The Evolution of FERA to FEMA.

     Edited by: Vaani Garg                                                                                                 

    Foreign Exchange Regulation Act, 1973(FERA) was introduced with an object of having stringent control to conserve foreign exchange and utilize these scarce resources in the best interest of the country. After liberalization, there was increased flow of foreign exchange in India.

     It imposed severe restrictions on the types of payments and foreign exchange and securities transactions, as well as on transactions that impacted the exchange, as well as the indirect import and export of currency.

    The goal behind FERA

    FERA was to regulate payments and exchange. It also intended to conserve foreign exchange, better the use of the foreign exchange, in order to boost the country’s economic development. So, there arises a need to review the provisions of (FERA), Foreign Exchange Regulation Act.

    A task force was constituted to have an overall look on the subject and suggest the required changes. The task force submitted its report in 1994. On the recommendation of the task force and keeping in view the significant developments that had taken place since 1993 the Foreign Exchange Management (FEMA) Bill was introduced in the Parliament.  

    FEMA stands for Foreign Exchange Management Act which was introduced in the year 1999 and it acts as a replacement for the FERA (Foreign Exchange Regulation Act). FEMA was enforced on June 1, 2000.

    The Foreign Exchange Regulation Act, 1973 was reviewed in 1993 and several amendments were enacted as part of the on-going process of economic liberalisation relating to foreign investments and foreign trade for closer interaction with the world economy. At that stage, the Central Government decided that a further review of the Foreign Exchange Regulation Act(FERA) would be undertaken in the light of subsequent developments and experience in relation to foreign trade and investment.

    It was subsequently felt that a better course would be to repeal the existing Foreign Exchange Regulation Act(FERA) and enact a new legislation. Reserve bank of India was accordingly asked to undertake fresh exercise and suggest a new legislation. A task force constituted for this purpose, submitted its report in 1994 recommending substantial changes in the existing Act.

    Significant developments have taken place since 1993 such as substantial increase in our foreign exchange reserves, growth in foreign trade, rationalization of tariffs, current account convertibility, liberalization of Indian Investments abroad, increased accesses to external commercial borrowings by Indian corporates and participation of foreign institutional investors in our stock markets.

    Keeping in view the changed environment, the Central Government has decided to introduce the Foreign Exchange Management Bill and repeal the Foreign Exchange Regulation Act, 1973. The provisions of the bill aim at consolidating and amending the law relating to Foreign Exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange markets in India.

                                Features of Foreign Exchange Management Act (FEMA)

    1. FEMA empowers the Central Government to initiate activities, such as making payments to a person outside the country or receiving money for it. In addition to this, foreign exchange, as well as foreign securities transactions, are also restricted by FEMA.
    1. Transactions cannot be made without specific or general consent of FEMA from any foreign country to India which deals with foreign security or foreign exchange as well as payments made by such foreign countries. All transactions must be carried out by an individual who has been authorized to do so.
    1.  The Central Government may restrict an authorized individual from carrying out foreign exchange transactions within the current account, based on the general interest of the public.
    1. Although the withdrawal or sale of foreign currency by an authorized person, FEMA law empowers the Reserve Bank of India to place a number of restrictions on the transactions of the capital account.
    1.  Under the statute, the residents of India have the right to conduct foreign security transactions and foreign exchange, or the right to own or own immovable property in a foreign country in the event that the security, property or currency is acquired or owned when the individual is based. outside the country, or when they inherit the property of another individual living outside the country.
    1. The law does not apply to the resident (of an Indian citizen) living outside the country.

                                                Applicability of FEMA

    This law applies to all parts of India, i.e. to any transaction that takes place in India by any person residing in India at the time of the transaction. This also applies to all branches, offices, and agencies outside of India that are owned or controlled by a person residing in India. Any violation committed by these entities outside India is also covered under FEMA. Residential status is the most important factor in determining the appropriateness of the Act. The persons covered by the Act are persons residing in India, non-resident Indian (NRI), persons residing outside India, an overseas corporate body (OCB) and persons of Indian origin (PIO) [1].

    An Indian company will always be considered as a resident of India whereas a foreign company will be treated as a resident of India only if the control and management of its affairs are situated wholly in India during the relevant tax year. A non-resident Indian (NRI) indicates a person residing outside of India who is a citizen of India or is a person of Indian origin.

    A Non-Resident Indian will be treated as a person resident in India if he returns to or stays in India, for taking up employment in India, or for carrying on in India, a business or vocation, or for any other purpose that would show his intention to stay in India for an uncertain period. Non-Resident Indian citizens and Persons of Indian Origin on temporary visits or stay in India without any intention to stay in India for an uncertain period will be treated as Non-Residents during their stay in India [2].

    Overseas corporate body means a corporation, partnership, corporation, and other proprietary entity owned directly or indirectly to the extent of at least 60% by non-resident Indians and includes trust abroad in which an interest of not less than sixty percent Indians residing directly or indirectly but irrevocably. By a person of Indian origin is meant a citizen of any country other than Bangladesh or Pakistan, if –

    1. he had an Indian passport at any time, or

    2. he or one of his parents or one of his grandparents was an Indian citizen by virtue of the Constitution of India or the Citizenship Act of 1955, or
    3. the person is the spouse of an Indian citizen or a person referred to in sub-clause (a) or (b).

