Introduction

:
Exchange control:
In India, foreign exchange business is governed by the foreign exchange regulation act 1973. The reserve bank of India administers the exchange control. A study of exchange control regulations forms a part of the study of foreign. The types of transaction which are affected by the foreign exchange regulation act are, in general, all those having international financial implications. The regulation framed by the reserve bank in regard to foreign exchange are contain in the exchange control manual. The manual sets forth the authority granted to banks to buy and sell foreign exchange and to do other thing incidental there to, as also the procedures to be followed by them. It also contains exchange regulation act and notification issued by central government and reserve bank relating to exchange control.

Foreign Exchange Market:
We have seen that the origin of foreign exchange is in the foreign trade. At all times, there exporters who receive foreign currencies from there overseas buyer settlement of the trade transactions and there are also importers who have to pay in foreign currencies to their overseas supplier. Again, there are agencies like bank that business it is to arrange for exchange of currencies as required by their customers. The banks would buy foreign currencies from their customers like exporters who wish to convert their foreign currencies receipts into Indian rupees the banks would sell currencies to those customers like importers who have to make foreign currencies payment. Thus arises the needs for the foreign exchange market, which play the part of a clearing house through which purchases and sales of foreign currencies are offset against each other. The foreign exchange market, however is not a market in the concrete sense of the term or geographical entity like a fish

market, vegetable market etc. it may not be an actual meeting place for the participants(sellers & buyers ). The term foreign exchange market is used in an abstract sense only, meaning a number of buyers and sellers systematically in contact with each other for the purpose of transacting foreign exchange business. This is the sense in which the term ‘market’ is used in economics. In fact, it is said that the foreign exchange market is fit example of Prof. Marshall’s definition of a perfect market.

INDIAN FOREIGN EXCHANGE MARKET:
The Indian foreign exchange market may be broadly described as a three-tiered market. The first tier consists of foreign exchange transaction between the banks and their customers, mainly importers and exporters. Secondly, their there is the inter-bank market wherein there are exchange dealings between banks themselves, conducted through foreign exchange brokers and supplemented from time to time by reserve bank of India. The interbank market is mainly established in three important port centers, namely Bombay, Kolkatta and chennai. The third tier consists of foreign exchange dealings between banks in India and their counterparts and branches in foreign countries that have exchange business to transact with India. In addition, the banks in India also operate in international markets like London, New York etc. to cover their foreign exchange dealings with the customers and other banks. While the first could be compared with the retail market, the second is in fact a domestic wholesale market. The third is also a wholesale market but on an international plane. All the three are inter connected, this is so because after all the customers are the ultimate suppliers and the consumers (sellers and buyers) of foreign currencies and their needs and met by the banks either by operating in the inter-bank market locally or in the international; exchange market. In 1999, Foreign Exchange Management Act was passed to

replace FERA to manage the Indian Foreign Exchange Market in a better manner.

FOREIGN (FEMA)

EXCHANGE

MANAGEMENT

ACT,

1999

A bill based on the recommendations of the Task Force, was introduced in the Lok Sabha on 4 August, 98. The Bill was referred to the standing committee on Finance which submitted its report to the House on 23 December' 98 with suggestion and modifications. The 12th Lok Sabha was dissolved before any decision could be taken on the bill. The Bill subsequently lapsed. The bill was again introduced in the 13th Lok Sabha on 25th Oct'99. The presidential Assent was received on 6th Jan 2000. Finally the FEMA came into operation w.e.f. 1st June 2000.

The FEMA, is applicable to:
 To the whole of India.  Any Branch, office and agency, which is situated outside India, but is owned or controlled by a person resident in India.  Any contravention of provisions of FEMA, by all those, who are covered under above two aspects committed outside India.

