Professional Documents
Culture Documents
Upon review of the Foreign Exchange Regulation Act, 1973 (FERA) in 1993, it was realised that
significant changes had taken place since the promulgation of FERA. Among the major changes
noticed were: Large increase in country’s Foreign Exchange Reserves ,substantial growth in
Foreign Trade , rationalisation of tariffs ,current account convertibility ,liberalization of Indian
Investments abroad, enhanced access to external commercial borrowings by Indian corporates
and active and significant participation of Foreign Institutional Investors in Indian stock market.
The Central Govt. looking at such significant developments , decided to bring in Fresh
Amendments in the law relating to Foreign Exchange to suit the new environments. The
objective was to facilitate the external trade, ease receipts and payments pertaining thereto and
promoting orderly and fully organised Foreign Exchange markets.
Thus, the Foreign Exchange Management Act, 1999 (FEMA) which seeks to replace the Foreign
Exchange 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 the
conservation of the foreign exchange resources of the country and the proper utilization thereof in
the 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 exchange
transactions unless there was a general or specific permission to do so and subject to conditions
as specified. Under FEMA, however, all current account transactions are permissible by the law
itself 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 be
thrice the sum involved (as against 5 times under FERA) where however the contravention
amount is not quantifiable the penalty would be 2 lacs of rupees, and Rs. 5,000/- per day from
second day onwards where a contravention continues beyond one day. Again as per latest
circular AP(DIR Series) circular 31 dated 01.02.2005 the Govt. has in consultation with RBI
reviewed the procedures for compounding of contravention under FEMA 1999. The procedure
has been reviewed to provide comfort to the citizens and corporate community by minimsing the
transaction costs while taking severe view of the will full MALAFIDE and FRAUDLENT
transactions. Accordingly the responsibility of compounding contraventions has been vested with
RBI except of (clause a) of section 3 which deals essentially with HAWALA transactions which
will 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 monetary
penalty 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 who
are operationalising the revised procedures. Once a contravention has been compounded by
compounding 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 person
proves otherwise. Under FEMA, it is for the prosecution to prove that a person has committed the
offence.
Section 35 of FERA empowers the Enforcement Officers to arrest a person, if they had reasons
to believe that the person was guilty of FERA violations. FEMA provides such power of arrest
only 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 means
that cases in which proceedings have already begun under FERA will continue to be governed by
it. All such cases must be disposed of within the period of two years from the date of enforcement
of FEMA, after which time they shall become invalid under FERA.
• Definitions of capital account transaction and current account transaction have been
introduced keeping in mind the possibility of introduction of capital account convertibility
in the near future.
• All key sections relating to dealings, holding and payments in foreign exchange and
exports have been simplified.
• Liberalization in enforcement provisions reflects that the attitude is of putting trust in the
persons covered
FERA had 81 sections (some of which were deleted by 1993 amendment), out of which 32
sections related to operational part and the balance dealt with Penalties, Enforcement
Directorate, etc. FEMA has only 49 sections divided into seven chapters. First 3 chapters
containing 12 sections relate to operational part and the balance 4 chapters containing 37
sections deal with Penalties, Adjudication, Appeals, Enforcement Directorate, etc. Major salient
features of FEMA are discussed in the following paragraphs.
• 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 the
Chairperson 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
27(3);
• 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/s
39(ii); and
The Central Government and Reserve Bank have, by various notifications, issued rules and
regulations. 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 early
1990s and this led to the deregulation and liberalization of the country's economy. Foreign
Exchange Management Act (FEMA) was thus formulated in order to be compatible with the policies
of pro- liberalization of the Indian government.
The objective of the Act is to consolidate and amend the law relating to
foreign exchange with the objective of facilitating external trade and
payments and for promoting the orderly development and
maintenance of foreign exchange market in India.
• deal in or transfer any foreign exchange or foreign security to any person not
being an authorized person;
• make any payment to or for the credit of any person resident outside India in any
manner;
• receive otherwise through an authorized person, any payment by order or on
behalf of any person resident outside India in any manner;
• reasonable restrictions for current account transactions as may be prescribed.
• furnish to the Reserve Bank or to such other authority a declaration in such form
and in such manner as may be specified, containing true and correct material
particulars, including the amount representing the full export value or, if the full
export value of the goods is not ascertainable at the time of export, the value
which the exporter, having regard to the prevailing market conditions, expects to
receive on the sale of the goods in a market outside India;
• furnish to the Reserve Bank such other information as may be required by the
Reserve Bank for the purpose of ensuring the realization of the export proceeds
by such exporter.
The Reserve Bank may, for the purpose of ensuring that the full export
value of the goods or such reduced value of the goods as the Reserve
Bank determines, having regard to the prevailing market-conditions, is
received without any delay, direct any exporter to comply with such
requirements as it deems fit.
Where any amount of foreign exchange is due or has accrued to any
person resident in India, such person shall take all reasonable steps to
realize and repatriate to India such foreign exchange within such
period and in such manner as may be specified by the Reserve Bank.
Section 3: Except as provided in the FEMA Act, rules and RBI
permission, no person shall: Deal in/ transfer any forex to any person
not being an authorized person Make any payment to or for the credit
of any non resident Receive otherwise through an authorized person,
any payment by order or on behalf of any non resident Enter into any
financial transaction in India as consideration for or in association with
acquisition or creation or transfer of a right to acquire, any asset
outside India by any person
[edit] Investigation
The Directorate of Enforcement investigate to prevent leakage of
foreign exchange which generally occurs through the following
malpractices :