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The court has given the Centre two weeks to get the regulations
amended.
An RBI spokesperson explained the role of the central bank in enabling
multi-brand retail FDI: RBI has to come out with a circular, which could be
done immediately. A Fema notification also has to be issued. As the
notification would be a legal amendment, RBI would require the
governments permission for this. While RBI would approach the finance
ministry for approval, other ministries, too, may be consulted. After the
government nod, the central bank would place the notification on the
gazette.
How quickly the regulations are amended would depend on the time the
government takes to approve the Fema notification. The amendment
doesnt require the Parliaments approval.
Last month, the Cabinet had cleared 51 per cent FDI in multi-brand retail.
But lawyer M L Sharma had filed a public interest litigation challenging the
Centre's policy on the grounds that retail trading was strictly prohibited
under Fema, for which the power to come out with a circular was vested
with RBI. The central bank hadnt issued any regulation in this regard after
2008.
On Monday, judges R M Lodha and A R Dave said the policy suffered from
curable irregularity, as RBI had not amended Fema regulations,
which should have been done before the Centre had issued its notification.
The judges said, It is a legal process which has to be taken to the logical
conclusion.
Foreign investors in the retail sector have already raised concern over the
conditions on investment. Contentious issues in the sector include a statewise roll-out of FDI, the criterion that only cities with a population of more
than a million can allow foreign retail set-ups and the clause of at least
$100-million fresh investment, 50 per cent of which would have to be in
back-end infrastructure.
The Reserve Bank today said resident Indians cannot trade in forex market as per the existing
regulation.
The existing regulations under Foreign Exchange Management Act (FEMA), 1999, do not
permit residents to trade in foreign exchange in domestic or overseas markets, RBI said in a
statement.
The clarification of the RBI assumes significance in the light of several people losing heavily in forge
trade through internet portals in the recent past.
It also said, remittance in any form towards overseas foreign exchange trading through
electronic/internet trading portals is not permitted under the FEMA.
RBI cautioned investors against advertisements issued by certain electronic and internet portals
offering trading or investing in foreign exchange with guaranteed high returns.
Many companies even engage agents who personally contact gullible people to undertake forex
trading and investment schemes and entice them with promises of disproportionate or exorbitant
returns, it said.
The Reserve Bank of India has said Indian companies merging with
overseas firms will continue to be treated as entities resident in the
country under the Foreign Exchange Management Act (Fema).
There is no provision for such a merger under the current Companies Act.
But a Bill to amend the Act tabled in the Budget
session of Parliament proposes to allow Indian companies to merge with
overseas companies, under section 205, a move that could introduce
greater flexibility in cross-border merger and acquisitions (M&As).
The amendment to allow Indian companies to merge with foreign
companies was first suggested in 2005 by an expert committee on
company law chaired by Tata Sons Director J J Irani. If this amendment
goes through, it will meet a key demand of many multinationals investing
in India.
financial penalties instead of criminal charges. The government's advisory, informed sources
said, will not apply to all the cases as the RBI will decide on a case-to-case basis.
The government wants the RBI to take up cases which do not have major ramifications on
foreign exchange management and deal with minor repatriations matters.
The Reserve Bank is in the process of collating such cases and making a rough estimate of the
amount of foreign exchange involved.
Officials clarified that this will not result in Fera cases being dropped. "What would happen is
that if RBI realises that the violation is not significant, its views will be forwarded to the courts
for examination and the offender could get away through compounding of offence under Fema
instead of facing criminal charges under Fera," an official said.
LIFE UNDER FEMA
Offence no longer a criminal offence, punishable with a financial
penalty
For a quantifiable offence, penalty could be up to twice the sum
involved
In non-quantifiable cases, the penalty can go up to Rs 100,000.
In cases where contravention is a continuing offence, a further
penalty of up to Rs 5,000 for a day can be levied from the day the offence
first took place
As a precedent, they cited the long-pending share transfer case of Surachan Chawla, a
Thailand-based NRI, who was to acquire a 38 per cent stake in Catholic Syrian Bank.
Permission for the deal had been withheld since he had a pending Fera case. Recently, RBI and
the Enforcement Directorate have approved the share transfer and forwarded their views to the
Supreme Court.
The official said that the agency did not have the precise number of the cases which were yet to
be decided, though there were nearly 3,000 cases pending in various courts and only 300-400
cases were to be decided.
level.
At present, corporate entities from Bangladesh and Pakistan are barred from investing in
India under FEMA rules. The rules also prohibit setting up of a branch or liaison office,
without the RBI's approval, by Pakistani, Sri Lankan, Afghan, Iranian and Chinese citizens.
The investment restrictions for citizens from Sri Lanka were lifted in September 2004.
The move is being considered as a sweetener for Bangladesh, where several Indian
companies, including Tata Power and the Gas Authority of India Ltd, are keen to invest. The
Bangladesh government is yet to clear the investments.
Officials said the move was also being considered as a precursor to finalising a bilateral
investment protection agreement with Bangladesh. The agreement was expected to be signed
during the recent visit of Bangladesh Premier Khaleda Zia to India. However, it was held up
on account of the restrictions on corporate investments from Dhaka.
According to Akash Gupt, principal consultant, PricewaterhouseCoopers the proposed
relaxation will encourage direct investment.
"In practical terms, entrepreneurs from Bangladesh and even Pakistan have made investments
in India through other intermediate jurisdictions like Mauritius and Cyprus.
The removal of these prohibitions will encourage more direct investment," he said.
Clubbed under Section 3 (a) of Fema, these offences will continue to be dealt with by the
Enforcement Directorate.
