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.
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.
Broadly,the objectives of FEMA
are: (i) To facilitate external trade and payments; and (ii) 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.
FEMA
permits only authorised person to deal in foreign exchange or foreign
security. Such an authorised person, under the Act, means authorised dealer,money
changer, off-shore banking unit or any other person for the time being
authorised by Reserve Bank. The Act thus prohibits any person who:-
- 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;
- 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 is resident in India which acquire, hold, own, possess or transfer any foreign exchange, foreign security
or any immovable property situated outside India.
The Act deals with two types of foreign exchange transactions.
