Professional Documents
Culture Documents
Faculty Of Law
B.A. LLB (H) Self- Finance
VIIth Semester
Assignment
ACKNOWLEDGEMENT
INDEX
INTRODUCTION
Need, Purpose, and Learning Objective
The FERA was introduced in 1973 when India’s foreign exchange reserves position was
not satisfactory. It required stringent controls to conserve foreign exchange and to utilise
in the best interest of the country. Very strict restrictions have outlived their utility in the
current changed scenario and therefore there was a need to remove the draconian provisions
of FERA and have a forward-looking legislation covering foreign exchange matters which
gave birth to FEMA.
The primary difference between FERA and FEMA is that FERA was enacted to facilitate
all the payments and other foreign exchange activities in India.
On the other hand, despite being an improvement of FERA, which means that it also covers
payments and facilitation of foreign exchange activities, FEMA has a specific role of
ensuring that external trade and payments are correctly executed.
FEMA has the responsibility of ensuring that there is the orderly management of foreign
exchange market in the country.
The preamble to FEMA lays down the purpose 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. Rationale for strict regulations under FERA 1973. After Independence
India was left with little forex reserves and during the oil Crisis of seventies ballooning oil
import bills further drained foreign exchange reserves.
Broadly, the objectives of FEMA are to facilitate external trade and payments and to
promote the orderly development and maintenance of foreign exchange market. The Act
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has assigned an important role to the Reserve Bank of India (RBI) in the administration of
FEMA. The rules, regulations and norms pertaining to several sections of the Act are laid
down by the Reserve Bank of India, in consultation with the Central Government.
The crisis was caused by currency devaluation; the current account deficit, and investor
confidence played significant role in the sharp exchange rate depreciation.
The economic crisis was primarily due to the large and growing fiscal imbalances over the
1980s. During the mid-eighties, India started having balance of payments problems.
Precipitated by the Gulf War, India’s oil import bill swelled, exports slumped, credit dried up,
and investors took their money out. Large fiscal deficits, over time, had a spill over effect on
the trade deficit culminating in an external payments crisis. By the end of the 1980s, India was
in serious economic trouble.
The gross fiscal deficit of the government (centre and states) rose from 9.0 percent of GDP in
1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the centre alone, the
gross fiscal deficit rose from 6.1 percent of GDP in 1980-81 to 8.3 percent in 1985-86 and to
8.4 percent in 1990-91. Since these deficits had to be met by borrowings, the internal debt of
the government accumulated rapidly, rising from 35 percent of GDP at the end of 1980-81 to
53 percent of GDP at the end of 1990-91. The foreign exchange reserves had dried up to the
point that India could barely finance three weeks’ worth of imports.
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In mid-1991, India's exchange rate was subjected to a severe adjustment. This event began with
a slide in the value of the Indian rupee leading up to mid-1991. The authorities at the Reserve
Bank of India took partial action, defending the currency by expending international reserves
and slowing the decline in value. However, in mid-1991, with foreign reserves nearly depleted,
the Indian government permitted a sharp devaluation that took place in two steps within three
days (1 July and 3 July 1991) against major currencies.
With India’s foreign exchange reserves at $1.2 billion in January 1991 and depleted by half by
June, barely enough to last for roughly 3 weeks of essential imports, India was only weeks
away from defaulting on its external balance of payment obligations.
P. V. Narasimha Rao took over as Prime Minister in June, and roped in Manmohan
Singh as Finance Minister. The Narasimha Rao government ushered in several reforms that are
collectively termed as liberalization in the Indian media. There was significant opposition to
such reforms, suggesting they were an "interference with India's autonomy".
FERA deals with laws related to foreign exchange in India. The law was basically made to
manage foreign investments in India. But there was a general dislike for it for a variety of
reasons. FERA consisted of 80 complex sections. Also under FERA any offence was a criminal
one which included imprisonment. FERA 1973 gave enormous powers to the Enforcement
Directorate which enforced the law strictly and rigidly. Several complaints of harassment and
misuse of powers were lodged. However, FERA was administered rigorously.
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Positive outlook towards forex reserve and market forces, shifting emphasis from
regulation to management
FERA (Foreign Exchange Regulation Act) which was passed in 1947 was amended in 1973.
The new FERA came into force from 1974. The main objective was the conservation of India’s
Foreign Exchange reserves, judicious use of foreign exchange. FERA was repealed in 1998
and Foreign Exchange Management Act (FEMA) was enacted.
The need for FEMA was because of the two crucial factors. Primary among them were the
obligations under Article 8 of the IMF (International Monetary Fund), under which India must
move fast to make the rupee fully convertible on the capital account. That automatically made
FERA redundant. Secondly, FERA was relevant when there was an enormous flight of capital
from forex-scarce India but on 1997 the forex reserves were of $19 billion plus.
