a current

account transaction.

The Central Government may, in public interest and in

consultation with the Reserve Bank, impose such

reasonable restrictions for current account transactions

as may be required from time to time.

8/10/2019 FERA FEMA12

12/21

12

Current Account Transactions Contd.

The definition is inclusive and any expenditure which is not a capital

account transaction will be current account transaction. It includes:

payments due in connection with foreign trade, other currentbusiness, services, and short-term banking and credit facilities in theordinary course of business

payments due as interest on loans and as net income frominvestments

remittances for living expenses of parents, spouse and childrenresiding abroad, and

expenses in connection with foreign travel, education and medicalcare of parents, spouse and children

8/10/2019 FERA FEMA12

13/21

13

Current Account Transactions

Few Examples

Payment for imports of goods

Remittance of interest on investment made andfunds borrowed from abroad after tax deductions

Remittance of Dividend if the investment wasallowed without any condition

Booking with Airlines/Shipping

Salary/remuneration to Foreign Directors subject to

restrictions in any other law

8/10/2019 FERA FEMA12

14/21

14

Capital Account Transactions

"capital account transaction" means a transaction whichalters the assets or liabilities, including contingentliabilities, outside India of persons resident in India orassets or liabilities in India of persons resident outsideIndia, and includes transactions like:

Changes in Assets/ Liabilities Transfer/ issue of security Borrowing/ Lending Export, import or holding of currency or currency notes

Giving guarantee

Capital Account Transaction are deemed to be prohibitedunless permitted and Current Account Transactions aredeemed to be permitted unless prohibited

8/10/2019 FERA FEMA12

15/21

15

Penalties for Contravention under FEMA

The Penalty could be up to thrice the sum involvedwhere amount is quantifiable

If the Amount is not quantifiable , penalty upto Rs 2lacs can be imposed

If contravention is of continuing nature, further

penalty up to Rs 5000 per day during which thecontravention continues can be imposed

8/10/2019 FERA FEMA12

16/21

16

Repatriation

Repatriate to India" means bringing into India the realizedforeign exchange and-

the selling of such foreign exchange to an authorized personin India in exchange for rupees, or

the holding of realized amount in an account with anauthorized person in India to the extent notified by theReserve Bank,

It includes use of the realized amount for discharge of a debtor liability denominated in foreign exchange

8/10/2019 FERA FEMA12

17/21

17

Manner of Repatriation

It can be done in the following manner:

Sell it to Authorized Person in India in exchange for

Rupees

Retain in an account with an authorized dealer

Use it for discharge of a debt or liability denominated inforeign exchange in the manner specified by RBI

8/10/2019 FERA FEMA12

18/21

Administration Of The Act

- The rules regulations and norms pertaining to many sections arelaid down by RBI in consultation with central Government.

- The Act requires central Government to appoint,

Adjudicating Authorities for holding enquires related to thecontravention of the Act

one or more Special Directors (appeals) to hear appeals againstthe order of the Adjudicating authorities

- Central Government shall have to establish

1. An Appellate Tribunal for foreign Exchange to hear appealsagainst the order of the Adjudicating Authorities and the SpecialDirectors

2. A Director of Enforcement with a Director and such officers orclass of officers as it thinks fit for taking up for investigation the

contravention under this Act

8/10/2019 FERA FEMA12

19/21

Export of goods and services

Every exporter of goods shall:

(a) Furnish to the Reserve bank or to such other authority a

declaration in such form as may be specified, containing true and

correct material, including the amount representing the full export

value, if the full export value of goods is not ascertainable at the

time of export , the value which the exporter, having in regard to

the prevailing market conditions, expects to receive on the sale of

the goods in the market outside India;

(b) Furnish to the Reserve bank all information as may be required by

the reserve bank for the purpose of ensuring the realization of

export proceeds by such exporter.

8/10/2019 FERA FEMA12

20/21

The Reserve may, for the purpose of ensuring

that the full export value of the goods as the

Reserve bank determines, having regard to theprevailing market conditions, is received without

any delay.

Every exporter of services shall furnish to the

Reserve bank a declaration in such form as may

be specified, containing the true and correctmaterial particulars in relation to payment for

such services.

8/10/2019 FERA FEMA12

21/21

Realization and Repatriation of Foreign

Exchange

When any amount of foreign exchange is due or has

accrued to any person shall take all reasonable steps to

realize and repatriate to India such foreign exchange

within such period and in such manner as may bespecified by the Reserve bank.