FEMA

FOREIGN EXCHANGE MANAGEMENT ACT.

Name Denis Samuel Jude Pinto Harsh Thakkar Yamini Nair Kirti Pai

Roll no 92 79 109 70 118

Contribution
Introduction, What is FEMA? Law Similarities,Differences,Type of offences. Broad scheme of FEMA. Salient features of FEMA. Highlights of FEMA Conclusion.

INDEX
1. 2. 3. 4. 5. 6.

INTRODUCTION TO FEMA WHAT IS FEMA? SIMILARITIES & DIFFERENCES. TYPES OF OFFENCES. LAW. HIGLIGHTS OF FEMA

7. 8.

BROAD SCHEME OF FEMA CONCLUSION

Introduction
The Foreign Exchange Management Act (1999) or in short 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.

The main objective behind the Foreign Exchange Management Act (1999) 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. FEMA is applicable to the all parts of India. The act is 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

The Foreign Exchange Regulation Act, 1973 has been replaced by the Foreign Exchange Management Act, 1999. The latter has dropped many of the stringent provisions of the older Act, in the area of transactions involving foreign exchange. The FEMA 1999 took effect from June 1, 2000.

What is FEMA?
The Foreign Exchange Management Act, 1999 is a new Act dealing with foreign exchange. In a sense, it replaces the Foreign exchange Regulation Act of 1973, with contents to suit the present economic state in the country. Has it been notified, regarding its applicability? The Act has been notified to come into effect from June 1, 2000 and will extend to the entire country. It also applies to all branches, offices, agencies outside India -those owned or controlled by a person residing in India. Any contravention of the provisions of the law committed outside India will attract action under the Act.

What are the objects of the Act?

The object is to consolidate and amend the law relating to foreign exchange to facilitate external trade/payment and promote the orderly development and maintenance of the forex market in India.

Foreign exchange:
Foreign exchange means foreign currency and also includes: Deposits, credits and balances payable in any foreign currency. Drafts, traveller's cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in foreign and Indian currency.

Foreign currency:
It means any currency other than Indian currency. Is the Act applicable to individuals only? The act applies to all persons, and person includes: an individual, a Hindu undivided family, a company, and a firm, an association of persons or body of individuals, incorporated or otherwise.

The provisions in the Act for regulation and management of foreign exchange:
It provides certain restrictions in dealing with foreign exchange. In essence, all transactions shall be through an authorised person only. Likewise, no person can make any payment to or for the credit of any person residing outside India in any manner. He shall not receive any payment by order or on behalf of any person, resident outside India, except through the authorised person.

What about the issue of holding or possessing foreign exchange by an Indian resident?
Acquisition holding/owning/possessing or transferring foreign exchange, or any immovable property, situated outside India with the RBI's approval.

Who is an authorised person?

An authorised person may be a dealer or a money-changer. The authority may also be an offshore banking unit or any other person appointed under the Act.

Appointment of an authorized person:

The RBI appoints any person to be known as a authorised person, to deal in foreign exchange or foreign securities. An order appointing the authorised person shall be in writing, imposing necessary conditions.

Duties and obligations of an authorized person:

The authorised person shall, in all his dealings in foreign exchange or foreign security, comply with the RBI, directions/orders, and shall not engage in any transactions involving foreign exchange. Before undertaking any transaction in foreign exchange on behalf of any person, a declaration and information have to be taken from that person to the effect that the transaction will not contravene or evade the Act's provisions. If such information or declaration is not given to the authorised person, the transaction can be refused. Under such circumstances, the RBI needs to be notified.

RBI's role in capital account transactions:

Though any persons may sell or draw foreign exchange to or from an authorised person for a capital transaction, the RBI in consultation with the Centre, can specify: Any class/classes of capital account transactions which are permissible. The limit for foreign exchange admissible for such transactions.

However the RBI cannot impose any restrictions on the withdrawal of foreign exchange for payments due on account of loans or depreciation of direct investments, in the ordinary course of business.

