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FOREIGN EXCHANGE FOREIGN EXCHANGE MANAGEMENT ACT, 1999MANAGEMENT ACT, 1999

PRESENTED BY:

BHASKER KUSHWAHA AMIT SAHADEBASHISH ROY

FEMA Prof. Parul Gupta 2

An Act to consolidate and amend 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 market in India.

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BACKGROUND OF FEMA :

When a business enterprise imports goods from other countries, exports its products to them or makes investments abroad, it deals in foreign exchange. Foreign exchange means 'foreign currency' and includes:- (i) deposits, credits and balances payable in any foreign currency; (ii) drafts, travellers' cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency; and (iii) drafts, travellers' cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency.

In India, all transactions that include foreign exchange were regulated by Foreign Exchange Regulations Act (FERA),1973. The main objective of FERA was conservation and proper utilisation of the foreign exchange resources of the country. It also sought to control certain aspects of the conduct of business outside the country by Indian companies and in India by foreign companies. It was a criminal legislation which meant that its violation would lead to imprisonment and payment of heavy fine. It had many restrictive clauses which deterred foreign investments.

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CONTINUED…..

In the light of economic reforms and the liberalised scenario, FERA was replaced by a new Act called the Foreign Exchange Management Act (FEMA),1999. The Act applies to all branches, offices and agencies outside India, owned or controlled by a person resident in India. FEMA emerged as an investor friendly legislation which is purely a civil legislation in the sense that its violation implies only payment of monetary penalties and fines.

However, under it, a person will be liable to civil imprisonment only if he does not pay the prescribed fine within 90 days from the date of notice but that too happens after formalities of show cause notice and personal hearing. FEMA also provides for a two year sunset clause for offences committed under FERA which may be taken as the transition period granted for moving from one 'harsh' law to the other 'industry friendly' legislation

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OVERVIEW OF FEMA :

The Foreign Exchange Management Act, 1999 was enacted to consolidate and amend 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 market in India. In fact it is the central legislation that deals with inbound investments into India and outbound investments from India and trade and business between India and the other countries.

The FEMA provides: Free transactions on current account subject to reasonable restrictions that may be imposed RBI control over Capital Account Transactions Control over realization of export proceeds Dealings in Foreign Exchange through Authorised Person (e.g Authorised Dealer/ Money Changer/ Off-shore Banking Unit) Adjudication of Offences Appeal provisions including Special Director (Appeals) and Appellate Tribunal Directorate of Enforcement

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• Introduction: -

Foreign exchange transactions were regulated by Foreign exchange regulation act (FERA), 1973

Following the liberalization ushered in 1991 some amendments were made to FERA in 1993 there was a lot demand to bring certain major changes in FERA in the light of economic changes took place.

Consequently a new act was formed to replace FERA, known as Foreign exchange management act (FEMA), 1999

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• Objectives:

To facilitate external trade and payments To promote the orderly development and maintenance of foreign exchange

market

The Act has assigned an important role to the Reserve Bank of India (RBI) in the administration of FEMA.

The rules , regulations and norms pertaining to several sections of the Act are laid down by the Reserve Bank of India, in consultation with the Central Government.

The Act requires the Central Government to appoint as many officers of the Central Government as Adjudicating Authorities for holding inquiries pertaining to contravention of the Act.

There is also a provision for appointing one or more Special Directors (Appeals) to hear appeals against the order of the Adjudicating authorities.

The Central Government also establish an Appellate Tribunal for Foreign Exchange to hear appeals against the orders of the Adjudicating Authorities and the Special Director (Appeals).

The FEMA provides for the establishment, by the Central Government, of a Director of Enforcement with a Director and such other officers or class of officers as it thinks fit for taking up for investigation of the contraventions under this Act.

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APPLICABILITY :

Foreign Exchange Management Act, 1999 extends to the whole of India. The Act also applies to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention there under committed outside India by any person to whom this Act applies.

FEMA has considerably liberalised provisions in respect of foreign exchange. However, sometimes an extraordinary situation may arise. In such cases, Central Government can suspend operation of any or all provisions of FEMA in public interest, by issuing a notification. The suspension can be relaxed by issuing a notification. Copy of Notification shall be placed before Parliament for 30 days. (Section 40)

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Salient features…

• Shift in object.• Govt. / RBI – powers clearly demarcated.• FX transactions categorized – Current / Capital• Provisions dependent on residential status.• Residential status on the basis of stay as well as

purpose.• Civil Law – • No arrest.• Prosecution to prove charges against accused.• Investigation and adjudication segregated.• A new concept - Compounding introduced.• Compounding in a definite time-frame (180 days).• Sun-set clause introduced.

