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Introduction:

Exchange control:

In India, foreign exchange business is governed by the foreign

exchange regulation act 1973. The reserve bank of India administers

the exchange control. A study of exchange control regulations forms

a part of the study of foreign. The types of transaction which are

affected by the foreign exchange regulation act are, in general, all

those having international financial implications. The regulation

framed by the reserve bank in regard to foreign exchange are

contain in the exchange control manual. The manual sets forth the

authority granted to banks to buy and sell foreign exchange and to

do other thing incidental there to, as also the procedures to be

followed by them. It also contains exchange regulation act and

notification issued by central government and reserve bank relating

to exchange control.

Foreign ExchangeMarket:

We have seen that the origin of foreign exchange is in the foreign

trade. At all times, there exporters who receive foreign currencies

from there overseas buyer settlement of the trade transactions and

there are also importers who have to pay in foreign currencies to

their overseas supplier. Again, there are agencies like bank that

business it is to arrange for exchange of currencies as required by

their customers. The banks would buy foreign currencies from their

customers like exporters who wish to convert their foreign

currencies receipts into Indian rupees the banks would sell

currencies to those customers like importers who have to make

foreign currencies payment. Thus arises the needs for the foreign

exchange market, which play the part of a clearing house through

which purchases and sales of foreign currencies are offset against

each other. The foreign exchange market, however is not a market

in the concrete sense of the term or geographical entity like a fish

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market, vegetable market etc. it may not be an actual meeting

place for the participants(sellers & buyers ). The term foreign

exchange market is used in an abstract sense only, meaning a

number of buyers and sellers systematically in contact with each

other for the purpose of transacting foreign exchange business. This

is the sense in which the term market is used in economics. In fact,

it is said that the foreign exchange market is fit example of Prof.

Marshalls definition of a perfect market.

INDIAN FOREIGN EXCHANGE MARKET:

The Indian foreign exchange market may be broadly described as athree-tiered market. The first tier consists of foreign exchange

transaction between the banks and their customers, mainly

importers and exporters. Secondly, their there is the inter-bank

market wherein there are exchange dealings between banks

themselves, conducted through foreign exchange brokers and

supplemented from time to time by reserve bank of India. The inter-

bank market is mainly established in three important port centers,namely Bombay, Kolkatta and chennai. The third tier consists of

foreign exchange dealings between banks in India and their

counterparts and branches in foreign countries that have exchange

business to transact with India. In addition, the banks in India also

operate in international markets like London, New York etc. to cover

their foreign exchange dealings with the customers and other banks.

While the first could be compared with the retail market, the second

is in fact a domestic wholesale market. The third is also a wholesale

market but on an international plane. All the three are inter

connected, this is so because after all the customers are the

ultimate suppliers and the consumers (sellers and buyers) of foreign

currencies and their needs and met by the banks either by operating

in the inter-bank market locally or in the international; exchange

market. In 1999, Foreign Exchange Management Act was passed to

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replace FERA to manage the Indian Foreign Exchange Market in a

better manner.

FOREIGN EXCHANGE MANAGEMENT ACT, 1999

(FEMA)

A bill based on the recommendations of the Task Force, was

introduced in the Lok Sabha on 4 August, 98. The Bill was referred to

the standing committee on Finance which submitted its report to the

House on 23 December' 98 with suggestion and modifications. The

12th Lok Sabha was dissolved before any decision could be taken onthe bill. The Bill subsequently lapsed.

The bill was again introduced in the 13th Lok Sabha on 25th Oct'99.

The presidential Assent was received on 6th Jan 2000. Finally the

FEMA came into operation w.e.f. 1st June 2000.

The FEMA, is applicable to:

To the whole of India.

Any Branch, office and agency, which is situated outside India,

but is owned or controlled by a person resident in India.

Any contravention of provisions of FEMA, by all those, who are

covered under above two aspects committed outside India.

IMPORTANT PROVISIONS FROM FEMA:

RELEVANT PROVISIONS OF EXCHANGE CONTROL MANUAL FOR THE

PURPOSE OF FEMA

Some of the relevant provisions of Exchange Control Manual under

FEMA, which still exist, are:

REFUND OF INWARD REMITTANCES:

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If a request is made from the overseas for cancellation of Inward

Remittances, Authorized Dealers may do so without referring to

Reserve Bank, if refunds are not to compensate for a loss.

