R.

Vijay Kumaran

Foreign exchange regulation act to Foreign exchange management act (1973) (August,1998)

Balance of Payment
Balance of Payment refers to the yearly financial statement of a country for the transactions in the external sector with the rest of the world. The BoP table has got two side viz, credit (export) and debit (import), hence it can be conceptualized as balance sheet of the country with rest of the world.

Currency convertibility
It means freedom for withdrawal of foreign exchange from authorised dealer for payment abroad. Full account convertibility refers to the permission to withdraw foreign exchange without ceiling for transaction.listed under the current account of the BoP. India has adopted partial capital account convertibility and liberal current account convertibility. RBI has fixed ceiling on withdrawl of foreign exchange for for transactions, under the capital account

The Capital account is an accounting measure ot the total domestic currency value of financial tranaction between domestic residents and the rest of the world over a period of time. Capital account can be divided into three account: 1. Direct Investment
2. Portfolio Investment 3. Other capital Flows

The principle objective of the Foreign Exchange Regulation Act (FERA) is to prevent the outflow of Indian currency.The objective of the act is as follows.
To regulate dealings in foreign exchange and securities To regulate the transaction indirectly affecting foreign exchange To regulate import and export of currency and bullion To regulate employment of foreign nationals To regulate foreign companies To regulate acquisition, holding etc of immovable property in India by non-residents

Given Indias progress towards a more open economy, it was only inevitable that the Foreign Exchange Regulation Act. (FERA). Be reborn in a liberal, modern avatar. The process received a push , with the cabinet approving the draft Foreign Exchange Management Act (FEMA). The draft reportedly relaxes to a degree the restrictions on all current and some capital account transactions.and provides for the expected move towards full account convertibility. FERA was the product of a time when oil crisis, among other things, had depleted Indias foreign currency reserves.

Unfortunately , the act went to absurd lengths in its attempt to conserve foreign exchange. A simple hospitality offered by a foreign national for instance, had to be reported to the government. The Act also routinely came into the way of many national business transactions, and combined with the extremely harsh penalties for offences under the Act,
Effectively discouraged productive investment. The excess became glaring post 1991, as the countrys trade and investment linkage with the rest of the world increased and foreign exchange reserve mounted to near embarrassing levels.

Business associations without exception and rightly, saw the Act as a fetter on the ability of domestic enterprise to take on the challenges of a globalising world. It is this concern primarily that the government is now seeking to address with FEMA.
For all the expected relaxations through, the draft bill is unlikely to receive more than half a cheer from Industry. While most would welcome the distinction the bill seeks to make between compoundable and penal offence the former with provisions for fine and the latter with provision for criminal proceedings

It is still far from clear what would actually constitute penal offence(s) and what would be the enforcement directorates precise powers. If penal offences relate essentially to money laundering activities--- the Indian subcontinent is , incidentally,a major international hub for such actions--- the definition would make eminent sense. A much wider definition could, however make the proposed act not very different from what exists, and especially if the current over arching power of the enforcement directorate remain what the are. It was also widely anticipated that the provision of new bill would apply retrospectively,to cover cases already under investigation.

As it stands tough, this is not to be . The principle that on going cases ought to be considered in the light of the objectives and norms that obtain today is a well established one, and it is difficult to understand why government did not it appropriate for application in the present instance. The issue needs to be debated once again. Finally the government would do well to examine how other countries, placed in situation similar to Indias in the matter of foreign exchange problems, have managed with significantly more lenient legislation.

If Indian enterprise is to mark its presence globally, it is perhaps much better to err on the side of liberty.In any case, the government guiding objective in this whole exercise should be to take the fear out of FERA.

The FEMA act extends to the whole of India. The main provision of the Act are as follows:
Section 3: Dealing in Foreign Exchange Section 4 Holding of foreign Exchange Section 5 Current account Transaction Section 6 : Capital account Transaction Section 7: Export of Goods and Services Section 8 : Relisation of Repatriation and Foreign Exchange Section 9: Exemption from Resalisation and Repatriation

Recent Changes

Overseas Investment External commercial Borrowing( ECB) Liberalized Remittance of US $ 25000 per annum by Resident Indians. Foreign Investment liberalized. Student studying abroad are treated as NRIs The system of self write-off and self extension of due date for export realisation for exporter was introduced.

The Rupee Progress

1950-51 to 1960-61 : Rs 4.76 1980-81 : Rs 7.9 1987-88 : Rs12.97 1992-93 : Rs 30.65 2001-02 : Rs 47.68 The rupee has not been too volatile over the years. But that doest mean it hast depreciated to the dollar. It has fallen from Rs 4.76 in 1950-51to Rs 47.84 on December 7,2001-a plunge in excess of 1000%. Now, see this in the light of the fact that the past 50 years have seen a mere two devaluation (in June 1966 and July 1991) and

The Rupees Progress

It is evident that the rupee has continually adjust its value. In 1991, the RBI partially freed the rupee through the liberalised Exchange Rate Mechanism (LERM) in 1991. Subsequently in 1993, the central bank scrapped LERMs and made the rupee free on the trade account. And in 1993, the RBI made the rupee fully convertible on the current account to boost foreign capital inflows.