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Chapter 6


Foreign Exchange

Foreign exchange is the system or process of

converting one national currency into another, and
of transferring money from one country to another.
Foreign currency means any currency other than
Indian currency.
Foreign security means any security, in the form of
shares, stocks, bonds, debentures or any other
instrumental denominated or expressed in foreign
currency but where redemption or any form of
return such as interest or dividends is payable in
Indian currency.

FERA | History
The Foreign Exchange Regulation Act (FERA) :
was a legislation passed by the Indian
Parliament in 1973 and came into force with
effect from January 1, 1974 with the goal of
conserving India's foreign exchange resources.
The country was facing a trade deficit, which
was followed by a devaluation of the currency
and an increase in the price of imported oil.
act specified which foreign exchange
transactions were permitted, including those
between Indian residents and nonresidents.

FERA | Introduction
The Foreign Exchange Regulation Act (FERA) :
Deals with laws which relate to foreign exchange
in India.
FERA emphasized strict exchange control over
everything that was specified, relating to foreign
Law violators were treated as criminal offenders
which included imprisonment as per code of
criminal procedure, 1973.
at minimizing dealings in foreign
exchange and foreign securities.

FERA | Introduction

Government and the Reserve Bank of India were

vested with powers to regulate foreign equity in
companies operating in India.
Companies in low-priority areas such as consumer
goods could continue with 40 per cent equity.
Coca-Cola came under this category.
FERA applies to the whole of India, to citizens of
India outside India and to branches and agencies
outside India registered in India .
FERA consists 7 Chapter and 81 complex sections.

FERA | Reasons

Low foreign exchange (Forex) reserves

Forex is a scarce commodity.
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).
FERA primarily prohibited all transactions,
except ones permitted by RBI.

FERA | Objectives

To regulate certain payments.

To regulate dealings in foreign exchange and
To regulate transactions, indirectly affecting
foreign exchange.
To regulate the import and export of currency.
To conserve precious foreign exchange.
The proper utilization of foreign exchange so
as to promote the economic development of
the country.

FERA | Objectives

To regulate employment of foreign

To regulate foreign companies.
To regulate acquisition, holding etc of
immovable property in India by nonresidents.
To see that the foreign exchange
legitimately due to India should be

FERA | Features

RBI can authorize a person / company todeal in foreign exchange.

RBI can authorize the dealers to do transact the Foreign
Currencies, subject to review and RBI was given power to revoke
the authorization in case of non-compliancy.
RBI would authorize the persons as Money Changers who will
convert the currency of one nation to currency of their nation at
ratesDetermined by RBI
NO person, other than authorizeddealer would enter inany
transaction of the foreign currency.
For whatever purpose Foreign exchange was required, it was to be
used only for that purpose. If he feels that he cannot use the
currency of that particular purpose, he wouldsell it to a
authorized dealerwithin 30 days.

FERA | Features

No person in India, without permission from RBI

shallmake payments to a person resident outside
Indiaand receive any payment from a person from
outside India.
No person shall draw issue or negotiate anybill of
exchangein which a right to receive payment outside
India is created.
No person shall makeany credit in an account of a
person resident out of India.
No person except authorized by RBI shallsend foreign
currency out of India.
A person who has right to receive the foreign exchange
would havenot to delay the receipt of the foreign

FERA | Restrictions

Regulation of dealings in Foreign Exchange:

Take permission from the Reserve Bank for
Foreign Exchange Transactions.
Restrictions on Payments: No body shall

make any payment to or for any person outside

receive any payment on behalf of anybody outside

Restrictions regarding assets held by Non

residents and Import and Export of certain
currency and Bullion.

FERA | Restrictions

Prior permission of Reserve Bank required for

taking up employment in India by Nationals of
foreign state.
Restrictions on appointment of certain persons
and companies as agents or technical or
management advisors in India.
FERA was enacted so that all forex earnings by
companies and residents have to reported and
surrendered (immediately after receiving) to
RBI (Reserve Bank of India) at a rate which was
mandated by RBI.

FERA | Summary

To sum up, FERA prescribed a policy

nothing (forex transactions) is
mentioned in the act.
The Experts called it a Draconian
Actwhich hindered the growth and
modernization of Indian Industries.