As per the new norms, the RBI will be required to conclude case proceedings within 180 days
from the receipt for application for compounding and the sum worked out after compounding
has to be paid within 15 days from the order of compounding.
The RBI has graded the contraventions. Offences involving up to Rs 5 lakh will be handled
by an officer in the rank of assistant general manager; more than Rs 5 lakh by deputy general
manager; Rs 20 lakh and above by general manager; and contravention above Rs 50 lakh by
chief general manager.
The order passed by RBI will be applicable for a period of three years. If a second offense is
committed after the expiry of three years, it will be deemed as a fresh contravention and not a
repetition of the earlier one.
Similarly, for offences to be dealt by the Enforcement Directorate, the guidelines specify that
offenses will dealt by officers in the rank of deputy director who will handle contravention of
up to Rs 5 lakh.
Offences above Rs 50 lakh will be dealt either by the special director or deputy legal adviser
of the directorate of enforcement.
In between, the offences of more than Rs 5 lakh, up to Rs 10 lakh and more will be handled
by additional director and special director, respectively. No contravention shall be
compounded unless the amount involved in such contravention is quantifiable.
MUMBAI: From now on, individuals and corporates will have to deal with the Reserve Bank of India,
and not the Enforcement Directorate, to settle most violations of foreign exchange regulations.
While ED will continue to decide on cases pertaining to hawala transactions (or irregular foreign
currency dealings), the move is viewed as a partial dilution of ED's powers.
Other than hawala, all other forex violations relating to export and import would be handled by the
banking regulator.
According to a RBI release, the Central bank can compound the violations of foreign exchange
regulation rules under Foreign Exchange Management Act (FEMA), enabling the party to settle the
matter within six months, and probably with a lower rate of penalty.
The RBI was vested with this power after the government reviewed the existing procedures for
compounding, the release said.
Under FEMA, a violation can attract penalty of up to 300% of the amount involved, but if the party
involved chooses to compound in other words, the party admits the violation and is ready to fork
out a fine it may get away with a penalty that could be less than 100% or 50%, depending on the
Fema should be more liberal than Fera on all counts, right? Not really. According to officials, the
Foreign Exchange Management Act (Fema) which is now in force, is soft on preventive action, but
tough on penalties, as compared to the law it has replaced, the Foreign Exchange Regulation Act.
Hence, if a company or individual fails to pay up the penalty imposed on them, they are liable to
imprisonment.
This was not the case earlier, where the ED saw itself as a preventive department rather than a
revenue generating arm of the government. This meant that it used its powers to deter violations
through fear, rather than bother to prove guilt and punish through penalties.
The government too saw this as ED's role. Hence, Fera itself did not hold the ED responsible for the
collection of the penalties imposed. Instead, it empowered district collectors to collect the penalties
imposed by the adjudicators on violators. The net result was poor collection of dues, resulting in the
Comptroller and Auditor General of India (CAG) passing strictures against the ED for poor collection
of penalties in one of its reports.
This position has now changed. Fema not only provides for severe penalties, but also provides for
imprisonment when the penalties are not paid within 90 days of imposition.
Under Fema, the adjudicator (an officer with the ED) can impose a penalty three times the size of the
contravention involved where the sum is quantifiable. In case the contravention is not quantifiable, the
penalty is set at Rs 2 lakh. Further, where the violation is a continuing one, an additional penalty of Rs
5,000 per day of contravention can be imposed. The adjudicating officer can also order the
confiscation of the property, security, foreign exchange etc involved in the contravention by the
Central government.
It can also order the repatriation of the foreign exchange involved.
Interesting, while these penalties are considered to be reasonable, Fema packs a punch as far as the
failure to comply with the penalties is concerned. Defaults can attract civil imprisonment, subject to
certain safeguards.
The adjudicating authority can order arrest and detention of the defaulter in a civil prison, provided he
has a notice and followed it up with a show cause asking why the defaulter should not be imprisoned
for not appearing before the adjudicating authority.
seize', powers to arrest, no time limit for deciding the cases -- but
cautioned that it remained to be seen whether these provisions
would be retained in the Money Laundering Bill, which is under
Parliament's consideration.
Mr. Yesuthasen wondered FEMA was needed at all, as all the changes
could have been effected in FERA itself. He added that over the
years, FERA had by itself become liberal, because the RBI could give
general purpose approvals, even on post-facto basis.
Mr. Yesuthasen and Ms. Muthukrishnan said that there had been no
problem with FERA as a law, but only in the enforcement part.
While the RBI could give post-facto approvals to transactions under
FERA, FEMA allows no post-facto approvals. ``If you have violated,
you have violated,'' Mr. Yesuthasen said, adding that to this extent,
FEMA was not keeping in line with the spirit of l iberalisation.
FEMA requires authorised dealers (renamed in the Act as authorised
persons) to satisfy themselves that the purpose for which foreign
exchange was being drawn was really current account in nature.
Unlike earlier, the RBI does not prescribe documents or forms for the
drawee to fill up. Instead, designing such forms is up to the
authorised dealer.
However, the authorised dealers were required to keep the
documents, such as a letter of declaration of purpose for which
foreign exchange was being drawn. Inspectors from the RBI would
inspect such documents.
Mr. AL. Alagappan, Assistant General Manager, Indian Overseas Bank
(Chennai), who is also an office-bearer of Federation of Authorised
Dealers of India (FEDAI), said that this aspect would lead to
problems between the authorised dealers and the RBI.
On one hand, the authorised dealers only had to satisfy themselves
about the genuineness of the transaction for which foreign exchange
was being sought -- which could be technically done by word of
mouth. But on the other hand, the RBI would inspect docu ments.