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FERA was introduced at a time when foreign exchange (forex) reserves of the country were low, forex being a scarce commodity. FERA therefore proceeded on the presumption that all foreign exchange earned by Indian residents rightfully belonged to the Government of India and had to be collected and surrendered to the Reserve bank of India (RBI).

It regulated not only transactions in forex, but also all financial transactions with non-residents. FERA primarily prohibited all transactions, except to the extent permitted by general or specific permission by RBI.

Constrained freedom of foreign investors The aim was to regulate foreign exchange transactions to limit the use of foreign exchange resources which apparently constrained the freedom of foreign investors.

Huge delays in processing of information those dealing with foreign exchange were subjected to stricter scrutiny. The considerable discretionary powers vested in regulatory agencies resulted in huge delays in the processing of applications, and the whole transactions to limit the use of foreign exchange resources which apparently, constrained the system developed into an institutional arrangement that promoted rent-seeking and discrimination.

Declining social profitability There was evidence of declining social profitability of industrial investment during this period. The lack of technological dynamism, the absence of Competition and the protection of markets drastically restricted the development of a competitive industrial sector in India during this period . Greater power to govt. & RBI This Act had given much wider powers to the Government and Reserve Bank of India (RBI) in dealing with matters pertaining to foreign exchange regulations, regulating the working of foreign companies, or companies incorporated in India.

The Foreign Exchange Regulation Act was replaced by the Foreign Exchange Management Act as it was an impediment in India's to go global. India's foreign exchange transactions were governed under the Foreign Exchange Regulation Act until June 2000. This law had been enacted in 1973 when the Indian economy was facing a crisis and foreign exchange had become a precious commodity. By the nineties, FERA had outlived its utility and was in fact, an impediment in India's effort to go global and compete with other developing countries. Thus, there was a need to scrap FERA and the Foreign Exchange Management Act, 1999 came into effect on June 1, 2000.

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 Objective 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 exchange market in India. Applicable to the all parts of India Also applicable to all branches, offices and agencies outside India owned or controlled by a person who is resident of India

FEMA head-office also known as Enforcement Directorate is situated in New Delhi and is headed by a Director. The Directorate is further divided into 5 zonal offices at Delhi, Bombay, Calcutta, Madras and Jalandhar and each office is headed by a Deputy Directors Each zone is further divided into 7 sub-zonal offices headed by the Assistant Directors and 5 field units headed by the Chief Enforcement Officers

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. In such liberal atmosphere, the government realized that possession of forex could no longer be regarded as a crime

IN FEMA Terms like Capital Account Transaction, current Account Transaction, export service etc. were defined , but not in FERA. The restrictions on drawl of Foreign Exchange for the purpose of current Account Transactions, has been removed 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.

The Reserve Bank of India and central government would continue to be the regulatory bodies. Presumption of extra territorial jurisdiction as predicted 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

PROVISIONS

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

FEATURES

Presumption of negative intention (Mens Rea ) and joining hands in offence (declined) existed in FERA These presumptions of Mens Rea and abatement have been excluded in FEMA

Definition of "Authorized Person" in FERA was a narrow one ( 2(b) The definition of Authorized person has been widened to include banks, money changes, off shore banking Units etc. (2 ( c))
An "Authorised Person" under FEMA, is a person who is authorized by Reserve Bank to deal in Foreign Exchange. For being registered as an "Authorized Person", necessary application along with relevant documents has to be furnished to Reserve Bank. An "Authorized 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.

AS COMPARED WITH INCOME TAX ACT, there was a big difference in the definition of "Resident", under FERA, and Income Tax Act The provision of FEMA, are in consistent with income Tax Act, in respect to the definition of term " Resident".
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. Now the 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 nonresident under the income Tax Act, 1961 will also be considered a non-resident for the purposes of application of FEMA.
But a person who is considered to be nonresident under FEMA may not necessarily be a non-resident under the Income Tax Act. *For instance a business man going abroad and staying there for a period of 182 days or more in a financial year will become a non-resident under FEMA.

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

FERA 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.

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 non-resident 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 resident ship has

An appeal against the order of "adjudicating office", before " Foreign Exchange Regulation Appellate Board went before High Court. The appellate authority under FEMA is the special Director ( Appeals) Appeal 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)

ADJUDICATING AUTHORITY The inquiry of any breach 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.

The inquiry of any contravention of FEMA is conducted by an Adjudicating Authority.

Appeal from an order of "Adjudicating Authority" lies before" special Director (appeal) "Appellate Tribunal" is entitled to hear appeal arising out of an order from "Adjudicating Authority" and "special Director (appeal). An appeal from the decision of "Appellate Tribunal" lies before High Court.

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.

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, 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.

Relevant offences are as follows:

DETAILS IN FOREIGN EXCHANGE: Only a person Authorized by Reserve Bank can deal in foreign Exchange 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.

QUANTUM OF PENALTY

The monetary penalty payable under FERA, was nearly the five times the amount involved.
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.

RIGHT OF ASSISTANCE DURING LEGAL PROCEEDINGS.

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

POWER OF SEARCH AND SEIZE

FERA conferred wide 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

1.

