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.

·         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.

·         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.

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

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