Other strings the RBI has in the Act:

The RBI has got powers to prohibit, restrict or regulate the following: Transfer or issue of any foreign security by a resident of India and by a person residing outside India. Transfer or issue of any security or foreign security by any branch, office or agency in India owned by a person outside India. Any borrowing or lending in foreign exchange. Any borrowing or lending in rupees, between a resident in India and a person outside India.

Deposits between residents in India and residents outside India.

Export, import or holding of currency or currency notes. Transfer of immovable property outside India other than a lease not exceeding five years, by a person resident in India. Acquisition or transfer of immovable property in India, other than a lease by a person resident outside India. Giving guarantee or surety in respect of any debt obligation or other liability incurred by a person resident in India to a person outside India and vice-versa.

SIMILARITIES.

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

DIFFERENCES BETWEEN FERA AND FEMA:

Sr. DIFFERENCES No PROVISIONS 1 FEATURES 2

FERA FERA consisted of 81 sections, and was more complex Presumption of negative intention (Mens Rea ) and joining hands in offence (abatement) existed in FEMA

FEMA FEMA is much simple, and consist of only 49 sections. These presumptions of Mens Rea and abatement have been excluded in FEMA Terms like Capital Account Transaction, current account Transaction person, service etc., have been defined in detail in FEMA The definition of Authorised person has been widened to include banks, money changes, off shore banking Units etc. (2 (c)

NEW TERMS IN Terms like Capital Account FEMA Transaction, current Account Transaction, person, service etc. were not defined in FERA. DEFINITION OF Definition of "Authorised AUTHORISED Person" in FERA was a PERSON narrow one ( 2(b)

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 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 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 therefor a period of 182 days or more in a financial year will become a nonresident under FEMA. 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.

PUNISHMENT

Any offence under FERA, was a criminal offence , punishable with imprisonment as per code of criminal procedure, 1973

QUANTUM OF The monetary penalty payable Under FEMA the quantum

PENALTY.

under FERA, was nearly the five times the amount involved. An appeal against the order of "Adjudicating office", before " Foreign Exchange Regulation Appellate Board went before High Court

of penalty has been considerably decreased to three times the amount involved. 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) FEMA expressly recognises the right of appellant to take assistance of legal practitioner or chartered accountant (32) The scope and power of search and seizure has been curtailed to a great extent

APPEAL

RIGHT OF ASSISTANCE DURING LEGAL PROCEEDINGS.

FERA did not contain any express provision on the right of on impleaded person to take legal assistance FERA conferred wide powers on a police officer not below the rank of a Deputy Superintendent of Police to make a search

POWER OF SEARCH AND 10 SEIZE

WHAT TYPE OF OFFENCES?

Although under FEMA, offences pertain to transactions in foreign Exchange only. However relevant offences are as follows:

DETAILS IN FOREIGN EXCHANGE:

Only a person Authorised 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.

LAW
The foreign exchange law, in general, and, the regulation of export, in particular, are moving towards a trust-based self-regulation, from the earlier `suspicioncontrol' regime. `Managing cash is managing profits' is the dictum in business. Trade receivables, or technically the debtor-turnover ratio, should be healthy enough to help a business realise its true value. In export sale, if the export proceeds become fully bad and are to be written off or partially reduced, in addition to erosion of what is already a wafer-thin margin to the seller, the precious foreign exchange is lost to the country as well. The problem also arises out of other complex factors. First, the global market conditions, for a country like India, are fiercely competitive. The country may have strengths in IT/ITES segment, but other players such as China, Taiwan, and Korea are not far behind. Second, with too many small players and too few branded firms, buyers of goods and services have the upper hand in the bargaining, given their large resources. Third, any extreme situation such as litigation against overseas buyers remains in legal documents more as a form, than to actually strike with, since the cost of litigation abroad is expensive that, in most cases, suffering damage may be better; the exporter would not like to throw good money after bad.

