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Foreign Exchange Management Act, 1999

Foreign Exchange Management Act, 1999

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Published by: amluxavier on Nov 29, 2009
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Foreign Exchange Management Act, 1999
Upon review of the Foreign Exchange Regulation Act, 1973 (FERA) in 1993, it was realised thatsignificant changes had taken place since the promulgation of FERA. Among the major changesnoticed were: Large increase in country’s Foreign Exchange Reserves ,substantial growth inForeign Trade , rationalisation of tariffs ,current account convertibility ,liberalization of IndianInvestments abroad, enhanced access to external commercial borrowings by Indian corporatesand active and significant participation of Foreign Institutional Investors in Indian stock market.The Central Govt. looking at such significant developments , decided to bring in FreshAmendments in the law relating to Foreign Exchange to suit the new environments. Theobjective was to facilitate the external trade, ease receipts and payments pertaining thereto andpromoting orderly and fully organised Foreign Exchange markets.Thus, the Foreign Exchange Management Act, 1999 (FEMA) which seeks to replace the ForeignExchange Regulation Act, 1973 (FERA), was brought into effect from 1st June, 2000.FERA aimed to regulate certain payments, dealings in foreign exchange and securities,transactions indirectly affecting foreign exchange and the import and export of currency for theconservation of the foreign exchange resources of the country and the proper utilization thereof inthe interests of the economic development of the country.While FERA sought to 'control' foreign exchange transactions, FEMA seeks to 'regulate' and'manage' such transactions. FERA, in its substantive form, prohibited all foreign exchangetransactions unless there was a general or specific permission to do so and subject to conditionsas specified. Under FEMA, however, all current account transactions are permissible by the lawitself and , thus, it is a positive law to this extent.Further, an offence under FERA attracted criminal proceedings, whereas the offence under FEMA is considered as one of a civil nature. Also, under FEMA, maximum penalty would bethrice the sum involved (as against 5 times under FERA) where however the contraventionamount is not quantifiable the penalty would be 2 lacs of rupees, and Rs. 5,000/- per day fromsecond day onwards where a contravention continues beyond one day. Again as per latestcircular AP(DIR Series) circular 31 dated 01.02.2005 the Govt. has in consultation with RBIreviewed the procedures for compounding of contravention under FEMA 1999. The procedurehas been reviewed to provide comfort to the citizens and corporate community by minimsing thetransaction costs while taking severe view of the will full
transactions. Accordingly the responsibility of compounding contraventions has been vested withRBI except of (clause a) of section 3 which deals essentially with
transactions whichwill continue to be dealt with by Directorate of Enforcement. Under FEMA, compounding of contravention allows the contravener to settle an offence through imposition of a monetarypenalty without going in for litigation after the admission of the contravention by such contravener.The RBI has issued instructions to those authorised dealers for compounding contraventions whoare operationalising the revised procedures. Once a contravention has been compounded bycompounding authority no proceeding can be further initiated against the contravener. A proper procedure for compounding has been laid .Under FERA there is presumption of existence of a guilty mind, unless the accused personproves otherwise. Under FEMA, it is for the prosecution to prove that a person has committed theoffence.Section 35 of FERA empowers the Enforcement Officers to arrest a person, if they had reasonsto believe that the person was guilty of FERA violations. FEMA provides such power of arrestonly if penalty levied under section 13 of FEMA is not paid by the guilty within the given time.
Transition from FERA to FEMA
A cut-off period of two years has been stipulated for transition from FERA to FEMA, which meansthat cases in which proceedings have already begun under FERA will continue to be governed byit. All such cases must be disposed of within the period of two years from the date of enforcementof FEMA, after which time they shall become invalid under FERA.
Salient features of FEMA:
It will facilitate trade rather than prevent misuse of foreign exchange.
Definitions of capital account transaction and current account transaction have beenintroduced keeping in mind the possibility of introduction of capital account convertibilityin the near future.