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STRUCTURE :

The legislations, rules and regulations, regulating Foreign Exchange Management can be divided into the following: FEMA Bare Act of 49 sections (Supreme Legislation) 5 Sets of Rules made by Ministry under section 46 of FEMA (Subordinate or delegated Legislations) 23 sets of Regulations made by RBI under section 47 of FEMA (Subordinate or delegated Legislations) Master circulars issued by RBI on 1st July of every year Foreign Direct Investment policy issued by Department of Industrial Policy and Promotion Reserve Bank of India notifications and circulars Enforcement Directorate

FEMA contains 7 Chapters divided into 49 sections of which 12 sections cover operational part and the rest contravention, penalties, adjudication, appeals, enforcement directorate, etc.

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As far as transactions on account of trade in goods and services are concerned, FEMA has by and large removed the restrictions except for the enabling provision for the Central Government to impose reasonable restrictions in public interest. The capital account transactions will be regulated by RBI / Central Government for which necessary circulars / notifications will have to be issued under FEMA. CHAPTER I – Preliminary (Sec 1&2) CHAPTER II- Regulation and Management of Foreign Exchange (Sec 3 –9) CHAPTER III – Authorised Person (Sec 10 –12) CHAPTER IV – Contravention and Penalties (Sec 13-15) CHAPTER V – Adjudication and Appeal (Sec 16- 35) CHAPTER VI – Directorate of Enforcement (Sec 36-38) CHAPTER VII- Miscellaneous (Sec 39 – 49)

Besides the FEMA, there are 5 rules and 23 regulations under the Act which help in implementation of the Act.

Continued…

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Definitions :

In this Act, unless the context otherwise requires,—

( a ) “Adjudicating Authority” means an officer authorised under sub-section (1) of section 16; ( b ) “Appellate Tribunal” means the Appellate Tribunal for Foreign Exchange established under section 18; ( c ) “authorised person” means an authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under sub-section (1) of section 10 to deal in foreign exchange or foreign securities; ( d ) “Bench” means a Bench of the Appellate Tribunal; ( e ) “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 referred to in sub-section (3) of section 6; ( f ) “Chairperson” means the Chairperson of the Appellate Tribunal; ( g ) “chartered accountant” shall have the meaning assigned to it in clause (b) of sub- section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949); ( h ) “currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank; ( i ) “currency notes” means and includes cash in the form of coins and bank notes;

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( j ) “current account transaction” means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,— ( i ) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business, ( ii) payments due as interest on loans and as net income from investments, ( iii) remittances for living expenses of parents, spouse and children residing abroad, and ( iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children;

( k ) “Director of Enforcement” means the Director of Enforcement appointed under sub-section (1) of section 36; ( l ) “export”, with its grammatical variations and cognate expressions, means— ( i ) the taking out of India to a place outside India any goods, ( ii) provision of services from India to any person outside India;

( m ) “foreign currency” means any currency other than Indian currency; ( n ) “foreign exchange” means foreign currency and includes,— ( i ) deposits, credits and balances payable in any foreign currency, ( ii) drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency, ( iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency;

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( o ) “foreign security” means any security, in the form of shares, stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency and includes securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency; ( p ) “import”, with its grammatical variations and cognate expressions, means bringing into India any goods or services; ( q ) “Indian currency” means currency which is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934 (2 of 1934); ( r ) “legal practitioner” shall have the meaning assigned to it in clause (i) of sub- section (1) of section 2 of the Advocates Act, 1961 (25 of 1961); ( s ) “Member” means a Member of the Appellate Tribunal and includes the Chairperson thereof; ( t ) “notify” means to notify in the Official Gazette and the expression “notification” shall be construed accordingly; ( u ) “person” includes— ( i ) an individual, ( ii) a Hindu undivided family, ( iii) a company, ( iv) a firm, ( v ) an association of persons or a body of individuals, whether incorporated or not, ( vi) every artificial juridical person, not falling within any of the preceding sub- clauses, and ( vii) any agency, office or branch owned or controlled by such person;

