FERA & FEMA

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 THE FOREIGN EXCHANGE MANAGEMENT
ACT, 1999 (FEMA)
• The law regulating certain payments, dealing in foreign
exchange and securities, transactions indirectly
affecting foreign exchange and the import and export
of currency and bullion, for the conservation of the
foreign exchange resources of the country and the
proper utilization thereof in the interest of the
economic development of the country.

• Foreign Exchange Regulation Act, 1973(FERA) was

passed to replace the Act of 1947. 2
 Historical Background :
• Historical Background The Foreign Exchange
Regulation Act of 1973 (FERA) Enacted in 1973
• In the backdrop of acute shortage of Foreign
Exchange in the country.
• FERA had a controversial 27 year stint during
which many bosses of the Indian Corporate world
found themselves at the mercy of the Enforcement
Directorate (E.D.).
• The Foreign Exchange Regulation Act (FERA) was
legislation passed by the Indian Parliament in 1973 by
the government of Indira Gandhi 3

• It came into force with effect from January 1, 1974.

 Cont’d
• FERA imposed stringent regulations on certain kinds
of payments.
• It deals in foreign exchange and securities and the
transactions which had an indirect impact on the
foreign exchange and the import and export of
currency.
• The purpose of the act, inter alia, was to "regulate
certain payments, dealings in foreign exchange and
securities, transactions indirectly affecting foreign
exchange and the import and export of currency, for
the conservation of foreign exchange resources of the 4
country".
 Cont’d
•It was subsequently felt that a better course would be
repeal the existing Foreign Exchange Regulation Act and
enact a new legislation.

•At that stage, the Central Government decided that a

further review of the Foreign Exchange Regulation Act
would be undertaken in the light of subsequent
developments and experience in relation to foreign trade
and investment.

•Reserve Bank of India was according asked to undertake a 5

fresh exercise and suggest a new legislation.
Cont’d
•The Foreign Exchange Regulation Act, 1973(FERA)
was reviewed in 1993 and several amendments
were enacted as part of the on-going process of
economic liberalization relating to foreign
investments and foreign trade for closer interaction
with the world economy.

•A Task Force constituted for this purpose submitted

its report in 1994 recommending substantial
changes in the existing Act.
6
•
 Cont’d
• The Foreign Exchange Management Act(FEMA)
was an act passed in the winter session of Parliament
in 1999 which replaced Foreign Exchange Regulation
Act.
• FERA was repealed in 1999 by the government
of Atal Bihari Vajpayee.
• The Foreign Exchange Management Act ,
liberalized foreign exchange controls and restrictions
on foreign investment.
• This act seeks to make offenses related to foreign
7
exchange civil offenses.
• It extends to the whole of India.
Cont’d
• It had become the need of the hour since FERA
had become incompatible with the pro-
liberalisation policies of the Government of India.
• FEMA has brought a new management regime of
Foreign Exchange consistent with the emerging
framework of the World Trade Organisation(WTO).
• It is another matter that the enactment of FEMA
also brought with it the Prevention of Money
Laundering Act 2002, which came into effect from
1 July 2005. 8
 Cont’d
•Significant developments took place after 1993
such as substantial increase in our foreign
exchange reserves, growth in foreign trade,
rationalization of tariffs, current account
convertibility, liberalization of Indian investment
abroad, and increased access to external
commercial borrowing by Indian corporate and
participation of foreign institutional investors in
our stock markets.
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 FERA
•Foreign exchange transactions were regulated in India
by the Foreign Exchange Regulation Act (FERA) 1973.
This act also sought to regulate certain aspects of the
conduct of business outside the country by Indian
companies and in India by foreign companies.

•The FERA was widely described as a draconian and

obnoxious law. Following the economic liberalization
ushered in 1991, some amendments to the FERA
were effected in 1993.
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 Objectives of Foreign Exchange Regulation Act
(FERA)
1. The principle objective of the Foreign Exchange Regulation
Act (FERA) is to prevent the outflow of Indian currency
2. To regulate certain payments.
3. To regulate dealings in Foreign Exchange and Securities.
4. To regulate the transactions indirectly affecting Foreign
Exchange.
5. To regulate Import and Export of currency and bullion.
6. To conserve the Foreign Exchange resource of the country
and to utilize the same in the interests of the economic
development of the country.
7. To regulate holding of immovable property outside India.
8. To regulate employment of foreign nationals.
9. To regulate acquisitions, holding, etc. of immovable
property in India by non-residents. 11
10. To regulate foreign companies.
 From FERA to FEMA
Under FERA it was necessary to obtain Reserve Bank
of India permission either special or general in
respect of most of the regulation, but FEMA has
brought change in this regard except section 3 which
relate to dealing in foreign exchange etc. no other
provision of FEMA requires Reserve Bank permission.
The demand of new legislation was basically on the
following accounts:-

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 From FERA to FEMA
1. FERA was introduced in 1973 when India’s foreign exchange reserve
position was not satisfactory. Accordingly strict controls were required
on the use of the Foreign Exchange with improvement in the Foreign
Exchange position; it is argued that such strict controls are not required
now.

