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CHAPTER - “ FEMA ”
“ FOREIGN EXCHANGE MANAGEMENT ACT, 1999 ”
OBJECTS OF FEMA
DIFFERENCE BETWEEN FERA & FEMA
DEFINITIONS
DEFINITIONS RELATING TO RESIDENTIAL STATUS
REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE
(A) GENERAL PERMISSION FOR PAYMENTS BY A PERSON RESIDENT IN INDIA
ECEIPTS BY A PERSON RESIDENT IN INDIA - GENERAL PERMISSION
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PRACTICAL QUESTIONS
1 What are the OBJECTS of enacting Foreign Exchange Management
Act, 1999? Also state the extent and application of FEMA.
Ans. Foreign Exchange Regulation Act ( FERA ) was introduced in the
year 1974 with an object of having stringent controls to conserve foreign
exchange and utilise these scarce resources in the best interest of the
country. With the liberalized economic environment and increased flow of
foreign exchange to India the draconian provisions of FERA were needed
to be reviewed. Therefore, FERA was repealed and Foreign Exchange
Management Act, 1999 (FEMA) was passed. FEMA has been brought
into force from 1st June, 2000.
The preamble to FEMA reads as under :
“An Act 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.”
EXTENT and APPLICATION ( Sec. 1 )
The Act extends to the WHOLE of India. Also, the Act has extra territorial
jurisdiction, i.e., it also applies to :-
(a) All branches, offices and agencies OUTSIDE India - owned or
controlled by a Person RESIDENT in India;
and
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1. Object of the Act. The main object of FERA was to CONSERVE the
foreign exchange resources and prevent the misuse thereof. However,
the main object of FEMA is to PROMOTE and DEVELOP the foreign
exchange management of the Country. In other words, FERA sought to
‘control’ foreign exchange transactions while FEMA seeks to ‘manage’
foreign exchange.
2. Meaning of Person Resident in India. Citizenship was the criterion to
determine the residential-status of a person under FERA. The definition
of RESIDENT in India has been redefined in FEMA. A person residing for
more than 182 days in India - is a person RESIDENT in India as per
FEMA.
3. Structure of the Act - Prohibition/Relaxation. FERA PROHIBITED
almost all the foreign exchange transactions UNLESS a general or
special permission was issued. However, under FEMA, all the current
account transactions are permissible EXCEPT some transactions
controlled by the Rules.
4. Nature of Offences. The offences under FEMA shall be treated as civil
wrongs whereas under FEMA, offences were subject to criminal
punishments also. Therefore, FERA was held to be draconian, severe
and harsh.
5. Presumption of Mens-rea. Under FERA there was a presumption “
existence of guilty mind ”, UNLESS the accused proved otherwise. Under
FEMA, however, the prosecution will have to PROVE that a person has
committed an offence.
6. Power to Arrest. Sec. 35 of FERA empowered 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 in
the following 2 cases :
(a) Where the accused person FAILS to pay the full payment of penalty
- WITHIN 90 days from service of notice on him.
(b) Where the accused person FAILS to furnish the security for his
appearance BEFORE the Adjudicating Authority, the Adjudicating
Authority may, in his discretion, order that the accused person be
DETAINED - in the custody of an Officer of the Adjudicating
Authority.
7. Compounding of Offences. All the offences under FEMA are
compoundable whereas compounding was not permissible under FERA.
8. Appellate Authorities. There was only ONE Appellate Authority under
FERA whereas in FEMA, there exists TWO Appellate Authorities.
9. Right of Legal Assistance. The accused has a right to take the
assistance of a Legal Practitioner (or) a Chartered Accountant under
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(b) Contravention of Act etc. The Reserve Bank of India may revoke the
authorisation if it is satisfied that the authorised person has failed to
comply with the condition subject to which the authorisation was granted
or has contravened any of the provisions of the Act or any rule,
regulation, notification, direction or order made thereunder. However, the
Reserve Bank of India shall give the authorised person a reasonable
opportunity of making a representation in the matter.