After the various reforms, FERA has become totally dysfunctional. FERA created a huge black
market in foreign exchange and capital inflows were perking up sufficiently to neutralize the
current account deficit. The rupee's hardening shows that there's a clear case for going for
capital account convertibility soon. The main aim of FEMA was to formulate a law consistent
with full rupee convertibility and progressive liberalization of capital account transaction..
The inception of FEMA has proved to be a booster for productive investments as any offences
under the Act is treated only as civil offences whereas it was criminal offences under FERA.
Introduction
The (Foreign Exchange Management Act, 1999) (FEMA) is an Act of the Parliament of
India 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. The Foreign Exchange Management Act
(1999) or in short FEMA has been introduced as a replacement for earlier Foreign Exchange
Regulation Act (FERA). FEMA came into act on the 1st day of June 2000. FEMA is much
simple, and consist of only 49 sections. Terms like Capital Account Transaction, current
account Transaction person, service etc., have been defined in detail in FEMA under FEMA.
FEMA
Objectives To facilitate foreign trade and maintain forex
Provisions Consists only 49 sections and is much simpler
Introduced when? 1999
Violation Civil offence
Punishment for
Fine or imprisonment (if fine not paid in the stipulated time)
contravention
More than 6 month stay in India is the criteria to determine the
Residential status
residential status of a person
Key Objectives
The main objective behind the Foreign Exchange Management Act (1999) is to consolidate
and amend the law relating to foreign exchange with objective of facilitating external trade
and payments and for promoting the orderly development and maintenance of foreign
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exchange market in India and also to regulate the foreign capital in India. Apart from this, it
also aims at removing the imbalances of payments and also to make strong and developed
foreign exchange market. Moreover, FEMA is applicable to the all parts of India. The act is
also applicable to all branches, offices and agencies outside India owned or controlled by a
person who is resident of India
Scope of FEMA:
FEMA provides:
1. Free transactions on current account subject to reasonable restrictions that may be imposed.
5. Adjudication of Offences.
(ii) drafts, traveler’ s cheques, letters of credit or bills of exchange, expressed or drawn in Indian
currency but payable in any foreign currency,
(iii) drafts, traveler’s cheques, letters of credit or bills of exchange drawn by banks, institutions
or persons outside India, but payable in Indian currency;
Section 3 . Save as otherwise provided in this Act, rules or regulations made thereunder, or
with the general or special permission of the Reserve Bank, no person shall—
(a) deal in or transfer any foreign exchange or foreign security to any person not being
an authorised person;
(b) make any payment to or for the credit of any person resident outside India in any
manner;
(c) receive otherwise (than) through an authorised person, any payment by order or on
behalf of any person resident outside India in any manner;
Explanation.—For the purpose of this clause, where any person in, or resident in,
India receives any payment by order or on behalf of any person resident outside India
through any other person (including an authorised person) without a corresponding
inward remittance from any place outside India, then, such person shall be deemed
to have received such payment otherwise than through an authorised person;
(d) 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.
Explanation.—For the purpose of this clause, financial transaction means making any
payment to, or for the credit of any person, or receiving any payment for, by order or on behalf
of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or
transferring any security or acknowledging any debt.
Section 4. Save as otherwise provided in this Act, no person resident in India shall acquire,
hold, own, possess or transfer any foreign exchange, foreign security or any immovable
property situated outside India.
FEMA prohibits:
Dealing in or transfer of Foreign Exchange or Foreign Security to any person other than
Authorised Person
Make any payment otherwise through an authorized person 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.
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
2. Every person dealing in foreign exchange should follow rules and regulation under
FEMA act.
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RBI cannot do all transactions in foreign exchange itself. Hence RBI delegates its
power to authorized persons with suitable guidelines to deal in foreign exchange and
foreign securities.
Section 2(c) of FEMA states that authorized person means authorized dealer, money
changer, off shore banking unit or any other person authorized under section 10(1) to
deal in foreign exchange and foreign securities.
Though RBI is the overall controlling authority in respect of FEMA, enforcement of FEMA
has been entrusted to a separate “Directorate of Enforcement” formed for this purpose. (Section
36)
As stated earlier all transactions between a resident and a non-resident is covered in FEMA,
these transaction can be broadly classified in two groups current account transactions and
capital account transactions.
As per Sec 2 (e) “Capital account transaction” means a transaction which alters the assets or
liabilities, including contingent liabilities, outside India of persons resident in India or assets
or liabilities in India of persons resident outside India, and includes transactions referred to
in Sec 6(3). Any person may sell or draw foreign exchange to or from an 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.