All current account transactions shall be allowed (subject to reasonable restrictions).Reserve Bank to classify those capital account transactions that are to be permitted andto regulate transfer and issue of foreign securities by a resident in/outside India as well assetting up of branches/offices by foreign companies in India.
All key sections relating to dealings, holding and payments in foreign exchange andexports have been simplified.
Liberalization in enforcement provisions reflects that the attitude is of putting trust in thepersons covered
Scheme of FERA and FEMA
FERA had 81 sections (some of which were deleted by 1993 amendment), out of which 32sections related to operational part and the balance dealt with Penalties, EnforcementDirectorate, etc. FEMA has only 49 sections divided into seven chapters. First 3 chapterscontaining 12 sections relate to operational part and the balance 4 chapters containing 37sections deal with Penalties, Adjudication, Appeals, Enforcement Directorate, etc. Major salientfeatures of FEMA are discussed in the following paragraphs.
Power to make rules
Section 46 of FEMA empowers the Central Government , by notification, to make rules to carryout the provisions of the Act. Such rules may provide for:
imposition of reasonable restrictions on current account transactions u/s 5;
manner in which the contravention may be compounded u/s 15(I);
manner of holding an inquiry by the Adjudicating Authority u/s 16(I);
form of appeal and fee for filing such appeal u/s 17 and 19;
salary and allowances payable to and other terms and conditions of service of theChairperson and other Members of the Appellate Tribunal and the Special Director (Appeals) u/s 23;
salaries and allowances and other conditions of service of the officers and employees of the Appellate Tribunal and the office of the Special Director (Appeals) under section
additional matters in respect of which the Appellate Tribunal and the Special Director (Appeals) may exercise the powers of a civil court under clause(i) of subsection 2 of section 28;
authority or person and the manner in which any document may be authenticated u/s39(ii); and
any other matter which is required to be or may be prescribed.
Power to make regulations
Section 47 of FEMA empowers the Reserve Bank, by notification, to make regulations to carryout the provisions of this Act and the rules thereunder. Such regulations may provide for:
permissible classes of capital account transactions, limits of admissibility of foreignexchange for such transactions, and the prohibition, restriction or regulation of certaincapital account transactions u/s 6;
manner and form in which declaration is to be furnished u/s 7 (I)(a);
period within which and the manner of repatriation of foreign exchange u/s 8;
limit up to which any person may possess foreign currency or foreign coins u/s 9(a);
class of persons and limit up to which foreign currency account may be held or operatedu/s 9(b);
limit up to which foreign exchange acquired may be exempted u/s 9(d);
limit up to which foreign exchange acquired may be retained u/s 9(e);
any other matter which is required to be or may be specified.
The Central Government and Reserve Bank have, by various notifications, issued rules andregulations. A summary of these rules and regulations may be seen in Annexure A.
the 1st of June, 2000, FEMA came into force replacing the Foreign Exchange Regulation Act (FERA),which was formulated in 1973. Extensive economic reforms were undertaken in India in the early1990s and this led to the deregulation and liberalization of the country's economy. ForeignExchange Management Act (FEMA) was thus formulated in order to be compatible with the policiesof pro- liberalization of the Indian government.
Extent of Foreign Exchange Management Act (FEMA):
Foreign Exchange Management Act (FEMA) is applicable to the entire country. Agencies, branches,and offices, outside India, that are owned by Indian residents, also fall under the jurisdiction of thisact. Foreign Exchange Management Act (FEMA) also extends to any dispute that are committed inoffices, agencies and branches outside India that are owned by individuals covered by this act.
Objectives of Foreign Exchange Management Act (FEMA):
Among the various objectives of the Foreign Exchange Management Act (FEMA), an important one isto revise and unite all the laws that relate to foreign exchange. Further FEMA aims to promoteforeign payments and trade in the country. Another important objective of the Foreign ExchangeManagement Act (FEMA) is to encourage the orderly maintenance and development of the foreignexchange market in India.
Implementation of Foreign Exchange Management Act (FEMA):

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