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( v ) “person resident in India” means— ( i ) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include— (A)a person who has gone out of India or who stays outside India, in either case— ( a ) for or on taking up employment outside India, or ( b ) for carrying on outside India a business or vocation outside India, or ( c ) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

(B) a person who has come to or stays in India, in either case, otherwise than— ( a ) for or on taking up employment in India, or ( b ) for carrying on in India a business or vocation in India, or ( c ) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period; ( ii) any person or body corporate registered or incorporated in India, ( iii) an office, branch or agency in India owned or controlled by a person resident outside India, ( iv) an office, branch or agency outside India owned or controlled by a person resident in India;

( w ) “person resident outside India” means a person who is not resident in India; ( x ) “prescribed” means prescribed by rules made under this Act;

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(y) "repatriate to India" means bringing into India the realized foreign exchange and- (i)the selling of such foreign exchange to an authorized person in India in exchange for rupees, or (ii)the holding of realized amount in an account with an authorized person in India to the extent notified by the Reserve Bank, and includes use of the realized amount for discharge of a debt or liability denominated in foreign exchange and the expression "repatriation" shall be construed accordingly;

(z) "Reserve Bank" means the Reserve Bank of India constituted under sub-section (1) of section 3 of the Reserve Bank of India Act, 1934 (2 of 1934);

(za) "security" means shares, stocks, bonds and debentures, Government securities as defined in he Public Debt Act, 1944; (zb) "service" means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance,etc.; (zc) "Special Director (Appeals)" means an officer appointed under section 18; (zd) "specify" means to specify by regulations made under this Act and the expression "specified" shall be construed accordingly; (ze) "Transfer" includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien.

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The Rules under FEMA are: 1.F.E.M.(Encashment of Draft, Cheque, Instrument and Payment of Interest) Rules, 2000 2. F.E.M. (Authentication of Documents) Rules, 2000 3. F.E.M. (Current Account Transaction) Rules, 2000 4. F.E.M. (Adjudication Proceedings and Appeal) Rules, 2000 5. F.E.M. (Compounding Proceedings) Rules, 2000

The Regulations under FEMA are: 1.F.E.M. (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2000 2. F.E.M. (Borrowing and Lending in Rupees) Regulations, 2000 3. F.E.M. (Borrowing or Lending in Foreign Exchange) Regulations, 20004. F.E.M. (Deposit) Regulations, 2000 5. F.E.M. (Export and Import of Currency) Regulations, 2000 6. F.E.M. (Guarantees) Regulations, 2000 7. F.E.M. (Issue of Security in India by a Branch, Office or Agency of a Person Resident Outside India) Regulations, 2000 8. F.E.M. (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 9. F.E.M. (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000 10. F.E.M. (Export of Goods and Service) Regulations, 2000

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11. F.E.M. (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000 12. F.E.M. (Insurance) Regulations, 2000 13. F.E.M. (Investment in Firm or Proprietary Concern in India) Regulations, 2000 14. F.E.M. (Manner of Receipt and Payment) Regulations, 2000 15. F.E.M. (Permissible Capital Account Transactions) Regulations, 2000 16. F.E.M. (Possession and Retention of Foreign Currency) Regulations, 2000 17. F.E.M. (Realization, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 18. F.E.M. (Remittance of Assets) Regulations, 2000 19. F.E.M. (Transfer or Issue of Security by a person Resident outside India) Regulations, 2000 20. F.E.M. (Foreign Exchange Derivative Contracts) Regulations, 2000 21. F.E.M. (Transfer or Issue of any Foreign Security) Regulations, 2004 22. F.E.M. (Offshore Banking Unit) Regulations, 2002 23. F.E.M. (Withdrawal of General Permission to Overseas Corporate Bodies (OCBs) Regulations, 2003

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AUTHORITIES AND ENFORCEMENT MACHINERY UNDER FEMA :

FEMA in itself is not an independent and isolated law. The provisions of FEMA are spread at different places and so are there regulatory bodies. Reserve Bank of India (RBI) makes regulations for FEMA and the rules are made by Central Government.Though RBI is the overall controlling authority in respect of FEMA, enforcement of FEMA has been entrusted to a separate “Directorate of Enforcement” formed for this purpose. (Section 36)

Authorities governing the enforcement of FEMA:

