Explain FEMA (Foreign Exchange Management Act) in Brief
FEMA A
Major Departure From FERA
As is clear
from the name of the Act itself, the emphasis under FEMA is on ‘exchange
management’ whereas under FERA the Emphasis was on ‘exchange regulation’ or
exchange control. Under FERA it was necessary to obtain Reserve Bank’s
permission, either special or general, in respect of most of the development
and maintenance of foreign exchange market in India. “It was adopted by the
parliament in 1999 and is known as the foreign Exchange Management Act, 1999.
Chapter II of FEMA deals with the regulation and management of foreign
exchange. Section 3 state that except as otherwise provide in this Act, no
person shall in any manner deal in or transfer any foreign exchange or foreign
security to any person not being an authorized person. Section 4 states that except
or otherwise provided in this Act, no person resident of India shall acquire,
hold, own, possess or transfer any foreign exchange, foreign, security or any
immovable property situation outside India.
Current Account and Capital Account Transactions:
Sections 5 and
6 deal with current account and capital transactions. According to Section 5,
any person may sell or draw foreign exchange to or form an authorized person of
such person if such sale or drawls is a current account transaction. However,
the Central Government may, in public interest and in consultation with the
Reserve Bank, impose such reasonable restrictions for current account transaction
as may prescribed. According to sub-section I of section 6, any person may sell
or draw foreign exchange to or from an authorized person for a capital account
transaction subject to provision of sub-section 2. Sub-section 2 state the
reserve bank may in consultation with the central Government, specify – (a) any
class or classes of capital account transaction which are permissible; (b) the
limit up to which foreign Exchange shall be admissible for such transaction.
However, the reserve bank shall not impose any restriction on the Drawl of
foreign exchange for payments due on account of amortization of lone or for
depreciation of direct investments in the ordinary course of business.
Sub-section of section 6, nevertheless, lay down that without prejudice to the
generality of the provisions of sub-section 2, the reserve bank may prohibit,
restrict or regulate specified transaction in foreign exchange/foreign securities
etc.
Sub-section
4 of section 6 state that a person resident of India may hold, own, transfer or
invest in foreign currency, foreign security or any immovable property situated
outside India if such currency, foreign security 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. Sub section 5 state that a person
resident outside India may hold, own, transfer or invest in India 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 of
India or inherited from a person who was resident of India.
Realization and Repatriation of Foreign Exchange:
Section
8 lays down that save as otherwise provided in the Act, where any amount of
foreign exchange is due or has accrued to any person resident on India such
foreign exchange within such period and in such manner as may be specific by
the Reserve Bank.
Section
9 provides the following exemptions from Realization and repatriation of
foreign exchange:
- possession of foreign currency or foreign coins by any person up to such limit as the Reserve Bank may specify;
- foreign currency account held or operated by such person or class of person and the limit up to which the reserve bank may specify;
- foreign exchange acquired or received before the 8th day of July, 1947 or any income arising or accruing thereon which is held outside India by any person in pursuance of permission granted by the Reserve Bank;
- Foreign Exchange held by a person resident of India up to such limit as the Reserve Bank may specify, if such foreign exchange was acquired by way of Gift or inheritance from a person referred to in clause (c), including any income arising their form;
- Foreign exchange acquired from employment, business, trade, vacation, service honorarium, gifts, inheritance or any other legitimate means up to such limits as the Reserve Bank may specify; and
- such other receipts in foreign exchange as the Reserve Bank may specify.
Contravention and Penalties:
Section
13 says that if any person contravenes any provision of this Act he shall, upon
adjudication, be liable to a penalty up to thrice the sum involve 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
benefits from the workers of the
approval system, not necessarily in keeping with government policy, in other
words the approval system proved ineffective as a regulatory framework in
relation to resourceful TNCs that chose to come to terms with the system.”
New concessions for FERA companies:
In
line with the liberalization measures announced in the new industrial and trade
policy in 1991 and the subsequent period, the government announced major
concessions in November 1991 and January 1992.
On
January 8’1993 the government promulgated an Ordinance to amend FERA with
immediate effect. The Ordinance removed a large number of restrictions on
companies with more than 40 per cent non-resident equity, removed FERA controls
on Indian firms setting up joint ventures abroad and allowed Indians to hold
immovable property abroad, subject to certain conditions.
Important concessions announced in November 1991, January 1992 and January 1993 were as follows:
- Companies with foreign shareholding were allowed to increase foreign equity to 51 per cent by remittances in foreign exchange in specific high priority industries;
- Section 26, sub-section 7, which required the FERA companies to get reserve bank’s permission before raising working capital or accepting deposits was revoked;
- Section 28 and 29 were revoked. This meant that FERA companies could now use they’re in India and could carry on in India and activity of a trading, commercial or industrial nature;
- Section 31 was revoked. This allowed FERA companies to deal in immovable property in India;
- Section 27 which restricted Indian companies setting up joint ventures abroad and resident India associating themselves with or taking part in overseas concerns was scrapped;
- Restrictions regarding assets held in India by non-resident were removed Indians were allowed to keep foreign currency up to $ 500 or Rs. 15,000;
- Import and export in gold and silver was exempted from FERA implying that these commodities were now to be governed by Exim policy;
- Section 17 which conferred power on the government to regulate uses of important gold and silver was deleted;
- Restriction on transfers a of any security from a register in India to a register outside India were removed;
- Restrictions on transfers of shares by a non-resident to another non-resident were removed;
- The provision allowing the Government to acquire foreign securities for purpose of strengthening foreign exchange position had never been invoked and was unlikely to be invoked. Since this provision could cause avoidable apprehension and fears in foreign investors, it was deleted;
- Foreign nationals were exempted from obtaining prior permission under FERA before taking up employed in India;
- A FERA provision which provided that the Government could direct certain payment to be made by FERA companies in a special account, was deleted.
The
above list of concession shows that FERA was made redundant and effort were
made to place FERA companies at par with Indian companies. In fact, the Union Budget,
1998-99, advocate repealing FERA and replacing it with FEMA (Foreign Exchange
Management Act) as, according to the government, FERA was out of tune with the
changing times.