The challenges are going to increase, even as India strives for one per cent share of the global trade. Given this background, it is worthwhile understanding the law governing exports and its developments in the past five years. The Foreign Exchange Regulation Act, 1973 (FERA 1973) was perceived as a draconian piece of legislation that gave the Enforcement Directorate and other authorities under that Act vast powers, including to control every conceivable trade/business-related transaction, arrest persons for interrogation, levy huge penalties, presume documents against suspects and so on. The Act was a quasi-criminal legislation. Regulation of export was controlled by the Exchange Control Manual (Chapter 6 of the Exchange Control Manual 1993 Edition).

Consistent with the legacy of `control and permission', the law and its regulation required every export to be monitored, right from payment terms, manner of payment, period within which realisation takes place, extension of time, reduction in invoice value, to write off. In some cases, the law was oblivious to international competition/market conditions. In 1999, the law was thoroughly amended and in came the Foreign Exchange Management Act, 1999 (FEMA) that was more a civil law, giving no automatic powers to authorities to arrest; diluting the penal provisions, the whole thrust of the new law is one of orderly development of the foreign exchange market and facilitating external trade. This law vests the residuary power with the Centre, to amend, relax or tighten the law, in public interest. This is the obvious requirement, since the law, unlike many other statutes, is contingent upon the country's foreign exchange reservoir. Fortunately, the forex kitty has more than trebled in the last five years, giving hope that FEMA is only set for progressive liberalisation, ultimately leading to full

convertibility, though the timing for this will be set by the Reserve Bank of India after considering various factors. But FEMA has accelerated the liberalisation of exports by "facilitating" rather than "regulating". FEMA contains provisions (Section 7) to regulate export of both goods and services. The inclusion of `services' is consequent to the growing opportunity for India in the last decade.

The law regulates such exports through the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000 contained in Notification No FEMA 23 /2000-RB dated May 3, 2000 [Regulation] as seen in Table 1. The Regulation still obliges an exporter to file the required declaration and makes him responsible for realising the full value of exports. The period of six months for realisation and repatriation of export proceeds is the general requirement under the Regulation as originally enacted.

The RBI continues to have the power to give any directions, including approval of longer credit period and extension of time for receiving export proceeds.

However, these powers have been diluted to a larger extent by the central bank itself in the last five years (Table 2). Such liberalisation started in September 2000 through A.P. (DIR Series) Circular 12 wherein the RBI extensively dealt with the various issues on exports, including follow up of overdue export bills, reduction in value, extension of time limit for realising export proceeds, write-off of such proceeds where realisation is not possible and dealing with defaulting exporters placed in the caution list. Since then the relaxation of rules has happened in phases, classifying exporter in different categories. Thus, status holder exporters (that is, thosewho enjoy special status such as export house or star house under the EXIM Policy) have relaxed norms for write off, and extension of time for export realisation up to 12 months. Units in Special Economic Zones have been granted one year to realise export proceeds, eventually removing the time restriction, allowing them decide for themselves the credit terms, based on market conditions. The RBI withdrew from granting extensions of time or reducing the value of realisation of export proceeds, delegating these powers to banks (authorised dealers), though subject to certain conditions. Now, banks themselves can write off bad debt up to 10 per cent of the export proceeds due in a calendar year. With assured documents covering payments, banks can now deal with even the caution list exporters. In addition, a number of other simplifications of documents/procedures/reporting has been made in external trade, in line with the Commerce Ministry's thrust to

promote exports. Thus, in about four years, the de-regulation of exports has seen a conscious acceleration, which also reduced the transaction costs. All this change are predicated on a trust in the business community and on the belief that no business would allow generation of bad debt. There is also a realisation that an official of a regulatory body can hardly decide better than the business community on how to deal with a customer. Though abuse of this trust cannot be ruled out, in general, businesses will regulate themselves in their best interests in realising and repatriating the full value of export sale. Any any contravention can be compounded by the RBI or the Enforcement Directorate in terms of Section 15 of FEMA. In February, the rules for compounding were extended to cover every contravention and the necessary procedures are in place to make the process transparent. This provides for a quicker and an effective mechanism to settle litigation, which otherwise may be long-drawn, uncertain and expensive. The law maker and the regulator have reposed confidence in the business community, going far from their earlier approach, and it is time to wait and see whether business, in turn, responds in similar fashion in its responsibility to the nation.