IMPORTANT PROVISIONS FROM FEMA:
RELEVANT PROVISIONS OF EXCHANGE CONTROL MANUAL FOR THE PURPOSE OF FEMA Some of the relevant provisions of Exchange Control Manual under FEMA, which still exist, are:  REFUND OF INWARD REMITTANCES:

If a request is made from the overseas for cancellation of Inward Remittances, Authorized Dealers may do so without referring to Reserve Bank, if refunds are not to compensate for a loss.  APPLICATION FOR REMITTANCES IN FOREIGN CURRENCY: A person firm or bank may apply to an Authorized Dealer for remittances in any foreign currency to a beneficiary abroad. Application should be made in FORM -A1, if the purpose of remittance is import of goods into India. For any other purpose in Form -A2 The Authorized Dealer may sell the foreign Exchange applied for if he think fit provided it is within his powers, and the purpose of remittance is an approved one.  MODE OF PAYMENT OF RUPEES AGAINST SALE OF

FOREIGN EXCHANGE: In case of sale of foreign Exchange or remittance foreign Exchange amounting to Rs. 20,000 or more the payment received by the Authorized Dealer, from the applicant should be through a crossed cheque drawn on the applicant bank account or on the bank account of the Firm/ Company. Payment can also be accepted in the form of a Banker's cheque / Pay Order / Demand Draft. Receipt of Payment in cash in case of such sale of foreign Exchange or remittance in foreign Exchange is strictly prohibited. EXCEPTION: However where purpose of sale of foreign exchange is for travel abroad for business etc, cash may be received by Authorized Dealer from Applicant upto Rs. 50,000/Where the rupee equivalent for drawing foreign exchange exceeds Rs. 50,000 either for any single installment or for more than one installment reckoned--- together for a single journey / visit it should

be paid by the traveler by means of a gross cheque / demand draft/ pay order as stated above.  TRAVELERS CHEQUE NEGOTIABLE ONLY IN INDIA: Rupee Travelers cheque cannot be encashed outside India, if they are issued solely for use within India. In such a case they cannot be taken or sent out of India. Reimbursements should be strictly refused where such traveler’s cheques have been encashed outside India.  REIMBURSEMENT OUTSIDE INDIA: Rupee Travellers cheque, which are issued by authorized dealers, encashable outside India, may be reimbursed by Authorized Dealers or by their selling Agent.  IMPORT OF FOREIGN CURRENCY NOTES: When the stock of foreign currency notes with Authorized Dealer is not adequate for meeting their normal business requirement they could import foreign currency notes from their overseas branches or correspondents.  RECONVERSION OF INDIAN CURRENCY: Foreign currency may be sold against Indian Rupees held by persons who are not resident of India but are passing through or leaving India after a visit, at the time of their departure from India. For this purpose, a Bank or Encashment certificate issued by Authorized Dealer, exchange bureau or Authorized Money changer in form BCI, ECF OR ECR, is required to show that the rupee had been acquired by sale of foreign Exchange to an Authorized Dealer or money changer in India. Such a certificate is valid for such reconversion i.e. a period of three months is not over from the date of sale of the foreign currency by the traveller.

 RATES OF EXCHANGE: Authorized dealers and their Exchange bureau may buy from and sell to public foreign currency notes and coins at rates of exchange determined by market conditions. Dealings in foreign currency notes and coins between authorized dealers and between authorized dealers and money changers would also be at rates determined by market conditions.

COMPARISION OF FERA AND FEMA:
1. SIMILARITIES:  The similarities between FERA and FEMA are as follows:  The Reserve Bank of India and central government would continue to be the regulatory bodies.  Presumption of extra territorial jurisdiction as envisaged in section (1) of FERA has been retained.  The Directorate of Enforcement continues to be the agency for enforcement of the provisions of the law such as conducting search and seizure

2. DIFFERENCES BETWEEN FERA AND FEMA:

Sr. No

DIFFERENCES

FERA

FEMA

1 PROVISIONS

FERA consisted of 81 FEMA is much simple, sections, and was more and consist of only 49 complex sections. presumptions Rea and Mens