2. Many experts state that since India has qualified for article VII under the
article of association of IMF the rupees is deemed to be convertible on
current account hence FERA must be further liberalized. Corporate
sector feels that a current account transaction is possible without
permission of RBI.

3. The private corporate sector has been complaining for long against what
is termed as DRACONIAN provision of FERA, which gave powers to
Enforcement Directorate, arrest any person, search any premises, seize
document ad start proceedings against any person for the violation of
FERA. The contravention / violation of FERA were treated as a criminal
offence and the burden of proof was on guilty 13
Current Account Transactions
Few Examples
• Payment for imports of goods
• Remittance of interest on investment made and
funds borrowed from abroad after tax
deductions
• Remittance of Dividend if the investment was
allowed without any condition
• Booking with Airlines/Shipping
• Salary/remuneration to Foreign Directors subject
to restrictions in any other law
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 Capital Account Transactions
• "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 like:

• Changes in Assets/ Liabilities

• Transfer/ issue of security
• Borrowing/ Lending
• Export, import or holding of currency or currency notes
• Giving guarantee

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 Restrictive Provisions of FERA
• Restrictions on dealing in Foreign exchange (sec.8)
• Restrictions on payment (SEC.9)
• Restriction on import and export of certain currency
and bullion (SEC.13)
• Duty of persons entitled to receive foreign exchange
(SEC.16)
• Payment for exported goods. (SEC.18)
• Regulation of export and transfer of securities
( SEC.19)
• Restrictions on holding of immovable property 16
outside India.(SEC.25)
Cont’d
• Restrictions on acquisition, holding etc. of
immovable property in India. (Sub Section 1 of
Section 31)
• Restrictions on appointment of certain persons and
companies as agents or technical or management
advisors in India. (Sec.28)
• Restrictions on establishment of place of business in
India.(sec.29)
• Prior permission necessary for nationals and foreign
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states for taking up employment in India.
Provisions Relating To Enforcement ,
Penalty And Prosecution
• Sections dealing with enforcement (SEC. 34-
44)

• Penalty ,Adjudication and Appeal.( SEC.50-

53)

• Offences and Prosecutions: (SEC.56-57)

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FEMA

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 Foreign Exchange Management Act, 1999
•The FEMA 1999 replaced the Foreign Exchange
Regulation Act 1973 which regulated Foreign
exchange transactions in India and which sought to
control certain aspects of the conduct of business
outside the country by Indian companies and in India
by foreign companies.

•This act aims at consolidating and amending the law

relating to foreign exchange with the objective of
facilitating external trade and payments and for
promoting the orderly developments ant the 20

maintenance of foreign exchange markets in India.

 Foreign Exchange Management Act, 1999
•The FEMA which came into effect from January 1st
2000 extends to whole of India and also applies to all
the branches, offices and agencies outside India
owned or controlled by a person resident in India.

Objectives of FEMA –

1. To facilitate the external trade and the payments.

2. To promote the orderly developments and
maintenance of foreign exchange market. 21
 The important features noticed in the act as
compared to the previous one are
1. The nature of current account and the capital
account transactions has been clearly defined.

2. The new enactment is positive in the sense that all

the current account transactions not otherwise
restricted can be freely carried on.

3. The definition of the residents and the non-

residents take into account the duration of their
stay in India, as in the case of Income Tax Act. 22
Administrative Set-up

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Administrative Set-up
•The Central Government has been empowered under
section 46 of the foreign exchange management act to make
rules to carry out provisions of the act.

•Similarly, Section 47 empowers the Reserve Bank of India to

make regulation to carry out the act and the rule made their
under.

•Further, section 41 provides that the Central Government

may, from time to time, give to the Reserve Bank such
general and special directions as it thinks fit and the Reserve
Bank shall comply with such directions. Thus ultimately the
Reserve Bank has been charged with the power as well as 24

the responsibility to administer foreign exchange in India.

