Foreign Exchange

Control
BBA IB FEO –
FERA
 The Foreign Exchange Regulation Act
(FERA) was legislation passed by the
Indian Parliament in 1973 by the
government of Indira Gandhi and came into
force with effect from January 1, 1974.
 The bill was formulated with the aim of

regulating payments and foreign exchange.

FERA
 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.
 FERA was repealed in 1998 by the government of
Atal Bihari Vajpayee and replaced by the
Foreign Exchange Management Act, which
liberalized foreign exchange controls and
restrictions on foreign investment.
FERA
 Regulated in India by the Foreign Exchange
Regulation Act(FERA),1973.
 Consisted of 81 sections.
 FERA Emphasized strict exchange control.
 Control everything that was specified,

relating to foreign exchange.

 Law violators were treated as criminal

offenders.
 Aimed at minimizing dealings in foreign

exchange and foreign securities.

FERA
 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).
 FERA primarily prohibited all transactions,
except one’s permitted by RBI.
Objectives of FERA
 To regulate certain payments.
 To regulate dealings in foreign exchange and
securities.
 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
 The Foreign Exchange Regulation Act(FERA) enacted in 1973, strictly
controlled any activities in any remote way related to foreign exchange.
 FERA was introduced during 1973, when foreign exchange was a scarce
commodity.
 Post independence, union government’s socialistic way of managing
business and the license Raj made the Indian companies noncompetitive in
the international market, leading to decline in export. Simultaneously India
import bill because of capital goods, crude oil & petrol products increased
the Forex outgo leading to sever scarcity of foreign exchange.
 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 was given the real power by making "any violation of FERA was a
criminal offense liable to imprisonment
 It a professed a policy of “a person is guilty of Forex violations unless he
proves that he has not violated any norms of FERA”.
 To sum up, FERA prescribed a policy – nothing (Forex transactions) is
permitted unless specifically mentioned in the act
FEMA
 Foreign Exchange Management Act or in short
(FEMA) is an act that provides guidelines for the free
flow of foreign exchange in India.
 It has brought a new management regime of foreign
exchange consistent with the emerging frame work
of the World Trade Organization (WTO).
 Foreign Exchange Management Act replaced FERA ,
which has been found to be unsuccessful with the
proliberalisation policies of the Government of India.
 FEMA is applicable in all over India and even
branches, offices and agencies located outside India,
if it belongs to a person who is a resident of India.
Highlights or Provisions of
FEMA
 It prohibits foreign exchange dealing undertaken other than
an authorized person;
 It also makes it clear that if any person residing in India,
received any Forex payment (without there being a
corresponding inward remittance from abroad) the
concerned person shall be deemed to have received the
payment from a nonauthorised person.
 There are 7 types of current account transactions, which are
totally prohibited, and therefore no transaction can be
undertaken relating to them. These include transaction
relating to lotteries, football pools, banned magazines and a
few others.
 FEMA and the related rules give full freedom to NRI to hold
or own or transfer any foreign security or immovable
property situated outside India.
Highlights or Provisions of
FEMA
 Similar freedom is also given to a resident who inherits such
security or immovable property from an NRI.
 An NRI is permitted to hold shares, securities and properties
acquired by him while he was a Resident or inherited such
properties from a Resident.
 The exchange drawn can also be used for purpose other than
for which it is drawn provided drawal of exchange is otherwise
permitted for such purpose.
 Certain prescribed limits have been substantially enhanced.
For instance, residence now going abroad for business purpose
or for participating in conferences seminars will not need the
RBI's permission to avail foreign exchange up to US$. 25,000
per trip irrespective of the period of stay, basic travel quota
has been increased from the existing US$ 3,000 to US$ 5,000
per calendar year.
Highlights or Provisions of
FEMA
 The FEMA preamble declares the
consolidation and amendment of the law
relating to foreign exchange _ so as to
facilitate external trade and payments and
for promoting the orderly development and
maintenance of the foreign exchange market
in India _ as it s object.
 The state assumes the role of facilitator and
promoter of economic development.
 Whereas FERA had 81 sections, FEMA has
only 49.
Highlights or Provisions of
FEMA
 FEMA, on the other hand, holds out no
threat of prosecution.
 Violations of FEMA will not drag the accused

to criminal courts.
 Foreign exchange violation will hereafter be

treated as a civil offence.

Highlights or Provisions of
FEMA
 Penalties and compounding
 Sec. 13 of FEMA provides for a penalty up to

three times the amount involved for

contravention of the rules, regulations and
directions under FEMA. If the amount is not
quantifiable, the penalty can go up to Rs. 2
lakhs. A continuing offence will invite a
penalty which may extend to Rs. 5,000 per
day of contravention. There is also the
provision for confiscation and for
compounding of the offence.
Highlights or Provisions of
FEMA
 The procedure for adjudication and appeal
has been streamlined.
 An appellate tribunal for foreign exchange _

under Sec. 18 of FEMA.

 The Tribunal will hear appeals from the

orders of the Special Director (Appeals).

 Thus, in many ways, the income-tax set-up

is sought to be duplicated under FEMA.