Highlights of FEMA:
Application of FEMA can be seen from 2 angles viz . current account transactions and capital account transactions. Capital account transactions relate to the movement of capital eg. Transactions in property and investments , lending and borrowing money. . Transactions which do fall in the capital a/c transactions are current a/c which are permitted freely subject to few restrictions. . Certain current a/c transactions will require RBI approval if they exceed a certain ceiling.

. A few current a/c transactions need permission of appropriate Govt of India authority irrespective of the amount. . There are 7 types of current a/c transactions which are totally prohibited and no transactions can therefore be undertaken relating to the .. These include transactions relating to lotteries , banned magazines and a few others.

FEMA gives full freedom to a person resident in India who was earlier resident outside India to hold or transfer any foreign security security or immovable property situated outside India when he was a resident there. . Similar freedom is also given to a resident who inherits such security or immovable property from a person resident outside India . .A person resident outside India can hold shares , securities and properties acquired by him while he / she was a resident there .

Similar freedom is given if eh inherits similar properties from a person resident in India . The exchange drawn can be used for another purpose other than for which it is drawn provided the other purpose is permitted. . NO RBI permission will be required for persons visiting foreign countries for business purposes or for attending seminars and conferences for foreign exchange upto $ 25000 irrespective of the period of stay , and basic travel quota has been increased to $ 5000 per calendar yr . .Indian companies engaged in certain specified sectors can acquire shares of foreign exchange companies engaged in similar transactions by share swap or exchange through issue of ADRs / GDRs upto certain specified limits. .FEMA describes a redressal machinery for total justice and fairness to the implicated.

BROAD SCHEME OF THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999

SECTION 3 - Prohibits dealings in foreign exchange except through an authorised person. This Section says that no person can, without general or special permission of the RBI(a) Deal in or transfer any foreign exchange or foreign securities to any persc4~iot being an author ised person (corresponding to sections 8 and 19 of FERA). (b) Make any payment to or for the credit of any person resident outside India in any manner (corresponding to section 9(l)(a) of FERA). (c) Receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner (corresponding to section 9(1)(b) of FERA) and (d) Enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person (corresponding to sections9(l)(f) & (g) ofFERA). SECTION 4 - 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. The terms "foreign exchange" and "foreign security" are defined in sections 2(n) and 2(o) respectively of the Act. The Central Govt. has made Foreign Exchange Management (Current Account Transactions) Rules, 2000.

SECTION 6 - deals with capital account transactions. This section allows a person to draw or sell foreign exchange from or to an authorised person for a capital account transaction. RBI in consultation with Central Govt. has issued various regulations on capital account transactions in terms of sub-sect ion (2)and (3 )f section 6. SECTION 7 - deals with export of goods and services. Every exporter is required to furnish to the RBI or any other authority, a declaration etc. etc. regarding full export value. SECTION 8 - casts the responsibility on the persons resident in India who have any amount of foreign exchange due or accured in their favour to get same realised 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. Authorised person has been defined in Sec.2(c) of the Act which means an authorised dealer, money changer, off shore banking unit or any other person for the time being authorized to deal in foreign exchange or foreign securities. SECTIONS 13 and 15 - of the Act with penalties and enforcement of the orders of Adjudicating Authority as well power to compound contravent ions under the Act. SECTION 36 to 37 - pertains to the establishment of Directorate of Enforcement and the powers to investigate the violation of any provisions of Act, rule, regulation, notifications, directions or order issued in exercise of the powers under this Act. The Director of Enforcement and other officer of Enforcement not below the rank of Asstt. Director have been empowered to take up investigations. ENFORCEMENT DIRECTORATE The Directorate of Enforcement is mainly concerned with the enforcement of the provisions of the Foreign Exchange Management Act to prevent leakage of foreign exchange which generally occurs through the following malpractices 1) Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments. 2) Acquisition of foreign currency illegally by person in India. 3) Non-repatriation of the proceeds of the exported goods. 4) Unauthorised maintenance of accounts in foreign countries. 5) Under-invoicing of exports and over-invoicing of imports and any other type of invoice manipulation. 6) Siphoning off of foreign exchange against fictitious and bogus imports land by. 7) Illegal acquisition of foreign exchange through Hawala. 8) Secreting of commission abroad. Directorate has to detect cases of violation and also perform substantial adjudicatory functions to curb such malpractices.