 FOREGIN EXCHANGE MANAGEMENT ACT

CENTRAL GOVERNEMENT

RESERVE BANK OF INDIA

FOREGIN EXCHANGE DEALERS ASSN OF INDIS

AUTHORISED PERSON

AUTHORSIED MONEY AUTHORISED

CHANGERS DEALERS

CATEGORY 2 CATEGORY 1 CATEGORY 3

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FULL RISTRICTED
 Administrative Set-up
Authorized Persons
•While the RBI has the authority to administer the foreign
exchange in India, it is recognized that it cannot do so by
itself.
•Foreign exchange is received or required by a large
number of exporters and importers in the country spread
over a vast geographical area it would be impossible for
RBI to deal with them individually.
•Therefore, provision has been made in the act section 10
enables the RBI to authorize any person to be known as
authorized person to deal in foreign exchange or in
foreign securities, as an authorized dealer money
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changer or off shore banking unit or in any other
manner as it deems fit.
 Administrative Set-up
Authorized Persons
•An authorized person should comply with the general
or special directions or orders of the RBI in all his
foreign exchange dealings. Before undertaking any
transaction in foreign exchange he should obtain
from his customer such declaration and information
as to insure that the provision of the act are not
violated.
•Where the authorized person is not satisfied he
should refuse in writing to undertake the
transactions. If he has a reason to believe that any
contravention or evasion of the regulation is 27
contemplated he should report the matter to RBI.
 Administrative Set-up
Authorized Dealers
Authorized dealers are the banks financial institutions and
other institutions authorized by RBI to deal in foreign exchange.
An authorized dealer should comply with the directions and
instructions of the RBI given from time to time.

Authorized Dealer - Category 1

A major portion of actual dealing in Foreign Exchange from the
customers (Importers, exporters and receiving on making
personal remittances) is dealt with by such of the bank in India
which have been authorized by the RBI to deal in the foreign
exchange. These banks are known as authorized dealer
category 1. They are authorized to carry out all current
account and capital account transactions as permitted by RBI
from time to time. Any exporter or importer should route his 28
transactions through authorized dealer category 1.
 Administrative Set-up
Authorized Dealer – Category 2
They comprise of upgraded full fledged money changers, co-
operative banks, regional rural banks and others. They can
purchase foreign exchange and sell foreign exchange for private
and business visits abroad undertaken by residents, which is the
functions performed by a full fledge money changers.
In addition, they can also execute for resident specified non
trade related a current account transactions such as those
relating to education, medical expenses, subscriptions, etc.

Authorized Dealer- Category 3

They comprise of selected financial and other institutions. They
are permitted to carry out transactions incidental to the foreign 29
exchange activities undertaken by them.
 Administrative Set-up
Foreign Exchange Dealer’s Association of India
(FEDAI)
•FEDAI was established in 1958 as an association of all
authorized dealers in India.
•All authorized dealers of Category 1 & 3, currently
numbering over 90, are its members. It has its head
quarter at Mumbai and local offices at Bangalore,
Kolkata, Chennai and New Delhi.
•The affairs if FEDAI are managed by a managing
committee at the head office and respective local
committees at local offices. The committees are 30
represented equally by banks incorporated in India
and outside India.
 Administrative Set-up
Foreign Exchange Dealer’s Association of India (FEDAI)
•The principles of FEDAI are –
•To frame rules for the conduct of Foreign exchange business in
India. The rules cover various aspects like hours of business,
charges of foreign exchange transactions, quotation of rates
to customers, inter bank dealing etc.
•All authorized dealers have given undertakings to the reserve
bank to abide by these rules.
•To coordinate with RBI in proper administration of exchange
control.
•To circulate information likely to be of interest to its members.
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 Administrative Set-up
Authorized Money Changers:
To provides facilities for encashment of foreign
currency for tourists etc , certain established firms,
hotel and other organizations have been permitted to
deal in foreign currency notes, coins and travelers
cheques subject to direction issued to them from time
to time. These firms and organizations are called
‘Authorized Money Changer’. It may be a ‘full fledged
money changers’ or ‘a restricted money changers’.

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 Administrative Set-up
Full fledged money changer – Is authorized by RBI to undertake
both purchases of foreign exchange and sell transactions with
the public for private and business visits abroad. Departments
of posts, urban cooperative banks and others are recognized as
full fledged money changers.

A restricted money changer – Is authorized only to purchase

foreign currency notes, coins and travelers cheques subject to
the conditions that all such collections are surrendered by him
in turn to authorized dealers in foreign exchange. The system
of approval of restricted money changers by RBI has
discontinued. Now authorized dealers and full fledged money
changers can enter into agency/ franchise agreements with
entitles for the purpose of carrying on restricted money 33
changing business.
 A Bird – Eye – View of FEMA Provisions
FEMA is brief statute with only 49 sections. Important provisions of FEMA are
summarized below:

Sections 2 deals with the definition of various expressions used in the Act.