    Another definition of PIO is that “person of Indian origin” means an individual (who is not a citizen of Afghanistan, Bangladesh, Bhutan, China, Iran, Nepal, Pakistan or Sri Lanka) who-

    1. at any time holds the Indian passport; or

    2. who or one of whose fathers or grandfather was an Indian citizen under the Constitution of India or the Citizenship Act, 1955 (57 of 1955)

                                      Difference between FERA and FEMA Acts

                           S.N.                      FERA                       FEMA
      1.  It was approved by the Parliament in 1973.  It was approved by the Parliament in 1999.
      2.  Currently it is not in force.  Currently it is not in force.
      3.  It had 81 sections.  It had 49 sections.
      4.  It was implemented to regulate foreign payments and to ensure optimum use of foreign currency in India.  It aims to promote foreign trade, foreign payments and to increase size of foreign exchange reserve in the country.
      5.  Under FERA, only “citizenship” was a criterion to conclude the residential status of a person.  As per this law; a person who is living in India from last 6 months can be considered as an Indian.
      6.  The crime was kept in criminal offence category.  The crime was kept in Civil offence category.
      7.  If anyone found guilty of FERA violation; there was a provision of punishment directly.  Fine or imprisonment (if the person does not deposit the prescribed penalty within 90 days from the date of conviction).
      8.  The accused was considered guilty as soon as the lawsuit was filed and he had to prove that he is innocent.  In FEMA, the accused is not liable to prove his innocence but burden lies on the FEMA officer to prove him guilty.
      9.  A person has to obtain permission of RBI with regard to transfer of funds related to external operations.  There is no requirement of pre-approval from RBI related to remittances & external trade.

                                                    Role of RBI under FEMA

    Foreign Exchange Management (FEMA) envisages that Reserve Bank of India (“RBI”) will have a key role in management of foreign exchange. The main functions of RBIunder FEMA are as follows:

    a) Controlling dealings in foreign exchange by giving general or special permission for dealing in foreign exchange, excluding those cases where specific provisions have been made in Act, Rules or Regulations – Section 3.

    b) RBI cannot impose any restrictions on current account transactions. These can be imposed only by Central Government in consultation with RBI – Section 5. However, in certain cases, prior approval of RBI is required for current account transactions as provided in Foreign Exchange Management (Current Account Transactions) Rules, 2000.

    c) Specifying conditions for payment in respect of capital account transaction – Section 6(2).

    d) Regulate/prohibit/restrict the following, by issuing Regulations:

    • Transfer or issue of foreign security to resident and Indian security to non-resident;

    • Borrowing and lending in foreign exchange or to a foreign person;

    • Export/import of currency or currency notes;

    • Transfer of immovable property outside India;

    • Giving guarantee or surety where foreign exchange transaction is involved – Section 6(3)

    e) Specify (by regulation) period and manner in which foreign exchange due from export of goods and services should be received – Section 8.

    f) To grant exemption from realisation and repatriation in cases specified under Section 9.

    g) Granting authorisation to ‘Authorised Person’ to deal in foreign exchange, to give directions to them and to inspect the authorised person – Sections 10, 11 & 12.

                                       Major Provisions of FEMA Act 1999:

    Here are major provisions that are part of FEMA (1999) –

    • Free transactions on current account subject to reasonable restrictions that may be imposed.
    • RBI controls over capital account transactions.
    • Control over realization of export proceeds. 
    • Dealing in foreign exchange through authorized persons like authorized dealer or money changer etc.
    • Appeal provision including Special Director (Appeals)
    • Directorate of enforcement
    • Any person can sell or withdraw foreign exchange, without any prior permission from RBI and then can inform RBI later. 
    • Enforcement Directorate will be more investigative in nature
    • FEMA recognized the possibility of Capital Account convertibility.
    • The violation of FEMA is a civil offence.
    • FEMA is more concerned with the management rather than regulations or control.
    • FEMA is regulatory mechanism that enables RBI and Central Government to pass regulations and rules relating to foreign exchange in tune with foreign trade policy of India.

                                                              CONCLUSION

    In conclusion, FEMA does not see the exchange rate flow as an evil act but works to factor it in to manage the exchange rate process. The goal is to manage the exchange rate more efficiently, rather than retain it. It applies general asset management rules to foreign exchange management and aims to optimize it instead of maximizing it. More importantly, it promotes a more liberal form of economy.

    As per Section 3 of FEMA, all the current account transactions are free; however central government at any time could impose reasonable instructions by issuing special rules. As per Section 6 of FEMA, Capital Account Transactions are permitted only to the extent as specified by RBI in its issued regulations. As per Section 10 of FEMA, RBI have controlling role in its management however RBI cannot directly handle foreign exchange transaction and must authorize a person to deal with it as per directions set by RBI. FEMA also has provisions of various enforcements, penalties, adjudication and appeals in this area.


    [1] https://www.caclubindia.com/articles/foreign-exchange-management-act-1999-fema-basic-understanding-13654.asp

    [2] http://www.caaa.in/Image/fema2011.pdf