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The shift from FERA to FEMA

K. Srinivasan TO REGULATE is to control or restrict by rule. The Foreign Exchange Regulation Act, 1973 (FERA) is gone with the year 1999. There was a general dislike for it for a variety of reasons. It conferred enormous powers on relatively junior officers of the Gov ernment. It proved ineffective despite all the sound and fury that it generated, because it could rarely reach the men behind the scene: It was mostly the small fry - the stooges - that suffered vicarious punishment. FERA in its existing form became, therefore, increasingly incompatible with the change in economic policy in the early 1990s. While the need for sustained husbandry of foreign exchange was recognised, there was an outcry for a less aggressive and more me llow enactment, couched in milder language. Thus, the Foreign Exchange Management Act, 1999 (FEMA) came into being. I FEMA reads like a contrite FERA. It scrupulously avoids the word `offence' in its substantive provisions. Only seven of its 49 sections - sections 3-9 - spell out the `dos and don'ts' for those who deal in or hold foreign exchange. Detailed provisi ons explaining the restrictions will be relegated to regulations to be framed by the Reserve Bank of India. There will be no prosecution for contravention of sections 3-9. Even penalty for such infractions will, under section 13, be subject to a maximum of thrice the sum involved, unlike the ceiling of five times prescribed in section 50 of FERA. It is only non-payment of the penalty that may lead to a man landing up in jail. Neither penalty nor any such drastic measure for non-payment of penalty will be resorted to without first affording ample opportunity for representing his case to the delinq uent before an adjudicating authority and, if he is so inclined, for further appealing to a Special Director (Appeals), a High-Powered Appellate Tribunal with a chairperson of the status of a judge of a High Court, and the concerned High Court itself. If there had been cause for the complaint that action under FERA could be high-handed, FEMA is fair to a fault. Determination and recovery of a penalty may be delayed but nobody can be heard to say that his case suffered for want of a chance to be heard. I t is not without significance that as many as twenty of the sections of the Act - sections 16-35 - relate only to adjudication and appeals. I It is rarely that a statute provides for compounding a penalty. FEMA has the distinction of making such a provision in section 15. All circumstances that may call for the mitigation of a penalty are supposed to be taken into consideration when the pena lty is levied by the adjudicating authority. It is difficult to imagine a situation in which the Director of Enforcement or an officer of the RBI may be persuaded to give a relief that has been denied by the adjudicating authority or that may be refused, in an appeal, in the ordinary course, to the Special Director (Appeals) or the Appellate Tribunal. I A good deal of thought seems to have gone into the provision for compounding a contravention under section 15 because while the relevant provision in th e Foreign Exchange Management Bill, 1998 permitted the Centre to authorise only the officers of the Directorate of Enforcement to do the compounding, the final version in 1999 enables the Centre to entrust it also to officers of the RBI. Anyone accused o f a breach of any provision under FEMA seems to have a much wider range of authorities at whose doors he may knock for a remedy than those who collapsed under the strain of the FERA machinery. What are the transactions coming within the purview of FEMA a nd how will they be regulated? I Sections 5 and 6 point out that convertibility of the rupee into other currencies will be freer with regard to ``current account transactions'' than ``capital account

transactions''. Loans, investments and all transactions which create new liabilities (including contingent liabilities), or add to assets outside India or alter the existing foreign assets or liabilities of a `person' resident in India, are capital account transactions. Acquisition of assets or accretions to liabilities in India of a per son not resident in India will be treated in the same manner. The RBI will specify under subsection (3) of section 6, the classes of capital account transactions which are permissible and the limits up to which foreign exchange may be `admissible' for s uch transactions. I Regulations will be framed by the RBI laying down the restrictions, and so on, that will govern the 10 types of capital transactions that are set out at clauses (a) to (j) of subsection (3) of section 6, namely, transfer of foreign securities/securiti es in India; borrowings and lendings in foreign exchange/rupees; deposits between residents and non-residents, export/import/holding of currency or currency notes; acquisition/transfer of immovable properties in India/outside India and giving of guarante es and securities in respect of debts/obligations, etc, in India/outside India in the case of a resident/nonresident. Regulations will also cover establishment of a branch office or place of business in India by a non-resident. The interests of a non-re sident holding currency or immovable property in India will not be prejudiced in any manner if he becomes a resident subsequently. Likewise, it will make no difference to the interests of a resident holding currency or immovable property abroad, if he tu rns into a non-resident later. I Current account transactions are those not so depicted as capital account transactions. In particular, they include payments made in the course of day-to-day business, shortterm banking and credit facilities, interest on loans, net income from investm ents, remittances for living expenses of parents, spouse and children being abroad and expenses in connection with foreign travel, education and medical care of parents, spouse and children. Section 5 makes it clear that a resident may sell or draw forei gn exchange to or from ``any authorised persons'' (specified banks), if such a sale or drawal is a current account transaction, subject to any reasonable restrictions prescribed for such transactions by the Centre. I Residents, who are engaged in the export of any goods or services from India, are required to furnish under section 7 detailed information of the exports, including their value, to the RBI, presumably to enable the bank to monitor the early repayment o f the export proceeds to India and to satisfy itself broadly, that the export value of the goods/services has not been understated and there is no recourse to malpractices like `compensation payments' to frustrate the law. I All transactions involving the acquisition or holding or transfer of any foreign exchange which is not in conformity with what the law permits, and also all transactions designed to bypass it or contravene it indirectly, may be the subject matter of in vestigation by the Directorate of Enforcement under section 37 read with section 13. The adjudication will be done by the adjudicating authority after holding an inquiry and giving an opportunity of being heard to the person alleged to have committed the contravention with reference to the investigation report of the Directorate of Enforcement. I Section 13 has to be read with sections 3, 4 and 8, in particular, besides the regulations that may be notified by the RBI under sub-sections (3) and (6) of section 6 and section 47 and the rules required to be notified by the Centre under section 46. Section 4 states that, save as provided under the Act, no resident shall acquire, hold, own, possess or transfer any foreign exchange, any foreign security or immovable property situated outside India. Section 8 enjoins that all reasonable steps shall be taken to realise and repatriate to India any foreign exchange that is due or has accrued to any person resident in India, within such period and in such manner as may be specified by the RBI.

Section 3 exposes the following four types of cases to action under section 13, except to the extent that they are protected by any provision in the Act or Rules or Regulations: A Dealing in any foreign exchange or foreign security with, or their transfer to, any person other than an `authorised person' within the meaning of that expression in clause (c) of section 2 read with section 10. A Making any payment to or for the credit of any person outside India in any manner. A Receiving any payment, in any manner, by order or on behalf of any person resident outside India through any one other than an authorised person. A Entering into any financial transaction in India as a consideration for or in association with acquisition or creation or transfer of a right to acquire any asset outside India by any person (for example, `compensation payments' in rupees in India for sales effected in any foreign currency outside India). Section 9 saves the following, among other things from the legal compulsion, otherwise, to realise and repatriate foreign dues to India from abroad, in the case of a resident: A Possession of foreign currency or foreign coins by any resident in India up to such limit as the RBI may specify. A Foreign currency account held or operated by such person or class of persons that the RBI may specify along with the ceilings for such holding/operation. A Foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means up to such limits as the Reserve Bank may specify. A Pre-1947, acquisitions/holdings/gifts/inheritance with the permission, or in accordance with directions of the RBI. A Such other receipts in foreign exchange as the Reserve Bank may specify. The shift in emphasis from citizenship to duration of stay in India for applicability of the new regime.