FERA | Example
Coca Cola Example:
Coca-Cola was India's leading soft drink until
1977 when it left India after a new
government ordered the company to turn
over its secret formula for Coca-Cola and
dilute its stake in its Indian unit as required by
the Foreign Exchange Regulation Act (FERA).
In 1993, the company (along with PepsiCo)
returned after the introduction of India's
Liberalization policy.

Reasons to repeal FERA

Substantial increase in the foreign exchange

Growth in Liberalization of Indian Investments abroad.
Foreign trade.
FERA created flourishing black market in foreign
exchange. It brought into the economic lexicon the
word HAWALA.
Increased access to external commercial borrowings
by Indian corporates.
Participation of foreign investors in the Stock markets.

Hawala Transaction

FEMA | Introduction

TheForeign Exchange Management Act

(FEMA) was an act passed in the winter session
of Parliament in 1999 which replaced FERA.
FEMA became an act on the 1st day of June,
To relax the control on foreign exchange in India.
The deals in Foreign Exchange were to be
managed instead of regulated.
The switch to FEMA shows the change on the
part of the government in terms of the foreign

FEMA | Introduction

Transition from the era of permissions to regulations.

The emphasis of FEMA is on RBI laying down the
regulations rather than granting permissions on case
to case basis.
FEMA expanded the list of activities in which a
person/company can undertake forex transactions.
Through FEMA, government liberalized the exportimport policy, limits of FDI (Foreign Direct
Investment) & FII (Foreign Institutional Investors)
investments and repatriations, cross-border M&A and
fund raising activities.

FEMA | Features

Non compliance with the regulation is

diluted. Its only of civil & no criminal
Nature of current account & capital account
transactions have been clearly defined.
All the current account transactions can be
freely carried out.
Definitions of residents & non residents
taken into account.

FEMA | Features

U/s 46 the central government has been

authorized to carry out provisions of the
Section 47 empowers RBI to make rules &
regulations to carry out provisions of the
Section 41 central government may from
time to time give directions to RBI.
RBI has the ultimate power & responsibility.

FEMA | Objectives

The main objective behind the Foreign

Exchange Management Act (1999) is to
consolidate and amend the law relating to
foreign exchange with the objective of
facilitating external trade and payments.
To promote the orderly development and
maintenance of foreign exchange market in
To control certain aspects of the conduct of
business outside the country by Indian
companies and in India by foreign companies.

FEMA | Objectives

Regulation of employment business and

investment of non-residents .
To regulate foreign payments.

To Whom Act is Applicable ?

The FEMA, is applicable

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.

Broadly speaking FEMA, covers, three different

types of categories, and deals differently with
them. These categories are:

Person Resident In India
Person Resident Outside India

A. Person

For the purpose of provisions, a person shall

include any of the following:

An individual
A Hindu Undivided family
A company
A Firm
An association of persons or a body of individuals,
whether incorporated or not,
Every artificial judicial person, not falling within any of
the preceding sub clauses, and
Any agency, office or branch owned or controlled by
such person.

B. Person resident in India

A person who has been residing in India for more

than 182 days, in the last financial year. This means
if a person has to be assessed, as to whether he is
person resident in India, for any offence committed in
August 2001, then he should be residing in India for
more than 182 days during April 2000 to March 2001
Any person or body corporate registered or
incorporated in India, or
An office, branch or agency in India owned or
controlled by a person resident outside India, or
An office, branch or agency outside India owned or
controlled by a person resident in India.

C. Person resident outside


Simply putting it, "a person resident

outside India" means "a person who is
not resident in India"

FEMA | Important Terms

Authorized Person:

Authorized under the Act to deal in foreign exchange

Capital account transaction:
Alters the assets or liability
Currency notes, Money order, cheque, drafts etc
Currency Notes:
Coin and bank notes
Currency Account Transaction:
Transactions other than capital account transactions
Indian Currency: Indian rupees

FEMA | Important Terms


Foreign Currency:

Security expressed in foreign currency


Means foreign currency

Foreign Security:

Other than Indian currency

Foreign Exchange:

Goods and services from India to outside

Goods and services from outside to India


Shares, Stock etc as defined in the Public Debt Act of 1994

FEMA | Important Terms

Repatriate to India: Realized foreign exchange to India

Service: Banking, Financing, insurance etc

Transfer: Sale, Purchase, Exchange etc
Non-Resident Indian (NRI): Citizen of India residing
Overseas Corporate Body (OCB):