ORGANISATION SET-UP

The Enforcement Directorate, with its Headquarters at New Delhi has seven zonal offices at Bombay, Calcutta, Delhi, Jalandhar, Madras, Ahmedabad and Bangalore. The zonal offices are headed by the Deputy Directors. The Directorate has nine sub-zonal offices at Agra, Srinagar, Jaipur, Varanasi, Trivandrum, Calicut, Hyderabad, Guwahati and Goa, which are headed by the Assistant Directors. The Directorate has also a Unit at Madurai, which is headed by a Chief Enforcement Officer. Besides, there are three Special Directors of Enforcement and one Additional Director of Enforcement. STAFF

The total sanctioned strength of staff of all categories is 813 - The breaking up is as under:Category "A" Officers 54 (Class I officers) Category "B" Officers l53 (Class II officers) Category "C" Officers 440 (CLASS III officers) Category "D" Officers 166 (Class IV officers)

FUNCTIONS
The main functions of the Directorate are as under: 1) To collect and develop intelligence relating to violation of the provisions of Foreign Exchange Regulation Act and while working out the same, depending upon the circumstances of the case: 2) To conduct searches of suspected persons, conveyances and premises for seizing incriminating materials (including Indian and foreign currencies involved) and/or. 3) To enquire into and investigate suspected violations of provisions of the Foreign Exchange Management Act. 4) To adjudicate cases of violations of Foreign Exchange Management Act for levying penalties departmentally and also for confiscating the amounts involved in contravent ions; 5) To realise the penalties imposed in departmental adjudication; In addition to the above functions relating to the Foreign Exchange Management Act, the Directorate also processes and recommends cases for detention of habitual offenders under the Conservation of Foreign Exchange and Prevention of smuggling Activities Act, 1974 (52 of 1974), which provides inter-alia for

detention of a person with a view to preventing him from acting in a manner prejudicial to the conservation and augmentation of foreign exchange.

CONCLUSION
The fema seeks to bring the view on the subject upto the date keeping in view the changed environment.this act aims at consolidating and amending the law relating to forex with the objective of facilitatingexternal trade and payments and for promoting the orderly development and maintenance of forex markets in india.

Important features noticed in the new act as compared to previous one are
(1)

The seriousness of non compliance with regulation is diluted.it is only of civil and no criminal consequences The nature of current and capital account transactions has been clearly defined The new enactment is positive in the sense that all current account transactions not otherwise restricted can be freely carried on Definition of residents and non residents take into account the duration of their stay in india as in the case of income tax act

(2)

(3)

(4)

Conclusion (2)
Significant developments took place after 93 such as substantial increase in our forex reserves,growth in foreign trade,rationalization of tariffs,current account convertibility,liberalization of Indian investments abroad,increased access ti external commercial borrowings by Indian corporate and participation of foreign institutional investors in our stock markets.this needed change in the outlook of statue governing the foreign exchange transactions to one of control and conservation to that of encouragement and promotion FEMA 1999 was introduced to provide the necessary change .

BIBLIOGRAPHY
1. 2. 3. 4. 5. 6.

Taxmanns For Ex Management Manual. www.helplinelaw.com www.finmin.nic.in www.infodriveindia.com www.fema.rbi.org BANKING TRANSACTIONS OF WELINGKAR INSTITUTE ..