APPLICATION FOR REMITTANCES IN FOREIGN CURRENCY:

A person firm or bank may apply to an Authorized Dealer for

remittances in any foreign currency to a beneficiary abroad.

Application should be made in FORM -A1, if the purpose of

remittance is import of goods into India.

For any other purpose in Form -A2

The Authorized Dealer may sell the foreign Exchange applied for if

he think fit provided it is within his powers, and the purpose of

remittance is an approved one.

MODE OF PAYMENT OF RUPEES AGAINST SALE OF

FOREIGN EXCHANGE:

In case of sale of foreign Exchange or remittance foreign Exchange

amounting to Rs. 20,000 or more the payment received by the

Authorized Dealer, from the applicant should be through a crossed

cheque drawn on the applicant bank account or on the bank account

of the Firm/ Company. Payment can also be accepted in the form of

a Banker's cheque / Pay Order / Demand Draft. Receipt of Payment

in cash in case of such sale of foreign Exchange or remittance in

foreign Exchange is strictly prohibited.

EXCEPTION:

However where purpose of sale of foreign exchange is for travel

abroad for business etc, cash may be received by Authorized Dealer

from Applicant upto Rs. 50,000/-

Where the rupee equivalent for drawing foreign exchange exceeds

Rs. 50,000 either for any single installment or for more than one

installment reckoned--- together for a single journey / visit it should

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be paid by the traveler by means of a gross cheque / demand draft/

pay order as stated above.

TRAVELERS CHEQUE NEGOTIABLE ONLY IN INDIA:

Rupee Travelers cheque cannot be encashed outside India, if they

are issued solely for use within India. In such a case they cannot be

taken or sent out of India. Reimbursements should be strictly

refused where such travelers cheques have been encashed outside

India.

REIMBURSEMENT OUTSIDE INDIA:

Rupee Travellers cheque, which are issued by authorized dealers,

encashable outside India, may be reimbursed by Authorized Dealers

or by their selling Agent.

IMPORT OF FOREIGN CURRENCY NOTES:

When the stock of foreign currency notes with Authorized Dealer is

not adequate for meeting their normal business requirement theycould import foreign currency notes from their overseas branches or

correspondents.

RECONVERSION OF INDIAN CURRENCY:

Foreign currency may be sold against Indian Rupees held by persons

who are not resident of India but are passing through or leaving

India after a visit, at the time of their departure from India.For this purpose, a Bank or Encashment certificate issued by

Authorized Dealer, exchange bureau or Authorized Money changer

in form BCI, ECF OR ECR, is required to show that the rupee had

been acquired by sale of foreign Exchange to an Authorized Dealer

or money changer in India. Such a certificate is valid for such

reconversion i.e. a period of three months is not over from the date

of sale of the foreign currency by the traveller.

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RATES OF EXCHANGE:

Authorized dealers and their Exchange bureau may buy from and

sell to public foreign currency notes and coins at rates of exchange

determined by market conditions. Dealings in foreign currency notesand coins between authorized dealers and between authorized

dealers and money changers would also be at rates determined by

market conditions.

COMPARISION OF FERA AND FEMA:

1. SIMILARITIES:

The similarities between FERA and FEMA are as follows:

The Reserve Bank of India and central government would

continue to be the regulatory bodies.

Presumption of extra territorial jurisdiction as envisaged in

section (1) of FERA has been retained.

The Directorate of Enforcement continues to be the agency

for enforcement of the provisions of the law such as

conducting search and seizure

2. DIFFERENCES BETWEEN FERA AND FEMA:

Sr.

No

DIFFERENCES FERA FEMA

1 PROVISIONS FERA consisted of 81

sections, and was more

complex

FEMA is much simple,

and consist of only 49

sections.

2 FEATURES Presumption of negative

intention (Mens Rea )

and joining hands in

offence (abatement)

These presumptions

of Mens Rea and

abatement have been

excluded in FEMA

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existed in FEMA

3 NEW TERMS IN

FEMA

Terms like Capital

Account Transaction,

current Account Transaction, person,

service etc. were not

defined in FERA.