A company, firm etc.. Owned at least 60% by NRIs

Person of Indian Origin (PIO):

Citizen of country other then Bangladesh and Pakistan, if
Any time held Indian passport or
Either of his parents or grandparents was citizen of India
The Person is spouse of an Indian citizen


To comply with RBI directions

Not to engage in un authorized
Ensure compliance of FEMA provisions
To produce books, accounts etc


To deal in or transfer any foreign

Receive payments by order
To sell or purchase foreign exchange for
current account transactions
To sell or purchase foreign exchange for
permissible capital account transactions

Powers of Reserve Bank of


statements, information or particular
authorized person has failed to furnish
Securing compliance with the provisions
of Act

FEMA | Provisions in Section


Prohibits dealings in foreign exchange except

through an authorized person
Make any payment 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 for
acquisition or creation or transfer of a right to
acquire, any asset outside India by any person.

FEMA | Provisions

SECTION 5 deals with current account transaction

Any person may sell or draw foreign exchange to or from an

authorized person if such sale or drawl is a current account

SECTION 6 - deals with capital account transactions

Restrains any person resident in India from acquiring, holding,

owning, possessing or transferring any foreign exchange, foreign
security or any immovable property situated outside India except
as specifically provided in the Act.

This section allows a person to draw or sell foreign exchange

from or to an authorized person for a capital account transaction.

FEMA | Provisions

SECTION 7 - deals with export of goods and services.

SECTION 8 and 9

Every exporter is required to furnish to the RBI or any other

authority, a declaration etc. etc. regarding full export value.
casts the responsibility on the persons resident in India who
have any amount of foreign exchange due or accrued in
their favor to get same realized and repatriated to India
within the specific period and the manner specified by RBI.

SECTIONS 10 and 12

deals with duties and liabilities of the Authorized persons

authorized dealer, money changer, off shore banking unit or
any other person for the time being authorized to deal in
foreign exchange or foreign securities.

FEMA | Provisions
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 up to 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.

FEMA | Provisions



If a person fails to make full payment of the penalty

imposed with in a period of 90 days, he shall be liable to
civil imprisonment.
Empowers the Directorate of Enforcement and Officers of
the Reserve Bank of India as may be authorized by the
central Govt. in this behalf to compound the offences.


Empowers the central Govt. to appoint the as many

adjudicating authorities as it may think fit for holding

FEMA | Provisions

Empowers the central Govt. to appoint one or
more special Directors to hear the appeals against
the orders of the Adjudicating Authorities.
Empowers the central Govt. to establish Appellate
Tribunal to hear appeals against the orders of
Adjudicating Authorities and special Director.
makes provisions as regards appeals to
Appellate Tribunal.

FERA vs FEMA | Similarities

The RBI and central government would

continue to be the regulatory bodies.
jurisdiction as envisaged in section (1) of
FERA has been retained.
continues to be the agency for
enforcement of the provisions of the law
such as conducting search and seizure.

FERA vs FEMA | Differences

Points of

FEMA -2000

FERA -1973


There are 49 sections out of

which 12 section relate to
operational part and rest
with penal provisions

There were 81 sections

out of which 32 sections
related to operational
part and rest deals with
penalty, appeals etc.

2. Nature

Basically it is a civil law

It was considered as a
criminal law

3. Applicability

The Act applies to all

branches , offices and
branches outside India
owned or controlled by a
person resident in India

The Act applied to all

citizens of India and to
branches and agencies
outsides India and to
branches and agencies
outside India

4. New Terms

Capital account
transactions, current

These terms were not


FERA vs FEMA | Differences

Points of

FEMA -2000

FERA -1973


Limited to three times the

sum involved if it is
quantifiable .If it is not
quantifiable .

Five times of the sum

involved + imprisonment
in most of the cases

6. Object

The object is to encourage

external trade.

The object was to

control, regulate and
prohibits foreign
exchange transactions

7. Legal Help

The complainant has full

right to take legal help
from a lawyer or a
chartered accountant

There was no provision

for legal assistance

8.Power of Police

The power to the police

officers has restricted to
great extent

Extensive powers had

given to police officers

9. Definition of

It has been extended to

It was limited in case of