2 FEATURES

Presumption of negative These intention (Mens Rea ) of and joining hands offence

in abatement have been

(abatement) excluded in FEMA

existed in FEMA 3 NEW TERMS IN Terms FEMA Account current Transaction, defined in FERA. 4 DEFINITION AUTHORISED PERSON OF Definition like Capital Terms Account current person, Transaction etc., like Capital account person, have Transaction, Account Transaction,

service etc. were not service in FEMA of The

been defined in detail definition of

"Authorised Person" in Authorised ( 2(b)

person

FERA was a narrow one has been widened to include banks, money changes, c) off shore banking Units etc. (2 (

5 MEANING COMPARED WITH TAX ACT.

OF There

was in FERA,

a

big The the FEMA,

provision are

of in with

"RESIDENT" AS difference INCOME under

definition of "Resident", consistent Income Tax Act respect Resident". to Now

and income Tax Act, in the the definition of term " criteria of "In India for 182 days" to make a person resident has been brought under FEMA. Therefore a person who qualifies to be a non-resident under the income Tax Act, 1961 will also be considered resident a for nonthe

purposes

of

application of FEMA, but a person who is considered to be nonresident under FEMA may not necessarily be Act, a for non-resident instance and a under the Income Tax business man going abroad staying therefore a period of 182 days or more in a financial become 6 PUNISHMENT Any offence with per offence , year a will non-

resident under FEMA. under Here, the offence is offence only FERA, was a criminal considered to be a punishable civil of imprisonment code as punishable with some a Imprisonment penalty. is

criminal amount of money as

procedure, 1973

prescribed only when one fails to pay the penalty. 7 QUANTUM PENALTY. OF The monetary penalty Under FEMA the payable was times involved. under the the FERA, quantum of penalty five has been decreased to three times the amount involved. amount considerably nearly

8 APPEAL

An appeal against the The appellate order of "Adjudicating authority under FEMA office", before " Foreign is the special Director Exchange Appellate Regulation ( Appeals)Appeal Board went against the order of Adjudicating Authorities and special Director (appeals) lies before "Appellate Tribunal for Foreign Exchange.” An appeal from an order of Appellate Tribunal would lie to the High Court. (sec 17,18,35)

before High Court

9 RIGHT ASSISTANCE

OF FERA did not contain FEMA expressly any express provision recognises the right the right of on of appellant to take to assistance of legal practitioner or chartered accountant (32) person

DURING LEGAL on

PROCEEDINGS. impleaded

take legal assistance

10 POWER SEARCH SEIZE

OF FERA conferred wide AND powers on a police officer not below the rank of a Deputy Superintendent of Police to make a search

The scope and power of search and seizure has been curtailed to a great extent

3. A STEP AHEAD FROM FERA TO FEMA: Enactment of FEMA has brought in many changes in the dealings of Foreign Exchange, as compared to FERA. Some of them are restrictive, and some has widened the scope. However some of the relevant progresses made, from FERA to FEMA, are as follows:  DRAWAL OF FOREIGN EXCHANGE Now, the restrictions on drawal of Foreign Exchange for the purpose of current Account Transactions, has been removed. However, the Central Government may, in public interest in consultation with the Reserve Bank impose such reasonable restrictions for current account transactions as may be prescribed. FEMA has also by and large removed the restrictions on transactions in foreign Exchange on account of trade in goods, services except for retaining certain enabling provisions for the Central Government to impose reasonable restriction in public interest.  OMISSION OF CRIMINAL PROCEEDINGS Under FERA, any contravention was a criminal offence and the proceedings were governed by the code of Criminal Procedure. Moreover the Enforcement Directorate had powers to arrest any person, search any premises, seize documents, and initiate proceeding. Now all these have been done away with, and contravention of FEMA is no more a Criminal offence, and only monetary penalty, i.e. civil proceedings are applicable. Civil imprisonment is provided, only in case of default to pay fine.  RESIDENTIAL STATUS