DUTIES of authorised person ( Sec. 10 )
1. To comply with RBI directions. An authorised person shall, in all his
dealings in foreign exchange or foreign security, comply with such
general or special directions or orders as the Reserve Bank may, from
time to time, think fit to give.
2. Not to engage in unlawful transactions. Except with the previous
permission of the Reserve Bank, an authorised person shall not engage
in any transaction involving any foreign exchange or foreign security
which is not in conformity with the terms of his authorisation under this
section.
3. To ensure compliance with act, rules, etc. An authorised person shall,
before undertaking any transaction in foreign exchange on behalf of any
person, require that person to make such declaration and to give such
information as will reasonably satisfy him that the transaction will not
involve, and is not designed for the purpose of any contravention or
evasion of the provisions of this Act or of any rule, regulation, notification,
direction or order made thereunder.
4. To report to Reserve Bank of India apprehended contravention of
the Act. Where a person refuses to make the declaration or to give the
information required by the authorised person or makes only
unsatisfactory compliance therewith, the authorised person shall refuse
in writing to undertake the transaction. Also, if he has reason to believe
that certain contravention or evasion is contemplated by the person, he
shall report the matter to the Reserve Bank.
Powers of Reserve Bank ( Sec. 11 )
1. Issue of directions. The Reserve Bank may, for the purpose of securing
compliance with the provisions of this Act and of any rules, regulations,
notifications or directions made thereunder, give to the authorised
persons any direction in regard to making of payment or the doing or
desist from doing any act relating to foreign exchange or foreign security.
2. Calling of information. The Reserve Bank may, for the purpose of
ensuring the compliance with the provisions of this Act or of any rule,
regulation, notification, direction or order made thereunder, direct any
authorised person to furnish such information, in such manner, as it
deems fit.
3. Penalty for contravention.
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(a) When can penalty be levied? The penalty may be levied in the
following cases :
(i) Where an authorised person contravenes any direction given
by the Reserve Bank under this Act.
(ii) Where an authorised person fails to file any return as directed
by the Reserve Bank.
(b) Amount of penalty.
(i) The penalty shall not exceed 10,000.
(ii) Where any contravention is a continuing one, further penalty
not exceeding Rs. 2,000 per day may be levied.
(c) Opportunity of being heard to be given. Before levying any
penalty the Reserve Bank shall give a reasonable opportunity of
being heard to the authorised person.
Power of Reserve Bank to inspect authorised person ( Sec. 12 )
1. Inspection by Reserve Bank. The Reserve Bank may, at any time,
cause an inspection to be made, by any officer of the Reserve Bank
specially authorised in writing by the Reserve Bank in this behalf, of the
business of any authorised person as may appear to it to be necessary
or expedient for the purpose of - (a) verifying the correctness of any
statement, information or particulars furnished to the Reserve Bank;
(b) obtaining any information or particulars which such authorised
person has failed to furnish on being called upon to do so ;
(c) securing compliance with the provisions of this Act or of any rules,
regulations, directions or orders made thereunder.
2. Duty produce books and furnish information. It shall be the duty of
every authorised person, and where such person is a company or a firm,
every director, partner or other officer of such company or firm, as the
case may be, to produce to any officer making an inspection under sub-
section (1), such books of accounts and other documents in his custody
or power and to furnish any statement or information relating to the
affairs of such person, company or firm as the said of facer may require
within such time and in such manner as the said of facer may direct.
Duties of acquire of foreign exchange
If a person who has acquired foreign exchange for any purpose
mentioned in the declaration made by him to an authorised person shall
be deemed to have committed contravention of the provisions of the Act,
if he -
(a) does not use it for such purpose; or
(b) does not surrender it to authorised person within the specified period; or
(c) uses the foreign exchange so acquired for any other purpose for which
purchase or acquisition of foreign exchange is not permissible.
***
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person resident outside India, for carrying on any activity relating to such
branch, office or other place of business.
3. The Reserve Bank may, in consultation with the Central Government,
specify -
(a) any class or classes of capital account transactions which are
permissible;
(b) the limit upto which foreign exchange shall be admissible for such
transactions:
***
13 What are the RESTRICTIONS imposed on a person resident in India
relating to holding of IMMOVABLE property OUTSIDE India ?