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 current business, services, and
short-term banking and credit facilities in the ordinary course of business
payments due as interest on loans and as net income from investments
remittances for living expenses of parents, spouse and children residing abroad, and
expenses in connection with foreign travel, education and medical care of parents,
spouse and children
Though the norms of Capital Account Transactions have been considerably relaxed, as a
general rule all capital account are prohibited unless specifically allowed. Permissible capital
account transactions are governed by the Foreign Exchange Management (Permissible Capital
Account Transactions) Regulations, 2000 (Notification FEMA 1/2000-RB).
Upto USD 10,000 or equivalent in one financial year for one or more private visits
abroad (Nepal and Bhutan being exempted )
Upto USD 25,000 for business visits
Upto USD 1,00,000 for person going to abroad for employment, education (yearly) and
for medical Treatment[9]
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Section 2 (j) of FEMA defines “capital account transaction” as a transaction which alters the
assets or liabilities, including contingent liabilities, outside India of persons resident in India
or assets or liabilities in India of persons resident outside India, and includes transactions like:
As per the provisions laid down in Section 5, a person may sell or draw foreign exchange freely
for his current account transactions, except in a few cases where limits have been prescribed
The Central Government has the power to regulate current account transactions. Unless the
transaction is restricted, Foreign exchange can be drawn for the same. Current Account
transactions are governed by the Foreign Exchange Management (Current Account
Transactions) Rules, 2000 (Notification No.GSR.381(E), dated 03/05/2000).
Drawal means drawal of foreign exchange from an authorized person and includes opening of
Letter of credit or use of International Credit Card or International Debit Card or ATM Card
or any other thing by whatever name called which has the effect of creating foreign exchange
liability.[11]
Conclusion
FDI, being a major driver of economic growth and a source for non-debt, long-term finance for
the economic development of the country, has been one of top priorities of the current
Government. In the past 2 years, we have witnessed many reforms and new initiatives
announced by Government across various sectors. One of the common features in most of the
reforms has been the focus of the Government towards ease of doing business in India, which
has led to India’s improved position in the World Bank’s report on Ease of Doing Business and
earned India an enhanced sovereign rating by Moody’s. Most of the proposals discussed above
are along similar lines, it either eliminates an existing defect in the system or puts in place a
newer innovative mechanism to make the process quicker than before. While India is already
seen as one of the most attractive country for FDI, the above-said relaxations would further
enhance the inflow of FDI into the country.
The Indian foreign exchange market has operated in a liberalised environment for more than a
decade. A cautious and well-calibrated approach was followed while liberalising the foreign
exchange market with an emphasis on the need to safeguard against potential financial
instability that could arise due to excessive speculation.
Besides, with the Indian economy moving towards further capital account liberalisation, the
development of a well-integrated foreign exchange market also becomes important as it is
through this market that cross-border financial inflows and outflows are channelled to other
markets. Replacing of FERA, 1973 by FEMA, 1999 helped removing the flaws and
overcoming the hurdles posed by it.
The Foreign Exchange Management Act (FEMA), 1999 was enacted 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. In fact it is the central legislation that deals with inbound investments into
India and outbound investments from India and trade and business between India and the other
countries. Foreign Exchange Management Act (FEMA) replaced Foreign Exchange Regulation
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Act (FERA), not just as piece of paper but in terms of inflows and outflows of forex in India.
Foreign Exchange Regulation Act (FERA) was only the regulations, where Foreign Exchange
Management Act (FEMA) works for the proper management of the forex. Under Foreign
Exchange Regulation Act (FERA) all violations would attract prosecutions. Foreign Exchange
Management Act (FEMA) diluted the rigorous enforcement provisions which were the
hallmark of the erstwhile legislation. Violation of Foreign Exchange Regulation Act (FERA)
was a criminal offence whereas violation of Foreign Exchange Management Act (FEMA) is a
civil offence. We are of the view that Foreign Exchange Management Act (FEMA) has rightly
replaced Foreign Exchange Regulation Act (FERA), as to boost the Indian economy and it shall
be hurting the growth process if all the time corporates runs behind the RBI and other
authorities to seek permission to even small and medium size of foreign investment. Hence,
the automatic route was made available to the Indian corporate for foreign funding.
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Bibliography
https://rbi.org.in/scripts/FAQView.aspx?Id=26
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https://en.wikipedia.org/wiki/Foreign_Exchange_Management_Act
http://dipp.nic.in/foreign-direct-investment/foreign-exchange-management-act
https://rbi.org.in/Scripts/BS_ViewMasterDirections.aspx?id=10202
https://economictimes.indiatimes.com/small-biz/resources/startup-handbook/foreign-
investment-compliance-under-rbi/fema/articleshow/59488429.cms
https://economictimes.indiatimes.com/topic/FEMA-regulations
https://www.investopedia.com/terms/a/asian-financial-crisis.asp