The definition of "Residential Status" under FEMA has gone through considerable change. It has now been made compatible with the definition provided under "Income Tax" Act. The residential status is now based on the physical stay of the person in the country. The period of 182 days as provided, indicates that it is not necessary that there should be a continuous period of stay. The period of stay would be calculated by adding up all the days of stay of the individual in the country. An Indian resident becomes a non-resident when he goes abroad and takes up a job or engages in business. A major change in the definition of residential status of partnerships and firms in worth noticing. Earlier, under FERA, a branch was considered a resident of a place where it was situated. Now, under FEMA, an office, branch or agency outside India owned or controlled by a person resident in India will be considered a resident in India for the purposes of this Act. For example, a person residing in India has a branch in Mauritius; such branch will be considered a resident in India.  IMMOVABLE PROPERTY OUTSIDE INDIA Earlier, under FERA, there was no restriction placed on foreign citizens who were residents of India, for acquiring immovable property outside India. Now FEMA prohibits a resident to acquire, own process, hold or transfer any immovable property situated outside India. This restriction applies irrespective of whether the resident is an Indian citizen or foreign citizen. With this provision being effective a foreign citizen who is a resident in India has to take approval of Reserve Bank of India for selling or buying any immovable property situated outside India.  IMMOVABLE PROPERTY IN INDIA Earlier, under FERA, a foreign citizen could acquire or transfer immovable property in India only after seeking permission from the

Reserve Bank. Now, under FEMA, the control of Reserve Bank is determined by the residential status of a person. Only a nonresident as defined within the meaning of FEMA would require permission of the Reserve Bank to acquire or transfer an immovable property in India. The distinction based on citizenship has been abolished and that based on residentship has been introduced.  EXPORT OF SERVICES FERA had no provision for export of services. Now, FEMA has included payment received by an Exporter of Services in its ambit. Every Exporter, who receives payment from outside India, for his services rendered is obliged to furnish details of payment to the 'Reserve Bank. For example; a Doctor, or Engineer or Lawyer or Accountant or any other professional may give opinions or consultation to people outside India, via internet or mail, and his fees may be credited to his credit account. Then he is obliged to furnish details of such payment to Reserve Bank.  INCLUSION OF NEW TERMS Some new terms like "Capital Account Transactions, Current Account Transactions"; have been included in FEMA. Reserve Bank has been confirmed with powers and with consultation with central government to specify maximum permissible limit upto which exchange is admissible for such transactions.

WHAT TYPE OF OFFENCES?
Although under FEMA, offences pertain to transactions in foreign Exchange only. However relevant offences are as follows:

DETAILS IN FOREIGN EXCHANGE:

 Only a person Authorized by Reserve Bank can deal in foreign Exchange. An "Authorised Person" under FEMA, is a person who is authorised by Reserve Bank to deal in Foreign Exchange. For being registered as an "Authorised Person", necessary application along with relevant documents has to be furnished to Reserve Bank. An "Authorised Person" is also, not given a free hand to deal in foreign Exchange. He has to furnish details and information, to Reserve Bank from time to time as may be required by it.  No one can make a payment to a person resident outside India, without permission of Reserve Bank.  No one receives any payment from a person resident outside India, without permission of Reserve Bank.  A person resident in India cannot deal in foreign exchange, foreign security or any immovable property situated outside India, without permission of Reserve Bank. (sec 4)  Similarly a person resident outside India cannot acquire immovable property in India without permission. EXPORTER OF GOODS AND SERVICES Every exporter of goods and services is under an obligation, to give details to Reserve Bank regarding value of export, mode of payment, and amount of payment received etc. REPATRIATION OF FOREIGN EXCHANGE Where any amount of foreign exchange has become due or accrued to any person who is a resident in India, he shall realise and repatriate (Bring Back) such amount, within the time specified by Reserve Bank and in such manner as may be specified by the Reserve Bank. AUTHORISED PERSON