Ans. The Reserve Bank of India has framed Foreign Exchange
Management ( Acquisition and Transfer of Immovable Property Outside
India ) Regulations, 2000.
The provisions contained in these regulations are explained as
under :
1. Restriction on Acquisition or Transfer of Immovable Property
OUTSIDE India.
NO person resident in India shall acquire or transfer any immovable
property situated outside India EXCEPT in accordance with -
(a) the Foreign Exchange Management Act; or
(b) the provisions contained in these regulations; or
(c) general permission of the Reserve Bank; or
(d) special permission of the Reserve Bank.
2. “ Exemptions ”
(a) Nothing contained in these regulations shall apply to the property
held by a person resident in India who is a national of a foreign
state.
(b) Nothing contained in these regulations shall apply to the property
acquired by a person resident in India on or before 8th July, 1947
and continued to be held by him with the permission of the Reserve
Bank.
(c) A person resident in India may hold, own, transfer or invest in any
immovable property situated outside India if such property was
acquired, held or owned by such person when he was resident
outside India or inherited from a person who was resident outside
India [Section 6(4)].
(d) A person resident in India may acquire immovable property outside
India -
(i) by way of gift or inheritance from a person referred to in (b) or
(c) above.
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under the Act is dealt with by the appropriate Adjudicating Authority. For
the purpose of adjudication, the Central Government has been
empowered (vice section 16) to appoint the Adjudicating Authorities who
shall hold the inquiry in the manner prescribed under the Act read with
Foreign Exchange Management (Adjudication Proceedings and Appeal)
Rules, 2000.
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(g) Time limit for disposal of appeal. No time limit has been prescribed
for disposal of an appeal by the Special Director (Appeals).
2. Appeal with the Appellate Tribunal ( Sec. 19 )
(a) Establishment of Appellate Tribunal. The Central Government
shall appoint an Appellate Tribunal to hear appeals against the
orders of the Adjudicating Authorities and the Special Director
( Appeals ).
(b) Who can prefer an appeal. The Central Government or any
person aggrieved may prefer an appeal to the Appellate Tribunal.
(c) Right of legal assistance. The appellant may either appear in
person or take the assistance of a legal practitioner or a chartered
accountant of his choice for presenting his case before the
Appellate Tribunal ( Sec. 32).
(d) When can appeal be filed. An appeal can be filed with the
Appellate Tribunal against the order made by -
(i) Special Director ( Appeals ); or
(ii) An Adjudicating Authority other than an Assistant Director of
Enforcement or a Deputy Director of Enforcement.
Thus, the Appellate Tribunal is the second appellate authority which
has original appellate jurisdiction as well as revisionary jurisdiction.
(e) Deposit of penalty. Any person filing an appeal to the Appellate
Tribunal shall, while filing the appeal, deposit the amount of such
penalty with such authority as may be notified by the Central
Government.
Discretion to dispense with deposit of penalty. The Appellate
Tribunal may dispense with the deposit of penalty, if it is of the
opinion that the deposit of penalty would cause undue hardship to
such person. The Appellate Tribunal may impose certain conditions
so as to safeguard the realisation of penalty.
(f) Time limit for filing the appeal. The appeal shall be filed within 45
days from the date of order of the Adjudicating Authority or the
Special Director ( Appeals ) ( excluding the time required in
obtaining a copy of the order ). However, if sufficient cause is
shown, the Appellate Tribunal may condone the delay.
(g) ORDER of Appellate Tribunal
- The Appellate Tribunal may pass such orders as he thinks fit.
It may confirm, modify or set aside the order
appealed against.
- It shall give an opportunity of being heard to the parties before
passing any order.
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works for gain. Where there are more than one respondent, the
appeal shall lie to the High Court within whose jurisdiction any of
the respondents ordinarily resides or carries on business or
personally works for gain.
(b) Appeal by the accused The appeal shall be made to the High court
within whose jurisdiction the appellant (i.e., the accused) ordinarily
resides or carries on business or personally works for gain.