Section 3 seeks to prohibit dealings in foreign exchange except through an

authorized person.

Section 4 no person, resident in India, shall acquire, hold, own, possess or

transfer any foreign exchange, foreign security or any immovable property
situated outside India, without permission from the RBI.

Section 5 any person may sell or draw foreign exchange to or from an authorized
person if such sale or drawl is current account transaction.

Section 6 any person may sell or draw foreign exchange to or from an authorized
person if such sale or drawl is capital account transaction. The RBI may, in
consultation with the Central Government, specify any class or classes of capital 34
account transaction which are permissible and limit upto which foreign
exchange shall be admissible for such transaction.
 A Bird – Eye – View of FEMA Provisions
Section 7 every exporter of goods or services shall furnish to the RBI bank details
regarding the export value of such goods or services.

Section 8 where any amount of foreign exchange is due or accrued o any person resident
in India, such person shall take steps to realize and repatriate to India, such foreign
exchange within a specified period of time.

Section 9 seeks to provide for exemptions in respect of realization and repatriation in the
cases specified therein. Most of the transactions specified therein were exempted in term
of various notifications of the RBI.

Section 10 enables the RBI to authorize any person to be known as authorized person to
deal in foreign exchange or in foreign securities, as an authorized dealer money changer
or off shore banking unit or in any other manner as it deems fit.

Section 11 empowers the RBI to issues direction to authorized persons and impose
penalty if direction given by RBI is contravened by any authorized person.

Section 12 empowers the RBI to inspect the authorized person who shall have to produce
such books, a/c’s and other documents, etc. as may required by the officers making
inspection. 35
 A Bird – Eye – View of FEMA Provisions
Section 13 deals with the contraventions as civil offences and the adjudicating officers are
empowered to impose penalties.

Section 14 lays down the procedure for payments of penalties and the consequences of
civil imprisonment for failure to make full payment of the penalty within specified period.
It provides that the detention order shall be executed like warrant of arrest.

Section 16 provides for appointment of central government officers as Adjudicating

Authorities for holding an enquiry for the purpose of imposing any penalty.

Section 17 provides for establishment of one or more special Directors to hear appeal
against the orders of Adjudicating Authorities.

Section 18 provide establishment of Appellate Tribunal to hear appeals against the order
of adjudicating authorities and special directors.

Section 34 provides for filling an appeal to the Civil Court against the decision or order of
the Adjudicating Authorities or by Appellate Tribunal.

Section 35 provides for filling an appeal to the High Court against the decision or order of 36
the Appellate Tribunal.
 A Bird – Eye – View of FEMA Provisions
Section 36 provides for establishment of Directorate of Enforcement.

Section 38 provides that a Directorate of Enforcement and other officers of

enforcement shall have the power of investigation conferred in Income Tax
authorities under Income Tax Act, 1961.

Section 46 empowers the Central Government to frame the rules

Section 47 empowers the RBI to frame the rules to carry out the provisions of this
enactment.

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Comparison between FERA and
FEMA

38
S.no Basis of FERA FEMA
Difference

1 Generation FERA was the first act FEMA is the outcome of economic
for the foreign exchange reforms undertaken by the
transactions government of . So it is a next
generation statute existing from
FERA.
2. Object The object of FERA was The object of FEMA is consolidating
preservation and rational and amending the law relating to
use of foreign exchange foreign exchange with the objective
reserves. of facilitating external trade and
payment and for promoting the
orderly development and
maintenance of foreign exchange
market in .

3. Position of Indian citizens under this Indian citizens under this act means
residence act means Indian persons. all those who are residing in .

4. Offence Breaking rule under the Breaking the rule under this act is
act makes the person considered only for the breach of 39
liable for criminal contract.
offence.
S.n Basis of FERA FEMA
o Difference

5. Penalty In case of offence of In case of default fine is to paid

not abiding with the three times of the effected
rules the person can be amount and in case it is not
held liable for the fine determined the fine will be Rs.
of Rs.5000/- or five 2,00,000/- and in case the breach
times effected amount continues the fine can be
whichever is more. imposed Rs. 5000/- per day.
6. Right of There is no right to The breach of law can be
termination terminate the error. terminated
7. Number of It has 81 sections It has 49 sections
sections
8. Exemptions In FERA on producing In FEMA Central Government
the complete and true doesn’t have any such right.
description the Central
Government can 40
exempt from the
charges and the fine.