An "Authorised Person" under FEMA, is a person who is authorised by Reserve Bank to deal in Foreign Exchange. For being registered as an "Authorised Person", a necessary application alongwith relevant document has to be furnished to Reserve Bank. An "Authorised Person" is also, not given a free hand to deal in foreign Exchange. He has to furnish details and information, to Reserve Bank from time to time as may be required by it. PROSECUTION OF OFFENCES COMMITTED Before detailing the procedure for prosecution, it is important to mark out the Adjudicating Agencies. They are:  ADJUDICATING AUTHORITY The inquiry of any contravention of FEMA is conducted by an Adjudicating Authority appointed by the Central Government.  APPEAL TO SPECIAL DIRECTOR (APPEALS) The special Director (Appeals) is authorised to hear the appeals arising out of in order of the Adjudicating Authority.  APPEAL TO THE APPELLATE TRIBUNAL The Appellate Tribunal is entitled to hear appeals made in accordance, from an order made by Adjudicating Authority or special Director (Appeals).  DIRECTOR OF ENFORCEMENT The Director of Enforcement and other officers has power to conduct investigation, search and seize any articles. PROCEDURE INQUIRY BY ADJUDICATING AUTHORITY (14) The inquiry of any contravention of FEMA is conducted by an Adjudicating Authority.

 When, an inquiry is to be conducted against a person for any contravention; the Adjudicating Authority shall issue a notice to such person.  The notice will also indicate the date on which the offender is required to appear before authority, and will also mention the nature of offence committed by him.  Such person (offender) will have a right to give reasons or explanation, and then a date will be fixed for his appearance. He can appear either personally or through an Advocate or chartered accountant.  On the date of appearance, the Adjudicating Authority shall present its case, and explain the reason and type & implications of offence committed by offender.  Then in turn, such person will also be given an opportunity to put up his case, and to produce documents and evidence.  Finally, if Adjudicating Authority is convinced, that the offender has committed an offence, then it will impose such fine and penalty, as it thinks fit. APPEAL TO SPECIAL DIRECTOR (APPEALS) (17) Appeal from an order of "Adjudicating Authority" lies before" special Director (appeal)"  The appeal shall be made in "Form No. 1", along with three copies of the order appealed against and the requisite fees.  The appeal should be filed within 45 days, from the date of receipt of receipt of impugned order.  On the date of hearing the appeal the applicant may appoint a legal practitioner or a chartered accountant to appear, plead and act on their behalf before the special Director (Appeal)  The order of the special Director (Appeals) made at the conclusion of the proceedings shall be in writing and shall state briefly the grounds for the decision.

APPEAL TO THE APPELLATE TRIBUNAL (19) "Appellate Tribunal" is entitled to hear appeal arising out of an order from "Adjudicating Authority" and "special Director (appeal)."  The appeal shall be made in Form No. 2, along with three copies of the impugned order and requisite fees.  The appeal shall be made within 45 days, from the date on which copy of the impugned order is received.  A copy of the order and appeal shall be sent to the opposite party, i.e. "Director of Enforcement," and a date shall be fixed for hearing of the appeal.  The appellant shall have the right to present his case / appeal through a legal practitioner or chartered Accountant.  On the fixed date of hearing, the "Appellate Tribunal" shall pass its order in writing and the reasons therefore. APPEAL TO HIGH COURT (35)  An appeal from the decision of "Appellate Tribunal" lies before High Court.  The appeal shall be filed within "60 days" from the date of communication of the decision or order of the Appellate Tribunal to him on any question of law arising from the impugned order. AMOUNT OF PENALTY Any contravention, under FEMA, may invite following kinds of penalties:  If, the amount against which offence is quantities, then penalty will be "THRICE" the sum involved in contravention.  Where the amount cannot be quantified the penalty may be imposed upto two lakh rupees.

 If, the contravention is continuing everyday, then Rs. Five Thousand for every day after the first day during which the contravention continues. Further in addition to the penalty, any currency, security or other money or property involved in the contravention may also be confiscated.

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