4. “ APPEAL ” to Supreme Court
Unlike the Income Tax Act, there is no provision in FEMA for appeal to
Supreme Court from the order of the High Court. However, the aggrieved
party is free to apply for leave to appeal to the Supreme Court under
Article 136(1) of the Constitution and then prefer an appeal to the
Supreme Court if such appeal is otherwise maintainable.
***
24 The Adjudicating Authority, Special Director (Appeals) and the
Appellate Tribunal - have the same POWERS as are vested in a Civil
Court. Explain.
Ans. As per Section 28, the Special Director (Appeals) and the
Appellate Tribunal shall have the same powers as are vested in a civil
court under the Code of Civil Procedure, 1908 while trying a suit, in
respect of the following matters :
(a) Summoning and enforcing the attendance of any person and
examining him on oath.
(b) Requiring the discovery and production of documents.
(c) Receiving evidence on affidavits.
(d) Requisitioning any public record or document.
(e) Issuing commissions for the examination of witnesses or
documents.
(f) Reviewing its decisions.
(g) Dismissing a representation of default or deciding it ex parse.
(h) Setting aside any order of dismissal of any representation for
default or any order passed by it expires.
(i) Any other matter which may be prescribed by the Central
Government.
“ PROVISIONS ” applicable to Appellate Tribunal and Special Director
(Appeals) ( Sec. 28 )
1. The Appellate Tribunal and the Special Director (Appeals) shall NOT be
bound by the procedure laid down by the Code of Civil Procedure, but
shall be guided by the principles of natural justice.
2. The Appellate Tribunal and the Special Director (Appeals) shall have
powers to regulate their own procedure.
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These accounts may be opened only in the form of term deposit for any
of the three maturity periods, viz. one year and above but less than two
years, two years and above but less than three years and three years
only.
“ RATE of Interest ”
The rate of interest on funds held in these deposit accounts will be in
accordance with the directives issued by the Reserve Bank from time to
time.
“ Permissible Debits/Credits ”
All debits/credits permissible in respect of NRE accounts shall be
permissible in respect of these accounts also.
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Balances in NRO accounts are not eligible for remittance outside India
without the approval of Reserve Bank. Funds received by way of
remittances from outside India in foreign exchange which have not lost
their identity as remittable funds will only be considered by Reserve Bank
for remittance outside India.
“ Grant of Loans / Overdrafts ”
(a) To account holders.
(i) Loans to non-resident account holders may be granted in rupees
against the security of fixed deposits subject to usual norms as are
applicable to resident accounts, for personal purposes or for
carrying on business activities except for the purpose of relenting or
carrying on agricultural/ plantation activity or for investment in real
estate business.
(ii) Authorised dealer/bank may permit overdraft in the account of the
account holder subject to his commercial judgment and compliance
with the interest rate, etc. directives.
(b) To third parties. Loans/overdrafts to resident individuals/firms/companies
in India may be granted against the security of deposits held in NRO
accounts, subject to the following terms and conditions -
(i) The loans shall be utilised only for meeting borrower’s personal
requirements and / or business purpose and not for carrying on
agricultural/plantation activities or real estate business, or for re-
lending.
(ii) Regulations relating to margin and rate of interest as stipulated by
Reserve Bank from time to time shall be complied with.
(iii) The usual norms and considerations as applicable in the case of
advances to trade/industry shall be applicable for such loans/
facilities.
“ Joint Accounts with Residents ”
The accounts may be held jointly with residents.
“ Change of Resident Status of Account Holder ”
(a) From resident to non-resident. When a person resident in India leaves
India for a country (other than Nepal or Bhutan) for taking up
employment, or for carrying on business or vocation outside India or for
any other purpose indicating his intention to stay outside India for an
uncertain period, his existing account should be designated as a Non-
resident (Ordinary) account.
(b) From non-resident to resident. NRO accounts may be re-designated
as resident rupee accounts on the return of the account holder to India
for taking up employment, or for carrying on business or vocation or for
any other purpose indicating his intention to stay in India for an uncertain
period. Where the account holder is only on a temporary visit to India, the
account should continue to be treated as non-resident during such visit.
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