Terms like Capital

Account Transaction,

current account Transaction person,

service etc., have

been defined in detail

in FEMA

4 DEFINITION OF

AUTHORISED

PERSON

Definition of

"Authorised Person" in

FERA was a narrow one( 2(b)

The definition of

Authorised person

has been widened toinclude banks, money

changes, off shore

banking Units etc. (2 (

c )

5 MEANING OF

"RESIDENT" AS

COMPAREDWITH INCOME

TAX ACT.

There was a big

difference in the

definition of "Resident",under FERA, and

Income Tax Act

The provision of

FEMA, are in

consistent withincome Tax Act, in

respect to the

definition of term "

Resident". Now the

criteria of "In India for

182 days" to make a

person resident hasbeen brought under

FEMA. Therefore a

person who qualifies

to be a non-resident

under the income Tax

Act, 1961 will also be

considered a non-

resident for the

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purposes of

application of FEMA,

but a person who is

considered to be non-resident under FEMA

may not necessarily

be a non-resident

under the Income Tax

Act, for instance a

business man going

abroad and stayingtherefore a period of

182 days or more in a

financial year will

become a non-

resident under FEMA.

6 PUNISHMENT Any offence under

FERA, was a criminaloffence , punishable

with imprisonment as

per code of criminal

procedure, 1973

Here, the offence is

considered to be acivil offence only

punishable with some

amount of money as

a penalty.

Imprisonment is

prescribed only when

one fails to pay the

penalty.

7 QUANTUM OF

PENALTY.

The monetary penalty

payable under FERA,

was nearly the five

times the amount

involved.

Under FEMA the

quantum of penalty

has been

considerably

decreased to three

times the amount

involved.

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8 APPEAL An appeal against the

order of "Adjudicating

office", before " Foreign

Exchange RegulationAppellate Board went

before High Court

The appellate

authority under FEMA

is the special Director

( Appeals)Appealagainst the order of

Adjudicating

Authorities and

special Director

(appeals) lies before

"Appellate Tribunal

for ForeignExchange. An appeal

from an order of

Appellate Tribunal

would lie to the High

Court. (sec 17,18,35)

9 RIGHT OF

ASSISTANCEDURING LEGAL

PROCEEDINGS.

FERA did not contain

any express provisionon the right of on

impleaded person to

take legal assistance

FEMA expressly

recognises the rightof appellant to take

assistance of legal

practitioner or

chartered accountant

(32)

10 POWER OF

SEARCH ANDSEIZE

FERA conferred wide

powers on a policeofficer not below the

rank of a Deputy

Superintendent of

Police to make a search

The scope and power

of search and seizurehas been curtailed to

a great extent

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3. A STEP AHEAD FROM FERA TO FEMA:

Enactment of FEMA has brought in many changes in the dealings ofForeign Exchange, as compared to FERA. Some of them are

restrictive, and some has widened the scope.

However some of the relevant progresses made, from FERA to

FEMA, are as follows:

DRAWAL OF FOREIGN EXCHANGE

Now, the restrictions on drawal of Foreign Exchange for the purpose

of current Account Transactions, has been removed. However, theCentral Government may, in public interest in consultation with the

Reserve Bank impose such reasonable restrictions for current

account transactions as may be prescribed.

FEMA has also by and large removed the restrictions on transactions

in foreign Exchange on account of trade in goods, services except

for retaining certain enabling provisions for the Central Government

to impose reasonable restriction in public interest.

OMISSION OF CRIMINAL PROCEEDINGS

Under FERA, any contravention was a criminal offence and the

proceedings were governed by the code of Criminal Procedure.

Moreover the Enforcement Directorate had powers to arrest any

person, search any premises, seize documents, and initiate

proceeding.Now all these have been done away with, and contravention of

FEMA is no more a Criminal offence, and only monetary penalty, i.e.

civil proceedings are applicable. Civil imprisonment is provided, only

in case of default to pay fine.

