Foreign Exchange Management Act, 1999

Foreign Exchange Management Act, 1999 Upon review of the Foreign Exchange Regulation Act, 1973 (FERA) in 1993, it was realised that significant changes had taken place since the promulgation of FERA. Among the major changes noticed were: Large increase in country’s Foreign Exchange Reserves ,substantial growth in Foreign Trade , rationalisation of tariffs ,current account convertibility ,liberalization of Indian Investments abroad, enhanced access to external commercial borrowings by Indian corporates and active and significant participation of Foreign Institutional Investors in Indian stock market. The Central Govt. looking at such significant developments , decided to bring in Fresh Amendments in the law relating to Foreign Exchange to suit the new environments. The objective was to facilitate the external trade, ease receipts and payments pertaining thereto and promoting orderly and fully organised Foreign Exchange markets. Thus, the Foreign Exchange Management Act, 1999 (FEMA) which seeks to replace the Foreign Exchange Regulation Act, 1973 (FERA), was brought into effect from 1st June, 2000. FERA aimed to regulate certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency for the conservation of the foreign exchange resources of the country and the proper utilization thereof in the interests of the economic development of the country. While FERA sought to 'control' foreign exchange transactions, FEMA seeks to 'regulate' and 'manage' such transactions. FERA, in its substantive form, prohibited all foreign exchange transactions unless there was a general or specific permission to do so and subject to conditions as specified. Under FEMA, however, all current account transactions are permissible by the law itself and , thus, it is a positive law to this extent. Further, an offence under FERA attracted criminal proceedings, whereas the offence under FEMA is considered as one of a civil nature. Also, under FEMA, maximum penalty would be thrice the sum involved (as against 5 times under FERA) where however the contravention amount is not quantifiable the penalty would be 2 lacs of rupees, and Rs. 5,000/- per day from second day onwards where a contravention continues beyond one day. Again as per latest circular AP(DIR Series) circular 31 dated 01.02.2005 the Govt. has in consultation with RBI reviewed the procedures for compounding of contravention under FEMA 1999. The procedure has been reviewed to provide comfort to the citizens and corporate community by minimsing the transaction costs while taking severe view of the will full MALAFIDE and FRAUDLENT transactions. Accordingly the responsibility of compounding contraventions has been vested with RBI except of (clause a) of section 3 which deals essentially with HAWALA transactions which will continue to be dealt with by Directorate of Enforcement. Under FEMA, compounding of contravention allows the contravener to settle an offence through imposition of a monetary penalty without going in for litigation after the admission of the contravention by such contravener. The RBI has issued instructions to those authorised dealers for compounding contraventions who are operationalising the revised procedures. Once a contravention has been compounded by compounding authority no proceeding can be further initiated against the contravener. A proper procedure for compounding has been laid . Under FERA there is presumption of existence of a guilty mind, unless the accused person proves otherwise. Under FEMA, it is for the prosecution to prove that a person has committed the offence. Section 35 of FERA empowers the Enforcement Officers to arrest a person, if they had reasons to believe that the person was guilty of FERA violations. FEMA provides such power of arrest only if penalty levied under section 13 of FEMA is not paid by the guilty within the given time.

Transition from FERA to FEMA A cut-off period of two years has been stipulated for transition from FERA to FEMA, which means that cases in which proceedings have already begun under FERA will continue to be governed by it. All such cases must be disposed of within the period of two years from the date of enforcement of FEMA, after which time they shall become invalid under FERA. Salient features of FEMA: •

It will facilitate trade rather than prevent misuse of foreign exchange.

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Definitions of capital account transaction and current account transaction have been introduced keeping in mind the possibility of introduction of capital account convertibility in the near future.

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All current account transactions shall be allowed (subject to reasonable restrictions). Reserve Bank to classify those capital account transactions that are to be permitted and to regulate transfer and issue of foreign securities by a resident in/outside India as well as setting up of branches/offices by foreign companies in India.

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All key sections relating to dealings, holding and payments in foreign exchange and exports have been simplified.