Highlights or Provisions of
FEMA
 Residential status
 The most interesting part of FEMA relates to the
definition of a person resident in India, simillar to I-T
law.
 FEMA incorporates an inclusive definition of the term
person and takes in any agency, office or branch
owned or controlled by such person.
 Sec. 2(v) of FEMA is to be contrasted with Sec. 2(p) of
FERA.
 The term `citizen' is omitted in FEMA. Any person
residing in India for more than 182 days during the
course of the preceding financial year will be taken as
resident in India.
Highlights or Provisions of
FEMA
 Application and definitions
 Whereas FERA applied to citizens of India, FEMA omits the
reference to citizens.
 A ``capital account transaction'' is defined as one that
alters the assets or liabilities, including contingent liabili
ties, outside India of persons resident in India, or assets
or liabilities in India of persons resident outside India.
 A ``current account transaction'' means one other than a
capital account transaction and includes payments due in
connection with forei gn trade, other current business
services and short-term banking and credit facilities in the
ordinary course of business.
 It also includes payments due as interest on loans and net
income from investments.
Highlights or Provisions of
FEMA
 FEMA also defines `export' as meaning the taking out of
India to a place outside India any goods and the provision
of services from India to any person outside India. There
is a corresponding definition of import.
 An interesting definition relates to the term `service'. Sec.
2(zb) defines `service' to mean service of any description
which is made available to potential users and includes
the provision of facilities in connection with banking,
financing, insurance, medical and legal assistance, chit
fund, real estate, and so on. It also includes the providing
of entertainment and the purveying of news or other
information. It does not include the rendering of any
service free of charge or under a contract of personal
service.
Difference between FERA and FEMA

 The object of FERA 1973 was to conserve foreign exchange and

prevention of leakage of it due to adverse position of foreign
exchange balance in India.
 After liberalization in 1992, various sectors for opened for FDI time to
time which radically changed the foreign exchange position. Instead
of negative balance, there was substantial foreign exchange reserve
so it was felt necessary to drop out the draconian law of FERA.
 The object of FEMA which replaced FERA from 1st June, 2000 was:
 To consolidate and amend the law relating to foreign exchange with
the object to facilitating external trade and payments and for
promoting the foreign exchange market in India.
 So the new law is for the management of foreign exchange instead of
regulation of foreign exchange.
 The draconian provisions were dropped out in new enactment.
 The size of the bare act got reduced to 49 sections in place of 81
sections in FERA
FERA & FEMA
 The similarities between FERA and FEMA are as
follows:
 The Reserve Bank of India and central
government would continue to be the
regulatory bodies.
 Presumption of extra territorial jurisdiction as
envisaged 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
FERA & FEMA
 1 PROVISIONS
 FERA consisted of 81 sections, and was more complex
 FEMA is much simple, and consist of only 49 sections.
 2 FEATURES
 Presumption of negative intention and joining hands in offence
(abatement) existed in FERA
 These presumptions of and abatement have been excluded in FEMA
 3 NEW TERMS IN FEMA
 Terms like Capital Account Transaction, current Account Transaction,
person, service etc. were not defined in FERA.
 Terms like Capital Account Transaction, current account Transaction
person, service etc., have been defined in detail in FEMA
4DEFINITION OF AUTHORIZED PERSON
 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 )
FERA & FEMA
 5 MEANING OF "RESIDENT" 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". 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 non-resident
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 non-resident under FEMA may
not necessarily be a non-resident under the Income Tax Act, for instance a business man
going abroad and staying therefore a period of 182 days or more in a financial year will
become a non-resident under FEMA.
 6 PUNISHMENT
 Any offence under FERA, was a criminal offence , punishable with imprisonment as per
code of criminal procedure, 1973
 Here, the offence is considered to be a civil offence only punishable with some amount of
money as a penalty. Imprisonment is prescribed only when one fails to pay the penalty.
 7 QUANTUM OF PENALTY.
 The monetary penalty payable under FERA, was nearly the five times the amount
involved.
 Under FEMA the quantum of penalty has been considerably decreased to three times the
amount involved.
FERA & FEMA
 8 APPEAL
 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)
 9 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 recognizes the right of appellant to take assistance of legal
practitioner or chartered accountant (32)
 10 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
FERA & FEMA
 1 Emphasis
 On regulation of foreign exchange
 On management of foreign exchange
 2 Situation
 Foreign exchange reserves positions was not satisfactory for that stringent controls were
required on the use of foreign exchange
 With the improvement in foreign exchange reserves such stringent controls are not
required now.
 3 Permission
 Need to take permission of RBI in connection with remittances involving external trade
 No need for seeking the permission of RBI in connection with remittances involving
external trade except section 3 relates to dealing in foreign exchange
 4 Restrictions
 These restrictions on drawals of foreign exchange for the purpose current account
transactions
 Section 5, it removes all the restrictions on drawals of foreign exchange for the purpose of
current account transactions
 5 Violations of Rules
 Violations of FERA was treated as criminal offence and burden of proof was on the guilty
 Violations of FEMA treated as civil offence removes the threat of imprisonment compared
their illegal acts by paying a fine (not too high)