Foreign Exchange Department of Reserve Bank of India (RBI) - www.fema.rbi.org.in Directorate of Enforcement, Department of Revenue, Ministry of Finance- http://directorateofenforcement. gov.in Capital Markets Division, Department of Economic Affairs, Ministry of Finance – http:// finmin.nic.in/the ministry/dept eco affairs/ Foreign Trade Division, Department of Economic Affairs, Ministry of Finance – http:// finmin.nic.in/the ministry/dept eco affairs/

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Besides RBI, following other regulators are involved in FEMA:

Ministry of Industry, Government of India which announces Industrial Policy which contains provisions in respect of Foreign Direct Investment, foreign technical collaboration, joint ventures, royalty payments etc. Ministry of Finance, Government of India which controls External Commercial Borrowings, FCCB, ADRs, and GDRs Directorate of Enforcement which is directly involved in enforcement of FEMA. Besides this SEBI, Income Tax, Custom Laws, FCRA, SAFEMA, COFEPOSA are some acts whose provisions are relevant in FEMA.

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 occurs through malpractices. Directorate has to detect cases of violation and also perform substantial adjudicatory functions to curb malpractices.(Website of the Directorate - http://www.directorateofenforcement. gov.in/)

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Functions :

The main functions of the Directorate are as under:1.To enforce Foreign Exchange Management Act 1999 and Prevention of money Laundering Act 2002.2.To collect and develop intelligence relating to violation of the provisions of Foreign Exchange Management Act and Prevention of money Laundering Act 2002.3. To conduct searches of suspected persons, conveyances and premises and seize incriminating materials (including Indian and foreign currencies involved)4. To enquire into and investigate suspected violations of provisions of Foreign Exchange Management Act, 1999 and Prevention of money Laundering Act 2002.5. To adjudicate cases of violations of Foreign Exchange Management Act penalties departmentally and also for confiscating the amounts involved in violations.6. To realize the penalties imposed in departmental adjudication;7. To attach and confiscate properties involved in the act of Money laundering.8. To arrest the person suspected to be involved in the act of money laundering.9. To prosecute the person involved in the act of money laundering.

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Section 3 of FEMA

It talks about dealings in foreign exchange and foreign securities and payments to and receipts from any person outside India.

The general or special permission of the Reserve Bank of India is required in the following matters

(a)Dealing in any foreign exchange or foreign security with any person other than the authorized person

(b) Payment to or for the credit of any person resident outside India in any manner

© Receiving of any payment by order or on behalf of any person resident

outside India in any manner otherwise through an authorized person

(d) Enter in to any financial transaction in India as a consideration for or in. association with requisition or creation or transfer of a right to acquire any asset outside India by any person

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Holding of Foreign Exchange:-No person resident in India shall acquire, hold, own,

possess or transfer any foreign exchange/foreign security or any immovable property situated outside India

Current account Transactions:- -Act permits dealing in foreign exchange through

authorized persons for current account transactions.

-Central Government can impose reasonable restrictions in public interest with this regard

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Current account transactions:

Section 2 (j) of FEMA defines “Current account transaction” as a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,-(i) Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,(ii) Payments due as interest on loans and as net income from investments,(iii) Remittances for living expenses of parents, spouse and children residing abroad, and(iv) Expenses in connection with foreign travel, education and medical care of parents, spouse and children;

As per the provisions laid down in Section 5, a person may sell or draw foreign exchange freely for his current account transactions, except in a few cases where limits have been prescribed The Central Government has the power to regulate current account transactions. Unless the transaction is restricted, Foreign exchange can be drawn for the same.

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Capital Account Transactions: -

Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction permitted by RBI in consultation with central Government .

RBI prohibits, restricts or regulate the following,

(a) Transfer or issue of any foreign security by a person resident in India

(b) Transfer or issue of any foreign security by a person resident outside India

© Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India

(d) Any borrowing or lending in foreign exchange in whatever form or by whatever name called

(e) Any borrowing or lending in rupees in whatever form or whatever name called between a person resident in India and a person resident outside India;

(f) Deposits between persons resident in India and a person resident outside India

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(g) Export, Import or holding of currency or currency notes(h) Transfer of immovable property outside India other than a lease not exceeding five years by a person resident outside India(i) Acquisition or transfer of immovable property in India other than a lease not exceeding five years by a person resident outside India(j) Giving of guarantee or surety in respect of any debt obligation or the liability1. By a person resident in India and owed to a person resident outside India or2. By a person resident outside India

Prohibited transactions:

•For person resident outside India investment in India, in any form ,in any company, firm or proprietory concern or any other entity which is or proposed to be engaged in :

Chit fundAgricultural and plantation activitiesReal estate business or construction of farm housesTrading in TDRs.