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Liberalization in enforcement provisions reflects that the attitude is of putting trust in the persons covered

Scheme of FERA and FEMA FERA had 81 sections (some of which were deleted by 1993 amendment), out of which 32 sections related to operational part and the balance dealt with Penalties, Enforcement Directorate, etc. FEMA has only 49 sections divided into seven chapters. First 3 chapters containing 12 sections relate to operational part and the balance 4 chapters containing 37 sections deal with Penalties, Adjudication, Appeals, Enforcement Directorate, etc. Major salient features of FEMA are discussed in the following paragraphs. Power to make rules Section 46 of FEMA empowers the Central Government , by notification, to make rules to carry out the provisions of the Act. Such rules may provide for: •

imposition of reasonable restrictions on current account transactions u/s 5;

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manner in which the contravention may be compounded u/s 15(I);

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manner of holding an inquiry by the Adjudicating Authority u/s 16(I);

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form of appeal and fee for filing such appeal u/s 17 and 19;

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salary and allowances payable to and other terms and conditions of service of the Chairperson and other Members of the Appellate Tribunal and the Special Director (Appeals) u/s 23;

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salaries and allowances and other conditions of service of the officers and employees of the Appellate Tribunal and the office of the Special Director (Appeals) under section

27(3); •

additional matters in respect of which the Appellate Tribunal and the Special Director (Appeals) may exercise the powers of a civil court under clause(i) of subsection 2 of section 28;

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authority or person and the manner in which any document may be authenticated u/s 39(ii); and

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any other matter which is required to be or may be prescribed.

Power to make regulations Section 47 of FEMA empowers the Reserve Bank, by notification, to make regulations to carry out the provisions of this Act and the rules thereunder. Such regulations may provide for: • permissible classes of capital account transactions, limits of admissibility of foreign exchange for such transactions, and the prohibition, restriction or regulation of certain capital account transactions u/s 6; • manner and form in which declaration is to be furnished u/s 7 (I)(a); • period within which and the manner of repatriation of foreign exchange u/s 8; • limit up to which any person may possess foreign currency or foreign coins u/s 9(a); • class of persons and limit up to which foreign currency account may be held or operated u/s 9(b); • limit up to which foreign exchange acquired may be exempted u/s 9(d); • limit up to which foreign exchange acquired may be retained u/s 9(e); •

any other matter which is required to be or may be specified.

The Central Government and Reserve Bank have, by various notifications, issued rules and regulations. A summary of these rules and regulations may be seen in Annexure A.

the 1st of June, 2000, FEMA came into force replacing the Foreign Exchange Regulation Act (FERA), which was formulated in 1973. Extensive economic reforms were undertaken in India in the early 1990s and this led to the deregulation and liberalization of the country's economy. Foreign Exchange Management Act (FEMA) was thus formulated in order to be compatible with the policies of pro- liberalization of the Indian government.

Extent of Foreign Exchange Management Act (FEMA): Foreign Exchange Management Act (FEMA) is applicable to the entire country. Agencies, branches, and offices, outside India, that are owned by Indian residents, also fall under the jurisdiction of this act. Foreign Exchange Management Act (FEMA) also extends to any dispute that are committed in offices, agencies and branches outside India that are owned by individuals covered by this act.

Objectives of Foreign Exchange Management Act (FEMA): Among the various objectives of the Foreign Exchange Management Act (FEMA), an important one is to revise and unite all the laws that relate to foreign exchange. Further FEMA aims to promote foreign payments and trade in the country. Another important objective of the Foreign Exchange Management Act (FEMA) is to encourage the orderly maintenance and development of the foreign exchange market in India.

Implementation of Foreign Exchange Management Act (FEMA):

Extensive efforts have been undertaken to ensure the effective implementation of FEMA in India. Proper implementation measures and efficient supervision are important preconditions for the success of the Foreign Exchange Management Act (FEMA).

The objective of the Act is 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. FEMA extends to the whole of India. It applies to all branches, offices and agencies outside India owned or controlled by a person who is a resident of India and also to any contravention there under committed outside India by any person to whom this Act applies. Except with the general or special permission of the Reserve Bank of India, no person can :• • • •

deal in or transfer any foreign exchange or foreign security to any person not being an authorized person; make any payment to or for the credit of any person resident outside India in any manner; receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner; reasonable restrictions for current account transactions as may be prescribed.

Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. The Reserve Bank may, in consultation with the Central Government, specify :• •

any class or classes of capital account transactions which are permissible; the limit up to which foreign exchange shall be admissible for such transactions

However, the Reserve Bank cannot impose any restriction on the drawing of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business. The Reserve Bank can, by regulations, prohibit, restrict or regulate the following :• • • •

transfer or issue of any foreign security by a person resident in India; transfer or issue of any 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; any borrowing or lending in foreign exchange in whatever form or by whatever name called;

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any borrowing or tending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India; deposits between persons resident in India and persons resident 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 not exceeding five years, by a person resident outside India; giving of a guarantee or surety in respect of any debt, obligation or other liability incurred o (i) by a person resident in India and owed to a person resident outside India or o (ii) by a person resident outside India.

A person, resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India. The Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business. Every exporter of goods and services must :•

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furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India; furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realization of the export proceeds by such exporter.

The Reserve Bank may, for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the Reserve Bank determines, having regard to the prevailing market-conditions, is received without any delay, direct any exporter to comply with such requirements as it deems fit.

Where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank. Section 3: Except as provided in the FEMA Act, rules and RBI permission, no person shall: Deal in/ transfer any forex to any person not being an authorized person Make any payment to or for the credit of any non resident Receive otherwise through an authorized person, any payment by order or on behalf of any non resident 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

[edit] Contraventions and Penalties If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues. Any Adjudicating Authority adjudging any contravention may, if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government and further direct that the foreign exchange holdings, if any, of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf. "Property" in respect of which contravention has taken place, shall include deposits in a bank, where the said property is converted into such deposits, Indian currency, where the said property is converted into that currency; and any other property which has resulted out of the conversion of that property. If any person fails to make full payment of the penalty imposed on him within a period of ninety days from the date on which the notice for payment of such penalty is served on him, he shall be liable to civil imprisonment. -vivin vijay

[edit] Investigation

The Directorate of Enforcement investigate to prevent leakage of foreign exchange which generally occurs through the following malpractices : • • • • • • • •

Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments. Acquisition of foreign currency illegally by person in India. Non-repatriation of the proceeds of the exported goods. Unauthorised maintenance of accounts in foreign countries. Under-invoicing of exports and over-invoicing of imports and any other type of invoice manipulation. Siphoning off of foreign exchange against fictitious and bogus imports. Illegal acquisition of foreign exchange through Hawala. Secreting of commission abroad.

[edit] Organisational Set Up and Functions Of Enforcement Directorate Directorate of Enforcement has to detect cases of violation and also perform substantially adjudicatory functions to curb above malpractices. 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. The main functions of the Directorate are as under: •

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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: To conduct searches of suspected persons, conveyances and premises for seizing incriminating materials (including Indian and foreign currencies involved) and/or. To enquire into and investigate suspected violations of provisions of the Foreign Exchange Management Act. To adjudicate cases of violations of Foreign Exchange Management Act for levying penalties departmentally and also for confiscating the amounts involved in contravent ions; To realise the penalties imposed in departmental adjudication.

[edit] Procedural Provisions

For enforcing the provisions of various sections of FEMA, 1999, the officers of Enforcement Directorate of the level of Assistant Director and above will have to undertake the following functions • • • • • • • • • •

Collection and development of intelligence/information. Keeping surveillance over suspects. Searches of persons/vehicles by provisions of Income-tax Act, 1961. Searches of premises as per provisions of Income-tax Act, 1961. Summoning of persons for giving evidence and producing of documents as per provisions of Income-tax Act, 1961. Power to examine persons as per provisions of Income-tax Act,1961. Power to call for any information/document as per provisions of Income-tax Act, 1961. Power to seize documents etc. as per provisions of Income-tax Act, 1961. Custody of documents as per Income-tax Act, 1961. Adjudication and appeals - Officers of and above the rank of Dy Director of Enforcement, are cases of contravention of the provisions of the Act; these proceedings which are quasi-judicial in nature, start with the issuance of show cause notice; in the event of cause shown by the Notice-not being found satisfactory, further proceedings are held, vis. personal hearing, in which the noticee has a further right to present his defence, either in person or through any authorised representative; on conclusion of these proceedings, the adjudicating authority has to examine and consider the evidence on record, in its entirety and in case the charges not being found proved, the noticee is acquitted, and in the event of charges being found substantiated, such penalty, as is considered appropriate as per provisions of section 13 of the Act can be imposed, besides confiscation of amounts involved in these contraventions.