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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.).
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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FERA was repealed in 1999 by the government of Atal BihariVajpayee.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.
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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.
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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
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Objectives
8) To facilitate external trade and payments
9) To promote the orderly development and
maintenance of foreign exchange market
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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.
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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.
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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
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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.