Up to US $ 5,000 in every calendar year for foreign travel (increased from the limit of US $ 3,000 under FERA).

2. Up to US $ 25,000 per trip for a business trip or for attending a conference abroad, irrespective of the length of the trip (under FERA, you had limits per day plus an entertainment allowance). 3. For gifts up to US $ 5,000 per beneficiary per annum (under FERA, the limit was US $ 1,000 and restricted only to defined relatives). 4. For donations up to US $ 5,000 per beneficiary.

5. For maintenance of close relatives abroad up to US $ 5,000 per recipient. 6. For foreign studies up to US $ 30,000, or the estimate from the foreign institution, whichever is higher.

7. For meeting expenses for medical treatment abroad, up to the estimate from doctor in India or hospital or doctor abroad.
*There do not seem to be any restrictions on payments to be made in forex for various sundry expenses, such as purchase of books or software for your own use, for which there were certain limits under FERA.

Exchange Control Regulations have been framed by RBI, being the Exchange Control Authority of India. These regulations have been framed in terms of the provisions of the FEMA,1999. The various exchange control Rules and Regulations relating to export of goods and services are: FEM (Current Account Transactions) Rules,2000. FEM (Export of goods & Services ) Regulation,2000. FEM (Manner of Receipt & Payment)

1.

2.

3.

(a ) Purchase and sale of and other dealings in forex and maintenance of balances at foreign centres (b) Procedure for realisation of proceeds of exports (c) Payments to NRI or to their accounts in India (d) Transfer of securities between residents and non-residents and acquisition and holding of foreign securities (e) Foreign travel with exchange (f) Export and import of currency, cheques, drafts, travellers cheques and other financial instruments, securities, etc. (g) Activities in India of branches of foreign firms and companies and foreign nationals

(h) Fdi and portfolio investment in India including

investment by non-resident Indian nationals/persons of Indian origin and corporate bodies predominantly owned by such persons (i) Appointment of non-residents and foreign nationals and foreign companies as agents in India (j) Setting up of joint ventures/subsidiaries outside India by Indian companies (k) Acquisition, holding and disposal of immovable property in India by foreign nationals and foreign companies (l) Acquisition, holding and disposal of immovable property outside India by Indian nationals resident in India.

Capital Account Transactions (By a person resident in India) Investment in foreign securities Loan raised in foreign currency in India or abroad Acquisition or transfer of immovable property outside India. Guarantees issued in favour of a person resident outside India Export, import or holding of currency or currency notes Loans and overdrafts from a person resident outside India; Maintenance of foreign currency accounts in India and outside India Insurance policy from an insurance company outside India Remittance of capital assets outside India Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad

1. 2. 3.

4.
5. 6. 7. 8. 9. 10.

Two types of prohibitions

General Prohibitions A person shall not undertake or sell or draw foreign exchange to or from an authorised person for any capital account transactions, subject to circulars and notifications specified by RBI.
Special Prohibitions A non resident person shall not make investment in India in any form in any company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage, - In the business of chit funds - as nidhi company - in agricultural or plantation activities - in real estate business or construction of farm houses - in trading in Transferable Development Rights (TDRs)

Current Account Transactions

A transaction other than a capital account transaction also includes, 1. payments due in connection with - foreign trade - other current business or services, - Short term banking and credit facilities in ordinary course of business. 2. payments due as - interest on loans - Net income from investments - remittances for living expenses of parents, spouse and children residing abroad - expenses in connection with foreign travel, education and medical care of parents, spouse and children

Foreign Exchange Management (current account transactions) rules, 2000 The Classification of current account transactions which are, - Totally prohibited - Permitted, subject to the prior approval of concerned ministry, Central government - Permitted, subject to prior approval of the RBI Exhaustive List For transactions not covered in this notifications, authorised dealers are free to release foreign exchange upon the satisfaction that the transactions will not involve and is not designed for violation of the act or rule made there under.

Under FEMA an Indian company with foreign equity participation is treated at par with other locally incorporated companies. Accordingly, the exchange control laws and regulations for residents apply to foreigninvested companies as well

Foreign investment is freely permitted in almost all sectors. Foreign Direct Investments (FDI) can be made under two routes Automatic Route and Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the RBI or GOI for the investment. Under the Government Route, prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required

FEMA Regulations prescribe the mode of investments i.e. manner of receipt of funds, issue of shares/convertible debentures and preference shares and reporting of the investments to RBI. The impact of amendment in act from FERA to FEMA is evident in the BOP table shown

After the amendment in 1993 by allowing the fully convertibility of the Indian rupee on current account the Forex inflow increased from Rs.18 bn in 1992-93 to Rs. 144 bn in 1993-94 forex outflow increased from Rs.1 bn in 199293 to Rs. 11 bn in 1993-94.This shows the impact on forex reserve as well which increased from Rs. 8.8 bn in 1992-93 to Rs.267.8 bn in 1993-94

Year (April-March) 1991-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008 (April , May)

Amount of FDI inflows (In US$ million) 16,698 2,908 4,222 3,134 2,634 3,759 5,546 15,726 24,579 7,681