RESIDENTIAL STATUS

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The definition of "Residential Status" under FEMA has gone through

considerable change. It has now been made compatible with the

definition provided under "Income Tax" Act.

The residential status is now based on the physical stay of the

person in the country. The period of 182 days as provided, indicates

that it is not necessary that there should be a continuous period of

stay. The period of stay would be calculated by adding up all the

days of stay of the individual in the country. An Indian resident

becomes a non-resident when he goes abroad and takes up a job or

engages in business. A major change in the definition of residential

status of partnerships and firms in worth noticing. Earlier, under

FERA, a branch was considered a resident of a place where it was

situated. Now, under FEMA, an office, branch or agency outside

India owned or controlled by a person resident in India will be

considered a resident in India for the purposes of this Act.

For example, a person residing in India has a branch in Mauritius;

such branch will be considered a resident in India.

IMMOVABLE PROPERTY OUTSIDE INDIA

Earlier, under FERA, there was no restriction placed on foreign

citizens who were residents of India, for acquiring immovable

property outside India.

Now FEMA prohibits a resident to acquire, own process, hold or

transfer any immovable property situated outside India. This

restriction applies irrespective of whether the resident is an Indian

citizen or foreign citizen. With this provision being effective a foreign

citizen who is a resident in India has to take approval of Reserve

Bank of India for selling or buying any immovable property situated

outside India.

IMMOVABLE PROPERTY IN INDIA

Earlier, under FERA, a foreign citizen could acquire or transfer

immovable property in India only after seeking permission from the

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Reserve Bank. Now, under FEMA, the control of Reserve Bank is

determined by the residential status of a person. Only a non-

resident as defined within the meaning of FEMA would require

permission of the Reserve Bank to acquire or transfer an immovable

property in India. The distinction based on citizenship has been

abolished and that based on residentship has been introduced.

EXPORT OF SERVICES

FERA had no provision for export of services. Now, FEMA has

included payment received by an Exporter of Services in its ambit.

Every Exporter, who receives payment from outside India, for his

services rendered is obliged to furnish details of payment to the

'Reserve Bank.

For example; a Doctor, or Engineer or Lawyer or Accountant or any

other professional may give opinions or consultation to people

outside India, via internet or mail, and his fees may be credited to

his credit account. Then he is obliged to furnish details of such

payment to Reserve Bank.

INCLUSION OF NEW TERMS

Some new terms like "Capital Account Transactions, Current

Account Transactions"; have been included in FEMA. Reserve Bank

has been confirmed with powers and with consultation with central

government to specify maximum permissible limit upto which

exchange is admissible for such transactions.

WHAT TYPE OF OFFENCES?

Although under FEMA, offences pertain to transactions in foreign

Exchange only. However relevant offences are as follows:

DETAILS IN FOREIGN EXCHANGE:

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Only a person Authorized by Reserve Bank can deal in foreign

Exchange. An "Authorised Person" under FEMA, is a person who is

authorised by Reserve Bank to deal in Foreign Exchange. For

being registered as an "Authorised Person", necessary applicationalong with relevant documents has to be furnished to Reserve

Bank. An "Authorised Person" is also, not given a free hand to

deal in foreign Exchange. He has to furnish details and

information, to Reserve Bank from time to time as may be

required by it.

No one can make a payment to a person resident outside India,

without permission of Reserve Bank. No one receives any payment from a person resident outside

India, without permission of Reserve Bank.

A person resident in India cannot deal in foreign exchange,

foreign security or any immovable property situated outside

India, without permission of Reserve Bank. (sec 4)

Similarly a person resident outside India cannot acquire

immovable property in India without permission.

EXPORTER OF GOODS AND SERVICES

Every exporter of goods and services is under an obligation, to give

details to Reserve Bank regarding value of export, mode of

payment, and amount of payment received etc.

REPATRIATION OF FOREIGN EXCHANGEWhere any amount of foreign exchange has become due or accrued

to any person who is a resident in India, he shall realise and

repatriate (Bring Back) such amount, within the time specified by

Reserve Bank and in such manner as may be specified by the

Reserve Bank.

AUTHORISED PERSON

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An "Authorised Person" under FEMA, is a person who is authorised

by Reserve Bank to deal in Foreign Exchange.