•For person resident in India investment outside India in the business of:BankingReal estate

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Export of goods and servicesEvery exporter of goods shall famish to the RBI or to such other

authority the following

(a)A declaration specified1. True and correct material particulars2. Amount representing the value of full export of goods3. The time of the export4. The value which exporter having regard to the prevailing market

conditions expects to receive on the sale of the goods in a market outside India

(b) Other information-That may be required by RBI for the purpose of ensuring the

realization of the export proceeds by such exporter- Every exporter of the services shall furnish to the RBI or to such

other authorities a declaration as specified, containing the true and correct material particulars in relation to the payment for such services

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Realization and Repatriation of foreign exchange:-

Any person in this concern shall have to follow the reasonable steps to realize and repatriate it to India with or with in the time in the manner prescribed by the act

Contravention and penal ties:-• For any kind of contravention under this act

defaulter is liable to pay up to thrice the amount involved where it is quantifiable Up to Rs. 2 lakhs Where not quantifiable

• If such contravention is continued further penalty which may extend to Rs. 5,000 for every day after the first day

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Administration of the Act

- The rules regulations and norms pertaining to many sections are laid down by RBI in consultation with central Government.

- The Act requires central Government to appoint,• Adjudicating Authorities for holding enquires related to the

contravention of the Act• one or more Special Directors (appeals) to hear appeals against

the order of the Adjudicating authorities

- Central Government shall have to establish1. An Appellate Tribunal for foreign Exchange to hear appeals against

the order of the Adjudicating Authorities and the Special Directors2. A Director of Enforcement with a Director and such officers or

class of officers as it thinks fit for taking up for investigation the contravention under this Act

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FERA V/s FEMA:-

1. In FEMA only the specified acts related to foreign exchange are regulated while in FERA anything and everything that has to do with foreign exchange was controlled

2. The objective of FEMA is to facilitate trade while that of FERA is to prevent misuse

3. FEMA is a much smaller enactment only 49 sections against 81 sections of FERA

4. Offences under FERA were not compoundable whereas offences under FEMA are compoundable.

5. Citizenship was a criteria to determine residential status of a person under FERA, while stay of More than 182 days in India is the criteria to decide residential status under FEMA.

6. Provisions in respect of Basic Travel Quota (BTQ), business travel, export commission, gifts, donations etc. have been considerably liberalised in FEMA.

7. FEMA is a civil law, while FERA was a draconian police law.

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ED raids 4 foreign exchange traders:

Officials of the Enforcement Directorate raided four foreign exchange traders in Sector 35 and seized incriminating documents, allegedly pertaining to illegal financial transactions to the tune of “hundreds of crores” of rupees late on Thursday evening.The agency also seized unaccounted Indian and foreign currency worth around Rs 60 lakh and booked two traders for Foreign Exchange Management Act violations.ED sources said that this was one of the biggest seizures in the city as the recovered documents pointed to hawala transactions over the last several years.Sunil Bajaj and his brother Subhash Bajaj were booked under sections 3A and 3B of FEMA for alleged violations and illegal sale and purchase of foreign currency in their offices: SB Forex, Bajaj Enterprises, Sunil Medicos (an exchange shop running under the garb of a chemist shop) and Bajaj Money, all in Sector 35-D.A team of ED officials from the agency’s zonal office in the city, led by Assistant Director Narendra Dhaka, conducted the searches.The money seized from the Bajajs reportedly includes foreign currency of around 25 different countries, including the US dollars, Swiss francs, dinars, Euros, Singapore dollars and Ringgits.For contravention of any provision or regulation under FEMA, the maximum penalty is three times the money involved. Sources said that the accused already had a few similar FEMA cases pending against them.

“Although the firm had been named by alleged druglord Jagdish Bhola earlier, this is a fresh case based on our recent intelligence and surveillance and has nothing to do with the drug trade. The accused are habitual racketeers,” sources said.

In a similar case, the ED had raided a medical-cum-foreign currency exchange shop in Sector 15 on June 26 and seized around Rs 1 crore, all of it unaccounted.

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QUESTIONS

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THANK YOU