For being registered as an "Authorised Person", a necessary

application alongwith relevant document has to be furnished to

Reserve Bank.

An "Authorised Person" is also, not given a free hand to deal in

foreign Exchange. He has to furnish details and information, to

Reserve Bank from time to time as may be required by it.

PROSECUTION OF OFFENCES COMMITTED

Before detailing the procedure for prosecution, it is important to

mark out the Adjudicating Agencies. They are:

ADJUDICATING AUTHORITY

The inquiry of any contravention of FEMA is conducted by an

Adjudicating Authority appointed by the Central Government.

APPEAL TO SPECIAL DIRECTOR (APPEALS)

The special Director (Appeals) is authorised to hear theappeals arising out of in order of the Adjudicating Authority.

APPEAL TO THE APPELLATE TRIBUNAL

The Appellate Tribunal is entitled to hear appeals made in

accordance, from an order made by Adjudicating Authority or

special Director (Appeals).

DIRECTOR OF ENFORCEMENT

The Director of Enforcement and other officers has power toconduct investigation, search and seize any articles.

PROCEDURE

INQUIRY BY ADJUDICATING AUTHORITY (14)

The inquiry of any contravention of FEMA is conducted by an

Adjudicating Authority.

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When, an inquiry is to be conducted against a person for any

contravention; the Adjudicating Authority shall issue a notice

to such person.

The notice will also indicate the date on which the offender isrequired to appear before authority, and will also mention the

nature of offence committed by him.

Such person (offender) will have a right to give reasons or

explanation, and then a date will be fixed for his appearance.

He can appear either personally or through an Advocate or

chartered accountant.

On the date of appearance, the Adjudicating Authority shallpresent its case, and explain the reason and type &

implications of offence committed by offender.

Then in turn, such person will also be given an opportunity to

put up his case, and to produce documents and evidence.

Finally, if Adjudicating Authority is convinced, that the

offender has committed an offence, then it will impose such

fine and penalty, as it thinks fit.

APPEAL TO SPECIAL DIRECTOR (APPEALS) (17)

Appeal from an order of "Adjudicating Authority" lies before" special

Director (appeal)"

The appeal shall be made in "Form No. 1", along with three

copies of the order appealed against and the requisite fees.

The appeal should be filed within 45 days, from the date ofreceipt of receipt of impugned order.

On the date of hearing the appeal the applicant may appoint a

legal practitioner or a chartered accountant to appear, plead

and act on their behalf before the special Director (Appeal)

The order of the special Director (Appeals) made at the

conclusion of the proceedings shall be in writing and shall

state briefly the grounds for the decision.

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APPEAL TO THE APPELLATE TRIBUNAL (19)

"Appellate Tribunal" is entitled to hear appeal arising out of an order

from "Adjudicating Authority" and "special Director (appeal)."

The appeal shall be made in Form No. 2, along with three

copies of the impugned order and requisite fees.

The appeal shall be made within 45 days, from the date on

which copy of the impugned order is received.

A copy of the order and appeal shall be sent to the opposite

party, i.e. "Director of Enforcement," and a date shall be fixed

for hearing of the appeal. The appellant shall have the right to present his case / appeal

through a legal practitioner or chartered Accountant.

On the fixed date of hearing, the "Appellate Tribunal" shall

pass its order in writing and the reasons therefore.

APPEAL TO HIGH COURT (35)

An appeal from the decision of "Appellate Tribunal" lies beforeHigh Court.

The appeal shall be filed within "60 days" from the date of

communication of the decision or order of the Appellate

Tribunal to him on any question of law arising from the

impugned order.

AMOUNT OF PENALTYAny contravention, under FEMA, may invite following kinds of

penalties:

If, the amount against which offence is quantities, then

penalty will be "THRICE" the sum involved in contravention.

Where the amount cannot be quantified the penalty may be

imposed upto two lakh rupees.

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If, the contravention is continuing everyday, then Rs. Five

Thousand for every day after the first day during which the

contravention continues.

Further in addition to the penalty, any currency, security or other

money or property involved in the contravention may also be

confiscated.